**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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

**Forthe quarterly period ended June 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 CrossingBoulevardCarmel, Indiana 46032**

(Address of principalexecutive offices)

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

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Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No 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

Thenumber of shares of common stock outstanding as of August 9, 2005:

| Class      | ** ** | **Number of Shares Outstanding** |
|------------|------------|----------------------------------|
| **Common** | ** ** | **89,533,971**                   |

 

 

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**Index**
|                                         | ** ** | ** **                                                                                  | ** **   | Page   |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|--------------|--------|
| PART I—FINANCIAL  INFORMATION |       |                                                                                        |
| Item 1.                            |       | Financial Statements                                                                        |         |   |
| *** ***                            |       | Consolidated  Statements of Income                                                          | *** *** | 3      |
|                                    |       | Consolidated  Balance Sheets                                                                |         | 4      |
|                                    |       | Consolidated  Statements 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 |         | 21     |
| Item 3.                            |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |         | 36     |
| Item 4.                            |       | Controls and  Procedures                                                                    |         | 37     |
| PART II—OTHER INFORMATION     |       |                                                                                        |
| Item 1.                            |       | Legal Proceedings                                                                           |         | 38     |
| Item 2.                            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |         | 40     |
| Item 4.                            |       | Submission of  Matters to a Vote of Security Holders                                        |         | 40     |
| Item 6.                            |       | Exhibits                                                                                    |         | 41     |
| Signatures                              |       | 42                                                                                          |
| Exhibit Index                      |       | 43                                                                                          |
|                                         |            |                                                                                             |              |        |  |  |

 

2

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**PART IFINANCIAL INFORMATION**

**Item 1.   Financial Statements**

**ADESA, Inc.Consolidated Statements of Income*(In millions, except per share data)(unaudited)***
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                              | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating revenues                                      | ** ** |                             | ** ** | ** **                     |       |   | ** ** |   |   | ** ** | ** ** | ** ** | ** ** |
| Auction and related services                            | ** ** |                             | **$**      | **215.5**                      | ** ** |   |   | $ | 202.6 |   |   | **$** | **430.5** |   | $ | 421.0 |   |
| Dealer financing                                        | ** ** |                             | **32.2**   | ** **                     |       |   | 28.4 |   |   | **61.2** |   | 57.3 |   |
| Total operating  revenues                               | ** ** |                             | **247.7**  | ** **                     |       |   | 231.0 |   |   | **491.7** |   | 478.3 |   |
| Operating  expenses                                     |       |                             | ** ** | ** **                     |       |   |   |   |   |   |   |   |   |
| Cost of services                                        | ** ** |                             | **115.8**  | ** **                     |       |   | 110.8 |   |   | **231.0** |   | 231.6 |   |
| Selling, general and administrative                     | ** ** |                             | **56.7**   | ** **                     |       |   | 53.6 |   |   | **112.2** |   | 112.8 |   |
| Depreciation and amortization                           | ** ** |                             | **10.0**   | ** **                     |       |   | 8.9 |   |   | **19.2** |   | 18.1 |   |
| Total operating  expenses                               | ** ** |                             | **182.5**  | ** **                     |       |   | 173.3 |   |   | **362.4** |   | 362.5 |   |
| Operating profit                                        | ** ** |                             | **65.2**   | ** **                     |       |   | 57.7 |   |   | **129.3** |   | 115.8 |   |
| Interest expense                                        | ** ** |                             | **8.5**    | ** **                     |       |   | 4.7 |   |   | **16.6** |   | 8.7 |   |
| Other income, net                                       | ** ** |                             | **(2.3**   | **)**                          |       |   | (0.6 | ) |   | **(3.8** | **)** | (1.4 | ) |
| Income from continuing operations before income  taxes  | ** ** |                             | **59.0**   | ** **                     |       |   | 53.6 |   |   | **116.5** |   | 108.5 |   |
| Income taxes                                            | ** ** |                             | **23.0**   | ** **                     |       |   | 21.0 |   |   | **45.5** |   | 42.6 |   |
| Income from continuing operations                       | ** ** |                             | **36.0**   | ** **                     |       |   | 32.6 |   |   | **71.0** |   | 65.9 |   |
| Loss from discontinued operations net of income  taxes  | ** ** |                             | **(0.1**   | **)**                          |       |   | (4.0 | ) |   | **(0.1** | **)** | (4.0 | ) |
| Net income                                              | ** ** |                             | **$**      | **35.9**                       | ** ** |   |   | $ | 28.6 |   |   | **$** | **70.9** |   | $ | 61.9 |   |
| Earnings per  share—basic                          |       |                             | ** ** | ** **                     |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                       | ** ** |                             | **$**      | **0.40**                       | ** ** |   |   | $ | 0.36 |   |   | **$** | **0.79** |   | $ | 0.74 |   |
| Loss from discontinued operations, net of income  taxes | ** ** |                             | **—** | ** **                     |       |   | (0.04 | ) |   | **—** |   | (0.05 | ) |
| Net income                                              | ** ** |                             | **$**      | **0.40**                       | ** ** |   |   | $ | 0.32 |   |   | **$** | **0.79** |   | $ | 0.69 |   |
| Earnings per  share—diluted                        |       |                             | ** ** | ** **                     |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                       | ** ** |                             | **$**      | **0.40**                       | ** ** |   |   | $ | 0.36 |   |   | **$** | **0.78** |   | $ | 0.74 |   |
| Loss from discontinued operations, net of income  taxes | ** ** |                             | **—** | ** **                     |       |   | (0.04 | ) |   | **—** |   | (0.05 | ) |
| Net income                                              | ** ** |                             | **$**      | **0.40**                       | ** ** |   |   | $ | 0.32 |   |   | **$** | **0.78** |   | $ | 0.69 |   |
| Dividends  declared per common share (Note 12)     | ** ** |                             | **$**      | **0.075**                      | ** ** |   |   | $ | — |   |   | **$** | **0.15** |   | $ | — |   |

 

See notes to consolidated financial statements

3

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**ADESA, Inc.Consolidated Balance Sheets*(In millions, except share data)***
| ** **                                                                                              | ** **   | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|--------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** **   | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                              | *** *** | **(*unaudited*)** | ** ** | ** **            | ** ** |
| **Assets**                                                                                              |         |              |       |                  |       |   |   |   |   |
| ***Current assets***                                                                                    |         |              |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                               | ** **   | ** **        | **$**      | **254.0**             |       |   |   | $ | 309.4 |   |   |
| Trade receivables, net of allowances of $6.7 (2005) and  $7.5 (2004)                               | ** **   | ** **        | **293.8**  |                  |       |   | 161.1 |   |   |
| Finance receivables, net of allowances of $4.7 (2005) and  $4.3 (2004)                             | ** **   | ** **        | **283.1**  |                  |       |   | 218.6 |   |   |
| Deferred income taxes                                                                                   | ** **   | ** **        | **29.5**   |                  |       |   | 28.0 |   |   |
| Other current assets                                                                                    | ** **   | ** **        | **15.8**   |                  |       |   | 13.7 |   |   |
| Total current assets                                                                                    | ** **   | ** **        | **876.2**  |                  |       |   | 730.8 |   |   |
| ***Other assets***                                                                                      |         |              |       |                  |       |   |   |   |   |
| Goodwill                                                                                                | ** **   | ** **        | **525.3**  |                  |       |   | 514.6 |   |   |
| Other intangible assets, net of accumulated amortization of $24.6  (2005) and $25.2 (2004)              | ** **   | ** **        | **38.5**   |                  |       |   | 31.6 |   |   |
| Other assets                                                                                            | ** **   | ** **        | **55.9**   |                  |       |   | 58.3 |   |   |
| Total other assets                                                                                      | ** **   | ** **        | **619.7**  |                  |       |   | 604.5 |   |   |
| Property and equipment, net of  accumulated depreciation of  $142.9  (2005) and $130.2 (2004) | ** **   | ** **        | **594.4**  |                  |       |   | 578.2 |   |   |
| Total assets                                                                                            | ** **   | ** **        | **$**      | **2,090.3**           |       |   |   | $ | 1,913.5 |   |   |

** **

See notes to consolidated financial statements

4

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**ADESA, Inc.Consolidated Balance Sheets*(In millions, except share data)***
| ** **                                                                                                                                         | ** **   | **June 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                         | ** **   | **2005**          | ** **  | **2004**              | ** ** |
| ** **                                                                                                                                         | *** *** | **(*unaudited*)** | ** **  | ** **            | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                     |         |              |        | ** **            |       |   |   |   |   |
| ***Current liabilities***                                                                                                                          |         |              |        | ** **            |       |   |   |   |   |
| Accounts payable                                                                                                                                   | ** **   | ** **        | **$**       | **409.9**             | ** ** |   |   | $ | 227.3 |   |   |
| Employee benefits and compensation                                                                                                                 | ** **   | ** **        | **32.4**    | ** **            |       |   | 40.4 |   |   |
| Other accrued expenses                                                                                                                             | ** **   | ** **        | **38.2**    | ** **            |       |   | 36.0 |   |   |
| Income taxes payable                                                                                                                               | ** **   | ** **        | **18.2**    | ** **            |       |   | 25.3 |   |   |
| Current maturities of long-term debt                                                                                                               | ** **   | ** **        | **37.1**    | ** **            |       |   | 37.1 |   |   |
| Current liabilities of discontinued operations                                                                                                     | ** **   | ** **        | **6.7**     | ** **            |       |   | 6.5 |   |   |
| Total current liabilities                                                                                                                          | ** **   | ** **        | **542.5**   | ** **            |       |   | 372.6 |   |   |
| ***Non-current liabilities***                                                                                                                      |         |              |        | ** **            |       |   |   |   |   |
| Long-term debt                                                                                                                                     | ** **   | ** **        | **460.5**   | ** **            |       |   | 479.0 |   |   |
| Deferred tax liabilities                                                                                                                           | ** **   | ** **        | **45.8**    | ** **            |       |   | 42.1 |   |   |
| Other liabilities                                                                                                                                  | ** **   | ** **        | **7.6**     | ** **            |       |   | 8.4 |   |   |
| Total non-current liabilities                                                                                                                      | ** **   | ** **        | **513.9**   | ** **            |       |   | 529.5 |   |   |
| Commitments and contingencies  (Note 13)                                                                                                           | ** **   | ** **        | **—**  | ** **            |       |   | — |   |   |
| ***Stockholders’ equity***                                                                                                                    |         |              |        | ** **            |       |   |   |   |   |
| Preferred stock, $0.01 par value:  Authorized shares: 50,000,000Issued shares: none                                                                | ** **   | ** **        | **—**  | ** **            |       |   | — |   |   |
| Common stock, $0.01 par value:  Authorized shares: 500,000,000  Issued shares: 94,868,104 (2005 and 2004)                                          | ** **   | ** **        | **1.0**     | ** **            |       |   | 1.0 |   |   |
| Additional paid-in capital                                                                                                                         | ** **   | ** **        | **670.8**   | ** **            |       |   | 675.1 |   |   |
| Retained earnings                                                                                                                                  | ** **   | ** **        | **439.6**   | ** **            |       |   | 382.2 |   |   |
| Unearned compensation                                                                                                                              | ** **   | ** **        | **(3.3**    | **)**                 |       |   | (3.1 | ) |   |
| Treasury stock, at cost:  Shares: 5,352,286 (2005)               4,343,478 (2004) | ** **   | ** **        | **(112.3**  | **)**                 |       |   | (85.9 | ) |   |
| Accumulated other comprehensive income                                                                                                             | ** **   | ** **        | **38.1**    | ** **            |       |   | 42.1 |   |   |
| Total stockholders’ equity                                                                                                                    | ** **   | ** **        | **1,033.9** | ** **            |       |   | 1,011.4 |   |   |
| Total liabilities and stockholders’ equity                                                                                                    | ** **   | ** **        | **$**       | **2,090.3**           | ** ** |   |   | $ | 1,913.5 |   |   |

 

See notes to consolidated financial statements

5

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**ADESA, Inc.Consolidated Statements 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                                      |       |       |       |       |       |           |       |         |       |             |       |         |       |                   | 70.9       |       |       |   |   | ** ** |   | ** ** | ** ** |   |   |   |   | 70.9 |   |
| Other  comprehensive income (loss), net of tax: |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | ** ** | ** ** |   |   |   |   |   |   |
| Foreign currency translation                    |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | ** ** | ** ** |   | (4.7 | ) |   |   |   |
| Unrealized gain on interest rate swaps          |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | ** ** | ** ** |   | 0.7 |   |   |   |   |
| Other comprehensive loss                        |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | ** ** | ** ** |   |   |   |   | (4.0 | ) |
| Comprehensive income                            |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | ** ** | ** ** |   |   |   |   | 66.9 |   |
| Cash dividends paid to stockholders             |       |       |       |       |       |           |       |         |       |             |       |         |       |                   | (13.5      | )          |       |   |   | ** ** |   | ** ** | ** ** |   |   |   |   | (13.5 | ) |
| Issuance of common stock under stock plans      |       |       |       |       |       |           |       |         |       |             | (6.3       | )            |       |                   |       |       |       |   | (0.2 | **)** |   | 17.0 | ** ** |   |   |   |   | 10.5 |   |
| Tax benefits from employee stock plans          |       |       |       |       |       |           |       |         |       |             | 2.0        |         |       |                   |       |       |       |   |   | ** ** |   | ** ** | ** ** |   |   |   |   | 2.0 |   |
| Repurchase of common stock                      |       |       |       |       |       |           |       |         |       |             |       |         |       |                   |       |       |       |   |   | ** ** |   | (43.4 | **)** |   |   |   |   | (43.4 | ) |
| **Balance  at June 30, 2005*(unaudited)*** | ** ** | ** ** | **94.9**   |       | ** ** | ** **     | **$**      | **1.0**      |       | ** **       | ** ** | **$**        | **670.8**  |                   | ** ** | ** ** | **$**      | **439.6** |   | ** ** | ** ** | **$** | **(3.3** | **)** | ** ** | **$** | **(112.3** | **)** | ** ** | **$** | **38.1** |   | ** ** | **$** | **1,033.9** | ** ** |

 

See notes to consolidated financial statements

6

 

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**ADESA, Inc.Consolidated Statements of Cash Flows*(In millions)(unaudited)***
| ** **                                                                                                 | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                 | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                 | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| **Operating  activities**                                                                                  |       |                           |       |   |   |
| Net income                                                                                                 | ** ** | **$**                          | **70.9**   |   | $ | 61.9 |   |
| **Adjustments to reconcile net income to net cash provided  by operating activities:** | ** ** | ** **                     |       |   |   |
| Depreciation and amortization                                                                              | ** ** | **19.2**                       |       | 18.1 |   |
| Bad debt expense                                                                                           | ** ** | **1.1**                        |       | 1.5 |   |
| Deferred income taxes                                                                                      | ** ** | **2.2**                        |       | 4.0 |   |
| Compensation associated with equity programs                                                               | ** ** | **1.5**                        |       | 0.1 |   |
| Other non-cash, net                                                                                        | ** ** | **1.2**                        |       | (0.1 | ) |
|                                                                                                       | ** ** | **96.1**                       |       | 85.5 |   |
| **Changes in operating assets and liabilities:**                                                           | ** ** | ** **                     |       |   |   |
| Finance receivables                                                                                        | ** ** | **(64.4**                      | **)**      | (31.9 | ) |
| Trade receivables and other assets                                                                         | ** ** | **(134.3**                     | **)**      | (111.3 | ) |
| Accounts payable and accrued expenses                                                                      | ** ** | **117.3**                      |       | 140.7 |   |
| **Net cash provided by operating activities**                                                              | ** ** | **14.7**                       |       | 83.0 |   |
| **Investing activities**                                                                                   | ** ** | ** **                     |       |   |   |
| Acquisition of businesses, net of cash acquired                                                            | ** ** | **(18.7**                      | **)**      | — |   |
| Purchases of property, equipment and computer  software                                                    | ** ** | **(36.7**                      | **)**      | (5.7 | ) |
| Purchase of other intangibles                                                                              | ** ** | **(0.3**                       | **)**      | — |   |
| Proceeds from the sale of property, equipment and  computer software                                       | ** ** | **0.1**                        |       | 10.1 |   |
| **Net cash (used by) provided by investing  activities**                                                   | ** ** | **(55.6**                      | **)**      | 4.4 |   |
| **Financing activities**                                                                                   | ** ** | ** **                     |       |   |   |
| Net increase in book overdrafts                                                                            | ** ** | **52.6**                       |       | 31.2 |   |
| Net decrease in lines of credit                                                                            | ** ** | **—**                     |       | (45.8 | ) |
| Payments on long-term debt                                                                                 | ** ** | **(18.5**                      | **)**      | (165.4 | ) |
| Proceeds from long-term debt                                                                               | ** ** | **—**                     |       | 400.0 |   |
| Payments for debt issuance costs                                                                           | ** ** | **—**                     |       | (9.9 | ) |
| Net proceeds from issuance of common stock                                                                 | ** ** | **—**                     |       | 136.0 |   |
| Issuance of common stock under stock plans                                                                 | ** ** | **9.1**                        |       | — |   |
| Dividends paid to ALLETE                                                                                   | ** ** | **—**                     |       | (117.5 | ) |
| Dividends paid to stockholders                                                                             | ** ** | **(13.5**                      | **)**      | — |   |
| Repurchase of common  stock                                                                                | ** ** | **(43.4**                      | **)**      | — |   |
| Transfer to restricted  cash                                                                               |       | —                         |       | (152.4 | ) |
| **Net cash (used by) provided by financing  activities**                                                   | ** ** | **(13.7**                      | **)**      | 76.2 |   |
| Effect of exchange rate changes on cash                                                                    | ** ** | **(0.8**                       | **)**      | (1.3 | ) |
| **Net (decrease) increase in cash and cash  equivalents**                                                  | ** ** | **(55.4**                      | **)**      | 162.3 |   |
| Cash and cash equivalents at beginning of period                                                           | ** ** | **309.4**                      |       | 112.7 |   |
| Cash and cash equivalents at end of period                                                                 | ** ** | **$**                          | **254.0**  |   | $ | 275.0 |   |
| **Non-cash activities**                                                                                    | ** ** | ** **                     |       |   |   |
| Capital  contributions from ALLETE                                                                         | ** ** | **$**                          | **—** |   | $ | 1.2 |   |

 

See notes to consolidated financial statements

7

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

**Note 1—Basis ofPresentation**

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 includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. Operating results from interimperiods are not necessarily indicative of results that may be expected for theyear as a whole. In the opinion of management, the consolidated financialstatements reflect all adjustments considered necessary (consisting of normalrecurring accruals) for a fair statement of the Company’s financial results forthe periods presented. The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures at the date of thefinancial statements and during the reporting period. Actual results coulddiffer from these estimates. A listing of the Company’s critical accountingestimates is described in the “Critical Accounting Estimates” section of “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

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 withthe Securities and Exchange Commission (“SEC”). As used herein, the terms “theCompany” and “ADESA” shall mean ADESA, Inc. and its consolidatedsubsidiaries. The term “ALLETE” shall mean ADESA’s former parent, ALLETE, Inc.and its consolidated subsidiaries.

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

Certain reclassificationshave been made to prior year amounts to conform to current year presentation.

**Note 2—New AccountingStandards**

ADESA discloses pro forma net income and earnings pershare in accordance with Statement of Financial Accounting Standard (“SFAS”)123, *Accounting for Stock-Based Compensation*and SFAS 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*. In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS 123(R), *Share-Based Payment*. This statement revises SFAS 123 andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*. SFAS 123(R) requiresthat the cost 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. No compensation cost is recognizedfor equity instruments for which employees do not render service.

8

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

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 for public companies that delayed theeffective date of SFAS 123(R) to annual, rather than interim, periods thatbegin after June 15, 2005. As such, the Company will adopt SFAS 123(R) onJanuary 1, 2006. Once adopted, the Company will be required to recordcompensation cost as expense for the portion of outstanding unvested awards,based on the grant-date fair value of those awards.  The Company expects to apply the prospectivetransition method of SFAS 123(R), which would allow the Company toprospectively record expense for the compensation costs related to the portionof outstanding unvested awards at January 1, 2006, without restating anyprior periods. The Company is currently considering the financial accountingand income tax implications of SFAS 123(R) and SAB 107.

**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 of theCompany 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 of Directors consideredseveral factors in determining to accelerate the vesting of these options. Primarily,the acceleration 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 

9

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

the Company’s expectedfuture grants. The Company and Board also believe that the acceleration is inthe best interest of the stockholders as it will reduce the Company’s reportedstock option expense in future periods mitigating the impact SFAS 123(R) thatwill take effect in the first quarter of 2006.

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 reduction in theafter-tax pro forma stock-based employee compensation expense disclosed in thesecond quarter of 2005. In addition, the acceleration will result in reductionsin the after-tax pro forma stock-based employee compensation expense disclosedin the third and fourth quarters of 2005 of $1.1 million and $1.1 million. TheCompany did not record any stock-based employee compensation expense in theconsolidated statements of income associated with the acceleration of theseoptions because the intrinsic value (the excess of the market price of thecommon stock over the exercise price of option) of the options at the date ofacceleration was not greater than of the original intrinsic value of theoptions. The Company expects that the acceleration will reduce the stock optionexpense it otherwise would have been required to recognize in its consolidatedstatements 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.

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS 123 toall stock options. The fair value of stock options was estimated as of thegrant date using the Black-Scholes option-pricing model and the attributionmethod. The Black-Scholes option-pricing model does not consider the non-tradednature of employee stock options, the lack of transferability or a vestingperiod. If the model took these items into consideration, the resultingestimate for fair value of the stock options could be different. These proforma amounts may not be representative of the effects on reported net incomefor future years due to the uncertainty of stock option grant volume andpotential changes in assumptions driven by market factors.
| ** **                                                                              | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***(in millions except per share data)***                      | ** ** | ** **                                  | ** ** |
| Reported net  income                                                                    | ** ** | **$**                                       | **35.9**   | ** **                                | $          | 28.6 |   | **$** | **70.9** |   | $ | 61.9 |   |
| Add: stock-based  employee compensation included in reported net income, net of tax (1) | ** ** | **0.5**                                     | ** ** | 0.2                                       |       | **0.7** |   | 0.4 |   |
| Deduct: total  stock-based employee compensation expense, net of tax                    | ** ** | **(1.3**                                    | **)**      | (0.6                                      | )          | **(11.4** | ) | (0.9 | ) |
| Pro forma net  income                                                                   | ** ** | **$**                                       | **35.1**   | ** **                                | $          | 28.2 |   | **$** | **60.2** |   | $ | 61.4 |   |
| Earnings per  share:                                                                    | ** ** | ** **                                  | ** ** |                                      |       | ** ** |   |   |   |
| Basic—as reported                                                                  | ** ** | **$**                                       | **0.40**   | ** **                                | $          | 0.32 |   | **$** | **0.79** |   | $ | 0.69 |   |
| Basic—pro forma                                                                    | ** ** | **$**                                       | **0.39**   | ** **                                | $          | 0.31 |   | **$** | **0.67** |   | $ | 0.69 |   |
| Diluted—as reported                                                                | ** ** | **$**                                       | **0.40**   | ** **                                | $          | 0.32 |   | **$** | **0.78** |   | $ | 0.69 |   |
| Diluted—pro forma                                                                  | ** ** | **$**                                       | **0.39**   | ** **                                | $          | 0.31 |   | **$** | **0.66** |   | $ | 0.69 |   |

 

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

10

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

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 andsecond quarters 2005, the Company awarded approximately 40,500 and 19,100restricted stock units (“RSUs”), respectively, under the Company’s 2004 Equityand Incentive Plan to employees representing approximately $0.9 million and$0.4 million of unearned compensation at the grant dates. Under the Plan, certainexecutive officers receive an annual RSU grant equal to 25% of the bonus earnedin the prior year. The awards granted during the first quarter 2005 includedapproximately 18,800 RSUs (which vest after three years) granted to thesecertain executive officers of the Company. The vesting schedule for theremaining RSUs granted during the first and second quarters generally rangefrom one to three years from the date of grant. Compensation expense related toRSU awards is recognized ratably over the vesting period.

**Note 4—Acquisitions**

In the second quarter of 2005, ADESA acquired twoauctions for a total cost of $18.7 million, which was paid in cash. On May 3,2005, the Company completed the purchase of certain of the assets of ABCWashington Dulles, LLC to gain access to the Washington, D.C. auction market. Theassets included an 83-acre leased auction facility located in Sterling,Virginia, which commenced operations in 2001 offering six auction lanes andreconditioning facilities, the related operating equipment and all customerrelationships related to the auction. In addition, the Company assumedoperating 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 related operatingequipment, accounts receivable, and all customer relationships related to theauction. The Company did not assume any material liabilities or indebtedness inconnection with the acquisition. Results of operations for this acquisitionwill be included in the Company’s consolidated financial statements commencingin the third quarter of 2005.

The purchase price of theacquisitions was allocated to the acquired assets based upon fair marketvalues, including $3.0 million to other intangible assets, representing thefair value of acquired customer relationships and non-compete agreements, whichwill be amortized over their expected useful lives ranging from 2 to 20 years. Thepurchase price allocations resulted in aggregate goodwill of $11.7 million. Thepurchase price allocations are preliminary as the receipt and analysis of thefinal appraisals and valuations from third party valuation experts are pending.The goodwill was assigned to the auction and related services reporting segmentand is expected to be fully deductible for tax purposes. Pro forma financialresults for the acquisitions were not material.

11

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

**Note5—Long-Term Debt**

Long-term debtconsists of the following *(in millions)*:
| ** **                              | ** ** | **Interest Rate** | ** ** | **Maturity** | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|-------------------|------------|--------------|------------|-------------------------|------------|-----------------------------|------------|
| Term Loan A                             |       | LIBOR + 2.25%     |       | 06/21/2009   | ** ** |                    | **$**      | **140.0**                   |       |   |   | $ | 157.5 |   |   |
| Term Loan B                             |       | LIBOR + 2.50%     |       | 06/21/2010   | ** ** |                    | **198.0**  |                        |       |   | 199.0 |   |   |
| 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                              |       |              | ** ** | ** **   |       |                    | **497.6**  |                        |       |   | 516.1 |   |   |
| Less current portion of  long-term debt |       |              | ** ** | ** **   |       |                    | **37.1**   |                        |       |   | 37.1 |   |   |
| Long-term debt                          |       |              | ** ** | ** **   |       |                    | **$**      | **460.5**                   |       |   |   | $ | 479.0 |   |   |

 

Concurrent with theCompany’s June 2004 initial public offering and notes offering, theCompany entered into a $525 million senior secured credit facility with asyndicate of lenders, consisting of a $150 million revolving creditfacility and two term loan facilities aggregating $375 million. Except forAFC’s special purpose subsidiary, the credit facility is guaranteed bysubstantially all of the Company’s direct and indirect domestic subsidiariesand is secured by a pledge of all of the equity interests in the guarantors anda pledge of 65% of the equity interests in certain of the Company’s Canadianand Mexican subsidiaries. The credit facility contains customary affirmativeand negative covenants, including restrictions on the ability to incurindebtedness, grant liens, pay dividends or make distributions to stockholdersand make any prepayment or redemption with respect to the senior subordinatednotes. The credit facility also contains financial covenants including amaximum total leverage ratio, a minimum interest coverage ratio and a minimumfixed charge coverage ratio. The senior notes contain certain financial andoperational restrictions on paying dividends and other distributions, makingcertain acquisitions or investments and incurring indebtedness, and sellingassets. At June 30, 2005, the Company was in compliance with the covenantscontained in both the credit facility and senior notes. On July 25, 2005,the Company entered into an amended and restated $500 million credit facility(see Note 14, “Subsequent Event”).

**Note 6—Derivatives**

The Company uses interest rate swap agreements tomanage its exposure to interest rate movements and to reduce borrowing costs. InJune 2004, the Company entered into two interest rate swap agreements withnotional amounts of $105 million and $60 million to manage its exposure tointerest rate movements on its variable rate debt. Both interest rate swapagreements contain amortizing provisions and mature in December 2006. TheCompany has designated its interest rate swap agreements as cash flow hedges. Theearnings impact of interest rate swaps designated as cash flow hedges isrecognized 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 six months of2005 or 2004.

12

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

At June 30, 2005, thefair value of the interest rate swap agreements is a $0.9 million gain, whichis 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 millionloss which was recorded in “Other liabilities” on the consolidated balancesheet. Changes in the fair value of the interest rate swap agreementsdesignated as cash flow hedges are recorded in “Other comprehensive income”. Unrealizedgains on interest rate swap agreements are included as a component of “Accumulatedother comprehensive income”. At June 30, 2005, there were unrealized gainstotaling $0.6 million, net of taxes of $0.3 million. At December 31, 2004,there were unrealized losses totaling $0.1 million, net of taxes of $0.1million.

**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 that is consolidated for accounting purposes inaccordance with SFAS 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Liabilities*.The special purpose subsidiary, AFC Funding Corporation, was established forthe purpose of purchasing AFC’s finance receivables. Effective July 8,2005, AFC and AFC Funding Corporation amended their securitization agreement.As part of the amendment, the expiration date of the agreement was extendedfrom January 2006 to June 30, 2008; however, this agreementis subject to annual renewal of short-term liquidity by the liquidity providersand allows for the revolving sale by the subsidiary to a bank conduit facilityof up to a maximum of $500 million in undivided interests in certain eligiblefinance receivables subject to committed liquidity. AFC Funding Corporation had$425 million of committed liquidity at June 30, 2005. Receivables sold tothe bank conduit facility are not reported on the Company’s consolidatedbalance sheet.

At June 30, 2005, AFC managed total finance receivables of $689.6million, of which $589.5 million had been sold to AFC Funding Corporation. AFCFunding Corporation sold $401.8 million of these finance receivables to thebank conduit facility with recourse to AFC Funding Corporation at June 30,2005, leaving $287.8 million of gross finance receivables recorded on theCompany’s consolidated balance sheet at June 30, 2005.

Receivables undermanagement, sold, and retained were as follows *(inmillions)*:
| **Finance Receivables** | ** ** | ** ** | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|
| Total receivables  managed   | ** ** | **$**      | **689.6**  | ** **              |       | $                           | 582.7      |   |   |
| Less: amounts sold           | ** ** | **(401.8** | **)**      |                    | (359.8     | )                           |       |
| Receivables  retained        | ** ** | **287.8**  | ** ** |                    | 222.9      |                        |       |
| Less: allowance for losses   | ** ** | **(4.7**   | **)**      |                    | (4.3       | )                           |       |
| Net finance receivables      | ** ** | **$**      | **283.1**  | ** **              |       | $                           | 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 June 30,2005 the Company was in compliance with the covenants contained in thesecuritization agreement.

13

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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 Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                          | ** ** | **   2005   **    | ** ** | **   2004   **  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income from  continuing operations                                  | ** ** |                                            | **$**      | **36.0**                                      | ** ** |   |   | $ | 32.6 |   |   | **$** | **71.0** |   | $ | 65.9 |   |
| Loss from  discontinued operations, net of income taxes        | ** ** |                                            | **(0.1**   | **)**                                         |       |   | (4.0 | ) |   | **(0.1** | **)** | (4.0 | ) |
| Net income                                                          | ** ** |                                            | **$**      | **35.9**                                      | ** ** |   |   | $ | 28.6 |   |   | **$** | **70.9** |   | $ | 61.9 |   |
| Weighted average common shares outstanding                          | ** ** |                                            | **89.69**  | ** **                                    |       |   | 89.64 |   |   | **90.19** |   | 89.12 |   |
| Effect of  dilutive stock options and restricted stock awards       | ** ** |                                            | **0.45**   | ** **                                    |       |   | 0.06 |   |   | **0.48** |   | 0.03 |   |
| Weighted average  common shares outstanding and assumed conversions | ** ** |                                            | **90.14**  | ** **                                    |       |   | 89.70 |   |   | **90.67** |   | 89.15 |   |
| **Earnings  per share—basic**                                  | ** ** |                                            | ** ** | ** **                                    |       |   |   |   |   | ** ** |   |   |   |
| Income from continuing operations                                   | ** ** |                                            | **$**      | **0.40**                                      | ** ** |   |   | $ | 0.36 |   |   | **$** | **0.79** |   | $ | 0.74 |   |
| Loss from discontinued operations, net of income  taxes             | ** ** |                                            | **—** | ** **                                    |       |   | (0.04 | ) |   | **—** |   | (0.05 | ) |
| Net income                                                          | ** ** |                                            | **$**      | **0.40**                                      | ** ** |   |   | $ | 0.32 |   |   | **$** | **0.79** |   | $ | 0.69 |   |
| **Earnings  per share—diluted**                                | ** ** |                                            | ** ** | ** **                                    |       |   |   |   |   | ** ** |   |   |   |
| Income from continuing operations                                   | ** ** |                                            | **$**      | **0.40**                                      | ** ** |   |   | $ | 0.36 |   |   | **$** | **0.78** |   | $ | 0.74 |   |
| Loss from discontinued operations, net of income  taxes             | ** ** |                                            | **—** | ** **                                    |       |   | (0.04 | ) |   | **—** |   | (0.05 | ) |
| Net income                                                          | ** ** |                                            | **$**      | **0.40**                                      | ** ** |   |   | $ | 0.32 |   |   | **$** | **0.78** |   | $ | 0.69 |   |

 

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 June 30, 2005 and 2004, wereapproximately 4.6 million and 2.9 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 3.2million options were excluded from diluted earnings per share for the three andsix months ended June 30, 2005. For the three and six months ended June 30,2004, diluted earnings per share included all 2.9 million options outstanding,as the exercise price of these stock options was less than the average marketvalue.

During the three monthsended June 30, 2005, the Company repurchased approximately 1.5 millionshares of ADESA common stock at an aggregate cost of $34.9 million. The sharesrepurchased during the second quarter of 2005 included approximately 1.5million shares at an aggregate cost of $34.7 million repurchased pursuant tothe Company’s previously approved $130 million share repurchase program. Inaddition to purchases pursuant to the program, the share activity for the threemonths ended June 30, 2005, includes shares withheld during the secondquarter of 2005 to satisfy tax withholding obligations in 

14

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

connectionwith the vesting of restricted stock units and performance share awards duringthe quarter at an aggregate cost of $0.2 million. 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 flow hedges. For the second quarter 2005 and 2004, comprehensiveincome was $32.8 million and $24.5 million. Comprehensive income for the sixmonths ended June 30, 2005 and 2004 was $66.9 million and $55.4 million. Thechanges in comprehensive income are primarily due to changes in net income andvolatility in the Canadian currency.

**Note 10—SegmentInformation**

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 andincludes expenses associated with being a public company, such as salaries,benefits, travel costs for the corporate management team, Board of Directors’fees, investor relations costs, incremental insurance, treasury, legal,accounting, and risk management costs. Holding company interest includes theinterest incurred on the corporate debt structure. The majority of costsincurred at the holding company are not allocated to the two business segments.

15

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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  Related Services** | ** ** | **Dealer  Financing** | ** ** | **Holding  Company** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|
| **Three Months Ended June 30, 2005** |       |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                            |       |                                        | $          | 215.5                 |       |                 |       | $                | 32.2       |   |   |   | $ | — |   |   |   | $ | 247.7 |   |   |
| Operating  expenses                                           |       |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services                                              |       |                                        | 109.6      |                  |       |                 | 6.2        |             |       |   | — |   |   |   | 115.8 |   |   |
| Selling, general and administrative                           |       |                                        | 47.2       |                  |       |                 | 5.3        |             |       |   | 4.2 |   |   |   | 56.7 |   |   |
| Depreciation and amortization                                 |       |                                        | 8.9        |                  |       |                 | 1.0        |             |       |   | 0.1 |   |   |   | 10.0 |   |   |
| Total operating  expenses                                     |       |                                        | 165.7      |                  |       |                 | 12.5       |             |       |   | 4.3 |   |   |   | 182.5 |   |   |
| Operating profit (loss)                                       |       |                                        | 49.8       |                  |       |                 | 19.7       |             |       |   | (4.3 | ) |   |   | 65.2 |   |   |
| Interest expense                                              |       |                                        | 1.6        |                  |       |                 | —     |             |       |   | 6.9 |   |   |   | 8.5 |   |   |
| Other income, net                                             |       |                                        | (1.4       | )                     |       |                 | (0.1       | )                |       |   | (0.8 | ) |   |   | (2.3 | ) |   |
| Income (loss)  from continuing operations before income taxes |       |                                        | 49.6       |                  |       |                 | 19.8       |             |       |   | (10.4 | ) |   |   | 59.0 |   |   |
| Income taxes                                                  |       |                                        | 19.4       |                  |       |                 | 7.7        |             |       |   | (4.1 | ) |   |   | 23.0 |   |   |
| Income (loss)  from continuing operations                     |       |                                        | $          | 30.2                  |       |                 |       | $                | 12.1       |   |   |   | $ | (6.3 | ) |   |   | $ | 36.0 |   |   |
| Assets                                                        |       |                                        | $          | 1,479.2               |       |                 |       | $                | 344.2      |   |   |   | $ | 266.9 |   |   |   | $ | 2,090.3 |   |   |
| **Three  Months Ended June 30, 2004**                    | ** ** |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Operating revenues                                            |       |                                        | $          | 202.6                 |       |                 |       | $                | 28.4       |   |   |   | $ | — |   |   |   | $ | 231.0 |   |   |
| Operating  expenses                                           |       |                                        |       |                  |       |                 |       |             |       |   |   |   |   |   |   |   |   |
| Cost of services                                              |       |                                        | 104.6      |                  |       |                 | 6.2        |             |       |   | — |   |   |   | 110.8 |   |   |
| Selling, general and administrative                           |       |                                        | 44.0       |                  |       |                 | 5.1        |             |       |   | 4.5 |   |   |   | 53.6 |   |   |
| Depreciation and amortization                                 |       |                                        | 7.7        |                  |       |                 | 1.2        |             |       |   | — |   |   |   | 8.9 |   |   |
| Total operating  expenses                                     |       |                                        | 156.3      |                  |       |                 | 12.5       |             |       |   | 4.5 |   |   |   | 173.3 |   |   |
| Operating profit (loss)                                       |       |                                        | 46.3       |                  |       |                 | 15.9       |             |       |   | (4.5 | ) |   |   | 57.7 |   |   |
| Interest expense                                              |       |                                        | 3.8        |                  |       |                 | —     |             |       |   | 0.9 |   |   |   | 4.7 |   |   |
| Other (income)  expense, net                                  |       |                                        | (0.8       | )                     |       |                 | 0.2        |             |       |   | — |   |   |   | (0.6 | ) |   |
| Income (loss)  from continuing operations before income taxes |       |                                        | 43.3       |                  |       |                 | 15.7       |             |       |   | (5.4 | ) |   |   | 53.6 |   |   |
| Income taxes                                                  |       |                                        | 16.8       |                  |       |                 | 6.3        |             |       |   | (2.1 | ) |   |   | 21.0 |   |   |
| Income (loss)  from continuing operations                     |       |                                        | $          | 26.5                  |       |                 |       | $                | 9.4        |   |   |   | $ | (3.3 | ) |   |   | $ | 32.6 |   |   |
| Assets                                                        |       |                                        | $          | 1,505.0               |       |                 |       | $                | 311.6      |   |   |   | $ | 279.0 |   |   |   | $ | 2,095.6 |   |   |

 

16

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

 
| ** **                                                    | ** ** | **Auction and  Related Services** | ** ** | **Dealer  Financing** | ** ** | **Holding  Company** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|
| **Six Months Ended June 30, 2005**                       | ** ** |                                        | ** ** | ** **            |       |                 | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating revenues                                            |       |                                        | $          | 430.5                 | ** ** |                 |       | $                | 61.2       | ** ** |   |   | $ | — | ** ** |   |   | $ | 491.7 | ** ** |   |
| Operating expenses                                            |       |                                        |       | ** **            |       |                 |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Cost of services                                              |       |                                        | 218.8      | ** **            |       |                 | 12.2       | ** **       |       |   | — | ** ** |   |   | 231.0 | ** ** |   |
| Selling, general and  administrative                          |       |                                        | 92.7       | ** **            |       |                 | 10.2       | ** **       |       |   | 9.3 | ** ** |   |   | 112.2 | ** ** |   |
| Depreciation and  amortization                                |       |                                        | 16.9       | ** **            |       |                 | 2.1        | ** **       |       |   | 0.2 | ** ** |   |   | 19.2 | ** ** |   |
| Total operating expenses                                      |       |                                        | 328.4      | ** **            |       |                 | 24.5       | ** **       |       |   | 9.5 | ** ** |   |   | 362.4 | ** ** |   |
| Operating profit (loss)                                       |       |                                        | 102.1      | ** **            |       |                 | 36.7       | ** **       |       |   | (9.5 | **)** |   |   | 129.3 | ** ** |   |
| Interest expense                                              |       |                                        | 2.9        | ** **            |       |                 | —     | ** **       |       |   | 13.7 | ** ** |   |   | 16.6 | ** ** |   |
| Other income, net                                             |       |                                        | (2.0       | **)**                 |       |                 | (0.1       | **)**            |       |   | (1.7 | **)** |   |   | (3.8 | **)** |   |
| Income (loss) from  continuing operations before income taxes |       |                                        | 101.2      | ** **            |       |                 | 36.8       | ** **       |       |   | (21.5 | **)** |   |   | 116.5 | ** ** |   |
| Income taxes                                                  |       |                                        | 39.7       | ** **            |       |                 | 14.2       | ** **       |       |   | (8.4 | **)** |   |   | 45.5 | ** ** |   |
| Income (loss) from  continuing operations                     |       |                                        | $          | 61.5                  | ** ** |                 |       | $                | 22.6       | ** ** |   |   | $ | (13.1 | **)** |   |   | $ | 71.0 | ** ** |   |
| Assets                                                        |       |                                        | $          | 1,479.2               | ** ** |                 |       | $                | 344.2      | ** ** |   |   | $ | 266.9 | ** ** |   |   | $ | 2,090.3 | ** ** |   |
| **Six Months Ended June 30, 2004**                       | ** ** |                                        | ** ** | ** **            |       |                 | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating revenues                                            |       |                                        | $          | 421.0                 | ** ** |                 |       | $                | 57.3       | ** ** |   |   | $ | — | ** ** |   |   | $ | 478.3 | ** ** |   |
| Operating expenses                                            |       |                                        |       | ** **            |       |                 |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Cost of services                                              |       |                                        | 220.1      | ** **            |       |                 | 11.5       | ** **       |       |   | — | ** ** |   |   | 231.6 | ** ** |   |
| Selling, general and  administrative                          |       |                                        | 94.0       | ** **            |       |                 | 10.9       | ** **       |       |   | 7.9 | ** ** |   |   | 112.8 | ** ** |   |
| Depreciation and  amortization                                |       |                                        | 15.8       | ** **            |       |                 | 2.3        | ** **       |       |   | — | ** ** |   |   | 18.1 | ** ** |   |
| Total operating expenses                                      |       |                                        | 329.9      | ** **            |       |                 | 24.7       | ** **       |       |   | 7.9 | ** ** |   |   | 362.5 | ** ** |   |
| Operating profit (loss)                                       |       |                                        | 91.1       | ** **            |       |                 | 32.6       | ** **       |       |   | (7.9 | **)** |   |   | 115.8 | ** ** |   |
| Interest expense                                              |       |                                        | 7.8        | ** **            |       |                 | —     | ** **       |       |   | 0.9 | ** ** |   |   | 8.7 | ** ** |   |
| Other (income) expense,  net                                  |       |                                        | (1.6       | **)**                 |       |                 | 0.2        | ** **       |       |   | — | ** ** |   |   | (1.4 | **)** |   |
| Income (loss) from  continuing operations before income taxes |       |                                        | 84.9       | ** **            |       |                 | 32.4       | ** **       |       |   | (8.8 | **)** |   |   | 108.5 | ** ** |   |
| Income taxes                                                  |       |                                        | 33.0       | ** **            |       |                 | 13.0       | ** **       |       |   | (3.4 | **)** |   |   | 42.6 | ** ** |   |
| Income (loss) from continuing  operations                     |       |                                        | $          | 51.9                  | ** ** |                 |       | $                | 19.4       | ** ** |   |   | $ | (5.4 | **)** |   |   | $ | 65.9 | ** ** |   |
| Assets                                                        |       |                                        | $          | 1,505.0               | ** ** |                 |       | $                | 311.6      | ** ** |   |   | $ | 279.0 | ** ** |   |   | $ | 2,095.6 | ** ** |   |

 

17

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

**Note 11—Discontinued Operations**

In February 2003, ADESA approved a plan todiscontinue the operations of its vehicle importation business. The financialresults of the vehicle importation business have been accounted for asdiscontinued operations. Net loss from discontinued operations in 2004 includesa $6.6 million pre-tax charge related to a jury award in a suit related to theCompany’s vehicle importation business including the related interest and legalcosts.  Net loss from discontinuedoperations in 2005 includes interest on the jury award.

At June 30, 2005 and December 31, 2004,there were no assets and $6.7 million and $6.5 million in liabilities relatedto discontinued operations. Liabilities at June 30, 2005 represent theaccrual of the judgment, currently under appeal, and accrued interest on thejudgment pursuant to Michigan law.

Thefollowing summarizes financial information for discontinued operations *(in millions, except per share data)*:
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **   2005   **    | ** ** | **   2004   **  | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Operating  revenues                                                     | ** ** |                                            | **$**      | **—**                                    | ** ** |   |   | $ | — |   |   |   | **$** | **—** | ** ** |   | $ | — |   |
| Loss from  discontinued operations before income taxes                  | ** ** |                                            | **$**      | **(0.1**                                      | **)**      |   |   | $ | (6.6 | ) |   |   | **$** | **(0.1** | **)** |   | $ | (6.6 | ) |
| Net loss from  discontinued operations                                  | ** ** |                                            | **$**      | **(0.1**                                      | **)**      |   |   | $ | (4.0 | ) |   |   | **$** | **(0.1** | **)** |   | $ | (4.0 | ) |
| Net loss per share from  discontinued operations—basic and diluted | ** ** |                                            | **$**      | **—**                                    | ** ** |   |   | $ | (0.04 | ) |   |   | **$** | **—** | ** ** |   | $ | (0.05 | ) |

 

**Note 12—Dividends**

On June 15, 2005, theCompany paid a second quarter dividend of $0.075 per common share. In thesecond quarter of 2004, the Company paid accrued interest and principal on a$100.0 million note representing a dividend paid to its former parent, ALLETE. Cashdividends declared per share excludes dividends declared and paid to ALLETEprior to ADESA becoming an independent public company. On July 27, 2005,the Company’s Board of Directors declared a third quarter dividend of $0.075per common share payable September 15, 2005, to stockholders of record on August 17,2005.

**Note13—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 

18

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

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 $3.3 million and $4.8 million atJune 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 withsuppliers, service providers, customers and others. These guarantees andindemnifications do not materially impact the Company’s financial condition orresults of operations, but indemnifications associated with the Company’sactions generally have no dollar limitations and currently cannot bequantified.

As noted above, theCompany is involved in litigation and disputes arising in the ordinary courseof business, such as actions related to personal injuries, property damage,handling, storage or disposal of vehicles, environmental laws and regulations,and other litigation incidental to the business such as employment matters anddealer disputes. Such litigation is generally not, in the opinion ofmanagement, likely to have a material adverse effect on the financialcondition, results of operations or cash flows. Legal and regulatoryproceedings which could be material are discussed in the description of legalproceedings in Part II, Item 1 (“Legal Proceedings”) of this report.

**Note 14—Subsequent Event**

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. Borrowings under the Credit Agreementmay be used to refinance certain of ADESA’s outstanding debt, to financeworking capital, capital expenditures and acquisitions permitted under theCredit Agreement 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.

19

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

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. The credit facility is guaranteed bysubstantially all of the Company’s material domestic subsidiaries (excluding,among others, AFC Funding Corporation), and is secured by a pledge of all ofthe equity interests in the guarantors and certain of the Company’s Canadiansubsidiaries.

On July 31, 2005, there was $150 millionoutstanding on the term loan and $173 million outstanding on the revolvingcredit facility. As a result of amending the credit agreement, the Companyanticipates incurring a third quarter charge of approximately $2.8 millionrelated to the write-off of unamortized debt issue costs and related expensesassociated with the amended and restated senior credit agreement.

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**Item 2.   Management’s Discussion and Analysis ofFinancial 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, 2004 andfiled on March 29, 2005. Some ofthese factors include: general business conditions; market trends;competition; weather; vehicle production; trends in new and used vehicle sales;business development activities, including acquisitions; investments intechnology; economic conditions including exchange rate and interest ratefluctuations; litigation developments and other risks described from time totime in ADESA’s filings with the Securities and Exchange Commission (“SEC”)including the Quarterly Reports on Form 10-Q to be filed by ADESA in 2005.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 intoexisting operations 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. The Companycannot predict what portion of overall sales will be conducted through onlineauctions or other redistribution methods in the future and what impact this mayhave on its auction business.

The interim financialstatements included in this Quarterly Report on Form 10-Q and thefollowing discussion and analysis should be read in conjunction with thehistorical financial statements, related notes thereto, and other financialinformation included in the Company’s Annual Report on Form 10-K, as filedwith the Securities and Exchange Commission, which includes audited financialstatements for each of the three years in the period ended December 31,2004.

**Executive Overview**

For the three months ended June 30, 2005, theCompany reported revenue of $247.7 million and net income of $35.9 million or$0.40 per diluted share, compared with revenue of $231.0 million and net incomeof $28.6 million or $0.32 per diluted share for the quarter ended June 30,2004.  Cash provided by operations was$14.7 million for the six months ended June 30, 2005, compared with cashprovided by operations of $83.0 million for the six months ended June 30,2004 (see “Summary of Cash Flows” for further discussion).

In the second quarter of 2005, ADESA achieved 7%growth in revenues compared with the second quarter of 2004, while secondquarter vehicle volumes were essentially flat compared with the second quarterof 2004. AFC posted 3% growth in loan transaction volume compared with the secondquarter of 2004 to a record 280,649 loan transactions in the second quarter of2005. The Company also invested approximately $19 million in two acquisitionsincluding entrance into the Washington, D.C. used vehicle 

21

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auction market via theacquisition of ABC Washington Dulles, LLC, an 83 acre leased facility locatedin Sterling, Virginia in May and the purchase of an independently owned120 acre salvage auction in the Charlotte, North Carolina area on June 30.In addition, the Company strengthened its focus on increasing its dealerconsignment volume with the appointment of Brent Huisman as Vice President ofDealer Relations.

The Company continues toinvest in its core information technology capabilities as well as in facilitiesand real estate. Capital expenditures for the six months ended June 30,2005 totaled $36.7 million compared with $5.7 million in the first six monthsof 2004. Management believes that these areas of investment are critical toboth maintaining the Company’s competitive position and positioning itself forfuture growth.

**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, impairment of goodwill and long-lived assets, self-insuranceprograms, legal proceedings and other loss contingencies, and income taxes. TheCompany completed its annual goodwill impairment testing in the second quarterof 2005 with no resulting impairment.

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.

**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, hurricanes and other major weather relatedevents. In addition, mild weather conditions and decreases in traffic volumecan each lead to a decline in the available supply of salvage vehicles becausefewer traffic accidents occur, 

22

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resultingin fewer damaged vehicles overall. As a result, revenues and operating expensesrelated to volume will fluctuate accordingly on a quarterly basis. The Company’searnings are generally highest in the second calendar quarter followed by thethird calendar quarter. Although volume is typically higher in the first calendarquarter than the third calendar quarter, earnings are generally lower due toadditional costs associated with winter weather. The fourth calendar quartertypically has the lowest earnings as a result of the lower volume andadditional costs associated with the holidays and winter weather.

**Results of Operations**

Thefollowing table sets forth operations data for the periods indicated *(in millions)*:
| ** **                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Change** | ** ** | **Six Months Ended  June 30,** | ** ** | **Change** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|------------|------------|
| **Operations Data:**             | ** ** | ** **                                      | ** ** | **2005**   | ** ** | **2004**                                      | ** ** | **$**      | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Auction and  related services revenue |       |                                            |       |       |       |                                          |       |       |       |   |   |   |   |   |   |   |   |
| US                                    | ** ** | **$**                                           | **168.3**  |       | $          | 161.8                                         | ** ** | ** ** |       |   |   | **$** | **339.3** |   | $ | 336.8 |   |   |   |   |   |
| Canada                                | ** ** | **47.2**                                        |       | 40.8       | ** ** | ** **                                    |       |       |       | **91.2** |   | 84.2 |   |   |   |   |   |
| Dealer financing  revenue             |       |                                            |       |       |       |                                          |       |       |       |   |   |   |   |   |   |   |   |
| US                                    | ** ** | **29.9**                                        |       | 26.7       | ** ** | ** **                                    |       |       |       | **57.1** |   | 54.0 |   |   |   |   |   |
| Canada                                | ** ** | **2.3**                                         |       | 1.7        | ** ** | ** **                                    |       |       |       | **4.1** |   | 3.3 |   |   |   |   |   |
| Total revenue                         | ** ** | **247.7**                                       |       | 231.0      |       | 16.7                                          |       | 7          | %          | **491.7** |   | 478.3 |   | 13.4 |   | 3 | % |
| Cost of services                      | ** ** | **115.8**                                       |       | 110.8      |       | 5.0                                           |       | 5          | %          | **231.0** |   | 231.6 |   | (0.6 | ) | (<1 | )% |
| Selling, general  and administrative  | ** ** | **56.7**                                        |       | 53.6       |       | 3.1                                           |       | 6          | %          | **112.2** |   | 112.8 |   | (0.6 | ) | (1 | )% |
| Depreciation and  amortization        | ** ** | **10.0**                                        |       | 8.9        |       | 1.1                                           |       | 12         | %          | **19.2** |   | 18.1 |   | 1.1 |   | 6 | % |
| Operating profit                      | ** ** | **65.2**                                        |       | 57.7       |       | 7.5                                           |       | 13         | %          | **129.3** |   | 115.8 |   | 13.5 |   | 12 | % |
| Net income                            | ** ** | **$**                                           | **35.9**   |       | $          | 28.6                                          |       | $          | 7.3        |   | 26 | % | **$** | **70.9** |   | $ | 61.9 |   | $ | 9.0 |   | 15 | % |
|                                       |            |                                                 |            |            |            |                                               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth operations data as a percentage of total revenue forthe periods indicated:
| ** **                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **Operations Data:**             | ** ** | ** **                                      | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Auction and  related services revenue | ** ** | **87.0**                                        | **%**      | 87.7                                          | %          | **87.6** | **%** | 88.0 | % |
| Dealer financing  revenue             | ** ** | **13.0**                                        | **%**      | 12.3                                          | %          | **12.4** | **%** | 12.0 | % |
| Total revenue                         | ** ** | **100.0**                                       | **%**      | 100.0                                         | %          | **100.0** | **%** | 100.0 | % |
| Cost of services                      | ** ** | **46.8**                                        | **%**      | 48.0                                          | %          | **47.0** | **%** | 48.4 | % |
| Selling, general  and administrative  | ** ** | **22.9**                                        | **%**      | 23.2                                          | %          | **22.8** | **%** | 23.6 | % |
| Depreciation and  amortization        | ** ** | **4.0**                                         | **%**      | 3.8                                           | %          | **3.9** | **%** | 3.8 | % |
| Operating profit                      | ** ** | **26.3**                                        | **%**      | 25.0                                          | %          | **26.3** | **%** | 24.2 | % |
|                                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |

 

The Company’s revenue is derived from auction fees andrelated services at its auction facilities and dealer financing services at AFC.AFC’s net revenue consists of interest and fee income and gain on sale offinance receivables less provisions for credit losses. This net presentation ofAFC’s revenues is customary for finance companies. Operating expenses for theCompany consist of cost of services, selling, general and administrativeexpenses and depreciation and amortization. Cost of services is composed ofpayroll and related costs, subcontract services, supplies, insurance, propertytaxes, utilities and maintenance. Selling, general and administrative expensesare composed of indirect payroll and related costs, sales and marketing,information technology services and professional fees.

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**Three Months Ended June 30, 2005**

*Operating Revenue*

Auctionand Related Services
| ** **                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | ** **     | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|
| ***(In millions except volumes  and per vehicle amounts)*** | ** ** | **2005**                                        | ** ** | **2004 ** | ** ** | **% Change** | ** ** |
| Auction and  related services revenue                                                     | ** ** | **$**                                           | **215.5**  |           | $          | 202.6 |   |   | 6 | % |   |
| Vehicles sold                                                                             | ** ** | ** **                                      | ** ** | ** **     |       |   |   |   |   |
| Used                                                                                      | ** ** | **444,787**                                     |       | 444,588        |       |   | < 1 | % |   |
| Salvage                                                                                   | ** ** | **49,695**                                      |       | 50,059         |       |   | (1 | )% |   |
| Total vehicles sold                                                                       | ** ** | **494,482**                                     |       | 494,647        |       |   | (< 1 | )% |   |
| Used vehicle conversion percentage                                                        | ** ** | **62.4**                                        | **%**      | 61.7           | %          |   |   |   |   |
| Revenue per vehicle sold                                                                  | ** ** | **$**                                           | **436**    |           | $          | 410 |   |   | 6 | % |   |

 

Revenue for auction and related services increased$12.9 million, or 6%, to $215.5 million for the quarter ended June 30,2005, compared with $202.6 million for the quarter ended June 30, 2004. Thisincrease in revenue was a result of a 6% increase in revenue per vehicle soldas well as revenues from the Company’s recently acquired Washington D.C.auction.

Revenue per vehicle sold increased $26, or 6%, for thequarter ended June 30, 2005 compared with the quarter ended June 30,2004. The 6% increase in revenue per vehicle sold resulted in increased auctionand related services revenue of approximately $13.0 million includingfluctuations in the Canadian exchange rate which positively impacted revenue byapproximately $4.0 million for the quarter ended June 30, 2005, comparedwith the quarter ended June 30, 2004. The increase in revenue per vehiclesold is attributable to selected pricing actions, the effect of changes in theCanadian currency, as well as the Company’s increased penetration rate forInternet and other ancillary services.

The total number of vehicles sold decreased 165 unitsin the second quarter of 2005 compared with the second quarter of 2004,resulting in a decrease in auction and related services revenue of less than$0.1 million compared with the three months ended June 30, 2004. However,dealer vehicles sold increased approximately 5% compared with the secondquarter of 2004 as the Company continues to focus on increasing dealer volumes.

The used vehicle conversion percentage, calculated asthe number of vehicles sold as a percentage of the number of vehicles enteredfor sale at the Company’s used vehicle auctions, increased to 62.4% in thesecond quarter of 2005 from 61.7% in second quarter of 2004 driven by thecontinued supply shortage of institutional vehicles available for sale combinedwith strong demand for used vehicles. However, used vehicle prices softenedlate in the second quarter of 2005 as a result of new vehicle employee pricingprograms initiated by several of the automotive original equipmentmanufacturers.  While the Companyanticipates that these programs will likely result in continued downwardpressure on used vehicle prices and conversion rates in the short-term, thelonger-term impact could be positive for the vehicle remarketing industry asthe current increases in new vehicle sales may eventually result in higher usedvehicle sales.

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DealerFinancing
| ** **                                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | ** **     | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|
| ***(In millions except volumes and per loan amounts)*** | ** ** | **2005**                                        | ** ** | **2004 ** | ** ** | **% Change** | ** ** |
| Dealer financing  revenue                                                                  | ** ** | ** **                                      | ** ** | ** **     |       |   |   | ** ** |   |
| Gain on sale of finance receivables                                                        | ** ** | **$**                                           | **15.3**   | ** **     | $          | 15.0 | ** ** |   |   | ** ** |   |
| Interest and fee income                                                                    | ** ** | **16.1**                                        | ** ** | 13.2           | ** ** |   |   | ** ** |   |
| Other revenue                                                                              | ** ** | **0.1**                                         | ** ** | 0.6            | ** ** |   |   | ** ** |   |
| Provision for credit losses                                                                | ** ** | **0.7**                                         | ** ** | (0.4           | )          |   |   | ** ** |   |
| Total dealer financing revenue                                                             | ** ** | **$**                                           | **32.2**   | ** **     | $          | 28.4 | ** ** |   | 13 | % |   |
| Loan transactions                                                                          | ** ** | **280,649**                                     | ** ** | 272,533        | ** ** |   | 3 | % |   |
| Revenue per loan  transaction                                                              | ** ** | **$**                                           | **115**    | ** **     | $          | 104 | ** ** |   | 11 | % |   |

 

Dealer financing revenue increased to $32.2 millionfor the quarter ended June 30, 2005, compared with $28.4 million for thequarter ended June 30, 2004. The increase in dealer financing revenue wasdriven by an 11% increase in revenue per loan transaction and a 3% increase inthe number of loan transactions for the second quarter of 2005 compared withthe second quarter of 2004. Increases in loan transactions were primarily aresult of an increase in floorplan utilization by the existing dealer base.

Revenue per loan transaction increased $11, or 11%,primarily driven by increased interest and fee income of $2.9 million (theFederal Funds rate increased 225 basis points compared with the second quarterof 2004).  In addition, the provision forcredit losses decreased during the second quarter of 2005 increasing totaldealer financing revenue by $1.1 million for the second quarter of 2005compared with the second quarter of 2004.

AFC’s competition includesManheim Automotive Financial Services (“MAFS”), Auto Use, Dealer ServicesCorporation (“DSC”), other specialty lenders, banks and other financialinstitutions. In July 2005, DSC, founded by AFC’s former president,commenced operations in numerous locations including the six AuctionBroadcasting Company LLC auctions formerly serviced on-site by AFC and is nowcompeting against AFC in various markets.  AFC expects to aggressively compete to serviceits customers in these markets. In July 2005, AFC filed a lawsuit againstDSC and 23 former AFC employees who now work for DSC alleging, among otherclaims, that DSC and certain former AFC employees misappropriated AFC’s tradesecrets and confidential customer information.

*Cost of Services*

Cost of services increased$5.0 million, or 5%, for the three months ended June 30, 2005,compared with the three months ended June 30, 2004. The addition of theWashington D.C. auction as well as increases in transportation and payrollcosts were the leading drivers increasing cost of services. In addition,fluctuations in the Canadian exchange rate increased cost of services byapproximately $1.9 million. The slight decrease in vehicles sold during thesecond quarter of 2005 had a minimal impact on cost of services.

*Selling, Generaland Administrative Expenses*

Selling, general andadministrative expenses increased $3.1 million, or 6%, for the quarterended June 30, 2005, compared with the quarter ended June 30, 2004,primarily due to $1.0 million of incremental corporate expenses to supportADESA as an independent public company, increases of $0.7 million associatedwith fluctuations in the Canadian exchange rate and increased salary andrelated employee benefits. Incremental corporate expenses consisted ofsalaries, benefits and other expenses due to the addition of corporate levelpersonnel, professional fees, incremental insurance and other costs 

25

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necessaryto support an independent public company.  In addition, the second quarter of 2004included $1.4 million of non-recurring transaction costs (primarily legal fees)associated with the Company’s initial public offering.

*Depreciation andAmortization*

Depreciation andamortization totaled $10.0 million for the three months ended June 30,2005, representing a $1.1 million increase, or 12%, from the $8.9 millionreported for the three months ended June 30, 2004. The increase indepreciation and amortization is representative of the Company’s increasedcapital spending in 2005 compared with 2004.

*Operating Profit*

Operating profit increased$7.5 million, or 13%, for the three months ended June 30, 2005, comparedwith the three months ended June 30, 2004 primarily as a result ofincreased operating revenues. As a percentage of revenue, operating profitincreased to 26.3% in the second quarter of 2005 compared with 25.0% in thesecond quarter of 2004. The mix shift from institutional to dealer vehiclescombined with higher average used vehicle conversion rates contributed to theimprovement in operating profit margin. The improvement in operating profitalso reflects management’s continued focus in reducing direct costs (as apercentage of revenue) at the auction sites to match volumes.

*Interest Expense*

Interest expense increased$3.8 million, or 81%, for the quarter ended June 30, 2005, comparedwith the quarter ended June 30, 2004, as the Company is carryingadditional debt related to its 2004 recapitalization at a higher weightedaverage interest rate.

*Income Taxes*

The effective income taxrate on income from continuing operations was 39.0% for the quarter ended June 30,2005, consistent with the effective rate of 39.2% for the quarter ended June 30,2004.

*DiscontinuedOperations*

In February 2003,ADESA approved a plan to discontinue the operations of its vehicle importationbusiness. The financial results of the vehicle importation business have beenaccounted for as discontinued operations.  Net loss from discontinued operations in 2004includes a $6.6 million pre-tax charge related to a jury award in a suitrelated to the Company’s vehicle importation business including the relatedinterest and legal costs.  Net loss fromdiscontinued operations in 2005 includes interest on the judgment.

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*Significant ItemsAffecting Comparability*

TheCompany incurred various charges and incremental expenses in 2004 and 2005related to its initial public offering and subsequent separation from ALLETEthat affect the comparability of its reported results of operations. The impactof these transactions on income from continuing operations is as follows (*in millions*):
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                        | ** ** | **2004** | ** ** |
| Non-recurring item:                            |       |                                            |       |   |   |
| Transaction-related expenses*                  | ** ** | **$**                                           | **—** |   | $ | 1.4 |   |
| Incremental expenses                           | ** ** | ** **                                      |       |   |   |
| Corporate expenses*                            | ** ** | **1.0**                                         |       | — |   |
| Interest expense*                              | ** ** | **3.8**                                         |       | — |   |
|                                           | ** ** | **4.8**                                         |       | — |   |
| Tax benefit of above items                     | ** ** | **(1.9**                                        | **)**      | (0.6 | ) |
| Decrease to  income from continuing operations | ** ** | **$**                                           | **2.9**    |   | $ | 0.8 |   |

 

** Thenon-recurring transaction-related expenses in 2004 consisted primarily of legaland professional fees associated with the Company’s initial public offering andseparation from ALLETE. Incremental corporate expenses for 2005 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, while incremental interest expense isthe result of the Company’s recapitalization and transition to an independentpublic company.*

**Six Months Ended June 30, 2005**

*Operating Revenue*

Auctionand Related Services
| ** **                                                                                    | ** ** | **Six Months Ended  June 30,** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|
| ***(In millions except volumes and per vehicle amounts)*** | ** ** | **2005**                                      | ** ** | **2004 ** | ** ** | **% Change** | ** ** |
| Auction and  related services revenue                                                         | ** ** | **$**                                         | **430.5**  | ** **     | $          | 421.0 | ** ** |   | 2 | % |   |
| Vehicles sold                                                                                 | ** ** | ** **                                    | ** ** | ** **     |       |   |   |   |   |
| Used                                                                                          | ** ** | **904,745**                                   | ** ** | 925,906        | ** ** |   | (2 | )% |   |
| Salvage                                                                                       | ** ** | **104,183**                                   | ** ** | 107,507        | ** ** |   | (3 | )% |   |
| Total vehicles sold                                                                           | ** ** | **1,008,928**                                 | ** ** | 1,033,413      | ** ** |   | (2 | )% |   |
| Used vehicle conversion percentage                                                            | ** ** | **65.6**                                      | **%**      | 65.0           | %          |   |   |   |   |
| Revenue per vehicle sold                                                                      | ** ** | **$**                                         | **427**    | ** **     | $          | 407 | ** ** |   | 5 | % |   |

 

Revenue for auction and related services increased$9.5 million, or 2%, to $430.5 million for the six months ended June 30,2005, compared with $421.0 million for the six months ended June 30, 2004.This increase in revenue was a result of a 5% increase in revenue per vehiclesold during the first half of 2005, offset by a 2% decrease in vehicles sold.

Revenue per vehicle sold increased $20, or 5%, for thesix months ended June 30, 2005 compared with the six months ended June 30,2004. The 5% increase in revenue per vehicle sold resulted in increased auctionand related services revenue of approximately $19.5 million includingfluctuations in the Canadian exchange rate which positively impacted revenue byapproximately $7.0 million for the six months ended 

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June 30, 2005,compared with the six months ended June 30, 2004. The increase in revenueper vehicle sold is attributable to selected pricing actions, the favorableeffect of changes in the Canadian currency, as well as the Company’s increasedpenetration rate for Internet and other ancillary services.

The total number ofvehicles sold decreased 2% in the first half of 2005 compared with the firsthalf of 2004, resulting in a decrease in auction and related services revenueof approximately $10.0 million compared with the six months ended June 30,2004. The anticipated industry-wide decline in off-lease vehicles and declinesin repossessed vehicle volumes available for sale at auctions continued duringthe first half of 2005. The used vehicle conversion percentage, calculated asthe number of vehicles sold as a percentage of the number of vehicles enteredfor sale at the Company’s used vehicle auctions, increased to 65.6% in thefirst half of 2005 from 65.0% in first half of 2004 driven by a short supply ofinstitutional vehicles available for sale combined with strong demand for usedvehicles.

DealerFinancing
| ** **                                                                                 | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ***(In millions except volumes and per loan amounts)*** | ** ** | **2005**                                      | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| Dealer financing  revenue                                                                  |       |                                          |       |       |       |   |   |   |   |
| Gain on sale of finance receivables                                                        | ** ** | **$**                                         | **30.9**   |       | $          | 30.9 |   |   |   |   |   |
| Interest and fee income                                                                    | ** ** | **30.7**                                      |       | 26.4       |       |   |   |   |   |
| Other revenue                                                                              | ** ** | **0.3**                                       |       | 1.1        |       |   |   |   |   |
| Provision for credit losses                                                                | ** ** | **(0.7**                                      | **)**      | (1.1       | )          |   |   |   |   |
| Total dealer financing revenue                                                             | ** ** | **$**                                         | **61.2**   |       | $          | 57.3 |   |   | 7 | % |   |
| Loan transactions                                                                          | ** ** | **559,626**                                   |       | 535,579    |       |   | 4 | % |   |
| Revenue per loan transaction                                                               | ** ** | **$**                                         | **109**    |       | $          | 107 |   |   | 2 | % |   |

 

Dealer financing revenue increased to $61.2 millionfor the six months ended June 30, 2005, compared with $57.3 million forthe six months ended June 30, 2004. The 7% increase in dealer financingrevenue was driven by a 4% increase in the number of loan transactions and a 2%increase in revenue per loan transaction for the first half of 2005 comparedwith the first half of 2004. Increases in loan transactions were primarily theresult of an increase in floorplan utilization by the existing dealer base.

Revenue per loantransaction increased $2, or 2%, primarily driven by increased interest and feeincome of $4.3 million (the Federal Funds rate increased 225 basis pointscompared with the first six months of 2004) and a decrease in the provision forcredit losses of $0.4 million, partially offset by a reduction in other revenueof $0.8 million compared with the first half of 2004.

*Cost of Services*

Cost of services decreased$0.6 million, or less than 1%, for the six months ended June 30,2005, compared with the six months ended June 30, 2004. The decrease invehicles sold during the first half of 2005 reduced cost of services byapproximately $6.9 million compared with the first half of 2004. Thisreduction was partially offset by fluctuations in the Canadian exchange ratewhich increased cost of services by approximately $3.4 million. The addition ofthe Washington D.C auction as well as inflationary costs accounted for a $2.4million increase in cost of services over the first six months of 2004. Finally,an increase in cost of services for the dealer financing segment of $0.6million (net of a Canadian exchange rate increase of $0.1 million) resultedfrom increasing loan transaction volumes and the opening of four new branchessince the second quarter of 2004.

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*Selling, Generaland Administrative Expenses*

Selling, general andadministrative expenses decreased $0.6 million, or 1%, for the first halfof 2005, compared with the first half of 2004, primarily due to lower incentivecompensation as well as fewer computer leases, as the Company has increased itsrelated capital spending. In addition, the first half of 2004 included $2.6million of non-recurring transaction costs (primarily legal fees) associatedwith the Company’s initial public offering.  Selling, general and administrative expensesfor the first half of 2005 included approximately $3.9 million of incrementalcorporate expenses to support ADESA as an independent public company. Incrementalcorporate expenses consisted of salaries, benefits and other expenses due tothe addition of corporate level personnel, professional fees, incrementalinsurance and other costs necessary to support an independent public company.

*Depreciation andAmortization*

Depreciation andamortization totaled $19.2 million for the six months ended June 30, 2005,representing a $1.1 million increase, or 6%, from the $18.1 million reportedfor the six months ended June 30, 2004. The increase in depreciation andamortization is a result of the Company’s increased capital spending in 2005compared with 2004.

*Operating Profit*

Operating profit increased$13.5 million, or 12%, for the six months ended June 30, 2005, comparedwith the six months ended June 30, 2004 primarily as a result of increasedrevenues. As a percentage of revenue, operating profit increased to 26.3% inthe first half of 2005 compared with 24.2% in the first half of 2004. The mixshift from institutional to dealer vehicles combined with higher average usedvehicle conversion rates contributed to the improvement in operating profitmargin. The improvement in operating profit also reflects management’scontinued focus in reducing direct costs at the auction sites to match volumes.

*Interest Expense*

Interest expense increased$7.9 million, or 91%, for the six months ended June 30, 2005,compared with the six months ended June 30, 2004, as the Company iscarrying additional debt related to its 2004 recapitalization.

*Income Taxes*

The effective income taxrate on income from continuing operations was 39.1% for the first half of 2005,consistent with the effective rate of 39.3% for the first half of 2004.

*DiscontinuedOperations*

In February 2003,ADESA approved a plan to discontinue the operations of its vehicle importationbusiness. The financial results of the vehicle importation business have beenaccounted for as discontinued operations.  Net loss from discontinued operations in 2004includes a $6.6 million pre-tax charge related to a jury award in a suitrelated to the Company’s vehicle importation business including the relatedinterest and legal costs.  Net loss fromdiscontinued operations in 2005 includes interest on the judgment.

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*Significant ItemsAffecting Comparability*

The Company incurred various charges and incrementalexpenses in 2004 and 2005 related to its initial public offering and subsequentseparation from ALLETE that affect the comparability of its reported results ofoperations. The impact of these transactions on income from continuingoperations is as follows (*in millions*):
| ** **                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| Non-recurring item:                            |       |                                          |       |   |   |
| Transaction-related expenses*                  | ** ** | **$**                                         | **—** |   | $ | 2.6 |   |
| Incremental expenses                           |       |                                          |       |   |   |
| Corporate expenses*                            | ** ** | **3.9**                                       |       | — |   |
| Interest expense*                              | ** ** | **7.9**                                       |       | — |   |
| ** **                                     |       | **11.8**                                      |       | — |   |
| Tax benefit of above items                     | ** ** | **(4.6**                                      | **)**      | (1.0 | ) |
| Decrease to  income from continuing operations | ** ** | **$**                                         | **7.2**    |   | $ | 1.6 |   |

 

**The non-recurring transaction-related expenses in 2004 consisted primarily oflegal and professional fees associated with the Company’s initial publicoffering and separation from ALLETE. Incremental corporate expenses for 2005consisted of salaries, benefits and other expenses due to the addition ofcorporate level personnel, professional fees, incremental insurance and othercosts necessary to support an independent public company, while incrementalinterest expense is the result of the Company’s recapitalization and transitionto 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.
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ***(Dollars in millions)***    | ** ** | **2005**          | ** ** | **2004**              | ** ** | **2004**          | ** ** |
| Cash and cash  equivalents               | ** ** |              | **$**      | **248.2**             |       |              |       | $ | 304.5 |   |   |   | $ | 275.0 |   |   |
| Restricted cash                          | ** ** |              | **$**      | **5.8**               |       |              |       | $ | 4.9 |   |   |   | $ | 155.8 |   |   |
| Working capital                          | ** ** |              | **$**      | **333.7**             |       |              |       | $ | 358.2 |   |   |   | $ | 314.4 |   |   |
| Amounts available  under credit facility | ** ** |              | **$**      | **137.3**             |       |              |       | $ | 139.0 |   |   |   | $ | 239.0 |   |   |
| Current ratio                            | ** ** |              | **1.6:1**  |                  |       |              | 2.0:1      |   |   |   | 1.5:1 |   |   |

**Working Capital**

A substantial amount ofthe Company’s working capital is generated internally from payments forservices provided. In addition, ADESA has a $150 million revolving line ofcredit from which no amounts were drawn as of June 30, 2005. There wereoutstanding letters of credit totaling approximately $12.7 million at June 30,2005, which reduce the available borrowings under the credit facility. TheCompany’s Canadian operations have additional letters of credit outstandingtotaling $2.3 million at June 30, 2005, which do not impact availableborrowings under the credit facility. The credit facility contains certainfinancial covenants including a covenant requiring ADESA to maintain a minimumfixed charge coverage ratio. These financial covenants affect the Company’soperating flexibility by, among other things, restricting its ability to incurexpenses and indebtedness that could be used to grow the business, as well asto fund general corporate purposes. At June 30, 2005, the Company was incompliance with the covenants contained in the credit facility.

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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 to the CreditAgreement that provide additional commitments), provided that in no event maythe aggregate amount of the lenders’ commitments under the Credit Agreement atany time 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 July 31, 2005, there was $150 millionoutstanding on the term loan and $173 million outstanding on the revolvingcredit facility. As a result of amending the credit agreement, the Companyanticipates incurring a third quarter charge of approximately $2.8 millionrelated to the write-off of unamortized debt issue costs and related expensesassociated with the amended and restated senior credit agreement. The Companyexpects that cash on hand together with cash generated from operations andamounts available under its amended and restated $500 million senior creditfacility will allow ADESA to meet its current working capital needs and thoseof its subsidiaries in the foreseeable future.

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 CashFlows**

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, andexternally through acquisitions.
| ** **                                            | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ***(In millions)***                              | ** ** | **2005**                                      | ** ** | **2004**   | ** ** | **Change** | ** ** |
| Net cash provided  by (used by):                      |       |                                          |       |       |       |   |   |
| Operating activities                                  | ** ** | **$**                                         | **14.7**   |       | $          | 83.0 |   | $ | (68.3 | ) |
| Investing activities                                  | ** ** | **(55.6**                                     | **)**      | 4.4        |       | (60.0 | ) |
| Financing activities                                  | ** ** | **(13.7**                                     | **)**      | 76.2       |       | (89.9 | ) |
| Effect of exchange rate on cash                       | ** ** | **(0.8**                                      | **)**      | (1.3       | )          | 0.5 |   |
| Net (decrease) increase  in cash and cash equivalents | ** ** | **$**                                         | **(55.4**  | **)**      | $          | 162.3 |   | $ | (217.7 | ) |

 

Cash provided by operating activities was $14.7million for the six months ended June 30, 2005, compared with cashprovided by operating activities of $83.0 million for the six months ended June 30,2004. The primary reason for the decrease in cash flow from operations was thechange in operating assets and liabilities. Operating cash flow was unfavorablyimpacted by a $32.5 million increase in finance receivables as well as a $23.0million increase in trade receivables and other assets. The increase in financereceivables is a result of timing in borrowings by AFC’s largest line of creditobligor and the growth in the portfolio. This obligor had $23.5 million and$3.7 million outstanding at June 30, 2005 and December 31, 2004.The increase in trade receivables reflects an increase in vehicles sold at theCompany’s auctions in the last few days of June 2005 compared with thelast few days of June 2004. The greater volume of vehicles sold over thelast few days of the period provides a shorter time frame to collectreceivables, thereby increasing the corresponding amounts carried on thebalance sheet. The change in operating assets and liabilities was partiallyoffset by a $9.0 million increase in net income.

Net cash used by investingactivities was $55.6 million for the six months ended June 30, 2005,compared with net cash provided by investing activities of $4.4 million for thesix months ended June 30, 2004. This change is primarily the result ofcash disbursements for acquisitions totaling $18.7 million as well as anincrease in capital expenditures of $31.0 million. In addition, in the firsthalf of 2004, the Company benefited from a $9.8 million sale of land and assets.For a discussion of the Company’s capital expenditures, see “CapitalExpenditures” below.

Cash used by financingactivities was $13.7 million for the first half of 2005, compared withcash provided by financing activities of $76.2 million for the first halfof 2004. The change is representative of a combination of items including fewerdebt and line of credit payments of $192.7 million, a decrease in transfers torestricted cash of $152.4 million (primarily for the redemption of senior notesin the third quarter of 2004) and the absence of dividend payments to ALLETE inthe first six months of 2005, representing a $117.5 million increase infinancing activities. These financing activity increases were offset bydecreases to cash of $400.0 million for long-term debt proceeds in 2004, $136.0million for issuance of common stock in 2004, and $43.4 million for therepurchase of common stock in connection with the completion of the stockrepurchase program.

**Other FinancialData**

EBITDA is definedas earnings before interest expense, income taxes, depreciation andamortization. The Company believes that EBITDA is a usefulsupplement and meaningful indicator of earnings performance to be used by itsinvestors, financial analysts and others to analyze the Company’s financialperformance and results of operations over time. In addition, EBITDA isa useful supplement to net cash provided by operating activities to helpinvestors understand the Company’s ability to generate cash flows 

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from operations that areavailable for taxes, debt service and capital expenditures. EBITDA is also usedby the Company’s creditors in assessing 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 operating performance,and should not be considered in isolation or as a substitute for measures ofperformance prepared in accordance with generally accepted accountingprinciples (“GAAP”). This measure may not be comparable to similarly titledmeasures reported by other companies.

The followingtable reconciles EBITDA to income from continuing operations:
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,**            | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| **EBITDA *(In millions)***   | ** ** | **   2005   **    | ** ** | **    2004    ** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Income  from continuing operations** | ** ** |                                            | **$**      | **36.0**                                                 |       |   |   | $ | 32.6 | ** ** |   | **$** | **71.0** |   | $ | 65.9 |   |
| Add back:                              |       |                                            | ** ** |                                                     |       |   |   | ** ** |   |   |   |   |   |
| Income tax expense                     | ** ** |                                            | **23.0**   |                                                     |       |   | 21.0 | ** ** |   | **45.5** |   | 42.6 |   |
| Interest expense                       | ** ** |                                            | **8.5**    |                                                     |       |   | 4.7 | ** ** |   | **16.6** |   | 8.7 |   |
| Depreciation and amortization          | ** ** |                                            | **10.0**   |                                                     |       |   | 8.9 | ** ** |   | **19.2** |   | 18.1 |   |
| **EBITDA**                             | ** ** |                                            | **$**      | **77.5**                                                 |       |   |   | $ | 67.2 | ** ** |   | **$** | **152.3** |   | $ | 135.3 |   |

 

EBITDA for the three and six months ended June 30,2005 includes incremental corporate expenses of $1.0 million and $3.9 million,respectively, ($0.6 million and $2.4 million after-tax or $0.01 per share and$0.03 per share).

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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **EBITDA *(In millions)***           | ** ** | **   2005   **    | ** ** | **   2004   **  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  cash provided by operating activities** | ** ** |                                            | **$**      | **22.8**                                      | ** ** |   |   | $ | 69.4 |   |   | **$** | **14.7** |   | $ | 83.0 |   |
| Changes in  operating assets and liabilities   | ** ** |                                            | **25.3**   | ** **                                    |       |   | (30.7 | ) |   | **81.4** |   | 2.5 |   |
| Bad debt expense                               | ** ** |                                            | **0.7**    | ** **                                    |       |   | (0.3 | ) |   | **(1.1** | **)** | (1.5 | ) |
| Interest expense                               | ** ** |                                            | **8.5**    | ** **                                    |       |   | 4.7 |   |   | **16.6** |   | 8.7 |   |
| Income tax  expense                            | ** ** |                                            | **23.0**   | ** **                                    |       |   | 21.0 |   |   | **45.5** |   | 42.6 |   |
| Deferred income  tax                           | ** ** |                                            | **(1.7**   | **)**                                         |       |   | (1.4 | ) |   | **(2.2** | **)** | (4.0 | ) |
| Discontinued  operations (net of taxes)        | ** ** |                                            | **0.1**    | ** **                                    |       |   | 4.0 |   |   | **0.1** |   | 4.0 |   |
| Compensation associated  with equity programs  | ** ** |                                            | **(1.1**   | **)**                                         |       |   | (0.1 | ) |   | **(1.5** | **)** | (0.1 | ) |
| Other non-cash,  net                           | ** ** |                                            | **(0.1**   | **)**                                         |       |   | 0.6 |   |   | **(1.2** | **)** | 0.1 |   |
| **EBITDA**                                     | ** ** |                                            | **$**      | **77.5**                                      | ** ** |   |   | $ | 67.2 |   |   | **$** | **152.3** |   | $ | 135.3 |   |

 

**Capital Expenditures**

Capital expenditures (excluding acquisitions) for thesix months ended June 30, 2005 and the year ended December 31, 2004were $36.7 million and $31.2 million, and were funded primarily frominternally generated funds. Planned capital expenditures for the remainder of2005 are expected to total between $13 million and $23 million. Anticipatedexpenditures are primarily attributable to expansions and ongoing improvementsat existing vehicle auction facilities and improvements in informationtechnology systems. Future capital expenditures could vary substantially if theCompany is required to undertake corrective action or incur environmental costsin connection with any outstanding or future liabilities. ADESA may also pursueexpansion opportunities, including the acquisition of other companies.

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In the second quarter of 2005, ADESA acquired twoauctions for a total cost of $18.7 million, which was paid in cash. On May 3,2005, the Company completed the purchase of certain of the assets of ABCWashington Dulles, LLC to gain access to the Washington, D.C. auction market. Theassets included an 83-acre leased auction facility located in Sterling,Virginia which commenced operations in 2001 offering six auction lanes andreconditioning facilities, the related operating equipment and all customer relationshipsrelated to the auction. In addition, the Company assumed operating leaseobligations related to the facility through 2025. Initial annual lease paymentsfor the facility are approximately $1.9 million per year. The Company did notassume any other material liabilities or indebtedness in connection with theacquisition. Financial results for this acquisition have been included in theCompany’s consolidated financial statements since the date of acquisition andwere not material to the company’s results of operations in the three or sixmonth periods ended June 30, 2005.

On June 30, 2005, theCompany acquired an independently owned salvage auction facility servingCharlotte and western North Carolina. The assets included an 120-acre facility,the related operating equipment, accounts receivable and all customer relationshipsrelated to the auction. The Company did not assume any material liabilities orindebtedness in connection with the acquisition. Financial results for thisacquisition will be included in the Company’s consolidated financial statementsin the third quarter 2005.

**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 that is consolidated for accounting purposes inaccordance with SFAS 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Liabilities*.The special purpose subsidiary, AFC Funding Corporation, was established forthe purpose of purchasing AFC’s finance receivables. Effective July 8,2005, AFC and AFC Funding Corporation amended their securitization agreement.As part of the amendment, the expiration date of the agreement was extendedfrom January 2006 to June 30, 2008; however thisagreement is subject to annual renewal of short-term liquidity by the liquidityproviders and allows for the revolving sale by the subsidiary to a bank conduitfacility of up to a maximum of $500 million in undivided interests in certaineligible finance receivables subject to committed liquidity. AFC FundingCorporation had $425 million of committed liquidity at June 30, 2005. Receivablessold to the bank conduit facility are not reported on the Company’sconsolidated balance sheet.

At June 30, 2005, AFC managed total finance receivables of $689.6million, of which $589.5 million had been sold to AFC Funding Corporation. AFCFunding Corporation then in turn sold loans, with recourse to AFC FundingCorporation, of $401.8 million to the bank conduit facility at June 30,2005, leaving $287.8 million of gross finance receivables recorded on theCompany’s consolidated balance sheet at June 30, 2005.

Receivables undermanagement, sold, and retained were as follows *(inmillions)*:
| **Finance Receivables** | ** ** | ** ** | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|
| Total receivables  managed   | ** ** | **$**      | **689.6**  |                    |       | $                           | 582.7      |   |   |
| Less: amounts sold           | ** ** | **(401.8** | **)**      |                    | (359.8     | )                           |       |
| Receivables  retained        | ** ** | **287.8**  |       |                    | 222.9      |                        |       |
| Less: allowance for losses   | ** ** | **(4.7**   | **)**      |                    | (4.3       | )                           |       |
| Net finance receivables      | ** ** | **$**      | **283.1**  |                    |       | $                           | 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 

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including,among others, limits on the amount of debt AFC can incur, minimum levels oftangible net worth, and other covenants tied to the performance of the financereceivables portfolio. The securitization agreement alsoincorporates the financial covenants of ADESA’s credit facility. At June 30,2005, the Company was in compliance with the covenants contained in thesecuritization agreement.

**New Accounting Standards**

ADESA discloses pro forma net income and earnings pershare in accordance with Statement of Financial Accounting Standard (“SFAS”) 123,*Accounting for Stock-Based Compensation*and SFAS 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*. In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS 123(R), *Share-Based Payment*. This statement revises SFAS 123 andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*. SFAS 123(R) requiresthat the cost 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. No compensation cost is recognizedfor equity instruments for which employees do not render service.

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 theCompany 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 of Directors considered severalfactors in determining to accelerate the vesting of these options. Primarily,the acceleration will enhance the comparability of the Company’s financialstatements in prior and subsequent periods. The options awarded to theexecutive officers were 

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special, one-time grantsin conjunction with the Company’s IPO. As such, these grants are not indicativeof past grants when ADESA was a subsidiary of ALLETE prior to June 2004and are not representative of the Company’s expected future grants. The Companyand Board also believe that the acceleration is in the best interest of thestockholders as it will reduce the Company’s reported stock option expense infuture periods mitigating the impact SFAS 123(R) that will take effect inthe first quarter of 2006.

As a result of theacceleration, the Company disclosed incremental, pro forma stock-based employeecompensation expense of approximately $7.7 million, net of tax, in its firstquarter 2005 pro forma disclosure. The acceleration also resulted in a $2.0million reduction in the after-tax pro forma stock-based employee compensationexpense disclosed in the second quarter of 2005. In addition, the accelerationwill result in reductions in the after-tax pro forma stock-based employeecompensation expense disclosed in the third and fourth quarters of 2005 of $1.1million and $1.1 million. The Company did not record any stock-based employeecompensation expense in the consolidated statements of income associated withthe acceleration 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.

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

**Foreign Currency**

The Company’s foreigncurrency exposure is limited and arises from transactions denominated inforeign currencies, particularly intercompany loans as well as 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 $1.2 million for the three and six monthsended June 30, 2005. Currency exposure of the Company’s Mexican operationsis not material to the results of operations.

**Interest Rates**

The Company is exposed tointerest rate risk on borrowings. Accordingly, interest rate fluctuationsaffect the amount of interest expense the Company is obligated to pay. In June 2004,the Company entered into two interest rate swap agreements with notionalamounts of $105 million and $60 million to manage its exposure to interest ratemovements on its variable rate debt. Both interest rate swap agreements containamortizing provisions and mature in December 2006. The Company hasdesignated its interest rate swap agreements as cash flow hedges. The earningsimpact of interest rate swaps designated as cash flow hedges is recognized uponthe recognition of the interest related to the hedged debt. Any ineffectivenessin a hedging relationship is recognized immediately into earnings. There was nosignificant ineffectiveness in the first six months of 2005 or 2004.

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The fair value of theinterest rate swap agreements is estimated using pricing models widely used infinancial markets and represents the estimated amount the Company would receiveor pay to terminate the agreements at the reporting date. At June 30,2005, the fair value of the interest rate swap agreements is a $0.9 milliongain 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 millionloss which was recorded in “Other liabilities” on the consolidated balancesheet. In accordance with the provisions of SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities,* changes in thefair value of the interest rate swap agreements designated as cash flow hedgesare recorded in “Other comprehensive income”. Unrealized gains on interest rateswap agreements are included as a component of “Accumulated other comprehensiveincome”. At June 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 six months ended June 30,2005 would have resulted in an increase in interest expense of approximately$0.5 million and $1.0 million.

**Item 4.**                        Controlsand 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 is accumulatedand communicated to ADESA’s management, including the CEO and CFO, asappropriate to allow timely decisions regarding required disclosure.

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 second 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.   Legal Proceedings**

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 the consolidatedfinancial statements in Part II, Item 8 of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004 and Part I, Item 3 of the sameAnnual Report. The following discussion is limited to certain recentdevelopments concerning the Company’s Legal and regulatory proceedings andshould be read in conjunction with those earlier Reports. Unless otherwiseindicated, all proceedings discussed in those earlier Reports remainoutstanding.

***ADESA 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. Although thesource 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 a municipalwaterline to serve the residents adjacent to the site. In the second quarter of2005, the Company entered into a settlement agreement with its environmentalinsurance carrier with respect to certain coverage matters which were indispute relating to the Taunton site. The payment that was made to ADESA Impactunder the settlement agreement was not material to the Company’s results ofoperations or financial condition. The Company has released its insurancecarrier from any further claims with respect to environmental conditions at theTaunton site.

In June 2005, 64 residents of Taunton,Massachusetts filed two separate lawsuits against ADESA Impact in MassachusettsSuperior Court, Bristol Division (Civil Action No.2005-00640 and Civil Action No. 2005-00641).The complaints seek approximately $5.7 million in damages for ADESA’s allegednegligence, trespass, and creation of a public nuisance arising from elevatedgasoline and contaminants of MTBE in the ground water and water wells of theplaintiffs which plaintiffs contend resulted from an above ground gasolinestorage tank leak or spill at ADESA Impact’s Taunton, salvage auction. Inparticular, plaintiffs are seeking damages for: (1) diminution in theappraised value of their respective residences (2) well contamination (3) damageto and loss of use of their property (4) pain and suffering and (5) reimbursementof certain expenses incurred as a result of the MTBE release.

ADESA Impact has filed a Notice of Removal withrespect to both actions with the United States District Court for the Districtof Massachusetts requesting that the court remove the cases pending in theBristol County Superior Court of the Commonwealth of Massachusetts to thefederal court. Although there is the potential for an adverse judgment giventhe risk and uncertainties of litigation, in the event of an adverse decision,ADESA does not believe that it would have a material adverse effect on itsconsolidated financial condition or liquidity but could possibly be material toits consolidated results of operations in any one accounting period. ADESAImpact intends to vigorously defend itself against the claims of theplaintiffs.

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The Company has aremaining accrual of $1.0 million at June 30, 2005 with respect to theTaunton matter which includes ongoing filtration and monitoring costs. Thisamount is included in the $3.3 million liability accrued for environmentalmatters at June 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 June 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 security interest inthe 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. Basedon an assessment of recoverability, the Company recorded provisions for creditlosses totaling $1.3 million. AFC had net receivables from this individual’swholesale vehicle business totaling $0.4 million at June 30, 2005 and December 31,2004.

On March 4, 2005, AFC and Automotive Finance Canada, Inc.(the “AFC Entities”) met with SeanHallett and his related companies (the “Hallett Entities”) in Toronto,Canada and participated in a mandatory mediation session in an unsuccessfuleffort to resolve the litigation. Hallett’sStatement of Defense and Counterclaim against AFC, AFCI, ADESA, Inc.,ADESA Canada and ADESA Auctions Canada alleges that there were no outstandingobligations and that the named counterclaim defendants owe approximately $6million to Hallett in compensatory and punitive damages. The AFCEntities intend to continue to prosecute their claims against the HallettEntities and the litigation is currently in discovery.

***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 CV0638), alleging infringement of U.S. Patent No. 6,813,612 (the “ ‘612Patent”) which was issued November 2, 2004 and pertains to an audio/videosystem for streaming instantaneous and buffer free data to and from a liveauction site. The AMS complaint was served upon ADESA on July 5, 2005. TheCompany intends to vigorously defend itself against the infringementallegations and expects to file its answer to the complaint on or before August 24,2005.

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 Division (Civil Action No. 05-394), alleging that ADESA, Inc.,ADESA Lexington, LLC and ALLETE, Inc. 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 367 ofthe State of Kentucky Revised Statutes. The Company intends to vigorouslydefend itself against the allegations made by the plaintiff.

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

**Issuer Purchases ofEquity Securities**

On May 12, 2005, the Company completed its $130million share repurchase program. The Company repurchased a cumulative total of6.2 million shares at a weighted average price of $20.83 and an aggregate costof $128.9 million pursuant to the program.

The following table provides informationabout purchases by ADESA of its shares of common stock during the quarter endedJune 30, 2005 (*in millions, except pershare data*):

**ADESA Common Stock Repurchases (1)**
| **Period**                      | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased (2)** | ** ** | **Average  Price Paid  per Share (2)** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced  Plan** | ** ** | **Approximate  Dollar Value of  Shares That  May Yet Be  Purchased  Under the Plan** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| April 1–April 30 |       |       | 1.2        |                                                  |       |                                                  | $          | 23.45                                                                                                 |       |                                                                                                                    |       | 1.2 |   |   |   | $ | 8.6 |   |   |
| May 1–May 31     |       |       | 0.3        |                                                  |       |                                                  | $          | 23.97                                                                                                 |       |                                                                                                                    |       | 0.3 |   |   |   | $ |  — |   |   |
| June 1–June 30   |       |       | —     |                                                  |       |                                                  | $          | —                                                                                                |       |                                                                                                                    |       | — |   |   |   | $ |  — |   |   |
| Total                           |       |       | 1.5        |                                                  |       |                                                  | $          | 23.56                                                                                                 |       |                                                                                                                    |       | 1.5 |   |   |   | $ |  — |   |   |

 

(1)          On August 30, 2004,the Company’s Board of Directors approved a program to repurchase up to $130million of the Company’s common stock. The repurchase program was completed on May 12,2005.

(2)          Inaddition to purchases under the $130 million program approved by the Board in August 2004,this column reflects shares surrendered in the second fiscal quarter to satisfytax withholding obligations in connection with the vesting of restricted stockand performance share awards issued to employees.

**Item 4.   Submission ofMatters to a Vote of Security Holders**

The Company held its 2005 Annual Meeting ofStockholders on May 17, 2005 at the Ritz Charles in Carmel, Indiana. TheBoard of Directors of the Company solicited proxies for this meeting pursuantto a proxy statement filed under Section 14(a) of the SecuritiesExchange Act of 1934, as amended.

The stockholders’ voted onthe following matters for the annual meeting:

***Proposal No. 1—Election of Directors***

Thefollowing nominees for election as directors were elected for a term of threeyears and received the number of votes set forth below:
| **Name**              | ** ** | ** ** | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-----------------------|------------|------------|------------|------------|------------|--------------|------------|
| Wynn V. Bussmann      |       | 63,077,802 |       | 13,587,058 |       |
| Thomas L.  Cunningham |       | 63,046,981 |       | 13,617,879 |       |
| Donald C. Wegmiller   |       | 72,145,407 |       | 4,519,453  |       |

 

Following the annualmeeting, Dennis O. Green, Nick Smith and Deborah L. Weinstein continue to serveas directors with terms expiring at the 2006 annual meeting, and David G.Gartzke and A. R. Sales continue to serve as directors with terms expiring atthe 2007 annual meeting.

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***Proposal No. 2—Ratification of IndependentAuditors***

TheAudit Committee of the Board of Directors appointed PricewaterhouseCoopers LLPas the Company’s independent Registered Public Accounting Firm to audit itsconsolidated financial statements for the 2005 fiscal year. Although theCompany was not required to seek stockholder approval of this appointment, theBoard believed it to be sound corporate governance to do so. The ratificationof the appointment of PricewaterhouseCoopers as the independent auditors forADESA received the number of votes set forth below:
| **Ratification of Appointment of** | ** ** | ** ** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Broker  Non-Votes** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|-----------------|------------|-----------------------|------------|
| PricewaterhouseCoopers  LLP                       |       | 61,176,398 |       | 15,218,519 |       |        | 269,943    |            |       |                  | —     |   |   |
|                                                   |            |            |            |            |            |             |            |                 |            |                       |            |  |  |  |  |

 

**Item 6.   Exhibits**

(a)          Exhibits.   The Exhibit Index isincorporated herein by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                             | ADESA, Inc.               |
|-----------------------------|--------------------------------|
|                        | (Registrant)                   |
| Date: August 12,  2005 | /s/  CAMERON C. HITCHCOCK      |
|                        | Cameron C. Hitchcock           |
|                        | *Executive Vice President and* |
|                        | *Chief Financial Officer*      |
|                        | *(Duly Authorized Officer and* |
|                        | *Principal Financial Officer)* |

 
| Date: August 12, 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** |   |
|             | 10.31      |                     |                          | 2005 Annual Management Incentive Plan Bonus Targets  and Compensation*                                                                                        | 8-K        |       | 001-32198 |   | N/A |   | 5/2/05 |   |   |   |
|             | 10.32      |                     |                          | ADESA, Inc. 2005 Supplemental Executive  Retirement Plan*                                                                                                | S-8        |       | 001-32198 |   | 4.1 |   | 5/19/05 |   |   |   |
|             | 10.33      |                     |                          | Compensation Package for Non-Management Directors*                                                                                                            | 8-K        |       | 001-32198 |   | N/A |   | 5/23/05 |   |   |   |
|             | 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 |   |
|                  |            |                          |                               |                                                                                                                                                               |            |            |  |  |  |  |  |  |  |  |  |  |

 

*       Management contract or compensation planor arrangement

 

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