**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly periodended September 30, 2006**

** **

**CommissionFile Number 001-32198**

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**ADESA, Inc.**

(Exact name of Registrantas specified in its charter)

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

 

**13085 Hamilton CrossingBoulevard**

**Carmel, Indiana 46032**

(Address of principalexecutive offices and zip code)

Registrant’s telephonenumber, 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 forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes x  No 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 markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o  No x

The number of shares of common stock outstanding as ofOctober 31, 2006:

| Class  | ** ** | **Number of Shares Outstanding** |
|--------|------------|----------------------------------|
| Common |       | 89,939,579                       |

 

 

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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 |     | 25 |
| Item 3.                                | Quantitative and Qualitative Disclosures About Market  Risk                                 |     | 44 |
| Item 4.                                | Controls and Procedures                                                                     |     | 45 |
| PART II—OTHER INFORMATION    |                                                                                        |     |
| Item  1.                               | Legal  Proceedings                                                                          |     | 45 |
| Item  1A.                              | Risk  Factors                                                                               |     | 49 |
| Item 2.                                | Unregistered Sales of Equity Securities and Use of  Proceeds                                |     | 49 |
| Item 6.                                | Exhibits                                                                                    |     | 49 |
| Signatures                             |                                                                                        | 50       |
| Exhibit Index                     |                                                                                        | 51       |

 

2

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**PART IFINANCIAL INFORMATION**

**Item1.**                        FinancialStatements

**ADESA, Inc.**

**ConsolidatedStatements of Income**

***(Inmillions, except per share data)***

***(unaudited)***

 

| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating revenues                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Auction services group                                         | ** ** | **$**                            | **236.2**  |                            | $          | 208.1 | ** ** | **$** | **726.3** |   | $ | 636.1 |   |
| Dealer services group                                          | ** ** | **36.7**                         |       | 32.9                            | ** ** | **108.1** |   | 94.1 |   |
| Total operating revenues                                       | ** ** | **272.9**                        |       | 241.0                           | ** ** | **834.4** |   | 730.2 |   |
| Operating expenses                                             | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Cost of services  (exclusive of depreciation and amortization) | ** ** | **137.8**                        |       | 116.8                           | ** ** | **419.7** |   | 346.4 |   |
| Selling, general and  administrative                           | ** ** | **64.7**                         |       | 57.5                            | ** ** | **195.4** |   | 168.4 |   |
| Depreciation and  amortization                                 | ** ** | **12.1**                         |       | 10.8                            | ** ** | **33.9** |   | 30.0 |   |
| Total operating expenses                                       | ** ** | **214.6**                        |       | 185.1                           | ** ** | **649.0** |   | 544.8 |   |
| Operating profit                                               | ** ** | **58.3**                         |       | 55.9                            | ** ** | **185.4** |   | 185.4 |   |
| Interest expense                                               | ** ** | **7.1**                          |       | 7.4                             | ** ** | **21.2** |   | 24.0 |   |
| Other income, net                                              | ** ** | **(1.8**                         | **)**      | (2.5                            | )          | **(5.3** | **)** | (6.3 | ) |
| Loss on extinguishment  of debt                                | ** ** | **—**                       |       | 2.9                             | ** ** | **—** |   | 2.9 |   |
| Income from continuing  operations before income taxes         | ** ** | **53.0**                         |       | 48.1                            | ** ** | **169.5** |   | 164.8 |   |
| Income taxes                                                   | ** ** | **18.6**                         |       | 16.5                            | ** ** | **62.6** |   | 62.0 |   |
| Income from continuing  operations                             | ** ** | **34.4**                         |       | 31.6                            | ** ** | **106.9** |   | 102.8 |   |
| Loss from discontinued  operations, net of income taxes        | ** ** | **(0.3**                         | **)**      | (0.1                            | )          | **(0.4** | **)** | (0.4 | ) |
| Net income                                                     | ** ** | **$**                            | **34.1**   |                            | $          | 31.5 | ** ** | **$** | **106.5** |   | $ | 102.4 |   |
| Earnings per share—basic                                  | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Income from continuing  operations                             | ** ** | **$**                            | **0.38**   |                            | $          | 0.35 | ** ** | **$** | **1.19** |   | $ | 1.14 |   |
| Loss from discontinued  operations, net of income taxes        | ** ** | **—**                       |       | —                          |       | —- |   | — |   |
| Net income                                                     | ** ** | **$**                            | **0.38**   |                            | $          | 0.35 | ** ** | **$** | **1.19** |   | $ | 1.14 |   |
| Earnings per share—diluted                                | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Income from continuing  operations                             | ** ** | **$**                            | **0.38**   |                            | $          | 0.35 | ** ** | **$** | **1.19** |   | $ | 1.14 |   |
| Loss from discontinued  operations, net of income taxes        | ** ** | **—**                       |       | —                          | ** ** | **(0.01** | **)** | (0.01 | ) |
| Net income                                                     | ** ** | **$**                            | **0.38**   |                            | $          | 0.35 | ** ** | **$** | **1.18** |   | $ | 1.13 |   |
| Dividends declared per common share (Note 11)                  | ** ** | **$**                            | **0.075**  |                            | $          | 0.075 | ** ** | **$** | **0.225** |   | $ | 0.225 |   |

 

See notes to consolidated financial statements

3

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

| ** **                                                                                   | ** **   | **September 30,** | ** **   | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|--------------|------------------------|--------------|-----------------------|------------|
| ** **                                                                                   | ** **   | **2006**               | ** **   | **2005**              | ** ** |
| ** **                                                                                   | *** *** | ***(unaudited)***      | ** **   | ** **            | ** ** |
| **Assets**                                                                                   | * *     |                   | * *     | * *              |       |   | * * | * * |   |
| ***Current assets***                                                                         | *** *** | ** **             | *** *** | * *              | ** ** | ** ** | *** *** | * * |   |
| Cash and cash equivalents                                                                    | ** **   | ** **             | **$**        | **211.2**             | * *   |   |   | $ | 240.2 | * * |   |
| Restricted cash                                                                              | ** **   | ** **             | **7.3**      | * *              |       |   | 5.7 | * * |   |
| Trade receivables, net of allowances of $5.8 (2006) and $3.9 (2005)                          | ** **   | ** **             | **272.1**    | * *              |       |   | 188.6 | * * |   |
| Finance receivables, net of allowances of $2.6 (2006) and $2.4 (2005)                        | ** **   | ** **             | **233.9**    | * *              |       |   | 196.7 | * * |   |
| Retained interests in finance receivables sold                                               | ** **   | ** **             | **67.2**     | * *              |       |   | 56.8 | * * |   |
| Deferred income taxes                                                                        | ** **   | ** **             | **19.6**     | * *              |       |   | 21.6 | * * |   |
| Other current assets                                                                         | ** **   | ** **             | **15.2**     | * *              |       |   | 14.5 | * * |   |
| Total current assets                                                                         | ** **   | ** **             | **826.5**    | * *              |       |   | 724.1 | * * |   |
| ***Other assets***                                                                           | *** *** | ** **             | *** *** | * *              | ** ** | ** ** | *** *** | * * |   |
| Goodwill                                                                                     | ** **   | ** **             | **559.0**    | * *              |       |   | 532.6 | * * |   |
| Other intangible assets, net of accumulated amortization of $38.4  (2006) and $29.8 (2005)   | ** **   | ** **             | **49.9**     | * *              |       |   | 42.0 | * * |   |
| Other assets                                                                                 | ** **   | ** **             | **64.0**     | * *              |       |   | 50.9 | * * |   |
| Total other assets                                                                           | ** **   | ** **             | **672.9**    | * *              |       |   | 625.5 | * * |   |
| Property and equipment, net of  accumulated depreciation of $180.7  (2006) and $155.2 (2005) | ** **   | ** **             | **606.7**    | * *              |       |   | 595.9 | * * |   |
| Total  assets                                                                                | ** **   | ** **             | **$**        | **2,106.1**           | * *   |   |   | $ | 1,945.5 | * * |   |

 

See notes to consolidated financial statements

4

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

| ** **                                          | ** **   | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------|--------------|------------------------|-------------|-----------------------|------------|
| ** **                                          | ** **   | **2006**               | ** **  | **2005**              | ** ** |
| ** **                                          | ** **   | **(*unaudited*)**      | ** **  | ** **            | ** ** |
| **Liabilities  and Stockholders’ Equity**      | ** **   |                   | ** **  | ** **            |       |   | ** ** | ** ** |   |
| ***Current liabilities***                           | *** *** |                   | ** **  | ** **            | * *   | * * | *** *** | *** *** | * * |
| Accounts payable                                    | ** **   |                   | **$**       | **382.2**             | ** ** |   |   | $ | 270.3 |   |   |
| Accrued employee benefits and compensation expenses | ** **   |                   | **42.0**    | ** **            |       |   | 35.0 |   |   |
| Other accrued expenses                              | ** **   |                   | **42.0**    | ** **            |       |   | 36.7 |   |   |
| Income taxes payable                                | ** **   |                   | **9.9**     | ** **            |       |   | 3.3 |   |   |
| Current maturities of long-term debt                | ** **   |                   | **30.0**    | ** **            |       |   | 70.0 |   |   |
| Current liabilities of discontinued operations      | ** **   |                   | **7.1**     | ** **            |       |   | 6.8 |   |   |
| Total current liabilities                           | ** **   |                   | **513.2**   | ** **            |       |   | 422.1 |   |   |
| ***Non-current liabilities***                       | *** *** |                   | ** **  | ** **            | * *   | * * | *** *** | *** *** | * * |
| Long-term debt                                      | ** **   |                   | **330.0**   | ** **            |       |   | 362.5 |   |   |
| Deferred tax liabilities                            | ** **   |                   | **59.7**    | ** **            |       |   | 63.6 |   |   |
| Other liabilities                                   | ** **   |                   | **6.0**     | ** **            |       |   | 7.4 |   |   |
| Total non-current liabilities                       | ** **   |                   | **395.7**   | ** **            |       |   | 433.5 |   |   |
| Commitments and contingencies  (Note 13)            | ** **   |                   | **—**  | ** **            |       |   | — |   |   |
| ***Stockholders’ equity***                     | *** *** |                   | ** **  | ** **            | * *   | * * | *** *** | *** *** | * * |
| Preferred  stock, $0.01 par value:                  |         |                   | ** **  | ** **            |       |   |   |   |   |
| Authorized shares: 50,000,000                       | ** **   |                   | ** **  | ** **            |       |   |   |   |   |
| Issued shares: none                                 | ** **   |                   | **—**  | ** **            |       |   | — |   |   |
| Common  stock, $0.01 par value:                     |         |                   | ** **  | ** **            |       |   |   |   |   |
| Authorized shares: 500,000,000                      |         |                   | ** **  | ** **            |       |   |   |   |   |
| Issued shares: 94,868,104  (2006 and 2005)          | ** **   |                   | **1.0**     | ** **            |       |   | 1.0 |   |   |
| Additional paid-in capital                          | ** **   |                   | **672.6**   | ** **            |       |   | 668.3 |   |   |
| Retained earnings                                   | ** **   |                   | **567.0**   | ** **            |       |   | 480.7 |   |   |
| Treasury  stock, at cost:                           |         |                   | ** **  | ** **            |       |   |   |   |   |
| Shares: 4,954,436 (2006)                            |         |                   | ** **  | ** **            |       |   |   |   |   |
|  5,275,585 (2005)                              | ** **   |                   | **(104.0**  | **)**                 |       |   | (110.7 | ) |   |
| Accumulated other comprehensive income              | ** **   |                   | **60.6**    | ** **            |       |   | 50.6 |   |   |
| Total stockholders’ equity                     | ** **   |                   | **1,197.2** | ** **            |       |   | 1,089.9 |   |   |
| Total liabilities and stockholders’ equity     | ** **   |                   | **$**       | **2,106.1**           | ** ** |   |   | $ | 1,945.5 |   |   |

 

See notes to consolidated financial statements

5

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**ADESA, Inc.**

**ConsolidatedStatement of Stockholders’ Equity**

***(In millions)***

***(unaudited)***

| ** **                                  | ** ** | **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                                  |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      | 106.5      |   |   |   |   |   |   |   |   | 106.5 |   |
| Other  comprehensive income, net of tax:    |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation                |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   | 10.2 |   |   |   |   |
| Unrealized loss on interest rate swaps      |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   | (0.2 | ) |   |   |   |
| Other comprehensive income                  |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | 10.0 |   |
| Comprehensive  income                       |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | 116.5 |   |
| Cash dividends  paid to stockholders        |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      | (20.2      | ) |   |   |   |   |   |   |   | (20.2 | ) |
| Issuance of  common stock under stock plans |       |                          |       |                          |       |                                 |       |                   |       |                | (0.3       | )                                                         |       |      |       |   |   | 6.8 |   |   |   |   |   | 6.5 |   |
| Stock based  compensation expense           |       |                          |       |                          |       |                                 |       |                   |       |                | 3.7        |                                                      |       |      |       |   |   |   |   |   |   |   |   | 3.7 |   |
| Tax benefits from  employee stock plans     |       |                          |       |                          |       |                                 |       |                   |       |                | 0.9        |                                                      |       |      |       |   |   |   |   |   |   |   |   | 0.9 |   |
| Repurchase of  common stock                 |       |                          |       |                          |       |                                 |       |                   |       |                |       |                                                      |       |      |       |   |   | (0.1 | ) |   |   |   |   | (0.1 | ) |
| **Balance at September 30,  2006**     | ** ** | ** **                    | **94.9**   |                          | ** ** | ** **                           | **$**      | **1.0**                |       | ** **          | ** ** | **$**                                                     | **672.6**  |      | ** ** | ** ** | **$** | **567.0** |   | ** ** | **($104.0** | ) | ** ** | **$** | **60.6** |   | ** ** | **$** | **1,197.2** | ** ** |

 

See notes toconsolidated financial statements

6

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

| ** **                                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Operating activities**                                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                                             | ** ** | **$**                                               | **106.5**  |   | $ | 102.4 |   |
| **Adjustments to reconcile net income to net cash  provided by operating activities:** | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                         | ** ** | **33.9**                                            |       | 30.0 |   |
| Bad debt expense                                                                       | ** ** | **3.5**                                             |       | 1.8 |   |
| Deferred income taxes                                                                  | ** ** | **3.8**                                             |       | 14.7 |   |
| Stock-based compensation  expense                                                      | ** ** | **4.5**                                             |       | 2.2 |   |
| Loss on extinguishment  of debt                                                        | ** ** | **—**                                          |       | 2.9 |   |
| Other non-cash, net                                                                    | ** ** | **2.4**                                             |       | 2.7 |   |
|                                                                                   | ** ** | **154.6**                                           |       | 156.7 |   |
| **Changes in operating assets and liabilities, net  of acquisitions:**                 | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Finance receivables held  for sale                                                     | ** ** | **(8.5**                                            | **)**      | (24.6 | ) |
| Retained interests in  finance receivables sold                                        | ** ** | **(10.4**                                           | **)**      | (6.9 | ) |
| Trade receivables and  other assets                                                    | ** ** | **(82.3**                                           | **)**      | (90.5 | ) |
| Accounts payable and  accrued expenses                                                 | ** ** | **71.0**                                            |       | 70.3 |   |
| **Net cash provided by operating  activities**                                         | ** ** | **124.4**                                           |       | 105.0 |   |
| **Investing activities**                                                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net increase in finance  receivables held for investment                               | ** ** | **(27.3**                                           | **)**      | (4.5 | ) |
| Acquisition of  businesses, net of cash acquired                                       | ** ** | **(54.7**                                           | **)**      | (18.7 | ) |
| Purchases of property,  equipment and computer software                                | ** ** | **(24.2**                                           | **)**      | (47.8 | ) |
| Purchase of other  intangibles                                                         | ** ** | **(0.6**                                            | **)**      | (1.0 | ) |
| Proceeds from the sale  of property, equipment and computer software                   | ** ** | **—**                                          |       | 0.1 |   |
| Proceeds from the sale  of discontinued operations                                     | ** ** | **—**                                          |       | 3.3 |   |
| Equity investments                                                                     | ** ** | **(12.6**                                           | **)**      | — |   |
| Transfer to restricted  cash                                                           | ** ** | **(1.6**                                            | **)**      | (0.7 | ) |
| **Net cash used by investing  activities**                                             | ** ** | **(121.0**                                          | **)**      | (69.3 | ) |
| **Financing activities**                                                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net increase in book  overdrafts                                                       | ** ** | **53.4**                                            |       | 51.1 |   |
| Net (decrease) increase  in borrowings from lines of credit                            | ** ** | **(50.0**                                           | **)**      | 158.0 |   |
| Payments on long-term  debt                                                            | ** ** | **(22.5**                                           | **)**      | (364.0 | ) |
| Proceeds from long-term  debt                                                          | ** ** | **—**                                          |       | 150.0 |   |
| Payments for debt  issuance costs                                                      | ** ** | **—**                                          |       | (1.7 | ) |
| Issuance of common stock  under stock plans                                            | ** ** | **6.3**                                             |       | 9.5 |   |
| Excess tax benefits from  share-based compensation                                     | ** ** | **0.2**                                             |       | — |   |
| Dividends paid to  stockholders                                                        | ** ** | **(20.2**                                           | **)**      | (20.2 | ) |
| Repurchase of common  stock                                                            | ** ** | **(0.1**                                            | **)**      | (43.5 | ) |
| **Net cash used by financing  activities**                                             | ** ** | **(32.9**                                           | **)**      | (60.8 | ) |
| Effect of exchange rate  changes on cash                                               | ** ** | **0.5**                                             |       | 1.0 |   |
| **Net  decrease in cash and cash equivalents**                                         | ** ** | **(29.0**                                           | **)**      | (24.1 | ) |
| Cash and cash  equivalents at beginning of period                                      | ** ** | **240.2**                                           |       | 304.5 |   |
| Cash and cash equivalents at end of period                                             | ** ** | **$**                                               | **211.2**  |   | $ | 280.4 |   |

 

See notes to consolidated financial statements

7

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

**NOTES TOCONSOLIDATED 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 for 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 2005 Annual Report on Form 10-K,which includes audited financial statements.

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 nine months ended September 30, 2006, was a $2.7 million pretaxcharge incurred in the first quarter of 2006, or $0.02 per diluted share,related to the correction of certain unreconciled balance sheet differencesconcealed by a former employee at the Company’s Kitchener, Ontario, auctionfacility. The corrections were recorded in “Selling, general and administrative”expenses and decreased net income for the nine months ended September 30,2006 by a total of $1.7 million.

8

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

***Reclassifications and Revisions***

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

***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.

***RevisionsRelated to 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 Corporation securitizes a portion of its floorplan receivables using arevolving securitization structure. The securitization agreement allows for therevolving sale of undivided interests in certain eligible finance receivablesby AFC Funding 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 principal operatingactivity, originating and servicing floorplan receivables; however, accordingto 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. Cash flows related to the origination and collections of finance receivables held for investmentare recorded in investing activities in the Consolidated Statements of CashFlows.

TheCompany has revised its presentation of the cash flows from finance receivablesheld for investment in its Consolidated Statements of Cash Flows prospectivelyfor the comparable quarterly periods in 2005 in its 2006 quarterly reports on Form 10-Q.Prior to December 31, 2005, the cash flows arising in connection withchanges in finance receivables held for investment were reported as operatingcash flows. These cash flows are now reported as investing cash flows. Theamounts revised were deemed immaterial to the Company’s prior financialstatements. These revisions had no impact on the total “Net (decrease) increasein cash and cash equivalents” on the Consolidated Statements of Cash Flows. Operatingand investing cash flows for the unaudited interim period in 2005 have beenrevised as follows:

| ** **                    | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **September 30, 2005** | ** ** |
| ** **                    | ** ** | **Reported**                     | ** ** | **Revised** | ** ** |
| Operating cash flow |       |                             | $          | 100.5 |   |   | $ | 105.0 |   |
| Investing cash flow           |       |                             | $          | (64.1 | ) |   | $ | (69.3 | ) |

 

The revisions also includereclassifications to operating cash flows of insignificant amounts related topresentation of the financial results of the Company’s former vehicle importationbusiness as discontinued operations.

9

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**ADESA, 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 $12.5 million incash. Finance Express is a financial software and services company specializingin software to facilitate the origination and servicing of motor vehicle retailinstallment loan 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. The Company evaluated its investment inFinance Express pursuant to Financial Accounting Standards Board InterpretationNo. 46R, *Consolidation of Variable Interest Entities,an Interpretation of Accounting Research Bulletin No. 51*. 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.Finance Express is a LLC that maintains specific capital accounts for eachmember. Therefore, the Company uses the equity method of accounting for thisinvestment in accordance with the guidance in Emerging Issues Task Force (“EITF”)03-16, *Accounting for Investments in LimitedLiability Companies*, Statement of Position (“SOP”) 78-9, *Accounting for Investments in Real Estate Ventures*, and SABTopic D-46, *Accounting for Limited PartnershipInvestments*. The Company’s share of Finance Express’ earnings orlosses is recorded in “Other income, net” in the Consolidated Statements ofIncome and was not material for the three or nine month periods ended September 30,2006.

***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 awards. Accordingly, the Companydid not recognize compensation expense for employee stock options that weregranted in prior years. However, compensation expense was recognized on otherforms of stock-based awards, including restricted stock units and performancebased stock awards. On January 1, 2006, the Company adopted the provisionsof SFAS 123(R), *Share-Based Payment*, using themodified prospective application method, and therefore was not required torestate its financial results for prior periods. Under this method, as of January 1,2006, ADESA began to apply the provisions of this statement to new and modifiedawards, as well as to the nonvested portion of awards granted and outstandingbefore 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, by recognizing any remaining unrecognized compensationcost at the date of retirement. Following adoption of SFAS 123(R), new awards aresubject 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 continues to follow the 

10

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

nominal vesting periodapproach for the remaining portion of unvested outstanding awards. Anadditional requirement of SFAS 123(R) is that estimated forfeitures beconsidered in determining compensation expense. As previously permitted, theCompany recorded forfeitures when they occurred. Estimating forfeitures did nothave a material impact 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 per share. The awards accelerated were made under theADESA, Inc. 2004 Equity and Incentive Plan in conjunction with ADESA’sinitial public offering (“IPO”) in June 2004. As a result, options topurchase approximately 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. The remainingtwo-thirds of the options awarded to these executive officers and otheremployees in conjunction with the IPO would have vested in equal increments at December 31,2005 and 2006. All of these options expire in June 2010. All other termsand conditions applicable to the outstanding stock option grants remain ineffect.

The Company and its board considered several factorsin determining to accelerate the vesting of these options. Primarily, theacceleration enhances the comparability of the Company’s 2005 financialstatements with those of 2006 and subsequent periods. The options awarded tothe executive 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 was in the best interest of the stockholdersas it reduces the Company’s reported stock option expense in future periodsmitigating the impact of applying 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 nine months ended September 30, 2006, were $2.6 million and $1.6million lower, respectively, than if the Company had continued to account forshare-based awards under APB Opinion No. 25. Basic and diluted earningsper share from continuing operations were both $0.03 lower for the nine monthsended September 30, 2006 as a result 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 from the exercise of stock options inexcess of recognized compensation cost (excess tax benefits) to be classifiedas financing cash flows. This change in classification did not have asignificant impact on the Consolidated Statement of Cash Flows in the currentperiod as the excess tax benefits recognized for the nine months ended September 30,2006 were approximately $0.2 million.

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 

11

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

granted under the plan wasequal to the 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.

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 awards in fiscal year 2005. The fair value of stockoptions was estimated as of the grant date using the Black-Scholesoption-pricing model and the attribution method. The Black-Scholesoption-pricing model does not consider the non-traded nature of employee stockoptions, the lack of transferability or a vesting period. If the model tookthese items into consideration, the resulting estimate for fair value of thestock options could be different. In addition, because of the change to thenon-substantive vesting period approach, the application of estimatedforfeitures, the acceleration of vesting of underwater IPO stock options, thefact that the Company’s options vest over three years and additional optiongrants are expected to be made subsequent to January 1, 2006, the resultsof expensing stock-based awards under SFAS 123(R) may have a materiallydifferent affect on net income in future periods than that presented below.

| **(in millions except per share amounts)**                     | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Reported net  income                                                                    |       |                                                           | $          | 31.5                                                          |       |   |   | $ | 102.4 |   |   |
| Add: stock-based  employee compensation included in reported net income, net of tax (1) |       |                                                           | 0.4        |                                                          |       |   | 1.1 |   |   |
| Deduct: total  stock-based employee compensation expense, net of tax                    |       |                                                           | (0.8       | )                                                             |       |   | (12.2 | ) |   |
| Pro forma net  income                                                                   |       |                                                           | $          | 31.1                                                          |       |   |   | $ | 91.3 |   |   |
| Earnings per share:                                                                     |       |                                                           |       |                                                          |       |   |   |   |   |
| Basic—as reported                                                                  |       |                                                           | $          | 0.35                                                          |       |   |   | $ | 1.14 |   |   |
| Basic—pro forma                                                                    |       |                                                           | $          | 0.35                                                          |       |   |   | $ | 1.01 |   |   |
| Diluted—as reported                                                                |       |                                                           | $          | 0.35                                                          |       |   |   | $ | 1.13 |   |   |
| Diluted—pro forma                                                                  |       |                                                           | $          | 0.35                                                          |       |   |   | $ | 1.01 |   |   |

 

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

***New Accounting Standards***

In March 2006, the FASB issued SFAS 156, *Accounting for Servicing of Financial Assets—an amendment of FASBStatement No. 140*. SFAS 156 requires recognition of a servicingasset or liability at fair value each time an obligation is undertaken toservice a financial asset by entering into a servicing contract. The standardalso provides guidance on subsequent measurement methods for each class ofservicing assets and liabilities and specifies financial statement presentationand disclosure requirements. SFAS 156 is effective for fiscal years beginningafter September 15, 2006. The Company will adopt SFAS 156 on January 1,2007, and is currently evaluating the impact the adoption of SFAS 156 will haveon the consolidated financial statements.

12

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

In July 2006, the FASB released Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No 109*(“FIN 48”). FIN 48 clarifiesthe accounting and reporting for uncertainty in income taxes recognized in anenterprise’s financial statements. This interpretation prescribes acomprehensive model for the financial statement recognition, measurement,presentation and disclosure of uncertain tax positions taken or expected to betaken on income tax returns. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company will adopt FIN 48 on January 1,2007, and is currently evaluating the impact the adoption of FIN 48 will haveon the consolidated financial statements. The cumulative effects, if any, ofapplying this Interpretation will be recorded as an adjustment to retainedearnings as of the beginning of the period of adoption.

In September 2006,the FASB issued SFAS 157, *Fair Value Measurements*.The statement defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. This standard is effective for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years. TheCompany is currently evaluating the impact the adoption of SFAS 157 will haveon the consolidated financial 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 wereapproximately 2.7 million remaining shares available for grant under the Planon September 30, 2006. The Plan provides for the grant of incentive stockoptions and non-qualified stock options, stock appreciation rights, restrictedstock, restricted stock units and other stock-based awards. To date, the grantshave taken the form of stock options, restricted stock and restricted stockunits.

The Company currently uses its treasury stock tosatisfy stock option exercises and stock distributions. At September 30,2006, the Company holds 4,954,436 shares of treasury stock, and therefore doesnot expect to be required to purchase additional shares in fiscal 2006 tosatisfy stock option exercises and stock distributions.

The compensation cost thatwas charged against income for all plans was $4.5 million and $1.9 million forthe nine months ended September 30, 2006 and 2005. The total income taxbenefit recognized in the Consolidated Statements of Income for stockcompensation agreements was approximately $1.7 million and $0.8 million for thenine months ended September 30, 2006 and 2005.  Had the Company followed SFAS 123 rather thanAPB Opinion No. 25, an additional $11.1 million of compensation expense,net of tax, would have been recorded for the nine months ended September 30,2005 (as disclosed in the pro forma information in Note 1). The Company did notcapitalize any stock-based compensation cost in the nine months ended September 30,2006.

***Stock Options***

Stockoptions may be granted under the Plan at an exercise price of not less than thefair market 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 $8.54 and $7.36 per share for the first nine months of2006 and 2005, 

13

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

respectively. The fair value of stock options grantedwas estimated on the date of grant using the Black-Scholes option pricing modeland the following assumptions:

| **Assumptions**           | ** ** | ** **         | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate  | ** ** | **4.6–5.0**   | **%**      | 3.6      | %          |
| Expected  life—years | ** ** | **4**              |       | 4        |       |
| Expected  volatility      | ** ** | **38.0**           | **%**      | 41.0     | %          |
| Dividend yield            | ** ** | **1.15–1.18** | **%**      | 1.34     | %          |

 

*Risk-freeinterest rate—**This*is the yield on U.S. TreasurySecurities posted at the date of grant having a term equal to the expected lifeof the option. An increase in the risk-free interest rate will increasecompensation expense.

*Expectedlife—years—**This*is the period of time overwhich the options granted are expected to remain outstanding. Options grantedby ADESA have a maximum term of six years, while the options converted fromALLETE to ADESA have a maximum term of ten years. An increase in the expectedlife 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.

Thefollowing table summarizes stock option activity for the nine months ended September 30,2006:

| ***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                                 |       | 338,507    |       |       | $          | 25.99                                  |       |                                                |       |                                                          |       |   |   |   |   |   |
| Exercised                               |       | (288,637   | )          |       | $          | 21.20                                  |       |                                                |       |                                                          |       |   |   |   |   |   |
| Forfeited or  cancelled                 |       | (231,068   | )          |       | $          | 23.89                                  |       |                                                |       |                                                          |       |   |   |   |   |   |
| Outstanding at  September 30, 2006 |       | 4,301,755  |       |       | $          | 22.36                                  |       |                                                |       | 4.2                                                           |       |   |   | $ | 6.5 |   |   |
| Exercisable at September 30,  2006 |       | 3,590,746  |       |       | $          | 22.03                                  |       |                                                |       | 4.1                                                           |       |   |   | $ | 6.3 |   |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on ADESA’s closing stockprice of $23.11 on September 30, 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 nine months ended September 30,2006 and 2005 was $1.0 million and $6.3 million. The fair value of all vestedand exercisable shares at September 30, 2006 and 2005 was $83.0 millionand $86.8 million.

As of September 30,2006, there was approximately $3.2 million of total unrecognized compensationexpense related to stock options granted which is expected to be recognizedover a weighted average term 

14

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

of 2.0years. This unrecognized compensation expense only includes the cost for thoseoptions expected to vest, as the Company estimated expected forfeitures inaccordance with SFAS 123(R). When estimating forfeitures, the Company considersvoluntary and involuntary termination behavior as well as actual forfeitures. Anincrease in estimated forfeitures would decrease compensation expense.

***Restricted Stock Units***

The fair value of restricted stock units (“RSUs”) isthe value of ADESA’s stock at the date of grant, which have ranged between$15.60 and $26.17 per share. The grants are contingent upon continuedemployment and vest over periods ranging from one to three years. Dividends,payable in stock, accrue on a portion of the grants and are subject to the samespecified terms as the original grants. As of September 30, 2006, a totalof 3,444 stock units have accumulated on nonvested RSUs due to dividendreinvestment.

Thefollowing table summarizes RSU activity, excluding dividend reinvestment units,for the nine months ended September 30, 2006:

| ***Restricted Stock Units*** | ** ** | ** ** | ** ** | **Number** | ** ** | **Weighted Average   Grant Date Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| RSUs at  January 1, 2006          |       | 227,769    |       |       | $          | 23.34                                                                 |       |   |
| Granted                                |       | 78,511     |       |       | $          | 26.00                                                                 |       |   |
| Vested                                 |       | (10,704    | )          |       | $          | 21.08                                                                 |       |   |
| Forfeited or  cancelled                |       | (19,082    | )          |       | $          | 23.83                                                                 |       |   |
| RSUs at  September 30, 2006       |       | 276,494    |       |       | $          | 24.15                                                                 |       |   |

 

As of September 30,2006, there was $2.5 million of total unrecognized compensation expense relatedto nonvested RSUs granted which is expected to be recognized over a weightedaverage term of 1.6 years. The fair value of shares vested during the ninemonths ended September 30, 2006 was $0.2 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 $0.8 million,pretax, at September 30, 2006 for the performance based RSUs. The amountis included 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 $0.3 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 independently ownedsalvage auction in northeast Pennsylvania. The purchased assets included theaccounts receivables, operating equipment and customer relationships related tothe auction. In addition, the Company entered into operating lease obligationsrelated to the facility through 2016. Initial annual lease payments for thefacilities total approximately $0.1 million per year. The Company did 

15

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

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.

In March 2006, the Company completed theacquisition of certain assets of Auction Broadcasting Company’s South Tampaused vehicle auction serving western and central Florida. The Company hasrenamed the auction ADESA Sarasota. The assets purchased included land andbuildings, the related operating equipment, accounts receivable and customerrelationships related to the auction. The auction is comprised of approximately63 acres and includes six auction lanes and full-service reconditioning shopsproviding detail, mechanical and body shop services. The Company did not assumeany material 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.

In September 2006, the Company acquired threeindependent salvage auctions in the state of Texas, providing the Company apresence in the second largest salvage market in the U.S. The auctions havebeen renamed ADESA Impact San Antonio, ADESA Impact Houston and ADESA ImpactDallas/Ft. Worth. The assets purchased included operating equipment, accountsreceivable and customer relationships related to the auctions. In addition, theCompany entered into operating lease obligations related to the facilitiesthrough 2011. Initial annual lease payments for the facilities totalapproximately $1.2 million per year. The Company did not assume any othermaterial liabilities or indebtedness in connection with the acquisition. Financialresults for these acquisitions have been included in the Company’s consolidatedfinancial statements since the date of acquisition.

ADESA acquired the fivepreviously mentioned auctions for a total cost of $54.3 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 $12.8 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 of 3 to 15years. The preliminary purchase price allocations resulted in aggregategoodwill of $23.2 million. The goodwill was assigned to the auction servicesgroup reporting segment and is expected to be fully deductible for tax purposes.The Company expects to finalize the purchase price allocations related to eachof the acquisitions upon receipt and analysis of third party valuations. Proforma financial results reflecting the acquisitions were not materiallydifferent from those reported.

**Note 4—Long-Term Debt**

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

| ** **                              | ** ** | **Interest Rate** | ** ** | **Maturity** | ** ** | **September 30**,  2006 | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|------------------------|------------|--------------|------------|------------------------------|------------|-----------------------------|------------|
| Term Loan A                             |       | LIBOR + 1.00           | %          | 06/30/2010   | ** ** |                         | **$**      | **112.5**                   |       |   |   | $ | 135.0 |   |   |
| $350 million  revolving credit facility |       | LIBOR + 1.00           | %          | 06/30/2010   | ** ** |                         | **88.0**   |                        |       |   | 138.0 |   |   |
| Atlanta capital  lease obligation       |       | 5.0                    | %          | 12/01/2013   | ** ** |                         | **34.5**   |                        |       |   | 34.5 |   |   |
| Senior  subordinated notes              |       | 75¤8              | %          | 06/15/2012   | ** ** |                         | **125.0**  |                        |       |   | 125.0 |   |   |
| Canadian line of  credit                |       | Prime + 0.25           | %          | 12/31/2006   | ** ** |                         | **—** |                        |       |   | — |   |   |
| Total debt                              | ** ** | ** **             |       |         |       |                         | **360.0**  |                        |       |   | 432.5 |   |   |
| Less current  portion of long-term debt | ** ** | ** **             |       |         |       |                         | **30.0**   |                        |       |   | 70.0 |   |   |
| Long-term debt                          | ** ** | ** **             |       |         |       |                         | **$**      | **330.0**                   |       |   |   | $ | 362.5 |   |   |

 

16

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

On July 25,2005, the Company entered into a $500 million credit facility, pursuant to theterms and conditions of an amended and restated credit agreement (the “CreditAgreement”) with Bank of America, N.A., as administrative agent, and asyndicate of lenders. The Credit Agreement provides for a five year$150 million term loan and a $350 million revolving credit facility. Lettersof credit reducing the available line of credit were $14.6 million at September 30,2006. Contractual debt obligations over the next twelve months are limited toprincipal payments totaling $30 million on the Company’s Term Loan A. Thecredit facility is guaranteed by substantially all of the Company’s materialdomestic subsidiaries (excluding, among others, AFC Funding Corporation), andis secured by a pledge of all of the equity interests in the guarantors and apledge of 65 percent of certain capital interests of the Company’s Canadiansubsidiaries.

The Credit Agreement contains certain restrictive loancovenants, including, among others, financial covenants requiring a maximumtotal leverage ratio, a minimum interest coverage ratio, and a minimum fixedcharge coverage ratio and covenants limiting ADESA’s ability to incurindebtedness, grant liens, make acquisitions, be acquired, dispose of assets,pay dividends, repurchase stock, make capital expenditures and make investments. EBITDA (earnings before interestexpense, income taxes, depreciation and amortization) adjusted to excludeafter-tax (a) gains or losses from asset sales; (b) temporary gainsor losses on currency; (c) certain non-recurring gains and losses; (d) stockoption expense; and (e) certain other noncash amounts included in thedetermination of net income, is utilized in the calculation of the financialratios contained in the covenants. In addition, the senior subordinated notescontain certain financial and operational restrictions on paying dividends andother distributions, making certain acquisitions or investments and incurringindebtedness, and selling assets. At September 30, 2006, theCompany was in compliance with the covenants contained in both the creditfacility and the senior subordinated notes.

**Note 5—Derivatives**

TheCompany uses interest rate swap agreements to manage its exposure to interestrate movements and to reduce borrowing costs. In June 2004, the Companyentered into an interest rate swap agreement with a notional amount of $105million to manage its exposure to interest rate movements on its variable ratedebt. The interest rate swap agreement contains amortizing provisions andmatures in December 2006. In November 2005, the Company entered intoan interest rate swap agreement with a notional amount of $40 million to manageits exposure to interest rate movements on its variable rate credit facility. Theswap matures in May 2008.

The Company designates its interest rate swapagreements as cash flow hedges. The fair value of the interest rate swapagreements is estimated using pricing models widely used in financial marketsand represents the estimated amount the Company would receive or pay toterminate the agreements at the reporting date. At September 30, 2006, thefair value of the interest rate swap agreements was a $0.5 million gainrecorded 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. Changes in the fair value ofthe interest rate swap agreements designated as cash flow hedges are recordedin “Other comprehensive income”. Unrealized gains or losses on interest rateswap agreements are included as a component of “Accumulated other comprehensiveincome”. At September 30, 2006, there was a net unrealized gain totaling$0.3 million, net of taxes of $0.2 million. At December 31, 2005, therewas a net unrealized gain totaling $0.5 million, net of taxes of $0.3 million.

**Note 6—Finance Receivables**

AFC sells themajority of its U.S. dollar denominated finance receivables on a revolvingbasis and without recourse to a wholly owned, bankruptcy remote, consolidated,special purpose subsidiary (“AFC Funding Corporation”), established for thepurpose of purchasing AFC’s finance receivables. Effective 

17

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

March 31, 2006, AFC and AFC Funding Corporation amended theirsecuritization agreement to extend the expiration date of the agreementfrom 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 $550 million and $425 million at September 30, 2006 and December 31,2005, respectively. Receivables that AFC Funding sells to the bank conduitfacility qualify for sales accounting for financial reporting purposes pursuantto SFAS 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities,* and as a resultare not reported on the Company’s Consolidated Balance Sheet.

At September 30, 2006, AFCmanaged total finance receivables of $786.7 million, of which $699.8 millionhad been sold without recourse to AFC Funding Corporation. At December 31,2005, AFC managed total finance receivables of $655.7 million, of which $581.9million had been sold without recourse to AFC Funding Corporation. Undividedinterests in finance receivables were sold by AFC Funding Corporation to thebank conduit facility with recourse totaling $483.0 million and $399.8 millionat September 30, 2006 and December 31, 2005, respectively. Financereceivables include $74.2 million and $51.1 million classified as held for saleand $162.3 million and $148.0 million classified as held for investment at September 30, 2006 and December 31,2005, respectively. AFC’s allowance for losses of $2.6 million and $2.4 millionat September 30, 2006 and December 31, 2005, respectively,include an estimate of losses for finance receivables. Additionally, accruedliabilities of $4.8 million and $2.9 million for the estimated losses for loanssold by the special purpose subsidiary were recorded at September 30, 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 therevolving sale of receivables to the bank conduit facility were used to fundnew loans to customers. AFC and AFC Funding Corporation must maintain certainfinancial covenants including, among others, limits on the amount ofdebt AFC can incur, minimum levels of tangible net worth, and other covenantstied to the performance of the finance receivables portfolio. Thesecuritization agreement also incorporates the financial covenants of ADESA’scredit facility. At September 30, 2006, the Company was in compliance with thecovenants contained in the securitization agreement.

 

18

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

**Note 7—Earnings Per Share**

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

| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income from  continuing operations                                  | ** ** | **$**                                                | **34.4**   | ** **                                          | $          | 31.6 |   | **$** | **106.9** |   | $ | 102.8 | ** ** |
| Loss from  discontinued operations, net of income taxes             | ** ** | **(0.3**                                             | **)**      | (0.1                                                | )          | **(0.4** | **)** | (0.4 | ) |
| Net income                                                          | ** ** | **$**                                                | **34.1**   | ** **                                          | $          | 31.5 |   | **$** | **106.5** |   | $ | 102.4 |   |
| Weighted average common shares outstanding                          | ** ** | **89.90**                                            | ** ** | 89.53                                               |       | **89.84** |   | 89.97 |   |
| Effect of  dilutive stock options and restricted stock awards       | ** ** | **0.32**                                             | ** ** | 0.44                                                |       | **0.37** |   | 0.46 |   |
| Weighted average  common shares outstanding and assumed conversions | ** ** | **90.22**                                            | ** ** | 89.97                                               |       | **90.21** |   | 90.43 |   |
| **Earnings  per share—basic**                                  | ** ** | ** **                                           | ** ** |                                                |       | ** ** |   |   |   |
| Income from continuing operations                                   | ** ** | **$**                                                | **0.38**   | ** **                                          | $          | 0.35 |   | **$** | **1.19** |   | $ | 1.14 |   |
| Loss from discontinued operations, net of income  taxes             | ** ** | **—**                                           | ** ** | **—**                                          | ** ** | **—** | ** ** | **—** | ** ** |
| Net income                                                          | ** ** | **$**                                                | **0.38**   | ** **                                          | $          | 0.35 |   | **$** | **1.19** |   | $ | 1.14 |   |
| **Earnings  per share—diluted**                                | ** ** | ** **                                           | ** ** |                                                |       | ** ** |   |   |   |
| Income from continuing operations                                   | ** ** | **$**                                                | **0.38**   | ** **                                          | $          | 0.35 |   | **$** | **1.19** |   | $ | 1.14 |   |
| Loss from discontinued operations, net of income  taxes             | ** ** | **—**                                           | ** ** | **—**                                          | ** ** | **(0.01** | **)** | (0.01 | ) |
| Net income                                                          | ** ** | **$**                                                | **0.38**   | ** **                                          | $          | 0.35 |   | **$** | **1.18** |   | $ | 1.13 |   |

 

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 September 30, 2006 and 2005 were 4.3 million and 4.6million. Stock options with an exercise price per share greater than theaverage market price per share were excluded from the calculation ofdiluted earnings per share for all periods presented as including these optionswould have an anti-dilutive impact. Approximately 3.6 million and 3.1 millionoptions were excluded from the calculation of diluted earnings per share forthe quarters ended September 30 and 2006 and 2005, respectively. For thenine months ended September 30, 2006 and 2005, approximately 3.0 millionand 3.1 million options were excluded from the calculation of diluted earningsper share. The Company’s policy for calculating the potential windfall taxbenefit or shortfall for the purpose of calculating assumed proceeds under thetreasury stock method excludes the impact of pro forma deferred tax assetsrelated to partially or fully vested awards on the date of adoption.

19

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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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **   2006   **         | ** ** | **   2005   **        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                    | ** ** |                                                 | **$**      | **34.1**                                            |       |   |   | $ | 31.5 | ** ** |   | **$** | **106.5** |   | $ | 102.4 |   |
| Other comprehensive  income, net of tax       | ** ** |                                                 | ** ** |                                                |       |   |   | ** ** |   | ** ** |   |   |   |
| Foreign currency translation gain (loss)      | ** ** |                                                 | **(0.3**   | **)**                                               |       |   | 12.5 | ** ** |   | **10.2** |   | 7.8 |   |
| Unrealized gain (loss) on interest rate swaps | ** ** |                                                 | **(0.4**   | **)**                                               |       |   | — | ** ** |   | **(0.2** | **)** | 0.7 |   |
| Comprehensive income                          | ** ** |                                                 | **$**      | **33.4**                                            |       |   |   | $ | 44.0 | ** ** |   | **$** | **116.5** |   | $ | 110.9 |   |

 

The composition of “Accumulatedother comprehensive income” at September 30, 2006 and December 31,2005 was the net unrealized gains or losses on interest rate swaps of $0.3million and $0.5 million and foreign currency translation adjustments of $60.3million and $50.1 million, respectively.

**Note 9—Segment Information**

During the second quarter of 2006, the Companyimplemented several organizational realignment and management changes intendedto better position the Company to serve its diverse customer bases, accommodateanticipated growth and realize operational efficiencies across all businesslines. The former auction and related services or “ARS” segment is now referredto as Auction Services Group (“ASG”). ASG encompasses all wholesale and salvageauctions throughout North America (U.S. and Canada). The former dealerfinancing segment is now referred to as Dealer Services Group (“DSG”). DSG isthe umbrella group that was formed to include the Automotive FinanceCorporation (“AFC”) finance business as well as other businesses and venturesthe Company may enter into, focusing on providing the Company’s independentused vehicle dealer customers with value-added ancillary services and products.

Prior to the second quarter of 2006, the Company’soperations were grouped into four operating segments: U.S. used vehicleauctions, Canada used vehicle auctions, Impact salvage auctions and AFC andaggregated into two reportable business segments: auction and related servicesand dealer financing. Prior to the second quarter of 2006, the used vehicleauction operating segment consisted of two operating segments (U.S. usedvehicle auctions and Canada used vehicle auctions). As a result of therealignment, the Company combined the U.S. and Canadian used vehicle auctionsinto one operating segment. As of the second quarter of 2006, the Companyaggregates its three operating segments (used vehicle auctions, Impact salvageauctions and AFC) into two reportable business segments: ASG and DSG. Therealignment had no impact on aggregation of financial information at thereportable segment level.

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.

20

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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  Services**

**Group** | ** ** | **Dealer  Services  Group** | ** ** | **Holding  Company** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|----------------------|------------|------------------|------------|
| **Three Months Ended September 30, 2006** |       |                             |       |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Operating  revenues                                                |       | $                                | 236.2      |                        |       | $                    | 36.7       |             |       |   | $ | — |   |   |   | $ | 272.9 |   |   |
| Operating expenses                                                 |       |                             |       |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization)     |       | 131.5                            |       |                        | 6.3        |                 |       |             | —     |   |   |   | 137.8 |   |   |
| Selling, general and administrative                                |       | 53.8                             |       |                        | 5.1        |                 |       |             | 5.8        |   |   |   | 64.7 |   |   |
| Depreciation and amortization                                      |       | 11.0                             |       |                        | 0.9        |                 |       |             | 0.2        |   |   |   | 12.1 |   |   |
| Total operating  expenses                                          |       | 196.3                            |       |                        | 12.3       |                 |       |             | 6.0        |   |   |   | 214.6 |   |   |
| Operating profit (loss)                                            |       | 39.9                             |       |                        | 24.4       |                 |       |             | (6.0       | ) |   |   | 58.3 |   |   |
| Interest expense                                                   |       | 1.1                              |       |                        | —     |                 |       |             | 6.0        |   |   |   | 7.1 |   |   |
| Other (income)  expense, net                                       |       | (1.7                             | )          |                        | 0.3        |                 |       |             | (0.4       | ) |   |   | (1.8 | ) |   |
| Income (loss)  from continuing operations before income taxes      |       | 40.5                             |       |                        | 24.1       |                 |       |             | (11.6      | ) |   |   | 53.0 |   |   |
| Income taxes                                                       |       | 15.7                             |       |                        | 7.2        |                 |       |             | (4.3       | ) |   |   | 18.6 |   |   |
| Income (loss)  from continuing operations                          |       | $                                | 24.8       |                        |       | $                    | 16.9       |             |       |   | $ | (7.3 | ) |   |   | $ | 34.4 |   |   |
| Assets                                                             |       | $                                | 1,743.8    |                        |       | $                    | 387.4      |             |       |   | $ | (25.1 | ) |   |   | $ | 2,106.1 |   |   |
| **Three Months Ended September 30, 2005**                     | ** ** | ** **                       | ** ** |                        |       |                 | ** ** |             |       |   |   |   |   |   |   |
| Operating revenues                                                 |       | $                                | 208.1      |                        |       | $                    | 32.9       |             |       |   | $ | — |   |   |   | $ | 241.0 |   |   |
| Operating expenses                                                 |       |                             |       |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization)     |       | 110.5                            |       |                        | 6.3        |                 |       |             | —     |   |   |   | 116.8 |   |   |
| Selling, general and administrative                                |       | 47.4                             |       |                        | 5.3        |                 |       |             | 4.8        |   |   |   | 57.5 |   |   |
| Depreciation and amortization                                      |       | 9.6                              |       |                        | 1.0        |                 |       |             | 0.2        |   |   |   | 10.8 |   |   |
| Total operating  expenses                                          |       | 167.5                            |       |                        | 12.6       |                 |       |             | 5.0        |   |   |   | 185.1 |   |   |
| Operating profit (loss)                                            |       | 40.6                             |       |                        | 20.3       |                 |       |             | (5.0       | ) |   |   | 55.9 |   |   |
| Interest expense                                                   |       | 1.0                              |       |                        | —     |                 |       |             | 6.4        |   |   |   | 7.4 |   |   |
| Other income, net                                                  |       | (1.2                             | )          |                        | (0.2       | )                    |       |             | (1.1       | ) |   |   | (2.5 | ) |   |
| Loss on  extinguishment of debt                                    |       | —                           |       |                        | —     |                 |       |             | 2.9        |   |   |   | 2.9 |   |   |
| Income (loss)  from continuing operations before income taxes      |       | 40.8                             |       |                        | 20.5       |                 |       |             | (13.2      | ) |   |   | 48.1 |   |   |
| Income taxes                                                       |       | 14.0                             |       |                        | 7.7        |                 |       |             | (5.2       | ) |   |   | 16.5 |   |   |
| Income (loss)  from continuing operations                          |       | $                                | 26.8       |                        |       | $                    | 12.8       |             |       |   | $ | (8.0 | ) |   |   | $ | 31.6 |   |   |
| Assets                                                             |       | $                                | 1,626.2    |                        |       | $                    | 335.0      |             |       |   | $ | 97.8 |   |   |   | $ | 2,059.0 |   |   |

 

21

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

 

| ** **                                                        | ** ** | **Auction  Services  Group** | ** ** | **Dealer  Services  Group** | ** ** | **Holding  Company** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|----------------------|------------|------------------|------------|
| **Nine Months Ended September 30, 2006** |       |                         |       |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Operating  revenues                                               |       | $                            | 726.3      |                        |       | $                    | 108.1      |             |       |   | $ | — |   |   |   | $ | 834.4 |   |   |
| Operating expenses                                                |       |                         |       |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization)    |       | 398.5                        |       |                        | 21.2       |                 |       |             | —     |   |   |   | 419.7 |   |   |
| Selling, general and administrative                               |       | 162.1                        |       |                        | 16.4       |                 |       |             | 16.9       |   |   |   | 195.4 |   |   |
| Depreciation and amortization                                     |       | 30.7                         |       |                        | 2.7        |                 |       |             | 0.5        |   |   |   | 33.9 |   |   |
| Total operating  expenses                                         |       | 591.3                        |       |                        | 40.3       |                 |       |             | 17.4       |   |   |   | 649.0 |   |   |
| Operating profit (loss)                                           |       | 135.0                        |       |                        | 67.8       |                 |       |             | (17.4      | ) |   |   | 185.4 |   |   |
| Interest expense                                                  |       | 3.2                          |       |                        | —     |                 |       |             | 18.0       |   |   |   | 21.2 |   |   |
| Other (income)  expense, net                                      |       | (4.3                         | )          |                        | 0.9        |                 |       |             | (1.9       | ) |   |   | (5.3 | ) |   |
| Income (loss)  from continuing operations before income taxes     |       | 136.1                        |       |                        | 66.9       |                 |       |             | (33.5      | ) |   |   | 169.5 |   |   |
| Income taxes                                                      |       | 52.6                         |       |                        | 23.0       |                 |       |             | (13.0      | ) |   |   | 62.6 |   |   |
| Income (loss)  from continuing operations                         |       | $                            | 83.5       |                        |       | $                    | 43.9       |             |       |   | $ | (20.5 | ) |   |   | $ | 106.9 |   |   |
| Assets                                                            |       | $                            | 1,743.8    |                        |       | $                    | 387.4      |             |       |   | $ | (25.1 | ) |   |   | $ | 2,106.1 |   |   |
| **Nine Months Ended September 30, 2005**                     | ** ** | ** **                   | ** ** |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Operating revenues                                                |       | $                            | 636.1      |                        |       | $                    | 94.1       |             |       |   | $ | — |   |   |   | $ | 730.2 |   |   |
| Operating expenses                                                |       |                         |       |                        |       |                 |       |             |       |   |   |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization)    |       | 327.9                        |       |                        | 18.5       |                 |       |             | —     |   |   |   | 346.4 |   |   |
| Selling, general and administrative                               |       | 138.8                        |       |                        | 15.5       |                 |       |             | 14.1       |   |   |   | 168.4 |   |   |
| Depreciation and amortization                                     |       | 26.5                         |       |                        | 3.1        |                 |       |             | 0.4        |   |   |   | 30.0 |   |   |
| Total operating  expenses                                         |       | 493.2                        |       |                        | 37.1       |                 |       |             | 14.5       |   |   |   | 544.8 |   |   |
| Operating profit (loss)                                           |       | 142.9                        |       |                        | 57.0       |                 |       |             | (14.5      | ) |   |   | 185.4 |   |   |
| Interest expense                                                  |       | 3.9                          |       |                        | —     |                 |       |             | 20.1       |   |   |   | 24.0 |   |   |
| Other income, net                                                 |       | (3.2                         | )          |                        | (0.3       | )                    |       |             | (2.8       | ) |   |   | (6.3 | ) |   |
| Loss on  extinguishment of debt                                   |       | —                       |       |                        | —     |                 |       |             | 2.9        |   |   |   | 2.9 |   |   |
| Income (loss)  from continuing operations before income taxes     |       | 142.2                        |       |                        | 57.3       |                 |       |             | (34.7      | ) |   |   | 164.8 |   |   |
| Income taxes                                                      |       | 53.7                         |       |                        | 21.9       |                 |       |             | (13.6      | ) |   |   | 62.0 |   |   |
| Income (loss)  from continuing operations                         |       | $                            | 88.5       |                        |       | $                    | 35.4       |             |       |   | $ | (21.1 | ) |   |   | $ | 102.8 |   |   |
| Assets                                                            |       | $                            | 1,626.2    |                        |       | $                    | 335.0      |             |       |   | $ | 97.8 |   |   |   | $ | 2,059.0 |   |   |

 

**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 

22

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

casualty insuranceindustry. The financial results of the vehicle importation business and ComSearchhave been accounted for as discontinued operations for all periods presented. Bothbusinesses were formerly included in the ASG segment.

Revenues from discontinued operations were $0.4million and $2.9 million for the three and nine months ended September 30,2005. Net loss from discontinued operations for the three and nine months endedSeptember 30, 2006 of $0.3 million and $0.4 million ($0.01 per dilutedshare for the nine months ended September 30, 2006) includes interest onthe vehicle importation business adverse judgment as well as accrued legal fees.Net loss from discontinued operations for the three and nine months ended September 30,2005 of $0.1 million and $0.4 million ($0.01 per diluted share for the ninemonths ended September 30, 2005) is representative of operating losses atComSearch and interest on the vehicle importation business adverse judgment.

At September 30, 2006and December 31, 2005, there were no assets and $7.1 million and $6.8million, respectively, in liabilities related to discontinued operations. Liabilitiesat September 30, 2006 and December 31, 2005 represent the accrual ofthe importation adverse judgment, currently under appeal, and accrued intereston the award pursuant to Michigan law. This and other legal matters arediscussed in the description of legal proceedings in Part II, Item 1 (“LegalProceedings”) of this report.

**Note 11—Dividends**

On September 15,2006, the Company paid a third quarter dividend of $0.075 per common share. On October 26,2006, the Company’s board of directors declared a fourth quarter dividend of$0.075 per common share payable December 15, 2006, to stockholders ofrecord on November 14, 2006.

**Note 12—Income Taxes**

The effective income taxrates for the quarters ended September 30, 2006 and 2005 were 35.1% and34.3%. The effective income tax rates for the nine-month periods ended September 30,2006 and 2005 were 36.9% and 37.6%. The decrease in the effective tax rate forthe quarter ended September 30, 2006 compared with previous quarters in2006 was a result of a settlement of pre spin-off tax matters with the Company’sformer parent, ALLETE, Inc. The effective income tax rate for the quarterended September 30, 2005 was favorably impacted by the following: therecognition of certain 2004 provision to tax return differences, theelimination of valuation allowances for state net operating losses and taxcredits, and changes in estimates regarding tax contingencies.

**Note 13—Commitments andContingencies**

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 contingencies includinglitigation and environmental matters are included in “Other accrued expenses”and “Other liabilities” at undiscounted amounts and generally exclude claimsfor recoveries from insurance or other third parties. These accruals 

23

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

are adjusted periodicallyas assessment and remediation efforts progress, or as additional technical orlegal information become available. If the amount of an actual loss is greaterthan the amount accrued, this could have an adverse impact on the Company’soperating results in that period. Legal fees are expensed 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 $3.2 million at September 30,2006 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 eventualsale or other disposition; however, the Company is generally not liable fordamage related to severe weather conditions, natural disasters or other factorsoutside of the Company’s control. Loss is possible; however, at this timemanagement cannot estimate a range of loss that could occur. Individual stoploss and aggregate insurance coverage is maintained on the consigned vehicles. Thesevehicles are consigned to the Company and are not included in the ConsolidatedBalance 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, theCompany is involved in litigation and disputes arising in the ordinary courseof business, such as actions related to injuries; property damage; handling,storage or disposal of vehicles; environmental laws and regulations; and otherlitigation incidental to the business such as employment matters and dealerdisputes. Such litigation is generally not, in the opinion of management,likely to have a material adverse effect on the Company’s financial condition,results of operations or cash flows. Certain legal and regulatory proceedingswhich could be material are discussed in the description of legal proceedingsin Part II, Item 1 (“Legal Proceedings”) of this report.

**Note 14—Subsequent Event**

On November 2, 2006, the Company received writtennotice of ALLETE, Inc.’s election to withdraw from joint ownership of twocorporate aircraft and terminate the Joint Aircraft Ownership and ManagementAgreement between ALLETE, Inc. and the Company dated as of June 4,2004 (the “Aircraft Agreement”). The Aircraft Agreement sets forth the termsand conditions relating to the duties and responsibilities of ALLETE and theCompany with respect to two aircraft previously owned by ALLETE. In addition,pursuant to the Aircraft Agreement, ALLETE contributed a 70 percent ownershipinterest in each of the two aircraft to the Company. Upon termination of the AircraftAgreement, each owner is entitled to 100 percent ownership interest in,and title to, one of the aircraft. As a result of the termination of the AircraftAgreement, the Company expects to record a non-cash pretax charge in the rangeof approximately $3.0 million to $4.0 million in the fourth quarter of2006 representing a reduction of ownership interests in the aircraft and othercosts associated with the termination of the Aircraft Agreement.

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**Item 2.        Management’s Discussion and Analysis ofFinancial 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. Such statements, including: statements regarding:the Company’s future growth; trends and expectations regarding conversionrates; expectations regarding economic conditions and their impact on retailused vehicle sales and the Company; increases in auction volumes; management’sability to capitalize on increasing volumes, if any; anticipated capitalexpenditures; the Company’s competitive position; and acquisition opportunitiesare not guarantees of future performance and are subject to risks anduncertainties that could cause actual results to differ materially from theresults projected, expressed or implied by these forward-looking statements. Factorsthat could cause or contribute to such differences include, but are not limitedto, those discussed in Item 1A “Risk Factors” in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005 and filed on March 16,2006. Some of these factors include:

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

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

·       weather;

·       competition;

·       litigationdevelopments;

·       trendsin the vehicle remarketing industry;

·       businessdevelopment activities, including acquisitions and integration of acquiredbusinesses;

·       investmentsin technology;

·       strategicactions, including dispositions;

·       generalbusiness conditions;

·       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-Qfiled 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 vehicle sold volumes and loantransaction volumes, acquire additional auctions, manage expansion andintegration of acquisitions, control costs in its operations, introduce modestfee increases, expand its product and service offerings including technologicaldevelopment and retain its executive officers and key employees. 

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In addition, the Company’sindebtedness will require it to use a portion of its operating cash flow to payinterest and principal on debt instead of for other corporate purposes,including funding future expansion and ongoing capital expenditures. Accordingly,the Company cannot predict whether its growth strategy will be successful. Inaddition, the Company cannot predict what portion of overall sales will beconducted through online auctions or other redistribution methods in the futureand what impact this may have 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**

The volume of used vehicles coming to auctioncontinued to increase in the third quarter of 2006. The Company believes theincrease in used vehicles coming to auction is a positive longer-term trend forthe business. In addition, retail used vehicle sales appear to be rebounding. Retailused vehicle sales increased 5.1 percent from August to September representingthe largest monthly August to September increase since 1997 whilefalling gasoline prices contributed to the first price increase for full-sizesport utility vehicles since April 2004. In addition, retail used vehiclesprices have returned to a more favorable range between 50 percent to 60 percentof the price of a new vehicle. However despite the recent improvement, retailused vehicle sales for the nine months ended September 30, 2006 were downabout 10 percent from the comparable period in 2005, representing the steepest January throughSeptember year-over-year decline in the last six years. The continuedrelative weakness in retail demand for used vehicles was reflected in theCompany’s used vehicle conversion percentage which decreased from 58.8 percentin the third quarter of 2005 to 58.2 percent in the third quarter of 2006representing the lowest third quarter used vehicle conversion rate for theCompany since 2002. However, the year-over-year decline in the used vehicleconversion rate narrowed significantly in the third quarter of 2006 comparedwith the first and second quarters of 2006.

Despite a continuing challenging environment, ADESA’sthird quarter revenues increased approximately 13 percent compared with thethird quarter of 2005, primarily due to a 10 percent increase in revenue pervehicle sold resulting from an increase in ancillary services driven by a 2percent increase in the vehicles entered to the Company’s used vehicle auctions.In addition, the Dealer Services Group segment performed well in the thirdquarter of 2006 reporting a 5 percent increase in loan transactions and a 7percent increase in revenue per loan transaction. However, operating resultswere negatively impacted by increases in costs of services as much of theincremental revenue was related to lower margin ancillary services from anadditional 15,000 institutional vehicles coming to auction as compared with thethird quarter of 2005. In addition, there were increased costs associated withhandling those additional vehicles entered for sale combined with thecontinuing weakness in used vehicle conversion rates.

For the quarter ended September 30, 2006, theCompany reported third quarter revenue of $272.9 million and net income of$34.1 million or $0.38 per diluted share, compared with revenue of $241.0million and net income of $31.5 million or $0.35 per diluted share for thethird quarter of 2005. On January 1, 2006, the Company implementedStatement of Financial Accounting Standards (“SFAS”) 123(R), *Share-Based Payment*, which resulted in approximately $0.8million of pretax incremental stock-based compensation or nearly $0.01 perdiluted share for the quarter ended September 30, 2006. The results forthe third quarter of 2005 included a $1.5 million after-tax charge ($0.02 perdiluted share) related to debt refinancing.

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For the nine months ended September 30, 2006, theCompany reported revenue of $834.4 million and net income of $106.5 million or$1.18 per diluted share, compared with revenue of $730.2 million and net incomeof $102.4 million or $1.13 per diluted share for the nine months ended September 30,2005. In addition, in the first nine months of 2006, ADESA incurred $4.5million of pretax stock based compensation expense, of which $2.6 million wasincremental as a result of the adoption of SFAS 123(R). Included in the resultsfor the nine months ended September 30, 2006, is a $2.7 million pretaxcharge incurred in the first quarter of 2006, or $0.02 per diluted share,related to the correction of certain unreconciled balance sheet differencesconcealed by a former employee at the Company’s Kitchener, Ontario, auctionfacility acquired in June 2000. The results for the first nine months of2005 include the impact of the previously mentioned $1.5 million after-tax debtrefinancing charge. The business continues to generate a significant amount ofcash. Cash provided by operations was $124.4 million for the nine months ended September 30,2006, compared with cash provided by operations of $105.0 million for the ninemonths ended September 30, 2005.

During the third quarter, the Company also completedthe acquisition of three salvage sites in Texas, giving ADESA Impact a presencein the second largest salvage market in the United States. In addition, ADESAImpact opened a new location in Syracuse, New York, providing ADESA with its 42nd salvage location. The Company continues to beoptimistic about its acquisition opportunities.

On November 2, 2006,the Company received written notice of ALLETE, Inc.’s election to withdrawfrom joint ownership of two corporate aircraft and terminate the Joint AircraftOwnership and Management Agreement between ALLETE, Inc. and the Companydated as of June 4, 2004 (the “Aircraft Agreement”). The Aircraft Agreementsets forth the terms and conditions relating to the duties and responsibilitiesof ALLETE and the Company with respect to two aircraft previously owned byALLETE. In addition, pursuant to the Aircraft Agreement, ALLETE contributed a 70percent ownership interest in each of the two aircraft to the Company. Upontermination of the Aircraft Agreement, each owner is entitled to 100 percentownership interest in, and title to, one of the aircraft. As a result of thetermination of the Aircraft Agreement, the Company expects to record a non-cashpretax charge in the range of approximately $3.0 million to $4.0 millionin the fourth quarter of 2006 representing a reduction of ownership interestsin the aircraft and other costs associated with the termination of the AircraftAgreement.

**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  September  30,** | ** ** | **Change** | ** ** | **Nine Months Ended  September  30,** | ** ** | **Change** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|------------|------------|
| **Operations Data:**                                      | ** ** | ** **                                                 | ** ** | **2006**   | ** ** | **2005**                                                  | ** ** | **$**      | ** ** | **%** | ** ** | **2006** | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| Auction services group  revenue                                |       |                                                       |       |       |       |                                                      |       |       |       |   |   |   |   |   |   |   |   |
| U.S.                                                           | ** ** | **$**                                                      | **180.6**  |       | $          | 163.7                                                     | ** ** | ** ** |       |   |   | **$** | **559.6** |   | $ | 498.9 |   |   |   |   |   |
| Canada                                                         | ** ** | **55.6**                                                   |       | 44.4       | ** ** | ** **                                                |       |       |       | **166.7** |   | 137.2 |   |   |   |   |   |
| Dealer services group  revenue                                 |       |                                                       |       |       |       |                                                      |       |       |       |   |   |   |   |   |   |   |   |
| U.S.                                                           | ** ** | **33.3**                                                   |       | 30.9       | ** ** | ** **                                                |       |       |       | **98.8** |   | 88.0 |   |   |   |   |   |
| Canada                                                         | ** ** | **3.4**                                                    |       | 2.0        | ** ** | ** **                                                |       |       |       | **9.3** |   | 6.1 |   |   |   |   |   |
| Total revenue                                                  | ** ** | **272.9**                                                  |       | 241.0      |       | 31.9                                                      |       | 13         | %          | **834.4** |   | 730.2 |   | 104.2 |   | 14 | % |
| Cost of services (exclusive of depreciation and  amortization) | ** ** | **137.8**                                                  |       | 116.8      |       | 21.0                                                      |       | 18         | %          | **419.7** |   | 346.4 |   | 73.3 |   | 21 | % |
| Selling, general  and administrative                           | ** ** | **64.7**                                                   |       | 57.5       |       | 7.2                                                       |       | 13         | %          | **195.4** |   | 168.4 |   | 27.0 |   | 16 | % |
| Depreciation and  amortization                                 | ** ** | **12.1**                                                   |       | 10.8       |       | 1.3                                                       |       | 12         | %          | **33.9** |   | 30.0 |   | 3.9 |   | 13 | % |
| Operating profit                                               | ** ** | **58.3**                                                   |       | 55.9       |       | 2.4                                                       |       | 4          | %          | **185.4** |   | 185.4 |   | — |   | — |   |
| Net income                                                     | ** ** | **$**                                                      | **34.1**   |       | $          | 31.5                                                      |       | $          | 2.6        |   | 8 | % | **$** | **106.5** |   | $ | 102.4 |   | $ | 4.1 |   | 4 | % |
|                                                                |            |                                                            |            |            |            |                                                           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

| ** **                                                     | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September  30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Operations Data:**                                      | ** ** | ** **                                                 | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Auction services  group revenue                                | ** ** | **86.6%**                                                  |       | 86.3%                                                     | ** ** | **87.0%** |   | 87.1% |   |
| Dealer services  group revenue                                 | ** ** | **13.4%**                                                  |       | 13.7%                                                     | ** ** | **13.0%** |   | 12.9% |   |
| Total revenue                                                  | ** ** | **100.0%**                                                 |       | 100.0%                                                    | ** ** | **100.0%** |   | 100.0% |   |
| Cost of services  (exclusive of depreciation and amortization) | ** ** | **50.5%**                                                  |       | 48.5%                                                     | ** ** | **50.3%** |   | 47.4% |   |
| Selling, general  and administrative                           | ** ** | **23.7%**                                                  |       | 23.8%                                                     | ** ** | **23.4%** |   | 23.1% |   |
| Depreciation and  amortization                                 | ** ** | **4.4%**                                                   |       | 4.5%                                                      | ** ** | **4.1%** |   | 4.1% |   |
| Operating profit                                               | ** ** | **21.4%**                                                  |       | 23.2%                                                     | ** ** | **22.2%** |   | 25.4% |   |
|                                                                |            |                                                            |            |                                                           |            |  |  |  |  |  |  |

 

The Company’s revenue is derived from auction fees andrelated services at its auction facilities and dealer financing services atAutomotive Finance Corporation (“AFC”). AFC’s net revenue consists of gain onsale of finance receivables sold and interest and fee income less provisionsfor credit losses. This net presentation of AFC’s revenues is customary forfinance companies. Operating expenses for the Company consist of cost ofservices, selling, general and administrative expenses and depreciation andamortization. Cost of services is composed of payroll and related costs,subcontract services, supplies, insurance, property taxes, utilities,maintenance and lease expense related to the auction sites and loan offices. Costof services excludes depreciation and amortization. Selling, general andadministrative expenses are composed of indirect payroll and related costs,sales and marketing, information technology services and professional fees.

During the second quarter of 2006, the Companyimplemented several organizational realignment and management changes intendedto better position the Company to serve its diverse customer bases, accommodateanticipated growth and realize operational efficiencies across all businesslines. The former 

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auction and related servicesor “ARS” segment is now referred to as Auction Services Group (“ASG”). ASGencompasses all wholesale and salvage auctions throughout North America (U.S.and Canada). The former dealer financing segment is now referred to as DealerServices Group (“DSG”). DSG is the umbrella group that was formed to includethe AFC finance business as well as other businesses and ventures the Companymay enter into, focusing on providing the Company’s independent used vehicledealer customers with value-added ancillary services and products.

Prior to the second quarter of 2006, the Company’soperations were grouped into four operating segments: U.S. used vehicleauctions, Canada used vehicle auctions, Impact salvage auctions and AFC andaggregated into two reportable business segments: auction and related servicesand dealer financing. Prior to the second quarter of 2006, the used vehicleauction operating segment consisted of two operating segments (U.S. usedvehicle auctions and Canada used vehicle auctions). As a result of therealignment, the Company combined the U.S. and Canadian used vehicle auctionsinto one operating segment. As of the second quarter of 2006, the Companyaggregates its three operating segments (used vehicle auctions, Impact salvageauctions and AFC) into two reportable business segments: ASG and DSG. Therealignment had no impact on aggregation of financial information at thereportable segment level.

**Three Months Ended September 30,2006**

*Operating Revenue*

AuctionServices Group

| ** **                                                                                    | ** ** | **Three Months Ended  September  30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per vehicle amounts)*** | ** ** | **2006**                                                   | ** ** | **2005**   | ** ** | **% Change** | ** ** |
| Auction services  group revenue                                                               | ** ** | **$**                                                      | **236.2**  | ** ** | $          | 208.1 | ** ** |   | 14 | % |   |
| Vehicles sold                                                                                 | ** ** | ** **                                                 | ** ** |       | ** ** |   |   |   |   |
| Used                                                                                          | ** ** | **435,038**                                                | ** ** | 430,045    | ** ** |   | 1 | % |   |
| Salvage                                                                                       | ** ** | **56,870**                                                 | ** ** | 45,482     | ** ** |   | 25 | % |   |
| Total vehicles sold                                                                           | ** ** | **491,908**                                                | ** ** | 475,527    | ** ** |   | 3 | % |   |
| Used vehicles entered (excludes salvage)                                                      | ** ** | **746,940**                                                | ** ** | 731,825    | ** ** |   | 2 | % |   |
| Used vehicle  conversion percentage                                                           | ** ** | **58.2**                                                   | **%**      | 58.8       | %          |   |   |   |   |
| Revenue per vehicle sold                                                                      | ** ** | **$**                                                      | **480**    | ** ** | $          | 438 | ** ** |   | 10 | % |   |

 

For the quarter ended September 30, 2006, revenuefrom ASG increased $28.1 million, or 14 percent, to $236.2 millioncompared with $208.1 million for the quarter ended September 30, 2005. Theincrease in revenue was a result of a 10 percent increase in revenue pervehicle sold during the quarter and a 3 percent increase in vehicles sold.

For the three months ended September 30, 2006,revenue per vehicle sold increased $42, or 10 percent, compared with the threemonths ended September 30, 2005. The 10 percent increase in revenue pervehicle sold resulted in increased auction services group revenue ofapproximately $21.8 million. The increase in revenue per vehicle sold wasprimarily attributable to an increase in lower margin services such astransportation, reconditioning and other ancillary services resulting from an8.5 percent increase in the number of institutional vehicles entered. Thesefactors resulted in increased ASG revenue of approximately $11.0 million. Incrementalfee income related to selective fee increases and higher wholesale used vehiclevalues resulted in increased ASG revenue of approximately $7.1 million. Thehigher transportation, reconditioning, and other ancillary services revenuesalso resulted in corresponding increases in cost of services. Fluctuations inthe Canadian exchange rate increased revenue by approximately $3.7 million forthe quarter ended September 30, 2006, compared with the quarter ended September 30,2005.

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The total number of vehicles sold increased 3 percentin the third quarter of 2006 compared with 2005, resulting in an increase inASG revenue of approximately $6.3 million. The increase in vehicles sold was primarily the result of added volumesfrom recent acquisitions.  The usedvehicle conversion percentage, calculated as the number of vehicles sold as apercentage of the number of vehicles entered for sale at the Company’s usedvehicle auctions, declined to 58.2 percent for the quarter ended September 30,2006, from 58.8 percent for the quarter ended September 30, 2005, reflecting arelatively weak retail used vehicle market in the third quarter of 2006compared with the third quarter of the prior year.  The decline in the used vehicle conversionpercentage negatively impacted ASG revenues, cost of sales and operating profitfor the three months ended September 30, 2006 compared with the three monthsended September 30, 2005.  

DealerServices Group

| ** **                                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per loan amounts*)** | ** ** | **2006**                                             | ** ** | **2005**   | ** ** | **% Change** | ** ** |
| Dealer services  group revenue                                                             |       |                                                 |       |       |       |   |   |   |   |
| Gain on sale of finance receivables                                                        | ** ** | **$**                                                | **18.5**   |       | $          | 17.6 |   |   |   |   |   |
| Interest and fee income                                                                    | ** ** | **17.5**                                             |       | 14.6       |       |   |   |   |   |
| Other revenue                                                                              | ** ** | **0.2**                                              |       | 0.2        |       |   |   |   |   |
| Provision for credit losses                                                                | ** ** | **0.5**                                              |       | 0.5        |       |   |   |   |   |
| Total dealer services group revenue                                                        | ** ** | **$**                                                | **36.7**   |       | $          | 32.9 |   |   | 12 | % |   |
| Loan transactions                                                                          | ** ** | **289,614**                                          |       | 276,985    |       |   | 5 | % |   |
| Revenue per loan  transaction                                                              | ** ** | **$**                                                | **127**    |       | $          | 119 |   |   | 7 | % |   |

 

DSG revenue increased to $36.7 million for the quarterended September 30, 2006, compared with $32.9 million for the quarter endedSeptember 30, 2005.  The 12 percentincrease in DSG revenue was driven by a 7 percent increase in revenue per loantransaction and a 5 percent increase in the number of loan transactions for thequarter ended September 30, 2006, compared with the quarter ended September 30,2005.  The increase in loan transactionswas primarily the result of an increase in floorplan utilization by AFC’sexisting dealer base.

Revenue per loantransaction, which includes both loans paid off and loans curtailed, increased$8, or 7 percent, primarily driven by a $2.9 million increase in fee andinterest income as the Federal Funds rate has increased approximately 150 basispoints since September 30, 2005. Increases in both the average values of vehicles floored as well as theaverage portfolio duration also contributed to the increase in revenue per loantransaction.  

*Cost of Services*

For the three months ended September 30, 2006, cost ofservices increased $21.0 million, or 18 percent, compared with the threemonths ended September 30, 2005.  Weakretail used vehicle demand resulted in a decrease in the used vehicleconversion rate from 58.8 percent for the quarter ended September 30, 2005 to58.2 percent for the quarter ended September 30, 2006.  Cost of services was significantly impactedby an increase in lower margin services such as transportation, reconditioningand other ancillary services, as well as costs associated with handling anadditional 15,000 used vehicles entered for sale at the Company’s auctions inthe third quarter of 2006 compared with the third quarter of 2005.  Fluctuations in the Canadian exchange rateincreased cost of services by approximately $2.0 million.  

Cost of services at the ASG segment increased $21.0million, or 19 percent, to $131.5 million for the quarter ended September 30,2006.  Increases in reconditioning andother ancillary services costs totaling $6.2 million, primarily resulting froman 8.5 percent increase in the number of institutional vehicles 

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entered, impacted cost ofservices for the ASG segment.  A $5.1million increase in transportation costs, which includes fuel costs, was also aleading driver increasing cost of services. Cost of services was significantly impacted by costs associated withhandling an additional 15,000 used vehicles entered for sale at the Company’sused vehicle auctions in the third quarter of 2006 compared with the thirdquarter of 2005.  The addition ofacquired used vehicle and salvage auctions over the last twelve months furthercontributed to the increase in cost of services.  Fluctuations in the Canadian exchange rateincreased cost of services at the ASG segment by approximately $1.9million.  

Cost of services at the DSGsegment totaled $6.3 million for the three months ended September 30, 2006 and 2005.

*Selling, Generaland Administrative Expenses*

For the quarter ended September 30, 2006, selling,general and administrative expenses increased $7.2 million, or 13 percent,compared with the quarter ended September 30, 2005.  This increase was primarily due tocompensation and related employee benefit cost increases, the impact of 2005and 2006 acquisitions and an increase of $0.7 million associated withfluctuations in the Canadian exchange rate. In addition, in the third quarter of 2006, ADESA incurred $1.2 millionof pretax stock based compensation expense, of which $0.8 million wasincremental as a result of the adoption of Statement of Financial AccountingStandards 123(R), *Share-Based Payment*.  

Selling, general and administrative expenses at theASG segment increased $6.4 million, or 14 percent, to $53.8 million for thequarter ended September 30, 2006, primarily due to increases in compensationand related employee benefit costs.  TheASG segment also incurred $0.5 million of incremental stock based compensationcost.  In addition, there was an increaseof $0.6 million resulting from changes in the Canadian exchange rate.  

Selling, general and administrative expenses at theDSG segment decreased $0.2 million, or 4 percent, to $5.1 million for thequarter ended September 30, 2006, primarily due to decreases in compensationand related employee benefits offset by increases in professional fees. 

Selling, general andadministrative expenses at the holding company increased $1.0 million, or 21percent, to $5.8 million for the third quarter of 2006 relative to the thirdquarter of 2005, due to increases in compensation and related employee benefitsas well as costs for professional fees.   

*Depreciation andAmortization*

Depreciation andamortization totaled $12.1 million for the three months ended September 30,2006, representing an increase of $1.3 million, or 12 percent, from the $10.8million reported for the three months ended September 30, 2005.  The increase in depreciation and amortizationwas a result of the Company’s capital spending in 2005, including over $20 millionrelated to information technology, which generally has a shorter depreciablelife.  The Company continues to invest inits core information technology capabilities, as well as new technology serviceofferings, relocations and acquisitions. 

*Operating Profit*

For the quarter ended September 30, 2006, operatingprofit increased $2.4 million, or 4 percent, compared with the quarter endedSeptember 30, 2005.  As a percentage ofrevenue, operating profit decreased to 21.4 percent in the quarter ended September30, 2006, compared with 23.2 percent in the quarter ended September 30, 2005.  This increase in operating profit wasprimarily the result of increased operating profit at the DSG segment which waspartially offset by decreased operating profit at the ASG segment, as well asincreased holding company costs.  

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Operating profit at the ASG segment decreased $0.7million, or 2 percent, to $39.9 million for the quarter ended September 30,2006, primarily as a result of the 19 percent increase in cost of services.  Cost of services was significantly impactedby costs associated with an increase in lower margin services such astransportation, reconditioning and other ancillary services resulting from asignificant increase in the number of institutional vehicles entered.  The additional handling costs related to theincremental 15,000 used vehicles entered also increased cost of services.  Furthermore, operating profit at the ASGsegment increased by $1.0 million due to fluctuations in the Canadian exchangerate.  

Operating profit at the DSG segment increased $4.1million, or 20 percent, to $24.4 million for the quarter ended September 30,2006, primarily as a result of the 12 percent increase in revenue and anapproximately 2 percent decrease in both cost of services and selling, generaland administrative expenses as a percentage of revenues.  

Operating profit in theASG and DSG segments was offset by a $1.0 million increase in holding companyoperating expenses, consisting of compensation and related employee benefitscosts as well as costs for professional fees.        

*Interest Expense*

For the quarter endedSeptember 30, 2006, interest expense decreased $0.3 million, or 4 percent,compared with the quarter ended September 30, 2005, as the Company is carryingless debt than in the third quarter of 2005 which was partially offset byhigher interest rates.  

*Loss onExtinguishment of Debt*

In the third quarter of2005, the Company recorded a non-recurring $2.9 million pretax charge for thewrite-off of certain unamortized debt issuance costs associated with theCompany’s June 2004 credit facility and certain expenses related to the July2005 amended and restated credit facility. The Term Loan B facility was repaid in conjunction with the amended andrestated credit facility and the related interest rate swap agreement wasterminated in the third quarter of 2005 resulting in a pretax gain of $0.5million.  The $0.5 million gain wasrecorded in “Other income, net” and when combined with the $2.9 million charge,resulted in a net pretax charge of $2.4 million related to the amendment andrestatement of the credit facility.  

*Income Taxes*

The effective income taxrate on income from continuing operations was 35.1 percent for the quarterended September 30, 2006, an increase from the effective rate of 34.3 percentfor the quarter ended September 30, 2005. The decease in the effective tax rate for the quarter endedSeptember 30, 2006 compared with previous quarters in 2006 was a result ofa settlement of pre spin-off tax matters with the Company’s former parent,ALLETE, Inc.  The effective income taxrate for the quarter ended September 30, 2005 was favorably impacted bythe following: the recognition of certain 2004 provision to tax returndifferences, the elimination of valuation allowances for state net operatinglosses and tax credits, and changes in estimates regarding taxcontingencies.  The Company currentlyexpects its full year 2006 effective income tax rate will be approximately 37.0to 37.5 percent.  

*DiscontinuedOperations*

In February 2003,management approved a plan to discontinue the operations of the Company’svehicle importation business.  In August2005, ADESA sold ComSearch, Inc. which provides professional claims outsourcingservices, automotive parts-locating and desk-auditing services to the propertyand casualty insurance industry.  Thefinancial results of the vehicle importation business and ComSearch have been classifiedas discontinued operations.  Net lossfrom discontinued operations for the three months 

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endedSeptember 30, 2006 includes interest on the vehicle importation businessadverse judgment as well as accrued legal fees. Net loss from discontinued operations for the three months endedSeptember 30, 2005 includes the third quarter operating income of ComSearchoffset by the loss on sale of the ComSearch business and interest accruing onthe vehicle importation business adverse judgment.  For a further description of the importationlegal matter see Part II Item 1. “Legal Proceedings”.

**Nine Months EndedSeptember 30, 2006**

*Operating Revenue*

AuctionServices Group

| ** **                                                                                    | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                                                    | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ***(In millions except volumes and per vehicle amounts)*** | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **% Change** | ** ** |
| Auction services  group revenue                                                               |       | **$**                           | **726.3**  |       | $          | 636.1 |   |   | 14 | % |   |
| Vehicles sold                                                                                 |       | ** **                      |       |       |       |   |   |   |   |
| Used                                                                                          |       | **1,348,137**                   |       | 1,334,790  |       |   | 1 | % |   |
| Salvage                                                                                       |       | **176,935**                     |       | 149,665    |       |   | 18 | % |   |
| Total vehicles sold                                                                           |       | **1,525,072**                   |       | 1,484,455  |       |   | 3 | % |   |
| Used vehicles entered (excludes salvage)                                                      |       | **2,218,262**                   |       | 2,110,048  |       |   | 5 | % |   |
| Used vehicle  conversion percentage                                                           |       | **60.8**                        | **%**      | 63.3       | %          |   |   |   |   |
| Revenue per vehicle sold                                                                      |       | **$**                           | **476**    |       | $          | 429 |   |   | 11 | % |   |

 

Revenue from ASG increased $90.2 million, or 14percent, to $726.3 million for the nine months ended September 30, 2006,compared with $636.1 million for the nine months ended September 30, 2005.  The 14 percent increase in revenue was aresult of an 11 percent increase in revenue per vehicle sold during the ninemonths and a 3 percent increase in vehicles sold.

For the nine months ended September 30, 2006, revenueper vehicle sold increased $47, or 11 percent, compared with the nine monthsended September 30, 2005.  The 11 percentincrease in revenue per vehicle sold resulted in increased ASG revenue ofapproximately $75.0 million.   Theincrease in revenue per vehicle sold was primarily attributable to an increasein lower margin services such as transportation, reconditioning and otherancillary services resulting from a 7.4 percent increase in the number ofinstitutional vehicles entered as well as a salvage vehicle mix shift.  These factors resulted in increased ASGrevenue of approximately $42.5 million.  Incrementalfee income related to selective fee increases and higher wholesale used vehiclevalues resulted in increased ASG revenue of approximately $20.2 million.  The higher transportation, reconditioning andother ancillary services revenues, as well as the change in mix of salvagevehicles sold, also resulted in corresponding increases in cost ofservices.  Fluctuations in the Canadianexchange rate increased revenue by approximately $12.3 million for the ninemonths ended September 30, 2006, compared with the nine months ended September30, 2005.

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The total number ofvehicles sold increased 3 percent for the nine months ended September 30,2006 compared with 2005, resulting in an increase in ASG revenue ofapproximately $15.2 million. The increase in vehicles sold was primarily theresult of added volumes from recent acquisitions. 

The used vehicleconversion percentage, calculated as the number of vehicles sold as apercentage of the number of vehicles entered for sale at the Company’s usedvehicle auctions, declined to 60.8 percent for the nine months ended September 30,2006 from 63.3 percent for the nine months ended September 30, 2005,reflecting a relatively weak retail used vehicle market for the first ninemonths of 2006 compared with the first nine months of 2005. The decline in theused vehicle conversion percentage negatively impacted ASG revenues, cost ofsales and operating profit for the nine months ended September 30, 2006compared with the nine months ended September 30, 2005.

**DealerServices Group**

|                                                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per loan amounts)*** | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **% Change** | ** ** |
| Dealer services group  revenue                                                             | ** ** | ** **                                          | ** ** |       | ** ** |   |   |   |   |
| Gain on sale of finance receivables                                                        | ** ** | **$**                                               | **57.9**   | ** ** | $          | 51.7 | ** ** |   |   |   |   |
| Interest and fee income                                                                    | ** ** | **50.3**                                            | ** ** | 42.2       | ** ** |   |   |   |   |
| Other revenue                                                                              | ** ** | **0.5**                                             | ** ** | 0.5        | ** ** |   |   |   |   |
| Provision for credit losses                                                                | ** ** | **(0.6**                                            | **)**      | (0.3       | )          |   |   |   |   |
| Total dealer services group revenue                                                        | ** ** | **$**                                               | **108.1**  | ** ** | $          | 94.1 | ** ** |   | 15 | % |   |
| Loan transactions                                                                          | ** ** | **866,525**                                         | ** ** | 836,611    | ** ** |   | 4 | % |   |
| Revenue per loan  transaction                                                              | ** ** | **$**                                               | **125**    | ** ** | $          | 113 | ** ** |   | 11 | % |   |

 

For the nine months ended September 30,2006, DSG revenue increased to $108.1 million compared with $94.1 million forthe nine months ended September 30, 2005. The 15 percent increase in DSGrevenue was driven by an 11 percent increase in revenue per loan transactionand a 4 percent increase in the number of loan transactions for the nine monthsended September 30, 2006, compared with the nine months ended September 30,2005. The increase in loan transactions to 866,525 for the first nine months of2006 was primarily the result of an increase in floorplan utilization by AFC’sexisting dealer base.

Revenue per loantransaction, which includes both loans paid off and loans curtailed, increased$12, or 11 percent, primarily driven by increases in interest rates andincreases in both the average values of vehicles floored as well as the averageportfolio duration. These factors contributed to the increase in gain on saleof $6.2 million and increased fee and interest income of $8.1 million. TheFederal Funds rate has increased approximately 150 basis points since September 30,2005.

*Cost of Services*

For the nine months ended September 30,2006, cost of services increased $73.3 million, or 21 percent, comparedwith the nine months ended September 30, 2005. Weak used vehicle demandresulted in a decrease in the used vehicle conversion rate from 63.3 percentfor the nine months ended September 30, 2005 to 60.8 percent for the ninemonths ended September 30, 2006. Cost of services was significantlyimpacted by an increase in lower margin services such as transportation,reconditioning and other ancillary services, as well as costs associated withhandling an additional 108,000 used vehicles entered for sale at the Company’sauctions in the first nine months of 2006 compared with the first nine monthsof 2005. Fluctuations in the Canadian exchange rate increased cost of servicesby approximately $6.5 million.

For the nine months ended September 30,2006, cost of services at the ASG segment increased $70.6 million, or 22percent, to $398.5 million. An $18.1 million increase in transportation costs,which includes fuel costs, was a leading driver increasing cost of services. Increasesin reconditioning and other ancillary 

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servicescosts totaling $17.4 million, primarily resulting from a 7.4 percent increasein the number of institutional vehicles entered, also impacted cost of servicesfor the ASG segment. Cost of services increased significantly due to the costsassociated with handling an additional 108,000 used vehicles entered for saleat the Company’s used vehicle auctions in the first nine months of 2006compared with the first nine months of 2005. 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. Fluctuations in the Canadian exchange rate increased cost ofservices at the ASG segment by approximately $6.4 million.

For the nine months ended September 30,2006, cost of services at the DSG segment increased $2.7 million, or 15percent, to $21.2 million, primarily due to increased compensation and relatedemployee benefit costs.

*Selling, General and Administrative Expenses*

For the nine months ended September 30,2006, selling, general and administrative expenses increased $27.0 million, or16 percent, compared with the nine months ended September 30, 2005. Thisincrease was primarily due to compensation and related employee benefit costincreases, the impact of 2005 and 2006 acquisitions and an increase of $2.6million associated with fluctuations in the Canadian exchange rate. In thefirst nine months of 2006, ADESA incurred $4.5 million of pretax stock basedcompensation expense, of which $2.6 million was incremental as a result of theadoption of Statement of Financial Accounting Standards 123(R), *Share-Based Payment.*In addition, selling, general andadministrative expenses for the first quarter of 2006 included a $2.7 millionpretax charge related to the correction of certain unreconciled balance sheet differencesconcealed by a former employee at the Company’s Kitchener, Ontario auctionfacility acquired in June 2000. The unreconciled differences accumulatedand were concealed over a period of five to six years between 2000 and 2006. Approximatelyone-half of the amounts concealed date back to fiscal years prior to 2003. Managementhas implemented changes to its internal control processes and systems and hasconcluded that the matters related to the $2.7 million charge, individually orin the aggregate, did not give rise to or arise from a material weakness due tothe nature of the items and compensating controls. In addition, management hasconcluded that the corrections were not material to either the current or anyprior period financial statements.

Selling, general andadministrative expenses at the ASG segment increased $23.3 million, or 17percent, to $162.1 million for the nine months ended September 30, 2006primarily due to increases in compensation and related employee benefits coststotaling $9.6 million, which included severance and other separation costsrelated to the departure of a senior executive. The ASG segment also incurred$1.8 million of incremental stock based compensation and the $2.7 millionpretax Kitchener charge. In addition, there was an increase of $2.5 millionresulting from changes in the Canadian exchange rate.

Selling, general andadministrative expenses at the DSG segment increased $0.9 million, or 6percent, to $16.4 million for the nine months ended September 30, 2006, primarilydue to increases in certain professional fees, as well as employee training andtravel costs.

For the first nine monthsof 2006, selling, general and administrative expenses at the holding companyincreased $2.8 million, or 20 percent, to $16.9 million, primarily due toincreases in compensation and related employee benefit costs, as well asexecutive and director searches and increased travel costs.

As the Company continuesstrategic actions such as corporate development, standardization and centralization,and dealer consignment sales and training initiatives, selling, general andadministrative expenses are expected to increase in the short-term. However,the Company believes the long-term benefits justify the current investments.

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*Depreciation and Amortization*

Depreciation andamortization totaled $33.9 million for the nine months ended September 30,2006, representing an increase of $3.9 million, or 13 percent, from the $30.0million reported for the nine months ended September 30, 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, relocations and acquisitions.

*Operating Profit*

Operating profit remainedconstant at $185.4 million, for the nine months ended September 30, 2006and 2005. As a percentage of revenue, operating profit decreased to 22.2percent in the first nine months of 2006, compared with 25.4 percent in thefirst nine months of 2005. This decrease was primarily the result of increasedoperating expenses at the ASG segment driven by an increase in lower marginancillary services revenues, a softness in the retail used vehicle market anddeclining used vehicle conversion rates.

Operating profit at theASG segment decreased $7.9 million, or 6 percent, to $135.0 million for thenine months ended September 30, 2006 primarily as a result of the 3.4percent increase in cost of services as a percent of revenues along with the0.5 percent increase in selling, general and administrative expenses as apercent of revenues. Cost of services was significantly impacted by costsassociated with an increase in lower margin services such as transportation,reconditioning and other ancillary services resulting from a significantincrease in the number of institutional vehicles entered. Additionally, thedecline in the used vehicle conversion percentage resulted in additionalhandling costs related to the incremental 108,000 used vehicles entered whichincreased cost of services. Furthermore, selling, general and administrativeexpenses at the ASG segment were impacted by the Kitchener charge andincremental stock-based compensation expense.

Operating profit at theDSG segment increased $10.8 million, or 19 percent, to $67.8 million for thenine months ended September 30, 2006 primarily as a result of the 15percent increase in revenue and a 2.1 percent decrease in operating expenses asa percentage of revenues. Increased revenue at the DSG segment more than offsethigher operating expenses associated with processing more loan transactions,which increased operating profit at the DSG segment.

Operating profit in theASG and DSG segments was offset by a $2.9 million increase in holding companyoperating expenses, consisting primarily of compensation and related employeebenefit costs at the holding company.

*Interest Expense*

Interest expense decreased$2.8 million, or 12 percent, for the nine months ended September 30, 2006,compared with the nine months ended September 30, 2005, as the Company iscarrying less debt than in the first nine months of 2005 which was partiallyoffset by higher interest rates.

*Loss on Extinguishment of Debt*

In the third quarter of2005, the Company recorded a non-recurring $2.9 million pretax charge for thewrite-off of certain unamortized debt issuance costs associated with theCompany’s June 2004 credit facility and certain expenses related to the July 2005amended and restated credit facility. The Term Loan B facility was repaid inconjunction with the amended and restated credit facility and the relatedinterest rate swap agreement was terminated in the third quarter of 2005resulting in a pretax gain of $0.5 million. The $0.5 million gain was recordedin “Other income, net” and when combined with the $2.9 million charge, resultedin a net pretax charge of $2.4 million related to the amendment and restatementof the credit facility.

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*Income Taxes*

The effective income taxrate on income from continuing operations was 36.9 percent for the nine monthsended September 30, 2006, a decrease from the effective rate of 37.6percent for the nine months ended September 30, 2005. The decline in theeffective tax rate versus the nine months ended September 30, 2005 isprimarily due to a settlement of pre spin-off tax matters with the Company’sformer parent, ALLETE, Inc. The Company currently expects its full year2006 effective income tax rate will be approximately 37.0 to 37.5 percent.

*Discontinued Operations*

In February 2003,management approved a plan to discontinue the operations of the Company’svehicle importation business. In August 2005, ADESA sold ComSearch, Inc.which provides professional claims outsourcing services, automotiveparts-locating and desk-auditing services to the property and casualtyinsurance industry. The financial results of the vehicle importation businessand ComSearch have been classified as discontinued operations. Net loss fromdiscontinued operations for the nine months ended September 30, 2006 of$0.4 million includes interest on the vehicle importation business adversejudgment as well as accrued legal fees. Net loss from discontinued operationsfor the nine months ended September 30, 2005 of $0.4 million includes theyear-to-date operating loss of ComSearch, the loss on sale of the ComSearchbusiness and interest on the vehicle importation business adverse judgment. Fora further description of the importation legal matter see Part II Item 1. “LegalProceedings”.

**LIQUIDITY AND CAPITAL 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.

| ** **                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ***(Dollars in millions)***     | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2005**               | ** ** |
| Cash and cash  equivalents                | ** ** |                   | **$**      | **211.2**             |       |                   |       | $ | 240.2 |   |   |   | $ | 280.4 |   |   |
| Restricted cash                           | ** ** |                   | **$**      | **7.3**               |       |                   |       | $ | 5.7 |   |   |   | $ | 5.6 |   |   |
| Working capital                           | ** ** |                   | **$**      | **313.3**             |       |                   |       | $ | 302.0 |   |   |   | $ | 304.1 |   |   |
| Amounts available  under credit facility  | ** ** |                   | **$**      | **247.4**             |       |                   |       | $ | 199.3 |   |   |   | $ | 179.3 |   |   |
| Cash flow from  operations (year-to-date) | ** ** |                   | **$**      | **124.4**             |       |                   |       | $ | 136.5 |   |   |   | $ | 105.0 |   |   |

 

**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 $88.0 million was drawnas of September 30, 2006. There were outstanding letters of credittotaling approximately $14.6 million at September 30, 2006, which reducethe available borrowings under the credit facility. The Company’s Canadianoperations had letters of credit outstanding totaling $2.6 million at September 30,2006, which do not impact available borrowings under the credit facility. In September 2006,the Company’s senior credit facility was upgraded to a Ba1 rating by Moody’s.

The Credit Agreement contains certain restrictive loancovenants, including, among others, financial covenants requiring a maximumtotal leverage ratio, a minimum interest coverage ratio, and a minimum fixedcharge coverage ratio and covenants limiting ADESA’s ability to incurindebtedness, grant liens, make acquisitions, be acquired, dispose of assets,pay dividends, repurchase stock, make capital expenditures and make investments. EBITDA (earnings before interestexpense, income taxes, depreciation and amortization) adjusted to excludeafter-tax (a) gains or losses from asset sales; (b) temporary gainsor losses on currency; (c) certain non-recurring gains and losses; (d) stockoption expense; and (e) certain other noncash amounts included in thedetermination of net income, is utilized in 

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the calculation of thefinancial ratios contained in the covenants. In addition, the seniorsubordinated notes contain certain financial and operational restrictions onpaying dividends and other distributions, making certain acquisitions orinvestments and incurring indebtedness, and selling assets. These financialcovenants affect the Company’s operating flexibility by, among other things,restricting its ability to incur expenses and indebtedness that could be usedto grow the business, as well as to fund general corporate purposes. At September 30, 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 three 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 and vendorsincluded in current liabilities. Because the majority of these outstandingchecks for operations in the U.S. are drawn upon bank accounts at financialinstitutions other than the financial institutions that hold the unavailablecash, the Company cannot offset the cash and the outstanding checks on itsbalance 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 October 26, 2006,the Company’s board of directors declared a fourth quarter dividend of $0.075per common share payable December 15, 2006, to stockholders of record on November 14,2006.

**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.

| *** ***                               | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ***(In millions)***                   | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
| Net cash provided by  (used by):           |       |                                                |       |       |       |   |   |
| Operating activities                       | ** ** | **$**                                               | **124.4**  |       | $          | 105.0 |   | $ | 19.4 |   |
| Investing activities                       | ** ** | **(121.0**                                          | **)**      | (69.3      | )          | (51.7 | ) |
| Financing activities                       | ** ** | **(32.9**                                           | **)**      | (60.8      | )          | 27.9 |   |
| Effect of exchange rate on cash            | ** ** | **0.5**                                             |       | 1.0        |       | (0.5 | ) |
| Net decrease in cash and  cash equivalents | ** ** | **$**                                               | **(29.0**  | **)**      | $          | (24.1 | ) | $ | (4.9 | ) |

 

Cash flow from operating activities was $124.4 millionfor the nine months ended September 30, 2006, compared with $105.0 millionfor the same period in 2005. Operating cash flow was favorably impacted by 

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higher earnings andnon-cash charges, primarily related to depreciation and stock-basedcompensation, as well as lower levels of cash used for working capital.

Net cash used for investing activities was $121.0million for the nine months ended September 30, 2006, compared with netcash used by investing activities of $69.3 million for the nine months ended September 30,2005. This change was primarily the result of cash investments totaling $12.6million in Finance Express LLC, an increase in cash used for acquisitions of$36.0 million and a larger increase in finance receivables held for investmentof $22.8 million. The increase in cash used by investing activities waspartially offset by a decrease in capital expenditures of $23.6 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.

Net cash used by financingactivities was $32.9 million for the nine months ended September 30,2006, compared with cash used by financing activities of $60.8 million forthe same period in 2005. The primary driver for the increase is a decline inthe cash used for the repurchase of common stock of $43.4 million (a sharerepurchase program was in effect during the first half of 2005). In addition,in the third quarter of 2005 ADESA restructured its debt facility receiving$308.0 million in cash and paying down $364.0 million in debt. There were nosignificant financing cash flows related to discontinued operations in theperiods presented.

**CapitalExpenditures**

Capital expenditures(excluding acquisitions and other investments) for the nine months ended September 30,2006 and the year ended December 31, 2005 totaled $24.2 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 $30million and $40 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 the initiation of new information systems projects to support the Company’sstrategic initiatives.

**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 receivable, operating equipment and customer relationships relatedto the auction. In addition, the Company entered into 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 certain assets of Auction Broadcasting Company’s South Tampaused vehicle auction serving western and central Florida. The Company hasrenamed the auction ADESA Sarasota. The assets purchased included land andbuildings, the related operating equipment, accounts receivable and customerrelationships related to the auction. The auction is comprised of approximately63 acres and includes six auction lanes and full-service reconditioning shopsproviding detail, mechanical and body shop services. The Company did not assumeany material 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.

In September 2006, the Company acquired threeindependent salvage auctions in the state of Texas, providing the Company apresence in the second largest salvage market in the U.S. The auctions havebeen 

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renamed ADESA Impact SanAntonio, ADESA Impact Houston and ADESA Impact Dallas/Ft. Worth. The assetspurchased included operating equipment, accounts receivable and customerrelationships related to the auctions. In addition, the Company entered intooperating lease obligations related to the facilities through 2011. Initialannual lease payments for the facilities total approximately $1.2 million peryear. The Company did not assume any other material liabilities or indebtednessin connection with the acquisition. Financial results for these acquisitionshave been included in the Company’s consolidated financial statements since thedate of acquisition.

ADESA acquired the fivepreviously mentioned auctions for a total cost of $54.3 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 $12.8 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 of 3 to 15years. The preliminary purchase price allocations resulted in aggregategoodwill of $23.2 million. The goodwill was assigned to the auction servicesgroup reporting segment and is expected to be fully deductible for tax purposes.The Company expects to finalize the purchase price allocations related to eachof the acquisitions upon receipt and analysis of third party valuations. Pro formafinancial results reflecting the acquisitions were not materially differentfrom those reported.

**Other Investment**

In February 2006, AFCacquired a 15 percent interest in Finance Express LLC for $12.5 million in cash.Finance Express is a financial software and services company specializing insoftware to facilitate the origination and servicing of motor vehicle retailinstallment loan 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. The Company evaluated its investment inFinance Express pursuant to Financial Accounting Standards Board InterpretationNo. 46R, *Consolidation of Variable Interest Entities,an Interpretation of Accounting Research Bulletin No. 51*. 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.Finance Express is a LLC that maintains specific capital accounts for eachmember. Therefore, the Company uses the equity method of accounting for thisinvestment in accordance with the guidance in Emerging Issues Task Force (“EITF”)03-16, *Accounting for Investments in LimitedLiability Companies*, Statement of Position (“SOP”) 78-9, *Accounting for Investments in Real Estate Ventures*, and SABTopic D-46, *Accounting for Limited PartnershipInvestments*. The Company’s share of Finance Express’ earnings orlosses is recorded in “Other income, net” in the Consolidated Statements ofIncome, and was not material for the three or nine month periods ended September 30,2006.

**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 toextend the expiration date of the agreement from June 30, 2008 to April 30,2009. This agreement is subject to annual renewal of short-term liquidity by theliquidity providers and allows for the revolving sale by AFC FundingCorporation to a bank conduit facility of up to a maximum of $600 million inundivided interests in certain eligible finance receivables subject tocommitted liquidity. AFC Funding Corporation had committed liquidity of $550million and $425 million at September 30, 2006 and December 31, 2005,respectively. Receivables that AFC Funding sells to the bank conduit facilityqualify for sales accounting for financial reporting purposes pursuant to SFAS140, *Accounting for Transfers and Servicing of Financial*

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*Assets and Extinguishment ofLiabilities,* and as a result are not reported on the Company’sConsolidated Balance Sheet.

At September 30, 2006, AFC managed total finance receivables of $786.7million, of which $699.8 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$483.0 million and $399.8 million at September 30, 2006 and December 31,2005, respectively. Finance receivables include $74.2 million and $51.1 millionclassified as held for sale and $162.3 million and $148.0 million classified asheld for investment at September 30, 2006 and December 31, 2005,respectively. AFC’s allowance for losses of $2.6 million and $2.4 million at September 30,2006 and December 31, 2005, respectively, include an estimate of lossesfor finance receivables. Additionally, accrued liabilities of $4.8 million and$2.9 million for the estimated losses for loans sold by the special purposesubsidiary were recorded at September 30, 2006 and December 31, 2005,respectively. These loans were sold to a bank conduit facility with recourse tothe special purpose subsidiary and will come back on the balance sheet of thespecial purpose subsidiary at fair market value if they become ineligible underthe terms of the collateral arrangement with the bank conduit facility.

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 September 30,2006, 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 theconsolidated financial statements. In cases where management estimates areused, they are based on historical experience, information from third-partyprofessionals, and various other assumptions believed to be reasonable. TheCompany’s critical accounting estimates are discussed in the “CriticalAccounting Estimates” section of “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Part II, Item 7 of theCompany’s Annual Report on Form 10-K for the year ended December 31,2005, as filed with the Securities and Exchange Commission. In addition, ADESA’smost significant accounting polices are discussed in Note 3 and elsewhere in the Notes to the Consolidated 

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Financial Statements included in Company’s 2005Annual Report on Form 10-K, which includes audited financialstatements.

**Adoption of SFAS 123(R), *Share-BasedPayment***

Prior to 2006, ADESAapplied the intrinsic value method provisions of Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations, to account forstock-based awards. Accordingly, the Company did not recognize compensationexpense for employee stock options that were granted in prior years. However,compensation expense was recognized on other forms of stock-based awards,including restricted stock units and performance based stock awards. On January 1,2006, the Company adopted the provisions of SFAS 123(R), *Share-BasedPayment*, using the modified prospective application method, andtherefore was not required to restate its financial results for prior periods. Underthis method, as of January 1, 2006, ADESA began to apply the provisions ofthis statement to new and modified awards, as well as to the nonvested portionof awards granted and outstanding before the Company’s adoption.

The Company’s stock-basedcompensation awards, including both stock options and restricted stock units,have a retirement eligible provision, whereby awards granted to employees whohave reached the retirement eligible age and meet certain service requirementswith either ADESA and/or its former parent, ALLETE, automatically vest when aneligible employee retires from the Company. The Company has previouslyaccounted for this type of arrangement by recognizing compensation cost (forboth pro forma and recognition purposes) over the nominal vesting period (i.e.over the full stated vesting period of the award) and, if the employee retiredbefore the end of the vesting period, by recognizing any remaining unrecognizedcompensation cost at the date of retirement. Following adoption of SFAS 123(R),new awards are subject to the non-substantive vesting period approach, whichspecifies that an award is vested when the employee’s retention of the award isno longer contingent on providing subsequent service. Recognizing that manycompanies followed the nominal vesting period, the SEC issued guidance forconverting to the non-substantive vesting period approach. The Company has revisedits approach to apply the non-substantive vesting period approach to all newgrants after adoption, but continues to follow the nominal vesting periodapproach for the remaining portion of unvested outstanding awards. Anadditional requirement of SFAS 123(R) is that estimated forfeitures beconsidered in determining compensation expense. As previously permitted, theCompany recorded forfeitures when they occurred. Estimating forfeitures did nothave a material impact on the determination of compensation expense.

On March 9, 2005, theboard of directors (the “board”) of the Company accelerated the vesting ofcertain unvested and “out-of-the-money” stock options previously awarded toemployees and officers that have an exercise price of $24 per share. The awardsaccelerated were made under the ADESA, Inc. 2004 Equity and Incentive Planin conjunction with ADESA’s initial public offering (“IPO”) in June 2004. Asa result, options to purchase approximately 2.9 million shares of the Company’scommon stock became exercisable immediately and the Company disclosedincremental pro forma stock-based employee compensation expense ofapproximately $7.7 million, net of tax, in the first quarter 2005. The optionsawarded in conjunction with the IPO to the Company’s named executive officersand the majority of the other officers would have vested in equal increments atJune 15, 2005, 2006 and 2007. The options awarded to certain otherexecutive officers and employees had different vesting terms. One-third of theoptions 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 boardconsidered several factors in determining to accelerate the vesting of theseoptions. Primarily, the acceleration enhances the comparability of the Company’s2005 financial 

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statementswith those of 2006 and subsequent periods. The options awarded to the executiveofficers were special, one-time grants in conjunction with the Company’s IPO. Assuch, these grants are not indicative of past grants when ADESA was asubsidiary of ALLETE prior to June 2004 and are not representative of theCompany’s expected future grants. The Company and board also believe that theacceleration was in the best interest of the stockholders as it reduces theCompany’s reported stock option expense in future periods mitigating the impactof SFAS 123(R).

As a result of adoptingSFAS 123(R) on January 1, 2006, income from continuing operations beforeincome taxes and net income for the nine months ended September 30, 2006,were $2.6 million and $1.6 million lower, respectively, than if the Company hadcontinued to account for share-based awards under APB Opinion No. 25. Basicand diluted earnings per share from continuing operations were both $0.03 lowerfor the nine months ended September 30, 2006 as a result of the adoptionof SFAS 123(R).

Prior to the adoption ofSFAS 123(R), tax benefits of deductions resulting from the exercise of stockoptions were presented as operating cash flows in the Consolidated Statementsof Cash Flows. SFAS 123(R) requires cash flows resulting from taxdeductions from the exercise of stock options in excess of recognizedcompensation cost from the exercise of stock options (excess tax benefits) tobe classified as financing cash flows. This change in classification did nothave a significant impact on the Consolidated Statement of Cash Flows in thecurrent period as the excess tax benefits recognized for the nine months ended September 30,2006 were approximately $0.2 million.

Prior to the adoption ofSFAS 123(R), the Company applied the disclosure-only provisions of SFAS 123, *Accounting for Stock-Based Compensation*, as amended by SFAS148, *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 awards in the first quarter of itsfiscal year. See Note 2 “Stock-Based Compensation” included in this Form 10-Qfor further details on the Company’s stock-based awards programs.

**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 what effect the adoption of SFAS 156 will have on the consolidatedfinancial statements.

In July 2006, the FASB released Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No 109*(“FIN 48”). FIN 48 clarifiesthe accounting and reporting for uncertainty in income taxes recognized in anenterprise’s financial statements. This interpretation prescribes acomprehensive model for the financial statement recognition, measurement,presentation and disclosure of uncertain tax positions taken or expected to betaken on income tax returns. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company will adopt FIN 48 on January 1,2007, and is currently evaluating the impact the adoption of FIN 48 will haveon the consolidated financial statements. The cumulative effects, if any, ofapplying this Interpretation will be recorded as an adjustment to retainedearnings as of the beginning of the period of adoption.

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In September 2006,the FASB issued SFAS 157, *Fair Value Measurements*.The statement defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. This standard is effective for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years. TheCompany is currently evaluating the impact the adoption of SFAS 157 will haveon the consolidated financial statements.

**Item 3.        Quantitative and Qualitative DisclosuresAbout Market Risk**

**Foreign Currency**

The Company’s foreign currency exposure is limited andarises from transactions denominated in foreign currencies, particularlyintercompany loans, as well as from translation of the results of operationsfrom the Company’s Canadian subsidiary. However, fluctuations between U.S. andnon-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 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 $0.6 million for the three months ended September 30,2006 and $1.6 million for the nine months ended September 30, 2006.

**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 earningsimpact 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 nine 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 the interest rate swap agreements isestimated using pricing models widely used in financial markets and representsthe estimated amount the Company would receive or pay to terminate theagreements at the reporting date. At September 30, 2006, the fair value ofthe interest rate swap agreements was a $0.5 million gain recorded in “Otherassets” on the consolidated balance sheet. At December 31, 2005, the fairvalue of the interest rate swap agreements consisted of a $0.9 million gainrecorded 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 September 30, 2006, there was a net unrealized gain totaling$0.3 million, net of taxes of $0.2 million. At December 31, 2005, there wasa net 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 three and nine months ended September 30,2006 would have resulted in an increase in interest expense of approximately$0.3 million and $1.1 million, respectively.

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**Item 4.        Controls and 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 disclosed inreports 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 such information to beaccumulated and communicated to management as appropriate to allow timelydecisions regarding required disclosure.

**Changes in InternalControl Over Financial Reporting**

The Company iscontinuously seeking to improve the efficiency and effectiveness of itsoperations and internal controls. This results in refinements to processesthroughout the Company. In the third quarter of 2006, the Company implemented anew human resource information system which resulted in some changes ininternal controls over financial reporting. The changes in internal controlover financial reporting are primarily related to the Company’s processing ofpayroll transactions which was previously outsourced to a third party. Testingof the controls related to the new system is ongoing and will be completed inthe fourth quarter. There were no other changes in the Company’s internalcontrol over financial reporting that occurred during the period covered bythis Quarterly Report on Form 10-Q that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**PART IIOTHER INFORMATION**

**Item 1.        Legal Proceedings**

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 otherwiseindicated, all proceedings discussed in those earlier reports remainoutstanding.

***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 

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purchase of InternationalVehicle Importers, 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. In August 2006, the Michigan Court of Appeals issuedan unpublished opinion affirming the judgment against ADESA. In September 2006,ADESA filed a Motion for Reconsideration with the Michigan Court of Appeals. InOctober 2006, the Michigan Court of Appeals denied ADESA’s Motion forReconsideration. ADESA intends to file an application for leave to appeal thedecision to the Michigan Supreme Court.

The Company discontinuedthe operations of AIS, its vehicle importation business, in February 2003.At September 30, 2006, the Company has an accrual totaling $7.1 million($5.8 million award plus accrued interest of $1.3 million) as a result of thejury trial verdict.

***Hallett Entities***

As previously reported, wholesale vehicle businessesowned or controlled by Sean Hallett, the son of James Hallett, a formerExecutive Vice President of ADESA, were in default with respect to threeseparate lines of credit with AFC and an outstanding loan through a relatedentity totaling $1.7 million. The lines of credit totaling $0.4 million weresecured with a perfected blanket security interest in the assets of thewholesale vehicle businesses. The loan was cross-collateralized with one of thecredit lines and is secured by certain unencumbered personal property valuedbetween $0.3 million and $0.5 million. Based on an assessment ofrecoverability, the Company recorded provisions for credit losses totaling $1.3million in 2004 leaving AFC with a net receivable position of $0 and $0.4million at September 30, 2006 and December 31, 2005.

In November 2004, AFC and Automotive FinanceCanada, Inc. (“AFCI”) initiated legal action and filed a statement ofclaim in the Ontario Superior Court of Justice alleging that Sean Hallett andhis related companies (the “Hallett Entities”) had defaulted on theiroutstanding obligations to AFC and AFCI (Ontario Superior Court of Justice;Case File No. 04-CV-278564CM2). In December 2004, theHallett Entities filed their statement of defense and counterclaim against AFC,AFCI, ADESA, Inc., ADESA Canada and ADESA Auctions Canada (collectivelythe “AFC Entities”) stating that the Hallett Entities had satisfied their debtsto the AFC Entities and alleging that the AFC Entities owed approximately $6million to Hallett in compensatory and punitive damages.

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In August 2006, theAFC Entities and the Hallett Entities entered into a settlement agreement whichprovides, among other matters, for the Hallett Entities to transfer title ofthe unencumbered personal property which secured the loan to AFC, to pay theAFC Entities a total of CDN$500,000 and the dismissal of the pendingproceedings.

***ADESA Impact Taunton facility***

In December 2003, the Massachusetts Department ofEnvironmental Protection (“MADEP”) identified the Company as a potentiallyresponsible party regarding contamination of several private drinking waterwells in a residential development that abuts the Taunton, Massachusettssalvage auction facility operated by the Company. The wells had elevated levelsof methyl tertiary butyl ether (“MTBE”). MTBE is a chemical compound added togasoline to reduce environmental emissions. In 2005, the EPA preliminarilyidentified MTBE as a “likely” carcinogen.

The Company engaged GeoInsight, Inc. anenvironmental services firm, to conduct tests of the soil, groundwater andambient air on and adjacent to the Company’s salvage auction site. The resultsof the soil and water tests indicated levels of MTBE exceeding MADEP standardswith respect to certain residential properties. In response to the empiricalfindings, the Company, with the approval of the MADEP, installed granularactivated carbon filtration systems in 33 residences that may be impacted byMTBE.

In January 2004, the Company submitted animmediate response action plan (“IRA”) to the MADEP describing the initialactivities the Company performed, and the additional measures that the Companyused to further assess the existence of any imminent hazard to human health. Inaddition, as required by the MADEP, the Company has conducted an analysis toidentify sensitive receptors that may have been affected, including areaschools and municipal wells. Based on the analyses conducted, the Company hasadvised the MADEP that it believes that an imminent hazard condition does notexist. The Company is submitting periodic status updates to the MADEP.

The salvage auction facility was acquired from AutoPlacement Center, Inc. in 2001. Although the primary releases of gasolineand MTBE may have preceded the Company’s acquisition of the Taunton salvagesite, the Company voluntarily agreed to several remediation measures includingthe construction of a municipal waterline to serve the residents of the area. Theconstruction of the waterline was completed in the first quarter of 2005. Inthe second quarter of 2005, the Company entered into a settlement agreementwith its environmental insurance carrier with respect to certain coveragematters which were in dispute relating to the Taunton site. The payment thatwas made to the Company under the settlement agreement was not material to theCompany’s results of operations or financial condition. The Company hasreleased its insurance carrier from any further claims with respect toenvironmental conditions at the Taunton site.

In June 2005, 64 residents of Taunton,Massachusetts filed two separate lawsuits against ADESA Impact in MassachusettsSuperior Court, Bristol Division (Civil Action No.2005-00640 and CivilAction No. 2005-00641). The complaints seek approximately $5.7million in damages for ADESA’s alleged negligence, trespass, and creation of apublic nuisance arising from elevated gasoline and contaminants of MTBE in theground water and water wells of the plaintiffs which plaintiffs contend resultedfrom an above ground gasoline storage tank leak or spill at the Company’sTaunton salvage auction. In particular, plaintiffs are seeking damages for: (1) diminutionin the appraised value of their respective residences, (2) wellcontamination, (3) damage to and loss of use of their property, (4) painand suffering and (5) reimbursement of certain expenses incurred as aresult of the MTBE release.

In September 2006, ADESA Impact reached asettlement agreement with plaintiffs’ counsel whereby ADESA Impact has agreedto pay each of the thirty-four households $38,000 for an aggregate paymenttotaling $1.3 million to resolve all pending litigation and asserted claimsrelated to the alleged release of gasoline and MTBE into ground water at ADESAImpact’s Taunton salvage facility.

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The Company recordedprovisions totaling approximately $0.6 million in the third quarter of 2006 toincrease its accrual related to the settlement and has a total accrual of $1.5million at September 30, 2006 with respect to the Taunton matter whichincludes the settlement amount and ongoing monitoring costs. This amount isincluded in the $3.2 million liability accrued for environmental matters at September 30,2006.

***KASP, Inc.***

In July 2005, the plaintiff, KASP, Inc., which is in the businessof automobile auctions in Lexington, Kentucky, filed a lawsuit in the UnitedStates District Court for the Eastern District of Kentucky, London Division(Civil Action No. 05-394), alleging that ADESA, Inc., ADESALexington, LLC and ALLETE, Inc. (the “Defendants”) violated antitrust lawsby reducing fees in exchange for agreements from customers to refrain fromdoing business with the plaintiff. In particular, plaintiff alleges violationsof Sections 1 and 2 of the Sherman Act, Section 3 of the Clayton Act andChapter 367 of the State of Kentucky Revised Statutes and tortuous interference.In September 2005, the Defendants filed a joint motion to dismiss thecomplaint on the grounds that it did not state a valid claim under federal orstate law. In October 2005, plaintiff filed an amended complaint outliningits allegations with more specificity. In December 2005, the Defendantsfiled a motion to dismiss plaintiff’s amended complaint contending thatplaintiff’s Sherman and Clayton Act claims fail to make actionable allegationsof conspiracy, monopolization or exclusive dealing, and that plaintiff’sKentucky antitrust claim fails for lack of standing. In January 2006,plaintiff filed a motion in opposition to defendants’ motion to dismiss.

In February 2006, theCourt issued an Order:  (1) dismissingALLETE, Inc. as a party to the action; (2) granting defendants’motion for summary judgment with respect to plaintiff’s claims under Section 3of the Clayton Act; and (3) denying defendants’ motion for summaryjudgment with respect to all other counts. The Company filed its answer,including affirmative defenses, to the complaint in March 2006. In September 2006,the parties entered into a binding settlement whereby ADESA agreed to pay KASP$125,000 and both ADESA and KASP agreed to refrain from entering into anyfuture contracts that expressly prohibit any dealer or customer from conductingbusiness with either company.

***Other Matters***

Cheryl Munce, former Executive Vice President of theCompany and President of ADESA Impact, elected to depart from the Companyon May 26, 2006. Brian Warner, former Vice President of the Company andPresident of ADESA Canada Corporation, departed the Company on May 19,2006.

In August 2006, Cheryl Munce filed a Statement ofClaim (06-CV-317340PD2) in the Ontario Superior Court of Justiceagainst ADESA, Inc., Impact Auto Auction Ltd., Automotive RecoveryServices, Inc. d/b/a ADESA Impact, and ADESA Auctions Canada Corporationd/b/a ADESA Canada (collective referred to as “ADESA”) alleging wrongful and/orconstructive dismissal from employment and claiming monetary damages in excessof CDN $2.5 million including punitive damages and costs of the action. ADESAfiled its Notice of Intent to Defend in August 2006 and its Statement ofDefenses in September 2006. ADESA plans to aggressively defend thelitigation.

In September 2006,Brian Warner filed a Statement of Claim in the Ontario Superior Court ofJustice against ADESA, Inc. and ADESA Auctions Canada Corporation d/b/aADESA Canada (collectively referred to as “ADESA”) alleging wrongful dismissalfrom employment. In his claim, Warner seeks monetary damages in excess of CDN$5.75 million including punitive damages and costs of the action. ADESA hasfiled its Notice of Intent to Defend and filed its Statement of Defenses in October 2006. ADESA plans to aggressively defend thelitigation. In connection with the previously announced organizationalrealignment of the Company, Mr. Warner was offered a senior leadershipposition with the Company. Mr. Warner declined to accept the offer andelected to depart the Company. After failing to 

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agree onthe terms of a severance package, the Company implemented a compensation andbenefits package for Mr. Warner that the Company believes satisfies anyobligations the Company may have to Mr. Warner.

**Item 1A.     Risk Factors**

**Inaddition to the other information set forth in this report, readers shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in the Company’s Annual Report on Form 10-K for the year ended December 31,2005, which could materially affect ADESA’s business, financial condition orfuture results. The risks described in the Company’s Annual Report on Form 10-Kare not the only risks facing the Company. Additional risks and uncertaintiesnot currently known to ADESA or that ADESA currently deems to be immaterialalso may materially adversely affect the Company’s business, financialcondition and/or operating results.**

**Item 2.        Unregistered Sales of Equity Securitiesand Use of Proceeds**

**Issuer Purchases ofEquity Securities**

The following table provides informationabout purchases by ADESA of its shares of common stock during the quarter endedSeptember 30, 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** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| July 1–July 31           |       |       | 2,229      |                                                      |       |                                                  | $          | 20.95                                                                                                         |       |                                                                                                                    |       | — |   |   |   | $ | — |   |   |
| August 1–August 31       |       |       | —     |                                                      |       |                                                  | $          | —                                                                                                        |       |                                                                                                                    |       | — |   |   |   | — |   |   |
| September 1–September 30 |       |       | 597        |                                                      |       |                                                  | $          | 22.61                                                                                                         |       |                                                                                                                    |       | — |   |   |   | — |   |   |
| Total                                   |       |       | 2,826      |                                                      |       |                                                  | $          | 21.30                                                                                                         |       |                                                                                                                    |       | — |   |   |   | $ | — |   |   |

 

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(1)          Primarily reflectsshares surrendered in the third fiscal quarter to satisfy tax withholdingobligations in connection with the vesting of restricted stock awards issued toemployees.

**Item 6.        Exhibits**

(a)          Exhibits.The Exhibit Index is incorporated herein by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                                                           | ADESA, Inc.               |
|-----------------------------------------------------------|--------------------------------|
|                                                      | (Registrant)                   |
| Date:     November 8,  2006 | /s/ TIMOTHY  C. CLAYTON        |
|                                                      | Timothy C. Clayton             |
|                                                      | *Chief Financial Officer*      |
|                                                      | *(Duly Authorized Officer and* |
|                                                      | *Principal Financial Officer)* |
| Date:     November 8,  2006 | /s/ SCOTT  A. ANDERSON         |
|                                                      | Scott A. Anderson              |
|                                                      | *Controller*                   |
|                                                      | *(Chief Accounting Officer)*   |

 

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**EXHIBITINDEX**

|                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** ** | **Incorporated by Reference** | ** ** | ** **   |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------------------------|------------|--------------|
| **Exhibit  No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                             | ** ** | ** ** | **Form**                      | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Filing   Date** | ** ** | **Filed  Herewith** |
| 10.5             |       | Amendment  No. 7 to Second Amended and Restated Receivables Purchase Agreement  entered into by and among AFC Funding Corporation, Automotive Finance  Corporation, Fairway Finance Company, LLC, Gresham Receivables (No. 8)  Limited, Lloyds TSB Bank PLC, and BMO Capital Markets Corp. (formerly Harris  Nesbitt Corp.), dated July 28, 2006.         |       |       |                          |       |         |   |   |   | X |
| 10.6             |       | Amendment  No. 8 to Second Amended and Restated Receivables Purchase Agreement  entered into by and among AFC Funding Corporation, Automotive Finance  Corporation, Fairway Finance Company, LLC, Gresham Receivables (No. 8)  Limited, Lloyds TSB Bank PLC, and BMO Capital Markets Corp. (formerly Harris  Nesbitt Corp.), dated September 22, 2006. ** |       |       |                          |       |         |   |   |   | X |
| 10.7             |       | Amendment  No. 1 to the Amended and Restated Credit Agreement entered into by and  among ADESA, Inc., certain subsidiaries of ADESA, Inc. as  guarantors, the lenders, Bank of America, N.A., the Swing Line Lender and the  L/C Issuer dated October 10, 2006.                                                                                      |       |       |                          |       |         |   |   |   | X |
| 10.8             |       | Amendment to  Engagement Letter, dated as of October 20, 2006, between  ADESA, Inc. and Emerging Capital *                                                                                                                                                                                                                                                     | 8-K        |       | 001-32198                     |       | 10.1         |   | 10/26/06 |   |   |
| 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 Timothy C. Clayton                                                                                                                                                                                                                                                                              |       |       |                          |       |         |   |   |   | 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 Timothy C. Clayton                                                                                                                                                                                                                                                                              |       |       |                          |       |         |   |   |   | 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.

51

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