PHOENIX — Despite a 20.7-percent increase in total revenue
and an 18.3-percent jump in unit sales, DriveTime Automotive Group explained
why its gross margins still softened during the second quarter.

According to reports filed with the Securities and Exchange
Commission, DriveTime's revenue came in at $364.8 million, and the company's 104
dealerships turned 17,357 vehicles.

DriveTime's originations increased 22.8 percent
year-over-year to $279.2 million during the second quarter.

However, the company determined its gross margin as a
percentage of sales revenue decreased to 32.6 percent from 34.4 percent during
the second quarter. Gross margin as a percentage of sales revenue decreased to
32.8 percent from 34.0 percent for the six-month span that ended June 30.

"Gross margin was adversely impacted in 2013 as a result of
the accounting effects related to offering our DriveCare limited warranty as a
separately priced product in certain regions in which we operate," DriveTime
officials said.

"Excluding the effects of unbundling the warranty, gross
margin percentage would have been 34.1 percent and 34.4 percent for three
months ended June 30, 2013 and 2012, and would have been 34.5 percent and 34.0
percent for six months ended June 30, 2013," they continued.

Beyond the warranty factor, DriveTime touched on another
factor pinching its gross margins.

"Gross margin also continues to be affected by an increased
vehicle acquisition cost," officials said. "Only a portion of the increase in
base cost of vehicles was passed on to customers through an increase in sales
price due to competitive pressure and to maintain affordability for our customers.

"As we experience wholesale pricing pressure, our ability to
pass on costs to our customers is limited, because our customers are generally sensitive
to down payment and monthly payment amounts," they continued.

"Our cost of vehicles sold per unit increased primarily as a
result of selling a lower mileage and newer model year vehicle in conjunction
with the impact of wholesale used-vehicle prices," DriveTime went on to say.

More on Q2 Originations

The company reported that the principal amount of loans its
related finance company – DriveTime Acceptance – originated increased for both
the three- and six-month timeframes.

During Q2, the company originated $278.4 million in
contracts. The average financing deal was for $16,088 with an APR of 19.7
percent for 64.6 months. Year-over-year, the averages moved $456 higher with
the term lengthening by more than seven months and the APR ticking 0.6 percent
lower.

"These increases are due to an increase in the number of
used vehicles sold, an increase in the average amount financed per loan
originated as a direct result of an increase in the average sales price per
vehicle sold, and a decrease in the average down payment per loan originated,"
officials said.

"Average APR of loans originated decreased and average term
increased as a result of our overall interest rate and financing/underwriting
strategy, which is designed to optimize affordability for our customers, while
considering the effects of retail costs and vehicle pricing," they continued.

"The increase in vehicle costs have indirectly affected
origination APR and increased term in an effort to maintain customer
affordability," DriveTime officials went on to say. "The increase in the
percentage of sales revenue financed is primarily a result of a lower average
down payment combined with a higher average sales price, coupled with the
effects of customers financing the cost of the DriveCare warranty in regions
where we offer the warranty as a separately priced service contract."

Provision for Credit Losses and Delinquencies

DriveTime indicated its provision for credit losses
increased year-over-year for the three- and six-month spans that ended June 30.

"The increase is primarily the result of an increase in the
principal balance of loans outstanding as a result of increased sales volume, coupled
with an increase in the allowance as a percent of principal," officials said.

The company's net charge-offs as a percent of average
outstanding principal increased during Q2 to 3.1 percent from 2.7 percent.
Looking over the first six months of this year, the metric ticked up to 6.8
percent from 5.7 percent.

"The increase in net charge-offs percentage is the result of
an increase in gross charge-offs, coupled with a decrease in our recovery rate,"
officials said.

DriveTime's Q2 gross principal charged-off increased to 4.9
percent 4.6 percent. Through six months, the reading moved up to 11.0 percent
compared to 10.1 percent a year earlier.

"Influencing gross loss rates were higher average principal
charged-offs due in part to historical high used-vehicle prices, which resulted
in the sale of older, higher mileage vehicles and longer financing terms to
maintain customer payment affordability, plus general economic conditions
including unemployment and underemployment rates, and the latent impact of the
disruption of our collection operations resulting from the terminated
transaction for the sale of the company in 2012," officials said.

And drilling deeper into a discussion about delinquencies
and collections, DriveTime indicated that as a percentage of total outstanding
loan principal balances, delinquencies over 30 days increased year-over-year. However,
the company's delinquencies below 30 days decreased and total delinquencies
only increased slightly quarter-over-quarter.

Specifically, paperwork filed with the SEC showed DriveTime's
delinquencies between 30 and 60 days rose 1.8 percent year-over-year, coming in
at 8.3 percent in the second quarter.

"The increase in delinquencies greater than 30 days is the
result of our change in collection strategy for early delinquencies aimed to
improve customer experience while reducing cost of servicing and centralization
of collection efforts for early delinquencies, which includes the use of
off-shore services," DriveTime said.

"As a result of the terminated transaction for the sale of
the company in 2012, turnover of collections personnel increased, we enacted a
collections hiring freeze and experienced a general disruption of our
collections operations, all which adversely impacted delinquencies," officials
continued.

"We also closed our regional collection centers in Orlando,
Fla., and Richmond, Va., which temporarily impacted delinquencies," they went
on to say. "Since the termination of the transaction and closure of our
regional facilities, we have taken steps to increase collections personnel and
supplement our closed regional centers to our normal staffing levels."

DriveTime Acquires Inilex

Also contained within its quarterly report to the SEC, DriveTime
said that in June the company acquired Inilex, a provider of intelligent
telemetry solutions that has been the retailer's provider of GPS technology
installed on vehicle inventory.

"As a result of acquiring a controlling interest in Inilex,
their accounts are consolidated and intercompany transactions are eliminated in
consolidation," officials said.

"The income attributable to the remaining non-controlling
interest in Inilex is presented both on the condensed consolidated statement of
operations as well as in equity within the condensed consolidated balance
sheet," they added.

During the second quarter, Inilex generated $7.9 million in
revenue and $1.5 million of net income, of which $0.7 million was attributable
to a non-controlling interest.

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