**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**

**Forthe quarterly period ended September 30, 2005**

**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 for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  xNo  o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

Thenumber of shares of common stock outstanding as of November 4, 2005:

| **Class** |   | **Number  of Shares Outstanding** |
|-----------|--------|-----------------------------------|
| Common    |   | 89,569,554                        |

 

 

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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 | 22 |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                 | 41 |
| Item 4.                            | Controls and  Procedures                                                                    | 42 |
| PART II—OTHER  INFORMATION    |                                                                                        |
| Item 1.                            | Legal Proceedings                                                                           | 44 |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 46 |
| Item 6.                            | Exhibits                                                                                    | 46 |
| Signatures                              | 47                                                                                          |
| Exhibit Index                      | 48                                                                                          |

 

2

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**PART IFINANCIAL INFORMATION**

**Item 1.**   FinancialStatements

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

| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating revenues                                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Auction and related services                            | ** ** | **$**                                                | **208.1**  |                                                | $          | 198.7 | ** ** | **$** | **636.1** |   | $ | 616.5 |   |
| Dealer financing                                        | ** ** | **32.9**                                             |       | 28.3                                                | ** ** | **94.1** |   | 85.6 |   |
| Total operating  revenues                               | ** ** | **241.0**                                            |       | 227.0                                               | ** ** | **730.2** |   | 702.1 |   |
| Operating  expenses                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of services                                        | ** ** | **116.8**                                            |       | 109.6                                               | ** ** | **346.4** |   | 339.5 |   |
| Selling, general and administrative                     | ** ** | **57.5**                                             |       | 52.6                                                | ** ** | **168.4** |   | 164.6 |   |
| Depreciation and amortization                           | ** ** | **10.8**                                             |       | 8.5                                                 | ** ** | **30.0** |   | 26.5 |   |
| Total operating  expenses                               | ** ** | **185.1**                                            |       | 170.7                                               | ** ** | **544.8** |   | 530.6 |   |
| Operating profit                                        | ** ** | **55.9**                                             |       | 56.3                                                | ** ** | **185.4** |   | 171.5 |   |
| Interest expense                                        | ** ** | **7.4**                                              |       | 8.7                                                 | ** ** | **24.0** |   | 17.4 |   |
| Other income, net                                       | ** ** | **(2.5**                                             | **)**      | (1.8                                                | )          | **(6.3** | **)** | (3.2 | ) |
| Loss on  extinguishment of debt                         | ** ** | **2.9**                                              |       | 14.0                                                | ** ** | **2.9** |   | 14.0 |   |
| Income from continuing operations before income  taxes  | ** ** | **48.1**                                             |       | 35.4                                                | ** ** | **164.8** |   | 143.3 |   |
| Income taxes                                            | ** ** | **16.5**                                             |       | 13.9                                                | ** ** | **62.0** |   | 56.3 |   |
| Income from continuing operations                       | ** ** | **31.6**                                             |       | 21.5                                                | ** ** | **102.8** |   | 87.0 |   |
| Loss from discontinued operations net of income  taxes  | ** ** | **(0.1**                                             | **)**      | —                                              | ** ** | **(0.4** | **)** | (3.6 | ) |
| Net income                                              | ** ** | **$**                                                | **31.5**   |                                                | $          | 21.5 | ** ** | **$** | **102.4** |   | $ | 83.4 |   |
| Earnings per  share—basic                          |       |                                                 |       |                                                |       |   |   |   |   |
| Income from continuing operations                       | ** ** | **$**                                                | **0.35**   |                                                | $          | 0.23 | ** ** | **$** | **1.14** |   | $ | 0.96 |   |
| Loss from discontinued operations, net of income  taxes | ** ** | **—**                                           | ** ** | —                                              | ** ** | **—** |   | (0.04 | ) |
| Net income                                              | ** ** | **$**                                                | **0.35**   |                                                | $          | 0.23 | ** ** | **$** | **1.14** |   | $ | 0.92 |   |
| Earnings per  share—diluted                        |       |                                                 |       |                                                |       |   |   |   |   |
| Income from continuing operations                       | ** ** | **$**                                                | **0.35**   |                                                | $          | 0.23 | ** ** | **$** | **1.14** |   | $ | 0.95 |   |
| Loss from discontinued operations, net of income  taxes | ** ** | **—**                                           | ** ** | —                                              | ** ** | **(0.01** | **)** | (0.03 | ) |
| Net income                                              | ** ** | **$**                                                | **0.35**   |                                                | $          | 0.23 | ** ** | **$** | **1.13** |   | $ | 0.92 |   |
| Dividends  declared per common share (Note 12)          | ** ** | **$**                                                | **0.075**  |                                                | $          | — | ** ** | **$** | **0.225** |   | $ | — |   |

 

See notes to consolidated financial statements

3

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**ADESA, Inc.**

**Consolidated Balance Sheets**

***(In millions, except share data)***

| ** **                                                                                         | ** **   | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|--------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** **   | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                         | *** *** | ***(unaudited)***      | ** ** | ** **            | ** ** |
| **Assets**                                                                                         |         |                   |       |                  |       |   |   |   |   |
| ***Current assets***                                                                               |         |                   |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                          | ** **   | ** **             | **$**      | **286.0**             |       |   |   | $ | 309.4 |   |   |
| Trade receivables, net of allowances of $7.8 (2005) and  $7.5 (2004)                          | ** **   | ** **             | **250.5**  |                  |       |   | 160.2 |   |   |
| Finance receivables, net of allowances of $3.4 (2005) and  $4.3 (2004)                        | ** **   | ** **             | **257.4**  |                  |       |   | 218.6 |   |   |
| Deferred income taxes                                                                              | ** **   | ** **             | **32.1**   |                  |       |   | 28.0 |   |   |
| Other current assets                                                                               | ** **   | ** **             | **15.6**   |                  |       |   | 13.7 |   |   |
| Current assets of discontinued operations                                                          | ** **   | ** **             | **—** |                  |       |   | 0.9 |   |   |
| Total current assets                                                                               | ** **   | ** **             | **841.6**  |                  |       |   | 730.8 |   |   |
| ***Other assets***                                                                                 |         |                   |       |                  |       |   |   |   |   |
| Goodwill                                                                                           | ** **   | ** **             | **526.2**  |                  |       |   | 514.6 |   |   |
| Other intangible assets, net of accumulated amortization of $27.0  (2005) and $25.1 (2004)         | ** **   | ** **             | **39.8**   |                  |       |   | 31.5 |   |   |
| Other assets                                                                                       | ** **   | ** **             | **51.6**   |                  |       |   | 58.2 |   |   |
| Long-term assets of discontinued operations                                                        | ** **   | ** **             | **—** |                  |       |   | 1.8 |   |   |
| Total other assets                                                                                 | ** **   | ** **             | **617.6**  |                  |       |   | 606.1 |   |   |
| Property and equipment, net of  accumulated depreciation of  $147.5  (2005) and $129.1 (2004) | ** **   | ** **             | **598.3**  |                  |       |   | 576.6 |   |   |
| Total assets                                                                                       | ** **   | ** **             | **$**      | **2,057.5**           |       |   |   | $ | 1,913.5 |   |   |

** **

See notes to consolidated financial statements

4

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**ADESA, Inc.**

**Consolidated Balance Sheets**

***(In millions, except share data)***

| ** **                                      | ** **   | **September 30,** | ** **   | **December 31,** | ** **   |
|-------------------------------------------------|--------------|------------------------|--------------|-----------------------|--------------|
| ** **                                      | ** **   | **2005**               | ** **   | **2004**              | ** **   |
| * *                                        |         | ***(unaudited)***      |         |                  |         |   |   |
| **Liabilities and Stockholders’ Equity**   |         |                   |         |                  |         |   |   |
| ***Current liabilities***                       |         |                   |         |                  |         |   |   |
| Accounts payable                                | ** **   | **$**                  | **358.3**    |                  |         | $ | 227.3 |   |   |
| Employee benefits and compensation              | ** **   | **33.7**               |         |                  | 40.2         |   |   |
| Other accrued expenses                          | ** **   | **39.1**               |         |                  | 35.9         |   |   |
| Income taxes payable                            | ** **   | **19.6**               |         |                  | 25.4         |   |   |
| Current maturities of long-term debt            | ** **   | **80.1**               |         |                  | 37.1         |   |   |
| Current liabilities of discontinued operations  | ** **   | **6.7**                |         |                  | 6.7          |   |   |
| Total current liabilities                       | ** **   | **537.5**              |         |                  | 372.6        |   |   |
| ***Non-current liabilities***                   |         |                   |         |                  |         |   |   |
| Long-term debt                                  | ** **   | **380.0**              |         |                  | 479.0        |   |   |
| Deferred tax liabilities                        | ** **   | **61.0**               |         |                  | 42.1         |   |   |
| Other liabilities                               | ** **   | **6.7**                |         |                  | 8.4          |   |   |
| Total non-current liabilities                   | ** **   | **447.7**              |         |                  | 529.5        |   |   |
| Commitments and contingencies  (Note 14)        | ** **   | **—**             |         |                  | —       |   |   |
| ***Stockholders’ equity***                 | *** *** | *** ***           | *** *** | *** ***          | *** *** | *** *** | *** *** |
| Preferred stock, $0.01 par value:               | ** **   | ** **             |         |                  |         |   |   |
| Authorized shares: 50,000,000                   | ** **   | ** **             |         |                  |         |   |   |
| Issued shares: none                             | ** **   | **—**             |         |                  | **—**   |   |   |
| Common stock, $0.01 par value:                  | ** **   | ** **             |         |                  |         |   |   |
| Authorized shares: 500,000,000                  | ** **   | ** **             |         |                  |         |   |   |
| Issued shares: 94,868,104  (2005 and 2004)      | ** **   | **1.0**                |         |                  | 1.0          |   |   |
| Additional paid-in capital                      | ** **   | **671.0**              |         |                  | 675.1        |   |   |
| Retained earnings                               | ** **   | **464.4**              |         |                  | 382.2        |   |   |
| Unearned compensation                           | ** **   | **(3.1**               | **)**        |                  | (3.1         | ) |   |
| Treasury stock, at cost:                        | ** **   | ** **             |         |                  |         |   |   |
| Shares: 5,318,007 (2005)                        | ** **   | ** **             |         |                  |         |   |   |
|  4,343,478 (2004)                          | ** **   | **(111.6**             | **)**        |                  | (85.9        | ) |   |
| Accumulated other comprehensive income          | ** **   | **50.6**               |         |                  | 42.1         |   |   |
| Total stockholders’ equity                 | ** **   | **1,072.3**            |         |                  | 1,011.4      |   |   |
| Total liabilities and stockholders’ equity | ** **   | **$**                  | **2,057.5**  |                  |         | $ | 1,913.5 |   |   |

 

See notes to consolidated financial statements

5

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**ADESA, Inc.**

**Consolidated Statement of Stockholders’ Equity**

***(In millions)***

| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                           | ** ** | **Common** | ** ** | **Common** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Stock**  | ** ** | **Stock**  | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Unearned**     | ** ** | **Treasury** | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Compensation** | ** ** | **Stock**    | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| **Balance at December 31, 2004** |       |       | 94.9       |       |       |           | $          | 1.0          |       |             |       | $            | 675.1      |                   |       |       | $          | 382.2 |   |   |   | $(3.1 | **)** |   | $(85.9 | ) |   | $ | 42.1 |   |   | $ | 1,011.4 |   |
| Comprehensive income:                                |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   |   |   |   |   |   |
| Net income                                           |       |       |       |       |       |           |       |         |       |             |       |         |       |                   | 102.4      |       |       |   |   | ** ** |   |   |   |   |   |   |   | 102.4 |   |
| Other  comprehensive income, net of tax:             |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   |   |   |   |   |   |
| Foreign currency translation                         |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   | 7.8 |   |   |   |   |
| Unrealized gain on interest rate swaps               |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   | 0.7 |   |   |   |   |
| Other comprehensive income                           |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   |   |   |   | 8.5 |   |
| Comprehensive  income                                |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   |   |   |   | 110.9 |   |
| Cash dividends  paid to stockholders                 |       |       |       |       |       |           |       |         |       |             |       |         |       |                   | (20.2      | )          |       |   |   | ** ** |   |   |   |   |   |   |   | (20.2 | ) |
| Issuance of  common stock under stock plans          |       |       |       |       |       |           |       |         |       |             | (6.2       | )            |       |                   |       |       |       |   | — | ** ** |   | 17.8 |   |   |   |   |   | 11.6 |   |
| Tax benefits from  employee stock plans              |       |       |       |       |       |           |       |         |       |             | 2.1        |         |       |                   |       |       |       |   |   | ** ** |   |   |   |   |   |   |   | 2.1 |   |
| Repurchase of  common stock                          |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | (43.5 | ) |   |   |   |   | (43.5 | ) |
| **Balance at September 30,  2005*(unaudited)*** | ** ** | ** ** | **94.9**   |       | ** ** | ** **     | **$**      | **1.0**      |       | ** **       | ** ** | **$**        | **671.0**  |                   | ** ** | ** ** | **$**      | **464.4** |   | ** ** | ** ** | **$(3.1** | **)** | ** ** | **$(111.6** | **)** | ** ** | **$** | **50.6** |   | ** ** | **$** | **1,072.3** | ** ** |

 

See notes to consolidated financial statements

6

 

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**ADESA, Inc.**

**Consolidated Statements of Cash Flows**

***(Inmillions)***

***(unaudited)***

| ** **                                                                             | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **September 30,**          | ** ** |
| ** **                                                                             | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| **Operating activities**                                                          | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                             | ** ** | **$**                           | **102.4**  |   | $ | 83.4 |   |
| **Adjustments to reconcile net income to net cash  provided by operating activities:** |       |                            |       |   |   |
| Depreciation and  amortization                                                         | ** ** | **30.0**                        |       | 26.5 |   |
| Bad debt expense                                                                       | ** ** | **1.8**                         |       | 4.0 |   |
| Deferred income taxes                                                                  | ** ** | **14.7**                        |       | 7.4 |   |
| Compensation associated  with equity programs                                          | ** ** | **2.2**                         |       | 0.6 |   |
| Loss on extinguishment  of debt                                                        | ** ** | **2.9**                         |       | 14.0 |   |
| Other non-cash, net                                                                    | ** ** | **1.6**                         |       | (0.1 | ) |
| ** **                                                                             |       | **155.6**                       |       | 135.8 |   |
| **Changes in operating assets and liabilities:**                                       |       |                            |       |   |   |
| Finance receivables                                                                    | ** ** | **(40.1**                       | **)**      | (51.6 | ) |
| Trade receivables and  other assets                                                    | ** ** | **(85.3**                       | **)**      | (137.4 | ) |
| Accounts payable and  accrued expenses                                                 | ** ** | **70.3**                        |       | 162.7 |   |
| **Net cash provided by operating  activities**                                         | ** ** | **100.5**                       |       | 109.5 |   |
| **Investing activities**                                                               |       |                            |       |   |   |
| Acquisition of  businesses, net of cash acquired                                       | ** ** | **(18.7**                       | **)**      | — |   |
| Purchases of property,  equipment and computer software                                | ** ** | **(47.8**                       | **)**      | (13.1 | ) |
| Purchase of other  intangibles                                                         | ** ** | **(1.0**                        | **)**      | — |   |
| Proceeds from the sale  of property, equipment and computer software                   | ** ** | **0.1**                         |       | 10.4 |   |
| Proceeds from the sale  of discontinued operations                                     | ** ** | **3.3**                         |       | — |   |
| **Net cash used by investing  activities**                                             | ** ** | **(64.1**                       | **)**      | (2.7 | ) |
| **Financing activities**                                                               |       |                            |       |   |   |
| Net increase in book  overdrafts                                                       | ** ** | **51.1**                        |       | 47.3 |   |
| Net increase (decrease)  in lines of credit                                            | ** ** | **158.0**                       |       | (45.8 | ) |
| Payments on long-term  debt                                                            | ** ** | **(364.0**                      | **)**      | (313.8 | ) |
| Proceeds from long-term  debt                                                          | ** ** | **150.0**                       |       | 500.0 |   |
| Payments for debt  issuance costs                                                      | ** ** | **(1.7**                        | **)**      | (9.9 | ) |
| Net proceeds from  issuance of common stock                                            | ** ** | **—**                      |       | 136.0 |   |
| Issuance of common stock  under stock plans                                            | ** ** | **9.5**                         |       | — |   |
| Dividends paid to ALLETE                                                               | ** ** | **—**                      |       | (117.5 | ) |
| Dividends paid to  stockholders                                                        | ** ** | **(20.2**                       | **)**      | — |   |
| Repurchase of common  stock                                                            | ** ** | **(43.5**                       | **)**      | — |   |
| Transfer to restricted  cash                                                           |       | —                          |       | (10.9 | ) |
| **Net cash (used by) provided by  financing activities**                               | ** ** | **(60.8**                       | **)**      | 185.4 |   |
| Effect of exchange rate  changes on cash                                               | ** ** | **1.0**                         |       | 0.6 |   |
| **Net  (decrease) increase in cash and cash equivalents**                              | ** ** | **(23.4**                       | **)**      | 292.8 |   |
| Cash and cash  equivalents at beginning of period                                      | ** ** | **309.4**                       |       | 112.6 |   |
| Cash and cash  equivalents at end of period                                            | ** ** | **$**                           | **286.0**  |   | $ | 405.4 |   |
| **Non-cash activities**                                                                |       |                            |       |   |   |
| Capital contributions from ALLETE                                                      | ** ** | **$**                           | **—** |   | $ | 6.2 |   |

 

See notes to consolidated financial statements

7

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**ADESA, Inc.Notes to ConsolidatedFinancial Statements**

**Note 1—Basisof Presentation**

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

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, 2004 included in the Company’sAnnual Report on Form 10-K (Commission file number 001-32198)filed with the Securities and Exchange Commission (“SEC”). As used herein, theterms the “Company” and “ADESA” shall mean ADESA, Inc. and itsconsolidated subsidiaries. The term “ALLETE” shall mean ADESA’s former parent,ALLETE, Inc. and its consolidated subsidiaries.

ADESA is North America’s largest publicly tradedprovider of wholesale vehicle auctions and used vehicle dealer floorplanfinancing. The Company is the second largest used vehicle auction network inNorth America, based upon the number of used vehicles passing through auctionsannually, and also provides services such as inbound and outbound logistics,reconditioning, vehicle inspection and certification, titling, administrativeand salvage recovery services. In addition, through its wholly owned subsidiaryAutomotive Finance Corporation (“AFC”), the Company primarily providesshort-term inventory-secured financing, known as floorplan financing, primarilyto used vehicle dealers. ADESA is able to serve the diverse and multi-facetedneeds of its customers through the wide range of services offered at itsfacilities.

Certain reclassifications,including the reclassification of the results of ComSearch, Inc. todiscontinued operations as a result of its sale in the third quarter of 2005,have been made to prior year amounts to conform to current year presentation.

**Note 2—NewAccounting Standards**

ADESA discloses pro forma net income and earnings pershare in accordance with Statement of Financial Accounting Standards (“SFAS”)123, *Accounting for Stock-Based Compensation*and SFAS 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*. In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS 123(R), *Share-BasedPayment*. This statement revises SFAS 123 and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*. SFAS 123(R) requires that the cost ofemployees services received in exchange for an award of equity instruments berecognized in the income statement. Compensation cost will be measured 

8

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

based on the grant-datefair value of the equity instruments issued. The cost will be recognized overthe period during which an employee is required to provide service in exchangefor the award.

In March 2005, the SEC issued Staff Accounting Bulletin107 (“SAB 107”), which offers guidance on SFAS 123(R). SAB 107 was issued toassist issuers by simplifying some of the implementation challenges of SFAS 123(R) whileenhancing the information that investors receive. Key topics of SAB 107 includediscussion on the valuation models available to issuers and guidance on keyassumptions used in these valuation models, such as expected volatility andexpected term, as well as guidance on accounting for the income tax effects ofSFAS 123(R) and disclosure considerations, among other topics.

On April 14, 2005, the SEC approved a new rule forpublic companies that delayed the effective date of SFAS 123(R) to annual,rather than interim, periods that begin after June 15, 2005. As such, theCompany will adopt SFAS 123(R) on January 1, 2006. Once adopted, theCompany will be required to record compensation cost as expense for the portionof outstanding unvested awards, based on the grant-date fair value of thoseawards.  The Company expects to apply theprospective transition method of SFAS 123(R), which would allow theCompany to prospectively record expense for the compensation costs related tothe portion of outstanding unvested awards at January 1, 2006, withoutrestating any prior periods. The Company is currently considering the financialaccounting and income tax implications of SFAS 123(R) and SAB 107.

In May 2005, the FASBissued SFAS 154, *Accounting Changes and Error Corrections*.SFAS 154 replaces Accounting Principles Board Opinion No. 20 (“APB 20”), *Accounting Changes*, and SFAS 3, *ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple. This Statement applies to all voluntary changes in accountingprinciple and changes required by a new accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.SFAS 154 requires retrospective application of changes in accounting principleto prior periods’ financial statements, unless it is impracticable to determineeither the period—specific effects or the cumulative effect of the change. SFAS154 also requires that any change in accounting method of depreciation,amortization or depletion for long-lived assets be accounted for prospectivelyas a change in accounting estimate. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. The Company will adopt SFAS 154 on January 1, 2006.

**Note 3—Stock-BasedCompensation**

The Company has adopted the disclosure-only provisionsof SFAS 123, as amended by SFAS 148. The Company accounts for stock-basedcompensation under APB Opinion No. 25, and related interpretations, usingthe intrinsic value method. Accordingly, the Company has not recognizedcompensation expense for employee stock options that have been granted.

On February 15, 2005 and April 26, 2005, theCompany granted options to purchase approximately 0.7 million shares andapproximately 0.1 million shares of ADESA common stock, with exercise prices of$22.44 per share and $24.00 per share, respectively, under the ADESA, Inc.2004 Equity and Incentive Plan. The $22.44 options vest in equal increments at February 14,2006, 2007 and 2008. The $24.00 options vested immediately upon grant. Theoptions have a six year life.

On March 9, 2005, the Board of Directors (the “Board”)of the Company accelerated the vesting of certain unvested and “out-of-the-money”stock options previously awarded to employees and officers that have anexercise price of $24. The awards accelerated were made under the ADESA, Inc.2004 Equity and 

9

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

Incentive Plan inconjunction 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. The options awarded in conjunctionwith the IPO to the Company’s named executive officers and the majority of theother officers would have vested in equal increments at June 15, 2005,2006 and 2007. The options awarded to certain other executive officers andemployees had different vesting terms. One-third of the options awarded to theother executive officers and employees vested on December 31, 2004. Theremaining two-thirds of the options awarded to these executive officers andother employees in conjunction with the IPO would have vested in equalincrements at December 31, 2005 and 2006. All of these options expire in June 2010.All other terms and conditions applicable to the outstanding stock optiongrants remain in effect.

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

As a result of the acceleration, the Company disclosedincremental, pro forma stock-based employee compensation expense ofapproximately $7.7 million, net of tax, in the first quarter of 2005. The accelerationalso resulted in a $2.0 million and $1.1 million reduction in the after-tax proforma stock-based employee compensation expense disclosed in the second andthird quarters of 2005. In addition, the acceleration will result in areduction in the expected after-tax pro forma stock-based employee compensationexpense for the fourth quarter of 2005 of $1.1 million. The Company did notrecord any stock-based employee compensation expense in the consolidatedstatements of income associated with the acceleration of these options becausethe intrinsic value (the excess of the market price of the common stock overthe exercise price of option) at the date of acceleration was not greater thanthe original intrinsic value of the options. The Company expects that theacceleration will reduce the stock option expense it otherwise would have beenrequired to recognize in its consolidated statements of income in conjunctionwith adopting SFAS 123(R) by approximately $4.8 million in 2006 and $1.2million in 2007 on a pre-tax basis.

The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123 to all stock options. The fair value ofstock options 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 took theseitems into consideration, the resulting estimate for fair value of the stockoptions could be different. These pro forma amounts may not be representativeof the effects on reported net income for future years due to the uncertaintyof stock option grant volume and potential changes in assumptions driven bymarket factors.

10

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

 

| ***(in millions except per share data)***                      | *** *** | ** ** | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|--------------|------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                              | ** **   | **2005**   | ** ** | **2004**                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Reported net income                                                                     | ** **   | **$**      | **31.5**   |                                                 | $          | 21.5                                                | ** ** | **$** | **102.4** |   | $ | 83.4 |   |
| Add: stock-based  employee compensation included in reported net income, net of tax (1) | ** **   | **0.4**    |       | 0.3                                                  | ** ** | **1.1**                                             |       | 0.7 |   |
| Deduct: total  stock-based employee compensation expense, net of tax                    | ** **   | **(0.8**   | **)**      | (2.4                                                 | )          | **(12.2**                                           | **)**      | (3.3 | ) |
| Pro forma net income                                                                    | ** **   | **$**      | **31.1**   |                                                 | $          | 19.4                                                | ** ** | **$** | **91.3** |   | $ | 80.8 |   |
| Earnings per share:                                                                     | ** **   | ** ** |       |                                                 | ** ** | ** **                                          |       |   |   |
| Basic—as reported                                                                  | ** **   | **$**      | **0.35**   |                                                 | $          | 0.23                                                | ** ** | **$** | **1.14** |   | $ | 0.92 |   |
| Basic—pro forma                                                                    | ** **   | **$**      | **0.35**   |                                                 | $          | 0.20                                                | ** ** | **$** | **1.01** |   | $ | 0.89 |   |
| Diluted—as reported                                                                | ** **   | **$**      | **0.35**   |                                                 | $          | 0.23                                                | ** ** | **$** | **1.13** |   | $ | 0.92 |   |
| Diluted—pro forma                                                                  | ** **   | **$**      | **0.35**   |                                                 | $          | 0.20                                                | ** ** | **$** | **1.01** |   | $ | 0.89 |   |

 

*(1)**         *Reported amounts include expenseassociated with restricted stock units and performance share awards.

Theexpense noted above for employee stock options granted, determined underSFAS 123, was calculated using the Black-Scholes option pricing model andthe following assumptions:

| **Assumptions**           | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate  | ** ** | **3.6**    | **%**      | 3.6      | %          |
| Expected  life—years | ** ** | **4**      |       | 4        |       |
| Expected  volatility      | ** ** | **41.0**   | **%**      | 39.0     | %          |
| Dividend growth rate      | ** ** | **1.34**   | **%**      | 1.25     | %          |

 

During the first, secondand third quarters of 2005, the Company awarded approximately 40,500, 19,100and 18,200 restricted stock units (“RSUs”), respectively, under the Company’s2004 Equity and Incentive Plan to employees representing approximately $0.9million, $0.4 million and $0.4 million, respectively, of unearned compensationat the grant dates. Under the Plan, certain executive officers receive anannual RSU grant equal to 25% of the bonus earned in the prior year. The awardsgranted during the first quarter of 2005 included approximately 18,800 RSUs(which vest after three years) granted to these certain executive officers ofthe Company. The vesting schedule for the remaining RSUs granted during thefirst and second quarters generally range from one to three years from the dateof grant. Compensation expense related to RSU awards is recognized ratably overthe vesting period.

**Note 4—Acquisitions**

On May 3, 2005, the Company completed thepurchase of certain assets of ABC Washington Dulles, LLC to gain access to theWashington, D.C. auction market. The assets included an 83-acre leasedauction facility located in Sterling, Virginia, which commenced operations in2001 offering six auction lanes and reconditioning facilities, the relatedoperating equipment and all customer relationships related to the auction. Inaddition, the Company has operating lease obligations related to the facilitythrough 2025. Initial annual lease payments for the facility are approximately$1.9 million per year. The Company did not assume any other materialliabilities or indebtedness in connection with the acquisition. Financialresults 

11

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

for this acquisition havebeen included in the Company’s consolidated financial statements since the dateof acquisition.

On June 30, 2005, the Company acquired anindependently owned salvage auction facility serving Charlotte and westernNorth Carolina. The assets included an 120-acre facility, the relatedoperating equipment, accounts receivable, and all customer relationshipsrelated to the auction. The Company did not assume any material liabilities orindebtedness in connection with the acquisition. Commencing in the thirdquarter of 2005, financial results for this acquisition have been included inthe Company’s consolidated financial statements.

In the second quarter of2005, ADESA acquired the two previously mentioned auctions for a total cost of$18.7 million, in cash. The purchase price of the acquisitions was allocated tothe acquired assets based upon fair market values, including $3.9 million toother intangible assets, representing the fair value of acquired customerrelationships and non-compete agreements, which will be amortized over theirexpected useful lives ranging from 2 to 20 years. The purchase priceallocations resulted in aggregate goodwill of $10.8 million. The goodwill wasassigned to the auction and related services reporting segment and is expectedto be fully deductible for tax purposes. Pro forma financial results for theacquisitions were not material.

**Note 5—Long-TermDebt**

Long-term debt consists of the following *(in millions)*:
| ** **                              | ** ** | ** **        | ** ** | ** **   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Interest Rate** | ** ** | **Maturity** | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                    |       |              |       |         |       |                   |       | ** **            | ** ** |
| Term Loan A                             |       | LIBOR  + 1.25%    |       | 06/30/2010   | ** ** |                   | **$**      | **142.5**             |       |   |   | $ | 157.5 |   |   |
| Term Loan B                             |       | LIBOR  + 2.50%    |       | 06/21/2010   | ** ** |                   | **—** |                  |       |   | 199.0 |   |   |
| $350 million revolving  credit facility |       | LIBOR  + 1.25%    |       | 06/30/2010   | ** ** |                   | **158.0**  |                  |       |   | NA |   |   |
| Atlanta capital lease  obligation       |       | 5.0%              |       | 12/01/2013   | ** ** |                   | **34.5**   |                  |       |   | 34.5 |   |   |
| Other, secured by  property             |       | 6.0%              |       | 12/31/2005   | ** ** |                   | **0.1**    |                  |       |   | 0.1 |   |   |
| Senior subordinated  notes              |       | 75¤8%        |       | 06/15/2012   | ** ** |                   | **125.0**  |                  |       |   | 125.0 |   |   |
| Total debt                              |       |              | ** ** | ** **   | ** ** |                   | **460.1**  |                  |       |   | 516.1 |   |   |
| Less current portion of  long-term debt |       |              | ** ** | ** **   | ** ** |                   | **80.1**   |                  |       |   | 37.1 |   |   |
| Long-term debt                          |       |              | ** ** | ** **   | ** ** |                   | **$**      | **380.0**             |       |   |   | $ | 479.0 |   |   |

 

On July 25, 2005, the Company entered into a $500million credit facility, pursuant to the terms and conditions of an amended andrestated credit agreement (the “Credit Agreement”) with Bank of America, N.A.,as administrative agent, and a syndicate of lenders. The Credit Agreementamends and restates ADESA’s $525 million credit facility, dated as of June 21,2004. The Credit Agreement has a five year term that expires on June 30,2010. Under the terms of the Credit Agreement, the lenders have committed toprovide advances and letters of credit in an aggregate amount of up to $500million. Borrowings under the Credit Agreement may be used to refinance certainof ADESA’s outstanding debt, to finance working capital, capital expendituresand acquisitions permitted under the Credit Agreement and for other corporatepurposes. The Credit Agreement provides for a five year $150 million termloan and a $350 million revolving credit facility. The term loan will berepaid in 20 quarterly installments, with the final payment due on June 30,2010. The revolving credit facility may be used for loans, and up to 

12

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

$25 million may beused for letters of credit. The revolving loans may be borrowed, repaid andreborrowed until June 30, 2010, at which time all amounts borrowed must berepaid.

The revolving credit facility and the term loanfacility bear interest at a rate equal to LIBOR plus a margin ranging from 87.5basis points to 150 basis points depending on the Company’s total leverageratio. ADESA’s initial margin based on its current leverage ratio is 125 basispoints. The Term Loan B facility was eliminated in the amended $500 millionfacility.

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. At September 30, 2005, the Companywas in compliance with the covenants contained in the credit facility. 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.

As a result of amendingthe credit agreement, the Company incurred a third quarter charge ofapproximately $2.9 million related to the write-off of certain unamortized debtissue costs and related expenses associated with the amended and restatedcredit agreement.

**Note 6—Derivatives**

The Company uses interest rate swap agreements tomanage its exposure to interest rate movements and to reduce borrowing costs. TheCompany designates its interest rate swap agreements as cash flow hedges. Theearnings impact of interest rate swaps designated as cash flow hedges isrecorded upon the recognition of the interest related to the hedged debt. Anyineffectiveness in a hedging relationship is recognized immediately intoearnings. There was no significant ineffectiveness in the first nine months of2005 or 2004.

In June 2004, the Company entered into twointerest rate swap agreements with notional amounts of $105 million and $60million to manage its exposure to interest rate movements on its variable ratedebt. In conjunction with the amended and restated senior credit facility, theCompany terminated its interest rate swap for the former Term Loan B facility(swap agreement with notional amount of $60 million) in the third quarter of2005. As a result, the unrealized gain of approximately $0.5 million recordedin “Other comprehensive income” was realized in “Other income, net” during thethird quarter. The remaining interest rate swap agreement contains amortizingprovisions and matures in December 2006.

At September 30, 2005, the fair value of theinterest rate swap agreement is a $0.9 million gain, which is recorded in“Other assets” on the consolidated balance sheet. At December 31, 2004,the fair value of the interest rate swap agreements was a $0.2 million losswhich was recorded in “Other liabilities” on the consolidated balance sheet.Changes in the fair value of the interest rate swap agreements designated ascash flow hedges are recorded in “Other comprehensive income”. Unrealized gainsand losses on interest rate swap agreements are included as a component of“Accumulated other comprehensive income”. At September 30, 2005, therewere unrealized gains totaling $0.6 million, net of taxes of $0.3 million. AtDecember 31, 2004, there were unrealized losses totaling $0.1 million, netof taxes of $0.1 million.

13

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

In November 2005, the Company entered into aninterest rate swap agreement with a notional amount of $40 million to manageits exposure to interest rate movements on its variable rate credit facility. Thenew swap has been designated as a cash flow hedge and matures in May 2008.

**Note 7—Finance Receivables**

AFC sells the majority of its US dollar denominated finance receivables ona revolving basis and without recourse to a wholly-owned, bankruptcy remote,special purpose subsidiary (AFC Funding Corporation) that is consolidated foraccounting purposes in accordance with SFAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities*. The special purpose subsidiary, AFC FundingCorporation, was established for the purpose of purchasing AFC’s financereceivables. Effective July 8, 2005, AFC and AFC Funding Corporationamended their securitization agreement. As part of the amendment, theexpiration date of the agreement was extended from January 2006 to June 30,2008. This agreement is subject to annual renewal of short-term liquidity by theliquidity providers and allows for the revolving sale by the subsidiary to abank conduit facility of up to a maximum of $500 million in undivided interestsin certain eligible finance receivables subject to committed liquidity. AFCFunding Corporation had $425 million of committed liquidity at September 30,2005. Receivables sold to the bank conduit facility are not reported on theCompany’s consolidated balance sheet.

At September 30, 2005, AFC managedtotal finance receivables of $664.6 million, of which $584.8 million had beensold to AFC Funding Corporation. AFC Funding Corporation sold $403.8 million ofthese finance receivables to the bank conduit facility with recourse to AFCFunding Corporation at September 30, 2005, leaving $260.8 million of grossfinance receivables recorded on the Company’s consolidated balance sheet at September 30,2005.

Receivables undermanagement, sold, and retained were as follows *(inmillions)*:

| **Finance Receivables** | ** ** | ** ** | ** ** | **September 30,  2005** | ** ** | **December 31,   2004** | ** ** |
|------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------------|------------|
| Total receivables  managed   | ** ** |       | **$**      | **664.6**                    | ** ** |                              |       | $ | 582.7 |   |   |
| Less: amounts sold           | ** ** |       | **(403.8** | **)**                        |       |                              | (359.8     | ) |   |
| Receivables  retained        | ** ** |       | **260.8**  | ** **                   |       |                              | 222.9      |   |   |
| Less: allowance for losses   | ** ** |       | **(3.4**   | **)**                        |       |                              | (4.3       | ) |   |
| Net finance receivables      | ** ** |       | **$**      | **257.4**                    | ** ** |                              |       | $ | 218.6 |   |   |

 

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 30,2005 the Company was in compliance with the covenants contained in thesecuritization agreement.

14

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

**Note 8—Earnings Per Share**

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

| ** **                                                          | ** ** | **Three Month  Ended ** | ** ** | **Nine Months  Ended ** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**            | ** ** | **September 30,**            | ** ** |
| ** **                                                          | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income from  continuing operations                                  | ** ** | **$**                             | **31.6**   | ** **                        | $          | 21.5 |   | **$** | **102.8** |   | $ | 87.0 |   |
| Loss from  discontinued operations, net of income  taxes            | ** ** | **(0.1**                          | **)**      | **—**                        |       | **(0.4** | **)** | (3.6 | ) |
| Net income                                                          | ** ** | **$**                             | **31.5**   | ** **                        | $          | 21.5 |   | **$** | **102.4** |   | $ | 83.4 |   |
| Weighted average  common shares outstanding                         | ** ** | **89.53**                         | ** ** | 94.86                             |       | **89.97** |   | 91.03 |   |
| Effect of  dilutive stock options and restricted stock  awards      | ** ** | **0.44**                          | ** ** | 0.25                              |       | **0.46** |   | 0.10 |   |
| Weighted average  common shares outstanding and assumed conversions | ** ** | **89.97**                         | ** ** | 95.11                             |       | **90.43** |   | 91.13 |   |
| **Earnings  per share—basic**                                  | ** ** | ** **                        | ** ** |                              |       | ** ** |   |   |   |
| Income from continuing operations                                   | ** ** | **$**                             | **0.35**   | ** **                        | $          | 0.23 |   | **$** | **1.14** |   | $ | 0.96 |   |
| Loss from discontinued operations, net of income  taxes             | ** ** | **—**                        | ** ** | **—**                        |       | **—** |   | (0.04 | ) |
| Net income                                                          | ** ** | **$**                             | **0.35**   | ** **                        | $          | 0.23 |   | **$** | **1.14** |   | $ | 0.92 |   |
| **Earnings  per share—diluted**                                | ** ** | ** **                        | ** ** |                              |       | ** ** |   |   |   |
| Income from continuing operations                                   | ** ** | **$**                             | **0.35**   | ** **                        | $          | 0.23 |   | **$** | **1.14** |   | $ | 0.95 |   |
| Loss from discontinued operations, net of income  taxes             | ** ** | **—**                        | ** ** | **—**                        |       | **(0.01** | **)** | (0.03 | ) |
| Net income                                                          | ** ** | **$**                             | **0.35**   | ** **                        | $          | 0.23 |   | **$** | **1.13** |   | $ | 0.92 |   |

 

Basic earnings per share were calculated based uponthe weighted-average number of outstanding common shares for the period. Dilutedearnings per share were calculated consistent with basic earnings per shareincluding the effect of dilutive unissued common shares related to the Company’sstock-based employee compensation programs. Total options outstanding at September 30, 2005 and 2004, wereapproximately 4.6 million and 4.5 million. Stock options with an exercise priceper share greater than the average market price per share were excludedin the calculation of diluted earnings per share for all periods presented asincluding these options would have an anti-dilutive impact. Approximately 3.1million options were excluded from diluted earnings per share for the three andnine months ended September 30, 2005. For the three and nine months ended September 30,2004, approximately 3.0 million options were excluded from diluted earnings pershare.

On May 12, 2005, theCompany completed its $130 million share repurchase program. The Companyrepurchased a cumulative total of 6.2 million shares at a weighted averageprice of $20.83 and an aggregate cost of $128.9 million pursuant to theprogram.

**Note 9—Comprehensive Income**

Comprehensive income iscomprised of net income adjusted for changes in foreign currency translationand unrealized gains or losses on interest rate swap contracts designated andqualifying as cash 

15

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

flowhedges. For the third quarter 2005 and 2004, comprehensive income was $44.0million and $34.0 million. Comprehensive income for the nine months ended September 30,2005 and 2004 was $110.9 million and $89.4 million. The changes incomprehensive income are primarily due to changes in net income and volatilityin the Canadian currency exchange rates.

**Note 10—Segment Information**

The Company operates in two business segments: (1) Auctionand Related Services and (2) Dealer Financing. These reportable segmentsoffer different services and have fundamental differences in their operations. Aholding company is maintained separately from the two reportable segments andcontains corporate office expenses including costs associated with being apublic company, such as salaries, benefits, travel costs for the corporatemanagement team, Board of Directors’ fees, investor relations costs,incremental 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.

16

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

Financialinformation regarding the Company’s two reportable segments, Auction andRelated Services and Dealer Financing, is set forth below *(inmillions)*:

| ** **                                                         | ** ** | **Auction and**      | ** ** | **Dealer**    | ** ** | **Holding** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|---------------|------------|-------------|------------|------------------|------------|
| ** **                                                         | ** ** | **Related Services** | ** ** | **Financing** | ** ** | **Company** | ** ** | **Consolidated** | ** ** |
| **Three Months Ended September 30, 2005** |       |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                                 |       |                      | $          | 208.1         |       |        |       | $                | 32.9       |   |   |   | $ | — |   |   |   | $ | 241.0 |   |   |
| Operating expenses                                                 |       |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services                                                   |       |                      | 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                                                             |       |                      | $          | 1,401.2       |       |        |       | $                | 333.5      |   |   |   | $ | 322.8 |   |   |   | $ | 2,057.5 |   |   |
| **Three Months Ended September 30, 2004**                     | ** ** |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                                 |       |                      | $          | 198.7         |       |        |       | $                | 28.3       |   |   |   | $ | — |   |   |   | $ | 227.0 |   |   |
| Operating expenses                                                 |       |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services                                                   |       |                      | 103.9      |          |       |        | 5.7        |             |       |   | — |   |   |   | 109.6 |   |   |
| Selling, general and administrative                                |       |                      | 43.8       |          |       |        | 4.6        |             |       |   | 4.2 |   |   |   | 52.6 |   |   |
| Depreciation and amortization                                      |       |                      | 7.3        |          |       |        | 1.1        |             |       |   | 0.1 |   |   |   | 8.5 |   |   |
| Total operating  expenses                                          |       |                      | 155.0      |          |       |        | 11.4       |             |       |   | 4.3 |   |   |   | 170.7 |   |   |
| Operating profit (loss)                                            |       |                      | 43.7       |          |       |        | 16.9       |             |       |   | (4.3 | ) |   |   | 56.3 |   |   |
| Interest expense                                                   |       |                      | 2.9        |          |       |        | —     |             |       |   | 5.8 |   |   |   | 8.7 |   |   |
| Other income, net                                                  |       |                      | (1.1       | )             |       |        | (0.1       | )                |       |   | (0.6 | ) |   |   | (1.8 | ) |   |
| Loss on  extinguishment of debt                                    |       |                      | —     |          |       |        | —     |             |       |   | 14.0 |   |   |   | 14.0 |   |   |
| Income (loss)  from continuing operations before income taxes      |       |                      | 41.9       |          |       |        | 17.0       |             |       |   | (23.5 | ) |   |   | 35.4 |   |   |
| Income taxes                                                       |       |                      | 16.4       |          |       |        | 6.8        |             |       |   | (9.3 | ) |   |   | 13.9 |   |   |
| Income (loss)  from continuing operations                          |       |                      | $          | 25.5          |       |        |       | $                | 10.2       |   |   |   | $ | (14.2 | ) |   |   | $ | 21.5 |   |   |
| Assets                                                             |       |                      | $          | 1,534.1       |       |        |       | $                | 338.3      |   |   |   | $ | 272.2 |   |   |   | $ | 2,144.6 |   |   |

 

 

17

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

| ** **                                                        | ** ** | **Auction and**      | ** ** | **Dealer**    | ** ** | **Holding** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|---------------------------|------------|---------------|------------|-------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Related Services** | ** ** | **Financing** | ** ** | **Company** | ** ** | **Consolidated** | ** ** |
| **Nine Months Ended September 30, 2005** |       |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                           |       |                      | $          | 636.1         |       |        |       | $                | 94.1       |   |   |   | $ | — |   |   |   | $ | 730.2 |   |   |
| Operating  expenses                                               |       |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services                                                  |       |                      | 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                                                            |       |                      | $          | 1,401.2       |       |        |       | $                | 333.5      |   |   |   | $ | 322.8 |   |   |   | $ | 2,057.5 |   |   |
| **Nine  Months Ended September 30, 2004**                    | ** ** |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                                |       |                      | $          | 616.5         |       |        |       | $                | 85.6       |   |   |   | $ | — |   |   |   | $ | 702.1 |   |   |
| Operating  expenses                                               |       |                      |       |          |       |        |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services                                                  |       |                      | 322.3      |          |       |        | 17.2       |             |       |   | — |   |   |   | 339.5 |   |   |
| Selling, general and administrative                               |       |                      | 137.0      |          |       |        | 15.5       |             |       |   | 12.1 |   |   |   | 164.6 |   |   |
| Depreciation and amortization                                     |       |                      | 23.0       |          |       |        | 3.4        |             |       |   | 0.1 |   |   |   | 26.5 |   |   |
| Total operating  expenses                                         |       |                      | 482.3      |          |       |        | 36.1       |             |       |   | 12.2 |   |   |   | 530.6 |   |   |
| Operating profit (loss)                                           |       |                      | 134.2      |          |       |        | 49.5       |             |       |   | (12.2 | ) |   |   | 171.5 |   |   |
| Interest expense                                                  |       |                      | 10.7       |          |       |        | —     |             |       |   | 6.7 |   |   |   | 17.4 |   |   |
| Other (income)  expense, net                                      |       |                      | (2.7       | )             |       |        | 0.1        |             |       |   | (0.6 | ) |   |   | (3.2 | ) |   |
| Loss on  extinguishment of debt                                   |       |                      | —     |          |       |        | —     |             |       |   | 14.0 |   |   |   | 14.0 |   |   |
| Income (loss)  from continuing operations before income taxes     |       |                      | 126.2      |          |       |        | 49.4       |             |       |   | (32.3 | ) |   |   | 143.3 |   |   |
| Income taxes                                                      |       |                      | 49.2       |          |       |        | 19.8       |             |       |   | (12.7 | ) |   |   | 56.3 |   |   |
| Income (loss)  from continuing operations                         |       |                      | $          | 77.0          |       |        |       | $                | 29.6       |   |   |   | $ | (19.6 | ) |   |   | $ | 87.0 |   |   |
| Assets                                                            |       |                      | $          | 1,534.1       |       |        |       | $                | 338.3      |   |   |   | $ | 272.2 |   |   |   | $ | 2,144.6 |   |   |

 

18

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

**Note11—Discontinued Operations**

In August 2005, ADESAsold ComSearch, Inc. which provides professional claims outsourcingservices, automotive parts-locating and desk-auditing services to the propertyand casualty insurance industry. In February 2003, ADESA approved a planto discontinue the operations of its vehicle importation business. Thefinancial results of ComSearch and the vehicle importation business have beenaccounted for as discontinued operations. Both businesses were formerlyincluded in the Auction and Related Services segment.

Net loss from discontinuedoperations for the nine months ended September 30, 2005 includes interestrelated to an adverse judgment in a suit related to the Company’s formervehicle importation business, operating losses generated by ComSearch and the$0.1 million net of tax loss on sale of the ComSearch business. Net lossfrom discontinued operations in 2004 includes a $6.7 million pre-taxcharge related to the vehicle importation business adverse judgment, includingthe related interest and legal costs, partially offset by $0.8 million inpre-tax income generated by ComSearch.

At September 30, 2005and December 31, 2004, there were $0 and $2.7 million in assets and$6.7 million in liabilities related to discontinued operations. Assets at December 31,2004 primarily represent receivables and property, plant and equipment relatedto the former ComSearch corporate offices. Liabilities at September 30,2005 and December 31, 2004 primarily represent the accrual of theimportation adverse judgment, currently under appeal, and accrued interest onthe award pursuant to Michigan law.

Thefollowing summarizes financial information for the discontinued operations *(in millions, except per share data)*:

| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                     | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  revenues                                            | ** ** | **$**                            | **0.4**    |                            | $          | 1.5 | ** ** | **$** | **2.9** |   | $ | 4.7 |   |
| Gain/(Loss) from  discontinued operations before income  taxes | ** ** | **(0.2**                         | **)**      | 0.1                             | ** ** | **(0.5** | **)** | (5.9 | ) |
| Net loss from  discontinued operations                         | ** ** | **(0.1**                         | **)**      | —                          | ** ** | **(0.4** | **)** | (3.6 | ) |
| Net loss per  share from discontinued operations—basic    | ** ** | **—**                       | ** ** | —                          | ** ** | **—** |   | (0.04 | ) |
| Net loss per share from  discontinued operations—diluted  | ** ** | **—**                       | ** ** | —                          | ** ** | **(0.01** | **)** | (0.03 | ) |
|                                                                |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Note 12—Dividends**

On September 15,2005, the Company paid a third quarter dividend of $0.075 per common share. Cashdividends declared per share excludes dividends declared and paid to ALLETEprior to ADESA becoming an independent public company. On October 26,2005, the Company’s Board of Directors declared a fourth quarter dividend of$0.075 per common share payable December 15, 2005, to stockholders ofrecord on November 14, 2005.

**Note 13—Income Taxes**

The effective income taxrates for the quarters ended September 30, 2005 and 2004 were 34.3% and39.3%. The income tax rates for the nine-month periods ended September 30,2005 and 2004 were 37.6% and 39.3%. The decrease in the effective tax rate wasprimarily the result of the following: the recognition of certain 2004provision to tax return differences, the elimination of valuation allowancesfor state net operating losses and tax credits, and changes in estimatesregarding tax contingencies.

19

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

**Note14—Commitments and Contingencies**

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

The Company has accrued, as appropriate, forenvironmental remediation costs anticipated to be incurred at certain of itsauction facilities. Liabilities for environmental matters included in “Otheraccrued expenses” and “Other liabilities” were $3.1 million and $4.8 millionat September 30, 2005 and December 31, 2004.

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 with suppliers,service providers, customers and others. These guarantees and indemnificationsdo not materially impact the Company’s financial condition or results ofoperations, but indemnifications associated with the Company’s actionsgenerally have no dollar limitations and currently cannot be quantified.

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

20

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

**Note 15—Subsequent Event**

On November 2, 2005,the Company completed the purchase of certain assets of the “Ohio Connection,”a group of four independently owned salvage auctions that handle approximately20,000 vehicles annually. The assets include the operating equipment and allcustomer relationships related to the auctions. In addition, the Company hasoperating lease obligations related to the four facilities through 2025.Initial annual lease payments for the facilities total approximately$0.5 million per year. Two of the purchase agreements include contingentpayments related to the volume of certain vehicles sold subsequent to thepurchase date. The Company did not assume any other significant liabilities orindebtedness in connection with the acquisition. This acquisition is effectiveNovember 1, 2005 and the purchase price allocation will be completed inthe Company’s fourth quarter ending December 31, 2005. Financial resultsfor this acquisition will be included in the Company’s consolidated financialstatements from the date of acquisition.

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

**Forward-Looking Statements**

The following discussion contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Such statements are subject to certain risks, trends, anduncertainties. In particular, statements made in this report that are nothistorical facts (including but not limited to expectations, estimates,assumptions and projections regarding the industry, business, future operatingresults, and anticipated cash requirements) may be forward-looking statements. Actualresults could differ materially from the results projected, expressed orimplied by these forward-looking statements. Factors that could cause orcontribute to such differences include, but are not limited to, those discussedin “Factors that May Affect Future Results” described in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004and filed on March 29, 2005. Someof these factors include: general business conditions; trends in new andused vehicle sales and incentives, including wholesale used vehicle pricing;economic conditions including fuel prices, Canadian exchange rate and interestrate fluctuations; competition; market trends; business development activities,including acquisitions; investments in technology; litigation developments;weather; changes in applicable tax laws and regulations (including significantaccounting and tax matters), vehicle production and other risks described fromtime to time in ADESA’s filings with the Securities and Exchange Commission (“SEC”).Many of these risk factors are outside of ADESA’s control, and as such, theyinvolve risks which are not currently known to ADESA that could cause actualresults to differ materially from those discussed or implied herein. Theforward-looking statements in this document are made as of the date hereof andADESA does not undertake to update its forward-looking statements.

The Company’s future growth depends on a variety offactors, including its ability to increase volume, acquire additional auctions,manage expansion, control costs in its operations, introduce modest feeincreases and new services, consolidate future auction acquisitions into existingoperations and retain its executive officers and key employees.  In addition, the Company’s indebtedness willrequire it to use a portion of its operating cash flow to pay interest andprincipal on debt instead of for other corporate purposes, including fundingfuture expansion and ongoing capital expenditures. Accordingly, the Companycannot predict whether its growth strategy will be successful. In addition, theCompany cannot predict what portion of overall sales will be conducted throughonline auctions or other redistribution methods in the future and what impactthis 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 31,2004.

**Executive Overview**

The third quarter of 2005 presented a challengingoperating environment for ADESA. There was continued pressure on the wholesaleused vehicle market from original equipment manufacturers pricing programs andweather related disruptions, along with increasing fuel prices due to thehurricanes in the gulf coast. Despite these challenges, ADESA achieved 6%growth in revenues compared with the third quarter of 2004, while third quartervehicle sold volumes were down slightly compared with the third quarter of 2004.The Company’s Auction and Related Services segment posted 6% growth in revenueper vehicle sold to $438 per vehicle compared with the third quarter of 2004,representing the tenth consecutive quarter of year-over-year growth in revenueper vehicle sold. AFC posted 3% growth in loan transaction volume to almost277,000 loan transactions compared with the third quarter of 2004, representingthe ninth consecutive quarter of year-over-year growth in loan transactions.

22

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For the three months ended September 30, 2005,the Company reported revenue of $241.0 million and income from continuingoperations of $31.6 million or $0.35 per diluted share, compared with revenueof $227.0 million and income from continuing operations of $21.5 million or$0.23 per diluted share for the quarter ended September 30, 2004.  Results for the third quarter of 2005 includeda net $1.5 million after-tax charge related to the refinancing of the Company’ssenior credit facility. Results for the third quarter of 2004 included $8.7million of after-tax debt prepayment and spin-related charges. In the thirdquarter of 2005, operating profit was negatively impacted by new vehicleincentive programs and higher fuel prices which contributed to 100 basis pointdecrease in the used vehicle conversion rate. However, results for the thirdquarter of 2005 benefited from an effective tax rate of 34.3 percent comparedwith 39.3 percent in the third quarter of 2004. Cash provided by operations was$100.5 million for the nine months ended September 30, 2005, compared withcash provided by operations of $109.5 million for the nine months ended September 30,2004.

Capital expenditures forthe nine months ended September 30, 2005 totaled $47.8 million comparedwith $13.1 million in the first nine months of 2004. The Company continues toinvest in its core information technology capabilities as well as in lane andcapacity expansion, and real estate. In the fourth quarter of 2005, the Companycommenced its roll-out of Auction Access®, a nationwide dealer registrationprogram that prevents dealers from having to re-register at multiple auctionlocations. In addition, the Company is now rolling-out its AutoVision® wirelessvehicle inspection technology to its used vehicle auction operations. Managementbelieves that these areas of investment are critical to both maintaining theCompany’s competitive position and positioning itself for future growth. Inaddition, the Company is optimistic about its acquisition opportunities and isfocused on accelerating its deployment of capital.

**Critical Accounting Estimates**

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 31,2004, 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 ConsolidatedFinancial Statements included in the Company’s Annual Report on Form 10-K,which includes audited financial statements for the three years ended December 31,2004. The Company completed its annual 

23

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goodwillimpairment testing in the second quarter of 2005 and management concluded therewas no resulting impairment.

**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. Auction volumes tend to decline during prolongedperiods of winter weather conditions.  Inaddition, mild weather conditions and decreases in traffic volume can each leadto a decline in the available supply of salvage vehicles because fewer trafficaccidents occur, resulting in fewer damaged vehicles overall. As a result,revenues and operating expenses related to volume will fluctuate accordingly ona quarterly basis. The Company’s earnings are generally highest in the secondcalendar quarter. The fourth calendar quarter typically has the lowest earningsas a result of the lower auction volume and additional costs associated withthe holidays and winter weather.

**Results of Operations**

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

| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **Change** | ** ** | **September 30,**          | ** ** | **Change** | ** ** |
| **Operations Data:**             | ** ** | ** **                       | ** ** | **2005**   | ** ** | **2004**                        | ** ** | **$**      | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Auction and  related services Revenue |       |                             |       |       |       |                            |       |       |       |   |   |   |   |   |   |   |   |
| US                                    | ** ** | **$**                            | **164.5**  |       | $          | 160.3                           | ** ** | ** ** |       |   | ** ** | **$** | **501.3** |   | $ | 493.9 |   |   |   |   |   |
| Canada                                | ** ** | **43.6**                         |       | 38.4       | ** ** | ** **                      |       |       | ** ** | **134.8** |   | 122.6 |   |   |   |   |   |
| Dealer financing  revenue             |       |                             |       |       |       |                            |       |       |       |   |   |   |   |   |   |   |   |
| US                                    | ** ** | **30.9**                         |       | 26.7       | ** ** | ** **                      |       |       | ** ** | **88.0** |   | 80.7 |   |   |   |   |   |
| Canada                                | ** ** | **2.0**                          |       | 1.6        | ** ** | ** **                      |       |       | ** ** | **6.1** |   | 4.9 |   |   |   |   |   |
| Total revenue                         | ** ** | **241.0**                        |       | 227.0      |       | 14.0                            |       | 6          | %          | **730.2** |   | 702.1 |   | 28.1 |   | 4 | % |
| Cost of services                      | ** ** | **116.8**                        |       | 109.6      |       | 7.2                             |       | 7          | %          | **346.4** |   | 339.5 |   | 6.9 |   | 2 | % |
| Selling, general  and administrative  | ** ** | **57.5**                         |       | 52.6       |       | 4.9                             |       | 9          | %          | **168.4** |   | 164.6 |   | 3.8 |   | 2 | % |
| Depreciation and amortization         | ** ** | **10.8**                         |       | 8.5        |       | 2.3                             |       | 27         | %          | **30.0** |   | 26.5 |   | 3.5 |   | 13 | % |
| Operating profit                      | ** ** | **55.9**                         |       | 56.3       |       | (0.4                            | )          | (1         | )%         | **185.4** |   | 171.5 |   | 13.9 |   | 8 | % |
| Net income                            | ** ** | **$**                            | **31.5**   |       | $          | 21.5                            |       | $          | 10.0       |   | 47 | % | **$** | **102.4** |   | $ | 83.4 |   | $ | 19.0 |   | 23 | % |
|                                       |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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:**             | ** ** | ** **                                           | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Auction and  related services revenue | ** ** | **86.3**                                             | **%**      | 87.5                                                | %          | **87.1** | **%** | 87.8 | % |
| Dealer financing  revenue             | ** ** | **13.7**                                             | **%**      | 12.5                                                | %          | **12.9** | **%** | 12.2 | % |
| Total revenue                         | ** ** | **100.0**                                            | **%**      | 100.0                                               | %          | **100.0** | **%** | 100.0 | % |
| Cost of services                      | ** ** | **48.5**                                             | **%**      | 48.3                                                | %          | **47.4** | **%** | 48.4 | % |
| Selling, general  and administrative  | ** ** | **23.8**                                             | **%**      | 23.2                                                | %          | **23.1** | **%** | 23.4 | % |
| Depreciation and  amortization        | ** ** | **4.5**                                              | **%**      | 3.7                                                 | %          | **4.1** | **%** | 3.8 | % |
| Operating profit                      | ** ** | **23.2**                                             | **%**      | 24.8                                                | %          | **25.4** | **%** | 24.4 | % |
|                                       |            |                                                      |            |                                                     |            |  |  |  |  |  |  |

 

The Company’s revenue isderived from auction fees and related services at its auction facilities anddealer financing services at AFC. AFC’s net revenue consists of interest andfee income and gain on sale of finance receivables less provisions for creditlosses. This net presentation of AFC’s revenues is customary for financecompanies. Operating expenses for the Company consist of cost of services, selling,general and administrative expenses and depreciation and amortization. Cost ofservices is composed of payroll and related costs, subcontract services,supplies, insurance, property taxes, utilities and maintenance. Selling,general and administrative expenses are composed of indirect payroll andrelated costs, sales and marketing, information technology services andprofessional fees.

**Three Months Ended September 30, 2005**

*Operating Revenue*

*Auction and Related Services*

| ** **                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per vehicle amounts)*** | ** ** | **2005**                                             | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| Auction and related  services revenue                                                         | ** ** | **$**                                                | **208.1**  |       | $          | 198.7 |   |   | 5 | % |   |
| Vehicles sold                                                                                 |       |                                                 |       |       |       |   |   |   |   |
| Used                                                                                          | ** ** | **430,045**                                          |       | 431,449    |       |   | (< 1 | )% |   |
| Salvage                                                                                       | ** ** | **45,482**                                           |       | 46,934     |       |   | (3 | )% |   |
| Total vehicles sold                                                                           | ** ** | **475,527**                                          |       | 478,383    |       |   | (< 1 | )% |   |
| Used vehicle conversion  percentage                                                           | ** ** | **58.8**                                             | **%**      | 59.8       | %          |   |   |   |   |
| Revenue per vehicle sold                                                                      | ** ** | **$**                                                | **438**    |       | $          | 415 |   |   | 6 | % |   |

 

Revenuefrom auction and related services increased $9.4 million, or 5%, to $208.1 millionfor the quarter ended September 30, 2005, compared with $198.7 million forthe quarter ended September 30, 2004. This increase in revenue wasprimarily a result of a 6% increase in revenue per vehicle sold.

Revenueper vehicle sold increased $23, or 6%, for the quarter ended September 30,2005 compared with the quarter ended September 30, 2004. The 6% increasein revenue per vehicle sold resulted in increased auction and related servicesrevenue of approximately $10.6 million including fluctuations in theCanadian exchange rate which positively impacted revenue by approximately $3.5 million(or $7 per vehicle) for the quarter ended September 30, 2005,compared with the quarter ended September 30, 2004. The increase inrevenue per vehicle sold is primarily attributable to selected fee increases,the effect of changes in the Canadian currency exchange rates, as well as theCompany’s increased penetration rate for Internet and other ancillary services.

25

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Thetotal number of vehicles sold decreased less than 1% in the third quarter of 2005compared with the third quarter of 2004, resulting in a decrease in auction andrelated services revenue of approximately $1.2 million compared with thethree months ended September 30, 2004. The industry-wide decline inoff-lease vehicles and declines in repossessed vehicle volumes available forsale at auctions continued during the third quarter of 2005 and was partiallyoffset by revenues from the Company’s second quarter acquisitions totaling $4.1 millionin the third quarter of 2005. In addition, dealer vehicles sold increased over7% compared with the third quarter of 2004 as the Company continues to focus onincreasing dealer volumes.

Theused vehicle conversion percentage, calculated as the number of vehicles soldas a percentage of the number of vehicles entered for sale at the Company’sused vehicle auctions, decreased to 58.8% in the third quarter of 2005 from59.8% in the third quarter of 2004.  Newvehicle pricing programs offered by several of the automotive originalequipment manufacturers and the significant increase in fuel prices contributedto a soft used vehicle market for independent dealers. The resulting declinesin used vehicle prices, especially prices for sport utility and full-sizedvehicles, as well as the continued mix shift from institutional towards moredealer consignment vehicles contributed to the 100 basis point decline in theused vehicle conversion rate. Although the new vehicle incentive programs haveresulted in continued downward pressure on used vehicle prices and conversionrates in the short-term, the current increases in new vehicle sales couldeventually result in increased vehicle auction volumes in the long-term.

The Company continues to focus its efforts onincreasing dealer consignment volumes with centrally coordinated dealerconsignment strategies. The continued mix shift from institutional towards moredealer consignment vehicles could negatively impact revenue per vehicle soldand conversion rates while positively impacting operating margins.

Dealer Financing

| ** **                                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per loan amounts)*** | ** ** | **2005**                                             | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| **Dealer financing revenue**                                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain on sale of finance  receivables                                                       | ** ** | **$**                                                | **15.9**   |       | $          | 15.3 |   |   |   |   |   |
| Interest and fee income                                                                    | ** ** | **16.3**                                             |       | 13.4       |       |   |   |   |   |
| Other revenue                                                                              | ** ** | **0.2**                                              |       | 0.3        |       |   |   |   |   |
| Provision for credit  losses                                                               | ** ** | **0.5**                                              |       | (0.7       | )          |   |   |   |   |
| Total dealer financing  revenue                                                            | ** ** | **$**                                                | **32.9**   |       | $          | 28.3 |   |   | 16 | % |   |
| Loan transactions                                                                          | ** ** | **276,985**                                          |       | 267,863    |       |   | 3 | % |   |
| Revenue per loan transaction                                                               | ** ** | **$**                                                | **119**    |       | $          | 106 |   |   | 12 | % |   |

 

Dealerfinancing revenue increased to $32.9 million for the quarter ended September 30,2005, compared with $28.3 million for the quarter ended September 30,2004. The increase in dealer financing revenue was driven by a 12% increase inrevenue per loan transaction and a 3% increase in the number of loantransactions for the third quarter of 2005 compared with the third quarter of2004. The increase in loan transactions was primarily a result of an increasein floorplan utilization by AFC’s existing dealer base.

Revenueper loan transaction increased $13, or 12%, primarily driven by increased interestand fee income of $2.9 million (the Federal Funds rate increased 200 basispoints compared with the third quarter of 2004).  In addition, the provision for credit lossesdecreased during the third quarter of 2005 increasing total dealer financingrevenue by $1.2 million compared with the third quarter of 2004.

26

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AFC’s competition includes Manheim AutomotiveFinancial Services, Auto Use, Dealer Services Corporation (“DSC”), otherspecialty lenders, banks and financial institutions. In July 2005, DSC,founded by AFC’s former president, commenced lending operations in numerouslocations where AFC has loan offices including the six Auction BroadcastingCompany LLC auctions formerly serviced on-site by AFC. As previously reported,AFC initiated litigation against DSC and certain of its employees, who formerlyworked at AFC, alleging misappropriation of AFC’s trade secrets andconfidential information. DSC filed an answer and counterclaim in early September.In October 2005, AFC and DSC entered into a comprehensive settlementagreement which provides, among other matters, for the proscribed treatment ofsuch confidential business information on an ongoing basis and prohibitscertain business practices and communications with respect to the parties. AFCis focused on all of its competition in the marketplace and will continue totake actions from time to time to enhance the competitiveness of its productofferings.

*Cost of Services*

Cost of services increased $7.2 million, or 7%,for the three months ended September 30, 2005, compared with the threemonths ended September 30, 2004. The addition of the Washington D.C.auction and the Charlotte salvage auction resulted in an additional $3.3 millionin cost of services. Increases in transportation costs, which include fuelcosts, and lower used vehicle conversion rates were also leading driversincreasing cost of services. In addition, fluctuations in the Canadian exchangerate increased cost of services by approximately $1.7 million. Theseincreases were partially offset by the impact of the used vehicle market mixshift toward more dealer vehicles.

*Selling, General andAdministrative Expenses*

Selling, general and administrative expenses increased$4.9 million, or 9%, for the quarter ended September 30, 2005,compared with the quarter ended September 30, 2004, primarily due tocompensation and related employee benefit cost increases, dealer consignmentrelated marketing and promotion costs, training, Sarbanes-Oxley costs and anincrease of $0.7 million associated with fluctuations in the Canadianexchange rate.

*Depreciation andAmortization*

Depreciation and amortization totaled $10.8 millionfor the three months ended September 30, 2005, representing a $2.3 millionincrease, or 27%, from the $8.5 million reported for the three monthsended September 30, 2004. The increase in depreciation and amortization isrepresentative of the Company’s increased capital spending in 2005 comparedwith 2004.

*Operating Profit*

Operating profit decreased $0.4 million, or 1%, forthe three months ended September 30, 2005, compared with the three monthsended September 30, 2004 as a result of increases in each component ofoperating expenses. As a percentage of revenue, operating profit decreased to23.2% in the third quarter of 2005 compared with 24.8% in the third quarter of2004. In the third quarter of 2005, auction and related services operatingprofit was negatively impacted by new vehicle incentive programs and higherfuel prices which contributed to a 100 basis point decrease in the used vehicleconversion rate and increased transportation costs. The decrease in operatingprofit from the auctions and related services segment and increased expenses inthe holding company were partially offset by increased operating profit fromdealer financing segment primarily driven by increased revenue.

27

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*Interest Expense*

Interest expense decreased $1.3 million, or 15%,for the quarter ended September 30, 2005, compared with the quarter ended September 30,2004, as a result of lower debt balances in combination with interest ratebenefits received from the Company’s July 2005 debt refinancing.

*Loss on Extinguishment ofDebt*

Inthe third quarter of 2005, the Company recorded a non-recurring $2.9 millionpretax charge for the write-off of certain unamortized debt issuance costsassociated with the Company’s June 2004 credit facility and certainexpenses related to the July 2005 amended and restated credit facility. TheTerm Loan B facility was repaid in conjunction with the amended and restatedcredit facility and the related interest rate swap agreement was terminated inthe third quarter of 2005 resulting in a pretax non-recurring gain of $0.5 million. The $0.5 milliongain was recorded in “Other income, net” and when combined with the $2.9 millioncharge, resulted in a net pretax charge of $2.4 million related to theamendment and restatement of the credit facility.

In the third quarter of 2004, ADESA redeemed its $90 million7.7% Series A Senior Notes due 2006 and its $35 million 8.1% Series BSenior Notes due 2010, which resulted in non-recurring prepayment expenses of$14.0 million before taxes, including an early redemption penalty and thewrite-off of unamortized debt issuance costs.

*Income Taxes*

The effective income tax rate on income fromcontinuing operations declined to 34.3% for the quarter ended September 30,2005, compared with the effective tax rate of 39.3% for the quarter ended September 30,2004. The decrease in the effective tax rate was primarily the result of thefollowing: the recognition of certain 2004 provision to tax return differences,the elimination of valuation allowances for state net operating losses and taxcredits, and changes in estimates regarding tax contingencies. The Companycontinues to implement certain tax planning strategies as a result of itsongoing review of its tax structure and tax position in both the United Statesand Canada as an independent public company. The Company currently expects itslong-term effective tax rate will be approximately 37.5% to 38%.

*Discontinued Operations*

In August 2005,ADESA sold ComSearch, Inc., a non-core business providing professionalclaims outsourcing services, automotive parts-locating and desk-auditingservices to the property and casualty insurance industry. In February 2003,ADESA approved a plan to discontinue the operations of its vehicle importationbusiness. The financial results of the ComSearch and vehicle importationbusinesses have been classified as discontinued operations. Net loss fromdiscontinued operations for the quarter ended September 30, 2005 includesthe third quarter operating income of ComSearch offset by the loss on sale ofthe ComSearch business and interest accruing on the vehicle importation businessadverse judgment.

28

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*Significant ItemsAffecting Comparability*

TheCompany incurred various charges in 2004 and 2005 related to its initial publicoffering and subsequent separation from ALLETE and subsequent restructuring ofits debt that affect the comparability of its reported results of operations. Theimpact of these transactions on income from continuing operations is as follows(*in millions*):

| ** **                                       | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                             | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Non-recurring items:                             | ** ** | ** **                                           |       |   |   |
| Debt prepayment and transaction-related expenses | ** ** | **$**                                                | **2.9**    |   | $ | 14.4 |   |
| Gain on termination of swap                      | ** ** | **(0.5**                                             | **)**      | — |   |
| ** **                                       |       | **2.4**                                              |       | 14.4 |   |
| Tax benefit of above items                       | ** ** | **(0.9**                                             | **)**      | (5.7 | ) |
| Decrease to  income from continuing operations   | ** ** | **$**                                                | **1.5**    |   | $ | 8.7 |   |

 

In the third quarter of2005, the company recorded a charge for the write-off of certain unamortizeddebt issuance costs associated with the Company’s June 2004 creditfacility and certain expenses related to the amended and restated creditfacility. In addition, an interest rate swap agreement related to the formerTerm Loan B facility was terminated in the third quarter of 2005. Debtprepayment expenses in 2004 consisted of make-whole premiums related to theredemption of the Company’s senior notes and write-off of related unamortizeddebt issuance costs. The non-recurring transaction-related expenses in 2004consisted primarily of legal and professional fees associated with the Company’sinitial public offering and separation from ALLETE.

**Nine Months Ended September 30, 2005**

*Operating Revenue*

*Auctionand Related Services*

| ** **                                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per vehicle amounts)*** | ** ** | **2005**                                            | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| Auction and  related services revenue                                                         | ** ** | **$**                                               | **636.1**  |       | $          | 616.5 |   |   | 3 | % |   |
| Vehicles sold                                                                                 |       |                                                |       |       |       |   |   |   |   |
| Used                                                                                          | ** ** | **1,334,790**                                       |       | 1,357,355  |       |   | (2 | )% |   |
| Salvage                                                                                       | ** ** | **149,665**                                         |       | 154,441    |       |   | (3 | )% |   |
| Total vehicles sold                                                                           | ** ** | **1,484,455**                                       |       | 1,511,796  |       |   | (2 | )% |   |
| Used vehicle conversion percentage                                                            | ** ** | **63.3**                                            | **%**      | 63.2       | %          |   |   |   |   |
| Revenue per vehicle sold                                                                      | ** ** | **$**                                               | **429**    |       | $          | 408 |   |   | 5 | % |   |

 

Revenue from auction and related services increased$19.6 million, or 3%, to $636.1 million for the nine months ended September 30,2005, compared with $616.5 million for the nine months ended September 30,2004. This increase in revenue was a result of a 5% increase in revenue pervehicle sold during the first nine months of 2005 offset by a 2% decrease invehicles sold.

Revenue per vehicle sold increased $21, or 5%, for thenine months ended September 30, 2005 compared with the nine months ended September 30,2004. The 5% increase in revenue per vehicle sold resulted in increased auctionand related services revenue of approximately $30.8 million including 

29

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fluctuations in theCanadian exchange rate which positively impacted revenue by approximately $10.6million for the nine months ended September 30, 2005, compared with thenine months ended September 30, 2004. The increase in revenue per vehiclesold is primarily attributable to selected fee increases, the favorable effectof changes in the Canadian currency exchange rates, as well as the Company’sincreased penetration rate for Internet and other ancillary services.

The total number ofvehicles sold decreased 2% in the first nine months of 2005 compared with thefirst nine months of 2004, resulting in a decrease in auction and relatedservices revenue of approximately $11.1 million. The industry-wide decline inoff-lease vehicles and declines in repossessed vehicle volumes available forsale at auctions continued during the first nine months of 2005 and waspartially offset by revenues from the Company’s current year acquisitions totaling$6.6 million in the first nine months of 2005. The used vehicle conversionpercentage, calculated as the number of vehicles sold as a percentage of thenumber of vehicles entered for sale at the Company’s used vehicle auctions,increased slightly to 63.3% in the first nine months of 2005 from 63.2% infirst nine months of 2004.

*DealerFinancing*

| **(*In millions except volumes and per loan amounts)*** | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                                                 | ** ** | **2005**                                            | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| **Dealer financing revenue**                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain on sale of finance receivables                                                        | ** ** | **$**                                               | **46.8**   |       | $          | 46.2 |   |   |   |   |   |
| Interest and fee income                                                                    | ** ** | **47.0**                                            |       | 39.8       |       |   |   |   |   |
| Other revenue                                                                              | ** ** | **0.5**                                             |       | 1.4        |       |   |   |   |   |
| Provision for credit losses                                                                | ** ** | **(0.2**                                            | **)**      | (1.8       | )          |   |   |   |   |
| Total dealer financing revenue                                                             | ** ** | **$**                                               | **94.1**   |       | $          | 85.6 |   |   | 10 | % |   |
| Loan transactions                                                                          | ** ** | **836,611**                                         |       | 803,442    |       |   | 4 | % |   |
| Revenue per loan  transaction                                                              | ** ** | **$**                                               | **113**    |       | $          | 107 |   |   | 6 | % |   |

 

Dealer financing revenue increased to $94.1 millionfor the nine months ended September 30, 2005, compared with $85.6 millionfor the nine months ended September 30, 2004. The 10% increase in dealerfinancing revenue was driven by a 4% increase in the number of loantransactions and a 6% increase in revenue per loan transaction for the firstnine months of 2005 compared with the first nine months of 2004. The increasein loan transactions was primarily the result of an increase in floorplanutilization by AFC’s existing dealer base.

Revenue per loantransaction increased $6, or 6%, primarily driven by increased interest and feeincome of $7.2 million (the Federal Funds rate increased 200 basis pointscompared with the first nine months of 2004) and a decrease in the provisionfor credit losses of $1.6 million, partially offset by a reduction in otherrevenue of $0.9 million compared with the first nine months of 2004.

*Cost of Services*

Cost of services increased$6.9 million, or 2%, for the nine months ended September 30, 2005,compared with the nine months ended September 30, 2004. Fluctuations inthe Canadian exchange rate increased cost of services by approximately $5.1million. The addition of the Washington D.C. used vehicle auction and theCharlotte salvage auction also contributed to the increase in cost of services.This activity was partially offset by the impact of the used vehicle market mixshift toward more dealer vehicles and fewer vehicles sold.

30

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*Selling, Generaland Administrative Expenses*

Selling, general andadministrative expenses increased $3.8 million, or 2%, for the first ninemonths of 2005, compared with the first nine months of 2004, primarily due tocompensation and related employee benefit cost increases, dealer consignmentrelated marketing, training, and an increase of $1.9 million associatedwith fluctuations in the Canadian exchange rate. In addition, the first ninemonths of 2004 included $3.0 million of non-recurring transaction costs(primarily legal fees) associated with the Company’s initial public offering.Selling, general and administrative expenses for the first nine months of 2005included approximately $3.9 million of incremental corporate expensesincurred in the first six months of 2005 to support ADESA as anindependent public company. Incremental corporate expenses consisted ofsalaries, benefits and other expenses due to the addition of corporate levelpersonnel, professional fees, incremental insurance and other costs necessaryto support an independent public company.

*Depreciation andAmortization*

Depreciation andamortization totaled $30.0 million for the nine months ended September 30,2005, representing an increase of $3.5 million, or 13%, from the $26.5 millionreported for the nine months ended September 30, 2004. The increase indepreciation and amortization is a result of the Company’s increased capitalspending in 2005.

*Operating Profit*

Operating profit increased$13.9 million, or 8%, for the nine months ended September 30, 2005,compared with the nine months ended September 30, 2004. As a percentage ofrevenue, operating profit increased to 25.4% in the first nine months of 2005compared with 24.4% in the first nine months of 2004. The mix shift frominstitutional to dealer vehicles and improved operating margins at AFCcontributed to the improvement in operating profit margin.

*Interest Expense*

Interest expense increased$6.6 million, or 38%, for the nine months ended September 30, 2005,compared with the nine months ended September 30, 2004, as the Companycarried additional debt in the first half of 2005 relative to the first half of2004.

*Loss onExtinguishment of Debt*

In the third quarter of 2005, the Company recorded anon-recurring $2.9 million pretax charge for the write-off of certainunamortized debt issuance costs associated with the Company’s June 2004credit facility and certain expenses related to the July 2005 amended andrestated credit facility. The Term Loan B facility was repaid in conjunctionwith the amended and restated credit facility and the related interest rateswap agreement was terminated in the third quarter of 2005 resulting in apretax gain of $0.5 million. The $0.5 million gain was recorded in “Otherincome, net” and when combined with the $2.9 million charge, resulted in anet pretax charge of $2.4 million related to the amendment and restatementof the credit facility.

In the third quarter of2004, ADESA redeemed its $90 million 7.7% Series A Senior Notes due 2006and its $35 million 8.1% Series B Senior Notes due 2010, whichresulted in non-recurring expenses of $14.0 million before taxes,including an early redemption penalty and the write-off of unamortized debtissuance costs.

31

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*Income Taxes*

The effective income tax rateon income from continuing operations declined to 37.6% for the nine monthsended September 30, 2005, compared with the effective tax rate of 39.3%for the nine months ended September 30, 2004. The decrease in theeffective tax rate was primarily the result of the following: the recognitionof certain 2004 provision to tax return differences, the elimination ofvaluation allowances for state net operating losses and tax credits, andchanges in estimates regarding tax contingencies. The Company continues toimplement certain tax planning strategies as a result of its ongoing review ofits tax structure and tax position in both the United States and Canada as anindependent public company. The Company currently expects its long-termeffective tax rate will be approximately 37.5% to 38%.

*DiscontinuedOperations*

In August 2005, ADESA sold ComSearch, Inc. anon-core business providing professional claims outsourcing services,automotive parts-locating and desk-auditing services to the property andcasualty insurance industry. In February 2003, ADESA approved a plan todiscontinue the operations of its vehicle importation business. The financialresults of the ComSearch and vehicle importation businesses have beenclassified as discontinued operations. Net loss from discontinued operationsfor the nine months ended September 30, 2005 includes the year-to-dateoperating loss of ComSearch, the loss on sale of the ComSearch business andinterest on the vehicle importation business adverse judgment. Net loss fromdiscontinued operations in 2004 includes a $6.7 million pre-tax chargerelated to the vehicle importation business adverse judgment, including therelated accrued interest and legal costs, partially offset by $0.8 millionin pre-tax income generated by ComSearch.

The following summarizesfinancial information for the discontinued operations (*in millions*):

| ** **                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Operating revenues                                | ** ** | **$**                                               | **2.9**    | ** ** | $ | 4.7 |   |
| Loss from discontinued  operations before income taxes | ** ** | **$**                                               | **(0.5**   | **)** | $ | (5.9 | ) |
| Net loss from  discontinued operations                 | ** ** | **$**                                               | **(0.4**   | **)** | $ | (3.6 | ) |

 

*Significant ItemsAffecting Comparability*

TheCompany incurred various charges and incremental expenses in 2004 and 2005related to its initial public offering and subsequent separation from ALLETEand subsequent restructuring of its debt that affect the comparability of itsreported results of operations. The impact of these transactions on income fromcontinuing operations is as follows (*in millions*):

| ** **                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| **Non-recurring items:**                    | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Transaction-related and debt prepayment expenses | ** ** | **$**                                               | **2.9**    |   | $ | 17.0 |   |
| Gain on termination of swap                      | ** ** | **(0.5**                                            | **)**      | — |   |
| ** **                                       |       | **2.4**                                             |       | 17.0 |   |
| Incremental  expenses:                           |       |                                                |       |   |   |
| Corporate expenses                               | ** ** | **3.9**                                             |       | — |   |
| Interest expense                                 | ** ** | **7.9**                                             |       | — |   |
| ** **                                       |       | **11.8**                                            |       | — |   |
| Tax benefit of above items                       | ** ** | **(5.5**                                            | **)**      | (6.7 | ) |
| Decrease to  income from continuing operations   | ** ** | **$**                                               | **8.7**    |   | $ | 10.3 |   |

 

32

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In the third quarter of 2005, the Company recorded acharge for the write-off of certain unamortized debt issuance costs associatedwith the Company’s June 2004 credit facility and certain expenses relatedto the amended and restated credit facility. In addition, an interest rate swapagreement related to the former Term Loan B facility was terminated in thethird quarter of 2005. Debt prepayment expenses in 2004 consisted of make-wholepremiums related to the redemption of the Company’s senior notes and write-offof related unamortized debt issuance costs. The non-recurringtransaction-related expenses in 2004 consisted primarily of legal and professionalfees associated with the Company’s initial public offering and separation fromALLETE.

Incremental corporateexpenses were incurred in the first half of 2005 and consisted of salaries,benefits and other expenses due to the addition of corporate level personnel,professional fees, incremental insurance and other costs necessary to supportan independent public company, while incremental interest expense incurred inthe first half of 2005 is the result of the Company’s recapitalization andtransition to an independent public company.

**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)***    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2004**               | ** ** |
| Cash and cash  equivalents               | ** ** |                   | **$**      | **280.4**             |       |                   |       | $ | 304.5 |   |   |   | $ | 405.4 |   |   |
| Restricted cash                          | ** ** |                   | **$**      | **5.6**               |       |                   |       | $ | 4.9 |   |   |   | $ | 14.3 |   |   |
| Working capital                          | ** ** |                   | **$**      | **304.1**             |       |                   |       | $ | 358.2 |   |   |   | $ | 441.4 |   |   |
| Amounts available  under credit facility | ** ** |                   | **$**      | **179.3**             |       |                   |       | $ | 139.0 |   |   |   | $ | 139.0 |   |   |
| Cash flow from  operations               | ** ** |                   | **$**      | **100.5**             |       |                   |       | $ | 167.4 |   |   |   | $ | 109.5 |   |   |

 

**Working Capital**

A substantial amount of the Company’s working capitalis generated internally from payments for services provided. In addition, ADESAhas a $350 million revolving line of credit pursuant to the amended andrestated $500 million credit facility, from which $158 million was drawnas of September 30, 2005. There were outstanding letters of credittotaling approximately $12.7 million at September 30, 2005, which reducethe available borrowings under the credit facility. The Company’s Canadianoperations have additional letters of credit outstanding totaling $2.5 millionat September 30, 2005, which do not impact available borrowings under thecredit facility. The credit facility contains certain financial covenantsincluding a covenant requiring ADESA to maintain a minimum fixed chargecoverage ratio. These financial covenants affect the Company’s operatingflexibility by, among other things, restricting its ability to incur expensesand indebtedness that could be used to grow the business, as well as to fundgeneral corporate purposes. At September 30, 2005, the Companywas in compliance with the covenants contained in the credit facility.

On July 25, 2005, the Company entered into anamended and restated $500 million credit facility, pursuant to the terms andconditions of an amended and restated credit agreement (the “Credit Agreement”)with Bank of America, N.A., as administrative agent, and a syndicate of lenders.The Credit Agreement amends and restates ADESA’s $525 million credit facility,dated as of June 21, 2004. The Credit Agreement has a five year term thatexpires on June 30, 2010. Under the terms of the Credit Agreement, thelenders have committed to provide advances and letters of credit in anaggregate amount of up to $500 million. Subject to the terms and conditions ofthe Credit Agreement, ADESA may request that the lenders’ commitments under theCredit Agreement be increased (or additional lenders be added 

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to the Credit Agreementthat provide additional commitments), provided that in no event may theaggregate amount of the lenders’ commitments under the Credit Agreement at anytime exceed $825 million. Borrowings under the Credit Agreement may beused to refinance certain of ADESA’s outstanding debt, to finance workingcapital, capital expenditures and acquisitions permitted under the CreditAgreement and for other corporate purposes.

The Credit Agreement provides for a five year$150 million term loan and a $350 million revolving credit facility. Theterm loan will be repaid in 20 quarterly installments, with the final paymentdue on June 30, 2010. The revolving credit facility may be used for loans,and up to $25 million may be used for letters of credit. The revolvingloans may be borrowed, repaid and reborrowed until June 30, 2010, at whichtime all amounts borrowed must be repaid.

The revolving credit facility and the term loanfacility bear interest at a rate equal to LIBOR plus a margin ranging from 87.5basis points to 150 basis points depending on the Company’s total leverageratio. ADESA’s initial margin based on its current leverage ratio is 125 basispoints. The Term Loan B facility was eliminated in the amended $500 millionfacility.

On September 30, 2005, there was$142.5 million outstanding on the term loan and $158 millionoutstanding on the revolving credit facility. As a result of amending thecredit agreement, the Company incurred a third quarter pretax charge ofapproximately $2.9 million related to the write-off of certain unamortizeddebt issue costs and certain related expenses associated with the amended andrestated senior credit agreement. The Company expects that cash on hand togetherwith cash generated from operations and amounts available under its amended andrestated $500 million senior credit facility will allow ADESA to meet itscurrent working capital needs and those of its subsidiaries in the foreseeablefuture.

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

AFC offers short-term inventory-secured financing,also known as floorplan financing, to used vehicle dealers. Financing isprimarily provided for terms of 30 to 45 days. AFC principally generatesits funding through the sale of its US dollar denominated receivables. Forfurther discussion of AFC’s securitization arrangements, see “Off-Balance SheetArrangements”.

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**Summary of Cash Flows**

TheCompany strives to continuously improve cash flow from operations. ADESA’sstrategy includes growing its vehicle auction and dealer financing businessesboth internally by expanding facilities, services and operations, and externallythrough acquisitions.

| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ***(In millions)***                              | ** ** | **   2005   **        | ** ** | **2004**   | ** ** | **Change** | ** ** |
| Net cash provided by  (used by):                      | ** ** |                                                | ** ** | ** ** |       |   |   |   |   |
| Operating activities                                  | ** ** |                                                | **$**      | **100.5**  | ** ** |   | $ | 109.5 |   | $ | (9.0 | ) |
| Investing activities                                  | ** ** |                                                | **(64.1**  | **)**      |       | (2.7 | ) | (61.4 | ) |
| Financing activities                                  | ** ** |                                                | **(60.8**  | **)**      |       | 185.4 |   | (246.2 | ) |
| Effect of exchange rate on cash                       | ** ** |                                                | **1.0**    | ** ** |       | 0.6 |   | 0.4 |   |
| Net (decrease) increase  in cash and cash equivalents | ** ** |                                                | **$**      | **(23.4**  | **)**      |   | $ | 292.8 |   | $ | (316.2 | ) |

 

Cash provided by operating activities was $100.5million for the nine months ended September 30, 2005, compared with cashprovided by operating activities of $109.5 million for the nine months ended September 30,2004. The primary reason for the decrease in cash flow from operations was thechange in operating assets and liabilities. Operating cash flow was favorablyimpacted by a $52.1 million decrease in trade receivables and other assets aswell as a $19.0 million increase in net income. The favorable changes in tradereceivables and net income were offset by decreases in accounts payable andaccrued expenses totaling $92.4 million for the nine months ended September 30,2005 compared to the nine months ended September 30, 2004.

Net cash used by investing activities was $64.1million for the nine months ended September 30, 2005, compared with netcash used by investing activities of $2.7 million for the nine months ended September 30,2004. This change is primarily the result of an increase in capitalexpenditures of $34.7 million as well as cash disbursements foracquisitions totaling $18.7 million. In addition, the Company received $10.3million more from the sale of property, equipment and computer software in thefirst nine months of 2004 compared to the first nine months of 2005. For adiscussion of the Company’s capital expenditures, see “Capital Expenditures”below.

Cash used by financingactivities was $60.8 million for the first nine months of 2005, comparedwith cash provided by financing activities of $185.4 million for the firstnine months of 2004. During the first nine months of 2005, the Company hasreduced its outstanding debt by $56.0 million. In contrast, the Companyincreased its outstanding debt by $140.4 million in the first nine months of2004 as the Company’s separation from ALLETE and related restructuring of itsdebt was completed. In addition, the Company repurchased $43.5 million of itscommon stock and paid dividends to shareholders totaling $20.2 millionduring the first nine months of 2005.

**Other Financial Data**

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

While the Company believes that EBITDA is an important financial measure,it is not presented as an alternative to cash flow, income from continuingoperations or net income as indicators of liquidity or 

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operating performance, and should not beconsidered in isolation or as a substitute for measures of performance preparedin accordance with generally accepted accounting principles (“GAAP”). Thismeasure may not be comparable to similarly titled measures reported by othercompanies.

The followingtable reconciles EBITDA to income from continuing operations:

| ** **                             | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **EBITDA *(In millions)***   | ** ** | **2005**                                         | ** ** | **2004**                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Income  from continuing operations** | ** ** | **$**                                            | **31.6**   |                                            | $          | 21.5 | ** ** | **$** | **102.8** |   | $ | 87.0 |   |
| Add back:                              | ** ** | ** **                                       |       |                                            |       |   | ** ** | ** ** | ** ** |
| Income tax expense                     | ** ** | **16.5**                                         |       | 13.9                                            | ** ** | **62.0** |   | 56.3 |   |
| Interest expense                       | ** ** | **7.4**                                          |       | 8.7                                             | ** ** | **24.0** |   | 17.4 |   |
| Depreciation and amortization          | ** ** | **10.8**                                         |       | 8.5                                             | ** ** | **30.0** |   | 26.5 |   |
| **EBITDA**                             | ** ** | **$**                                            | **66.3**   |                                            | $          | 52.6 | ** ** | **$** | **218.8** |   | $ | 187.2 |   |

 

EBITDA for the nine months ended September 30,2005 includes incremental corporate expenses of $3.9 million incurred in thefirst half of 2005.

A reconciliationof net cash provided by operating activities, another comparable GAAP measure,to EBITDA for each of the periods indicated is presented below.

| ****                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **EBITDA *(In millions)***                     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  cash provided by operating activities** | ** ** | **$85.8**                                  |       | $26.5                                     |       | **$100.5** |   | $109.5 |   |
| Changes in  operating assets and liabilities   | ** ** | **(26.3**                                  | **)**      | 23.8                                      |       | **55.1** |   | 26.3 |   |
| Bad debt expense                               | ** ** | **(0.7**                                   | **)**      | (2.5                                      | )          | **(1.8** | **)** | (4.0 | ) |
| Interest expense                               | ** ** | **7.4**                                    |       | 8.7                                       |       | **24.0** |   | 17.4 |   |
| Income tax  expense                            | ** ** | **16.5**                                   |       | 13.9                                      |       | **62.0** |   | 56.3 |   |
| Deferred income  tax                           | ** ** | **(12.5**                                  | **)**      | (3.4                                      | )          | **(14.7** | **)** | (7.4 | ) |
| Discontinued  operations (net of taxes)        | ** ** | **0.1**                                    |       | —                                    |       | **0.4** |   | 3.6 |   |
| Compensation  associated with equity programs  | ** ** | **(0.7**                                   | **)**      | (0.5                                      | )          | **(2.2** | **)** | (0.6 | ) |
| Loss on  extinguishment of debt                | ** ** | **(2.9**                                   | **)**      | (14.0                                     | )          | **(2.9** | **)** | (14.0 | ) |
| Other non-cash,  net                           | ** ** | **(0.4**                                   | **)**      | 0.1                                       |       | **(1.6** | **)** | 0.1 |   |
| **EBITDA**                                     | ** ** | **$66.3**                                  |       | $52.6                                     |       | **$218.8** |   | $187.2 |   |

 

**Capital Expenditures**

Capital expenditures(excluding acquisitions) for the nine months ended September 30, 2005 andthe year ended December 31, 2004 were $47.8 million and$31.2 million, and were funded primarily from internally generated funds. Plannedannual capital expenditures for 2005 are expected to total approximately $60million. Anticipated expenditures are primarily attributable to lane expansionsand ongoing improvements at existing vehicle auction facilities andimprovements in information technology systems and infrastructure. Futurecapital expenditures could vary substantially based on capital project timingand if the Company is required to undertake corrective action or incurenvironmental costs in connection with any outstanding or future liabilities.

**Acquisitions**

On May 3, 2005, the Company completed thepurchase of certain assets of ABC Washington Dulles, LLC to gain access to theWashington, D.C. auction market. The assets included an 83-acre leasedauction 

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facility located inSterling, Virginia, which commenced operations in 2001 offering six auctionlanes and reconditioning facilities, the related operating equipment and allcustomer relationships related to the auction. In addition, the Company hasoperating lease obligations related to the facility through 2025. Initialannual lease payments for the facility are approximately $1.9 million per year.The Company did not assume any other material liabilities or indebtedness inconnection with the acquisition. Financial results for this acquisition havebeen included in the Company’s consolidated financial statements since the dateof acquisition.

On June 30, 2005, the Company acquired anindependently owned salvage auction facility serving Charlotte and westernNorth Carolina. The assets included an 120-acre facility, the relatedoperating equipment, accounts receivable, and all customer relationshipsrelated to the auction. The Company did not assume any material liabilities orindebtedness in connection with the acquisition. Commencing in the thirdquarter of 2005, financial results for this acquisition have been included inthe Company’s consolidated financial statements.

In the second quarter of 2005, ADESA acquired the twopreviously mentioned auctions for a total cost of $18.7 million, in cash. Thepurchase price of the acquisitions was allocated to the acquired assets basedupon fair market values, including $3.9 million to other intangible assets, representingthe fair value of acquired customer relationships and non-compete agreements,which will be amortized over their expected useful lives ranging from 2 to 20years. The purchase price allocations resulted in aggregate goodwill of $10.8million. The goodwill was assigned to the auction and related servicesreporting segment and is expected to be fully deductible for tax purposes. Proforma financial results for the acquisitions were not material.

On November 2, 2005,the Company completed the purchase of certain assets of the “Ohio Connection,”a group of four independently owned salvage auctions that handle approximately20,000 vehicles annually. The assets include the operating equipment and allcustomer relationships related to the auctions. In addition, the Company hasoperating lease obligations related to the four facilities through 2025. Initialannual lease payments for the facilities total approximately $0.5 million peryear. Two of the purchase agreements include contingent payments related to thevolume of certain vehicles sold subsequent to the purchase date. The Companydid not assume any other significant liabilities or indebtedness in connectionwith the acquisition. This acquisition is effective November 1, 2005 andthe purchase price allocation will be completed in the Company’s fourth quarterending December 31, 2005. Financial results for this acquisition will beincluded in the Company’s consolidated financial statements from the date ofacquisition.

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**Contractual Obligations**

Thetable below sets forth a summary of the Company’s contractual debt andoperating lease obligations as of September 30, 2005. Some of the figuresincluded in this table are based on management’s estimates and assumptionsabout these obligations, including their duration, the possibility of renewaland other factors. Because these estimates and assumptions are necessarilysubjective, the obligations the Company may actually pay in future periodscould vary from those reflected in the table. The following summarizes theCompany’s contractual cash obligations as of September 30, 2005 *(in millions)*:

| ** **                                        | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                  | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Long-term debt                                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior subordinated  notes (a)                    |       | $                                         | 125.0      |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 125.0 |   |   |
| Term loan facility (b)                            |       | 142.5                                     |       |   | 30.0 |   |   |   | 60.0 |   |   |   | 52.5 |   |   |   | — |   |   |
| Revolving credit facility (b)                     |       | 158.0                                     |       |   | — |   |   |   | — |   |   |   | 158.0 |   |   |   | — |   |   |
| Other debt                                        |       | 0.1                                       |       |   | 0.1 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Capital lease  obligation (c)                     |       | 34.5                                      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 34.5 |   |   |
| Interest payments  relating to long-term debt (d) |       | 104.6                                     |       |   | 24.6 |   |   |   | 39.0 |   |   |   | 24.7 |   |   |   | 16.3 |   |   |
| Interest rate  swap (e)                           |       | (0.9                                      | )          |   | — |   |   |   | (0.9 | ) |   |   | — |   |   |   | — |   |   |
| Operating leases  (f)                             |       | 162.4                                     |       |   | 16.3 |   |   |   | 27.2 |   |   |   | 18.8 |   |   |   | 100.1 |   |   |
| **Total contractual cash  obligations**           |       | $                                         | 726.2      |   |   | $ | 71.0 |   |   |   | $ | 125.3 |   |   |   | $ | 254.0 |   |   |   | $ | 275.9 |   |   |
|                                                   |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(a)           This borrowing isfurther explained in Note 12 in the Notes to the Consolidated FinancialStatements included in the Company’s Annual Report on Form 10-K,which includes audited financial statements for the three years ended December 31,2004. The table assumes the long-term debt is held to maturity.

(b)          The credit facility isfurther explained in Note 5 in the Notes to the Consolidated FinancialStatements and in “Working Capital” included in this Quarterly Report on Form 10-Q.The table assumes (i) the term loan facility will be repaid in 20quarterly installments as provided in the Credit Agreement, (ii) theCompany will not draw any further amounts on the revolving credit facility and (iii) thecurrent outstanding amount on the facility is held to maturity.

(c)           This obligation,related to the Atlanta auction facility, is further explained in Note 11 in theNotes to the Consolidated Financial Statements included in the Company’s AnnualReport on Form 10-K, which includes audited financial statements forthe three years ended December 31, 2004.

(d)          Interest payments onlong-term debt are projected based on the contractual rates of the debtsecurities. (Note: interest on the capital lease is not included as it isoffset by interest received from the related bonds.)  Interest rates for the variable rate debtinstruments were projected through 2006 based on information available fromlenders and held constant at the 2006 projected rates for 2007 - 2010 due totheir unpredictable nature. These amounts assume no additional borrowings onthe $350 million revolver due to the amount of cash the Company is expected togenerate; however, unused revolver fees are included in the interest paymentsas are standby letter of credit fees and swap income.

(e)           The fair value of theinterest rate swap agreement is estimated using pricing models widely used infinancial markets and represents the estimated amount the Company would receiveto terminate the agreement at the reporting date. The agreement does not matureuntil December 2006. The interest rate swap is further explained in Note 6in the Notes to the Consolidated Financial Statements and in Item 3 “Quantitative and Qualitative Disclosures AboutMarket Risk” included in this Quarterly Report on Form 10-Q.

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(f)             Operating leases areentered into in the normal course of business. ADESA leases some of its auctionfacilities as well as other property and equipment under operating leases. Somelease agreements contain options to renew the lease or purchase the leasedproperty. Future operating lease obligations would change if the renewaloptions were exercised and/or if the Company entered into additional operatinglease agreements. For additional information, see Note 14 in the Notes to theConsolidated Financial Statements included in the Company’s Annual Report on Form 10-K,which includes audited financial statements for the three years ended December 31,2004.

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. In addition,the Company believes the previously mentioned sources of liquidity will besufficient to fund the Company’s capital requirements, debt service, futureacquisitions and dividend payments for the next five years.

On October 26, 2005,the Company’s Board of Directors declared a fourth quarter dividend of $0.075per common share payable December 15, 2005, to shareholders of record on November 14,2005. The Company anticipates paying quarterly dividends at a rate of $0.075per common share in 2006 resulting in total cash payments for dividends ofapproximately $6.7 million each quarter.

**Off-Balance Sheet Arrangements**

AFC sells the majority of its US dollar denominated finance receivables ona revolving basis and without recourse to a wholly owned, bankruptcy remote,special purpose subsidiary (AFC Funding Corporation) that is consolidated foraccounting purposes in accordance with SFAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities*. The special purpose subsidiary, AFC FundingCorporation, was established for the purpose of purchasing AFC’s financereceivables. Effective July 8, 2005, AFC and AFC Funding Corporationamended their securitization agreement. As part of the amendment, theexpiration date of the agreement was extended from January 2006 to June 30,2008. This agreement is subject to annual renewal of short-term liquidity by theliquidity providers and allows for the revolving sale by the subsidiary to abank conduit facility of up to a maximum of $500 million in undivided interestsin certain eligible finance receivables subject to committed liquidity. AFCFunding Corporation had $425 million of committed liquidity at September 30,2005. Receivables sold to the bank conduit facility are not reported on theCompany’s consolidated balance sheet.

At September 30, 2005, AFC managed total finance receivables of $664.6million, of which $584.8 million had been sold to AFC Funding Corporation. AFCFunding Corporation then in turn sold loans, with recourse to AFC FundingCorporation, of $403.8 million to the bank conduit facility at September 30,2005, leaving $260.8 million of gross finance receivables recorded on theCompany’s consolidated balance sheet at September 30, 2005.

Receivables undermanagement, sold, and retained were as follows *(inmillions)*:

| **Finance Receivables** | ** ** | ** ** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| Total receivables  managed   | ** ** |       | **$**      | **664.6**                    | ** ** |                        |       | $ | 582.7 |   |   |
| Less: amounts sold           | ** ** |       | **(403.8** | **)**                        |       |                        | (359.8     | ) |   |
| Receivables  retained        | ** ** |       | **260.8**  | ** **                   |       |                        | 222.9      |   |   |
| Less: allowance for losses   | ** ** |       | **(3.4**   | **)**                        |       |                        | (4.3       | ) |   |
| Net finance receivables      | ** ** |       | **$**      | **257.4**                    | ** ** |                        |       | $ | 218.6 |   |   |

 

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 

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worth,and other covenants tied to the performance of the finance receivablesportfolio. The securitization agreement also incorporatesthe financial covenants of ADESA’s credit facility. At September 30, 2005, the Companywas in compliance with the covenants contained in the securitization agreement.

**New Accounting Standards**

ADESA discloses pro forma net income and earnings pershare in accordance with Statement of Financial Accounting Standards (“SFAS”)123, *Accounting for Stock-Based Compensation*and SFAS 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*. In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS 123(R), *Share-BasedPayment*. This statement revises SFAS 123 and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*. SFAS 123(R) requires that thecost of employees services received in exchange for an award of equityinstruments be recognized in the income statement. Compensation cost will bemeasured based on the grant-date fair value of the equity instruments issued. Thecost will be recognized over the period during which an employee is required toprovide service in exchange for the award.

In March 2005, the SEC issued Staff AccountingBulletin 107 (“SAB 107”), which offers guidance on SFAS 123(R). SAB 107 wasissued to assist issuers by simplifying some of the implementation challengesof SFAS 123(R) while enhancing the information that investors receive. Keytopics of SAB 107 include discussion on the valuation models available toissuers and guidance on key assumptions used in these valuation models, such asexpected volatility and expected term, as well as guidance on accounting forthe income tax effects of SFAS 123(R) and disclosure considerations, amongother topics.

On April 14, 2005, the SEC approved a new rule forpublic companies that delayed the effective date of SFAS 123(R) to annual,rather than interim, periods that begin after June 15, 2005. As such, theCompany will adopt SFAS 123(R) on January 1, 2006. Once adopted, theCompany will be required to record compensation cost as expense for the portionof outstanding unvested awards, based on the grant-date fair value of thoseawards. The Company expects to apply the prospective transition method of SFAS 123(R),which would allow the Company to prospectively record expense for thecompensation costs related to the portion of outstanding unvested awards at January 1,2006, without restating any prior periods. The Company is currently consideringthe financial accounting and income tax implications of SFAS 123(R) andSAB 107.

On March 9, 2005, the Board of Directors of the Company(the “Board’) accelerated the vesting of certain unvested and “out-of-the-money”stock options previously awarded to employees and officers that have anexercise price of $24. The awards accelerated were made under the ADESA, Inc.2004 Equity and Incentive Plan in conjunction with ADESA’s initial publicoffering (“IPO”) in June 2004. As a result, options to purchaseapproximately 2.9 million shares of the Company’s common stock becameexercisable immediately. The options awarded in conjunction with the IPO to theCompany’s named executive officers and the majority of the other officers wouldhave vested in equal increments at June 15, 2005, 2006 and 2007. Theoptions awarded to certain other executive officers and employees had differentvesting terms. One-third of the options awarded to the other executive officersand employees vested on December 31, 2004. The remaining two-thirds of theoptions awarded to these executive officers and other employees in conjunctionwith the IPO would have vested in equal increments at December 31, 2005and 2006. All of these options expire in June 2010. All other terms andconditions applicable to the outstanding stock option grants remain in effect.

The Company and its Board considered several factorsin determining to accelerate the vesting of these options. Primarily, theacceleration will enhance the comparability of the Company’s financialstatements in prior and subsequent periods. The options awarded to theexecutive officers were special, one-time grants in conjunction with theCompany’s IPO. As such, these grants are not indicative of past grants whenADESA was a subsidiary of ALLETE prior to June 2004 and are notrepresentative of the 

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Company’s expected futuregrants. The Company and Board also believe that the acceleration is in the bestinterest of the stockholders as it will reduce the Company’s reported stockoption expense in future periods mitigating the impact of SFAS 123(R).

As a result of the acceleration, the Company disclosedincremental, pro forma stock-based employee compensation expense ofapproximately $7.7 million, net of tax, in its first quarter 2005 pro formadisclosure. The acceleration also resulted in a $2.0 million and $1.1 millionreduction in the after-tax pro forma stock-based employee compensation expensedisclosed in the second and third quarters of 2005. In addition, theacceleration will result in a reduction in the after-tax pro forma stock-basedemployee compensation expense disclosed in the fourth quarter of 2005 of $1.1million. The Company did not record any stock-based employee compensationexpense in the consolidated statements of income associated with theacceleration of these options because the intrinsic value (excess of marketprice of common stock over the exercise price of option) of the options at thedate of acceleration was not greater than of the original intrinsic value ofthe options. The Company expects that the acceleration will reduce the stockoption expense it otherwise would have been required to recognize in itsconsolidated statements of income in conjunction with adopting SFAS 123(R) byapproximately $4.8 million in 2006 and $1.2 million in 2007 on a pre-tax basis.

In May 2005, the FASBissued SFAS 154, *Accounting Changes and Error Corrections*.SFAS 154 replaces Accounting Principles Board Opinion No. 20 (“APB 20”), *Accounting Changes*, and SFAS 3, *ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple. This Statement applies to all voluntary changes in accountingprinciple and changes required by a new accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.SFAS 154 requires retrospective application of changes in accounting principleto prior periods’ financial statements, unless it is impracticable to determineeither the period—specific effects or the cumulative effect of the change. SFAS154 also requires that any change in accounting method of depreciation,amortization or depletion for long-lived assets be accounted for prospectivelyas a change in accounting estimate. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. The Company will adopt SFAS 154 on January 1, 2006.

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

**Foreign Currency**

The Company’s foreigncurrency exposure is limited and arises from transactions denominated inforeign currencies, particularly intercompany loans as well as from translationof the results of operations from the Company’s Canadian and, to a much lesserextent, Mexican subsidiaries. However, fluctuations between US and non-UScurrency values may adversely affect the Company’s results of operations andfinancial position. In addition, there are tax inefficiencies in repatriatingcash flow from non-US subsidiaries. To the extent such repatriation isnecessary 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 $0.7 million and $1.9 million for the three and nine monthsended September 30, 2005. Currency exposure of the Company’s Mexicanoperations is not material to the results of operations.

**Interest Rates**

The Company is exposed to interest rate risk onborrowings. Accordingly, interest rate fluctuations affect the amount ofinterest expense the Company is obligated to pay. The Company uses interestrate swap agreements to manage its exposure to interest rate risk. The Companydesignates its interest rate 

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swap agreements as cashflow hedges. The earnings impact of interest rate swaps designated as cash flowhedges is recorded upon the recognition of the interest related to the hedgeddebt. Any ineffectiveness in a hedging relationship is recognized immediatelyinto earnings. There was no significant ineffectiveness in the first ninemonths of 2005 or 2004.

In June 2004, the Company entered into twointerest rate swap agreements with notional amounts of $105 million and $60million to manage its exposure to interest rate movements on its variable ratedebt. In conjunction with the amended and restated senior credit facility, theCompany terminated its interest rate swap for the former Term Loan B facility(swap agreement with notional amount of $60 million) in the third quarter of2005. As a result, the unrealized gain of approximately $0.5 million recordedin “Other comprehensive income” was realized in “Other income, net” during thethird quarter. The remaining interest rate swap agreement contains amortizingprovisions and matures in December 2006.

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, 2005, the fair value ofthe interest rate swap agreement is a $0.9 million gain which is recorded in “Otherassets” on the consolidated balance sheet. At December 31, 2004, the fairvalue of the interest rate swap agreements was a $0.2 million loss which wasrecorded in “Other liabilities” on the consolidated balance sheet. Inaccordance with the provisions 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, 2005, there were unrealized gains totaling $0.6million, net of taxes of $0.3 million. At December 31, 2004, there wereunrealized losses totaling $0.1 million, net of taxes of $0.1 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 30,2005 would have resulted in an increase in interest expense of approximately$0.6 million and $1.6 million.

In November 2005, theCompany entered into an interest rate swap agreement with a notional amount of$40 million to manage its exposure to interest rate movements on its variablerate credit facility. The new swap has been designated as a cash flow hedge andmatures in May 2008.

**Item 4. Controls and Procedures**

**ControlsEvaluation and Related CEO and CFO Certifications**

ADESA conducted an evaluation of the effectiveness ofthe design and operation of its “disclosure controls and procedures” (“disclosurecontrols”) as of the end of the period covered by this Quarterly Report on Form 10-Q.The controls evaluation was done under the supervision and with theparticipation of management, including the Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”). Attached as exhibits to this Quarterly Reporton Form 10-Q are certifications of the CEO and the CFO, which arerequired in accordance with Rule 13a-14 of the Exchange Act.

Disclosure controls are controls and proceduresdesigned to reasonably assure that information required to be disclosed in theCompany’s reports filed under the Exchange Act, such as this Report on Form 10-Q,is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. Disclosurecontrols are also designed to reasonably assure that such information isaccumulated and communicated to ADESA’s management, including the CEO and CFO,as appropriate to allow timely decisions regarding required disclosure.

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A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues, if any, within the Company have been detected and reported.These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of simpleerror or mistake. Controls can also be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe controls. The design of any system of controls is based in part on certainassumptions about the likelihood of future events, and there can only bereasonable assurance that any design will succeed in achieving its stated goalsunder all potential future conditions. Over time, controls may becomeinadequate because of changes in conditions or deterioration in the degree ofcompliance with policies or procedures. Because of the inherent limitations ina cost-effective control system, misstatements due to error or fraud may occurand not be detected.

ADESA’s CEO and CFO have concluded that as of the endof the period covered by this report, the Company’s disclosure controls andprocedures were effective. There were no changes to the Company’s internalcontrol over financial reporting during the third quarter of 2005 thatmaterially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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**PART IIOTHER INFORMATION**

**Item 1.**                        LegalProceedings

The Company is involved in litigation and damageclaims arising in the ordinary course of business, such as actions related toinjuries; property damage; handling, storage or disposal of vehicles; environmentallaws and regulations; and other litigation incidental to the business such asemployment matters and dealer disputes. Such litigation is generally not, inthe opinion of management, likely to have a material adverse effect on theCompany’s financial condition, results of operations or cash flows.

Certain legal proceedingsin which the Company is involved are discussed in Note 19 to theconsolidated financial statements in Part II, Item 8 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004and Part I, Item 3 of the same Annual Report. The followingdiscussion is limited to certain recent developments concerning the Company’slegal and regulatory proceedings and should be read in conjunction with thoseearlier Reports. Unless otherwise indicated, all proceedings discussed in thoseearlier reports remain outstanding.

***ADESA Impact Taunton Facility***

As previously reported, in December 2003 theMassachusetts Department of Environmental Protection (MDEP) identified theCompany as a potentially responsible party regarding contamination of severalprivate drinking water wells in a residential development that abuts theTaunton, Massachusetts salvage auction facility. The salvage auction wasacquired from Auto Placement Massachusetts Associates LLC in 2001. Althoughthe source and time period(s) of the release of gasoline and contaminants ofmethyl tertiary butyl ether (“MTBE”) are unclear, ADESA Impact voluntarilyagreed to several remediation measures including the construction of amunicipal waterline to serve the residents adjacent to the site. In the secondquarter of 2005, the Company entered into a settlement agreement with itsenvironmental insurance carrier with respect to certain coverage matters whichwere in dispute relating to the Taunton site. The payment that was made toADESA Impact under the settlement agreement was not material to the Company’sresults of operations or financial condition. The Company has released itsinsurance carrier from any further claims with respect to environmentalconditions 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 andCivil Action No. 2005-00641). The complaints seek approximately $5.7 millionin damages for ADESA’s alleged negligence, trespass, and creation of a publicnuisance arising from elevated gasoline and contaminants of MTBE in the groundwater and water wells of the plaintiffs which plaintiffs contend resulted froman above ground gasoline storage tank leak or spill at ADESA Impact’s Taunton,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.

ADESA Impact filed a Notice of Removal with respect toboth actions with the United States District Court for the District ofMassachusetts removing both of the cases pending in the Bristol County SuperiorCourt of the Commonwealth of Massachusetts to the U.S. District Court (CivilActions No. 05-11493 and 05-11494). On or about August 29,2005, Automotive Recovery Services, Inc. d/b/a ADESA Impact filedanswers, including defenses, to the pending actions. Although there is thepotential for an adverse judgment given the risk and uncertainties oflitigation, in the event of an adverse decision, ADESA does not believe that itwould have a material adverse effect on its consolidated financial condition orliquidity but could possibly be material to its consolidated results ofoperations in any one accounting period. ADESA Impact intends to vigorouslydefend itself against the claims of the plaintiffs.

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The Company has aremaining accrual of $1.0 million at September 30, 2005 with respectto the Taunton matter which includes ongoing filtration and monitoring costs. Thisamount is included in the $3.1 million liability accrued for environmentalmatters at September 30, 2005.

***Hallett Entities***

As previously reported, wholesale vehicle businessesowned by Sean Hallett, the son of James Hallett, a former Executive VicePresident of ADESA, were in default with respect to three separate lines ofcredit with AFC and an outstanding loan through a related entity. As of September 30,2005, the total amount owed to AFC was $1.7 million. The lines of credittotaling $0.4 million are secured with a perfected blanket securityinterest in the assets of the wholesale vehicle businesses. The loan iscross-collateralized with one of the credit lines and is secured by certainunencumbered personal property valued between $0.3 million and $0.5 million.Based on an assessment of recoverability, the Company recorded provisions forcredit losses totaling $1.3 million. AFC had net receivables from thisindividual’s wholesale vehicle business totaling $0.4 million at September 30,2005 and December 31, 2004.

The Company is pursuing legal action related tocollection of these amounts. AFC and Automotive Finance Canada, Inc. (“AFCI”)filed a Statement of Claim in the Ontario Superior Court of Justice in November 2004alleging that Sean Hallett and his related companies (the “Hallett Entities”)had defaulted on their outstanding obligations to AFC and AFCI (OntarioSuperior Court of Justice; Case File No. 04-CV-278564CM2). In December 2004,the Hallett Entities filed their Statement of Defense and Counterclaim againstAFC, AFCI, ADESA, Inc., ADESA Canada and ADESA Auctions Canada(collectively the “AFC Entities”) stating that the Hallett Entities hadsatisfied their debts to the AFC Entities and alleging that the AFC Entitiesowed approximately $6 million to Hallett in compensatory and punitivedamages.

In February 2005, theAFC Entities filed their Reply and Defense to Counterclaim denying the claimsmade by the Hallett Entities and reaffirming the allegations made in theStatement of Claim, and the Hallett Entities filed a Reply to Defense toCounterclaim denying the allegations in the AFC Entities’ Reply and Defense toCounterclaim and reaffirming the claims and allegations in their Statement ofDefense and Counterclaim. The AFC Entities intend to continue to prosecute theirclaims against the Hallett Entities and the litigation is currently indiscovery.

***Auction Management Solutions, Inc.***

In March 2005, Auction Management Solutions, Inc.(“AMS”) filed a lawsuit against ADESA, Inc. in U.S. District Court for theNorthern District of Georgia, Atlanta Division (Civil Action No. 05 CV 0638),alleging infringement of U.S. Patent No. 6,813,612 (the “ ’612 Patent”)which was issued November 2, 2004 and pertains to an audio/video systemfor streaming instantaneous and buffer free data to and from a live auctionsite. The AMS complaint was served upon ADESA on July 5, 2005. The Companyfiled its answer, including its defenses, to the complaint in August 2005.The Company intends to vigorously defend itself against the infringementallegations.

Although ADESA believes ithas substantial defenses to the AMS claims, there is the potential for anadverse judgment given the risk and uncertainty inherent in litigation. In theevent of an adverse decision, ADESA does not believe that it would have amaterial adverse effect on its consolidated financial condition or liquiditybut could possibly be material to its consolidated results of operations in anyone accounting period.

***KASP, Inc.***

In July 2005, the plaintiff, KASP, Inc.,which is in the business of automobile auctions in Lexington, Kentucky, filed alawsuit in the United States District Court for the Eastern District ofKentucky, London 

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Division (CivilAction No. 05-394), alleging that ADESA, Inc., ADESA Lexington, LLCand ALLETE, Inc. (the “Defendants”) violated antitrust laws by reducingfees in exchange for agreements from customers to refrain from doing businesswith the plaintiff. In particular, plaintiff alleges violations of Sections 1and 2 of the Sherman Act, Section 3 of the Clayton Act and Chapter 367of the State of Kentucky Revised Statutes. In September 2005, theDefendants filed a joint motion to dismiss the complaint on the grounds that itdid not state a valid claim under federal or state law. In October 2005,KASP, Inc. filed an amended complaint outlining its allegations with morespecificity. The Company intends to vigorously defend itself against theallegations made by the plaintiff.

***Dealer Services Corporation***

In July 2005,Automotive Finance Corporation (“AFC”) filed a complaint against DealerServices Corporation (“DSC”) and 23 former AFC employees who now work for DSCin Hamilton Superior Court, Hamilton County, Indiana (Cause No. 29D01 0507PL 609), alleging, among other claims, that DSC and certain former AFC employeesmisappropriated AFC’s trade secrets and confidential customer information. In September 2005,DSC filed a counterclaim seeking $25 million in punitive and other damagesalleging, among other claims, that AFC engaged in unfair competition, interferedwith DSC’s prospective business relationships and knowingly filed frivolous andbaseless claims against DSC in bad faith. In October 2005, AFC and DSCentered into a comprehensive settlement agreement which provides, among othermatters, for the proscribed treatment of such confidential business informationon an ongoing basis and prohibits certain business practices and communicationswith respect to the parties.

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

**IssuerPurchases of Equity Securities**

The following table provides informationabout purchases by ADESA of its shares of common stock during the quarter endedSeptember 30, 2005 (*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           |       |       | 1,323      |                                                      |       |                                                  | $          | 22.14                                                                                                         |       |                                                                                                                    |       | — |   |   |   | $ | — |   |   |
| August 1—August 31       |       |       | —     |                                                      |       |                                                  | —     |                                                                                                          |       |                                                                                                                    | —     |   |   |   | — |   |   |
| September 1—September 30 |       |       | 3,771      |                                                      |       |                                                  | $          | 22.48                                                                                                         |       |                                                                                                                    |       | — |   |   |   | — |   |   |
| Total                                   |       |       | 5,094      |                                                      |       |                                                  | $          | 22.39                                                                                                         |       |                                                                                                                    |       | — |   |   |   | $ | — |   |   |

 

*(1)*          Reflects sharessurrendered in the third fiscal quarter to satisfy tax withholding obligationsin connection with the vesting of restricted stock awards issued to employees.

**Item 6.**                        Exhibits

(a)          Exhibits. The Exhibit Index is incorporatedherein 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 9,  2005 | /s/  CAMERON C.  HITCHCOCK |
|                         | Cameron C. Hitchcock            |
|                         | *Executive Vice President and*       |
|                         | *Chief Financial Officer*            |
|                         | *(Duly Authorized Officer and*       |
|                         | *Principal Financial Officer)*       |
| Date: November 9,  2005 | /s/  SCOTT A.  ANDERSON    |
|                         | Scott A. Anderson               |
|                         | *Controller*                         |
|                         | *(Chief Accounting Officer)*         |

 

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**EXHIBIT INDEX**

|                      | ** ** | ** **               | ** ** | **Incorporated by Reference**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **Exhibit No.** | ** ** | Exhibit Description | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Form**   | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** | ** ** |
|                 | 10.34      |                     |       | Amendment  No. 2 to that certain Second Amended and Restated Receivables Purchase  Agreement entered into by and among AFC Funding Corporation, an ultimate  subsidiary of ADESA, Inc., Automotive Finance Corporation, an ultimate  subsidiary of ADESA, Fairway Finance Company, LLC, Harris Nesbitt Corp.  and XL Capital Assurance Inc.*                                                                                                                                                                         |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|                 | 10.35      |                     |       | Amended and  Restated Credit Agreement, dated as of July 25, 2005, by and among  ADESA, Inc., the guarantors party thereto, the lenders party thereto,  Wells Fargo Bank, National Association and JP Morgan Chase Bank, N.A.,  as Documentation Agents, Harris, N.A. and SunTrust Bank, as Syndication  Agents, U.S. Bank National Association and LaSalle Bank National Association,  as Managing Agents, and Bank of America, N.A., as Administrative Agent, Swing  Line Lender, L/C Issuer and  Collateral Agent |       |       | 8-K        |   |   | 001-32198 |   |   | 99.1 |   |   | 7/29/05 |   |   |   |   |   |
|                 | 10.36      |                     |       | Amended and  Restated Pledge Agreement, dated as of July 25, 2005, by and among  ADESA, Inc., the guarantors party thereto and Bank of America, N.A.                                                                                                                                                                                                                                                                                                                                                                           |       |       | 8-K        |   |   | 001-32198 |   |   | 99.2 |   |   | 7/29/05 |   |   |   |   |   |
|                 | 31.1       |                     |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|                 | 31.2       |                     |       | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|                 | 32.1       |                     |       | Certification of  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                            |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|                 | 32.2       |                     |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|                      |            |                          |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*                    Portions ofthis exhibit 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 Act of 1934, asamended.

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