ATLANTIC COAST AIRLINES HOLDINGS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

Commission file number 0-21976

ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware 13-3621051
(State of incorporation) (IRS Employer
Identification No.)

45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (703) 650-6000

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

Common Stock par value $ .02 NASDAQ National Market
(Title of Class) (Name of each exchange
on which registered)

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 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 of the
registrant as of March 1, 2002 was approximately $1.2 billion.

As of March 1, 2002 there were 50,054,000 shares of common stock of the
registrant issued and 45,007,668 shares of common stock were outstanding.

Documents Incorporated by Reference

Certain portions of the document listed below have been incorporated by
reference into the indicated part of this Form 10-K.

Document Incorporated Part of Form 10-K
Proxy Statement for 2002 Annual Meeting Part III, Items 10-13
of Shareholders

2
PART I

Item 1. Business

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking
statements. Statements in the Business and Management's Discussion and
Analysis of Operations and Financial Condition sections of this filing,
together with other statements beginning with such words as "believes",
"intends", "plans", and "expects" include forward-looking statements that
are based on management's expectations given facts as currently known by
management on the date this Form 10-K was first filed with the SEC.
Actual results may differ materially. Factors that could cause the
Company's future results to differ materially from the expectations
described here include the costs and other effects of enhanced security
measures and other possible government orders; changes in and
satisfaction of regulatory requirements including requirements relating
to fleet expansion; changes in levels of service agreed to by the Company
with its code share partners due to market conditions; the ability of
these partners to manage their operations and cash flow; the ability and
willingness of these partners to continue to deploy the Company's
aircraft and to utilize and pay for scheduled service at agreed rates;
increased cost and reduced availability of insurance; changes in existing
service; final calculation and auditing of government compensation;
unexpected costs or delays in the implementation of new service; adverse
weather conditions; satisfactory resolution of union contracts becoming
amendable during 2002 with the Company's aviation maintenance technicians
and ground service equipment mechanics, and the Company's flight
attendants; ability to hire and retain employees; availability and cost
of funds for financing new aircraft; the ability of Fairchild Dornier to
fulfill its contractual obligations to the Company, and of Bombardier and
Fairchild Dornier to deliver aircraft on schedule; airport and airspace
congestion; ability to successfully retire turboprop aircraft; flight
reallocations and potential service disruptions due to labor actions by
employees of Delta Air Lines or United Airlines; general economic and
industry conditions; and additional acts of war. The statements in this
Annual Report are made as of March 29, 2002 and the Company undertakes no
obligation to update any of the forward-looking information included in
this release, whether as a result of new information, future events,
changes in expectations or otherwise.

General

Atlantic Coast Airlines Holdings, Inc. ("ACAI"), is a holding
company with its primary subsidiary being Atlantic Coast Airlines
("ACA"), a regional airline serving 64 destinations in 28 states in the
Eastern and Midwestern United States and Canada as of March 1, 2002 with
760 scheduled non-stop flights system-wide every weekday. On July 1,
2001, ACAI combined the operations of its Atlantic Coast Jet, Inc.
("ACJet") subsidiary into the operations of ACA. As a result, ACA now
operates under its marketing agreements as both a United Express carrier
with United Air Lines, Inc. ("United") and as a Delta Connection carrier
with Delta Air Lines, Inc. ("Delta"). United Express operations are
conducted throughout the Eastern and Central United States, while Delta
Connection operations are conducted predominately in the Northeastern
United States and Canada. Unless the context indicates otherwise, the
terms "the Company", "we", "us", or "our" refer herein to Atlantic Coast
Airlines Holdings, Inc. As of March 1, 2002, the Company operated a
fleet of 124 aircraft (93 regional jets and 31 turboprop aircraft) having
an average age of approximately three years.

3
Recent Developments

On September 11, 2001, two United airplanes and two American
Airlines, Inc. airplanes were hijacked and used in terrorist attacks on
the United States. As a result of these terrorist attacks, the Federal
Aviation Administration ("FAA") issued a federal ground stop order that
required the immediate suspension of all commercial airline flights on
the morning of September 11, 2001. The Company recommenced flight
operations on September 14 at reduced levels from its pre-September 11
schedule. The events of September 11, together with the slowing economy
throughout 2001, has significantly affected the U.S. airline industry.
These events have resulted in changed government regulation, declines and
shifts in passenger demand, higher insurance rates and tightened credit
markets which continue to affect the operations and financial condition
of participants in the U.S. airline industry and may affect the Company
in ways that it is not currently able to predict. See, for example,
"Business - Insurance," "Business - Regulation," and "Management's
Discussion and Analysis of Results of Operations and Financial
Condition," below.

Marketing Agreements

The Company derives substantially all of its revenues through
its marketing agreements with United and Delta.

United Express:

The Company's United Express Agreements ("UA Agreements")
define the Company's relationship with United. In November 2000, the
Company and United amended and restated the UA Agreements, effectively
changing from a prorated fare arrangement to a fee-per-departure
arrangement. Under the UA Agreements in effect prior to November 2000,
the Company was responsible for scheduling, marketing and pricing its
flights, in coordination with United's operations, and paid a portion of
fares it received to United. Under the fee-per-departure structure in
effect as of December 1, 2000, the Company is contractually obligated to
operate a flight schedule designated by United, for which United pays the
Company an agreed amount per departure regardless of the number of
passengers carried, with incentive payments based on operational
performance. The Company thereby assumes the risks associated with
operating the flight schedule and United assumes the risk of scheduling,
marketing, and selling seats to the traveling public. The restated UA
Agreements are for a term of ten years. The restated UA Agreements give
ACA the authority to operate 128 regional jets in the United Express
operation. By operating under the UA Agreements, the Company is able to
use United's "UA" flight designator code to identify the Company's
flights and fares in the major airline Computer Reservation Systems,
including United's "Apollo" reservation system, and to use the United
Express logo and exterior aircraft paint schemes and uniforms similar to
those of United.

Pursuant to the restated UA Agreements, United, at its own
expense, provides a number of additional services to ACA. These include
customer reservations, customer service, pricing, scheduling, revenue
accounting, revenue management, frequent flyer administration,
advertising, provision of ground support services at most of the airports
served by both United and ACA, provision of ticket handling services at
United's ticketing locations, and provision of airport signage at
airports where both ACA and United operate. Under the restated
agreement, the Company remains responsible for fees associated with the
major airline Computer Reservation Systems. The UA Agreements do not
prohibit United from serving, or from entering into agreements with other
airlines who would serve, routes served by the Company, but state that
United may terminate the UA Agreements if ACAI or ACA enter into a
similar arrangement with any other carrier other than Delta or a
replacement for Delta without United's prior written approval. The UA
Agreements limit the ability of ACAI and ACA to merge with another
company or dispose of certain assets or aircraft without offering United
a right of first refusal to acquire the Company or such assets or
aircraft, and provide United a right to terminate the UA Agreements if
ACAI or ACA merge with or are controlled or acquired by another carrier.
The UA agreements provide United with the right to assume ACA's ownership
or leasehold interest in certain aircraft in the event ACA breaches
specified provisions of the UA agreements, or fails to meet specified
performance standards.
4

The UA Agreements call for the resetting of fee-for-departure
rates annually based on the Company's planned level of operations for the
upcoming year. On December 31, 2001, the Company and United agreed on fee-
per-departure rates to be utilized during 2002. Under the terms of this
agreement the Company and United settled prior contract issues, agreed
that there would be no adjustment for utilization changes in the fourth
quarter of 2001, agreed to aggressively contain costs in 2002, and
committed to a J-41 retirement plan.

Delta Connection:

In September 1999, the Company reached a ten-year agreement
with Delta to operate regional jet aircraft as part of the Delta
Connection program on a fee-per-block hour basis. The Company began Delta
Connection revenue service on August 1, 2000. The Company's Delta
Connection Agreement ("DL Agreement") defines the Company's relationship
with Delta. The Company is compensated by Delta on a fee-per-block hour
basis. Under the fee-per-block hour structure, the Company is
contractually obligated to operate a flight schedule designated by Delta,
for which Delta pays the Company an agreed amount per block hour flown
regardless of the number of passengers carried, with incentive payments
based on operational performance. The Company thereby assumes the risks
associated with operating the flight schedule and Delta assumes the risks
of scheduling, marketing, and selling seats to the traveling public. By
operating as part of the Delta Connection program, the Company is able to
use Delta's "DL" flight designator to identify ACA's flights and fares in
the major Computer Reservation Systems, including Delta's "Deltamatic"
reservation system, and to use the Delta Connection logo and exterior
aircraft paint schemes and uniforms similar to those of Delta.

Pursuant to the DL Agreement, Delta, at its expense, provides a
number of support services to ACA. These include customer reservations,
customer service, ground handling, station operations, pricing,
scheduling, revenue accounting, revenue management, frequent flyer
administration, advertising and other passenger, aircraft and traffic
servicing functions in connection with the ACA operation. Delta may
terminate the DL Agreement at any time if the Company fails to maintain
certain performance standards and, subject to certain rights of the
Company and by providing 180 days notice to the Company, may terminate
without cause. If Delta terminates the Delta agreement without cause
prior to March 2010, the Company has the right to sell all or some of the
Delta Connection aircraft to Delta. In January 2001, the Company reached
an agreement with United and Delta to place 20 CRJ's originally ordered
for the Delta Connection program in the United Express program. The DL
Agreement requires the Company to obtain Delta's approval if it chooses
to enter into a code-sharing arrangement with another carrier other than
a replacement for United, to list its flights under any other code, or to
operate flights for any other carrier, except with respect to such
arrangements with United or non-U.S. code-share partners of United or in
certain other circumstances. The DL Agreement does not prohibit Delta
from serving, or from entering into agreements with other airlines who
would serve, routes flown by the Company. The DL Agreement also
restricts the ability of the Company to dispose of aircraft subject to
the agreement without offering Delta a right of first refusal to acquire
such aircraft, and provides that Delta may extend or terminate the
agreement if, among other things, the Company merges with or sells its
assets to another entity, is acquired by another entity or if any person
acquires more than a specified percentage of its stock.
5
Due to the rapid increase in fleet size during 2001, the
Company and Delta agreed to compensation for 2001 utilizing a cost plus
formula based on reimbursement of fixed amounts for initial pilot
training expenses and for all other costs, based on actual costs
incurred, plus a contracted margin, and incentive compensation tied to
operating performance. The Company and Delta have agreed to return to a
fee-per-block hour rate arrangement for 2002. The Company and Delta are
currently setting these rates based on the Company's planned level of
operations for the upcoming year. The Company does not anticipate
material differences on a per-block-hour basis for its 2002 revenues as
compared to 2001 revenues due to the reversion to a fee-per-block-hour
rate.

Agreements with Other Airlines:

As of March 1, 2002 the Company has implemented code-sharing
arrangements with Lufthansa German Airlines ("Lufthansa"), Air Canada,
and Scandinavian Airlines involving certain United Express flights. Such
international code-sharing arrangements permit these foreign air carriers
to place their respective airline codes on certain flights operated by
ACA, and provide a wide range of benefits for passengers including
schedule coordination, through ticketing and frequent flyer
participation. The revenue benefits from these arrangements inures to
United, and any such arrangements as may be made in the future with
respect to the Company's Delta Connection flights would inure to Delta,
due to the nature of the Company's agreements with these two airlines.
Thus the Company's primary role under these arrangements is to obtain
regulatory approvals for the relationships and to operate the flights.

Charter Operations

The Company established a charter operation in February 2002.
The Company is presently providing regular private shuttle service to two
destinations pursuant to an agreement with a major corporation and
performing ad hoc charter services secured through brokers and other
means. The charter business is solicited and managed by a dedicated
management team separate from those involved in airline operations,
utilizing the Company's operations and maintenance services. The Company
has ordered three 328JETs for its charter business, one of which has been
delivered and the others of which are scheduled to be delivered during
the second quarter of 2002.

Markets

The Company's United Express operation is centered around
Washington's Dulles and Chicago's O'Hare airports. During 2001 and 2002,
the Company has greatly increased its Chicago operation such that as of
March 2002, 55% of the Company's United Express capacity (as measured in
available seat miles) is flown to/from Chicago's O'Hare airport. The
growth in Chicago results from the combination of adding complementary
service to United mainline service in 14 markets and replacing United
mainline service completely in 11 markets during 2001.
6
The Delta Connection operation is focused at New York's
LaGuardia airport, Boston's Logan airport and Cincinnati Northern
Kentucky International airport. As of March 2002, 42% of the Company's
Delta Connection capacity (as measured in available seat miles) was at
LaGuardia, 31% was at Boston, and 27% was at Cincinnati.
7
The following tables set forth the destinations served by the
Company as of March 1, 2002:

United Express Service
Washington-Dulles (To/From)
(Regional Jet and Turboprop Service)

Albany, NY Louisville, KY
Allentown, PA Manchester, NH
Binghamton, NY Nashville, TN
Birmingham, AL Newburgh, NY
Buffalo, NY New York, NY
(Kennedy)
Burlington, VT New York, NY
(LaGuardia)
Charleston, SC Newark, NJ
Charleston, WV Norfolk, VA
Charlottesville, VA Philadelphia, PA
Cleveland, OH Pittsburgh, PA
Columbia, SC Portland, ME
Columbus, OH Providence, RI
Dayton, OH Raleigh-Durham, NC
Detroit, MI Richmond, VA
Greensboro, NC Roanoke, VA
Greenville/Spartanburg, SC Rochester, NY
Harrisburg, PA Savannah, GA
Hartford, CT/Springfield, MA State College, PA
Indianapolis, IN Syracuse, NY
Jacksonville, FL White Plains, NY
Knoxville, TN
Chicago-O'Hare (To/From)
(Regional Jet Service)
Akron/Canton, OH Lansing, MI
Albany, NY Lexington, KY
Allentown, PA Memphis, TN
Buffalo, NY Madison, WI
Cedar Rapid/Iowa City, IA Nashville, TN
Charleston, SC Norfolk/Virginia Beach, VA
Charleston, WV Oklahoma City, OK
Charlotte, NC Omaha, NE
Cleveland, OH Peoria, IL
Columbia, SC Portland, ME
Dayton, OH Raleigh/Durham, NC
Des Moines, IA Roanoke, VA
Detroit, MI Rochester, NY
Fargo, ND Saginaw, MI
Grand Rapids, MI Savannah, GA
Greenville/Spartanburg, SC Sioux Falls, SD
Greensboro/High Point, NC South Bend, IN
Hartford, CT/Springfield, MA Springfield/Branson, MO
Indianapolis, IN Syracuse, NY
Jacksonville, FL Tulsa, OK
Kansas City, MO White Plains, NY
Knoxville, TN Wilkes-Barre/Scranton, PA

8

Delta Connection Service
New York LaGuardia (To/From)
(Regional Jet Service)

Columbia, SC Greenville/Spartanburg, SC
Columbus, OH Indianapolis, IN
Charleston, SC Nashville, TN
Cincinnati, OH Portland, ME
Dayton, OH Raleigh-Durham, NC
Greensboro/High Point, NC Richmond, VA

Boston Logan (To/From)
(Regional Jet Service)
Bangor, ME Newark, NJ
Burlington, VT Philadelphia, PA
Cincinnati, OH Portland, ME
Montreal, Quebec Canada Raleigh-Durham, NC
New York, NY (Kennedy) Washington-Dulles, DC

Cincinnati-Northern Kentucky (To/From)
(Regional Jet Service)
Birmingham, AL Columbia, SC
Boston, MA Greensboro/High Point, NC
Bristol, TN Greenville/Spartanburg, SC
Burlington, VT Nashville, TN
Charleston, SC New York, NY
(LaGuardia)
Charlotte, NC Raleigh-Durham, NC

Fleet Description

Fleet Expansion: As of March 1, 2002, the Company operated a
fleet of 60 Canadair Regional Jets ("CRJs"), 33 Fairchild Dornier 328
regional jets ("328JET"), and 31 British Aerospace Jetstream-41 ("J-41s")
turboprop aircraft. Thirty 328JETs are operated under the Delta
Connection program, 59 CRJs, two 328JETs and 31 J-41's are operated under
the United Express program, and one 328JET and one CRJ are currently
dedicated to charter operations.

As of March 1, 2002, the Company had a total of 36 CRJs on firm
order from Bombardier, Inc., in addition to the 60 already delivered, and
held options for 80 additional CRJs. The Company also had 32 328JETs on
firm order from Fairchild-Dornier, in addition to the 33 already
delivered, and held options for an additional 81 aircraft. In January
2001, the Company reached an agreement with United and Delta to place 20
CRJs originally ordered for the Delta Connection program in the United
Express Program. The future delivery schedule of the remaining 68 firm
ordered regional jet aircraft undelivered as of March 1, 2002 is as
follows: 16 CRJs for delivery during the remainder of 2002 and 20 CRJs
for delivery in 2003, and 10 328JETs for delivery during the remainder of
2002 and 22 328JETs in 2003.

9
Fleet Composition: The following table describes the Company's
fleet of aircraft, scheduled firm deliveries and options as of March 1,
2002:

Total Number Number
Number of of Average
of Aircraft Aircraft Passenger Age in Firm
Aircraft Leased Owned Capacity Years Orders Options

Canadair 60 56 4 50 2.1 36 80
Regional Jets
Fairchild 33 32 1 32 1.0 32 81
Dornier 328JET
British 31 26 5 29 7.2 - -
Aerospace J-41
124 114 10 3.1 68 161

Turboprop Retirement: During the fourth quarter of 2001, the
Company recorded an aircraft early retirement charge of $23.5 million
($14.0 million after tax) for the early retirement of nine leased
Jetstream-41 turboprop aircraft, which the Company plans to remove from
service prior to year-end 2002. The Company anticipates taking
additional charges during 2002 of approximately $48 million pre-tax
($28.4 million after-tax) for the retirement of its remaining 29-seat
Jetstream-41 turboprop aircraft. Fairchild Dornier GMBH ("Fairchild
Dornier"), the manufacturer of the 328JETS, is contractually obligated to
make the Company whole for any difference between lease payments, if any,
received from remarketing the 26 J-41 aircraft leased by the Company and
the lease payment obligations of the Company on those aircraft.
Fairchild Dornier also has agreed to purchase the five J-41 aircraft
owned by the Company at their net book value at the time of retirement.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Outlook and Business Risks" below. In 2001, the
Company completed the early retirement of the 19 seat J-32 turboprop fleet
and reversed approximately $500,000 of excess aircraft early retirement
charges that had been expensed in 2000.

In March 2001, the Company reached agreement with the lessor
for the early return and lease termination of the 28 19-seat Jetstream-32
turboprop aircraft formerly utilized in the Company's United Express
operations. Under this agreement, the Company paid a lease termination
fee, which consisted of $19.1 million in cash and the application of $5.2
million in credits due from the lessor. The Company completed the early
retirement of these aircraft from its fleet and returned the aircraft to
the lessor during 2001. The Company is in the process of completing the
disposal of spare parts and has certain oversight obligations with
respect to seven aircraft until July 2003, but does not expect to incur
any additional charges against earnings for the early retirement of the J-
32 fleet.
10
Fuel

The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices
in quantities sufficient to meet its future requirements. Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program, and United
Airlines bears such risk for the Company's United Express program. As
such, the Company reasonably expects that its results of operations with
United and Delta will not be directly affected by fuel price volatility.

Insurance

Following the September 11 terrorist attacks, the aviation
insurance industry imposed a worldwide surcharge on aviation insurance
rates as well as a reduction in coverage for certain war risks. In
response to the reduction in coverage, the Air Transportation Safety and
System Stabilization Act provided U.S. air carriers with the option to
purchase certain war risk liability insurance from the United States
government on an interim basis at rates that are more favorable than
those available from the private market. The Company has purchased this
coverage through May 19, 2002 and anticipates renewing it for as long as
the coverage is available from the U.S. government. The airlines and
insurance industry, together with the United States and other
governments, are continuing to evaluate both the cost and options for
providing coverage of aviation insurance. Recently, an industry-led
group announced a proposal to create a mutual insurance company, to be
called Equitime, to cover war risk and terrorism risk, which would
initially seek support through government guarantees. Equitime would
provide a competitive alternative to insurance being offered by the
traditional insurance market, which opposes this initiative. Equitime's
organizers project that it may be available to provide insurance as early
as May 2002 to up to 70 U.S. carriers. The Company has not been actively
involved in the formation of Equitime and is unable to anticipate whether
this source of insurance will be made available and, if so, whether it
will offer competitive rates. The Company anticipates that it will
follow industry practices with respect to sources of insurance.

Competition

Under the Company's fee arrangements with United and Delta,
United and Delta are responsible for establishing routes and fee
structure, and the Company's revenue is not directly related to passenger
revenue earned by United or Delta on its flights. However, the overall
system benefit to those airlines is likely to affect the Company in such
areas as future growth opportunities.

Slots

Slots are reservations for takeoffs and landings at specified
times and are required by governmental authorities to operate at certain
airports. The Company has rights to and utilizes takeoff and landing
slots at Chicago-O'Hare and LaGuardia, Kennedy and White Plains, New York
airports. The Company also uses slot exemptions at Chicago-O'Hare, which
differ from slots in that they allow service only to designated cities
and are not transferable to other airlines without the approval of the
U.S. Department of Transportation ("DOT"). Airlines may acquire slots by
governmental grant, by lease or purchase from other airlines, or by loan
when another airline does not use a slot but desires to avoid
governmental reallocation of a slot for lack of use. All leased and
loaned slots are subject to renewal and termination provisions. Under
rules presently in effect, all slot regulation is scheduled to end at
Chicago-O'Hare after July 1, 2002 and at LaGuardia and Kennedy after
January 1, 2007. The rules also provide that, in addition to those slots
currently held by carriers, operators of regional jet aircraft may apply
for, and the Secretary of Transportation must grant, additional slots at
Chicago, LaGuardia, and Kennedy in order to permit the carriers to offer
new service, increase existing service or upgrade to regional jet service
in qualifying smaller communities. There is no limit on the number of
slots a carrier may request.
11
The ability of regional carriers to obtain slots at LaGuardia
in large numbers led to an increase in flight activity at the airport
that exceeded the capacity of LaGuardia. As a result, and to reduce
airport congestion and delays, the FAA implemented a slot lottery system
resulting in a decrease in the operation of new regional jet service to
and from LaGuardia including ACA services operated for Delta. The FAA
has stated that the slot lottery is a temporary measure, and that it is
considering implementing a long-term solution that could involve
increasing landing and other fees to discourage operations during peak
hours. To the extent other airports experience significant flight
delays, the FAA or local airport operators could seek to impose similar
peak period pricing systems or other demand-reducing strategies, which
could impede the Company's ability to serve or increase service at any
such impacted airport.

Employees

As of March 1, 2002, the Company had 3,601 full-time and 391
part-time employees, classified as follows:

Classification Full- Part-
Time Time

Pilots 1,221 1
Flight attendants 517 -
Station personnel 898 349
Maintenance personnel 480 8
Management,
administrative and
clerical personnel 485 33

Total employees 3,601 391

The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), flight attendants are represented by the
Association of Flight Attendants ("AFA"), and aviation maintenance
technicians and ground service equipment mechanics are represented by the
Aircraft Mechanics Fraternal Association ("AMFA").

In January 2001, the Company agreed to a new four-and-a-half
year contract with its pilot union that was subsequently ratified and
became effective on February 9, 2001. The collective bargaining
agreement covers pilots flying for the United Express, Delta Connection,
and charter operations. The new agreement provides for substantial
increases in pilot compensation and improvements in benefits, training,
and other matters, which the Company believes are consistent with the
regional airline industry.

ACA's collective bargaining agreement with AFA was ratified in
October 1998. The agreement is for a four-year duration and becomes
amendable in October 2002. This agreement covers all flight attendants
working for the Company. The collective bargaining agreement with AMFA
was ratified in June 1998. The agreement is for a four-year duration and
becomes amendable in June 2002. This agreement covers all aviation
maintenance technicians and ground service equipment mechanics working
for the Company.
12
The Company believes that certain of the Company's
unrepresented labor groups are from time to time approached by unions
seeking to represent them. However, as of March 1, 2002, the Company has
not received any official notice of organizing activity and there have
been no representation applications filed with the National Mediation
Board by any of these groups. The Company believes that the wage rates
and benefits for non-union employee groups are comparable to similar
groups at other regional airlines.

The Company continues to emphasize employee recruiting and
retention efforts and to hire personnel to accommodate its growth plans.
Recently the Company has benefited from a decline in attrition due to the
softening of the national economy. However, due to fluctuations in
industry hiring demands, a competitive local labor market in Northern
Virginia and the potential for the resumption of normal attrition, there
can be no assurance that the Company will be able to continue to meet its
hiring requirements.

Pilot Training

The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow the Company to train
CRJ, J-41 and 328JET pilots at PAIFA's facility near Washington-Dulles.
In 2001, PAIFA relocated its Washington-Dulles operations to a new
training facility housing two CRJ simulators, a 328JET simulator, and a J-
41 simulator near the Company's Washington-Dulles headquarters. The
Company has agreements to purchase an annual minimum number of CRJ and J-
41 simulator training hours at agreed rates, through 2010 for the CRJ,
and 2002 for the J-41. The Company's payment obligations for CRJ and J-
41 simulator usage over the remaining years of the agreements total
approximately $12.5 million.

In 2001, a simulator provision and service agreement between
PAIFA, CAE Schreiner and the Company was executed and 328JET training
commenced at the PAIFA facility. Under this agreement, the Company has
committed to purchase all of its 328JET simulator time from PAIFA at
agreed upon rates, with no minimum number of simulator hours guaranteed.
A second 328JET simulator is scheduled for installation at the Washington-
Dulles PAIFA simulator facility in July 2002.

Regulation

Economic. The Department of Transportation ("DOT") has
extensive authority to issue certificates authorizing carriers to engage
in air transportation, establish consumer protection regulations,
prohibit certain unfair or anti-competitive pricing practices, mandate
conditions of carriage and make ongoing determinations of a carrier's
fitness, willingness and ability to provide air transportation. The DOT
can bring proceedings for the enforcement of its regulations under
applicable federal statutes, which proceedings may result in civil
penalties, revocation of operating authority or criminal sanctions.

The Company's ACA subsidiary holds a certificate of public
convenience and necessity, issued by the DOT, that authorizes it to
conduct scheduled and charter air transportation of persons, property and
mail between all points in the United States, its territories and
possessions. In addition, ACA may conduct charters to points outside the
United States, subject to obtaining any necessary authority from any
foreign country to be so served. This certificate requires that ACA
maintain DOT-prescribed minimum levels of insurance, comply with all
applicable statutes and regulations and remain continuously "fit" to
engage in air transportation. In addition to this authority, ACA is
authorized to engage in air transportation between the United States and
Canada.
13
The Company's ACJet subsidiary also holds a certificate of
public convenience and necessity, issued by the DOT, that authorizes it
to conduct scheduled and charter air transportation of persons, property
and mail between all points in the United States, its territories and
possessions. On July 1, 2001, the Company combined the operations of its
ACJet subsidiary into the operations of Atlantic Coast Airlines. ACJet
is now a dormant company with its only assets being its DOT and FAA air
carrier operating certificates. The certificates issued to ACJet are
subject to revocation for dormancy as of July 1, 2001.

Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time proposes
and adopts new regulations or amends existing regulations that may impose
additional regulatory burdens and costs on the Company. In addition,
air carriers may volunteer to impose new or additional requirements on
themselves to address Congressional concerns or concerns expressed by the
public, such as passenger rights initiatives. Imposition of new laws and
regulations on air carriers or agreement on voluntary initiatives could
increase the cost of operation and or limit carrier management
discretion.

Safety. The FAA extensively regulates the safety-related
activities of air carriers. The Company is subject to the FAA's
jurisdiction with respect to aircraft maintenance and operations,
equipment, ground facilities, flight dispatch, communications, training,
weather observation, flight personnel, airport security, the
transportation of hazardous materials and other matters affecting air
safety. To ensure compliance with its regulations, the FAA requires that
airlines under its jurisdiction obtain an operating certificate and
operations specifications for the particular aircraft and types of
operations conducted by such airlines. The Company's ACA subsidiary
possesses an operating certificate and related authorities issued by the
FAA authorizing it to conduct operations with turboprop and turbojet
equipment. The Company, like all carriers, requires specific FAA
authority to add aircraft to its fleet. ACA's authority to conduct
operations is subject to suspension, modification or revocation for
cause. The FAA has authority to bring proceedings to enforce its
regulations, which proceedings may result in civil or criminal penalties
or revocation of operating authority.

The Company's ACJet subsidiary was issued by the FAA an
operating certificate and related authorities authorizing it to conduct
operations with turbojet equipment. On July 1, 2001, the Company
combined the operations of its ACJet subsidiary into the operations of
Atlantic Coast Airlines.

From time to the time and with varying degrees of intensity,
the FAA conducts inspections of air carriers. Such inspections may be
scheduled or unscheduled and may be triggered by specific events
involving either the specific carrier being inspected or other air
carriers. In addition, the FAA may require airlines to demonstrate that
they have the capacity to properly manage growth and safely operate
increasing numbers of aircraft.
14
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and
other mandatory orders. These relate to, among other things, the
inspection of aircraft and the mandatory removal and replacement of parts
or structures. In addition, the FAA from time to time amends its
regulations and such amended regulations may impose additional regulatory
burdens on the Company, such as the required installation of new safety-
related items. Depending upon the scope of the FAA's orders and amended
regulations, these requirements may cause the Company to incur
substantial, unanticipated expenses that may not be reimbursable under
the Company's marketing agreements. The FAA enforces its maintenance
regulations by the imposition of civil penalties, which can be
substantial.

On November 19, 2001 the President signed into law the Aviation
and Transportation Security Act (the "Security Act"). The Security Act
requires heightened passenger, baggage and cargo security measures to be
adopted as well as enhanced airport security procedures. The Security
Act created the Transportation Security Administration ("TSA") that has
taken over the responsibility for conducting the screening of passengers
and their baggage at the nation's airports as of February 17, 2002. The
activities of the TSA are to be funded in part by the application of a
$2.50 per passenger enplanement security fee (subject to a maximum of
$5.00 per one way trip) and payment by all passenger carriers of a sum
not exceeding each carrier's passenger and baggage screening cost
incurred in calendar year 2000. The TSA is charged to have equipment in
operation by the end of 2002 to be able to electronically screen all
checked passenger baggage with explosive detection systems. The TSA is
also required to deploy federal air marshals on an increased number of
passenger flights.

The Security Act imposes new and increased requirements for air
carrier employee background checks and additional security training of
flight and cabin crew personnel. These additional and new requirements
may increase the security related costs of the Company. The Security Act
also mandates and the FAA has adopted new rules requiring the
strengthening of cockpit doors, some of the costs of which may be
reimbursed by the FAA. The Company has completed level one fortification
of its cockpit doors on all of its aircraft as of November 15, 2001. The
FAA has mandated additional cockpit door modifications that will result
in additional costs. The Company intends to apply for reimbursement of
these costs and other security costs for which the FAA has established a
cost reimbursement program. There is no guarantee that the Company will
be reimbursed in full for the cost of these modifications. New passenger
and baggage screening requirements have caused disruptions in the flow of
passengers through airports and in some cases delayed airline operations.
The Company may experience security-related disruptions in the future,
including reduced passenger demand for air travel, but believes that its
exposure to such disruptions is not greater than that faced by other
providers of regional air carrier services.

Although the TSA has taken over the former responsibilities of
the air carriers for the screening of all passengers and baggage, the FAA
continues to require air carriers to adopt and enforce procedures
designed to safeguard property, and ensure airport and aircraft to
protect against terrorist acts. The FAA, from time to time, imposes
additional security requirements on air carriers and airport authorities
based on specific threats or world conditions or as otherwise required.
The FAA has issued a number of security directives following the
September 11 terrorist attacks, and the Company has adjusted its security
procedures on numerous occasions in response to these directives. The
Company incurs substantial expense in complying with current security
requirements and it cannot predict what additional security requirements
may be imposed in the future or the cost of complying with such
requirements.
15
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the transportation of
hazardous materials. The Company has policies against accepting
hazardous materials or other dangerous goods for transportation.
Employees of the Company are trained in the recognition of hazardous
materials and dangerous goods through an FAA approved training course.
The Company may ship aircraft and other parts and equipment, some of
which may be classified as hazardous materials, using the services of
third party carriers, both ground and air. In acting in the capacity of
a shipper of hazardous materials, the Company must comply with applicable
regulations. The FAA enforces its hazardous material regulations by the
imposition of civil penalties, which can be substantial.

Other Regulation. In the maintenance of its aircraft fleet and
ground equipment, the Company handles and uses many materials that are
classified as hazardous. The Environmental Protection Agency and similar
local agencies have jurisdiction over the handling and processing of
these materials. The Company is also subject to the oversight of the
Occupational Safety and Health Administration concerning employee safety
and health matters. The Company is subject to the Federal Communications
Commission's jurisdiction regarding the use of radio frequencies.

Federal law establishes maximum aircraft noise and emissions
limits. At the present time, all of the aircraft operated by the Company
comply with all applicable federal noise and emissions regulations.
Federal law generally preempts airports from imposing unreasonable local
noise rules that restrict air carrier operations. However, under certain
circumstances airport operators may implement reasonable and
nondiscriminatory local noise abatement procedures, which procedures
could impact the ability of the Company to serve certain airports,
particularly in off-peak hours.

Seasonality

Seasonal factors such as winter snowstorms, thunderstorms, and
hurricanes have the ability to affect the Company's departures,
completion factor, profitability and cash generation. As a whole, the
Company's principal geographic areas of operations usually experience
more adverse weather during the year as compared to other geographical
regions, causing a greater percentage of the Company's and other
airlines' flights to be canceled.

Item 2. Properties

Leased Facilities

Airports

The Company leases gate and ramp facilities at most of the
airports ACA serves and leases ticket counter and office space at those
locations where ticketing is handled by Company personnel. Payments to
airport authorities for ground facilities are generally based on a number
of factors, including space occupied as well as flight and passenger
volume. The Company occupies a 69,000 square foot passenger concourse at
Washington-Dulles dedicated solely to regional airline operations. The
36-gate concourse, designed to support the Company's United Express
operation, is owned by the Metropolitan Washington Airports Authority and
leased to the Company under a 15-year lease.
16
Corporate Offices

In December 2000, the Company moved into a newly built three-
story office building encompassing 77,000 square feet of space under a
ten year operating lease. This new facility houses the executive,
administrative and system control departments. The Company's previously
leased headquarters facility, comprised of 79,000 square feet, has been
transformed into an employee training and services center. The Company
renegotiated this lease for a new seven-year term expiring in January
2008. Together, these two properties will provide the necessary
facilities for the Company's continued growth.

Maintenance Facilities

The FAA's safety regulations mandate periodic inspection and
maintenance of commercial aircraft. The Company performs most line
maintenance, service and inspection of its aircraft and engines at its
maintenance facilities using its own personnel.

The Company performs maintenance functions at its 112,000
square foot aircraft maintenance facility at Washington-Dulles airport,
and at its 34,000 square foot hangar facility in Columbia, SC. The
Washington-Dulles facility is comprised of 60,000 square feet of hangar
space and 52,000 square feet of support space and includes hangar, shop
and office space necessary to maintain the Company's fleet. In addition
to these facilities, the company performs maintenance functions and
maintains leased hangar space at LaGuardia Airport in New York, Logan
Airport in Boston, O'Hare International Airport in Chicago, and
Cincinnati Northern Kentucky International Airport.

Item 3. Legal Proceedings

The Company is a party to routine litigation and to FAA civil
action proceedings, all of which are viewed to be incidental to its
business, and none of which the Company believes are likely to have a
material effect on the Company's financial position or the results of its
operations.

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

No matter was submitted during the fiscal quarter ended
December 31, 2001, to a vote of the security holders of the Company
through the solicitation of proxies or otherwise.

PART II

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

The Company's common stock, par value $.02 per share (the
"Common Stock"), is traded on the NASDAQ National Market ("NASDAQ/NM")
under the symbol "ACAI". Trading of the Common Stock commenced on July
21, 1993.
17
The following table sets forth the reported high and low
closing sale prices of the Common Stock on the NASDAQ/NM for the periods
indicated:

2000 High Low
First quarter $12.97 $8.31
Second quarter $16.00 $11.99
Third quarter $18.49 $13.00
Fourth quarter $21.38 $13.53

2001
First quarter $23.50 $18.25
Second quarter $29.99 $20.75
Third quarter $29.16 $10.03
Fourth quarter $24.94 $13.61

2002
First quarter $29.21 $23.05
(through March 1, 2002)

As of March 1, 2002, the closing sales price of the Common
Stock on NASDAQ/NM was $27.25 per share and there were approximately 166
holders of record of Common Stock.

The Company has not paid any cash dividends on its Common Stock
and does not anticipate paying any Common Stock cash dividends in the
foreseeable future. The Company intends to retain earnings to finance
the growth of its operations. The payment of Common Stock cash dividends
in the future will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition, the applicability of any
restrictions imposed upon the Company subsidiaries by certain of its
financing agreements, the dividend restrictions imposed by the Company's
line of credit, and other factors deemed relevant by the Board of
Directors. In addition, ACAI is a holding company and its only
significant asset is its investment in its subsidiary, ACA.

The Company's Board of Directors has approved the purchase of
up to $40 million of the Company's outstanding common stock in open
market or private transactions. As of March 1, 2002, the Company has
purchased 2,128,000 shares of its common stock at an average price of
$8.64 per share. The Company has approximately $21.6 million remaining
of the $40 million authorization. The Company did not repurchase shares
of its common stock during fiscal 2001.

Item 6. Selected Financial Data

The following selected financial data under the captions
"Consolidated Financial Data" and "Consolidated Balance Sheet Data"
relating to the years ended December 31, 1997, 1998, 1999, 2000 and 2001
have been derived from the Company's consolidated financial statements.
The following selected operating data under the caption "Selected
Operating Data" have been derived from Company records. The data should
be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K.
18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and
operating data)

Consolidated Financial Data: Years ended December 31,

1997 1998 1999 2000 2001

Operating revenues:
Passenger revenues $202,540 $285,243 $342,079 $442,695 $577,604
Other revenues 2,904 4,697 5,286 9,831 5,812
Total operating revenues 205,444 289,940 347,365 452,526 583,416
Operating expenses:
Salaries and related costs 49,661 68,135 84,554 107,831 164,446
Aircraft fuel 17,766 23,978 34,072 64,433 88,308
Aircraft maintenance and 16,860 22,730 24,357 36,750 48,478
materials
Aircraft rentals 29,570 36,683 45,215 59,792 90,323
Traffic commissions and 32,667 42,429 54,521 56,623 15,589
related fees
Facility rents and landing 10,376 13,475 17,875 20,284 32,025
fees
Depreciation and 3,566 6,472 9,021 11,193 15,353
amortization
Other 16,035 23,347 28,458 42,537 61,674
Aircraft early retirement - - - 28,996 23,026
charges (1)
Total operating expenses 176,501 237,249 298,073 428,439 539,222
Operating income 28,943 52,691 49,292 24,087 44,194
Other income (expense):
Interest expense (3,450) (4,207) (5,614) (6,030) (4,832)
Interest income 1,284 4,145 3,882 5,033 7,500
Debt conversion expense (2) - (1,410) - - -

Government compensation (3) - - - - 9,710
Other income (expense), net 62 326 (85) (278) 263
Total other expense, net (2,104) (1,146) (1,817) (1,275) 12,641

Income before income tax
expense and cumulative
effect of accounting 26,839 51,545 47,475 22,812 56,835
change
Income tax provision 12,339 21,133 18,319 7,657 22,513

Income before cumulative
effect of accounting change 14,500 30,412 29,156 15,155 34,322

Cumulative effect of - - (888) - -
accounting change, net (4)
Net income $14,500 $30,412 $28,268 $15,155 $34,322

19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(Dollars in thousands, except per share amounts and operating data)

Years ended December 31,

1997 1998 1999 2000 2001
Income per share:
Basic:
Income before $0.47 $.84 $.77 $.38 $.79
cumulative effect of
accounting change
Cumulative effect of - - (0.02) - -
accounting change
Net income per share (5) $0.47 $.84 $.75 $.38 $.79

Diluted:
Income before $0.40 $.71 $.68 $.36 $.76
cumulative effect of
accounting change
Cumulative effect of - - (0.02) - -
accounting change
Net income per share (5) $0.40 $.71 $.66 $.36 $.76

Weighted average number
of shares used
in computation (in 31,294 36,256 37,928 40,150 43,434
thousands) (5) 39,024 44,372 44,030 43,638 45,210
Basic
Diluted

Selected Operating Data:
Departures 146,069 170,116 186,571 199,050 235,794
Revenue passengers 1,666,975 2,534,077 3,234,713 3,778,811 4,937,208
carried
Revenue passenger 419,977 792,934 1,033,912 1,271,273 1,895,152
miles (000s) (6)
Available seat miles 861,222 1,410,763 1,778,984 2,203,839 3,292,798
(000s) (7)
Passenger load 48.8% 56.2% 58.1% 57.7% 57.6%
factor (8)
Revenue per $0.239 $0.206 $0.195 $0.205 $0.177
available seat mile
Cost per available $0.205 $0.168 $0.168 $0.181 $0.157
seat mile (9)
Average yield per $0.482 $0.360 $0.331 $0.348 $0.305
revenue passenger mile
(10)
Average passenger 252 313 320 336 384
trip length (miles)
Aircraft in service 65 74 84 105 117
(end of period)
Destinations served 43 53 51 53 64
(end of period)

Consolidated Balance
Sheet Data:
Working capital $45,028 $68,130 $60,440 $72,018 $138,659
Total assets 148,992 227,626 293,753 382,700 452,425
Long-term debt and
capital leases, less 76,145 64,735 92,787 67,089 60,643
current portion
Total stockholders' 34,805 110,377 125,524 168,173 221,300
equity

20
1. In 2001, the Company recorded an operating charge of $23,537,000
($14,005,000 net of income tax benefits) for the non-discounted value of
future lease and other costs associated with the early retirement of nine
J-41 turboprop aircraft. In 2000, the Company recorded an operating
charge of $28,996,000 ($17,398,000 net of income tax benefits) for the
present value of future lease and other costs associated with the early
retirement of 28 J-32 turboprop aircraft. Upon completion of the J-32
retirement plan in 2001, the Company reversed $500,000 of the original
2000 operating charge in 2001.

2. In connection with the induced conversion of a portion of the 7%
Convertible Subordinated Notes, the Company recorded a non-cash, non-
operating charge of approximately $1.4 million in 1998.

3. In 2001, the Company recognized $9.7 million as non-operating income
under the Air Transportation Safety and System Stabilization Act, signed
into law by President Bush on September 22, 2001.

4. In 1999, the Company recorded a charge of $888,000 for the
cumulative effect, net of income taxes, of a change in accounting for
preoperating costs in connection with the implementation of Statement of
Position 98-5.

5. All per share calculations have been restated to reflect 2-for-1
common stock splits effected as dividends distributed on May 15, 1998 and
February 23, 2001.

6. "Revenue passenger miles" or "RPMs" represent the number of miles
flown by revenue passengers.

7. "Available seat miles" or "ASMs" represent the number of seats
available for passengers multiplied by the number of scheduled miles the
seats are flown.

8. "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles
by available seat miles.

9. "Operating cost per available seat mile" or "CASM" represents total
operating expenses, excluding aircraft early retirement charges, divided
by available seat miles.

10. "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.

21
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition

General

Atlantic Coast Airlines Holdings, Inc. ("ACAI") operates
through its wholly owned subsidiary, Atlantic Coast Airlines ("ACA"). In
2001, the Company recorded net income of $34.3 million compared to $15.2
million for 2000, and $28.3 million for 1999. The 2001 results include a
restructuring charge of $13.7 million, net of income taxes, related to
the planned early retirement of nine leased 29-seat J-41 turboprop
aircraft and $5.8 million, net of income taxes, in government
compensation received pursuant to the Air Transportation Safety and
System Stabilization Act ("Stabilization Act") signed by the President of
the United States in September 2001. The 2000 results include a
restructuring charge of $17.4 million, net of income taxes, related to
the early retirement of 28 leased 19-seat J-32 turboprop aircraft and non-
recurring tax credits of $1.4 million. The 1999 net results include the
cumulative effect of an accounting change, net of income taxes, of
$888,000 related to the adoption of Statement of Position 98-5, which
resulted in the write-off of remaining unamortized regional jet
implementation costs. Excluding these unusual items, net income for
2001, 2000 and 1999 would have been $42.2 million, $31.1 million, and
$29.2 million, respectively. For 2001, the Company's available seat
miles ("ASM") increased 49% with the addition of 19 Canadair Regional Jet
("CRJ") aircraft and 15 Fairchild Dornier 328JET ("328JET") aircraft, net
of the reduction of 21 J-32 turboprop aircraft during the year. The
number of total passengers increased 31%, and revenue passenger miles
("RPM") increased 49%.

Results of Operations

The Company's net income was $34.3 million (including a $23.0
million pre-tax operating charge related to the early retirement of nine
J-41 turboprop aircraft and $9.7 million in pre-tax income for government
compensation) or $.76 per diluted share in 2001 compared to $15.2 million
(including a $29.0 million pre-tax operating charge related to the early
retirement of 28 J-32 turboprop aircraft) or $.36 per diluted share in
2000, and $28.3 million or $.66 per diluted share in 1999. During 2001,
the Company generated operating income of $44.2 million (including a $23
million operating charge related to the early retirement of nine J-41
turboprop aircraft), compared to $24.1 million for 2000 (including a $29
million pre-tax operating charge related to the early retirement of 28 J-
32 turboprop aircraft) and $49.3 million for 1999. Excluding the
aircraft early retirement charges in 2001 and 2000, operating margins for
2001, 2000 and 1999 were 11.5%, 11.7% and 14.2% respectively.

Results for 2001 include special pre-tax government
compensation of $9.7 million arising from the Stabilization Act. The
Stabilization Act provides cash grants to commercial air carriers as
compensation for direct and incremental losses resulting from the attacks
of September 11, 2001 and incurred from that date through December 31,
2001.

The 83.5% increase in operating income from 2000 to 2001 is a
reflection of the 49.4% increase in available seat miles coupled with a
13.7% decrease in revenue per available seat mile and a 13.3% decrease in
the cost per available seat mile. Additionally, the 2001 aircraft early
retirement charge of $23 million was $6 million less than the aircraft
early retirement charge in 2000. Revenue and cost per available seat
mile have decreased as the turboprop aircraft are retired and the Company
utilizes more regional jets.
22
The 51.1% decrease in operating income from 1999 to 2000 is a
reflection of the J-32 retirement charge of $29 million. Excluding this
charge, operating income increased 7.7%, which reflects a 5.1% increase
in unit revenue (total revenue per ASM) from $0.195 to $0.205, an
increase of 7.7% in unit costs (cost per ASM) from $0.168 to $.181 and a
23.9% increase in ASM's.

Fiscal Year 2000 vs. 2001

Operating Revenues

The Company's operating revenues increased 28.9% to $583.4
million in 2001 compared to $452.5 million in 2000. The increase
resulted primarily from a 49.4% increase in ASMs to 3.3 billion as well
as a 9.9% increase in revenue per departure to $2,452. Revenue in 2001
was recognized primarily under fee-for-service agreements as compared to
a combination of a proration-of-fare agreement and a fee-for-service
agreement in 2000. Revenue for 2001 also included an additional $3.8
million attributable to routine subsequent period sampling adjustments to
prior billed tickets under the Company's former proration-of-fare
arrangement. The Company believes that it will no longer experience
revenue adjustments attributable to its former proration-of-fare
arrangements. The increase in ASMs reflects the addition of 19 CRJ
aircraft and 15 328JET aircraft in 2001, and the full year effect in 2001
of adding 14 CRJ aircraft and 14 328JET aircraft during 2000, offset by
the removal of 21 J-32 aircraft during 2001. Revenue passengers
increased 30.7% in 2001 compared to 2000, which combined with the
increase in the average passenger stage length resulted in a 49.1%
increase in RPMs.

The 40.8% decrease in other revenues year over year reflects a
$1.8 million decrease in revenue from package and mail delivery and a
$1.4 million decrease in United employee ticket revenue. The decrease
reflects the fact that these revenues are no longer earned by the Company
as a result of the restatement of the United Express agreement, which
went into effect on December 1, 2000.

Operating Expenses

Excluding the $23 million and $29 million aircraft early
retirement charge in 2001 and 2000, respectively, the Company's operating
expenses increased 29.2% to $516.2 million in 2001 compared to $399.4
million in 2000. This increase was due primarily to: a 52.5% increase in
total salary costs, a 51.1% increase in aircraft rentals, a 57.9%
increase in facility rents and landing fees and a 49.4% increase in ASMs.
These increases reflect the addition of 34 regional jet aircraft in 2001,
and the retirement of 21 J-32s during 2001.
23
A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 2000
and 2001 is as follows:

Year Ended December 31,
2000 2001

Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)

Salaries and related 23.8% 4.9 28.2% 5.0
costs
Aircraft fuel 14.2% 2.9 15.1% 2.7

Aircraft maintenance 8.1% 1.7 8.3% 1.5
and materials
Aircraft rentals 13.2% 2.7 15.5% 2.7

Traffic commissions and 12.5% 2.6 2.7% .5
related fees
Facility rents and 4.5% .9 5.5% 1.0
landing fees
Depreciation and 2.5% .5 2.6% .4
amortization
Other 9.5% 1.9 10.6% 1.9
Aircraft early 6.4% 1.3 3.9% .7
retirement charge

Total 94.7% 19.4 92.4% 16.4

Costs per ASM decreased 15.5% to 16.4 cents in 2001 compared to
19.4 cents for 2000. The main factors contributing to the decrease were
a 49.4% increase in ASMs and a 72.5% decrease in the year-over-year
traffic commissions and related fees. The decrease in traffic
commissions and related fees reflects the fact that many of these fees
are no longer borne by the Company as a result of the restatement of the
United Express agreement, which went into effect on December 1, 2000.
Excluding the aircraft early retirement charge in both 2001 and 2000,
costs per ASM decreased 13.3% to 15.7 cents during 2001 compared to 18.1
cents for 2000.

Salaries and related costs per ASM increased 2.0% to 5.0 cents
in 2001 compared to 4.9 cents in 2000. In absolute dollars, salaries and
related expenses increased 52.5% from $107.8 million in 2000 to $164.4
million in 2001. The increase primarily resulted from the net addition
of 557 full and part time employees during 2001 to support the 34
regional jet aircraft added during 2001, an accrual of $2.9 million
recorded in 2001 reflecting estimated costs for additional company
contributions which may be made to the Company's 401(k) plan to address
operational defects found in the plan, and $1.8 million in executive
compensation related to deferred compensation benefits being provided to
senior executive officers.

The cost per ASM of aircraft fuel decreased to 2.7 cents in
2001 compared to 2.9 cents in 2000. The total average price per gallon
of fuel decreased 11.7% to 98 cents in 2001 compared to $1.11 in 2000.
In absolute dollars, aircraft fuel expense increased 37.1% from $64.4
million in 2000 to $88.3 million in 2001, reflecting a 27.3% increase in
block hours and the higher fuel consumption per hour of regional jet
aircraft versus turboprop aircraft which resulted in a 21.6% increase in
the system average burn rate (gallons used per block hour flown).

The cost per ASM of aircraft maintenance and materials
decreased to 1.5 cents in 2001 compared to 1.7 cents in 2000. In
absolute dollars, aircraft maintenance and materials expense increased
31.9% from $36.8 million in 2000 to $48.5 million in 2001. The increased
expense resulted from the increase in the size of the total fleet, the
continual increase in the average age of the J-41 turboprop fleet and the
gradual expiration of manufacturer's warranties on the CRJs.
24
The cost per ASM of aircraft rentals remained the same at 2.7
cents in 2001 and 2000. During 2001, the Company took delivery of 34
additional regional jet aircraft, all of which were lease financed. In
absolute dollars, aircraft rental expense increased 51.1% to $90.3
million as compared to $59.8 million in 2000 due to the additional
regional jet aircraft added to the fleet.

The cost per ASM of traffic commissions and related fees
decreased to .5 cents in 2001 as compared to 2.6 cents in 2000. In
absolute dollars, traffic commissions and related fees decreased 72.5% to
$15.6 million in 2001 from $56.6 million in 2000. The decrease reflects
the fact that many of these fees are no longer borne by the Company as a
result of the restatement of the United Express agreement, which went
into effect on December 1, 2000. Under the restated agreement, the
Company is now only responsible for fees associated with the major
airline Computer Reservation Systems.

The cost per ASM of facility rent and landing fees increased to
1.0 cents for 2001 from .9 cents for 2000. In absolute dollars, facility
rent and landing fees increased 57.9% to $32 million for 2001 from $20.3
million in 2000. The increase in absolute dollars for facility rent and
landing fees is a result of an 18.5% increase in the number of
departures, the heavier landing weight of the regional jets and the lease
of the Company's new corporate headquarters building commencing on
December 1, 2000.

The cost per ASM of depreciation and amortization decreased
slightly to 0.4 cents for 2001 from 0.5 cents in 2000. In absolute
dollars, depreciation and amortization expense for 2001 increased 37.2%
to $15.4 million from $11.2 million in 2000. The absolute increase
results in part from additional expenditures for rotable spare parts,
engines and aircraft improvements.

The cost per ASM of other operating expenses remained the same
at 1.9 cents for 2001 and 2000. In absolute dollars, other operating
expenses increased 45% to $61.7 million for 2001 from $42.5 million in
2000. The increased costs result primarily from a 200% increase in the
cost of passenger insurance, a 96.4% increase in the cost of hull
insurance, and the 30.7% increase in revenue passengers which resulted in
higher passenger handling costs, training expenses and crew accommodation
costs for new flight crews to support additional aircraft and stations.
The Company expects pilot training and crew accommodation costs to
continue to increase as the remaining firm ordered CRJ and 328JET
aircraft are received. Under the Stabilization Act, the government
subsequently authorized air carriers to apply for reimbursement for
increased insurance costs incurred during the period October 1, 2001 to
October 30, 2001, and the Company applied for, received, and recorded as
a reduction to insurance expense $652,000 in such reimbursements. This
amount was based on costs incurred during the period, and no other
insurance reimbursements are anticipated.

In 2001, the Company recorded an operating charge of 0.7 cents
per ASM for costs associated with the early retirement of nine J-41
turboprop aircraft, as compared to 1.3 cents per ASM in 2000 for costs
associated with the early retirement of 28 J-32 turboprop aircraft. In
absolute dollars, the amount of the charge was $23 million in 2001
compared to $29 million in 2000. The retirement of the J-32 fleet was
completed by December 31, 2001 and the Company reversed $500,000 of the
2000 charge. Nine of the J-41 turboprop aircraft are expected to be
retired in 2002, with the remaining 22 aircraft to be retired by December
31, 2003.
25
Other Income (Expense)

Interest expense decreased from $6 million in 2000 to $4.8
million in 2001. The decrease is the result of the full year effect of
the impact of the conversion of the Company's 7% notes into equity during
the first half of 2000.

Interest income increased from $5 million in 2000 to $7.5
million in 2001. This is primarily the result of the Company's
significantly higher cash balances during 2001 as compared to 2000 offset
partially by lower rate of return on short-term investments in 2001.

On September 22, 2001, President Bush signed into law the
Stabilization Act. The Stabilization Act provides cash grants to
commercial air carriers as compensation for (1) direct losses incurred
beginning with the terrorist attacks on September 11, 2001 as a result of
any FAA mandated ground stop order issued by the Secretary of
Transportation (and for any subsequent order which continues or renews
such a stoppage), and (2) incremental losses incurred during the period
beginning September 11, 2001 and ending December 31, 2001 as a direct
result of such attacks. The Company is entitled to receive cash grants
under these provisions. The exact amount of the Company's compensation
will be based on the lesser of actual losses incurred or a statutory
limit based on the total amount allocable to all airlines. This total
amount is not yet determinable because the statutory limit is subject to
information not yet released by the government. The Company has received
$9.7 million in government compensation, which is the government's
estimate of approximately 85% of the Company's allocation based on
preliminary data. The Company has received $9.7 million in cash grants
under these provisions recognized as non-operating income under
"government compensation" for the third and fourth quarters 2001. This
amount was the government's estimate of approximately 85% of amount due
to the Company based on preliminary data. The exact amount of the
Company's compensation will be based on the lesser of actual losses
incurred or a statutory limit based on the total amount allocable to all
airlines. This exact amount is not yet determinable because the
statutory limit is subject to information not yet released by the federal
government. As such, the Company is unsure if it will be entitled to any
further government compensation under this program and will recognize any
remaining payments as non-operating income during the period it is
determined the Company is entitled to such amounts. All amounts
received as government compensation are subject to audit and adjustment
by the federal government.

The Company recorded a provision for income taxes of $22.5
million for 2001, compared to a provision for income taxes of $7.7
million in 2000. The 2001 effective tax rate was approximately 39.6% as
compared to the 2000 effective tax rate of approximately 33.6%. This
increase is primarily due to a favorable state income tax ruling in 2000
resulting in the application of one time state tax credits, and the
realization of certain tax benefits that were previously reserved, which
together reduced income tax expense by approximately $1.4 million for
2000. The effective tax rates reflect non-deductible permanent
differences between taxable and book income.
26
Fiscal Year 1999 vs. 2000

Operating Revenues

The Company's operating revenues increased 30.3% to $452.5
million in 2000 compared to $347.4 million in 1999. The increase
resulted from a 23.9% increase in ASMs, together with an increase in
revenue per ASMs of 5.1%. The increase in ASMs reflects the addition of
fourteen CRJ aircraft and fourteen 328JET aircraft in 2000, and the full
year effect in 2000 of adding ten CRJ aircraft during 1999, offset by the
removal of seven J-32 aircraft during 2000. Revenue passengers increased
16.8% in 2000 compared to 1999, which combined with the increase in the
average passenger stage length resulted in a 23% increase in RPMs.

The 86% increase in other revenues year over year includes
amounts paid by Delta Air Lines related to certain pilot training for the
Delta Connection operation.

Operating Expenses

Excluding the $29.0 million aircraft early retirement charge,
the Company's operating expenses increased 34.0% to $399.4 million in
2000 compared to $298.1 million in 1999. This increase was due primarily
to: an 89% increase in total fuel costs as a result of a 49% increase in
the average price per gallon of jet fuel, coupled with a 20% increase in
the average fuel burn rate to 222 gallons per hour; a 23.9% increase in
ASMs; and expenses for the certification and start up of the ACJet
operation. The increase in ASMs, passengers and burn rates reflects the
addition of fourteen CRJs and fourteen 328JETs into scheduled service,
net of the retirement of seven J-32s during 2000.

A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 1999
and 2000 is as follows:

Year Ended December 31,
1999 2000

Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)

Salaries and related 24.3% 4.8 23.8% 4.9
costs
Aircraft fuel 9.8% 1.9 14.2% 2.9
Aircraft maintenance 7.0% 1.4 8.1% 1.7
and materials
Aircraft rentals 13.0% 2.5 13.2% 2.7
Traffic commissions and 15.7% 3.1 12.5% 2.6
related fees
Facility rents and 5.2% 1.0 4.5% .9
landing fees
Depreciation and 2.6% .5 2.5% .5
amortization
Other 8.2% 1.6 9.5% 1.9
Aircraft early - - 6.4% 1.3
retirement charge

Total 85.8% 16.8 94.7% 19.4

Costs per ASM increased 15.5% to 19.4 cents in 2000 compared to
16.8 cents for 1999. The main factors contributing to the increase were
a 49% increase in the year over year price per gallon of jet fuel, the
expenses associated with the certification and start-up of ACJet, flight
crew training costs, and the aircraft early retirement charge. Excluding
the aircraft early retirement charge, costs per ASM increased 7.7% to
18.1 cents during 2000 compared to 16.8 cents for 1999.
27
Salaries and related costs per ASM increased 2.1% to 4.9 cents
in 2000 compared to 4.8 cents in 1999. In absolute dollars, salaries and
related expenses increased 27.5% from $84.6 million in 1999 to $107.8
million in 2000. The increase primarily resulted from the net addition
of 780 full and part time employees during 2000 to support the 28
regional jet aircraft added during 2000.

The cost per ASM of aircraft fuel increased to 2.9 cents in
2000 compared to 1.9 cents in 1999. The total price per gallon of fuel
increased 48.9% to $1.11 in 2000 compared to 74.6 cents in 1999. In
absolute dollars, aircraft fuel expense increased 89.1% from $34.1
million in 1999 to $64.4 million in 2000, reflecting the higher cost per
gallon fuel price, a 5.8% increase in block hours and the higher fuel
consumption per hour of regional jet aircraft versus a turboprop aircraft
which resulted in a 20% increase in the system average burn rate (gallons
used per block hour flown).

The cost per ASM of aircraft maintenance and materials
increased to 1.7 cents in 2000 compared to 1.4 cents in 1999. In
absolute dollars, aircraft maintenance and materials expense increased
50.9% from $24.4 million in 1999 to $36.8 million in 2000. The increased
expense resulted from the increase in the size of the total fleet, the
continual increase in the average age of the turboprop fleets, the
gradual expiration of manufacturer's warranties on the CRJs, and the
reversal in 1999 of approximately $1.5 million in life limited parts
repair expense accruals related to CRJ engines that were no longer
required based on the introduction of a maintenance contract covering the
GE engines operating on the CRJ fleet.

The cost per ASM of aircraft rentals increased slightly to 2.7
cents in 2000 compared to 2.5 cents in 1999. During 2000, the Company
took delivery of 28 additional regional jet aircraft, all of which were
lease financed. In absolute dollars, aircraft rental expense increased
32.2% to $59.8 million as compared to $45.2 million in 1999 due to the
additional aircraft added to the fleet.

The cost per ASM of traffic commissions and related fees
decreased to 2.6 cents in 2000 as compared to 3.1 cents in 1999. Delta
is responsible for travel agent commissions and related fees and
effective December 1, 2000, United is responsible for travel agent
commissions and program fee expense as a result of the restated UA
agreement. In absolute dollars, traffic commissions and related fees
increased 3.9% to $56.6 million in 2000 from $54.5 million in 1999. The
increase resulted from an increase in passenger revenues and passenger
volumes, offset by a reduction in the commission rates payable to travel
agents.

The cost per ASM of facility rents and landing fees decreased
to .9 cents for 2000 from 1.0 cent for 1999. In absolute dollars,
facility rent and landing fees increased 13.5% to $20.3 million for 2000
from $17.9 million in 1999. The increase in absolute dollars for
facility rent and landing fees is a result of a 6.7% increase in the
number of departures, and the heavier landing weight of the regional
jets.

The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for 2000 and 1999. In absolute dollars, depreciation
and amortization expense for 2000 increased 24.1% to $11.2 million from
$9 million in 1999. The absolute increase results in part from the full
year effect of purchasing two CRJ aircraft and rotable spare parts in
1999 for approximately $59 million.
28
The cost per ASM of other operating expenses increased to 1.9
cents for 2000 from 1.6 cents in 1999. In absolute dollars, other
operating expenses increased 49.5% to $42.5 million for 2000 from $28.5
million in 1999. The increased costs result primarily from the 16.8%
increase in revenue passengers which resulted in higher passenger
handling costs, training expenses for new flight crews, and expenses for
ACJet pre-operating activities.

In 2000, the Company recorded an operating charge of 1.3 cents
per ASM for costs associated with the early retirement of 28 J-32
turboprop aircraft. In absolute dollars, the amount of the charge was
$29 million. The charge included the estimated cost of contractual
obligations to meet aircraft return conditions as well as a lease
termination fee. The retirement of the J-32 fleet was completed on
December 31, 2001.

Other Income (Expense)

Interest expense increased from $5.6 million in 1999 to $6
million in 2000. The increase is the result of the full year effect of
the debt outstanding for the purchase of two CRJs in 1999 partially
offset by the impact of the conversion of the Company's 7% notes into
equity during the first half of 2000.

Interest income increased from $3.9 million in 1999 to $5
million in 2000. This is primarily the result of the Company's
significantly higher cash balances during 2000 as compared to 1999.

The Company recorded a provision for income taxes of $7.7
million for 2000, compared to a provision for income taxes of $18.3
million in 1999. The 2000 effective tax rate is approximately 33.6% as
compared to the 1999 effective tax rate of approximately 38.6%. This
decrease is due to a favorable state income tax ruling resulting in the
application of one time state tax credits, and the realization of certain
tax benefits that were previously reserved, which together reduced income
tax expense by approximately $1.4 million for 2000. The effective tax
rates reflect non-deductible permanent differences between taxable and
book income.

The American Institute of Certified Public Accountants issued
Statement of Position 98-5 on accounting for start-up costs, including
preoperating costs related to the introduction of new fleet types by
airlines. The new accounting guidelines were effective for 1999. The
Company had previously deferred certain start-up costs related to the
introduction of the CRJs and was amortizing such costs to expense ratably
over four years. Effective January 1, 1999, the Company recorded a
charge for the remaining unamortized balance of approximately $888,000,
net of $598,000 of income taxes, associated with previously deferred
preoperating costs.
29
Outlook and Business Risks

This Outlook and Business Risks section and the Liquidity and
Capital Resources section below contain forward-looking statements. The
Company's actual results may differ materially. Factors that could cause
the Company's future results to differ materially from the expectations
described here include the costs and other effects of enhanced security
measures and other possible government orders; changes in and
satisfaction of regulatory requirements including requirements relating
to fleet expansion; changes in levels of service agreed to by the Company
with its code share partners due to market conditions; the ability of
these partners to manage their operations and cash flow; the ability and
willingness of these partners to continue to deploy the Company's
aircraft and to utilize and pay for scheduled service at agreed rates;
the ability of these partners to force changes in rates; increased cost
and reduced availability of insurance; changes in existing service; final
calculation and auditing of government compensation; unexpected costs or
delays in the implementation of new service; adverse weather conditions;
satisfactory resolution of union contracts becoming amendable during 2002
with the Company's aviation maintenance technicians and ground service
equipment mechanics, and the Company's flight attendants; ability to hire
and retain employees; availability and cost of funds for financing new
aircraft; the ability of Fairchild Dornier to fulfill its contractual
obligations to the Company, and of Bombardier and Fairchild Dornier to
deliver aircraft on schedule; airport and airspace congestion; ability to
successfully retire turboprop aircraft; flight reallocations and
potential service disruptions due to labor actions by employees of Delta
Air Lines or United Airlines; general economic and industry conditions;
and additional acts of war. The statements in this Annual Report are
made as of March 29, 2002 and the Company undertakes no obligation to
update any of the forward-looking information included in this release,
whether as a result of new information, future events, changes in
expectations or otherwise.

The events of September 11, together with the slowing economy
throughout 2001, have significantly affected the U.S. airline industry.
These events have resulted in changed government regulation, declines and
shifts in passenger demand, increased insurance costs and tightened
credit markets which continue to affect the operations and financial
condition of participants in the industry including the Company, its
code share partners, and aircraft manufactures. These circumstances have
raised substantial risks and uncertainties, including those discussed
below, which may impact the Company, its code share partners, and
aircraft manufacturers, in ways that the Company is not currently able to
predict.

The Company provides service for its Delta Connection operations
exclusively with regional jets and is continuing its transformation of
its existing United Express operation to an all regional jet fleet. In
addition to the 60 CRJs and 33 328JETs in service as of March 1, 2002,
the Company has firm orders for an additional 36 CRJs from Bombardier
Inc. and 32 328JETs from Fairchild Dornier, with option orders for 80
CRJs and 81 328JETs, and long-term marketing agreements with United and
Delta to fly the firm ordered jet aircraft in United Express and Delta
Connection service. Under these agreements, the Company is dependent on
United and Delta for substantially all of its revenue and for providing
support services necessary to operate its aircraft, and is dependent on
Bombardier and Fairchild for providing aircraft expected to support the
Company's future growth and for other support described in this report on
Form 10-K. Business or operational difficulties, liquidity problems or
bankruptcy of any of these entities could materially impact the Company's
operations and financial condition.

The slowing economy in 2001 and the terrorist attacks of
September 11 have resulted in both United and Delta changing how the
Company's regional jet aircraft are utilized. In the past, regional jets
were primarily deployed to open new long, thin routes and to replace some
turboprop service in higher traffic markets. With the fleet reductions
of older, higher cost narrow body aircraft by United and Delta, the
Company has been replacing mainline service to select United markets from
Chicago and added mainline complementary service on numerous other
routes. For Delta, the Company is currently operating hubs at New York's
LaGuardia airport, Boston's Logan airport, and Cincinnati and Northern
Kentucky International Airport.
30
UAL Corporation, the parent of United, has disclosed that
during the fourth quarter 2001 it began implementing a financial recovery
plan that includes four planks: reducing the size of the airline and
cutting capital and operating spending in line with that reduction,
generating as much revenue as possible from each flight, working with its
unions and other employee groups to find further labor savings and
implementing a financing plan to support it through the execution of its
financial recovery plan. UAL Corporation further disclosed that the
impact of the events of September 11, 2001 on United and the sufficiency
of its financial resources to absorb that impact are dependent on a
number of factors, including United's success in implementing its
financial recovery plan.

Following September 11, United requested that the Company
propose measures that it could take to assist in improving United's
financial situation. The Company believes that United made a similar
request to other suppliers and vendors. On December 31, 2001, the
Company and United agreed on fee-per-departure rates to be utilized
during 2002. In addition, in the context of reaching this agreement, the
Company agreed to certain concessions that would benefit United by (1)
settling various existing contract issues, (2) agreeing that United would
not have to pay increased rates to reflect utilization changes in the
fourth quarter of 2001, (3) agreeing to 2002 rates that require
aggressive cost containment, and (4) reaffirming its commitment to retire
the Company's J-41 turboprop aircraft. The Company determined that these
concessions, which were favorable to United as compared to prior
contractual arrangements and were designed to assist United in its
financial recovery plan, were appropriate in light of the circumstances
at the time.

In late March 2002, United informed the Company that an
essential component of its financial recovery plan includes obtaining
cost reductions from its employees, suppliers and partners, and that
United is seeking the Company's assistance in decreasing the cost of the
Company's product and achieving cash flow improvements for United over the
next 24 months. The Company has commenced discussions with United
regarding opportunities for reducing its costs or creating value to
address United's financial situation. The basis for, nature, timing
and extent of any such actions has not been agreed. While the Company
has expressed its willingness to work with United to find mutually
acceptable opportunities, the Company believes that it is not
contractually obligated to make any such changes under the United
Express Agreements or the December 31, 2001 rate setting
agreement.

The Company's Delta Connection service commenced revenue
service with 328JETs during the third quarter of 2000 and added CRJs
during the fourth quarter of 2000. Approximately $7.8 million in start-
up expenses from inception through commencement of revenue service were
incurred, which were expensed as incurred. Delta is reimbursing the
Company for $5.2 million of these costs, and the amounts are being
recorded as revenue ratably through July 2003. As of December 31, 2001
the Company has recorded $2.0 million of this revenue.
31
The chairman of Fairchild Dornier, the manufacturer of the
328JET, recently stated that it has an immediate and critical need for
additional funding, and that it is in discussions with several potential
strategic partners regarding proposed investments. The Company is unable
to predict whether Fairchild Dornier will be successful in finding
additional capital or in otherwise restructuring its finances, but
believes that Fairchild Dornier may be forced to seek bankruptcy
protection if it is unsuccessful in its efforts. In the event of a
Fairchild Dornier bankruptcy, Fairchild Dornier could either sell,
liquidate or reorganize some or all of its businesses, and in the event
of a reorganization or sale of its businesses would have the right to
assume or reject future contractual obligations. Should Fairchild
Dornier be unable to deliver ordered 328JETS, the Company would reassess
available alternatives in pursuing its growth strategy and possibly delay
the Company's turboprop retirement plans, and adjust other plans
discussed elsewhere in this Form 10-K relating to its 328JET aircraft.

Fairchild Dornier has significant future obligations to the
Company in connection with the order of 328JET aircraft. These include
obligations: to deliver 32 firm ordered 328JETs and 81 additional option
328JETs with certain financing support; to pay the Company any difference
between the lease payments, if any, received from the remarketing the of
26 J-41 aircraft leased by the Company and the lease payment obligations
of the Company on those aircraft; to purchase five J-41 aircraft owned by
the Company at their net book value at the time of retirement; to assume
certain crew training costs; and, to provide spares, warranty,
engineering, and related support. Fairchild Dornier has delayed the
delivery of one 328JET that was scheduled to be delivered to the Company
during the week of March 25, 2002 for reasons connected with its
financing. The Company believes it has secured rights to Fairchild
Dornier's equity interest in the delivered 328JETs that it may proceed
against in the event that Fairchild Dornier fails to fulfill certain of
these obligations.

During the fourth quarter of 2001, the Company recorded a pre-
tax aircraft early retirement charge of $23.5 million for the early
retirement of nine leased Jetstream-41 turboprop aircraft, which the
Company plans to remove from service prior to year-end 2002. The Company
anticipates taking additional charges during 2002 of approximately $48.0
million pre-tax for the retirement of its remaining 29-seat Jetstream-41
turboprop aircraft. The undiscounted remaining lease obligations (net of
the Company's estimate of the future sublease rentals) on the J-41 fleet
after planned retirement dates in 2002 and 2003 are approximately $55
million and continue through 2010 and the book value of the five owned J-
41 aircraft as of March 1, 2002 is $18.1 million. To the extent that
Fairchild Dornier fulfills its contractual obligations, the majority of
the aircraft early retirement charge will not adversely affect the
Company's cash position, with the payments by Fairchild Dornier being
recorded as an aircraft purchase inducement on the 328JET aircraft. The
Company would remain liable for the lease payments on its J-41 aircraft
and thus be required to pay the remaining lease payments if, and to the
extent that, Fairchild Dornier were to default on its obligation.

As of December 31, 2001, the Company has received $9.7 million
in cash grants under the loss compensation provisions of the
Stabilization Act, which amount was recognized as non-operating income
under "government compensation" in its financial results for 2001. This
amount was the government's estimate of approximately 85% of amount due
to the Company based on preliminary data. The exact amount of the
Company's compensation will be based on the lesser of actual losses
incurred or a statutory limit based on the total amount allocable to all
airlines. This exact amount is not yet determinable because the
statutory limit is subject to information not yet released by the federal
government. As such, the Company is unsure if it will be entitled to any
further government compensation under this program and will recognize any
remaining payments as non-operating income during the period it is
determined the Company is entitled to such amounts. All amounts
received as government compensation are subject to audit and adjustment
by the federal government.
32
In addition to the compensation described above, the
Stabilization Act, among other things, provides U.S. air carriers with
the option to purchase certain war risk liability insurance from the
United States government on an interim basis at rates that are more
favorable than those available from the private market; authorizes the
federal government to reimburse air carriers for the increased cost of
war risk insurance premiums for a limited but undetermined period of time
as a result of the terrorist attacks of September 11, 2001; and,
authorizes the federal government, pursuant to new regulations, to
provide loan guarantees to air carriers in the aggregate amount of
$10 billion. Since September 11, the Company has purchased hull war risk
coverage through the private insurance market through September 24, 2002,
and has purchased liability war risk coverage from the U.S. government
through May 19, 2002 and anticipates renewing the government insurance
for as long as the coverage is available. The government subsequently
authorized air carriers to apply for reimbursement under the
Stabilization Act for increased insurance costs incurred during the
period October 1, 2001 to October 30, 2001, and the Company applied for,
received, and recorded as a reduction in insurance expense, $652,000 in
such reimbursements. The airlines and insurance industry, together with
the United States and other governments, are continuing to evaluate both
the cost and options for providing coverage of aviation insurance.
Recently, an industry-led group announced a proposal to create a mutual
insurance company, to be called Equitime, to cover war risk and terrorism
risk, which would initially seek support through government guarantees.
Equitime would provide a competitive alternative to insurance being
offered by the traditional insurance market, which opposes this
initiative. Equitime's organizers project that it may be available to
provide insurance as early as May 2002 to up to 70 U.S. carriers. The
Company has not been actively involved in the formation of Equitime and
is unable to anticipate whether this source of insurance will be made
available and, if so, whether it will offer competitive rates. The
Company anticipates that it will follow industry practices with respect
to sources of insurance.

The Company continues to evaluate the terms and conditions
being imposed by the government with respect to federal loan guarantees,
and has not yet determined whether to make application for any such
facility.

Collective bargaining agreements are negotiated under the
Railway Labor Act, which governs labor relations in the transportation
industry, and typically do not contain an expiration date. Instead, they
specify a date called the amendable date, by which either party may
notify the other of its desire to amend the agreement. Upon reaching the
amendable date, the contract is considered "open for amendment." Prior
to the amendable date, neither party is required to agree to
modifications to the bargaining agreement. Nevertheless, nothing
prevents the parties from agreeing to start negotiations or to modify the
agreement in advance of the amendable date. Contracts remain in effect
while new agreements are negotiated. During the negotiating period, both
the Company and the negotiating union are required to maintain the status
quo.

ACA's collective bargaining agreement with AFA was ratified in
October 1998. The agreement is for a four-year duration and becomes
amendable in October 2002. This agreement covers all flight attendants
working for the Company. The collective bargaining agreement with AMFA
was ratified in June 1998. The agreement is for a four-year duration and
becomes amendable in June 2002. This agreement covers all aviation
maintenance technicians and ground service equipment mechanics working
for the Company. Although there can be no assurances as to the outcome
of these negotiations, the Company anticipates being able to reach
agreement with both unions on mutually satisfactory contracts with no
material effect on its results of operations or financial position.
33
Liquidity and Capital Resources

As of December 31, 2001, the Company had cash, cash
equivalents, and short-term investments of $181 million and working
capital of $138.7 million compared to $121.2 million and $72 million,
respectively, as of December 31, 2000. During the year ended December
31, 2001, cash and cash equivalents increased $87.6 million, reflecting
net cash provided by operating activities of $88 million, net cash used
in investing activities of $5.7 million (primarily the results of
increased purchases of property and equipment of $34.9 million offset by
the net reduction in short term investments of $27.8 million) and net
cash provided by financing activities of $5.2 million. Net cash provided
by financing activities was mainly related to proceeds from exercise of
stock options.

As of December 31, 2000, the Company had cash, cash
equivalents, and short-term investments of $121.2 million and working
capital of $72 million compared to $57.4 million and $60.4 million,
respectively, as of December 31, 1999. During the year ended December
31, 2000, cash and cash equivalents increased $46.2 million, reflecting
net cash provided by operating activities of $93.9 million, net cash used
in investing activities of $43.8 million (related to aircraft purchase
deposits, purchases of aircraft and equipment and increases in short term
investments) and net cash used in financing activities of $3.9 million.
The increase in cash provided by operating activities is primarily due to
the restated UA Agreements, effective December 1, 2000, in which the
Company is now paid weekly in advance for monthly revenue as compared to
receiving monthly revenue 30 to 60 days after the end of a month. Net
cash used in financing activities was mainly related to payments of long-
term debt and capital lease obligations and purchases of treasury stock.

Capital Commitments
The Company's business is very capital intensive, requiring
significant amounts of capital to fund the acquisition of assets,
particularly aircraft. The Company has historically funded the
acquisition of its aircraft by entering into off-balance sheet financing
arrangements known as leveraged leases, in which third parties provide
equity and debt financing to purchase the aircraft and simultaneously
enter into long-term agreements to lease the aircraft to the Company.
Similarly, the Company often enters into long-term lease commitments with
airports to ensure access to terminal, cargo, maintenance and other
similar facilities. As can be seen in the table below setting forth
information as of December 31, 2001, these operating lease commitments
are significant.

(In thousands) 2002 2003 2004 2005 Thereafter Total

Long term debt $ 4,639 $ 4,900 $ 5,153 $ 6,019 $ 42,369 $ 63,080
Capital lease 1,584 1,565 772 - - 3,921
obligations
Guaranteed simulator 3,631 1,371 1,391 1,178 4,929 12,500
usage commitments
Operating lease 128,150 120,138 124,243 122,653 1,106,225 1,601,409
commitments
Aircraft purchase 524,000 664,000 - - - 1,188,000
commitments
Total contractual 662,004 791,974 131,559 129,850 1,153,523 2,868,910
cash obligations

See Note 4 "Debt", Note 5 "Obligations Under Capital Leases", Note 6
"Operating Leases", and Note 10 "Commitments and Contingencies" in the
Notes to Consolidated Financial Statements for additional discussion of
these items. The Company also has a variety of other long-term
contractual commitments that are of a nature that, under accounting
principles generally accepted in the United States, are not required to
be reflected on the Company's balance sheet, and that are not generally
viewed as "off-balance sheet financing arrangements," such as commitments
for major overhaul maintenance on the Company's aircraft. See "Liquidity
and Capital Resources - Other Commitments" below and "Business - Pilot
Training" above, and Note 1 "Summary of Accounting Policies - (l)
Maintenance" and Note 10 "Commitments and Contingencies - Training" in
the Notes to Consolidated Financial Statements for additional discussion
of these items.
34
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the expected availability
of operating lease financing, and other available equipment financing
will be sufficient to meet its working capital needs, expected operating
lease financing commitments, aircraft acquisitions and other capital
expenditures, and debt service requirements for the next twelve months.

Other Financing

On September 28, 2001, the Company entered into an asset-based
lending agreement with a financial institution that provided the Company
with a line of credit for up to $25 million. The new line of credit,
which will expire on October 15, 2003, replaced a previous $35 million
line of credit. The interest rate on this line is LIBOR plus .875% to
1.375% depending on the Company's fixed charges coverage ratio. As of
December 31, 2001, the Company's interest rate on its line of credit was
3.0%. The Company has pledged $15.3 million of this line of credit as
collateral for letters of credit issued on behalf of the Company by a
financial institution. The available borrowing under the line of credit
is limited to the value of the bond letter of credit on the Company's
Dulles, Virginia hangar facility plus the value of 60% of the book value
of certain rotable spare parts. As of December 31, 2001 the amount of
available credit under the line was $9.7 million. As of December 31,
2001 there were no outstanding borrowings on the $25 million line of
credit.

In September 1997, approximately $112 million of pass through
certificates were issued in a private placement by separate pass through
trusts, which purchased with the proceeds, equipment notes (the
"Equipment Notes") issued in connection with (i) leveraged lease
transactions relating to four J-41s and six CRJs, all of which were
leased to the Company (the "Leased Aircraft"), and (ii) the financing of
four J-41s owned by the Company (the "Owned Aircraft"). The Equipment
Notes issued with respect to the Owned Aircraft are direct obligations of
ACA, guaranteed by ACAI and are included as debt obligations in the
accompanying consolidated financial statements and in the table above.
The Equipment Notes issued with respect to the Leased Aircraft are not
obligations of ACA or guaranteed by ACAI.

Aircraft

The Company has significant lease obligations for aircraft that
are classified as operating leases and therefore are not reflected as
liabilities on the Company's balance sheet. The remaining terms of such
leases range from one to sixteen and three quarters years. The Company's
total rent expense in 2001 under all non-cancelable aircraft operating
leases was approximately $90.3 million. As of December 31, 2001, the
Company's minimum annual rental payments for 2002 under all non-
cancelable aircraft operating leases with remaining terms of more than
one year were approximately $120.9 million. In order to minimize the
total aircraft rental expense over the entire life of the related
aircraft leveraged lease transactions, the Company has uneven semiannual
lease payment dates of January 1 and July 1 for its CRJ and 328JET
aircraft. Currently, approximately 56.7% of the Company's annual lease
payments for its CRJ and 328JET aircraft are due in January and 28.4% are
due in July. The Company made lease payments for its CRJ and 328JET
aircraft totaling $59.9 million on January 2, 2002.
35
As of March 1, 2002, the Company had a total of 36 CRJs on
order from Bombardier, Inc., and held options for 80 additional CRJs.
The Company also has a firm order with Fairchild Dornier for 32 328JET
aircraft, and options for 81 additional 328JETs. Of the 68 firm ordered
aircraft deliveries, 26 are scheduled for the remainder of 2002 and 42
are scheduled for 2003. The addition of the firm ordered regional jets,
net of the removal from service of all of the turboprop aircraft, will
allow the Company to grow capacity as measured in ASM's, based on planned
aircraft delivery dates, by approximately 34% in 2002 and 25% in 2003. As
of March 2002, the Company's ASM capacity was split 82% in United Express
service and 18% in Delta Connection service. The Company is obligated to
purchase and finance (including leveraged leases) the 68 firm ordered
aircraft at an approximate capital cost of $1.1 billion. The Company
anticipates leasing all of its year 2002 aircraft deliveries on terms
similar to previously delivered regional jet aircraft, except that three
328JETs to be utilized for charter operations will be purchased by the
Company. One of these, which has already been acquired, was purchased
through the application of certain deposits previously placed with
Fairchild Dornier, and the others will be financed through debt, with
repayment over approximately ten years. Aircraft orders are subject to
price escalation formulas based on certain indices designed to reflect
increased costs in the production of the aircraft. During 2001 the rate
of escalation increased, and such increases will be reflected in future
aircraft cost or lease rates. During the first quarter of 2002, the rate
of escalation has remained constant.

The Company has financed its aircraft through leveraged lease
transactions, which include requiring equity and debt investors for each
aircraft. For the CRJs, the Company has firm commitments for equity
financing for 19 future aircraft and for debt financing for one aircraft,
and anticipates finalizing arrangements with Canada's export development
agency during the second quarter 2002 for debt financing for at least
nine additional aircraft. For the 328JETs, the manufacturer has
committed to find debt financing for all undelivered aircraft, to provide
equity financing for the next 8 aircraft and to find equity financing for
the remaining undelivered aircraft (for recent developments regarding
Fairchild Dornier, see Outlook). From time to time the Company seeks
investors to participate in its leveraged leases, with equity sources
normally consisting of domestic banks and industrial credit investors,
and debt sources including export credit agencies and European banks.
Commitments are normally sought during the first and second quarter of
each year for funding for aircraft to be delivered throughout the year.
Following the terrorist attacks, it has been the Company's experience
that sources of funding have decreased and the cost of available funding
has increased. The Company believes that it will able to find funding
for its future lease requirements, but the outcome, and the cost of
funds, is subject to market conditions in a volatile lease financing
market.

Capital Equipment and Debt Service

In 2002 the Company anticipates capital spending of
approximately $56 million consisting of approximately $30 million for
aircraft, $15.5 million for rotable spare parts, $4.8 million for
equipment, and $5.7 million for other capital assets, and expects to
finance these capital expenditures out of working capital.

Principal payments on long term debt for 2002 are estimated to
be approximately $4.6 million reflecting borrowings related to the
purchase of four CRJs acquired in 1998 and 1999 and five J-41s acquired
in 1997 and 1998. The foregoing amount does not include additional debt
that may be required for the financing of new CRJs, 328JETs, spare parts
and spare engines.
36
Other Commitments

The Company's regional jet fleet is comprised of new aircraft
with an average age of less than two years. Since maintenance expense
on new aircraft is lower in the early years of operation due to
manufacturers' warranties and the generally lower failure rates of major
components, the Company's maintenance expense for regional jet aircraft
will increase in future periods.

In 2000, the Company executed a seven-year engine services
agreement with GE Engine Services, Inc. ("GE") covering the scheduled and
unscheduled repair of ACA's CRJ jet engines, operated on the 43 CRJs
already delivered or on order for the United Express operation. This
agreement was amended in July 2000 to cover 23 additional CRJ aircraft,
bringing the total number of CRJ aircraft covered under the agreement to
66. Under the terms of the agreement, the Company pays a set dollar
amount per engine hour flown on a monthly basis to GE and GE assumes the
responsibility to repair the engines when required at no additional
expense to the Company, subject to certain exclusions. The Company
expenses the amount paid to GE based on the monthly rates stipulated in
the agreement, as engine hours are flown. The Company's future
maintenance expense on CRJ engines covered under the new agreement will
escalate based on contractual rate increases, intended to match the
timing of actual maintenance events that are due pursuant to the terms.
The Company is presently negotiating with GE for an adjustment in rates.
The Company believes that it has the right to remove any or all engines
from this agreement at any time, and that it may remove engines if a
favorable adjustment cannot be agreed. GE has expressed the view that it
does not agree that the Company has the right to remove all engines, but
nevertheless is participating in rate discussions. The Company has
signed an hourly maintenance agreement covering engines for up to 80
328JETs with Pratt & Whitney, and also anticipates signing a similar
agreement for the remaining regional jets on order.

Effective September 2001, the Company entered a sixteen year
maintenance agreement with Air Canada covering maintenance, repair and
overhaul services for airframe components on its CRJ aircraft. Under the
terms of this agreement, the Company pays a varying amount per flight
hour each month, based on the age of the aircraft. The Company expenses
the amount paid to Air Canada based on the rates stipulated in the
agreement and the hours flown each month. In February 2002, the Company
entered into a five-year agreement with Air Canada covering the scheduled
airframe C-check overhaul of its CRJ aircraft. The Company expenses this
cost as the overhaul is completed.

Effective January 2001, the Company entered into an agreement
with BAE Systems Holdings, Inc. covering repair and overhaul of airframe
rotable parts on the Company's J-41 aircraft through the remaining
service life of the J-41 fleet. Under the terms of this agreement, the
Company pays a fixed amount per flight hour each month. The Company
expenses the amount paid to BAE Systems Holdings, Inc. based on the rates
stipulated in the agreement and the hours flown each month.

The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow the Company to train
CRJ, J-41 and 328JET pilots at PAIFA's facility near Washington-Dulles.
In 2001, PAIFA relocated its Washington-Dulles operations to a new
training facility housing two CRJ simulators, a 328JET simulator, and a J-
41 simulator near the Company's Washington-Dulles headquarters. The
Company has agreements to purchase an annual minimum number of CRJ and J-
41 simulator training hours at agreed rates, through 2010 for the CRJ,
and 2002 for the J-41. The Company's payment obligations for CRJ and J-
41 simulator usage over the remaining years of the agreements total
approximately $12.5 million.
37
In 2001, a simulator provision and service agreement between
PAIFA, CAE Schreiner and the Company was executed and 328JET training
commenced at the PAIFA facility. Under this agreement, the Company has
committed to purchase all of its 328JET simulator time from PAIFA at
agreed upon rates, with no minimum number of simulator hours guaranteed.
A second 328JET simulator is scheduled for installation at the Washington-
Dulles PAIFA simulator facility in July 2002.

The Company has committed to provide its senior executive
officers a deferred compensation plan which utilizes split dollar life
insurance polices, and for a certain officer, a make-whole provision for
income taxes, post retirement salary based on ending salary, and post
retirement benefits based on benefits similar to those currently provided
to the executive while actively employed. The Company has estimated the
cost of the deferred compensation and tax gross up feature, future salary
and future benefits and is accruing this cost over the remaining required
service time of the executive officers. In 2001, the Company expensed
approximately $1.8 million as the current year's cost of these benefits.
The company expects to recognize similar costs annually over the
remaining required service life of the senior executives.

In 1999, the Company commenced a replacement project of its
computer software systems. The Company anticipates spending
approximately $11 million on this project, the majority of which will be
capitalized and amortized over seven years. In 1999, the Company
expensed approximately $400,000 related to replacement software selection
and capitalized $2.3 million in acquisition and implementation costs. In
2000 and 2001, the Company capitalized an additional $5.2 million and
$2.8 million of costs incurred, respectively, bringing the total
capitalized costs to date to $10.3 million. In October 2001, the Company
implemented a new Payroll/Human Resource system as part of this project.
The Company anticipates completing the remainder of this project in 2002.

The Company's Board of Directors has approved the purchase of
up to $40 million of the Company's outstanding common stock in open
market or private transactions. As of March 1, 2002, the Company has
purchased 2,128,000 shares of its common stock at an average price of
$8.64 per share. The Company has approximately $21.6 million remaining
of the $40 million authorization. The Company has not repurchased shares
of its common stock since February 2, 2000.

Inflation

Inflation has not had a material effect on the Company's
operations.

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires Company
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. The U.S. Securities and
Exchange Commission has defined a company's most critical accounting
policies as the ones that are most important to the portrayal of the
Company's financial condition and results, and which require the company
to make its most difficult and subjective judgments, often as a result of
the need to make estimates of matters that are inherently uncertain.
Based on this definition, the Company has identified its critical
accounting policies as including those addressed below. The Company also
has other key accounting policies, which involve the use of estimates,
judgments and assumptions. See Note 1 "Summary of Accounting Policies "
in the Notes to Consolidated Financial Statements for additional
discussion of these items. Management believes that its estimates and
assumptions are reasonable, based upon information presently available;
however, actual results may differ from these estimates under different
assumptions or conditions.
38
Revenue Recognition: Under the proration-of-fare arrangement in
effect with United until November of 2000, the Company recognized
passenger revenue when a flight was completed. This required various
estimates about passenger fares and other factors that were subject to
subsequent adjustment and settlement with United and other carriers.
Following certain changes in estimates, which resulted in adjustments in
2001, as, described in "Results of Operations", the Company does not
expect any further adjustments attributable to the former proration-of-
fare arrangement. Under the fee-per-departure and fee-per-block hour
contracts currently in place with United and Delta, respectively,
revenue is the product of the agreed upon rate and the number of
departures or the number of block hours flown. Rates are generally
agreed to on an annual basis and are subject to adjustments upon
certain specified events. In certain circumstances, the Company may be
required to estimate these rates until final rates are agreed to by
either United or Delta.

Major maintenance costs: The Company has executed long-term
agreements with the engine manufacturers and other service providers
covering the repair and overhaul of its engines, airframe and avionics
components, and landing gear. These agreements generally include
escalating rates per flight hour over the term of the agreement. The
escalating rates are intended to reflect the approximate actual
maintenance cost increases as the aircraft age. The Company expenses
costs based upon the current rate per hour and the number of aircraft and
engines hours for the period. As a result, maintenance costs for the
Company's existing aircraft fleet are expected to increase in future
years.

Aircraft leases: The majority of the Company's aircraft are
leased from third parties. In order to determine the proper
classification of a lease as either an operating lease or a capital
lease, the Company must make certain estimates at the inception of the
lease relating to the economic useful life and the fair value of an asset
as well as select an appropriate discount rate to be used in discounting
future lease payments. These estimates are utilized by management in
making computations as required by existing accounting standards that
determine whether the lease is classified as an operating lease or a
capital lease. Substantially all of the Company's aircraft leases have
been classified as operating leases, which results in rental payments
being charged to expense over the terms of the related leases.
Additionally, operating leases are not reflected in the balance sheet and
accordingly, neither a lease asset nor an obligation for future lease
payments are reflected in the Company's consolidated balance sheet.

Aircraft Early Retirement Costs: In determining the cost of
the early retirement of leased aircraft (and thus in determining the
amount of the aircraft early retirement charge), the Company must
estimate, among other things, market lease rates, future sub-lease
income, the cost of maintenance return provisions and the duration and
cost of aircraft storage. The Company generally does not accrue for the
costs of retiring leased aircraft more than one year before the planned
date of removal from service, considering the potential for changes in
plans and associated costs. As the associated leases may extend over
several years, these costs estimates are subject to change.
39
Recent Accounting Pronouncements

On July 5, 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 141, "Business
Combinations", and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 addresses the
accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. Statement No. 142
includes requirements to test goodwill and indefinite life intangible
assets for impairment rather than amortize them. Statement No. 142 will
be effective for fiscal years beginning after December 15, 2001. The
Company will adopt Statement No. 142 beginning in the first quarter of
2002. The Company anticipates that implementation of SFAS 141 and SFAS
142 will have minimal impact on the Company's financial position or
results of operations.

On October 3, 2001, the Financial Accounting Standards Board
issued FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Statement No. 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Statement No. 144
includes requirements related to the classification of assets as held for
sale, including the establishment of six criteria that must be satisfied
prior to this classification. Statement No. 144 also includes guidance
related to the recognition and calculation of impairment losses for long-
lived assets. Statement No. 144 will be effective for fiscal years
beginning after December 15, 2001. The Company will adopt Statement No.
144 beginning in the first quarter of 2002. The Company anticipates that
implementation of Statement No. 144 will have minimal impact on the
Company's financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company's principal market risk results in changes in
interest rates.

The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. From time to time the Company has entered into put and call
contracts designed to limit the Company's exposure to interest rate
changes until permanent financing is secured upon delivery of the
Bombardier regional jet aircraft. During 1999 and 2000, the Company
settled seven and eight hedge transactions, respectively, receiving
$119,000 in 1999 and paying the counterparty $379,000 in 2000. In 1999,
the Company recognized a gain of $211,000 on the settlement of one
contract, representing the ineffective portion of a hedge. At December
31, 2000 the Company had one interest rate hedge transaction open with a
notional value of $8.5 million. The Company settled this contract on
January 3, 2001 by paying the counterparty $722,000. The Company had no
open hedge transactions at December 31, 2001.

As of March 1, 2002, the Company had firm commitments to
purchase 68 additional jet aircraft. The Company expects to finance
these commitments using a combination of debt and leveraged leases.
Changes in interest rates will impact the actual cost to the Company for
these transactions. Aircraft orders are also subject to price escalation
formulas based on certain indices designed to reflect increased costs in
the production of the aircraft. During 2001 the rate of escalation
increased, and such increases will be reflected in future aircraft cost
or lease rates. During the first quarter of 2002, the rate of escalation
has remained constant.
40
The Company does not have significant exposure to changing
interest rates on its long-term debt as the interest rates on such debt
are fixed. The Company's interest rate on its $25 million line of credit
is dependent on LIBOR plus a percentage ranging from .875% to 1.375%
depending on the Company's fixed charges coverage ratio. The Company
does not hold long-term interest sensitive assets and therefore is not
exposed to interest rate fluctuations for its assets. The Company does
not purchase or hold any derivative financial instruments for trading
purposes.
41
Item 8. Consolidated Financial Statements

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page

Independent Auditors' Report 42

Consolidated Balance Sheets as of December 31, 2000 and 2001 43

Consolidated Statements of Operations for the years ended 44
December 31, 1999, 2000 and 2001

Consolidated Statements of Stockholders' Equity for the 45
years ended December 31, 1999, 2000 and 2001

Consolidated Statements of Cash Flows for the years ended 46
December 31, 1999, 2000 and 2001

Notes to Consolidated Financial Statements 47

42
Independent Auditors' Report

The Board of Directors and Stockholders Atlantic Coast Airlines Holdings,
Inc.:

We have audited the accompanying consolidated balance sheets of Atlantic
Coast Airlines Holdings, Inc. and subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Atlantic Coast Airlines Holdings, Inc. and subsidiaries as of December
31, 2000 and 2001, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 1 to the consolidated financial statements,
effective January 1, 1999, the Company changed its method of accounting
for preoperating costs.

KPMG LLP

McLean, VA
January 30, 2002, except as to Notes 1(f) and 13,
which are as of March 29, 2002
43

(In thousands, except for share data and par values)
December 31, 2000 2001

Assets
Current:
Cash and cash equivalents $ 86,117 $ 173,669
Short term investments 35,100 7,300
Accounts receivable, net 29,052 8,933
Expendable parts and fuel inventory,net 6,188 10,565
Prepaid expenses and other current assets 8,055 19,365
Deferred tax asset 13,973 6,806
Total current assets 178,485 226,638
Property and equipment at cost, net of
accumulated depreciation and amortization 142,840 171,528
Intangible assets, net of accumulated 2,045 1,941
amortization
Debt issuance costs, net of accumulated 2,912 3,415
amortization
Aircraft deposits 46,420 44,810
Other assets 9,998 4,093
Total assets $ 382,700 $ 452,425
Liabilities and Stockholders' Equity
Current:
Current portion of long-term debt $ 4,344 $ 4,639
Current portion of capital lease 1,512 1,359
obligations
Accounts payable 19,724 21,750
Accrued liabilities 53,044 55,570
Accrued aircraft early retirement charge 27,843 4,661
Total current liabilities 106,467 87,979
Long-term debt, less current portion 63,080 58,441
Capital lease obligations, less current portion 4,009 2,202
Deferred tax liability 18,934 17,448
Deferred credits, net 22,037 45,063
Accrued aircraft early retirement charge, - 19,226
less current portion
Other long-term liabilities - 766
Total liabilities 214,527 231,125
Stockholders' equity:
Preferred Stock: $.02 par value per share;
shares authorized - -
5,000,000; no shares issued or
outstanding in 2000 or 2001
Common stock: $.02 par value per share;
shares authorized 130,000,000; shares
issued 47,704,720 in 2000 and 49,229,202
in 2001; shares outstanding 42,658,388 in
2000 and 44,182,870 in 2001 954 985
Class A common stock: nonvoting; no par
value; $.02 stated value per share; shares - -
authorized 6,000,000; no shares issued or
outstanding
Additional paid-in capital 117,284 136,058
Less: Common stock in treasury, at cost,
5,046,332 shares in 2000 and 2001 (35,303) (35,303)
Retained earnings 85,238 119,560
Total stockholders' equity 168,173 221,300
Total liabilities and stockholders' $382,700 $452,425
equity
Commitments and Contingencies
See accompanying notes to consolidated financial statements

44

(In thousands, except for per share
data)
Years ended December 31, 1999 2000 2001

Operating revenues:
Passenger $ 342,079 $ 442,695 $ 577,604
Other 5,286 9,831 5,812
Total operating revenues 347,365 452,526 583,416
Operating expenses:
Salaries and related costs 84,554 107,831 164,446
Aircraft fuel 34,072 64,433 88,308
Aircraft maintenance and materials 24,357 36,750 48,478
Aircraft rentals 45,215 59,792 90,323
Traffic commissions and related fees 54,521 56,623 15,589
Facility rents and landing fees 17,875 20,284 32,025
Depreciation and amortization 9,021 11,193 15,353
Other 28,458 42,537 61,674
Aircraft early retirement charge - 28,996 23,026
Total operating expenses 298,073 428,439 539,222
Operating income 49,292 24,087 44,194
Other income (expense):
Interest expense (5,614) (6,030) (4,832)
Interest income 3,882 5,033 7,500
Government compensation - - 9,710
Other income (expense), net (85) (278) 263
Total other (expense) income, net (1,817) (1,275) 12,641
Income before income tax provision and
cumulative effect of accounting change 47,475 22,812 56,835
Income tax provision 18,319 7,657 22,513
Income before cumulative effect of 29,156 15,155 34,322
accounting change
Cumulative effect of accounting
change, net of income tax (888) - -
benefit of $598
Net income $ 28,268 $ 15,155 $ 34,322
Income per share:
Basic:
Income before cumulative effect of $.77 $.38 $.79
accounting change
Cumulative effect of accounting change (.02) - -
Net income $.75 $.38 $.79
Diluted:
Income before cumulative effect of $.68 $.36 $.76
accounting change
Cumulative effect of accounting change (.02) - -
Net income $.66 $.36 $.76

Weighted average shares used in
computation: 37,928 40,150 43,434
Basic 44,030 43,638 45,210
Diluted
See accompanying notes to consolidated financial statements

45

(In thousands, except
for share data) Common Stock Additional Treasury Stock Retained
Paid- In Earnings
------------ Capital -------------
Shares Amount Shares Amount

Balance December 31, 41,642,002 $ 833 $84,798 2,945,000 $(17,069) $41,815
1998
Exercise of common 525,852 10 1,574 - - -
stock options
Tax benefit of stock - - 1,835 - - -
option exercise
Purchase of treasury - - - 1,993,000 (17,192) -
stock
ESOP share - - 60 (26,668) 155 -
contributions
Amortization of - - 437 - - -
deferred compensation
Net income - - - - - 28,268
Balance December 31, 42,167,854 $ 843 $88,704 4,911,332 $(34,106) $70,083
1999
Exercise of common 1,132,432 23 3,919 - - -
stock options
Tax benefit of stock - - 4,952 - - -
option exercise
Purchase of treasury - - - 135,000 (1,197) -
stock
Conversion of debt 4,404,434 88 19,261 - - -
Amortization of - - 448 - - -
deferred compensation
Net income - - - - - 15,155
Balance December 31, 47,704,720 $954 $117,284 5,046,332 $(35,303) $85,238
2000
Exercise of common 1,524,482 31 8,145 - - -
stock options
Tax benefit of stock - - 9,010 - - -
option exercise
Amortization of - - 1,619 - - -
deferred compensation
Net income - - - - - 34,322
Balance December 31, 49,229,202 $985 $136,058 5,046,332 $(35,303) $119,560
2001

See accompanying notes to consolidated financial statements.

46

(In thousands)
Years ended December 31, 1999 2000 2001
Cash flows from operating activities:

Net income $ 28,268 $ 15,155 $ 34,322
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 9,109 11,544 16,179
Write-off of preoperating costs 1,486 - -
Amortization of intangibles and 176 183 193
preoperating costs
Provision for uncollectible 564 503 227
accounts receivable
Provision for inventory 110 237 578
obsolescence
Amortization of deferred credits (1,114) (1,599) (3,662)
Amortization of debt issuance 354 297 293
costs
Capitalized interest, net (1,683) (2,554) (1,835)
Deferred tax provision (benefit) 5,905 (4,648) 5,681
Net loss on disposal of fixed 380 - 198
assets
Amortization of debt discount and 73 56 61
finance costs
Contribution of stock to the ESOP 214 - -
Gain on ineffective hedge position (211) - -
Gain on early termination of (291) (3) -
capital lease
Amortization of deferred 437 469 1,619
compensation
Changes in operating assets and
liabilities:
Accounts receivable (3,572) 6,564 25,148
Expendable parts and (847) (2,310) (4,956)
fuel inventory
Prepaid expenses and
other current assets (2,660) (1,866) (5,376)
Accounts payable 2,139 22,300 9,275
Accrued liabilities 11,013 49,601 10,100
Net cash provided by 49,850 93,929 88,045
operating activities

Cash flows from investing activities:
Purchases of property and equipment (59,669) (19,146) (34,903)
Proceeds from sales of fixed assets 6,608 585 -
Purchases of short term investments (17,550) (74,705) (76,715)
Sales of short term investments 66 57,155 104,515
Refund of deposits 3 4,600 11,100
Payments for aircraft and other (19,270) (12,330) (9,701)
deposits
Net cash used in (89,812) (43,841) (5,704)
investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term 37,203 - -
debt
Payments of long-term debt (4,189) (4,758) (4,344)
Payments of capital lease (1,839) (1,647) (1,959)
obligations
Proceeds from receipt of deferred 37 173 4,286
credits and other
Deferred financing costs (157) (381) (948)
Proceeds from exercise of stock 1,584 3,942 8,176
options
Purchase of treasury stock (17,192) (1,197) -
Net cash provided by 15,447 (3,868) 5,211
(used in) financing activities
Net increase (decrease) in cash and (24,515) 46,220 87,552
cash equivalents
Cash and cash equivalents, beginning 64,412 39,897 86,117
of year
Cash and cash equivalents, end of year $ 39,897 $ 86,117 $ 173,669
See accompanying notes to consolidated financial statements

.
47
1. Summary of
Accounting
Policies (a)Basis of Presentation

The accompanying consolidated financial
statements include the accounts of Atlantic Coast
Airlines Holdings, Inc. ("ACAI") and its wholly
owned subsidiaries, Atlantic Coast Airlines
("ACA") and Atlantic Coast Jet, Inc. ("ACJet"),
(together, the "Company"). On July 1, 2001, ACAI
combined the operations of its ACJet subsidiary
into the operations of ACA. All significant
intercompany accounts and transactions have been
eliminated in consolidation. The Company's
flights are operated under code sharing
agreements with United Airlines, Inc. ("United")
and Delta Airlines ("Delta") and are identified
as United Express and Delta Connection flights in
computer reservation systems. As of December 31,
2001, the Company provided scheduled air
transportation service as United Express for
passengers to destinations in states in the
Eastern and Midwestern United States. The
Company provides scheduled air transportation
service as Delta Connection to various
destinations in the Eastern United States and
Canada.

(b)Cash, Cash Equivalents and Short-Term Investments

The Company considers investments with an
original maturity of three months or less when
purchased to be cash equivalents. Investments
with an original maturity greater than three
months and less than one year are considered
short-term investments. In addition, the Company
holds investments in tax-free Industrial Revenue
Bonds ("IRB") having initial maturities up to 30
years. The IRB's are secured by letters of
credit or insured and come up for auction on a
weekly or monthly basis. As such, the Company
considers securities of this type to be short-
term investments. All short-term investments
are considered to be available for sale. Due to
the short maturities associated with the
Company's investments, the amortized cost
approximates fair market value. Accordingly, no
adjustment has been made to record unrealized
holding gains and losses.
48
(c)Airline Revenues

Passenger revenues are recorded as operating
revenues at the time transportation is provided.
Under the Company's fee-per-departure and fee-
per-block hour agreements, transportation is
considered provided when the flight has been
completed. Under the proration of fare
agreement in effect with United for periods
prior to and through November 2000,
transportation was considered provided when the
passenger flew. All of the passenger tickets
used by the Company's revenue passengers are
sold by other air carriers.

ACA participates in United's Mileage Plus
frequent flyer program and in the Delta SkyMiles
frequent flyer program. The Company does not
accrue for incremental costs for mileage
accumulation or redemption relating to these
programs because the Company operates under
agreements with United and Delta, which are not
affected by the number of miles earned by its
passengers or number of passengers on its
flights redeeming miles.

(d)Accounts and Notes Receivable

Accounts receivable are stated net of allowances
for uncollectible accounts of approximately
$755,000 and $595,000 at December 31, 2000 and
2001, respectively. Amounts charged to expenses
for uncollectible accounts in 1999, 2000 and 2001
were $564,000, $503,000 and $227,000,
respectively. Write-off of accounts receivable
were $156,000, $521,000 and $386,000 in 1999,
2000 and 2001, respectively. Accounts receivable
as of December 31, 2000 and 2001 included ticket
receivables of $18.6 million and $1.3 million
respectively, and approximately $5.6 million and
$4.4 million, respectively, related to
manufacturers credits to be applied towards
future spare parts purchases and training
expenses. The large decrease in ticket
receivables is due to the change in the United
Express agreement from a proration-of-fare
arrangement to a fee-per-departure arrangement as
described herein.

(e)Concentrations of Credit Risk

Substantially all of the Company's passenger
tickets are sold by other air carriers. Prior to
the change from a proration of fare agreement to
a fee-per-departure agreement, the Company had a
significant concentration of its accounts
receivable with other air carriers with no
collateral. At December 31, 2000 and 2001,
accounts receivable from air carriers totaled
approximately $18.6 million and $929,000,
respectively. Of the total amount, approximately
$13.3 million and $240,000 at December 31, 2000
and 2001, respectively, were due from United.
Under the fee-per-departure agreements, the
Company receives payment in advance from both
United and Delta. Historically, accounts
receivable losses have not been significant.

49
(f)Risks and Uncertainties

The events of September 11, together with the
slowing economy throughout 2001, have significantly
affected the U.S. airline industry. These events
have resulted in changed government regulation,
declines and shifts in passenger demand, increased
insurance costs and tightened credit markets which
continue to affect the operations and financial
condition of participants in the industry including
the Company, its code share partners, and aircraft
manufacturers. These circumstances have raised
substantial risks and uncertainties, including
those discussed below, which may inpact the Company,
its code share partners, and aircraft manufacturers,
in ways that the Company is not currently able to
predict.

United Express:

The Company's United Express Agreements ("UA
Agreements") define the Company's relationship
with United. The UA Agreements authorize the
Company to use United's "UA" flight designator
code to identify the Company's flights and fares
in the major airline Computer Reservation
Systems, including United's "Apollo" reservation
system, to use the United Express logo, to use
United's exterior aircraft paint schemes, and to
use uniforms similar to those of United.

In November 2000, the Company and United
restated the UA Agreements, effectively changing
from a prorated fare arrangement to a fee-per-
departure arrangement. Under the fee-per-
departure structure, the Company is
contractually obligated to operate the flight
schedule, for which United pays the Company an
agreed amount per departure regardless of the
number of passengers carried, with incentive
payments based on operational performance. The
Company thereby assumes the risks associated
with operating the flight schedule and United
assumes the risk of scheduling, marketing, and
selling seats to the traveling public. The
restated UA Agreements are for a term of ten
years. The restated UA Agreements give ACA the
authority to operate 128 regional jets in the
United Express operation. Pursuant to the
restated UA Agreements, United provides a number
of additional services to ACA at no cost. These
include customer reservations, customer service,
pricing, scheduling, revenue accounting, revenue
management, frequent flyer administration,
advertising, provision of ground support
services at most of the airports served by both
United and ACA, provision of ticket handling
services at United's ticketing locations, and
provision of airport signage at airports where
both ACA and United operate. The UA Agreements
do not prohibit United from serving, or from
entering into agreements with other airlines who
would serve, routes served by the Company, but
state that United may terminate the UA
Agreements if ACAI or ACA enter into a similar
arrangement with any other carrier other than
Delta or a replacement for Delta without
United's prior written approval. The UA
Agreements limit the ability of ACAI and ACA to
merge with another company or dispose of certain
assets or aircraft without offering United a
right of first refusal to acquire the Company or
such assets or aircraft, and provide United a
right to terminate the UA Agreements if ACAI or
ACA merge with or are controlled or acquired by
another carrier. The UA agreements provide
United with the right to assume ACA's ownership
or leasehold interest in certain aircraft in the
event ACA breaches specified provisions of the
UA agreements, or fails to meet specified
performance standards. The UA Agreements call
for the resetting of fee-for-departure rates
annually based on the Company's planned level of
operations for the upcoming year.
50
UAL Corporation, the parent of United, has
disclosed that during the fourth quarter 2001 it
began implementing a financial recovery plan
that includes four planks: reducing the size of
the airline and cutting capital and operating
spending in line with that reduction, generating
as much revenue as possible from each flight,
working with its unions and other employee
groups to find further labor savings and
implementing a financing plan to support it
through the execution of its financial recovery
plan. UAL Corporation further disclosed that
the impact of the events of September 11, 2001
on United and the sufficiency of its financial
resources to absorb that impact are dependent on
a number of factors, including United's success
in implementing its financial recovery plan.

Following September 11, United requested that
the Company propose measures that it could take
to assist in improving United's financial
situation. The Company believes that United
made a similar request to other suppliers and
vendors. On December 31, 2001, the Company and
United agreed on fee-per-departure rates to be
utilized during 2002. In addition, in the
context of reaching this agreement, the Company
agreed to certain concessions that would benefit
United by (1) settling various existing contract
issues, (2) agreeing that United would not have
to pay increased rates to reflect utilization
changes in the fourth quarter of 2001, (3)
agreeing to 2002 rates that require aggressive
cost containment, and (4) reaffirming its
commitment to retire the Company's J-41
turboprop aircraft. The Company determined that
these concessions, which were favorable to
United as compared to prior contractual
arrangements and were designed to assist United
in its financial recovery plan, were appropriate
in light of the circumstances at the time.

In late March 2002, United informed the Company
that an essential component of its financial
recovery plan includes obtaining cost reductions
from its employees, suppliers and partners, and
that United is seeking the Company's assistance
in decreasing the cost of the Company's product
and achieving cash flow improvements
for United over the next 24 months. The
Company has commenced discussions with United
regarding opportunities for reducing its costs
or creating value to address United's financial
situation. The basis for, nature, timing and
extent of any such actions has not been agreed.
While the Company has expressed its willingness
to work with United to find mutually acceptable
opportunities, the Company believes that it is
not contractually obligated to make any such
changes under the United Express Agreements or
the December 31, 2001 rate setting agreement.

51
Delta Connection:

In September 1999, the Company reached a ten-
year agreement with Delta to operate regional
jet aircraft as part of the Delta Connection
program on a fee-per-block hour basis. The
Company began Delta Connection revenue service
on August 1, 2000. The Company's Delta
Connection Agreement ("DL Agreement") defines
the Company's relationship with Delta. The
Company is compensated by Delta on a
fee-per-block hour basis. Under the fee-per-
block hour structure, the Company is
contractually obligated to operate the flight
schedule, for which Delta pays the Company an
agreed amount per block hour flown regardless of
passenger revenue with additional incentive
payments based on operational performance. The
Company thereby assumes the risks associated
with operating the flight schedule and Delta
assumes the risks of scheduling, marketing, and
selling seats to the traveling public. By
operating as part of the Delta Connection
program, the Company is able to use Delta's "DL"
flight designator to identify ACA's flights and
fares in the major Computer Reservation Systems,
including Delta's "Deltamatic" reservation
system, and to use the Delta Connection logo and
exterior aircraft paint schemes and uniforms
similar to those of Delta.

Due to the rapid increase in fleet size during
2001, the Company and Delta agreed to
compensation based on a cost plus formula based
on reimbursement of fixed amounts for initial
pilot training expenses and for all other costs,
based on actual costs incurred, plus a
contracted margin, and incentive compensation
tied to operating performance. The Company and
Delta have agreed to return to a fee-per-block
hour rate arrangement for 2002. The Company and
Delta are currently setting these rates based on
the Company's planned level of operations for
the upcoming year. The Company does not
anticipate material differences on a per-block-
hour basis for its 2002 revenues as compared to
2001 revenues due to the reversion to a fee-per-
block-hour rate.
52
Pursuant to the DL Agreement, Delta, at its
expense, provides a number of support services
to ACA. These include customer reservations,
customer service, ground handling, station
operations, pricing, scheduling, revenue
accounting, revenue management, frequent flyer
administration, advertising and other passenger,
aircraft and traffic servicing functions in
connection with the ACA operation. Delta may
terminate the DL Agreement at any time if the
Company fails to maintain certain performance
standards and, subject to certain rights of the
Company and by providing 180 days notice to the
Company, may terminate without cause, effective
no earlier than August 1, 2002. If Delta
terminates the Delta agreement without cause
prior to March 2010, the Company has the right
to put all or some of the Delta Connection
aircraft to Delta. In January 2001, the Company
reached an agreement with United and Delta to
place 20 Bombardier Canadair Regional Jets
("CRJ's") originally ordered for the Delta
Connection program in the United Express
program. The DL Agreement requires the Company
to obtain Delta's approval if it chooses to
enter into a code-sharing arrangement with
another carrier other than a replacement for
United, to list its flights under any other
code, or to operate flights for any other
carrier, except with respect to such
arrangements with United or non-U.S. code-share
partners of United or in certain other
circumstances. The DL Agreement does not
prohibit Delta from serving, or from entering
into agreements with other airlines who would
serve, routes flown by the Company. The DL
Agreement also restricts the ability of the
Company to dispose of aircraft subject to the
agreement without offering Delta a right of
first refusal to acquire such aircraft, and
provides that Delta may extend or terminate the
agreement if, among other things, the Company
merges with or sells its assets to another
entity, is acquired by another entity or if any
person acquires more than a specified percentage
of its stock.

At December 31, 2001 54 CRJs, and 31 British
Aerospace J-41's ("J-41's") were operated under
the United Express program and 29 Fairchild-
Dornier 328 Jets ("328JET's") and three CRJs
were operated under the Delta Connection
program. For the year ended December 31, 2001,
82% of consolidated revenues were derived from
the United Express program and 18% of
consolidated revenues were derived from the
Delta Connection program. Following the
terrorist attacks on September 11, 2001, the
major U.S. airlines have suffered substantial
losses and continued losses are expected until
passenger traffic levels substantially recover.
Notwithstanding that the terms of the Company's
agreements with its major U.S. airline partners,
as described above, extend several years into
the future, the near term loss of either of the
Company's code share agreements would, unless
replaced by a similar agreement with another
carrier, likely have a material adverse impact
on the Company financial position and operating
results.
53
Fairchild Dornier Purchase Agreement:

Fairchild Dornier, the manufacturer of the
328JET, recently stated that it has an immediate
and critical need for additional funding, and
that it is in discussions with several potential
strategic partners regarding proposed
investments. The Company is unable to predict
whether Fairchild Dornier will be successful in
finding additional capital or in otherwise
restructuring its finances, but believes that
Fairchild Dornier may be forced to seek
bankruptcy protection if it is unsuccessful in
its efforts. In the event of a Fairchild
Dornier bankruptcy, Fairchild Dornier could
either sell, liquidate or reorganize some or all
of its businesses, and in the event of a
reorganization or sale of its businesses would
have the right to assume or reject future
contractual obligations. Should Fairchild
Dornier be unable to deliver ordered 328JETS,
the Company would reassess available
alternatives in pursuing its growth strategy and
possibly delay the Company's turboprop
retirement plans, and adjust other plans
discussed elsewhere in this Form 10-K relating
to its 328JET aircraft.

Fairchild Dornier has significant future
obligations to the Company in connection with
the order of 328JET aircraft. These include
obligations: to deliver 32 firm ordered 328JETs
and 81 additional option 328JETs with certain
financing support; to pay the Company any
difference between the lease payments, if any,
received from remarketing the 26 J-41
aircraft leased by the Company and the lease
payment obligations of the Company on those
aircraft; to purchase five J-41 aircraft owned
by the Company at their net book value at the
time of retirement; to assume certain crew
training costs; and, to provide spares,
warranty, engineering, and related support.
Fairchild Dornier has delayed the delivery of
one 328JET that was scheduled to be delivered to
the Company during the week of March 25, 2002
for reasons connected with its financing. The
Company believes it has secured rights to
Fairchild Dornier's equity interest in the
delivered 328JETs that it may proceed against in
the event that Fairchild Dornier fails to
fulfill certain of these obligations.

During the fourth quarter of 2001, the Company
recorded a pre-tax aircraft early retirement
charge of $23.5 million for the early retirement
of nine leased Jetstream-41 turboprop aircraft,
which the Company plans to remove from service
prior to year-end 2002. The Company anticipates
taking additional charges during 2002 of
approximately $48.0 million pre-tax for the
retirement of its remaining 29-seat Jetstream-41
turboprop aircraft. The undiscounted remaining
lease obligations (net of the Company's estimate
of the future sublease rentals) on the J-41
fleet after planned retirement dates in 2002 and
2003 are approximately $55 million and continue
through 2010 and the book value of the five
owned J-41 aircraft as of March 1, 2002 is $18.1
million. To the extent that Fairchild Dornier
fulfills its contractual obligations, the
majority of the aircraft early retirement charge
will not adversely affect the Company's cash
position, with the payments by Fairchild Dornier
being recorded as an aircraft purchase
inducement on the 328JET aircraft. The Company
would remain liable for the lease payments on its
J-41 aircraft and thus be required to pay the
remaining lease payments if, and to the extent
that, Fairchild Dornier were to default on its
obligation.
54
Collective Bargaining Agreements:

The Company's pilots are represented by the
Airline Pilots Association ("ALPA"), flight
attendants are represented by the Association of
Flight Attendants ("AFA"), and aviation
maintenance technicians and ground service
equipment mechanics are represented by the
Aircraft Mechanics Fraternal Association
("AMFA").

The ALPA collective bargaining agreement became
amendable in February 2000 and in early 2001,
the Company's pilots ratified a new four-and-a-
half year agreement in effect until August 2005.
This agreement provides for improvements in pay
rates, benefits, training and other areas. The
collective bargaining agreement covers pilots
flying for both the Atlantic Coast
Airlines/United Express operation, as well as
the Atlantic Coast Airlines/Delta Connection
operation. The new agreement provides for
substantial increases in pilot compensation,
which the Company believes are consistent with
regional airline industry trends.

ACA's collective bargaining agreement with AFA
was ratified in October 1998. The agreement is
for a four-year duration and becomes amendable
in October 2002.

The collective bargaining agreement with AMFA
was ratified in June 1998. The agreement is for
a four-year duration and becomes amendable in
June 2002. This agreement covers all aviation
maintenance technicians and ground service
equipment mechanics working for the Company.
55
Aviation Insurance

Following the September 11 terrorist attacks,
the aviation insurance industry imposed a
worldwide surcharge on aviation insurance rates
as well as a reduction in coverage for certain
war risks. In response to the reduction in
coverage, the Air Transportation Safety and
System Stabilization Act provided U.S. air
carriers with the option to purchase certain war
risk liability insurance from the United States
government on an interim basis at rates that are
more favorable than those available from the
private market. Prior to September 11, it was
not customary for independent regional airlines
to carry general war risk insurance. Since
September 11, the Company has purchased hull war
risk coverage through the private insurance
market through September 24, 2002, and has
purchased liability war risk coverage from the
U.S. government through May 19, 2002 and
anticipates renewing the government insurance
for as long as the coverage is available. The
airlines and insurance industry, together with
the United States and other governments, are
continuing to evaluate both the cost and options
for providing coverage of aviation insurance.
Recently, an industry-led group announced a
proposal to create a mutual insurance company,
to be called Equitime, to cover war risk and
terrorism risk, which would initially seek
support through government guarantees. Equitime
would provide a competitive alternative to
insurance being offered by the traditional
insurance market, which opposes this initiative.
Equitime's organizers project that it may be
available to provide insurance as early as May
2002 to up to 70 U.S. carriers. The Company has
not been actively involved in the formation of
Equitime and is unable to anticipate whether
this source of insurance will be made available
and, if so, whether it will offer competitive
rates. The Company anticipates that it will
follow industry practices with respect to
sources of insurance.

(g)Use of Estimates

The preparation of financial statements in
accordance with accounting principles generally
accepted in the United States of America requires
management to make certain estimates and
assumptions regarding valuation of assets,
recognition of liabilities for costs such as
aircraft maintenance, differences in timing of
air traffic billings from United and other
airlines, operating revenues and expenses during
the period and disclosure of contingent assets
and liabilities at the date of the consolidated
financial statements. Actual results could
differ from those estimated.

(h)Expendable Parts

Expendable parts and supplies are stated at the
lower of cost or market, less an allowance for
obsolescence of $665,000 and $1.2 million as of
December 31, 2000 and 2001, respectively.
Expendable parts and supplies are charged to
expense as they are used. Amounts charged to
costs and expenses for obsolescence in 1999, 2000
and 2001 were $110,000, $237,000 and $578,000,
respectively.

56
(i)Property and Equipment

Property and equipment are stated at cost.
Depreciation is computed using the straight-line
method over the estimated useful lives of the
related assets that range from five to sixteen
and one half years. Capital leases and leasehold
improvements are amortized over the shorter of
the estimated life or the remaining term of the
lease.

Amortization of capital leases and leasehold
improvements is included in depreciation expense.

The Company periodically evaluates whether events
and circumstances have occurred which may impact
the remaining estimated useful life or the
recoverability of the remaining carrying value of
its long-lived assets. If such events or
circumstances were to indicate that the carrying
amount of these assets would not be recoverable,
the Company would estimate the future cash flows
expected to result from the use of the assets and
their eventual disposition. If the sum of the
expected future cash flows (undiscounted and
without interest charges) is less than the
carrying amount of the asset, an impairment loss
would be recognized by the Company.

(j)Preoperating Costs

Preoperating costs represent the cost of
integrating new types of aircraft. Prior to 1999,
such costs, which consist primarily of flight
crew training and aircraft ownership related
costs, were deferred and amortized over a period
of four years on a straight-line basis. The
American Institute of Certified Public
Accountants issued Statement of Position 98-5
("SOP 98-5") on accounting for start-up costs,
including preoperating costs related to the
introduction of new fleet types by airlines.

During 1997 the Company capitalized approximately
$2.1 million of these costs related to the
introduction of the regional jet ("CRJ") into the
Company's fleet. Accumulated amortization of
preoperating costs at December 31, 1998 was
$571,000. On January 1, 1999, the Company wrote-
off the remaining unamortized preoperating costs
balance of approximately $1.5 million, before
income tax benefit of $598,000, in accordance
with the implementation of SOP 98-5. Also, in
accordance with SOP 98-5, approximately $2.2
million of preoperating costs incurred during
1999 and approximately $5.6 million of
preoperating costs incurred during 2000 for the
start up of ACJet were expensed as incurred.
57
(k)Intangible Assets

Goodwill of approximately $3.2 million,
representing the excess of cost over the fair
value of net assets acquired in the acquisition
of ACA, is being amortized by the straight-line
method over twenty years. Costs incurred to
acquire slots are being amortized by the straight-
line method over twenty years. The primary
financial indicator used by the Company to assess
the recoverability of its intangible assets is
undiscounted future cash flows from operations.
The amount of impairment, if any, is measured
based on projected future cash flows using a
discount rate reflecting the Company's average
cost of funds. Accumulated amortization of
intangible assets at December 31, 2000 and 2001
was $1.6 million and $1.8 million, respectively.

In accordance with Statement of Financial
Accounting Standards No. 142, (see Footnote 16),
which the Company will adopt as of January 1,
2002, the Company will no longer recognize
amortization of its goodwill and slots for 2002
and future years.

(l)Maintenance

The Company has executed long term agreements
with the engine manufacturers and other service
providers covering repair and overhaul of its
engines, airframe and avionics components, and
landing gear. These agreements call for an
escalating rate per hour flown over the life of
the agreement. The Company's maintenance
accounting policy is to expense amounts based on
the current rate as the aircraft are flown.
Prior to the execution of these long-term
maintenance agreements, the Company's maintenance
policy was a combination of expensing certain
events as incurred and accruing for certain
maintenance events at rates it estimated would be
sufficient to cover maintenance cost for the
aircraft.

In 2000, the Company executed a seven-year
engine services agreement with GE Engine
Services, Inc. ("GE") covering the scheduled and
unscheduled repair of ACA's CRJ jet engines,
operated on the 43 CRJs already delivered or on
order for the United Express operation. This
agreement was amended in July 2000 to cover 23
additional CRJ aircraft, bringing the total
number of CRJ aircraft covered under the
agreement to 66. Under the terms of the
agreement, the Company pays a set dollar amount
per engine hour flown on a monthly basis to GE
and GE assumes the responsibility to repair the
engines when required at no additional expense
to the Company, subject to certain exclusions.
The Company expenses the amount paid to GE based
on the monthly rates stipulated in the
agreement, as engine hours are flown. The
Company's future maintenance expense on CRJ
engines covered under the new agreement will
escalate based on contractual rate increases,
intended to match the timing of actual
maintenance events that are due pursuant to the
terms. The Company has signed a similar
agreement covering engines for up to 80 328JETs
with Pratt & Whitney.
58
Effective September 2001, the Company entered a
sixteen year maintenance agreement with Air
Canada covering maintenance, repair and overhaul
services for airframe components on its CRJ
aircraft. Under the terms of this agreement,
the Company pays a varying amount per flight
hour each month, based on the age of the
aircraft. The Company expenses the amount paid
to Air Canada based on the rates stipulated in
the agreement and the hours flown each month.

Effective January 2001, the Company entered into
an agreement with BAE Systems Holdings, Inc.
covering repair and overhaul of airframe rotable
parts on the Company's J-41 aircraft through the
remaining service life of the J-41 fleet. Under
the terms of this agreement, the Company pays a
fixed amount per flight hour each month. The
Company expenses the amount paid to BAE Systems
Holdings, Inc. based on the rates stipulated in
the agreement and the hours flown each month.

During the third quarter of 1999, the Company
reversed approximately $1.5 million in life
limited parts repair expense accruals related to
CRJ engines that are no longer required based on
the maintenance services and terms contained in
the GE engine maintenance agreement.

(m)Deferred Credits

The Company accounts for incentives provided by
the aircraft manufacturers as deferred credits
for leased aircraft. These credits are amortized
on a straight-line basis as a reduction to lease
expense over the respective lease term. The
incentives are credits that may be used to
purchase spare parts, pay for training expenses,
or be applied against future rental payments.

(n)Income Taxes

The Company accounts for income taxes using the
asset and liability method. Under the asset and
liability method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between
the financial statement carrying amounts for
existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
expected to apply to taxable income in future
years in which those temporary differences are
expected to be recovered or settled.
59
(o)Stock-Based Compensation

The Company accounts for its stock-based
compensation plans using the intrinsic value
method prescribed under Accounting Principles
Board (APB) No. 25. As such, the Company records
compensation expense for stock options and awards
only if the exercise price is less than the fair
market value of the stock on the measurement
date.

(p)Income Per Share

Basic income per share is computed by dividing
net income by the weighted average number of
common shares outstanding. Diluted income per
share is computed by dividing net income by the
weighted average number of common shares
outstanding and common stock equivalents, which
consist of shares subject to stock options
computed using the treasury stock method. In
addition, dilutive convertible securities are
included in the denominator while interest on
convertible debt, net of tax, is added back to
the numerator. On January 25, 2001, the Company
announced a 2-for-1 common stock split payable
as a stock dividend on February 23, 2001 to
shareholders of record on February 9, 2001. All
share and income per share information has been
adjusted for all years presented to reflect the
stock split.

60
A reconciliation of the numerator and denominator
used in computing income per share is as follows
(in thousands, except per share amounts):

1999 2000 2001
Basic Diluted Basic Diluted Basic Diluted

Share calculation:
Average number of common
shares 37,928 37,928 40,150 40,150 43,434 43,434
Outstanding
Incremental
shares due to - 1,698 - 1,616 - 1,776
assumed exercise of
options
Incremental shares
due to assumed - 4,404 - 1,872 - -
conversion of
convertible debt
Weighted average
common shares 37,928 44,030 40,150 43,638 43,434 45,210
Outstanding

Adjustments to net
income:
Income before cumulative
effect
of accounting $29,156 $29,156 $15,155 $15,155 $34,322 $34,322
change
Cumulative effect
of accounting (888) - - - - -
change, net of
income tax
Interest expense on
convertible debt, - 831 - 416 - -
net of tax
Net Income $28,268 $29,987 $15,155 $15,571 $34,322 $34,322

Net Income per share $ .75 $ .66 $ .38 $ .36 $ .79 $ .76

(q) Reclassifications

Certain prior year amounts as previously reported
have been reclassified to conform to the current
year presentation.

(r) Interest Rate Hedges

The Company has periodically used swaps to hedge
the effects of fluctuations in interest rates
associated with aircraft financings. These
transactions meet the requirements for current
hedge accounting. The effective portions of
hedging gains and losses resulting from the
interest rate swap contracts are deferred until
the contracts are settled and then amortized over
the aircraft lease term or capitalized as part of
acquisition cost, if purchased, and depreciated
over the life of the aircraft. The ineffective
portions of hedging gains and losses are recorded
as incurred.

(s) Segment Information

The Company has adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and
Related Information." The statement requires
disclosures related to components of a company
for which separate financial information is
available that is evaluated regularly by a
company's chief operating decision maker in
deciding the allocation of resources and
assessing performance. The Company is engaged
in one line of business, the scheduled and
chartered transportation of passengers, which
constitutes nearly all of its operating revenues.
61
2. Property Property and equipment consist of
and the following:
Equipment

(in thousands)
December 31,
2000 2001

Owned aircraft and improvements $ 92,931 $ 92,562
Improvements to leased aircraft 5,771 6,782
Flight equipment, primarily 51,199 82,372
rotable spare parts
Maintenance and ground equipment 9,310 10,971
Computer hardware and software 11,345 14,314
Furniture and fixtures 1,329 2,120
Leasehold improvements 4,282 7,887
176,167 217,008
Less: Accumulated depreciation 33,327 45,480
and amortization
$ 142,840 $ 171,528

In 1999, the Company commenced a replacement
project of its computer software systems. The
Company anticipates spending approximately $11
million on this project, the majority of which will
be capitalized and amortized over seven years. In
1999, the Company expensed approximately $400,000
related to replacement software selection and
capitalized $2.3 million in acquisition and
implementation costs. In 2000 and 2001, the
Company capitalized an additional $5.2 million and
$2.8 million of costs incurred, respectively,
bringing the total capitalized costs to date to
$10.3 million.

62
3. Accrued Accrued liabilities consist of the
Liabilities following:

(in thousands)

December 31,
2000 2001

Payroll and employee benefits $ 13,038 $ 20,385
Air traffic liability 3,075 2,534
Interest 1,021 949
Aircraft rents 8,109 6,765
Passenger related expenses 9,692 6,075
Maintenance costs 2,880 1,266
Fuel 7,049 4,595
Other 8,180 13,001
$ 53,044 $ 55,570

4. Debt On September 28, 2001, the Company entered into an
asset-based lending agreement with a financial
institution that provided the Company with a line
of credit for up to $25 million. The new line of
credit, which will expire on October 15, 2003,
replaced a previous $35 million line of credit.
The interest rate on this line is LIBOR plus .875%
to 1.375% depending on the Company's fixed charges
coverage ratio. As of December 31, 2001, the
Company's interest rate on its line of credit was
3.0%. The Company has pledged $15.3 million of
this line of credit as collateral for letters of
credit issued on behalf of the Company by a
financial institution. The available borrowing
under the line of credit is limited to the value of
the bond letter of credit on the Company's Dulles,
Virginia hangar facility plus the value of 60% of
the book value of certain rotable spare parts. As
of December 31, 2001 the amount of available credit
under the line was $9.7 million. As of December
31, 2001 there were no outstanding borrowings on
the $25 million line of credit.

In July 1997, the Company issued $57.5 million
aggregate principal amount of 7% Convertible
Subordinated Notes due July 1, 2004 ("the Notes").
The Notes were convertible into shares of Common
Stock unless previously redeemed or repurchased, at
a conversion price of $4.50 per share, subject to
certain adjustments. During 1998, approximately
$37.7 million of the notes were converted into
approximately 8.5 million shares of common stock.
Interest on the Notes was payable on April 1 and
October 1 of each year. On May 15, 2000, the
Company called the remaining $19.8 million
principal amount of Notes outstanding, for
redemption at 104% of face value effective July 3,
2000. The Noteholders elected to convert all of
the Notes into common stock and approximately 4.4
million shares were issued in exchange for the
Notes during the period May 25, 2000 to June 6,
2000, resulting in an addition to paid in capital
of approximately $19.8 million partially offset by
a reduction of approximately $471,000 for the
unamortized debt issuance costs relating to the
Notes in connection with their conversion.
63
In September 1997, approximately $112 million of
pass through certificates were issued in a private
placement by separate pass through trusts, which
purchased with the proceeds, equipment notes (the
"Equipment Notes") issued in connection with (i)
leveraged lease transactions relating to four J-41s
and six CRJs, all of which were leased to the
Company (the "Leased Aircraft"), and (ii) the
financing of four J-41s owned by the Company (the
"Owned Aircraft"). The Equipment Notes issued with
respect to the Owned Aircraft are direct
obligations of ACA, guaranteed by ACAI and are
included as debt obligations in the accompanying
consolidated financial statements. The Equipment
Notes issued with respect to the Leased Aircraft
are not obligations of ACA or guaranteed by ACAI.

Long-term debt consists of the
following:
(in thousands) 2000 2001
December 31,

Equipment Notes associated with Pass
Through Trust Certificates, due
January 1, 2008 and January 1,
2010, principal payable annually
through January 1, 2006 and semi- 13,304 12,262
annually thereafter through maturity,
interest payable semi-annually at 7.49%
throughout term of notes,
collateralized by four J-41 aircraft.

Notes payable to institutional lenders,
due between October 23, 2010 and May
15, 2015, principal payable 50,952 48,096
semiannually with interest ranging from
5.65% to 7.63% through maturity,
collateralized by four CRJ aircraft.

Note payable to institutional lender, due
October 2, 2006, principal payable 3,168 2,722
semiannually with interest at 6.56%,
collateralized by one J-41 aircraft.

Total 67,424 63,080
Less: Current Portion 4,344 4,639
$63,080 $58,441

64

As of December 31, 2001, maturities of long-term
debt are as follows:
(in thousands)

2002 $ 4,639
2003 4,900
2004 5,153
2005 6,019
2006 5,936
Thereafter 36,433
$63,080

The Company has various financial covenant
requirements associated with its debt and United
marketing agreements. These covenants require the
Company to meet certain financial ratio tests,
including tangible net worth, net earnings, current
ratio and debt service levels.

5. Obligations The Company leases certain equipment for
Under noncancellable terms of more than one year. The net
Capital book value of the equipment under capital leases at
Leases December 31, 2000 and 2001 is $5.5 million and $3.6
million, respectively. The leases were capitalized
at the present value of the lease payments. The
weighted average interest rate for these leases is
approximately 7.6 %.

At December 31, 2001, the future minimum payments, by
year and in the aggregate, together with the present
value of the net minimum lease payments, are as
follows:

(in thousands)
Year Ending December 31,

2002 $ 1,584
2003 1,565
2004 772
Total future minimum lease 3,921
payments
Amount representing interest 360
Present value of minimum lease 3,561
payments
Less: Current maturities 1,359
$ 2,202

65
6. Operating Future minimum lease payments under noncancellable
Leases operating leases at December 31, 2001 are as follows:

(in thousands)
Year ending December 31, Aircraft Other Total

2002 $ 120,914 $ 7,236 $ 128,150
2003 112,841 7,297 120,138
2004 116,945 7,297 124,242
2005 115,559 7,094 122,653
2006 113,565 7,042 120,607
Thereafter 940,188 45,431 985,619
Total minimum
lease payments $1,520,012 $ 81,397 $1,601,409

Certain of the Company's leases require aircraft to
be in a specified maintenance condition at lease
termination or upon return of the aircraft.

The Company's lease agreements generally provide that
the Company pays taxes, maintenance, insurance and
other operating expenses applicable to leased assets.
Operating lease expense was $56.2 million, $70.8
million, and $107.4 million for the years ended
December 31, 1999, 2000, and 2001, respectively.

7. Stockholders' Stock Splits
Equity
On January 25, 2001, the Company announced a 2-for-1
common stock split payable as a stock dividend on
February 23, 2001 to shareholders of record on
February 9, 2001. The effect of this stock split is
reflected in the accompanying financial statements,
calculation of income per share, and stock option
table presented below as of and for the years ended
December 31, 1999, 2000 and 2001.

Stock Option Plans

The Company's 1992 Stock Option Plan has 3.0 million
shares of which a majority had been granted by 1995.
The Company's 1995 Stock Incentive Plan has 5.0
million shares of which the majority had been granted
by year-end 1999. In 2000, the Company's
shareholders approved a new 2000 Stock Incentive Plan
for 4.0 million shares. These three shareholder
approved plans provide for the issuance of incentive
stock and non qualified stock options to purchase
common stock of the Company and restricted stock
awards to certain employees and directors of the
Company. In addition, during 2000 the Company's Board
of Directors approved stock option programs for an
additional 2.4 million shares. The Board approved
programs provide for the issuance of non-qualified
stock options to purchase common stock of the Company
and restricted stock awards to certain employees.
Executive officers and directors of the Company are
not eligible to participate in the Board authorized
stock option programs. Under the plans and programs,
options are granted by the Chief Executive Officer of
the Company with approval from the Compensation
Committee of the Board of Directors and vest over a
period ranging from three to five years.

66
A summary of the status of the Company's stock option
plan awards, including restricted stock awards as of
December 31, 1999, 2000, and 2001 and changes during
the periods ending on those dates is presented below:

1999 2000 2001
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price

Options outstanding at
beginning of year 3,719,798 $ 3.76 4,445,642 $ 6.14 4,576,994 $ 8.57
Granted 1,470,000 $11.44 1,341,000 $12.51 2,202,826 $14.74
Exercised 525,852 $ 3.07 1,132,432 $ 3.46 1,524,482 $ 5.35
Canceled 218,304 $ 8.85 77,216 $10.84 60,700 $14.90
Options outstanding 4,445,642 $ 6.14 4,576,994 $ 8.58 5,194,638 $12.07
at end of year

Options exercisable 2,320,412 $ 3.03 2,132,823 $ 5.02 1,408,608 $ 7.88
at year-end
Options available for 54,668 5,190,884 3,048,758
granting at year end

Weighted-average fair
value of options $6.57 $7.45 $8.77
granted during the
year

The Company awarded a total of 55,900 shares of
restricted stock to certain employees during 2001.
These shares vest over four years and have a
provision for accelerated vesting tied to a 25%
increase in any 2002 quarter's operating results over
the prior years quarter. The Company recognized
$218,000 in compensation expense in 2001 due to these
restricted stock awards. The Company awarded a total
of 67,000 shares of restricted stock to certain
employees during 2000. These shares vest over three
years and had a provision for accelerated vesting if
the Company's stock price appreciated by 25% during
the first year of vesting. In February 2001, the
Company's stock price met the threshold for
accelerated vesting and as a result, these restricted
shares vested 100% in April 2001. The Company
recognized $1.1 million and $78,000 in compensation
expense in 2001 and 2000, respectively, due to these
restricted stock awards and as a result of the
accelerated vesting schedule. In 1998, the Company
awarded a total of 200,000 shares of restricted stock
to certain employees. These shares vest over three
to five years. The Company recognized $343,000,
$301,000 and $241,000 in compensation expense for
1999, 2000 and 2001 respectively, associated with the
1998 restricted stock awards and $94,000, $90,000 and
$57,000 for 1999, 2000 and 2001 respectively,
associated with stock option awards.
67
The following table summarizes information about
stock options outstanding at December 31, 2001:

Options Outstanding Options Exercisable
Weighted-
Number average Weighted- Number Weighted-
outstanding remaining average exercisable average
Range of exercise at contractual exercise exercise
price 12/31/01 life price price 12/31/01 price
(years)

$0.00 - $2.79 421,588 2.7 $ .42 310,302 $ .58
$2.80 - $5.59 198,776 5.0 $ 3.72 198,776 $ 3.72
$5.60 - $8.39 134,992 6.0 $ 6.12 134,992 $ 6.12
$8.40 - $11.19 593,866 7.5 $9.85 221,516 $9.67
$11.20 - $13.99 3,195,730 8.9 $13.43 404,386 $12.55
$14.00 - $16.79 351,786 7.8 $15.67 135,136 $15.35
$16.80 - $19.59 13,000 9.0 $17.70 2,000 $17.13
$19.60 - $22.39 188,000 9.2 $20.56 1,500 $20.95
$22.40 - $25.19 16,500 9.3 $23.49 - -
$25.20 - $27.99 80,400 9.6 $26.90 - -
5,194,638 8.0 $12.07 1,408,608 $ 7.88

The Company uses the Black-Scholes option model to
estimate the fair value of options. A risk-free
interest rate of 6.6%, 6.0% and 4.5% for 1999, 2000
and 2001, respectively, a volatility rate of 65%, 65%
and 73.4% for 1999, 2000 and 2001, respectively, with
an expected life of 6.7 years for 1999, 4.0 years for
2000 and 4.0 years for 2001 were assumed in
estimating the fair value. No dividend rate was
assumed for any of the years.

The following summarizes the pro forma effects
assuming compensation for such awards had been
recorded based upon the estimated fair value. The
proforma information disclosed below does not include
the impact of awards made prior to January 1, 1995
(in thousands, except per share data):

68

1999 2000 2001
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma

Net income $28,268 $23,931 $15,155 $12,009 $34,322 $29,038

Basic
earnings $ .75 $ .63 $ .38 $ .30 $ .79 $ .67
per share

Diluted
earnings $ .66 $ .56 $ .36 $ .28 $ .76 $ .64
per share

Preferred Stock

The Board of Directors of the Company is authorized
to provide for the issuance by the Company of
preferred stock in one or more series and to fix the
rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including,
without limitation, dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption
or repurchase, redemption or repurchase prices,
limitations or restrictions thereon, liquidation
preferences and the number of shares constituting any
series or the designation of such series, without any
further vote or action by the stockholders.

8. Employee Employee Stock Ownership Plan
Benefit
Plans The Company established an Employee Stock Ownership
Plan (the "ESOP") covering substantially all
employees. For each of the years 1992 through 1995,
the Company made contributions to the ESOP that were
used in part to make loan and interest payments.
Shares of common stock acquired by the ESOP were
allocated to each employee based on the employee's
annual compensation.

Effective June 1, 1998, the Board of Directors of the
Company voted to terminate the Plan. On March 15,
1999, the Internal Revenue Service issued a
determination letter notifying the Company that the
termination of the Plan does not adversely affect the
Plan's qualification for federal tax purposes. Upon
termination of the Plan, a participant becomes 100%
vested in his or her account. In preparing for the
final distribution of ESOP shares to participants, it
was determined that a misallocation of shares had
occurred in years 1993 through 1997 resulting in
certain eligible participants not receiving some of
their entitled shares. The Company contributed the
required number of additional shares to the ESOP
during the second and third quarters of 1999 when the
final calculation was determined and recognized
approximately $250,000 in expense. The Company filed
a request for a compliance statement under the IRS's
Voluntary Compliance Resolution Program to obtain
Service approval of the Company's response to the
share misallocation issue. In September 1999, the
ESOP trustee began distribution of the ESOP assets
per participant's direction. In 2000 and 2001,
additional ESOP shares were distributed, as
participants were located. The ESOP will continue
until all participants are located and any remaining
assets are properly distributed. The number of
shares remaining in the Plan as of December 31, 2000
and 2001 were 29,074 and 14,537, respectively.
69
401K Plan

Effective January 1, 1992, the Company adopted a
401(k) Plan (the "Plan"). The Plan covers
substantially all full-time employees who meet the
Plan's eligibility requirements. Employees may elect
a salary reduction contribution of up to 15% of their
annual compensation not to exceed the maximum amount
allowed by the Internal Revenue Service.

Effective October 1, 1994, the Plan was amended to
require the Company to make contributions to the Plan
for eligible pilots in exchange for certain
concessions. These contributions are in excess of
any discretionary contributions made for the pilots
under the original terms of the Plan. These
contributions are 100% vested and equal to 3% of the
first $15,000 of each eligible pilot's compensation
plus 2% of compensation in excess of $15,000. The
Plan limits the Company's contributions for the
pilots to 15% of the Company's adjusted net income
before extraordinary items for such plan year. The
Company's obligations to make contributions with
respect to all plan years in the aggregate are
limited to $2.5 million. The employer's aggregate
contribution as of December 31, 1999 was $2,500,000.

The Plan allows the Company to make discretionary
matching contributions for non-union employees,
mechanics, and certain flight attendants, equal to
25% of salary contributions up to 4% of total
compensation. Effective with the ratification of the
pilot's new union agreement on February 9, 2001, the
Company's match for pilots is variable depending upon
the pilot's length of service and the Company's
operational performance. The Company's matching
percentage for a pilot can range from one to seven
percent of eligible contributions. The Company's
matching contribution for all qualified employees, if
any, vests ratably over five years. Contribution
expense was approximately $303,000, $374,000 and $3.9
million for 1999, 2000 and 2001, respectively. The
Company's contribution expense in 2001 includes
estimated costs of $2.9 million for additional
contributions to correct operational defects found in
the Company's 401(k) plan in addition to $1 million
in discretionary matching contributions.

Profit Sharing Programs

The Company has profit sharing programs that result
in periodic payments to all eligible employees.
Profit sharing compensation, which is based on
attainment of certain performance and financial
goals, was approximately $4.5 million, $4.5 million,
and $6.3 million in 1999, 2000 and 2001,
respectively.
70
9.Income The provision (benefit) for income taxes includes the
Taxes following components: (in thousands)

Year Ended December 31,
1999 2000 2001

Federal:
Current $ 10,420 $ 11,295 $ 15,392
Deferred 5,602 (4,267) 4,437
Total federal 16,022 7,028 19,829
provision
State:
Current 1,993 1,010 2,207
Deferred 304 (381) 477
Total state provision 2,297 629 2,684
Total provision on
income before
accounting change 18,319 7,657 22,513
Income tax benefit
due to change in (598)
accounting method - -
Total provision $ 17,721 $ 7,657 $ 22,513

A reconciliation of income tax expense at the
applicable federal statutory income tax rate of 35%
to the tax provision recorded is as follows:

(in thousands)
Year ended December
31, 1999 2000 2001

Income tax expense
at statutory rate $16,616 $7,984 $19,892
Increase (decrease)
in tax
expense due to:
Permanent differences 89 (487) 877
and other
State income
taxes, net 1,614 160 1,744
of federal benefit

Income tax expense $18,319 $7,657 $22,513

Deferred income taxes result from temporary
differences which are the result of provisions of the
tax laws that either require or permit certain items
of income or expense to be reported for tax purposes
in different periods than for financial reporting
purposes. The Company's 2000 effective tax rate was
positively affected by the receipt of a favorable
ruling request which allowed the Company to obtain
additional tax credits to offset income tax as well
as the realization of certain tax benefits that were
previously reserved which together reduced income tax
expense by approximately $1.4 million.
71
The following is a summary of the Company's deferred
income taxes as of December 31, 2000 and 2001:

(in thousands)
December 31,
2000 2001

Deferred tax assets:
Engine maintenance $ 679 $ 411
accrual
Intangible assets 735 569
Air traffic liability 672 942
Allowance for bad debts 302 238
Deferred aircraft rent 1,737 2,363
Deferred credits 2,830 2,241
Accrued compensation 944 1,557
Accrued aircraft early 11,599 9,555
retirement charge
Start up and 2,204 1,702
organizational costs
Other 867 3,735
Total deferred tax 22,569 23,313
assets

Deferred tax liabilities:
Depreciation and (26,534) (32,717)
amortization
Accrued expenses and (996) (1,238)
other
Total deferred tax (27,530) (33,955)
liabilities
Net deferred income tax
(liabilities) $ (4,961) $ (10,642)

No valuation allowance was established in either
2000 or 2001, as the Company believes it is more
likely than not that the deferred tax assets will be
realized.

72
10. Aircraft
Commitments
and As of December 31, 2001, the Company had a total of
39 Canadair Regional Jets ("CRJs") on order from
Contingencies Bombardier, Inc., and held options for 80
additional CRJs. The Company also had a firm order
with Fairchild Dornier for 36 Fairchild Dornier 32
seat regional jets ("328JET") aircraft, and options
for 81 additional 328JETs. Of the 75 firm aircraft
deliveries, 33 are scheduled for 2002 and 42 are
scheduled for 2003. The Company is obligated to
purchase and finance (including leveraged leases)
the 75 firm ordered aircraft at an approximate
capital cost of $1.2 billion. The Company
anticipates leasing the majority of its year 2002
aircraft deliveries on terms similar to previously
delivered regional jet aircraft.

Post Retirement Benefits

The Company has committed to provide its senior
executive officers a deferred compensation plan
which utilizes split dollar life insurance policies,
and for a certain officer, a make-whole provision for
taxes, post retirement salary based on ending salary,
and post retirement benefits based on benefits similar
to those currently provided to the executive while
actively employed. The Company has estimated the
cost of the deferred compensation and tax gross up
feature, future salary and future benefits and is
accruing this cost over the remaining required
service time of the executive officers. In 2001,
the Company expensed approximately $1.8 million as
the current year's cost of these benefits. The
company expects to recognize similar costs annually
over the remaining service life of the senior
executives.

Training

The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow
the Company to train CRJ, J-41 and 328JET pilots at
PAIFA's facility near Washington-Dulles. In 2001,
PAIFA relocated its Washington-Dulles operations to
a new training facility housing two CRJ simulators,
a 328JET simulator, and a J-41 simulator near the
Company's Washington-Dulles headquarters. The
Company has agreements to purchase an annual
minimum number of CRJ and J-41 simulator training
hours at agreed rates, through 2010 for the CRJ,
and 2002 for the J-41. The Company's payment
obligations for CRJ and J-41 simulator usage over
the remaining years of the agreements total
approximately $12.5 million.
73
In 2001, a simulator provision and service
agreement between PAIFA, CAE Schreiner and the
Company was executed and 328JET training commenced
at the PAIFA facility. Under this agreement, the
Company has committed to purchase all of its 328JET
simulator time from PAIFA at agreed upon rates,
with no minimum number of simulator hours
guaranteed. A second 328JET simulator is scheduled
for installation at the Washington-Dulles PAIFA
simulator facility in July 2002.

At December 31, 2001, the Company's minimum payment
obligations under the PAIFA agreements for the CRJ
and J-41 simulators are as follows:

(in thousands)
Year ended December 31,
2002 $3,631
2003 1,371
2004 1,391
2005 1,178
2006 1,195
Thereafter 3,692
$ 12,458

Derivative Financial Instruments

The Company has periodically entered into a series
of put and call contracts as an interest rate hedge
designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent
financing relating to the delivery of the CRJ
aircraft. During 1999, 2000 and 2001, the Company
settled seven, eight and one hedge transactions,
respectively, receiving $119,000 from the
counterparty in 1999, paying the counterparty
$379,000 in 2000 and paying the counterparty
$722,000 in 2001. In 1999, the Company recognized
a gain of $211,000 on the settlement of one
contract, representing the ineffective portion of a
hedge. At December 31, 2000 the Company had one
interest rate hedge transaction open with a
notional value of $8.5 million. It settled on
January 3, 2001 resulting in the payment to the
counterparty referenced above.

In October 1999, the Company entered into commodity
swap transactions to hedge price changes on
approximately 13,300 barrels of crude oil per month
for the period April to June 2000, and on
approximately 23,300 barrels of crude oil per month
for the period July through September 2000. The
contracts provided for an average fixed price equal
to approximately 52.6 cents per gallon for the
second quarter of 2000 and 51 cents per gallon for
the third quarter of 2000. Effective December 1,
2000, under the United Air Lines agreements and
since inception of the Delta Air Lines agreements,
the Company no longer bears the risk associated
with fuel price volatility for its operations.
Accordingly, no fuel hedging transactions were
entered for 2001, and there were no fuel hedging
transactions open as of December 31, 2001 and 2000.
74
11. Aircraft During the fourth quarter of 2001, the Company
Early recorded an aircraft early retirement charge of
Retirement $23.5 million ($14.0 million after tax) for the
Charge early retirement of nine leased Jetstream-41
turboprop aircraft that will be removed from
service prior to year-end 2002. The Company
anticipates taking additional charges during 2002
of approximately $48 million pre-tax ($28.4 million
after-tax) for the retirement of its remaining 29-
seat Jetstream-41 turboprop aircraft in 2003.
Fairchild Dornier, the manufacturer of the 328JETs,
is contractually obligated to make the Company
whole for any difference between lease payments, if
any, received from remarketing the 26 J-41 aircraft
leased by the Company and the lease payment
obligations of the Company on those aircraft. To
the extent that Fairchild Dornier fulfills its
contractual obligations, the majority of the
aircraft early retirement charge will not adversely
affect the Company's cash position, with the
payments by Fairchild Dornier being recorded as an
aircraft purchase inducement on the 328JET
aircraft. The undiscounted remaining lease
obligations (net of the Company's estimate of
future sublease rentals) on the J-41 fleet after
planned retirement dates in 2002 and 2003 are
approximately $55 million and continue through
2010. The Company would remain liable for these
lease payments in the event that Fairchild Dornier
defaults on its obligation. No asset impairment
charges were included in the aircraft early retirement
charge.

During 2000, the Company recorded aircraft early
retirement operating charges totaling $29 million
($17.4 million net of income tax) for the early
lease termination of its 28 19-seat Jetstream 32
turboprop aircraft, which were removed from service
prior to December 31, 2001. The charge included
the estimated cost of contractual obligations to
meet aircraft return conditions, as well as a lease
termination fee, which fee was calculated including
such factors as the discounted present value cost
of future lease obligations from the planned out of
service date to the lease termination date, and
miscellaneous costs and benefits of early return to
the lessor. As a result of completing the J-32
early retirement during the fourth quarter of 2001,
the Company reversed approximately $500,000 of the
original $29 million charge which will not be
required, and recorded this amount as a reduction
to the aircraft early retirement charge taken in
2001.

75
12. Air On September 22, 2001, President Bush signed into
Transportation law the Air Transportation Safety and System
Safety and Stabilization Act (the "Act"). The Act provided
System cash grants to commercial air carriers as
Stabilization compensation for direct losses incurred beginning
Act/Aviation with the terrorist attacks on September 11, 2001
and as a result of the FAA mandated ground stop order
Transportation issued by the Secretary of Transportation, and for
Security Act incremental losses incurred during the period
beginning September 11, 2001 and ending December
31, 2001 as a direct result of such attacks. The
Company has received $9.7 million in cash grants
under these provisions recognized as non-operating
income under "government compensation" for the
third and fourth quarters 2001. This amount was
the government's estimate of approximately 85% of
amount due to the Company based on preliminary
data. The exact amount of the Company's
compensation will be based on the lesser of actual
losses incurred or a statutory limit based on the
total amount allocable to all airlines. This
exact amount is not yet determinable because the
statutory limit is subject to information not yet
released by the federal government. As such, the
Company is unsure if it will be entitled to any
further government compensation under this program
and will recognize any remaining payments as non-
operating income during the period it is
determined the Company is entitled to such
amounts. All amounts received as government
compensation are subject to audit and adjustment
by the federal government.

In addition to the Compensation described above,
the Act: provides U.S. air carriers with the
option to purchase certain war risk liability
insurance from the United States government on an
interim basis at rates that are more favorable
than those available from the private market;
authorizes the federal government to reimburse air
carriers for the increased cost of war risk
insurance premiums for a limited but undetermined
period of time as a result of the terrorist
attacks of September 11, 2001; and, authorizes the
federal government, pursuant to new regulations,
to provide loan guarantees to air carriers in
the aggregate amount of $10 billion.
Subsequently the government authorized air
carriers to apply for reimbursement under the Act
for increased insurance costs incurred during the
period October 1, 2001 to October 30, 2001, and
the Company applied for received, and booked as a
reduction to insurance expense $652,000 in such
reimbursements. This amount was based on costs
incurred during the period, and no other insurance
reimbursements are anticipated. Finally, with
respect to federal loan guarantees, the Company
continues to evaluate the terms and conditions
being imposed by the government, and has not yet
determined whether to make application for any
such facility.

Following the September 11 terrorist attacks, the
aviation insurance industry imposed a worldwide
surcharge on aviation insurance rates as well as a
reduction in coverage for certain war risks. In
response to the reduction in coverage, the Air
Transportation Safety and System Stabilization Act
provided U.S. air carriers with the option to
purchase certain war risk liability insurance from
the United States government on an interim basis
at rates that are more favorable than those
available from the private market. The Company
has purchased this coverage through May 19, 2002
and anticipates renewing it for as long as the
coverage is available from the U.S. government.
The airlines and insurance industry, together with
the United States and other governments, are
continuing to evaluate both the cost and options
for providing coverage of aviation insurance.
Recently, an industry-led group announced a
proposal to create a mutual insurance company, to
be called Equitime, to cover war risk and
terrorism risk, which would initially seek support
through government guarantees. Equitime would
provide a competitive alternative to insurance
being offered by the traditional insurance market,
which opposes this initiative. Equitime's
organizers project that it may be available to
provide insurance as early as May 2002 to up to 70
U.S. carriers. The Company has not been actively
involved in the formation of Equitime and is
unable to anticipate whether this source of
insurance will be made available and, if so,
whether it will offer competitive rates. The
Company anticipates that it will follow industry
practices with respect to sources of insurance.

On November 19, 2001 the President signed into law
the Aviation and Transportation Security Act (the
"Security Act"). The Security Act requires
heightened passenger, baggage and cargo security
measures be adopted as well as enhanced airport
security procedures. The Security Act created the
Transportation Security Administration ("TSA")
that has taken over from the air carriers the
reasonability for conducting the screening of
passengers and their baggage. The TSA assumed
both of the Company's passenger screening
contracts on February 17, 2002. Air carriers
continue to have responsibility for aircraft
security, employee background checks, the security
of air carrier airport facilities and other
security related functions.
77
The activities of the TSA are to be funded in part
by the application of a $2.50 per passenger
enplanement security fee (subject to a maximum of
$5.00 per one way trip) and payment by all
passenger carriers of a sum not exceeding each
carrier's passenger and baggage screening cost
incurred in calendar year 2000. The TSA is
charged to have equipment in operation by the end
of 2002 to be able to electronically screen all
checked passenger baggage with explosive detection
systems. The TSA is also required to deploy
federal air marshals on an increased number of
passenger flights. The Security Act imposes new
and increased requirements for air carrier
employee background checks and additional security
training of flight and cabin crew personnel.
These additional and new requirements may increase
the security related costs of the Company. The
Security Act also mandated and the FAA has adopted
new rules requiring the strengthening of cockpit
doors, some of the costs of which may be
reimbursed by the FAA. The Company has completed
level one fortification if its cockpit doors on
all of its aircraft as of November 15, 2001. The
FAA has mandated additional cockpit door
modifications that will result in additional
costs. The Company intends to apply for
reimbursement of these costs and other security
costs for which the FAA has established a cost
reimbursement program. There is no guarantee that
the Company will be reimbursed in full for the
cost of these modifications. New passenger and
baggage screening requirements have caused
disruptions in the flow of passengers through
airports and in some cases delayed airline
operations. The Company may experience security-
related disruptions in the future, including
reduced passenger demand for air travel, but
believes that its exposure to such disruptions is
not greater than that faced by other providers of
regional air carrier services.

13. Subsequent In the first quarter of 2002, the Company expanded
Events its charter operations by ordering three additional
328JET aircraft from Fairchild Dornier. One of
these, which has already been acquired, was
purchased through the application of certain
deposits previously placed with Fairchild Dornier,
and the others will be financed through debt, with
repayment over approximately ten years.

14. Litigation The Company is a party to routine litigation and to
FAA civil action proceedings, all of which are
incidental to its business, and none of which the
Company believes are likely to have a material
effect on the Company's financial position or the
results of its operations.

15. Financial Statement of Financial Accounting Standards No.
107, "Disclosure of Fair Value of Financial
Instruments Instruments" requires the disclosure of the fair
value of financial instruments. Some of the
information used to determine fair value is
subjective and judgmental in nature; therefore,
fair value estimates, especially for less
marketable securities, may vary. The amounts
actually realized or paid upon settlement or
maturity could be significantly different.

Unless quoted market price indicates otherwise, the
fair values of cash and cash equivalents, short-
term investments, accounts receivable and accounts
payable generally approximate market because of the
short maturity of these instruments. The Company
has estimated the fair value of long term debt
based on quoted market prices, when available, or
by discounted expected future cash flows using
current rates offered to the Company for debt with
similar maturities.
78
The estimated fair values of the Company's
financial instruments, none of which are held for
trading purposes, are summarized as follows
(brackets denote liability):

(in thousands) December 31, 2000 December 31, 2001
Carrying Estimated Carrying Estimated
Amount Fair Amount Fair
Value Value

Cash and cash
Equivalents $86,117 $86,117 $173,669 $173,669
Short-term 35,100 35,100 7,300 7,300
investments
Accounts 29,052 29,052 8,933 8,933
receivable
Accounts (19,724) (19,724) (21,750) (21,750)
payable
Long-term debt (67,424) (68,061) (63,080) (63,856)

See note 10 for information regarding the fair value of
derivative financial instruments.

16. Supplemental disclosures of cash flow
Supplemental information:
Cash Flow Year ended
Information December 31,
(in thousands)

1999 2000 2001

Cash paid during the
period for:
- Interest $4,532 $6,410 $5,352
- Income taxes 8,193 8,944 7,837

The following non cash investing and financial
activities took place in 1999, 2000 and 2001:

During 1999, the Company received $755,000 of
manufacturers credits that were applied against the
purchase price of the two CRJs purchased in 1999
from the manufacturer. The credits will be
utilized primarily through the purchase of rotable
parts and other fixed assets, expendable parts, and
pilot training.

In 1999, the Company capitalized $1.8 million in
interest related to $38.7 million on deposit with
aircraft manufacturers.

In 2000, the Company capitalized $2.7 million in
interest related to $46.4 million on deposit with
aircraft manufacturers.

In 2000, the remaining $19.8 million principal
amount of Notes outstanding were converted into
common stock of the Company resulting in a $19.3
million increase to paid in capital.

In 2001, the Company capitalized $2.6 million in
interest related to $44.8 million on deposit with
aircraft manufacturers.
79
17. Recent
Accounting
Pronouncement On July 5, 2001, the Financial Accounting Standards
s Board issued Statement of Financial Accounting
Standard No. 141, "Business Combinations", and
Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement
No. 141 addresses the accounting for acquisitions of
businesses and is effective for acquisitions
occurring on or after July 1, 2001. Statement No.
142 includes requirements to test goodwill and
indefinite life intangible assets for impairment
rather than amortize them. Statement No. 142 will be
effective for fiscal years beginning after December
15, 2001. The Company will adopt Statement No. 142
beginning in the first quarter of 2002. The Company
anticipates that implementation of SFAS 141 and SFAS
142 will have minimal impact on the Company's
financial position or results of operations.

On October 3, 2001, the Financial Accounting
Standards Board issued FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-
Lived Assets, which addresses financial accounting
and reporting for the impairment or disposal of long-
lived assets. Statement No. 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of and APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Statement No. 144 includes
requirements related to the classification of assets
as held for sale, including the establishment of six
criteria that must be satisfied prior to this
classification. Statement No. 144 also includes
guidance related to the recognition and calculation
of impairment losses for long-lived assets.
Statement No. 144 will be effective for fiscal years
beginning after December 15, 2001. The Company will
adopt Statement No. 144 beginning in the first
quarter of 2002. Statement No. 144 is projected to
have minimal impact on the Company's financial
position or results of operations.
80 (in thousands, except per share amounts)
18. Selected
Quarterly
Financial
Data
(Unaudited)

Quarter Ended
March 31, June 30, September 30, December 31,
2001 2001 2001 2001

Operating $133,454 $146,221 $147,651 $156,090
revenues
Operating 15,479 20,868 15,895 (8,049) (1)
income (loss)
Net income 9,625 12,948 12,751 (1,003) (1,3)
(loss)
Net income
(loss) per
share
Basic $ 0.23 $ 0.30 $ 0.29 $ (0.02)
Diluted $ 0.22 $ 0.29 $ 0.28 $ (0.02)
Weighted
average
shares
outstanding
Basic 42,750 43,168 43,775 43,999
Diluted 44,638 45,029 45,426 43,999

Quarter Ended
March 31, June 30, September 30, December 31,
2000 2000 2000 2000

Operating $92,499 $116,332 $115,356 $128,339
revenues
Operating 4,540 20,629 2,226(2) (3,308)(2)
income (loss)
Net income(loss) 2,280 12,029 2,666(2) (1,821)(2)
Net income(loss)
per share
Basic $ 0.06 $ 0.31 $ 0.06 $ (0.04)
Diluted $ 0.06 $ 0.28 $ 0.06 $ (0.04)
Weighted
average
shares
outstanding
Basic 37,256 38,746 42,144 42,404
Diluted 43,048 43,542 43,864 42,404

1 In the fourth quarter of 2001, the Company recorded an aircraft
early retirement charge. The amount of the charge was 23.0
million (pre-tax).
2 In the third and fourth quarters of 2000, the Company recorded
aircraft early retirement charges. The amount of the charges were
$8.7 million (pre-tax) in the third quarter, and $20.3 million
(pre-tax) in the fourth quarter.
3 Includes government compensation of $4.6 million (pre-tax) in the
third quarter of 2001 and $5.1 million (pre-tax) in the fourth quarter
of 2001.
Note: The sum of the four quarters may not equal the totals for
the year due to rounding of quarterly results.

81
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None to report.

PART III

The information required by this Part III (Items 10, 11, 12 and
13) is hereby incorporated by reference from the Company's definitive
proxy statement, which is expected to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 not later than 120 days after the
end of the fiscal year covered by this report.

PART IV

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

(a) 1. Financial Statements

The Consolidated Financial Statements listed in the index
in Part II, Item 8, are filed as part of this report.

2. Consolidated Financial Statement Schedules

Reference is hereby made to the Consolidated Financial
Statements and the Notes thereto included in this filing
in Part II, Item 8.

3. Exhibits

Exhibit
Number Description of Exhibit

3.1 (note 3) Restated Certificate of Incorporation of the Company.
3.2 (note 13) Restated By-laws of the Company.
4.1 (note 11) Specimen Common Stock Certificate.
4.19 (note 12) Rights Agreement between Atlantic Coast Airlines
Holdings, Inc. and Continental Stock Transfer & Trust
Company dated as of January 27, 1999.
10.1 (notes 17 and 19) Atlantic
Coast Airlines, Inc. 1992 Stock Option Plan.
10.6 (notes 5 & 18) United
Express Agreement, dated as of November 22, 2000, as
amended as of February 6, 2001, among United Airlines,
Inc., Atlantic Coast Airlines and the Company.
10.8 (notes 9 & 18) Delta
Connection Agreement, dated as of September 9, 1999
among Delta Air Lines, Inc., Atlantic Coast Airlines
Holdings, Inc. and Atlantic Coast Jet, Inc.
82
10.12(a) (notes 2 & 19) Second
Amended and Restated Severance Agreement, dated as of
July 25, 2001, between the Company and Kerry B. Skeen.
10.12(b) (notes 1 & 19) Amended
and Restated Severance Agreement, dated as of December
28, 2001, between the Company and Thomas J. Moore.
10.12(c) (notes 1 & 19) Form of
Severance Agreement. The Company entered into
substantially similar agreements with other senior
executive officers.
10.12(d) (notes 1 & 19)
Form of Letter Agreement substantially similar to
agreements entered into with senior executive officers
regarding reduction in base salary.
10.13(a) (note 15) Form of
Indemnity Agreement. The Company has entered into
substantially identical agreements with the individual
members of its Board of Directors.
10.23 (note 1) Loan and Security Agreement dated September 28, 2001
between Atlantic Coast Airlines and Wachovia Bank, N.A.
10.24 (notes 11 and 19) Atlantic
Coast Airlines, Inc. 1995 Stock Incentive Plan, as
amended as of May 5, 1998.
10.245 (notes 7 and 19) 2000
Stock Incentive Plan of Atlantic Coast Airlines Holding,
Inc.
10.25(a)(notes 11 and 19) Form of Incentive Stock Option Agreement. The
Company enters into this agreement with employees who
have been granted incentive stock options pursuant to
the Stock Incentive Plans.
10.25(b) (notes 11 & 19) Form of
Incentive Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted incentive stock options pursuant to the
Stock Incentive Plans.
10.25(c) (notes 11 & 19) Form of
Non-Qualified Stock Option Agreement. The Company enters
into this agreement with employees who have been granted
non-qualified stock options pursuant to the Stock
Incentive Plans.
10.25(d) (notes 11 & 19) Form of
Non-Qualified Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted non-qualified stock options pursuant to the
Stock Incentive Plans.
10.25(e) (notes 11 & 19) Form of
Restricted Stock Agreement. The Company entered into
this agreement with corporate officers who were granted
restricted stock pursuant to the Stock Incentive Plans.
10.27 (notes 8 & 19) Form of
Split Dollar Agreement and Agreement of Assignment of
Life Insurance Death Benefit as Collateral. The Company
has entered into substantially identical agreements with
Kerry B. Skeen, Thomas J. Moore, Michael S. Davis,
Richard J. Surratt, and William R. Lange.
10.31 (note 19) Summary of Senior Management Incentive Plan. The Company
has adopted a plan as described in this exhibit for 2002
and for the three previous years.
10.32 (note 19) Summary of Management Incentive Plan and Share the
Success Program. The Company has adopted plans as
described in this exhibit for 2002 and for the three
previous years.
10.40A (notes 11 & 18) Purchase
Agreement between Bombardier Inc. and Atlantic Coast
Airlines Relating to the Purchase of Canadair Regional
Jet Aircraft dated January 8, 1997, as amended through
December 31, 1998.
10.40A(1) (notes 9 & 18) Contract
Change Orders No. 13, 14, and 15, dated April 28, 1999,
July 29, 1999, and September 24, 1999, respectively,
amending the Purchase Agreement between Bombardier Inc.
and Atlantic Coast Airlines relating to the purchase of
Canadair Regional Jet Aircraft dated January 8, 1997.
83
10.41 (notes 9 & 18) Purchase
Agreement between Bombardier Inc. and Atlantic Coast
Airlines relating to the Purchase of Canadair Regional
Jet Aircraft dated July 29, 1999, as amended through
September 30, 1999.
10.45 (note 4) Form of Aircraft Purchase Agreement between Fairchild
Dornier GmbH and Atlantic Coast Airlines dated effective
December 20, 2000 (supersedes Exhibits 10.45 and
10.45(1) filed as an Exhibit to the Annual Report on
Form 10-K for the year ended December 31, 2000.
Confidential treatment is being sought for portions of
this exhibit).
10.50(a) (note 14) Form of
Purchase Agreement, dated September 19, 1997, among the
Company, Atlantic Coast Airlines, Morgan Stanley & Co.
Incorporated and First National Bank of Maryland, as
Trustee.
10.50(b) (note 14) Form of
Pass Through Trust Agreement, dated as of September 25,
1997, among the Company, Atlantic Coast Airlines, and
First National Bank of Maryland, as Trustee.
10.50(c) (note 14) Form of
Pass Through Trust Certificate.
10.50(d) (note 14) Form of
Participation Agreement, dated as of September 30, 1997,
Atlantic Coast Airlines, as Lessee and Initial Owner
Participant, State Street Bank and Trust Company of
Connecticut, National Association, as Owner Trustee, the
First National Bank of Maryland, as Indenture Trustee,
Pass-Through Trustee, and Subordination Agent,
including, as exhibits thereto, Form of Lease Agreement,
Form of Trust Indenture and Security Agreement, and Form
of Trust Agreement.
10.50(e) (note 14)
Guarantee, dated as of September 30, 1997, from the
Company.
10.80 (note 14) Ground Lease Agreement Between The Metropolitan
Washington Airports Authority And Atlantic Coast
Airlines dated as of June 23, 1997.
10.85 (note 11) Lease Agreement Between The Metropolitan Washington
Airports Authority and Atlantic Coast Airlines, with
amendments as of January 1, 1999.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG LLP.

Notes

(1) Filed as an Exhibit to this Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.
(2) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended September 30, 2001.
(3) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended June 30, 2001.
(4) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended March 31, 2001.
(5) Filed by Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
(6) Filed as an Exhibit to the Current Report on Form 8-K filed on
March 2, 2001.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended June 30, 2000.
(8) Filed as an Exhibit to the Amended Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1999.
84
(9) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended September 30, 1999.
(10) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1999.
(11) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(12) Filed as Exhibit 99.1 to Form 8-A (File No. 000-21976),
incorporated herein by reference.
(13) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1998.
(14) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, incorporated herein by
reference.
(15) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, incorporated herein by
reference.
(16) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, incorporated herein by
reference.
(17) Filed as an Exhibit to Form S-1, Registration No. 33-62206,
effective July 20, 1993, incorporated herein by reference.
(18) Portions of this document have been omitted pursuant to a request
for confidential treatment that has been granted.
(19) This document is a management contract or compensatory plan or
arrangement.

Reports on Form 8-K:

10/10/01 Regulation FD Disclosure of presentation slides to be used in
analyst and/or investor meetings

10/19/01 Regulation FD Disclosure of press release announcing capacity
levels and schedule additions

11/05/01 Salomon Smith Barney Transportation Conference Presentation

01/30/02 Raymond James & Associates Growth Airline Conference
Presentation

02/11/02 Goldman Sachs Air Carrier Conference Presentation

02/11/02 Deutsche Banc Alex. Brown Global Transportation Conference
Presentation

03/01/02 Raymond James & Associates 23rd Annual Institutional Investors
Conference Presentation

85
SIGNATURES

Pursuant to the requirements of Section 13 of 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 on March 29, 2002.

ATLANTIC COAST AIRLINES HOLDINGS, INC.

By: /S/

Kerry B. Skeen
Chairman of the Board

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 indicated on March 29, 2002.

Name Title

/S/ Chairman of the Board of
Directors
Kerry B. Skeen and Chief Executive Officer
(Principal executive officer)

/S/ Director, President and
Thomas J. Moore Chief Operating Officer

/S/ Executive Vice President,
Treasurer and
Richard J. Surratt Chief Financial Officer
(Principal financial officer)

/S/ Vice President, and Controller
David W. Asai (Principal accounting officer)

/S/
C. Edward Acker Robert E. Buchanan
Director Director

/S/ /S/
Susan MacGregor Coughlin Daniel L. McGinnis
Director Director

/S/ /S/
James C. Miller III John M. Sullivan
Director Director