**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended March 31, 2006**

**Commission File Number****001-32198**

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**ADESA, Inc.**

(Exact name of Registrant as specified in its charter)

| **Delaware**                     |   | **35-1842546**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**13085 Hamilton Crossing Boulevard****Carmel, Indiana 46032**

(Address ofprincipal executive offices and zip code)

Registrant’s telephone number, including area code: **(800) 923-3725**

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. 

Yes x     No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No x

Thenumber of shares of common stock outstanding as of April 30, 2006:

| **Class** |   | **Number of Shares Outstanding** |
|-----------|--------|-------------------------------------------------|
| Common    |   | 89,860,569                                      |

 

 

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**Index**

|                                         | ** **                                                                                  | **Page**     | ** **   |
|-----------------------------------------|---------------------------------------------------------------------------------------------|--------------|--------------|
| PART I—FINANCIAL  INFORMATION |                                                                                        |         |         |   |   |
| Item  1.                                | Financial  Statements                                                                       | ** **   | ** **   |   |   |   |
|                                    | Consolidated Statements of Income                                                           | *** *** | *** *** | 3 |   |   |
|                                    | Consolidated  Balance Sheets                                                                |         |         | 4 |   |   |
|                                    | Consolidated Statement of Stockholders’ Equity                                         |         |         | 6 |   |   |
|                                    | Consolidated Statements of Cash Flows                                                       |         |         | 7 |   |   |
|                                    | Notes to Consolidated Financial Statements                                                  |         |         | 8 |   |   |
| Item 2.                                 | Management’s Discussion and Analysis of Financial Condition  and Results of Operations |         |         | 23 |   |   |
| Item 3.                                 | Quantitative and Qualitative Disclosures About Market  Risk                                 |         |         | 37 |   |   |
| Item  4.                                | Controls  and Procedures                                                                    |         |         | 38 |   |   |
| PART II—OTHER  INFORMATION    |                                                                                        |         |         |   |   |
| Item  1.                                | Legal  Proceedings                                                                          | ** **   | ** **   | 40 |   |   |
| Item 1A.                                | Risk Factors                                                                                |         |         | 41 |   |   |
| Item 2.                                 | Unregistered Sales of Equity Securities and Use of  Proceeds                                |         |         | 41 |   |   |
| Item 6.                                 | Exhibits                                                                                    |         |         | 41 |   |   |
| Signatures                              |                                                                                        |         | 42           |   |   |
| Exhibit Index                      |                                                                                        |         | 43           |   |   |

 

2

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**PART IFINANCIAL INFORMATION**

**Item 1.**   Financial Statements

**ADESA, Inc.Consolidated Statements of Income*(In millions, except per share data)**(unaudited)***

| ** **                                                       | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Operating revenues                                               |       |                                                                 |       |   |   |   |   |   |   |
| Auction and related services                                     | ** ** | ** **                                                           | **$**      | **250.4** |   |   |   | $ | 213.7 |   |   |
| Dealer financing                                                 | ** ** | ** **                                                           | **35.2**   |   |   |   | 29.0 |   |   |
| Total operating  revenues                                        | ** ** | ** **                                                           | **285.6**  |   |   |   | 242.7 |   |   |
| Operating  expenses                                              |       |                                                                 |       |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization)   | ** ** | ** **                                                           | **144.2**  |   |   |   | 114.5 |   |   |
| Selling, general and administrative                              | ** ** | ** **                                                           | **66.9**   |   |   |   | 54.8 |   |   |
| Depreciation and amortization                                    | ** ** | ** **                                                           | **10.8**   |   |   |   | 9.2 |   |   |
| Total operating  expenses                                        | ** ** | ** **                                                           | **221.9**  |   |   |   | 178.5 |   |   |
| Operating profit                                                 | ** ** | ** **                                                           | **63.7**   |   |   |   | 64.2 |   |   |
| Interest expense                                                 | ** ** | ** **                                                           | **7.0**    |   |   |   | 8.1 |   |   |
| Other income, net                                                | ** ** | ** **                                                           | **(1.7**   | **)** |   |   | (1.5 | ) |   |
| Income from continuing operations before income  taxes           | ** ** | ** **                                                           | **58.4**   |   |   |   | 57.6 |   |   |
| Income taxes                                                     | ** ** | ** **                                                           | **22.1**   |   |   |   | 22.5 |   |   |
| Income from continuing operations                                | ** ** | ** **                                                           | **36.3**   |   |   |   | 35.1 |   |   |
| (Loss) income from discontinued operations, net of  income taxes | ** ** | ** **                                                           | **—** |   |   |   | (0.1 | ) |   |
| Net income                                                       | ** ** | ** **                                                           | **$**      | **36.3** |   |   |   | $ | 35.0 |   |   |
| Earnings per  share—basic                                   |       |                                                                 |       |   |   |   |   |   |   |
| Income from continuing operations                                | ** ** | ** **                                                           | **$**      | **0.40** |   |   |   | $ | 0.39 |   |   |
| (Loss) income from discontinued operations, net of  income taxes | ** ** | ** **                                                           | **—** |   |   |   | — |   |   |
| Net income                                                       | ** ** | ** **                                                           | **$**      | **0.40** |   |   |   | $ | 0.39 |   |   |
| Earnings per  share—diluted                                 |       |                                                                 |       |   |   |   |   |   |   |
| Income from continuing operations                                | ** ** | ** **                                                           | **$**      | **0.40** |   |   |   | $ | 0.38 |   |   |
| (Loss) income from discontinued operations, net of  income taxes | ** ** | ** **                                                           | **—** |   |   |   | — |   |   |
| Net income                                                       | ** ** | ** **                                                           | **$**      | **0.40** |   |   |   | $ | 0.38 |   |   |
| Dividends  declared per common share (Note 11)                   | ** ** | ** **                                                           | **$**      | **0.075** |   |   |   | $ | 0.075 |   |   |

 

See notes to consolidated financial statements

3

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**ADESA, Inc.Consolidated Balance Sheets*(In millions, except share data)***

| ** **                                                                                         | ** **   | **March 31,** | ** **   | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|-----------------------|------------|
| ** **                                                                                         | ** **   | **2006**           | ** **   | **2005**              | ** ** |
| ** **                                                                                         | *** *** | ***(unaudited)***  | ** **   | ** **            | ** ** |
| **Assets**                                                                                         | * *     |               | * *     | * *              |       |   | * * | * * |   |
| ***Current assets***                                                                               | *** *** | ** **         | *** *** | * *              | ** ** | ** ** | *** *** | * * |   |
| Cash and cash equivalents                                                                          | ** **   | ** **         | **$**        | **238.4**             | * *   |   |   | $ | 240.2 | * * |   |
| Restricted cash                                                                                    | ** **   | ** **         | **7.1**      | * *              |       |   | 5.7 | * * |   |
| Trade receivables, net of allowances of $4.5 (2006) and  $3.9 (2005)                          | ** **   | ** **         | **274.8**    | * *              |       |   | 188.6 | * * |   |
| Finance receivables, net of allowances of $3.2 (2006) and  $2.4 (2005)                        | ** **   | ** **         | **241.7**    | * *              |       |   | 196.7 | * * |   |
| Retained interests in finance receivables sold                                                     | ** **   | ** **         | **65.8**     | * *              |       |   | 56.8 | * * |   |
| Deferred income taxes                                                                              | ** **   | ** **         | **20.0**     | * *              |       |   | 21.6 | * * |   |
| Other current assets                                                                               | ** **   | ** **         | **17.8**     | * *              |       |   | 14.5 | * * |   |
| Total current assets                                                                               | ** **   | ** **         | **865.6**    | * *              |       |   | 724.1 | * * |   |
| ***Other assets***                                                                                 | *** *** | ** **         | *** *** | * *              | ** ** | ** ** | *** *** | * * |   |
| Goodwill                                                                                           | ** **   | ** **         | **543.2**    | * *              |       |   | 532.6 | * * |   |
| Other intangible assets, net of accumulated amortization of $31.9  (2006) and $29.8 (2005)         | ** **   | ** **         | **46.6**     | * *              |       |   | 42.0 | * * |   |
| Other assets                                                                                       | ** **   | ** **         | **65.7**     | * *              |       |   | 50.9 | * * |   |
| Total other assets                                                                                 | ** **   | ** **         | **655.5**    | * *              |       |   | 625.5 | * * |   |
| Property and equipment, net of  accumulated depreciation of  $162.9  (2006) and $155.2 (2005) | ** **   | ** **         | **600.7**    | * *              |       |   | 595.9 | * * |   |
| Total assets                                                                                       | ** **   | ** **         | **$**        | **2,121.8**           | * *   |   |   | $ | 1,945.5 | * * |   |

 

See notes to consolidated financial statements

4

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**ADESA, Inc.Consolidated Balance Sheets*(In millions, except share data)***

| ** **                                                                                                               | ** **   | **March 31,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                                               | ** **   | **2006**           | ** **  | **2005**              | ** ** |
| ** **                                                                                                               | *** *** | ***(unaudited)***  | ** **  | ** **            | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                           | ** **   |               | ** **  |                  |       |   | ** ** | ** ** |   |
| ***Current liabilities***                                                                                                | ** **   |               | ** **  |                  |       |   | ** ** | ** ** |   |
| Accounts payable                                                                                                         | ** **   |               | **$**       | **415.5**             |       |   |   | $ | 270.3 |   |   |
| Accrued employee benefits and compensation expenses                                                                      | ** **   |               | **34.5**    |                  |       |   | 35.0 |   |   |
| Other accrued expenses                                                                                                   | ** **   |               | **40.7**    |                  |       |   | 36.7 |   |   |
| Income taxes payable                                                                                                     | ** **   |               | **3.4**     |                  |       |   | 3.3 |   |   |
| Current maturities of long-term debt                                                                                     | ** **   |               | **70.0**    |                  |       |   | 70.0 |   |   |
| Current liabilities of discontinued operations                                                                           | ** **   |               | **6.9**     |                  |       |   | 6.8 |   |   |
| Total current liabilities                                                                                                | ** **   |               | **571.0**   |                  |       |   | 422.1 |   |   |
| ***Non-current liabilities***                                                                                            | ** **   |               | ** **  |                  |       |   |   |   |   |
| Long-term debt                                                                                                           | ** **   |               | **355.0**   |                  |       |   | 362.5 |   |   |
| Deferred tax liabilities                                                                                                 | ** **   |               | **62.6**    |                  |       |   | 63.6 |   |   |
| Other liabilities                                                                                                        | ** **   |               | **7.8**     |                  |       |   | 7.4 |   |   |
| Total non-current liabilities                                                                                            | ** **   |               | **425.4**   |                  |       |   | 433.5 |   |   |
| Commitments and contingencies  (Note 12)                                                                                 | ** **   |               | **—**  |                  |       |   | — |   |   |
| ***Stockholders’ equity***                                                                                          | ** **   |               | ** **  |                  |       |   |   |   |   |
| Preferred stock, $0.01 par value:                                                                                        | ** **   |               | ** **  |                  |       |   |   |   |   |
| Authorized shares: 50,000,000  Issued shares: none                                                                       | ** **   |               | **—**  |                  |       |   | — |   |   |
| Common stock, $0.01 par value:                                                                                           | ** **   |               | ** **  |                  |       |   |   |   |   |
| Authorized shares: 500,000,000  Issued shares: 94,868,104 (2006 and 2005)                                                | ** **   |               | **1.0**     |                  |       |   | 1.0 |   |   |
| Additional paid-in capital                                                                                               | ** **   |               | **670.0**   |                  |       |   | 668.3 |   |   |
| Retained earnings                                                                                                        | ** **   |               | **510.3**   |                  |       |   | 480.7 |   |   |
| Treasury stock, at cost:                                                                                                 | ** **   |               | ** **  | ** **            |       |   |   |   |   |
| Shares: 5,029,663 (2006)               5,275,585 (2005) | ** **   |               | **(105.6**  | **)**                 |       |   | (110.7 | ) |   |
| Accumulated other comprehensive income                                                                                   | ** **   |               | **49.7**    |                  |       |   | 50.6 |   |   |
| Total stockholders’ equity                                                                                          | ** **   |               | **1,125.4** |                  |       |   | 1,089.9 |   |   |
| Total liabilities and stockholders’ equity                                                                          | ** **   |               | **$**       | **2,121.8**           |       |   |   | $ | 1,945.5 |   |   |

 

See notes to consolidated financial statements

5

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**ADESA, Inc.Consolidated Statement of Stockholders’ Equity*(In millions)***

| ** **                                        | ** ** | **Common  Stock Shares** | ** ** | **Common  Stock Amount** | ** ** | **Additional  Paid-In Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|--------------------------------------|------------|------------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| **Balance  at December 31, 2005**            |       |                          | 94.9       |                          |       |                                 | $          | 1.0                    |       |                |       | $                                                         | 668.3      |      |       |   | $ | 480.7 |   |   | ($110.7 | ) |   | $ | 50.6 |   |   | $ | 1,089.9 |   |
| Comprehensive income:                             |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                        |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      | 36.3       |   |   |   |   |   |   |   |   | 36.3 |   |
| Other  comprehensive income, net of tax:          |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation                      |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   | (1.1 | ) |   |   |   |
| Unrealized gain on interest rate swaps            |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   | 0.2 |   |   |   |   |
| Other comprehensive income                        |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | (0.9 | ) |
| Comprehensive  income                             |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | 35.4 |   |
| Cash dividends  paid to stockholders              |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      | (6.7       | ) |   |   |   |   |   |   |   | (6.7 | ) |
| Issuance of  common stock under stock plans       |       |                          |       |                          |       |                                 |       |                   |       |                | 0.3        |                                                      |       |      |       |   |   | 5.1 |   |   |   |   |   | 5.4 |   |
| Stock based  compensation expense                 |       |                          |       |                          |       |                                 |       |                   |       |                | 1.4        |                                                      |       |      |       |   |   |   |   |   |   |   |   | 1.4 |   |
| **Balance  at March 31, 2006 *(unaudited)*** | ** ** | ** **                    | **94.9**   |                          | ** ** | ** **                           | **$**      | **1.0**                |       | ** **          | ** ** | **$**                                                     | **670.0**  |      | ** ** | ** ** | **$** | **510.3** |   | ** ** | **($105.6** | **)** | ** ** | **$** | **49.7** |   | ** ** | **$** | **1,125.4** | ** ** |

See notes to consolidatedfinancial statements

6

 

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**ADESA, Inc.Consolidated Statements of Cash Flows*(In millions)(unaudited)***

| ** **                                                                             | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| **Operating  activities**                                                              | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                             | ** ** |                                                                 | **$**      | **36.3** | ** ** |   |   | $ | 35.0 |   |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:** | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Depreciation and amortization                                                          | ** ** |                                                                 | **10.8**   | ** ** |   |   | 9.2 |   |   |
| Bad debt expense                                                                       | ** ** |                                                                 | **1.8**    | ** ** |   |   | 1.7 |   |   |
| Deferred income taxes                                                                  | ** ** |                                                                 | **1.0**    | ** ** |   |   | 0.5 |   |   |
| Stock-based compensation expense                                                       | ** ** |                                                                 | **1.8**    | ** ** |   |   | 0.4 |   |   |
| Other non-cash, net                                                                    | ** ** |                                                                 | **0.7**    | ** ** |   |   | 1.5 |   |   |
|                                                                                   | ** ** |                                                                 | **52.4**   | ** ** |   |   | 48.3 |   |   |
| **Changes  in operating assets and liabilities, net of acquisitions:**                 | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Finance receivables held for sale                                                      | ** ** |                                                                 | **(24.1**  | **)** |   |   | (33.3 | ) |   |
| Retained interests in finance receivables sold                                         | ** ** |                                                                 | **(9.0**   | **)** |   |   | (4.3 | ) |   |
| Trade receivables and other assets                                                     | ** ** |                                                                 | **(87.8**  | **)** |   |   | (126.9 | ) |   |
| Accounts payable and accrued expenses                                                  | ** ** |                                                                 | **70.7**   | ** ** |   |   | 118.6 |   |   |
| **Net  cash provided by operating activities**                                         | ** ** |                                                                 | **2.2**    | ** ** |   |   | 2.4 |   |   |
| **Investing activities**                                                               | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net increase in finance receivables held for  investment                               | ** ** |                                                                 | **(23.2**  | **)** |   |   | (10.6 | ) |   |
| Acquisition of businesses, net of cash acquired                                        | ** ** |                                                                 | **(29.7**  | **)** |   |   | — |   |   |
| Purchases of property, equipment and computer  software                                | ** ** |                                                                 | **(6.2**   | **)** |   |   | (20.0 | ) |   |
| Purchase of other intangibles                                                          | ** ** |                                                                 | **(0.2**   | **)** |   |   | — |   |   |
| Proceeds from the sale of property, equipment and  computer software                   | ** ** |                                                                 | **—** | ** ** |   |   | 0.1 |   |   |
| Purchase of investments                                                                | ** ** |                                                                 | **(12.5**  | **)** |   |   | — |   |   |
| Transfer to restricted cash                                                            | ** ** |                                                                 | **(1.4**   | **)** |   |   | — |   |   |
| **Net  cash used by investing activities**                                             | ** ** |                                                                 | **(73.2**  | **)** |   |   | (30.5 | ) |   |
| **Financing activities**                                                               | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net increase in book overdrafts                                                        | ** ** |                                                                 | **77.9**   | ** ** |   |   | 75.4 |   |   |
| Payments on long-term debt                                                             | ** ** |                                                                 | **(7.5**   | **)** |   |   | (9.3 | ) |   |
| Issuance of common stock under stock plans                                             | ** ** |                                                                 | **5.4**    | ** ** |   |   | 5.9 |   |   |
| Dividends paid to stockholders                                                         | ** ** |                                                                 | **(6.7**   | **)** |   |   | (6.9 | ) |   |
| Repurchase of common stock                                                             | ** ** |                                                                 | **—** | ** ** |   |   | (4.7 | ) |   |
| **Net  cash provided by financing activities**                                         | ** ** |                                                                 | **69.1**   | ** ** |   |   | 60.4 |   |   |
| Effect of exchange rate changes on cash                                                | ** ** |                                                                 | **0.1**    | ** ** |   |   | (0.2 | ) |   |
| **Net (decrease) increase in cash and cash  equivalents**                              | ** ** |                                                                 | **(1.8**   | **)** |   |   | 32.1 |   |   |
| Cash and cash  equivalents at beginning of period                                      | ** ** |                                                                 | **240.2**  | ** ** |   |   | 304.5 |   |   |
| Cash and cash  equivalents at end of period                                            | ** ** |                                                                 | **$**      | **238.4** | ** ** |   |   | $ | 336.6 |   |   |

 

See notes to consolidated financial statements

7

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**ADESA, Inc. Notes to Consolidated Financial Statements**

**Note 1—Summary ofSignificant Accounting Policies**

***Basis of Presentation***

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. Operating results from interimperiods are not necessarily indicative of results that may be expected for theyear as a whole. In the opinion of management, the consolidated financialstatements reflect all adjustments considered necessary (consisting of normalrecurring accruals) for a fair statement of the Company’s financial results forthe periods presented. The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures at the date of thefinancial statements and during the reporting period. Actual results coulddiffer from these estimates. A listing of the Company’s critical accountingestimates is described in the “Critical Accounting Estimates” section of “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Form 10-Q and in Part II, Item 7, Note 3 and elsewhere in the Notes to the ConsolidatedFinancial Statements included in the Company’s Annual Report on Form 10-K,which includes audited financial statements for the three years ended December 31,2005.

These consolidated financial statements and condensednotes to consolidated financial statements are unaudited and should be read inconjunction with the audited consolidated financial statements and notesthereto for the year ended December 31, 2005 included in the Company’sAnnual Report on Form 10-K (Commission file number 001-32198)filed with the Securities and Exchange Commission (“SEC”). The 2005 year-endconsolidated balance sheet data included in this Form 10-Q wasderived from the audited financial statements referenced above, but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America. As used herein, the terms the “Company” and “ADESA”shall mean ADESA, Inc. and its consolidated subsidiaries. The term “ALLETE”shall mean ADESA’s former parent, ALLETE, Inc. and its consolidatedsubsidiaries.

ADESA is the second largest used vehicle auctionnetwork in North America, based upon the number of used vehicles sold throughauctions annually, and also provides services such as inbound and outboundlogistics, reconditioning, vehicle inspection and certification, titling,administrative and salvage recovery services. Through its wholly ownedsubsidiary Automotive Finance Corporation (“AFC”), the Company also providesshort-term inventory-secured financing, known as floorplan financing, to usedvehicle dealers. ADESA is able to serve the diverse and multi-faceted needs ofits customers through the wide range of services offered at its facilities.

Included in the resultsfor the three months ended March 31, 2006, is a $2.7 million pretaxcharge, or $0.02 per diluted share, related to unreconciled balance sheetdifferences concealed by a former employee at the company’s Kitchener, Ontario,auction facility. The corrections were recorded in “Selling, general andadministrative” expenses and decreased net income for the three months ended March 31,2006 by a total of $1.7 million.

***Reclassifications and Revisions***

Certain prior year amountsin the consolidated financial statements have been reclassified or revised toconform to the current year presentation.

8

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

*DiscontinuedOperations*

In February 2003,management approved a plan to discontinue the operations of the Company’svehicle importation business. In August 2005, ADESA sold ComSearch, Inc.The financial results of the vehicle importation business and ComSearch havebeen reclassified as discontinued operations for all periods presented.

*Revisions Relatedto Cash Flows from Finance Receivables*

AFC sells the majority of its U.S. dollar denominated finance receivableson a revolving basis and without recourse to a wholly owned, bankruptcy remote,consolidated, special purpose subsidiary (“AFC Funding Corporation”). AFCFunding securitizes a portion of its floorplan receivables using a revolvingsecuritization structure. The securitization agreement allows for the revolvingsale of undivided interests in certain eligible finance receivables by AFCFunding Corporation to a bank conduit facility.

Prior to December 31, 2005, ADESA reported an increase ordecrease in operating cash flows in the Consolidated Statements of Cash Flowsrelated to the origination and collection of certain finance receivables thatwere held for investment. This cash flow treatment followed AFC’s principaloperating activity, originating and servicing floorplan receivables; however,according to Statement of Financial Accounting Standards (“SFAS”) No. 102, *Statement ofCash Flows—Exemption of Certain Enterprises and Classification of Cash Flowsfrom Certain Securities Acquired for Resale*, cash receipts and cashpayments related to finance receivables held for investment should beclassified within investing activities in the Consolidated Statements ofCash Flows. As of March 31, 2006, cash flows related to the origination and collection offinance receivables held for investment were recorded in investing activitiesin the Consolidated Statements of Cash Flows.

Consequently, to achieve comparable presentation forall periods presented, the net change in finance receivables held forinvestment in the Consolidated Statements of Cash Flows for the quarter ended March 31,2005 has been revised. The amounts revised were deemed immaterial to theCompany’s prior financial statements. These revisions had no impact on thetotal “Net (decrease) increase in cash and cash equivalents” on theConsolidated Statements of Cash Flows.

TheCompany has and will revise its presentation of the cash flows from financereceivables held for investment in its Consolidated Statements of Cash Flowsprospectively for the comparable quarterly periods in 2005 when it files its2006 quarterly reports on Form 10-Q. Prior to December 31,2005, the cash flows arising in connection with changes in finance receivablesheld for investment were reported as operating cash flows. These cash flows arenow reported as investing cash flows. As a result, operating and investing cashflows for the unaudited interim periods in 2005 have been and will be revisedas follows:

| ** **           | ** ** | **Three Months Ended  March 31, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|----------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **           | ** ** | **Reported**                                               | ** ** | **Revised**                                             | ** ** | **Reported**                                                  | ** ** | **Revised** | ** ** | **Reported** | ** ** | **Revised** | ** ** |
| Operating cash  flow |       |                                                       | $          | (8.1                                                    | )          |                                                          |       | $ | 2.4 |   |   |   | $ | 14.7 |   |   |   | $ | 37.7 |   |   |   | $ | 100.5 |   |   | $ | 105.0 |   |
| Investing cash flow  |       |                                                       | $          | (19.9                                                   | )          |                                                          |       | $ | (30.5 | ) |   |   | $ | (55.6 | ) |   |   | $ | (79.9 | ) |   |   | $ | (64.1 | ) |   | $ | (69.3 | ) |

 

The revisions for thethree months ended March 31, 2005 and June 30, 2005 also includereclassifications to operating cash flows of insignificant amounts related topresentation of the financial results of the Company’s former vehicleimportation business as discontinued operations.

9

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

***Other Assets***

Other assets consist ofinvestments held to maturity, debt issuance costs, notes receivable, deposits,cost and equity method investments and other long-term assets. In February 2006,AFC acquired a 15 percent interest in Finance Express, LLC for $12.5million in cash. Finance Express is a financial software and services companyspecializing in software for the origination and servicing of motor vehicleretail installment contracts between independent used vehicle dealers and lendinginstitutions. In addition, the Company also receives certain fees from FinanceExpress for assistance in marketing its software product and services toindependent used vehicle dealers. Finance Express qualifies as a variableinterest entity (“VIE”) pursuant to Financial Interpretation No. 46, *Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin No. 51* (“FIN 46”). The Company iscurrently not the primary beneficiary of the VIE and its risk of loss islimited, in all material respects, to its investment in Finance Express. TheCompany’s investment in Finance Express is accounted for using the equitymethod of accounting and its equity in Finance Express’ earnings or losses isrecorded in “Other income, net” in the Consolidated Statements of Income. TheCompany’s equity in Finance Express’ earnings or losses was not material forthe period ended March 31, 2006.

***Stock-Based Compensation***

Prior to 2006, ADESA applied the intrinsic valuemethod provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, to account for stock-based compensation. Accordingly, theCompany did not recognize compensation expense for employee stock options thatwere granted in prior years. However, compensation expense was recognized onother forms of stock-based compensation, including restricted stock units andperformance based stock awards. On January 1, 2006, the Company adoptedthe provisions of SFAS 123(R), *Share-Based Payment*,using the modified prospective application method, and therefore was notrequired to restate its financial results for prior periods. Under this method,as of January 1, 2006, ADESA will apply the provisions of this statementto new and modified awards, as well as to the nonvested portion of awardsgranted and outstanding before the Company’s adoption.

The Company’s stock-based compensation awards,including both stock options and restricted stock units, have a retirementeligible provision, whereby awards granted to employees who have reached theretirement eligible age and meet certain service requirements with either ADESAand or its former parent, ALLETE, automatically vest when an eligible employeeretires from the Company. The Company has previously accounted for this type ofarrangement by recognizing compensation cost (for both pro forma andrecognition purposes) over the nominal vesting period (i.e., over the fullstated vesting period of the award) and, if the employee retired before the endof the vesting period, recognizing any remaining unrecognized compensation costat the date of retirement. Upon adoption of SFAS 123(R), new awards will besubject to the non-substantive vesting period approach, which specifies that anaward is vested when the employee’s retention of the award is no longercontingent on providing subsequent service. Recognizing that many companiesfollowed the nominal vesting period, the SEC issued guidance for converting tothe non-substantive vesting period approach. The Company has revised itsapproach to apply the non-substantive vesting period approach to all new grantsafter adoption, but will continue to follow the nominal vesting period approachfor the remaining portion of unvested outstanding awards. An additionalrequirement of SFAS 123(R) is that estimated forfeitures be considered indetermining compensation expense. As previously permitted, the Company recordedforfeitures when they occurred. Estimating forfeitures did not have a materialimpact on the determination of compensation expense.

10

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

On March 9, 2005, the board of directors (the “board”)of the Company accelerated the vesting of certain unvested and “out-of-the-money”stock options previously awarded to employees and officers that have an exerciseprice of $24. The awards accelerated were made under the ADESA, Inc. 2004Equity and Incentive Plan in conjunction with ADESA’s initial public offering (“IPO”)in June 2004. As a result, options to purchase approximately 2.9 millionshares of the Company’s common stock became exercisable immediately and theCompany disclosed incremental pro forma stock-based employee compensationexpense of approximately $7.7 million, net of tax, in the first quarter 2005. Theoptions awarded in conjunction with the IPO to the Company’s named executiveofficers and the majority of the other officers would have vested in equalincrements at June 15, 2005, 2006 and 2007. The options awarded to certainother executive officers and employees had different vesting terms. One-thirdof the options awarded to the other executive officers and employees vested on December 31,2004. The remaining two-thirds of the options awarded to these executiveofficers and other employees in conjunction with the IPO would have vested inequal increments at December 31, 2005 and 2006. All of these optionsexpire in June 2010. All other terms and conditions applicable to theoutstanding stock option grants remain in effect.

The Company and its board considered several factorsin determining to accelerate the vesting of these options. Primarily, theacceleration will enhance the comparability of the Company’s financialstatements in prior and subsequent periods. The options awarded to theexecutive officers were special, one-time grants in conjunction with theCompany’s IPO. As such, these grants are not indicative of past grants whenADESA was a subsidiary of ALLETE prior to June 2004 and are notrepresentative of the Company’s expected future grants. The Company and boardalso believe that the acceleration is in the best interest of the stockholdersas it will reduce the Company’s reported stock option expense in future periodsmitigating the impact of SFAS 123(R).

As a result of adopting SFAS 123(R) on January 1,2006, income from continuing operations before income taxes and net income forthe quarter ended March 31, 2006, were $1.0 million and $0.6 million lowerthan if the Company had continued to account for share-based compensation underAPB Opinion No. 25. Basic and diluted earnings per share from continuingoperations were $0.01 lower for the quarter ended March 31, 2006 as aresult of the adoption of SFAS 123(R).

Prior to the adoption of SFAS 123(R), tax benefits ofdeductions resulting from the exercise of stock options were presented as operatingcash flows in the Consolidated Statements of Cash Flows. SFAS 123(R) requirescash flows resulting from tax deductions in excess of recognized compensationcost from the exercise of stock options (excess tax benefits) to be classifiedas financing cash flows. This change in classification did not have an impacton the Consolidated Statement of Cash Flows in the current period as the excesstax benefits recognized for the three months ended March 31, 2006 were notmaterial.

Prior to the adoption of SFAS 123(R), the Companyapplied the disclosure-only provisions of SFAS 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*, which permitted companies to apply the existing accountingrules under APB Opinion No. 25 and related interpretations. Generally,if the exercise price of options granted under the plan was equal to the marketprice of the underlying common stock on the grant date, no share-basedcompensation cost was recognized in net income. As required by SFAS 148, priorto the adoption of SFAS 123(R), pro forma net income and pro forma net incomeper common share were provided for stock-based awards, as if the fair valuerecognition provisions of SFAS 123 had been applied.

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS 123 toall stock-based employee compensation in 

11

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

fiscal year 2005. The fair value of stock options wasestimated as of the grant date using the Black-Scholes option-pricing model andthe attribution method. The Black-Scholes option-pricing model does notconsider the non-traded nature of employee stock options, the lack oftransferability or a vesting period. If the model took these items intoconsideration, the resulting estimate for fair value of the stock options couldbe different. In addition, because of the change to the non-substantive vestingperiod approach, the application of estimated forfeitures, the acceleration ofvesting of underwater IPO stock options, the fact that the Company’s optionsvest over three years and additional option grants are expected to be madesubsequent to January 1, 2006, the results of expensing stock-basedcompensation under SFAS 123(R) may have a materially different effect onnet income in future periods than that presented below.

| ***(in millions except per share amounts)***                        | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Reported net  income                                                                         |       |                                                       | $          | 35.0 |   |   |
| Add: stock-based  employee compensation included in reported net income, net of tax(1)  |       |                                                       | 0.2        |   |   |
| Deduct: total  stock-based employee compensation expense, net of tax                         |       |                                                       | (10.1      | ) |   |
| Pro forma net  income                                                                        |       |                                                       | $          | 25.1 |   |   |
| Earnings per share:                                                                          |       |                                                       |       |   |   |
| Basic—as reported                                                                       |       |                                                       | $          | 0.39 |   |   |
| Basic—pro forma                                                                         |       |                                                       | $          | 0.28 |   |   |
| Diluted—as reported                                                                     |       |                                                       | $          | 0.38 |   |   |
| Diluted—pro forma                                                                       |       |                                                       | $          | 0.28 |   |   |

----

(1)          Reportedamounts include expense associated with restricted stock units and performanceshare awards.

***New Accounting Standards***

In March 2006, theFASB issued SFAS 156, *Accounting for Servicingof Financial Assets—an amendment of FASB Statement No. 140*. SFAS156 requires recognition of a servicing asset or liability at fair value eachtime an obligation is undertaken to service a financial asset by entering intoa servicing contract. The standard also provides guidance on subsequentmeasurement methods for each class of servicing assets and liabilities andspecifies financial statement presentation and disclosure requirements. SFAS156 is effective for fiscal years beginning after September 15, 2006. TheCompany will adopt SFAS 156 on January 1, 2007 and is currentlyevaluating the impact the adoption of SFAS 156 will have on the consolidatedfinancial statements.

**Note 2—Stock-BasedCompensation**

***Equity and Incentive Plan***

Certain key employees of the Company and itssubsidiaries participate in the ADESA, Inc. 2004 Equity and Incentive Plan(“the Plan”). The maximum number of shares reserved for the grant of awardsunder the 2004 Equity and Incentive Plan is 8.5 million. There were approximately2.5 million remaining shares available for grant under the Plan on March 31,2006. The Plan provides for the grant of incentive stock options andnon-qualified stock options, stock appreciation rights, restricted stock,restricted stock 

12

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

units and otherstock-based awards. To date, the grants have taken the form of stock options,restricted stock and restricted stock units.

The Company currently uses its treasury stock tosatisfy stock option exercises and stock distributions. At March 31, 2006,the Company holds 5,029,663 shares of treasury stock, and therefore does notexpect to be required to purchase additional shares in fiscal 2006 to satisfystock option exercises and stock distributions.

The compensation cost thatwas charged against income for all plans was $1.8 million and $0.4 million forthe quarters ended March 31, 2006 and 2005. The total income tax benefitrecognized in the Consolidated Statements of Income for stock compensationagreements was approximately $0.7 million and $0.2 million for the quartersended March 31, 2006 and 2005.  Hadthe Company followed SFAS 123 rather than APB Opinion No. 25, anadditional $9.9 million of compensation expense, net of tax, would have beenrecorded for the quarter ended March 31, 2005 (as disclosed in the proforma information in Note 1). The Company did not capitalize any stock-basedcompensation cost in the three months ended March 31, 2006.

***Stock Options***

Stockoptions may be granted under the Plan at a price of not less than the fairmarket value of a share of ADESA common stock on the date of grant andgenerally vest in equal annual installments over three years with expirationnot to exceed six years from the date of grant. The weighted average fair valueof options granted was $8.56 and $7.31 per share for the first three months of2006 and 2005, respectively. The fair value of stock options granted wasestimated on the date of grant using the Black-Scholes option pricing model andthe following assumptions:

| **Assumptions**           | ** ** | ** **           | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate  | ** ** | **4.6 – 4.7**   | **%**      | 3.6      | %          |
| Expected  life—years | ** ** | **4**                |       | 4        |       |
| Expected  volatility      | ** ** | **38.0**             | **%**      | 41.0     | %          |
| Dividend yield            | ** ** | **1.15 – 1.17** | **%**      | 1.34     | %          |

 

*Risk-freeinterest rate—**This***isthe yield on U.S. Treasury Securities posted at the date of grant having a termequal to the expected life of the option. An increase in the risk-free interestrate will increase compensation expense.

*Expectedlife—years—**This***isthe period of time over which the options granted are expected to remainoutstanding. Options granted by ADESA have a maximum term of six years, whilethe options converted from ALLETE to ADESA have a maximum term of ten years. Anincrease in the expected life will increase compensation expense.

*Expectedvolatility—**Actual* changes in the market valueof the Company’s stock are used to calculate the volatility assumption. Basedon the Company’s limited time as a publicly traded company, a combination ofhistorical volatility and the volatility of its comparable peer group was usedto calculate expected volatility. An increase in the expected volatility willincrease compensation expense.

*Dividendyield—**This* is the annual rate ofdividends per share over the exercise price of the option. An increase in thedividend yield will decrease compensation expense.

13

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

Thefollowing table summarizes stock option activity for the three months ended March 31,2006:

| ***Options***                        | ** ** | ** ** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value(in millions)** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| Outstanding at  January 1, 2006 |       | 4,482,953  |       |       | $          | 22.09                                  |       |                                                |       |                                              |       |   |   |   |   |   |
| Granted                              |       | 288,507    |       |       | $          | 26.11                                  |       |                                                |       |                                              |       |   |   |   |   |   |
| Exercised                            |       | (241,186   | )          |       | $          | 22.14                                  |       |                                                |       |                                              |       |   |   |   |   |   |
| Forfeited or  cancelled              |       | (4,370     | )          |       | $          | 20.97                                  |       |                                                |       |                                              |       |   |   |   |   |   |
| Outstanding at  March 31, 2006  |       | 4,525,904  |       |       | $          | 22.35                                  |       |                                                |       | 4.7                                               |       |   |   | $ | 19.9 |   |   |
| Exercisable at  March 31, 2006  |       | 3,827,035  |       |       | $          | 22.05                                  |       |                                                |       | 4.5                                               |       |   |   | $ | 17.9 |   |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on ADESA’s closing stockprice of $26.74 on March 31, 2006, that would have been received by theoption holders had all option holders exercised their options as of that date. Thisamount changes continuously based on the fair value of the Company’s stock. Thetotal intrinsic value of options exercised during the quarters ended March 31,2006 and 2005 was $0.7 million and $4.2 million. The fair value of all vestedand exercisable shares at March 31, 2006 and 2005 was $102.3 million and$96.0 million.

As of March 31, 2006,there was $3.9 million of total unrecognized compensation expense related tostock options granted which is expected to be recognized over a weightedaverage term of 2.2 years. This unrecognized compensation expense only includesthe cost for those options expected to vest, as the Company estimated expectedforfeitures in accordance with SFAS 123(R). When estimating forfeitures, theCompany considers voluntary and involuntary termination behavior as well asactual forfeitures. An increase in estimated forfeitures would decreasecompensation expense.

***Restricted Stock Units***

The fair value of restricted stock units (“RSUs”) isthe value of ADESA’s stock at the date of grant ranging between $15.60 and$26.17 per share. The grants are contingent upon continued employment and vestover periods ranging from one to three years. Dividends, payable in stock,accrue on a portion of the grants and are subject to the same specified termsas the original grants. As of March 31, 2006, a total of 2,829 stock unitshave accumulated on nonvested RSUs due to dividend reinvestment.

Thefollowing table summarizes RSU activity, excluding dividend reinvestment units,for the three months ended March 31, 2006:

| ***Restricted Stock Units*** | ** ** | ** ** | ** ** | **Number** | ** ** | **Weighted Average  Grant Date Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------------------|------------|
| RSUs at  January 1, 2006          |       | 227,769    |       |       | $          | 23.34                                                           |       |   |
| Granted                                |       | 70,877     |       |       | $          | 26.14                                                           |       |   |
| Vested                                 |       | (1,932     | )          |       | $          | 20.57                                                           |       |   |
| Forfeited or  cancelled                |       | —     |       |       | $          | —                                                          |       |   |
| RSUs at March 31,  2006           |       | 296,714    |       |       | $          | 24.03                                                           |       |   |

 

14

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**ASESA, Inc. Notes to Consolidated Financial Statements (Continued)**

As of March 31, 2006,there was $3.8 million of total unrecognized compensation expense related tononvested RSUs granted which is expected to be recognized over a weightedaverage term of 1.9 years. The fair value of shares vested during the quarterended March 31, 2006 was less than $0.1 million.

***Performance Based Restricted Stock Units***

The Company’s 2006long-term incentive plan includes performance based restricted stock unitswhose future award is contingent upon annual 2006 income from continuingoperations performance. If applicable, the date of grant will occur in February 2007and the fair value of the RSUs will be the value of ADESA’s stock at the dateof grant. The potential grants will also be contingent upon continuedemployment and would vest 33 percent in February 2008, 33 percent in February 2009and 34 percent in February 2010. The Company has accrued $0.4 million,pretax, at March 31, 2006 for the performance based RSUs. The amount isincluded in “Accrued employee benefits and compensation expenses” on theConsolidated Balance Sheet. Based on current performance and forfeiture rateassumptions, the Company expects to accrue an additional $1.2 million, pretax,in fiscal 2006.

**Note 3—Acquisitions**

In February 2006, the Company completed thepurchase of certain assets of the N.E. Penn Salvage Company, an independentlyowned salvage auction in northeast Pennsylvania. The purchased assets includedthe accounts receivables, operating equipment and customer relationshipsrelated to the auction. In addition, the Company has operating leaseobligations related to the facility through 2016. Initial annual lease paymentsfor the facilities total approximately $0.1 million per year. The Company didnot assume any other material liabilities or indebtedness in connection withthe acquisition. Financial results for this acquisition have been included inthe Company’s consolidated financial statements since the date of acquisition.

In March 2006, the Company completed theacquisition of Auction Broadcasting Company’s South Tampa used vehicle auctionserving western and central Florida. The Company has renamed the auction ADESASarasota. The assets purchased included land and buildings, the relatedoperating equipment, accounts receivable and customer relationships related tothe auction. The auction is comprised of approximately 63 acres and includessix auction lanes and full-service reconditioning shops providing detail,mechanical and body shop services. The Company did not assume any othermaterial liabilities or indebtedness in connection with the acquisition. Financialresults for this acquisition have been included in the Company’s consolidatedfinancial statements since the date of acquisition.

ADESA acquired the two previously mentioned auctionsfor a total cost of $29.6 million, in cash. Preliminary purchase priceallocations have been recorded for each acquisition. The purchase price of theacquisitions was allocated to the acquired assets based upon fair marketvalues, including $5.0 million to other intangible assets, representing thefair value of acquired customer relationships and non-compete agreements, whichwill be amortized over their expected useful lives. The preliminary purchaseprice allocations resulted in aggregate goodwill of $11.4 million. The goodwillwas assigned to the auction and related services reporting segment and isexpected to be fully deductible for tax purposes. The Company expects tofinalize the purchase price allocations related to each of the acquisitionsupon receipt and analysis of third party valuations. Pro forma financialresults for the acquisitions were not material.

15

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

**Note 4—Long-TermDebt**

Long-termdebt consists of the following *(in millions)*:

| ** **                              | ** ** | **Interest Rate** | ** ** | **Maturity** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|------------------------|------------|--------------|------------|--------------------------|------------|-----------------------------|------------|
| Term Loan A                             |       | LIBOR  + 1.00%         |       | 06/30/2010   | ** ** |                     | **$**      | **127.5**                   |       |   |   | $ | 135.0 |   |   |
| $350 million  revolving credit facility |       | LIBOR  + 1.00%         |       | 06/30/2010   | ** ** |                     | **138.0**  |                        |       |   | 138.0 |   |   |
| Atlanta capital  lease obligation       |       | 5.0%                   |       | 12/01/2013   | ** ** |                     | **34.5**   |                        |       |   | 34.5 |   |   |
| Senior  subordinated notes              |       | 75¤8%             |       | 06/15/2012   | ** ** |                     | **125.0**  |                        |       |   | 125.0 |   |   |
| Canadian line of  credit                |       | Prime  + 0.25%         |       | 12/31/2006   | ** ** |                     | **—** |                        |       |   | — |   |   |
| Total debt                              |       |                   |       |         | ** ** |                     | **425.0**  |                        |       |   | 432.5 |   |   |
| Less current  portion of long-term debt |       |                   |       |         | ** ** |                     | **70.0**   |                        |       |   | 70.0 |   |   |
| Long-term debt                          |       |                   |       |         | ** ** |                     | **$**      | **355.0**                   |       |   |   | $ | 362.5 |   |   |

 

On July 25, 2005, the Company entered into a $500million credit facility, pursuant to the terms and conditions of an amended andrestated credit agreement (the “Credit Agreement”) with Bank of America, N.A.,as administrative agent, and a syndicate of lenders. The Credit Agreementprovides for a five year $150 million term loan and a $350 millionrevolving credit facility. Letters of credit reducing the available line ofcredit were $14.6 million at March 31, 2006. The credit facility isguaranteed by substantially all of the Company’s material domestic subsidiaries(excluding, among others, AFC Funding Corporation), and is secured by a pledgeof all of the equity interests in the guarantors and a pledge of 65 percent ofcertain capital interests of the Company’s Canadian subsidiaries.

The Credit Agreementcontains certain restrictive loan covenants, including, among others, financialcovenants requiring a maximum total leverage ratio, a minimum interest coverageratio, and a minimum fixed charge coverage ratio and covenants limiting ADESA’sability to incur indebtedness, grant liens, make acquisitions, be acquired,dispose of assets, pay dividends, repurchase stock, make capital expendituresand make investments.  In addition, thesenior subordinated notes contain certain financial and operationalrestrictions on paying dividends and other distributions, making certainacquisitions or investments and incurring indebtedness, and selling assets. At March 31,2006, the Company was in compliance with the covenants contained in both the creditfacility and the senior subordinated notes.

**Note 5—Derivatives**

The Company uses interest rate swap agreements tomanage its exposure to interest rate movements and to reduce borrowing costs. InJune 2004, the Company entered into an interest rate swap agreement with anotional amount of $105 million to manage its exposure to interest ratemovements on its variable rate debt. The interest rate swap agreement containsamortizing provisions and matures in December 2006. In November 2005,the Company entered into an interest rate swap agreement with a notional amountof $40 million to manage its exposure to interest rate movements on itsvariable rate credit facility. The swap matures in May 2008.

The Company designates itsinterest rate swap agreements as cash flow hedges. The fair value of theinterest rate swap agreements is estimated using pricing models widely used infinancial markets and represents the estimated amount the Company would receiveor pay to terminate the agreements at the reporting date. At March 31,2006, the fair value of the interest rate swap agreements was a $1.1 milliongain recorded in “Other assets” on the Consolidated Balance Sheet. At December 31,2005, the fair value 

16

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

of theinterest rate swap agreements consisted of a $0.9 million gain recorded in “Otherassets” and a $0.1 million loss recorded in “Other liabilities” on the ConsolidatedBalance Sheet. Changes in the fair value of the interest rate swap agreementsdesignated as cash flow hedges are recorded in “Other comprehensive income”. Unrealizedgains or losses on interest rate swap agreements are included as a component of“Accumulated other comprehensive income”. At March 31, 2006, there was anet unrealized gain totaling $0.7 million, net of taxes of $0.4 million. At December 31,2005, there was a net unrealized gain totaling $0.5 million, net of taxes of$0.3 million.

**Note 6—FinanceReceivables**

AFC sells the majority of its U.S. dollar denominated finance receivableson a revolving basis and without recourse to a wholly owned, bankruptcy remote,consolidated, special purpose subsidiary (“AFC Funding Corporation”),established for the purpose of purchasing AFC’s finance receivables. Effective March 31,2006, AFC and AFC Funding Corporation amended their securitization agreement.As part of the amendment, the expiration date of the agreement was extendedfrom June 30, 2008 to April 30, 2009. This agreement is subject to annual renewalof short-term liquidity by the liquidity providers and allows for the revolvingsale by AFC Funding Corporation to a bank conduit facility of up to a maximumof $600 million in undivided interests in certain eligible finance receivablessubject to committed liquidity. AFC Funding Corporation had committed liquidityof $475 million and $425 million at March 31, 2006 and December 31,2005, respectively. On May 5, 2006, committed liquidity wasincreased to $550 million. Receivables that AFC Funding sells to the bankconduit facility qualify for sales accounting for financial reporting purposespursuant to SFAS 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Liabilities*and as a result are not reported on the Company’s Consolidated Balance Sheet.

At March 31, 2006, AFC managed total finance receivables of $783.7million, of which $708.6 million had been sold without recourse to AFC FundingCorporation. At December 31, 2005, AFC managed total finance receivablesof $655.7 million, of which $581.9 million had been sold without recourse toAFC Funding Corporation. Undivided interests in finance receivables were soldby AFC Funding Corporation to the bank conduit facility with recourse totaling$473.0 million and $399.8 million at March 31, 2006 and December 31,2005, respectively. Finance receivables include $88.0 million and $51.1 millionclassified as held for sale and $156.9 million and $148.0 million classified asheld for investment at March 31, 2006 and December 31, 2005,respectively. AFC’s allowance for losses of $3.2 million and $2.4 million at March 31,2006 and December 31, 2005, respectively, include an estimate of lossesfor finance receivables held for investment. Additionally, accrued liabilitiesof $3.9 million and $2.9 million for the estimated losses for loans sold by thespecial purpose subsidiary were recorded at March 31, 2006 and December 31,2005, respectively. These loans were sold to a bank conduit facility withrecourse to the special purpose subsidiary and will come back on the balancesheet of the special purpose subsidiary at fair market value if they becomeineligible under the terms of the collateral arrangement with the bank conduitfacility.

Proceeds from the revolving sale ofreceivables to the bank conduit facility were used to fund new loans tocustomers. AFC and AFC Funding Corporation must maintain certain financialcovenants including, among others, limits on the amount of debt AFC canincur, minimum levels of tangible net worth, and other covenants tied to theperformance of the finance receivables portfolio. The securitization agreement alsoincorporates the financial covenants of ADESA’s credit facility. At March 31,2006, the Company was in compliance with the covenants contained in thesecuritization agreement.

17

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

**Note 7—Earnings PerShare**

Thefollowing table sets forth the computation of earnings per share *(in millions except share and per share amounts)*:

| ** **                                                          | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Income from  continuing operations                                  | ** ** |                                                                 | **$**      | **36.3** |   |   |   | $ | 35.1 |   |   |
| Loss from  discontinued operations, net of income taxes             | ** ** |                                                                 | **—** |   |   |   | (0.1 | ) |   |
| Net income                                                          | ** ** |                                                                 | **$**      | **36.3** |   |   |   | $ | 35.0 |   |   |
| Weighted average common shares outstanding                          | ** ** |                                                                 | **89.76**  |   |   |   | 90.69 |   |   |
| Effect of  dilutive stock options and restricted stock awards       | ** ** |                                                                 | **0.47**   |   |   |   | 0.50 |   |   |
| Weighted average  common shares outstanding and assumed conversions | ** ** |                                                                 | **90.23**  |   |   |   | 91.19 |   |   |
| **Earnings per share—basic**                                   | ** ** |                                                                 | ** ** |   | ** ** | ** ** | ** ** |   |   |
| Income from continuing operations                                   | ** ** |                                                                 | **$**      | **0.40** |   |   |   | $ | 0.39 |   |   |
| Loss from discontinued operations, net of income  taxes             | ** ** |                                                                 | **—** |   | ** ** | ** ** | **—** |   |   |
| Net income                                                          | ** ** |                                                                 | **$**      | **0.40** |   |   |   | $ | 0.39 |   |   |
| **Earnings per share—diluted**                                 | ** ** |                                                                 | ** ** |   | ** ** | ** ** | ** ** |   |   |
| Income from continuing operations                                   | ** ** |                                                                 | **$**      | **0.40** |   |   |   | $ | 0.38 |   |   |
| Loss from discontinued operations, net of income taxes              | ** ** |                                                                 | **—** |   | ** ** | ** ** | **—** |   |   |
| Net income                                                          | ** ** |                                                                 | **$**      | **0.40** |   |   |   | $ | 0.38 |   |   |

 

Basic earnings per sharewere calculated based upon the weighted-average number of outstanding commonshares for the period. Diluted earnings per share were calculated consistentwith basic earnings per share including the effect of dilutive unissued commonshares related to the Company’s stock-based employee compensation programs. Total options outstanding at March 31,2006 and 2005 were 4.5 million and 4.8 million. Stock options with an exerciseprice per share greater than the average market price per share wereexcluded in the calculation of diluted earnings per share for all periodspresented as including these options would have an anti-dilutive impact. Approximately0.3 million and 3.7 million options were excluded from diluted earnings pershare for the quarters ended March 31, 2006 and 2005, respectively. TheCompany’s policy for calculating the potential windfall tax benefit orshortfall for the purpose of calculating assumed proceeds under the treasurystock method excludes the impact of pro forma deferred tax assets related topartially or fully vested awards on the date of adoption.

18

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

**Note 8—ComprehensiveIncome**

Thecomponents of comprehensive income are as follows (*in millions*):

| ** **                              | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                              | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Net income                              | ** ** |                                                                 | **$**      | **36.3** |   |   |   | $ | 35.0 |   |   |
| Other  comprehensive income, net of tax |       |                                                                 | ** ** |   |   |   |   |   |   |
| Foreign currency translation            | ** ** |                                                                 | **(1.1**   | **)** |   |   | (1.9 | ) |   |
| Unrealized gain on interest rate swaps  | ** ** |                                                                 | **0.2**    |   |   |   | 1.0 |   |   |
| Comprehensive income                    | ** ** |                                                                 | **$**      | **35.4** |   |   |   | $ | 34.1 |   |   |

 

The composition of “Accumulatedother comprehensive income” at March 31, 2006 and December 31, 2005was the net unrealized gains or losses on interest rate swaps of $0.7 millionand $0.5 million and foreign currency translation adjustments of $49.0 millionand $50.1 million, respectively.

**Note 9—SegmentInformation**

The Company aggregates its four operating segments(U.S. used vehicle auctions, Canada used vehicle auctions, Impact salvageauctions and AFC) into two reportable business segments: auction and relatedservices (“ARS”) and dealer financing. These reportable segments offerdifferent services and are managed separately based on the fundamentaldifferences in their operations.

The holding company is maintained separately from thetwo reportable segments and includes expenses associated with being a publiccompany, such as salaries, benefits, and travel costs for the corporatemanagement team, board of directors’ fees, investor relations costs, andincremental insurance, treasury, legal, accounting, and risk management costs. Holdingcompany interest includes the interest incurred on the corporate debt structure.The majority of costs incurred at the holding company are not allocated to thetwo business segments.

19

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

Financialinformation regarding the Company’s reportable segments is set forth below *(in millions)*:

| ** **                                                     | ** ** | **Auction and  Related Services** | ** ** | **Dealer  Financing** | ** ** | **Holding  Company** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|
| **Three  Months Ended March 31, 2006**                    |       |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Operating  revenues                                            |       |                                        | $          | 250.4                 |       |                 |       | $                | 35.2       |   |   |   | $ | — |   |   |   | $ | 285.6 |   |   |
| Operating expenses                                             |       |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization) |       |                                        | 137.0      |                  |       |                 | 7.2        |             |       |   | — |   |   |   | 144.2 |   |   |
| Selling, general and administrative                            |       |                                        | 55.5       |                  |       |                 | 5.7        |             |       |   | 5.7 |   |   |   | 66.9 |   |   |
| Depreciation and amortization                                  |       |                                        | 9.8        |                  |       |                 | 0.9        |             |       |   | 0.1 |   |   |   | 10.8 |   |   |
| Total operating  expenses                                      |       |                                        | 202.3      |                  |       |                 | 13.8       |             |       |   | 5.8 |   |   |   | 221.9 |   |   |
| Operating profit (loss)                                        |       |                                        | 48.1       |                  |       |                 | 21.4       |             |       |   | (5.8 | ) |   |   | 63.7 |   |   |
| Interest expense                                               |       |                                        | 0.9        |                  |       |                 | —     |             |       |   | 6.1 |   |   |   | 7.0 |   |   |
| Other income, net                                              |       |                                        | (1.0       | )                     |       |                 | 0.2        |             |       |   | (0.9 | ) |   |   | (1.7 | ) |   |
| Income (loss)  from continuing operations before income taxes  |       |                                        | 48.2       |                  |       |                 | 21.2       |             |       |   | (11.0 | ) |   |   | 58.4 |   |   |
| Income taxes                                                   |       |                                        | 18.7       |                  |       |                 | 7.8        |             |       |   | (4.4 | ) |   |   | 22.1 |   |   |
| Income (loss)  from continuing operations                      |       |                                        | $          | 29.5                  |       |                 |       | $                | 13.4       |   |   |   | ($6.6 | ) |   |   | $ | 36.3 |   |   |
| Assets                                                         |       |                                        | $          | 1,690.3               |       |                 |       | $                | 397.7      |   |   |   | $ | 33.8 |   |   |   | $ | 2,121.8 |   |   |
| **Three Months Ended March 31, 2005**                     | ** ** |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                             |       |                                        | $          | 213.7                 |       |                 |       | $                | 29.0       |   |   |   | $ | — |   |   |   | $ | 242.7 |   |   |
| Operating expenses                                             |       |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization) |       |                                        | 108.5      |                  |       |                 | 6.0        |             |       |   | — |   |   |   | 114.5 |   |   |
| Selling, general and administrative                            |       |                                        | 44.8       |                  |       |                 | 4.9        |             |       |   | 5.1 |   |   |   | 54.8 |   |   |
| Depreciation and amortization                                  |       |                                        | 8.0        |                  |       |                 | 1.1        |             |       |   | 0.1 |   |   |   | 9.2 |   |   |
| Total operating  expenses                                      |       |                                        | 161.3      |                  |       |                 | 12.0       |             |       |   | 5.2 |   |   |   | 178.5 |   |   |
| Operating profit (loss)                                        |       |                                        | 52.4       |                  |       |                 | 17.0       |             |       |   | (5.2 | ) |   |   | 64.2 |   |   |
| Interest expense                                               |       |                                        | 1.3        |                  |       |                 | —     |             |       |   | 6.8 |   |   |   | 8.1 |   |   |
| Other income, net                                              |       |                                        | (0.6       | )                     |       |                 | —     |             |       |   | (0.9 | ) |   |   | (1.5 | ) |   |
| Income (loss)  from continuing operations before income taxes  |       |                                        | 51.7       |                  |       |                 | 17.0       |             |       |   | (11.1 | ) |   |   | 57.6 |   |   |
| Income taxes                                                   |       |                                        | 20.3       |                  |       |                 | 6.5        |             |       |   | (4.3 | ) |   |   | 22.5 |   |   |
| Income (loss)  from continuing operations                      |       |                                        | $          | 31.4                  |       |                 |       | $                | 10.5       |   |   |   | ($6.8 | ) |   |   | $ | 35.1 |   |   |
| Assets                                                         |       |                                        | $          | 1,403.3               |       |                 |       | $                | 346.5      |   |   |   | $ | 380.9 |   |   |   | $ | 2,130.7 |   |   |

 

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

**Note 10—DiscontinuedOperations**

In February 2003, management approved a plan todiscontinue the operations of the Company’s vehicle importation business. In August 2005,ADESA sold ComSearch, Inc. which provides professional claims outsourcingservices, automotive parts-locating and desk-auditing services to the propertyand casualty insurance industry. The financial results of the vehicleimportation business and ComSearch have been accounted for as discontinuedoperations for all periods presented. Both businesses were formerly included inthe auction and related services segment.

Revenues from discontinued operations were $1.3million for the three months ended March 31, 2005. Net loss fromdiscontinued operations for the three months ended March 31, 2005 wasrepresentative of a $0.1 million operating loss at ComSearch.

At March 31, 2006 andDecember 31, 2005, there were no assets and $6.9 and $6.8 million,respectively, in liabilities related to discontinued operations. Liabilities atMarch 31, 2006 and December 31, 2005 represent the accrual of theimportation adverse judgment, currently under appeal, and accrued interest onthe award pursuant to Michigan law. This and other legal matters are discussedin the description of legal proceedings in Part II, Item 1 (“LegalProceedings”) of this report.

**Note 11—Dividends**

On March 15, 2006,the Company paid a first quarter dividend of $0.075 per common share. On April 28,2006, the Company’s board of directors declared a second quarter dividend of$0.075 per common share payable June 15, 2006, to stockholders of recordon May 15, 2006.

**Note 12—Commitmentsand Contingencies**

The Company is involved in litigation and disputesarising in the ordinary course of business, such as actions related toinjuries; property damage; handling, storage or disposal of vehicles;environmental laws and regulations; and other litigation incidental to thebusiness such as employment matters and dealer disputes. Management considersthe likelihood of loss or the incurrence of a liability, as well as the abilityto reasonably estimate the amount of loss, in determining loss contingencies. TheCompany accrues an estimated loss contingency when it is probable that aliability has been incurred and the amount of loss can be reasonably estimated.Management regularly evaluates current information available to determinewhether accrual amounts should be adjusted. Accruals for contingenciesincluding litigation and environmental matters are included in “Other accruedexpenses” and “Other liabilities” at undiscounted amounts and generally excludeclaims for recoveries from insurance or other third parties. These accruals areadjusted periodically as assessment and remediation efforts progress, or asadditional technical or legal information become available. If the amount of anactual loss is greater than the amount accrued, this could have an adverseimpact on the Company’s operating results in that period. Legal fees areexpensed as incurred.

The Company has accrued, as appropriate, forenvironmental remediation costs anticipated to be incurred at certain of itsauction facilities. Liabilities for environmental matters included in “Otheraccrued expenses” and “Other liabilities” were $3.1 million at March 31,2006 and December 31, 2005. No amounts have been accrued as receivablesfor potential reimbursement or recoveries to offset this liability.

The Company stores a significant number of vehiclesowned by various customers and consigned to the Company to be auctioned. TheCompany is contingently liable for each consigned vehicle until the 

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**ADESA, Inc. Notes to Consolidated Financial Statements (Continued)**

eventual sale or otherdisposition; however, the Company is generally not liable for damage related tosevere weather conditions, natural disasters or other factors outside of theCompany’s control. Loss is possible; however, at this time management cannotestimate a range of loss that could occur. Individual stop loss and aggregateinsurance coverage is maintained on the consigned vehicles. These vehicles areconsigned to the Company and are not included in the Consolidated Balance Sheets.

In the normal course of business, the Company alsoenters into various other guarantees and indemnities in its relationships withsuppliers, service providers, customers and others. These guarantees andindemnifications do not materially impact the Company’s financial condition orresults of operations, but indemnifications associated with the Company’sactions generally have no dollar limitations and currently cannot bequantified.

As noted above, the Company is involved in litigationand disputes arising in the ordinary course of business, such as actionsrelated to injuries; property damage; handling, storage or disposal ofvehicles; environmental laws and regulations; and other litigation incidentalto the business such as employment matters and dealer disputes. Such litigationis generally not, in the opinion of management, likely to have a materialadverse effect on the financial condition, results of operations or cash flows.Certain legal and regulatory proceedings which could be material are discussedin the description of legal proceedings in Part II, Item 1 (“Legal Proceedings”)of this report.

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**Item 2.**   Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Forward-LookingStatements**

This QuarterlyReport on Form 10-Q contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Suchstatements are subject to certain risks, trends, and uncertainties. Inparticular, statements made in this report on Form 10-Q that are nothistorical facts (including, but not limited to, expectations, estimates,assumptions and projections regarding the industry, business, future operatingresults, potential acquisitions, and anticipated cash requirements) may beforward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,”“believes,” “seeks,” “estimates,” and similar expressions identifyforward-looking statements. Forward looking statements are not guarantees offuture performance and are subject to risks and uncertainties that could causeactual results to differ materially from the results projected, expressed orimplied by these forward-looking statements. Factors that could cause orcontribute to such differences include, but are not limited to, those discussedin Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005 and filed on March 16, 2006. Some of these factors include:

·       generalbusiness conditions;

·       trendsin new and used vehicle sales and incentives, including wholesale used vehiclepricing;

·       economicconditions including fuel prices and Canadian exchange rate and interest ratefluctuations;

·       competition;

·       trendsin the vehicle remarketing industry;

·       businessdevelopment activities, including acquisitions and integration of acquiredbusinesses;

·       strategicactions, including dispositions,

·       investmentsin technology;

·       litigationdevelopments;

·       weather;

·       changesin applicable tax laws and regulations (including significant accounting andtax matters);

·       vehicleproduction; and

·       otherrisks described from time to time in ADESA’s filings with the Securities andExchange Commission (“SEC”), including the Quarterly Reports on Form 10-Qto be filed by ADESA in 2006.

Many of these risk factors are outside of ADESA’scontrol, and as such, they involve risks which are not currently known to ADESAthat could cause actual results to differ materially from those discussed orimplied herein. The forward-looking statements in this document are made as ofthe date hereof and ADESA does not undertake to update its forward-lookingstatements.

The Company’s future growth depends on a variety offactors, including its ability to increase volume, acquire additional auctions,manage expansion and integration of acquisitions, control costs in itsoperations, introduce modest fee increases, expand its product and serviceofferings including technological development and retain its executive officersand key employees. In addition, the Company’s indebtedness will require it touse a portion of its operating cash flow to pay interest and principal on debtinstead of for other corporate purposes, including funding future expansion andongoing capital expenditures. Accordingly, the Company cannot predict whetherits growth strategy will be successful. In 

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addition, the Companycannot predict what portion of overall sales will be conducted through onlineauctions or other redistribution methods in the future and what impact this mayhave on its auction business.

The interim financialstatements included in this Quarterly Report on Form 10-Q and thefollowing discussion and analysis should be read in conjunction with thehistorical financial statements, related notes thereto, and other financialinformation included in the Company’s Annual Report on Form 10-K, asfiled with the Securities and Exchange Commission, which includes auditedfinancial statements for each of the three years in the period ended December 31,2005.

**Executive Overview**

For the quarter ended March 31, 2006, the Companyreported revenue of $285.6 million and net income of $36.3 million or $0.40 perdiluted share, compared with revenue of $242.7 million and net income of $35.0million or $0.38 per diluted share for the first quarter of 2005. As discussedbelow, results for first quarter of 2006 included a $2.7 million pretax charge,or $0.02 per diluted share, related to unreconciled balance sheet differencesconcealed by a former employee at the Company’s Kitchener, Ontario auctionfacility. During the first quarter of 2006, the Company also implementedStatement of Financial Accounting Standards (“SFAS”) 123(R), *Share-based Payment*, which resulted in approximately $1.0million of pretax incremental stock-based compensation or nearly $0.01 perdiluted share.

ADESA’s first quarter revenues were up nearly 18percent compared with the first quarter of 2005, primarily due to a 13 percentincrease in revenue per vehicle sold resulting from an increase in ancillaryservices driven by a significant increase in the number of institutionalvehicles consigned. In addition, a 20 percent increase in revenue per loantransaction, primarily driven by increases in both the average values ofvehicles floored as well as the average portfolio duration, contributed to theincrease in revenue compared to the first quarter of 2005. However, increasesin costs of services primarily due to an increase in the volume of lower marginservices such as transportation and reconditioning, a decline in the usedvehicle conversion percentage, along with the previously mentioned Kitchenercharge and the impact of adopting of FAS 123(R) impacted operatingprofits.

Despite thepressure on operating margins during the quarter, ADESA achieved severalnoteworthy recent financial and operational accomplishments:

·       Achievedfirst increase in organic vehicle sold volume since the first quarter of 2004

·       Experienceda 6 percent increase in used vehicles entered for sale at auction

·       Achievedrecord first quarter loan transaction volume of 280,952

·       Firstquarter income from continuing operations of $36.3 million, or $0.40 per share

·       Deployed$42.2 million for acquisitions and strategic investments

·       Strengthenedsenior management team by the appointment of A. R. Sales as President and ChiefOperating Officer and Ron Beaver as Executive Vice President and ChiefInformation Officer

·       Completedacquisitions of N.E. Penn salvage and Sarasota used vehicle auctions

·       Purchaseda 15 percent investment in Finance Express, LLC

·       CompletedU.S. roll-out of Auction Access® dealer registration system

·       Teamedwith First Look to provide used vehicle dealers with custom auction andinventory optimization tools

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In the first quarter of 2006, average wholesale usedvehicle prices were strong, increasing 5 to 6 percent compared with thefirst quarter of 2005. The Company believes this pricing trend was partiallydue to declining new vehicle incentives. An influx of late model, high priced,quality institutional vehicles including rental cars and commercial fleetvolumes returning to auction also impacted wholesale used vehicle pricing. Higherused vehicle prices were a contributor to increases in the Company’s revenueper vehicle sold and revenue per loan transaction in the first quarter of 2006. However, the first quarter used vehicleretail market was relatively weak from a historical perspective and theresulting decrease in demand was reflected in the decrease in the Company’sused vehicle conversion percentage from the record level of 69.1 percent in thefirst quarter of 2005 to 66.3 percent in the first quarter of 2006. The Companygenerally expects conversion rates to moderate and approach their three-yearhistorical trend line.

The Company continues to invest in its coreinformation technology capabilities and capacity expansion. As noted above, inthe first quarter of 2006 the Company completed its U.S. roll-out of Auction Access®,a nationwide dealer registration program that eliminates the need for dealersto re-register at multiple auction locations. In addition, the Company is nowrolling out its AutoVision® wireless vehicle inspection technology to its usedvehicle auction operations. In the first quarter of 2006, the Company initiatedthe roll-out of its customer relationship management technology,Salesforce.com®. Management believes that these areas of investment arecritical to both maintaining the Company’s competitive position and positioningitself for future growth. In addition, the Company continues to be optimisticabout its acquisition opportunities and remains focused on accelerating itsdeployment of capital.

Included in the resultsfor the three months ended March 31, 2006, is a $2.7 million pretaxcharge, or $0.02 per diluted share, related to unreconciled balance sheetdifferences concealed by a former employee at the company’s Kitchener, Ontario,auction facility acquired in June 2000. The charge was recorded in “Selling,general and administrative” expenses and decreased net income for the threemonths ended March 31, 2006 by a total of $1.7 million. The unreconcileddifferences accumulated and were concealed over a period of five to six yearsbetween 2000 and 2006. Approximately one-half of the amounts concealed dateback to fiscal years prior to 2003. The Company has retained outside counsel inCanada to assist in the investigation of any potential wrongdoing and todetermine if legal action is warranted. Management has implemented changes toits internal control processes and systems and has concluded that the mattersrelated to the $2.7 million charge, individually or in the aggregate, did notgive rise to or arise from a material weakness as of the end of the period dueto the nature of the items and compensating controls. In addition, managementhas concluded that the corrections were not material to either the current orany prior period financial statements.

**Seasonality**

Generally, the volume ofvehicles sold at the Company’s auctions is highest in the first and secondcalendar quarters of each year and slightly lower in the third quarter. Fourthquarter volume of vehicles sold is generally lower than all other quarters.This seasonality is affected by several factors including weather, the timingof used vehicles available for sale from selling customers, holidays, and theseasonality of the retail market for used vehicles, which affect the demandside of the auction industry. Used vehicle auction volumes tend to declineduring prolonged periods of winter weather conditions.  In addition, mild weather conditions anddecreases in traffic volume can each lead to a decline in the available supplyof salvage vehicles because fewer traffic accidents occur, resulting in fewerdamaged vehicles overall. As a result, revenues and operating expenses relatedto volume will fluctuate accordingly on a quarterly basis, and the Company’searnings are generally highest in the second calendar quarter. The fourthcalendar quarter typically has the lowest earnings as a result of the lowerauction volume and additional costs associated with the holidays and winterweather.

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**Results ofOperations**

Thefollowing table sets forth operations data for the periods indicated *(in millions)*:

| ** **                                                    | ** ** | **Three Months Ended  March 31,**                     | ** ** | **Change**                                                           | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Operations Data:**                                     | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** | **$** | ** ** | **%** | ** ** |
| Auction and related  services revenue                         | ** ** |                                                                 | ** ** | ** **                                                           |       |   |   |   |   |   |   |   |   |
| U.S.                                                          | ** ** |                                                                 | **$**      | **197.2**                                                            | ** ** |   |   | $ | 169.1 |   |   |   |   |   |   |
| Canada                                                        | ** ** |                                                                 | **53.2**   | ** **                                                           |       |   | 44.6 |   |   |   |   |   |   |
| Dealer financing revenue                                      | ** ** |                                                                 | ** ** | ** **                                                           |       |   |   |   |   |   |   |   |   |
| U.S.                                                          | ** ** |                                                                 | **32.3**   | ** **                                                           |       |   | 27.2 |   |   |   |   |   |   |
| Canada                                                        | ** ** |                                                                 | **2.9**    | ** **                                                           |       |   | 1.8 |   |   |   |   |   |   |
| Total revenue                                                 | ** ** |                                                                 | **285.6**  | ** **                                                           |       |   | 242.7 |   |   | 42.9 |   | 18 | % |
| Cost of services (exclusive of depreciation and amortization) | ** ** |                                                                 | **144.2**  | ** **                                                           |       |   | 114.5 |   |   | 29.7 |   | 26 | % |
| Selling, general  and administrative                          | ** ** |                                                                 | **66.9**   | ** **                                                           |       |   | 54.8 |   |   | 12.1 |   | 22 | % |
| Depreciation and  amortization                                | ** ** |                                                                 | **10.8**   | ** **                                                           |       |   | 9.2 |   |   | 1.6 |   | 17 | % |
| Operating profit                                              | ** ** |                                                                 | **63.7**   | ** **                                                           |       |   | 64.2 |   |   | (0.5 | ) | (1 | )% |
| Net income                                                    | ** ** |                                                                 | **$**      | **36.3**                                                             | ** ** |   |   | $ | 35.0 |   |   | $ | 1.3 |   | 4 | % |
|                                                               |            |                                                                      |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth operations data as a percentage of total revenue forthe periods indicated:

| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Operations Data:**                                      | ** ** | ** **                                       | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Auction and  related services revenue                          | ** ** |                                             | **87.7**   | **%** |   |   | 88.1 | % |   |
| Dealer financing  revenue                                      | ** ** |                                             | **12.3**   | **%** |   |   | 11.9 | % |   |
| Total revenue                                                  | ** ** |                                             | **100.0**  | **%** |   |   | 100.0 | % |   |
| Cost of services  (exclusive of depreciation and amortization) | ** ** |                                             | **50.5**   | **%** |   |   | 47.2 | % |   |
| Selling, general  and administrative                           | ** ** |                                             | **23.4**   | **%** |   |   | 22.5 | % |   |
| Depreciation and  amortization                                 | ** ** |                                             | **3.8**    | **%** |   |   | 3.8 | % |   |
| Operating profit                                               | ** ** |                                             | **22.3**   | **%** |   |   | 26.5 | % |   |
|                                                                |            |                                                  |            |  |  |  |  |  |  |  |  |

 

The Company’s revenue isderived from auction fees and related services at its auction facilities anddealer financing services at AFC. AFC’s net revenue consists of gain on sale offinance receivables sold and interest and fee income less provisions for creditlosses. This net presentation of AFC’s revenues is customary for financecompanies. Operating expenses for the Company consist of cost of services,selling, general and administrative expenses and depreciation and amortization.Cost of services is composed of payroll and related costs, subcontractservices, supplies, insurance, property taxes, utilities, maintenance and leaseexpense related to the auction sites and loan offices. Cost of servicesexcludes depreciation and amortization. Selling, general and administrativeexpenses are composed of indirect payroll and related costs, sales andmarketing, information technology services and professional fees.

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**Three Months Ended March 31,2006**

*Operating Revenue*

*Auctionand Related Services*

| ** **                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per vehicle amounts)*** | ** ** | **2006**                                         | ** ** | **2005**   | ** ** | **% Change** | ** ** |
| Auction and  related services revenue                                                         | ** ** | **$**                                            | **250.4**  | ** ** | $          | 213.7 | ** ** |   | 17 | % |   |
| Vehicles sold                                                                                 | ** ** | ** **                                       | ** ** |       | ** ** |   |   |   |   |
| Used                                                                                          | ** ** | **468,211**                                      | ** ** | 459,958    | ** ** |   | 2 | % |   |
| Salvage                                                                                       | ** ** | **63,346**                                       | ** ** | 54,488     | ** ** |   | 16 | % |   |
| Total vehicles sold                                                                           | ** ** | **531,557**                                      | ** ** | 514,446    | ** ** |   | 3 | % |   |
| Used vehicle conversion percentage                                                            | ** ** | **66.3**                                         | **%**      | 69.1       | %          |   |   |   |   |
| Revenue per vehicle sold                                                                      | ** ** | **$**                                            | **471**    | ** ** | $          | 415 | ** ** |   | 13 | % |   |

 

Revenue from auction and related services (“ARS”)increased $36.7 million, or 17 percent, to $250.4 million for the quarterended March 31, 2006, compared with $213.7 million for the quarter ended March 31,2005. The increase in revenue was a result of a 13 percent increase in revenueper vehicle sold during the quarter and a 3 percent increase in vehicles sold.

Revenue per vehicle sold increased $56, or 13 percent,for the three months ended March 31, 2006, compared with the three monthsended March 31, 2005. The 13 percent increase in revenue per vehicle soldresulted in increased auction and related services revenue of approximately$29.3 million.  Fluctuations in theCanadian exchange rate increased revenue by approximately $3.0 million for thequarter ended March 31, 2006, compared with the quarter ended March 31,2005. The increase in revenue per vehicle sold was primarily attributable to anincrease in lower margin services such as transportation, reconditioning andother ancillary services resulting from a 6 percent increase in the number ofinstitutional vehicles consigned which resulted in increased auction andrelated services revenue of approximately $17.3 million. Selected feeincreases, driven in part by higher wholesale used vehicle prices, and salvagevehicle mix resulted in increased auction and related services revenue ofapproximately $9.0 million. The higher transportation, reconditioning, andother ancillary services revenues also had corresponding increases in cost ofservices.

The total number ofvehicles sold increased 3 percent in the first quarter of 2006 compared with2005, resulting in an increase in auction and related services revenue ofapproximately $7.4 million. The increase in vehicles sold was primarily theresult of added volumes from recent acquisitions. However, organic vehiclevolumes also increased for the quarter ended March 31, 2006 compared withthe quarter ended March 31, 2005. This year over year increase in organicvehicle volumes was the first such increase since the first quarter of 2004. Theused vehicle conversion percentage, calculated as the number of vehicles soldas a percentage of the number of vehicles entered for sale at the Company’sused vehicle auctions, declined to 66.3 percent for the quarter ended March 31,2006 from 69.1 percent for the quarter ended March 31, 2005 reflecting arelatively weak retail used vehicle market in the first quarter of 2006compared with the first quarter of the prior year. This decline in the usedvehicle conversion percentage negatively impacted ARS revenues, cost of salesand operating profit for the three months ended March 31, 2006 comparedwith the three months ended March, 31, 2005.

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*DealerFinancing*

| *** ***                                                                               | ** ** | **Three Months Ended  March 31,**                     | ** ** | ** **                                                           | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ***(In millions except volumes and per loan amounts)*** | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** | **% Change** | ** ** |
| Dealer financing  revenue                                                                  |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Gain on sale of finance receivables                                                        | ** ** | **$**                                                                | **20.7**   |                                                                 | $          | 17.1 |   |   |   |   |   |
| Interest and fee income                                                                    | ** ** | **15.2**                                                             |       | 13.1                                                                 |       |   |   |   |   |
| Other revenue                                                                              | ** ** | **0.1**                                                              |       | 0.2                                                                  |       |   |   |   |   |
| Provision for credit losses                                                                | ** ** | **(0.8**                                                             | **)**      | (1.4                                                                 | )          |   |   |   |   |
| Total dealer financing revenue                                                             | ** ** | **$**                                                                | **35.2**   |                                                                 | $          | 29.0 |   |   | 21 | % |   |
| Loan transactions                                                                          | ** ** | **280,952**                                                          |       | 278,977                                                              |       |   | 1 | % |   |
| Revenue per loan  transaction                                                              | ** ** | **$**                                                                | **125**    |                                                                 | $          | 104 |   |   | 20 | % |   |

 

Dealer financing revenue increased to $35.2 millionfor the quarter ended March 31, 2006, compared with $29.0 million for thequarter ended March 31, 2005. The 21 percent increase in dealer financingrevenue was driven by a 20 percent increase in revenue per loan transaction anda 1 percent increase in the number of loan transactions for the quarter ended March 31,2006, compared with the quarter ended March 31, 2005. The increase in loantransactions was primarily the result of an increase in floorplan utilizationby AFC’s existing dealer base and yielded a record volume of first quarter loantransactions totaling 280,952.

Revenue per loantransaction increased $21, or 20 percent, primarily driven by increases in boththe average values of vehicles floored as well as the average portfolioduration. These factors contributed to the increase in gain on sale of $3.6million and increased fee and interest income of $2.1 million. In addition, theFederal Funds rate has increased approximately 200 basis points since March 31,2005 which also contributed to the increase in interest income.  A decrease in the provision for credit lossesof $0.6 million compared with the three months ended March 31, 2005 alsocontributed to the increase in revenue per loan transaction.

*Cost of Services*

Cost of services increased $29.7 million, or 26percent, for the three months ended March 31, 2006, compared with thethree months ended March 31, 2005. Fluctuations in the Canadian exchangerate increased cost of services by approximately $1.7 million. Cost of serviceswas significantly impacted by costs associated with handling an additional41,000 used vehicles entered for sale at the Company’s auctions in the firstquarter of 2006 compared with the first quarter of 2005 as well as an increasein lower margin services such as transportation, reconditioning and otherancillary services.

Cost of services at the auction and related servicessegment increased $28.5 million, or 26 percent, to $137.0 million for thequarter ended March 31, 2006. Increases in reconditioning and otherancillary services costs totaling $8.2 million, primarily resulting from a 6percent increase in the number of institutional vehicles consigned, was aleading driver increasing cost of services. An $8.0 million increase intransportation costs, which includes fuel costs, also impacted cost of servicesfor the auction and related services segment. The addition of the acquired usedvehicle and salvage auctions over the last twelve months further contributed tothe increase in cost of services, along with a change in mix of salvagevehicles sold and a decrease in the used vehicle conversion rate from a record69.1 percent for the quarter ended March 31, 2005 to 66.3 percent for thequarter ended March 31, 2006. Fluctuations in the Canadian exchange rateincreased cost of services at the auction and related services segment byapproximately $1.7 million.

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Cost of services at thedealer financing segment increased $1.2 million, or 20 percent, to $7.2 millionfor the three months ended March 31, 2006 primarily due to increased compensationand related employee benefit costs.

*Selling, Generaland Administrative Expenses*

Selling, general and administrative expenses increased$12.1 million, or 22 percent, for the quarter ended March 31, 2006,compared with the quarter ended March 31, 2005. This increase wasprimarily due to compensation and related employee benefit cost increases, theimpact of 2005 and 2006 acquisitions, and an increase of $0.7 millionassociated with fluctuations in the Canadian exchange rate. Selling, generaland administrative expenses for the first quarter of 2006 included a $2.7million pretax charge related to unreconciled balance sheet differencesconcealed by a former employee at the Company’s Kitchener, Ontario auctionfacility. In addition, in the first quarter of 2006, ADESA incurred $1.8million of pretax stock based compensation expense, of which $1.0 million wasincremental as a result of the adoption of Statement of Financial AccountingStandards 123(R), *Share Based Payment*.

Selling, general and administrative expenses at theauction and related services segment increased $10.7 million, or 24 percent, to$55.5 million for the quarter ended March 31, 2006 primarily due to annualincreases in compensation and related employee benefit costs totaling $4.8million including $0.9 million of stock based compensation and the pretax $2.7million Kitchener charge. In addition, there was an increase of $0.7 millionassociated with fluctuations in the Canadian exchange rate.

Selling, general and administrative expenses at thedealer financing segment increased $0.8 million, or 16 percent, to $5.7 millionfor the quarter ended March 31, 2006 primarily due to increases in certainprofessional fees, as well as employee training and travel costs.

Selling, general and administrative expenses at theholding company increased $0.6 million, or 12 percent, to $5.7 million forthe first three months of 2006, primarily due to increases in compensation andrelated employee benefit costs.

As the company continuesstrategic actions such as corporate development, standardization andcentralization, and dealer consignment sales and training initiatives, selling,general and administrative expenses are expected to increase in the short-term.However, the Company believes the long-term benefits justify the currentinvestments and should help the Company capitalize on the expected increase inindustry volumes in 2007 and beyond.

*Depreciation andAmortization*

Depreciation andamortization totaled $10.8 million for the three months ended March 31,2006, representing an increase of $1.6 million, or 17 percent, from the $9.2million reported for the three months ended March 31, 2005. The increasein depreciation and amortization was a result of the Company’s capital spendingin 2005, including over $20 million related to information technology, whichgenerally has a shorter depreciable life. The Company continues to invest inits core information technology capabilities, as well as new technology serviceofferings, lane and capacity expansion, relocations and acquisitions.

*Operating Profit*

Operating profit decreased $0.5 million, or 1 percent,for the quarter ended March 31, 2006, compared with the quarter ended March 31,2005. As a percentage of revenue, operating profit decreased to 22.3 percent inthe first three months of 2006, compared with 26.5 percent in the first threemonths of 2005. This decrease was primarily the result of increased operatingexpenses at the auction and related services segment.

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Operating profit at the auction and related servicessegment decreased $4.3 million, or 8 percent, to $48.1 million for the quarterended March 31, 2006 primarily as a result of the 3.9 percent increase incost of services as a percent of revenues along with the 1.2 percent increasein selling, general and administrative expenses as a percent of revenues. Costof services was significantly impacted by costs associated with an increase inlower margin services such as transportation, reconditioning and otherancillary services resulting from a significant increase in the number ofinstitutional vehicles consigned. Additionally, the decline in the used vehicleconversion percentage resulted in additional handling costs to make vehiclesavailable for sale multiple times. Furthermore, selling, general and administrativeexpenses at the auction and related services segment were impacted by theKitchener charge and incremental stock-based compensation expense.

Operating profit at the dealer financing segmentincreased $4.4 million, or 26 percent, to $21.4 million for the quarter ended March 31,2006 primarily as a result of the 21 percent increase in revenue and a 2.2percent decrease in operating expenses as a percentage of revenues. Increasedrevenue at the dealer financing segment more than offset higher operatingexpenses associated with processing more loan transactions, which resulted inimproved operating margins at the dealer financing segment.

Operating profit in theARS and dealer financing segments was offset by a $0.6 million increase inoperating expenses, consisting primarily of compensation and related employeebenefit costs at the holding company.

*Interest Expense*

Interest expense decreased$1.1 million, or 14 percent, for the quarter ended March 31, 2006,compared with the quarter ended March 31, 2005, as the Company is carryingless debt than in the first quarter of 2005.

*Income Taxes*

The effective income tax rate on income fromcontinuing operations was 37.8 percent for the quarter ended March 31,2006, a decrease from the effective rate of 39.1 percent for the quarter ended March 31,2005. The first quarter 2006 rate of 37.8 percent is fairly consistent with thefull year 2005 rate of 37.5 percent which also reflects the anticipatedfull year 2006 effective tax rate.

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**LIQUIDITY ANDCAPITAL RESOURCES**

TheCompany believes that the strongest indicators of liquidity for its businessare cash on hand, cash flow from operations, working capital and amountsavailable under its credit facility.

| ** **                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ***(Dollars in millions)***    | ** ** | **2006**           | ** ** | **2005**              | ** ** | **2005**           | ** ** |
| Cash and cash  equivalents               | ** ** |               | **$**      | **238.4**             | ** ** |               |       | $ | 240.2 |   |   |   | $ | 336.6 |   |   |
| Restricted cash                          | ** ** |               | **$**      | **7.1**               | ** ** |               |       | $ | 5.7 |   |   |   | $ | 4.9 |   |   |
| Working capital                          | ** ** |               | **$**      | **294.6**             | ** ** |               |       | $ | 302.0 |   |   |   | $ | 365.6 |   |   |
| Amounts available  under credit facility | ** ** |               | **$**      | **197.4**             | ** ** |               |       | $ | 199.3 |   |   |   | $ | 137.3 |   |   |
| Cash flow from  operations               | ** ** |               | **$**      | **2.2**               | ** ** |               |       | $ | 136.5 |   |   |   | $ | 2.4 |   |   |

 

**Working Capital**

A substantial amount of the Company’s working capitalis generated from the payments received for services provided. In addition,ADESA has a $350 million revolving line of credit pursuant to the amendedand restated $500 million credit facility, from which $138 million was drawn asof March 31, 2006. There were outstanding letters of credit totalingapproximately $14.6 million at March 31, 2006, which reduce the availableborrowings under the credit facility. The Company’s Canadian operations haveadditional letters of credit outstanding totaling $1.6 million at March 31,2006, which do not impact available borrowings under the credit facility. Thecredit facility contains certain financial covenants including a covenantrequiring ADESA to maintain a minimum fixed charge coverage ratio. Thesefinancial covenants affect the Company’s operating flexibility by, among otherthings, restricting its ability to incur expenses and indebtedness that couldbe used to grow the business, as well as to fund general corporate purposes. At March 31, 2006, theCompany was in compliance with the covenants contained in the creditfacility.

The majority of the Company’s working capital needsare short-term in nature, usually less than a week in duration. Due to thedecentralized nature of the business, payments for services are received ateach auction and loan production office and are deposited locally. Most of thefinancial institutions place a temporary hold on the availability of the fundsdeposited that can range anywhere from one to five business days, resulting incash in the Company’s accounts and on its balance sheet that is unavailable foruse until it is made available by the various financial institutions. Over theyears, the Company has increased the amount of funds that are available forimmediate use and is actively working on initiatives that will continue todecrease the time between the deposit of and the availability of funds receivedfrom customers. There are outstanding checks (book overdrafts) to sellers andvendors included in current liabilities. Because the majority of theseoutstanding checks for operations in the U.S. are drawn upon bank accounts atfinancial institutions other than the financial institutions that hold theunavailable cash, the Company cannot offset the cash and the outstanding checkson its balance sheet.

AFC offers short-term inventory-secured financing,also known as floorplan financing, to used vehicle dealers. Financing isprimarily provided for terms of 30 to 60 days. AFC principally generatesits funding through the sale of its U.S. dollar denominated receivables. Forfurther discussion of AFC’s securitization arrangements, see “Off-Balance SheetArrangements”.

The Company believes its sources of liquidity from itscash and cash equivalents on hand, working capital, cash provided by operatingactivities, and availability under its credit facility are sufficient to meetits short and long-term operating needs for the foreseeable future. Inaddition, the Company believes the previously mentioned sources of liquiditywill be sufficient to fund the Company’s capital requirements, debt service anddividend payments for the next five years.

On April 28, 2006,the Company’s board of directors declared a second quarter dividend of $0.075per common share payable June 15, 2006, to stockholders of record on May 15,2006.

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**Summary of CashFlows**

ADESA’scash flow initiatives include growing its vehicle auction and dealer financingbusinesses both internally by expanding facilities, services and operations,and externally through acquisitions.

| ***(In millions)***                              | ** ** | **Three Months Ended  March 31,**                     | ** ** | ** **                                                           | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** | **Change** | ** ** |
| Net cash provided  by (used by):                      |       |                                                                 |       |                                                                 |       |   |   |   |   |   |   |
| Operating activities                                  | ** ** | ** **                                                           | **$**      | **2.2**                                                              |       |   |   | $ | 2.4 |   |   | $ | (0.2 | ) |
| Investing activities                                  | ** ** | ** **                                                           | **(73.2**  | **)**                                                                |       |   | (30.5 | ) |   | (42.7 | ) |
| Financing activities                                  | ** ** | ** **                                                           | **69.1**   |                                                                 |       |   | 60.4 |   |   | 8.7 |   |
| Effect of exchange rate on cash                       | ** ** | ** **                                                           | **0.1**    |                                                                 |       |   | (0.2 | ) |   | 0.3 |   |
| Net (decrease) increase in  cash and cash equivalents | ** ** | ** **                                                           | **$**      | **(1.8**                                                             | **)**      |   |   | $ | 32.1 |   |   | $ | (33.9 | ) |

 

Cash flow from operating activities was $2.2 millionfor the quarter ended March 31, 2006, compared with $2.4 million for thesame period in 2005. Operating cash flow was unfavorably impacted by a $47.9million decrease in accounts payable and accrued expenses and a $4.7 millionincrease in retained interests in finance receivables sold, offset by afavorable decrease in trade receivables and other assets of $39.1 million and adecrease in finance receivables held for sale of $9.2 million.

Net cash used for investing activities was $73.2million for the quarter ended March 31, 2006, compared with net cash usedby investing activities of $30.5 million for the three months ended March 31,2005. This change was primarily the result of cash disbursements foracquisitions totaling $29.7 million, as well as a $12.5 million investment inFinance Express LLC and an increase in finance receivables held for investmentof $12.6 million. The increase in cash used by investing activities waspartially offset by a decrease in capital expenditures of $13.8 million. For adiscussion of the Company’s capital expenditures, see “Capital Expenditures”below. There were no significant investing cash flows related to discontinuedoperations in the periods presented.

Cash provided by financingactivities was $69.1 million for the quarter ended March 31, 2006,compared with cash provided by financing activities of $60.4 million forthe same period in 2005. The primary drivers for the increase include a declinein the repurchase of common stock of $4.7 million (a share repurchase programwas in effect during the first quarter of 2005), a $2.5 million increase inbook overdrafts and $1.8 million decrease in debt payments. There were nosignificant financing cash flows related to discontinued operations in theperiods presented.

**Other FinancialData**

EBITDA is defined as earnings before interest expense,income taxes, depreciation and amortization. The Companybelieves that EBITDA is a useful supplement and meaningful indicator ofearnings performance to be used by its investors, financial analysts and othersto analyze the Company’s financial performance and results of operations overtime. In addition, EBITDA is a useful supplement to net cash provided byoperating activities to help investors understand the Company’s ability togenerate cash flows from operations that are available for taxes, debt serviceand capital expenditures. EBITDA is also used by the Company’s creditors inassessing debt covenant compliance. The Company also uses EBITDA as a segmentperformance measure.

While the Company believes that EBITDA is an important financial measure,it is not presented as an alternative to cash flow, income from continuing operationsor net income as indicators of liquidity or operating performance, and shouldnot be considered in isolation or as a substitute for measures of performanceprepared in accordance with generally accepted accounting principles (“GAAP”). Thismeasure may not be comparable to similarly titled measures reported by othercompanies.

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The followingtable reconciles EBITDA to income from continuing operations and net income (*in millions*):

| ** **                                 | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| **Net income**                             | ** ** |                                                                 | **$**      | **36.3** |   |   |   | $ | 35.0 |   |   |
| Add back:                                  |       |                                                                 | ** ** |   |   |   |   |   |   |
| Loss (income) from discontinued operations | ** ** |                                                                 | **—** |   |   |   | 0.1 |   |   |
| **Income  from continuing operations**     | ** ** |                                                                 | **$**      | **36.3** |   |   |   | $ | 35.1 |   |   |
| Add back:                                  |       |                                                                 | ** ** |   |   |   |   |   |   |
| Income tax expense                         | ** ** |                                                                 | **22.1**   |   |   |   | 22.5 |   |   |
| Interest expense                           | ** ** |                                                                 | **7.0**    |   |   |   | 8.1 |   |   |
| Depreciation and amortization              | ** ** |                                                                 | **10.8**   |   |   |   | 9.2 |   |   |
| **EBITDA**                                 | ** ** |                                                                 | **$**      | **76.2** |   |   |   | $ | 74.9 |   |   |

 

A reconciliationof net cash provided by operating activities, another comparable GAAP measure,to EBITDA for each of the fiscal periods indicated is presented below (*in millions*):

| ** **                                                        | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| **Net  cash provided by operating activities**                    | ** ** |                                                                 | **$**      | **2.2** |   |   |   | $ | 2.4 |   |   |
| Changes in  operating assets and liabilities, net of acquisitions | ** ** |                                                                 | **50.2**   |   |   |   | 45.9 |   |   |
| Bad debt expense                                                  | ** ** |                                                                 | **(1.8**   | **)** |   |   | (1.7 | ) |   |
| Interest expense                                                  | ** ** |                                                                 | **7.0**    |   |   |   | 8.1 |   |   |
| Income tax  expense                                               | ** ** |                                                                 | **22.1**   |   |   |   | 22.5 |   |   |
| Deferred income  tax                                              | ** ** |                                                                 | **(1.0**   | **)** |   |   | (0.5 | ) |   |
| Discontinued  operations, net of taxes                            | ** ** |                                                                 | **—** |   |   |   | 0.1 |   |   |
| Stock-based  compensation expense                                 | ** ** |                                                                 | **(1.8**   | **)** |   |   | (0.4 | ) |   |
| Other non-cash,  net                                              | ** ** |                                                                 | **(0.7**   | **)** |   |   | (1.5 | ) |   |
| EBITDA                                                            | ** ** |                                                                 | **$**      | **76.2** | ** ** | ** ** | ** ** | **$** | **74.9** |   |   |

 

**CapitalExpenditures**

Capital expenditures(excluding acquisitions and other investments) for the three months ended March 31,2006 and the year ended December 31, 2005 totaled $6.2 million and $55.3million, respectively and were funded primarily from internally generated funds.The Company continues to invest in its core information technology capabilitiesand capacity expansion. Capital expenditures are expected to total between $40million and $50 million for 2006. Anticipated expenditures are primarilyattributable to ongoing improvements at existing vehicle auction facilities andimprovements in information technology systems and infrastructure. Futurecapital expenditures could vary substantially based on capital project timingand if the Company is required to undertake corrective action or incurenvironmental costs in connection with any outstanding or future liabilities.

**Acquisitions**

In February 2006, the Company completed thepurchase of certain assets of the N.E. Penn Salvage Company, an independentlyowned salvage auction in northeast Pennsylvania. The purchased assets includedthe accounts receivables, operating equipment and customer relationshipsrelated to the auction. In addition, the Company has operating leaseobligations related to the facility through 2016. Initial annual lease paymentsfor the facilities total approximately $0.1 million per year. The Company didnot assume 

33

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any other materialliabilities or indebtedness in connection with the acquisition. Financialresults for this acquisition have been included in the Company’s consolidatedfinancial statements since the date of acquisition.

In March 2006, the Company completed theacquisition of Auction Broadcasting Company’s South Tampa used vehicle auctionserving western and central Florida. The Company has renamed the auction ADESASarasota. The assets purchased included land and buildings, the relatedoperating equipment, accounts receivable and customer relationships related tothe auction. The auction is comprised of approximately 63 acres and includessix auction lanes and full-service reconditioning shops providing detail,mechanical and body shop services. The Company did not assume any othermaterial liabilities or indebtedness in connection with the acquisition. Financialresults for this acquisition have been included in the Company’s consolidatedfinancial statements since the date of acquisition.

ADESA acquired the twopreviously mentioned auctions for a total cost of $29.6 million, in cash. Preliminarypurchase price allocations have been recorded for each acquisition. Thepurchase price of the acquisitions was allocated to the acquired assets basedupon fair market values, including $5.0 million to other intangible assets,representing the fair value of acquired customer relationships and non-competeagreements, which will be amortized over their expected useful lives. Thepreliminary purchase price allocations resulted in aggregate goodwill of $11.4million. The goodwill was assigned to the auction and related servicesreporting segment and is expected to be fully deductible for tax purposes. TheCompany expects to finalize the purchase price allocations related to each ofthe acquisitions upon receipt and analysis of third party valuation procedures.Pro forma financial results for the acquisitions were not material.

**Other Investment**

In February 2006, AFCacquired a 15 percent interest in Finance Express, LLC for $12.5 million incash. Finance Express is a financial software and services company specializingin software for the origination and servicing of motor vehicle retailinstallment contracts between independent used vehicle dealers and lendinginstitutions. In addition, the Company also receives certain fees from FinanceExpress for assistance in marketing its software product and services toindependent used vehicle dealers. Finance Express qualifies as a variableinterest entity (“VIE”) pursuant to Financial Interpretation No. 46, *Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin No. 51* (“FIN 46”). TheCompany is currently not the primary beneficiary of the VIE and its risk ofloss is limited, in all material respects, to its investment in Finance Express.The Company’s investment in Finance Express is accounted for using the equitymethod of accounting and its equity in Finance Express’ earnings or losses isrecorded in “Other income, net” in the Consolidated Statements of Income. TheCompany’s equity in Finance Express’ earnings or losses was not material forthe period ended March 31, 2006.

**Off-Balance SheetArrangements**

AFC sells the majority of its U.S. dollar denominated finance receivableson a revolving basis and without recourse to a wholly owned, bankruptcy remote,consolidated, special purpose subsidiary (“AFC Funding Corporation”),established for the purpose of purchasing AFC’s finance receivables. Effective March 31,2006, AFC and AFC Funding Corporation amended their securitization agreement.As part of the amendment, the expiration date of the agreement was extendedfrom June 30, 2008 to April 30, 2009. This agreement is subject to annual renewalof short-term liquidity by the liquidity providers and allows for the revolvingsale by AFC Funding Corporation to a bank conduit facility of up to a maximumof $600 million in undivided interests in certain eligible finance receivablessubject to committed liquidity. AFC Funding Corporation had committed liquidityof $475 million and $425 million at March 31, 2006 and December 31,2005, respectively. On May 5, 2006, committed liquidity wasincreased to $550 million. Receivables that AFC Funding sells to the bankconduit facility qualify for sales accounting for financial 

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reporting purposes pursuant to SFAS 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishment of Liabilities* and as a result are not reported onthe Company’s Consolidated Balance Sheet.

At March 31, 2006, AFC managed total finance receivables of $783.7million, of which $708.6 million had been sold without recourse to AFC FundingCorporation. At December 31, 2005, AFC managed total finance receivablesof $655.7 million, of which $581.9 million had been sold without recourse toAFC Funding Corporation. Undivided interests in finance receivables were soldby AFC Funding Corporation to the bank conduit facility with recourse totaling$473.0 million and $399.8 million at March 31, 2006 and December 31,2005, respectively. Finance receivables include $88.0 million and $51.1 millionclassified as held for sale and $156.9 million and $148.0 million classified asheld for investment at March 31, 2006 and December 31, 2005,respectively. AFC’s allowance for losses of $3.2 million and $2.4 million at March 31,2006 and December 31, 2005, respectively, include an estimate of lossesfor finance receivables held for investment. Additionally, accrued liabilitiesof $3.9 million and $2.9 million for the estimated losses for loans sold by thespecial purpose subsidiary were recorded at March 31, 2006 and December 31,2005, respectively. These loans were sold to a bank conduit facility withrecourse to the special purpose subsidiary and will come back on the balancesheet of the special purpose subsidiary at fair market value if they becomeineligible under the terms of the collateral arrangement with the bank conduitfacility.

Proceeds from the revolving sale ofreceivables to the bank conduit facility were used to fund new loans tocustomers. AFC and AFC Funding Corporation must maintain certain financialcovenants including, among others, limits on the amount of debt AFC canincur, minimum levels of tangible net worth, and other covenants tied to theperformance of the finance receivables portfolio. The securitization agreement alsoincorporates the financial covenants of ADESA’s credit facility. At March 31,2006, the Company was in compliance with the covenants contained in thesecuritization agreement.

**Critical AccountingEstimates**

In preparing the financial statements in accordancewith generally accepted accounting principles, management must often makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures at the date of thefinancial statements and during the reporting period. Some of those judgmentscan be subjective and complex. Consequently, actual results could differ fromthose estimates. Accounting measurements that management believes are mostcritical to the reported results of operations and financial condition of theCompany include: uncollectible receivables and allowance for credit losses anddoubtful accounts, recoverability of goodwill and long-lived assets,self-insurance programs, legal proceedings and other loss contingencies, andincome taxes.

Management has discussed the development and selectionof its critical accounting estimates with the Audit Committee of ADESA’s boardof directors. In addition to the critical accounting estimates, there are otheritems used in the preparation of ADESA’s consolidated financial statements thatrequire estimation, but are not deemed critical. Changes in estimates used inthese and other items could have a material impact on ADESA’s financialstatements.

ADESA continuallyevaluates the accounting policies and estimates it uses to prepare the consolidatedfinancial statements. In cases where management estimates are used, they arebased on historical experience, information from third-party professionals, andvarious other assumptions believed to be reasonable. The Company’s criticalaccounting estimates are discussed in the “Critical Accounting Estimates”section of “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Part II, Item 7 of the Company’s Annual Reporton Form 10-K for the year ended December 31, 2005, as filedwith the Securities and Exchange Commission. In addition, ADESA’s mostsignificant accounting polices are discussed in Note 3 and elsewhere in the Notes to the Consolidated 

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Financial Statements included in the Company’sAnnual Report on Form 10-K, which includes audited financialstatements for the three years ended December 31, 2005.

**Adoption of SFAS123(R), *Share-Based Payment***

Prior to 2006, ADESA applied the intrinsic valuemethod provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, to account for stock-based compensation. Accordingly, theCompany did not recognize compensation expense for employee stock options thatwere granted in prior years. However, compensation expense was recognized onother forms of stock-based compensation, including restricted stock units andperformance based stock awards. On January 1, 2006, the Company adoptedthe provisions of SFAS 123(R), *Share-Based Payment*,using the modified prospective application method, and therefore was notrequired to restate its financial results for prior periods. Under this method,as of January 1, 2006, ADESA will apply the provisions of this statementto new and modified awards, as well as to the nonvested portion of awardsgranted and outstanding before the Company’s adoption.

The Company’s stock-based compensation awards,including both stock options and restricted stock units, have a retirementeligible provision, whereby awards granted to employees who have reached theretirement eligible age and meet certain service requirements with either ADESAand or its former parent, ALLETE, automatically vest when an eligible employeeretires from the Company. The Company has previously accounted for this type ofarrangement by recognizing compensation cost (for both pro forma andrecognition purposes) over the nominal vesting period (i.e. over the fullstated vesting period of the award) and, if the employee retired before the endof the vesting period, recognizing any remaining unrecognized compensation costat the date of retirement. Upon adoption of SFAS 123(R), new awards will besubject to the non-substantive vesting period approach, which specifies that anaward is vested when the employee’s retention of the award is no longercontingent on providing subsequent service. Recognizing that many companiesfollowed the nominal vesting period, the SEC issued guidance for converting tothe non-substantive vesting period approach. The Company has revised itsapproach to apply the non-substantive vesting period approach to all new grantsafter adoption, but will continue to follow the nominal vesting period approachfor the remaining portion of unvested outstanding awards. An additionalrequirement of SFAS 123(R) is that estimated forfeitures be considered indetermining compensation expense. As previously permitted, the Company recordedforfeitures when they occurred. Estimating forfeitures did not have a materialimpact on the determination of compensation expense.

On March 9, 2005, the board of directors (the “board”)of the Company accelerated the vesting of certain unvested and “out-of-the-money”stock options previously awarded to employees and officers that have anexercise price of $24. The awards accelerated were made under the ADESA, Inc.2004 Equity and Incentive Plan in conjunction with ADESA’s initial publicoffering (“IPO”) in June 2004. As a result, options to purchaseapproximately 2.9 million shares of the Company’s common stock becameexercisable immediately and the Company disclosed incremental pro formastock-based employee compensation expense of approximately $7.7 million, net oftax, in the first quarter 2005. The options awarded in conjunction with the IPOto the Company’s named executive officers and the majority of the otherofficers would have vested in equal increments at June 15, 2005, 2006 and2007. The options awarded to certain other executive officers and employees haddifferent vesting terms. One-third of the options awarded to the otherexecutive officers and employees vested on December 31, 2004. Theremaining two-thirds of the options awarded to these executive officers andother employees in conjunction with the IPO would have vested in equalincrements at December 31, 2005 and 2006. All of these options expire in June 2010.All other terms and conditions applicable to the outstanding stock optiongrants remain in effect.

The Company and its board considered several factorsin determining to accelerate the vesting of these options. Primarily, theacceleration will enhance the comparability of the Company’s financialstatements in prior and subsequent periods. The options awarded to theexecutive officers were special, 

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one-time grants inconjunction with the Company’s IPO. As such, these grants are not indicative ofpast grants when ADESA was a subsidiary of ALLETE prior to June 2004 andare not representative of the Company’s expected future grants. The Company andboard also believe that the acceleration is in the best interest of thestockholders as it will reduce the Company’s reported stock option expense infuture periods mitigating the impact of SFAS 123(R).

As a result of adopting SFAS 123(R) on January 1,2006, income from continuing operations before income taxes and net income forthe quarter ended March 31, 2006, were $1.0 million and $0.6 million lowerthan if the Company had continued to account for share-based compensation underAPB Opinion No. 25. Basic and diluted earnings per share from continuingoperations were $0.01 lower for the quarter ended March 31, 2006 as aresult of the adoption of SFAS 123(R).

Prior to the adoption of SFAS 123(R), tax benefits ofdeductions resulting from the exercise of stock options were presented asoperating cash flows in the Consolidated Statements of Cash Flows. SFAS 123(R) requirescash flows resulting from tax deductions in excess of recognized compensationcost from the exercise of stock options (excess tax benefits) to be classifiedas financing cash flows. This change in classification did not have an impacton the Consolidated Statement of Cash Flows in the current period as the excesstax benefits recognized for the three months ended March 31, 2006 were notmaterial.

Prior to the adoption of SFAS 123(R), the Companyapplied the disclosure-only provisions of SFAS 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*, which permitted companies to apply the existingaccounting rules under APB Opinion No. 25 and related interpretations.Generally, if the exercise price of options granted under the plan was equal tothe market price of the underlying common stock on the grant date, noshare-based compensation cost was recognized in net income. As required by SFAS148, prior to the adoption of SFAS 123(R), pro forma net income and pro formanet income per common share were provided for stock-based awards, as if thefair value recognition provisions of SFAS 123 had been applied.

The Company typicallyissues its annual grant of stock-based compensation in the first quarter of itsfiscal year, including the quarter ended March 31, 2006. See Note 2 “Stock-BasedCompensation” included in this Form 10-Q for further details.

**New AccountingStandards**

In March 2006, theFASB issued SFAS 156, *Accounting for Servicingof Financial Assets—an amendment of FASB Statement No. 140*. SFAS156 requires recognition of a servicing asset or liability at fair value eachtime an obligation is undertaken to service a financial asset by entering intoa servicing contract. The standard also provides guidance on subsequentmeasurement methods for each class of servicing assets and liabilities andspecifies financial statement presentation and disclosure requirements. SFAS156 is effective for fiscal years beginning after September 15, 2006. TheCompany will adopt SFAS 156 on January 1, 2007 and is currentlyevaluating what effect the adoption of SFAS 156 will have on the consolidatedfinancial statements.

**Item 3.   Quantitativeand Qualitative Disclosures About Market Risk**

**Foreign Currency**

The Company’s foreigncurrency exposure is limited and arises from transactions denominated inforeign currencies, particularly intercompany loans, as well as fromtranslation of the results of operations from the Company’s Canadian and, to amuch lesser extent, Mexican subsidiaries. However, fluctuations between U.S.and non-U.S. currency values may adversely affect the Company’s results ofoperations and financial position. In addition, there are tax inefficiencies inrepatriating cash from non-U.S. subsidiaries. To the extent such repatriationis necessary for ADESA to meet its debt service or other obligations, these 

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taxinefficiencies may adversely affect ADESA. The Company has not entered into anyforeign exchange contracts to hedge changes in the Canadian or Mexican exchangerates. Canadian currency translation positively affected net income byapproximately $0.3 million for the three months ended March 31, 2006.Currency exposure of the Company’s Mexican operations is not material to theresults of operations.

**Interest Rates**

The Company is exposed to interest rate risk onborrowings. Accordingly, interest rate fluctuations affect the amount ofinterest expense the Company is obligated to pay. The Company uses interestrate swap agreements to manage its exposure to interest rate risk. The Companydesignates its interest rate swap agreements as cash flow hedges. The earningimpact of interest rate swaps designated as cash flow hedges is recorded uponthe recognition of the interest related to the hedged debt. Any ineffectivenessin a hedging relationship is recognized immediately into earnings. There was nosignificant ineffectiveness in the first three months of 2006 or 2005.

In June 2004, the Company entered into aninterest rate swap agreement with a notional amount of $105 million to manageits exposure to interest rate movements on its variable rate debt. The interestrate swap agreement contains amortizing provisions and matures in December 2006.In November 2005, the Company entered into an interest rate swap agreementwith a notional amount of $40 million to manage its exposure to interest ratemovements on its variable rate credit facility. The swap matures in May 2008.

The fair value of theinterest rate swap agreements is estimated using pricing models widely used infinancial markets and represents the estimated amount the Company would receiveor pay to terminate the agreements at the reporting date. At March 31,2006, the fair value of the interest rate swap agreements was a $1.1 milliongain recorded in “Other assets” on the consolidated balance sheet. At December 31,2005, the fair value of the interest rate swap agreements consisted of a $0.9million gain recorded in “Other assets” and a $0.1 million loss recorded in “Otherliabilities” on the consolidated balance sheet. In accordance with theprovisions of SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities,* changes in the fair value of theinterest rate swap agreements designated as cash flow hedges are recorded in “Othercomprehensive income”. Unrealized gains or losses on interest rate swapagreements are included as a component of “Accumulated other comprehensiveincome”. At March 31, 2006, there was a net unrealized gain totaling $0.7million, net of taxes of $0.4 million. At December 31, 2005, there was anet unrealized gain totaling $0.5 million, net of taxes of $0.3 million. TheCompany is exposed to credit loss in the event of non-performance by thecounterparties; however, non-performance is not anticipated. The Company hasonly partially hedged its exposure to interest rate fluctuations on itsvariable rate debt. A sensitivity analysis of the impact on the Company’svariable rate debt instruments to a hypothetical 100 basis point increasein short-term interest rates for the quarter ended March 31, 2006 wouldhave resulted in an increase in interest expense of approximately $0.4 million.

**Item 4.   Controlsand Procedures**

**Disclosure Controlsand Procedures**

The Company’s management,with the participation of its Chief Executive Officer and its Chief FinancialOfficer, evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a—15(e) and15d—15(e) under the Securities Exchange Act of 1934, as amended (“theExchange Act”)), as of the end of the period covered by this Quarterly Reporton Form 10-Q. Based on the evaluation, management, including theChief Executive Officer and the Chief Financial Officer, concluded that theCompany’s disclosure controls and procedures were effective as of the end ofthe period covered by this report for the information required to be disclosedin reports we file or submit under the Exchange Act to be recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and for 

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suchinformation to be accumulated and communicated to management as appropriate toallow timely decisions regarding required disclosure.

**Changes in InternalControl Over Financial Reporting**

The Company is continuously seeking to improve theefficiency and effectiveness of its operations and internal controls. Thisresults in refinements to processes throughout the Company. However, there wereno changes in the Company’s internal control over financial reporting thatoccurred during the period covered by this Quarterly Report on Form 10-Qthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

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**PART II**

**OTHER INFORMATION**

**Item 1.**                        LegalProceedings

The Company is involved in litigation and disputesarising in the ordinary course of business, such as actions related toinjuries; property damage; handling, storage or disposal of vehicles;environmental laws and regulations; and other litigation incidental to thebusiness such as employment matters and dealer disputes. Such litigation isgenerally not, in the opinion of management, likely to have a material adverseeffect on the financial condition, results of operations or cash flows.

Certain legal proceedingsin which the Company is involved are discussed in Note 21 to the consolidatedfinancial statements in Part II, Item 8 of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005 and Part I, Item 3 of the sameAnnual Report. The following discussion is limited to certain recentdevelopments concerning the Company’s legal and regulatory proceedings andshould be read in conjunction with those earlier Reports. Unless otherwise indicated,all proceedings discussed in those earlier reports remain outstanding.

***ADESA Importation Services, Inc. litigation***

In January, 2002, Johnny Cooper (“Cooper”), a formermanager of ADESA Importation Services, Inc. (“AIS”), a wholly ownedsubsidiary of the Company, filed suit against the Company and AIS (collectively“ADESA”) in the Circuit Court of the State of Michigan, County of Genesee, CaseNo. 02-72517-CK, alleging breach of contract and breach ofother oral agreements related to AIS’s purchase of International VehicleImporters, Inc. in December 2000. Cooper was the controllingshareholder who sold the business to AIS in 2000. AIS filed a counterclaimagainst Cooper including allegations of breach of contract, breach of fiduciaryduty and fraud. Pursuant to Michigan law, the case was originally evaluated byan independent three attorney panel which awarded Cooper damages of $153,000for his claims and awarded ADESA damages of $225,000 for its counterclaims. Cooperrejected the panel’s decision resulting in a jury trial. In June 2004, thejury awarded Cooper damages of $5.8 million related to the allegation thatADESA breached oral agreements to provide funding to AIS. The jury also foundin favor of ADESA on three of its counterclaims including breach of contract,breach of fiduciary duty and fraud and awarded ADESA $69,000. In July 2004,the Genesee County Circuit Court entered judgment for Cooper in the amount of$6,373,812, netting the amount of the damages and awarding the plaintiffprejudgment interest. In October 2004, the Genesee County Circuit Courtdenied post-judgment motions made by ADESA for a new trial and/or reduction inthe damages. In November 2004, the Company filed a Claim of Appeal withthe Michigan Court of Appeals. Both parties subsequently submitted theirrespective appellate briefs to the Michigan Court of Appeals.

In December 2005, the company filed a motion forperemptory reversal requesting the Michigan Court of Appeals to reverse thejudgment on the grounds that Cooper’s oral side agreement claim was barred, asa matter of law, by the merger provisions of the asset purchase agreement thatwas entered into in 2000 in connection with the sale of the business to AIS. InMarch 2006, the Company was notified that the Court of Appeals denied themotion on the grounds that it failed to persuade the Court of the existence ofmanifest error requiring reversal without argument for formal submission. In April 2006,the parties presented their respective oral arguments to a three judge panel ofthe Court of Appeals. A decision is expected later this year.

The Company discontinuedthe operations of AIS, its vehicle importation business, in February 2003.At March 31, 2006, the Company has an accrual totaling $6.9 million ($5.8million award plus accrued interest of $1.1 million) as a result of the jurytrial verdict.

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**Item 1A.**                RiskFactors

In addition to the other information set forth in thisreport, readers should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2005, which could materially affect ADESA’s business,financial condition or future results. The risks described in the Company’sAnnual Report on Form 10-K are not the only risks facing the Company.Additional risks and uncertainties not currently known to ADESA or that ADESAcurrently deems to be immaterial also may materially adversely affect theCompany’s business, financial condition and/or operating results.

**Item 2.                        UnregisteredSales of Equity Securities and Use of Proceeds**

**Issuer Purchases ofEquity Securities**

The following table provides informationabout purchases by ADESA of its shares of common stock during the quarter endedMarch 31, 2006 (*actual shares*):

**ADESA Common Stock Repurchases (1)**

| **Period**                            | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average Price  Paid  per Share (1)** | ** ** | **Total Number  of Shares Purchased  as Part of Publicly  Announced Plan** | ** ** | **Approximate  Dollar Value  of Shares That  May Yet Be  Purchased  Under the Plan** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| January 1—January 31   |       |       | 683        |                                                      |       |                                                  | $          | 25.55                                                                                                         |       |                                                                                                                    |       | — |   |   |   | $ | — |   |   |
| February 1—February 28 |       |       | 123        |                                                      |       |                                                  | $          | 25.50                                                                                                         |       |                                                                                                                    |       | — |   |   |   | — |   |   |
| March 1—March 31       |       |       | —     |                                                      |       |                                                  | $          | —                                                                                                        |       |                                                                                                                    |       | — |   |   |   | — |   |   |
| Total                                 |       |       | 806        |                                                      |       |                                                  | $          | 25.54                                                                                                         |       |                                                                                                                    |       | — |   |   |   | $ | — |   |   |

 

*(1)*          Primarilyreflects shares surrendered in the first fiscal quarter to satisfy taxwithholding obligations in connection with the vesting of restricted stockawards issued to employees.

**Item 6.**                        Exhibits

(a)   Exhibits. The Exhibit Index is incorporatedherein by reference.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

|                                 |       | ADESA, Inc.               |
|--------------------------------------|------------|--------------------------------|
|                                 |       | (Registrant)                   |
| Date:   May 10,  2006 |       | /s/  CAMERON C. HITCHCOCK      |
|                                 |       | Cameron C. Hitchcock           |
|                                 |       | *Executive Vice President and* |
|                                 |       | *Chief Financial Officer*      |
|                                 |       | *(Duly Authorized Officer and* |
|                                 |       | *Principal Financial Officer)* |
| Date:   May 10,  2006 | ** ** | /s/  SCOTT A. ANDERSON         |
|                                 |       | Scott A. Anderson              |
|                                 |       | *Controller*                   |
|                                 |       | *(Chief Accounting Officer)*   |

 

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**EXHIBITINDEX**

|             | ** ** | ** **                   | ** ** | **Incorporated by Reference**                                                                                                                                                                                                                                                                                      | ** ** | ** ** | ** ** |
|-------------|------------|------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **Exhibit** | ** ** | ** **                   | ** ** | ** **                                                                                                                                                                                                                                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Filing** | ** ** | **Filed** | ** ** |
| **No.**     | ** ** | **Exhibit Description** | ** ** | ** **                                                                                                                                                                                                                                                                                                                   | ** ** | **Form**   | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Date** | ** ** | **Herewith** | ** ** |
|        | 10.31      |                         |       | Executive Restricted  Stock Unit Awards, Annual Management Incentive Plan Bonus Targets and  Compensation* and Long-Term Management Incentive Program Bonus Targets                                                                                                                                                          |       |       | 8-K        |   |   | 001-32198 |   |   | N/A |   |   | 2/14/06 |   |   |   |   |   |
|        | 10.37      |                         |       | Amendment No. 6 to  that certain Second Amended and Restated Receivables Purchase Agreement  entered into by and among AFC Funding Corporation, an ultimate subsidiary of  ADESA, Inc., Automotive Finance Corporation, an ultimate subsidiary of  ADESA, Fairway Finance Company, LLC, and Harris Nesbitt Corp.** |       |       | 8-K        |   |   | 001-32198 |   |   | N/A |   |   | 4/5/06 |   |   | X |   |   |
|        | 31.1       |                         |       | Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of David G. Gartzke                                                                                                                                                                                                                                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|        | 31.2       |                         |       | Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of Cameron C. Hitchcock                                                                                                                                                                                                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|        | 32.1       |                         |       | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of David G. Gartzke                                                                                                                                                                                                                                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|        | 32.2       |                         |       | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of Cameron C. Hitchcock                                                                                                                                                                                                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|             |            |                              |            |                                                                                                                                                                                                                                                                                                                              |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*                    Managementcontract or compensation plan or arrangement

**             Portions of thisexhibit have been redacted and are subject to a request for confidentialtreatment filed separately with the Secretary of the Securities and ExchangeCommission pursuant to Rule 24b-2 under the Securities Exchange Actof 1934, as amended.

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