--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
--------------------------------------------------------------------------------

                             Washington, D.C. 20549

                                   FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
    ACT OF 1934
    For the fiscal year ended DECEMBER 31, 2000

/ /  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE  ACT OF 1934
     For the  transition  period  from           to
                                        --------    --------
     Commission File No. 1-3548

                                     ALLETE
                (LEGALLY INCORPORATED AS MINNESOTA POWER, INC.)
             (Exact name of registrant as specified in its charter)

              MINNESOTA                                41-0418150
  (State or other jurisdiction of         (I.R.S. Employer Identification No.)  
    incorporation or organization)

             30 WEST SUPERIOR STREET, DULUTH, MINNESOTA 55802-2093
          (Address of principal executive offices including Zip Code)

                                 (218) 279-5000

              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


                                              NAME OF EACH STOCK EXCHANGE    
         TITLE OF EACH CLASS                      ON WHICH REGISTERED
         -------------------                      -------------------

   Common Stock, without par value              New York Stock Exchange

8.05% Cumulative Quarterly Income
Preferred Securities of ALLETE
Capital I, a subsidiary of ALLETE               New York Stock Exchange

          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  /X/    No  / /

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. / /

The aggregate  market value of voting stock held by nonaffiliates on January 29,
2001 was $1,668,941,155.

As of January  29, 2001 there were  75,335,983  shares of ALLETE  Common  Stock,
without par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders  are
incorporated by reference in Part III.

--------------------------------------------------------------------------------
                          ALLETE 2000 ANNUAL REPORT                           19



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

                                TABLE OF CONTENTS

                                                                            PAGE
--------------------------------------------------------------------------------
DEFINITIONS   .............................................................  21

SAFE HARBOR STATEMENT......................................................  22


PART I

Item 1.  Business..........................................................  23
         Energy Services...................................................  24
              Retail Electric Sales........................................  25
              Purchased Power and Capacity Sales...........................  26
              Fuel.........................................................  27
              Wholesale Electric Sales.....................................  27
              Regulatory Issues............................................  27
              Competition..................................................  29
              Franchises...................................................  29
              Environmental Matters........................................  29
         Automotive Services...............................................  31
              Competition..................................................  33
              Environmental Matters........................................  33
         Water Services....................................................  34
              Regulatory Issues............................................  34
              Competition..................................................  35
              Franchises...................................................  35
              Environmental Matters........................................  35
         Investments.......................................................  35
              Environmental Matters........................................  36
         Executive Officers of the Registrant..............................  37

Item 2.  Properties........................................................  38

Item 3.  Legal Proceedings.................................................  38

Item 4.  Submission of Matters to a Vote of Security Holders...............  38
                                                                             

PART II                                                                      

Item 5.  Market for the Registrant's Common Equity and Related Stockholder   
           Matters.........................................................  38

Item 6.  Selected Financial Data...........................................  39

Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations.......................................  41
              Consolidated Overview........................................  41
              2000 Compared to 1999........................................  42
              1999 Compared to 1998........................................  43
              Outlook......................................................  43
              Liquidity and Capital Resources..............................  45
              Capital Requirements.........................................  46
              Market Risk..................................................  47
              New Accounting Standards.....................................  47

Item 7A. Quantitative and Qualitative Disclosures about Market Risk........  47

Item 8.  Financial Statements and Supplementary Data.......................  47

Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure............................................  47


PART III

Item 10. Directors and Executive Officers of the Registrant................  48

Item 11. Executive Compensation............................................  48

Item 12. Security Ownership of Certain Beneficial Owners and Management....  48

Item 13. Certain Relationships and Related Transactions....................  48


PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...  48

SIGNATURES.................................................................  52

CONSOLIDATED FINANCIAL STATEMENTS..........................................  53

--------------------------------------------------------------------------------
20                         ALLETE 2000 ANNUAL REPORT



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

                                  DEFINITIONS

The following abbreviations or acronyms are used in the text.

ABBREVIATION OR ACRONYM        TERM
--------------------------------------------------------------------------------

ACE                            ACE Limited
ADESA                          ADESA Corporation
ADESA Canada                   ADESA Canada Inc.
ADESA Importation              ADESA Importation Services, Inc.
ADT                            ADT Automotive, Inc.
AFC                            Automotive Finance Corporation
Americas' Water                Americas' Water Services Corporation
APC                            Auto Placement Center, Inc.
AutoVIN                        AutoVIN, Inc.
BNI Coal                       BNI Coal, Ltd.
Boswell                        Boswell Energy Center
CAG                            Canadian Auction Group
Cape Coral Holdings            Cape Coral Holdings, Inc.
Capital Re                     Capital Re Corporation
CIP                            Conservation Improvement Program(s)
Company                        ALLETE and its subsidiaries
ComSearch                      ComSearch, Inc.
Dicks Creek                    Dicks Creek Wastewater Utility
EBITDAL                        Earnings Before Interest, Taxes, Depreciation,
                                 Amortization and Lease Expense
EndTrust                       EndTrust Lease End Services, LLC
EPA                            Environmental Protection Agency
ESOP                           Employee Stock Ownership Plan
FERC                           Federal Energy Regulatory Commission
Florida Water                  Florida Water Services Corporation
Form 8-K                       ALLETE Current Report on Form 8-K
Form 10-K                      ALLETE Annual Report on Form 10-K
Form 10-Q                      ALLETE Quarterly Report on Form 10-Q
FPSC                           Florida Public Service Commission
Georgia Water                  Georgia Water Services Corporation
Great Rigs                     Great Rigs Incorporated
Great River                    Great River Energy
Heater                         Heater Utilities, Inc.
Hibbard                        M.L. Hibbard Station
Impact Auto                    Impact Auto Auctions Ltd. And Suburban Auto
                                 Parts Inc., collectively
Invest Direct                  ALLETE's Direct Stock Purchase and Dividend
                                 Reinvestment Plan
kWh                            Kilowatthour(s)
Laskin                         Laskin Energy Center
Lehigh                         Lehigh Acquisition Corporation
LS Power                       LS Power, LLC
Manheim                        Manheim Auctions, Inc.
MAPP                           Mid-Continent Area Power Pool
MBtu                           Million British thermal units
Mid South                      Mid South Water Systems, Inc.
Minnesota Power                Minnesota Power, Inc.
Minnkota Power                 Minnkota Power Cooperative, Inc.
MP Telecom                     Minnesota Power Telecom, Inc.
MPUC                           Minnesota Public Utilities Commission
MW                             Megawatt(s)
MWh                            Megawatthour(s)
NCUC                           North Carolina Utilities Commission
Note___                        Note___ to the consolidated financial statements
                                 indexed in Item 14(a) of this Form 10-K
NPDES                          National Pollutant Discharge Elimination System
Palm Coast                     Palm Coast Holdings, Inc.
PAR                            PAR, Inc.
PCUC                           Palm Coast Utility Corporation
PSCW                           Public Service Commission of Wisconsin
Rainy River                    Rainy River Energy Corporation
SFAS                           Statement of Financial Accounting Standards No.
Split Rock                     Split Rock Energy LLC
Spruce Creek                   Spruce Creek South Utilities Inc.
Square Butte                   Square Butte Electric Cooperative
SWL&P                          Superior Water, Light and Power Company
WPPI                           Wisconsin Public Power, Inc.

--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          21


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In  connection  with  the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995 (Reform  Act),  we are hereby  filing  cautionary
statements  identifying important factors that could cause our actual results to
differ  materially from those projected in  forward-looking  statements (as such
term is defined in the Reform Act) made by or on behalf of ALLETE in this Annual
Report on Form 10-K,  in  presentations,  in response to questions or otherwise.
Any  statements  that  express,  or  involve  discussions  as to,  expectations,
beliefs, plans, objectives,  assumptions or future events or performance (often,
but not  always,  through  the use of words or  phrases  such as  "anticipates,"
"believes,"  "estimates," "expects," "intends," "plans," "predicts," "projects,"
"will  likely  result,"  "will  continue,"  or  similar   expressions)  are  not
statements of historical facts and may be forward-looking.

Forward-looking statements involve estimates,  assumptions and uncertainties and
are  qualified in their  entirety by reference to, and are  accompanied  by, the
following   important   factors,   which  are  difficult  to  predict,   contain
uncertainties,  are beyond our  control and may cause  actual  results to differ
materially from those contained in forward-looking statements:

     -   prevailing  governmental  policies and  regulatory  actions,  including
         those of the United States Congress, state legislatures,  the FERC, the
         MPUC, the FPSC, the NCUC, the PSCW and various county regulators, about
         allowed rates of return,  industry and rate structure,  acquisition and
         disposal of assets and facilities,  operation and construction of plant
         facilities,  recovery of purchased power and capital  investments,  and
         present or prospective wholesale and retail competition  (including but
         not limited to transmission costs);

     -   economic and geographic factors, including political and economic
         risks;

     -   changes in and compliance with environmental and safety laws and
         policies;

     -   weather conditions;

     -   population growth rates and demographic patterns;

     -   competition for retail and wholesale customers;

     -   pricing and transportation of commodities;

     -   market demand, including structural market changes;

     -   changes in tax rates or policies or in rates of inflation;

     -   changes in project costs;

     -   unanticipated changes in operating expenses and capital expenditures;

     -   capital market conditions;

     -   competition for new energy development opportunities; and

     -   legal  and  administrative  proceedings  (whether  civil  or  criminal)
         and  settlements  that  influence  the  business  and  profitability of
         ALLETE.

Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking  statement
to reflect  events or  circumstances  after the date on which that  statement is
made or to reflect the occurrence of  unanticipated  events.  New factors emerge
from time to time and it is not possible for  management to predict all of these
factors, nor can it assess the impact of each of these factors on the businesses
of ALLETE or the extent to which any factor,  or  combination  of  factors,  may
cause results to differ  materially from those contained in any  forward-looking
statement. [GRAPHIC OMITTED - SQUARE]


--------------------------------------------------------------------------------

                                    NEW NAME.
                               NEW OPPORTUNITIES.
                              NEW SPOT ON THE NYSE.

Now that we've changed our name, it's a whole new ballgame.
We've moved up toward the top of the New York Stock Exchange.    [ALLETE LOGO]
Look for our new ticker symbol, ALE, formerly MPL.

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
22                         ALLETE 2000 ANNUAL REPORT



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------


                                     PART I

ITEM 1.  BUSINESS

ALLETE is a  multi-services  company  incorporated  under the laws of  Minnesota
since 1906. ALLETE is legally  incorporated as Minnesota Power, Inc.  References
in  this  report  to  "we"  and  "our"  are  to  ALLETE  and  its  subsidiaries,
collectively.

We have  operations  in 43 states and nine  Canadian  provinces  engaged in four
business segments:

     -   ENERGY SERVICES includes electric and gas services, coal mining and
         telecommunications;

     -   AUTOMOTIVE  SERVICES includes a network of vehicle auctions,  a finance
         company,  an auto transport company, a vehicle  remarketing  company, a
         company that  provides  field  information  services to the  automotive
         industry and its lenders,  and a company that  provides  Internet-based
         parts location and insurance adjustment audit services nationwide;

     -   WATER SERVICES includes water and wastewater services; and

     -   INVESTMENTS  includes real estate  operations,  investments in emerging
         technologies  related to the electric utility industry and a securities
         portfolio.

Corporate charges represent general corporate expenses,  including interest, not
specifically related to any one business segment. As of December 31, 2000 we had
approximately 13,000 employees, 4,000 of which were not full time.

Since the inception of the 1996  corporate  strategic  plan, we have pursued and
will  continue to pursue a course of expanding our existing  business  segments.
Acquisitions have been and will continue to be a primary means of expansion.

Energy  Services  continues to pursue plans to  construct  in  partnership  with
Wisconsin Public Service Corporation a 250-mile,  345-kilovolt transmission line
from  Wausau,  Wisconsin  to Duluth,  Minnesota  and pursue  regional  wholesale
merchant  generating  plant  opportunities.  In 2000 Minnesota Power in alliance
with Great River formed Split Rock. (See Energy Services.)  Minnesota Power also
signed an  agreement  to install,  by  mid-2001,  a 24-MW  turbine  generator at
Potlatch  Corp.'s  facility in Cloquet,  Minnesota and Electric Odyssey expanded
into the Minneapolis/St. Paul area.

In 2000 and early  2001  Automotive  Services  expanded  significantly  with the
addition of 28 vehicle auction facilities and 19 auction facilities that provide
"total loss" vehicle recovery services to insurance  companies.  These additions
established ADESA as the premier  automotive  services company in Canada and the
second largest vehicle auction  business in North America and position us as the
third  largest  provider  of "total  loss"  vehicle  recovery  services in North
America.

In 2000 Water Services  experienced customer growth through increased population
in the states  they serve and the  acquisition  of Spruce  Creek in Florida  and
other small water and wastewater  systems in North  Carolina and Florida.  Water
Services also closed on a transaction,  subject to certain conditions, that will
expand its wastewater services into a third state, Georgia.

In 2000  Investments sold its investment in ACE and reported record sales by its
real estate operations.

<TABLE>
<CAPTION>

Year Ended December 31                        2000         1999         1998
-----------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>
Consolidated Operating
  Revenue - Millions                         $1,332       $1,132       $1,039

Percentage of Consolidated
  Operating Revenue

Energy Services
  Retail
    Industrial
      Taconite Producers                       13%          13%          16%
      Paper and Pulp Mills                      5            5            6
      Pipelines and Other Industries            3            3            3
-----------------------------------------------------------------------------
         Total Industrial                      21           21           25
    Residential                                 5            6            6
    Commercial                                  5            6            6
  Sales to Other Power Suppliers                6            9            8
  Other Revenue                                 7            7            9
-----------------------------------------------------------------------------
         Total Energy Services                 44           49           54

Automotive Services                            41           36           32

Water Services                                  9           10            9

Investments                                     6            5            5
-----------------------------------------------------------------------------
                                              100%         100%         100%
-----------------------------------------------------------------------------
</TABLE>


For a detailed  discussion  of results of  operations  and  trends,  see Item 7.

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.  For  business  segment  information,  see  Notes 1 and 2.  [GRAPHIC
OMITTED - SQUARE]

--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          23



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

ENERGY SERVICES

The businesses we include in Energy  Services  generate,  transmit,  distribute,
market  and trade  electricity.  Coal  mining  and  telecommunications  are also
included  in  Energy  Services.   The  discussion  below  summarizes  the  major
businesses we include in Energy Services.  Statistical  information is presented
as of December  31, 2000.  All  subsidiaries  are wholly owned unless  otherwise
specifically indicated.

MINNESOTA  POWER provides  electricity in a 26,000 square mile electric  service
territory  located in  northeastern  Minnesota.  Minnesota Power supplies retail
electric  service to 130,000  customers  and  wholesale  electric  service to 16
municipalities.  SWL&P sells  electricity  and natural gas,  and provides  water
service in northwestern Wisconsin.  SWL&P has 14,000 electric customers,  11,000
natural gas customers and 10,000 water customers.

Minnesota  Power had an annual net peak load of 1,454 MW on December  11,  2000.
Our power supply sources are shown below.

We have electric  transmission and  distribution  lines of 500 kilovolts (kV) (8
miles),  230 kV (606 miles),  161 kV (43 miles), 138 kV (6 miles), 115 kV (1,259
miles) and less than 115 kV (6,393  miles).  We own and operate 177  substations
with a total capacity of 8,534  megavoltamperes.  Some of our  transmission  and
distribution lines interconnect with other utilities.

We own offices and service  buildings,  an energy control center,  repair shops,
motor  vehicles,   construction   equipment  and  tools,  office  furniture  and
equipment, and lease offices and storerooms in various localities. Substantially
all of our electric plant is subject to our mortgages  which  collateralize  our
outstanding  first  mortgage  bonds.  Generally,  our properties are held by the
Company  in  fee  and  are  free  from  other  encumbrances,  subject  to  minor
exceptions. Some property,  including certain offices and equipment, is utilized
under leases.  Some of our electric  lines are located on land not owned in fee,
but  are  covered  by  necessary  permits  of  governmental  authorities  or  by
appropriate  easement  rights.  In 1990 we sold a portion of  Boswell  Unit 4 to
WPPI.  WPPI has the right to use our  transmission  line facilities to transport
its share of generation.

MPEX is Minnesota Power's power marketing division which buys and sells capacity
and energy in the wholesale power market. Customers are other power suppliers in
the Midwest and Canada. During 2000 Minnesota Power and Great River formed Split
Rock.  Headquartered  in Elk River,  Minnesota,  Great River is a consumer-owned
generation  and  transmission  cooperative  and is  Minnesota's  second  largest
utility in terms of generating capacity.  Split Rock combines the two companies'
power supply  capabilities  and  customer  loads for power pool  operations  and
generation  outage  protection.  Ownership  of  generation  assets  and  current
customer supply  arrangements  have not changed for either  company.  Split Rock
contracts for wholesale power marketing services from MPEX.

<TABLE>
<CAPTION>
                                                                                                  For the Year Ended
                                                           Unit      Year       Net Winter         December 31, 2000
Power Supply                                                No.    Installed    Capability       Electric Requirements
-------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>     <C>          <C>              <C>             <C>
                                                                                    MW             MWh              %
Steam
  Coal-Fired
    Boswell Energy Center - near Grand Rapids, MN            1       1958            69
                                                             2       1960            69
                                                             3       1973           353
                                                             4       1980           428
-------------------------------------------------------------------------------------------------------------------------
                                                                                    919           5,774,422       46.7%
-------------------------------------------------------------------------------------------------------------------------
    Laskin Energy Center - Hoyt Lakes, MN                    1       1953            55
                                                             2       1953            55
-------------------------------------------------------------------------------------------------------------------------
                                                                                    110             573,765        4.6
-------------------------------------------------------------------------------------------------------------------------
  Purchased Steam
    M.L. Hibbard - Duluth, MN                               3&4    1949, 1951        53              45,101        0.4
-------------------------------------------------------------------------------------------------------------------------
        Total Steam                                                               1,082           6,393,288       51.7
-------------------------------------------------------------------------------------------------------------------------
Hydro
  Group consisting of ten stations in MN                            Various         115             544,908        4.4
-------------------------------------------------------------------------------------------------------------------------
Purchased Power
  Square Butte burns lignite in Center, ND                                          322           2,351,916       19.0
  All other - Net                                                                     -           3,069,176       24.9
-------------------------------------------------------------------------------------------------------------------------
        Total Purchased Power                                                       322           5,421,092       43.9
-------------------------------------------------------------------------------------------------------------------------
        Total                                                                     1,519          12,359,288      100.0%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>



--------------------------------------------------------------------------------
24                         ALLETE 2000 ANNUAL REPORT



<PAGE>
--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

BNI  COAL  owns and  operates  a  lignite  mine in North  Dakota.  Two  electric
generating  cooperatives,  Minnkota  Power and Square Butte,  presently  consume
virtually  all of BNI Coal's  production  of lignite coal under  cost-plus  coal
supply  agreements  expiring in 2027.  (See Fuel and Note 14.) A large dragline,
shop complex and other  property at BNI Coal are leased under a leveraged  lease
agreement  that expires in 2002.  During 2000 BNI Coal entered into an agreement
to purchase in 2002 all  property and  equipment  subject to this lease for $4.7
million.

ELECTRIC OUTLET,  INC., doing business as Electric  Odyssey,  is a retail store,
catalog  and  e-commerce  merchandiser  that  sells  electric-related  products.
Electric  Odyssey has three Minnesota  stores located in leased mall facilities.
Its catalogs are  distributed  nationwide.  In  addition,  Electric  Odyssey has
established alliances with several utilities, membership-based organizations and
other Internet  businesses to market Electric  Odyssey products through Internet
electronic commerce.

MP TELECOM provides highly reliable fiber optic-based communication and advanced
data services to businesses  and  communities  in Minnesota  and  Wisconsin.  MP
Telecom  owns or has rights to  approximately  1,500  route miles of fiber optic
cable. These route miles contain multiple fibers that total approximately 47,500
fiber miles. MP Telecom also owns optronic and data switching  equipment that is
used to  "light  up" the  fiber  optic  cable and  provides  customer  bandwidth
services.  Most of the locations  from which MP Telecom  services  customers are
leased from third parties.

RAINY RIVER is engaged in wholesale power marketing. (See Wholesale Electric
Sales.)

RETAIL ELECTRIC SALES

Approximately  62% of the ore consumed by  integrated  steel  facilities  in the
Great Lakes region  originates from five taconite  customers of Minnesota Power.
Taconite, an iron-bearing rock of relatively low iron content that is abundantly
available in Minnesota,  is an important domestic source of raw material for the
steel  industry.  Taconite  processing  plants use large  quantities of electric
power to grind the  ore-bearing  rock,  and  agglomerate  and pelletize the iron
particles into taconite pellets.  Annual taconite production in Minnesota was 47
million tons in 2000 (43 million tons in 1999;  47 million tons in 1998).  Based
on our research of the taconite industry, Minnesota taconite production for 2001
is  anticipated to be about 37 million tons.  The  anticipated  decrease in 2001
taconite  production is due to high import levels and a softening  economy.  The
majority of the anticipated  10-million ton reduction in taconite production for
2001 is occurring at mines that are not Large Power  Customers.  Two Large Power
Customers have announced  temporary shut downs,  accounting for  approximately 2
million tons of the anticipated decrease. While taconite production is currently
expected to continue at annual levels of about 40 million tons, the  longer-term
outlook of this cyclical  industry is less certain.  We expect any excess energy
not used by our Large Power Customers will be marketed by MPEX and Split Rock.

LARGE  POWER  CUSTOMER  CONTRACTS.  Minnesota  Power  has large  power  customer
contracts with twelve customers (Large Power Customers),  each of which requires
10 MW or more of generating  capacity.  Large Power Customer  contracts  require
Minnesota Power to have a certain amount of generating capacity available.  (See
table on next  page.) In turn,  each Large  Power  Customer is required to pay a
minimum monthly demand charge that covers the fixed costs associated with having
this  capacity  available  to serve the  customer,  including a return on common
equity.  Most  contracts  allow  customers to  establish  the level of megawatts
subject to a demand charge on a bi-annual  (power pool season) basis and require
that a portion of their megawatt  needs be comitted on a take-or-pay  basis for
the entire term of the agreement.  In addition to the demand charge,  each Large
Power  Customer  is billed  an energy  charge  for each  kilowatthour  used that
recovers the variable costs incurred in generating electricity. Six of the Large
Power  Customers have  interruptible  service for a portion of their needs which
provides  a  discounted  demand  rate and  energy  priced at  Minnesota  Power's
incremental cost after serving all firm power obligations.  Minnesota Power also
provides  incremental  production  service for customer  demand levels above the
contract  take-or-pay  levels.  There is no demand  charge for this  service and
energy is priced at an  increment  above  Minnesota  Power's  cost.  Incremental
production  service is  interruptible.  Contracts  with ten of the twelve  Large
Power  Customers  provide for  deferral  without  interest of one-half of demand
charge obligations incurred during the first three months of a strike or illegal
walkout at a customer's  facilities,  with repayment  required over the 12-month
period following resolution of the work stoppage.

Each contract  continues past the contract  termination date unless the required
four-year advance notice of cancellation has been given. Such contracts minimize
the impact on earnings that otherwise would result from  significant  reductions
in kilowatthour  sales to such customers.  Large Power Customers are required to
purchase any electric service requirements from Minnesota Power for the duration
of their contracts. The rates and corresponding revenue associated with capacity
and energy provided under these contracts are subject to change through the same
regulatory process governing all retail electric rates. (See Regulatory Issues -
Electric Rates.)


<TABLE>
<CAPTION>
Minimum Revenue and Demand Under Contract
As of February 1, 2001
------------------------------------------------------------
                        Minimum                   Monthly
                    Annual Revenue               Megawatts
------------------------------------------------------------
<S>                 <C>                          <C>
2001                 $89.4 million                  560
2002                 $69.7 million                  419
2003                 $62.7 million                  368
2004                 $57.1 million                  336
2005                 $41.6 million                  248
------------------------------------------------------------
Based on past experience and projected  operating levels, we
believe   revenue  from  Large  Power   Customers   will  be
substantially in excess of the minimum contract amounts.
</TABLE>



--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          25



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
Contract Status for Minnesota Power Large Power Customers
As of February 1, 2001
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Earliest
Customer                         Industry            Location                     Ownership                        Termination Date
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                 <C>                          <C>                             <C>       
Eveleth Mines LLC                Taconite            Eveleth, MN                  45% Rouge Steel Co.             October 31, 2008
                                                                                  40% AK Steel Co.
                                                                                  15% Stelco Inc.

Hibbing Taconite Co.             Taconite            Hibbing, MN                  70.3% Bethlehem Steel Corp.     December 31, 2008
                                                                                  15% Cleveland-Cliffs Inc.
                                                                                  14.7% Stelco Inc.

Ispat Inland Mining Company      Taconite            Virginia, MN                 Ispat Inland Steel Company      December 31, 2007

National Steel Pellet Co.        Taconite            Keewatin, MN                 National Steel Corp.            December 31, 2005

USX Corporation                  Taconite            Mt. Iron, MN                 USX Corporation                 December 31, 2007

Blandin Paper Co.                Paper               Grand Rapids, MN             UPM-Kymmene Corporation         April 30, 2006

Boise Cascade Corporation        Paper               International Falls, MN      Boise Cascade Corporation       December 31, 2002

Potlatch Corp.                   Paper               Cloquet, MN                  Potlatch Corp.                  December 31, 2008
                                                     Brainerd, MN
                                                     Grand Rapids, MN

Stora Enso North America,        Paper and Pulp      Duluth, MN                   Stora Enso Oyj                  July 31, 2008
     Duluth Paper Mill and
     Duluth Recycled Pulp Mill

USG Interiors, Inc.              Manufacturer        Cloquet, MN                  USG Corporation                 December 31, 2005

Lakehead Pipe Line Co. L.P.      Pipeline            Deer River, MN               Lakehead Pipe Line              May 31, 2001
                                                     Floodwood, MN                  Partners, L.P.

Minnesota Pipeline Company       Pipeline            Staples, MN                  60% Koch Pipeline Co. L.P.      September 30, 2002
                                                     Little Falls, MN             40% Marathon Ashland
                                                     Park Rapids, MN                Petroleum LLC
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


PURCHASED POWER AND CAPACITY SALES

A purchase or sale is  generally  made to balance the supply or demand,  thereby
capping the cost of power or fixing a margin.  Minnesota Power's risk management
policy,  contract  provisions,   operational  flexibility,   credit  policy  and
procedures  for  purchasing  power to cap cost or fix  margins  are  designed to
minimize Minnesota Power's risk and exposure in a market with volatile prices.

Minnesota  Power has  contracts  to purchase  capacity  and energy from  various
entities.  The largest  contract is with Square Butte.  Under an agreement  with
Square Butte, expiring at the end of 2026, Minnesota Power is currently entitled
to  approximately  71% of the  output  of a 455-MW  coal-fired  generating  unit
located near Center, North Dakota. (See Note 14.)

Minnesota  Power has a power  purchase  contract with LTV Steel Mining Co. under
which it may purchase approximately 60 MW of capacity from LTV to the extent LTV
does not utilize this  capacity for its own use. LTV has  historically  supplied
its own power requirements  through its own 225 MW generation plant. In December
2000 LTV filed for bankruptcy in a Chapter 11  reorganization  proceeding and in
January 2001 shut down its taconite pellet  operation in Hoyt Lakes,  Minnesota.
LTV was not a Large Power Customer.  Minnesota Power is in discussions  with LTV
concerning existing capacity purchase and interconnection  contracts and ongoing
electric needs.

In October 2000  Minnesota  Power entered into a power  purchase  agreement with
Great River. Under this agreement Minnesota Power will purchase 240 MW from June
2001 to  April  2003  and 80 MW from  May  2003 to  April  2004  from a  natural
gas-fired  Lakefield  Junction  generating plant located in southern  Minnesota.
Excess energy will be marketed by Split Rock.


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FUEL

Minnesota Power purchases low-sulfur,  sub-bituminous coal from the Powder River
Basin coal field located in Montana and Wyoming.  Coal  consumption for electric
generation at Minnesota Power's Minnesota coal-fired generating stations in 2000
was about 4 million  tons.  As of December 31, 2000  Minnesota  Power had a coal
inventory  of  about  300,000  tons.  Minnesota  Power  has  three  coal  supply
agreements with Montana  suppliers.  Under these agreements  Minnesota Power has
the tonnage  flexibility to procure 70% to 100% of its total coal  requirements.
Minnesota Power will obtain coal in 2001 under these  agreements and in the spot
market.  This mix of coal supply options allows Minnesota Power to manage market
price and supply risk and to take  advantage  of favorable  spot market  prices.
Minnesota  Power is  exploring  future coal supply  options  and  believes  that
adequate  supplies  of  low-sulfur,  sub-bituminous  coal  will  continue  to be
available.

Burlington  Northern  Santa Fe Railroad  transports  coal by unit train from the
Powder River Basin to Minnesota Power's generating stations. Minnesota Power and
Burlington  Northern  Santa Fe Railroad  have two  long-term  coal  freight-rate
contracts.  One contract  provides for coal deliveries  through 2003 to Boswell.
The other  contract  provides for coal  deliveries  through 2003 to Laskin via a
Duluth Missabe & Iron Range Railway interchange.


<TABLE>
<CAPTION>
Coal Delivered to Minnesota Power
Year Ended December 31       2000      1999      1998
--------------------------------------------------------
<S>                         <C>       <C>       <C>
Average Price Per Ton       $21.19    $20.60    $20.37
Average Price Per MBtu       $1.16     $1.14     $1.12
--------------------------------------------------------
</TABLE>


The Square Butte  generating  unit operated by Minnkota Power burns North Dakota
lignite  supplied by BNI Coal,  pursuant to the terms of a contract  expiring in
2027.  Square Butte's cost of lignite burned in 2000 was  approximately 63 cents
per MBtu.  The lignite  acreage  that has been  dedicated to Square Butte by BNI
Coal is located on lands  essentially all of which are under private control and
presently  leased by BNI Coal.  This lignite supply is sufficient to provide the
fuel for the anticipated useful life of the generating unit.

WHOLESALE ELECTRIC SALES

Minnesota  Power has wholesale  contracts with a number of municipal  customers.
(See  Regulatory  Issues - Federal Energy  Regulatory Commission.)

In an increasingly volatile wholesale  marketplace,  Minnesota Power's wholesale
alliance through Split Rock mitigates marketplace risk while creating additional
marketing  opportunities for both Minnesota Power and Great River. MPEX provides
power trading, energy sourcing and risk management services to Split Rock. Split
Rock's risk management policies are consistent with Minnesota Power's.

In September  1999 Rainy River entered into an amended  15-year  power  purchase
agreement with a subsidiary of LS Power, a privately  owned,  independent  power
producer.   Rainy   River  will  take  the  full   output  of  one  entire  unit
(approximately 275 MW) of a four unit (approximately 1,100 MW) natural gas-fired
combined cycle generation facility located near Chicago, Illinois.  Construction
of the generation  facility began in 2000 with commercial  operation expected in
May 2002.  Minnesota  Power  expects the  agreement  will enhance its ability to
serve an expanding  customer base outside of the MAPP region,  as well as enable
additional  participation in the wholesale bulk power  marketplace.  Rainy River
has entered into a 15-year agreement to resell approximately 50 MW, has a letter
of intent to sell another 50 MW and is engaged in the wholesale marketing of the
remaining  electrical  power.  There  will be a charge  for both  capacity  made
available and energy delivered. Rainy River will be responsible for the purchase
and transportation of natural gas to the facility. Rainy River will be obligated
to pay fixed  capacity  related  charges when  commercial  operation of the unit
occurs.

In June 1999  Minnesota  Power  announced  plans to build a  natural  gas-fired,
combustion  turbine power plant near Superior,  Wisconsin.  Combustion  turbines
produce low emissions and will help alleviate a developing  regional shortage of
electricity  during  periods  of  peak  electrical  demand.   Unavailability  of
combustion  turbines led to a decision to purchase  near-term  peaking  capacity
from Great River's new Lakefield  Junction Project for 2001 to 2004. The project
in Superior is still being  considered  along with a number of other  options to
meet regional needs beyond this time period.

REGULATORY ISSUES

We are exempt from  regulation  under the Public Utility  Holding Company Act of
1935, except as to Section 9(a)(2) which relates to acquisition of securities of
public utility companies.

We are subject to the jurisdiction of various regulatory  authorities.  The MPUC
has  regulatory  authority  over  Minnesota  Power's  service area in Minnesota,
retail rates,  retail  services,  issuance of securities and other matters.  The
FERC  has  jurisdiction  over  the  licensing  of  hydroelectric  projects,  the
establishment  of rates and charges for the sale of  electricity  for resale and
transmission of electricity in interstate  commerce,  and certain accounting and
record  keeping  practices.  The PSCW has  regulatory  authority over the retail
sales of  electricity,  water  and gas by  SWL&P.  The  MPUC,  FERC and PSCW had
regulatory authority over 29%, 3% and 3%, respectively, of our 2000 consolidated
operating revenue.

ELECTRIC RATES.  Minnesota Power has historically  designed its electric service
rates based on cost of service  studies under which  allocations are made to the
various classes of customers. Nearly all retail sales include billing adjustment
clauses which adjust electric  service rates for changes in the cost of fuel and
purchased energy, and recovery of current and deferred CIP expenditures.

In  addition  to  Large  Power  Customer  contracts,  Minnesota  Power  also has
contracts with large industrial and commercial customers with monthly demands of
more than 2 MW but less  than 10 MW of  capacity.  The terms of these  contracts
vary depending  upon the  customer's  demand for power and the cost of extending
Minnesota Power's facilities to provide electric service.

Minnesota  Power requires that all large  industrial  and  commercial  customers
under contract specify the date when power is first required, and thereafter the
customer  is billed for at least the  minimum  power for which they  contracted.
These conditions are part of all contracts  covering power to be supplied to new
large industrial and commercial customers and to current customers as

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                           ALLETE 2000 ANNUAL REPORT                          27


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their  contracts  expire or are amended.  All  contracts  provide that new rates
which  have  been  approved  by  appropriate   regulatory  authorities  will  be
substituted immediately for existing rates, without regard to any unexpired term
of the  existing  contract.  All rate  schedules  and other  contract  terms are
subject to approval by appropriate regulatory authorities.

FEDERAL  ENERGY  REGULATORY  COMMISSION.  The  FERC  has  jurisdiction  over our
wholesale  electric  service and open  access  transmission  service.  Minnesota
Power's hydroelectric  facilities,  which are located in Minnesota, are licensed
by the FERC. (See Environmental Matters - Water.)

Minnesota  Power  has  long-term  contracts  with  16  Minnesota  municipalities
receiving  wholesale  electric  service.  Four contracts are for service through
2002 and 2005,  while the other 12 are for service  through at least  2007.  The
contracts limit rate increases  (including fuel costs) to about 2% per year on a
cumulative  basis.  In 2000  municipal  customers  purchased  703,555  MWh  from
Minnesota Power.

Minnesota Power filed a pro forma open access  transmission  tariff with FERC in
1996, as required.  The tariff governs  Minnesota Power's rates for transmission
and ancillary services to transmission customers.

Issued   in   December   1999   FERC   Order  No.   2000   strongly   encouraged
transmission-owning  utilities  to  participate  in large  independent  regional
transmission  organizations  (RTOs).  The  formation  and  structure of RTOs are
evolving  in the  implementation  of this  federal  policy.  RTOs  will plan and
operate,  and  sometimes  own  regional  transmission  systems.  Members will be
required to turn over  ownership or  operational  control of their  transmission
facilities to the RTO. In  compliance  with FERC Order No. 2000, in October 2000
Minnesota Power filed its intent to join an RTO, indicating a preference for the
Midwest  Independent  System  Operator,  Inc.  (MISO)  while  seeking to resolve
certain  organizational  issues at the  MISO.  Order No.  2000  seeks  voluntary
participation  in an RTO by December 15, 2001.  SWL&P is impacted by a Wisconsin
statute that mandates membership in an RTO.

Minnesota  Power  participates in MAPP, a power pool operating in parts of eight
states in the Upper  Midwest and in three  provinces in Canada.  MAPP  functions
include a regional reliability council that maintains generation reserve sharing
requirements,  a regional  transmission planning group and a wholesale power and
energy market committee.  MAPP enhances  regional electric service  reliability,
provides the opportunity for members to enter into various  economic  wholesale
power  transactions  and  coordinates  the planning and operation of existing as
well as the installation of new generation and transmission facilities. MAPP has
open membership which includes various electric  utilities within the MAPP area,
and marketers and brokers located throughout North America.  MAPP operates under
a 1996 agreement, as amended, and an open access transmission tariff approved by
FERC.  Under this  agreement,  any member who elects to withdraw  from MAPP must
first provide a three-year notice of their intent to do so.

MINNESOTA PUBLIC UTILITIES COMMISSION.  Minnesota Power's retail rates are based
on a 1994 MPUC  retail  rate  order that  allows  for an 11.6%  return on common
equity dedicated to utility plant.

Minnesota  requires investor owned electric utilities to spend a minimum of 1.5%
of gross annual retail  electric  revenue on conservation  improvement  programs
(CIP) each year. These investments are recovered from retail customers through a
billing  adjustment and amounts  included in retail base rates.  The MPUC allows
utilities to  accumulate,  in a deferred  account for future  recovery,  all CIP
expenditures as well as a carrying charge on the deferred account balance, which
amount  was $1.1  million  at  December  31,  2000.  During  1999 the  Minnesota
legislature  enacted Minnesota  Power-supported  legislation  allowing customers
with 20 MW or more of connected  load at one service point to opt out of the CIP
minimum spending requirements, and associated expense recovery, upon showing the
MPUC that they had implemented all reasonably available  conservation  measures.
Opt outs were approved in early 2000 for seven of Minnesota  Power's  industrial
customers.  As a result,  the 2000 CIP  investment  goal was $2.7  million  with
actual spending at $1.9 million,  down substantially from the $7.1 million spent
in 1999.  The 2000  spending  shortfall is expected to be made up by  additional
2001 spending.

Until 1999 the MPUC approved  Minnesota Power's request to recover lost margins.
Lost  margins  represent  energy  sales  lost  over a  five-year  period  due to
Minnesota Power's efforts to assist customers in conserving energy.  Lost margin
recovery compensates  utilities for reduced sales resulting from CIP activities.
In 1999 the MPUC denied  Minnesota  Power's  request to recover  $3.5 million of
lost  margins  related to 1998 CIP  activities.  Minnesota  Power  appealed  the
decision to the Minnesota Court of Appeals.  In December 2000 the court reversed
the MPUC's denial of Minnesota  Power's 1998 lost margin claim.  The court found
that the MPUC's action constituted  retroactive ratemaking and was arbitrary and
capricious.  In January  2001 the MPUC  appealed  the  court's  decision  to the
Minnesota Supreme Court. We are unable to predict the outcome of this matter.

PUBLIC  SERVICE  COMMISSION  OF  WISCONSIN.  In  December  1999  SWL&P  filed an
application  with the PSCW for authority to increase  retail utility rates 1.8%.
This average  increase is comprised of a 3.2% decrease in electric rates, a 1.1%
increase in gas rates and a 31%  increase in water  rates.  The  proposed  water
increase is the result of  construction  currently under way to replace an aging
well system.  A final order is expected in March 2001.  SWL&P's  current  retail
rates are based on a 1996 PSCW retail rate order that allows for an 11.6% return
on common equity.

In April 1999 Minnesota  Power and Wisconsin  Public Service  Corporation  (WPS)
announced  plans to construct a 250-mile,  345-kilovolt  transmission  line from
Wausau,  Wisconsin  to  Duluth,   Minnesota.  The  proposal,  called  "Power  Up
Wisconsin," is a direct response to former Wisconsin Governor Thompson's call to
address the pressing need for more  dependable  electricity in Wisconsin and the
Upper Midwest.  Alternative routes for the line using existing rights-of-way are
proposed where feasible.  The Final Environmental Impact Statement was issued in
October 2000 by the PSCW. Hearings in Wisconsin for public input were completed

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in December 2000.  Technical hearings are under way and expected to be completed
in early  2001.  The PSCW is  expected  to make a decision  in mid 2001 based on
evidence  introduced at the hearings.  Application for approval of the Minnesota
portion of the line was filed with the  Minnesota  Environmental  Quality  Board
(MEQB) in 1999. The scope of the MEQB hearings was defined as limited to impacts
from construction and operation of the transmission line on human health and the
environment  within  Minnesota.  Minnesota  evidentiary and public hearings were
held in August and September  2000. A  recommendation  for approval was received
from the Administrative Law Judge and the application is expected to be voted on
by the full MEQB in mid 2001.  Depending  on siting  and  regulatory  review and
approval,  the new transmission line could be in service in 2004 at an estimated
cost of between $125 million and $175 million.  Approximately $30 million to $40
million of the estimated  cost is for facilities in Minnesota that will be owned
by Minnesota  Power. The facilities in Wisconsin are being financed and owned by
WPS and may  ultimately  be owned in part by Minnesota  Power (if it exercises a
buy-out option for roughly one half the line), WPS or the American  Transmission
Company RTO in Wisconsin.

In December 2000 the PSCW ordered  SWL&P to apply for  membership in a federally
approved  RTO by  February  1, 2001,  which was  extended  to April 1, 2001.  In
January 2001 SWL&P filed an  application  for  rehearing  and  reopening of this
order. We are unable to predict the outcome of this matter.  (See Federal Energy
Regulatory Commission.)

The PSCW must approve the  ownership,  control and  operation of any  affiliated
wholesale  merchant  generating  plants in Wisconsin.  (See  Wholesale  Electric
Sales.)

COMPETITION

INDUSTRY  RESTRUCTURING.  The electric utility industry continues to restructure
in response to growing competition at both the wholesale and retail levels. This
restructuring has primarily affected Minnesota Power's wholesale power marketing
and trading  activity  through Split Rock discussed  above.  New legislation and
regulation to increase  reliability and address wholesale price volatility while
encouraging  competition  at both  the  wholesale  and  retail  levels  is being
considered  at both the federal and state  levels.  Legislative  and  regulatory
activity as well as the actions of  competitors  affect the way Minnesota  Power
strategically plans for its future.

CUSTOMER CHOICE. Twenty-five states representing approximately 70% of the United
States population have passed either  legislation or regulation that initiates a
process which may lead to retail  customer  choice.  In 2001 retail  competition
legislation  will likely again be debated at the federal  level and in Minnesota
and  Wisconsin  though these  initiatives  currently  lack  momentum.  We cannot
predict the timing or substance of any future legislation.

FRANCHISES

Minnesota  Power  holds   franchises  to  construct  and  maintain  an  electric
distribution and  transmission  system in 84 cities and towns located within its
electric service territory. SWL&P holds franchises in 15 cities and towns within
its service  territory.  The remaining  cities and towns served do not require a
franchise to operate within their boundaries.

ENVIRONMENTAL MATTERS

Certain  businesses  included  in our Energy  Services  segment  are  subject to
regulation by various federal,  state and local  authorities  about air quality,
water quality,  solid wastes and other environmental  matters. We consider these
businesses to be in substantial compliance with those environmental  regulations
currently  applicable to their  operations and believe all necessary  permits to
conduct such operations have been obtained.  We do not currently anticipate that
potential  capital  expenditures  for  environmental  matters  will be material.
However, because environmental laws and regulations are constantly evolving, the
character,  scope  and  ultimate  costs of  environmental  compliance  cannot be
estimated.

AIR. Minnesota Power's generating facilities in Minnesota burn mainly low-sulfur
western coal and Square Butte,  located in North Dakota, burns lignite coal. All
of these  facilities  are equipped  with  pollution  control  equipment  such as
scrubbers,  baghouses or electrostatic precipitators.  The federal Clean Air Act
Amendments  of 1990  (Clean  Air Act)  created  emission  allowances  for sulfur
dioxide.  Each allowance is an  authorization to emit one ton of sulfur dioxide,
and each utility must have sufficient  allowances to cover its annual emissions.
Sulfur dioxide emission requirements are currently being met by all of Minnesota
Power's  generating  facilities,  creating  a surplus  allowance  situation  for
Minnesota   Power.   Square  Butte   anticipates   meeting  its  sulfur  dioxide
requirements  through  increased  use of  existing  scrubbers  and  by  annually
purchasing additional allowances as necessary.

In accordance  with the Clean Air Act, the EPA has  established  nitrogen  oxide
limitations for electric  generating units. To meet nitrogen oxide  limitations,
Minnesota Power installed advanced low emission burner technology and associated
control  equipment to operate the Boswell and Laskin  facilities at or below the
compliance emission limits. Nitrogen oxide limitations at Square Butte are being
met by combustion tuning. Minnesota Power has obtained all necessary Title V air
operating permits from the Minnesota Pollution Control Agency for its applicable
facilities to conduct electric operations.

In December 2000 the EPA announced their decision to regulate mercury  emissions
from coal and oil fired  power  plants  under  Section 112 of the Clean Air Act.
Section 112 will require all such power plants in the United States to adhere to
the EPA maximum achievable control technology (MACT) standards for mercury.  The
EPA's  announcements  clarified that the EPA will establish  applicable  mercury
MACT standards through a four-year rule making and public comment period, giving
consideration  to factors such as a facility's  installed  design and operation.
Final regulations  defining control  requirements are planned for December 2004.
Cost estimates are premature at this time.

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                           ALLETE 2000 ANNUAL REPORT                          29



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In December 2000 Minnesota  Power received a request from the EPA, under Section
114 of the Clean Air Act, seeking information  regarding capital expenditures at
all  of  its  coal-fired  generating  stations.   This  action  is  part  of  an
industry-wide  investigation assessing compliance with the New Source Review and
the New Source Performance  Standards (emissions standards that apply to new and
changed  units) of the Clean Air Act at  electric  generating  stations.  We are
unable to predict  whether any  further  action will be taken by the EPA on this
matter or  whether  Minnesota  Power  will be  required  to incur any costs as a
result.

WATER.  The Federal Water Pollution  Control Act of 1972 (FWPCA),  as amended by
the Clean Water Act of 1977 and the Water Quality Act of 1987,  established  the
National  Pollutant  Discharge  Elimination  System (NPDES) permit program.  The
FWPCA  requires  NPDES permits to be obtained from the EPA (or, when  delegated,
from individual state pollution control agencies) for any wastewater  discharged
into navigable waters. Minnesota Power has obtained all necessary NPDES permits,
including NPDES storm water permits for applicable facilities,  to conduct their
electric operations.

Minnesota  Power holds FERC licenses  authorizing the ownership and operation of
seven  hydroelectric  generating  projects with a total  generating  capacity of
about 118 MW. In June 1996  Minnesota  Power filed in the U.S.  Court of Appeals
for the  District  of Columbia  Circuit a petition  for review of the license as
issued by the FERC for  Minnesota  Power's  St.  Louis River  project.  Separate
petitions for review were also filed by the U.S.  Department of the Interior and
the  Fond  du Lac  Band  of Lake  Superior  Chippewa  (Fond  du Lac  Band),  two
intervenors  in the  licensing  proceedings.  The court  consolidated  the three
petitions for review and suspended the briefing  schedule while  Minnesota Power
and the Fond du Lac Band negotiate the reasonable fee for use of tribal lands as
mandated  by the new  license.  Both  parties  informed  the  court  that  these
negotiations may resolve other disputed issues, and they are obligated to report
to the court  periodically the status of these  discussions.  Beginning in 1996,
and most recently in January 2001,  Minnesota Power filed requests with the FERC
for extensions of time to comply with certain plans and studies  required by the
license that might conflict with the settlement discussions.

SOLID AND HAZARDOUS  WASTE.  The Resource  Conservation and Recovery Act of 1976
regulates  the  management  and  disposal of solid  wastes.  As a result of this
legislation,  the EPA has promulgated  various hazardous waste rules.  Minnesota
Power is required to notify the EPA of hazardous  waste  activity and  routinely
submits the necessary annual reports to the EPA.

In response to EPA Region V's request for utilities to  participate in the Great
Lakes  Initiative by voluntarily  removing  remaining  polychlorinated  biphenyl
(PCB) inventories, Minnesota Power has scheduled replacement of PCB-contaminated
oil by 2004.  The total cost is  expected  to be  between  $2.5  million  and $3
million,  of which $1.1 million was spent  through  December 31, 2000.  [GRAPHIC
OMITTED - SQUARE]

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AUTOMOTIVE SERVICES

Automotive Services includes several subsidiaries that are integral parts of the
vehicle redistribution business.  Vehicle sales within the auto auction industry
are expected to rise at a rate of 2% to 4% annually over the next several years.
With the  continued  increased  popularity  of leasing  and the high cost of new
vehicles, a steady flow of vehicles is expected to return to auction. Automotive
Services plans to grow through increased sales at existing businesses, selective
acquisitions  and expansion of its services to customers.  The discussion  below
summarizes the major businesses we include in Automotive  Services.  Statistical
information is presented as of the date of this Form 10-K. All  subsidiaries are
wholly owned unless otherwise specifically indicated.

ADESA  is  the  second  largest   vehicle  auction  network  in  North  America.
Headquartered in Indianapolis,  Indiana,  ADESA owns (or leases) and operates 54
vehicle  auction  facilities in the United States and Canada  through which used
cars and other vehicles are sold to franchised  automobile  dealers and licensed
used car dealers.  Sellers at ADESA's auctions include domestic and foreign auto
manufacturers,  car dealers, automotive fleet/lease companies, banks and finance
companies.  ADESA also has 19 auction facilities in the United States and Canada
that provide  "total loss"  vehicle  recovery  services to insurance  companies.
During  2000 ADESA  acquired  or opened 28 new vehicle  auction  facilities  and
purchased the remaining 53% of Canada's largest provider of "total loss" vehicle
recovery services.

Also in 2000 ADESA  Importation  Services,  Inc.  purchased all of the assets of
International  Vehicle  Importers,  Inc., a United States  registered  importer.
ADESA  Importation  is  headquartered  in Flint,  Michigan  with  facilities  in
Buffalo,  New York; Grand Forks, North Dakota;  Sweetgrass,  Montana and Blaine,
Washington.  ADESA  Importation  is the second  largest  independent  commercial
registered importer of vehicles in the United States.

In  January  2001  ALLETE and ADESA  acquired  all of the  outstanding  stock of
ComSearch,  Inc. and purchased the assets of Auto Placement Center,  Inc. (APC),
in an overall  transaction  valued at $62.4 million.  APC provides  "total loss"
vehicle  recovery  services at eight auction  facilities  in the United  States.
ComSearch provides  Internet-based parts location and insurance adjustment audit
services nationwide. Both APC and ComSearch are based in Rhode Island.

The table on the next page lists the vehicle auctions  currently owned or leased
by ADESA. Each auction has a multi-lane, drive-through auction facility, as well
as additional  buildings for  reconditioning,  registration,  maintenance,  body
work, and other  ancillary and  administrative  services.  Each auction also has
secure parking areas to store vehicles for auction. All vehicle auction property
owned by ADESA is subject to liens securing various notes payable.

AFC provides inventory financing for wholesale and retail automobile dealers who
purchase  vehicles  from ADESA  auctions,  independent  auctions,  other auction
chains and outside sources.  AFC is  headquartered in Indianapolis,  Indiana and
has 86 loan  production  offices at or near auto auctions  across North America.
These offices provide  qualified  dealers credit to purchase  vehicles at any of
the 400 plus  auctions  approved by AFC. In October  2000 AFC  launched  its new
computer  application  system,  COSMOS (an acronym for computer operating system
managing our success).  COSMOS, an Oracle-based  system,  follows each loan from
origination  to payoff  and  allows AFC to better  manage  its  business,  while
expediting  services  through its branch network to more than 15,000  registered
dealers.

GREAT RIGS is one of the nation's largest independent used automobile  transport
carriers  with more than 140  automotive  carriers,  the  majority  of which are
leased. Headquartered in Moody, Alabama, Great Rigs offers customers pick up and
delivery  services  as well as  marshalling  services  through 11  strategically
located  transportation  hubs.  Customers  of Great Rigs  include both ADESA and
competitors' auctions, car dealerships, vehicle manufacturers, leasing companies
and finance companies. Great Rigs' major customers include Ford Motor Credit, GE
Capital, General Motors Acceptance Corp., Nissan and DaimlerChrysler.

PAR, which is doing business as PAR North America,  provides  customized vehicle
remarketing  services to various  companies  such as banks,  non-prime  finance,
non-prime  servicing,  captive  finance,  credit  unions,  company owned fleets,
commercial fleets and rental car dealers in the United States and Canada.  PAR's
services  include  repossessions,  remarketing,  pre-  and  post-term  lease-end
management,  United States and Canadian registration title service, and Canadian
registered  importation.  PAR  offers  its  telemarketing  service  through  its
affiliate  company,  EndTrust  and its Canadian  import  service  through  ADESA
Importation.  Together PAR and ADESA Importation offer a complete and full range
of  import  servicing,  including  marshalling,  point-to-point  transportation,
Department of  Transportation  compliance  registration,  odometer  replacement,
auction representation and sales tax processing.

AUTOVIN is a 90% owned subsidiary that provides  professional  field information
services to the automotive  industry and the  industry's  secured  lenders.  Its
services include vehicle condition reporting,  inventory  verification auditing,
program compliance auditing and facility inspection.  AutoVIN works closely with
AFC to offer auto  dealers  one-stop  shopping  for  financial  and  information
services.  AutoVIN  expanded its inspection  services in 2000 to include dealers
selling other products, such as motorcycles and lawn equipment.  While inventory
verification is still the core of AutoVIN's  business,  its growth  potential is
increased by providing inspection services for other products.

--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          31



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                    Year        Number of
                                                           State/                Operations      Auction
ADESA Auctions                        City                 Province               Commenced       Lanes
------------------------------------------------------------------------------------------------------------
<S>                                   <C>                  <C>                   <C>             <C>
United States
     ADESA Birmingham                 Moody                Alabama                  1987           10
     ADESA Phoenix                    Phoenix              Arizona                  1988           12
     ADESA Central Arkansas <F1>      Beebe                Arkansas                 1987            6
     ADESA Little Rock <F1>           Little Rock          Arkansas                 1984           10
     ADESA Los Angeles                Mira Loma            California               2000            6
     ADESA Sacramento                 Sacramento           California               1997            5
     ADESA San Diego                  San Diego            California               1982            6
     ADESA Golden Gate                San Francisco        California               1985            6
     ADESA Colorado Springs <F1>      Colorado Springs     Colorado                 1982            3
     ADESA Clearwater <F1>            Clearwater           Florida                  1972            4
     ADESA Jacksonville               Jacksonville         Florida                  1996            6
     ADESA Ocala <F2>                 Ocala                Florida                  1996            5
     ADESA Orlando-Sanford            Orlando              Florida                  1987            6
     ADESA Tampa                      Tampa                Florida                  1989            8
     ADESA Atlanta                    Atlanta              Georgia                  1986            6
     ADESA Southern Indiana <F3>      Columbus             Indiana                  1997            3
     ADESA Indianapolis               Plainfield           Indiana                  1983           10
     ADESA Des Moines <F1>            Des Moines           Iowa                     1967            3
     ADESA Lexington                  Lexington            Kentucky                 1982            6
     ADESA Ark-La-Tex                 Shreveport           Louisiana                1979            5
     ADESA Concord                    Concord              Massachusetts            1947            5
     ADESA Boston <F1>                Framingham           Massachusetts            1995           11
     ADESA Lansing                    Dimondale            Michigan                 1976            5
     ADESA St. Louis                  Barnhart             Missouri                 1987            3
     ADESA Kansas City                Kansas City          Missouri                 1963            7
     ADESA New Jersey                 Manville             New Jersey               1996            8
     ADESA Buffalo                    Akron                New York                 1992           10
     ADESA Charlotte <F1>             Charlotte            North Carolina           1994           10
     ADESA Cincinnati/Dayton          Franklin             Ohio                     1986            8
     ADESA Cleveland <F1>             Northfield           Ohio                     1994            8
     ADESA Pittsburgh                 Mercer               Pennsylvania             1971            7
     ADESA Knoxville <F1>             Lenoir City          Tennessee                1984            6
     ADESA Memphis                    Memphis              Tennessee                1990            6
     ADESA Austin <F1>                Austin               Texas                    1990            6
     ADESA Houston                    Houston              Texas                    1995            8
     ADESA Dallas                     Mesquite             Texas                    1990            8
     ADESA San Antonio                San Antonio          Texas                    1989            8
     ADESA Seattle                    Seattle              Washington               1984            4
     ADESA Wisconsin                  Portage              Wisconsin                1984            5
Canada
     ADESA Calgary                    Airdrie              Alberta                  2000            4
     ADESA Edmonton <F1>              Edmonton             Alberta                  1988            3
     ADESA Vancouver                  New Westminster      British Columbia         1972            7
     CAG Vancouver <F1>               Surrey               British Columbia         1986            2
     ADESA Winnipeg                   Winnipeg             Manitoba                 1987            4
     ADESA Moncton                    Moncton              New Brunswick            1987            2
     ADESA St. John's <F1>            St. John's           Newfoundland             1994            1
     ADESA Dartmouth                  Dartmouth            Nova Scotia              1985            3
     ADESA Halifax                    Enfield              Nova Scotia              1993            3
     ADESA Kitchener                  Ayr                  Ontario                  1988            4
     ADESA Toronto                    Brampton             Ontario                  1987            6
     CAG Hamilton                     Hamilton             Ontario                  1978            2
     ADESA Ottawa                     Vars                 Ontario                  1990            5
     ADESA Montreal                   St. Eustache         Quebec                   1974           12
     ADESA Saskatoon <F1>             Saskatoon            Saskatchewan             1980            2
------------------------------------------------------------------------------------------------------------
<FN>
<F1> Leased auction facilities. (See Note 7.)
<F2> ADESA owns 51% of this auction business.
<F3> ADESA owns 80% of this auction business.
</FN>
</TABLE>


--------------------------------------------------------------------------------
 32                        ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

COMPETITION

Within  the  automobile   auction   industry,   ADESA's   competition   includes
independently  owned  auctions  as well as a major chain and  associations  with
auctions in geographic proximity. ADESA competes with these other auctions for a
supply of vehicles to be sold on consignment for automobile  dealers,  financial
institutions  and other  sellers.  ADESA  also  competes  for a supply of rental
repurchase vehicles from automobile  manufacturers for auction at factory sales.
Automobile  manufacturers often choose between auctions across multi-state areas
in distributing rental repurchase  vehicles.  ADESA competes for these customers
by attempting to attract a large number of dealers to purchase  vehicles,  which
ensures competitive prices and supports the volume of vehicles auctioned.  ADESA
also competes by providing a full range of automotive services, including dealer
inventory financing,  reconditioning services that prepare vehicles for auction,
transportation of vehicles and processing of sales transactions.

ADESA utilizes e-commerce as another component in its array of services. Dealers
are provided training on how to use on-line products,  including the purchase of
vehicles on-line.  The dealers can also access auction runlists and other market
report information offered on ADESA's website, www.ADESA.com.  ADESA believes it
has a competitive  advantage in a small but growing  segment of the used vehicle
market  combining  on-line  services with auction  facilities and  knowledgeable
auction personnel located across North America.

AFC is the  largest  provider  of  dealer  floorplan  financing  to  independent
automobile dealers in North America.  AFC's competition includes other specialty
lenders,  banks and other financial  institutions.  AFC has distinguished itself
from its competitors by convenience of payment,  quality of service and scope of
services offered. In addition to its floorplan services,  AFC, through alliances
with other  experienced  vendors,  has  expanded  its  service  array to include
sub-prime  financing,  physical  damage  insurance and warranty  products to its
dealer base. These alliances make AFC a one-stop shopping provider.

PAR provides customized remarketing services throughout North America.  Although
other providers are larger in size and volume,  PAR's  competition  comes from a
handful  of  similar  service  providers,  none of which  offer as many  diverse
services  as it does.  In June  2000 PAR  introduced  its  interactive  website,
electronically  connecting  customers  with its services.  Further  enhancements
scheduled  for  availability  in the first  quarter of 2001 include  interactive
connection  with  repossession   agents  and  auction  vendor  networks.   PAR's
affiliation with EndTrust gives it a competitive edge in gaining market share in
the lease-end  management  services arena.  Another area that  distinguishes PAR
from its competition is ADESA Importation.

ENVIRONMENTAL MATTERS

Certain businesses in our Automotive  Services segment are subject to regulation
by various federal,  state and local authorities  concerning air quality,  water
quality,  solid  wastes  and other  environmental  matters.  We  consider  these
businesses to be in substantial compliance with those environmental  regulations
currently  applicable to their  operations and believe all necessary  permits to
conduct such operations have been obtained.  We do not currently anticipate that
potential  capital  expenditures  for  environmental  matters  will be material.
However, because environmental laws and regulations are constantly evolving, the
character,  scope  and  ultimate  costs of  environmental  compliance  cannot be
estimated. [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          33


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

WATER SERVICES

Our Water Services segment consists of regulated and non-regulated  wholly owned
subsidiaries.  Non-regulated  subsidiaries  market our water  expertise  outside
traditional  utility  boundaries.  The  discussion  below  summarizes  the major
businesses we include in Water Services. Statistical information is presented as
of December 31, 2000.

REGULATED SUBSIDIARIES. FLORIDA WATER, the largest investor owned water supplier
in Florida,  owns and operates water and wastewater  treatment facilities within
that state.  Florida Water serves 152,000 water customers and 73,000  wastewater
customers, and maintains 157 water and wastewater facilities with plants ranging
in size from 6  connections  to greater than 25,000  connections.  Florida Water
provides  customers  with over 19 billion  gallons of water per year,  primarily
from  Florida's  underground  aquifer.  Substantially  all  of  Florida  Water's
properties used in water and wastewater operations are encumbered by a mortgage.
During 2000  Florida  Water  purchased  the assets of Spruce  Creek which serves
5,600 water and  wastewater  customers in three  communities  in Marion  County,
Florida.  The systems  acquired  are designed to  accommodate  a total of 10,000
water and  wastewater  customers.  In December 2000 Florida Water also purchased
the assets of Steeplechase  Utility  Company,  Inc. which serves 1,200 water and
wastewater  customers  in Marion  County,  Florida.  The system is  designed  to
accommodate a total of 3,200 water and wastewater customers.

HEATER  provides  water and  wastewater  treatment  services in North  Carolina.
Heater serves 44,000 water customers and 5,000 wastewater customers.  Heater has
water and wastewater  systems  located in subdivisions  surrounding  Raleigh and
Fayetteville,  North  Carolina,  and the Piedmont and Mountain  regions of North
Carolina.  Water  supply is primarily  from ground  water deep wells.  Community
ground water systems vary in size from 25 connections to 6,000 connections. Some
systems  are  supplied  by  purchased  water.   Heater  has   approximately  415
interconnected  and  stand-alone  systems  and 972  wells.  Heater  also  has 33
wastewater  treatment  plants,  ranging in size from  10,000  gallons per day to
670,000  gallons  per  day,  and 79  lift  stations  located  in its  wastewater
collection  systems.  Substantially all of Heater's properties used in its water
and  wastewater  operations  are  encumbered  by a mortgage.  During 2000 Heater
acquired the assets of several  small water and  wastewater  systems which added
approximately 1,100 customers.

NON-REGULATED  SUBSIDIARIES.  AMERICAS'  WATER was  incorporated in 1997 and has
offices in Grand Rapids,  Michigan,  Plymouth,  Wisconsin and Orlando,  Florida.
Americas' Water offers contract management,  operations and maintenance services
for water and wastewater  treatment  facilities to governments  and  industries.
Americas' Water provides services in Minnesota,  Michigan,  Wisconsin,  Ohio and
Florida.

INSTRUMENTATION    SERVICES,    INC.   provides   predictive   maintenance   and
instrumentation  consulting services to water and wastewater utilities and other
industrial  operations  throughout the southeastern part of the United States as
well as Texas and Minnesota.

GEORGIA WATER  SERVICES  CORPORATION  was  established in 2000. In December 2000
ALLETE Water Services, Inc. purchased, subject to certain conditions, the assets
of Dicks Creek  Wastewater  Utility for $6.6 million plus a commitment  to pay a
fee for residential connections. Beginning in 2001, the commitment fee will be a
minimum of $400,000  annually for four years or until the  cumulative  fees paid
reach $2 million.  Dicks Creek, which is located near Atlanta in Forsyth County,
Georgia,  will be operated by Georgia Water.  The  transaction is expected to be
completed in early 2001.

REGULATORY ISSUES

FLORIDA PUBLIC SERVICE  COMMISSION.  In 1995 the Florida First District Court of
Appeals (Court of Appeals) reversed a 1993 FPSC order establishing uniform rates
for most of Florida Water's service areas. With "uniform rates" all customers in
each uniform rate area pay the same rates for water and wastewater services.  In
response to the Court of Appeals' order, in August 1996 the FPSC ordered Florida
Water to issue refunds to those customers who paid more since October 1993 under
uniform rates than they would have paid under stand-alone  rates. This order did
not permit a balancing surcharge to customers who paid less under uniform rates.
Florida  Water  appealed,  and the Court of Appeals  ruled in June 1997 that the
FPSC could not order refunds without  balancing  surcharges.  In response to the
Court of Appeals' ruling,  the FPSC issued an order in January 1998 that did not
require  refunds.  Florida Water's  potential  refund liability at that time was
about $12.5 million,  which included interest,  to customers who paid more under
uniform rates.

In the same January 1998 order, the FPSC required Florida Water to refund,  with
interest,  $2.5 million, the amount paid by customers in the Spring Hill service
area from January 1996 through June 1997 under  uniform  rates that exceeded the
amount  these  customers  would  have paid  under a  modified  stand-alone  rate
structure.  No balancing  surcharge was permitted.  The FPSC ordered this refund
because  Spring  Hill  customers  continued  to pay  uniform  rates  after other
customers  began  paying  modified  stand-alone  rates  effective  January  1996
pursuant to the FPSC's interim rate order in Florida Water's 1995 Rate Case. The
FPSC did not include  Spring Hill in this  interim rate order  because  Hernando
County had assumed  jurisdiction  over Spring Hill's rates. In June 1997 Florida
Water  reached an agreement  with  Hernando  County to revert  prospectively  to
stand-alone rates for Spring Hill customers.

Customer  groups that paid more under uniform rates  appealed the FPSC's January
1998 order,  arguing that they are entitled to a refund  because the FPSC had no
authority to order uniform  rates.  Florida Water also appealed the $2.5 million
refund order. Initial briefs were filed by all parties in May 1998. In June 1998
the Court of Appeals  reversed  its  previous  ruling  that the FPSC was without
authority to order uniform rates at which time customer  groups  supporting  the
FPSC's  January  1998 order  filed a motion  with the Court of  Appeals  seeking
dismissal of the appeal by customer groups seeking  refunds.  Customers  seeking
refunds filed amended  briefs in September  1998. A provision for refund related
to the $2.5 million refund order was recorded in 1999.

--------------------------------------------------------------------------------
34                         ALLETE 2000 ANNUAL REPORT



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

In December 2000 Hernando County approved a settlement agreement relating to the
Spring  Hill  refund  issue  that was  before  the Court of  Appeals.  Under the
settlement  agreement,  Spring Hill customers  would receive a prospective  rate
reduction over three years totaling $1.8 million with no refunds.  Florida Water
also  agreed  it would  not file a rate case to  increase  rates to Spring  Hill
customers  for a period of three  years.  In December  2000 the Court of Appeals
remanded the issue back to the FPSC for settlement consideration.  We are unable
to predict the timing or outcome of the appeal and settlement process.

NORTH  CAROLINA  UTILITIES  COMMISSION.  In October 2000 the NCUC issued a final
order  approving a $2.2  million,  or 18%,  annual rate  increase  for water and
wastewater customers of Heater.  Heater had requested an annual rate increase of
$3.3 million, or 26%, for its water and waste water customers.

COMPETITION

Water Services provides water and wastewater  services at regulated rates within
exclusive service  territories  granted by regulators.  Significant  competition
exists for the provision of the types of services  provided by Americas'  Water.
Although a few private  contractors control a large percentage of the market for
contract  management,  operations  and  maintenance  services,  we believe  that
continued growth in these markets will enable emerging  companies like Americas'
Water to succeed.

FRANCHISES

Florida Water provides water and  wastewater  treatment  services in 21 counties
regulated by the FPSC and holds  franchises  in 5 counties  which have  retained
authority to regulate such operations.  (See Regulatory  Issues - Florida Public
Service  Commission.) Water and wastewater services provided by Heater are under
the  jurisdiction of the NCUC. The NCUC grants  franchises for Heater's  service
territory when the rates are authorized.

ENVIRONMENTAL MATTERS

Our Water Services are subject to regulation by various federal, state and local
authorities  concerning  water  quality,  solid  wastes and other  environmental
matters.  We consider these  businesses to generally be in compliance with those
environmental  regulations currently applicable to their operations and have the
permits  necessary to conduct such  operations.  We do not currently  anticipate
that potential capital expenditures for environmental  matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character,  scope  and  ultimate  costs of  environmental  compliance  cannot be
estimated. [GRAPHIC OMITTED - SQUARE]

INVESTMENTS

Our  Investments  segment  consists of real estate  operations,  investments  in
emerging  technologies  related to the electric utility industry and an actively
traded  securities   portfolio.   The  discussion  below  summarizes  the  major
components of Investments.  Statistical  information is presented as of December
31,  2000.  All  subsidiaries  are wholly owned  unless  otherwise  specifically
indicated.

REAL ESTATE  OPERATIONS.  Our real estate operations include CAPE CORAL HOLDINGS
and an 80% ownership in LEHIGH. Through subsidiaries, we own Florida real estate
operations in four different locations:

     -   Lehigh Acres with 1,000 acres of land and approximately 700 home sites
         adjacent to Fort Myers, Florida;

     -   Sugarmill Woods with 530 home sites in Citrus County, Florida;

     -   Palm Coast with 1,950 home sites and 9,300 acres of residential,
         commercial and industrial land at Palm Coast,  Florida. Palm Coast is a
         planned community between St. Augustine and Daytona Beach; and

     -   Cape  Coral,  also  located  adjacent  to  Fort  Myers,  Florida,  with
         approximately  1,000 acres of commercial  and  residential  zoned land,
         including home sites, marina and commercial buildings.

The real estate strategy is to continue to acquire large properties at low cost,
add value and sell them at going market prices.

EMERGING  TECHNOLOGY  INVESTMENTS.  Since 1985 we have invested $38.6 million in
start-up companies that are developing  technologies that may be utilized by the
electric  utility  industry.  We are  comitted  to invest an  additional  $13.3
million  through  2008.  The  investments   were  first  made  through  emerging
technology funds initiated by us and other electric utilities. More recently, we
have made investments directly in privately held companies.  The majority of our
direct investments relate to distributed  generation  technology,  such as micro
generation and fuel cell technology.


<TABLE>
<CAPTION>
Emerging Technology Investments                  Future
As of December 31, 2000          Investment    Commitment
-----------------------------------------------------------
Millions
<S>                              <C>           <C>  
Emerging Technology Funds          $27.2         $12.8
Proton Energy Systems, Inc.          3.1             -
Metallic Power, Inc.                 3.7             -
Enporion, Inc.                       3.0             -
Other                                1.6           0.5
-----------------------------------------------------------
    Total                          $38.6         $13.3
-----------------------------------------------------------
</TABLE>



--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          35


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

The emerging  technology  funds (Funds) have made  investments in companies that
develop  advanced  technologies  to be used by the utility  industry,  including
electrotechnologies   and  renewable   energy   technologies  and  software  and
communications   technologies  related  to  utility  customer  support  systems.
Customer support systems include customer information systems, energy management
systems, Internet marketing, broadband communications and power quality.

PROTON ENERGY SYSTEMS,  INC. develops and manufactures  proton exchange membrane
products  for use in  hydrogen  generating  devices and  regenerative  fuel cell
systems  that  function  as power  generating  and energy  storage  devices.  In
addition to our direct investment, the Funds are also invested in Proton.

METALLIC  POWER,  INC. is engaged in the development  and  commercialization  of
zinc/air fuel cells to be used in place of battery operated and small combustion
engines (i.e.,  forklifts,  golf carts, lawn mowers and portable  generation for
mobile applications).  Metallic is privately held and located in California.  In
addition to our direct investment, the Funds are also invested in Metallic.

ENPORION,  INC.  is  a  start-up  business-to-business   electronic  marketplace
focusing on the supply chain of energy  utilities.  Enporion was founded in 2000
by seven  electric and gas utilities,  including us. The electronic  marketplace
began  transacting  business  in the  fourth  quarter  of 2000.  Our $3  million
investment represents a 12.5% ownership interest.

As companies  included in our emerging  technology  investments are sold, we may
recognize a gain or loss.  In the second half of 2000,  several of the companies
included in the Funds completed an initial public offering. Typically, investors
are not  permitted  to sell  stock of the  companies  for a  period  of 180 days
following an initial public offering. Other restrictions on sale may also apply.
Since  going  public,  the  market  value of  these  companies  has  experienced
significant  volatility.  Our  investment in the companies that have gone public
has a cost basis of  approximately  $13 million.  The aggregate  market value of
these companies at December 31, 2000 was $52 million.

Our  emerging  technology  investments  provide  us with  access  to  developing
technologies  before their  commercial  debut, as well as financial  returns and
diversification opportunities.  We view these investments as a source of capital
for  redeployment in existing  businesses and a potential entree into additional
business  opportunities.  Portions of any proceeds received on these investments
may be  reinvested  back  into  companies  to  encourage  development  of future
technology.

SECURITIES  PORTFOLIO.  Our securities  portfolio is managed by selected outside
managers as well as internal managers. It is intended to provide stable earnings
and  liquidity.  Proceeds  from  the  securities  portfolio  are  available  for
investment in existing businesses,  to fund strategic  initiatives and for other
corporate purposes.  Our investment in the securities  portfolio at December 31,
2000 was $91 million ($257 million at December 31, 1999).

In May 2000 we sold 4.7 million  shares of ACE common  stock that we received in
exchange for 7.3 million shares of Capital Re common stock in December 1999. The
exchange of stock was the result of a merger in which each  Capital Re share was
exchanged for 0.65  ordinary  shares of ACE plus $3.4456 in cash. At the time of
the  merger we owned 20% of  Capital Re which  converted  to 2% of ACE.  The ACE
shares were included in our securities portfolio at December 31, 1999.

ENVIRONMENTAL MATTERS

Certain businesses included in our Investments segment are subject to regulation
by various federal,  state and local authorities  concerning air quality,  water
quality,  solid  wastes  and other  environmental  matters.  We  consider  these
businesses to be in substantial compliance with those environmental  regulations
currently  applicable to their  operations and believe all necessary  permits to
conduct such operations have been obtained.  We do not currently anticipate that
potential  capital  expenditures  for  environmental  matters  will be material.
However, because environmental laws and regulations are constantly evolving, the
character,  scope  and  ultimate  costs of  environmental  compliance  cannot be
estimated. [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
36                         ALLETE 2000 ANNUAL REPORT



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT
<CAPTION>
                                                                                              Initial
Executive Officers                                                                        Effective Date
-------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>
John Cirello, Age 57
  Executive Vice President ALLETE and President and
    Chief Executive Officer - ALLETE Water Services, Inc.                                 July 24, 1995

Donnie R. Crandell, Age 56
  Executive Vice President ALLETE and President - ALLETE Properties, Inc.                 January 15, 1999
  Senior Vice President and President - ALLETE Properties, Inc.                           January 1, 1996

Robert D. Edwards, Age 56
  Executive Vice President ALLETE and President - Minnesota Power                         July 26, 1995

Brenda J. Flayton, Age 45
  Vice President - Human Resources                                                        July 22, 1998

John E. Fuller, Age 57
  Executive Vice President ALLETE and President and Chief Executive Officer - AFC         January 15, 1999
  Senior Vice President and President and Chief Executive Officer - AFC                   April 23, 1997
  President and Chief Executive Officer - AFC                                             January 1, 1994

Laurence H. Fuller, Age 52
  Vice President - Corporate Development                                                  February 10, 1997

David G. Gartzke, Age 57
  Senior Vice President - Finance and Chief Financial Officer                             December 1, 1994

James P. Hallett, Age 47
  Executive Vice President ALLETE and President and Chief Executive Officer - ADESA       April 23, 1997
  President and Chief Executive Officer - ADESA                                           August 21, 1996
  President - ADESA Canada Inc.                                                           May 26, 1994

Philip R. Halverson, Age 52
  Vice President, General Counsel and Secretary                                           January 1, 1996

David P. Jeronimus, Age 58
  Vice President - Environmental Services                                                 February 1, 1999

James A. Roberts, Age 50
  Vice President - Corporate Relations                                                    January 1, 1996

Edwin L. Russell, Age 55
  Chairman, President and Chief Executive Officer                                         May 14, 1996
  President and Chief Executive Officer                                                   January 22, 1996
  President                                                                               May 9, 1995

Mark A. Schober, Age 45
  Controller                                                                              March 1, 1993

James K. Vizanko, Age 47
  Treasurer                                                                               March 1, 1993

Claudia Scott Welty, Age 48
  Vice President - Information Technology                                                 February 1, 1999
  Vice President - Support Services                                                       July 1, 1995
</TABLE>

--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          37



<PAGE>
--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

All of the executive  officers  except Mr. Laurence Fuller have been employed by
us for more than five years in executive or management positions.

     MR.  LAURENCE FULLER was previously  senior vice  president,  new business
     development  and  strategic  planning,  for  Diners  Club  International, a
     subsidiary of Citicorp, Inc.

In the five years prior to election to the positions  shown above,  Ms.  Flayton
and Mr. Jeronimus held other positions with us.

     MS. FLAYTON was director of human resources.

     MR. JERONIMUS was director of environmental resources.

There are no family  relationships  between any of the executive  officers.  All
officers and directors are elected or appointed annually.

The present term of office of the above executive  officers extends to the first
meeting of our Board of Directors after the next annual meeting of shareholders.
Both meetings are scheduled for May 8, 2001. [GRAPHIC OMITTED - SQUARE]


I
TEM 2.   PROPERTIES

Properties  are  included in the  discussion  of our business in Item 1. and are
incorporated by reference herein.


ITEM 3.   LEGAL PROCEEDINGS

Material legal and regulatory  proceedings are included in the discussion of our
business in Item 1. and are incorporated by reference herein.


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 2000.


                                   PART II


ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

We have paid dividends  without  interruption  on our common stock since 1948. A
quarterly  dividend  of $0.2675  per share on our  common  stock will be paid on
March 1, 2001 to the holders of record on February 15, 2001. Our common stock is
listed on the New York Stock Exchange  under the symbol ALE.  Dividends paid per
share,  and the  high  and low  prices  for our  common  stock  for the  periods
indicated as reported by THE WALL STREET JOURNAL,  Midwest  Edition,  are in the
accompanying chart.

On March 2, 1999 our common  stock was split  two-for-one.  All common share and
per share amounts have been adjusted for all periods to reflect the  two-for-one
stock split.

The amount and timing of  dividends  payable on our common  stock are within the
sole  discretion  of our  Board  of  Directors.  In 2000 we  paid  out 51%  (64%
excluding the gain related to the ACE  transaction) of our per share earnings in
dividends.

Our Articles of Incorporation, and Mortgage and Deed of Trust contain provisions
which under  certain  circumstances  would  restrict the payment of common stock
dividends.  As of December 31, 2000 no retained  earnings  were  restricted as a
result of these provisions.  At January 29, 2001 there were approximately 38,000
common stock shareholders of record. [GRAPHIC OMITTED - SQUARE]


<TABLE>
<CAPTION>
                                 Price Range          
                             ------------------         Dividends 
Quarter                        High        Low            Paid
------------------------------------------------------------------             
<S>                          <C>         <C>            <C> 
2000 - First                 $18.06      $14.75         $0.2675
       Second                 20.75       16.00          0.2675
       Third                  24.25       17.31          0.2675
       Fourth                 25.50       20.13          0.2675
------------------------------------------------------------------
       Annual Total                                     $1.07
------------------------------------------------------------------
1999 - First                 $22.09      $19.53         $0.2675
       Second                 21.81       18.94          0.2675
       Third                  19.88       16.56          0.2675
       Fourth                 18.69       16.00          0.2675
------------------------------------------------------------------
       Annual Total                                     $1.07
------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
38                         ALLETE 2000 ANNUAL REPORT



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------


ITEM 6.    SELECTED FINANCIAL DATA

All common  share and per share  amounts  have been  adjusted for all periods to
reflect our March 2, 1999 two-for-one common stock split.  Financial information
presented in the table below may not be  comparable  between  periods due to our
purchase of 80% of ADESA, including AFC and Great Rigs, in July 1995, another 3%
in January 1996 and the remaining 17% in August 1996.

<TABLE>
<CAPTION>

BALANCE SHEET                                         2000           1999         1998          1997          1996           1995
------------------------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                 <C>           <C>           <C>           <C>            <C>           <C>
Assets
     Current Assets                                 $  731.0      $  564.5      $  487.5      $  385.3       $  334.4      $  251.9
     Property, Plant and Equipment                   1,479.7       1,258.8       1,178.9       1,170.2        1,188.8       1,149.1
     Investments                                       116.4         197.2         263.5         252.9          236.5         201.4
     Goodwill                                          472.8         181.0         169.8         158.9          167.0         120.2
     Other Assets                                      114.1         111.1         109.2         119.0          123.6         126.8
------------------------------------------------------------------------------------------------------------------------------------
                                                    $2,914.0      $2,312.6      $2,208.9      $2,086.3       $2,050.3      $1,849.4
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
     Current Liabilities                            $  707.0      $  398.3      $  346.0      $  342.6       $  339.7      $  256.8
     Long-Term Debt                                    952.3         712.8         672.2         685.4          694.4         639.5
     Other Liabilities                                 278.9         289.2         298.6         301.8          298.9         320.5
     Mandatorily Redeemable Preferred
       Securities of ALLETE Capital I                   75.0          75.0          75.0          75.0           75.0             -
     Redeemable Preferred Stock                            -          20.0          20.0          20.0           20.0          20.0
     Stockholders' Equity                              900.8         817.3         797.1         661.5          622.3         612.6
------------------------------------------------------------------------------------------------------------------------------------
                                                    $2,914.0      $2,312.6      $2,208.9      $2,086.3       $2,050.3      $1,849.4
------------------------------------------------------------------------------------------------------------------------------------

INCOME STATEMENT
------------------------------------------------------------------------------------------------------------------------------------
Millions

Operating Revenue
     Energy Services                                $  589.5      $  554.5      $  559.8      $  541.9       $  529.2      $  503.5
     Automotive Services                               546.4         406.6         328.4         255.5          183.9          61.6
     Water Services                                    118.6         112.9          95.6          95.5           85.2          66.1
     Investments                                        77.4          57.8          55.5          60.7           48.6          36.1
------------------------------------------------------------------------------------------------------------------------------------
                                                     1,331.9       1,131.8       1,039.3         953.6          846.9         667.3
------------------------------------------------------------------------------------------------------------------------------------
Expenses
     Fuel and Purchased Power                          229.0         200.2         205.7         194.1          190.9         177.0
     Operations                                        842.6         705.9         635.4         579.9          512.2         389.1
     Interest Expense                                   69.2          59.5          64.9          64.2           62.1          48.0
------------------------------------------------------------------------------------------------------------------------------------
                                                     1,140.8         965.6         906.0         838.2          765.2         614.1
------------------------------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re and ACE             191.1         166.2         133.3         115.4           81.7          53.2
Income (Loss) from Investment in Capital Re
  and Related Disposition of ACE                        48.0         (34.5)         15.2          14.8           11.8           9.8
------------------------------------------------------------------------------------------------------------------------------------
Operating Income                                       239.1         131.7         148.5         130.2           93.5          63.0
Distributions on Redeemable Preferred
  Securities of ALLETE Capital I                         6.0           6.0           6.0           6.0            4.7             -
Income Tax Expense                                      84.5          57.7          54.0          46.6           19.6           1.1
------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations                      148.6          68.0          88.5          77.6           69.2          61.9
Income from Discontinued Operations                        -             -             -             -              -           2.8
------------------------------------------------------------------------------------------------------------------------------------
Net Income                                             148.6          68.0          88.5          77.6           69.2          64.7
Preferred Dividends                                      0.9           2.0           2.0           2.0            2.4           3.2
------------------------------------------------------------------------------------------------------------------------------------
Earnings Available for Common Stock                    147.7          66.0          86.5          75.6           66.8          61.5
Common Stock Dividends                                  74.5          73.0          65.0          62.5           59.6          57.9
------------------------------------------------------------------------------------------------------------------------------------
Retained (Deficit) in the Business                  $   73.2      $   (7.0)     $   21.5      $   13.1       $    7.2      $    3.6
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          39



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                             2000           1999            1998           1997           1996            1995
--------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>             <C>            <C>            <C>             <C>
Shares Outstanding - Millions
     Year-End                                74.7           73.5            72.3           67.1           65.5            62.9
     Average<F1>                             69.8           68.4            64.0           61.2           58.6            57.0
Diluted Earnings Per Share
     Continuing Operations                  $2.11<F2>      $0.97<F2>       $1.35          $1.24          $1.14           $1.03
     Discontinued Operations                    -              -               -              -              -            0.05
--------------------------------------------------------------------------------------------------------------------------------
                                            $2.11<F2>      $0.97<F2>       $1.35          $1.24          $1.14           $1.08
--------------------------------------------------------------------------------------------------------------------------------
Return on Common Equity                     17.1%<F2>       8.3%<F2>       12.4%          12.1%          11.3%           10.7%
Common Equity Ratio                         46.3%          49.3%           49.9%          44.9%          43.1%           45.6%
Dividends Paid Per Share                    $1.07          $1.07           $1.02          $1.02          $1.02           $1.02
Dividend Payout                             50.7%<F2>       110%<F2>         76%            83%            89%             94%
Book Value Per Share at Year-End           $12.06         $10.97          $10.86          $9.69          $9.32           $9.28
Market Price Per Share
     High                                  $25.50         $22.09          $23.13         $22.00         $14.88          $14.63
     Low                                   $14.75         $16.00          $19.03         $13.50         $13.00          $12.13
     Close                                 $24.81         $16.94          $22.00         $21.78         $13.75          $14.19
Market/Book at Year-End                      2.06           1.54            2.03           2.25           1.48            1.53
Price Earnings Ratio at Year-End             11.8<F2>       17.5<F2>        16.3           17.6           12.1            13.1
Dividend Yield at Year-End                   4.3%           6.3%            4.6%           4.7%           7.4%            7.2%
Employees                                  12,633          8,246           7,003          6,817          6,537           5,649
Net Income
     Energy Services                        $43.1          $45.0           $47.4          $43.1          $39.4           $41.0
     Automotive Services                     48.5           39.9            25.5           14.0            3.7               -
     Water Services                          13.1           12.2             7.5            8.2            5.4            (1.0)
     Investments                             59.7<F2>       (9.4)<F2>       29.6           32.1           38.1            41.3
     Corporate Charges                      (15.8)         (19.7)          (21.5)         (19.8)         (17.4)          (19.4)
--------------------------------------------------------------------------------------------------------------------------------
                                            148.6           68.0            88.5           77.6           69.2            61.9
     Discontinued Operations                    -              -               -              -              -             2.8
--------------------------------------------------------------------------------------------------------------------------------
                                           $148.6          $68.0           $88.5          $77.6          $69.2           $64.7
--------------------------------------------------------------------------------------------------------------------------------
Customers - Thousands
     Electric                               141.0          139.7           138.1          135.8          135.1           135.8
     Water                                  273.8          255.3           205.1          201.0          197.2           198.4
Electric Sales - Millions of MWh             11.7           11.3            12.0           12.4           13.2            11.5
Power Supply - Millions of MWh
     Steam Generation                         6.4            6.2             6.3            6.1            6.4             6.0
     Hydro Generation                         0.5            0.7             0.6            0.6            0.7             0.7
     Long-Term Purchase - Square Butte        2.4            2.3             2.1            2.3            2.4             1.9
     Purchased Power                          3.1            2.6             3.2            3.8            4.4             3.6
--------------------------------------------------------------------------------------------------------------------------------
                                             12.4           11.8            12.2           12.8           13.9            12.2
--------------------------------------------------------------------------------------------------------------------------------
Water Sold - Billions of Gallons             22.7           20.3            18.1           16.5           16.0            14.7
Coal Sold - Millions of Tons                  4.4            4.5             4.2            4.2            4.5             4.0
Vehicles Sold - Thousands                   1,319          1,037             897            769            637             230
Vehicles Financed - Thousands                 795            695             531            323            140              70
Capital Expenditures - Millions
     Energy Services                       $ 64.7          $47.7           $36.1          $34.6         $ 37.5          $ 39.4
     Automotive Services                     74.2           23.8            22.0           11.2           41.7            42.7
     Water Services                          29.6           26.9            21.8           22.2           22.2            32.7
     Investments                              0.2            0.9             0.1            0.2            0.1               -
     Corporate                                  -            0.4             0.8            4.0              -               -
     Discontinued Operations                    -              -               -              -              -             0.7
--------------------------------------------------------------------------------------------------------------------------------
                                           $168.7          $99.7           $80.8          $72.2         $101.5          $115.5
--------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>  Excludes unallocated ESOP Shares.

<F2>  In May 2000 we recorded a $30.4 million, or $0.44 per share, after-tax gain on  the sale of 4.7 million shares of ACE that
      we received in December 1999 when  Capital Re merged  with ACE.  As a result of  the  merger, in  1999 we recorded a $36.2
      million, or $0.52 per share, after-tax non-cash  charge. Excluding the Capital Re and  ACE transactions, diluted  earnings
      per share were $1.67 in 2000 ($1.49 in 1999), the return on common equity  was 13.6% in 2000 (12.9% in 1999), the dividend
      payout was 64.1% in 2000 (72% in 1999),  the  price  earnings  ratio was 14.9 in  2000  (11.4 in 1999) and net income from
      Investments was $29.3 million in 2000 ($26.8 million in 1999).
</FN>
</TABLE>



--------------------------------------------------------------------------------
40                          ALLETE 2000 ANNUAL REPORT





<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


<TABLE>
<CAPTION>
CONSOLIDATED OVERVIEW
                                           2000          1999         1998
------------------------------------------------------------------------------
Millions
<S>                                      <C>           <C>          <C>

Operating Revenue
  Energy Services                        $  589.5      $  554.5     $  559.8
  Automotive Services                       546.4         406.6        328.4
  Water Services                            118.6         112.9         95.6
  Investments                                77.4          57.8         55.5
------------------------------------------------------------------------------
                                         $1,331.9      $1,131.8     $1,039.3
------------------------------------------------------------------------------
Operating Expenses
  Energy Services                        $  516.0        $479.0       $480.5
  Automotive Services                       464.3         337.3        281.5
  Water Services                             96.7          93.3         83.1
  Investments                                32.7          23.9         22.3
  Corporate Charges                          31.1          32.1         38.6
------------------------------------------------------------------------------
                                         $1,140.8        $965.6       $906.0
------------------------------------------------------------------------------
Net Income
  Energy Services                        $   43.1        $ 45.0       $ 47.4
  Automotive Services                        48.5          39.9         25.5
  Water Services                             13.1          12.2          7.5
  Investments                                29.3<F1>      26.8<F2>     29.6
  Corporate Charges                         (15.8)        (19.7)       (21.5)
------------------------------------------------------------------------------
                                            118.2         104.2         88.5
  Capital Re and ACE Transactions            30.4         (36.2)           -
------------------------------------------------------------------------------
                                         $  148.6        $ 68.0       $ 88.5
------------------------------------------------------------------------------
Diluted Average Shares
  of Common Stock - Millions                 70.1          68.7         64.2
------------------------------------------------------------------------------
Diluted Earnings Per Share
  of Common Stock
     Before Capital Re and
       ACE Transactions                     $1.67         $1.49        $1.35
     Capital Re and ACE Transactions         0.44         (0.52)           -
------------------------------------------------------------------------------
                                            $2.11         $0.97        $1.35
------------------------------------------------------------------------------
Return on Common Equity                     13.6%<F1>     12.9%<F2>    12.4%
------------------------------------------------------------------------------
<FN>

<F1>  Including the $30.4 million gain associated with the ACE transaction, 2000
      net income from Investments was $59.7 million and the return on equity was
      17.1%. (See Note 6.)

<F2>  Including the $36.2 million non-cash charge associated with the Capital Re
      transaction,  1999 net income from Investments was a $9.4 million loss and
      the return on equity was 8.3%. (See Note 6.)
</FN>
</TABLE>


We achieved strong earnings growth as 2000 net income,  exclusive of the Capital
Re and ACE  transactions  (see net  income  discussion  for  Capital  Re and ACE
transactions on the next page),  increased  $14.0 million,  or 13%, and earnings
per share  increased  $0.18,  or 12%,  over 1999.  Much of the growth  came from
Automotive  Services,  as net  income  from  that  segment  in 2000  was up $8.6
million,  or 22%, over 1999.  Although a cooler summer in 2000 resulted in lower
net income from Energy  Services,  financial  results for all business  segments
reflected  ongoing  operational   improvements  and  the  successful  strategies
initiated to grow and diversify each business.

We  measure   performance  of  our  operations  through  careful  budgeting  and
monitoring of contributions by each business segment to consolidated net income.
Corporate Charges represent general corporate expenses,  including interest, not
specifically related to any one business segment.

The following  summarizes  significant events which impacted net income for each
of our business segments for the past three years.

ENERGY  SERVICES' net income in 2000 declined $1.9 million,  or 4%, from 1999 as
strong  megawatthour  sales were more than offset by lower  margins on wholesale
power marketing  activities.  Megawatthour sales increased 4% to 11.7 million in
2000 (11.3 million in 1999;  12 million in 1998)  primarily due to more sales to
large industrial customers.  Lower demand in the region's wholesale power market
as a result of more  moderate  summer  weather led to the  decrease in wholesale
margins in 2000. In 1999 Energy Services  reflected lower  megawatthour sales to
industrial   customers  and  higher  margins  from  wholesale   power  marketing
activities,  a denial  of lost  margin  recovery  for  conservation  improvement
programs  and a  one-time  property  tax  levy  associated  with  an  industrial
development  project.  The 1999 decline in sales was primarily  attributable  to
fewer sales to taconite,  paper and pipeline  customers  because of lower demand
for domestic steel, stronger competition in the paper markets and lower pipeline
pumping levels. In 1998 net income reflected higher margins from wholesale power
marketing activities.  An unusually mild winter in 1998 negatively impacted both
net income and megawatthour sales to retail customers.

AUTOMOTIVE  SERVICES  continued its strong growth,  as 2000 net income increased
$8.6 million,  or 22%, over 1999. The growth was due to increased sales activity
at ADESA  auction  facilities  and  increased  financing  activity at AFC's loan
production offices.  ADESA added 28 new auction facilities in 2000 (two in 1999;
three in 1998) and  completed  the  acquisition  of 11 auction  facilities  that
provide "total loss" vehicle recovery services to insurance companies.  At ADESA
auction  facilities 1.3 million vehicles were sold in 2000 (1.0 million in 1999;
0.9 million in 1998).  Same store growth at ADESA auction  facilities  increased
12% as measured by earnings before interest, taxes,  depreciation,  amortization
and  lease  expense.  AFC  contributed  48% of the net  income  from  Automotive
Services in 2000. AFC had 86 loan production  offices in 2000 (84 in 1999; 84 in
1998). The growth of AFC's dealer/customer base from 11,500 in 1998 to 15,000 in
2000 has enabled AFC to finance more vehicles, 795,000 vehicles in 2000 (695,000
in 1999; 531,000 in 1998). In 1999 Automotive Services showed significant growth
reflecting a profitable mix of same-store  growth and selective  acquisitions at
ADESA  as  well  as  increased  financing  activity  and  the  maturing  of loan
production  offices  that were  opened in 1998 by AFC. In 1998 AFC added 30 loan
production offices.

WATER SERVICES' net income in 2000 was up $0.9 million,  or 7%, compared to 1999
due to increased water  consumption as a result of drier weather  conditions and
customer growth,  regulatory relief granted by Florida's  Hillsborough  Board of
County Commissioners

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         41




<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

in 2000 and higher rates  approved by the FPSC in 1999.  In 1999 Water  Services
generated  higher net income due to strategic  acquisitions  and customer growth
that increased the customer base by 24%,  regulatory  relief granted by the FPSC
in the  settlement  of  Florida  Water's  1995 rate case and  increased  average
consumption.  In  1998  Water  Services  results  reflected  regulatory  relief,
customer growth, increased consumption and operating efficiencies.

INVESTMENTS'  net income in 2000 was $2.5 million,  or 9%, more than 1999 due to
record sales by our real estate operations.  While the balance of our securities
portfolio was reduced to fund significant  acquisitions by Automotive  Services,
improved  returns  on our  investments  contributed  to higher net  income.  Our
securities portfolio earned an annualized after-tax return of 7.0% in 2000 (3.3%
in 1999;  5.5% in 1998).  In 1999  Investments  reported  gains from an emerging
technology investment and lower returns on our securities portfolio due to stock
market  volatility.  In 1998 Investments  reported a lower after-tax return from
our securities  portfolio due to the under  performance of certain  investments,
which  was  offset by  dividend  income  received  from an  emerging  technology
investment and strong sales by our real estate operations.

CORPORATE  CHARGES in 2000 were $3.9 million,  or 20%, less than 1999 due to the
resolution of various federal and state tax issues and less preferred  dividends
because of  redemption.  Corporate  Charges in 1999 reflected  reduced  interest
expense  as a result of a lower  average  commercial  paper  balance.  Corporate
Charges in 1998 included  reduced  interest  expense due to the  availability of
cash from the sale of common stock  offset by higher  expenses  associated  with
benefit incentives, a change in accounting for start-up costs, and technological
and communication improvements made to corporate-wide systems.

CAPITAL RE AND ACE  TRANSACTIONS.  In May 2000 we recorded a $30.4  million,  or
$0.44 per share, after-tax gain on the sale of 4.7 million shares of ACE that we
received  in December  1999 when  Capital Re merged with ACE. As a result of the
merger,  in 1999 we  recorded a $36.2  million,  or $0.52 per  share,  after-tax
non-cash charge as follows: a $24.1 million,  or $0.35 per share,  charge in the
second quarter  following the merger agreement and  discontinuance of our equity
accounting  for Capital Re; and a $12.1 million,  or $0.17 per share,  charge in
the fourth quarter upon completion of the merger.

2000 COMPARED TO 1999

OPERATING REVENUE

ENERGY SERVICES' operating revenue was up $35.0 million, or 6%, in 2000 due to a
6% increase in retail  megawatthour  sales  because of higher  demand from large
industrial  customers.  This increase was  partially  offset by fewer sales from
wholesale power  marketing  activities.  Wholesale  prices and volumes were down
from 1999 because of lower  demand for  electricity  in the  region's  wholesale
power  market as a result  of more  moderate  summer  weather  and  transmission
constraints.

AUTOMOTIVE  SERVICES'  operating revenue was up $139.8 million,  or 34%, in 2000
primarily  due  to a  27%  increase  in  vehicles  sold  through  ADESA  auction
facilities  and a 14%  increase in the number of vehicles  financed by AFC.  The
increase in vehicles sold was primarily attributable to new auctions acquired or
opened in 1999 and 2000.  Financial  results  for 2000  included  a full year of
operations  for  auction  facilities  acquired  in 1999  and a  partial  year of
operations for auction facilities acquired or opened in 2000.

WATER SERVICES' operating revenue was up $5.7 million, or 5%, in 2000 because of
a 12% increase in water consumption.  Drier weather conditions,  customer growth
and the  inclusion  of water  systems  acquired  during  1999 and early 2000 all
influenced the increase in water consumption.  In addition,  revenue in 2000 was
$1.0 million higher due to regulatory  relief granted by Florida's  Hillsborough
Board of County  Commissioners  in 2000 and $0.8  million  higher  due to higher
rates approved by the FPSC in 1999. Revenue in 1999 reflected the recognition of
$2.7 million of regulatory relief granted by the FPSC.

INVESTMENTS'   operating  revenue  was  up  $19.6  million,  or  34%,  in  2000.
Significant  sales by our real estate operations were the primary reason for the
increase.  In 2000 seven large sales  contributed $31.9 million to revenue while
in 1999 five large sales contributed  $17.1 million to revenue.  Despite a lower
average balance in 2000, income from our securities  portfolio was higher due to
improved  returns.  Income from our  emerging  technology  investments  was $4.6
million lower in 2000 because in 1999 we reported gains received from one of our
emerging technology investments.

OPERATING EXPENSES

ENERGY  SERVICES'  operating  expenses  were up $37.0  million,  or 8%,  in 2000
primarily due to increased fuel and purchased power  expenses.  Fuel expense was
$5.7 million higher in 2000 because we paid higher prices for coal and generated
247,000,  or 4%,  more  megawatthours  to meet the  higher  requirements  of our
industrial  customers.  In 2000  purchased  power  expense was up $23.1  million
because of higher prices.

AUTOMOTIVE  SERVICES' operating expenses were up $127.0 million, or 38%, in 2000
primarily due to the  inclusion of new vehicle  auction  facilities  acquired or
opened in 1999 and 2000.  Increased sales activity at the auction facilities and
increased financing activity at AFC also increased operating expenses in 2000.

WATER SERVICES'  operating expenses were up $3.4 million,  or 4%, in 2000 due to
the inclusion of water systems acquired in 1999 and 2000.

INVESTMENTS' operating expenses were up $8.8 million, or 37%, in 2000 due to the
cost of property sold by our real estate operations.

--------------------------------------------------------------------------------
42                         ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

1999 COMPARED TO 1998

OPERATING REVENUE

ENERGY SERVICES' operating revenue was down $5.3 million, less than 1%, in 1999.
Revenue  in 1999  reflected  a  $23.0  million  increase  from  wholesale  power
marketing  activities  because of extreme  weather  conditions  affecting  power
market  prices  during the third  quarter of 1999.  Temperatures,  which were at
record highs during the last week of July 1999,  created a high demand for power
from  other  power  suppliers.   Revenue  from  industrial  customers  was  down
approximately $19 million in 1999 due to decreased  taconite  production,  paper
manufacturing  and pipeline  usage.  Revenue  from  residential  and  commercial
customers was $3.8 million higher in 1999 because the winter weather in northern
Minnesota and  Wisconsin  was colder than 1998 and July 1999 was unusually  hot.
Revenue in 1998  included  $3.8 million of CIP lost margin  recovery.  Minnesota
Power  was  denied  CIP lost  margin  recovery  in 1999.  (See  Item 1. - Energy
Services - Minnesota Public Utilities Commission.)

AUTOMOTIVE SERVICES' operating revenue was up $78.2 million, or 24%, in 1999 due
to stronger sales at ADESA auction facilities,  and increased financing activity
and 12 months of operations at loan production offices opened in 1998 by AFC. At
ADESA auction  facilities  16% more vehicles were sold in 1999 compared to 1998.
In 1999 ADESA auction  financial  results  included 12 months of operations from
three vehicle auctions acquired in 1998 and partial year results for two vehicle
auction  facilities  acquired in 1999.  AFC financed  31% more  vehicles in 1999
compared to 1998. AFC has had 84 loan  production  offices since August 1998, 30
of which were opened during 1998.

WATER SERVICES'  operating  revenue was up $17.3 million,  or 18%, in 1999, with
$12.3 million of the increase  coming from PCUC,  which was purchased in January
1999. The remainder of the increase was attributed to regulatory  relief granted
by the FPSC in December 1998 and September  1999,  the  acquisition of Mid South
and more consumption due to customer growth.  Overall consumption  increased 12%
in 1999.  In 1998 overall  consumption  was lower than normal due to some of our
water  systems  being  adversely  impacted by record  rainfall  during the first
quarter. Gains totaling $600,000 from the sale of a water system and the sale of
land were included in 1998 revenue.

INVESTMENTS' operating revenue was up $2.3 million, or 4%, in 1999 primarily due
to $10.7 million in gains from an investment in an emerging  technology fund and
higher  sales by our real estate  operations.  These  increases  were  partially
offset  by  lower  returns  on the  securities  portfolio  due to  stock  market
volatility.  Also,  revenue in 1998  included  $4.3  million of dividend  income
received from an emerging technology investment.

OPERATING EXPENSES

ENERGY  SERVICES'  operating  expenses  decreased  $1.5 million,  or 3%, in 1999
primarily due to a $5.5 million  reduction in fuel and purchased  power expenses
because of less steam generation and fewer purchases from other power suppliers,
and a $1.9 million decrease in depreciation  expense  primarily the result of an
updated production plant depreciation  study.  Operating expenses were also $2.7
million lower in 1999 because the  amortization of an early  retirement  program
was completed in July 1998.  These decreases were partially offset by a one-time
property  tax levy and  other  expenses  related  to an  industrial  development
project totaling $3.6 million,  and higher  compensation and consulting  service
expenses.

AUTOMOTIVE  SERVICES'  operating expenses were up $55.8 million, or 20%, in 1999
primarily  due to increased  sales  activity at the auction  facilities  and the
floorplan financing  business.  Additional expenses associated with more auction
facilities and loan  production  offices also  contributed to higher expenses in
1999.

WATER  SERVICES'  operating  expenses  were up $10.2  million,  or 12%,  in 1999
primarily due to inclusion of PCUC and Mid South operations.

INVESTMENTS'  operating expenses were up $1.6 million,  or 7%, in 1999 primarily
due to more sales by our real estate operations.

CORPORATE  CHARGES  decreased  $6.5  million,  or 17%, in 1999 because  interest
expense in 1998 reflected a settlement with the Internal  Revenue Service on tax
issues relating to prior years.  As a result of the settlement,  a previous $4.7
million income tax expense accrual was reversed and recorded as interest expense
in the first  quarter of 1998.  There was no impact on  consolidated  net income
from this  transaction.  Also,  interest expense was reduced in 1999 because the
average commercial paper balance was lower.

OUTLOOK

CORPORATE. Our businesses in 43 states and nine Canadian provinces employ 13,000
employees engaged in Energy Services,  Automotive  Services,  Water Services and
Investments.  We  expect  to  continue  to  focus  on  attaining  our  strategic
objectives of substantially  growing  earnings,  achieving market  leadership in
each of our businesses,  significantly  enhancing total shareholder  return with
the objective of increasing our market capitalization to over $4 billion by 2005
and achieving market recognition as a multi-services  company. While maintaining
the quality of our credit and security  ratings,  we plan to achieve these goals
through  selective  acquisitions and internal growth within our businesses.  Our
$438 million investment in new vehicle auction facilities during 2000,  followed
by our $63 million  investment in auction  facilities  that provide "total loss"
vehicle  recovery  services  in  January  2001,  is  consistent  with our growth
strategy. These investments are expected to contribute to our goal of 12% growth
in operating earnings in 2001.

ENERGY  SERVICES.  Energy Services  continues to be a strong cash flow generator
for us. Our  access to and  ownership  of  low-cost  power are Energy  Services'
greatest  strengths and we will continue to look for opportunities to add to our
low-cost energy  portfolio.  We have more than adequate  generation to serve our
native  load.  Power  over and above our  customers'  requirements  is  marketed
through MPEX and Split Rock.

Since  approximately  half of the electricity  Minnesota Power sells is to large
industrial  customers,   primarily  taconite  producers,  which  have  long-term
all-requirements contracts, the livelihood of the taconite industry is important
to us. Annual  taconite  production in Minnesota was 47 million tons in 2000 (43
million  tons in 1999;  47 million  tons in 1998).  Based on our research of the
taconite industry,  Minnesota taconite  production for 2001 is anticipated to be
about 37 million tons.

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         43


<PAGE>

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                                    FORM 10-K
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The  anticipated  decrease  in 2001  taconite  production  is due to high import
levels and a softening economy.  The majority of the anticipated  10-million ton
reduction  in taconite  production  for 2001 is  occurring at mines that are not
Large Power Customers.  Two Large Power Customers have announced  temporary shut
downs,  accounting  for  approximately  2 million  tons of the  decrease.  While
taconite  production is currently expected to continue at annual levels of about
40 million tons,  the  longer-term  outlook for this  cyclical  industry is less
certain.  Long-term  contracts with our Large Power  Customers help minimize the
impact on earnings that  otherwise  would result from such decreases in taconite
production.  We expect any excess  energy not used by our Large Power  Customers
will be marketed by MPEX and Split Rock.

Energy  Services  continues to pursue plans to  construct  in  partnership  with
Wisconsin Public Service Corporation a 250-mile,  345-kilovolt transmission line
from  Wausau,  Wisconsin  to Duluth,  Minnesota  and pursue  regional  wholesale
merchant  generating  plant  opportunities.   Minnesota  Power  also  signed  an
agreement to install a 24-MW turbine  generator at Potlatch  Corp.'s facility in
Cloquet,  Minnesota  by  mid-2001.  While  Minnesota  Power will own the turbine
generator and have access to its excess power in times of high demand,  Potlatch
will  operate  and  maintain  the  facility.  Energy  Services  intends  to seek
additional  cost  saving   alternatives   and   efficiencies,   and  expand  its
non-regulated services to maintain its contribution to overall net income.

AUTOMOTIVE SERVICES. We anticipate earnings from Automotive Services to increase
by more than 40% in 2001. This earnings  growth  includes a 10% to 15% increase
in EBITDAL from same store ADESA  auction  facilities.  Since 1995 when we first
entered the automotive industry, we have transformed and expanded our Automotive
Services  operations.  Automotive Services is now our largest contributor to net
income.

ADESA is the second  largest and fastest  growing  vehicle  auction  business in
North America.  The 2000  acquisition of CAG added 13 Canadian  vehicle  auction
facilities and associated dealer financing  business to Automotive  Services and
established ADESA as the premier  automotive  services company in Canada.  ADESA
also acquired or opened 15 other vehicle auction facilities in 2000.

ADESA's  purchase of the  remaining 53% ownership in Impact Auto in 2000 and APC
in January  2001  position  us as the third  largest  provider  of "total  loss"
vehicle  recovery  services  in  North  America  with  19  auction   facilities.
Simultaneously with the APC transaction, ADESA acquired ComSearch. Supplementing
Internet product  offerings at ADESA and APC,  ComSearch  brings  Internet-based
technology in the auto parts location and insurance adjustment business. We will
continue to look for accretive  acquisitions  not only in the wholesale  vehicle
auction  business,  but  also  in the  "total  loss"  vehicle  recovery  auction
business.

AFC's new computer  application  system  allows AFC to manage its business  more
effectively  while  expediting  services through its branch network to more than
15,000 registered dealers. AutoVIN expanded its inventory inspection services in
2000 to include  dealers  selling other  products,  such as motorcycles and lawn
equipment. While inventory verification is still the core of AutoVIN's business,
its growth potential is dramatically  increased by providing inspection services
for other products.

Vehicle sales within the auto auction industry are expected to rise at a rate of
2% to 4% annually  over the next several  years.  With the  continued  increased
popularity  of  leasing  and the high  cost of new  vehicles,  a steady  flow of
vehicles is expected to return to auction.  Automotive  Services also expects to
participate in the industry's growth through selective acquisitions and expanded
services.

ADESA and AFC  continue  to focus on growth in the volume of  vehicles  sold and
financed,   increased  ancillary  services,   and  operating  and  technological
efficiencies.  Great Rigs, PAR and ADESA  Importation plan to participate in the
growth of auction volume and enhance market share.

WATER  SERVICES.  Florida Water will continue to grow by  selectively  acquiring
targeted  water  systems.  The  strategic  emphasis at Heater is growth in North
Carolina.  Both Florida  Water and Heater  operate in states that are  currently
experiencing  rapid population  growth,  which should contribute to our expected
annual customer growth of 4% to 7% over the next two years.

Severe drought  conditions over the last several months in Florida have prompted
three out of the five Florida water management districts to issue Water Shortage
Orders  limiting lawn watering to one or two days per week.  The Orders  request
all local governments to enforce the restrictions  which will be in effect until
further notice from each water  district.  The Water Shortage  Orders affect the
majority of Florida  Water's  customers (all but one community) and could affect
water  revenue in 2001.  At this time,  however,  we are unable to predict  what
impact these Orders may have on Water Services' financial results for 2001.

INVESTMENTS.  Over the last 5 years, sales by real estate operations have been 3
to 4 times more than the acquisition cost of property sold, creating strong cash
generation and profitability. Our real estate operations may, from time to time,
acquire large residential  community  properties at low cost, add value and sell
them at  current  market  prices  in order to  continue  a  consistent  earnings
contribution from this business.

Our investments in emerging technology funds make capital available to companies
developing  products and services critical to the future of the electric utility
industry.  Our  focus  has been  primarily  on micro  generation  and fuel  cell
technology.  We view our  investments  in these funds as a source of capital for
redeployment  into existing  businesses and additional  business  opportunities.
With many of these funds now maturing,  our investments may add to income in the
future. The balance in our securities  portfolio declined  significantly in 2000
due to  acquisitions.  We plan to  continue  to  concentrate  on  market-neutral
investment  strategies designed to provide stable and acceptable returns without
sacrificing needed liquidity.  Our portfolio is hedged against market downturns.
Our objective is to maintain corporate liquidity.


--------------------------------------------------------------------------------
44                         ALLETE 2000 ANNUAL REPORT




<PAGE>

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                                    FORM 10-K
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LIQUIDITY AND CAPITAL RESOURCES

A primary goal of the  strategic  plan is to improve cash flow from  operations.
Since 1996 cash from  operating  activities  has tripled.  This increase in cash
flow from operations has been  accomplished due to operating  results and better
management of working  capital  throughout  our company.  Our strategy  includes
growing the businesses both internally  with expanded  facilities,  services and
operations (see Capital Requirements) and externally through acquisitions.

WORKING CAPITAL.  Additional working capital,  if and when needed,  generally is
provided by the sale of commercial  paper.  Our  securities  investments  can be
liquidated  to  provide  funds  for  reinvestment  in  existing   businesses  or
acquisition of new businesses.  Approximately 6 million original issue shares of
our common stock are available for issuance  through Invest  Direct,  our direct
stock purchase and dividend  reinvestment plan.  ALLETE's $205 million bank line
of credit provides credit support for our commercial  paper program.  The amount
and timing of future sales of our securities will depend upon market  conditions
and our specific needs. We may from time to time sell securities to meet capital
requirements,  to provide for the  retirement  or early  redemption of issues of
long-term debt, to reduce short-term debt and for other corporate purposes.

A substantial  amount of ADESA's  working  capital is generated  internally from
payments for  services  provided.  However,  ADESA has  arrangements  to use the
proceeds from the sale of commercial  paper issued by ALLETE to meet  short-term
working capital  requirements  arising from the timing of payment obligations to
vehicle sellers and the  availability of funds from vehicle  purchasers.  During
the sales process, ADESA does not typically take title to vehicles.

AFC also has  arrangements  to use proceeds  from the sale of  commercial  paper
ALLETE has issued to meet its operational  requirements.  AFC offers  short-term
on-site financing for dealers to purchase vehicles at auctions in exchange for a
security  interest in those  vehicles.  The  financing  is provided  through the
earlier of the date the dealer sells the vehicle or a general  borrowing term of
30 to 45 days.

AFC sells certain  finance  receivables on a revolving  basis to a wholly owned,
unconsolidated,  qualified special purpose  subsidiary.  This subsidiary in turn
sells,  on  a  revolving  basis,  an  undivided  interest  in  eligible  finance
receivables,  up to a maximum at any one time  outstanding  of $300 million,  to
third party  purchasers  under an agreement  that expires at the end of 2002. At
December  31, 2000 AFC had sold  $335.7  million of finance  receivables  to the
special purpose  subsidiary  ($296.8 million at December 31, 1999).  Third party
purchasers  had purchased an undivided  interest in finance  receivables of $239
million from this  subsidiary at December 31, 2000 ($225 million at December 31,
1999).  AFC has  also  entered  into an  arrangement  in  December  2000  with a
manufacturer to floorplan  certain vehicles located at auctions  awaiting resale
for a security interest in those vehicles.  AFC sells these finance receivables,
on a revolving basis, to another wholly owned, unconsolidated, qualified special
purpose  subsidiary.  This subsidiary  borrows money from a third party under an
agreement  that expires  June 15, 2001.  At December 31, 2000 AFC had sold $53.5
million of these finance  receivables  to the special  purpose  subsidiary.  The
third party lender had advanced $43 million  against these  receivables.  Unsold
finance  receivables  and  unfinanced  receivables  held by the special  purpose
subsidiaries are recorded by AFC as residual  interest at fair value. Fair value
is based upon  estimates  of future cash flows,  using  assumptions  that market
participants  would  use to  value  such  instruments,  including  estimates  of
anticipated  credit  losses  over  the  life  of the  receivables  sold  without
application of a discount rate due to the short-term  nature of the  receivables
sold. The fair value of AFC's  residual  interest was $106.2 million at December
31, 2000 ($57.6  million at December 31,  1999).  Proceeds  from the sale of the
receivables were used to repay borrowings from ALLETE and fund vehicle inventory
purchases for AFC's customers.

Significant  changes in accounts  receivable  and accounts  payable  balances at
December  31,  2000  compared  to  December  31,  1999  were due to  significant
acquisitions in 2000, and increased  sales and financing  activity at Automotive
Services.

SALE OF  INVESTMENTS.  In May 2000 we sold 4.7  million  shares  of ACE.  ALLETE
received the ACE shares and $25 million in cash in December 1999 when Capital Re
merged with ACE. Prior to the merger,  we owned 7.3 million  shares,  or 20%, of
Capital  Re.  The $127  million  in  proceeds  from the sale of ACE  shares  and
proceeds  from the sale of a portion of our  securities  portfolio  were used to
fund auction acquisitions.

ACQUISITIONS.  In February 2000 ADESA purchased the Mission City Auto Auction in
San Diego, California.

In May 2000 ADESA Canada  purchased  the  remaining  27% of Impact  Auto.  ADESA
Canada  acquired  20% of Impact  Auto on October 1, 1995,  27% in March 1999 and
another 26% in January 2000.  Impact Auto is Canada's largest provider of "total
loss"  vehicle  recovery  services.  Impact  Auto  provides  these  services  to
insurance companies.

In June 2000 ADESA  acquired  all of the  outstanding  common  shares of Auction
Finance Group,  Inc. (AFG).  AFG owns CAAG Auto Auction Holdings Ltd., which was
doing business as Canadian  Auction  Group.  This  acquisition  added 13 vehicle
auction  facilities and associated dealer financing business to ADESA's existing
locations and established  ADESA as the premier  automotive  services company in
Canada.

In August 2000 ADESA  acquired  Beebe Auto  Exchange,  Inc.  which  operated two
Arkansas  auto  auctions:  Mid-Ark Auto Auction in North Little Rock and Central
Arkansas  Auto Auction in Beebe,  Arkansas,  and 51% of Interstate  Auto Auction
located  in Ocala,  Florida.

In October 2000 ADESA purchased nine auction facilities from Manheim.

The  transactions  described  in the five  preceding  paragraphs  had a combined
purchase price of approximately $438 million.  We funded these transactions with
proceeds from the sale of ACE shares, proceeds from the sale of a portion of our
securities portfolio, internally generated funds and long-term debt.

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         45



<PAGE>

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                                    FORM 10-K
--------------------------------------------------------------------------------

In June 2000  Florida  Water  purchased  the  assets  of  Spruce  Creek for $5.5
million,  plus a commitment to pay fees for water connections through June 2005.
Spruce Creek serves 5,600 water and wastewater customers in three communities in
Marion County, Florida. The systems acquired are designed to accommodate a total
of 10,000  water and  wastewater  customers.  The  transaction  was funded  with
internally generated funds.

In December  2000 ALLETE  Water  Services,  Inc.  purchased,  subject to certain
conditions, the assets of Dicks Creek Wastewater Utility for $6.6 million plus a
commitment  to pay a fee for  residential  connections.  Beginning in 2001,  the
commitment  fee will be a minimum of $400,000  annually  for four years or until
the cumulative fees paid reach $2 million. We expect to complete the transaction
in early 2001.  Dicks Creek is located near Atlanta in Forsyth County,  Georgia.
The transaction was funded with internally generated funds.

In  January  2001  ALLETE and ADESA  acquired  all of the  outstanding  stock of
ComSearch and all of the assets of APC in an overall transaction valued at $62.4
million.  APC is a provider of "total loss" vehicle recovery services with eight
auction facilities in the United States. ComSearch provides Internet-based parts
location  and  insurance  adjustment  audit  services  nationwide.  Both APC and
ComSearch are based in Rhode Island.  APC and ComSearch's  combined  revenue for
2000 was $38 million.  The  transactions  were funded with internally  generated
funds and the issuance of our common stock.

LONG-TERM  DEBT.  In March 2000 ADESA issued $35 million of 8.10% Senior  Notes,
Series B, due  March  2010.  Proceeds  were used to  refinance  short-term  bank
indebtedness   incurred  for  the  acquisition  of  vehicle  auction  facilities
purchased in 1999 and for general corporate purposes.

In June 2000 ALLETE  refinanced $4.6 million of 6.875% Pollution Control Revenue
Refunding Bonds,  Series 1991-A,  with $4.6 million of Adjustable Rate Pollution
Control Revenue Refunding Bonds Series 2000 due December 2015. The new bonds had
an initial interest rate of 4.75%.

In June 2000 Heater issued an $8 million,  8.24%, note to CoBank,  ACB, due June
2025. Proceeds were used to refinance short-term  indebtedness  incurred for the
1999 acquisition of Mid South and capital improvements in 1999 and 2000.

In July 2000 we filed a registration statement with the SEC pursuant to Rule 415
under the  Securities  Act of 1933 for an  aggregate  of $400  million  of first
mortgage  bonds and debt  securities.  In October 2000 we issued $250 million of
Floating  Rate First  Mortgage  Bonds due  October  2003.  We have the option to
redeem these bonds on or after  October 20, 2001,  in whole or in part from time
to time,  on any interest  payment date prior to their  maturity.  Proceeds were
used to refinance  short-term  debt incurred in connection with the October 2000
acquisition of nine vehicle auction  facilities from Manheim.  The new bonds had
an initial  interest  rate of 7.61%.  We may sell the  remaining  securities  if
warranted by market conditions and our capital requirements.  Any offer and sale
of the remaining  first mortgage bonds and debt  securities will be made only by
means of a prospectus.

PREFERRED STOCK. In 2000 we redeemed all of our outstanding  Preferred Stock and
Preferred  Stock A with  proceeds  from the sale of a portion of our  securities
portfolio and internally generated funds.

All 100,000  outstanding shares of Serial Preferred Stock A, $7.125 Series, were
redeemed in April 2000 for an aggregate of $10 million.

All 100,000  outstanding shares of Serial Preferred Stock A, $6.70 Series,  were
redeemed in July 2000 for an aggregate of $10 million.

All 113,358  outstanding  shares of 5% Preferred  Stock were  redeemed in August
2000 at $102.50 per share plus  accrued and unpaid  dividends of $0.75 per share
for an aggregate of $11.7 million.

LEASES.  In April  2000  leases  for three  ADESA  auction  facilities  (Boston,
Charlotte and  Knoxville)  were  refinanced in a $28.4 million  leveraged  lease
transaction. The new lease expires on April 1, 2010, but may be terminated after
2005 under certain  conditions.  ALLETE has guaranteed ADESA's obligations under
the lease.

BOND RATINGS.  ALLETE's first mortgage bonds and secured pollution control bonds
are  currently  rated Baa1 by Moody's  Investors  Service and A by Standard  and
Poor's.  The  disclosure of these bond ratings is not a  recommendation  to buy,
sell or hold our securities.

PAYOUT  RATIO.  In 2000 we paid out 51%  (110% in 1999;  76% in 1998) of our per
share earnings in dividends.  Excluding the gain related to the ACE transaction,
in 2000 we paid out 64% of our per share  earnings in  dividends.  Excluding the
non-cash charge related to the Capital Re  transaction,  in 1999 we paid out 72%
of our per share earnings in dividends.

CAPITAL REQUIREMENTS

Consolidated  capital expenditures totaled $168.7 million in 2000 ($99.7 million
in 1999; $80.8 million in 1998). Expenditures in 2000 included $64.7 million for
Energy Services,  $74.2 million for Automotive Services, $29.6 million for Water
Services and $0.2 million for  Investments.  Internally  generated funds and the
proceeds from the issuance of long-term debt were the primary sources of funding
these capital expenditures.

Capital  expenditures  are  expected to be $166  million in 2001 and total about
$350 million for 2002  through  2005.  The 2001 amount  includes $58 million for
electric    co-generation,    system   component   replacement   and   upgrades,
telecommunication  fiber  and  coal  handling  equipment;  $75  million  for new
auctions currently under construction,  expansions and on-going  improvements at
existing vehicle auction  facilities and associated  computer  systems;  and $33
million to expand  water and  wastewater  treatment  facilities  to  accommodate
customer  growth,  to meet  environmental  standards and for water  conservation
initiatives.  We expect to use internally generated funds, and the proceeds from
the  issuance of  long-term  debt and equity  securities  to fund these  capital
expenditures.

--------------------------------------------------------------------------------
46                         ALLETE 2000 ANNUAL REPORT




<PAGE>

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                                    FORM 10-K
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MARKET RISK

Our  securities  portfolio  has exposure to both price and  interest  rate risk.
Investments  held  principally  for  near-term  sale are  classified  as trading
securities and recorded at fair value.  Trading  securities consist primarily of
common  stock of publicly  traded  companies.  In  strategies  designed to hedge
overall market risks, we also sell common stock short.  Investments  held for an
indefinite  period of time are classified as  available-for-sale  securities and
also recorded at fair value. At December 31, 2000 available-for-sale  securities
consisted of equity  securities in a grantor trust  established  to fund certain
employee benefits.


<TABLE>
<CAPTION>
December 31, 2000                            Fair Value
---------------------------------------------------------
Millions
<S>                                          <C>

Trading Securities Portfolio                    $90.8
Available-For-Sale Securities Portfolio         $12.3
---------------------------------------------------------
</TABLE>


We are also subject to interest rate risk through  outstanding  debt.  (See Note
9.) A portion of the  interest  rate risk is hedged  through the use of interest
rate swap agreements.

In October 2000 we entered into an interest rate swap  agreement with a notional
amount of $250 million to hedge $250  million of floating  rate debt also issued
in October 2000.  Under the one-year  swap  agreement,  we make fixed  quarterly
payments  based on a fixed rate of 6.5% and receive  payments at a floating rate
based on LIBOR (6.8% at December 31, 2000).

In March 2000 Florida Water entered into an interest rate swap  agreement with a
notional amount of $35.1 million to hedge $35.1 million of fixed rate industrial
development  bond debt. The swap agreement  superseded a previous swap agreement
entered into in 1998. Under the 25 year agreement, Florida Water makes quarterly
payments  at a floating  rate based upon The Bond Market  Association  Municipal
Swap  Index plus 174 basis  points  (4.8% at  December  31,  2000) and  receives
payments based on a fixed rate of 6.5%.

NEW ACCOUNTING STANDARDS

As  of  January  1,  2001  we  adopted  SFAS  133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities."  SFAS  133  establishes  accounting  and
reporting  standards  requiring that every derivative  instrument be recorded on
the  balance  sheet as  either an asset or  liability  measured  at fair  value.
Changes  in fair  value  are to be  recognized  in  current  earnings  or  other
comprehensive income, depending on the purpose for which the derivative is held.
Our use of derivative instruments is not significant. Upon adoption of SFAS 133,
we held  two  derivatives  in the form of  interest  rate  swaps,  both of which
qualify for hedge  accounting.  Both hedges are highly  effective  resulting  in
minimal earnings impact. [GRAPHIC OMITTED - SQUARE]

                         -------------------------------

READERS ARE CAUTIONED THAT FORWARD-LOOKING  STATEMENTS INCLUDING THOSE CONTAINED
ABOVE,  SHOULD BE READ IN CONJUNCTION  WITH OUR  DISCLOSURES  UNDER THE HEADING:
"SAFE HARBOR  STATEMENT UNDER THE PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF
1995" LOCATED ON PAGE 22 OF THIS FORM 10-K.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7.  Management's  Discussion  and Analysis of Results of Operations and
Financial  Condition - Market Risk for information  related to quantitative  and
qualitative disclosure about market risk.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See our consolidated  financial  statements as of December 31, 2000 and 1999 and
for each of the three years ended  December 31, 2000,  and  supplementary  data,
also included, which are indexed in Item 14(a).


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

Not applicable.

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         47


<PAGE>

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                                    FORM 10-K
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                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information  required for this Item is incorporated by reference  herein and
will be set  forth  under  the  "Election  of  Directors"  section  in our Proxy
Statement for the 2001 Annual Meeting of  Shareholders,  except for  information
with respect to executive officers which is set forth in Part I hereof. The 2001
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after the end of our 2000 fiscal year.


ITEM 11.   EXECUTIVE COMPENSATION

The information  required for this Item is incorporated by reference herein from
the "Compensation of Executive  Officers" section in our Proxy Statement for the
2001 Annual Meeting of Shareholders.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information  required for this Item is incorporated by reference herein from
the "Security  Ownership of Certain Beneficial Owners and Management" section in
our Proxy Statement for the 2001 Annual Meeting of Shareholders.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  required for this Item is incorporated by reference herein from
the  "Certain  Relationships  and  Related  Transactions"  section  in our Proxy
Statement for the 2001 Annual Meeting of Shareholders.

--------------------------------------------------------------------------------


                                     PART IV


ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Certain Documents Filed as Part of this Form 10-K.

(1)  Financial Statements                                                  Pages
       ALLETE
       Report of Independent Accountants .................................... 54
       Consolidated Balance Sheet at
        December 31, 2000 and 1999 .......................................... 55
       For the Three Years Ended December 31, 2000
        Consolidated Statement of Income .................................... 56
        Consolidated Statement of Cash Flows ................................ 57
        Consolidated Statement of Stockholders' Equity ...................... 58
     Notes to Consolidated Financial Statements .......................... 59-73

(2)  Financial Statement Schedules
       Report of Independent Accountants on
        Financial Statement Schedule ........................................ 74
       Schedule II - ALLETE Valuation and Qualifying
        Accounts and Reserves ............................................... 74
     
     All  other  schedules  have been omitted  either because the information is
     not  required  to  be reported by  ALLETE or  because  the  information  is
     included in the consolidated financial statements or the notes.

(3)  Exhibits including those incorporated by reference

Exhibit Number
--------------------------------------------------------------------------------
      *2 - Agreement and Plan of Merger by and among the Company, AC Acquisition
           Sub,   Inc.,   ADESA   Corporation   and  Certain  ADESA   Management
           Shareholders dated February 23, 1995 (filed as Exhibit 2 to the March
           3, 1995 Form 8-K, File No. 1-3548).

  *3(a)1 - Articles  of  Incorporation,  amended and restated as of May 27, 1998
          (filed as Exhibit 4(a) to the June 3, 1998 Form 8-K, File No. 1-3548).

  *3(a)2 - Amendment to  Certificate  of Assumed Name,  filed with the Minnesota
           Secretary  of State on August  29,  2000  (filed as  Exhibit 4 to the
           October 10, 2000 Form 8-K, File No. 1-3548).

   *3(b) - Bylaws, as  amended effective May 27, 1998 (filed as  Exhibit 4(b) to
           the June 3, 1998 Form 8-K, File No. 1-3548).

  *4(a)1 - Mortgage and Deed of Trust,  dated as of  September 1, 1945,  between
           the Company and The Bank of New York (formerly  Irving Trust Company)
           and  Douglas J. MacInnes  (successor  to  Richard H. West),  Trustees
           (filed as Exhibit 7(c), File No. 2-5865).


--------------------------------------------------------------------------------
48                         ALLETE 2000 ANNUAL REPORT


<PAGE>
--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

Exhibit Number
--------------------------------------------------------------------------------
  *4(a)2 - Supplemental Indentures to ALLETE's Mortgage and Deed of Trust:

Number            Dated as of             Reference File                 Exhibit
--------------------------------------------------------------------------------
First             March 1, 1949           2-7826                         7(b)
Second            July 1, 1951            2-9036                         7(c)
Third             March 1, 1957           2-13075                        2(c)
Fourth            January 1, 1968         2-27794                        2(c)
Fifth             April 1, 1971           2-39537                        2(c)
Sixth             August 1, 1975          2-54116                        2(c)
Seventh           September 1, 1976       2-57014                        2(c)
Eighth            September 1, 1977       2-59690                        2(c)
Ninth             April 1, 1978           2-60866                        2(c)
Tenth             August 1, 1978          2-62852                        2(d)2
Eleventh          December 1, 1982        2-56649                        4(a)3
Twelfth           April 1, 1987           33-30224                       4(a)3
Thirteenth        March 1, 1992           33-47438                       4(b)
Fourteenth        June 1, 1992            33-55240                       4(b)
Fifteenth         July 1, 1992            33-55240                       4(c)
Sixteenth         July 1, 1992            33-55240                       4(d)
Seventeenth       February 1, 1993        33-50143                       4(b)
Eighteenth        July 1, 1993            33-50143                       4(c)
Nineteenth        February 1, 1997        1-3548 (1996 Form 10-K)        4(a)3
Twentieth         November 1, 1997        1-3548 (1997 Form 10-K)        4(a)3
Twenty-first      October 1, 2000         333-54330                      4(c)3
                
  *4(b)1 - Mortgage  and  Deed  of Trust,  dated  as of  March 1, 1943,  between
           Superior Water, Light  and  Power Company and  Chemical  Bank & Trust
           Company and Howard B. Smith, as Trustees, both succeeded by U.S. Bank
           Trust N.A., as Trustee (filed as Exhibit 7(c), File No. 2-8668).

  *4(b)2 - Supplemental Indentures to Superior Water, Light and  Power Company's
           Mortgage and Deed of Trust:

Number            Dated as of             Reference File                 Exhibit
--------------------------------------------------------------------------------
First             March 1, 1951           2-59690                        2(d)(1)
Second            March 1, 1962           2-27794                        2(d)1
Third             July 1, 1976            2-57478                        2(e)1
Fourth            March 1, 1985           2-78641                        4(b)
Fifth             December 1, 1992        1-3548 (1992 Form 10-K)        4(b)1
Sixth             March 24, 1994          1-3548 (1996 Form 10-K)        4(b)1
Seventh           November 1, 1994        1-3548 (1996 Form 10-K)        4(b)2
Eighth            January 1, 1997         1-3548 (1996 Form 10-K)        4(b)3

  *4(c)1 - Indenture,  dated   as of  March 1, 1993,  between   Southern  States
           Utilities,  Inc.  (now  Florida   Water  Services   Corporation)  and
           Nationsbank  of  Georgia,  National  Association (now SunTrust  Bank,
           Central Florida, N.A.), as Trustee (filed as Exhibit 4(d) to the 1992
           Form 10-K, File No. 1-3548).

  *4(c)2 - Supplemental  Indentures  to  Florida  Water  Services  Corporation's
           Indenture:

Number            Dated as of             Reference File                 Exhibit
--------------------------------------------------------------------------------
First             March 1, 1993           1-3548 (1996 Form 10-K)        4(c)1
Second            March 31, 1997          1-3548 (March 31, 1997
                                               Form 10-Q)                4
Third             May 28, 1997            1-3548 (June 30, 1997
                                               Form 10-Q)                4

   *4(d) - Amended  and  Restated  Trust  Agreement,  dated as of March 1, 1996,
           relating to MP&L (now ALLETE) Capital I's 8.05% Cumulative  Quarterly
           Income Preferred Securities,  between the Company, as Depositor,  and
           The Bank of New  York,  The Bank of New York  (Delaware),  Philip  R.
           Halverson,  David G. Gartzke and James K. Vizanko, as Trustees (filed
           as Exhibit 4(a) to the March 31, 1996 Form 10-Q, File No. 1-3548), as
           modified by  Amendment  No. 1, dated April 11, 1996 (filed as Exhibit
           4(b) to the  March 31,  1996 Form  10-Q,  File No.  1-3548) and First
           Amendment [2000] dated August 23, 2000 (filed as Exhibit 4(f)2,  File
           No. 333-54330).

   *4(e) - Indenture, dated as of March 1, 1996, relating to the Company's 8.05%
           Junior  Subordinated  Debentures,  Series  A, Due 2015,  between  the
           Company and The Bank of New York,  as Trustee  (filed as Exhibit 4(c)
           to the March 31, 1996 Form 10-Q, File No. 1-3548).

   *4(f) - Guarantee Agreement, dated as of March 1, 1996, relating to MP&L (now
           ALLETE)  Capital  I's 8.05%  Cumulative  Quarterly  Income  Preferred
           Securities,  between the Company,  as Guarantor,  and The Bank of New
           York,  as Trustee  (filed as Exhibit  4(d) to the March 31, 1996 Form
           10-Q, File No. 1-3548).

   *4(g) - Agreement as to Expenses and Liabilities, dated as of March 20, 1996,
           relating to MP&L (now ALLETE) Capital I's 8.05% Cumulative  Quarterly
           Income  Preferred  Securities,  between  the  Company  and MP&L  (now
           ALLETE)  Capital I (filed as Exhibit  4(e) to the March 31, 1996 Form
           10-Q, File No. 1-3548).

   *4(h) - Officer's Certificate,  dated March 20, 1996,  establishing the terms
           of the  8.05%  Junior  Subordinated  Debentures,  Series  A, Due 2015
           issued in  connection  with the  8.05%  Cumulative  Quarterly  Income
           Preferred Securities of MP&L (now ALLETE) Capital I (filed as Exhibit
           4(i) to the 1996 Form 10-K, File No. 1-3548).

   *4(i) - Rights  Agreement dated as of July 24, 1996,  between the Company and
           the  Corporate  Secretary of the  Company,  as Rights Agent (filed as
           Exhibit 4 to the August 2, 1996 Form 8-K, File No. 1-3548).

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         49



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

Exhibit Number
--------------------------------------------------------------------------------

   *4(j) - Indenture (for Unsecured Debt Securities),  dated as of May 15, 1996,
           between  ADESA  Corporation  and The  Bank of New  York,  as  Trustee
           relating to the ADESA Corporation's 7.70% Senior Notes, Series A, Due
           2006,  and its  8.10%  Senior  Notes,  Series  B, Due 2010  (filed as
           Exhibit 4(k) to the 1996 Form 10-K, File No. 1-3548).

   *4(k) - Guarantee of the Company,  dated as of May 30, 1996,  relating to the
           ADESA  Corporation's 7.70% Senior Notes, Series A, Due 2006 (filed as
           Exhibit 4(l) to the 1996 Form 10-K, File No. 1-3548).

   *4(l) - ADESA Corporation  Officer's  Certificate  1-D-1, dated May 30, 1996,
           relating to the ADESA Corporation's 7.70% Senior Notes, Series A, Due
           2006 (filed as Exhibit 4(m) to the 1996 Form 10-K, File No. 1-3548).

   *4(m) - Guarantee  of the Company,  dated as of March 30,  2000,  relating to
           ADESA  Corporation's 8.10% Senior Notes, Series B, Due 2010 (filed as
           Exhibit 4(a) to the March 31, 2000 Form 10-Q, File No. 1-3548).

   *4(n) - ADESA Corporation  Officer's Certificate 2-D-2, dated as of March 30,
           2000,  relating to ADESA  Corporation's 8.10% Senior Notes, Series B,
           Due 2010 (filed as Exhibit 4(b) to the March 31, 2000 Form 10-Q, File
           No. 1-3548).

  *10(a) - Participation  Agreement,  dated as of March 31,  2000,  among  Asset
           Holdings III, L.P., as Lessor, ADESA Corporation, as Lessee, SunTrust
           Bank,  as Credit Bank,  and  Cornerstone  Funding  Corporation  I, as
           Issuer (filed as Exhibit 10(a) to the March 31, 2000 Form 10-Q,  File
           No. 1-3548).

  *10(b) - Lease Agreement,  dated as of March 31, 2000,  between Asset Holdings
           III, L.P.,  as Lessor  and  ADESA  Corporation,  as  Lessee (filed as
           Exhibit 10(b) to the March 31, 2000 Form 10-Q, File No. 1-3548).

  *10(c) - Reimbursement Agreement, dated as of March 31, 2000, between SunTrust
           Bank, as Credit Bank, and Asset Holdings III, L.P.,  as Lessor (filed
           as Exhibit 10(c) to the March 31, 2000 Form 10-Q, File No. 1-3548).

  *10(d) - Appendix  I  to   Participation   Agreement,   Lease   Agreement  and
           Reimbursement  Agreement,  all which are dated as of March 31,  2000,
           relating to the Lease  Financing for ADESA  Corporation  Auto Auction
           Facilities  (filed as Exhibit  10(d) to the March 31, 2000 Form 10-Q,
           File No. 1-3548).

  *10(e) - Assignment of Lease and Rents (without  Exhibit A) entered into as of
           March 31, 2000,  by and between Asset  Holdings III,  L.P., as Lessor
           and  SunTrust  Bank,  as Credit Bank  (filed as Exhibit  10(e) to the
           March 31, 2000 Form 10-Q, File No. 1-3548).

  *10(f) - Limited Guaranty of the Company, dated as of March 31, 2000, relating
           to the Lease Financing for ADESA Corporation Auto Auction  Facilities
           (filed as Exhibit  10(f) to the March 31,  2000 Form  10-Q,  File No.
           1-3548).

  *10(g) - Wholesale Power Coordination and Dispatch Operating Agreement,  dated
           April 14, 2000,  between the Company and Split Rock Energy LLC (filed
           as Exhibit 10(a) to the June 30, 2000 Form 10-Q, File No. 1-3548).

  *10(h) - Letter addressed to the Federal  Regulatory  Commission,  dated April
           21, 2000,  amending the  Wholesale  Power  Coordination  and Dispatch
           Operating  Agreement,  dated April 14, 2000,  between the Company and
           Split Rock  Energy LLC (filed as Exhibit  10(b) to the June 30,  2000
           Form 10-Q, File No. 1-3548).

  *10(i) - Guarantee  Agreement,  dated  August 16, 2000, made  by and among the
           Company,  CoBank, ACB and ABN AMRO Bank, N.V. (filed as Exhibit 10 to
           the September 30, 2000 Form 10-Q, File No. 1-3548).

 *10(j)1 - Receivables  Purchase  Agreement dated as of December 31, 1996, among
           AFC Funding Corporation,  as Seller,  Automotive Finance Corporation,
           as Servicer,  Pooled  Accounts  Receivable  Capital  Corporation,  as
           Purchaser,  and Nesbitt  Burns  Securities  Inc.,  as Agent (filed as
           Exhibit 10(f) to the 1996 Form 10-K, File No. 1-3548).

 *10(j)2 - Amendments to Receivables Purchase Agreement:

Number            Dated as of             Reference File                 Exhibit
--------------------------------------------------------------------------------
First             February 28, 1997       1-3548 (1996 Form 10-K)        10(g)
Second            August 15, 1997         1-3548 (September 30, 1997
                                             Form 10-Q)                  10
Third             October 30, 1998        1-3548 (September 30, 1999
                                             Form 10-Q)                  10(a)
Fourth            September 22, 1999      1-3548 (September 30, 1999
                                             Form 10-Q)                  10(b)

  *10(k) - Purchase and Sale  Agreement  dated as of December 31, 1996,  between
           AFC Funding  Corporation and Automotive Finance Corporation (filed as
           Exhibit 10(h) to the 1996 Form 10-K, File No. 1-3548).

   10(l) - Loan and Servicing  Agreement dated as of December 22, 2000 among AFC
           AIM Corporation,  as Borrower,  Automotive  Finance  Corporation,  as
           Servicer, and Bank of Montreal, as Lender.

--------------------------------------------------------------------------------
50                         ALLETE 2000 ANNUAL REPORT



<PAGE>
--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

Exhibit Number
--------------------------------------------------------------------------------

   10(m) - Purchase and Sale Agreement dated as of December 22, 2000 between AFC
           AIM Corporation and Automotive Finance Corporation.

  *10(n) - Power  Purchase  and Sale  Agreement  between  the Company and Square
           Butte  Electric  Cooperative,  dated  as of May 29,  1998  (filed  as
           Exhibit 10 to the June 30, 1998 Form 10-Q, File No. 1-3548).

 +*10(o) - Minnesota  Power  (now  ALLETE)   Executive  Annual  Incentive  Plan,
           effective  January 1, 1996  (filed as Exhibit  10(a) to the 1995 Form
           10-K, File No. 1-3548).

 +*10(p) - Minnesota  Power (now ALLETE) and Affiliated  Companies  Supplemental
           Executive Retirement Plan, as amended and restated,  effective August
           1, 1994  (filed as  Exhibit  10(b) to the 1995  Form  10-K,  File No.
           1-3548).

  *10(q) - Executive  Investment  Plan-I,  as amended  and  restated,  effective
           November 1, 1988 (filed as Exhibit 10(c) to the 1988 Form 10-K,  File
           No. 1-3548).

  *10(r) - Executive  Investment  Plan-II,  as amended and  restated,  effective
           November 1, 1988 (filed as Exhibit 10(d) to the 1988 Form 10-K,  File
           No. 1-3548).
 +*10(s) - Deferred  Compensation  Trust  Agreement,  as amended  and  restated,
           effective  January 1, 1989  (filed as Exhibit  10(f) to the 1988 Form
           10-K, File No. 1-3548).

 +*10(t) - Minnesota   Power  (now   ALLETE)   Executive   Long-Term   Incentive
           Compensation Plan,  effective January 1, 1996 (filed as Exhibit 10(a)
           to the June 30, 1996 Form 10-Q, File No. 1-3548).

 +*10(u) - Minnesota Power (now ALLETE) Director Stock Plan,  effective  January
           1, 1995  (filed as Exhibit 10 to the March 31,  1995 Form 10-Q,  File
           No. 1-3548).

 +*10(v) - Minnesota Power (now ALLETE) Director Long-Term Stock Incentive Plan,
           effective  January 1, 1996  (filed as  Exhibit  10(b) to the June 30,
           1996 Form 10-Q, File No. 1-3548).

      12 - Computation of  Ratios of Earnings to  Fixed Charges and Supplemental
           Ratios of Earnings  to  Fixed Charges.  (Included  as page 75 of this
           document.)

     *21 - Subsidiaries  of  the Registrant  (reference is made to ALLETE's Form
           U-3A-2 for the year ended  December 31, 2000,  File No. 69-78).

   23(a) - Consent of Independent Accountants.

   23(b) - Consent of General Counsel.

--------------------------------------
*  INCORPORATED HEREIN BY REFERENCE AS INDICATED.

+  MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT  REQUIRED TO BE FILED
   AS AN EXHIBIT TO THIS REPORT PURSUANT TO ITEM 14(C) OF FORM 10-K.

(b)  Reports on Form 8-K.

     Report on Form 8-K  filed  October 10, 2000  with  respect to Item 5. Other
     Events and Item 7. Financial Statements and Exhibits.

     Report on Form 8-K filed October 18, 2000 with respect to Item 7. Financial
     Statements and Exhibits.

     Report on Form 8-K filed January 19,  2001  with  respect to  Item 5. Other
     Events and Item 7. Financial Statements and Exhibits.

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         51
--------------------------------------------------------------------------------



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                                    ALLETE
                                 (legally incorporated as Minnesota Power, Inc.)

Dated: February 6, 2001      By                 Edwin L. Russell
                                ------------------------------------------------
                                                Edwin L. Russell
                                 Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


<TABLE>
<CAPTION>

          SIGNATURE                                 TITLE                                DATE
<S>                                 <C>                                            <C>
      Edwin L. Russell                      Chairman, President,                   February 6, 2001
-----------------------------       Chief Executive Officer and Director
      Edwin L. Russell              

      David G. Gartzke                Senior Vice President - Finance              February 6, 2001
-----------------------------            and Chief Financial Officer
      David G. Gartzke                   

       Mark A. Schober                           Controller                        February 6, 2001
-----------------------------
       Mark A. Schober

     Kathleen A. Brekken                          Director                         February 6, 2001
-----------------------------
     Kathleen A. Brekken

      Merrill K. Cragun                           Director                         February 6, 2001
-----------------------------
      Merrill K. Cragun

       Dennis E. Evans                            Director                         February 6, 2001
-----------------------------
       Dennis E. Evans

       Glenda E. Hood                             Director                         February 6, 2001
-----------------------------
       Glenda E. Hood

      Peter J. Johnson                            Director                         February 6, 2001
-----------------------------
      Peter J. Johnson

       George L. Mayer                            Director                         February 6, 2001
-----------------------------
       George L. Mayer

       Jack I. Rajala                             Director                         February 6, 2001
-----------------------------
       Jack I. Rajala

     Arend J. Sandbulte                           Director                         February 6, 2001
-----------------------------
     Arend J. Sandbulte

         Nick Smith                               Director                         February 6, 2001
-----------------------------
         Nick Smith

      Bruce W. Stender                            Director                         February 6, 2001
-----------------------------
      Bruce W. Stender

     Donald C. Wegmiller                          Director                         February 6, 2001
-----------------------------
     Donald C. Wegmiller

</TABLE>


--------------------------------------------------------------------------------
52                         ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                   FORM 10-K
--------------------------------------------------------------------------------








                        CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

                                      WITH


                        REPORT OF INDEPENDENT ACCOUNTANTS

                                       AND

                              REPORT OF MANAGEMENT












--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         53


<PAGE>

--------------------------------------------------------------------------------
                                   FORM 10-K
--------------------------------------------------------------------------------

                                    REPORTS

INDEPENDENT ACCOUNTANTS                        [PRICEWATERHOUSECOOPERS LLP LOGO]
                                                                
To the Shareholders and
Board of Directors of ALLETE

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements of income,  of cash flows and of  stockholders'  equity
present fairly, in all material  respects,  the financial position of ALLETE and
its  subsidiaries  at  December  31,  2000 and 1999,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting  principles  generally accepted
in  the  United  States  of  America.   These   financial   statements  are  the
responsibility  of  ALLETE's  management;  our  responsibility  is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United  States of America which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above. [GRAPHIC OMITTED - SQUARE]

Pricewaterhouse Coopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
January 17, 2001


--------------------------------------------------------------------------------

MANAGEMENT

The  consolidated  financial  statements and other  financial  information  were
prepared by management,  who is responsible for their integrity and objectivity.
The  financial  statements  have been  prepared  in  conformity  with  generally
accepted  accounting  principles and  necessarily  include some amounts that are
based on informed judgments and best estimates and assumptions of management.

To meet management's  responsibilities with respect to financial information, we
maintain  and  enforce a system of  internal  accounting  controls  designed  to
provide assurance,  on a cost effective basis, that transactions are carried out
in accordance with management's  authorizations  and that assets are safeguarded
against  loss from  unauthorized  use or  disposition.  The system  includes  an
organizational   structure   that  provides  an   appropriate   segregation   of
responsibilities,  careful selection and training of personnel, written policies
and  procedures,  and periodic  reviews by our  internal  audit  department.  In
addition,  we have  personnel  policies that require all employees to maintain a
high standard of ethical  conduct.  Management  believes the system is effective
and provides  reasonable  assurance that all transactions are properly  recorded
and have been executed in accordance with management's authorization. Management
modifies and improves our system of internal  accounting controls in response to
changes in business  conditions.  Our  internal  audit staff is charged with the
responsibility for determining compliance with our procedures.

Four of our directors, not members of management,  serve as the Audit Committee.
Our Board of  Directors,  through  the Audit  Committee,  oversees  management's
responsibilities  for financial  reporting.  The Audit Committee meets regularly
with  management,  the internal  auditors  and the  independent  accountants  to
discuss  auditing and financial  matters and to assure that each is carrying out
their  responsibilities.  The internal auditors and the independent  accountants
have full and free access to the Audit  Committee  without  management  present.
PricewaterhouseCoopers  LLP, independent accountants,  are engaged to express an
opinion on the financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and includes a review of internal controls
and tests of transactions to the extent necessary to allow them to report on the
fairness of our operating  results and financial  condition.  [GRAPHIC OMITTED -
SQUARE]



Edwin L. Russell

Edwin L. Russell
Chairman, President and Chief Executive Officer


David G. Gartzke

David G. Gartzke
Chief Financial Officer

--------------------------------------------------------------------------------
54                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

                        CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
ALLETE Consolidated Balance Sheet
December 31                                                                   2000              1999
-------------------------------------------------------------------------------------------------------
Millions
<S>                                                                         <C>              <C>
Assets
Current Assets
     Cash and Cash Equivalents                                              $  219.3         $  101.5
     Trading Securities                                                         90.8            179.6
     Accounts Receivable                                                       265.7            176.4
     Inventories                                                                26.4             24.2
     Prepayments and Other                                                     128.8             82.8
-------------------------------------------------------------------------------------------------------
         Total Current Assets                                                  731.0            564.5
Property, Plant and Equipment                                                1,479.7          1,258.8
Investments                                                                    116.4            197.2
Goodwill                                                                       472.8            181.0
Other Assets                                                                   114.1            111.1
-------------------------------------------------------------------------------------------------------
Total Assets                                                                $2,914.0         $2,312.6
-------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Current Liabilities
     Accounts Payable                                                       $  269.1         $  124.7
     Accrued Taxes, Interest and Dividends                                      52.3             79.4
     Notes Payable and Long-Term Debt Due Within One Year                      290.0            105.6

     Other                                                                      95.6             88.6
-------------------------------------------------------------------------------------------------------
         Total Current Liabilities                                             707.0            398.3
Long-Term Debt                                                                 952.3            712.8
Accumulated Deferred Income Taxes                                              125.1            139.9
Other Liabilities                                                              153.8            149.3
Commitments and Contingencies
-------------------------------------------------------------------------------------------------------
         Total Liabilities                                                   1,938.2          1,400.3
------------------------------------------------------------------------------------------------------- 
Company Obligated Mandatorily Redeemable Preferred Securities of
     Subsidiary ALLETE Capital I Which Holds Solely Company Junior                               
     Subordinated Debentures                                                    75.0             75.0
-------------------------------------------------------------------------------------------------------
Redeemable Serial Preferred Stock                                                  -             20.0
-------------------------------------------------------------------------------------------------------
Stockholders' Equity
Cumulative Preferred Stock                                                         -             11.5
Common Stock Without Par Value, 130.0 Shares Authorized
     74.7 and 73.5 Shares Outstanding                                          576.9            552.0
Unearned ESOP Shares                                                           (55.7)           (59.2)
Accumulated Other Comprehensive Income (Loss)                                   (4.2)             2.4
Retained Earnings                                                              383.8            310.6
-------------------------------------------------------------------------------------------------------
         Total Stockholders' Equity                                            900.8            817.3
-------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity                                  $2,914.0         $2,312.6
-------------------------------------------------------------------------------------------------------
</TABLE>

        The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         55


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ALLETE Consolidated Statement of Income
For the Year Ended December 31                                      2000               1999            1998
---------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts                           
<S>                                                               <C>               <C>              <C>
Operating Revenue                                           
     Energy Services                                              $  589.5          $  554.5         $  559.8
     Automotive Services                                             546.4             406.6            328.4
     Water Services                                                  118.6             112.9             95.6
     Investments                                                      77.4              57.8             55.5
---------------------------------------------------------------------------------------------------------------
         Total Operating Revenue                                   1,331.9           1,131.8          1,039.3
--------------------------------------------------------------------------------------------------------------- 
Operating Expenses                                          
     Fuel and Purchased Power                                        229.0             200.2            205.7
     Operations                                                      842.6             705.9            635.4
     Interest Expense                                                 69.2              59.5             64.9
--------------------------------------------------------------------------------------------------------------- 
         Total Operating Expenses                                  1,140.8             965.6            906.0
---------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re and ACE                           191.1             166.2            133.3
Income (Loss) from Investment in Capital Re and             
     Related Disposition of ACE                                       48.0             (34.5)            15.2
---------------------------------------------------------------------------------------------------------------
Operating Income                                                     239.1             131.7            148.5
Distributions on Redeemable                                 
     Preferred Securities of ALLETE Capital I                          6.0               6.0              6.0
Income Tax Expense                                                    84.5              57.7             54.0
---------------------------------------------------------------------------------------------------------------
Net Income                                                        $  148.6          $   68.0         $   88.5
---------------------------------------------------------------------------------------------------------------
Average Shares of Common Stock                              
     Basic                                                            69.8              68.4             64.0
     Diluted                                                          70.1              68.7             64.2
---------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock                          
     Basic                                                           $2.12             $0.97            $1.35
     Diluted                                                         $2.11             $0.97            $1.35
---------------------------------------------------------------------------------------------------------------
Dividends Per Share of Common Stock                                  $1.07             $1.07            $1.02
---------------------------------------------------------------------------------------------------------------
</TABLE>

        The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
56                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ALLETE Consolidated Statement of Cash Flows
For the Year Ended December 31                                        2000              1999            1998
---------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                 <C>               <C>              <C>
Operating Activities
     Net Income                                                     $ 148.6           $ 68.0           $ 88.5
     Loss (Income) from Investment in Capital Re and Related
         Disposition of ACE - Net of Dividends Received               (48.0)            34.5            (14.1)
     Depreciation and Amortization                                     86.7             76.9             75.0
     Deferred Income Taxes                                             (6.6)           (12.8)             1.1
     Changes in Operating Assets and Liabilities - Net of the
         Effects of Acquisitions
              Trading Securities                                       88.9             16.1            (46.4)
              Accounts Receivable                                     (29.1)           (20.3)            (9.7)
              Inventories                                              (2.2)            (0.2)             1.0
              Accounts Payable                                         92.7              1.4             26.4
              Other Current Assets and Liabilities                    (75.1)             0.3              5.1
     Other - Net                                                       19.6              9.9             19.4
---------------------------------------------------------------------------------------------------------------
              Cash from Operating Activities                          275.5            173.8            146.3
Investing Activities
     Proceeds from Sale of Investments                                146.0             67.6             35.2
     Additions to Investments                                         (42.5)           (27.5)           (33.1)
     Additions to Property, Plant and Equipment                      (168.7)           (99.7)           (80.8)
     Acquisitions - Net of Cash Acquired                             (453.0)           (93.6)           (23.8)
     Other - Net                                                       24.4            (16.9)             3.7
---------------------------------------------------------------------------------------------------------------
              Cash for Investing Activities                          (493.8)          (170.1)           (98.8)
---------------------------------------------------------------------------------------------------------------
Financing Activities
     Issuance of Long-Term Debt                                       306.3             51.5              2.0
     Issuance of Common Stock                                          23.6             21.8            111.0
     Changes in Notes Payable - Net                                   177.8             15.5            (48.1)
     Reductions of Long-Term Debt                                     (58.8)            (9.9)           (10.0)
     Redemption of Preferred Stock                                    (31.5)               -                -
     Dividends on Preferred and Common Stock                          (75.4)           (75.0)           (67.0)
---------------------------------------------------------------------------------------------------------------
              Cash from (for) Financing Activities                    342.0              3.9            (12.1)
---------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash                                (5.9)             4.5             (3.9)
---------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents                                   117.8             12.1             31.5
---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period                      101.5             89.4             57.9
---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                          $ 219.3           $101.5          $  89.4
---------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
     Cash Paid During the Period for
         Interest - Net of Capitalized                                $66.3            $61.3            $63.0
         Income Taxes                                                $107.1            $60.3            $54.4
---------------------------------------------------------------------------------------------------------------
</TABLE>

        The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         57


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ALLETE Consolidated Statement of Stockholders' Equity

                                                                                   Accumulated
                                                           Total                      Other       Unearned            Cumulative
                                                       Stockholders'   Retained   Comprehensive     ESOP     Common    Preferred
                                                          Equity       Earnings      Income        Shares     Stock      Stock
--------------------------------------------------------------------------------------------------------------------------------
Millions                                                                                                              
<S>                                                    <C>             <C>        <C>             <C>        <C>      <C>
Balance at December 31, 1997                              $661.5        $296.1        $ 3.8        $(65.9)   $416.0      $11.5
                                                                                                                      
Comprehensive Income                                                                                                  
     Net Income                                             88.5          88.5                                         
     Other Comprehensive Income - Net of Tax                                                                          
         Unrealized Gains on Securities - Net                1.6                        1.6                            
         Foreign Currency Translation Adjustments           (3.9)                      (3.9)                           
                                                          ------                                                       
              Total Comprehensive Income                    86.2                                                       
Common Stock Issued - Net                                  113.0                                              113.0   
Dividends Declared                                         (67.0)        (67.0)                                        
ESOP Shares Earned                                           3.4                                      3.4             
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998                               797.1         317.6          1.5         (62.5)    529.0       11.5
                                                                                                                      
Comprehensive Income                                                                                                  
     Net Income                                             68.0          68.0                                         
     Other Comprehensive Income - Net of Tax                                                                          
         Unrealized Losses on Securities - Net              (3.6)                      (3.6)                           
         Foreign Currency Translation Adjustments            4.5                        4.5                            
                                                          ------                                                       
              Total Comprehensive Income                    68.9                                                       
Common Stock Issued - Net                                   23.0                                               23.0   
Dividends Declared                                         (75.0)        (75.0)                                        
ESOP Shares Earned                                           3.3                                      3.3             
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999                               817.3         310.6          2.4         (59.2)    552.0       11.5
                                                                                                                      
Comprehensive Income                                                                                                  
     Net Income                                            148.6         148.6                                         
     Other Comprehensive Income - Net of Tax                                                                          
         Unrealized Losses on Securities - Net              (0.7)                      (0.7)                           
         Foreign Currency Translation Adjustments           (5.9)                      (5.9)                           
                                                          ------                                                       
              Total Comprehensive Income                   142.0                                                       
Common Stock Issued - Net                                   24.9                                               24.9   
Redemption of Cumulative Preferred Stock                   (11.5)                                                        (11.5)
Dividends Declared                                         (75.4)        (75.4)                                        
ESOP Shares Earned                                           3.5                                      3.5             
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000                              $900.8        $383.8        $(4.2)       $(55.7)   $576.9          -
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

        The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
58                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

                          NOTES TO FINANCIAL STATEMENTS
1 BUSINESS SEGMENTS

<TABLE>
<CAPTION>
Millions
                                                                   Energy      Automotive     Water                    Corporate
For the Year Ended December 31                   Consolidated     Services      Services    Services    Investments     Charges
--------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>         <C>           <C>         <C>            <C>       
                                                                
2000                                                            
Operating Revenue                                  $1,331.9        $589.5       $546.4<F1>   $118.6        $77.4             -
Operation and Other Expense                           957.9         445.8        392.4         70.8         32.4<F3>     $16.5
Depreciation and Amortization Expense                  86.7          46.3         26.4         13.5          0.2           0.3
Lease Expense                                          27.0           2.8         22.2          2.0            -             -
Interest Expense                                       69.2          21.1         23.3         10.4          0.1          14.3
--------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before ACE                    191.1          73.5         82.1         21.9         44.7         (31.1)
Income from Disposition of ACE                         48.0             -            -            -         48.0             -
Distributions on Redeemable                                     
     Preferred Securities of Subsidiary                 6.0           2.0            -            -            -           4.0
Income Tax Expense (Benefit)                           84.5          28.4         33.6          8.8         33.0         (19.3)
--------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                  $  148.6        $ 43.1       $ 48.5       $ 13.1        $59.7        $(15.8)
EBITDAL                                              $374.0        $143.7       $154.0        $47.8        $45.0        $(16.5)
Total Assets                                       $2,914.0        $950.7     $1,343.8<F2>   $337.7       $281.5          $0.3
Property, Plant and Equipment                      $1,479.7        $792.5       $409.9       $277.3            -             -
Accumulated Depreciation and Amortization            $957.7        $661.9        $82.3       $211.3         $2.2             -
Capital Expenditures                                 $168.7         $64.7        $74.2        $29.6         $0.2             -
--------------------------------------------------------------------------------------------------------------------------------
1999                                                            
Operating Revenue                                  $1,131.8        $554.5       $406.6<F1>   $112.9      $  57.8             -
Operation and Other Expense                           807.7         409.4        292.0         68.2         23.3 (c)   $  14.8
Depreciation and Amortization Expense                  76.9          45.2         17.7         13.5          0.2           0.3
Lease Expense                                          21.5           3.2         16.7          1.6            -             -
Interest Expense                                       59.5          21.2         10.9         10.0          0.4          17.0
--------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before Capital Re             166.2          75.5         69.3         19.6         33.9         (32.1)
Loss from Investment in Capital Re                    (34.5)            -            -            -        (34.5)            -
Distributions on Redeemable                                      
     Preferred Securities of Subsidiary                 6.0           1.7            -            -            -           4.3
Income Tax Expense (Benefit)                           57.7          28.8         29.4          7.4          8.8         (16.7)
--------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                  $   68.0        $ 45.0       $ 39.9       $ 12.2      $  (9.4)       $(19.7)
EBITDAL                                              $324.1        $145.1       $114.6        $44.7        $34.5        $(14.8)
Total Assets                                       $2,312.6        $995.7       $664.8<F2>   $314.8       $336.9          $0.4
Property, Plant and Equipment                      $1,258.8        $770.0       $234.0       $254.8            -             -
Accumulated Depreciation and Amortization            $879.7        $629.7        $57.4       $190.7         $1.9             -
Capital Expenditures                                  $99.7         $47.7        $23.8        $26.9         $0.9          $0.4
--------------------------------------------------------------------------------------------------------------------------------
1998                                                            
Operating Revenue                                  $1,039.3        $559.8       $328.4<F1>    $95.6        $55.5             -
Operation and Other Expense                           749.4         409.3        241.5         60.9         22.2<F3>   $  15.5
Depreciation and Amortization Expense                  75.0          47.1         15.7         11.8          0.1           0.3
Lease Expense                                          16.7           2.0         14.6          0.1            -             -
Interest Expense                                       64.9          22.1          9.7         10.3            -          22.8
--------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before Capital Re             133.3          79.3         46.9         12.5         33.2         (38.6)
Income from Investment in Capital Re                   15.2            -            -             -         15.2             -
Distributions on Redeemable                                     
     Preferred Securities of Subsidiary                 6.0           1.7           -             -            -           4.3
Income Tax Expense (Benefit)                           54.0          30.2         21.4          5.0         18.8         (21.4)
--------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                  $   88.5        $ 47.4       $ 25.5       $  7.5      $  29.6        $(21.5)
EBITDAL                                              $289.9        $150.5        $86.9        $34.7        $33.3        $(15.5)
Total Assets                                       $2,208.9        $998.6       $529.3<F2>   $269.1       $411.6          $0.3
Property, Plant and Equipment                      $1,178.9        $770.2       $186.2       $222.5            -             -
Accumulated Depreciation and Amortization            $775.6        $596.1        $42.7       $135.2         $1.6             -
Capital Expenditures                                  $80.8         $36.1        $22.0        $21.8         $0.1          $0.8
--------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>  Included $107.4 million of Canadian operating revenue in 2000 ($56.8 million in 1999; $36.2 million in 1998).
<F2>  Included $215.6 million of Canadian assets in 2000 ($119.3 million in 1999; $60.9 million in 1998).
<F3>  Included $0.5 million of minority interest in 2000 ($1.8 million in 1999; $2.0 million in 1998).
--------------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>


--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         59


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

2 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

FINANCIAL STATEMENT PREPARATION. References in this report to "we" and "our" are
to  ALLETE  and  its  subsidiaries,   collectively.  We  prepare  our  financial
statements in conformity with generally accepted  accounting  principles.  These
principles  require  management to make informed  judgments,  best estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION.  Our consolidated  financial statements include the
accounts  of ALLETE and all of our  majority  owned  subsidiary  companies.  All
material   intercompany  balances  and  transactions  have  been  eliminated  in
consolidation.  Information  for prior periods has been  reclassified to present
comparable information for all periods.

BUSINESS SEGMENTS.  We are a multi-services  company that has operations in four
principal  business  segments.  Energy Services,  Automotive  Services and Water
Services segments were determined based on products and services  provided.  The
Investment segment was determined based on short-term  corporate liquidity needs
and the need to provide financial flexibility to pursue strategic initiatives in
the other business  segments.  We measure  performance of our operations through
careful  budgeting and monitoring of contributions to consolidated net income by
business  segment.  Corporate  charges  consist  of  expenses  incurred  by  our
corporate headquarters and interest and preferred stock expense not specifically
identifiable to a business segment. Our policy is to not allocate these expenses
to business segments.

ENERGY SERVICES.  Energy Services  generate,  transmit,  distribute,  market and
trade electricity. Native load electric service is provided to 144,000 customers
in northeastern  Minnesota and  northwestern  Wisconsin.  Large Power Customers,
which include five taconite  producers,  four paper and pulp mills, two pipeline
companies and one manufacturer, purchase about half of the electricity Minnesota
Power sells under  all-requirements  contracts with  expiration  dates extending
from May 2001  through  December  2008.  (See Item 1. - Energy  Services - Large
Power Customers in this Form 10-K.) MPEX, a division of Minnesota Power, markets
power  across the  Midwest  and  Canada.  Split Rock  Energy  LLC,  formed as an
alliance between  Minnesota Power and Great River Energy,  combines power supply
capabilities and customer loads to share market and supply risks and to optimize
power trading  opportunities.  Split Rock contracts for exclusive  services from
MPEX. BNI Coal, a wholly owned  subsidiary,  mines and sells lignite coal to two
North Dakota mine-mouth  generating units, one of which is Square Butte.  Square
Butte supplies approximately 71% (322 MW) of its output to Minnesota Power under
a long-term contract. (See Note 14.)

Electric  rates  are  under  the  jurisdiction  of  various  state  and  federal
regulatory  authorities.  Billings  are  rendered on a cycle  basis.  Revenue is
accrued for service provided but not billed.  Electric rates include  adjustment
clauses that bill or credit  customers for fuel and purchased energy costs above
or below the base levels in rate  schedules  and bill retail  customers  for the
recovery of CIP expenditures not collected in base rates.

AUTOMOTIVE   SERVICES.   Automotive   Services   include  several  wholly  owned
subsidiaries operating as integral parts of the vehicle redistribution business.

ADESA is the second largest vehicle auction network in North America. ADESA owns
or leases,  and  operates 54 vehicle  auctions  in the United  States and Canada
through which used cars and other  vehicles are purchased and sold by franchised
automobile  dealers and licensed used car dealers.  Sellers at ADESA's  auctions
include  domestic  and  foreign  auto  manufacturers,  car  dealers,  automotive
fleet/lease  companies,  banks and finance companies.  ADESA also has 19 auction
facilities  in the United  States and Canada that provide  "total loss"  vehicle
recovery services to insurance  companies.  AFC provides inventory financing for
wholesale and retail automobile dealers who purchase vehicles at ADESA auctions,
independent  auctions  and  other  auction  chains.  AFC has 86 loan  production
offices  located  across the United  States and Canada.  These  offices  provide
qualified  dealers  credit to purchase  vehicles at any of the 400 plus auctions
approved by AFC.  Great Rigs is one of the  nation's  largest  independent  used
automobile transport companies with more than 140 automotive carriers. It offers
customers  pick  up  and  delivery  service  through  11  strategically  located
transportation  hubs in the United States. PAR provides  customized  remarketing
services,  including transporting and liquidating off-lease vehicles, to various
businesses with fleet  operations.  AutoVIN,  a 90% owned  subsidiary,  provides
professional field information  services to the automotive  industry,  including
vehicle condition reporting, inventory verification auditing, program compliance
auditing and facility  inspection.  ADESA, Great Rigs, PAR and AutoVIN recognize
revenue when services are performed.  AFC revenue is comprised of gains on sales
of  receivables,  and  interest,  fee and servicer  income.  As is customary for
finance  companies,  AFC  revenue is reported  net of  interest  expense of $2.7
million in 2000 ($2.0  million in 1999;  $1.8  million in 1998).  AFC  generally
sells its United States dollar denominated finance receivables through a private
securitization  structure.   Gains  and  losses  on  such  sales  are  generally
recognized at the time of settlement  based on the difference  between the sales
proceeds and the allocated basis of the finance  receivables sold,  adjusted for
transaction fees and residual interest  retained.  AFC also retains the right to
service receivables sold through the securitization and receives a fee for doing
so.

WATER  SERVICES.  Water  Services  include  several  wholly owned  subsidiaries.
Florida Water is the largest  investor  owned  supplier of water and  wastewater
utility services in Florida.  Heater is the largest investor owned water utility
in North Carolina.  Heater also provides  wastewater services in North Carolina.
In total,  196,000 water and 78,000 wastewater treatment customers are served by
Water Services. Water and wastewater rates are under the jurisdiction of various
state and county regulatory authorities. Billings are rendered on a cycle basis.
Revenue  is  accrued  for  services  provided  but not  billed.  Instrumentation
Services,  Inc. provides predictive and preventive maintenance services to water
utility  companies  and other  industrial  operations.  Americas'  Water  offers
contract  management,  operations and  maintenance  services to governments  and
industries.

--------------------------------------------------------------------------------
60                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

INVESTMENTS. Investments include real estate operations, investments in emerging
technologies  funds  related to the electric  utility  industry and a securities
portfolio.  Our real estate  operations  include Cape Coral  Holdings and an 80%
ownership in Lehigh. Both are Florida companies which through their subsidiaries
own real estate in Florida.  Real estate  revenue is  recognized  on the accrual
basis. Our emerging technology  investments provide us with access to developing
technologies  before their  commercial  debut, as well as financial  returns and
diversification opportunities.  We view these investments as a source of capital
for  redeployment in existing  businesses and a potential entree into additional
business  opportunities.  Our securities portfolio is intended to provide stable
earnings and liquidity. Proceeds from the securities portfolio are available for
reinvestment in existing businesses, to fund strategic initiatives and for other
corporate purposes.

DEPRECIATION.  Property,  plant and equipment are recorded at original cost, and
are  reported  on  the  balance  sheet  net  of  accumulated   depreciation  and
contributions in aid of construction. Expenditures for additions and significant
replacements and improvements are capitalized;  maintenance and repair costs are
expensed as incurred.  Expenditures for major plant overhauls are also accounted
for using this same policy.  When  property,  plant and equipment are retired or
otherwise  disposed of, gains or losses are recognized in revenue.  When utility
property,  plant and equipment are retired or otherwise  disposed of, no gain or
loss is  recognized.  Contributions  in aid of  construction  relate to  utility
assets,  and are amortized over the estimated life of the associated asset. This
amortization reduces depreciation expense.  Contributions in aid of construction
relate to water assets and amounted to $203.9 million in 2000 ($189.6 million in
1999).

Depreciation is computed using the estimated useful lives of the various classes
of plant.  In 2000 average  depreciation  rates for the energy,  automotive  and
water services segments were 3.3%, 3.7% and 2.0%,  respectively  (3.3%, 3.9% and
2.2%, respectively, in 1999; 3.5%, 4.1% and 2.6%, respectively, in 1998).

ACCOUNTS RECEIVABLE. Accounts receivable is reported on the balance sheet net of
an allowance for doubtful accounts.  The allowance is based on our evaluation of
the receivable  portfolio under current  conditions,  the size of the portfolio,
overall  portfolio  quality,  review of specific problems and such other factors
that in our judgment deserve recognition in estimating losses.

AFC sells certain  finance  receivables on a revolving  basis to a wholly owned,
unconsolidated,  qualified special purpose  subsidiary.  This subsidiary in turn
sells,  on  a  revolving  basis,  an  undivided  interest  in  eligible  finance
receivables,  up to a maximum at any one time  outstanding  of $300 million,  to
third party  purchasers  under an agreement  that expires at the end of 2002. At
December  31, 2000 AFC had sold  $335.7  million of finance  receivables  to the
special purpose  subsidiary  ($296.8 million at December 31, 1999).  Third party
purchasers  had purchased an undivided  interest in finance  receivables of $239
million from this  subsidiary at December 31, 2000 ($225 million at December 31,
1999).  AFC has  also  entered  into an  arrangement  in  December  2000  with a
manufacturer to floorplan  certain vehicles located at auctions  awaiting resale
for a security interest in those vehicles.  AFC sells these finance receivables,
on a revolving basis, to another wholly owned, unconsolidated, qualified special
purpose  subsidiary.  This subsidiary  borrows money from a third party under an
agreement  that expires  June 15, 2001.  At December 31, 2000 AFC had sold $53.5
million of these finance  receivables  to the special  purpose  subsidiary.  The
third party lender had advanced $43 million  against these  receivables.  Unsold
finance  receivables  and  unfinanced  receivables  held by the special  purpose
subsidiaries are recorded by AFC as residual  interest at fair value. Fair value
is based upon  estimates  of future cash flows,  using  assumptions  that market
participants  would  use to  value  such  instruments,  including  estimates  of
anticipated  credit  losses  over  the  life  of the  receivables  sold  without
application of a discount rate due to the short-term  nature of the  receivables
sold. The fair value of AFC's  residual  interest was $106.2 million at December
31, 2000 ($57.6  million at December 31,  1999).  Proceeds  from the sale of the
receivables were used to repay borrowings from ALLETE and fund vehicle inventory
purchases for AFC's customers.


<TABLE>
<CAPTION>
Accounts Receivable
December 31                                            2000              1999
--------------------------------------------------------------------------------
Millions
<S>                                                   <C>               <C>   

Trade Accounts Receivable                             $208.6            $120.6
     Less: Allowance for Doubtful Accounts               5.2               7.6
--------------------------------------------------------------------------------
                                                       203.4             113.0
--------------------------------------------------------------------------------
Finance Receivables                                    458.0             366.5
     Less: Amount Sold                                 389.2             296.8
           Allowance for Doubtful Accounts               6.5               6.3
--------------------------------------------------------------------------------
                                                        62.3              63.4
--------------------------------------------------------------------------------
Total Accounts Receivable                             $265.7            $176.4
--------------------------------------------------------------------------------
</TABLE>


INVENTORIES.  Inventories, which include fuel, material and supplies, are stated
at the lower of cost or market. Cost is determined by the average cost method.

GOODWILL.  Goodwill  primarily  relates to the Automotive  Services  segment and
represents  the  excess  of cost over  identifiable  net  assets  of  businesses
acquired.  Amortization  is  computed  on a  straight-line  basis over a 40 year
period.   Operating   expenses  in  2000   included  $8.2  million  of  goodwill
amortization ($5.1 million in 1999; $4.9 million in 1998).

UNAMORTIZED EXPENSE, DISCOUNT AND PREMIUM ON DEBT. Expense, discount and premium
on debt are deferred and amortized over the lives of the related issues.

CASH AND CASH EQUIVALENTS. We consider all investments purchased with maturities
of three months or less to be cash  equivalents.

FOREIGN   CURRENCY   TRANSLATION.   Results  of  operations   for  our  Canadian
subsidiaries  are  translated  into  United  States  dollars  using the  average
exchange rates during the period.  Assets and  liabilities  are translated  into
United States dollars using the exchange rate on the balance sheet date,  except
for  intangibles  and fixed assets,  which are  translated at historical  rates.
[GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         61


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

3 ACQUISITIONS AND DIVESTITURES

ADESA AUCTION FACILITIES. In February 2000 ADESA purchased the Mission City Auto
Auction in San Diego, California.

In May 2000 ADESA Canada  purchased  the  remaining  27% of Impact  Auto.  ADESA
Canada  acquired  20% of Impact  Auto on October 1, 1995,  27% in March 1999 and
another 26% in January 2000.  Impact Auto is Canada's largest national  provider
of "total loss" vehicle recovery services to insurance companies.

In June 2000 ADESA  acquired  all of the  outstanding  common  shares of Auction
Finance Group,  Inc. (AFG).  AFG owns CAAG Auto Auction Holdings Ltd., which was
doing business as Canadian  Auction  Group.  This  acquisition  added 13 vehicle
auction  facilities and associated dealer financing business to ADESA's existing
locations and established  ADESA as the premier  automotive  services company in
Canada.

In August 2000 ADESA  acquired  Beebe Auto  Exchange,  Inc.  which  operated two
Arkansas  auto  auctions:  Mid-Ark Auto Auction in North Little Rock and Central
Arkansas Auto Auction in Beebe,  Arkansas,  and 51% of  Interstate  Auto Auction
located in Ocala, Florida.

In October 2000 ADESA purchased nine auction facilities from Manheim.

The  transactions  described  in the five  preceding  paragraphs  had a combined
purchase  price of  approximately  $438 million and resulted in goodwill of $298
million,  which  we are  amortizing  over a  40-year  useful  life.  We used the
purchase method of accounting for these  transactions  and included an estimated
allocation of the purchase  price for the Manheim  transaction.  Final  purchase
accounting  adjustments  are not expected to be material  for this  transaction.
Financial  results have been included in our consolidated  financial  statements
since the date of each  purchase.  Pro  forma  financial  results  have not been
presented due to immateriality.

In April 1999 ADESA acquired Des Moines Auto Auction located in Des Moines, Iowa
and in July 1999 ADESA Canada,  Inc. purchased the Vancouver Auto Auction of New
Westminster,  British  Columbia.  The two transactions  had a combined  purchase
price of $31.3  million  and were  accounted  for using the  purchase  method of
accounting  resulting in goodwill of $11.9 million.  Financial  results for each
facility have been included in our consolidated  financial  statements since the
date of purchase. Financial results prior to the acquisition were not material.

ADESA acquired the assets of Greater  Lansing Auto Auction in Lansing,  Michigan
and I-55 Auto Auction in St. Louis,  Missouri in April 1998, and Ark-La-Tex Auto
Auction in  Shreveport,  Louisiana in May 1998 for a combined  purchase price of
$23.8 million.  The acquisitions were accounted for using the purchase method of
accounting  and  resulted in  additional  goodwill of $16.3  million.  Financial
results  for  these  three  auctions  have  been  included  in our  consolidated
financial statements since the dates of acquisition.  Financial results prior to
the acquisition were not material.

ACQUISITION  OF SPRUCE CREEK SOUTH  UTILITIES  INC. In June 2000  Florida  Water
purchased the assets of Spruce Creek for $5.5 million,  plus a commitment to pay
a fee for water connections through June 2005. The transaction was accounted for
using the purchase method of accounting. Financial results have been included in
our  consolidated  financial  statements  since the date of purchase.  Pro forma
financial  results have not been  presented due to  immateriality.  Spruce Creek
serves  5,600 water and  wastewater  customers  in three  communities  in Marion
County,  Florida.  The systems  acquired are designed to  accommodate a total of
10,000 water and wastewater customers.

ACQUISITION  OF DICKS  CREEK.  In December  2000  ALLETE  Water  Services,  Inc.
purchased,  subject to certain conditions,  the assets of Dicks Creek Wastewater
Utility  for  $6.6  million  plus  a  commitment  to pay a fee  for  residential
connections. Beginning in 2001, the commitment fee will be a minimum of $400,000
annually for four years or until the cumulative  fees paid reach $2 million.  We
expect to complete  the  transaction  in early  2001.  The  transaction  will be
accounted for using the purchase  method of  accounting.  Dicks Creek is located
near Atlanta in Forsyth County, Georgia.

ACQUISITION  OF PALM COAST  UTILITY  CORPORATION.  In January 1999 Florida Water
purchased the assets and assumed  certain  liabilities of PCUC for $16.8 million
plus $1,000 per new water connection for an eight-year  period.  We estimate the
present value of these future water  connections at $5.1 million.  PCUC provides
water and wastewater  services in Flagler County,  Florida.  The transaction was
accounted for using the purchase  method of accounting.  Financial  results have
been  included  in our  consolidated  financial  statements  since  the  date of
purchase. Financial results prior to the acquisition were not material.

ACQUISITION  OF CAPE CORAL.  In June 1999 Cape Coral  Holdings,  a subsidiary of
ALLETE Properties,  purchased, for $45.0 million, certain real estate properties
located in Cape  Coral,  Florida.  Cape Coral,  located  adjacent to Fort Myers,
Florida,   has  a  population  of  100,000  and  is  Florida's   second  largest
municipality in land area.  Properties  purchased included  approximately  2,500
acres of commercial  and  residential  zoned land,  including home sites, a golf
resort,  marina and commercial buildings.  Concurrently with the purchase,  Cape
Coral Holdings  assigned to a third party the rights to a shopping  center and a
portion of the vacant land for $8.8  million,  which reduced the net amount paid
by Cape Coral Holdings to $36.2 million. The transaction was accounted for using
the purchase method of accounting.  Financial  results have been included in our
consolidated financial statements since the date of purchase.  Financial results
prior to the acquisition were not material.

MID SOUTH WATER  SYSTEMS,  INC. In June 1999 Heater  acquired  the assets of Mid
South Water Systems,  Inc. (Mid South) located in Sherills Ford,  North Carolina
for $9 million.  The  acquisition was accounted for using the purchase method of
accounting.  Financial results have been included in our consolidated  financial
statements  since  the  date  of  purchase.   Financial  results  prior  to  the
acquisition were not material. [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
62                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

4 REGULATORY MATTERS

We file  for  periodic  rate  revisions  with  the  Minnesota  Public  Utilities
Commission (MPUC), the Federal Energy Regulatory  Commission (FERC), the Florida
Public  Service   Commission  (FPSC)  and  other  state  and  county  regulatory
authorities.  Interim  rates in  Minnesota  and Florida are placed into  effect,
subject to refund with  interest,  pending a final  decision by the  appropriate
commission.  In 2000 43% of our consolidated operating revenue (47% in 1999; 52%
in 1998) was under regulatory authority.  The MPUC had regulatory authority over
approximately  29% in 2000  (31%  in  1999;  36% in  1998)  of our  consolidated
operating revenue.

ELECTRIC  RATES.  Restructuring  of the  electric  utility  industry  continues.
Twenty-five  states   representing   approximately  70%  of  the  United  States
population have passed either legislation or regulation that initiates a process
leading to retail  customer  choice.  Neither  Minnesota  nor  Wisconsin  (where
Minnesota Power has retail electric customers) have passed retail  restructuring
laws. In 2001 utility  restructuring  legislation will likely be debated at both
the federal level and in Minnesota and Wisconsin. It is unlikely,  however, that
the United States  Congress or the  legislatures  of Minnesota or Wisconsin will
enact retail choice legislation into law this year. We cannot predict the timing
or substance of any future legislation that might ultimately be enacted.  We are
taking all necessary steps to cultivate  community and customer  relations,  and
continue to maintain our competitive  position as a low-cost and long-term power
supplier to large industrial customers.  With electric rates among the lowest in
the United States, customer satisfaction high, and long-term wholesale and Large
Power Customer retail  contracts in place, we believe we are well positioned for
the future.

WATER AND WASTEWATER  RATES. In 1995 the Florida First District Court of Appeals
(Court of Appeals)  reversed a 1993 FPSC order  establishing  uniform  rates for
most of Florida  Water's  service areas.  With "uniform  rates" all customers in
each uniform rate area pay the same rates for water and wastewater services.  In
response to the Court of Appeals' order, in August 1996 the FPSC ordered Florida
Water to issue refunds to those customers who paid more since October 1993 under
uniform rates than they would have paid under stand-alone  rates. This order did
not permit a balancing surcharge to customers who paid less under uniform rates.
Florida  Water  appealed,  and the Court of Appeals  ruled in June 1997 that the
FPSC could not order refunds without  balancing  surcharges.  In response to the
Court of Appeals' ruling,  the FPSC issued an order in January 1998 that did not
require  refunds.  Florida Water's  potential  refund liability at that time was
about $12.5 million,  which included interest,  to customers who paid more under
uniform rates.

In the same January 1998 order, the FPSC required Florida Water to refund,  with
interest,  $2.5 million, the amount paid by customers in the Spring Hill service
area from January 1996 through June 1997 under  uniform  rates that exceeded the
amount  these  customers  would  have paid  under a  modified  stand-alone  rate
structure.  No balancing  surcharge was permitted.  The FPSC ordered this refund
because  Spring  Hill  customers  continued  to pay  uniform  rates  after other
customers  began  paying  modified  stand-alone  rates  effective  January  1996
pursuant to the FPSC's interim rate order in Florida Water's 1995 Rate Case. The
FPSC did not include  Spring Hill in this  interim rate order  because  Hernando
County had assumed  jurisdiction  over Spring Hill's rates. In June 1997 Florida
Water  reached an agreement  with  Hernando  County to revert  prospectively  to
stand-alone rates for Spring Hill customers.

Customer  groups that paid more under uniform rates  appealed the FPSC's January
1998 order,  arguing that they are entitled to a refund  because the FPSC had no
authority to order uniform  rates.  Florida Water also appealed the $2.5 million
refund order. Initial briefs were filed by all parties in May 1998. In June 1998
the Court of Appeals  reversed  its  previous  ruling  that the FPSC was without
authority to order uniform rates at which time customer  groups  supporting  the
FPSC's  January  1998 order  filed a motion  with the Court of  Appeals  seeking
dismissal of the appeal by customer groups seeking  refunds.  Customers  seeking
refunds filed amended  briefs in September  1998. A provision for refund related
to the $2.5 million refund order was recorded in 1999.

In December 2000 Hernando County approved a settlement agreement relating to the
Spring  Hill  refund  issue  that was  before  the Court of  Appeals.  Under the
settlement  agreement,  Spring Hill customers  would receive a prospective  rate
reduction over three years totaling $1.8 million with no refunds.  Florida Water
also  agreed  it would  not file a rate case to  increase  rates to Spring  Hill
customers  for a period of three  years.  In December  2000 the Court of Appeals
remanded the issue back to the FPSC for settlement consideration.  We are unable
to predict the timing or outcome of the appeal and settlement process.

DEFERRED REGULATORY CHARGES AND CREDITS. Deferred regulatory charges and credits
are included in other assets and other  liabilities on our consolidated  balance
sheet.  Our  utility  operations  are  subject  to the  provisions  of SFAS  71,
"Accounting  for the Effects of Certain Types of  Regulation."  We capitalize as
deferred  regulatory  charges  incurred  costs which are probable of recovery in
future utility rates.  Deferred regulatory credits represent amounts expected to
be credited to customers in rates.  Based on current rate treatment,  we believe
all deferred regulatory charges are probable of recovery. [GRAPHIC OMITTED -
SQUARE]


<TABLE>
<CAPTION>
Deferred Regulatory Charges and Credits
December 31                                              2000            1999
--------------------------------------------------------------------------------
Millions                                         
<S>                                                     <C>              <C>         
                                                 
Deferred Charges                                 
     Income Taxes                                       $ 15.5           $17.0
     Conservation Improvement Programs                     1.1            13.5
     Premium on Reacquired Debt                            5.0             5.6
     Other                                                19.1            21.5
--------------------------------------------------------------------------------
                                                          40.7            57.6
Deferred Credits                                 
     Income Taxes                                         55.0            55.1
--------------------------------------------------------------------------------
Net Deferred Regulatory Charges (Credits)               $(14.3)          $ 2.5                                          
--------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          63


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

5 FINANCIAL INSTRUMENTS

SECURITIES  INVESTMENTS.  Our securities  portfolio is managed internally and by
selected  outside  managers.  Securities held principally for near-term sale are
classified as trading  securities  and included in current assets at fair value.
Changes in the fair value of trading  securities  are  recognized  in  earnings.
Trading  securities  consist  primarily of the common  stock of publicly  traded
companies.  Securities  held for an indefinite  period of time are classified as
available-for-sale  securities  and  included  in  investments  at  fair  value.
Unrealized  gains and losses on  available-for-sale  securities  are included in
accumulated  other  comprehensive  income,  net of  tax.  Unrealized  losses  on
available-for-sale  securities  that are other than  temporary are recognized in
earnings.  Realized  gains and losses are computed on each  specific  investment
sold.  At December 31, 2000  available-for-sale  securities  consisted of equity
securities in a grantor trust established to fund certain employee benefits.  At
December 31, 1999 available-for-sale securities also included 4.7 million shares
of ACE  Limited  (which  were sold in  2000).  Before  1999,  available-for-sale
securities consisted primarily of the preferred stock of utilities and financial
institutions  with  investment  grade debt ratings.  During 1999, we changed our
strategy  for this  preferred  stock  which  resulted in a  reclassification  to
trading and we recognized an unrealized loss of $2.6 million.


<TABLE>
<CAPTION>
Available-For-Sale Securities
------------------------------------------------------------------------
Millions
                                           Gross
                                        Unrealized              Fair
At December 31           Cost          Gain    (Loss)          Value
------------------------------------------------------------------------
<S>                     <C>            <C>     <C>             <C>          
                                                              
2000                     $7.6          $4.7        -           $12.3
1999                    $87.8          $6.3    $(0.3)          $93.8
1998                    $70.9          $7.7    $(5.1)          $73.5
<CAPTION>                                                     
                                                                 Net
                                                             Unrealized
                                                             Gain (Loss)
                                           Gross              in Other
                         Sales           Realized          Comprehensive
At December 31         Proceeds        Gain    (Loss)          Income
------------------------------------------------------------------------
<S>                    <C>            <C>      <C>         <C>         
                                                              
2000                    $129.9        $49.1        -           $(0.5)
1999                      $0.2            -        -            $1.6
1998                     $35.7         $1.7    $(2.3)           $1.3
------------------------------------------------------------------------
</TABLE>

                                                                     
Before  discontinuance  of the  equity  method of  accounting  in 1999,  we also
recorded  our share of  unrealized  gains  and  losses  from  available-for-sale
securities held by Capital Re, a $5.5 million gain in 1998.

The net unrealized loss included in earnings for trading  securities in 2000 was
$2.3 million ($1.6 million loss in 1999; $0.7 million gain in 1998).

OFF-BALANCE-SHEET  FINANCIAL  INSTRUMENTS  AND RISKS.  In  portfolio  strategies
designed  to  reduce  market  risks,  we sell  common  stock  securities  short.
Unrealized  gains  and  losses  on  short  sales  are  recognized  in  earnings.
Previously,  treasury futures were used as a hedge to reduce interest rate risks
associated with holding fixed dividend  preferred  stocks.  We no longer utilize
treasury  futures as most of the fixed  dividend  preferred  stocks were sold in
2000.

In October 2000 we entered into an interest rate swap  agreement with a notional
amount of $250 million to hedge $250  million of floating  rate debt also issued
in October 2000.  Under the one-year  swap  agreement,  we make fixed  quarterly
payments  based on a fixed rate of 6.5% and receive  payments at a floating rate
based on LIBOR (6.8% at December 31,  2000).  The agreement is subject to market
risk due to interest rate fluctuation.

In March 2000 Florida Water entered into an interest rate swap  agreement with a
notional  amount of $35.1 million to hedge fixed rate  long-term  debt. The swap
agreement  superseded a previous swap agreement  entered into in 1998. Under the
25 year  agreement,  Florida Water makes  quarterly  payments at a variable rate
based  upon The Bond  Market  Association  Municipal  Swap  Index plus 174 basis
points (4.8% at December 31, 2000) and receives  payments  based on a fixed rate
of 6.5%.  The swap  agreement  is subject to market  risk due to  interest  rate
fluctuation.

Effective  with the  January  1,  2001  adoption  of SFAS  133,  Accounting  for
Derivative Instruments and Hedging Activities,  both interest rate swaps will be
recorded on the balance sheet at fair value.

The  fair  value  of  off-balance  sheet  financial  instruments  reflected  the
estimated  amounts that we would receive or pay if the contracts were terminated
at December 31. This fair value represents the difference  between the estimated
future  receipts  and  payments  under  the  terms  of each  instrument,  and is
estimated by obtaining  quoted market prices or by using common pricing  models.
These fair values should not be viewed in  isolation,  but rather in relation to
the fair value of the underlying hedged transaction.


<TABLE>
<CAPTION>
Off-Balance-Sheet Financial Instruments
------------------------------------------------------------------------
Millions
                                                              Fair Value
                                             Contract         Receivable
December 31                                   Amount           (Payable)
------------------------------------------------------------------------
<S>                                          <C>              <C>
2000                                   
Short Stock Sales Outstanding                  $5.3             $(0.5)
Interest Rate Swaps                          $285.1             $(3.2)
------------------------------------------------------------------------
1999                                   
Short Stock Sales Outstanding                 $58.5             $(2.1)
Treasury Futures                               $8.6              $0.2
Interest Rate Swap                            $35.1             $(2.3)
------------------------------------------------------------------------
</TABLE>

                                 
--------------------------------------------------------------------------------
64                          ALLETE 2000 ANNUAL REPORT



<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

FAIR VALUE OF  FINANCIAL  INSTRUMENTS.  With the  exception  of the items listed
below,  the estimated fair values of all financial  instruments  approximate the
carrying amount. The fair values for the items below were based on quoted market
prices for the same or similar instruments.


<TABLE>
<CAPTION>
Financial Instruments                         Carrying           Fair
December 31                                    Amount            Value
------------------------------------------------------------------------
Millions
<S>                                           <C>               <C>

Long-Term Debt
     2000                                      $952.3           $961.2
     1999                                      $712.8           $694.5

Redeemable Serial Preferred Stock
     2000                                           -                -
     1999                                       $20.0            $20.0

Quarterly Income Preferred Securities
     2000                                       $75.0            $72.8
     1999                                       $75.0            $65.3
------------------------------------------------------------------------
</TABLE>


CONCENTRATION  OF  CREDIT  RISK.  Financial   instruments  that  subject  us  to
concentrations  of  credit  risk  consist  primarily  of  accounts   receivable.
Minnesota Power sells electricity to about 15 customers in northern  Minnesota's
taconite,  pipeline, paper and wood products industries.  Receivables from these
customers  totaled  approximately $12 million at December 31, 2000 ($8.2 million
at December 31,  1999).  Minnesota  Power does not obtain  collateral to support
utility  receivables,  but  monitors  the credit  standing  of major  customers.
[GRAPHIC OMITTED - SQUARE]

6 INVESTMENTS IN CAPITAL RE AND ACE

In May 2000 we recorded a $30.4 million,  or $0.44 per share,  after-tax gain on
the sale of 4.7 million shares of ACE Limited. We received 4.7 million shares of
ACE plus $25.1  million in December 1999 when Capital Re merged with ACE. At the
time of the merger we owned 7.3 million shares or 20% of Capital Re.

As a result of the  merger,  in 1999 we recorded a $36.2  million,  or $0.52 per
share,  after-tax  non-cash  charge as follows:  a $24.1  million,  or $0.35 per
share,  charge  in  the  second  quarter  following  the  merger  agreement  and
discontinuance of our equity  accounting for Capital Re and a $12.1 million,  or
$0.17 per share, charge in the fourth quarter upon completion of the merger.

In 1998 we used the equity  method to account for our  investment in Capital Re.
As a result of the pending merger with ACE, in 1999 we  discontinued  the equity
method of  accounting  for our  investment  in Capital Re and  accounted for our
investment in Capital Re as an available-for-sale  security.  [GRAPHIC OMITTED -
SQUARE]

7 LEASING AGREEMENTS

In April 2000 leases for three ADESA auction facilities  (Boston,  Charlotte and
Knoxville) were refinanced in a $28.4 million leveraged lease  transaction.  The
new lease is treated as an operating lease for financial  reporting purposes and
expires in April  2010.  The lease may be  terminated  after 2005 under  certain
conditions. We have guaranteed ADESA's obligations under the lease.

We lease other  properties and equipment in addition to those listed above under
operating and capital lease  agreements  with terms  expiring  through 2010. The
aggregate  amount of future  minimum  lease  payments for capital and  operating
leases  during 2001 is $15.2  million  ($11.7  million in 2002;  $7.5 million in
2003;  $6.0 million in 2004;  and $5.2 million in 2005).  Total rent expense was
$27.0 million in 2000 ($21.5 million in 1999;  $16.7 million in 1998).  [GRAPHIC
OMITTED - SQUARE]

8 JOINTLY OWNED ELECTRIC FACILITY

We own 80% of the 534 megawatt  Boswell  Energy  Center Unit 4 (Boswell Unit 4).
While we operate the plant,  certain  decisions  about the operations of Boswell
Unit 4 are subject to the  oversight  of a committee  on which we and  Wisconsin
Public Power,  Inc.  (WPPI),  the owner of the other 20% of Boswell Unit 4, have
equal  representation  and  voting  rights.  Each  of us  must  provide  our own
financing and is obligated to pay our ownership  share of operating  costs.  Our
share of direct  operating  expenses of Boswell  Unit 4 is included in operating
expense on our consolidated  statement of income.  Our 80% share of the original
cost  included in electric  plant at December  31, 2000 was $309  million  ($310
million at December 31,  1999).  The  corresponding  provision  for  accumulated
depreciation was $157 million at December 31, 2000 ($150 million at December 31,
1999). [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         65


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

9 LONG-TERM DEBT


<TABLE>
<CAPTION>
Long-Term Debt
December 31                                             2000              1999
--------------------------------------------------------------------------------
Millions                                                              
<S>                                                   <C>               <C>
                                                                      
First Mortgage Bonds                                                  
     Floating Rate Due 2003                           $250.0          
     6 1/4% Series Due 2003                             25.0            $ 25.0
     7.70% Senior Notes, Series A Due 2006              90.0              90.0
     6.68% Series Due 2007                              20.0              20.0
     7% Series Due 2007                                 60.0              60.0
     7 1/2% Series Due 2007                             35.0              35.0
     7 3/4% Series Due 2007                             55.0              55.0
     7% Series Due 2008                                 50.0              50.0
     8.10% Senior Notes, Series B Due 2010              35.0                 -
     8.46% Due 2013                                     51.2              54.7
     8.01% Due 2017                                     28.0              28.0
     6% Pollution Control Series E Due 2022            111.0             111.0
Variable Demand Revenue Refunding                                     
     Bonds Series 1997 A, B, C and D                                  
     Due 2007 - 2020                                    39.0              39.0
Industrial Development Revenue Bonds,                                 
     6.50% Due 2025                                     35.1              35.1
Other Long-Term Debt, 5.6-9.0%                                        
     Due 2001 - 2026                                    83.8             119.1
Less Due Within One Year                               (15.8)             (9.1)
--------------------------------------------------------------------------------
Total Long-Term Debt                                  $952.3            $712.8
--------------------------------------------------------------------------------
</TABLE>

                                                                     
The aggregate  amount of long-term  debt  maturing  during 2001 is $15.8 million
($10.9 million in 2002;  $286.9 million in 2003, $15.6 million in 2004; and $3.5
million in 2005).  Substantially  all of our electric and water plant is subject
to the lien of the mortgages securing various first mortgage bonds.

At December 31, 2000 we had  long-term  bank lines of credit  aggregating  $28.1
million ($58.8  million at December 31, 1999).  Drawn portions on these lines of
credit  aggregated  $14.1  million at December  31, 2000 ($43.5 at December  31,
1999) and are included in other long-term debt.

In March 2000 ADESA  issued $35  million of 8.10%  Senior  Notes,  Series B, due
March  2010.  Proceeds  were  used to  refinance  short-term  bank  indebtedness
incurred for the acquisition of vehicle auction facilities purchased in 1999 and
for general corporate purposes.

In June 2000 we  refinanced  $4.6 million of 6.875%  Pollution  Control  Revenue
Refunding  Bonds,  Series 1991-A with $4.6 million of Adjustable  Rate Pollution
Control Revenue Refunding Bonds Series 2000 due December 2015. The new bonds had
an initial interest rate of 4.75%.

Also in June 2000 Heater issued an $8 million,  8.24%, note to CoBank,  ACB, due
June 2025. Proceeds were used to refinance short-term  indebtedness incurred for
the 1999 acquisition of Mid South and capital improvements in 1999 and 2000.

In October 2000 we issued $250 million of Floating Rate First Mortgage Bonds due
October  2003.  We have the option to redeem these bonds on or after October 20,
2001, in whole or in part from time to time, on any interest  payment date prior
to their maturity.  Proceeds were used to refinance  short-term debt incurred in
connection with the October 2000 acquisition of nine vehicle auction  facilities
from  Manheim.  The new bonds had an initial  interest  rate of 7.61%.  [GRAPHIC
OMITTED - SQUARE]

10 SHORT-TERM BORROWINGS AND COMPENSATING BALANCES

We have bank lines of credit aggregating $214.5 million ($75 million at December
31, 1999),  which make financing  available  through  short-term  bank loans and
provide  credit  support for  commercial  paper.  At December 31,  2000,  $211.0
million was available  for use ($74 million at December 31,  1999).  At December
31,  2000 we had issued  commercial  paper  with a face value of $260.6  million
($96.9 million in 1999),  with support  provided by bank lines of credit and our
securities portfolio.

Certain lines of credit require a commitment  fee of 0.0125%.  Interest rates on
commercial  paper and borrowings  under the lines of credit ranged from 7.28% to
7.90% at December 31, 2000 (6.42% to 6.70% at December 31,  1999).  The weighted
average  interest rate on  short-term  borrowings at December 31, 2000 was 7.57%
(6.59% at December  31,  1999).  The total  amount of  compensating  balances at
December 31, 2000 and 1999, was immaterial. [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
66                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

11 COMMON STOCK AND EARNINGS PER SHARE

Our Articles of  Incorporation  and mortgages  contain  provisions  that,  under
certain circumstances,  would restrict the payment of common stock dividends. As
of December 31, 2000 no retained  earnings were  restricted as a result of these
provisions.

COMMON STOCK SPLIT. On March 2, 1999 our common stock was split two-for-one. All
common share and per share amounts in our financial  statements and notes to the
financial  statements  have  been  adjusted  for  all  periods  to  reflect  the
two-for-one stock split.


<TABLE>
<CAPTION>
Summary of Common Stock                           Shares             Equity
-----------------------------------------------------------------------------
Millions                                                          
<S>                                               <C>                <C>     
Balance at December 31, 1997                       67.1              $416.0
1998     Public Offering                            4.2                89.9
         Employee Stock Purchase Plan                 -                 0.9
         Invest Direct<F1>                          0.8                17.1
         Other                                      0.2                 5.1
-----------------------------------------------------------------------------
Balance at December 31, 1998                       72.3               529.0
1999     Employee Stock Purchase Plan               0.1                 1.3
         Invest Direct<F1>                          0.9                17.4
         Other                                      0.2                 4.3
-----------------------------------------------------------------------------
Balance at December 31, 1999                       73.5               552.0
2000     Employee Stock Purchase Plan               0.1                 1.1
         Invest Direct<F1>                          1.0                18.8
         Other                                      0.1                 5.0
-----------------------------------------------------------------------------
Balance at December 31, 2000                       74.7              $576.9
-----------------------------------------------------------------------------
<FN>
<F1> Invest Direct is ALLETE's direct stock purchase and dividend reinvestment
     plan.
</FN>
</TABLE>


COMMON STOCK ISSUANCE.  In September 1998 4.2 million shares of our common stock
were sold in a public  offering  at $21.875  per share.  Total net  proceeds  of
approximately  $89 million were used to repay  outstanding  commercial paper, to
fund  strategic  initiatives  and for capital  expenditures.  Net  proceeds  not
immediately  used  for  the  above  purposes  were  invested  in our  securities
portfolio.

SHAREHOLDER  RIGHTS PLAN.  In 1996 we adopted a rights plan that  provides for a
dividend  distribution  of one  preferred  share  purchase  right  (Right) to be
attached to each share of common stock.

The Rights,  which are currently not exercisable or transferable  apart from our
common  stock,  entitle the holder to purchase one  two-hundredth  of a share of
ALLETE's  Junior  Serial  Preferred  Stock A, without par value,  at an exercise
price of $45.  These  Rights  would  become  exercisable  if a  person  or group
acquires beneficial  ownership of 15% or more of our common stock or announces a
tender offer which would increase the person's or group's  beneficial  ownership
interest to 15% or more of our common stock,  subject to certain exceptions.  If
the 15%  threshold  is met,  each  Right  entitles  the holder  (other  than the
acquiring   person  or  group)  to  purchase   common   stock  (or,  in  certain
circumstances, cash, property or other securities of ours) having a market price
equal to twice the exercise  price of the Right.  If we are acquired in a merger
or business combination, or 50% or more of our assets or earning power are sold,
each  exercisable  Right  entitles  the holder to purchase  common  stock of the
acquiring or surviving  company having a value equal to twice the exercise price
of  the  Right.  Certain  stock  acquisitions  will  also  trigger  a  provision
permitting  the Board of Directors  to exchange  each Right for one share of our
common stock.

The Rights which expire on July 23, 2006,  are  nonvoting and may be redeemed by
us at a price of $.005  per  Right at any  time  they are not  exercisable.  One
million shares of Junior Serial  Preferred  Stock A have been authorized and are
reserved for issuance under the plan.

EARNINGS PER SHARE. The difference  between basic and diluted earnings per share
arises from outstanding stock options and performance share awards granted under
our Executive and Director Long-Term Incentive Compensation Plans.


<TABLE>
<CAPTION>
Reconciliation of
Basic and Diluted                               Basic      Dilutive     Diluted
Earnings Per Share                               EPS      Securities      EPS
--------------------------------------------------------------------------------
Millions Except Per Share Amounts
<S>                                            <C>        <C>           <C>
2000
Net Income                                     $148.6          -        $148.6
Less: Dividends on Preferred Stock                0.9          -           0.9
--------------------------------------------------------------------------------
Earnings Available for Common Stock            $147.7          -        $147.7
Common Shares                                    69.8        0.3          70.1
Per Share                                       $2.12          -         $2.11
--------------------------------------------------------------------------------
</TABLE>


There was no difference  between  basic and diluted  earnings per share for 1999
and 1998.

We paid  dividends on preferred  stock of $0.9 million in 2000 ($2.0  million in
both 1999 and 1998). [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         67


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

12 PREFERRED STOCK

In 2000 we redeemed all of our outstanding Preferred Stock and Preferred Stock A
with  proceeds  from the  sale of a  portion  of our  securities  portfolio  and
internally generated funds.

All 100,000  shares of Serial  Preferred  Stock A, $7.125 Series  outstanding at
December 31, 1999 were redeemed in April 2000 for an aggregate of $10 million.

All 100,000  shares of Serial  Preferred  Stock A, $6.70 Series  outstanding  at
December 31, 1999 were redeemed in July 2000 for an aggregate of $10 million.

All 113,358 shares of 5% Preferred  Stock  outstanding at December 31, 1999 were
redeemed in August 2000 at $102.50 per share plus  accrued and unpaid  dividends
of $0.75 per share for an aggregate of $11.7 million. [GRAPHIC OMITTED - SQUARE]

13 MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY

ALLETE Capital I (Trust) was established as a wholly owned business trust of the
Company  for the  purpose of  issuing  common and  preferred  securities  (Trust
Securities).  In March  1996 the  Trust  publicly  issued  three  million  8.05%
Cumulative Quarterly Income Preferred Securities (QUIPS), representing preferred
beneficial interests in the assets held by the Trust. The proceeds from the sale
of the QUIPS, and from common securities of the Trust issued to us, were used by
the  Trust to  purchase  from us $77.5  million  of  8.05%  Junior  Subordinated
Debentures,  Series  A, Due 2015  (Subordinated  Debentures),  resulting  in net
proceeds to us of $72.3  million.  Holders of the QUIPS are  entitled to receive
quarterly distributions at an annual rate of 8.05% of the liquidation preference
value of $25 per security.  We have the right to defer interest  payments on the
Subordinated   Debentures   which  would  result  in  the  similar  deferral  of
distributions  on  the  QUIPS  during  extension  periods  up to 20  consecutive
quarters. We are the owner of all the common trust securities,  which constitute
approximately  3%  of  the  aggregate   liquidation  amount  of  all  the  Trust
Securities. The sole asset of the Trust is Subordinated Debentures,  interest on
which is deductible  by us for income tax purposes.  The Trust will use interest
payments received on the Subordinated  Debentures it holds to make the quarterly
cash distributions on the QUIPS.

The QUIPS are subject to mandatory redemption upon repayment of the Subordinated
Debentures  at  maturity  or upon  redemption.  We have the option to redeem the
Subordinated Debentures upon the occurrence of certain events and, in any event,
may do so at any time on or after March 20, 2001.

We  have  guaranteed,   on  a  subordinated   basis,   payment  of  the  Trust's
obligations. [GRAPHIC OMITTED - SQUARE]

14 SQUARE BUTTE POWER PURCHASE AGREEMENT

Minnesota  Power has a power  purchase  agreement with Square Butte that extends
through 2026  (Agreement).  It provides a long-term supply of low-cost energy to
customers in our electric service  territory and enables Minnesota Power to meet
power pool  reserve  requirements.  Square  Butte,  a North  Dakota  cooperative
corporation,  owns a 455-megawatt coal-fired generating unit (Unit) near Center,
North Dakota.  The Unit is adjacent to a generating unit owned by Minnkota Power
Cooperative, Inc. (Minnkota), a North Dakota cooperative corporation whose Class
A members are also members of Square Butte.  Minnkota  serves as the operator of
the Unit and also purchases power from Square Butte.

Minnesota Power is entitled to approximately  71% of the Unit's output under the
Agreement.  After  2005 and  upon  compliance  with a  two-year  advance  notice
requirement,  Minnkota has the option to reduce Minnesota Power's entitlement by
5% annually,  to a minimum of 50%.  Minnesota  Power is obligated to pay its pro
rata share of Square  Butte's costs based on Minnesota  Power's  entitlement  to
Unit output.  Minnesota Power's payment  obligation is suspended if Square Butte
fails to deliver any power,  whether produced or purchased,  for a period of one
year. Square Butte's fixed costs consist primarily of debt service.  At December
31, 2000 Square Butte had total debt outstanding of $314.6 million. Total annual
debt  service for Square  Butte is expected to be  approximately  $36 million in
each of the  years  2001  through  2003 and $23  million  in both 2004 and 2005.
Variable  operating costs include the price of coal purchased from BNI Coal, our
subsidiary, under a long-term contract.

Minnesota  Power's  cost of power  purchased  from Square  Butte during 2000 was
$58.7 million  ($58.7  million in 1999;  $58.2  million in 1998).  This reflects
Minnesota  Power's pro rata share of total  Square  Butte costs based on the 71%
output entitlement in 2000, 1999 and 1998. Included in this amount was Minnesota
Power's  pro rata  share of  interest  expense of $14.8  million in 2000  ($15.5
million in 1999;  $14.6 million in 1998).  Minnesota  Power's payments to Square
Butte are approved as purchased  power expense for  ratemaking  purposes by both
the MPUC and FERC. [GRAPHIC OMITTED - SQUARE]

--------------------------------------------------------------------------------
68                          ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

15 INCOME TAX EXPENSE


<TABLE>
<CAPTION>
Income Tax Expense
Year Ended December 31                         2000          1999         1998
--------------------------------------------------------------------------------
Millions                                                 
<S>                                           <C>           <C>          <C>                                                        
Current Tax Expense                                      
     Federal                                  $75.6         $57.6        $38.5
     Foreign                                    8.0           6.9          4.9
     State                                      7.5           6.0          9.8
--------------------------------------------------------------------------------
                                               91.1          70.5         53.2
Deferred Tax Expense (Benefit)                           
     Federal                                   (4.9)         (6.4)         0.9
     Foreign                                    0.9          (0.4)        (0.4)
     State                                     (2.6)         (5.2)        (0.4)
--------------------------------------------------------------------------------
                                               (6.6)        (12.0)         0.1
Change in Valuation Allowance                   1.8           0.7          2.3
--------------------------------------------------------------------------------
Deferred Tax Credits                           (1.8)         (1.5)        (1.6)
--------------------------------------------------------------------------------
Total Income Tax Expense                      $84.5         $57.7        $54.0
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>                                                        
Reconciliation of Taxes from
Federal Statutory Rate to
Total Income Tax Expense
Year Ended December 31                         2000          1999         1998
--------------------------------------------------------------------------------
Millions                                                 
<S>                                           <C>           <C>          <C> 
Tax Computed at Federal                                  
     Statutory Rate                           $81.6         $44.0        $49.8
Increase (Decrease) in Tax                               
     State Income Taxes -- Net of                        
         Federal Income Tax Benefit             4.4           6.5          6.6
     Capital Re Transaction                       -          10.8            -
     Dividend Received Deduction               (0.6)         (1.4)        (2.7)
     Foreign Taxes                              1.2           2.3          2.0
     Tax Credits                               (1.4)         (3.3)        (2.4)
     Other                                     (0.7)         (1.2)         0.7
--------------------------------------------------------------------------------
Total Income Tax Expense                      $84.5         $57.7        $54.0
--------------------------------------------------------------------------------
</TABLE>
  
                                                      

<TABLE>
<CAPTION>
Deferred Tax Assets and Liabilities
December 31                                            2000         1999
---------------------------------------------------------------------------
Millions
<S>                                                   <C>          <C>    
Deferred Tax Assets
     Allowance for Bad Debts                          $  9.3       $ 10.1
     Contributions in Aid of Construction               14.8         16.3
     Lehigh Basis Difference                             7.9          7.8
     Deferred Compensation Plans                        15.1         13.4
     Depreciation                                       13.9         13.4
     Employee Stock Ownership Plan                       9.4          8.6
     Investment Tax Credits                             18.7         19.7
     Postemployment Benefits                             9.2          8.8
     Other                                              33.1         39.3
---------------------------------------------------------------------------
         Gross Deferred Tax Assets                     131.4        137.4
Deferred Tax Asset Valuation Allowance                  (5.1)        (3.3)
---------------------------------------------------------------------------
Total Deferred Tax Assets                              126.3        134.1
---------------------------------------------------------------------------
Deferred Tax Liabilities
     Depreciation                                      195.2        196.7
     Allowance for Funds Used During
         Construction                                   16.3         16.9
     Investment Tax Credits                             26.2         28.0
     Unrealized Portfolio Gains                          0.2          7.9
     Other                                              13.5         24.5
---------------------------------------------------------------------------
Total Deferred Tax Liabilities                         251.4        274.0
---------------------------------------------------------------------------
Accumulated Deferred Income Taxes                     $125.1       $139.9
---------------------------------------------------------------------------
</TABLE>


UNDISTRIBUTED EARNINGS.  Undistributed earnings of our foreign subsidiaries were
approximately  $27.9 million at December 31, 2000 ($19.3 million at December 31,
1999).  Foreign  undistributed   earnings  are  considered  to  be  indefinitely
reinvested and, accordingly,  we have no provision for United States federal and
state income taxes on these earnings. Upon distribution of foreign undistributed
earnings  in the form of  dividends  or  otherwise,  we would be subject to both
United States income tax (subject to an adjustment  for foreign tax credits) and
withholding taxes payable to Canada. Determination of the amount of unrecognized
deferred  United  States  income  tax  liability  is  not  practical  due to the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credit  carryforwards  would be  available to reduce some portion of
the United States  liability.  Withholding  taxes of approximately  $1.4 million
would be payable  upon  remittance  of all  previously  unremitted  earnings  at
December  31,  2000 ($1.0  million at December  31,  1999).  [GRAPHIC  OMITTED -
SQUARE]

--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         69


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------
16 OTHER COMPREHENSIVE INCOME


<TABLE>
<CAPTION>
Other Comprehensive Income                                         Pre-Tax      Tax Expense     Net-of-Tax
Year Ended December 31                                             Amount        (Benefit)        Amount
----------------------------------------------------------------------------------------------------------
Millions
<S>                                                                <C>          <C>             <C> 

2000
Unrealized Gain (Loss) on Securities
     Gain During the Year                                          $47.8           $17.4          $30.4
     Less: Gain Included in Net Income                              49.1            18.0           31.1
----------------------------------------------------------------------------------------------------------
         Net Unrealized Loss on Securities                          (1.3)           (0.6)          (0.7)
Foreign Currency Translation Adjustments                            (5.9)              -           (5.9)
----------------------------------------------------------------------------------------------------------
Other Comprehensive Loss                                           $(7.2)          $(0.6)         $(6.6)
----------------------------------------------------------------------------------------------------------

1999
Unrealized Gain (Loss) on Securities
     Gain During the Year                                          $ 1.6           $ 0.7          $ 0.9
     Add: Loss Included in Net Income                                1.7             0.7            1.0
     Less: Unrealized Gains of Disposed Equity Investee              6.7             1.2            5.5
----------------------------------------------------------------------------------------------------------
         Net Unrealized Loss on Securities                          (3.4)            0.2           (3.6)
Foreign Currency Translation Adjustments                             4.5               -            4.5
----------------------------------------------------------------------------------------------------------
Other Comprehensive Income                                         $ 1.1           $ 0.2          $ 0.9
----------------------------------------------------------------------------------------------------------

1998
Unrealized Gain on Securities
     Gain During the Year                                          $ 1.9           $ 0.7          $ 1.2
     Add: Loss Included in Net Income                                0.6             0.2            0.4
----------------------------------------------------------------------------------------------------------
         Net Unrealized Gain on Securities                           2.5             0.9            1.6
Foreign Currency Translation Adjustments                            (3.9)              -           (3.9)
----------------------------------------------------------------------------------------------------------
Other Comprehensive Loss                                           $(1.4)          $ 0.9          $(2.3)
----------------------------------------------------------------------------------------------------------
</TABLE>


The gain  included  in net income for the year 2000  included  the gain from our
sale of ACE shares.  Accumulated other comprehensive income at December 31, 2000
consisted of $2.8 million ($3.5 million at December 31, 1999) in net  unrealized
gains on securities and $(7.0) million  ($(1.1) million at December 31, 1999) in
foreign currency translation adjustments. [GRAPHIC  OMITTED - SQUARE]

--------------------------------------------------------------------------------
70                         ALLETE 2000 ANNUAL REPORT


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

17 PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Certain  eligible  employees  of ALLETE are covered by  noncontributory  defined
benefit pension plans. A defined  benefit plan covering  Florida Water employees
was terminated in 2000 and a $0.3 million credit was recognized  upon settlement
(curtailment  expense of $0.6 million was accrued in 1999). At December 31, 2000
approximately  10% of the defined  benefit  pension plan assets were invested in
our common stock. We have defined  contribution  pension plans covering eligible
employees,  for which the  aggregate  annual cost was $6.0 million in 2000 ($4.7
million in 1999;  $4.0 million in 1998). We provide certain health care and life
insurance  benefits  for eligible  retired  employees.  The deferred  regulatory
charge for postretirement health and life benefits was fully amortized in 1999.

The assumed  health care cost trend rate declines  gradually to an ultimate rate
of 6.0% by 2002. For postretirement  health and life benefits,  a 1% increase in
the  assumed  health care cost trend rate would  result in a $8.4  million and a
$1.1 million  increase in the benefit  obligation and total service and interest
costs,  respectively;  a 1%  decrease  would  result in a $6.9  million and $0.9
million decrease in the benefit obligation and total service and interest costs,
respectively. [GRAPHIC  OMITTED - SQUARE]


<TABLE>
<CAPTION>
Pension
--------------------------------------------------------------------------------
Millions

Plan Status
At September 30                                        2000              1999
--------------------------------------------------------------------------------
<S>                                                   <C>               <C>
Change in Benefit Obligation                                          
     Obligation, Beginning of Year                    $224.1            $244.6
     Service Cost                                        4.1               4.7
     Interest Cost                                      16.5              16.0
     Actuarial (Gain) Loss                               2.4             (26.6)
     Benefits Paid                                     (18.6)            (14.6)
--------------------------------------------------------------------------------
     Obligation, End of Year                           228.5             224.1
                                                                      
Change in Plan Assets                                                 
     Fair Value, Beginning of Year                     286.7             267.5
     Actual Return on Assets                            40.3              31.6
     Benefits Paid                                     (18.6)            (14.6)
     Other                                               1.4               2.2
--------------------------------------------------------------------------------
     Fair Value, End of Year                           309.8             286.7

Funded Status                                           81.3              62.6
     Unrecognized Amounts                                             
         Net Gain                                      (76.4)            (66.5)
         Prior Service Cost                              3.8               4.2
         Transition Obligation                           0.8               1.0
--------------------------------------------------------------------------------
Prepaid Pension Cost                                  $  9.5            $  1.3
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>                                                                   
Benefit Expense
Year Ended December 31                    2000            1999            1998
--------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C> 
Service Cost                            $  4.1          $  4.7          $  4.1
Interest Cost                             16.5            16.0            16.3
Expected Return on Assets                (27.5)          (24.9)          (23.2)
Amortized Amounts
     Unrecognized Gain                    (2.3)           (0.4)           (1.1)
     Prior Service Cost                    0.5             0.5             0.5
     Transition Obligation                 0.2             0.2             0.2
--------------------------------------------------------------------------------
                                          (8.5)           (3.9)           (3.2)
Early Retirement Expense                     -               -             2.8
--------------------------------------------------------------------------------
Net Pension Credit                      $ (8.5)         $ (3.9)         $ (0.4)
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
Actuarial Assumptions                             2000                   1999
--------------------------------------------------------------------------------
<S>                                            <C>                    <C>
Discount Rate                                       8.00%                  7.75%
Expected Return on Plan Assets                     10.25%                  10.0%
Rate of Compensation Increase                  3.5 - 4.5%             3.5 - 4.5%
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
Health and Life
--------------------------------------------------------------------------------
Millions

Plan Status
At September 30                                         2000              1999
--------------------------------------------------------------------------------
<S>                                                   <C>               <C>
Change in Benefit Obligation
     Obligation, Beginning of Year                    $ 62.6             $58.6
     Service Cost                                        2.8               2.7
     Interest Cost                                       4.8               3.8
     Actuarial (Gain) Loss                              (0.2)             (0.2)
     Participant Contributions                           0.7               0.7
     Benefits Paid                                      (3.1)             (3.0)
--------------------------------------------------------------------------------
     Obligation, End of Year                            67.6              62.6

Change in Plan Assets
     Fair Value, Beginning of Year                      31.6              27.6
     Actual Return on Assets                             3.1               3.1
     Employer Contribution                               9.4               3.2
     Participant Contributions                           0.7               0.7
     Benefits Paid                                      (3.1)             (3.0)
--------------------------------------------------------------------------------
     Fair Value, End of Year                            41.7              31.6

Funded Status                                          (25.9)            (31.0)
     Unrecognized Amounts
         Net Gain                                      (18.2)            (18.7)
         Prior Service Cost                             (3.4)             (3.6)
         Transition Obligation                          32.0              34.6
--------------------------------------------------------------------------------
Accrued Cost                                          $(15.5)           $(18.7)
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
Benefit Expense
Year Ended December 31                    2000            1999            1998
--------------------------------------------------------------------------------
<S>                                     <C>             <C>              <C> 
Service Cost                             $ 2.7           $ 2.7           $ 2.3
Interest Cost                              4.8             3.8             3.8
Expected Return on Assets                 (2.8)           (2.4)           (1.7)
Amortized Amounts
     Unrecognized Gain                    (0.9)           (0.9)           (1.3)
     Prior Service Cost                   (0.2)           (0.2)              -
     Transition Obligation                 2.6             2.6             2.3
--------------------------------------------------------------------------------
                                           6.2             5.6             5.4
Amortization of Deferred Charge              -             2.8             2.7
--------------------------------------------------------------------------------
Net Expense                              $ 6.2           $ 8.4           $ 8.1
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
Actuarial Assumptions                            2000                   1999
--------------------------------------------------------------------------------
<S>                                           <C>                    <C>
Discount Rate                                        8.0%                  7.75%
Expected Return on Plan Assets                6.0 - 10.0%            6.0 - 10.0%
Rate of Compensation Increase                  3.5 - 4.5%             3.5 - 4.5%
Health Care Cost Trend Rate                          6.9%                   7.8%
--------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         71


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

18 EMPLOYEE STOCK AND INCENTIVE PLANS

EMPLOYEE  STOCK  OWNERSHIP  PLAN. We sponsor an Employee  Stock  Ownership  Plan
(ESOP) with two leveraged accounts. 

A 1989 leveraged ESOP account covers certain eligible nonunion ALLETE employees.
The ESOP used the proceeds  from a $16.5 million loan (15 year term at 9.125%),
guaranteed by us, to purchase 1.2 million shares of our common stock on the open
market. These shares fund an annual benefit of not less than 2% of participants'
salaries.

A 1990  leveraged  ESOP account covers  certain  eligible  ALLETE  employees who
participated  in the  non-leveraged  ESOP plan prior to August 1989. In 1990 the
ESOP issued a $75 million  note (term not to exceed 25 years at 10.25%) to us as
consideration  for 5.6 million  shares of our newly issued common  stock.  These
shares  are used to fund an annual  benefit  at least  equal to the value of (a)
dividends on shares held in the 1990  leveraged ESOP which are used to make loan
payments, and (b) tax benefits obtained from deducting eligible dividends.

The loans will be repaid with  dividends  received by the ESOP and with employer
contributions.  ESOP shares  acquired with the loans were  initially  pledged as
collateral  for the loans.  The ESOP shares are  released  from  collateral  and
allocated to participants based on the portion of total debt service paid in the
year.  The ESOP  shares  that  collateralize  the loans are not  included in the
number of average shares used to calculate basic and diluted earnings per share.


<TABLE>
<CAPTION>
Year Ended December 31                      2000           1999           1998
--------------------------------------------------------------------------------
Millions
<S>                                        <C>            <C>           <C>
Expense
     Interest Expense                        $0.8          $0.9           $1.0
     Compensation Expense                     2.3           2.2            2.8
--------------------------------------------------------------------------------
     Total Expense                           $3.1          $3.1           $3.8
--------------------------------------------------------------------------------
Shares
     Allocated Shares                         3.9           3.8            3.6
     Unreleased Shares                        4.2           4.4            4.8
--------------------------------------------------------------------------------
     Total ESOP Shares                        8.1           8.2            8.4
--------------------------------------------------------------------------------
     Fair Value of Unreleased Shares       $104.6         $75.8         $104.0
--------------------------------------------------------------------------------
</TABLE>


EMPLOYEE  STOCK  PURCHASE  PLAN.  We have an Employee  Stock  Purchase Plan that
permits eligible  employees to buy up to $23,750 per year of our common stock at
95% of the market  price.  At December  31,  2000,  1.1 million  shares had been
issued  under the plan and  156,919  shares  were  held in  reserve  for  future
issuance.

STOCK  OPTION  AND  AWARD  PLANS.  We  have  an  Executive  Long-Term  Incentive
Compensation Plan (Executive Plan) and a Director Long-Term Stock Incentive Plan
(Director  Plan).  The Executive  Plan allows for the grant of up to 6.7 million
shares of our common stock to key  employees.  To date,  these grants have taken
the form of stock options, performance share awards and restricted stock awards.
The Director Plan allows for the grant of up to 0.3 million shares of our common
stock to nonemployee  directors.  Each nonemployee  director  receives an annual
grant of 1,500 stock options and a biennial grant of performance shares equal to
$10,000  in  value of  common  stock at the date of  grant.  Stock  options  are
exercisable  at the market  price of common  shares on the date the  options are
granted,  and vest in equal annual  installments  over two years with expiration
ten years from the date of grant.  Performance shares are earned over multi-year
time periods and are contingent upon the attainment of certain performance goals
of ALLETE. Restricted stock vests once certain periods of time have elapsed.

We have elected to account for our stock-based  compensation plans in accordance
with the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees," and accordingly, compensation expense has not been recognized for
stock  options  granted.  Compensation  expense is  recognized  over the vesting
periods for performance and restricted share awards based on the market value of
our common stock,  and was  approximately $5 million in 2000 ($3 million in 1999
and in  1998).  Pro forma net  income  and  earnings  per share  under  SFAS 123
"Accounting for Stock-Based  Compensation"  have not been presented because such
amounts are not materially different from actual amounts reported.  This may not
be representative of the pro forma effects for future years if additional awards
are granted.


<TABLE>
<CAPTION>
                                                                     Average
                                                                    Exercise
Stock Option Activity                         Options                 Price
-----------------------------------------------------------------------------
<S>                                         <C>                     <C> 
2000                                                             
Outstanding, Beginning of Year              1,603,900                $19.77
Granted                                     1,022,500                $16.33
Exercised                                     (60,700)               $14.91
Canceled                                     (135,800)               $18.85
-----------------------------------------------------------------------------
Outstanding, End of Year                    2,429,900                $18.50
-----------------------------------------------------------------------------
Exercisable, End of Year                    1,091,200                $19.42
Fair Value of Options Granted                                    
     During the Year                            $3.20
-----------------------------------------------------------------------------            
1999                                                             
Outstanding, Beginning of Year                963,500                $17.31
Granted                                       889,200                $21.77
Exercised                                    (131,100)               $13.91
Canceled                                     (117,700)               $21.25
-----------------------------------------------------------------------------
Outstanding, End of Year                    1,603,900                $19.77
-----------------------------------------------------------------------------
Exercisable, End of Year                      586,500                $16.38
Fair Value of Options Granted                                    
     During the Year                            $3.38
-----------------------------------------------------------------------------            
1998                                                             
Outstanding, Beginning of Year                667,400                $13.89
Granted                                       419,800                $21.63
Exercised                                    (112,600)               $13.95
Canceled                                      (11,100)               $16.73
-----------------------------------------------------------------------------
Outstanding, End of Year                      963,500                $17.31
-----------------------------------------------------------------------------
Exercisable, End of Year                      361,000                $13.99
Fair Value of Options Granted                                    
     During the Year                            $3.11
-----------------------------------------------------------------------------            
</TABLE>

                                                                
--------------------------------------------------------------------------------
72                          ALLETE 2000 ANNUAL REPORT                         


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

At December 31, 2000 options outstanding consisted of 1,290,966 with an exercise
price of $13.69 to $16.25,  and  1,138,922  with an exercise  price of $21.63 to
$21.94.  The options with an exercise  price of $13.69 to $16.25 have an average
remaining contractual life of 8.2 years with 328,062 exercisable on December 31,
2000 at an average price of $13.88. The options with an exercise price of $21.63
to $21.94 have an average  remaining  contractual life of 7.7 years with 763,146
exercisable on December 31, 2000 at an average price of $21.80.

In 2000,  329,000  performance  share  grants were  awarded,  with the  ultimate
issuance  contingent upon the attainment of certain future  performance goals of
ALLETE. The grant date fair value of the share grants was $5.3 million.

A total of 270,000  performance  share grants were awarded  during 1999 and 1998
for the performance period ended December 31, 1999. The grant date fair value of
these share grants was $5.8 million.  At December 31, 2000 50% of the shares had
already been issued, with the balance to be issued in 2001 and 2002.

In January 2001 we granted stock options to purchase  approximately  0.7 million
shares of common stock (exercise price of $23.63 per share).  [GRAPHIC OMITTED -
SQUARE]

19 QUARTERLY FINANCIAL DATA (UNAUDITED)

Information for any one quarterly  period is not  necessarily  indicative of the
results which may be expected for the year.  Financial results for 2000 included
a $30.4 million,  or $0.44 per share,  after-tax gain on the sale of 4.7 million
shares of ACE in the second quarter. We received the ACE shares in December 1999
when Capital Re merged with ACE. As a result of the merger,  in 1999 we recorded
a $36.2 million,  or $0.52 per share,  after-tax  non-cash charge as follows:  a
$24.1 million,  or $0.35 per share,  charge in the second quarter  following the
merger agreement and discontinuance of our equity accounting for Capital Re; and
a $12.1  million,  or  $0.17  per  share,  charge  in the  fourth  quarter  upon
completion of the merger. (See Note 6.) [GRAPHIC  OMITTED - SQUARE]


<TABLE>
<CAPTION>
Quarter Ended                    Mar. 31     Jun. 30     Sept. 30      Dec. 31
--------------------------------------------------------------------------------
Millions Except Earnings Per Share
<S>                              <C>         <C>         <C>           <C>

2000
Operating Revenue                $322.6      $327.0       $323.5        $358.8
Operating Income                  $52.0      $105.1        $49.4         $32.6
Net Income                        $30.4       $64.2        $35.0         $19.0
Earnings Available for
     Common Stock                 $29.9       $63.9        $34.9         $19.0
Earnings Per Share of
     Common Stock
         Basic                    $0.43       $0.92        $0.50         $0.27
         Diluted                  $0.43       $0.92        $0.50         $0.27
--------------------------------------------------------------------------------

1999
Operating Revenue                $257.7      $279.2       $308.0        $286.9
Operating Income                  $29.5       $28.2        $57.9         $16.1
Net Income                        $20.9        $1.9        $34.5         $10.7
Earnings Available for
     Common Stock                 $20.4        $1.4        $34.0         $10.2
Earnings Per Share of
     Common Stock
         Basic                    $0.30       $0.02        $0.50         $0.15
         Diluted                  $0.30       $0.02        $0.50         $0.15
--------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                            ALLETE 2000 ANNUAL REPORT                         73


<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

R
EPORT OF INDEPENDENT ACCOUNTANTS                  [PRICEWATERHOUSECOOPERS LOGO]
ON FINANCIAL STATEMENT SCHEDULE


To the Board of Directors
of ALLETE

Our audits of the consolidated  financial  statements  referred to in our report
dated  January 17, 2001  appearing on page 54 of this Form 10-K also included an
audit of the  Financial  Statement  Schedule  listed in Item  14(a) of this Form
10-K. In our opinion,  the Financial  Statement Schedule presents fairly, in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated financial statements. [GRAPHIC OMITTED - SQUARE]

PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 17, 2001



--------------------------------------------------------------------------------

<TABLE>
                                                                                                      SCHEDULE II

<CAPTION>                                                                                            
ALLETE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                                                      Additions         
                                                    Balance at   -------------------    Deductions     Balance at
                                                    Beginning     Charged     Other        from          End of
For the Year Ended December 31                       of Year     to Income   Changes    Reserves<F1>     Period
-----------------------------------------------------------------------------------------------------------------
Millions                                          
<S>                                                <C>           <C>         <C>        <C>            <C>             
Reserve Deducted from Related Assets              
     Reserve For Uncollectible Accounts           
         2000     Trade Accounts Receivable           $7.6         $2.9         -          $5.3           $5.2
                  Finance Receivables                  6.3          0.8         -           0.6            6.5
         1999     Trade Accounts Receivable            6.0          3.9         -           2.3            7.6
                  Finance Receivables                  3.6          3.8         -           1.1            6.3
         1998     Trade Accounts Receivable            5.1          5.4         -           4.5            6.0
                  Finance Receivables                  2.8          2.8         -           2.0            3.6
     Deferred Asset Valuation Allowance           
         2000     Deferred Tax Assets                  3.3          1.8         -             -            5.1
         1999     Deferred Tax Assets                  2.6          0.7         -             -            3.3
         1998     Deferred Tax Assets                  0.3          2.3         -             -            2.6
-----------------------------------------------------------------------------------------------------------------
<FN>

<F1> Reserve for uncollectible accounts includes bad debts written off.
</FN>
</TABLE>


--------------------------------------------------------------------------------
74                          ALLETE 2000 ANNUAL REPORT


<PAGE>



                                  Exhibit Index

Exhibit
Number
--------------------------------------------------------------------------------
  10(l)  -   Loan and Servicing  Agreement dated as of December 22, 2000 among
             AFC AIM Corporation,  as Borrower,  Automotive Finance Corporation,
             as Servicer, and Bank of Montreal, as Lender.

  10(m)  -   Purchase and Sale Agreement dated as of December 22, 2000 between
             AFC AIM Corporation and Automotive Finance Corporation.

     12  -   Computation of Ratios of Earnings to Fixed Charges and Supplemental
             Ratios of Earnings to Fixed Charges.

  23(a)  -   Consent of Independent Accountants.

  23(b)  -   Consent of General Counsel.






<PAGE>

                                                                   Exhibit 10(l)
                    








                          LOAN AND SERVICING AGREEMENT


                          dated as of December 22, 2000



                                      among




                              AFC AIM CORPORATION,

                                  as Borrower,




                         AUTOMOTIVE FINANCE CORPORATION,

                                  as Servicer,



                                       and



                                BANK OF MONTREAL,

                                    as Lender







<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE

                                   ARTICLE I.

                                     LOANS

Section 1.1.  Commitments to Lend; Limits on Lender's Obligations..............1
Section 1.2.  Making Loans; Borrowing Procedures...............................2
Section 1.3.  Grant of Security Interest.......................................2
Section 1.4.  Settlement Procedures............................................2
Section 1.5.  Fees.............................................................5
Section 1.6.  Payments and Computations, Etc...................................5
Section 1.7.  Increased Costs..................................................5
Section 1.8.  Additional Interest on Loans Bearing Interest Based on
              Cost of Funds....................................................6
Section 1.9.  Requirements of Law..............................................6
Section 1.10. Inability to Determine Cost of Funds.............................8
Section 1.11. Funding Losses...................................................9

                                   ARTICLE II.

                                    THE NOTE
Section 2.1.  Note.............................................................9
Section 2.2.  Interest on Loans................................................9
Section 2.3.  Repayments and Prepayments......................................10
Section 2.4.  General Procedures..............................................10
Section 2.5.  Reduction in Facility Limit.....................................10
Section 2.6.  Characterization of Note........................................11

                                  ARTICLE III.

                    REPRESENTATIONS AND WARRANTIES; COVENANTS

Section 3.1.  Representations and Warranties; Covenants.......................11
Section 3.2.  Events of Default; Remedies.....................................11
                                      
                                      -i-


<PAGE>
                                TABLE OF CONTENTS
                                  (CONTINUED)

                                                                            PAGE

                                  ARTICLE IV.

                                INDEMNIFICATION

Section 4.1.  Indemnities by the Borrower.....................................10
Section 4.2.
  Indemnities by Servicer.........................................12

                                   ARTICLE V.

                         ADMINISTRATION AND COLLECTIONS

Section 5.1.  Appointment of Servicer.........................................13
Section 5.2.  Duties of Servicer..............................................14
Section 5.3.  Establishment and Use of Collection Account.....................14
Section 5.4.  Enforcement Rights..............................................15
Section 5.5.  Servicing Fee...................................................16

                                   ARTICLE VI.

                                  MISCELLANEOUS

Section 6.1.  Amendments, Etc.................................................16
Section 6.2.  Notices, Etc....................................................16
Section 6.3.  Assignability...................................................16
Section 6.4.  Costs, Expenses and Taxes.......................................17
Section 6.5.  Confidentiality.................................................17
Section 6.6.  GOVERNING LAW AND JURISDICTION..................................18
Section 6.7.  Execution in Counterparts.......................................18
Section 6.8.  Survival of Termination.........................................18
Section 6.9.  WAIVER OF JURY TRIAL............................................18
Section 6.10. Entire Agreement................................................19
Section 6.11. Headings........................................................19

EXHIBIT I     DEFINITIONS....................................................I-1
EXHIBIT II    CONDITIONS PRECEDENT TO LOANS.................................II-1
EXHIBIT III   REPRESENTATIONS AND WARRANTIES...............................III-1
EXHIBIT IV    COVENANTS.....................................................IV-1

                                      -ii-

<PAGE>

                                TABLE OF CONTENTS
                                  (CONTINUED)

                                                                            PAGE

EXHIBIT V     EVENTS OF DEFAULT..............................................V-1
EXHIBIT VI    PORTFOLIO CERTIFICATE.........................................VI-1

SCHEDULE I    TRADE NAMES....................................................I-1
SCHEDULE II   TAX MATTERS...................................................II-1

ANNEX A       FORM OF BORROWING NOTICE

                                     -iii-


<PAGE>

                          LOAN AND SERVICING AGREEMENT

        This LOAN AND  SERVICING  AGREEMENT,  dated as of December 22, 2000 (as
amended,  supplemented or otherwise modified from time to time, the "AGREEMENT")
among AFC AIM CORPORATION, an Indiana corporation, as borrower (the "BORROWER"),
AUTOMOTIVE  FINANCE  CORPORATION,  an Indiana  corporation  ("AFC"),  as initial
servicer (in such capacity,  together with its successors and permitted  assigns
in such capacity,  the  "SERVICER")  and BANK OF MONTREAL,  CHICAGO  BRANCH,  as
lender (together with its successors and permitted assigns, the "LENDER").

                             PRELIMINARY STATEMENTS

        Certain terms that are  capitalized  and used throughout this Agreement
are defined in EXHIBIT I to this Agreement. References in the Exhibits hereto to
"the Agreement"  refer to this Agreement,  as amended,  modified or supplemented
from time to time.

        1.      Borrower has purchased and will purchase from time to time
Receivables and certain related assets.

        2.      Borrower  intends to finance the  Receivables  by  borrowing
Loans from the Lender.  Borrower has  requested  Lender,  and Lender has agreed,
subject to the terms and conditions  contained in this Agreement,  to make Loans
to  Borrower  from time to time during the term of this  Agreement,  which Loans
will be secured by such Receivables and other Collateral.

        3.      AFC has been requested, and is willing, to act as the Servicer
with respect to the Receivables.

        In consideration of the mutual  agreements,  provisions and covenants
contained herein, the parties hereto agree as follows:


                                   ARTICLE I.

                                      LOANS

        Section 1.1. COMMITMENTS  TO LEND;  LIMITS ON LENDER'S  OBLIGATIONS.
Upon the terms and subject to the  conditions  of this  Agreement,  from time to
time prior to the Termination Date,  Borrower may request that Lender make loans
to Borrower  secured by the  Collateral  (each,  a "LOAN") and Lender shall make
such  Loans;  PROVIDED  that no Loan  shall be made by Lender if,  after  giving
effect thereto,  the then Total Outstanding  Principal would exceed the Facility
Limit.


<PAGE>

        Section 1.2. MAKING LOANS; BORROWING PROCEDURES.
                       
        (a)     NOTICE OF  BORROWING.  Each Loan  hereunder  shall be made upon
the Borrower's irrevocable written notice,  substantially in the form of ANNEX A
(a "BORROWING  NOTICE"),  delivered to the Lender in accordance with SECTION 6.2
(which notice must be received by the Lender prior to 12:00 a.m.,  Chicago time)
on or before the requested  Financing  Date,  which notice shall specify (A) the
amount  requested  to be  borrowed  by  the  Borrower  (which  amount  shall  be
$1,000,000 or in integral $100,000 multiples thereof),  and (B) the date of such
Loan (which shall be a Business Day).

        (b)     FUNDING OF LOAN. On the date of each Loan, upon satisfaction of
the  applicable  conditions set forth in ARTICLE II, Lender shall make available
to  Borrower  in same day funds by  depositing  such funds  into the  Borrower's
Account. No Loan shall be made in an amount to exceed the Borrowing Base on such
Financing Date.

                The "BORROWING  BASE" means,  as of any Financing  Date,  with
        respect to the  Financed  Vehicle  Pool to be financed by a Loan on such
        date,  the sum of (i) 60% of the  aggregate  Black  Book  Value  of such
        Financed Vehicle Pool as of such date, MINUS the Adjustment  Amount, and
        (ii) the Credit Account Adjustment Amount.

                The "ADJUSTMENT AMOUNT" means, as of any Financing Date, with
        respect to the  Financed  Vehicle  Pool to be financed by a Loan on such
        date,  (i) so long as no  Trigger  Event has  occurred,  zero,  and (ii)
        following  the  occurrence  of a Trigger  Event,  an amount equal to the
        product of (x) aggregate Black Book Value of such Financed  Vehicle Pool
        as of such date, and (y) the largest  percentage by which the Black Book
        Value of any  Eligible  Vehicle  Model as of such  date is less than the
        Maximum Black Book Value for such Eligible Vehicle Model.

                "TRIGGER  EVENT"  means, at any time,  that the Black Book Value
        of any Eligible  Vehicle  Model as of such date is less than the Maximum
        Black Book Value of such Eligible Vehicle Model by more than 12.5%.

                "CREDIT ACCOUNT  ADJUSTMENT  AMOUNT" means, as  of any Financing
        Date, an amount which is equal to the lesser of (i) 15% of the aggregate
        Black Book Value of such Financed  Vehicle Pool as of such date and (ii)
        the Credit Account Balance as of such Financing Date.

        Section 1.3. GRANT OF SECURITY  INTEREST.  Borrower  hereby grants to
Lender a first  priority,  continuing  lien and security  interest in all right,
title and  interest of  Borrower  in, to and under the  Collateral,  whether now
owned or hereafter  acquired or existing.  Such lien and security interest shall
secure all of Borrower's obligations (monetary or otherwise) hereunder and under
the other Transaction Documents,  including, without limitation, the payments on
the Note, the payment of Fees and all Indemnified  Amounts and the obligation to
turn over all  Collections  to the  Servicer or the Lender for deposit  into the
Collection Account.  The Lender hereby accepts the foregoing grant of a security
interest in the Collateral.


                                      -2-

<PAGE>

        Section 1.4. SETTLEMENT PROCEDURES.  (a) Collection of the Receivables
shall be  administered  by the  Servicer  in  accordance  with the terms of this
Agreement,  the Isuzu Loan Documents and the other  Transaction  Documents.  The
Borrower  shall provide to the Servicer (if other than the Borrower) on a timely
basis all information needed for such administration.

        (b)     DEPOSIT OF  COLLECTIONS.  The Servicer shall segregate and hold
all  Collections  in trust for the benefit of the  Borrower  and the Lender and,
within one Business  Day of the receipt (or deemed  receipt) of  Collections  of
Receivables  by the Borrower or  Servicer,  deposit  such  Collections  into the
Collection Account.

        (c)     EXCESS SALES PROCEEDS.

                (i)     So long as no Isuzu Event of Default shall have occurred
        and be continuing,  the Servicer shall forward all Excess Sales Proceeds
        received in the Collection  Account to the Obligor in accordance with
        Section 2.5 of the Promissory Note and Security Agreement.

                (ii)    In the event that an Isuzu  Event of  Default shall have
        occurred and be  continuing,  the Servicer shall retain any Excess Sales
        Proceeds  received  in the  Collection  Account to the extent  permitted
        under the Isuzu Loan Document and shall apply such Excess Sales Proceeds
        in accordance  with the priority of payments set forth in SUBSECTION (d)
        below.

                (iii)   "EXCESS SALES PROCEEDS" means the excess, if any, of (i)
        the amount of the  aggregate  net sales  proceeds from the sale or other
        disposition  of a Batch of Financed  Vehicles,  over (ii) the  aggregate
        amount of the Advances related to such Financed  Vehicles (to the extent
        not  prepaid  under  Section  2.5 of the  Promissory  Note and  Security
        Agreement  or  otherwise).  For purposes  hereof,  a "BATCH" of Financed
        Vehicles is a group of Financed  Vehicles sold or otherwise  disposed of
        at a single  auction  site (or other  sale  site) on a single  day,  the
        individual  net sales proceeds with respect to which are permitted to be
        netted in accordance with the agreement of AFC and the Obligor.

        (d)     PAYMENT DATE PROCEDURES.  Amounts on deposit on any Payment Date
in the  Collection  Account  representing  Collections  received  during or with
respect to the related  Collection Period shall be withdrawn from the Collection
Account on such  Payment  Date,  in the  amounts  required,  and  applied in the
following order of priority:

                FIRST, to the Obligor,  any Excess Sales Proceeds  received in
        the Collection Account which the Obligor is entitled to receive pursuant
        to SUBSECTION  (c)(i) above,  but which have not yet been distributed to
        the Obligor;

                SECOND, to the Servicer, to the extent of available funds, the
        amount of the accrued and unpaid  Servicing Fee,  including any past due
        Servicing Fee;

                                      -3-

<PAGE>

                THIRD,  to the  Collection  Account  Bank,  to the  extent  of
        available  funds,  any fees,  charges or other expenses  incurred by the
        Borrower in connection  with the  establishment  or  maintenance  of the
        Collection Account;

                FOURTH,  to the Lender,  to the extent of available funds, all
        accrued and unpaid interest on all outstanding  Loans,including any past
        due interest;

                FIFTH, to the Lender, to the extent of available funds, as a
        repayment of principal on the Loans, the sum of:
         
                        (i)  the Mandatory Principal Repayment Amount, and

                        (ii) the amount of any  prepayment  of  principal on the
                Loans that the Borrower has elected to make on such Payment Date
                in accordance with SECTION 2.3(a) below.

                        "MANDATORY PRINCIPAL REPAYMENT AMOUNT" means

                        (a)     on any Payment Date prior to the occurrence of
                an Event of Default, the sum of:

                                (x)     the aggregate  Lender Financed Amount of
                        all  Financed  Vehicles (A) which were sold or otherwise
                        disposed  of, or which  suffered a Casualty,  during the
                        related   Collection   Period  or  (B)  as  to  which  a
                        prepayment  of principal  was made by the Obligor  under
                        Section  2.5  of  the   Promissory   Note  and  Security
                        Agreement during such Collection Period,

                                (y)     the aggregate AFC Financed Amount of all
                        Financed  Vehicles  (A)  which  were  sold or  otherwise
                        disposed  of, or which  suffered a Casualty,  during the
                        related   Collection   Period  or  (B)  as  to  which  a
                        prepayment  of principal  was made by the Obligor  under
                        Section  2.5  of  the   Promissory   Note  and  Security
                        Agreement during such Collection Period, and

                                (z)     the   amount  of  any   prepayment   of
                        principal  required  under  SECTION  2.3(b)  following a
                        reduction in the Facility  Limit pursuant to SECTION 2.5
                        during such  Collection  Period  (after giving effect to
                        any other  distributions  of  principal to occur on such
                        Payment Date),

                        PROVIDED,   HOWEVER,   that  the   Mandatory   Principal
                        Repayment   Amount   distributed  on  any  Payment  Date
                        pursuant  to this  CLAUSE (a) shall not exceed the Total
                        Outstanding Principal on such Payment Date (after giving
                        effect to any other  distributions of principal to occur
                        on such Payment Date);

                        and

                                      -4-

<PAGE>

                        (b)     on any Payment Date following the occurrence of
                an Event  of  Default,  an  amount  which is equal to the  Total
                Outstanding  Principal on such Payment Date (after giving effect
                to any other distributions of principal to occur on such Payment
                Date);

                SIXTH, to  the Lender or any Affected Person, Indemnified Party
        or other Person to whom any other amount is due hereunder, to the extent
        of  available  funds,  the  amount due to such party or parties on a pro
        rata basis.

        (e)     PAYMENT OF  UNCOLLECTED  AMOUNTS. To the extent that Collections
applied pursuant to SUBSECTION (d) above on any Payment Date are insufficient to
pay any amount due to the Lender,  the Servicer or any other  Person  hereunder,
the Borrower shall pay the amount of any such shortfall to the Person or Persons
to whom it is due on such Payment Date.

        (f)     FINAL PAYOUT DATE. Any funds remaining in the Collection Account
after the Final Payout Date shall be paid to the Borrower.

        (g)     DEEMED COLLECTIONS.  For the purposes of this SECTION 1.4,
                                   

                        (i)     if on any day the outstanding balance of any
                Receivable is reduced or adjusted as a result of any  adjustment
                made by AFC,  the  Borrower  or the  Servicer,  or any setoff or
                dispute between the Borrower, AFC, the Servicer and the Obligor,
                the  Borrower  shall be  deemed to have  received  on such day a
                Collection of such Receivable in the amount of such reduction or
                adjustment;

                        (ii)    if on any  day  any of the  representations  or
                warranties  in  PARAGRAPHS  A.(h) or A.(o) of EXHIBIT III is not
                true with respect to any Receivable,  the Seller shall be deemed
                to have received on such day a Collection of such  Receivable in
                full;

                        (iii)   if and to  the  extent  the  Lender  shall  be
                required  for any  reason  to pay  over to the  Obligor  (or any
                trustee,   receiver,   custodian  or  similar  official  in  any
                Insolvency Proceeding) any amount received by it hereunder, such
                amount  shall be deemed not to have been so received  but rather
                to have been  retained by the  Borrower  and,  accordingly,  the
                Lender,  as the  case may be,  shall  have a claim  against  the
                Borrower  for such  amount,  payable when and to the extent that
                any  distribution  from or on behalf of such  Obligor is made in
                respect thereof.

        (h)     CREDIT ACCOUNT.  Until the distribution of all remaining amounts
in the Collection  Account pursuant to SECTION 1.4(f),  the Borrower (subject to
the  Lender's  audit and  approval)  shall  maintain a book entry  account  (the
"CREDIT  ACCOUNT") for the purpose of recording the amount of Collections  which
represents  a credit to the  Borrower  against  which the  Borrower  can  borrow
additional amounts hereunder.  On any day the balance of the Credit Account (the
"CREDIT  ACCOUNT   BALANCE")  shall  equal  (i)  the  aggregate  amount  of  all
Collections  applied to reduce the  principal  balance of the Loans  pursuant to
CLAUSE (a)(y) of the definition of "Mandatory Principal Repayment

                                      -5-


<PAGE>

Amount," MINUS (ii) the amount,  determined  for each Loan,  equal to the amount
advanced with respect to such Loan over the amount permitted to be advanced with
respect to such Loan without  giving effect to CLAUSE (ii) of the  definition of
"Borrowing Base."

        Section 1.5.  FEES.  The Borrower shall pay to the Lender certain fees
in the amounts and on the dates set forth in a letter  dated  December  22, 2000
between the  Borrower  and the Lender (as the same may be  amended,  amended and
restated,  supplemented  or modified,  the "FEE LETTER")  delivered  pursuant to
SECTION 1 of EXHIBIT II, as such letter  agreement may be amended,  supplemented
or otherwise modified from time to time in accordance with the terms thereof.

        Section  1.6.  PAYMENTS AND  COMPUTATIONS,  ETC. (a) All amounts to be
paid or deposited by the  Borrower or the  Servicer  hereunder  shall be paid or
deposited in accordance  with the terms hereof no later than noon (Chicago time)
on the day when due in lawful money of the United  States of America in same day
funds to the Lender's  Account.  All amounts  received after noon (Chicago time)
will be deemed to have been received on the immediately succeeding Business Day.

        (b)    The Borrower shall, to the extent permitted by law, pay interest
on any amount not paid or  deposited by the Borrower or Servicer to the Lender's
Account when due  hereunder,  at an interest  rate equal to 2.0% PER ANNUM above
the Base Rate, payable on demand.

        (c)     All  computations  of interest  under  SUBSECTION (b) above and
all computations of fees and other amounts  hereunder shall be made on the basis
of a year of 360  days for the  actual  number  of days  elapsed.  Whenever  any
payment  or  deposit  to be made  hereunder  shall be due on a day other  than a
Business  Day,  such  payment  or  deposit  shall be made no later than the next
succeeding  Business  Day and such  extension  of time shall be  included in the
computation of such payment or deposit.

        Section 1.7.  INCREASED COSTS.  (a) If the Lender,  any Participant or
any of their respective  Affiliates (each an "AFFECTED PERSON")  determines that
the  existence of or  compliance  with (i) any law or  regulation  or any change
therein or in the interpretation or application  thereof,  in each case adopted,
issued or  occurring  after the date hereof or (ii) any  request,  guideline  or
directive from any central bank or other Governmental  Authority (whether or not
having the force of law) issued or  occurring  after the date of this  Agreement
affects  or would  affect  the  amount of capital  required  or  expected  to be
maintained by such Affected Person and such Affected Person  determines that the
amount of such  capital  is  increased  by or based  upon the  existence  of any
commitment to make a Loan hereunder  then,  upon demand by such Affected  Person
(with a copy to the  Lender  if such  Affected  Person is not the  Lender),  the
Borrower shall  immediately pay to the Lender,  for the account of such Affected
Person,  from time to time as  specified  by such  Affected  Person,  additional
amounts  sufficient  to  compensate  such  Affected  Person in the light of such
circumstances,  to the extent that such Affected  Person  reasonably  determines
such  increase  in  capital  to be  allocable  to the  existence  of any of such
commitments;  PROVIDED that within 30 days of an Affected  Party's  knowledge of
any such  circumstance such Affected Party shall notify the Borrower of the same
and whether such Affected Party will request that the Borrower  indemnify it for
such  circumstance.  A

                                      -6-

<PAGE>

certificate as to such amounts  submitted to the Borrower and the Lender by such
Affected  Person  shall be  conclusive  and  binding  for all  purposes,  absent
manifest error.

        (b)     If, due to either (i) the introduction of or any change (other
than any  change  by way of  imposition  or  increase  of  reserve  requirements
referred to in SECTION 1.9) in or in the interpretation of any law or regulation
or (ii)  compliance with any guideline or request from any central bank or other
Governmental  Authority (whether or not having the force of law), there shall be
any increase in the cost to any Affected Person of funding or maintaining a Loan
or portion of a Loan in respect of which  interest is computed by  reference  to
the Cost of Funds, then, upon demand by such Affected Person, the Borrower shall
immediately  pay to such  Affected  Person,  from  time  to  time as  specified,
additional  amounts  sufficient  to  compensate  such  Affected  Person for such
increased costs;  PROVIDED that within 30 days of an Affected Party's  knowledge
of any such  circumstance  such Affected  Party shall notify the Borrower of the
same and whether such Affected Party will request that the Borrower indemnify it
for  such  circumstance.  A  certificate  as to such  amounts  submitted  to the
Borrower  by such  Affected  Person  shall be  conclusive  and  binding  for all
purposes, absent manifest error.

        Section 1.8.  ADDITIONAL  INTEREST ON LOANS BEARING  INTEREST BASED ON
COST OF FUNDS.  The Borrower shall pay to any Affected  Person,  so long as such
Affected Person shall be required under regulations of the Board of Governors of
the Federal  Reserve System to maintain  reserves with respect to liabilities or
assets  consisting  of  or  including  "Eurocurrency  Liabilities",   additional
interest on the Loan during each Interest Period in respect of which interest is
computed by reference to the Cost of Funds, for such Interest Period,  at a rate
per annum  equal at all  times  during  such  Interest  Period to the  remainder
obtained by subtracting (i) the Cost of Funds for such Interest Period from (ii)
the rate obtained by dividing such Cost of Funds referred to in CLAUSE (i) above
by that percentage  equal to 100% minus the Eurodollar  Rate Reserve  Percentage
for such Interest  Period,  payable on each date on which interest is payable on
the  applicable  Portion  of  Investment;  PROVIDED  that  within  30 days of an
Affected Party's  knowledge of any such  circumstance  such Affected Party shall
notify the  Borrower of the same and whether  such  Affected  Party will request
that the Borrower indemnify it for such circumstance.  Such additional  interest
shall be determined by the Affected Person and notified to the Borrower  through
the Lender.  A  certificate  as to such  additional  interest  submitted  to the
Borrower  by the  Affected  Person  shall  be  conclusive  and  binding  for all
purposes, absent manifest error.

        Section  1.9.  REQUIREMENTS  OF LAW.  In the event  that any  Affected
Person  determines  that  the  existence  of or  compliance  with (i) any law or
regulation  or any  change  therein  or in  the  interpretation  or  application
thereof, in each case adopted, issued or occurring after the date hereof or (ii)
any request,  guideline or directive from any central bank or other Governmental
Authority (whether or not having the force of law) issued or occurring after the
date of this Agreement:

                (i)     does or shall subject such  Affected  Person to any tax
        of any kind whatsoever  with respect to this Agreement,  any increase in
        the  Total  Outstanding  Principal  relating  thereto,  or does or shall
        change the basis of  taxation of  payments  to such  Affected  Person on
        account of Collections,  interest or any other amounts payable hereunder
        (excluding  taxes

                                      -7-


<PAGE>

        imposed on the overall net income of such Affected Person, and franchise
        taxes imposed on such Affected  Person,  by the  jurisdiction  under the
        laws  of  which  such  Affected  Person  is  organized  or  a  political
        subdivision thereof);

                (ii)    does or shall  impose,  modify  or hold  applicable  any
        reserve, special deposit, compulsory loan or similar requirement against
        assets held by, or deposits or other  liabilities  in or for the account
        of  advances  or loans by,  or other  credit  extended  by, or any other
        acquisition  of funds by, any office of such  Affected  Person which are
        not otherwise  included in the determination of the Cost of Funds or the
        Base Rate hereunder; or

                (iii)   does or shall impose on such Affected Person any other
        condition;

and the  result  of any of the  foregoing  is (x) to  increase  the cost to such
Affected Person of making a Loan, or of agreeing to fund or maintain any Loan or
(y) to reduce any amount receivable  hereunder (whether directly or indirectly),
then, in any such case,  upon demand by such Affected  Person the Borrower shall
pay such Affected  Person any additional  amounts  necessary to compensate  such
Affected Person for such additional cost or reduced amount receivable.  All such
amounts shall be payable as incurred. A certificate from such Affected Person to
the  Borrower  certifying,   in  reasonably  specific  detail,  the  basis  for,
calculation of, and amount of such additional costs or reduced amount receivable
shall be conclusive in the absence of manifest error; PROVIDED, however, that no
Affected  Person shall be required to disclose any  confidential or tax planning
information in any such certificate.

        Section 1.10.  INABILITY TO DETERMINE COST OF FUNDS. In the event that
the Lender shall have  determined  prior to the first day of any Interest Period
(which determination shall be conclusive and binding upon the parties hereto) by
reason of circumstances  affecting the interbank  Eurodollar market,  either (a)
dollar deposits in the relevant amounts and for the relevant Interest Period are
not available,  (b) adequate and reasonable  means do not exist for ascertaining
the Cost of Funds for such Interest  Period or (c) the Cost of Funds  determined
pursuant  hereto  does  not  accurately  reflect  the  cost  to the  Lender  (as
conclusively  determined  by the  Lender) of  maintaining  any Loan  during such
Interest  Period,  the Lender  shall  promptly  give  telephonic  notice of such
determination,  confirmed in writing,  to the Borrower prior to the first day of
such Interest  Period.  Upon delivery of such notice (a) no Loan or portion of a
Loan shall be funded  thereafter at the Bank Rate determined by reference to the
Cost of Funds,  unless  and until the  Lender  shall  have  given  notice to the
Borrower  that the  circumstances  giving rise to such  determination  no longer
exist, and (b) with respect to any outstanding  Loans or portions of a Loan then
funded at the Bank Rate determined by reference to the Cost of Funds,  such Bank
Rate shall  automatically  be converted to the Bank Rate determined by reference
to the  Base  Rate at the  respective  last  days of the  then-current  Interest
Periods relating to such Loans or portions of a Loan.

        Section 1.11.   FUNDING  LOSSES.  In the event that any Affected Person
shall  incur any loss or expense  (including,  without  limitation,  any loss or
expense  incurred by reason of the  liquidation or  reemployment  of deposits or
other funds acquired by such Affected  Person to make or maintain any Loan) as a
result of (i) any  settlement  with  respect  to any Loan  being made on any day
other than

                                       -8-

<PAGE>

the  applicable  Payment Date with respect  thereto,  or (ii) any Loan not being
made in accordance with a request therefor under SECTION 1.2(a), then, within 30
days of written notice from such Affected Person to Borrower, Borrower shall pay
to such Affected Person the amount of such loss or expense.  Such written notice
(which shall include calculations in reasonable detail) shall, in the absence of
manifest error, be conclusive and binding upon the Borrower.

                                   ARTICLE II.

                                    THE NOTE

        Section 2.1.  NOTE.  The Loans shall be evidenced by a promissory  note
(as from time to time supplemented,  extended,  amended or replaced, the "NOTE")
in form and substance acceptable to the Lender,  dated the date hereof,  payable
to the order of Lender in the maximum  principal  amount of $60,000,000  (or, if
less,  in the  aggregate  unpaid  principal  amount of all of the  Loans) on the
Maturity  Date.  Principal  of the Loans  shall be paid from time to time as set
forth in SECTION 2.3. The Lender shall record in its records the date and amount
of each Loan made  hereunder,  the  interest  rate with  respect  thereto,  each
repayment thereof, and the other information provided for thereon. The aggregate
unpaid principal amount so recorded shall be rebuttable  presumptive evidence of
the principal  amount owing and unpaid on the Note. The failure so to record any
such  information or any error in so recording any such  information  shall not,
however,  limit or otherwise affect the actual obligations of Borrower hereunder
or under the Note to repay the principal amount of all Loans,  together with all
interest accruing thereon, as set forth in this Agreement.

        Section 2.2.  INTEREST ON LOANS.                     

        (a)     INTEREST RATES. Each Loan shall accrue interest during each
Collection Period at the Bank Rate.

        (b)     INTEREST PAYMENT DATES.  Interest accrued on each Loan shall be
paid, without limitation:

                (i)     on the Maturity Date;

                (ii)    on each Payment Date;

                (iii)   on or before the last day of each Interest Period;

                (iv)    on the date of any prepayment,  in whole or in part, of
        the  outstanding  principal of such Loan pursuant to SECTIONS  2.3(b) to
        the extent of the amount being prepaid; and

                (v)     on the date of the Maturity Date of any Loan which is
        accelerated pursuant to SECTION 3.2.
                                     
                                       -9-

<PAGE>

        (c)     PAYMENT FROM COLLECTION ACCOUNT.  Interest may be paid from
amounts on deposit in the Collection Account.
               
        Section 2.3.  REPAYMENTS  AND  PREPAYMENTS.  Borrower  shall  repay in
full the  unpaid  principal  amount of each  Loan on the  Maturity  Date.  Prior
thereto, Borrower:

        (a)     may,  from time to time on any  Business  Day with  respect  to
any Loan, make a prepayment,  in whole or in part, of the outstanding  principal
amount of any such Loan; PROVIDED, HOWEVER, that

                (i)     all such  voluntary  prepayments shall  require at least
        one (1) but no more than ten (10) Business Days' prior written notice to
        the Lender; and 

                (ii)    all such voluntary partial  prepayments shall be in
        a minimum amount of $1,000,000 and an integral multiple of $100,000, and
        the Total  Outstanding  Principal after giving effect to such prepayment
        shall be not less than $2,000,000;

        (b)     shall,  on each  date when any reduction  in the  Facility Limit
becomes effective  pursuant to SECTION 2.5, make a prepayment of the Loans in an
amount  equal to the excess,  if any,  of the  aggregate  outstanding  principal
amount of the Loans over the Facility Limit as so reduced; and

        (c)     shall,  immediately  upon any  acceleration of the Maturity Date
of any Loans pursuant to SECTION 3.2, repay such Loans.

        Each such prepayment (i) shall be subject to the payment of any amounts
required by Section 1.11  resulting from a prepayment or payment of a Loan prior
to the Payment Date with respect  thereto,  and (ii) may be made from amounts on
deposit in the Collection Account.

        Section 2.4.  GENERAL  PROCEDURES.  No outstanding  principal  shall be
considered  reduced by any  allocation,  setting  aside or  distribution  of any
portion  of  Collections  unless  such  Collections  shall  have  been  actually
delivered to the Lender for the purpose of paying such  principal.  No principal
or  interest  shall be  considered  paid by any  distribution  of any portion of
Collections if at any time such  distribution  is rescinded or must otherwise be
returned  for any reason.  No  provision  of this  Agreement  shall  require the
payment or permit the collection of interest in excess of the maximum  permitted
by applicable law.

        Section 2.5.  REDUCTION IN FACILITY  LIMIT.  The unused  portion of the
Facility  Limit may be  decreased  by an amount of  $10,000,000  or any integral
multiple of  $1,000,000 in excess  thereof upon 10 Business  Days' prior written
notice by Borrower to the Lender;  PROVIDED the Facility Limit shall in no event
be less than $10,000,000.

                                      -10-


<PAGE>

        Section 2.6.  CHARACTERIZATION OF NOTE. Borrower and the Lender agree
to treat  the Note for  Federal,  state  and  local  income  and  franchise  tax
purposes, and for book purposes, as indebtedness only of Borrower.


                                   ARTICLE III.

          REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS OF DEFAULT

        Section 3.1.  REPRESENTATIONS AND WARRANTIES;  COVENANTS.  Each of the
Borrower,  AFC and the Servicer hereby makes the representations and warranties,
and hereby agrees to perform and observe the covenants of such Person, set forth
in EXHIBITS III and IV, respectively hereto.

        Section 3.2.  EVENTS OF DEFAULT; REMEDIES.                  

        (a)     OPTIONAL ACCELERATION.  Upon the occurrence of any Event of
Default set forth in EXHIBIT V hereto (other than an Event of Default  described
in  SUBSECTION  (g) of EXHIBIT V), the Lender may declare  that the  Termination
Date has  occurred  and the  unpaid  principal  amount of the Note to be due and
payable  immediately,  by a notice in  writing  to  Borrower,  and upon any such
declaration, the Termination Date shall occur and such principal amount shall be
immediately  due and  payable,  together  with all accrued  and unpaid  interest
thereon,  without presentment,  demand, protest or other notice of any kind, all
of which are hereby waived by Borrower.

        (b)     AUTOMATIC ACCELERATION.  Upon the occurrence of an Event of
Default  described in SUBSECTION  (g) of EXHIBIT V, the  Termination  Date shall
occur   automatically  and  the  unpaid  principal  amount  of  the  Note  shall
automatically  become due and  payable,  together  with all  accrued  and unpaid
interest thereon,  without presentment,  demand,  protest or notice of any kind,
all of which are hereby waived by the Borrower.

        (c)     ADDITIONAL REMEDIES.  Upon any acceleration of the Note pursuant
to this  SECTION  3.2, no Loans  thereafter  will be made,  and the Lender shall
have,  in addition to all other  rights and  remedies  under this  Agreement  or
otherwise,  all  other  rights  and  remedies  provided  under  the  UCC of each
applicable  jurisdiction  and other  applicable  laws to a secured party,  which
rights  shall  be  cumulative,  including,  without  limitation,  the  right  to
foreclose upon the  Collateral and sell all or any portion  thereof at public or
private sale (and  Borrower  agrees that, to the extent that notice of such sale
is  required,  notice 10 days (or such lesser  period as may be agreed to by the
Lender)  prior to such sale  shall be  adequate  and  reasonable  notice for all
purposes).
 
                                   ARTICLE IV.

                                 INDEMNIFICATION

        Section 4.1. INDEMNITIES BY THE BORROWER.  Without limiting any other
rights that the Lender or any of their respective Affiliates, employees, agents,
successors,  transferees  or assigns  (each,  an

                                      -11-


<PAGE>

"INDEMNIFIED  PARTY") may have hereunder or under  applicable  law, the Borrower
hereby agrees to indemnify each  Indemnified  Party from and against any and all
claims,  damages,  expenses,  losses and liabilities  (including Attorney Costs)
(all of the foregoing being collectively  referred to as "INDEMNIFIED  AMOUNTS")
arising out of or resulting from this Agreement or other  Transaction  Documents
(whether  directly or  indirectly)  or the funding of the Loans or in respect of
any Receivable regardless of whether any such Indemnified Amounts result from an
Indemnified Party's negligence or strict liability or other acts or omissions of
an Indemnified Party, excluding,  however, (a) Indemnified Amounts to the extent
resulting  from  gross  negligence  or  willful  misconduct  on the part of such
Indemnified  Party,  or (b) any  overall  net income  taxes or  franchise  taxes
imposed on such Indemnified  Party by the  jurisdiction  under the laws of which
such  Indemnified  Party is  organized  or any  political  subdivision  thereof.
Without  limiting  or  being  limited  by  the  foregoing,  and  subject  to the
exclusions set forth in the preceding sentence, the Borrower shall pay on demand
to each  Indemnified  Party any and all  amounts  necessary  to  indemnify  such
Indemnified  Party from and against any and all Indemnified  Amounts relating to
or resulting from any of the following:

                (i)     the  failure of any  Financed Vehicle to be an Eligible
        Vehicle on the related  Financing  Date, the failure of any  information
        contained  in a Portfolio  Certificate  to be true and  correct,  or the
        failure of any other information  provided to the Lender with respect to
        Receivables or this Agreement to be true and correct;

                (ii)    the  failure  of  any   representation  or  warranty  or
        statement  made or deemed made by the Borrower (or any of its  officers)
        under or in  connection  with this  Agreement  or any other  Transaction
        Document to have been true and correct in all respects when made;

                (iii)   the  failure  by  the   Borrower  to  comply  with  any
        applicable law, rule or regulation with respect to any Receivable or the
        Isuzu Loan  Documents;  or the failure of any  Receivable or the related
        Isuzu Loan  Documents  to conform to any such  applicable  law,  rule or
        regulation;

                (iv)    the failure to vest and maintain vested in the Lender a
        first priority perfected  security interest in the Collateral,  free and
        clear of any Adverse  Claim,  other than an Adverse Claim arising solely
        as a result of an act of the  Lender,  whether  existing at the time any
        Loan is made hereunder or at any time thereafter;

                (v)     the  failure  to  have  filed, or any  delay in  filing,
        financing statements or other similar instruments or documents under the
        UCC of any applicable jurisdiction or other applicable laws with respect
        to any item of Collateral,  whether at the time of any Loan hereunder or
        at any subsequent time;

                (vi)    any  dispute,  claim,  offset  or  defense  (other  than
        discharge in bankruptcy of the Obligor) of the Obligor to the payment of
        any Receivable (including,  without limitation,  a defense based on such
        Receivable  or the Isuzu  Loan  Documents  not being a legal,  valid and
        binding obligation of such Obligor  enforceable against it in accordance
        with its terms),  or any other claim  resulting  from or relating to the
        transaction giving rise to such Receivable

                                      -12-


<PAGE>

        or relating to collection activities with respect to such Receivable (if
        such collection  activities were performed by the Borrower or any of its
        Affiliates acting as Servicer or by any agent or independent  contractor
        retained by the Borrower or any of its Affiliates);

                (vii)   any failure of the Borrower to perform its duties or
        obligations in accordance with the provisions hereof;

                (viii)  any products  liability or other claim,  investigation,
        litigation  or  proceeding  arising  out of or in  connection  with  the
        Financed  Vehicles,  other  goods,  insurance  or services  that are the
        subject of or secure any Receivable;

                (ix)   the  commingling  of  Collections  of  Receivables at any
        time with other funds;

                (x)     any  investigation,  litigation  or proceeding  related
        to this  Agreement  or the  funding  of the Loans or in  respect  of any
        Receivable or other item of Collateral or the Isuzu Loan Documents;

                (xi)    any  reduction  in the Total  Outstanding  Principal as
        a result of the distribution of Collections  pursuant to SECTION 1.4(d),
        in  the  event  that  all  or a  portion  of  such  distributions  shall
        thereafter be rescinded or otherwise must be returned for any reason; or

                (xii)   any tax or  governmental  fee or charge  (other than any
        tax upon or measured by net income or gross receipts),  all interest and
        penalties   thereon  or  with  respect   thereto,   and  all  reasonable
        out-of-pocket  costs and  expenses,  including the  reasonable  fees and
        expenses of counsel in  defending  against the same,  which may arise by
        reason of funding or maintaining the Loans.

        If for any reason the  indemnification  provided  above in this  SECTION
4.1 is  unavailable  to an  Indemnified  Party or is  insufficient  to hold such
Indemnified  Party  harmless,   then  the  Borrower  shall  contribute  to  such
Indemnified  Party the amount otherwise  payable by such Indemnified  Party as a
result of such loss, claim,  damage or liability to the maximum extent permitted
under applicable law.

        Section  4.2.  INDEMNITIES  BY SERVICER.  Without  limiting any other
rights which any such person may have hereunder under  applicable law,  Servicer
hereby agrees to indemnify each Indemnified Party, forthwith on demand, from and
against  any and  all  Indemnified  Amounts,  regardless  of  whether  any  such
Indemnified  Amounts  result from an  Indemnified  Party's  negligence or strict
liability or other acts or omissions of an Indemnified Party, awarded against or
incurred by any of them arising out of or relating to:

                (i)     the failure of any Receivable to be an Eligible
        Receivable  as of  the  related  Financing  Date,  the  failure  of  any
        information contained in a Portfolio Certificate to be true and correct,
        or the  failure of any other  information  provided  to the Lender  with
        respect to Receivables or this Agreement to be true and correct;

                                      -13-


<PAGE>

                (ii)    any  representation or warranty  made by AFC under or in
        connection with any Transaction  Document in its capacity as Servicer or
        any  information  or  report  delivered  by or on  behalf  of AFC in its
        capacity  as  Servicer  pursuant  hereto,  which  shall have been false,
        incorrect  or  misleading  in any  material  respect when made or deemed
        made;

                (iii)   the failure by AFC,  in its  capacity  as  Servicer,  to
        comply with any applicable law, rule or regulation  (including  truth in
        lending, fair credit billing, usury, fair credit reporting, equal credit
        opportunity, fair debt collection practices and privacy) with respect to
        any Receivable or the Isuzu Loan Documents; or

                (iv)    any failure of Servicer to perform its duties, covenants
        and  obligations in accordance  with the  applicable  provisions of this
        Agreement.

        If for any reason the  indemnification  provided  above in this SECTION
4.2 is  unavailable  to an  Indemnified  Party or is  insufficient  to hold such
Indemnified  Party harmless,  then Servicer shall contribute to such Indemnified
Party the amount otherwise payable by such Indemnified Party as a result of such
loss,  claim,  damage  or  liability  to  the  maximum  extent  permitted  under
applicable law.


                                  ARTICLE V.

                         ADMINISTRATION AND COLLECTIONS

        Section 5.1.  APPOINTMENT  OF SERVICER. (a) The servicing, administering
and collection of the Receivables shall be conducted by the Person so designated
from time to time as Servicer in  accordance  with this SECTION  5.1.  Until the
Lender gives notice to the  Borrower and the Servicer (in  accordance  with this
SECTION 5.1) of the designation of a new Servicer,  AFC is hereby designated as,
and  hereby  agrees to  perform  the duties  and  obligations  of, the  Servicer
pursuant to the terms hereof.  Upon the  occurrence of an Event of Default,  the
Lender may  designate as Servicer any Person  (including  itself) to succeed the
Servicer or any successor Servicer,  on the condition in each case that any such
Person so designated  shall agree to perform the duties and  obligations  of the
Servicer pursuant to the terms hereof.

        (b)     Upon the  designation  of a successor  Servicer  as set forth in
SECTION 5.1(a) hereof, the Servicer agrees that it will terminate its activities
as Servicer  hereunder in a manner which the Lender  determines  will facilitate
the transition of the  performance of such  activities to the new Servicer,  and
the Servicer shall cooperate with and assist such new Servicer. Such cooperation
shall include (without  limitation) access to and transfer of records and use by
the new Servicer of all licenses, hardware or software necessary or desirable to
collect the  Receivables  and any Related  Security;  PROVIDED,  HOWEVER,  that,
notwithstanding anything to the contrary herein,  Servicer's grant of a license,
further described below, to the Lender or any new Servicer,  shall be a limited,
non-exclusive,  non-transferable,  non-assignable,  license  to  access  and use
(reproduce,  transmit,  display and perform) the software  developed by Servicer
commonly  known as "COSMOS,"  residing on

                                      -14-


<PAGE>

Servicer's server computer commonly known as "AFC1," (or any successor  software
or hardware used by the Servicer)  via either  Servicer's,  Lender's or such new
Servicer's  workstations,  at the Lender's discretion (the "LICENSED  SOFTWARE")
solely for the limited  purpose of collecting on the Receivables and any Related
Security. No license or right to use, reproduce,  distribute,  display publicly,
perform  publicly,  transmit  or create  derivative  works based upon any of the
Licensed Software is granted to either the Lender or any new Servicer, except as
expressly provided in this paragraph.  Neither Lender nor any new Servicer shall
or permit any third party to, translate, reverse engineer, decompile, recompile,
update or modify all or any part of the Licensed Software.

        (c)     The Servicer acknowledges that, in making their decision to
execute  and deliver  this  Agreement,  the Lender has relied on the  Servicer's
agreement to act as Servicer hereunder. Accordingly, the Servicer agrees that it
will not voluntarily resign as Servicer.

        (d)     The Servicer may delegate its duties and  obligations  hereunder
to any  subservicer  (each,  a  "SUB-SERVICER");  provided  that,  in each  such
delegation,  (i) such Sub-Servicer  shall agree in writing to perform the duties
and obligations of the Servicer pursuant to the terms hereof,  (ii) the Servicer
shall remain  primarily  liable to the Lender for the  performance of the duties
and  obligations so delegated,  (iii) the Borrower and the Lender shall have the
right to look solely to the Servicer for such  performance and (iv) the terms of
any agreement with any Sub-Servicer  shall provide that the Lender may terminate
such agreement upon the  termination of the Servicer in accordance  with SECTION
5.1(a)  above  hereunder  by giving  notice  of its  desire  to  terminate  such
agreement to the Servicer (and the Servicer shall provide  appropriate notice to
such Sub-Servicer).

        Section 5.2.  DUTIES OF SERVICER.  (a) The Servicer shall take or cause
to be taken all such action as may be  necessary  or  advisable  to collect each
Receivable  from time to time, all in accordance  with this  Agreement,  the
other  Transaction  Documents  (including,  without  limitation,  the Isuzu Loan
Documents) and all applicable laws, rules and regulations,  with reasonable care
and diligence. The Borrower shall deliver to the Servicer and the Servicer shall
hold for the benefit of the  Borrower  and the Lender in  accordance  with their
respective  interests,  all records and documents  (including without limitation
computer  tapes or  disks)  with  respect  to each  Receivable.  Notwithstanding
anything to the contrary contained herein, the Lender may direct the Servicer to
commence or settle any legal action to enforce  collection of any  Receivable or
to foreclose upon or repossess any Related Security;  PROVIDED, HOWEVER, that no
such direction may be given unless an Event of Default has occurred.

        (b)     The Servicer's obligations hereunder shall terminate on the 
Final Payout Date.

        After such  termination,  the Servicer  shall  promptly  deliver to the
Borrower all books,  records and related materials that the Borrower  previously
provided to the Servicer in connection with this Agreement.

        Section 5.3.  ESTABLISHMENT AND USE OF COLLECTION ACCOUNT.

                                      -15-


<PAGE>

        (a)     The  Servicer  agrees to  establish  the  Collection  Account on
or before the date of the first Loan hereunder.  The Collection Account shall be
used to accept and hold Collections and for such other purposes described in the
Transaction Documents.

        (b)     The  Servicer  agrees to  transfer ownership  and control of the
Collection  Account to the Borrower on or before the Closing Date.  The Borrower
agrees that if the Lender so requests it shall grant a valid perfected  security
interest  in the  Collection  Account to the Lender  pursuant  to  documentation
satisfactory to the Lender.

        (c)     Any  amounts  in the Collection  Account may be  invested by the
Collection Account Bank, at Servicer's direction,  in Permitted Investments,  so
long as Lender's interest in such Permitted Investments is perfected in a manner
satisfactory to Lender and such Permitted  Investments are subject to no Adverse
Claims.

        (d)     The Lender may  following any Event of  Default (or an Unmatured
Event of Default of the type  described  in  PARAGRAPH  (g) of EXHIBIT V) at any
time give notice to the  Collection  Account Bank that the Lender is  exercising
its  rights  under  the  Collection  Account  Agreement  to do any or all of the
following:  (i) to have the exclusive  ownership  and control of the  Collection
Account transferred to the Lender and to exercise exclusive dominion and control
over the  funds  deposited  therein  and (ii) to take any or all  other  actions
permitted  under the Collection  Account  Agreement.  The Borrower hereby agrees
that if the  Lender at any time  takes  any  action  set forth in the  preceding
sentence,  the Lender shall have  exclusive  control of the proceeds  (including
Collections)  of all  Receivables and the Borrower hereby further agrees to take
any other  action  that the  Lender may  reasonably  request  to  transfer  such
control.  Any proceeds of Receivables  received by the Borrower,  as Servicer or
otherwise,  thereafter  shall be sent  immediately  to the  Lender.  The parties
hereto  hereby  acknowledge  that if at any time the Lender takes control of the
Collection Account, the Lender shall not have any rights to the funds therein in
excess of the unpaid amounts due to the Lender or any other Person hereunder.

        (e)     Until the Final Payment Date, no funds may be withdrawn from the
Collection Account except in accordance with the terms of this Agreement.

        Section 5.4.  ENFORCEMENT RIGHTS. (a) At any time following the
occurrence of an Event of Default:
                        
                (i)     the Lender may direct the Obligor that payment of all
        amounts  payable under any  Receivable be made directly to the Lender or
        its designee;

                (ii)    the Lender may  instruct the Borrower or the Servicer to
        give notice of the  Lender's  interest in  Receivables  to the  Obligor,
        which notice shall direct that  payments be made  directly to the Lender
        or its designee, and upon such instruction from the Lender, the Borrower
        or the Servicer, as applicable, shall give such notice at the expense of
        the Borrower; PROVIDED, that if the Borrower or the Servicer fails to so
        notify the Obligor, the Lender may so notify the Obligor; and

                                      -16-

<PAGE>

                (iii)   the Lender may request the  Borrower or the Servicer to,
        and upon such  request the  Borrower  or the  Servicer,  as  applicable,
        shall, (A) assemble all of the records necessary or desirable to collect
        the Receivables and the Related Security, and transfer or license to any
        new Servicer  the use of all software  necessary or desirable to collect
        the Receivables and the Related Security, and make the same available to
        the Lender or its  designee at a place  selected by the Lender,  and (B)
        segregate  all cash,  checks and other  instruments  received by it from
        time to time constituting Collections with respect to the Receivables in
        a manner acceptable to the Lender and, promptly upon receipt,  remit all
        such cash,  checks and instruments,  duly endorsed or with duly executed
        instruments of transfer, to the Lender or its designee.

        (b)     The Borrower hereby authorizes the Lender, and irrevocably
appoints the Lender as its attorney-in-fact  with full power of substitution and
with full authority in the place and stead of the Borrower, which appointment is
coupled with an interest,  to take any and all steps in the name of the Borrower
and on behalf of the Borrower  necessary or desirable,  in the  determination of
the Lender, to collect any and all amounts or portions thereof due under any and
all Receivables or Related Security,  including,  without limitation,  endorsing
the  name  of  the  Borrower  on  checks  and  other  instruments   representing
Collections and enforcing such Receivables,  Related Security and the Isuzu Loan
Documents.  The  Lender  shall  only  exercise  the  powers  conferred  by  this
SUBSECTION  (b) after the  occurrence  of an Event of  Default.  Notwithstanding
anything to the contrary  contained in this  SUBSECTION  (b), none of the powers
conferred  upon such  attorney-in-fact  pursuant  to this  SUBSECTION  (b) shall
subject such  attorney-in-fact  to any liability if any action taken by it shall
prove to be inadequate or invalid,  nor shall they confer any  obligations  upon
such attorney-in-fact in any manner whatsoever.

        Section 5.5. SERVICING FEE. The Servicer shall be paid a fee on each
Payment Date, solely through distributions contemplated by SECTION 1.4(d), equal
to (a) at any time AFC or an Affiliate of AFC is the  Servicer,  0.50% PER ANNUM
of the average Total Outstanding Principal during the related Collection Period,
and (b) at any  time a  Person  other  than  AFC or an  Affiliate  of AFC is the
Servicer, no more than 110% of the Servicer's cost of acting as Servicer.


                                   ARTICLE VI.

                                  MISCELLANEOUS

        Section 6.1. AMENDMENTS,  ETC. No amendment or waiver of any provision
of this  Agreement  or consent to any  departure  by the  Borrower  or  Servicer
therefrom shall be effective  unless in a writing signed by the Lender,  and, in
the case of any  amendment,  by the  Borrower  and the  Servicer  and then  such
amendment,  waiver or consent shall be effective  only in the specific  instance
and for the  specific  purpose  for which  given.  No failure on the part of the
Lender  to  exercise,  and no delay in  exercising,  any right  hereunder  shall
operate as a waiver  thereof;  nor shall any single or partial  exercise  of any
right hereunder  preclude any other or further  exercise thereof or the exercise
of any other right.

                                      -17-


<PAGE>

        Section  6.2.  NOTICES,  ETC.  All  notices  and other  communications
hereunder  shall,  unless  otherwise  stated herein,  be in writing (which shall
include facsimile communication) and sent or delivered, to each party hereto, at
its address set forth under its name on the  signature  pages  hereof or at such
other address as shall be  designated  by such party in a written  notice to the
other parties hereto. Notices and communications by facsimile shall be effective
when sent (and shall be  followed by hard copy sent by first  class  mail),  and
notices and communications sent by other means shall be effective when received.

        Section  6.3.  ASSIGNABILITY.  (a) This  Agreement  and the rights and
obligations of the Lender hereunder shall be assignable, in whole or in part, by
the Lender and its  successors  and  assigns;  PROVIDED,  HOWEVER,  that if such
assignment  is to any Person who is not an Affiliate  of the Lender,  the Lender
must receive the prior written  consent of the Borrower (which consent shall not
be unreasonably  withheld) Each assignor may, in connection with the assignment,
disclose to the applicable assignee any information  relating to the Borrower or
the Receivables furnished to such assignor by or on behalf of the Borrower.

        Upon the assignment by the Lender in accordance  with this SECTION 6.3,
the  assignee  receiving  such  assignment  shall  have all of the rights of the
Lender with respect to the Transaction  Documents and the Loans (or such portion
thereof as has been assigned).

        (b)     The  Lender may  at any time grant to one or more banks or other
institutions  (each  a  "PARTICIPANT")   participating   interests  or  security
interests  in the  Loans.  In the  event of any such  grant by the  Lender  of a
participating interest to a Participant, the Lender shall remain responsible for
the  performance of its  obligations  hereunder.  The Borrower  agrees that each
Participant  shall be entitled to the benefits of SECTIONS  1.8,  1.9,  1.10 and
1.11.

        (c)     Except as provided in SECTION 5.1(d), neither the Borrower nor
the Servicer may assign its rights or delegate its obligations  hereunder or any
interest herein without the prior written consent of the Lender.

        (d)     Without  limiting  any other  rights that may be available under
applicable  law,  the rights of the Lender may be enforced  through it or by its
agents.

        Section 6.4. COSTS,  EXPENSES AND TAXES. (a) In addition to the rights
of indemnification  granted under SECTION 4.1 hereof, the Borrower agrees to pay
on demand all reasonable  costs and expenses in connection with the preparation,
execution,   delivery  and  administration   (including   periodic  auditing  of
Receivables)  of this  Agreement,  the Purchase and Sale Agreement and the other
documents and  agreements to be delivered  hereunder or in connection  herewith,
including all reasonable costs and expenses  relating to the amending,  amending
and restating,  modifying or supplementing  of this Agreement,  the Purchase and
Sale Agreement and the other documents and agreements to be delivered  hereunder
or in  connection  herewith  and the  waiving  of any  provisions  thereof,  and
including in all cases,  without limitation,  Attorney Costs for the Lender, the
Lender and their respective  Affiliates and agents with respect thereto and with
respect to advising the Lender and its  Affiliates and agents as to their rights
and remedies under this Agreement and the other

                                      -18-


<PAGE>

Transaction Documents,  and all reasonable costs and expenses, if any (including
Attorney Costs), of the Lender and its Affiliates and agents, in connection with
the enforcement of this Agreement and the other Transaction Documents.

        (b)     In addition, the Borrower shall pay on demand any and all stamp
and other taxes and fees payable in  connection  with the  execution,  delivery,
filing and recording of this  Agreement or the other  documents or agreements to
be delivered hereunder,  and agrees to save each Indemnified Party harmless from
and against  any  liabilities  with  respect to or  resulting  from any delay in
paying or omission to pay such taxes and fees.

        Section 6.5. CONFIDENTIALITY.  Unless otherwise required by applicable
law or already  known by the  general  public or the third  party to which it is
disclosed, the Borrower agrees to maintain the confidentiality of this Agreement
and the other  Transaction  Documents (and all drafts thereof) in communications
with third parties and otherwise;  PROVIDED that this Agreement may be disclosed
to (a) third parties to the extent such disclosure is made pursuant to a written
agreement of  confidentiality in form and substance  reasonably  satisfactory to
the Lender,  (b) the Borrower's legal counsel and auditors if they agree to hold
it  confidential,  or (c) American  Isuzu  Motors Inc. to the extent  reasonably
deemed  necessary by Servicer or Borrower so long as American  Isuzu Motors Inc.
agrees to hold it confidential.

        Section 6.6. GOVERNING LAW AND JURISDICTION.  (a) THIS AGREEMENT SHALL
BE  GOVERNED  BY, AND  CONSTRUED  IN  ACCORDANCE  WITH,  THE LAW OF THE STATE OF
INDIANA  (WITHOUT  GIVING  EFFECT TO THE CONFLICT OF LAWS  PRINCIPLES  THEREOF),
EXCEPT  TO THE  EXTENT  THAT THE  PERFECTION  (OR THE  EFFECT OF  PERFECTION  OR
NON-PERFECTION)  OF THE INTERESTS OF THE LENDER IN THE COLLATERAL IS GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF INDIANA.

        (b)     ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
MAY BE BROUGHT IN THE COURTS OF THE STATE OF INDIANA OR OF THE UNITED STATES FOR
THE  SOUTHERN  DISTRICT  OF  INDIANA,  AND BY  EXECUTION  AND  DELIVERY  OF THIS
AGREEMENT, EACH OF THE PARITES HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE PARTIES
HERETO  IRREVOCABLY  WAIVES,  TO  THE  MAXIMUM  EXTENT  PERMITTED  BY  LAW,  ANY
OBJECTION,  INCLUDING  ANY  OBJECTION  TO THE  LAYING  OF  VENUE OR BASED ON THE
GROUNDS  OF FORUM  NON  CONVENIENS,  WHICH IT MAY NOW OR  HEREAFTER  HAVE TO THE
BRINGING OF ANY ACTION OR  PROCEEDING  IN SUCH  JURISDICTION  IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT  RELATED  HERETO.  EACH OF THE PARTIES WAIVES PERSONAL
SERVICE OF ANY  SUMMONS,  COMPLAINT OR OTHER  PROCESS,  WHICH MAY BE MADE BY ANY
OTHER MEANS PERMITTED BY INDIANA LAW.

                                      -19-


<PAGE>

        Section 6.7.  EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which when so executed shall be deemed to
be an original and all of which when taken together shall constitute one and the
same agreement.

        Section 6.8.  SURVIVAL OF TERMINATION.  The provisions of SECTIONS 1.7,
1.8,  1.9,  1.10,  1.11,  4.1,  4.2,  6.4,  6.5,  6.6 and 6.9 shall  survive any
termination of this Agreement.

        Section  6.9.  WAIVER OF JURY  TRIAL.  EACH  PARTY  HERETO  WAIVES ITS
RESPECTIVE  RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS  CONTEMPLATED
HEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY
OF THE  PARTIES  AGAINST ANY OTHER PARTY OR  PARTIES,  WHETHER  WITH  RESPECT TO
CONTRACT  CLAIMS,  TORT CLAIMS OR OTHERWISE.  EACH OF THE PARTIES  HERETO AGREES
THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING,  EACH OF THE PARTIES HERETO FURTHER AGREES
THAT ITS  RESPECTIVE  RIGHT TO A TRIAL BY JURY IS  WAIVED BY  OPERATION  OF THIS
SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE
OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY
PROVISION  HEREOF.  THIS  WAIVER  SHALL  APPLY  TO  ANY  SUBSEQUENT  AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.

        Section 6.10.  ENTIRE  AGREEMENT.  This Agreement  embodies the entire
agreement and understanding  between the parties hereto and supersedes all prior
or  contemporaneous  agreements and  understandings  of such Persons,  verbal or
written, relating to the subject matter hereof and thereof, except for any prior
arrangements  made  with  respect  to the  payment  by  the  Lender  of (or  any
indemnification  for) any fees,  costs or expenses payable to or incurred (or to
be incurred) by or on behalf of the Borrower, the Servicer and the Lender.

        Section  6.11.  HEADINGS.  The captions and  headings of this Agreement
and in any  Exhibit  hereto  are for  convenience  reference  only and shall not
affect the interpretation hereof or thereof.

                                      -20-


<PAGE>

                                       
         IN WITNESS  WHEREOF,  the  parties  have caused  this  Agreement  to be
executed by their respective officers thereunto duly authorized,  as of the date
first above written.


                                     AFC AIM CORPORATION, as Borrower


                                     By:   /s/ Curtis L. Phillips
                                        ---------------------------------
                                           Name: Curtis L. Phillips
                                           Title: EVP, CFO, Treas

                                           310 East 96th Street, Suite 320
                                           Indianapolis, Indiana 46240

                                           Attention: Curtis Phillips
                                           Telephone: (317) 815-9751
                                           Facsimile: (317) 815-9650



                                     AUTOMOTIVE FINANCE CORPORATION, as Servicer


                                     By:   /s/ Curtis L. Phillips
                                        ---------------------------------
                                           Name: Curtis L. Phillips
                                           Title: EVP,CFO, Treas

                                           310 East 96th Street, Suite 300
                                           Indianapolis, Indiana 46240

                                           Attention: Curtis L. Phillips
                                           Telephone: (317) 815-9751
                                           Facsimile: (317) 815-9650


                                      S-1           Loan and Servicing Agreement


<PAGE>



STATE OF Indiana
         ------------

COUNTY OF Marion
          -----------

         Before me the  undersigned,  a Notary Public in and for the said County
and State, personally appeared the above-referred officer of AFC AIM Corporation
who  acknowledged  the  execution  of the  power  of  attorney  granted  in this
Agreement this 22 of December, 2000.



                                                        
                                                        Notary Public-State of
                                                        Indiana My Commission
                                                      Expires: November 11, 2007
/s/ Gina J. Cook              My Commission Expires:  --------------------------
-------------------------          
(Notary Public Signature)


Gina J. Cook                  My County of Residence: Boone
-------------------------                             --------------------------
(Printed Name)



<PAGE>
                                            BANK OF MONTREAL, as Lender


                                            By:          /s/ Kanu Modi
                                               ---------------------------------
                                                     Name: Kanu Modi
                                                     Title: Director


                                                     BANK OF MONTREAL
                                                     115 S.  LaSalle Street
                                                     Floor 12W
                                                     Chicago, Illinois 60603
                                                     Attention: Kanu Modi
                                                     Telephone:  (312) 750-3891
                                                     Facsimile:  (312) 750-6057




                                      S-2           Loan and Servicing Agreement




<PAGE>


                                    EXHIBIT I

                                   DEFINITIONS


         As used in the Agreement (including its Exhibits),  the following terms
shall have the following  meanings  (such  meanings to be equally  applicable to
both the  singular  and plural  forms of the terms  defined).  Unless  otherwise
indicated,  all Section,  Annex, Exhibit and Schedule references in this Exhibit
are to Sections of and Annexes, Exhibits and Schedules to the Agreement.

                  "ADESA" means ADESA Corporation, an Indiana corporation.

                  "ADJUSTMENT AMOUNT" has the meaning set forth in SECTION
 1.2(b).

                  "ADVANCE"  has the  meaning  set  forth  in  Section  1 of the
Promissory Note and Security Agreement.

                  "ADVERSE  CLAIM"  means a lien,  security  interest  or  other
charge or encumbrance,  or any other type of preferential arrangement,  it being
understood that a lien, security interest or other charge or encumbrance, or any
other  type of  preferential  arrangement,  in favor  of the  Lender  shall  not
constitute an Adverse Claim.

                  "AFC"  has the  meaning  set  forth  in the  Preamble  to this
Agreement.

                   "AFC  FINANCED  AMOUNT"  means,  with respect to any Financed
Vehicle,  the amount of any Advance made by AFC to finance such  vehicle,  MINUS
the Lender Financed Amount with respect to such Financed Vehicle.

                  "AFFECTED PERSON" has the meaning set forth in SECTION 1.7.

                  "AFFILIATE"  means,  as to any Person,  any other Person that,
directly or  indirectly,  is in control of, is  controlled by or is under common
control with such Person or is a director or officer of such Person.

                  "APPLICABLE  MARGIN"  has the  meaning  set  forth  in the Fee
Letter.

                  "ALLETE" means Minnesota Power, Inc., a Minnesota corporation
doing business as "Allete, Inc."

                  "ATTORNEY COSTS" means and includes all fees and disbursements
of any law firm or other external  counsel,  and all  disbursements  of internal
counsel.

                                      I-1

<PAGE>


                  "BAILMENT   AGREEMENT"  means  each  Bailment   Agreement  and
Acknowledgment  of Bailor's  Security  Interest  between  AFC, the Obligor and a
bailee,  in substantially  the form attached to the Promissory Note and Security
Agreement  as Exhibit D, as the same may be amended,  supplemented  or otherwise
modified from time to time in accordance herewith.

                  "BANK  RATE" for any  Interest  Period  for any Loan  means an
interest rate PER ANNUM equal to the  Applicable  Margin above the Cost of Funds
for such Interest Period; provided, however, that in the case of

                           (i)     any Interest  Period on or prior to the first
                  day on which the Lender determines that the introduction of or
                  any  change  in  or  in  the  interpretation  of  any  law  or
                  regulation  makes it  unlawful,  or any central  bank or other
                  Governmental  Authority  asserts that it is unlawful,  for the
                  Lender to fund any Loan  based on the Cost of  Funds,  and the
                  Lender  shall  not  have  subsequently  determined  that  such
                  circumstances no longer exist,

                           (ii)    any  Interest  Period as to which (i) the
                  Lender  does not receive  notice,  by no later than 12:00 noon
                  (Chicago  time) on the first day of such Interest  Period that
                  the  Borrower  desires  that  such  Loan be funded at the Bank
                  Rate, or

                           (iii)   any Loan in an amount less than $1,000,000,

the "BANK RATE" for each such  Interest  Period  shall be an  interest  rate per
annum  equal to the Base  Rate in effect  on each day of such  Interest  Period.
Notwithstanding the foregoing, the "BANK RATE" for each day in a Interest Period
occurring  during the  continuance  of an Event of Default  shall be an interest
rate equal to 2% PER ANNUM above the Base Rate in effect on such day.

                  "BANKRUPTCY CODE" means the United States  Bankruptcy Reform
Act of 1978 (11 U.S.C. Section 101, ET SEQ.), as amended from time to time.

                  "BASE RATE" means for any day, a fluctuating interest rate per
annum as shall be in effect from time to time,  which rate shall be at all times
equal to the rate of  interest  most  recently  announced  by  Harris  Trust and
Savings Bank in Chicago, Illinois as its prime commercial rate for United States
loans made in the United States.

                  "BATCH" has the meaning set forth in SECTION 1.4(c)(iii).

                  "BLACK  BOOK"  means  the  Official  Used  Truck and Van Guide
Semi-monthly  Publication,  SouthEast  Edition,  published by Hearst  Publishing
Company, or any successor publication.

                  "BLACK BOOK VALUE" of any vehicle or vehicle  model means,  as
of any  date of  determination,  the  "average"  vehicle  book  value  (with  no
additions  or  deductions  for  equipment or mileage) of such vehicle or vehicle
model as reported in the Black Book in effect on such date of


                                      I-2


<PAGE>

determination.  The "Black Book Value" of any  Financed  Vehicle  Pool as of any
date of  determination  shall be  calculated as the sum of the Black Book Values
for all Financed Vehicles included in such Financed Vehicle Pool on such date of
determination.

                  "BORROWER"  has the meaning  set forth in the  preamble to the
Agreement.

                  "BORROWING BASE" has the meaning set forth in SECTION 1.2(b).

                  "BORROWING NOTICE" shall have the meaning set forth in SECTION
1.2(a).

                  "BUSINESS  DAY" means any day on which (i) both (A) the Lender
at its  branch  office  in  Chicago,  Illinois  is  open  for  business  and (B)
commercial  banks in New York City are not  authorized  or required to be closed
for  business,  and (ii) if this  definition  of  "Business  Day" is utilized in
connection  with the Cost of  Funds,  dealings  are  carried  out in the  London
interbank market.

                  "CASUALTY" means,  with respect to any Financed Vehicle,  that
the  Servicer has actual  knowledge  that such  Financed  Vehicle (a) shall have
suffered damage or destruction resulting in an insurance settlement on the basis
of an actual,  constructive  or compromised  total loss, (b) shall have suffered
destruction or damage beyond repair,  (c) shall have suffered  damage that makes
repairs uneconomic, or (d) shall have suffered theft, loss or disappearance.

                  "CHANGE IN CONTROL" means

                  (a)      Allete, Inc. shall fail to own directly or indirectly
             at  least  50% of the  outstanding  voting  stock  of ADESA; or

                  (b)      AFC shall fail to own, free and clear of all liens or
             other encumbrances,  100% of the outstanding shares of voting stock
             of the Borrower; or

                  (c)      Neither ADESA  nor Allete   shall  own,  directly  or
             indirectly,  free and clear of all liens or other encumbrances,  at
             least 80% of the  outstanding  shares of voting  stock of AFC, on a
             fully diluted basis.

                  "CLOSING DATE" means December 22, 2000.

                  "COLLATERAL" means (i) each Receivable, (ii) all of Borrower's
right,  title and  interest  under the Isuzu  Loan  Documents;  (iii) all of the
Borrower's  right,  title and interest in all payments of  principal,  interest,
administrative  fees or other  amounts  due in respect  of any  Advance or other
disbursement  under  the  Promissory  Note  and  Security  Agreement,  (iv)  the
Collection Account and any other account  established  hereunder for the benefit
of the Lender, all funds on deposit therein,  all investments  therein,  and all
certificates  and  instruments,  if  any,  from  time to  time  evidencing  such
accounts,  and funds on deposit and all  investments  made with such funds,  all
claims thereunder or in connection therewith, and interest,  dividends,  moneys,
instruments,   securities  and  other

                                      I-3


<PAGE>

property  from time to time  received,  receivable or otherwise  distributed  in
respect of any or all of the foregoing;  (vi) all of Borrower's right, title and
interest  under the Purchase  and Sale  Agreement;  (vii) all Related  Security;
(viii) all books and records (including computer tapes and disks) related to the
foregoing;  and (ix) all  Collections  and other  proceeds of any and all of the
foregoing.

                  "COLLECTION  ACCOUNT" means that certain bank account numbered
160-739-9 maintained at Harris Trust and Savings Bank in Chicago, Illinois which
is (i) identified as the "AFC AIM CORPORATION  COLLECTION  ACCOUNT," (ii) in the
Borrower's  name,  (iii)  pledged,  on a  first-priority  basis,  to the  Lender
pursuant  to  SECTION  1.2(d),  and  (iv)  governed  by the  Collection  Account
Agreement.

                  "COLLECTION ACCOUNT AGREEMENT" means the letter agreement,  in
form and substance acceptable to the Lender, among the Borrower,  the Lender and
the Collection Account Bank, as the same may be amended,  supplemented,  amended
and restated,  or otherwise  modified  from time to time in accordance  with the
Agreement.

                  "COLLECTION  ACCOUNT BANK" means the bank where the Collection
Account is maintained.

                  "COLLECTION PERIOD" means, (i) initially, the period beginning
on the  Closing  Date and ending on the date which is one day prior to the first
Payment Date, and (ii) thereafter,  the date immediately  following the last day
of the preceding Collection Period and ending on the date which is one day prior
to the next succeeding Payment Date.

                  "COLLECTIONS"  means, with respect to any Receivable,  (a) all
funds which are received by the Borrower,  AFC or the Servicer in payment of any
amounts  owed in  respect of such  Receivable  (including,  without  limitation,
principal payments, finance charges, interest and all other charges), or applied
(or to be applied)  to amounts  owed in respect of such  Receivable  (including,
without  limitation,  insurance  payments  and net proceeds of the sale or other
disposition of Financed  Vehicles or other collateral or property of the Obligor
or any other  Person  directly  or  indirectly  liable  for the  payment of such
Receivable  applied (or to be applied)  thereto),  (b) all Collections deemed to
have been received pursuant to SECTION 1.4(g) and (c) all other proceeds of such
Receivable, any Related Security and any other Collateral.

                  "COMPANY"  has the  meaning  set forth in the  preamble to the
Purchase and Sale Agreement.

                  "COMPANY NOTE" has the meaning set forth in Section 3.2 of the
Purchase and Sale Agreement.

                  "CONTRIBUTED  PORTION"  has the  meaning  set forth in Section
1.1(a) of the Purchase and Sale Agreement.

                                      I-4


<PAGE>

                  "COST OF FUNDS" means,  (i) for any Loan  requested to be made
by the Borrower in a Borrowing  Notice  delivered to the Lender two days or more
before the proposed Financing Date, the rate of interest per annum determined by
the Lender to be the arithmetic mean of the rates of interest per annum notified
to  the  Lender  as the  rate  of  interest  at  which  dollar  deposits  in the
approximate  amount  of the Loan or  portion  of the Loan  associated  with such
Interest Period would be offered to major banks in the London  interbank  market
at their request at or about 11:00 a.m. (London time) on the second Business Day
prior to the  commencement of the Interest Period at which interest is to accrue
on such Loan based on the Cost of Funds,  and (ii) for any Loan  requested to be
made by the Borrower in a Borrowing Notice delivered to the Lender less than two
days  before  the  proposed  Financing  Date,  the rate of  interest  per  annum
determined  by the Lender to be the rate of interest  per annum  notified to the
Lender as the rate of  interest  at which  dollar  deposits  in the  approximate
amount of the Loan or portion of the Loan  associated  with such Interest Period
would be offered to major banks in the  interbank  wholesale  funding  market on
such date of request.

                  "CREDIT ACCOUNT" has the meaning set forth in SECTION 1.4(h).

                  "CREDIT ACCOUNT  ADJUSTMENT  AMOUNT" has the meaning set forth
in SECTION 1.2(b).

                  "CREDIT  ACCOUNT  BALANCE"  means, on any date, the balance of
the Credit Account as determined in accordance with SECTION 1.4(h).

                  "CURTAILMENT  DATE" has the  meaning set forth in Section 1 of
the Promissory Note and Security Agreement.

                  "DEBT"  means  (i)  indebtedness  for  borrowed  money,   (ii)
obligations evidenced by bonds, debentures,  notes or other similar instruments,
(iii)  obligations  to pay the deferred  purchase price of property or services,
(iv) the outstanding balance of any non-recourse transaction, (v) obligations as
lessee  under  leases  which  shall have been or should be, in  accordance  with
generally  accepted  accounting  principles,  recorded as capital  leases,  (vi)
obligations  under direct or indirect  guaranties in respect of, and obligations
(contingent  or  otherwise)  to purchase or otherwise  acquire,  or otherwise to
assure a creditor  against loss in respect of,  indebtedness  or  obligations of
others  of kinds  referred  to in  CLAUSES  (i)  through  (v)  above,  and (vii)
liabilities in respect of unfunded  vested benefits under plans covered by Title
IV of ERISA.

                  "DIVIDENDS"  means any  dividend or  distribution  (in cash or
obligations)  on any  shares of any  class of  Borrower's  capital  stock or any
warrants,  options  or other  rights  with  respect  to  shares  of any class of
Borrower's capital stock.

                  "ELIGIBLE RECEIVABLE" means, at any time, any Receivable:

                  (a) which was  originated by AFC in accordance  with the terms
             and  conditions  of the Isuzu  Loan  Documents  and was sold to the
             Borrower pursuant to, and in compliance with, the Purchase and Sale
             Agreement;

                                      I-5


<PAGE>

                  (b)      in  which the Lender has a first priority,  perfected
             security  interest  and that is  either  a  general  intangible  or
             chattel   paper  as  defined  in  the  UCC  as  in  effect  in  the
             jurisdiction that governs the perfection of such security interest;

                  (c)      in which Borrower has a first priority, perfected
             security interest in the related Financed Vehicles;

                  (d)      with regard to which the warranty of Borrower in
             PARAGRAPH A.(h) of EXHIBIT III is true and correct;

                  (g)      the sale of  which pursuant to the Purchase and  Sale
             Agreement,  and  granting  of a security  interest  in the  related
             Collateral pursuant to the Agreement, do not contravene or conflict
             with any law,  or require  the  consent of the Obligor or any other
             Person;

                  (h)      as to which the Isuzu Loan Documents been duly
             authorized  by the  parties  thereto and that,  together  with such
             Receivable,  is in full force and effect and constitutes the legal,
             valid and binding obligation of the Obligor enforceable against the
             Obligor in accordance with its terms except as  enforceability  may
             be  limited by  bankruptcy,  insolvency,  reorganization,  or other
             similar  laws  affecting  the  enforcement  of  creditors'   rights
             generally  and by  general  principles  of  equity,  regardless  of
             whether such enforceability is considered in a proceeding in equity
             or at law;

                  (j)      which,  together with the Isuzu Loan  Documents, does
             not  contravene  in  any  material   respect  any  laws,  rules  or
             regulations  applicable  thereto  (including,  without  limitation,
             laws,  rules and regulations  relating to usury,  truth in lending,
             fair  credit   billing,   fair  credit   reporting,   equal  credit
             opportunity, fair debt collection practices and privacy);

                  (k)      which arises from the making of a loan to finance one
             or more Eligible Vehicles; and

                  (n)      which is guaranteed by the Obligor pursuant to a
             guaranty that runs directly to the Lender.

                  "ELIGIBLE VEHICLE" mean a Financed Vehicle:

                  (a)      which is an Eligible Vehicle Model;

                  (b)      which satisfies all conditions and requirements of
             the Isuzu Loan Documents,  including,  without limitation,  Section
             1.15 of the Promissory Note and Security Agreement;

                  (c)      with respect to which AFC has not  financed  more
             than 75% of the black book value (as determined in accordance  with
             Section 1.1 of the Promissory Note and Security  Agreement) of such
             Vehicle on the date of the related Advance;

                                      I-6


<PAGE>

                  (d)      which  is covered  by  an  umbrella   liability   and
             comprehensive   insurance   policy  or  policies   satisfying   all
             conditions and requirements of the Isuzu Loan Documents, including,
             without limitation, Section 5.5 of the Promissory Note and Security
             Agreement; and

                  (e)      prior to the financing of which,  the Servicer  shall
             have  examined  the  title or MSO,  as the  case  may be,  for such
             Vehicle and confirmed that such title or MSO corresponds to the VIN
             number of such Vehicle, and that such title or MSO is authentic and
             has been properly assigned to the Obligor.

                  "ELIGIBLE  VEHICLE  MODEL" means any one of the Isuzu Rodeo LS
4x2, the Isuzu Rodeo LS 4x4 or the Isuzu Trooper S 4x4.

                  "ERISA" means the Employee  Retirement  Income Security Act of
1974, as amended from time to time, and any successor statute of similar import,
together with the regulations thereunder, in each case as in effect from time to
time. References to sections of ERISA also refer to any successor sections.

                  "ERISA  AFFILIATE"  shall mean with respect to any Person,  at
any time, each trade or business  (whether or not  incorporated)  that would, at
the time,  be  treated  together  with such  Person as a single  employer  under
Section 4001 of ERISA or Sections 414(b), (c), (m) or (o) of the Code.

                  "EVENT OF DEFAULT" has the meaning specified in EXHIBIT V.

                  "EXCESS  SALES  PROCEEDS" has the meaning set forth in SECTION
1.4(c)(iii).

                  "FACILITY  LIMIT"  means  $60,000,000,  as such  amount may be
adjusted pursuant to SECTION 2.5.

                  "FEDERAL  RESERVE  BOARD"  means the Board of Governors of the
Federal  Reserve  System,  or any  entity  succeeding  to  any of its  principal
functions.

                  "FEES"  means  the  fees  payable  under  the  Fee  Letter  in
accordance with the terms, and subject to the conditions, set forth therein.

                  "FEE LETTER" has the meaning set forth in SECTION 1.5.

                  "FINAL PAYOUT DATE" means the date  following the  Termination
Date on which no Loan under the  Agreement  shall be  outstanding  and all other
amounts  payable  by the  Borrower  or the  Servicer  to the Lender or any other
Affected Person under the Transaction Documents shall have been paid in full.

                  "FINANCED  VEHICLE" means each Vehicle identified from time to
time  on a  Bailed  Property  Schedule  (as  set  forth  in  Section  2.2 of the
Promissory  Note and  Security  Agreement)  and

                                      I-7


<PAGE>

all other  Vehicles  acquired or funded,  or purported to be acquired or funded,
with the proceeds of Loans.

                  "FINANCED  VEHICLE  POOL" means all of the  Financed  Vehicles
financed on a particular Financing Date with the proceeds of a single Loan.

                  "FINANCING  DATE" means,  with respect to any Financed Vehicle
Pool, the date on which the Loan to finance such Financed Vehicle Pool is made.

                  "GAAP" means,  generally  accepted  accounting  principles and
practices in the United States, consistently applied.

                  "GOVERNMENTAL  AUTHORITY" means any nation or government,  any
state or other  political  subdivision  thereof,  any  central  bank (or similar
monetary  or  regulatory  authority)  thereof,  any  body or  entity  exercising
executive,  legislative,  judicial, regulatory or administrative functions of or
pertaining to government, including without limitation any court, and any Person
owned or controlled,  through stock or capital ownership or otherwise, by any of
the foregoing.

                  "INDEMNIFIED  AMOUNTS"  has the  meaning  set forth in SECTION
4.1.

                  "INDEMNIFIED PARTY" has the meaning set forth in SECTION 4.1.

                  "INSOLVENCY   PROCEEDING"   means  (a)  any  case,  action  or
proceeding  before  any  court  or  other  Governmental  Authority  relating  to
bankruptcy, reorganization,  insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors,  or (b) any general  assignment for the benefit
of  creditors,  composition,  marshalling  of assets  for  creditors,  or other,
similar  arrangement  in respect of its creditors  generally or any  substantial
portion  of its  creditors;  in each  case  (a) and (b)  undertaken  under  U.S.
Federal, state or foreign law, including the Bankruptcy Code.

                  "INTEREST  PERIOD" means,  with respect to each Loan, a period
during  which  interest  on such Loan or a portion of such Loan is accruing at a
particular rate of interest,  as determined by the Lender in accordance with the
terms of this Agreement.

                  "ISUZU EVENT OF DEFAULT"  means any of the "Events of Default"
set forth in Section 7.0 of the Promissory Note and Security Agreement.

                  "ISUZU  GUARANTY" means the Guaranty of the Obligor,  dated as
of December 22, 2000, in favor of AFC.

                  "ISUZU LOAN DOCUMENTS"  means the Promissory Note and Security
Agreement,  the  Bailment  Agreements,  the Isuzu  Guaranty,  the Isuzu Power of
Attorney,  the  Subordination  Agreement and each other  agreement or instrument
executed pursuant to or in connection with any of the foregoing, in each case as
amended, supplemented or otherwise modified in accordance with the terms of this
Agreement.

                                      I-8


<PAGE>

                  "ISUZU POWER OF ATTORNEY" means the power of attorney executed
by Isuzu  in  favor  of AFC,  in  substantially  the  form of  Exhibit  B to the
Promissory Note and Security Agreement.

                  "LENDER"  has the  meaning  set forth in the  preamble  to the
Agreement.

                  "LENDER FINANCED  AMOUNT" means,  with respect to any Financed
Vehicle,  an amount which is equal to the product of (i) the Borrowing Base with
respect to the Financed Vehicle Pool in which such Financed Vehicle was included
as of the Financing  Date for such Financed  Vehicle Pool,  and (ii) a fraction,
the  numerator of which is the Black Book Value of such  Financed  Vehicle as of
such Financing  Date, and the  denominator of which is the aggregate  Black Book
Value of all Financed Vehicle in such Financed Vehicle Pool as of such Financing
Date.

                  "LENDER'S  ACCOUNT" means the special account  (account number
124-856-6)  of the Lender  maintained  at the office of Harris Trust and Savings
Bank in  Chicago,  Illinois  (ABA  #071-000-288)  and  identified  as  "Bank  of
Montreal, Attention: Client Services, Ref.: AFC" or such other account as may be
so designated in writing by the Lender to the Borrower and the Servicer.

                  "LICENSED  SOFTWARE"  has the  meaning  set  forth in  SECTION
5.1(b).

                  "LOAN" has the meaning set forth in SECTION 1.1.

                  "MANDATORY  PRINCIPAL  REPAYMENT  AMOUNT"  has the meaning set
forth in SECTION 1.4(d).

                  "MATERIAL  ADVERSE EFFECT" means, with respect to any event or
circumstance, a material adverse effect on:

                  (a)      the business, operations, property or financial
             condition of the Borrower or the Servicer;

                  (b)      the ability of the Borrower or the  Servicer to
             perform  its   obligations   under  this  Agreement  or  any  other
             Transaction  Document to which it is a party or the  performance of
             any such obligations;

                  (c)      the validity or enforceability of this Agreement or
             any other Transaction Document;

                  (d)      the status,  existence,  perfection,  priority or
             enforceability of the Lender's security interest in the Collateral;
             or

                  (e)      the collectibility of the Receivables.

                                      I-9


<PAGE>

                  "MATURITY  DATE" means five (5) Business  Days  following  the
Curtailment Date of the Promissory Note and Security Agreement,  as the same may
be extended from time to time pursuant thereto.

                  "MAXIMUM BLACK BOOK VALUE" means, with respect to any Eligible
Vehicle  Model,  (i) on the Closing Date and prior to the  publication  of a new
edition of the Black Book  following the Closing  Date,  the Black Book Value of
such  Eligible  Vehicle  Model as  reported  in the Black  Book in effect on the
Closing  Date,  and (ii) on any later date of  determination,  the highest Black
Book Value for such Eligible Vehicle Model reported in any of the Black Books in
effect between the Closing Date and such later date of determination.

                  "NOTE" has the meaning set forth in SECTION 2.1.

                  "OBLIGOR"  means  American  Isuzu Motors Inc. as the borrower
under the Isuzu Loan  Documents or its  successors and assigns in such capacity.

                  "ORIGINATOR"  has the meaning set forth in the preamble to the
Purchase and Sale Agreement.

                  "OUTSTANDING BALANCE" has the meaning set forth in Section 2.1
of the Purchase and Sale Agreement.

                  "PARTICIPANT" has the meaning set forth in SECTION 6.3(b).

                  "PAYMENT  DATE" means the 10th  calendar day of each month or,
if such day is not a Business Day, the immediately preceding Business Day.

                  "PERMITTED INVESTMENTS" means (i) overnight obligations of the
United  States of America,  (ii) demand and time  deposits  or  certificates  of
deposit that are not  represented by  instruments,  have a maturity of not later
than the next succeeding  Payment Date and are issued by the Collection  Account
Bank or Bank of  Montreal  and  (iii)  commercial  paper  rated  at the  time of
investment not less than A-1 by S&P and P-1 by Moody's; PROVIDED,  HOWEVER, that
the Lender may,  from time to time,  upon three  Business  Days'  prior  written
notice to Servicer,  remove from the scope of "Permitted  Investments"  any such
obligations,  certificates  of deposit  or  commercial  paper and  specify to be
within such scope, other investments.

                  "PERSON"   means  an  individual,   partnership,   corporation
(including  a  business  trust),  joint  stock  company,  trust,  unincorporated
association,  joint venture,  limited  liability  company or other entity,  or a
government or any political subdivision or agency thereof.

                  "PORTFOLIO  CERTIFICATE" means a certificate  substantially in
the form of EXHIBIT VI to the Agreement.

                                      I-10


<PAGE>

                  "PROMISSORY NOTE AND SECURITY  AGREEMENT" means the Promissory
Note and Security Agreement,  dated as of December 22, 2000, between AFC and the
Obligor,  as the same may be amended,  supplemented  or otherwise  modified from
time to time in accordance herewith.

                  "PURCHASE  AND SALE  AGREEMENT"  means the  Purchase  and Sale
Agreement,  dated as of the date hereof,  between AFC and the  Borrower,  as the
same may be modified,  supplemented,  amended and amended and restated from time
to time in accordance with the Transaction Documents.

                  "PURCHASE  AND SALE  INDEMNIFIED  AMOUNTS" has the meaning set
forth in Section 9.1 of the Purchase and Sale Agreement.

                  "PURCHASE  AND SALE  INDEMNIFIED  PARTY" has the  meaning  set
forth in Section 9.1 of the Purchase and Sale Agreement.

                  "PURCHASE AND SALE TERMINATION DATE" has the meaning set forth
in Section 1.4 of the Purchase and Sale Agreement.

                  "PURCHASE  AND SALE  TERMINATION  EVENT" has the  meaning  set
forth in Section 8.1 of the Purchase and Sale Agreement.

                  "PURCHASE  FACILITY"  has the  meaning  set  forth in  Section
1.1(e) of the Purchase and Sale Agreement.

                  "PURCHASE  PRICE" has the  meaning set forth in Section 2.1 of
the Purchase and Sale Agreement.

                  "RECEIVABLE"  means any  right to  payment  from the  Obligor,
whether  constituting  an  account,  chattel  paper,  instrument  or  a  general
intangible, arising from the provision of financing and other services by AFC to
the Obligor with respect to a particular  Financed  Vehicle Pool pursuant to the
Isuzu Loan Documents,  and that is denominated and payable only in United States
dollars,  and includes the right to payment of any  interest,  finance  charges,
administrative fees and other obligations of the Obligor with respect thereto.

                  "RELATED  RIGHTS" has the meaning set forth in Section  1.1(h)
of the Purchase and Sale Agreement.

                  "RELATED SECURITY" means, with respect to any Receivable:

                  (a)      all right, title and interest in and to the Isuzu
             Loan Documents;

                  (b) all  security  interests  or liens  and  property  subject
             thereto  from time to time  purporting  to secure  payment  of such
             Receivable, whether pursuant to the Isuzu Loan

                                      I-11


<PAGE>

Documents or otherwise, including all Vehicles securing or purporting to secure
such payment;

                  (c)      all UCC financing statements covering any collateral
             securing payment of such Receivable;

                  (d)      all other  guarantees and other agreements or
             arrangements of whatever  character from time to time supporting or
             securing  payment  of  such  Receivable  whether  pursuant  to  the
             Contract related to such Receivable or otherwise;

                  (e)      all rights in any power of attorney delivered by the
             Obligor; and

                  (f) all rights and claims of the Borrower with respect to such
             Receivable,  pursuant to the  Purchase  and Sale  Agreement  or any
             other Transaction Document.

                  "RESTRICTED  PAYMENTS"  has the meaning set forth in PARAGRAPH
(n)(i) of EXHIBIT IV of the Agreement.

                  "SERVICER" has the meaning set forth in the preamble.

                  "SERVICING FEE" means the fee referred to in SECTION 5.5.

                  "SOLVENT"  has the  meaning  set forth in  Section  1.6 of the
                  Purchase and Sale  Agreement.  

                  "SUB-SERVICER"  has the meaning set forth in SECTION 5.1(d).

                  "SUBORDINATION  AGREEMENT" means the Intercreditor  Agreement,
dated as of December 22, 2000, among AFC, American Isuzu Motors Inc. and The CIT
Group/Sales  Financing,  Inc.,  as the  same  may be  amended,  supplemented  or
otherwise modified in accordance with the provisions hereof.

                  "TANGIBLE  NET WORTH" means,  with respect to any Person,  the
net worth of such Person  calculated in accordance  with GAAP after  subtracting
therefrom the aggregate amount of such Person's  intangible  assets,  including,
without  limitation,   goodwill,  franchises,   licenses,  patents,  trademarks,
tradenames, copyrights, service marks and brand names and capitalized software.

                  "TERMINATION  DATE" means the earliest of (i) the Payment Date
on which the Borrower  elects to make a prepayment of principal in full pursuant
to  SECTION  2.3(a),  (ii) the  Maturity  Date,  and (iii)  the date  determined
pursuant to SECTION 3.2.

                  "TOTAL OUTSTANDING  PRINCIPAL" at any time means the aggregate
outstanding principal amount of all Loans at such time.

                                      I-12


<PAGE>

                  "TRANSACTION DOCUMENTS" means the Agreement,  the Purchase and
Sale Agreement,  the Collection Account Agreement, the Isuzu Loan Documents, and
all other certificates, instruments, UCC financing statements, reports, notices,
agreements and documents  executed or delivered  under or in connection with any
of the  foregoing,  in each  case as the same may be  amended,  supplemented  or
otherwise modified from time to time in accordance with the Agreement.

                  "TRIGGER EVENT" has the meaning set forth in SECTION 1.2(b).

                  "UCC" means the Uniform  Commercial  Code as from time to time
in effect in the applicable jurisdiction.

                  "UNMATURED  EVENT OF DEFAULT"  means an event which,  with the
giving  of  notice  or lapse of time,  or  both,  would  constitute  an Event of
Default.

                  "VEHICLE"  has the  meaning  set  forth  in  Section  1 of the
Promissory Note and Security Agreement.

         OTHER TERMS.  Any other  capitalized  terms used herein but not defined
herein  shall have the  meanings  assigned to such term in the Purchase and Sale
Agreement,  or, if not defined  therein,  in the  Promissory  Note and  Security
Agreement  or  the  other  Isuzu  Loan  Documents.   All  accounting  terms  not
specifically  defined  herein shall be construed in  accordance  with  generally
accepted  accounting  principles.  All terms used in Article 9 of the UCC in the
State of  Indiana,  and not  specifically  defined  herein,  are used  herein as
defined in such  Article 9. Unless the context  otherwise  requires,  "or" means
"and/or,"  and  "including"   (and  with  correlative   meaning   "include"  and
"includes")  means including  without limiting the generality of any description
preceding such term.

                                      I-13

<PAGE>


                                   EXHIBIT II

                          CONDITIONS PRECEDENT TO LOANS


                  1.       CONDITIONS  PRECEDENT  TO INITIAL  LOAN.  The initial
Loan under the Agreement is subject to the conditions  precedent that the Lender
shall have  received on or before the date of such Loan the  following,  each in
form and substance (including the date thereof) satisfactory to the Lender:

                  (a)      A counterpart of this Agreement and the other
Transaction Documents duly executed by the parties thereto.

                  (b)      Certified  copies of (i) the resolutions of the Board
of  Directors  of  each  of the  Borrower  and AFC  authorizing  the  execution,
delivery, and performance by the Borrower and AFC of the Agreement and the other
Transaction  Documents,  (ii) all documents evidencing other necessary corporate
action and governmental approvals, if any, with respect to the Agreement and the
other Transaction  Documents and (iii) the articles of incorporation and by-laws
of the Borrower and AFC.

                  (c)      A certificate of the Secretary or Assistant Secretary
of the Borrower and AFC certifying the names and true signatures of the officers
of the  Borrower  and  AFC  authorized  to sign  the  Agreement  and  the  other
Transaction  Documents.  Until  the  Lender  receives  a  subsequent  incumbency
certificate from the Borrower and AFC in form and substance  satisfactory to the
Lender,  the  Lender  shall be  entitled  to rely on the last  such  certificate
delivered to it by the Borrower and AFC, as applicable.

                  (d)      Executed  financing  statements,  in proper form for
filing under the UCC of all jurisdictions  that the Lender may deem necessary or
desirable  in order to perfect  its  security  interest  in the  Collateral,  as
contemplated by the Agreement and other Transaction Documents.

                  (e)      Executed financing statements, if any, necessary to
release all security  interests and other rights of any Person in the Collateral
previously granted by the Borrower or AFC.

                  (f)      Completed UCC requests for information,  dated on or
before the date of such initial Loan, listing the financing  statements referred
to in SUBSECTION (e) above and all other effective financing statements filed in
the jurisdictions  referred to in SUBSECTION (e) above that name the Borrower or
AFC as debtor,  together with copies of such other financing statements (none of
which  shall cover any item of  Collateral),  and similar  search  reports  with
respect  to  federal  tax  liens  and  liens  of the  Pension  Benefit  Guaranty
Corporation  in such  jurisdictions  as the Lender may request,  showing no such
liens on any of the Collateral.

                  (g)      the Note, duly executed by the Borrower.


                                      II-1

<PAGE>

                  (h)      Executed  copies of the Collection Account  Agreement
with the Collection Account Bank, and an undated executed deposit account notice
in connection therewith.

                  (i)      Favorable  opinions of Joel Garcia,  Esq.,  in-house
counsel for the Borrower and AFC, as to corporate  and such other matters as the
Lender may reasonably request.

                  (j)      Favorable opinions of Ice Miller, special counsel for
the Borrower and AFC, as to enforceability  and such other matters as the Lender
may reasonably request.

                  (k)      Favorable opinions of Ice Miller, special counsel for
the Borrower and AFC, as to bankruptcy matters.

                  (l)      Favorable  opinions  of  Sheppard,  Mullin, Richter &
Hampton, special counsel for the Obligor, as to perfection matters.

                  (m)      A schedule listing all Financed Vehicles financed by
the Lender on the Closing Date.

                  (n)      Evidence (i) of the  execution  and delivery by each
of the  parties  thereto  of the  Purchase  and Sale  Agreement,  the Isuzu Loan
Documents and all documents,  agreements and  instruments  contemplated  thereby
(which evidence shall include copies,  either original or facsimile,  of each of
such documents,  instruments and  agreements),  (ii) that each of the conditions
precedent to the execution  and delivery of the Purchase and Sale  Agreement and
the Isuzu Loan Documents have been satisfied to the Lender's  satisfaction,  and
(iii) that the initial  Advances  under the Isuzu Loan Documents and the initial
purchases under the Purchase and Sale Agreement have been made.

                  (o)      Evidence  of payment by the  Borrower of all  accrued
and unpaid fees  (including  those  contemplated  by the Fee Letter),  costs and
expenses to the extent then due and payable on the date thereof.

                  (p)      The Fee Letter between the Borrower and the Lender
contemplated by SECTION 1.5.

                  (q)      Certificates of Existence with respect to the
Borrower  and AFC  issued by the  Indiana  Secretary  of State and  articles  of
incorporation of the Borrower certified by the Indiana Secretary of State.

                  (r)      Such other approvals, opinions or documents as the
Lender may reasonably request.

                  (s)      Such  powers of  attorney  as the Lender  shall
reasonably request to enable the Lender to collect all amounts due under any and
all Collateral.

                  2.       CONDITIONS PRECEDENT TO ALL LOANS.  Each Loan shall
be subject to the further conditions precedent that:

                                      II-2

<PAGE>


                  (a)      the Servicer shall have delivered to the Lender on or
prior to the  Financing  Date for such Loan a completed  Portfolio  Certificate,
dated as of such  Financing  Date,  in form and  substance  satisfactory  to the
Lender,  and such  additional  information as may reasonably be requested by the
Lender;

                  (b)      on the date of such Loan the following statements
shall be true (and  acceptance  of the  proceeds  of any Loan  shall be deemed a
representation and warranty by the Borrower that such statements are then true):

                           (i)   the representations and warranties contained in
             EXHIBIT III are true and correct on and as of the date of such Loan
             as though made on and as of such date; and

                           (ii)  no event has occurred and is continuing, or
             would result from such Loan that constitutes an Event of Default or
             an Unmatured Event of Default;

                  (c)      the Borrower shall have notified the Lender of the
occurrence of any Trigger Event; and

                  (d)       each Vehicle to be financed in connection  with such
Loan and the related  Title shall be in the custody of a bailee who has executed
a Bailment Agreement;

                  (e)      all conditions precedent to the making of an Advance
by AFC with  respect to the  Vehicles to be financed  with the  proceeds of such
Loan, and all conditions  precedent to the sale of the related  Receivables  and
Related  Security to the Borrower  pursuant to the Purchase and Sale  Agreement,
shall have been satisfied;

                  (f)      the Lender shall have received such other approvals,
opinions or documents as it may reasonably request; and

                  (g)      The Black Book Value of any Eligible Vehicle Model on
any date shall not exceed the Maximum Black Book Value of such Eligible  Vehicle
Model by more than 25%.

                                      II-3


<PAGE>

                                   EXHIBIT III

                         REPRESENTATIONS AND WARRANTIES


             A.   REPRESENTATIONS AND WARRANTIES OF THE BORROWER.  The Borrower
represents and warrants as follows:

                  (a)      The  Borrower is a corporation duly incorporated  and
in existence under the laws of the State of Indiana, and is duly qualified to do
business,   and  is  in  good  standing,  as  a  foreign  corporation  in  every
jurisdiction  where the nature of its  business  requires it to be so  qualified
except where the failure to so qualify has not had and could not  reasonably  be
expected to have a Material Adverse Effect.

                  (b)      The execution,  delivery and performance by the
Borrower of the Agreement and the other  Transaction  Documents to which it is a
party,  including the Borrower's  use of the Loan  proceeds,  (i) are within the
Borrower's  corporate  powers,  (ii) have been duly  authorized by all necessary
corporate action of the Borrower, (iii) do not contravene or result in a default
under or conflict with (1) the Borrower's charter or by-laws,  (2) any law, rule
or  regulation  applicable  to the  Borrower,  (3) any  contractual  restriction
binding on or affecting  the  Borrower or its  property or (4) any order,  writ,
judgment,  award,  injunction or decree  binding on or affecting the Borrower or
its  property,  and (iv) do not result in or require the creation of any Adverse
Claim upon or with respect to any of the Borrower's  properties,  where,  in the
cases of ITEMS (2), (3) and (4), such contravention, default or conflict has had
or could reasonably be expected to have a Material Adverse Effect. The Agreement
and the  other  Transaction  Documents  to which it is a party  have  been  duly
executed and delivered by the Borrower.

                  (c)      No  authorization  or approval  or other  action by,
and no notice to or filing with, any  Governmental  Authority or other Person is
required for the due execution,  delivery and performance by the Borrower of the
Agreement  or any other  Transaction  Document to which it is a party other than
those previously obtained or UCC filings.

                  (d)      Each of the Agreement and the other Transaction
Documents  to which it is a party  constitutes  the  legal,  valid  and  binding
obligation of the Borrower  enforceable  against the Borrower in accordance with
its terms,  except as enforceability  may be limited by bankruptcy,  insolvency,
reorganization  or other similar laws  affecting the  enforcement  of creditors'
rights  generally  and by general  principles  of equity,  regardless of whether
enforceability is considered in a proceeding in equity or at law.

                  (e) Since December 31, 1999 there has been no material adverse
change in the  business,  operations,  property or  financial  condition  of the
Borrower or AFC, the ability of the  Borrower or AFC to perform its  obligations
under the Agreement or the other Transaction

                                     III-1



<PAGE>

Documents to which it is a party or the  collectibility  of the Receivables,  or
which affects the legality,  validity or  enforceability of the Agreement or the
other Transaction Documents.

                  (f)      (i)   There is no action, suit,  proceeding or
investigation  pending  or, to the  knowledge  of the  Borrower,  threatened  in
writing against the Borrower before any Governmental Authority or arbitrator and
(ii) the  Borrower is not subject to any order,  judgment,  decree,  injunction,
stipulation  or  consent  order  of  or  with  any  Governmental   Authority  or
arbitrator,  that, in the case of each of foregoing  CLAUSES (i) and (ii), could
reasonably be expected to have a Material Adverse Effect.

                  (g)      No proceeds of any Loan will be used to acquire any
equity  security  of a class which is  registered  pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.

                  (h)      The  Borrower  is the  legal and  beneficial owner of
the Receivables and Related  Security,  free and clear of any Adverse Claim; the
Agreement  creates a security  interest in favor of the Lender in the Collateral
and  the  Lender  has a  first  priority  perfected  security  interest  in  the
Collateral,  free and  clear  of any  Adverse  Claims.  No  effective  financing
statement or other  instrument  similar in effect covering any of the Collateral
is on file in any  recording  office,  except those filed in favor of the Lender
relating to the Agreement.

                  (i)      Each  Portfolio  Certificate,  information,  exhibit,
financial  statement,  document,  book,  record  or  report  furnished  or to be
furnished  at any  time  by or on  behalf  of the  Borrower  to  the  Lender  in
connection with the Agreement is or will be accurate in all material respects as
of its date or (except as otherwise  disclosed to the Lender at such time) as of
the date so  furnished,  and no such item  contains  or will  contain any untrue
statement  of a  material  fact or omits or will omit to state a  material  fact
necessary in order to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading.

                  (j)      The principal place of business and chief executive
office (as such  terms are used in the UCC) of the  Borrower  and the  office(s)
where the Borrower keeps its records  concerning the  Receivables are located at
the address(es) referred to in PARAGRAPH (b) of EXHIBIT IV.

                  (k)      The Borrower is not in violation of any order of any
court, arbitrator or Governmental Authority.

                  (l)      Neither the  Borrower  nor any  Affiliate  of the
Borrower has any direct or indirect ownership or other financial interest in the
Lender.

                  (m)      No proceeds of any Loan will be used for any purpose
that  violates  any  applicable  law,  rule or  regulation,  including,  without
limitation, Regulation U of the Federal Reserve Board.

                  (n)      Each Receivable is an Eligible Receivable as of the
related Financing Date.

                                     III-2


<PAGE>

                  (o)      No event has occurred and is  continuing,  or would
result  from  the  making  of a Loan or from  the  application  of the  proceeds
thereof, which constitutes an Event of Default.

                  (p)      The Borrower and the  Servicer  have complied  in all
material respects with the Isuzu Loan Documents with regard to each Receivable.

                  (q)      The Borrower has complied with all of the terms,
covenants and  agreements  contained in the Agreement and the other  Transaction
Documents and applicable to it.

                  (r)      The Borrower's complete corporate name is set forth
in the  preamble to the  Agreement,  and the  Borrower  does not use and has not
during  the  last  six  years  used  any  other  corporate  name,   trade  name,
doing-business  name or fictitious  name,  except as set forth on SCHEDULE I and
except for names first used after the date of the  Agreement  and set forth in a
notice delivered to the Lender pursuant to PARAGRAPH (k)(vi) of EXHIBIT IV.

                  (s)      The authorized capital stock of Borrower consists of
1,000 shares of common stock, no par value,  1,000 shares of which are currently
issued and outstanding. All of such outstanding shares are validly issued, fully
paid and nonassessable and are owned (beneficially and of record) by AFC.

                  (t)      Except as set forth on SCHEDULE II, the Borrower has
filed all federal and other tax returns and reports required by law to have been
filed by it and has paid all taxes and governmental  charges thereby shown to be
owing.

                  (u)      The Borrower is not an "investment company" within
the meaning of the  Investment  Company Act of 1940, as amended.

             B.   REPRESENTATIONS AND WARRANTIES OF THE SERVICER.  The Servicer
represents and warrants as follows:

                  (a)      The Servicer is a  corporation duly incorporated  and
in existence under the laws of the State of Indiana, and is duly qualified to do
business,   and  is  in  good  standing,  as  a  foreign  corporation  in  every
jurisdiction  where the nature of its  business  requires it to be so  qualified
except where the failure to so qualify has not had and could not  reasonably  be
expected to have a Material Adverse Effect.

                  (b)      The execution, delivery and performance by the
Servicer of the Agreement and the other  Transaction  Documents to which it is a
party,  (i) are  within the  Servicer's  corporate  powers,  (ii) have been duly
authorized by all necessary corporate action on the part of the Servicer,  (iii)
do not  contravene  or  result  in a  default  under  or  conflict  with (1) the
Servicer's charter or by-laws, (2) any law, rule or regulation applicable to the
Servicer,  (3) any contractual  restriction binding on or affecting the Servicer
or its property or (4) any order, writ,  judgment,  award,  injunction or decree
binding on or affecting the Servicer or its property,  and (iv) do not result in
or require the creation of any Adverse  Claim upon or with respect to any of its
properties,  where, in the cases of

                                     III-3


<PAGE>

items (2), (3) and (4), such contravention, default or conflict has had or could
reasonably be expected to have a Material Adverse Effect.  The Agreement and the
other  Transaction  Documents to which it is a party have been duly executed and
delivered by the Servicer.

                  (c)      No  authorization or approval or other action by, and
no notice to or filing  with,  any  Governmental  Authority  or other  Person is
required for the due execution,  delivery and performance by the Servicer of the
Agreement or any other Transaction Document to which it is a party.

                  (d)      Each of the Agreement and the other Transaction
Documents  to which it is a party  constitutes  the  legal,  valid  and  binding
obligation of the Servicer  enforceable  against the Servicer in accordance with
its terms,  except as enforceability  may be limited by bankruptcy,  insolvency,
reorganization  or other similar laws  affecting the  enforcement  of creditors'
rights  generally  and by general  principles  of equity,  regardless of whether
enforceability is considered in a proceeding in equity or at law.

                  (e)      There is no pending  or  threatened  action or
proceeding   affecting  the  Servicer  before  any  Governmental   Authority  or
arbitrator which could have a Material Adverse Effect.

                  (f)      The Servicer has complied in all material respects
with the Isuzu Loan Documents.

                                     III-4


<PAGE>

                                   EXHIBIT IV

                                    COVENANTS


         COVENANTS  OF THE BORROWER  AND THE  SERVICER.  Until the latest of the
Termination Date, the date on which no Loan shall be outstanding or the date all
other  amounts  owed by the Borrower  under the  Agreement to the Lender and any
other Indemnified Party or Affected Person shall be paid in full:

                  (a)      COMPLIANCE  WITH LAWS,  ETC. Each of the Borrower and
the Servicer  shall comply in all material  respects with all  applicable  laws,
rules,   regulations  and  orders,  and  preserve  and  maintain  its  corporate
existence,  rights,  franchises,  qualifications,  and privileges  except to the
extent that the failure so to comply with such laws,  rules and  regulations  or
the failure so to preserve  and maintain  such  existence,  rights,  franchises,
qualifications,  and  privileges  would  not  materially  adversely  affect  the
collectibility  of the  Receivables  or the  enforceability  of the  Isuzu  Loan
Documents  or the  ability  of the  Borrower  or the  Servicer  to  perform  its
obligations under any Transaction Document to which it is a party.

                  (b)      OFFICES,  RECORDS AND BOOKS OF ACCOUNT,  ETC. The
Borrower  (i) shall keep its  principal  place of business  and chief  executive
office  (as such  terms are used in the UCC) and the  office  where it keeps its
records  concerning  the  Receivables  at the address of the  Borrower set forth
under its name on the signature page to the Agreement or, upon at least 60 days'
prior written notice of a proposed change to the Lender,  at any other locations
in jurisdictions where all actions reasonably requested by the Lender to protect
and perfect the  security  interest  of the Lender in the  Collateral  have been
taken and  completed  and (ii) shall  provide  the Lender with at least 60 days'
written notice prior to making any change in the  Borrower's  name or making any
other  change in the  Borrower's  identity or corporate  structure  (including a
merger) which could render any UCC financing  statement filed in connection with
this  Agreement  "seriously  misleading"  as such term is used in the UCC;  each
notice to the Lender  pursuant to this sentence  shall set forth the  applicable
change and the  effective  date  thereof.  The Borrower  and Servicer  also will
maintain and  implement  administrative  and  operating  procedures  (including,
without limitation, an ability to recreate records evidencing Receivables in the
event of the  destruction of the originals  thereof),  and keep and maintain all
documents,  books,  records,  computer  tapes and  disks  and other  information
reasonably  necessary  or  advisable  for  the  collection  of  all  Receivables
(including,   without   limitation,   records   adequate  to  permit  the  daily
identification of each Receivable and all Collections of and adjustments to each
existing Receivable).

                  (c)      [RESERVED]

                  (d)      SECURITY INTEREST, ETC. The  Borrower shall,  at  its
expense,  take all action  necessary or  desirable  to establish  and maintain a
first-priority, perfected security interest in the Collateral, free and clear of
any Adverse Claim, in favor of the Lender, including, without limitation,

                                      IV-1

<PAGE>

taking such  action to  perfect,  protect or more fully  evidence  the  security
interest of the Lender under the Agreement as the Lender may request.

                  (e)      SALES, LIENS, ETC. The Borrower shall not sell, 
assign (by operation of law or otherwise) or otherwise  dispose of, or create or
suffer to exist any  Adverse  Claim upon or with  respect  to, any or all of its
right,  title or  interest  in,  to or under any item of  Collateral  (including
without limitation the Borrower's undivided interest in any Receivable,  Related
Security,  or  Collections,  or upon or with respect to any account to which any
Collections of any  Receivables are sent), or assign any right to receive income
in respect of any items contemplated by this PARAGRAPH (e).

                  (f)      CHANGE IN BUSINESS.  Neither the Borrower nor the
Servicer  shall make any material  change in the  character of its business that
would   adversely   affect  the   collectibility   of  the  Receivables  or  the
enforceability  of the Isuzu Loan  Documents  or the ability of the  Borrower or
Servicer to perform its obligations  under any Transaction  Document to which it
is a party.

                  (g)      AUDITS.  Each of the Borrower and the Servicer shall,
from time to time during  regular  business  hours as  requested  by the Lender,
permit the  Lender,  or its agents or  representatives,  (i) to examine and make
copies of and  abstracts  from all  books,  records  and  documents  (including,
without  limitation,  computer  tapes and disks) in the  possession or under the
control of the Borrower or the Servicer  relating to Receivables and the Related
Security,  including,  without limitation, the Isuzu Loan Documents, and (ii) to
visit the  offices and  properties  of the  Borrower  and the  Servicer  for the
purpose of  examining  such  materials  described  in CLAUSE  (i) above,  and to
discuss  matters  relating  to  Receivables  and  the  Related  Security  or the
Borrower's or Servicer's performance hereunder or under the Isuzu Loan Documents
with any of the  officers,  employees,  agents or  contractors  of the  Borrower
having  knowledge of such matters;  PROVIDED that so long as no Event of Default
or  Unmatured  Event of Default has  occurred  the Lender shall not conduct more
than one such examination in any year.

                  (h)      CHANGE IN COLLECTION ACCOUNT BANK AND PAYMENT
INSTRUCTIONS  TO  OBLIGOR.  Without  the prior  written  consent of the  Lender,
neither the Borrower nor the Servicer  shall (x) add or terminate  any bank as a
Collection  Account  Bank,  or (y)  instruct the Obligor to make  payments  with
respect to the Receivables to any account other than the Collection  Account (or
any substitute  account  approved by the Lender in advance and made subject to a
Collection Account Agreement in form and substance acceptable to the Lender).

                  (i)      COLLECTION  ACCOUNT.  The Collection Account shall at
all times be subject to the Collection Account  Agreement.  Neither the Borrower
nor the Servicer will deposit or otherwise  credit,  or cause or permit to be so
deposited or credited,  to the  Collection  Account cash or cash proceeds  other
than Collections of Receivables.

                  (j) MARKING OF RECORDS.  At its expense,  the Borrower (or the
Servicer on its behalf) shall mark its master data processing  records  relating
to Receivables and the Isuzu Loan

                                      IV-2

<PAGE>

Documents,  including  with  a  legend  evidencing  that  such  Receivables  and
documents  are subject to the  security  interest of the Lender  pursuant to the
Agreement.

                  (k)      REPORTING REQUIREMENTS.  The Borrower will provide to
the Lender (in multiple  copies,  if requested by the Lender)  (except that with
respect to PARAGRAPH  (iii),  the Borrower will cause the Servicer to provide to
the Lender and the Servicer will deliver to the Lender) the following:

                           (i)    as soon as  available  and in any event within
             45 days after the end of the first  three  quarters  of each fiscal
             year of AFC in a format acceptable to the Lender, balance sheets of
             AFC, its  consolidated  subsidiaries and the Borrower as of the end
             of such quarter and  statements of income,  cash flows and retained
             earnings  of AFC  and its  consolidated  subsidiaries  and  balance
             sheets  and  income  statements  of the  Borrower  for  the  period
             commencing  at the end of the previous  fiscal year and ending with
             the end of such quarter,  certified by the chief financial  officer
             of such Person;

                           (ii)   as soon as available and in any event within
             90 days after the end of each fiscal year of AFC, (A) a copy of the
             annual report for AFC and its consolidated subsidiaries, containing
             financial     statements     for    such    year     audited     by
             PriceWaterhouseCoopers  LLP or other  independent  certified public
             accountants  acceptable to the Lender and (B) the income  statement
             of the  Borrower  for such year  certified  by the chief  financial
             officer of the Borrower;

                           (iii)  as soon as available and in any event no later
             than  the  last  Business  Day of each  week,  a  weekly  Portfolio
             Certificate  dated no  earlier  than one week  prior to the date of
             delivery;

                           (iv)   as  soon as possible  and in any  event within
             three  days  after the  occurrence  of each  Event of  Default  and
             Unmatured  Event of  Default,  a statement  of the chief  financial
             officer  of the  Borrower  setting  forth  details of such Event of
             Default or event and the  action  that the  Borrower  has taken and
             proposes to take with respect thereto;

                           (v)    promptly after the filing or receiving
             thereof, copies of all reports and notices that the Borrower or any
             Affiliate  files under ERISA with the Internal  Revenue  Service or
             the Pension Benefit Guaranty  Corporation or the U.S. Department of
             Labor or that the Borrower or any  Affiliate  receives  from any of
             the foregoing or from any multiemployer plan (within the meaning of
             Section 4001(a)(3) of ERISA) to which the Borrower or any Affiliate
             is  or  was,  within  the  preceding  five  years,  a  contributing
             employer,  in each case in respect of the  assessment of withdrawal
             liability or an event or condition  which could,  in the aggregate,
             result in the  imposition  of liability on the Borrower  and/or any
             such Affiliate in excess of $250,000;

                                      IV-3


<PAGE>

                           (vi)   at least 30 days  prior  to any change  in the
             Borrower's name or any other change  requiring the amendment of UCC
             financing  statements,  a notice setting forth such changes and the
             effective date thereof;

                           (vii)  such   other   information   respecting   the
             Receivables  (including a Portfolio  Certificate on a more frequent
             basis than  provided in CLAUSE  (iii)  above) or the  condition  or
             operations,  financial or otherwise,  of the Borrower or AFC as the
             Lender may from time to time reasonably request;

                           (viii) promptly after the Borrower obtains  knowledge
             thereof, notice of any (a) litigation,  investigation or proceeding
             which may exist at any time between the  Borrower,  the Servicer or
             AFC, on the one hand, and any Governmental  Authority which, if not
             cured or if adversely determined,  as the case may be, would have a
             Material Adverse Effect, or (b) litigation or proceeding  adversely
             affecting the Borrower or any of its subsidiaries,  the Servicer or
             AFC, as the case may be, in which the amount involved,  in the case
             of the  Servicer  or AFC,  is  $100,000  or more and not covered by
             insurance or in which injunctive or similar relief is sought or (c)
             litigation or proceeding relating to any Transaction Document; and

                           (ix)   promptly after the occurrence thereof, notice
             of any event or circumstance  that could  reasonably be expected to
             have a Material Adverse Effect.

                           (x)    promptly  after receipt thereof, a copy of any
             report or notice provided to the Servicer or the Borrower  pursuant
             to the Isuzu Loan Documents.

                  (l)      SEPARATE CORPORATE EXISTENCE. Each of the Borrower
and  the  Servicer  hereby   acknowledges  that  Lender  is  entering  into  the
transactions  contemplated  by the  Agreement and the  Transaction  Documents in
reliance  upon the  Borrower's  identity as a legal  entity  separate  from AFC.
Therefore,  from and after the date hereof,  the Borrower and AFC shall take all
reasonable steps to continue the Borrower's  identity as a separate legal entity
and to make it apparent  to third  Persons  that the  Borrower is an entity with
assets and liabilities  distinct from those of AFC and any other Person,  and is
not a division of AFC or any other Person.  Without  limiting the  generality of
the foregoing and in addition to and  consistent  with the covenant set forth in
PARAGRAPH  (a) of this  EXHIBIT IV, the Borrower and AFC shall take such actions
as shall be required in order that:

                           (i)    The   Borrower   will  be  a  limited  purpose
             corporation   whose  primary   activities  are  restricted  in  its
             certificate of  incorporation  to purchasing  Receivables from AFC,
             entering into  agreements  for the  servicing of such  Receivables,
             financing  such  Receivables  through  the  issuance of debt to the
             Lender secured by such Receivables and certain related assets,  and
             conducting   such  other   activities  as  it  deems  necessary  or
             appropriate to carry out its primary activities;

                           (ii)   Not less than one member of Borrower's Board
             of Directors (the  "INDEPENDENT  DIRECTORS") shall be an individual
             who is not a direct, indirect or beneficial


                                      IV-4



<PAGE>

             stockholder,  officer, director,  employee,  affiliate,  associate,
             customer,  supplier or agent of AFC or any of its  Affiliates.  The
             Borrower's Board of Directors shall not approve,  or take any other
             action  to cause  the  commencement  of a  voluntary  case or other
             proceeding  with  respect  to the  Borrower  under  any  applicable
             bankruptcy,   insolvency,    reorganization,    debt   arrangement,
             dissolution  or other similar law, or the  appointment of or taking
             possession   by,  a  receiver,   liquidator,   assignee,   trustee,
             custodian,  or other  similar  official for the Borrower  unless in
             each case the  Independent  Directors  shall  approve the taking of
             such  action in  writing  prior to the taking of such  action.  The
             Independent Directors' fiduciary duty shall be to the Borrower (and
             creditors) and not to the Borrower's shareholders in respect of any
             decision of the type  described in the preceding  sentence.  In the
             event an Independent  Director  resigns or otherwise ceases to be a
             director of the  Borrower,  there  shall be selected a  replacement
             Independent  Director  who shall not be an  individual  within  the
             proscriptions  of the first  sentence  of this  CLAUSE  (ii) or any
             individual who has any other type of professional relationship with
             AFC or any of its  Affiliates  or any  management  personnel of any
             such Person or Affiliate  and who shall be (x) a tenured  professor
             at a  business  or  law  school,  (y) a  retired  judge  or  (z) an
             established independent member of the business community,  having a
             sound  reputation  and  experience  relative  to the  duties  to be
             performed by such individual as an Independent Director;

                           (iii)  No  Independent  Director  shall at any time
             serve as a trustee in bankruptcy for AFC or any Affiliate thereof;

                           (iv)   Any  employee,  consultant  or  agent  of  the
             Borrower will be compensated  from the Borrower's own bank accounts
             for services  provided to the Borrower except as provided herein in
             respect of the  Servicer's  Fee. The Borrower will engage no agents
             other than a Servicer for the  Receivables,  which Servicer will be
             fully  compensated  for its  services to the Borrower by payment of
             the Servicer's Fee;

                           (v)    The Borrower will contract with the Servicer
             to perform  for the  Borrower  all  operations  required on a daily
             basis  to  service  its  Receivables.  The  Borrower  will  pay the
             Servicer  a monthly  fee based on the  level of  Receivables  being
             managed by the  Servicer.  The Borrower will not incur any material
             indirect or overhead expenses for items shared between the Borrower
             and AFC or any  Affiliate  thereof  which are not  reflected in the
             Servicer's Fee. To the extent, if any, that the Borrower and AFC or
             any Affiliate  thereof share items of expenses not reflected in the
             Servicer's  Fee,  such as legal,  auditing  and other  professional
             services,  such expenses will be allocated to the extent  practical
             on the basis of actual use or the value of services  rendered,  and
             otherwise  on a basis  reasonably  related to the actual use or the
             value of services rendered,  it being understood that AFC shall pay
             all expenses  relating to the preparation,  negotiation,  execution
             and  delivery  of the  Transaction  Documents,  including,  without
             limitation, legal and other fees;

                           (vi)   The  Borrower's operating expenses will not be
             paid by AFC or any Affiliate thereof unless the Borrower shall have
             agreed in writing with such Person to reimburse such Person for any
             such payments;

                                      IV-5

<PAGE>

                           (vii)  The Borrower will have its own separate
             mailing address and stationery;

                           (viii) The  Borrower's  books and records will be
             maintained separately from those of AFC or any Affiliate thereof;

                           (ix)   Any financial statements which are
             consolidated  to include the Borrower will contain  detailed  notes
             clearly  stating that the Borrower is a separate  corporate  entity
             and has granted a security interest in the Receivables;

                           (x)    The  Borrower's assets will be maintained in a
             manner that facilitates their  identification  and segregation from
             those of AFC and any Affiliate thereof;

                           (xi)   The Borrower will strictly  observe  corporate
             formalities in its dealings with AFC and any Affiliate thereof, and
             funds or other assets of the Borrower will not be  commingled  with
             those of AFC or any  Affiliate  thereof.  The  Borrower  shall  not
             maintain joint bank accounts or other depository  accounts to which
             AFC or any  Affiliate  thereof  (other than AFC in its  capacity as
             Servicer) has independent access. None of the Borrower's funds will
             at any  time be  pooled  with  any  funds  of AFC or any  Affiliate
             thereof;

                           (xii)  The  Borrower  shall  pay to AFC the  marginal
             increase (or, in the absence of such increase, the market amount of
             its portion) of the premium  payable with respect to any  insurance
             policy that covers the Borrower and any Affiliate thereof,  but the
             Borrower shall not, directly or indirectly,  be named or enter into
             an agreement to be named, as a direct or contingent  beneficiary or
             loss payee,  under any such insurance  policy,  with respect to any
             amounts  payable due to occurrences or events related to AFC or any
             Affiliate thereof (other than the Borrower); and

                           (xiii) The   Borrower  will  maintain   arm's  length
             relationships  with AFC and any Affiliate  thereof.  The AFC or any
             Affiliate thereof that renders or otherwise  furnishes  services to
             the Borrower  will be  compensated  by the Borrower at market rates
             for such  services.  Neither the Borrower nor AFC or any  Affiliate
             thereof will be or will hold itself out to be  responsible  for the
             debts of the other or the decisions or actions respecting the daily
             business and affairs of the other.

                  (m)      MERGERS, ACQUISITIONS, SALES, ETC.

                           (i)    The Borrower shall not:

                           (A)    be a party to any  merger or consolidation, or
                  directly or indirectly purchase or otherwise acquire,  whether
                  in one or a series of transactions,  all or substantially  all
                  of the assets or any stock of any class of, or any partnership
                  or joint  venture  interest  in,  any other  Person,  or sell,
                  transfer,  assign,  convey  or lease any of its  property  and
                  assets (including,  without limitation,  any Receivable or any
                  interest therein) other than pursuant to this Agreement;

                                      IV-6


<PAGE>
                           (B)    make, incur or suffer to exist an investment
                  in,  equity  contribution  to, loan,  credit or advance to, or
                  payment  obligation in respect of the deferred  purchase price
                  of property  from,  any other Person,  except for  obligations
                  incurred pursuant to the Transaction Documents; or

                           (C)    create  any  direct or indirect  Subsidiary or
                  otherwise  acquire direct or indirect  ownership of any equity
                  interests in any other Person.

                  (n)      RESTRICTED PAYMENTS.

                           (i)    GENERAL RESTRICTION. Except in accordance with
             this  SUBPARAGRAPH  (I),  the  Borrower  shall not (A)  purchase or
             redeem  any shares of its  capital  stock,  (B)  declare or pay any
             Dividend or set aside any funds for any such  purpose,  (C) prepay,
             purchase or redeem any  subordinated  indebtedness of the Borrower,
             (D) lend or  advance  any funds or (E) repay any loans or  advances
             to, for or from AFC.  Actions of the type  described in this CLAUSE
             (i) are herein collectively called "RESTRICTED PAYMENTS".

                           (ii)   TYPES OF  PERMITTED  PAYMENTS. Subject  to the
             limitations set forth in CLAUSE (iii) below,  the Borrower may make
             Restricted  Payments so long as such  Restricted  Payments are made
             only to AFC and only in one or more of the following ways:

                           (A)    Borrower may  make  cash  payments  (including
                  prepayments) on the Company Note in accordance with its terms;
                  and

                           (B)    if no amounts  are then outstanding  under the
                  Company Note, the Borrower may declare and pay Dividends.

                           (iii)  SPECIFIC  RESTRICTIONS.  The Borrower may make
             Restricted Payments only out of Collections paid or released to the
             Borrower  pursuant to SECTION  1.4(f).  Furthermore,  the  Borrower
             shall not pay, make or declare:

                           (A)    any Dividend if, after giving effect thereto,
                  the AFC Financed  Amount would be less than  $5,000,000; or

                           (B)    any Restricted Payment (including any
                  Dividend)  if,  after  giving  effect  thereto,  any  Event of
                  Default or Unmatured  Event of Default shall have occurred and
                  be continuing.

                  (o)      AMENDMENTS TO CERTAIN DOCUMENTS.

                           (i)    Neither  AFC  nor  the  Borrower  shall amend,
             supplement,  amend and restate, or otherwise modify any Transaction
             Document or the Borrower's  articles of  incorporation  or by-laws,
             except  (A)  in  accordance   with  the  terms  of  such  document,
             instrument or agreement and (B) with the advance written consent of
             the Lender.


                                      IV-7

<PAGE>


                           (ii)   AFC shall not enter  into or  otherwise become
             bound by, any agreement,  instrument, document or other arrangement
             that restricts its right to amend, supplement, amend and restate or
             otherwise  modify,  or to extend  or  renew,  or to waive any right
             under, this Agreement or any other Transaction Document.

                  (p)      INCURRENCE OF  INDEBTEDNESS.  The Borrower  shall not
(i) create,  incur or permit to exist,  any Debt or  liability  or (ii) cause or
permit  to be  issued  for  its  account  any  letters  of  credit  or  bankers'
acceptances,  except  for  Debt  incurred  pursuant  to  the  Company  Note  and
liabilities incurred pursuant to or in connection with the Transaction Documents
or otherwise permitted therein.

                  (q)      PERFORMANCE AND COMPLIANCE  WITH  TRANSACTION
DOCUMENTS.  Each of AFC and the Borrower shall,  at its own expense,  timely and
fully  perform  and comply with all  material  provisions,  covenants  and other
promises  required to be observed by it under the Isuzu Loan  Documents  and the
other Transaction Documents to which it is a party.

                  (r)      ENFORCEMENT.  Each of AFC and the Borrower shall
maintain in effect each of the Isuzu Loan  Documents,  diligently  and  promptly
enforce its respective rights thereunder and take all reasonable steps,  actions
and  proceedings  necessary or appropriate  for the  enforcement of all material
terms,  covenants  and  conditions  of the Isuzu Loan  Documents,  including the
prompt payment of all principal and interest payments,  administrative  fees and
all other amounts due under the Isuzu Loan Documents.


                                      IV-8

<PAGE>

                                    EXHIBIT V

                                EVENTS OF DEFAULT


         Each of the following shall be a "Event of Default":

                  (a)      Any Person which is the  Servicer  shall fail to make
when due any  payment or deposit to be made by it under the  Agreement  and such
failure shall remain  unremedied  for five (5) Business Days after notice to the
Servicer; or

                  (b)      The Borrower  shall fail (i) to transfer to any
successor  Servicer when required any rights,  pursuant to the Agreement,  which
the Borrower then has with respect to the servicing of the Receivables,  or (ii)
to make any  payment  required  under the  Agreement,  and in  either  case such
failure shall remain unremedied for five (5) Business Days after notice; or

                  (c)      Any  representation or warranty made or deemed made
by the Borrower or the Servicer (or any of their  respective  officers) under or
in connection with the Agreement or any  information or report  delivered by the
Borrower  or the  Servicer  pursuant to the  Agreement  shall prove to have been
incorrect  or  untrue  in any  material  respect  when  made or  deemed  made or
delivered;  PROVIDED,  HOWEVER,  if the  violation of this  PARAGRAPH (c) by the
Borrower or the Servicer may be cured without any potential or actual  detriment
to the Lender, the Borrower or the Servicer,  as applicable,  shall have 30 days
from the earlier of (i) such Person's  knowledge of such failure and (ii) notice
to such Person of such failure to so cure any such violation  before an Event of
Default  shall occur so long as such Person is  diligently  attempting to effect
such cure; or

                  (d)      The  Borrower  or the Servicer shall  fail to perform
or observe any other  material  term,  covenant or  agreement  contained  in the
Agreement on its part to be  performed  or observed  and any such failure  shall
remain  unremedied for 30 days after the earlier of (i) such Person's  knowledge
of such failure and (ii) notice to such Person of such failure (or, with respect
to a failure to deliver a Portfolio Certificate pursuant to the Agreement,  such
failure shall remain unremedied for five days); or

                  (e)      A default  shall occur in the payment when due
(subject to any applicable grace period),  whether by acceleration or otherwise,
of any Debt of either the Borrower, AFC Funding Corporation or AFC, or a default
shall occur in the performance or observance of any obligation or condition with
respect to such Debt if the effect of such default is to accelerate the maturity
of any  such  Debt  and the  Debt  with  respect  to  which  non-payment  and/or
non-performance  shall have occurred exceeds, at any point in time, with respect
to the Borrower, AFC Funding Corporation or AFC, $1,000,000 in the aggregate for
all such occurrences; or

                  (f)      The Agreement or any Loan pursuant to the Agreement
shall for any reason  (other than  pursuant to the terms hereof) cease to create
with  respect to the  Collateral,  or the interest 

                                      V-1


<PAGE>

of the  Lender  with  respect  to such  items  shall  cease to be,  a valid  and
enforceable  first-priority,  perfected security interest, free and clear of any
Adverse Claim; or

                  (g)      AFC,  Allete or Borrower shall generally not pay its
debts as such debts  become due, or shall admit in writing its  inability to pay
its debts  generally,  or shall  make a general  assignment  for the  benefit of
creditors;  or any proceeding  shall be instituted by or against AFC,  Allete or
Borrower  seeking  to  adjudicate  it  a  bankrupt  or  insolvent,   or  seeking
liquidation, winding up, reorganization,  arrangement,  adjustment,  protection,
relief,  or composition of it or its debts under any law relating to bankruptcy,
insolvency or  reorganization  or relief of debtors,  or seeking the entry of an
order for relief or the appointment of a receiver,  trustee,  custodian or other
similar  official for it or for any substantial part of its property and, in the
case of any such  proceeding  instituted  against it (but not instituted by it),
either such proceeding  shall remain  undismissed or unstayed for a period of 60
days,  or any of the  actions  sought  in such  proceeding  (including,  without
limitation,  the entry of an order for relief  against,  or the appointment of a
receiver,  trustee,  custodian  or other  similar  official  for,  it or for any
substantial  part of its property) shall occur; or AFC, Allete or Borrower shall
take any  corporate  action to  authorize  any of the actions set forth above in
this PARAGRAPH (g); or

                  (h)      A Change in Control shall occur; or

                  (i)      The Internal  Revenue  Service shall file notice of a
lien  pursuant to Section 6323 of the  Internal  Revenue Code with regard to any
assets of the Borrower,  AFC Funding  Corporation or AFC and such lien shall not
have been released  within ten Business  Days, or the Pension  Benefit  Guaranty
Corporation  shall,  or shall  indicate its  intention to, file notice of a lien
pursuant to Section  4068 of ERISA with regard to any of the assets of Borrower,
AFC Funding Corporation or AFC; or

                  (j)      The AFC Financed Amount shall be less than $5,000,000
or the  Tangible  Net  Worth  of AFC  shall  be  less  than  the  lesser  of (i)
$24,000,000,  or (ii) an amount equal to the sum of (x)  $12,000,000 and (y) 50%
of the sum of the net income of AFC for each fiscal  quarter that net income was
positive commencing with the fiscal quarter ending on March 31, 1997; or

                  (k)      At any time,  the sum of (i) all of AFC's Debt
(including intercompany loans), (ii) the Total Outstanding Principal,  and (iii)
the outstanding  balance of any other  non-recourse  transaction is greater than
the  product  of (x)  8.5  and  (y) the  total  stockholder's  equity  in AFC as
determined quarterly; or

                  (l)      Any material  adverse change shall occur in the
reasonable  business  judgment  of  the  Lender  in  the  collectibility  of the
Receivables or the business, operations, property or financial condition of AFC,
AFC Funding Corporation or the Borrower; or

                  (m)      Any Purchase and Sale Termination  Event or Isuzu
Event of Default shall occur (taking into account any applicable cure periods or
grace periods  provided for in the Purchase


                                      V-2


<PAGE>

and Sale Agreement or the Isuzu Loan Documents, but without regard to whether or
not such event is waived by any party which may be authorized to do so).


                                      V-3


<PAGE>

                                   EXHIBIT VI

                              PORTFOLIO CERTIFICATE


                                      VI-1


<PAGE>

<TABLE>

                                   EXHIBIT VI
                          FORM OF PORTFOLIO CERTIFICATE

<CAPTION>
AFC AIM CORPORATION
PORTFOLIO CERTIFICATE

CERTIFICATE DATE:

                                        LOAN ROLLFORWARD                 APC INVESTED AMOUNT
<S>                                     <C>                              <C>   
Beginning Balance                       $          -                     $          -
Additions                               $          -                     $          -
Principal Repayments                    $          -                     $          - GREATER THAN $5MM
Ending Balance                          $          -                     $          -

Available Borrowing Base                $          -

CREDIT ACCOUNT ROLLFORWARD
Beginning Balance                       $          -
AFC Invested Amount Repayments          $          -  Support for
                                                      AFC's Invested
                                                      Amount Attached
Reductions                              $          -
Ending Balance                          $          -


FINANCING DATE:

Market Value of Vehicle Pool            $          -  Financed Vehicle
                                                      Pool Advance Rate
                                                      Recap Attached
AFC AIM Advance (75% of MV)             $          -

New Cash Invested by AFC                $          -
Credit Account Reclaimed                $          -  Percentage
Total AFC Invested Amount Increase      $          -
Adds to BMO's Invested Amount           $          -

Number of Vehicles                                 -
Floorplan Fees Earned                   $          -

CURRENT PORTFOLIO DETAILS

Number of Cars Outstanding                         -
Loan Balance                            $          -

Overcollateralization                   $          -
Overcollateralization Percentage

Cash Balance + Investments              $          -
                                                                          
<CAPTION>
                                                                         Percent
MARKET VALUE TESTS                                                       Increase      FUNDING
Date of most current Black Book                       Max. Black Book   (Decrease)  RESTRICTIONS?
<S>                                     <C>           <C>                <C>        <C> 
Rodeo LS 4x2                            $          -  $              -       -
Rodeo LS 4x4                            $          -  $              -       -
Trooper S 4x4                           $          -  $              -       -

</TABLE>


<PAGE>

                                   SCHEDULE I

                                   TRADE NAMES

                                      None.










                                 Schedule I - 1


<PAGE>

                                   SCHEDULE II

                                   TAX MATTERS

                                      None.










                                 Schedule II - 1


<PAGE>

                                     ANNEX A

                            FORM OF BORROWING NOTICE

                                                                [DATE OF NOTICE]
                                                                                
BANK OF MONTREAL
115 S.  LaSalle Street
Floor 11W
Chicago, Illinois 60603
Attention: Denise Jirak
Phone number: (312) 750-4366

Re:      NOTICE OF BORROWING

Ladies and Gentlemen:

         Please refer to the Loan and Servicing Agreement,  dated as of December
22, 2000 (as amended,  supplemented or otherwise modified from time to time, the
"LOAN AND  SERVICING  AGREEMENT")  among AFC AIM  Corporation,  as borrower (the
"BORROWER"),  Automotive  Finance  Corporation,  as the  initial  servicer  (the
"SERVICER") and the Bank of Montreal, as lender (the "LENDER").

         The  undersigned,  on  behalf  of the  Borrower,  hereby  gives  notice
pursuant to SECTION 1.2(a) of the Loan and Servicing Agreement and requests that
a Loan be made to the Borrower as follows:

         1.   Borrowing date:                         
                                                      ------------------
         2.   Aggregate amount of Loan:              $
                                                      ------------------
         3.   Term of Loan                            
                                                      ------------------

         As an inducement to the Lender to make the Loan  described  above,  the
Servicer,  on its own behalf and on behalf of the Borrower,  hereby certifies to
the Lender that each of the  conditions  precedent to the making of the Loan set
forth in EXHIBIT II to the Loan and Servicing Agreement have been satisfied.

                                     AUTOMOTIVE FINANCE CORPORATION, as Servicer


                                     By: 
                                         ---------------------------------------
                                       Name:  
                                              ----------------------------------
                                       Title: 
                                              ----------------------------------



                                 Annex A - 1



<PAGE>

                                                                   Exhibit 10(m)













                          PURCHASE AND SALE AGREEMENT


                          Dated as of December 22, 2000


                                     between



                               AFC AIM CORPORATION



                                       and



                         AUTOMOTIVE FINANCE CORPORATION




<PAGE>


                                TABLE OF CONTENTS
                                      
                                                                            PAGE

                                    ARTICLE I

                      AGREEMENT TO PURCHASE AND CONTRIBUTE

1.1.  Agreement to Purchase and Sell...........................................2
1.2.  Timing of Purchases......................................................3
1.3.  Consideration for Purchases..............................................3
1.4.  Purchase and Sale Termination Date.......................................3
1.5.  Intention of the Parties.................................................3
1.6.  Certain Definitions......................................................4

                                   ARTICLE II

                          CALCULATION OF PURCHASE PRICE

2.1.  Calculation of Purchase Price............................................5

                                   ARTICLE III

                          CONTRIBUTION OF RECEIVABLES;
                            PAYMENT OF PURCHASE PRICE

3.1.  Contribution of Receivables..............................................7
3.2.  Initial Purchase Price Payment...........................................7
3.3.  Subsequent Purchase Price Payments.......................................7
3.4.  Settlement as to Specific Receivables....................................8
3.5.  Reconveyance of Receivables..............................................9

                                   ARTICLE IV

                             CONDITIONS OF PURCHASES

4.1.  Conditions Precedent to Initial Purchase.................................9
4.2.  Certification as to Representations and Warranties......................11

                                    ARTICLE V

                REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR

5.1.  Organization and Good Standing..........................................11

                                      -i-


<PAGE>

                               TABLE OF CONTENTS
                                  (continued)
                                                                            PAGE

5.2.  Due Qualification.......................................................11
5.3.  Power and Authority; Due Authorization..................................12
5.4.  Valid Sale or Contribution; Binding Obligations.........................12
5.5.  No Violation............................................................12
5.6.  Proceedings.............................................................12
5.7.  Bulk Sales Act..........................................................13
5.8.  Government
 Approvals....................................................13
5.9.  Financial Condition.....................................................13
5.10.  Margin Regulations.....................................................13
5.11.  Quality of Title.......................................................13
5.12.  Accuracy of Information................................................14
5.13.  Offices................................................................14
5.14.  Trade Names............................................................14
5.15.  Taxes..................................................................15
5.16.  Licenses and Labor Controversies.......................................15
5.17.  Compliance with Applicable Laws........................................15
5.18.  Reliance on Separate Legal Identity....................................15
5.19.  Purchase Price.........................................................15
5.20.  Eligibility of Receivables.............................................15

                                   ARTICLE VI

                           COVENANTS OF THE ORIGINATOR

6.1.  Affirmative Covenants...................................................16
6.2.  Reporting Requirements..................................................18
6.3.  Negative Covenants......................................................19

                                   ARTICLE VII

                      ADDITIONAL RIGHTS AND OBLIGATIONS IN
                           RESPECT OF THE RECEIVABLES

7.1.  Rights of the Company...................................................20
7.2.  Responsibilities of the Originator......................................20
7.3.  Further Action Evidencing Purchases.....................................21
7.4.  Application of Collections..............................................22

                                  ARTICLE VIII

                                      -ii-


<PAGE>

                               TABLE OF CONTENTS
                                  (continued)

                                                                            PAGE

                      PURCHASE AND SALE TERMINATION EVENTS

8.1.  Purchase and Sale Termination Events....................................22
8.2.  Remedies................................................................23

                                   ARTICLE IX

                                 INDEMNIFICATION

9.1.  Indemnities by the Originator...........................................24

                                    ARTICLE X

                                  MISCELLANEOUS

10.1.  Amendments, etc........................................................27
10.2.  Notices, etc...........................................................27
10.3.  No Waiver; Cumulative Remedies.........................................27
10.4.  Binding Effect; Assignability..........................................27
10.5.  Governing Law..........................................................28
10.6.  Costs, Expenses and Taxes..............................................28
10.7.  Submission to Jurisdiction.............................................29
10.8.  Waiver of Jury Trial...................................................29
10.9.  Captions and Cross References; Incorporation by Reference..............29
10.10.  Execution in Counterparts.............................................29
10.11.  Acknowledgment and Agreement..........................................30




                                    SCHEDULES

SCHEDULE 5.13  Office Locations

SCHEDULE 5.14  Trade Names

SCHEDULE 5.15  Tax Matters


                                    EXHIBITS

                                     -iii-


<PAGE>

                               TABLE OF CONTENTS
                                  (continued)


                                                                            PAGE


EXHIBIT A      Form of Company Note

                                      -iv-


<PAGE>






                           PURCHASE AND SALE AGREEMENT


         THIS PURCHASE AND SALE AGREEMENT (as amended,  supplemented or modified
from time to time, this "AGREEMENT"),  dated as of December 22, 2000, is between
AUTOMOTIVE FINANCE CORPORATION, an Indiana corporation, as originator and seller
(the  "ORIGINATOR"),  and AFC  AIM  CORPORATION,  an  Indiana  corporation  (the
"COMPANY"), as purchaser.


                                   DEFINITIONS

         Unless otherwise indicated, certain terms that are capitalized and used
throughout  this  Agreement  are defined in EXHIBIT I to the Loan and  Servicing
Agreement of even date herewith (as amended,  supplemented or otherwise modified
from time to time, the "LOAN AND SERVICING  AGREEMENT"),  among the Company, the
Originator, as initial Servicer, and BANK OF MONTREAL, CHICAGO BRANCH, as lender
(together with its successors and assigns, the "LENDER").


                                   BACKGROUND

         1.    The Company is a special  purpose corporation, all of the capital
stock of which is wholly-owned by the Originator.

         2.    On the Closing Date, the Originator is transferring a portion of
the  Receivables  and Related  Rights in  existence  on the Closing  Date to the
Company as a capital contribution to the Company.

         3.    In order to finance  its business, the Originator  wishes to sell
certain Receivables and Related Rights from time to time to the Company, and the
Company is willing, on the terms and subject to the conditions set forth herein,
to purchase such Receivables and Related Rights from the Originator.

         4.    The Company  intends to finance its  purchase of the  Receivables
and Related Rights through secured loans to be made to the Company by the Lender
pursuant to the Loan and Servicing Agreement.



<PAGE>

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
agreements herein contained, the parties hereto agree as follows:


                                    ARTICLE I

                      AGREEMENT TO PURCHASE AND CONTRIBUTE

         1.1.  AGREEMENT TO PURCHASE  AND SELL.  On the terms and subject to the
conditions  set  forth  in  this  Agreement   (including  ARTICLE  IV),  and  in
consideration  of the  Purchase  Price,  the  Originator  agrees  to sell to the
Company, and does hereby sell to the Company, and the Company agrees to purchase
from the  Originator,  and does hereby  purchase  from the  Originator,  without
recourse and without regard to  collectibility,  all of the Originator's  right,
title and interest in and to:

         (a)      each Receivable of the  Originator that existed and  was owing
to the Originator as of the opening of the Originator's business on December 22,
2000 (the "CLOSING DATE") (other than the portion of the Receivables and Related
Rights contributed by the Originator to the Company pursuant to SECTION 3.1 (the
"CONTRIBUTED PORTION"));

         (b)      each  Receivable created or originated  by the Originator from
the opening of the  Originator's  business on the Closing Date to and  including
the Purchase and Sale Termination Date;

         (c)      all of the Originator's right, title and interest under the
Isuzu Loan Documents;

         (d)      all of the Originator's  right,  title and interest in all
payments of  principal,  interest,  administrative  fees or other amounts due in
respect  of any  Advance or other  disbursement  under the  Promissory  Note and
Security Agreement.

         (e)      all rights to, but not the  obligations  under,  all Related
Security (other than with respect to the Contributed Portion);

         (f)      all monies due or to become due with respect to any of the
foregoing;

         (g)      all books and records related to any of the foregoing; and

         (h)      all  proceeds  thereof (as defined in the UCC)  including,
without limitation,  all funds which either are received by the Originator,  the
Company  or the  Servicer  from or on behalf of the  Obligor  in  payment of any
amounts owed (including,  without limitation,  finance charges, interest and all
other  charges)  in  respect  of any  Receivable  (other  than  the  Contributed
Portion),  or that are (or are to be) applied to amounts  owed in respect of any
such  Receivable  (including,  without  limitation,  insurance  payments and net
proceeds of the sale or other  disposition  of vehicles or other  collateral  or
property of the Obligor or any other Person  directly or  indirectly  liable for
the payment of any such Receivable that are (or are to be) applied thereto).

                                      -2-


<PAGE>


All purchases and contributions  hereunder shall be made without  recourse,  but
shall be made pursuant to and in reliance upon the  representations,  warranties
and covenants of the Originator,  in its capacity as Originator and contributor,
set forth in each Transaction  Document.  The Company's foregoing  commitment to
purchase such  Receivables and the proceeds and rights  described in SUBSECTIONS
(c) through (h) of this SECTION 1.1 (collectively,  including such item relating
to  Contributed  Portion,  the "RELATED  RIGHTS") is herein called the "PURCHASE
FACILITY."

         1.2.  TIMING OF PURCHASES.

         (a)      CLOSING DATE PURCHASES.  The Originator's entire right, title
and interest in (i) each Receivable that existed and was owing to the Originator
as of the opening of the Originator's  business on the Closing Date, (other than
Contributed  Portion) and (ii) all Related Rights with respect  thereto shall be
sold to the Company on the Closing Date.

         (b)      REGULAR PURCHASES.  After the Closing Date, each Receivable
created  or  originated  by the  Originator  and all  Related  Rights  shall  be
purchased  and  owned by the  Company  (without  any  further  action)  upon the
creation or origination of such Receivable.

         1.3.  CONSIDERATION FOR  PURCHASES.  On the terms and subject to the
conditions set forth in this Agreement,  the Company agrees to make all Purchase
Price payments to the Originator.

         1.4.  PURCHASE AND SALE TERMINATION  DATE.  The  "PURCHASE  AND SALE
TERMINATION  DATE"  shall  be the  earlier  to  occur  of (a)  the  date  of the
termination of this  Agreement  pursuant to SECTION 8.2 and (b) the Business Day
immediately following the day on which the Originator shall have given notice to
the Company that the Originator desires to terminate this Agreement.

         1.5.  INTENTION OF THE PARTIES. It is the express intent of the parties
hereto that the transfers of the Receivables  (other than  Contributed  Portion)
and Related Rights (other than those relating to the Contributed Portion) by the
Originator to the Company,  as contemplated by this Agreement be, and be treated
as,  sales and not as secured  loans  secured  by the  Receivables  and  Related
Rights.  If,  however,   notwithstanding   the  intent  of  the  parties,   such
transactions are deemed to be loans, the Originator hereby grants to the Company
a first priority security interest in all of the Originator's  right,  title and
interest  in and to each of the items  described  in clauses  (a) through (h) of
SECTION 1.1 above to secure all of the Originator's obligations hereunder.

         1.6.     CERTAIN  DEFINITIONS.  As used in this Agreement,  the terms
"Material Adverse Effect" and "Solvent" are defined as follows:

                  "MATERIAL  ADVERSE EFFECT" means, with respect to any event or
circumstance, a material adverse effect on:

                  (i)   the business, operations, property or financial
condition of the Originator;

                  (ii)  the ability of the Originator or the Servicer (if it is
the  Originator)  to  perform  its

                                      -3-


<PAGE>

obligations  under the Loan and  Servicing  Agreement  or any other  Transaction
Document to which it is a party or the performance of any such obligations;

                  (iii) the validity or enforceability of the Loan and 
Servicing Agreement or any other Transaction Document;

                  (iv)  with  respect to the Purchase  and Sale Agreement,  the
status, existence,  perfection, priority or enforceability of Company's interest
in the Receivables or Related Rights; or

                  (v)   the collectibility of the Receivables.

                  "SOLVENT"  means,  with  respect to any Person at any time,  a
condition under which:

                  (i)   the fair value and present fair  saleable  value of such
Person's  total  assets  is,  on the date of  determination,  greater  than such
Person's total liabilities  (including contingent and unliquidated  liabilities)
at such time;

                  (ii)  such Person is and shall continue to be able to pay all
of its liabilities as such liabilities mature; and

                  (iii) such Person  does not have  unreasonably  small  capital
with which to engage in its current and in its anticipated business.

For purposes of this definition:

                  (A) the  amount  of a  Person's  contingent  or unliquidated
         liabilities at any time shall be that amount which, in light of all the
         facts and circumstances then existing,  represents the amount which can
         reasonably be expected to become an actual or matured liability;

                  (B) the "fair value" of an asset shall be the amount which may
         be realized within a reasonable time either through  collection or sale
         of such asset at its regular market value;

                  (C) the "regular market value" of an asset shall be the amount
         which a capable and  diligent  business  person  could  obtain for such
         asset from an  interested  buyer who is willing to purchase  such asset
         under ordinary selling conditions; and

                  (D) the "present  fair  saleable  value" of an asset means the
         amount  which can be  obtained  if such  asset is sold with  reasonable
         promptness  in an  arm's  length  transaction  in an  existing  and not
         theoretical market.


                                      -4-


<PAGE>


                                   ARTICLE II

                          CALCULATION OF PURCHASE PRICE

         2.1.  CALCULATION OF PURCHASE PRICE. On the Closing Date, the Servicer
shall deliver to the Company,  the Lender and the Originator (if the Servicer is
other than the Originator) a schedule  listing each of the Vehicles  relating to
the  Receivable  funded on the Closing Date,  which  schedule  shall include the
amount of the Advance made with respect to each such  Vehicle.  Thereafter,  the
Servicer  shall provide to the Company,  the Lender and the  Originator  (if the
Servicer is other than the Originator) a copy of each Bailed  Property  Schedule
delivered  to the  Originator  by the  Obligor  pursuant  to Section  2.2 of the
Promissory Note and Security  Agreement with respect to any Vehicle  financed by
an Advance thereunder.

The "PURCHASE  PRICE" (to be paid to the Originator in accordance with the terms
of Article III) for each  Receivable  and the Related  Rights that are purchased
hereunder  shall be equal to the  Outstanding  Balance of such Receivable on the
date of purchase.

         "OUTSTANDING  BALANCE"  means,  with  respect  to any  Receivable,  the
aggregate  amount of all Advances  made by the  Originator  with respect to such
Receivable,  less any amounts deposited in the Collection Account and applied to
the  reduction of the  principal  amount of the related Loan  pursuant to clause
fifth of Section 1.4(d) of the Loan and Servicing Agreement (or paid directly to
the Lender as a repayment of principal with respect to such Loan).

                                   ARTICLE III

                          CONTRIBUTION OF RECEIVABLES;
                            PAYMENT OF PURCHASE PRICE

         3.1.  CONTRIBUTION OF RECEIVABLES. On the Closing Date, the Originator
shall,  and hereby does,  contribute to the capital of the Company,  in exchange
for the issuance of 1,000 shares of common  stock,  a portion of the  Receivable
and the Related  Rights  relating to the Advances made by the  Originator on the
Closing Date,  such that the aggregate  Outstanding  Balance of the  contributed
portion of such Receivable shall be equal to $1,000,000.

         3.2.  INITIAL PURCHASE PRICE PAYMENT. On the terms and subject to the
conditions  set  forth  in this  Agreement,  the  Company  agrees  to pay to the
Originator  the Purchase Price for the purchase of Receivables to be made on the
Closing  Date,  partially in cash in the amount of the proceeds of the Loan made
by the Lender on the Closing Date under the Loan and  Servicing  Agreement,  and
partially  by  issuing  a  promissory  note  in the  form  of  EXHIBIT  B to the
Originator  with an initial  principal  balance equal to the remaining  Purchase
Price  (as  such  promissory  note may be  amended,  supplemented,  indorsed  or
otherwise modified from time to time,  together with all promissory notes issued
from time to time in substitution therefor or renewal thereof in accordance with
the Transaction Documents, being herein called the "COMPANY NOTE").

                                      -5-


<PAGE>


         3.3.  SUBSEQUENT PURCHASE PRICE PAYMENTS. On each Business Day falling
after the  Closing  Date and on or prior to the  Purchase  and Sale  Termination
Date, on the terms and subject to the  conditions  set forth in this  Agreement,
the Company shall pay to the Originator  the Purchase Price for the  Receivables
sold by the  Originator  to the Company on such  Business  Day, in cash,  to the
extent funds are available to make such payment and such payment is permitted by
paragraph  (o) of Exhibit  IV to the Loan and  Servicing  Agreement,  and to the
extent any of such Purchase Price remains unpaid, such remaining portion of such
Purchase  Price  shall  be  paid  by  means  of an  automatic  increase  to  the
outstanding principal amount of the Company Note.

         Servicer shall make all appropriate record keeping entries with respect
to the  Company  Note  or  otherwise  to  reflect  the  foregoing  payments  and
adjustments  pursuant to SECTION 3.4,  and  Servicer's  books and records  shall
constitute  rebuttable  presumptive  evidence  of the  principal  amount  of and
accrued  interest on the Company Note at any time.  Furthermore,  Servicer shall
hold the Company Note for the benefit of the Originator,  and all payments under
the Company Note shall be made to the Servicer for the account of the applicable
payee thereof. The Originator hereby irrevocably authorizes Servicer to mark the
Company Note  "CANCELLED" and to return the Company Note to the Company upon the
final payment thereof after the occurrence of the Purchase and Sale  Termination
Date.

         3.4.  SETTLEMENT AS TO SPECIFIC RECEIVABLES AND DILUTION.

         (a)   If on the day of purchase or contribution of any Receivable  from
the Originator hereunder,  any of the representations or warranties set forth in
SECTION 5.4,  5.11 or 5.20 is not true with respect to such  Receivable  or as a
result  of any  action  or  inaction  of the  Originator,  on any day any of the
representations or warranties set forth in SECTION 5.4 or 5.11 is no longer true
with respect to such a Receivable,  then the Purchase  Price with respect to the
Receivables  purchased  hereunder  shall be  reduced  by an amount  equal to the
Outstanding  Balance of such Receivable and shall be accounted to the Originator
as provided in SUBSECTION (c) below;  PROVIDED,  that if the Company  thereafter
receives  payment on account of Collections due with respect to such Receivable,
the Company promptly shall deliver such funds to the Originator.

         (b)   If, on any day, the Outstanding Balance of any Receivable
purchased  or  contributed  hereunder  is reduced or adjusted as a result of any
adjustment made by the Originator,  Company or Servicer or any setoff or dispute
between the Originator or the Servicer and the Obligor,  then the Purchase Price
with  respect to the  Receivables  purchased  hereunder  shall be reduced by the
amount of such reduction and shall be accounted to the Originator as provided in
SUBSECTION (c) below.

         (c)   Any reduction in the Purchase Price of the Receivables  pursuant
to  SUBSECTION  (a) or (b) above shall be applied as a credit for the account of
the Company against the Purchase Price of Receivables  subsequently purchased by
the Company from the Originator hereunder;  PROVIDED, HOWEVER if there have been
no purchases of Receivables (or  insufficiently  large purchases of Receivables)
to create a Purchase  Price  sufficient  to so apply such  credit  against,  the
amount of such credit

                                      -6-


<PAGE>


                  (i)    shall be paid in cash to the Company by the  Originator
         in the manner and for application as described in the following
         proviso, or

                  (ii)   shall be  deemed  to be a  payment under,  and shall be
         deducted from the principal amount outstanding under, the Company Note,
         to the extent that such payment is  permitted  under  paragraph  (o) of
         Exhibit IV of the Loan and Servicing Agreement;

PROVIDED,  FURTHER,  that at any time (y) when an Event of Default or  Unmatured
Event of Default exists or (z) on or after the  Termination  Date, the amount of
any such  credit  shall be paid by the  Originator  to the Company by deposit in
immediately  available  funds into the  Collection  Account for  application  by
Servicer to the same extent as if Collections  of the  applicable  Receivable in
such amount had actually been received on such date.

         3.5.  RECONVEYANCE OF  RECEIVABLES.  In the event that the Originator
has paid to the Company the full Outstanding  Balance of any Receivable pursuant
to SECTION 3.4, the Company shall  reconvey such  Receivable to the  Originator,
without  representation or warranty,  but free and clear of all liens created by
the Company.


                                   ARTICLE IV

                             CONDITIONS OF PURCHASES

         4.1.  CONDITIONS  PRECEDENT TO INITIAL PURCHASE.  The initial purchase
hereunder  is subject to the  condition  precedent  that the Company  shall have
received,  on or before the Closing Date, the following,  each (unless otherwise
indicated)  dated  the  Closing  Date,  and  each in  form,  substance  and date
satisfactory to the Company:

         (a)   A copy  of  the  resolutions  of  the  Board of Directors  of the
Originator  approving  the  Transaction  Documents to be delivered by it and the
transactions  contemplated  hereby and thereby,  certified  by the  Secretary or
Assistant Secretary of the Originator;

         (b)   A Certificate of Existence for the Originator issued as of a
recent date by the Indiana Secretary of State;

         (c)   A  certificate  of the  Secretary  or  Assistant Secretary of the
Originator  certifying the names and true signatures of the officers  authorized
on the Originator's behalf to sign the Transaction  Documents to be delivered by
it (on which certificate the Company and Servicer (if other than the Originator)
may  conclusively  rely until such time as the  Company and the  Servicer  shall
receive from the Originator a revised  certificate  meeting the  requirements of
this SUBSECTION (c));

         (d)   The articles of  incorporation of the Originator together with a
copy of the by-laws of the  Originator,  each duly certified by the Secretary or
an Assistant Secretary of the Originator;

                                      -7-

<PAGE>

         (e)   Copies of the proper financing  statements (Form UCC-1) that have
been duly  executed and name the  Originator  as the assignor and the Company as
the  assignee  (and the Lender as  assignee of the  Company) of the  Receivables
generated by the Originator and Related Rights or other,  similar instruments or
documents,  as may be  necessary  or, in  Servicer's  or the  Lender's  opinion,
desirable under the UCC of all appropriate  jurisdictions  or any comparable law
of all appropriate  jurisdictions to perfect the Company's ownership interest in
all  Receivables  and  Related  Rights  in which an  ownership  interest  may be
transferred to it hereunder;

         (f)   A written search report from a Person  satisfactory to Servicer
and the  Lender  listing  all  effective  financing  statements  that  name  the
Originator  as debtor or  assignor  and that are filed in the  jurisdictions  in
which filings were made pursuant to the foregoing  SUBSECTION (e), together with
copies of such financing  statements (none of which,  except for those described
in the  foregoing  SUBSECTION  (e),  shall cover any  Receivable  or any Related
Right),  and tax and judgment lien search reports from a Person  satisfactory to
Servicer  and the Lender  showing no evidence  of such liens  filed  against the
Originator;

         (g)   Favorable  opinions of Joel Garcia,  Esq., general counsel to the
Originator,   Ice  Miller,   special  counsel  to  the  Originator,   concerning
enforceability  of this  Agreement  and certain other  matters,  and Ice Miller,
concerning  certain bankruptcy  matters,  and such other opinions as the Company
may reasonably request;

         (h)   Evidence (i) of the execution and delivery by each of the parties
thereto of each of the other Transaction  Documents to be executed and delivered
in  connection  herewith and (ii) that each of the  conditions  precedent to the
execution,  delivery and effectiveness of such other  Transaction  Documents has
been satisfied to the Company's satisfaction; and

         (i)   A certificate  from an officer of the Originator to the effect
that Servicer and the Originator have placed on the most recent,  and have taken
all  steps  reasonably  necessary  to  ensure  that  there  shall be  placed  on
subsequent,  summary master control data processing reports the following legend
(or the substantive equivalent thereof):  "THE RECEIVABLES DESCRIBED HEREIN HAVE
BEEN SOLD TO AFC AIM  CORPORATION  PURSUANT  TO A PURCHASE  AND SALE  AGREEMENT,
DATED AS OF DECEMBER 22, 2000, BETWEEN  AUTOMOTIVE  FINANCE  CORPORATION AND AFC
AIM CORPORATION; AND A SECURITY INTEREST IN THE RECEIVABLES DESCRIBED HEREIN HAS
BEEN GRANTED TO BANK OF MONTREAL,  PURSUANT TO A LOAN AND  SERVICING  AGREEMENT,
DATED  AS OF  DECEMBER  22,  2000,  AMONG  AFC  AIM  CORPORATION,  AS  BORROWER,
AUTOMOTIVE FINANCE CORPORATION, AS SERVICER, AND BANK OF MONTREAL, AS LENDER.

         4.2.  CERTIFICATION  AS  TO  REPRESENTATIONS   AND  WARRANTIES.   The
Originator,  by accepting the Purchase  Price  (including by the increase in the
outstanding balance of the Company Note) related to each purchase of Receivables
and Related Rights shall be deemed to have  certified  that the  representations
and  warranties  contained  in ARTICLE V are true and  correct on and as of such
day, with the same effect as though made on and as of such day.

                                      -8-


<PAGE>


                                    ARTICLE V

                REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR

         In order to induce the Company to enter into this Agreement and to make
purchases and accept contributions hereunder, the Originator, in its capacity as
Originator under this Agreement, hereby makes the representations and warranties
set forth in this ARTICLE V.

         5.1.  ORGANIZATION AND GOOD STANDING.  The Originator has been duly
incorporated  and in existence as a  corporation  under the laws of the state of
its incorporation, with power and authority to own its properties and to conduct
its  business  as such  properties  are  presently  owned and such  business  is
presently conducted.

         5.2.  DUE QUALIFICATION. The Originator is duly licensed or qualified
to do business as a foreign  corporation  in good  standing in the  jurisdiction
where its chief executive office and principal place of business are located and
in all other  jurisdictions  in which the  ownership or lease of its property or
the conduct of its business  requires  such  licensing or  qualification  except
where the  failure  to be so  licensed  or  qualified  has not had and could not
reasonably be expected to have a Material Adverse Effect.

         5.3.  POWER AND AUTHORITY; DUE AUTHORIZATION. The Originator has (a)
all  necessary  corporate  power,  authority  and legal right (i) to execute and
deliver,  and perform its obligations under, each Transaction  Document to which
it is a party, as Originator,  and (ii) to generate,  own, sell,  contribute and
assign Receivables and Related Rights on the terms and subject to the conditions
herein and therein provided; and (b) duly authorized such execution and delivery
and  such  sale,  contribution  and  assignment  and  the  performance  of  such
obligations by all necessary corporate action.

         5.4.  VALID SALE OR  CONTRIBUTION;  BINDING  OBLIGATIONS.  Each sale or
contribution,  as the case may be, of Receivables and Related Rights made by the
Originator  pursuant  to  this  Agreement  shall  constitute  a  valid  sale  or
contribution,  as the case  may be,  transfer,  and  assignment  thereof  to the
Company,  enforceable against creditors of, and purchasers from, the Originator;
and this Agreement constitutes, and each other Transaction Document to be signed
by the  Originator,  as  Originator,  when duly  executed  and  delivered,  will
constitute,   a  legal,   valid,  and  binding  obligation  of  the  Originator,
enforceable  in  accordance  with its  terms,  except as  enforceability  may be
limited  by  bankruptcy,  insolvency,   reorganization  or  other  similar  laws
affecting  the  enforcement  of  creditors'  rights  generally  and  by  general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in equity or at law.


         5.5.  NO VIOLATION. The consummation of the transactions contemplated
by this Agreement and the other Transaction Documents to which the Originator is
a party as Originator,  and the  fulfillment of the terms hereof or thereof will
not (a) conflict  with,  result in any breach of any of the terms and provisions
of, or  constitute  (with or without  notice or lapse of time or both) a default
under (i) the Originator's  articles of  incorporation  or by-laws,  or (ii) any
indenture,  loan  agreement,  mortgage,  deed of trust,  or other  agreement  or
instrument to which it is a party or by which it is

                                      -9-

<PAGE>

bound, (b) result in the creation or imposition of any Adverse Claim upon any of
its  properties  pursuant to the terms of any such  indenture,  loan  agreement,
mortgage,  deed of trust,  or other  agreement  or  instrument,  other  than the
Transaction  Documents,  or (c)  violate any law or any order,  writ,  judgment,
award,  injunction,  decree,  rule,  or  regulation  applicable  to  it  or  its
properties,  where,  in the cases of ITEMS  (a)(ii),  (b) or (c), such conflict,
breach,  default,  Adverse  Claim or violation  has had or could  reasonably  be
expected to have a Material Adverse Effect.

         5.6.  PROCEEDINGS.  (i) There is no litigation or, to the  Originator's
knowledge,  any  proceeding  or  investigation  pending  before  any  Government
Authority or arbitrator (a) asserting the invalidity of any Transaction Document
to which the  Originator  is a party as  Originator,  (b) seeking to prevent the
sale or  contribution  of  Receivables  and Related Rights to the Company or the
consummation  of any of the other  transactions  contemplated by any Transaction
Document to which the  Originator is a party as  Originator,  or (c) seeking any
determination  or ruling  that could  reasonably  be expected to have a Material
Adverse  Effect.  (ii) The  Originator  is not  subject to any order,  judgment,
decree,  injunction,  stipulation  or consent  order that  could  reasonably  be
expected to have a Material Adverse Effect.

         5.7.  BULK SALES ACT.  No transaction contemplated hereby requires
compliance with any bulk sales act or similar law.

         5.8.  GOVERNMENT  APPROVALS. Except for the filing of the UCC financing
statements  referred  to in ARTICLE  IV, all of which,  at the time  required in
ARTICLE IV, shall have been duly made and shall be in full force and effect,  no
authorization  or approval or other  action by, and no notice to or filing with,
any  governmental  authority or regulatory body is required for the Originator's
due execution,  delivery and performance of any Transaction Document to which it
is a party, as Originator.

         5.9.  FINANCIAL CONDITION.

         (a)   On the date hereof, and on the date of each sale of Receivables
by the  Originator  to the Company  (both before and after giving effect to such
sale), the Originator shall be Solvent.

         (b)   The  consolidated   balance sheets  of  the  Originator  and  its
consolidated subsidiaries as of December 31, 1999, and the related statements of
income  and  shareholders'   equity  of  the  Originator  and  its  consolidated
subsidiaries  for the  fiscal  year then  ended  certified  by the  Originator's
independent  accountants,  copies of which have been  furnished  to the Company,
present  fairly the  consolidated  financial  position of the Originator and its
consolidated  subsidiaries  for the period ended on such date, all in accordance
with generally accepted accounting  principles  consistently  applied; and since
such date no event has occurred that has had, or is reasonably likely to have, a
Material Adverse Effect.

         5.10. MARGIN  REGULATIONS.  No use of any funds  acquired  by the
Originator  under  this  Agreement  will  conflict  with  or  contravene  any of
Regulations  T, U and X  promulgated  by the Board of  Governors  of the Federal
Reserve System from time to time.

                                      -10-


<PAGE>


         5.11. QUALITY OF TITLE.

         (a)   Each  Receivable  (together with the Related Rights) which is to
be sold or  contributed  to the  Company  hereunder  is or shall be owned by the
Originator,  free and clear of any Adverse  Claim.  Whenever the Company makes a
purchase, or accepts a contribution,  hereunder,  it shall have acquired a valid
and perfected  ownership  interest  (free and clear of any Adverse Claim) in all
Receivables generated by the Originator and all Collections related thereto, and
in the Originator's entire right, title and interest in and to the other Related
Rights with respect thereto.

         (b)   No effective  financing  statement or other instrument similar in
effect  covering any Receivable or any Related Right is on file in any recording
office except such as may be filed in favor of the Company or the Originator, as
the case may be, in accordance  with this Agreement or in favor of the Lender in
accordance with the Loan and Servicing Agreement.

         5.12. ACCURACY OF INFORMATION. No factual written information furnished
or to be furnished in writing by the Originator,  as Originator,  to the Company
or the Lender for purposes of or in connection with any Transaction  Document or
any  transaction  contemplated  hereby or  thereby  (including  the  information
contained  in any  Purchase  Report)  is,  and no  other  such  factual  written
information hereafter furnished (and prepared) by the Originator, as Originator,
to the Company or the Lender  pursuant to or in connection  with any Transaction
Document, taken as a whole, will be inaccurate in any material respect as of the
date it was  furnished  or (except as  otherwise  disclosed to the Company at or
prior to such  time) as of the date as of  which  such  information  is dated or
certified, or shall contain any material misstatement of fact or omitted or will
omit to state any material fact necessary to make such information, in the light
of the circumstances  under which any statement therein was made, not materially
misleading on the date as of which such information is dated or certified.

         5.13. OFFICES.  The  Originator's principal place of business and chief
executive  office is located at the  address  set forth  under the  Originator's
signature  hereto,  and the offices  where the  Originator  keeps all its books,
records  and  documents  evidencing  the  Receivables  and all other  agreements
related to such  Receivables are located at the addresses  specified on SCHEDULE
5.13 (or at such  other  locations,  notified  to  Servicer  (if other  than the
Originator) and the Lender in accordance with SECTION 6.1(f),  in  jurisdictions
where all action required by SECTION 7.3 has been taken and completed).

         5.14. TRADE NAMES. Except as disclosed on SCHEDULE 5.14, the Originator
does not use any trade name other than its actual corporate name. From and after
the date that fell six years before the date hereof, the Originator has not been
known by any legal name or trade name  other than its  corporate  name as of the
date  hereof,  nor has the  Originator  been the  subject of any merger or other
corporate reorganization except, in each case, as disclosed on SCHEDULE 5.14.

         5.15. TAXES.  Except as set forth on SCHEDULE 5.15 the  Originator  has
filed all tax returns  and reports  required by law to have been filed by it and
has paid all taxes and  governmental  charges thereby shown to be owing,  except
any such taxes which are not yet delinquent or are being

                                      -11-


<PAGE>

diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate reserves in accordance with generally  accepted  accounting  principles
shall have been set aside on its books.


         5.16. LICENSES AND LABOR CONTROVERSIES.

         (a)   The  Originator  has not  failed to obtain any licenses, permits,
franchises or other  governmental  authorizations  necessary to the ownership of
its properties or to the conduct of its business,  which violation or failure to
obtain would be reasonably likely to have a Material Adverse Effect; and

         (b)   There are no labor  controversies  pending against the Originator
that have had (or are reasonably likely to have) a Material Adverse Effect.

         5.17. COMPLIANCE WITH APPLICABLE LAWS. The Originator is in compliance,
in all material  respects,  with the  requirements  of (i) all applicable  laws,
rules, regulations, and orders of all governmental authorities applicable to the
Receivables and the Isuzu Loan Documents.

         5.18. RELIANCE  ON  SEPARATE  LEGAL  IDENTITY.  The  Originator  is
aware that the Lender is entering into the Transaction  Documents to which it is
a party in reliance upon the Company's  identity as a legal entity separate from
the Originator.

         5.19. PURCHASE PRICE. The purchase price payable by the Company to the
Originator  hereunder is intended by the Originator and Company to be consistent
with the terms that would be obtained in an arm's  length sale.  The  Servicer's
Fee payable to the Originator is intended to be consistent with terms that would
be obtained in an arm's length servicing arrangement.

         5.20. ELIGIBILITY OF RECEIVABLES.  Unless  otherwise  identified to the
Company  on the  date  of the  purchase  hereunder,  each  Receivable  purchased
hereunder is on the date of purchase an Eligible Receivable.


                                   ARTICLE VI

                           COVENANTS OF THE ORIGINATOR

         6.1.  AFFIRMATIVE  COVENANTS. From the date  hereof until the first day
following the Final Payout Date, the Originator will, unless the Company and the
Lender shall otherwise consent in writing:

         (a)   COMPLIANCE WITH LAWS, ETC. Comply in all material respects with
all applicable laws, rules, regulations and orders, including those with respect
to the  Receivables  generated  by it and the  Isuzu  Loan  Documents  and other
agreements related thereto.

         (b)   PRESERVATION  OF  CORPORATE  EXISTENCE. Preserve and maintain its
corporate  existence,

                                      -12-


<PAGE>

rights, franchises and privileges in the jurisdiction of its incorporation,  and
qualify and remain  qualified in good standing as a foreign  corporation in each
jurisdiction where the failure to preserve and maintain such existence,  rights,
franchises,  privileges and qualification could reasonably be expected to have a
Material Adverse Effect.

         (c)   RECEIVABLES  REVIEW. (i) At any time and from time to time during
regular business hours, upon reasonable prior notice,  permit the Company and/or
the Lender, or their respective agents or  representatives,  (A) to examine,  to
audit and make copies of and  abstracts  from all books,  records and  documents
(including,  without limitation,  computer tapes and disks) in the possession or
under the  control of the  Originator  relating to the  Receivables  and Related
Rights and (B) to visit the Originator's  offices and properties for the purpose
of examining such materials described in the foregoing CLAUSE (A) and discussing
matters  relating  to the  Receivables  and Related  Rights or the  Originator's
performance  hereunder  with any of the officers or employees of the  Originator
having  knowledge of such matters;  and (ii) without  limiting the provisions of
CLAUSE  (i) next  above,  from time to time on  request  of the  Lender,  permit
certified  public  accountants  or other  auditors  acceptable  to the Lender to
conduct a review of its books and records  with respect to the  Receivables  and
Related Rights.

         (d)   KEEPING OF RECORDS AND BOOKS OF ACCOUNT.  Maintain an ability to
recreate  records  evidencing the Receivables in the event of the destruction of
the originals thereof.

         (e)   PERFORMANCE  AND  COMPLIANCE  WITH  ISUZU LOAN  DOCUMENTS. At its
expense timely and fully perform and comply with all  provisions,  covenants and
other promises  required to be observed by it under the Isuzu Loan Documents and
all other agreements related to the Receivables and Related Rights.

         (f)   LOCATION OF RECORDS, ETC.. (i) Keep its principal place of
business and chief executive office,  and the offices where it keeps its records
concerning or related to  Receivables  and Related  Rights,  at the  address(es)
referred to in  SCHEDULE  5.13 or,  upon 30 days'  prior  written  notice to the
Company and the  Lender,  at such other  locations  in  jurisdictions  where all
action  required  by SECTION 7.3 shall have been taken and  completed,  and (ii)
provide the Company and the Lender with at least 30 days'  written  notice prior
to making any change in its name or making any other  change in its  identity or
corporate  structure  (including a merger)  which could render any UCC financing
statement filed in connection with this Agreement "seriously misleading" as such
term is used in the UCC (which written  notice sets forth the applicable  change
and the effective date thereof).

         (g)   SEPARATE CORPORATE EXISTENCE OF THE COMPANY. Take such actions as
shall be required in order that:

               (i)   the  Company's  operating  expenses  (other  than  certain
organization  expenses and expenses incurred in connection with the preparation,
negotiation and delivery of the  Transaction  Documents) will not be paid by the
Originator;

               (ii)  the Company's books and records will be maintained
separately from those of

                                      -13-


<PAGE>

the Originator;

               (iii) all  financial  statements  of the  Originator  that are
consolidated to include the Company will contain  detailed notes clearly stating
that (A) all of the  Company's  assets  are  owned by the  Company,  and (B) the
Company is a separate  entity with creditors who have received  interests in the
Company's assets;

               (iv)  the Originator will strictly observe corporate formalities
in its dealing with the Company;

               (v)   the Originator shall not commingle its funds with any funds
of the Company;

               (vi)  the Originator  will maintain arm's length  relationships
with the Company, and the Originator will be compensated at market rates for any
services it renders or otherwise furnishes to the Company; and

               (vii) the Originator will not be, and will not hold itself out
to be,  responsible  for the debts of the Company or the decisions or actions in
respect of the daily  business  and  affairs  of the  Company  (other  than with
respect to such  decisions  or  actions of the  Originator  in its  capacity  as
Servicer).

         6.2.  REPORTING  REQUIREMENTS. From the date hereof until the first day
following the Purchase and Sale Termination Date, the Originator  shall,  unless
the Lender and the Company shall  otherwise  consent in writing,  furnish to the
Company and the Lender:

         (a)   PROCEEDINGS.  As soon as possible  and in any event within  three
Business Days after the Originator has knowledge thereof,  written notice to the
Company and the Lender of (i) all pending  proceedings and investigations of the
type described in SECTION 5.6 not previously disclosed to the Company and/or the
Lender  and (ii) all  material  adverse  developments  that have  occurred  with
respect to any previously disclosed proceedings and investigations;

         (b)   as soon as possible  and in any event within three  Business Days
after the occurrence of each Purchase and Sale Termination Event or event which,
with the giving of notice or lapse of time, or both, would constitute a Purchase
and Sale  Termination  Event, a statement of the chief financial  officer of the
Originator  setting forth details of such Purchase and Sale Termination Event or
event and the action  that the  Originator  has taken and  proposes to take with
respect thereto;

         (c)   promptly  after the  filing or  receiving  thereof, copies of all
reports and notices that the Originator or any Affiliate  files under ERISA with
the Internal Revenue Service or the Pension Benefit Guaranty  Corporation or the
U.S.  Department of Labor or that the Originator or any Affiliate  receives from
any of the  foregoing  or from any  multiemployer  plan  (within  the meaning of
Section 4001(a)(3) of ERISA) to which the Originator or any Affiliate is or was,
within the  preceding  five  years,  a  contributing  employer,  in each case in
respect of the assessment of withdrawal liability or an event or condition which
could, in the aggregate, result in the imposition of liability on the

                                      -14-


<PAGE>

Originator and/or any such Affiliate in excess of $250,000; and

         (d)   promptly  after the occurrence of any event or condition that
could reasonably be expected to have a Material  Adverse Effect,  notice of such
event or condition.

         (e)   OTHER.  Promptly,  from  time to  time,  such  other information,
documents,  records or reports respecting the Receivables, the Related Rights or
the Originator's  performance  hereunder that the Company or the Lender may from
time to time  reasonably  request  in  order to  protect  the  interests  of the
Company,  the Lender or any other Affected Party under or as contemplated by the
Transaction Documents.

         6.3.  NEGATIVE  COVENANTS.  From the date hereof until the date
following the Final Payout Date, the Originator  agrees that,  unless the Lender
and the Company shall otherwise consent in writing, it shall not:

         (a)   SALES,  LIENS, ETC. Except as otherwise provided herein or in any
other Transaction  Document,  sell, assign (by operation of law or otherwise) or
otherwise  dispose  of, or create or suffer to exist any  Adverse  Claim upon or
with  respect  to,  any  Receivable,  Collections  or Related  Security,  or any
interest  therein,  or assign to any  person  other than the Lender any right to
receive income in respect thereof.

         (b)   CHANGE IN BUSINESS.  Make any material  change in the  character
of  its  business  that  would  adversely  affect  the   collectibility  of  the
Receivables or the  enforceability  of the Isuzu Documents or the ability of the
Originator  to perform its  obligations  under the Isuzu  Documents or under any
other Transaction Document; without prior written consent of the Company and the
Lender.

         (c)   RECEIVABLES NOT TO BE EVIDENCED BY INSTRUMENTS.  Take any action
to cause or permit any  Receivable  generated  by it to become  evidenced by any
"instrument" (as defined in the applicable UCC) unless such  "instrument"  shall
be delivered to the Company which in turn shall deliver the same to the Lender.

         (d)   MERGERS,  ACQUISITIONS,  SALES,  ETC.  Merge or consolidate  with
another  Person  (except  pursuant to a merger or  consolidation  involving  the
Originator  where the  Originator  is the  surviving  corporation),  or  convey,
transfer,  lease or  otherwise  dispose  of  (whether  in one or in a series  of
transactions),  all or  substantially  all of its assets  (whether  now owned or
hereafter acquired), other than pursuant to this Agreement.

         (e)   COLLECTION  ACCOUNT BANK.  Replace or terminate the Collection
Account Bank unless the  requirements of paragraph (h) of Exhibit IV to the Loan
and Servicing Agreement have been met.

         (f)   ACCOUNTING  FOR  PURCHASES.  Account  for  or  treat  (whether in
financial  statements or otherwise) the transactions  contemplated hereby in any
manner  other  than as sales of the

                                      -15-


<PAGE>

Receivables and Related Security by the Originator to the Company.

         (g)   TRANSACTION DOCUMENTS. (i) Amend, supplement, amend and restate
or otherwise  modify any Transaction  Document except (A) in accordance with the
terms of such document, instrument or agreement and (B) with the advance written
consent of the Lender, or (ii) enter into, execute,  deliver or otherwise become
bound by any agreement, instrument, document or other arrangement that restricts
the right of the Originator to amend, supplement, amend and restate or otherwise
modify,  or to extend or renew,  or to waive any right under,  this Agreement or
any other Transaction Documents.


                                   ARTICLE VII

                      ADDITIONAL RIGHTS AND OBLIGATIONS IN
                           RESPECT OF THE RECEIVABLES

         7.1.  RIGHTS OF THE COMPANY.  The  Originator  hereby  authorizes the
Company and the  Servicer  (if other than the  Originator)  or their  respective
designees  to take  any and all  steps in the  Originator's  name  necessary  or
desirable, in their respective  determination,  to collect all amounts due under
any and all  Receivables  and Related  Rights,  including,  without  limitation,
endorsing the  Originator's  name on checks and other  instruments  representing
Collections and enforcing such  Receivables and the provisions of the Isuzu Loan
Documents that concern payment and/or enforcement of rights to payment.

         7.2.  RESPONSIBILITIES OF THE ORIGINATOR.  Anything herein to the
contrary notwithstanding:

         (a)   The Originator  agrees to transfer any Collections that it
receives  directly to the Collection  Account within one Business Day of receipt
thereof,  and agrees that all such  Collections  shall be segregated and held in
trust for the  Company  and the  Lender;  PROVIDED  that if the  Company  or the
Servicer is required by Section 5.4 of the Loan and Servicing Agreement to remit
Collections  directly to the Lender (or its designee) the Originator shall remit
such Collections  directly to the Lender (or its designee) in the same manner as
the Company and Servicer may be required to do so by Section 5.4 of the Loan and
Servicing  Agreement.  The  Originator  further  agrees not to deposit any funds
other than Collections in the Collection Account.

         (b)   The Originator  shall perform its obligations  hereunder, and the
exercise  by the  Company  or its  designee  of its rights  hereunder  shall not
relieve the Originator from such obligations.

         (c)   None of the Company,  Servicer (if other than the Originator), or
the Lender  shall have any  obligation  or liability to the Obligor or any other
third Person with respect to any  Receivables or the Isuzu Loan  Documents,  nor
shall the  Company,  Servicer (if other than the  Originator),  or the Lender be
obligated to perform any of the obligations of the Originator thereunder.

    
                                  -16-

<PAGE>


         (d)   The Originator agrees to deliver to the Servicer (if other than
the  Originator)  an  irrevocable   power  of  attorney,   with  full  power  of
substitution,  coupled with an interest,  to take in the name of the  Originator
all steps necessary or advisable to indorse,  negotiate or otherwise  realize on
any writing or other right of any kind held or  transmitted by the Originator or
transmitted or received by the Company  (whether or not from the  Originator) in
connection with any Receivable or Related Right.

         7.3.  FURTHER ACTION EVIDENCING PURCHASES.  The Originator agrees that
from time to time,  at its  expense,  it will  promptly  execute and deliver all
further instruments and documents,  and take all further action that the Company
or Servicer may  reasonably  request in order to perfect,  protect or more fully
evidence the Receivables  (and the Related Rights)  purchased by, or contributed
to, the Company  hereunder,  or to enable the Company to exercise or enforce any
of its  rights  hereunder  or under  any  other  Transaction  Document.  Without
limiting the generality of the foregoing, the Originator will:

         (a)   upon the request of the Company  execute and file such financing
or continuation  statements,  or amendments thereto or assignments  thereof, and
such other instruments or notices, as may be necessary or appropriate; and

         (b)   mark the summary master control data processing records with the
 legend set forth in SECTION 4.1(i).

The Originator hereby authorizes the Company or its designee to file one or more
financing or  continuation  statements,  and amendments  thereto and assignments
thereof,  relative to all or any of the Receivables (and the Related Rights) now
existing or hereafter  generated by the Originator.  If the Originator  fails to
perform any of its agreements or obligations  under this Agreement,  the Company
or its  designee  may (but shall not be required  to) itself  perform,  or cause
performance of, such agreement or obligation, and the expenses of the Company or
its designee incurred in connection therewith shall be payable by the Originator
as provided in SECTION 10.6.

         7.4.  APPLICATION  OF  COLLECTIONS.  Any  payment  by the  Obligor in
respect  of any  indebtedness  owed by it to the  Originator  shall,  except  as
otherwise  specified by the Obligor or otherwise required by contract or law and
unless otherwise instructed by the Company or the Lender, be applied FIRST, as a
Collection of any  Receivables  of the Obligor,  in the order of the age of such
Receivables,  starting with the oldest of such  Receivables,  and SECOND, to any
other indebtedness of the Obligor.


                                  ARTICLE VIII

                      PURCHASE AND SALE TERMINATION EVENTS

         8.1.  PURCHASE AND SALE  TERMINATION  EVENTS.  Each of the following
events or occurrences described in this SECTION 8.1 shall constitute a "PURCHASE
AND SALE TERMINATION EVENT":

                                      -17-


<PAGE>


         (a)    The Termination Date (as defined in the Loan and Servicing
Agreement) shall have occurred; or

         (b)    The Originator shall fail to make any payment or deposit to be
made by it hereunder when due and such failure shall remain  unremedied for five
(5) Business Days after notice; or

         (c)    Any  representation or warranty made or deemed to be made by the
Originator (or any of its officers)  under or in connection with this Agreement,
any other  Transaction  Document or any other  information  or report  delivered
pursuant  hereto or thereto  shall prove to have been false or  incorrect in any
material respect when made or deemed made provided, however, if the violation of
this  paragraph  (c) by the  Originator  may be cured  without any  potential or
actual  detriment to the Company,  or the Lender,  the Originator  shall have 30
days from the earlier of (i) the Originator's knowledge of such failure and (ii)
notice to the Originator of such failure to so cure any such violation  before a
Purchase and Sale  Termination  Event shall occur so long as the  Originator  is
diligently attempting to effect such cure; or

         (d)    The Originator shall fail to perform or observe in any material
respect any agreement  contained in any of SECTIONS 6.1(g) or 6.3; or

         (e)    The Originator  shall fail to perform or observe any other
material term,  covenant or agreement contained in this Agreement on its part to
be performed or observed and such failure  shall remain  unremedied  for 30 days
after written  notice  thereof shall have been given by Servicer,  the Lender or
the Company to the Originator; or

         (f)(i) The Originator or any of its  subsidiaries  shall generally not
pay its debts as such debts become due, or shall admit in writing its  inability
to pay its debts generally,  or shall make a general  assignment for the benefit
of creditors; or any proceeding shall be instituted by or against the Originator
or any of its subsidiaries seeking to adjudicate it a bankrupt or insolvent,  or
seeking  liquidation,  winding  up,  reorganization,   arrangement,  adjustment,
protection,  relief, or composition of it or its debts under any law relating to
bankruptcy,  insolvency or reorganization  or relief of debtors,  or seeking the
entry of an order for relief or the appointment of a receiver, trustee, or other
similar  official for it or for all or any substantial part of its property and,
in the case of any such proceeding  instituted against it (but not instituted by
it), such  proceeding  shall remain  undismissed  or unstayed for a period of 30
days; or (ii) the Originator or any of its subsidiaries shall take any corporate
action to  authorize  any of the  actions  set forth in CLAUSE (i) above in this
SECTION 8.1(f);

         (g)    A contribution failure shall occur with respect to any benefit
plan  sufficient  to give rise to a lien under Section  302(f) of ERISA,  or the
Internal  Revenue  Service shall,  or shall indicate its intention in writing to
the Originator to, file notice of a lien asserting a claim or claims pursuant to
the Code with  regard to any of the  assets of the  Originator,  or the  Pension
Benefit Guaranty  Corporation  shall, or shall indicate its intention in writing
to the  Originator  or an ERISA  Affiliate  to,  either  file  notice  of a lien
asserting a claim  pursuant to ERISA with regard to any assets of the Originator
or an ERISA  Affiliate or terminate  any benefit plan that has unfunded  benefit
liabilities; or

                                      -18-


<PAGE>

         (h)    The Internal Revenue Service shall file notice of a lien
pursuant  to Section  6323 of the  Internal  Revenue  Code with regard to any of
assets of the Originator  and such lien shall not have been released  within ten
Business  Days, or the Pension  Benefit  Guaranty  Corporation  shall,  or shall
indicate  its  intention  to, file notice of a lien  pursuant to Section 4068 of
ERISA with regard to any of the assets of the Originator.

         8.2.    REMEDIES.

                  (i)  OPTIONAL  TERMINATION.  Upon the occurrence of a Purchase
         and Sale  Termination  Event, the Company (and not Servicer) shall have
         the option by notice to the  Originator  (with a copy to the Lender) to
         declare the Purchase and Sale Termination Date to have occurred.

                  (ii) REMEDIES CUMULATIVE. Upon any termination of the Facility
         pursuant to this SECTION 8.2,  the Company  shall have,  in addition to
         all other rights and remedies  under this  Agreement or otherwise,  all
         other rights and  remedies  provided  under the UCC of each  applicable
         jurisdiction   and  other   applicable  laws,  which  rights  shall  be
         cumulative.  Without  limiting the  foregoing,  the  occurrence  of the
         Purchase  and Sale  Termination  Date  shall not deny the  Company  any
         remedy in addition to termination of the Purchase Facility to which the
         Company  may be  otherwise  appropriately  entitled,  whether at law or
         equity.


                                   ARTICLE IX

                                 INDEMNIFICATION

         9.1.    INDEMNITIES BY THE ORIGINATOR.  Without limiting any other
rights  which the  Company  may have  hereunder  or under  applicable  law,  the
Originator hereby agrees to indemnify the Company,  the Lender and each of their
respective  assigns,  officers,  directors,  employees  and agents  (each of the
foregoing  Persons being  individually  called a "PURCHASE AND SALE  INDEMNIFIED
PARTY"),  forthwith  on demand,  from and against any and all  damages,  losses,
claims,  judgments,  liabilities  and  related  costs  and  expenses,  including
reasonable  attorneys'  fees  and  disbursements  (all  of the  foregoing  being
collectively  called  "PURCHASE AND SALE  INDEMNIFIED  AMOUNTS"),  regardless of
whether  any such  Purchase  and Sale  Indemnified  Amount  is the  result  of a
Purchase and Sale Indemnified Party's negligence, strict liability or other acts
or  omissions  of a Purchase  and Sale  Indemnified  Party,  awarded  against or
incurred by any of them arising out of or as a result of the following:

         (a)   the  transfer by the  Originator of an interest in any Receivable
or Related Right to any Person other than the Company;

         (b)   the breach of any representation or warranty made by the
Originator  under or in connection with this Agreement or any other  Transaction
Document,  or any  information or report  delivered by the  Originator  pursuant
hereto or thereto  (including any  information  contained in a

                                      -19-


<PAGE>

Purchase  Report)  which  shall have been  false or  incorrect  in any  material
respect when made, deemed made or delivered;

         (c)   the failure by the  Originator to comply with any applicable law,
rule or regulation  with respect to any Receivable or the Isuzu Loan  Documents,
or the nonconformity of any Receivable or the Isuzu Loan Documents with any such
applicable law, rule or regulation;

         (d)   the failure to vest and maintain  vested in the Company a
perfected ownership interest in the Receivables  generated by the Originator and
Related Rights free and clear of any Adverse Claim,  other than an Adverse Claim
arising  solely as a result of an act of the  Company,  whether  existing at the
time  of the  purchase  or  contribution  of  such  Receivables  or at any  time
thereafter;

         (e)   the failure of the  Originator to file with respect to itself, or
any delay by the  Originator  in filing,  financing  statements or other similar
instruments or documents  under the UCC of any applicable  jurisdiction or other
applicable  laws  with  respect  to any  Receivables  or  purported  Receivables
generated  by the  Originator  or  Related  Rights,  whether  at the time of any
purchase or contribution or at any subsequent time;

         (f)   any  dispute,  claim, offset or defense (other than  discharge in
bankruptcy)  of the  Obligor  to the  payment  of any  Receivable  or  purported
Receivable generated by the Originator (including, without limitation, a defense
based on such  Receivables or the Isuzu Loan Documents not being a legal,  valid
and binding obligation of the Obligor  enforceable against it in accordance with
its terms),  or any other claim  resulting  from or relating to the  transaction
giving rise to any Receivable or relating to collection  activities with respect
to  any  Receivable  (if  such  collection  activities  were  performed  by  the
Originator  or any of its  Affiliates  acting  as  Servicer  or by any  agent or
independent contractor retained by the Originator or any of its Affiliates);

         (g)   any products liability or other claim, investigation, litigation
or proceeding arising out of or in connection with goods,  insurance or services
that secure or relate to any Receivable;

         (h)   any litigation, proceeding or investigation against the
Originator or in respect of any Receivable or Related Right;

         (i)   any tax or governmental fee or charge (other than any tax
excluded  pursuant to the proviso below),  all interest and penalties thereon or
with respect thereto,  and all out-of-pocket  costs and expenses,  including the
reasonable fees and expenses of counsel in defending against the same, which may
arise by reason of the purchase, contribution or ownership of the Receivables or
any Related Right connected with any such Receivables;

         (j)   any failure of the Originator,  individually or as Servicer,  to
perform its duties or  obligations  in  accordance  with the  provisions of this
Agreement or any other Transaction Document; and

         (k)   the commingling of any Collections at any time with other funds;


                                      -20-



<PAGE>



EXCLUDING,  HOWEVER,  (i)  Purchase and Sale  Indemnified  Amounts to the extent
resulting from gross negligence or willful  misconduct on the part of a Purchase
and Sale Indemnified  Party,  (ii) any  indemnification  which has the effect of
recourse  for  non-payment  of the  Receivables  due to  credit  reasons  to the
Originator  (except as otherwise  specifically  provided under this SECTION 9.1)
and (iii) any tax based upon or measured by net income or gross receipts.

         If for any reason the  indemnification  provided  above in this SECTION
9.1 is unavailable to a Purchase and Sale  Indemnified  Party or is insufficient
to hold such Purchase and Sale Indemnified  Party harmless,  then the Originator
shall  contribute  to the  amount  paid or  payable  by such  Purchase  and Sale
Indemnified  Party as a result of such loss,  claim,  damage or liability to the
maximum  extent  permitted  under  applicable  law.  Promptly after receipt by a
Purchase and Sale Indemnified Party under this ARTICLE IX of notice of any claim
or the  commencement  of any  action  arising  out of or as a  result  of any of
paragraphs (a) through (j) above, the Purchase and Sale Indemnified Party shall,
if a claim in respect  thereof is to be made against the  Originator  under this
ARTICLE IX, notify the Originator in writing of the claim or the commencement of
that action; PROVIDED,  HOWEVER, that the failure to notify the Originator shall
not relieve it from any liability which it may have under this ARTICLE IX except
to the extent it has been materially  prejudiced by such failure and,  PROVIDED,
FURTHER, that the failure to notify the Originator shall not relieve it from any
liability which it may have to a Purchase and Sale  Indemnified  Party otherwise
than under this ARTICLE IX. If any such claim or action shall be brought against
a Purchase  and Sale  Indemnified  Party,  the  Originator  shall be entitled to
participate  therein  and, to the extent  that it wishes,  to assume the defense
thereof with counsel  satisfactory to the Purchase and Sale  Indemnified  Party.
After notice from the Originator to the Purchase and Sale  Indemnified  Party of
its election to assume the defense of such claim or action, the Originator shall
not be liable to the Purchase and Sale  Indemnified  Party under this ARTICLE IX
for any legal or other  expenses  subsequently  incurred  by  Purchase  and Sale
Indemnified  Party in connection  with the defense thereof other than reasonable
costs of  investigation.  The Originator shall not (i) without the prior written
consent of the relevant  Purchase and Sale  Indemnified  Party or Parties (which
consent shall not be unreasonably withheld),  settle or compromise or consent to
the entry of any  judgment  with  respect to any  pending or  threatened  claim,
action,  suit or proceeding in respect of which  indemnification or contribution
may be sought hereunder  (whether or not the Purchase and Sale Indemnified Party
or Parties are actual or potential  parties to such claim or action) unless such
settlement,  compromise  or consent  includes an  unconditional  release of each
Purchase  and Sale  Indemnified  Party from all  liability  arising  out of such
claim,  action,  suit or proceeding or (ii) be liable for any  settlement of any
such action  affected  without its written  consent  (which consent shall not be
unreasonably withheld), but if settled with its written consent or if there be a
final  judgment of the plaintiff in any such action,  the  Originator  agrees to
indemnify and hold harmless any indemnified  party from and against any Purchase
and Sale Indemnified Amounts relating thereto.

                                      -21-



<PAGE>


                                    ARTICLE X

                                  MISCELLANEOUS

         10.1.   AMENDMENTS, ETC.

         (a)   The  provisions of this Agreement may from time to time be
amended,  modified or waived,  if such  amendment,  modification or waiver is in
writing and consented to by the Originator,  the Company, the Servicer (if other
than the Originator) and the Lender.

         (b)   No  failure  or  delay on the part of the  Company, Servicer, the
Originator  or any third  party  beneficiary  in  exercising  any power or right
hereunder  shall  operate as a waiver  thereof,  nor shall any single or partial
exercise  of any such  power or right  preclude  any other or  further  exercise
thereof or the  exercise of any other power or right.  No notice to or demand on
the Company,  Servicer,  or the  Originator  in any case shall entitle it to any
notice or demand in similar or other circumstances. No waiver or approval by the
Company or Servicer  under this  Agreement  shall,  except as may  otherwise  be
stated in such waiver or approval, be applicable to subsequent transactions.  No
waiver or approval under this Agreement  shall require any similar or dissimilar
waiver or approval thereafter to be granted hereunder.

         10.2.   NOTICES, ETC. All notices and other communications provided for
hereunder  shall,  unless  otherwise  stated  herein,  be in writing  (including
facsimile  communication)  and shall be personally  delivered or sent by express
mail or courier or by certified mail,  postage-prepaid,  or by facsimile, to the
intended party at the address or facsimile  number of such party set forth under
its name on the  signature  pages  hereof or at such other  address or facsimile
number as shall be  designated  by such  party in a written  notice to the other
parties hereto. All such notices and communications  shall be effective,  (i) if
personally  delivered or sent by express mail or courier or if sent by certified
mail, when received,  and (ii) if transmitted by facsimile,  when sent,  receipt
confirmed by telephone or electronic means.

         10.3.   NO WAIVER;  CUMULATIVE  REMEDIES.  The remedies herein provided
are  cumulative  and not  exclusive  of any  remedies provided by law.

         10.4.   BINDING EFFECT; ASSIGNABILITY.  This Agreement shall be binding
upon and inure to the benefit of the Company,  the Originator and its respective
successors  and  permitted  assigns.  The  Originator  may not assign its rights
hereunder or any interest  herein  without the prior  consent of the Company and
the  Lender.   This  Agreement   shall  create  and  constitute  the  continuing
obligations of the parties hereto in accordance with its terms, and shall remain
in full force and effect until the date after the Purchase and Sale  Termination
Date on which the  Originator has received  payment in full for all  Receivables
and Related  Rights  purchased  pursuant  to SECTION 1.1 hereof.  The rights and
remedies with respect to any breach of any  representation  and warranty made by
the  Originator  pursuant  to  ARTICLE  V and the  indemnification  and  payment
provisions of ARTICLE IX and SECTION 10.6 shall be continuing  and shall survive
any termination of this Agreement.

                                      -22-


<PAGE>

         10.5.   GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE  WITH, THE LAW OF THE STATE OF INDIANA  (WITHOUT  GIVING
EFFECT TO THE CONFLICT OF LAWS  PRINCIPLES  THEREOF),  EXCEPT TO THE EXTENT THAT
THE VALIDITY OR PERFECTION OF THE INTERESTS OF THE COMPANY IN THE RECEIVABLES OR
RELATED RIGHTS,  OR REMEDIES  HEREUNDER IN RESPECT THEREOF,  ARE GOVERNED BY THE
LAWS OF A JURISDICTION OTHER THAN THE STATE OF INDIANA.

         10.6.   COSTS,  EXPENSES  AND  TAXES.  In  addition  to the obligations
of the Originator under ARTICLE IX, the Originator agrees to pay on demand:

         (a)   all   reasonable   costs  and  expenses in  connection  with  the
preparation, execution, delivery and administration (including periodic auditing
of the Receivables) of this Agreement,  the Loan and Servicing Agreement and the
other  documents  and  agreements  to be delivered  hereunder  or in  connection
herewith,  including all reasonable costs and expenses relating to the amending,
amending and restating,  modifying or supplementing of this Agreement,  the Loan
and Servicing  Agreement and the other  documents and agreements to be delivered
hereunder or in connection  herewith and the waiving of any provisions  thereof,
and including in all cases, without limitation,  Attorney Costs for the Company,
the Lender and their  respective  Affiliates and agents with respect thereto and
with respect to advising the Company, the Lender and their respective Affiliates
and agents as to their rights and remedies  under this  Agreement  and the other
Transaction Documents,  and all reasonable costs and expenses, if any (including
Attorney Costs), of the Company, the Lender and their respective  Affiliates and
agents,  in  connection  with the  enforcement  of this  Agreement and the other
Transaction Documents; and

         (b)   any and all stamp and other taxes and fees  payable in connection
with the  execution,  delivery,  filing and  recording of this  Agreement or the
other documents or agreements to be delivered hereunder, and agrees to save each
Purchase and Sale  Indemnified  Party harmless from and against any  liabilities
with  respect to or  resulting  from any delay in paying or omission to pay such
taxes and fees.

         10.7.   SUBMISSION TO JURISDICTION.  EACH PARTY HERETO HEREBY
IRREVOCABLY (a) SUBMITS TO THE  NON-EXCLUSIVE  JURISDICTION OF ANY INDIANA STATE
COURT AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF INDIANA,
OVER ANY ACTION OR  PROCEEDING  ARISING OUT OF OR  RELATING  TO ANY  TRANSACTION
DOCUMENT; (b) AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND  DETERMINED  IN SUCH STATE OR UNITED  STATES  DISTRICT  COURT;  (c)
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, THE
DEFENSE  OF  AN  INCONVENIENT  FORUM  TO  THE  MAINTENANCE  OF  SUCH  ACTION  OR
PROCEEDING;  (d)  CONSENTS  TO THE  SERVICE  OF ANY AND ALL  PROCESS IN ANY SUCH
ACTION OR  PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT
ITS ADDRESS  SPECIFIED IN SECTION  10.2;  AND (e) TO THE EXTENT  ALLOWED BY LAW,
AGREES THAT A NONAPPEALABLE FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING

                                      -23-

<PAGE>

SHALL BE CONCLUSIVE  AND MAY BE ENFORCED IN OTHER  JURISDICTIONS  BY SUIT ON THE
JUDGMENT OR IN ANY OTHER  MANNER  PROVIDED BY LAW.  NOTHING IN THIS SECTION 10.7
SHALL  AFFECT THE  COMPANY'S  RIGHT TO SERVE LEGAL  PROCESS IN ANY OTHER  MANNER
PERMITTED BY LAW OR TO BRING ANY ACTION OR PROCEEDING  AGAINST THE ORIGINATOR OR
ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS.

         10.8. WAIVER OF JURY TRIAL. EACH PARTY HERETO EXPRESSLY WAIVES ANY
RIGHT TO A TRIAL BY JURY IN ANY  ACTION OR  PROCEEDING  TO ENFORCE OR DEFEND ANY
RIGHTS  UNDER  THIS  AGREEMENT,  ANY OTHER  TRANSACTION  DOCUMENT,  OR UNDER ANY
AMENDMENT,  INSTRUMENT  OR  DOCUMENT  DELIVERED  OR WHICH  MAY IN THE  FUTURE BE
DELIVERED IN CONNECTION  HEREWITH OR ARISING FROM ANY  RELATIONSHIP  EXISTING IN
CONNECTION  WITH THIS AGREEMENT OR ANY OTHER  TRANSACTION  DOCUMENT,  AND AGREES
THAT ANY SUCH ACTION OR PROCEEDING  SHALL BE TRIED BEFORE A COURT AND NOT BEFORE
A JURY.

         10.9.   CAPTIONS AND CROSS  REFERENCES; INCORPORATION BY REFERENCE. The
various captions (including,  without limitation, the table of contents) in this
Agreement are included for convenience  only and shall not affect the meaning or
interpretation of any provision of this Agreement.  References in this Agreement
to any  underscored  Section or Exhibit  are to such  Section or Exhibit of this
Agreement,  as the case may be. The Exhibits  hereto are hereby  incorporated by
reference into and made a part of this Agreement.

         10.10.  EXECUTION IN  COUNTERPARTS.  This Agreement  may be executed in
any  number  of  counterparts  and  by  different  parties  hereto  in  separate
counterparts,  each of which when so executed  shall be deemed to be an original
and all of  which  when  taken  together  shall  constitute  one  and  the  same
Agreement.

         10.11.  ACKNOWLEDGMENT AND AGREEMENT. By execution below, the
Originator  expressly  acknowledges and agrees that all of the Company's rights,
title,  and interests in, to, and under this  Agreement  shall be pledged by the
Company to the Lender  pursuant  to the Loan and  Servicing  Agreement,  and the
Originator  consents to such pledge. Each of the parties hereto acknowledges and
agrees that the Lender is a third party beneficiary of the rights of the Company
arising  hereunder  and  under  the  other  Transaction  Documents  to which the
Originator  is a party and that the Lender may enforce the rights of the Company
under this Agreement.

                                      -24-


<PAGE>



         IN WITNESS  WHEREOF,  the  parties  have caused  this  Agreement  to be
executed by their respective officers thereunto duly authorized,  as of the date
first above written.

                                                AUTOMOTIVE FINANCE CORPORATION


                                                By: /s/ Curtis L. Phillips
                                                   -----------------------------
                                                Name: Curtis L. Phillips
                                                Title: EVP, CFO, Treas
                                                310 East 96th Street, Suite 300
                                                Indianapolis, Indiana 46240
                                                Attention: Curt Phillips
                                                Telephone: (317) 815-9751
                                                Facsimile: (317) 815-9650



                                                AFC AIM CORPORATION


                                                By: /s/ Curtis L. Phillips
                                                   -----------------------------
                                                Name: Curtis L. Phillips
                                                Title: EVP CFO Treas
                                                310 East 96th Street, Suite 320
                                                Indianapolis, Indiana 46240
                                                Attention: Curt Phillips
                                                Telephone: (317) 815-9751
                                                Facsimile: (317) 815-9650



<PAGE>


                                  SCHEDULE 5.13

                                OFFICE LOCATIONS


                         310 East 96th Street, Suite 300
                           Indianapolis, Indiana 46240



<PAGE>



                                  SCHEDULE 5.14

                                   TRADE NAMES

AFC

AFC, Inc.

Autodaq Finance Corporation

Automotive Finance

Automotive Floorplan Corporation



<PAGE>



                                  SCHEDULE 5.15

                                   TAX MATTERS

                                      None.



<PAGE>



                                    EXHIBIT A

                              FORM OF COMPANY NOTE





<PAGE>


                                 NON-NEGOTIABLE
                                    TERM NOTE

                                                               December 22, 2000


    FOR VALUE RECEIVED,  the  undersigned,  AFC AIM  CORPORATION,  an Indiana
corporation (the "COMPANY"),  promises to pay to AUTOMOTIVE FINANCE CORPORATION,
an  Indiana  corporation  ("ORIGINATOR"),  on  the  terms  and  subject  to  the
conditions set forth herein and in the Purchase and Sale  Agreement  referred to
below, the aggregate  unpaid Purchase Price of all Receivables  purchased by the
Company from Originator  pursuant to such Purchase and Sale  Agreement,  as such
unpaid Purchase Price is shown in the records of Servicer.

    1.   PURCHASE  AND  SALE  AGREEMENT.  This Term  Note is the Company  Note
described  in,  and is subject to the terms and  conditions  set forth in,  that
certain  Purchase and Sale  Agreement of even date  herewith (as the same may be
amended, supplemented,  amended and restated or otherwise modified in accordance
with its terms,  the  "PURCHASE  AND SALE  AGREEMENT"),  among the  Company  and
Originator.  Reference is hereby made to the Purchase and Sale  Agreement  for a
statement of certain other rights and obligations of the Company and Originator.

    2.   DEFINITIONS.  Capitalized  terms used (but not defined) herein have the
meanings assigned thereto in the Purchase and Sale Agreement and in EXHIBIT I to
the  Receivables  Purchase  Agreement  (as  defined  in the  Purchase  and  Sale
Agreement).  In addition, as used herein, the following terms have the following
meanings:

                  "BANKRUPTCY  PROCEEDINGS"  has the meaning set forth in CLAUSE
(b) of PARAGRAPH 9 hereof.

                  "FINAL  MATURITY  DATE"  means the  Payment  Date  immediately
         following  the date that falls one hundred  twenty one (121) days after
         the Purchase and Sale Termination Date.

                  "INTEREST  PERIOD"  means  the  period  from and  including  a
         Payment Date (or, in the case of the first  Interest  Period,  the date
         hereof) to but excluding the next Payment Date.

                  "SENIOR  INTERESTS"  means,  collectively,   (i)  all  accrued
         interest on the Loans,  (ii) the fees referred to in SECTION 1.5 of the
         Loan and Servicing  Agreement,  (iii) all amounts  payable  pursuant to
         SECTION 1.7, 1.8, 1.9 or 1.11 of the Loan and Servicing Agreement, (iv)
         the principal amount of the Loans and (v) all other  obligations of the
         Company,  the Originator and the Servicer (as long as the Originator is
         the  Servicer)  that are due and  payable,  to (a) the  Lender  and its
         successors, permitted transferees

                                        1


<PAGE>

         and assigns arising in connection  with the  Transaction  Documents and
         (b) any  Indemnified  Party  arising  in  connection  with the Loan and
         Servicing  Agreement,  in each  case,  howsoever  created,  arising  or
         evidenced,  whether direct or indirect,  absolute or contingent, now or
         hereafter existing,  or due or to become due, together with any and all
         interest  accruing on any such  amount  after the  commencement  of any
         Bankruptcy  Proceedings,  notwithstanding  any provision or rule of law
         that  might  restrict  the  rights of any Senior  Interest  Holder,  as
         against the Company or anyone else, to collect such interest.

                  "SENIOR INTEREST HOLDERS" means, collectively, the Lender and
         the Indemnified Parties.

                  "SUBORDINATION  PROVISIONS" means,  collectively,  CLAUSES (a)
         through (l) of PARAGRAPH 9 hereof.

                  "TELERATE  SCREEN RATE" means,  for any Interest  Period,  the
         rate for thirty  day  commercial  paper  denominated  in Dollars  which
         appears on Page 1250 of the Dow Jones  Telerate  Service (or such other
         page as may  replace  that  page on that  service  for the  purpose  of
         displaying Dollar  commercial paper rates) at approximately  9:00 a.m.,
         New York City time, on the first day of such Interest Period.

    3.   INTEREST.  Subject to the  Subordination  Provisions set forth below,
         the Company  promises to pay interest on this Term Note as follows:

                  (a)  Prior to the Final  Maturity  Date,  the aggregate unpaid
         Purchase Price from time to time outstanding during any Interest Period
         shall bear  interest at a rate PER ANNUM equal to the  Telerate  Screen
         Rate for such Interest Period, as determined by Servicer; and

                  (b)  From (and  including)  the  Final  Maturity  Date to (but
         excluding) the date on which the entire aggregate unpaid Purchase Price
         is fully paid,  the aggregate  unpaid  Purchase Price from time to time
         outstanding  shall bear  interest at a rate PER ANNUM equal to the rate
         of interest  publicly  announced from time to time by Bank of Montreal,
         as its "base rate",  "reference  rate"  or other  comparable  rate,  as
         determined by Servicer.

    4.   INTEREST PAYMENT  DATES.  Subject to the Subordination Provisions set
forth below,  the Company  shall pay accrued  interest on this Term Note on each
Payment  Date,  and shall pay accrued  interest on the amount of each  principal
payment  made in cash on a date  other  than a Payment  Date at the time of such
principal payment.

    5.   BASIS OF  COMPUTATION.  Interest  accrued  hereunder that is computed
by reference to the Telerate Screen Rate shall be computed for the actual number
of days elapsed on the basis of a 360-day year, and interest  accrued  hereunder
that is computed by  reference to the rate  described in PARAGRAPH  3(b) of this
Term Note shall be computed  for the actual  number of days elapsed on the basis
of a 365- or 366-day year.
                                        2


<PAGE>

    6.   PRINCIPAL  PAYMENT DATES.  Subject to the Subordination  Provisions
set forth  below,  payments of the  principal  amount of this Term Note shall be
made as follows:

                  (a)  The principal amount of this Term Note shall be reduced
         by an amount equal to each payment  deemed made pursuant to SECTION 3.4
         of the Purchase and Sale Agreement; and

                  (b)  The  entire  remaining  unpaid  Purchase  Price  of  all
         Receivables  purchased by the Company from  Originator  pursuant to the
         Purchase and Sale Agreement shall be paid on the Final Maturity Date.

Subject to the Subordination Provisions set forth below, the principal amount of
and  accrued  interest  on this Term Note may be  prepaid  on any  Business  Day
without premium or penalty.

    7.   PAYMENT  MECHANICS.  All payments of principal and interest hereunder
are to be made in lawful  money of the  United  States of  America in the manner
specified in ARTICLE III of the Purchase and Sale Agreement.

    8.   ENFORCEMENT  EXPENSES.  In addition to and not in limitation of the
foregoing,  but subject to the  Subordination  Provisions set forth below and to
any  limitation  imposed  by  applicable  law,  the  Company  agrees  to pay all
expenses,  including reasonable attorneys' fees and legal expenses,  incurred by
Originator  in seeking to collect any amounts  payable  hereunder  which are not
paid when due.

    9.   SUBORDINATION  PROVISIONS.   The  Company  covenants and  agrees, and
Originator and any other holder of this Term Note (collectively,  Originator and
any such other holder are called the " HOLDER"), by its acceptance  of this Term
Note,  likewise  covenants and agrees on behalf of itself and any holder of this
Term Note, that the payment of the principal amount of and interest on this Term
Note is hereby  expressly  subordinated  in right of payment to the  payment and
performance of the Senior Interests to the extent and in the manner set forth in
the following clauses of this PARAGRAPH 9:

                  (a) No payment or other  distribution of the Company's  assets
         of any kind or character,  whether in cash, securities, or other rights
         or  property,  shall be made on account of this Term Note except to the
         extent such payment or other distribution is (i) permitted under CLAUSE
         (n) of  EXHIBIT  IV to the Loan and  Servicing  Agreement  or (ii) made
         pursuant to CLAUSE (a) or (b) of PARAGRAPH 6 of this Term Note;

                  (b) In the event of any dissolution,  winding up, liquidation,
         readjustment,  reorganization  or other similar  event  relating to the
         Company,  whether  voluntary or involuntary,  partial or complete,  and
         whether in bankruptcy,  insolvency or receivership proceedings, or upon
         an assignment for the benefit of creditors, or any other marshalling of
         the  assets  and  liabilities  of the  Company  or any  sale  of all or
         substantially  all of the assets of the Company other than as permitted
         by the  Purchase  and Sale  Agreement  (such  proceedings  being herein
         collectively called "BANKRUPTCY PROCEEDINGS"), the Senior Interests

                                        3

<PAGE>

         shall first be paid and performed in full and in cash before Originator
         shall be entitled to receive and to retain any payment or  distribution
         in respect of this Term Note. In order to implement the foregoing:  (i)
         all payments and  distributions  of any kind or character in respect of
         this Term Note to which Holder would be entitled except for this CLAUSE
         (b) shall be made directly to the Lender (for the benefit of the Senior
         Interest  Holders);  (ii) Holder shall promptly file a claim or claims,
         in the  form  required  in any  Bankruptcy  Proceedings,  for the  full
         outstanding  amount of this  Term  Note,  and  shall  use  commercially
         reasonable efforts to cause said claim or claims to be approved and all
         payments and other distributions in respect thereof to be made directly
         to the Lender (for the benefit of the Senior  Interest  Holders)  until
         the Senior  Interests shall have been paid and performed in full and in
         cash; and (iii) Holder hereby  irrevocably  agrees that Lender,  in the
         name of Holder or  otherwise,  demand,  sue for,  collect,  receive and
         receipt for any and all such payments or distributions, and file, prove
         and vote or consent in any such Bankruptcy  Proceedings with respect to
         any and all claims of Holder  relating to this Term Note,  in each case
         until the Senior  Interests  shall have been paid and performed in full
         and in cash;

                  (c) In the event that  Holder  receives  any  payment or other
         distribution  of any kind or  character  from the  Company  or from any
         other source  whatsoever,  in respect of this Term Note,  other than as
         expressly  permitted  by the terms of this Term Note,  such  payment or
         other  distribution  shall be received in trust for the Senior Interest
         Holders  and shall be turned  over by  Holder  to the  Lender  (for the
         benefit of the Senior Interest Holders) forthwith. Holder will mark its
         books and  records  so as clearly  to  indicate  that this Term Note is
         subordinated  in  accordance  with the terms  hereof.  All payments and
         distributions  received by the Lender in respect of this Term Note,  to
         the extent  received in or converted  into cash,  may be applied by the
         Lender (for the benefit of the Senior  Interest  Holders)  first to the
         payment of any and all expenses (including  reasonable  attorneys' fees
         and legal expenses) paid or incurred by the Senior Interest  Holders in
         enforcing these Subordination  Provisions, or in endeavoring to collect
         or realize upon this Term Note, and any balance  thereof shall,  solely
         as between  Originator and the Senior Interest  Holders,  be applied by
         the Lender (in the order of application  set forth in SECTION 1.4(d) of
         the Loan and  Servicing  Agreement)  toward  the  payment of the Senior
         Interests;  but as  between  the  Company  and its  creditors,  no such
         payments or  distributions  of any kind or character shall be deemed to
         be payments or distributions in respect of the Senior Interests;

                  (d) Notwithstanding any payments or distributions  received by
         the Senior  Interest  Holders  in respect of this Term Note,  while any
         Bankruptcy  Proceedings  are pending  Holder shall not be subrogated to
         the then existing rights of the Senior  Interest  Holders in respect of
         the  Senior  Interests  until the Senior  Interests  have been paid and
         performed  in  full  and in  cash.  If no  Bankruptcy  Proceedings  are
         pending,  Holder  shall only be entitled to  exercise  any  subrogation
         rights that it may acquire (by reason of a payment or  distribution  to
         the Senior Interest Holders in respect of this Term Note) to the extent
         that any payment  arising out of the  exercise of such rights  would be
         permitted  under  CLAUSE (n) of  EXHIBIT  IV to the Loan and  Servicing
         Agreement;
                                        4


<PAGE>

                  (e) These Subordination Provisions are intended solely for the
         purpose of defining the relative rights of Holder, on the one hand, and
         the Senior  Interest  Holders on the other hand.  Nothing  contained in
         these  Subordination  Provisions  or  elsewhere  in this  Term  Note is
         intended to or shall  impair,  as between the  Company,  its  creditors
         (other than the Senior  Interest  Holders)  and Holder,  the  Company's
         obligation,  which is  unconditional  and  absolute,  to pay Holder the
         principal  of and interest on this Term Note as and when the same shall
         become due and payable in accordance with the terms hereof or to affect
         the relative  rights of Holder and creditors of the Company (other than
         the Senior Interest Holders);

                  (f) Holder  shall not,  until the Senior  Interests  have been
         paid and  performed in full and in cash,  (i) cancel,  waive,  forgive,
         transfer  or  assign,  or  commence  legal  proceedings  to  enforce or
         collect,  or subordinate  to any  obligation of the Company,  howsoever
         created, arising or evidenced,  whether direct or indirect, absolute or
         contingent,  or now or  hereafter  existing,  or due or to become  due,
         other  than the  Senior  Interests,  this  Term  Note or any  rights in
         respect  hereof or (ii) convert this Term Note into an equity  interest
         in the Company,  unless  Holder shall have  received the prior  written
         consent of the Lender in each case;

                  (g) Holder shall not,  without the advance  written consent of
         the Lender, commence, or join with any other Person in commencing,  any
         Bankruptcy  Proceedings  with respect to the Company until at least one
         year and one day shall have  passed  since the Senior  Interests  shall
         have been paid and performed in full and in cash;

                  (h) If, at any time,  any payment (in whole or in part) of any
         Senior  Interest  is  rescinded  or must be  restored  or returned by a
         Senior   Interest   Holder   (whether  in  connection  with  Bankruptcy
         Proceedings  or  otherwise),   these  Subordination   Provisions  shall
         continue to be effective or shall be reinstated, as the case may be, as
         though such payment had not been made;

                  (i) Each of the  Senior  Interest  Holders  may,  from time to
         time, at its sole  discretion,  without  notice to Holder,  and without
         waiving any of its rights under these  Subordination  Provisions,  take
         any or all of the following  actions:  (i) retain or obtain an interest
         in any property to secure any of the Senior  Interests;  (ii) retain or
         obtain the primary or  secondary  obligations  of any other  obligor or
         obligors with respect to any of the Senior  Interests;  (iii) extend or
         renew for one or more periods  (whether or not longer than the original
         period),  alter or exchange any of the Senior Interests,  or release or
         compromise  any  obligation  of any nature  with  respect to any of the
         Senior  Interests;  (iv)  amend,  supplement,  amend  and  restate,  or
         otherwise modify any Transaction Document; and (v) release its security
         interest  in, or  surrender,  release  or permit  any  substitution  or
         exchange for all or any part of any rights or property  securing any of
         the  Senior  Interests,  or  extend  or renew  for one or more  periods
         (whether  or  not  longer  than  the  original  period),   or  release,
         compromise,  alter or  exchange  any  obligations  of any nature of any
         obligor with respect to any such rights or property;

                                        5


<PAGE>

                  (j) Holder  hereby  waives:  (i) notice of acceptance of these
         Subordination  Provisions by any of the Senior Interest  Holders;  (ii)
         notice of the existence,  creation,  non-payment or  non-performance of
         all  or any of  the  Senior  Interests;  and  (iii)  all  diligence  in
         enforcement,  collection or protection  of, or  realization  upon,  the
         Senior Interests, or any thereof, or any security therefor;

                  (k) Each of the  Senior  Interest  Holders  may,  from time to
         time,  on the  terms and  subject  to the  conditions  set forth in the
         Transaction  Documents  to which such  Persons  are party,  but without
         notice  to  Holder,  assign  or  transfer  any or  all  of  the  Senior
         Interests,  or any  interest  therein;  and,  notwithstanding  any such
         assignment  or  transfer  or  any  subsequent  assignment  or  transfer
         thereof, such Senior Interests shall be and remain Senior Interests for
         the purposes of these Subordination Provisions, and every immediate and
         successive  assignee or transferee of any of the Senior Interests or of
         any interest of such  assignee or  transferee  in the Senior  Interests
         shall be entitled to the benefits of these Subordination  Provisions to
         the same extent as if such assignee or transferee  were the assignor or
         transferor; and

                  (l) These  Subordination  Provisions  constitute  a continuing
         offer from the holder of this Term Note to all  Persons  who become the
         holders  of,  or who  continue  to hold,  Senior  Interests;  and these
         Subordination  Provisions  are  made  for  the  benefit  of the  Senior
         Interest Holders, and the Lender may proceed to enforce such provisions
         on behalf of each of such Persons.

    10.  GENERAL.  No failure or delay on the part of Originator in exercising
any power or right hereunder  shall operate as a waiver  thereof,  nor shall any
single or  partial  exercise  of any such power or right  preclude  any other or
further  exercise  thereof  or the  exercise  of any other  power or  right.  No
amendment,  modification or waiver of, or consent with respect to, any provision
of this Term Note shall in any event be  effective  unless (i) the same shall be
in writing  and  signed and  delivered  by the  Company  and Holder and (ii) all
consents  required for such actions under the  Transaction  Documents shall have
been received by the appropriate Persons.

    11.  MAXIMUM  INTEREST.  Notwithstanding  anything in this Term Note to the
contrary,  the Company  shall never be required to pay unearned  interest on any
amount outstanding  hereunder and shall never be required to pay interest on the
principal  amount  outstanding  hereunder  at a rate in  excess  of the  maximum
nonusurious  interest rate that may be contracted for, charged or received under
applicable  federal  or state law (such  maximum  rate being  herein  called the
"HIGHEST LAWFUL RATE").  If the effective rate of interest which would otherwise
by payable under this Term Note would exceed the Highest  Lawful Rate, or if the
holder of this Term Note shall  receive any unearned  interest or shall  receive
monies that are deemed to constitute interest which would increase the effective
rate of interest payable by the Company under this Term Note to a rate in excess
of the  Highest  Lawful  Rate,  then (i) the  amount  of  interest  which  would
otherwise by payable by the Company under this Term Note shall be reduced to the
amount  allowed by  applicable  law, and (ii) any unearned  interest paid by the
Company or any interest paid by the Company in excess of the Highest Lawful Rate
shall be refunded to the Company. Without limitation of the foregoing, all

                                        6

<PAGE>

calculations  of the rate of  interest  contracted  for,  charged or received by
Originator  under this Term Note that are made for the  purpose  of  determining
whether such rate exceeds the Highest Lawful Rate applicable to Originator (such
Highest Lawful Rate being herein called the  "ORIGINATOR'S  MAXIMUM  PERMISSIBLE
RATE")  shall be made,  to the  extent  permitted  by usury laws  applicable  to
Originator (now or hereafter enacted), by amortizing, prorating and spreading in
equal  parts  during  the  actual  period  during  which  any  amount  has  been
outstanding  hereunder  all  interest  at any time  contracted  for,  charged or
received by Originator in connection  herewith.  If at any time and from time to
time (i) the  amount of  interest  payable  to  Originator  on any date shall be
computed at Originator's  Maximum Permissible Rate pursuant to the provisions of
the  foregoing  sentence  and  (ii)  in  respect  of  any  subsequent   interest
computation  period the amount of interest otherwise payable to Originator would
be  less  than  the  amount  of  interest  payable  to  Originator  computed  at
Originator's  Maximum  Permissible  Rate, then the amount of interest payable to
Originator  in respect of such  subsequent  interest  computation  period  shall
continue to be computed at Originator's Maximum Permissible Rate until the total
amount of  interest  payable  to  Originator  shall  equal  the total  amount of
interest  which would have been  payable to  Originator  if the total  amount of
interest  had been  computed  without  giving  effect to the  provisions  of the
foregoing sentence.

    12.  NO NEGOTIATION.  This Term Note is not negotiable.

    13.  GOVERNING  LAW.  THIS TERM NOTE SHALL BE DEEMED TO BE A CONTRACT MADE
UNDER  AND  GOVERNED  BY THE LAWS OF THE  STATE OF  INDIANA  WITHOUT  REGARD  TO
CONFLICT OF LAWS PRINCIPLES.

    14.  CAPTIONS.  Paragraph  captions  used in this  Term  Note  are for
convenience  only and shall not affect  the  meaning  or  interpretation  of any
provision of this Term Note.

                            [Signature page follows)



                                        7


<PAGE>


                                            AFC AIM CORPORATION



                                            By:        /S/ CURTIS L. PHILLIPS
                                               ---------------------------------
                                            Name:      CURTIS L. PHILLIPS
                                                 -------------------------------
                                            Title:     EVP CFO, TREAS
                                                  ------------------------------







                                S-1                                 Company Note





<PAGE>

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

<TABLE>
                                                                     
                                                                                                                  EXHIBIT 12
<CAPTION>                                                                                                 
ALLETE
Computation of Ratios of Earnings to Fixed Charges and
Supplemental Ratios of Earnings to Fixed Charges

For the Year Ended December 31                                           2000       1999       1998       1997       1996
----------------------------------------------------------------------------------------------------------------------------
Millions Except Ratios
<S>                                                                     <C>        <C>        <C>        <C>        <C>
Income from Continuing Operations Per
     Consolidated Statement of Income                                   $148.6     $ 68.0     $ 88.5     $ 77.6     $ 69.2
Add (Deduct)
     Current Income Tax Expense                                           91.1       70.5       52.9       44.7       31.4
     Deferred Income Tax Expense (Benefit)                                (4.8)     (11.3)       2.7        3.2       (9.8)
     Deferred Investment Tax Credits                                      (1.8)      (1.5)      (1.6)      (1.3)      (2.0)
     Undistributed Income from Less than 50%
         Owned Equity Investments                                            -       (0.6)     (14.1)     (13.9)     (11.0)
     Minority Interest                                                       -        1.8        2.0        2.3        3.3
----------------------------------------------------------------------------------------------------------------------------
                                                                         233.1      126.9      130.4      112.6       81.1
----------------------------------------------------------------------------------------------------------------------------
Fixed Charges
     Interest on Long-Term Debt                                           54.5       48.4       48.5       50.4       52.4
     Capitalized Interest                                                  0.9        0.7        1.0        1.5        1.5
     Other Interest Charges - Net                                         15.9       12.0       17.1       14.3       10.2
     Interest Component of All Rentals                                     8.5        4.8        5.7        3.7        2.5
     Distributions on Redeemable Preferred Securities of Subsidiary        6.0        6.0        6.0        6.0        4.7
----------------------------------------------------------------------------------------------------------------------------
         Total Fixed Charges                                              85.8       71.9       78.3       75.9       71.3
----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes and Fixed Charges
     (Excluding Capitalized Interest)                                   $318.0     $198.1     $207.7     $187.0     $150.9
----------------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges                                        3.71       2.76       2.65       2.46       2.12
----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes and Fixed Charges
     (Excluding Capitalized Interest)                                   $318.0     $198.1     $207.7     $187.0     $150.9
Supplemental Charges
                                                      14.8       15.4       14.5       12.0       14.4
----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes and Fixed
     and Supplemental Charges (Excluding Capitalized Interest)          $332.8     $213.5     $222.2     $199.0     $165.3
----------------------------------------------------------------------------------------------------------------------------
Total Fixed Charges                                                     $ 85.8      $71.9      $78.3      $75.9      $71.3
Supplemental Charges                                                      14.8       15.4       14.5       12.0       14.4
----------------------------------------------------------------------------------------------------------------------------
     Fixed and Supplemental Charges                                     $100.6      $87.3      $92.8      $87.9      $85.7
----------------------------------------------------------------------------------------------------------------------------
Supplemental Ratio of Earnings to Fixed Charges<F1>                       3.31       2.45       2.39       2.26       1.93
----------------------------------------------------------------------------------------------------------------------------
<FN>

<F1> The supplemental  ratio of earnings to fixed charges includes  Minnesota  Power's  obligation under a contract with
     Square Butte which extends  through 2026, pursuant to which  Minnesota  Power is entitled to  approximately  71% of the
     output of a 455-megawatt coal-fired  generating unit (Unit).  Minnesota Power is obligated to pay its pro rata share of
     Square Butte's costs based on Unit output entitlement. Minnesota Power's payment obligation is suspended if Square Butte
     fails to deliver any power, whether produced or purchased,  for a period of one year. Square Butte's fixed costs consist
     primarily of debt service.  Variable operating costs include the price of coal purchased from BNI Coal under a long-term
     contract. (See Note 14.)
</FN>
</TABLE>


--------------------------------------------------------------------------------
                           ALLETE 2000 ANNUAL REPORT                          75



<PAGE>

                                                                   Exhibit 23(a)

                       CONSENT OF INDEPENDENT ACCOUNTANTS


We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements on Form S-8 (Nos. 33-51989, 333-26755, 333-16463, 333-16445,
333-82901) of ALLETE (legally incorporated as Minnesota Power, Inc.) of our
report dated January 17, 2001 appearing on page 54 of this Annual Report on Form
10-K.  We also  consent to the  incorporation  by reference  of our report dated
January 17,  2001  relating  to the  Financial Statement Schedule, which appears
on page 74 of this Form 10-K.

We also consent to the incorporation by reference in the Prospectus constituting
part of the  Registration  Statement  on Form S-3  (Nos.  333-02109,  333-40797,
333-52161,  333-58945,  333-54330, 333-41882) of ALLETE (legally incorporated as
Minnesota Power, Inc.) of our report dated January 17, 2001 appearing on page 54
of this Annual  Report on Form 10-K.  We also  consent to the  incorporation  by
reference  of our report  dated  January  17,  2001  relating  to the  Financial
Statement Schedule, which appears on page 74 of this Form 10-K.

PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 5, 2001








<PAGE>

                                                                   Exhibit 23(b)

                           CONSENT OF GENERAL COUNSEL


The statements of law and legal conclusions under "Item 1. Business" in ALLETE's
Annual  Report  on Form  10-K for the year  ended  December  31,  2000 have been
reviewed  by me and are set forth  therein  in  reliance  upon my  opinion as an
expert.

I hereby consent to the incorporation by reference of such statements of law and
legal  conclusions  in  Registration   Statement  Nos.   333-02109,   333-40797,
333-52161,  333-58945,  333-41882  and  333-54330 on Form S-3, and  Registration
Statement Nos. 33-51989, 333-26755,  333-16463,  333-16445 and 333-82901 on Form
S-8.


Philip R. Halverson

Philip R. Halverson
Duluth, Minnesota
February 5, 2001