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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number 001-32198

13085 Hamilton Crossing Boulevard
Carmel, Indiana 46032
(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

 The aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant was approximately $150,250,000 at June 30, 2004.

 As of March 18, 2005, the registrant had 91,076,424 shares of common stock outstanding.

Documents Incorporated by Reference

 Those sections or portions of the registrant's proxy statement for the Annual Meeting of Stockholders to be held on May 17, 2005 described in Part III hereof, are incorporated by reference in this report.

Index

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Forward-Looking Statements

 This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends, and uncertainties. In particular, statements made in this report on Form 10-K that are not historical facts (including but not limited to expectations, estimates, assumptions and projections regarding the industry, business, future operating results, and anticipated cash requirements) may be forward-looking statements. Actual results could differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors that May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Some of these factors include: general business conditions; market trends; competition; weather; vehicle production; trends in new and used vehicle sales; business development activities, including acquisitions; economic conditions including exchange rate and interest rate fluctuations; litigation developments and other risks described from time to time in ADESA's filings with the Securities and Exchange Commission 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, they involve risks which are not currently known to ADESA that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date hereof and ADESA does not undertake to update its forward-looking statements.

 ADESA's future growth depends on a variety of factors, including its ability to increase volume, acquire additional auctions, manage expansion, control costs in its operations, introduce modest fee increases and new services, consolidate future auction acquisitions into existing operations and retain its executive officers and key employees. In addition, ADESA's indebtedness will require it to use a portion of its operating cash flow to pay interest and principal on debt instead of for other corporate purposes, including funding future expansion and ongoing capital expenditures. Accordingly, ADESA cannot predict whether its growth strategy will be successful. ADESA cannot predict what portion of overall sales will be conducted through online auctions or other redistribution methods in the future and what impact this may have on its auction business.

PART I

Item 1. Business

GENERAL

 ADESA, Inc. is North America's largest publicly traded provider of wholesale vehicle auction and related redistribution services and floorplan financing for used vehicle dealers. The Company's operations span North America with 53 ADESA used vehicle auction sites, 30 salvage vehicle auction sites and 83 Automotive Finance Corporation ("AFC") loan production offices. As used herein, the terms "the Company" and "ADESA" mean ADESA, Inc. and its consolidated subsidiaries.

 Vehicles available at ADESA auctions include vehicles from dealers turning their inventory and off-lease vehicles, repossessed vehicles, rental and other program fleet vehicles that have reached a predetermined age or mileage at which time they are repurchased pursuant to agreements with the manufacturers. The Company's salvage auctions facilitate the redistribution of damaged vehicles that are branded as total losses for insurance or business purposes as well as recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. The Company's salvage auction business is the third largest in North America and specializes in providing services such as inbound and outbound logistics, inspection, evaluation, titling and settlement administrative services.

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 Redistribution services include a variety of activities designed to transfer used and salvage (also referred to as "total loss") vehicles between sellers and buyers throughout the vehicle life cycle. ADESA facilitates the exchange of these vehicles through an auction marketplace, which aligns sellers and buyers. As an agent for the customer, the Company generally does not take title to or ownership of the vehicles sold at its auctions. The Company generally earns fees from the seller and buyer on each successful auction transaction in addition to fees earned for ancillary services.

 ADESA is the second largest used vehicle auction network in North America, based on the number of used vehicles passing through auctions annually, and also provides services such as inbound and outbound logistics, reconditioning, vehicle inspection and certification, titling, administrative and salvage recovery services. Through its wholly-owned subsidiary, AFC, the Company also provides short-term inventory-secured financing, known as floorplan financing, for used vehicle dealers. ADESA is able to serve the diverse and multi-faceted needs of its customers through the wide range of services offered at its facilities.

 ADESA's used vehicle auction facilities are strategically located to draw professional sellers and buyers of vehicles together and create a marketplace for the redistribution of vehicles. Sellers of used vehicles are generally divided into two broad categories: institutions and dealers.

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Institutional customers include vehicle manufacturers and their captive finance arms, banks, vehicle finance companies, credit unions, other financial institutions, vehicle rental companies, commercial fleets and fleet management/licensing companies.



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Selling dealers include licensed franchised, independent and wholesale vehicle dealers. Buyers at the Company's used vehicle auctions are primarily used vehicle dealers.

 Salvage vehicles are primarily supplied by property and casualty insurance companies as well as vehicle leasing and rental car companies and are usually sold to licensed vehicle dismantlers, rebuilders, repair shop operators and used vehicle dealers. ADESA generates fees from sellers and buyers during the auction process which vary depending on the services provided. ADESA's dealer financing business primarily serves independent dealers who purchase vehicles at the Company's auctions, other auctions and non-auction sources.

INDUSTRY OVERVIEW

Vehicle redistribution industry

 The vehicle redistribution industry encompasses the activities designed to transfer used and salvage vehicle ownership between sellers and buyers throughout the vehicle life cycle. In the US and Canada in 2004, there were approximately 248 million vehicles in operation (also referred to as vehicle "parc"), approximately 229 million of which were located in the US and 19 million of which were located in Canada. Approximately 18 to 19 million new vehicles (including medium and heavy trucks) enter the vehicle parc each year (based on 1999-2004 data) while annual vehicle scrappage is approximately 13 to 15 million vehicles, resulting in a growth in the vehicle parc of approximately 3 to 6 million vehicles per year in the US and Canada. The growth in vehicle parc each year is affected by several factors, including sales of new vehicles, population growth (especially those of legal driving age), growth in the number of vehicles per household and the longer lifespan of vehicles currently on the road today. Of the 248 million vehicles in operation in the US and Canada in 2004, approximately 45 million used vehicles (43 million in the US and 2 million in Canada), or nearly 18% of the total parc, changed hands, representing the total opportunity available to used vehicle auctions, up from 40 million vehicles in 1990. Total used vehicle sales decreased modestly (less than 2 percent) from 2003 to 2004. However, retail sales of used vehicles, which exclude sales by private individuals, increased approximately 2.6 percent from 2003 to roughly 32 million units in 2004. Independent used vehicle dealers had a record year in 2004 selling more than one million more

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vehicles in 2004 than they did in 2003. Auction volumes declined slightly in 2004 in a year of great challenge for the industry to replace lost off-lease volume with volume from other sources, especially dealer consignment. Approximately 22% of the 45 million vehicles sold (or slightly less than 10 million vehicles) passed through National Auto Auction Association ("NAAA") member auctions in 2004. The Company projects growth in the vehicle redistribution industry of more than one million vehicles over the next five years, with a growing percentage over the next three years likely to come from dealers and a corresponding decline in percentage coming from institutional suppliers.

 The percentage of claims resulting in a total loss continues to increase as a result of higher cost equipment, the limited availability of like-kind and like-quality used parts and underwriting and claims practices among insurance companies. It is anticipated that the vehicle redistribution industry will continue to benefit from the increasing number of vehicles in operation, which should translate into increasing vehicle sales at auction.

 The following diagram summarizes the vehicle life cycle and redistribution industry in North America for the year ended December 31, 2004.

The Vehicle Life Cycle and Vehicle Remarketing in 2004
-U.S. & Canada-

*Includes approximately 3.25 million units of salvage auction sales.

Used vehicle auctions

 Auctions play a critical role in the vehicle redistribution industry. By capitalizing on economies of scale, auctions efficiently transfer ownership and titles; administer the flow of funds between sellers and buyers of vehicles; and facilitate the storing, transporting, reconditioning and selling of vehicles. In addition, auctions serve as a real-time independent marketplace for the industry. The used vehicle auction sector is large and growing, accounting for slightly less than 10 million of the 45 million vehicles that changed hands in 2004. The number of vehicles auctioned rose from approximately 7.4 million in 1997 to slightly less than 10 million in 2004, representing a compound annual growth rate of approximately 5 percent. The percentage of used vehicles that were sourced at auction and sold to retail customers by franchised dealers has grown from 6% in 1982 to 34% in 2003.

 The supply of used vehicles for sale at auction is provided by institutional customers and selling dealers. Institutional customers supply the auctions mainly with off-lease repossessed, and end of program term vehicles in addition to fleet vehicles that have reached a predetermined

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mileage level, age or condition. Program vehicles are vehicles used by rental car companies and other companies with individual corporate fleets of vehicles that are returned to manufacturers through repurchasing programs. It is estimated that approximately 5 million of the vehicles sold at NAAA auctions in 2004 were institutional vehicles (manufacturers, automotive finance companies, rental companies, commercial fleets, etc.), or approximately 50% of the total vehicles sold at auction. Selling dealers account for the remainder of the vehicles sold at NAAA affiliated auctions in 2004.

 Typically, institutional customers and selling dealers select auction sites based upon market prices, conversion rates, service and location. In addition, the volume of vehicles that dealers sell at auction is affected by previous auction purchases by the dealers, unwanted trade-ins from customers and aged inventory. Off-lease volumes presented for wholesale remarketing in the US fell from an estimated 1.9 million units in 2003 to 1.4 million units in 2004. ADESA anticipates that dealer supplied vehicles will be the primary source of auction volume growth in the coming years as off-lease volumes are expected to continue declining, albeit at a slower rate, through 2007. After 2007, ADESA expects the impact of current growth in lease penetration to result in modest growth in off-lease volumes, although not at the rate experienced earlier in this decade. Vehicle finance companies are expected to furnish more than one million units a year of repossessions to the remarketing industry. In addition, the Company expects off-rental and commercial fleet vehicles to supply steady volumes to the remarketing industry in the coming years.

 The demand for used vehicles at auction is driven by the retail demand for used vehicles. Franchise and used vehicle dealers in the US sold approximately 30.7 million used vehicles in 2004, accounting for approximately 72% of the total used vehicle sales in the US. The demand for used vehicles has grown due to the increase in the number of households that have more than one vehicle, improvements by manufacturers to the quality of vehicles that have extended vehicle lifespan and made used vehicles a more attractive option for retail vehicle buyers, and the affordability of used vehicles relative to new vehicles. To satisfy the demand for used vehicles, dealers increasingly utilize used vehicle auctions in addition to various other sources of supply to stock their inventory, including trade-ins from customers on new and used vehicle purchases, purchases from other dealers, wholesalers, individuals or other entities.

Salvage auctions

 The salvage sector of the auction industry has shown moderate organic growth over the last several years, and estimates indicate that approximately 3.2 million salvage vehicles were redistributed in the US and Canada in 2004. The remainder of the "scrappage" from the vehicle parc primarily consists of vehicles that were unaccounted for in vehicle registration records. While salvage auctions play a similar redistribution role in the salvage industry as used vehicle auctions, salvage auctions are usually loss mitigators for the sellers of the vehicles.

 Some factors that determine the supply of vehicles available for sale at a salvage auction include the number of accidents, thefts and fires, as well as the occurrence of major weather events and natural disasters. Increasing technological complexity of vehicles continues to lead insurers to declare more vehicles as salvage than in the past due to heightened costs of repairs. We estimate the percentage of claims resulting in a total loss has consistently increased over the last five years from 8.5% of claims in 2000 to more than 13% of claims in 2004. Insurance companies and other institutional customers declare the ownership or title of a damaged vehicle as a total loss based upon the extent of the damage, and the majority of these vehicles exit the vehicle parc as scrappage. Other factors have also played a role in the increased salvage vehicle supply, including shifting consumer preferences towards trucks, which generally are more costly to repair than cars, rising overall repair costs, and new title branding and ownership legislation in many states and provinces that require insurance companies to

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automatically brand vehicles as total losses once damages reach a certain percentage of the vehicle's value.

 Market values can vary widely between units of the same make, model and production year at salvage auctions based upon the extent of damage to the vehicles. The demand for salvage recovery services is driven by the value placed upon the parts that can be extracted from the vehicle and resold in order to repair vehicles that are still in operation. The insurance industry also utilizes the value of these parts in determining the settlement of claims submitted by policyholders for vehicle repairs. Scrap metal prices also play a role in salvage vehicle demand and pricing. As the number of vehicles in operation grows and vehicle lifespan continues to lengthen, the demand for parts from salvage vehicles should also grow, further driving demand upward for vehicles available for sale at salvage auctions.

 The primary buyers of salvage vehicles are vehicle dismantlers, rebuilders, repair shop operators and used vehicle dealers. Vehicle dismantlers, which are generally the largest group of salvage vehicle buyers either dismantle salvage vehicles and sell parts individually or sell entire salvage vehicles to rebuilders, used vehicle dealers or the public. Vehicle rebuilders and repair shop operators generally purchase salvage vehicles to repair and resell subject to applicable disclosure laws and regulations.

Internet and online auctions

 The wholesale vehicle redistribution industry has utilized the internet for nearly a decade. Since the mid-1990s, internet access has been offered by many of the auction service providers in the industry and is an accepted means of conducting business for sellers and buyers of used and salvage vehicles. The industry utilizes the internet for a number of purposes, including:

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Live, real time selling of vehicles via simultaneous bidding between online bidders and bidders at the physical auction.



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Online auctions with live, real time selling of vehicles.



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Bulletin board selling of vehicles at a set price or via an auction which is held for a set period of time (for example, several hours, a day or a week) and during which bids are taken on the vehicles. The highest bidder may then purchase the vehicle unless there is a floor price that has not been met.



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The compilation of accurate, timely, wholesale market prices of used vehicles based upon sales at auction.



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Additional customer services including:



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Account information.



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Online reporting of consigned vehicle inventory, auction run lists, vehicle condition reports and pictures of consigned vehicles.



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Posting of auction locations, policies, registration documents, promotions and other auction company related information.

 ADESA believes that the optimal aggregate market price for a seller's inventory of vehicles can be obtained by simultaneously utilizing online auctions in concert with physical auctions. Based upon the individual characteristics, some vehicles may be suitable for an online only auction.

 Online auction solutions that do not include any use of physical auctions potentially lack services that are integral to the redistribution process. These services may include:

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Secure storage of consigned vehicle inventory in centralized locations whereby customers can view the condition of multiple vehicles in person prior to sale at auction.

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Physical movement of each used vehicle through the auction building at the time of sale for customers to view the driving condition of each vehicle.



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Low cost vehicle enhancement services, including detailing and repairing of used vehicles and shrink wrapping of salvage units, all of which may increase the value of the vehicles prior to sale.



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Immediate on-site arbitration of disputes arising between the buyer and seller of a vehicle at auction.



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Processing of and handling of vehicle logistics, titles, ownership transfer and funds transfer.



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Immediate availability of purchased vehicles at the time of sale to buyers for resale or use in their business.



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On-site inspection and certification services.



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Large concentration of buyers competing for the purchase of each vehicle in real time.

 The use of the internet for conducting wholesale transactions in the vehicle redistribution industry is growing. The Company estimates that between 500,000 to 750,000 units were sold industry-wide online in 2004. ADESA feels that simultaneously combining the physical auctions with online auctions in real time offers a superior method of vehicle redistribution when compared with other online only auction solutions; however, the Company still maintains online only auction technology to complement its physical auction business. The Company believes it is well positioned to offer the appropriate mix of physical and online auctions and services to its customers to ensure the most effective and efficient redistribution of their vehicles.

Dealer financing

 The used vehicle floorplan financing sector consists primarily of short-term inventory-secured financing for dealers who purchase used vehicles for immediate resale. Common floorplan terms in the industry range anywhere from 30 to 90 days with interest accruing on the outstanding principal balance. In addition, a fee is usually charged per vehicle financed. The financing component of the vehicle redistribution industry remains largely fragmented and includes traditional financial institutions, floorplan financing companies, auctions which provide financing and the finance companies of vehicle manufacturers. Franchised dealers primarily secure floorplan financing from the captive finance arms of the manufacturers as well as national, regional and local banks and financial institutions. The majority of this financing is not available to independent dealers. Each wholesale vehicle transaction presents an opportunity to provide a dealer with floorplan financing. Most lenders in the industry, including AFC, take a security interest in the vehicles floorplanned and protect their security interest through audits of dealer inventory. Floorplan financing is not a retail installment loan, but rather an inventory-secured financing loan of a very short duration for dealer purchases.

COMPETITIVE STRENGTHS

 ADESA believes that the following key competitive strengths are critical to its continuing success:

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Comprehensive offering of vehicle redistribution services.    ADESA offers a comprehensive range of services, enabling it to serve sellers and buyers regardless of their size. The combination of the Company's used and salvage vehicle auctions with its marketing and internet-based services enables it to attract a large number of bidders, resulting in a higher sales rate for vehicles placed at auction for the first time, commonly referred to as the conversion rate, and higher sale prices for sellers of vehicles. The breadth of the Company's

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geographic coverage, the number of its facilities and the comprehensiveness of its offerings at these facilities allow ADESA to efficiently service customers, regardless of the size and location of their vehicle portfolios. ADESA's customers benefit from the convenience of the full range of services it offers, including:

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Inbound and outbound logistics services relieve sellers of used and salvage vehicles from associated administrative burdens such as arranging pickup, towing, storage, marshalling and tracking related charges.



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Reconditioning services for used vehicles enhance vehicle value to generate higher profit for sellers and greater satisfaction for buyers.



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Inspection and certification services contribute to increased buyer confidence.



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Administrative services handle title processing, transfer of funds, paperwork and salvage settlement processes, often resulting in lower administrative costs, greater efficiency and reduced turnaround times for customers.



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Expedited settlement services allow insurance companies to out-source administrative tasks associated with the salvage settlement process, which reduces cycle time and the burden on insurance customers.



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Floorplan financing services provided by AFC facilitate the purchase of vehicles at auction by providing convenient, short-term inventory-secured financing.



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Established relationships with diversified customer base.    ADESA has established strong business relationships with selling dealers and institutional customers, such as vehicle manufacturers, insurers, financial institutions, rental agencies and fleet companies. The Company's customer base is primarily comprised of repeat customers, allowing services to be tailored to specific customer preferences. Furthermore, ADESA's network of regional facilities enables it to maintain and develop relationships with local sellers and buyers, while the Company's national presence allows institutional customers to access buyers across the country and to redistribute their vehicles to markets where demand best matches their supply. Due to the diversity of ADESA's customer base, the Company does not have a major concentration of business with any one customer on either the buyer or the seller side of the auction process. This diversity also allows the Company to better withstand changes in the economy and market conditions. The Company's established relationships include:



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ADESA's strong relationships with institutional customers, including major domestic and foreign vehicle manufacturers, are important to its success. Institutional customers supply large quantities of late model vehicles that buyers typically find more attractive, resulting in stronger buyer participation.



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ADESA's salvage auctions have strong relationships with many of the major insurance companies that write vehicle insurance coverage policies and supply salvage vehicles.



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ADESA's floorplan financing business has more than 13,000 eligible dealers and relies on repeat customers for much of its success.



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ADESA's sales and marketing teams in all facets of the business seek to foster and maintain strong relationships with customers through frequent contact and consistent customer service.



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ADESA's sales, operations and information technology teams are aligned across each operating unit from the local level to the corporate office. These open lines of communication position the Company to be more responsive and timely in meeting customers' needs and goals, regardless of the size of their portfolio of vehicles.

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Consistency in quality services throughout the Company's North American network.    ADESA is committed to providing customers with superior and consistent customer service at all of its locations. The Company operates a network of vehicle redistribution facilities across North America offering customers a convenient experience by providing a diverse, high-quality selection of vehicles, reputable auctions, efficient title processing, on-site value-added services and well-trained, friendly, service-oriented personnel. To assure consistently high levels of service, the Company invests substantial resources in the recruiting and training of its employees and provides formal classroom workshops and seminars at its centralized training facilities. Based on the results of customer satisfaction surveys, ADESA believes that customers place significant value on the high level of customer service that ADESA provides.



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Commitment to information systems.    Over the last five years, ADESA has invested a significant portion of its annual capital expenditures in information systems. The Company has developed and continues to improve proprietary systems for each of its businesses to meet their operating needs as well as the needs of its customers. ADESA's information systems provide sellers with valuable market data and enable the Company to better match customer needs to locations and buyers with the desired product. ADESA believes its information systems will continue to provide important services to customers by giving them access to timely, accurate and customized information while also helping the Company achieve operating efficiencies through consistency, standardization and stability, leading to cost reductions. The Company continues striving towards better integration of its systems among its various service lines and facilities. Such integration will increase internal operating efficiency and customer convenience.



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Experienced management team.    ADESA's senior management team is experienced in the auto industry and has successfully grown the Company to a leadership position in the vehicle redistribution industry. ADESA's management team has accomplished this by implementing a disciplined strategy of selective acquisitions, increasing revenues and profitability by site, and opening new sites. This team has demonstrated its ability to efficiently and successfully integrate both large and small acquisitions of used vehicle and salvage auctions.

GROWTH STRATEGY

 ADESA is pursuing strategic initiatives that are designed to capitalize on its underlying business strengths, grow the business and improve profitability. Key elements of ADESA's growth strategy include:

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Growing auction sales volume.    ADESA expects to capitalize on the increasing volume of vehicles redistributed annually. The number of used vehicles sold at auction has generally increased each year since 1997, during a period that encompassed varying economic conditions. In addition, insurance companies are more likely to brand damaged vehicles as total losses because of the rising costs of repairing technologically complex vehicles. As a result, vehicles are more frequently entering the salvage recovery services sector than in the past. ADESA strives to capitalize on this growing pool of redistributed vehicles and to increase the volume of used and salvage vehicles redistributed through its auctions. ADESA believes auctions are the best means of transferring ownership of used and salvage vehicles between sellers and buyers based on the short time-to-cash cycle the Company's auctions offer to vehicle sellers, the range of services ADESA provides, the low cost of its services as a percent of the gross market value of the vehicles placed at auction, and the relative transparency of the auction process. Of the estimated 45 million vehicles that changed hands in 2004, approximately 35 million of these vehicles were not distributed through NAAA-affiliated auctions, creating an opportunity for growth.

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The Company expects the volume of vehicles sold by dealers at auction to grow faster than the volume of vehicles sold by institutional customers over the next several years. ADESA believes there is an opportunity to generate more business from dealers by increasing the first-time conversion rates of their consignments and providing more attractive services and economics as compared with other redistribution channels. The Company seeks to standardize practices among auctions and provide market data, including sales results and individual customer metrics, to make the auction process more efficient and attractive to dealers.

ADESA also intends to increase vehicle volume from existing institutional customers and to add new accounts by enabling customers to maximize the value of their vehicles through the redistribution process. ADESA's analytical services have been a key instrument in gaining new business with national accounts enabling the recommendation of optimal auction strategies based on the analysis of seller vehicle portfolios and ADESA's knowledge of buyers and the markets. ADESA strives to expand its market share by realizing the highest prices for its customers' vehicles and providing the best service.

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Increasing revenues per vehicle sold.    ADESA plans to increase revenues by providing and selling more services per vehicle, such as reconditioning, inspection, certification, titling and settlement administration services, and by implementing selective fee increases. The total fees earned per vehicle represent only a small fraction of the average wholesale value of each vehicle, while the underlying services ADESA provides may increase average wholesale values. ADESA strives to use the economic benefits provided by its pre- and post-auction services to significantly increase service penetration among sellers and buyers.



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Continue improving operating efficiency.    ADESA is improving operating efficiency by further centralizing certain administrative functions, optimizing and standardizing its redistribution processes, improving its use of technology and better utilizing its existing infrastructure. Current initiatives aim at providing better information throughout the auction process and moving vehicles faster, more accurately and more efficiently through the auction process to reduce the time-to-cash cycle for vehicle sellers. ADESA's strategy for better leveraging the existing infrastructure includes efforts to increase the utilization rates of its auction facilities by organizing more auctions per facility, conducting auctions of trucks, boats, other recreational vehicles, and equipment and combining some of the Company's used vehicle and salvage auction operations.

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Expanding into new markets.    ADESA is seeking continued growth through various channels, including alternate auction venues, combination used vehicle and salvage auction sites, acquisitions of independent auctions and "greenfield development." Alternate auction venues include off-site satellite, online and customer site auctions, as well as alternate day, night or specialty product sales. Opportunities exist throughout North America to offer auction services to customers in areas with limited options to satisfy their vehicle redistribution needs.

In areas where the Company has existing operations, ADESA seeks to leverage upon existing infrastructure and capital investments in used vehicle operations by opening new salvage auctions on many of these sites. The Company's auction sites in Jacksonville, Concord, Buffalo, Sacramento, Edmonton, Vancouver, Halifax and Ottawa are shared facilities that have successfully executed this strategy.

ADESA has been an active consolidator in used vehicle auctions, which has fueled much of the Company's historical growth. ADESA continues to consider acquiring independent used vehicle auctions in markets where ADESA does not have a presence or hopes to increase its penetration. ADESA also expects that consolidation opportunities will be available for salvage auctions.

Finally, in regions where ADESA does not have a presence and is not able to identify acquisition sites, or where ADESA has a presence but its auction sites are lacking or at capacity, the Company will consider greenfield development or relocation of auction sites. ADESA has pursued this strategy with used vehicle auctions in the following markets: Los Angeles, Boston, Des Moines, Colorado Springs, San Francisco, Vancouver, Long Island, Atlanta and Edmonton. ADESA also opened new salvage auction sites in Orlando, Long Island, Fremont, Sacramento, Clearwater and Hartford separate from its used vehicle operations in those markets. ADESA's strategy is to secure support from institutional customers and insurance companies prior to investing in new or relocated facilities.

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Growing online auctions and related services.    ADESA plans to continue expanding its existing online service offerings in addition to introducing new online services to its customers. ADESA is committed to investing additional capital and resources for emerging technologies and service offerings in the vehicle redistribution industry. ADESA's current online offerings include DealerBlock®, which provides for either real-time or "bulletin-board" type online auctions to customers; LiveBlock^TM, which allows online bidders to compete in real-time with bidders present at physical auctions; and consigned inventory information, including auction run lists through ADESA Run Lists^TM, condition reports, market data and sales results through the ADESA Market Guide^TM. DealerBlock also provides the platform for upstream selling services, whereby the Company's online vehicle redistribution system can be tailored and private-labeled for a vehicle manufacturer or other institutional customer to offer off-lease vehicles for sale to franchised or independent dealers shortly following lease expiration. During 2004, ADESA tripled the number of dealers registered for online auctions and the number of lanes equipped with LiveBlock, resulting in more than 675,000 vehicles being offered for sale in a dual bidding forum during 2004. ADESA will continue to tailor online services to each of its customers to include an optimal mix of physical auctions and online services.

ADESA'S BUSINESSES

 ADESA operates two main businesses that are integral parts of the vehicle redistribution industry: auctions and related services and dealer financing.

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Auctions and related services

 ADESA offers the vehicle redistribution industry used vehicle and salvage auctions across North America. Most ADESA locations are stand-alone facilities dedicated to either used vehicle auctions or salvage auctions, but in several locations, the Company has capitalized on the synergies of utilizing facilities for both types of auctions. In addition to vehicle auction services, ADESA also provides auctions and related services for specialty vehicles and equipment unique to the recreational vehicle, commercial trucking, construction and utility industries. In 2004, approximately two million vehicles (consisting of vehicles and equipment) were sold at ADESA used vehicle and salvage auctions. In 2004, the average revenue per vehicle sold at ADESA auctions (including auction and related redistribution services) was approximately $416.

 ADESA generates revenues primarily from auction fees paid by vehicle sellers and buyers as well as related pre- and post-auction fees generally for services such as inbound and outbound logistics, reconditioning, inspection and certification, titling, administrative and salvage recovery services. Buyer fees are added to the gross sales price paid by buyers for each vehicle, and ADESA generally collects payment from buyers on the sale day or within 24 hours thereafter. Seller fees for ADESA's services are generally deducted from the gross sales price of each vehicle before ADESA remits the net amount to the seller.

 ADESA provides internet solutions to institutional sellers, as well as dealers including internet bulletin board-type auctions, live online only auctions and simultaneously combined live physical and online auctions. Although acceptance of the internet as a method of doing business in the industry is growing, ADESA believes that it is not a replacement for the live physical auction, but rather a complement for the live physical auction that will enhance value to the seller and provide more timely and efficient service to buyers and sellers. ADESA is well positioned with its dual offering of physical and online auctions and related services to assist customers in directing their inventory between internet-based solutions and physical auctions to maximize the sale prices of their vehicles in a timely and cost effective manner.

Used vehicle auctions and related services

 ADESA is the second largest wholesale used vehicle auction network in the US and the largest in Canada. The Company operates 53 used vehicle auction facilities in close proximity to large concentrations of used vehicle dealers throughout North America. ADESA's used vehicle customers sold approximately 1.8 million units at ADESA auctions in 2004.

 Auctions are the hub of the redistribution system for used vehicles. The Company's auctions enable institutional customers and selling dealers to sell used vehicles to licensed franchised, independent and wholesale used vehicle dealers. ADESA's mission is to maximize the auction sales price for the sellers of used vehicles by effectively and efficiently transferring the vehicles, paperwork (including certificates of title and other evidence of ownership), and funds as quickly as possible from the sellers to a large population of dealers seeking to fill their inventory for resale. Auctions are typically held at least weekly at every location and provide real-time wholesale market prices for the vehicle redistribution industry. During the process, ADESA does not generally take title to or ownership of the vehicles consigned for auction, but instead facilitates the transfer of vehicle ownership directly from seller to buyer.

 A key measure to the results of the used vehicle auction process is the conversion percentage, which represents the number of vehicles sold as a percent of the vehicles offered for sale. The number of vehicles offered for sale is the key driver of the costs incurred and the number of vehicles sold is the key driver of the related fees generated by the redistribution process. Generally, as the conversion percentage increases, so does the efficiency of the Company's auctions.

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 ADESA provides a full range of services to sellers and buyers. Each of the services may be provided or purchased independently from the physical auction process, including:

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Auction services, such as marketing and advertising the vehicles to be auctioned, dealer registration, storage of consigned and purchased inventory, clearing of funds, arbitration of disputes, auction vehicle registration, condition report processing, security for consigned inventory, sales results reports, pre-sale lineups, and actual auctioning of vehicles by licensed auctioneers.



•

Internet-based solutions, including online bulletin board and real-time auctions and online live auctions running simultaneously with physical auctions.



•

Inbound and outbound logistics administration with services provided by third party carriers and the auctions.



•

Reconditioning services, including detailing, washing, body work, light mechanical work, glass repair, dent repair, tire and key replacement and upholstery repair.



•

Inspection and certification services whereby the auction performs a physical inspection and produces a condition report, in addition to varying levels of diagnostic testing for purposes of certification.



•

Title processing and other paperwork administration.



•

Outsourcing of remarketing functions and end of lease term management.

Salvage auctions and related services

 ADESA is currently the third largest salvage auction operator in North America, where the top three operators constitute an estimated 72% of the salvage vehicles sold through auctions. ADESA's customers, primarily insurance companies, sold an estimated 200,000 salvage vehicles at ADESA auctions in 2004, which include 30 salvage auction facilities in the US and Canada.

 ADESA provides solutions for all aspects of the salvage auction process, each of which may be provided or purchased independently from the auction process, including:

•

Auction services, such as registering vehicles, clearing of funds, reporting sales results and pre-sale lineups to customers, paying third party storage centers for the release of vehicles and the physical auctioning of the vehicles by licensed auctioneers.



•

Inbound and outbound logistics administration with actual services provided by third party carriers and the auctions.



•

Other services including vehicle inspections, evaluations, titling, settlement administration, drive through damage assessment centers, claims auditing, recycled parts locating and a national call center.



•

Internet-based solutions, including online bulletin board and real-time auctions and online live auctions running simultaneously with physical auctions.

 The Company's comprehensive offering of salvage recovery services provide efficiency and speed of service to customers, helping them mitigate their losses and manage the costs related to processing the claims and related vehicles. ADESA also provides the insurance industry with professional claims outsourcing and recycled parts locating services via an extensive network of third party suppliers of used vehicle parts. Each of these services may be purchased separately from the physical auction process.

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Seasonality

 Generally, the volume of vehicles sold at the Company's used vehicle and salvage auctions is highest in the first and second calendar quarters of each year and slightly lower in the third quarter. Fourth quarter volume of vehicles sold is generally lower than all other quarters. This seasonality is affected by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affect the demand side of the auction industry.

Dealer financing

 AFC primarily provides short-term inventory-secured financing, known as floorplan financing, for used vehicle dealers in North America who purchase vehicles from ADESA auctions, independent auctions, auctions affiliated with other auction networks and outside sources. In 2004, approximately 87% of the vehicles floorplanned by AFC were vehicles purchased by dealers at auction. AFC has 83 loan production offices across North America which arranged approximately 1.1 million loan transactions in 2004. The Company's ability to provide floorplan financing facilitates the growth of vehicle sales at auction, and also allows ADESA to have a larger role in the entire vehicle redistribution industry.

 AFC services more than 500 auctions with offices that are conveniently located at or within close proximity of ADESA auctions and other auctions, which allows dealers to reduce transaction time by providing immediate payment for vehicles purchased at auction. AFC provides availability lists on behalf of its customers to auction representatives regarding the financing capacity of its customers, thereby increasing the purchasing potential at auctions. Of AFC's 83 offices in North America, 57 are physically located at auction facilities (including 41 at ADESA auctions). Each of the remaining 26 AFC offices is strategically located in close proximity to at least one of the auctions that it serves. In addition, AFC has the ability to send finance representatives on-site to most approved independent auctions during auction sale-days. Geographic proximity to the customers gives the Company's employees the ability to stay in close contact with outstanding accounts, thereby better enabling them to manage credit risk.

 AFC's procedures and proprietary computer-based system enable the Company to manage its credit risk by tracking each loan from origination to payoff, while expediting services through its branch network. Every floorplan financed vehicle is treated as an individual loan. Typically, the Company assesses a floorplan fee at the inception of a loan. AFC collects the fee along with interest (accrued daily) when the loan is paid in full. In addition, AFC generally holds the title or other evidence of ownership to all vehicles which are floorplanned except where not permitted by law. Typical loan terms are 30 or 45 days, each with a possible loan extension. For an additional fee, this loan extension allows the dealer to extend the duration of the loan beyond the original term for another 30 to 45 days if the dealer makes payment towards principal, interest and fees.

 The extension of a credit line to a dealer starts with the underwriting process. Credit lines up to $150,000 (or Cdn$200,000) are extended using a proprietary scoring model developed internally by AFC with no requirement for financial statements. Credit lines in excess of $150,000 (or Cdn$200,000) may be extended using underwriting guidelines which require dealership and personal financial statements and tax returns. The underwriting of each line of credit requires an analysis, write-up and recommendation by the credit department and in case of credit lines in excess of $150,000 final review by a credit committee.

 AFC's proprietary computer-based system facilitates day to day collateral management by providing real time access to dealer information and enables branch and corporate personnel to assess and manage potential collection issues. Restrictions are automatically placed on

15

customer accounts in the event of a delinquency, insufficient funds received or poor audit results. Branch personnel are proactive in managing collateral by monitoring loans and notifying dealers that payments are coming due. In addition, routine audits, or lot checks, are performed by an affiliated company. Poor results from lot checks typically require branch personnel to take actions to determine the status of missing collateral, including visiting the dealer personally, verifying units held off-site and collecting payments for units sold. Audits also identify troubled accounts, triggering the involvement of AFC's collections department.

 AFC operates two divisions which are organized into nine regions in North America. Each division and region is monitored by managers who oversee daily operations. At the corporate level, AFC employs full-time collection specialists and collection attorneys who are assigned to specific regions and monitor collection activity for these areas. Collection specialists work closely with the branches to track trends before an account becomes a troubled account and to determine, together with collection attorneys, the best strategy to secure the collateral once a troubled account is identified.

 AFC emphasizes service, growth and management. All AFC employees at the management level participate in a two-stage interactive training program at the Company's corporate headquarters that facilitates providing consistent services to AFC customers and consistent monitoring of accounts at local, regional and central levels.

 As of December 31, 2004, approximately 8,700 active accounts (those accounts with financing for at least one vehicle outstanding) had an average line of credit of $112,000. An average of ten vehicles per active dealer were floorplanned with an approximate average value of $6,600 per vehicle at the end of 2004. Approximately 13,000 dealers utilize their lines of credit during any twelve month period. The following table depicts a range of the lines of credit available to eligible dealers:

 As of December 31, 2004, no single line of credit accounted for more than 10% of the total credit extended by AFC. AFC's top five active dealers represented a total committed credit of $81 million with a total outstanding principal amount of $30 million. The single largest committed line of credit granted by AFC is for $45 million, for which the obligor had $3.7 million outstanding on December 31, 2004. This obligor operates outside of AFC's normal floorplanning arrangements with specific covenants that must be maintained, and borrows on a revolving-based line of credit with advances based on eligible inventory.

SALES AND MARKETING

 ADESA's approach toward sales of auction services consists of a centralized process via the corporate headquarters sales team and a decentralized process via the individual auction locations. The corporate sales team is responsible for cultivating and maintaining the majority of business from institutional customers. Most institutional customers follow either a national or regional approach to the redistribution of their vehicles. As a result, matching the

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Company's corporate sales representatives with an institutional customer's decision makers is the most efficient method of managing the volume of vehicles consigned to ADESA from existing and new institutional customers. ADESA's sales representatives utilize the Company's geographic coverage, comprehensive service portfolio, size, attributes of the buying dealer population and the results of sales at particular auctions to develop a solution for each customer based upon its portfolio of vehicles.

 Managers of individual auction locations are responsible for cultivating and maintaining business from franchised and independent dealers in addition to smaller regional and local institutional customers. The managers, as well as the designated sales representatives at their locations, are responsible for developing, implementing and maintaining the sales strategy for their auctions. Managers of individual auction locations are also responsible for providing services to the institutional customers whose vehicles are directed to the auctions by the corporate sales team. Developing and servicing the largest possible population of buying dealers for the vehicles consigned for sale at each auction is integral to selling auction services and servicing institutional customers.

 ADESA markets its business in a variety of ways, primarily utilizing the following for sellers and buyers:

•

Direct customer visits.



•

Company and/or industry sponsored seminars and training.



•

Industry publications, including display and classified advertising, interviews and press releases regarding the businesses.



•

Tradeshows and conventions, including the annual National Vehicle Leasing Association (NVLA), National Automobile Dealers Association (NADA), National Independent Automobile Dealers Association (NIADA), NAAA, National Autobody Congress Exposition (NACE), ISO Auto Physical Damage Committee, ACE Claims Expo, and American Salvage Pool Association (ASPA) conventions.



•

ADESA publications such as Global Vehicle Remarketing (GVR) and Pulse®, as well as the electronic ADESA Market Guide available on the Company's website.



•

Membership in automotive related associations including NAAA, NVLA, NIADA, American Automotive Leasing Association (AALA), Automotive and Fleet Leasing Association (AFLA), NACE, ASPA and various state dealer associations and automotive recyclers associations.

 Marketing aimed specifically at dealers includes the following in addition to the above methods in order to ensure the largest possible number of buyers for the Company's services, ensuring that the market for ADESA services is well represented:

•

Targeted telemarketing whereby the Company attempts to market specific vehicles offered for sale to dealers based upon the dealers past buying habits and profiles.



•

ADESA Notify Me – alerts dealers by email of specific inventory available for sale at auction.

INFORMATION TECHNOLOGY

Operating and financial systems

 PeopleSoft® is the centralized financial software of the wholesale auctions, and Oracle® is the centralized financial software for the dealer financing business. ADESA utilizes internally developed, proprietary software to manage its auction processes and floorplan receivables.

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Sales and marketing

 ADESA has developed online tools to assist customers in redistributing their vehicles and to compete with emerging online vehicle auctions. ADESA's current online offerings include:

•

ADESA LiveBlock – allows online bidders to compete in real time with bidders present at physical auctions.



•

ADESA DealerBlock – provides for either real-time or round the clock "bulletin-board" type online auctions of consigned inventory not scheduled for active bidding.



•

ADESA Run Lists – provides consigned inventory information, including auction run lists allowing dealers to preview inventory prior to an auction event.



•

ADESA Dealer2Dealer – allows dealers to buy and sell inventory directly from their lots.



•

ADESA Market Guide – provides condition reports, market data, wholesale auction prices and auction sales results.

 ADESA's online platform facilitates ADESA's upstream selling services. Online vehicle redistribution systems can be tailored and branded for a vehicle manufacturer or other institutional customer to offer off-lease or other vehicles for sale directly to franchised or independent dealers.

 ADESA plans to continue expanding its existing online service offerings and is committed to investing additional capital and resources for emerging technologies and service offerings in the vehicle redistribution industry.

COMPETITION

 ADESA faces significant competition for the supply of used and salvage vehicles and for the buyers of those vehicles. The Company's principal competitors include other used and/or salvage vehicle auction companies, wholesalers, dealers, manufacturers and dismantlers, a number of whom may have established relationships with sellers and buyers of vehicles and may have greater financial resources than ADESA. Due to the limited number of sellers of used and salvage vehicles, the absence of long-term contractual commitments between ADESA and its customers and the increasingly competitive market environment, there can be no assurance that the Company's competitors will not gain market share at ADESA's expense.

 In the used vehicle auction industry, ADESA competes with Manheim, a subsidiary of Cox Enterprises, Inc., as well as several smaller chains of auctions including Auction Broadcasting Company and independent auctions, some of which are affiliated through their membership in an industry organization named ServNet®. Due to ADESA's national presence, competition is strongest with Manheim for the supply of used vehicles from national institutional customers. Although the supply of these vehicles is dispersed among all of the auctions in the used vehicle market, ADESA competes most heavily with the independent auctions (as well as Manheim and all others in the market) for the supply of vehicles from dealers.

 Due to the increased visibility of the internet as a marketing and distribution channel, new competition has arisen recently from internet-based companies and the Company's own customers who have historically redistributed vehicles through various channels, including auctions. Direct sales of vehicles by institutional customers and large dealer groups through internally developed or third party online auctions have largely replaced telephonic and other non-auction methods, becoming an increasing portion of overall used vehicle redistribution. The extent of use of direct, online systems varies by customer and, based upon the Company's estimates, currently less than 10% of overall used vehicle auction sales. Typically, these online

18

auctions serve to redistribute vehicles that have come off lease. In addition, some of the Company's competitors have begun to offer online auctions as all or part of their auction business and other online auction companies now include used vehicles among the products offered at their auctions. Online auctions or other methods of redistribution could potentially diminish both the quality and quantity and reduce the value of vehicles sold through traditional auction facilities.

 In the salvage sector, ADESA competes with Copart, Inc., Insurance Auto Auctions, Inc., independent auctions, some of which are affiliated through their membership in an industry organization named Sadisco®, and a limited number of used vehicle auctions that regularly redistribute salvage vehicles. Additionally, some dismantlers of salvage vehicles such as Greanleaf and LKQ Corporation and internet-based companies have entered the market, thus providing alternate avenues for sellers to redistribute salvage vehicles. ADESA anticipates further consolidation of the salvage auction services industry will occur and is evaluating various means by which the Company can continue its growth plan. Through strategic acquisitions, shared facilities with the Company's used vehicle auctions and greenfield expansion, ADESA strives to become a prominent salvage services auction provider to the insurance industry in the US.

 In Canada, ADESA is the largest provider of used and salvage vehicle auction services. ADESA's competitors include vehicle recyclers and dismantlers, independent vehicle auctions, brokers, Manheim and online auction companies. ADESA believes it is strategically positioned in this market by providing a full array of value-added services to customers including auctions and related services, online programs, data analyses and consultation.

 The used vehicle inventory floorplan financing sector is characterized by diverse and fragmented competition. AFC primarily provides short-term dealer floorplan financing of wholesale vehicles to independent vehicle dealers in North America. AFC's competition includes Manheim Automotive Financial Services ("MAFS"), other specialty lenders, banks and other financial institutions. At the local level, AFC faces competition from banks and credit unions who may offer floorplan financing to local auction customers. Such entities typically service only one or a small number of auctions. Some of ADESA's industry competitors who operate used vehicle auctions on a national scale may endeavor to capture a larger portion of the floorplan financing market. Currently, the largest competitor generally does not provide floorplan financing outside of its own auctions. AFC competes primarily on the basis of quality of service, convenience of payment, scope of services offered and historical and consistent commitment to the sector.

VEHICLE REGULATION

 ADESA's operations are subject to regulation, supervision and licensing under various US, Canadian or Mexican federal, state, provincial and local statutes, ordinances and regulations. Each auction is subject to laws in the state or province in which it operates which regulate auctioneers and/or vehicle dealers. Some of the transport vehicles used at the Company's auctions are regulated by the US Department of Transportation, Canadian Transportation Agency or related agencies of the Mexican government. The acquisition and sale of salvage and theft recovered vehicles is regulated by governmental agencies in each of the locations in which ADESA operates. In many states and provinces, regulations require that a salvage vehicle be forever "branded" with a salvage notice in order to notify prospective purchasers of the vehicle's previous salvage status. Some state, provincial and local regulations also limit who can purchase salvage vehicles, as well as determine whether a salvage vehicle can be sold as rebuildable or must be sold for parts only. Such regulations can reduce the number of potential buyers of vehicles at salvage auctions. In addition to the regulation of the sale and acquisition

19

of vehicles, ADESA is also subject to various local zoning requirements with regard to the location and operation of its auction and storage facilities.

ENVIRONMENTAL REGULATION

 ADESA's businesses are subject to regulation by various US, Canadian or Mexican federal, state, provincial and local authorities concerning air quality, water quality, solid wastes and other environmental matters. In the vehicle redistribution industry, large numbers of vehicles, including damaged vehicles at salvage auctions, are stored at auction facilities and, during that time, releases of fuel, motor oil and other fluids may occur, resulting in soil, air, surface water or groundwater contamination. In addition, the facilities generate and/or store petroleum products and other hazardous materials, including wastewater waste solvents and used oil, and body shops at the facilities may release harmful air emissions associated with painting. ADESA could incur substantial expenditures for preventative, investigative or remedial action and could be exposed to liability arising from its operations, contamination by previous users of the acquired facilities, or the disposal of waste at off-site locations. ADESA considers its businesses to be in compliance, in all material respects, with those environmental regulations currently applicable to its operations.

 Management considers the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. The Company accrues an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. Accruals for environmental liabilities are included in "Accrued expenses" and "Other liabilities" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information become available. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on the Company's operating results in that period.

 The discussion of environmental matters in "Legal Proceedings" in Item 3 of this Form 10-K, is incorporated herein by reference.

COMPANY HISTORY

 ADESA entered the vehicle redistribution industry in 1989 and first became a public company in 1992. ADESA remained a public company until 1996 when ADESA was acquired by ALLETE, Inc. ("ALLETE"). At that time, ADESA operated 19 used vehicle auctions and 19 AFC loan production offices. Since then, ADESA has grown the business, organically and through acquisition, into a leading vehicle redistribution company in North America, operating 53 used vehicle auctions, 30 salvage auctions and 83 AFC loan production offices. Key acquisitions include:

•

2001—Eight salvage auctions from Auto Placement Center. These auctions are located in Rhode Island, Massachusetts, Maine, New Hampshire, Vermont and New York.



•

2000—Nine used vehicle auctions from Manheim Auctions, Inc. ("Manheim") as part of a required divestiture. These auctions are located in close proximity to Atlanta, Clearwater, Colorado Springs, San Francisco, Kansas City, Orlando, Phoenix, Tampa and Seattle.



•

2000—Canadian Auction Group, Inc., a used vehicle auction chain consisting of 13 locations in Canada. These auctions are located in or near Calgary, Dartmouth, Edmonton, Kitchener, Les Cedres, Saskatoon, St. John's, Toronto, Winnipeg, Moncton, Hamilton and Vancouver.

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•

1995—Impact Auto Auctions, Ltd., a salvage auction chain in Canada was acquired in four stages: 20% of the company was purchased in October 1995, 33.33% was purchased in each of March 1999 and January 2000 and 13.34% was purchased in May 2000. Impact Auctions, Ltd. consisted of nine auctions that are located in Calgary, Edmonton, Halifax, London, Moncton, Montreal, Ottawa, Sudbury and Toronto.



•

1994—ADESA acquired AFC.

 ADESA Corporation was incorporated in Indiana on October 4, 1991. ADESA, Inc., was incorporated in the state of Delaware on January 23, 2004. On May 24, 2004, ADESA Corporation, then a wholly-owned subsidiary of ALLETE, was merged into ADESA, Inc, another wholly-owned subsidiary of ALLETE. ADESA's initial public offering of 6,250,000 shares of common stock was declared effective by the Securities and Exchange Commission ("SEC") on June 15, 2004. On September 20, 2004, ALLETE completed the distribution of a stock dividend to all ALLETE stockholders totaling 88,600,000 shares, completing the separation of ADESA from ALLETE.

EMPLOYEES

 At December 31, 2004, ADESA had a total of 10,418 employees, with 8,300 located in the US and Mexico and 2,118 located in Canada. Approximately 66 percent of the Company's work-force consists of full-time employees. Currently, none of the Company's employees participate in collective bargaining agreements.

 In addition to the employee workforce, ADESA also utilizes temporary labor services to assist in handling the vehicles consigned to the Company during periods of peak volume. Nearly all of the Company's auctioneers are independent contractors.

 Some of the services ADESA provides are outsourced to third party providers that perform the services either on-site or off-site. The use of third party providers depends upon the resources available at each auction facility as well as peaks in the volume of vehicles offered at auction.

AVAILABLE INFORMATION

 ADESA's web address is www.adesainc.com. ADESA's electronic filings with the SEC (including all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports) are available free of charge on the website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information posted on the Company's website is not incorporated into this Annual Report. In addition, the SEC maintains a website that contains reports, proxy and information statements and other information filed with the SEC. The website can be accessed at http://www.sec.gov.

New York Stock Exchange Corporate Governance Matters

 As a listed company with the New York Stock Exchange ("NYSE"), ADESA is subject to certain corporate governance standards required by the NYSE. Among other requirements, each listed company CEO is required, under Section 303A.12 (a) of the NYSE Listed Company Manual, to certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. After the 2005 Annual Meeting of Stockholders, ADESA intends to file with the NYSE the CEO certification confirming its compliance with the NYSE's corporate governance listing standards. ADESA's CEO was not required to make such annual certification in 2004 because ADESA completed its initial public offering and became listed with the NYSE in June 2004.

 Included as Exhibits 31.1 and 31.2 of this 2004 Annual Report on Form 10-K, are the required CEO and CFO Sarbanes-Oxley Act Section 302 certifications filed with the SEC.

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Item 2. Properties

 ADESA's corporate headquarters are located in Carmel, Indiana. The Company's corporate headquarters and its Canadian office are leased properties. Properties utilized by the Company's auction and related services business segment include 53 used vehicle auction facilities in North America, which are either owned or leased. Each auction is generally a multi-lane, drive-through facility, and may have additional buildings for reconditioning, registration, maintenance, bodywork, and other ancillary and administrative services. Each auction also has secure parking areas to store vehicles. ADESA also operates 30 salvage vehicle auction facilities in the US and Canada which are utilized by the Company's auction and related services business segment. Salvage auctions are generally smaller than used vehicle auctions in terms of acreage and building size and some locations share facilities with the Company's used vehicle auctions.

 Of AFC's 83 offices in North America, 57 are physically located at auction facilities (including 41 at ADESA auctions). Each of the remaining 26 AFC offices is strategically located in close proximity to at least one of the auctions that it serves. AFC generally leases its loan production offices.

 The following tables list the used and salvage vehicle auctions owned or leased by ADESA:

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^(a)

Shares facilities with salvage auction at the same location.

^(b)

Leased auction facilities.

^(c)

ADESA currently leases part of the property on which this auction is located.

^(d)

Facility includes an AFC office.

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^(a)

ADESA currently leases part of the property on which this auction is located.

^(b)

Leased auction facilities.

^(c)

Shares facilities with used vehicle auction at the same location.

^(d)

ADESA owns a 50% interest in this facility.

Item 3. Legal Proceedings

 The Company is involved in litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage, handling or disposal of vehicles, environmental laws and regulations, and other litigation incidental to the business such as employment matters and dealer disputes. Such litigation is generally not, in the opinion of management, likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. Legal and regulatory proceedings which could be material are discussed below.

SEC Informal Inquiry

 In December 2003, the staff of the SEC initiated an informal inquiry relating to ALLETE's internal audit function and the internal financial reporting of ALLETE (ADESA's former parent), ADESA, AFC, a wholly-owned subsidiary of ADESA, and the loan loss methodology at AFC. ALLETE and the Company fully and voluntarily cooperated with the informal inquiry and sent a response to the SEC in February 2004. Management believes that the Company has acted appropriately and that this inquiry will not result in action that has a material adverse impact on the Company or its reported results of operations. Although the matter remains open, the Company has had no further inquiries or correspondence with the SEC since the first quarter of 2004.

ADESA Impact Taunton facility

 In December 2003, the Massachusetts Department of Environmental Protection (MDEP) identified the Company as a potentially responsible party regarding contamination of several

24

private drinking water wells in a residential development that abuts the Taunton, Massachusetts salvage auction facility. The wells had elevated levels of methyl tertiary butyl ether (MTBE). MTBE is an oxygenating additive in gasoline to reduce harmful emissions. The EPA has identified MTBE as a possible carcinogen.

 The Company engaged GeoInsight, Inc. an environmental services firm, to conduct tests of the soil and groundwater at the salvage auction site. In December 2003, GeoInsight, Inc. collected soil samples, conducted groundwater tests and provided oversight for the installation of monitoring wells in various locations on and adjacent to the property adjoining the residential community. The results of the soil and water tests indicated levels of MTBE exceeding MDEP standards. In January 2004, GeoInsight, Inc. collected air samples from two residences that the Company identified as having elevated drinking water concentrations of MTBE. The Company has been advised that inhalation of, or contact exposure to MTBE in the ambient air poses minimal risk to human health. In response to its empirical findings, the Company proposed to MDEP that the Company install granular activated carbon filtration systems in the approximately 33 affected residences. The Company has installed filtration units in the residences that may be impacted by the water contamination.

 GeoInsight, Inc. prepared an immediate response action (IRA) plan to determine the extent of the environmental impact and define activities to prevent further environmental contamination. The IRA Plan, which the Company filed on January 24, 2004, describes the initial activities the Company performed, and proposes additional measures that the Company will use to further assess the existence of any imminent hazard to human health. In addition, as required by the MDEP, the Company has conducted an analysis to identify sensitive receptors that may have been affected, including area schools and municipal wells. GeoInsight, Inc. does not believe that an imminent hazard condition exists at the salvage auction site; however, the investigation and assessment of site conditions are ongoing.

 The Company submitted an IRA status report to MDEP on March 30, 2004. Additionally, the Company is submitting bi-weekly status updates to MDEP. A comprehensive ground water sampling event and monthly residential sampling event were conducted during the week of April 26, 2004. In October 2004, the Company agreed to construct a municipal water line to serve the adjacent residential community. Construction of the water line was completed in the first quarter of 2005.

 The Company has an accrual of $1.7 million at December 31, 2004 with respect to the Taunton matter, including the costs associated with extending the municipal water service. This amount is included in the $4.8 million liability accrued for environmental matters at December 31, 2004.

 The Company has received correspondence and appraisal reports from an attorney representing twenty-six residential households of the adjoining community claiming (1) damages for diminution in the appraised value of their respective residences and (2) reimbursement of certain expenses incurred as a result of the MTBE release. Accordingly, there is a possibility that property damage litigation against the Company may result. At this time, the Company does not believe that the value of the residences at issue has diminished. The Company has put its environmental insurance carrier on notice of the claims with respect to the Taunton environmental matter. The insurance carrier has retained an environmental consultant and is in the process determining if and to what extent insurance coverage may exist.

Related Party Matter

 Wholesale vehicle businesses owned by Sean Hallett, the son of James Hallett, an Executive Vice President of ADESA, had three separate lines of credit with AFC and an outstanding loan through a related entity. As of December 31, 2004, the total amount owed to AFC was

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$1.7 million. The lines of credit totaling $0.4 million are secured with a perfected blanket security interest in the assets of the wholesale vehicle businesses. The loan is cross-collateralized with one of the credit lines and is secured by certain unencumbered personal property valued at up to approximately $0.5 million. As of December 31, 2004, Sean Hallett and his related businesses were in default on these obligations. Based on an assessment of recoverability, the Company recorded provisions for credit losses totaling $0.8 million during the second half of 2004 related to the $1.7 million outstanding. All three credit lines have been closed. AFC had gross receivables from this individual's wholesale vehicle business totaling $0.9 million and $6.3 million at December 31, 2004 and 2003.

 The Company is pursuing legal action related to collection of these amounts. AFC and Automotive Finance Canada, Inc. (the "AFC Entities") filed their Statement of Claim in the Ontario Superior Court of Justice on or about November 8, 2004 wherein it was alleged that Sean Hallett and his related companies (the "Hallett Entities") had defaulted on their outstanding obligations to AFC (Ontario Superior Court of Justice; Case File No. 04-CV-278564CM2). On or about December 15, 2004, Hallett filed his Statement of Defense and Counterclaim against AFC, AFCI, ADESA, Inc., ADESA Canada and ADESA Auctions Canada alleging that there was no outstanding obligation and that the named counterclaim defendants owed approximately $6 million to Hallett in compensatory and punitive damages.

 On or about February 1, 2005, the AFC Entities filed their Reply and Defense to Counterclaim denying the claims made by the Hallett Entities and reaffirming the allegations made in the Statement of Claim. On or about February 17, 2005, the Hallett Entities filed a Reply to Defense to Counterclaim essentially denying the allegations in the AFC Entities' Reply and Defense to Counterclaim and reaffirming the claims and allegations in their Statement of Defense and Counterclaim.

 On March 4, 2005, the parties met in Toronto, Canada and participated in a mandatory mediation session in an effort to resolve the litigation. The AFC Entities intend to continue to prosecute their claims against the Hallett Entities as they work with the court appointed mediator to pursue resolving the litigation.

Item 4. Submission of Matters to a Vote of Security Holders

 No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders of Record

 ADESA's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "KAR" and has been traded on the NYSE since June 16, 2004. According to the records of the Company's transfer agent, there were approximately 34,020 stockholders of record of ADESA common stock at March 18, 2005.

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 The following table sets forth the range of high and low sales prices for each quarter since the Company has been a public company:

Dividend Information

 ADESA intends to pay a regular quarterly dividend to holders of its common stock. Payment of future dividends or the establishment of a dividend reinvestment plan will be at the discretion of the Board of Directors in accordance with applicable law after taking into account various factors, including ADESA's financial condition, operating results, current and anticipated cash needs, plans for expansion and contractual restrictions with respect to the payment of dividends.

 ADESA paid a $17.5 million dividend to ALLETE, the sole holder of record of the Company's common stock, through a wholly-owned subsidiary, on March 31, 2004. ADESA also paid a $100 million dividend to ALLETE on May 25, 2004, in the form of an intercompany note. On December 15, 2004, the Company paid a quarterly dividend of $0.075 per common share to stockholders of record on November 15, 2004. During each of the years ended December 31, 2003 and December 31, 2002, ADESA did not pay a dividend to ALLETE.

Use of Proceeds

 On June 21, 2004, the Company completed the initial public offering of its common stock and a registered public offering of its unsecured 7⁵/8% senior subordinated notes due 2012 pursuant to a registration statement on Form S-1 (File No. 333-113499) that was declared effective by the Securities and Exchange Commission on June 15, 2004. A total of 6,250,000 shares of common stock at a price of $24.00 per share and $125 million in aggregate principal amount of senior subordinated notes were offered, each under a separate prospectus. The managing underwriters of the offering were UBS Securities LLC and Merrill Lynch, Pierce, Fenner, & Smith Incorporated. The aggregate gross proceeds of the shares offered and sold were $150.0 million. In connection with the initial public offering and notes offering, the Company paid $10.5 million and $2.8 million, in underwriting discounts and commissions to the underwriters.

 In addition, the following table sets forth the other material expenses incurred in connection with the initial public offering and the notes offering (in millions):

 After deducting the underwriting discounts and commissions and the offering expenses described above, the Company received net proceeds of approximately $136.0 million and $121.7 million from its initial public offering and notes offering. The Company used the net proceeds from the initial public offering and the notes offering, together with $275.0 million

27

borrowed under the Company's new credit facility, to repay $75.1 million of outstanding debt to unaffiliated third parties, to pay accrued interest and principal on the $100.0 million intercompany note representing a dividend paid to ALLETE and to repay all of the Company's other outstanding intercompany debt owed to ALLETE and its subsidiaries, totaling $105.0 million. In addition, the Company's two existing senior notes were redeemed on August 18, 2004, for $139.0 million. The remaining net proceeds from the initial public offering and notes offering have and will be used for general corporate purposes, including the repurchase of up to $130 million of the Company's common stock pursuant to a share repurchase program approved by the Company's Board of Directors on August 30, 2004. During the fourth quarter of 2004, the Company repurchased a total of 4.4 million shares pursuant to this program for an aggregate cost of $86.7 million.

Issuer Purchases of Equity Securities

 The Company's share repurchase program has and may include open market transactions executed from time to time at prevailing market prices, as well as privately negotiated transactions, and will be structured to comply with, and be conducted under, Rule 10b-18 of the Securities Exchange Act of 1934 and other applicable regulations. Future purchases will be made at such times and in such amounts as ADESA deems appropriate and may be discontinued at any time. On October 28, 2004, the Company purchased of a total of 3.2 million shares of ADESA common stock at an average price of $19.68 per share from U.S. Bank National Association and American Express Trust, trustees for the Minnesota Power and Affiliated Companies Master Pension Trust and the Minnesota Power and Affiliated Companies Retirement Savings and Stock Ownership Plan, which are employee benefit plans of ALLETE. As of December 31, 2004, the Company had repurchased a total of 4.4 million shares at a weighted average price of $19.74 for an aggregate cost of $86.7 million.

 The following table provides information about purchases by ADESA of its common shares during the quarter ended December 31, 2004, (in millions, except per share amounts):

⁽¹⁾

On August 30, 2004, the Company's Board of Directors approved a program to repurchase up to $130 million of the Company's common stock. The program expires September 23, 2005.

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Item 6. Selected Financial Data

 The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

 Operating results of the Company's former vehicle transport and vehicle importation businesses are included in discontinued operations and amounts have been adjusted accordingly for all periods presented. Due to significant acquisitions in 2000 and 2001 involving the purchase of 26 used vehicle and 18 salvage auctions, information included below may not be comparable. Also, 2002, 2003 and 2004 operating results do not include goodwill amortization as required by Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."

 In June, 2004, the Company completed the initial public offering of its common stock and a registered public offering of its unsecured 7⁵/8% senior subordinated notes. As a result of the Company's recapitalization and transition to an independent public company, 2004 operating results might not be comparable to previous periods or ongoing operations. As noted below, the operating results for 2004 include non-recurring transaction costs and a loss on extinguishment of debt. Transaction costs consist primarily of legal and professional fees associated with the Company's initial public offering and separation from ALLETE. The loss on extinguishment of debt consists of make-whole premiums related to the redemption of the Company's senior notes and write-off of related unamortized debt issuance costs. In addition, the operating results for 2004 include incremental ongoing corporate expenses consisting of salaries, benefits and other expenses due to the addition of corporate level personnel, professional fees, incremental insurance and other costs necessary to support an independent public company. The recapitalization also resulted in incremental interest expense in 2004.

29

(Dollars in millions except per share and as otherwise noted)

30

 The following table reconciles EBITDA to income from continuing operations.

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

31

Footnotes to Selected Financial Data

⁽¹⁾

2004 operations include:

⁽²⁾

2003 operating expenses include a non-recurring gain on sale of real estate of $3.4 million ($2.1 million after tax or $0.03 per share).

⁽³⁾

Weighted average shares outstanding were 14,086,000 prior to the merger of ADESA, Inc. and ADESA Corporation on May 24, 2004. See Note 2 (Basis of Organization and Presentation) in the Notes to Consolidated Financial Statements.

⁽⁴⁾

Cash dividends declared per share does not include dividends declared and paid to ALLETE totaling $117.5 million prior to ADESA becoming an independent public company.

⁽⁵⁾

EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. The Company believes that EBITDA is a useful supplement and meaningful indicator of earnings performance to be used by its investors, financial analysts and others to analyze the Company's financial performance and results of operations over time. In addition, EBITDA is a useful supplement to net cash provided by operating activities to help investors understand the Company's ability to generate cash flows from operations that are available for taxes, debt service and capital expenditures. EBITDA is also used by 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 continuing operations or net income as indicators of liquidity or operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles (GAAP). This measure may not be comparable to similarly titled measures reported by other companies.

⁽⁶⁾

EBITDA for the year ended December 31, 2004 reflects incremental corporate expenses of $11.9 million and non-recurring transaction costs and a loss on extinguishment of debt totaling $17.0 million.

⁽⁷⁾

EBITDA for the year ended December 31, 2003 includes a gain on sale of real estate of $3.4 million.

⁽⁸⁾

For purposes of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest on indebtedness, amortization of debt issuance costs which are charged to interest expense and one-third of rent expense which is deemed representative of an interest factor. Fixed charges for 2004 include incremental interest expense of $8.7 million resulting from the Company's recapitalization in June 2004.

⁽⁹⁾

The used vehicle conversion rate represents the number of vehicles sold as a percentage of the number of vehicles entered or offered for sale at used vehicle auctions. This measure may not be comparable to similarly titled measures reported by other companies.

⁽¹⁰⁾

Revenue per vehicle sold is derived by taking auction and related services revenues divided by the number of vehicles sold. Revenue per vehicle sold does not include dealer financing revenues. This measure may not be comparable to similarly titled measures reported by other companies.

⁽¹¹⁾

Revenue per loan transaction is computed by taking dealer financing revenues divided by the number of loan transactions. This measure may not be comparable to similarly titled measures reported by other companies.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

 The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends, and uncertainties. In particular, statements made in this report that are not historical facts (including but not limited to expectations, estimates, assumptions and projections regarding the industry, business, future operating results, and anticipated cash requirements) may be forward-looking statements. Actual results could differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors that May Affect Future Results." Some of these factors include: general business conditions; market trends; competition; weather; vehicle production; trends in new and used vehicle sales; business development activities, including acquisitions; economic conditions including exchange rate and interest rate fluctuations; litigation developments and other risks described from time to time 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, they involve risks which are not currently known to ADESA that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date hereof and ADESA does not undertake to update its forward-looking statements.

Executive Overview

 2004 was a year of change and challenge for ADESA and the vehicle remarketing industry. In June 2004, ADESA completed its initial public offering of 6,250,000 shares of common stock followed by ALLETE's distribution of a stock dividend to all ALLETE stockholders in September of 2004 completing the separation of ADESA from ALLETE. This transition took place in a challenging industry environment in which industry-wide off-lease volumes decreased more than 25 percent from 2003. The continued decline in off-lease volumes contributed to a 2% decrease in vehicles sold at ADESA auctions. The operating results achieved in 2004 are a testament to management's ability to adapt to this challenging environment. ADESA expanded operations, achieved double-digit growth in income from continuing operations from both of its business segments, set a new annual loan transaction record, controlled expenses, repurchased 4.4 million shares of its common stock, implemented a quarterly dividend and continued to invest for the long-term.

 For the year ended December 31, 2004, the Company reported revenue of $931.6 million and net income of $105.3 million or $1.15 per share, compared with revenue of $911.9 million and net income of $115.1 million or $1.30 per share for 2003. Income from continuing operations was $109.5 million for 2004 compared with $114.8 million for 2003. Cash flows from operations were $167.4 million for the year ended December 31, 2004 compared with $140.9 million for 2003. The Company incurred various charges and incremental expenses in 2004 related to its initial public offering and subsequent separation from ALLETE that affect the comparability of its reported results of operations. In 2003, the Company recognized a gain on sale of real

33

estate that also affected the comparability of its results. The impact of these transactions on income from continuing operations is as follows (in millions):

^*

The non-recurring transaction-related expenses consisted primarily of legal and professional fees associated with the Company's initial public offering and separation from ALLETE. The debt prepayment expenses in 2004 consisted of make-whole premiums related to the redemption of the Company's senior notes and write-off of related unamortized debt issue costs. Incremental corporate expenses for 2004 consisted of salaries, benefits and other expenses due to the addition of corporate level personnel, professional fees, incremental insurance and other costs necessary to support an independent public company, while incremental interest expense is the result of the Company's recapitalization and transition to an independent public company.

 For 2005 and beyond, ADESA is poised to pursue its growth strategies as an independent public company. A key statistic that is critical to ADESA's business model and success is that there are approximately 248 million vehicles in operation in North America. About 45 million of these vehicles change hands every year. However only slightly less than 10 million of these vehicles are sold at auction, providing what management believes to be an opportunity for the auction industry and ADESA. The Company is pursuing a strategy designed to capitalize on its underlying business strengths by:

•

growing auction and loan volumes;



•

continuing to improve its operating efficiency;



•

expanding into new markets; and



•

growing online auction and related services.

 ADESA anticipates that dealer supplied vehicles will be the primary source of auction volume growth in the coming years as off-lease volumes are expected to continue declining, albeit at a slower rate, through 2007. Part of the Company's strategy includes a focus on the dealer customer and leveraging technology to improve service and decrease costs. ADESA is working on a number of information technology projects aimed at fully integrating its service offerings to enhance the level of customer service and increase its operating efficiencies. These efforts include the continued rollout of ADESA's LiveBlock™ online auction technology and initiatives focused on dealer customers.

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Critical Accounting Estimates

 It is important to understand ADESA's accounting policies in order to understand its financial statements. In preparing the financial statements in accordance with generally accepted accounting principles, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex. Consequently, actual results could differ from those estimates.

 Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of ADESA's Board of Directors. In addition to the critical accounting estimates, there are other items used in the preparation of ADESA's consolidated financial statements that require estimation, but are not deemed critical based on the above criteria. Changes in estimates used in these and other items could have a material impact on ADESA's financial statements.

 ADESA continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. In cases where management estimates are used, they are based on historical experience, information from third-party professionals, and various other assumptions believed to be reasonable. The following summarizes those accounting policies that are most subject to important estimates and assumptions and are most critical to the reported results of operations and financial condition. See Note 3 in the Notes to Consolidated Financial Statements for further description of these items and the Company's other accounting policies.

Uncollectible Receivables and Allowance for Credit Losses and Doubtful Accounts

 The Company maintains an allowance for credit losses and doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The allowances for credit losses and doubtful accounts are based on management's evaluation of the receivables portfolio under current economic conditions, the volume of the portfolio, overall portfolio credit quality, review of specific collection matters and such other factors, which in management's judgment deserve recognition in estimating losses. Specific collection matters can be impacted by the outcome of negotiations, litigation and bankruptcy proceedings.

 Due to the nature of the business at ADESA's auctions, substantially all of the Company's trade receivables are due from vehicle dealers, salvage buyers, institutional customers and insurance companies. ADESA generally has possession of vehicles or vehicle titles collateralizing a significant portion of these receivables. At the auction sites, risk is mitigated through a pre-auction registration process that includes verification of identification, bank accounts, dealer license status, acceptable credit history, buying history at other auctions and the written acceptance of all of the auction's policies and procedures.

 AFC's allowance for credit losses includes an estimate of losses for finance receivables currently held on the balance sheet of AFC and its subsidiaries. Additionally, an accrued liability is recorded for the estimated losses for loans sold by AFC's subsidiary, AFC Funding Corporation. These loans were sold to a bank conduit facility with recourse to AFC Funding Corporation and will come back on the balance sheet of AFC Funding Corporation at fair market value if they become ineligible under the terms of the collateral arrangement with the bank conduit facility. AFC controls credit risk through credit approvals, credit limits, underwriting and collateral management monitoring procedures, which includes holding vehicle titles where permitted.

 A 10% increase in the allowance for credit losses and doubtful accounts and the accrued liability for loans sold to the bank conduit facility would result in an increase in the provision

35

for credit losses of $1.2 million and a $0.6 million reduction in revenues and an aggregate decrease in earnings of $1.1 million. See "Liquidity and Capital Resources", "Off-balance Sheet Arrangements" and Note 9 in the Notes to Consolidated Financial Statements for further discussion.

Impairment of Goodwill and Long-Lived Assets

 In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, the Company assesses goodwill for impairment at least annually and whenever events or circumstances indicate that the carrying amount of the goodwill may not be recoverable. Important factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results; significant negative industry or economic trends; significant decline in the Company's stock price for a sustained period; and the Company's market valuation relative to its book value. In assessing the recoverability of goodwill, ADESA must make assumptions regarding estimated future cash flows and earnings, changes in the Company's business strategy and economic conditions affecting market valuations related to the fair values of ADESA's two reporting units which are its two business segments, Auction and Related Services and Dealer Financing. If the fair value of a reporting unit is determined to be less than the carrying amount, an impairment charge would be recorded in the period identified. In response to changes in industry and market conditions, ADESA may be required to strategically realign its resources and consider restructuring, disposing of or otherwise exiting businesses, which could result in an impairment of goodwill. As of December 31, 2004, ADESA had $514.6 million in goodwill that will be subject to future impairment tests. Annual testing was completed in the second quarter of 2004 with no resulting impairment. No significant changes in events or circumstances have occurred that would indicate the carrying amount of the Company's goodwill has been impaired since the test was completed.

 The Company reviews long-lived assets for possible impairment whenever circumstances indicate that their carrying amount may not be recoverable. If it is determined that the carrying amount of a long-lived asset exceeds the total amount of the estimated undiscounted future cash flows from that asset, the Company would recognize a loss to the extent that the carrying amount exceeds the fair value of the asset. Management judgment is involved in both deciding if testing for recovery is necessary and in estimating undiscounted cash flows. The Company's impairment analysis is based on the current business strategy, expected growth rates and estimated future economic conditions. No material adjustments were made to the carrying value of long-lived assets in 2004, 2003 or 2002. See Note 3 in the Notes to Consolidated Financial Statements for further discussion.

Self-Insurance Programs

 ADESA self-insures a portion of employee medical benefits under the terms of its employee health insurance program as well as a portion of its automobile, general liability and workers' compensation claims. The Company purchases individual stop-loss insurance coverage that limits the exposure on individual claims as well as aggregate stop-loss insurance coverage that limits the total exposure to overall claims for employee medical, automobile, general liability and workers' compensation claims. The cost of the stop-loss insurance is expensed over the contract periods.

 ADESA records an accrual for the claims expense related to its employee medical benefits, automobile, general liability and workers' compensation claims based upon the expected amount of all such claims. Trends in healthcare costs could have a significant impact on anticipated claims. If actual claims are higher than anticipated, the Company's accrual might be

36

insufficient to cover the claims costs, which would have an adverse impact on the operating results in that period.

Legal Proceedings and Other Loss Contingencies

 ADESA is subject to the possibility of various legal proceedings and other loss contingencies, many involving litigation incidental to the business and a variety of environmental laws and regulations. Litigation and other loss contingencies are subject to inherent uncertainties and the outcomes of such matters are often very difficult to predict and generally are resolved over long periods of time. The Company considers the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. Estimating probable losses requires the analysis of multiple possible outcomes that often are dependent on the judgment about potential actions by third parties. Contingencies are recorded in the consolidated financial statements, or otherwise disclosed, in accordance with SFAS 5, Accounting for Loss Contingencies. ADESA accrues for an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. If the amount of an actual loss is greater than the amount accrued, an adverse impact on operating results in that period would result. Legal fees are expensed as incurred. See Note 19 in the Notes to Consolidated Financial Statements for further discussion.

Income Taxes

 All income tax amounts reflect the use of the liability method. Under this method, deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes.

 ADESA operates in multiple tax jurisdictions with different tax rates and must determine the allocation of income to each of these jurisdictions based on estimates and assumptions. In the normal course of business, the Company will undergo scheduled reviews by taxing authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Tax reviews often require an extended period of time to resolve and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates.

 ADESA records its tax provision based on existing laws, experience with previous settlement agreements, the status of current IRS (or other taxing authority) examinations and management's understanding of how the tax authorities view certain relevant industry and commercial matters. Although the Company has recorded all probable income tax liabilities in accordance with SFAS 5, Accounting for Contingencies and SFAS 109, Accounting for Income Taxes, these accruals represent accounting estimates that are subject to inherent uncertainties associated with the tax audit process, and therefore include certain contingencies. ADESA establishes reserves when, despite management's belief that tax return positions are fully supportable, the Company believes that certain positions are likely to be challenged and that the Company may or may not prevail. The Company adjusts these reserves in light of changing facts and circumstances. See Note 3 in the Notes to Consolidated Financial Statements for further discussion.

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Results of Operations

 The following table sets forth operations data as a percentage of total revenue for the periods indicated:

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

Seasonality

 Generally, the volume of vehicles sold at the Company's auctions is highest in the first and second calendar quarters of each year and slightly lower in the third quarter. Fourth quarter volume of vehicles sold is generally lower than all other quarters. This seasonality is affected by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affect the demand side of the auction industry. Auction volumes tend to decline during prolonged periods of winter weather conditions, hurricanes and other major weather related events. In addition, mild weather conditions and decreases in traffic volume can each lead to a decline in the available supply of salvage vehicles because fewer traffic accidents occur, resulting in fewer damaged vehicles overall. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The Company's earnings are generally highest in the second calendar quarter followed by the third calendar quarter. Although volume is typically higher in the first calendar quarter than the third calendar quarter, earnings are generally lower due to additional costs associated with winter weather. The fourth calendar quarter typically has the lowest earnings as a result of the lower volume and additional costs associated with the holidays and winter weather.

Year Ended December 31, 2004

Summary

 Operating revenue increased $19.7 million, or 2%, to $931.6 million for the year ended December 31, 2004, compared with $911.9 million for the year ended December 31, 2003.

38

Operating revenue for auction and related services and for dealer financing increased 1% and 12% to $815.0 million and $116.6 million for the year ended December 31, 2004, compared with $807.6 million and $104.3 million for the same period in 2003.

 Operating profit for 2004 was 22.9% of revenue, an increase from 22.2% in 2003, despite incurring $11.9 million of incremental corporate costs to support ADESA as an independent public company and non-recurring transaction costs of $3.0 million.

 ADESA reported income from continuing operations of $109.5 million for the year ended December 31, 2004, compared with income from continuing operations of $114.8 million for the year ended December 31, 2003. In addition to the previously mentioned incremental corporate costs and non-recurring transaction costs, the Company recognized a $14.0 million loss on the extinguishment of debt ($8.5 million after tax) as well as incremental interest expense of $8.7 million ($5.3 million after tax) resulting from the recapitalization and transition to an independent public company.

Operating Revenue

Auction and Related Services

 Revenue for auction and related services increased $7.4 million, or 1%, to $815.0 million for the year ended December 31, 2004, compared with $807.6 million for the same period in 2003. A 3% increase in revenue per vehicle sold resulted in increased auction and related services revenue of approximately $24.1 million including fluctuations in the Canadian exchange rate which increased revenue by approximately $11.2 million for the year ended December 31, 2004 compared with the year ended December 31, 2003. Total auction vehicles sold decreased 2% for the year ended December 31, 2004, resulting in an offsetting decrease in auction and related services revenue of approximately $16.7 million compared with the year ended December 31, 2003.

 Revenue per vehicle sold grew 3% for the year ended December 31, 2004 compared with the year ended December 31, 2003 primarily due to selected price increases implemented earlier in the year and favorable changes in the Canadian exchange rate. In addition, the Company's increased penetration rate for vehicle inspections and e-business services such as AutoVin and LiveBlock contributed to the increase in revenue per vehicle sold for the year ended December 31, 2004. The shift in mix from institutional vehicles to dealer vehicles resulted in a decrease in ancillary services for logistics and reconditioning for the year ended December 31, 2004 compared with the year ended December 31, 2003, which offset some of the increases due to pricing and the increased penetration of other services.

 The total number of vehicles sold decreased 2% in the year ended December 31, 2004 compared with the year ended December 31, 2003. The number of used vehicles sold in 2004

39

declined from the number sold in 2003 primarily due to the industry decline in off-lease vehicles and a decline in vehicles repossessed by the Company's customers available for redistribution, which were partially offset by an increase in dealer vehicles sold and salvage vehicles sold. The used vehicle conversion percentage increased to 62.5% for 2004 from 61.0% in 2003, driven by an unusually high first quarter 2004 conversion percentage of 68.4% compared with 62.4% in 2003.

 The off-lease volumes returning for wholesale remarketing in the US fell from an estimated 1.9 million units in 2003 to approximately 1.5 million units in 2004. ADESA anticipates that dealer supplied vehicles will be the primary source of auction volume growth in the next few years as off-lease volumes are expected to continue to decline through 2007, albeit at a slower rate than in 2004. ADESA expects to increase the number of dealer vehicles sold in 2005 as a result of its dealer consignment initiatives and the continued substitution of dealer vehicles for institutional vehicles. ADESA believes there is an opportunity to generate more business from dealers by increasing the first-time conversion rates of their consignments and providing more attractive services and economics as compared with other redistribution channels. The Company seeks to standardize practices among its auctions and provide market data, including sales results and individual customer metrics, to make the auction process more attractive to selling dealers. The continuing mix shift from institutional vehicles to dealer vehicles could constrain growth in revenue per vehicle sold as institutional sellers generally exhibit a higher demand for ancillary services for logistics and reconditioning.

Dealer Financing

 Dealer financing revenue increased $12.3 million, or 12%, for the year ended December 31, 2004, compared with the year ended December 31, 2003. The increase in dealer financing revenue was driven by a 13% increase in loan transactions for the year ended December 31, 2004 compared with the year ended December 31, 2003. Increases in loan transactions were a result of an increase in the number of active dealers combined with an increase in floorplan utilization by the existing dealer base.

 Revenue per loan transaction decreased $1 primarily due to an increase in the provision for credit losses of approximately $1.5 million for the year ended December 31, 2004.

Cost of Services

 Cost of services (excluding depreciation and amortization) decreased $10.6 million, or 2%, for the year ended December 31, 2004 compared with the year ended December 31, 2003. The impact of the used vehicle market mix shift toward more dealer vehicles (fewer ancillary services are utilized by dealer sellers), higher average used vehicle conversion rates and

40

management cost controls favorably impacted cost of services by approximately $8.7 million, or 2%, for the year ended December 31, 2004. In addition, lower vehicle volumes also accounted for a $9.3 million decrease in cost of services for the year ended December 31, 2004 compared with the year ended December 31, 2003.

 These favorable impacts on cost of services as compared with the year ended December 31, 2003 were partially offset by the impact of fluctuations in the Canadian exchange rate, which increased cost of services by approximately $5.7 million, and the growth in loan transactions, which resulted in a $1.7 million increase in costs of services.

Selling, General and Administrative Expenses

 Selling, general and administrative expenses increased $18.5 million, or 9%, for the year ended December 31, 2004, compared with the same period in 2003, primarily due to incremental expenses associated with the June 2004 transactions (initial public offering, notes offering and new credit facility) and the Company's September 2004 separation from ALLETE. Selling, general and administrative expenses for the year ended December 31, 2004 included approximately $3.0 million of non-recurring transaction costs and $11.9 million of incremental corporate expenses to support ADESA as an independent public company. Transaction costs consist primarily of legal and professional fees associated with the initial public offering and the Company's separation from ALLETE. Incremental corporate expenses consist of salaries, benefits and other expenses due to the addition of corporate level personnel, professional fees, incremental insurance and other costs necessary to support an independent public company. Additionally, a $3.4 million non-recurring gain on the sale of real estate was recognized in 2003, which decreased selling, general and administrative expenses for the year ended December 31, 2003. The Company expects to incur approximately $4.0 million to $4.5 million of incremental corporate expenses in the first half of 2005 relative to the first half of 2004 as a result of operating as an independent public company.

Depreciation and Amortization

 Depreciation and amortization expense increased $0.8 million, or 2%, for the year ended December 31, 2004, compared with the year ended December 31, 2003, primarily due to increased depreciation expense associated with owning certain auction facilities previously leased and the addition of new facilities and equipment.

Operating Profit

 Operating profit increased $11.0 million, or 5%, for the year ended December 31, 2004, compared with the same period in 2003. As a percentage of revenue, operating profit increased to 22.9% in 2004 compared with 22.2% in 2003, primarily as a result of increased revenues and lower cost of services, partially offset by increased selling, general and administrative expenses from incremental corporate costs and non-recurring transaction costs incurred in 2004. The mix shift from institutional to dealer vehicles combined with higher average used vehicle conversion rates and management cost controls contributed to the improvement in operating profit margin in 2004. The improvement in operating profit also reflects management's success in reducing direct costs at the auction sites to match volumes while also modestly increasing revenue.

Interest Expense

 Interest expense increased $9.4 million, or 59%, in the year ended December 31, 2004, compared with the year ended December 31, 2003, as the Company is carrying additional debt

41

related to its recapitalization (notes offering and new credit facility). In the first half of 2005, the Company expects to incur approximately $7.0 million to $8.0 million of additional interest expense, incremental to the expense incurred in 2004, as a result of the additional debt related to its recapitalization.

Loss on Extinguishment of Debt

 ADESA redeemed its $90 million 7.7% Senior Notes, Series A, due 2006 and its $35 million 8.1% Senior Notes, Series B, due 2010 on August 18, 2004. As previously announced by the Company, the redemption resulted in non-recurring debt prepayment expenses of $14.0 million before income taxes. The non-recurring expenses included an early redemption penalty and the write-off of unamortized debt issuance costs.

Provision for Income Taxes

 The effective income tax rate was 38.8% for the year ended December 31, 2004, a decrease from the effective rate of 39.5% for the year ended December 31, 2003. The decrease in the effective tax rate in 2004 is attributable to the restructuring of certain tax planning strategies and other tax components associated with the Company's separation from ALLETE.

Discontinued Operations

 In February 2003, ADESA approved a plan to discontinue the operations of its vehicle importation business. The financial results of the vehicle importation business have been accounted for as discontinued operations. Net loss from discontinued operations for the year ended December 31, 2004 includes a $6.9 million pre-tax charge, $4.2 million net of tax, related to a jury award and the related interest and legal costs in a suit filed by a former employee of the Company's vehicle importation business. See Note 19 in the Notes to Consolidated Financial Statements for further description of this legal matter. Net income from discontinued operations for the year ended December 31, 2003 was $0.3 million as a result of a litigation settlement in the Company's discontinued vehicle transport business partially offset by exit charges incurred related to the Company's vehicle importation business.

 The following table summarizes financial information for the discontinued operations (in millions):

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Year Ended December 31, 2003

Summary

 Operating revenue increased $79.5 million, or 10%, in the year ended December 31, 2003 as compared with the year ended December 31, 2002. Operating revenue for auction and related services and dealer financing increased 10% and 4% to $807.6 million and $104.3 million for the year ended December 31, 2003, compared with $732.5 million and $99.9 million for the year ended December 31, 2002. Operating expenses increased by $51.6 million, or 8%, in the year ended December 31, 2003 as compared with the year ended December 31, 2002.

 Operating profit for the year ended December 31, 2003 was 22.2% of revenue, an increase from 21.0% for the year ended December 31, 2002. For the year ended December 31, 2003, ADESA reported income from continuing operations of $114.8 million, a 22% increase as compared with the year ended December 31, 2002. Higher net income in 2003 was attributable to an increased number of vehicles sold though the Company's auctions, selective fee increases, lower interest expense, a gain on the sale of real estate and receivables portfolio management at AFC.

Operating Revenue

Auction and Related Services

 Revenue in the auctions and related services segment increased $75.1 million, or 10%, in 2003 as compared with 2002. Revenue was higher in 2003 primarily due to an increased number of vehicles sold through the Company's auctions, a shift toward the sale of more institutional vehicles, selective fee increases and the increased Canadian dollar currency exchange rate. Total auction volumes increased 5% contributing approximately $33.4 million of the total revenue increase for auctions and related services. Volumes increased in 2003 as compared with 2002 due to the stabilization of wholesale used vehicles prices in mid-2003, increased demand for used vehicles as retail demand increased during the year, and an increase in volume from institutional customers. Vehicles sold at the Company's salvage auction facilities increased 11% due to expansion into new markets, including sites where the salvage auctions were combined with existing used vehicle auction facilities. The shift toward the sale of more institutional vehicles, which resulted in additional sales of ancillary services for logistics and reconditioning, as well as selective price increases, contributed approximately $24.2 million of the total revenue increase for the auctions and related services segment. The significant increase in the Canadian currency exchange rate in 2003 as compared with 2002 accounted for approximately $17.5 million of the revenue increase in the auctions and related services segment.

 Revenue per vehicle sold grew 5% for the year ended December 31, 2003 compared with the year ended December 31, 2002 as a result of a shift towards the sale of more institutional

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vehicles, selected pricing actions and changes in the Canadian exchange rate. The shift in mix from dealer vehicles to institutional vehicles resulted in an increase in ancillary services for logistics and reconditioning for the year ended December 31, 2003 as compared with 2002.

Dealer Financing