10-Q 1 dta-20140331x10q.htm 10-Q DTA-2014.03.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________ 
FORM 10-Q
 __________________________________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Numbers: 333-188977
____________________________________________________________ 
DriveTime Automotive Group, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE
 
86-0721358
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)

4020 East Indian School Road
Phoenix, Arizona 85018
(Address, including zip code, of principal executive offices)
(602) 852-6600
(Registrants’ telephone number, including area code)
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.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨ 
 
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The total number of shares of common stock outstanding as of April 30, 2014, was 102.1897.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements
DRIVETIME AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
March 31, 2014
 
December 31, 2013
 
(In thousands)
ASSETS
 
 
 
Cash and cash equivalents
$
31,197

 
$
30,754

Restricted cash and investments held in trust
143,609

 
115,200

Finance receivables
2,131,714

 
1,938,931

Allowance for credit losses
(319,753
)
 
(299,516
)
Finance receivables, net
1,811,961

 
1,639,415

Vehicle inventory
285,394

 
319,567

Property and equipment, net
106,715

 
103,660

Lease fleet vehicles, net
74,434

 
31,161

Other assets
70,388

 
58,087

Shareholder notes receivable
28,542

 
28,542

Total Assets
$
2,552,240

 
$
2,326,386

LIABILITIES & SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Payables and other accrued expenses
$
148,648

 
$
109,081

Accrued expenses—related party
610

 
647

Deferred revenue
100,746

 
42,133

Portfolio warehouse facilities
302,000

 
283,400

Portfolio term financings
1,103,907

 
987,821

Senior secured notes payable
253,083

 
253,316

Other secured notes payable
154,982

 
161,964

Total Liabilities
2,063,976

 
1,838,362

Shareholders’ equity—DTAG:
 
 
 
Common stock

 

Paid-in capital
148,370

 
147,729

Accumulated loss
(84,920
)
 
(45,650
)
Total shareholders’ equity—DTAG
63,450

 
102,079

Noncontrolling interest-Inilex (1)
(872
)
 
(263
)
Noncontrolling interest-DTAC (2)
425,686

 
386,208

Total Equity
488,264

 
488,024

Total Liabilities & Shareholders’ Equity
$
2,552,240

 
$
2,326,386

(1)    Refer to Note 1 for a discussion regarding the noncontrolling interest-Inilex 
(2)    Refer to Note 1 for a discussion regarding the noncontrolling interest-DTAC. 
See accompanying notes to Condensed Consolidated Financial Statements.


1


DRIVETIME AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Revenue:
 
 
 
Sales revenue
$
352,162

 
$
309,468

Interest income
88,261

 
74,971

Other income
13,345

 
589

Total Revenue
453,768

 
385,028

Costs and Expenses:
 
 
 
Cost of sales
259,248

 
211,638

Provision for credit losses
89,084

 
77,842

Portfolio debt interest expense
11,039

 
10,186

Non-portfolio debt interest expense
1,675

 
1,319

Senior secured debt interest expense
8,033

 
6,483

Senior secured debt interest expense—related party

 
158

Selling and marketing
12,037

 
8,904

General and administrative
57,809

 
42,407

General and administrative—related party
5,307

 
2,651

Depreciation expense
9,640

 
5,277

Total Costs and Expenses
453,872

 
366,865

Income (loss) before income taxes
(104
)
 
18,163

Income tax expense
901

 
342

Net income (loss) from continuing operations
$
(1,005
)
 
$
17,821

Income from discontinued operations, net of taxes

 
768

Net income (loss)
(1,005
)
 
18,589

Net (loss) attributable to noncontrolling interest—Inilex (1)
(591
)
 

Net Income (Loss) Attributable to DriveTime Consolidated
$
(414
)
 
$
18,589

 
 
 
 
Net loss attributable to noncontrolling interest—DTAC (2)
$
(66,730
)
 
$
(59,749
)
Net income attributable to DTAG
66,316

 
78,338

Net Income (Loss) Attributable to DriveTime Consolidated
$
(414
)
 
$
18,589

(1)    Refer to Note 1 for a discussion regarding the noncontrolling interest—Inilex 
(2)    Refer to Note 1 for a discussion regarding the noncontrolling interest—DTAC. 
See accompanying notes to Condensed Consolidated Financial Statements.


2


DRIVETIME AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three months ended March 31,
 
2014
 
2013
Cash Flows from Operating Activities:
(In thousands)
Net income (loss)
$
(1,005
)
 
$
18,589

Net loss attributable to noncontrolling interest - Inilex
591

 

Net income (loss) attributable to DriveTime consolidated
(414
)
 
18,589

Income from discontinued operations

 
(768
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Provision for credit losses
89,084

 
77,842

Depreciation expense
9,640

 
5,277

Amortization of debt issuance costs and debt premium and discount
1,498

 
1,660

Non-cash compensation expense—related party
1,282

 
311

Loss from disposal of property and equipment
440

 
31

Originations of finance receivables
(416,390
)
 
(311,829
)
Collections and recoveries on finance receivable principal balances
155,636

 
151,103

Change in accrued interest receivable and loan origination costs
(876
)
 
423

Decrease in vehicle inventory
34,173

 
41,857

Change in other assets
(12,679
)
 
(28,814
)
Increase in deferred revenue
58,612

 
6,779

Increase in accounts payable and accrued expenses
39,567

 
17,100

Change in accrued expenses—related party
(37
)
 
123

Net cash used in operating activities from continuing operations
(40,464
)
 
(20,316
)
Net cash provided by operating activities from discontinued operations

 
1,351

Net cash used in operating activities
(40,464
)
 
(18,965
)
Cash Flows from Investing Activities:
 
 
 
Proceeds from disposal of property and equipment
702

 
641

Purchase of property and equipment
(11,077
)
 
(7,685
)
Purchase of lease fleet
(46,033
)
 

Net cash used in investing activities from continuing operations
(56,408
)
 
(7,044
)
Net cash used in investing activities from discontinued operations

 
(33,909
)
Net cash used in investing activities
(56,408
)
 
(40,953
)
 
 
 
 

3


Cash Flows from Financing Activities:
 
 
 
Increase in restricted cash
(8,704
)
 
(15,760
)
Deposits into investments held in trust
(5,250
)
 

Change in investments held in trust and collection account cash
(14,455
)
 
(4,255
)
Additions to portfolio term financings
267,751

 
75,000

Repayments of portfolio term financings
(151,665
)
 
(135,207
)
Additions to portfolio warehouse facilities
313,600

 
210,300

Repayment of portfolio warehouse facilities
(295,000
)
 
(122,500
)
Additions to other secured notes payable

 
20,000

Repayment of other secured notes payable
(6,982
)
 
(614
)
Payment of debt issuance costs
(1,980
)
 
(348
)
Net cash provided by financing activities from continuing operations
97,315

 
26,616

Net cash provided by financing activities from discontinued operations

 
32,553

Net cash provided by financing activities
97,315

 
59,169

Net increase (decrease) in cash and cash equivalents
443

 
(749
)
Cash and cash equivalents at beginning of period
30,754

 
26,480

Cash and cash equivalents at end of period
31,197

 
25,731

Cash and cash equivalents from discontinued operations at end of period

 

Cash and cash equivalents from continuing operations at end of period
$
31,197

 
$
25,731

 
 
 
 
Supplemental Statement of Cash Flows Information:
 
 
 
Interest paid
$
12,817

 
$
11,424

Interest paid—related party
$

 
$
158

Income taxes paid
$
704

 
$
518

Supplemental Statement of Non-Cash Investing and Financing Activities:
 
 
 
Disposal of fully depreciated property and equipment
$
4

 
$

See accompanying notes to Condensed Consolidated Financial Statements.

4


DRIVETIME AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Description of Business, Ownership Formation, Basis of Presentation, and Principles of Consolidation
Description of Business
DriveTime Automotive Group, Inc. (“DTAG”) is the leading used vehicle retailer in the United States with a primary focus on the sale and lease of quality used vehicles and related products to the subprime market. Through DTAG's sister company, DT Acceptance Corp ("DTAC"), we provide auto financing and loan servicing for substantially all of the vehicles we sell. Auto financing is provided through retail installment sales contracts (referred to herein as "loans" and/or "finance receivables"). Through our national network of Company owned and branded dealerships, we provide our customers with a comprehensive end-to-end solution for their automotive needs, including the sale, financing and maintenance of their vehicles. As of March 31, 2014 we operated 110 dealerships and 21 reconditioning facilities located in 50 designated marketing areas ("DMA") in 20 states. As many of our customers may be unable to obtain financing to acquire a vehicle from another company, financing is an important component of our integrated business model and product offering. We fund this portfolio primarily through portfolio warehouse facilities, securitizations, and other portfolio term financings.
Ownership
DTAG and DTAC (collectively known as "DriveTime" and also referred to herein as “we,” “our,” “the Company,” and “us”) are sister companies operating collectively under common control and are consolidated for financial reporting purposes. Generally, DTAG directs our retail vehicle sales operations and DTAC directs our financing and loan servicing operations. As of March 31, 2014, and December 31, 2013, the shareholders of DTAG and DTAC were Ernest C. Garcia II (Executive Chairman) and the Garcia Family Trusts (collectively, herein also referred to as “Principal Shareholder” or “Mr. Garcia”) and Raymond C. Fidel (President and CEO). As of March 31, 2014 Mr. Garcia owned 100.0 shares, or 97.6% of each of DTAG and DTAC and Mr. Fidel owned 2.4939 shares, or 2.4% of each of DTAG and DTAC.
Basis of Presentation
We have determined that DTAC is a variable interest entity (“VIE”) and DTAG is the primary beneficiary of DTAC. Therefore, the accounts of DTAG and DTAC are consolidated and intercompany transactions between DTAG and DTAC are eliminated in consolidation. We determined DTAG is the primary beneficiary of DTAC because DTAG has both (1) the power to direct the activities of DTAC that most significantly impact DTAC's economic performance and (2) a potentially significant variable interest that carries with it the obligation to absorb the losses or the right to receive benefits of DTAC. DTAG has the power to direct the activities of DTAC because it originates and sells 100% of the loans DTAC is required to purchase, sets underwriting standards and origination terms, sets servicing and collection policies administered by DTAC, and DTAC was specifically created and designed by DTAG to obtain third party financing for DTAG's originations. DTAG also has potentially significant variable interests in the form of debt capital provided to DTAC through various debt issuances, guarantees of DTAC's debt, as well as operational liabilities owed to DTAG, all of which carry the obligation to absorb losses or receive benefits of DTAC. Creditors of DTAC generally do not have recourse to the general credit of DTAG, except that the special purpose entity ("SPE") related to our term residual facility entered into a demand note with DTAC. The demand note is guaranteed by DTAG.
Total assets of DTAC consolidated into DTAG are comprised primarily of net finance receivables, cash and cash equivalents, restricted cash, investments held in trust, and deferred financing costs. Total liabilities consolidated into DTAG are comprised primarily of portfolio warehouse, portfolio term, and senior secured debt. Total revenue of DTAC consolidated into DTAG is comprised of interest income and other finance charges. DTAC expenses are comprised of provision for credit losses, interest expense and general and administrative expenses.
Also included in the consolidated financial statements are SPEs of DTAC, which are all bankruptcy remote entities formed in conjunction with our securitizations, warehouse facilities, residual facility, real estate financing, and bank term financing transactions. We have determined that these SPEs are VIEs and DTAC is the primary beneficiary. Therefore, all intercompany accounts and transactions have been eliminated in consolidation for all periods presented. We determined DTAC is the primary beneficiary of these SPEs because DTAC has both (1) the power to direct the activities of the SPEs that most significantly impact the SPEs' economic performance and (2) a potentially significant variable interest that carries with it the obligation to absorb the losses or the right to receive benefits of DTAC. DTAC has the power to direct the activities of these SPEs because it services the loans in each of the securitizations, warehouse facilities and other lending arrangements. DTAC also has potentially significant variable interests in the form of holding the residual certificates for securitizations and rights to residual cash flows of the warehouse facilities. Creditors of the SPEs generally do not have recourse to the general credit of DTAC, except through servicing performance guarantees.
On December 5, 2013, DTAC sold GO Financial ("GO") to the shareholders of DTAC. GO's operations for the three months ended March 31, 2013 were reclassified out of operations and presented as a separate line on the condensed

5


consolidated statements of operations. We have determined that GO is a VIE, but that neither DTAG or DTAC are the primary beneficiary as we do not have the power to direct the most significant economic activities of GO, nor do we have the obligation to absorb losses or the right to receive benefits from GO's operations. Therefore, consolidation of GO is not required. We will not have significant continuing involvement in GO's operations. As such, GO qualifies for and is presented as a discontinued operation based on the guidance provided in ASC 205—Presentation of Financial Statements.
Reclassifications
Although not material, certain prior period amounts have been reclassified to be consistent with the current period financial statement presentation.
Noncontrolling Interests
DTAG and DTAC are consolidated for financial reporting purposes. Therefore, we are required to separately present the noncontrolling equity interest of the VIE (DTAC) on the condensed consolidated balance sheets and condensed consolidated statements of operations for all periods presented. The noncontrolling interest is DTAC’s equity and income for the periods presented. There are no third-party competing interests in DTAC. For the amounts of assets, liabilities, revenue, and income of DTAC consolidated into DTAG at March 31, 2014, see Note 16 — Supplemental Consolidating Financial Information.
In 2013, we acquired a controlling interest in Inilex through the purchase of 50% plus one share of its fully diluted outstanding common stock. Inilex is a provider of GPS technology solutions and has been our provider of GPS installed on vehicle inventory for approximately two years. In accordance with ASC 810—Consolidation, we are required to fully consolidate Inilex's operations, and eliminate all transactions between the entities.
For more information regarding DTAC's financial position and results of operations and the SPEs' financial position and results of operations consolidated into DTAG and DTAC, respectively, see Note 16 — Supplemental Consolidating Financial Information.
These condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such interim condensed consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes as of and for the year-ended December 31, 2013, which are included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 24, 2014.
Use of Estimates
The preparation of the consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities. Certain accounting estimates involve significant judgments, assumptions, and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period which management considers to be critical accounting estimates. The judgments, assumptions, and estimates used by management are based on historical experience, management's experience, and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Significant items subject to estimates and assumptions include the allowance for credit losses, the revenue recognition pattern of ancillary products, the reserve for ancillary product refunds, inventory valuation, fair value measurements, certain legal reserves, our reserve for sales returns and allowances, our recovery receivables, and our limited warranty accrual. Estimates used in deriving these amounts are described in the footnotes herein. Actual results could differ from these estimates.

6


(2) Restricted Cash and Investments Held in Trust
We maintain various cash accounts, which are pledged and/or held in trust as collateral under our debt agreements. We are permitted to invest funds in these accounts in short-term, high quality liquid investments. The following is a summary of restricted cash and investments held in trust:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Restricted cash
$
39,774

 
$
31,070

Investments held in trust
103,835

 
84,130

 
$
143,609

 
$
115,200

(3) Finance Receivables
The following summarizes the components of finance receivables:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Principal balances
$
2,068,792

 
$
1,871,576

Recovery receivables
24,122

 
29,432

Accrued interest
18,609

 
19,522

Loan origination costs
20,191

 
18,401

Total finance receivables
$
2,131,714

 
$
1,938,931

Our finance receivables are defined as one segment and class of loan, which is the sub-prime consumer auto loan. Therefore, the disaggregation of information into portfolio segment and classes for assets with different risk characteristics is limited, and the level of risks inherent in our financing receivables are managed as one homogeneous pool and further segmented with our proprietary credit scoring system as described below in —Credit Quality Indicators. We have chosen our internal customer credit scoring model as our key credit quality indicator because it has a direct and prominent impact in managing our portfolio of receivables and monitoring its performance.
A majority of our finance receivables are pledged in non-recourse SPEs, related to our warehouse facilities, asset backed securitizations, and bank term financings. The details of amounts pledged are provided in Note 5 — Debt Obligations. We do not place loans on nonaccrual status, nor do we classify loans as impaired, since accounts are charged-off when they become contractually past due under our charge-off policy. The amount charged-off is the difference between estimated recoveries and the carrying amount of the loan. We do not have loans that meet the definition of troubled debt restructurings.
Recovery receivables consist of estimated recoveries to be received on charged-off vehicle loans, including proceeds from selling repossessed vehicles at auction, net of sales tax, insurance proceeds, bankruptcy and deficiency collections, and estimates of expected refunds on terminated ancillary products. The recovery amount from selling repossessed vehicles at auction is a forecast of vehicles to be recovered from loans previously charged-off. Upon repossession, estimated recoveries are reclassified and recorded as a component of other assets in the accompanying condensed consolidated balance sheets.
Credit quality information for our finance receivables portfolio is provided as of the dates indicated below:

7


Age Analysis of Past Due Finance Receivables
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
  
Percent of
Loans
 
Loan
Principal
 
Percent of
Loans
 
Loan
Principal
 
Percent of
Loans
 
Loan
Principal
 
($ In thousands)
Current
63.0
%
 
$
1,303,338

 
53.7
%
 
$
1,005,036

 
61.4
%
 
$
1,047,839

Days Delinquent:
 
 
 
 
 
 
 
 
 
 
 
01-30 Days
26.4
%
 
546,161

 
30.0
%
 
561,473

 
28.0
%
 
478,733

31-60 Days
6.0
%
 
124,128

 
9.0
%
 
168,442

 
6.9
%
 
117,699

61-90 Days
3.0
%
 
62,064

 
4.9
%
 
91,707

 
3.2
%
 
54,531

91-120 Days
1.6
%
 
33,101

 
2.4
%
 
44,918

 
0.5
%
 
7,971

Total Past Due
37.0
%
 
765,454

 
46.3
%
 
866,540

 
38.6
%
 
658,934

Total Finance Receivables
100.0
%
 
$
2,068,792

 
100.0
%
 
$
1,871,576

 
100.0
%
 
$
1,706,773

An account is considered delinquent if a substantial portion of a scheduled payment has not been received by the date such payment was contractually due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year and economic factors. Delinquencies are presented on a Sunday-to-Sunday basis, which reflects delinquencies as of the nearest Sunday to period end. Sunday is used to eliminate any impact of the day of the week on delinquencies since delinquencies tend to be higher mid-week.
Credit Quality Indicators
We monitor our portfolio performance and the credit grade mix of originations. Our proprietary credit grading system segments our customers into credit grades.
Many companies use FICO scores as a standard metric to assess the credit risk of customers. Our internal scoring models include the use of alternative data sources along with traditional credit bureau data which allow us the ability to separate the credit risk levels of the subprime auto segment into different categories. Our centralized proprietary credit scoring models are currently used to classify customers into various risk grades that are linked to financing parameters. The scoring models are periodically updated to account for changes in loan performance, data sources, geographic presence, economic cycles, and business processes.
The static-pool tracking of portfolio loss performance is also monitored by credit grade. Our scoring model is comprised of credit grades ranging from A to D, with A being the lowest risk credit grade and a D being the highest risk credit grade. Generally, the lower the risk grade, the lower the unit loss rate.
A summary of our portfolio by our internally assigned credit risk ratings at March 31, 2014, and December 31, 2013, is as follows:
At March 31, 2014
Grade
 
Average
FICO Score (1)
 
Percentage of
Portfolio Loans
 
Total Loans
 
Percentage of
Portfolio Principal
 
Loan Principal
 
 
 
 
 
 
 
 
 
 
(In thousands)
A
 
547
 
28.6%
 
45,837
 
28.8%
 
$
596,745

B
 
519
 
38.2%
 
61,224
 
38.6%
 
797,989

C
 
506
 
28.9%
 
46,318
 
28.8%
 
595,843

C-/D
 
481
 
4.3%
 
6,891
 
3.8%
 
78,215

 
 
 
 
100.0%
 
160,270
 
100.0%
 
$
2,068,792


8


At December 31, 2013 
Grade
 
Average
FICO Score (1)
 
Percentage of
Portfolio Loans
 
Total Loans
 
Percentage of
Portfolio Principal
 
Loan Principal
 
 
 
 
 
 
 
 
 
 
(In thousands)
A
 
547
 
29.0%
 
43,730
 
29.5%
 
$
551,251

B
 
519
 
38.3%
 
57,836
 
38.9%
 
727,192

C
 
505
 
28.2%
 
42,480
 
27.8%
 
519,653

C-/D
 
484
 
4.5%
 
6,784
 
3.8%
 
73,480

 
 
 
 
100.0%
 
150,830
 
100.0%
 
$
1,871,576

(1) 
Average FICO score is provided as an external metric of credit quality. FICO score is not utilized as the primary tool in determining internal credit grade. 
Concentration of Credit Risk
As of March 31, 2014 and December 31, 2013, our portfolio concentration by state was as follows:
As of March 31, 2014
 
As of December 31, 2013
State
 
Percent of
Portfolio
 
Loan Principal
(In thousands)
 
State
 
Percent of
Portfolio
 
Loan Principal
(In thousands)
Texas
 
21.0
%
 
$
434,384

 
Texas
 
21.2
%
 
$
397,438

Florida
 
15.6
%
 
323,247

 
Florida
 
15.7
%
 
294,043

North Carolina
 
8.4
%
 
173,269

 
North Carolina
 
8.7
%
 
162,749

Georgia
 
7.8
%
 
160,991

 
Georgia
 
7.6
%
 
142,001

Arizona
 
6.0
%
 
124,059

 
Arizona
 
6.4
%
 
117,861

All Others (1)
 
41.2
%
 
852,842

 
All Others (2)
 
40.4
%
 
757,484

 
 
100.0
%
 
$
2,068,792

 
 
 
100.0
%
 
$
1,871,576

(1) 
Consists of fifteen additional states wherein the portfolio concentration per state is at or below 5.8%  
(2) 
Consists of fifteen additional states wherein the portfolio concentration per state is at or below 6.0%. 
Allowance for Credit Losses
The following table sets forth the rollforward of the allowance for credit losses for the periods indicated:
  
Three months ended March 31,
  
2014
 
2013
Allowance Activity:
($ In thousands)
Balance, beginning of period
$
299,516

 
$
252,590

Provision for credit losses
89,084

 
77,842

Net charge-offs
(68,847
)
 
(60,810
)
Balance, end of period
$
319,753

 
$
269,622

Allowance as a percent of portfolio principal, end of period
15.4
%
 
15.7
%
Charge off Activity:
 
 
 
Principal balances
$
(107,905
)
 
$
(97,917
)
Recoveries, net
39,058

 
37,107

Net charge-offs
$
(68,847
)
 
$
(60,810
)
(4) Leased Vehicles
A summary of our vehicle lease fleet is as follows:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Lease fleet vehicles
$
79,043

 
$
33,009

Less accumulated depreciation
(4,609
)
 
(1,848
)
Lease Fleet Vehicles, net
$
74,434

 
$
31,161


9


(5) Debt Obligations
Portfolio Term Financings
The following is a summary of portfolio term financings:
 
March 31,
2014
 
December 31,
2013
Securitization Debt:
(In thousands)
Asset-backed security obligations issued pursuant to the Company’s securitizations
$
869,848

 
$
713,953

Bank Term Financing:
 
 
 
Secured financing transaction for our finance receivables portfolio
184,059

 
223,868

Portfolio Term Residual Financing:
 
 
 
Variable rate financing facility secured by residual interests in finance receivables of warehouse facilities and securitization trusts
50,000

 
50,000

Total Portfolio Term Financings
$
1,103,907

 
$
987,821

Securitization debt
The following is a summary of securitization transactions with outstanding balances for each period presented:
 
 
As of March 31, 2014
 
As of December 31, 2013
Transaction
 
Debt
Balance
 
Gross Receivables
Pledged
 
Cash
Reserve
 
Interest
Rate (1)
 
Debt
Balance
 
Gross Receivables
Pledged
 
Cash
Reserve
 
Interest
Rate (1)
 
 
($ In thousands)
 
($ In thousands)
2011-1
 
$
16,922

 
$
22,845

 
$
4,200

 
3.0%
 
$
22,772

 
$
31,271

 
$
4,200

 
3.0%
2011-2
 
24,532

 
31,339

 
4,500

 
2.9%
 
34,762

 
41,954

 
4,500

 
2.9%
2011-3
 
49,515

 
59,724

 
4,500

 
3.9%
 
61,485

 
75,037

 
4,500

 
3.9%
2012-1
 
77,377

 
99,682

 
4,500

 
3.5%
 
90,175

 
117,529

 
4,500

 
3.5%
2012-2
 
97,435

 
119,387

 
4,500

 
2.9%
 
113,142

 
138,194

 
4,500

 
2.9%
2013-1
 
163,150

 
209,403

 
4,500

 
2.7%
 
181,018

 
233,346

 
4,500

 
2.7%
2013-2
 
190,510

 
252,096

 
4,500

 
2.9%
 
210,599

 
277,023

 
4,500

 
2.9%
2014-1
 
250,407

 
330,448

 
5,250

 
2.6%
 

 

 

 
—%
 
 
$
869,848

 
$
1,124,924

 
$
36,450

 
 
 
$
713,953

 
$
914,354

 
$
31,200

 
 
(1) These rates represent the original duration weighted average rates of the outstanding asset-backed securities.  
Asset-backed securities outstanding are secured by underlying pools of finance receivables (collateral) and investments held in trust (cash reserve). Credit enhancement for the asset-backed securities consists of a reserve account, over collateralization, and subordination of certain classes of notes in each trust to more senior classes of notes in such trust. Over collateralization represents finance receivable principal balance in excess of the face value of asset-backed securities issued. Cash reserves are funded with proceeds from the sale of asset-backed securities and through cash collections. Asset-backed securities outstanding have interest payable monthly at the fixed rates represented in the table above. All outstanding securitizations were rated in tranches with credit ratings from AAA to BBB by Standard & Poor's Ratings Service, a Standard & Poor's Financial Services LLC business, and DBRS, Inc., with the 2013-1, 2013-2 and 2014-1 securitizations also rated by Kroll Bond Rating Agency, Inc.
Individual securitization trusts are not cross-collateralized or cross-defaulted. Additionally, we have the option to purchase the remaining loans in a trust when the remaining principal balances of the loans reach 10% of their original principal balance. At March 31, 2014, we were in compliance with all financial covenants of outstanding securitizations.
Bank term financing
The bank term financing is secured by an underlying pool of finance receivables and a cash reserve account. The amounts outstanding bear interest at LIBOR plus 2.0%, resulting in an interest rate of 2.15% and 2.17% at March 31, 2014 and December 31, 2013, respectively. This financing includes overcollateralization and a cash reserve similar to a securitization transaction, but consists of only one class of bonds and is unrated. At March 31, 2014 and December 31, 2013, $226.4 million and $271.8 million in receivables were pledged as collateral to this facility, respectively. At both March 31, 2014 and December 31, 2013, $6.9 million was held as a cash reserve for this facility. At March 31, 2014, we were in compliance with all financial covenants of the facility.

10


Portfolio term residual financing
The term residual facility is secured by residual interests in our warehouse facilities and securitization trusts. The amounts outstanding under the term facility bear interest at LIBOR + 4.50% at March 31, 2014 and December 31, 2013 resulting in an interest rate of 4.66% at March 31, 2014 and December 31, 2013, respectively. This facility provides for funding through December 2019, with a term-out feature resulting in a final maturity of December 2020. At March 31, 2014, we were in compliance with all financial covenants of the facility.
The SPE related to our term residual facility entered into a demand note with DTAC, which is guaranteed by DTAG. Under specific circumstances, the lender may require DTAC to fund the demand note, with proceeds used to pay down the term residual facility if any of the following were to occur: (i) termination due to a defined Event of Termination, (ii) failure to maintain borrowing base compliance after the termination date, or (iii) an Event of Termination occurs after the termination date and is continuing.
Portfolio warehouse facilities
The following is a summary of portfolio warehouse facilities:
 
As of March 31, 2014
 
Amount
Drawn
 
Facility
Amount
 
Stated Advance
Rate
 
Collateral (1)
 
Interest
Rate (2)
 
Expiration
Date
 
Final
Maturity
Portfolio warehouse facilities
($ In thousands)
Deutsche Bank
$
101,500

 
$
150,000

 
65
%
 
$
183,975

 
2.41
%
 
Dec 2014
 
Dec 2015
Wells Fargo
110,500

 
150,000

 
66
%
(3) 
173,919

 
2.40
%
 
Dec 2015
 
Dec 2017
RBS
90,000

 
125,000

 
65
%
 
147,456

 
2.40
%
 
Jun 2014
 
Jun 2015
Total portfolio warehouse facilities
$
302,000

 
$
425,000

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
Amount
Drawn
 
Facility
Amount
 
Stated Advance
Rate
 
Collateral (1)
 
Interest
Rate (2)
 
Expiration
Date
 
Final
Maturity
Portfolio warehouse facilities
($ In thousands)
Deutsche Bank
$
98,400

 
$
150,000

 
65
%
 
$
189,970

 
2.41
%
 
Dec 2014
 
Dec 2015
Wells Fargo
107,000

 
150,000

 
66
%
(3) 
178,685

 
2.42
%
 
Dec 2015
 
Dec 2017
RBS
78,000

 
125,000

 
65
%
 
137,497

 
2.42
%
 
Mar 2014
 
Mar 2015
Total portfolio warehouse facilities
$
283,400

 
$
425,000

 
 
 
 
 
 
 
 
 
 
(1) 
Collateral represents underlying pools of finance receivables pledged to each facility. 
(2) 
Interest rate at period end equal to contractual benchmark plus index. 
(3) 
The Wells Fargo stated advance rate includes a cash reserve account pledged to the facility in the amount of 1% of all collateral pledged to the facility.  
Deutsche Bank Warehouse Facility
We have a revolving warehouse facility with Deutsche Bank AG, New York Branch ("Deutsche Bank"). The amounts outstanding under the facility bear interest at the mid-month LIBOR plus 2.25%. At March 31, 2014, we were in compliance with all financial covenants of this facility.
Wells Fargo Warehouse Facility
We have a revolving warehouse facility with Wells Fargo Bank, N.A. ("Wells Fargo"). The amounts outstanding under the facility bear interest at LIBOR plus 2.25%. At March 31, 2014, we were in compliance with all financial covenants of this facility.
RBS Warehouse Facility
We have a revolving warehouse facility with The Royal Bank of Scotland plc ("RBS"). The amounts outstanding under the facility bear interest at LIBOR plus 2.25%. At March 31, 2014, we were in compliance with all financial covenants of this facility.
Collateral
The finance receivables pledged as collateral to each of the warehouse facilities is established for the benefit of the lenders. These facilities contain a borrowing base which requires us to pledge finance receivables in excess of the amounts which we can borrow under the facilities. The aggregate balance of finance receivables are presented on our consolidated balance sheets included herein, and we do not separately classify those assets serving as collateral since the creditors in each

11


of the warehouse facilities do not have the right to sell or re-pledge the collateral, except in certain cases upon an event of default.
Senior Secured Notes Payable
In June 2010 we issued $200.0 million of 12.625% Senior Secured Notes (the “Senior Secured Notes”). The notes were issued with an original issuance price of 98.85%, resulting in an effective yield of 12.875%. In May 2013 we issued an additional $50.0 million of Senior Secured Notes. These notes were additional notes allowed under the indenture executed in June 2010. The additional notes were issued with an original issuance price of 111.00%, resulting in an effective "yield to first call date" of 7.67%, with interest, maturity and covenant terms identical to those of the initial offering. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 15th and December 15th of each year.
As of March 31, 2014 and December 31, 2013, the amounts of our outstanding Senior Secured Notes payable were $253.1 million and $253.3 million, net of unamortized net premium of $3.1 million and $3.3 million, respectively. As of March 31, 2014, we were in compliance with all financial covenants of the Senior Secured Notes.
Other secured notes payable
A summary of other secured notes payable follows:
 
As of March 31, 2014
 
Balance
 
Max Facility
Capacity
 
Advance
Rate
 
Interest
Rate (1)
 
Expiration
Date
Other secured notes payable
($ In thousands)
 
 
 
 
 
 
Revolving inventory facility
$
130,000

 
$
130,000

 
75%
(2) 
3.50%
 
Nov 2014
Mortgage note payable
12,171

 
 n/a

 
n/a
 
5.87%
 
Mar 2017
Real estate facility
12,811

 
25,000

 
70%
 
4.05%
 
Oct 2020
Total other secured notes payable
$
154,982

 
$
155,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
Balance
 
Max Facility
Capacity
 
Advance
Rate
 
Interest
Rate (1)
 
Expiration
Date
Other secured notes payable
($ In thousands)
 
 
 
 
 
 
Revolving inventory facility
$
136,321

 
$
140,000

(3) 
85%
(2) 
3.75%
 
Nov 2014
Mortgage note payable
12,231

 
 n/a

 
n/a
 
5.87%
 
Mar 2017
Real estate facility
13,412

 
25,000

 
70%
 
4.05%
 
Oct 2020
Total other secured notes payable
$
161,964

 
$
165,000

 
 
 
 
 
 
(1) 
Interest rate at period end equal to contractual benchmark plus index. 
(2) 
Advance rate is based on qualifying vehicle cost and is secured by our entire vehicle inventory. At March 31, 2014 the advance rate decreased to 60% for vehicles 151-180 days old. 
(3) 
Inclusive of a $10.0 million seasonal increase in the months of November through the end of January.  
Revolving inventory facility
We have a revolving inventory facility with Wells Fargo. The interest rate on the facility is based on the Daily One Month LIBOR rate plus 3.25%, and is secured by our entire vehicle inventory. At March 31, 2014, we were in compliance with all financial covenants of this facility.
Mortgage note payable
We have a mortgage note payable which is secured by our operations call center building in Mesa, Arizona (a commercial property). Terms of the note agreement provide for monthly principal and interest payments with a final balloon payment. At March 31, 2014, we were in compliance with all financial covenants of this loan.
Real Estate Facility
We have a seven year fully amortizing real estate facility with Wells Fargo. The amounts outstanding under the facility bear interest at LIBOR plus 4.0%, or LIBOR plus 3.5% for properties added to the facility subsequent to August 22, 2013. At March 31, 2014, the line was collateralized by eleven properties. At March 31, 2014, we were in compliance with all financial covenants of this facility.

12


(6) Accrued Warranty Liability
The accrued limited warranty liability represents our estimated obligations related to limited warranties that were included in the bundled price of vehicle sales and is recorded as a component of payables and other accrued expenses on the accompanying condensed consolidated balance sheets for each period presented. The following table reflects activity in the accrual for the periods indicated:
 
Three Months Ended March 31,
 
2014
 
2013
Limited warranty accrual activity
(In thousands)
Balance, beginning of period
$
15,806

 
$
24,420

Warranty expense

 
8,556

Warranty claims paid
(3,927
)
 
(6,355
)
Balance, end of period
$
11,879

 
$
26,621

(7) Deferred Revenue
Deferred revenue represents the remaining unearned revenue balance of our DriveCare® Extended Vehicle Service Contract, a 36 month/36,000 mile or 60 month/50,000 mile service contract ("VSC"), Guaranteed Asset Protection ("GAP"), GPS monitoring subscription ("GPS") and vehicle lease revenue. The following table sets forth information regarding the changes in deferred revenue:
 
Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Deferred revenue, beginning of period
$
42,133

 
$
2,501

Revenue deferred
85,819

 
8,219

Revenue recognized (1)
(27,206
)
 
(1,441
)
Deferred revenue, end of period
$
100,746

 
$
9,279

(1)     Revenue is recognized as a component of sales revenue on the condensed consolidated statements of operations.
(8) Related Party Transactions
Relationship with Verde Investments, Inc.
Verde Investments, Inc., or “Verde,” is an Arizona corporation that is wholly-owned by Mr. Garcia. Verde engages in the acquisition, development, and long-term investment in real estate and other commercial assets. Mr. Garcia is the principal shareholder, president and director of Verde. Transactions between us and Verde, as well as other related parties, are described below.
General and administrative expenses
During the three months ended March 31, 2014 and 2013, we recorded related party operating expenses as follows:
 
Three Months Ended March 31,
 
2014
 
2013
General and administrative expenses—related party
(In thousands)
Property lease expense
$
1,206

 
$
1,198

Restricted stock compensation expense
1,282

 
311

Aircraft operating and lease expense
2,768

 
1,088

Salaries and wages, general & administrative and other expenses
128

 
131

Reimbursement of certain general and administrative expenses
(77
)
 
(77
)
Total general and administrative expenses—related party
$
5,307

 
$
2,651


13


Interest expense
During the three months ended March 31, 2014 and 2013, we recorded related party interest expense as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Senior secured debt interest expense—related party
 
 
 
Senior secured debt interest expense—Verde
$

 
$
142

Senior secured debt interest expense—CEO

 
16

Total senior debt interest expense—related party
$

 
$
158

Related party interest expense relates to the $4.5 million and $0.5 million of Senior Secured Notes held by Verde and Mr. Fidel, respectively, during the first quarter of 2013. The notes were sold in August 2013, such that none of the Senior Secured Notes were held by a related party during the first quarter 2014.
Relationship with GO Financial
On December 5, 2013, DTAC entered into an agreement to sell GO to the shareholders of DTAC. Transactions between GO and us are described below.
i.
Sale of loans
We have an agreement with GO, such that GO purchases certain on-line generated loans from us each month. The loans are sold at par value with no associated gain or loss. The amount of the loans purchased for the three months ended March 31, 2014 and 2013 was $4.1 million and $0.3 million, respectively.
ii.
Shared services
We provide certain administrative services to GO, as they build out their business processes. For example, we provide payroll, benefits, accounting and certain other corporate ancillary services. These agreed upon services do not allow DriveTime the ability to direct GO's business activities, and are provided at a marketable rate. For the three months ended March 31, 2014, total shared service revenues recorded to other income were $0.7 million.
iii.
Reimbursement of general and administrative expenses
For the three months ended March 31, 2014, GO reimbursed us in the amount of $1.4 million for certain general and administrative expenses that we incurred on GO's behalf.
iv.
Inilex receivable for GPS devices provided to GO dealers
Inilex has an agreement with GO, wherein Inilex provides GPS devices to GO dealers. GO guarantees a portion of the payment for these devices on behalf of GO dealers. As of March 31, 2014, the total receivables due from GO were $0.5 million and were recorded in other assets on the condensed consolidated balance sheets. As of December 31, 2013, the total payables due to GO were $0.1 million and were recorded in payables and other accrued expenses on the condensed consolidated balance sheets.
v.
Commission Expense to GO
Inilex pays GO a commission expense for each GPS unit sold through a GO dealer. Commission expense for the three months ended March 31, 2014 and 2013 was $0.3 million and $0.2 million, respectively, and is recorded as a component of general and administrative expense on the condensed consolidated statements of operations . As of March 31, 2014 and December 31, 2013, accrued commissions in the amount of $0.1 million and zero, respectively, were recorded within payables and other accrued expenses on the condensed consolidated balance sheets.
Shareholder notes receivable
In December 2013 we executed notes receivable from our shareholders in the principal amount of $28.5 million, as a result of the sale of GO Financial. Interest only payments are paid monthly with the principal amount due in full in December 2018. Interest on principal amounts outstanding bear interest at LIBOR + 2.75%. For the three months ended March 31, 2014, we recorded $0.2 million in interest income related to these notes.
(9) Income Taxes
The condensed consolidated financial statements consist of financial and operating data of DTAG and DTAC, which are both S corporations. As DTAC and DTAG are flow-through entities for federal income tax purposes, there is no federal income tax expense related to the income of DTAC and DTAG, other than for two of DTAG’s C corporation subsidiaries, one

14


of which is wholly owned with the other majority owned. The taxable income of DTAG and DTAC flows through to our shareholders, who are responsible for paying the associated taxes.
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities recorded in jurisdictions that either do not recognize the Company's S corporation status and/or assess a tax on the Company's operations at the entity level.  If determined to be necessary, the Company's policy is to record a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that management believes is more likely than not to be realized. As of March 31, 2014 and December 31, 2013, we had a net deferred tax liability of $0.8 million and $0.6 million, respectively.
Although most states follow the federal recognition of S corporation status, some states do impose an entity level tax on that income; therefore, the tax expense is adjusted accordingly. As of March 31, 2014 and December 31, 2013, we had an income tax payable of $0.5 million and $0.6 million, respectively.
At March 31, 2014 and December 31, 2013, the Company had no unrecognized tax benefits.   The Company recognizes accrued interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense. The Company did not accrue any amounts related to the payment of interest and penalties as of March 31, 2014 and December 31, 2013. We do not anticipate any material changes to our unrecognized tax benefits in the next 12 months.
(10) Shareholders’ Equity, Dividends & Stock Compensation
Share Information
At March 31, 2014, DTAG had 1,000 shares of common stock authorized with a par value of $0.001 per share, of which 102.4939 were issued and outstanding. DTAC had 1,000,000 shares of common stock authorized with no par value, of which 102.4939 were issued and outstanding. On March 20, 2014 the Board of Directors approved a restricted stock award to Mr. Fidel, consisting of 0.7243 shares of restricted stock in each of DTAG and DTAC. On April 18, 2014, 0.3042 shares were repurchased to satisfy federal and state income tax obligations pursuant to Mr. Fidel's 83(b) tax election, resulting in a net increase of 0.4201 shares issued and outstanding as of April 30, 2014.
Dividends
Certain of our debt facilities place restrictions on the amount of cash dividends we are permitted to pay to our shareholders. If we are in compliance with the indebtedness ratio restriction in the Senior Secured Notes, we are permitted to pay cash dividends limited to an amount not greater than the percentage of S corporation taxable income for such quarterly period equal to the highest combined federal, state, and/or local tax rate for individuals, plus 50% of the difference between net earnings less amounts paid for tax. If we are not in compliance with the indebtedness ratio dividend restriction in the Senior Secured Notes, specifically related to our ability to pay dividends, we are only permitted to pay cash dividends limited to an amount not greater than the percentage of S corporation taxable income for such quarterly periods equal to the highest combined federal, state, and/or local tax rate for individuals. As of March 31, 2014, we exceeded the indebtedness ratio, which restricted our ability to pay dividends related to net GAAP earnings in excess of amounts to pay taxes. The indebtedness ratio dividend restriction under the Senior Secured Notes is not an aspect of the financial covenants of the Senior Secured Notes, but rather a mechanism designed to place limits on the Company’s ability to pay dividends to its shareholders.
No dividends were distributed during the three months ended March 31, 2014. However, in March 2014, the Board of Directors approved a cash dividend related to fourth quarter 2013 taxable income. The dividend of $3.8 million was declared and paid in April 2014 to our shareholders of record on the payment date and was not recorded as a liability as of March 31, 2014.
Chief Executive Officer Restricted Stock Grant
In March 2014, the Boards of Directors of each of DTAG and DTAC approved a new restricted stock award to Mr. Fidel, consisting of 0.7243 shares of restricted stock in each of DTAG and DTAC, pursuant to certain vesting restrictions. Mr. Fidel made an election under Section 83(b) of the United States Internal Revenue code of 1986 in April 2014, to be taxed on the fair market value of the entire restricted stock grant as of the grant date. In connection therewith, that portion of shares, the fair market value of which was sufficient to satisfy Mr. Fidel’s federal and state income tax obligations with respect to the entire award was deemed to be vested in full as of the grant date, which was determined to be March 20, 2014 under the provisions of ASC 718—Compensation—Stock Compensation. However, only those shares of a value equal to the minimum statutory federal and state withholding due from Mr. Fidel on the grant were repurchased by DTAG and DTAC, and the proceeds from such repurchase were delivered to the relevant tax authorities. One half of the remaining unvested shares of restricted stock vest subject to time based vesting of one-third each year over a period of three years commencing on March 20, 2014, and one half of the shares are subject to certain performance criteria. We believe it is probable the performance criteria will be satisfied.

15


For income tax purposes, Mr. Fidel was deemed to own 0.7243 shares at the grant date. In April 2014 the Company repurchased 0.3042 shares resulting in Mr. Fidel owning 0.4201 additional shares in each of DTAG and DTAC as of April 18, 2014. In connection with the execution of the Restricted Stock Agreements, Mr. Fidel also entered into a Shareholders' Agreement with our principal shareholder and DTAG and DTAC, which, among other things, restricts his ability to transfer his shares of restricted stock and grants him certain tag-along rights in the event of a sale by our principal shareholder and certain piggy-back registration rights in connection with a public offering of our shares or any successor entity.
In April 2014, we obtained a third party valuation of the 0.707% ownership award to Mr. Fidel, resulting in a $2.6 million fair value. As the terms of the agreements do not meet the specific criteria for liability classification as set forth in ASC 718—Compensation—Stock Compensation, we determined the awards to be equity based stock compensation awards, therefore recognizing the expense over the requisite service periods based on a graded vesting. As the restricted stock agreements require the achievement of a service and a performance condition, the Company will only recognize compensation expense for those periods where the service is rendered and the performance condition is met. In addition, as the number of shares and purchase price were known by Mr. Fidel at the time of grant, compensation cost was fixed and measured as of the grant date.
As a result of this transaction, we recorded $1.3 million restricted stock compensation expense in the first quarter 2014 for the 0.3367 shares which vested in the first quarter 2014. The remaining 53.51% of the shares will vest over the vesting schedule presented below, as set forth in the Agreement, and will be recognized as compensation expense in the requisite service periods.
Period 1
 
Period 2
 
Period 3
(3/20/14-12/31/14)
 
(1/31/15-12/31/15)
 
(1/31/16-12/31/16)
9 Months
 
12 Months
 
12 Months
17.84%
 
17.84%
 
17.83%
As set forth above, the vesting is deemed to be equal each period since the performance condition contains carry-back and carry-forward rights, allowing for the CEO to compensate for any shortfalls in future periods, and use excess performance in a given period to carry forward into future periods. As such, equal vesting was deemed appropriate since although it is probable he will achieve the criteria, no weighting can be estimated for each period.
For the three months ended March 31, 2014, we recorded $1.3 million in restricted stock compensation expense associated with the 2014 restricted stock agreements between Mr. Fidel and each of DTAG and DTAC. For the three months ended March 31, 2013, we recorded $0.3 million in restricted stock compensation expense associated with the 2010 restricted stock agreements between Mr. Fidel and each of DTAG and DTAC. The stock compensation recorded for these periods also increased our Paid-in Capital accounts for both companies during these periods.
(11) Commitments and Contingencies
Lease commitments
We lease used car sales facilities, reconditioning centers, our corporate office, aircraft, and certain other office/computer equipment from unrelated and related entities under various operating leases that expire through January 2025. The leases provide for periodic rent increases and many contain escalation clauses and various renewal options from one to ten years. In certain instances, we are also responsible for occupancy and maintenance costs, including real estate taxes, insurance, and utility costs. We recognize rent expense on a straight-line basis over the length of the lease term. As of March 31, 2014, we had approximately $104.4 million in aggregate operating lease obligations.
Legal matters
We are involved in various claims and actions arising in the ordinary course of business. In the opinion of management, based on consultation with legal counsel, the ultimate disposition of these matters will not have a material adverse effect on us. We believe appropriate accruals have been made for the disposition of these matters. In accordance with ASC 450, Contingencies, we establish an accrual for a liability when it is both probable that the liability has been incurred and the amount of the loss can be reasonably estimated. These accruals are reviewed monthly and adjusted to reflect the impact of negotiations, settlements and payments, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Legal expenses related to defense, negotiations, settlements, rulings, and advice of outside legal counsel are expensed as incurred.
There have been no material changes to the status of pending litigation or our accruals for legal matters disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 24, 2014. On January 29, 2014 our counsel had a Notice of Response and Advice ("NORA") call with the Consumer Financial Protection Bureau ("CFPB").  On February 20, 2014, we responded in writing to the CFPB with respect to the NORA call.  We have not yet had a response back from the CFPB.

16


Additionally, in the ordinary course of business, we are a defendant in or subject to various other types of legal proceedings. Although we cannot determine at this time the amount of the ultimate exposure from these legal proceedings, if any, based on the advice of counsel, management does not expect the final outcome to have a material adverse effect on us.
(12) Fair Value of Financial Instruments
Fair values of financial instruments are based on estimates using quoted market prices, discounted cash flows, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated timing and amount of future cash flows. Therefore, the estimates of fair value may differ substantially from amounts that ultimately may be realized or paid at settlement or maturity of the financial instruments and those differences may be material. Accordingly, the aggregate fair value amounts presented do not represent our underlying institutional value.
When assessing the inputs used in calculating the fair value of our financial instruments, we use a three tier hierarchy. This hierarchy indicates to what extent the inputs used in our calculations are observable in the market. The different levels of the hierarchy are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable and reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.
Limitations
Fair values of financial instruments are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties, matters of judgment and, therefore, cannot be determined with ultimate precision. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular instrument. Changes in assumptions could significantly affect these estimates. Because the fair value is estimated as of each balance sheet date presented, the amounts that will actually be realized or paid in settlement of the instruments could be significantly different.
The following is a summary of carrying values presented within the balance sheet and fair value of our financial instruments for each period presented:
 
March 31, 2014
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
Assets
(In thousands)
Finance receivables, net (1)
$
1,775,199

 
$

 
$

 
$
1,934,652

Shareholder notes receivable
28,542

 

 
28,542

 

Liabilities
 
 
 
 
 
 
 
Securitization debt
869,848

 
885,089

 

 

Portfolio term residual financing
50,000

 

 
47,573

 

Bank term financings
184,059

 

 
184,059

 

Portfolio warehouse facilities
302,000

 

 
302,000

 

Senior secured notes payable
253,083

 
271,748

 

 

Revolving inventory facility
130,000

 

 
130,298

 

Mortgage note payable
12,171

 

 
12,745

 

Real estate facility
12,811

 

 
13,086

 


17


 
December 31, 2013
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
Assets
(In thousands)
Finance receivables, net (1)
$
1,598,010

 
$

 
$

 
$
1,692,247

Shareholder notes receivable
28,542

 

 
28,542

 

Liabilities
 
 
 
 
 
 
 
Securitization debt
713,953

 
729,395

 

 

Portfolio term residual financing
50,000

 

 
47,462

 

Bank term financings
223,868

 

 
223,868

 

Portfolio warehouse facilities
283,400

 

 
283,400

 

Senior secured notes payable
253,316

 
279,914

 

 

Revolving inventory facility
136,321

 

 
136,729

 

Mortgage note payable
12,231

 

 
12,808

 

Real estate facility
13,412

 

 
13,700

 

(1) 
Represents finance receivable principal balances, plus accrued interest, less the allowance for credit losses.  
Valuation methodologies
Finance receivables
The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. This discounted cash flow is estimated utilizing an internal valuation model, which uses a combination of market inputs (i.e. discount rates for similar and like transactions) and our own assumptions regarding credit losses, recoveries, and prepayment rates in our portfolio, based on actual experience. We estimate the cash flow of the portfolio and the cash flow of our retained interests in securitization, warehouse and bank term financing transactions in measuring total cash flow. These cash flows are developed on a leveraged basis since our finance receivable portfolio is financed by these debt instruments and are not separable transactions.
Shareholder Notes Receivable
At March 31, 2014 and December 31, 2013, the fair value of shareholder notes approximates the carrying value as the notes were recently executed at a market rate provided by a third party.
Securitization debt
At March 31, 2014 and December 31, 2013, the fair value of securitization debt was determined using a third-party quoted market price.
Portfolio term residual financing
At March 31, 2014 and December 31, 2013, the fair value of the portfolio term residual financing was estimated by discounting future expected cash flows over the life of the facility, using market rates for similar facilities.
Bank term financing
At March 31, 2014 and December 31, 2013, the fair value of the bank term facility was determined to approximate carrying value based upon our knowledge of the securitization market.
Portfolio warehouse facilities
The portfolio warehouse facilities are short term in nature and the interest rates adjust in conjunction with the 30-day LIBOR. The Deutsche Bank Warehouse Facility was renewed in December 2012. The Royal Bank of Scotland Warehouse Facility expiration date was extended in March 2014 to June 2014. The Wells Fargo Warehouse Facility was renewed in December 2013. As these facilities were either recently renewed or extended and contain a floating market rate of interest, we believe the fair value of these facilities approximate carrying value at March 31, 2014 and December 31, 2013.
Senior secured notes payable
The fair value of senior secured notes payable at March 31, 2014 and December 31, 2013 was determined using a third-party quoted market price.

18


Revolving inventory facility
At March 31, 2014 and December 31, 2013, the fair value of the revolving inventory facility was estimated by discounting future cash flows expected to be paid over the life of the facility, using market rates for similar facilities.
Mortgage note payable
At March 31, 2014, and December 31, 2013, the fair value of this note was determined using third-party market prices for similar commercial real estate mortgages. Both periods utilize the December 31, 2013 analysis, as the market for these instruments is not considered volatile.
Real estate facility
At March 31, 2014 and December 31, 2013, the fair value of the real estate facility was determined using third-party market prices for similar real estate collateralized facilities. Both periods utilize the December 31, 2013 analysis, as the market for these instruments is not considered volatile.
(13) Subsequent Events
In April 2014, a $3.8 million dividend related to fourth quarter 2013 taxable income was declared and paid to our shareholders.
In April 2014, we completed our 2014-2 securitization, issuing $288.8 million of asset-backed securities with an original duration weighted average coupon of 2.42%. The securities were rated in tranches with credit ratings from AAA to BBB by Standard and Poor's Rating Service, and DBRS Inc.
In April 2014, DTAG acquired the shares of Pathfinder Insurance Company ("Pathfinder"), a property and casualty insurance company licensed to operate in 43 states, within the continental United States, and the District of Columbia. Pathfinder is currently inactive, does not have personnel, operations, tangible assets (other than cash reserves), or liabilities, and has not issued or assumed new insurance policies since 2007. We acquired these assets for a purchase price of $9.5 million.
(14) Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other accounting standards setting bodies, which we may adopt as of the specified date required by each standard. We believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption. However, the FASB continues to work on several projects, which will lead to new standards, which may have a material impact in future periods.
In 2014, the FASB is expected to release a new revenue recognition standard, to become effective in 2017, which will eliminate industry-specific revenue accounting, and will establish a single set of guidelines for revenue recognition across all industries. The proposed standard provides new guidance on identifying separate performance obligations in a contract, determining and allocating transaction price, and determining when a performance obligation is satisfied. Included within the exposure draft is a requirement to consider the time value of money when addressing contracts with a significant financing component. We will assess the impact of the new pronouncement when released. We believe the proposed new guidance may have a material effect on our future consolidated financial statements, but cannot determine the extent of the impact at this time.
In 2013 the FASB released a new lease accounting proposal which would eliminate the current operating and capital lease classifications and would require an asset or liability to be recorded for most leases longer than one year, similar to the current accounting treatment for capital leases. Additionally, the new guidance may change the way a lease is recorded on the income statement. The final standard is expected to be issued in 2014, and is anticipated to become effective in 2017. We will assess the impact of the new pronouncement when released, but believe the new guidance may have a material effect on our future consolidated financial statements by grossing up our assets and liabilities for leases that are currently treated as operating leases.
The FASB also continues working on a financial instruments project to address the classification and measurement of financial instruments. The FASB continues to deliberate the proposed measures of this project, but is expected to issue the final standard for impairment in 2014. We will assess the impact of the new pronouncement when released, to determine whether such pronouncement may have a material effect on our future consolidated financial statements, as this pronouncement may have an impact on our allowance for credit losses.

19


(15) Discontinued Operations—GO Financial
A summary of revenue and income before income taxes reported in discontinued operations follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Total revenue
$

 
$
2,803

Income before income taxes

 
768

(16) Supplemental Consolidating Financial Information
In accordance with the indenture governing the 12.625% Senior Secured Notes (see Note 5 — Debt Obligations), certain wholly-owned U.S. subsidiaries of the Company have fully and unconditionally guaranteed the Senior Secured Notes on a joint and several basis. Pursuant to Regulation S-X, Rule 3-10(f), we are required to present condensed consolidating financial information for subsidiaries that have guaranteed the debt of a registrant issued in a public offering, where the guarantee is full and unconditional, joint and several, and where the voting interest of the subsidiary is 100% owned by the registrant.
The following tables present condensed consolidating balance sheets as of March 31, 2014, and December 31, 2013; condensed consolidating statements of operations for the three months ended March 31, 2014 and 2013; and condensed consolidating statements of cash flows for the three months ended March 31, 2014 and 2013 for (i) DTAG and DTAC, —the co-issuers of the Senior Secured Notes, (ii) the separate DTAG and DTAC guarantor subsidiaries on a combined basis, (iii) the separate DTAG and DTAC non-guarantor subsidiaries on a combined basis, (iv) elimination adjustments, and (v) total consolidated amounts. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the senior note holders. Consolidating adjustments include elimination of investment in subsidiaries, elimination of intercompany accounts; elimination of intercompany sales between guarantor and non-guarantor subsidiaries; and elimination of equity in earnings (losses) of subsidiaries. The condensed consolidating financial information should be read in conjunction with the condensed consolidated financial statements herein.
See "Note 20—Supplemental Consolidating Financial Information" to our Annual Report on Form 10-K, filed with the SEC on March 24, 2014, for information regarding the names of the guarantor and non-guarantor subsidiaries of our Senior Secured Notes.
Consolidated amounts may be immaterially different compared to the condensed consolidated financial statements due to rounding.

20

Table of Contents                        
DriveTime Automotive Group, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
March 31, 2014
(In thousands)

 
DriveTime Automotive Group, Inc.
 
DT Acceptance Corp
 
 
 
 
 
Guarantor
Subsidiaries
Combined
 
Non-Guarantor
Subsidiaries
 
Parent
Company
 
Eliminations
 
Consolidated
 
Guarantor
Subsidiaries
Combined
 
Non-Guarantor
Subsidiaries
Combined
 
Parent
Company
 
Eliminations
 
Consolidated
 
Eliminations
 
DriveTime
Automotive
Group, Inc.
and
Subsidiaries
ASSETS
 
Cash and cash equivalents
$
10,231

 
$
4,115

 
$
5

 
$

 
$
14,351

 
$
5

 
$
736

 
$
16,105

 
$

 
$
16,846

 
$

 
$
31,197

Restricted cash and investments held in trust

 

 

 

 

 
21,799

 
121,810

 

 

 
143,609

 

 
143,609

Finance receivables

 

 

 

 

 

 

 
2,131,714

 

 
2,131,714

 

 
2,131,714

Allowance for credit losses

 

 

 

 

 

 

 
(319,753
)
 

 
(319,753
)
 

 
(319,753
)
Finance receivables, net

 

 

 

 

 

 

 
1,811,961

 

 
1,811,961

 

 
1,811,961

Vehicle inventory
286,012

 

 

 
(618
)
 
285,394

 

 

 

 

 

 

 
285,394

Property and equipment, net
84,738

 
391

 

 

 
85,129

 
4,163

 
15,261

 
2,162

 

 
21,586

 

 
106,715

Lease fleet vehicles, net
74,434

 

 

 

 
74,434

 

 

 

 

 

 

 
74,434

Investments in subsidiaries

 

 
146,965

 
(146,965
)
 

 

 

 
338,903

 
(338,903
)
 

 

 

Other assets
2,368,646

 
34,650

 
643,199

 
(704,932
)
 
2,341,563

 
1,304,398

 
1,948,062

 
2,257,632

 
(3,238,717
)
 
2,271,375

 
(4,542,550
)
 
70,388

Shareholder notes receivable

 

 

 

 

 

 

 
28,542

 

 
28,542

 

 
28,542

Total Assets
$
2,824,061

 
$
39,156

 
$
790,169

 
$
(852,515
)
 
$
2,800,871

 
$
1,330,365

 
$
2,085,869

 
$
4,455,305

 
$
(3,577,620
)
 
$
4,293,919

 
$
(4,542,550
)
 
$
2,552,240

LIABILITIES & SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payables and other accrued expenses
2,467,944

 
2,017

 
602,517

 
(704,283
)
 
2,368,195

 
1,651,449

 
7,804

 
3,903,077

 
(3,238,717
)
 
2,323,613

 
(4,542,550
)
 
149,258

Deferred revenue
100,746

 

 

 

 
100,746

 

 

 

 

 

 

 
100,746

Portfolio warehouse facilities

 

 

 

 

 

 
302,000

 

 

 
302,000

 

 
302,000

Portfolio term financings

 

 

 

 

 

 
1,103,907

 

 

 
1,103,907

 

 
1,103,907

Senior secured notes payable

 

 
126,542

 

 
126,542

 

 

 
126,541

 

 
126,541

 

 
253,083

Other secured notes payable
130,000

 
12,811

 

 

 
142,811

 

 
12,171

 

 

 
12,171

 

 
154,982

Total Liabilities
2,698,690

 
14,828

 
729,059

 
(704,283
)
 
2,738,294

 
1,651,449

 
1,425,882

 
4,029,618

 
(3,238,717
)
 
3,868,232

 
(4,542,550
)
 
2,063,976

Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest - Inilex

 
2,734

 

 
(3,942
)
 
(1,208
)
 

 

 

 

 

 
336

 
(872
)
Shareholders’ equity
125,371

 
21,594

 
61,110

 
(144,290
)
 
63,785

 
(321,084
)
 
659,987

 
425,687

 
(338,903
)
 
425,687

 
(336
)
 
489,136

Total Equity
125,371

 
24,328

 
61,110

 
(148,232
)
 
62,577

 
(321,084
)
 
659,987

 
425,687

 
(338,903
)
 
425,687

 

 
488,264

Total Liabilities & Shareholders’ Equity
$
2,824,061

 
$
39,156

 
$
790,169

 
$
(852,515
)
 
$
2,800,871

 
$
1,330,365

 
$
2,085,869

 
$
4,455,305

 
$
(3,577,620
)
 
$
4,293,919

 
$
(4,542,550
)
 
$
2,552,240


21

DriveTime Automotive Group, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
December 31, 2013
(In thousands)

 
DriveTime Automotive Group, Inc.
 
DT Acceptance Corp
 
 
 
 
 
Guarantor
Subsidiaries
Combined
 
Non-
Guarantor
Subsidiaries
 
Parent
Company
 
Eliminations
 
Consolidated
 
Guarantor
Subsidiaries
Combined
 
Non-
Guarantor
Subsidiaries
Combined
 
Parent
Company
 
Eliminations
 
Consolidated
 
Eliminations
 
DriveTime
Automotive
Group, Inc.
and
Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,589

 
$
15,477

 
$
5

 
$

 
$
21,071

 
$
5

 
$
588

 
$
9,090

 
$

 
$
9,683

 
$

 
$
30,754

Restricted cash and investments held in trust

 

 

 

 

 
12,707

 
102,493

 

 

 
115,200

 

 
115,200

Finance receivables

 

 

 

 

 

 

 
1,938,931

 

 
1,938,931

 

 
1,938,931

Allowance for credit losses

 

 

 

 

 

 

 
(299,516
)
 

 
(299,516
)
 

 
(299,516
)
Finance receivables, net

 

 

 

 

 

 

 
1,639,415

 

 
1,639,415

 

 
1,639,415

Vehicle inventory
320,406

 

 

 
(839
)
 
319,567