<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1998
REGISTRATION NO. 333-51819
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
ATLAS AIR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4731 84-1207329
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
538 COMMONS DRIVE
GOLDEN, COLORADO 80401
(303) 526-5050
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
RICHARD H. SHUYLER
EXECUTIVE VICE PRESIDENT -- STRATEGIC PLANNING
AND TREASURER
ATLAS AIR, INC.
538 COMMONS DRIVE
GOLDEN, COLORADO 80401
(303) 526-5050
(Name, Address, including Zip Code, and Telephone Number, including
Area Code, of Agent for Service)
with a copy to:
STEPHEN A. GREENE, ESQ.
CAHILL GORDON & REINDEL
80 PINE STREET
NEW YORK, NEW YORK 10005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
ATLAS AIR, INC.
OFFER TO EXCHANGE PASS THROUGH CERTIFICATES SERIES 1998-1,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING PASS THROUGH CERTIFICATES, SERIES 1998-1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON AUGUST 1, 1998, UNLESS EXTENDED.
Pass Through Certificates, Series 1998-1 (the "New Certificates"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this Prospectus
is a part, are hereby offered, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal" and, together with this Prospectus, the "Exchange Offer"), in
exchange for an equal principal amount of outstanding Pass Through Certificates,
Series 1998-1 (the "Old Certificates"), of which $538,915,000 aggregate
principal amount is outstanding as of the date hereof. The New Certificates and
the Old Certificates are collectively referred to herein as the "Certificates."
Any and all Old Certificates that are validly tendered and not withdrawn on
or prior to 5:00 P.M., New York City time, on the date the Exchange Offer
expires, which will be August 1, 1998 (30 calendar days following the
commencement of the Exchange Offer) unless the Exchange Offer is extended (such
date, including as extended, the "Expiration Date") will be accepted for
exchange. Tenders of Old Certificates may be withdrawn at any time prior to 5:00
P.M., New York City time on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Certificates being tendered
for exchange. However, the Exchange Offer is subject to certain customary
conditions which may be waived by Atlas Air, Inc. ("Atlas" or the "Company") and
to the terms of the Registration Rights Agreement (as defined herein). Old
Certificates may be tendered only in integral multiples of $1,000. See "The
Exchange Offer."
The New Certificates will be entitled to the benefits of the same Pass
Through Trust Agreements (as defined herein) which govern the Old Certificates
and will govern the New Certificates. The form and terms of the New Certificates
are the same in all material respects as the form and terms of the Old
Certificates, except that the New Certificates do not contain terms with respect
to the interest rate step-up provisions and the New Certificates have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. See "The Exchange Offer" and "Description of
New Certificates."
Each Certificate represents a fractional undivided interest in one of the
three Atlas Air 1998-1 Pass Through Trusts (the "Class A Trust", the "Class B
Trust" and the "Class C Trust", collectively, the "Trusts") formed pursuant to
three separate pass through trust agreements (the "Pass Through Trust
Agreements") between Atlas and Wilmington Trust Company (the "Trustee"), as
trustee under each Trust. Pursuant to an Intercreditor Agreement (as defined
herein), (i) the Certificates of the Class B Trust are subordinated in right of
payment to the Certificates of the Class A Trust, and (ii) the Certificates of
the Class C Trust are subordinated in right of payment to the Certificates of
the Class B Trust.
(continued on next page)
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 1 OF
THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PASS THROUGH FINAL EXPECTED
CERTIFICATES PRINCIPAL AMOUNT INTEREST RATE DISTRIBUTION DATE
- ------------ ---------------- ------------- -----------------
<S> <C> <C> <C>
1998-1A $300,254,000 7.38% January 2, 2018
1998-1B 115,481,000 7.68 January 2, 2014
1998-1C 123,180,000 8.01 January 2, 2010
------------
$538,915,000
============
</TABLE>
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 24, 1998
<PAGE> 3
(continued from cover page)
The Trusts have been established for the purpose of acquiring equipment
notes (the "Equipment Notes") expected to be issued in connection with the
financing of all or a portion of the purchase price of five Boeing 747-400F
freighter aircraft (collectively, the "Aircraft"), which are currently scheduled
for delivery during the period July 1998 through December 1998, with the final
delivery for purposes of purchase by the Trusts no later than June 30, 1999 (or
later under certain circumstances) (the "Delivery Period"). See "Risk
Factors -- Risk Factors Relating to the Company and the Air Cargo
Industry -- Availability of 747-400 Aircraft Financing; Delivery Delays." The
Equipment Notes will be issued, at the Company's option, either (i) on a
non-recourse basis by the trustees of separate owner trusts (each, an "Owner
Trustee") in connection with separate leveraged lease transactions
(collectively, the "Leased Aircraft") or (ii) on a recourse basis by Atlas in
connection with separate secured loan transactions, in which case the applicable
Aircraft will be owned by Atlas (collectively, the "Owned Aircraft").
The cash proceeds of the offering of Old Certificates by each Trust were
paid to First Security Bank, N.A. ("First Security"), as escrow agent (the
"Escrow Agent"), under an Escrow and Paying Agent Agreement for the benefit of
the holders of Certificates issued by such Trust (each, an "Escrow Agreement").
The Escrow Agent has deposited such cash proceeds (each, a "Deposit") with ABN
AMRO Bank N.V., acting through its Chicago branch (the "Depositary"), in
accordance with the Deposit Agreement relating to such Trust (each, a "Deposit
Agreement"). Pursuant to each Deposit Agreement, the Depositary will pay for
distribution to the holders of Certificates issued by each Trust on each
semiannual distribution date an amount equal to interest accrued on such
Certificates during the applicable interest period at the rate per annum
applicable to such Certificates. Upon each delivery of an Aircraft, the Trustee
for the Class A Trust, the Class B Trust and the Class C Trust will cause to be
withdrawn from the Deposits relating to such Trust funds sufficient to purchase
the Equipment Note of the series applicable to such Trust issued with respect to
such Aircraft.
If an Aircraft is not delivered on the scheduled (or rescheduled) delivery
date, the portion of the Deposits relating to such Aircraft, together with
accrued interest thereon, shall be withdrawn and distributed to the
Certificateholders upon not less than 15 days' notice, unless, subject to
certain conditions, Atlas elects to extend such delivery date to a date not
later than June 30, 1999 (or later under certain circumstances). If any funds
remain as Deposits relating to any Trust at the end of the Delivery Period or,
if earlier, upon the acquisition by the Trusts of the Equipment Notes with
respect to all of the Aircraft (the "Delivery Period Termination Date"), such
funds will be withdrawn by the Escrow Agent for such Trust and distributed, with
accrued and unpaid interest thereon, to the Certificateholders (as defined
herein) of such Trust after at least 15 days' prior notice. If such remaining
Deposits with respect to all of the Trusts exceed $10 million (the "Par
Redemption Amount"), such distribution will include a premium payable by Atlas
equal to the Deposit Make-Whole Premium (as defined herein) with respect to the
remaining Deposits applicable to such Trust in excess of such Trust's
proportionate share of the Par Redemption Amount. Since the maximum principal
amount of Equipment Notes may not be issued with respect to an Aircraft and, in
any such case, the Equipment Notes to be acquired by the Class C Trust are more
likely not to be issued in the maximum principal amount as compared to the other
Equipment Notes, it is more likely that a distribution of unused Deposits will
be made with respect to the Certificates issued by the Class C Trust as compared
to the other Certificates. In addition, notwithstanding the Par Redemption
Amount limitation, if any Aircraft is not delivered by the manufacturer prior to
the Delivery Period Termination Date due to any reason not occasioned by Atlas'
fault or negligence and no Substitute Aircraft (as defined herein) is provided
in lieu of such Aircraft, no Deposit Make-Whole Premium will be paid with
respect to the unused Deposits to be distributed as a result of such failure to
deliver in an amount equal to the maximum principal amount of Equipment Notes
that could have been issued and acquired by such Trust with respect to such
Aircraft in accordance with the Mandatory Economic Terms (as defined herein) and
such unused Deposits shall not be included in the calculation of the Par
Redemption Amount.
The Equipment Notes in respect of each Aircraft will be issued in three
series (the "Series A Equipment Notes", the "Series B Equipment Notes" and the
"Series C Equipment Notes"). In addition, Atlas may elect to issue a fourth
series of Equipment Notes (the "Series D Equipment Notes") in connection with
the financing of Owned Aircraft. Series D Equipment Notes will not be purchased
by any of the Trusts and will be
ii
<PAGE> 4
funded from other sources. The Class A Trust, the Class B Trust and the Class C
Trust will purchase the series of Equipment Notes issued with respect to each
Aircraft that has an interest rate equal to the interest rate applicable to the
Certificates to be issued by such Trust. The maturity dates of the Equipment
Notes acquired by each Trust will occur on or before the final expected
distribution date applicable to the Certificates issued by such Trust. The
Equipment Notes issued with respect to each Aircraft will be secured by a
security interest in such Aircraft and, in the case of each Leased Aircraft, by
an assignment of the lease relating thereto, including the right to receive
rentals payable with respect to such Leased Aircraft by Atlas. Although neither
the Certificates nor the Equipment Notes issued with respect to the Leased
Aircraft will be direct obligations of, or guaranteed by, Atlas, the amounts
unconditionally payable by Atlas for lease of the Leased Aircraft will be
sufficient to pay in full when due all amounts required to be paid on the
Equipment Notes issued with respect to the Leased Aircraft. The Equipment Notes
issued with respect to the Owned Aircraft will be direct obligations of Atlas.
All of the Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for the Certificates issued by such Trust, payable on
January 2 and July 2 of each year (each, a "Regular Distribution Date"),
commencing on the first such date to occur after initial issuance thereof. The
Deposits relating to each Trust will accrue interest at the applicable rate per
annum for the Certificates issued by such Trust, payable on January 2 and July 2
of each year, commencing on July 2, 1998, until the Deposits have been fully
withdrawn. The scheduled payments of interest on the Equipment Notes and on the
Deposits with respect to each Trust, taken together, will be sufficient to pay
an amount equal to accrued interest on the outstanding Certificates issued by
such Trust at the rate per annum applicable thereto. Such interest will be
distributed to Certificateholders of such Trust on each such date, subject, in
the case of interest payments made pursuant to the Equipment Notes, to the
Intercreditor Agreement. See "Description of the Equipment Notes -- General" and
" -- Principal and Interest Payments."
Scheduled principal payments on the Equipment Notes held in each Trust will
be passed through to the Certificateholders of each such Trust on January 2 and
July 2 in certain years, commencing on January 2, 1999. Such payments will be
made, subject to certain adjustments, in accordance with the principal repayment
schedule set forth below under "Description of the New Certificates -- Pool
Factors," in each case subject to the Intercreditor Agreement.
On the earlier of (i) the first Business Day (as defined herein) after June
30, 1999 or, if later, the fifth Business Day after the Delivery Period
Termination Date and (ii) the fifth Business Day after the occurrence of a
Triggering Event (as defined herein) (such Business Day, the "Transfer Date"),
each of the Trusts established at the time of the original issuance of the
Certificates (the "Original Trusts") will transfer and assign all of its assets
and rights to a newly-created successor trust with substantially identical terms
(each, a "Successor Trust"). The institution acting as Trustee of each of the
Original Trusts (each, an "Original Trustee") will also act as Trustee of the
corresponding Successor Trust (each, a "New Trustee"), and each New Trustee will
assume the obligations of the related Original Trustee under each transaction
document to which such Original Trustee was a party. Upon the effectiveness of
such transfer, assignment and assumption, each of the Original Trusts will be
liquidated and each of the Certificates will represent the same percentage
interest in the Successor Trust as it represented in the Original Trust
immediately prior to such transfer, assignment and assumption. Unless the
context otherwise requires, all references in this Prospectus to the Trusts, the
Trustees, the Pass Through Trust Agreements and similar terms shall apply to the
Original Trusts until the effectiveness of such transfer, assignment and
assumption and, thereafter shall apply to the Successor Trusts.
Each Class of New Certificates will be represented by a single, permanent
global Certificate in fully registered form and will be deposited with the
Trustee as custodian for and registered in the name of a nominee of The
Depository Trust Company ("DTC"). Beneficial interests in the permanent global
Certificates will be shown on, and transfers thereof will be effected through,
records maintained by DTC and its participants.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to third
parties, including Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1989) (the "Exxon Capital Letter"), Morgan Stanley & Co.
iii
<PAGE> 5
Incorporated, SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley
Letter") and Shearman & Sterling, SEC No-Action Letter (available July 2, 1993)
(the "Shearman & Sterling Letter") (collectively, the "Exchange Offer No-Action
Letters"), the Company believes that the New Certificates issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than a broker-dealer who acquires such New Certificates
directly from the Trustee for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act or any holder that
is an "affiliate" of the Company as defined under Rule 405 of the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Certificates are
acquired in the ordinary course of such holders' business and such holders are
not engaged in, and do not intend to engage in, a distribution of such New
Certificates and have no arrangement with any person to participate in a
distribution of such New Certificates and, with respect to holders of New
Certificates of the Class C Trust, such holders will not transfer such New
Certificates in an aggregate principal amount of less than $100,000. By
tendering the Old Certificates in exchange for New Certificates, each holder,
other than a broker-dealer, will represent to the Company that: (i) it is not an
affiliate of the Company (as defined under Rule 405 of the Securities Act) nor a
broker-dealer tendering Old Certificates acquired directly from the Company for
its own account; (ii) any New Certificates to be received by it will be acquired
in the ordinary course of its business; and (iii) it is not engaged in, and does
not intend to engage in, a distribution of such New Certificates and has no
arrangement or understanding to participate in a distribution of the New
Certificates. In addition by tendering the Old Certificates of the Class C Trust
in exchange for New Certificates of the Class C Trust, such holder will
represent to the Company that it will not transfer such New Certificates in an
aggregate principal amount of less than $100,000. If a holder of Old
Certificates is engaged in or intends to engage in a distribution of the New
Certificates or has any arrangement or understanding with respect to the
distribution of the New Certificates to be acquired pursuant to the Exchange
Offer or with respect to a holder of New Certificates of the Class C Trust,
transfer such New Certificates in an aggregate principal amount of less than
$100,000, such holder may not rely on the applicable interpretations of the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. Each broker-dealer that receives New Certificates for its
own account pursuant to the Exchange Offer (a "Participating Broker-Dealer")
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Certificates. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of New Certificates received in exchange for Old Certificates where such Old
Certificates were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities.
The Company will not receive any proceeds from this offering. The Company
has agreed to pay the expenses of the Exchange Offer. No underwriter is being
utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD CERTIFICATES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
Prior to this Exchange Offer, there has been no public market for the Old
Certificates or New Certificates. If such a market were to develop, the New
Certificates could trade at prices that may be higher or lower than their
principal amount. Neither Atlas nor any Trust has applied or intends to apply
for listing of the New Certificates on any national securities exchange or for
quotation of the New Certificates through the National Association of Securities
Dealers Automated Quotation System. One or more of Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. (collectively, the "Initial
Purchasers") have previously made a market in the Old Certificates and Atlas has
been advised that one or more of the Initial Purchasers presently intend to make
a market in the New Certificates, as permitted by applicable laws and
regulations, after consummation of the Exchange Offer. None of the Initial
Purchasers is obligated, however, to make a market in the Old Certificates
iv
<PAGE> 6
or the New Certificates and any such market making activity may be discontinued
at any time without notice at the sole discretion of each Initial Purchaser.
There can be no assurance as to the liquidity of the public market for the New
Certificates or that any active public market for the New Certificates will
develop or continue. If an active public market does not develop or continue,
the market prices and liquidity of the New Certificates may be adversely
affected. See "Risk Factors -- Risks Relating to the New Certificates -- Absence
of a Public Market for the Certificates."
FORWARD-LOOKING STATEMENTS
To the extent that any of the statements contained herein relating to the
Company's expectations, assumptions and other Company matters are
forward-looking, such statements are based on current expectations that involve
a number of uncertainties and risks that could cause actual results to differ
materially from those projected in the forward-looking statements, including,
but not limited to, risks associated with: worldwide business and economic
conditions; product demand and the rate of growth in the air cargo industry; the
impact of competitors and competitive aircraft and aircraft financing
availability; the ability to attract and retain new and existing customers;
normalized aircraft operating costs and reliability; management of growth; the
continued productivity of its workforce; dependence on key personnel; and
regulatory matters.
AVAILABLE INFORMATION FOR ATLAS
Atlas is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Commission. Such reports
and other information concerning Atlas may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1228, Washington, D.C. 20549; Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's Internet web site
(http://www.sec.gov), which contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. In addition, Atlas' common stock is traded on the New York Stock
Exchange and reports, proxy statements and other information concerning Atlas
may be inspected and copied at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and Quarterly Report on Form 10-Q for the three months ended March 31,
1998 are hereby incorporated in this Prospectus by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer contemplated hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for all purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, on
the written or oral request, a copy of any and all of the documents incorporated
in this Prospectus by reference, other than exhibits to such documents not
incorporated by reference therein. Requests for such copies should be directed
to Atlas Air, Inc., 538 Commons Drive, Golden, Colorado 80401 Attention: Chief
Financial Officer (telephone (303) 526-5050).
v
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Risk Factors................................................ 1
The Exchange Offer.......................................... 9
Selected Financial and Operating Data....................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 31
Management.................................................. 41
Summary of Terms of the New Certificates.................... 43
Description of the New Certificates......................... 43
Description of the Deposit Agreements....................... 59
Description of the Escrow Agreements........................ 61
Description of the Liquidity Facilities..................... 61
Description of the Intercreditor Agreement.................. 66
Description of the Aircraft and the Appraisals.............. 70
Description of the Equipment Notes.......................... 72
Certain U.S. Federal Income Tax Consequences................ 87
Certain Delaware Taxes...................................... 91
ERISA Considerations........................................ 92
Legal Matters............................................... 94
Experts..................................................... 94
Index to Consolidated Financial Statements.................. F-1
</TABLE>
vi
<PAGE> 8
RISK FACTORS
Unless the context otherwise requires, references to the "Company" or
"Atlas" shall mean Atlas Air, Inc., a Delaware corporation, and its
subsidiaries. In addition, references made in this Prospectus to "747-400
aircraft" means the Boeing 747-400F freighter aircraft.
HOLDERS OF OLD CERTIFICATES SHOULD CAREFULLY REVIEW THE INFORMATION
CONTAINED ELSEWHERE IN THIS PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE
FOLLOWING MATTERS. THE RISK FACTORS SET FORTH BELOW (OTHER THAN "-- RISK FACTORS
RELATING TO THE CERTIFICATES -- CONSEQUENCES OF FAILURE TO EXCHANGE") ARE
GENERALLY APPLICABLE TO THE OLD CERTIFICATES AS WELL AS THE NEW CERTIFICATES.
RISK FACTORS RELATING TO THE COMPANY AND THE AIR CARGO INDUSTRY
Availability of 747-400 Aircraft Financing; Delivery Delays
On June 9, 1997, the Company entered into an agreement with The Boeing
Company ("Boeing") to purchase 10 new 747-400 freighter aircraft to be powered
by engines acquired from General Electric Company ("GE"), with options to
purchase up to 10 additional 747-400 aircraft (the "Boeing Purchase Agreement").
The aggregate value of the 10 747-400 aircraft, four installed engines per
aircraft and five spare engines, based on list prices, is approximately $1.7
billion. In February 1998, the Company completed an offering of $538.9 million
of enhanced equipment trust certificates that are the subject of this Exchange
Offer, the proceeds of which were deposited with the Escrow Agent to be used to
finance a portion of the acquisition cost of the first five of the 10 747-400
aircraft scheduled to be delivered during the period July 1998 through December
1998. While the Company currently anticipates that it will be able to obtain the
necessary financing on a timely basis to pay the total purchase price for the
remaining 747-400 aircraft to be acquired, there can be no assurance that the
Company will be able to obtain sufficient financing or, if such financing is
available, that it will be available on commercially reasonable terms. A recent
decision of the United States District Court for the District of Colorado (in
which state the Company's headquarters are located) raises questions concerning
the ability of lenders and lessors under certain types of aircraft equipment
financing arrangements to exercise special remedies under bankruptcy law against
a bankrupt air carrier, which decision if not reversed or modified could
increase the cost of the Company's future aircraft financing arrangements. If
the Company is unable to obtain sufficient financing, the Company could be
required to modify its expansion plans, incur higher than anticipated financing
costs or incur various penalty payments under the Boeing Purchase Agreement,
which could have a material adverse effect on the Company. Due to production
problems at Boeing, some of the 1998 delivery positions of the 747-400 aircraft
may be delayed up to 60 days. While Boeing has agreed to compensate the Company
for delays in delivery of the 747-400 aircraft pursuant to the Boeing Purchase
Agreement, any further delays could adversely impact the Company's ability to
initiate service with prospective customers in a timely fashion.
Competition
The market for air cargo services is highly competitive. A number of
airlines currently provide services for themselves and for others, similar to
the services offered by the Company, and new airlines may be formed that would
also compete with the Company. Such airlines may have substantially greater
financial resources than the Company. The Company believes that the most
important bases for competition in the air cargo business are the range, payload
and cubic capacities of the aircraft and the price, flexibility, quality and
reliability of the cargo transportation service. The Company provides reliable
airport-to-airport cargo transportation services throughout the world to major
international air carriers generally under three- to five-year fixed-rate U.S.
dollar denominated contracts which typically require that the Company supply
aircraft, crew, maintenance and insurance (the "ACMI Contracts"). The ability of
the Company to achieve its strategic plan depends upon its success in convincing
major international airlines that outsourcing some portion of their air cargo
business remains more cost-effective than undertaking cargo operations with
their own incremental capacity and resources and the ability of the Company to
obtain higher ACMI Contract rates in connection with the 747-400 aircraft
compared to those currently obtained in connection with existing 747-200
aircraft.
1
<PAGE> 9
Dependence on Significant Customers; Geographic Concentration
In 1997, China Airlines Ltd. ("China Airlines"), Fast Air Carrier, S.A.
("Fast Air") and Lufthansa Cargo AG ("Lufthansa") accounted for approximately
34%, 11% and 8%, respectively, of the Company's total operating revenues. The
Company believes that its relationships with its customers are mutually
satisfactory, as evidenced by the fact that in the last three years it has
renewed twelve ACMI Contracts with customers including China Airlines and KLM
Royal Dutch Airlines ("KLM"), and entered into nine new ACMI Contracts with its
existing customers. However, there can be no assurance that any of these
agreements will be renewed upon their expiration. The scheduled termination
dates for the current ACMI Contracts range from 1998 to 2002. See
"Business -- ACMI Contracts." The failure to renew any of these agreements, or
the renewal of any of these agreements on terms less favorable to the Company,
could have a material adverse effect on the Company. Additionally, the Company
has concentrated a significant percentage of its resources in routes between the
United States and Asia and the Pacific Rim and between Europe and Asia and the
Pacific Rim. Any economic decline or any military or political disturbance in
these areas of the world might prevent or interfere with the Company's ability
to provide service to its Asian and Pacific Rim destinations and could have a
material adverse effect on the Company. The Company has not experienced any
adverse impact on its business resulting from the current turmoil in the Asian
financial markets; however, there can be no assurance that continuation of the
turmoil in the Asian financial markets could not have an adverse impact on air
cargo market growth generally, which could adversely affect the Company's
ability to obtain new ACMI Contracts or to renew existing ACMI Contracts.
Operations Dependent upon Limited Fleet
The Boeing 747-200 aircraft in the existing fleet are typically dedicated
by the Company to the service of one or more ACMI Contracts. Although the
Company typically utilizes spare aircraft, in the event one or more of the
Company's aircraft were to be lost or out of service for an extended period of
time, the Company may have difficulty fulfilling its obligations under one or
more of its ACMI Contracts. While the Company believes that its insurance
coverage is sufficient to cover the replacement cost of an aircraft, there can
be no assurance that suitable replacement aircraft could be located or that, if
located, the Company could contract for the services of such an aircraft without
undertaking substantial costs therefor. While the Company carries aircraft hull
physical damage and third party liability insurance, any extended interruption
of the Company's operations due to the loss of an aircraft could have a material
adverse effect on the Company.
Utilization of Future Aircraft
The Company has not yet obtained a long-term ACMI Contract to be serviced
by the one Boeing 747-200 aircraft owned but not yet fully modified from
passenger to freighter configuration or for the 747-400 aircraft scheduled to be
delivered commencing in July 1998. See "-- Availability of 747-400 Aircraft
Financing; Delivery Delays." Although the Company intends to have a new
long-term ACMI Contract in place for the aircraft not yet converted from
passenger to freighter configuration by the time it is placed in service, to the
extent arrangements for such a contract have not been made at such time, the
Company would seek other revenue opportunities for such aircraft which it
believes are generally available, although there can be no assurance that such
opportunities will be available at such time. The failure to generate adequate
revenue from new aircraft pending the entering into of ACMI Contracts, or the
failure to secure ACMI Contracts for such aircraft as well as the aircraft
currently in service in the Company's fleet, could have a material adverse
effect on the Company. See "Business -- Aircraft."
Aging Aircraft
The Company's fleet currently consists of 18 Boeing 747-200 aircraft and
one passenger aircraft currently undergoing conversion to freighter
configuration, all of which were manufactured between 1974 and 1986.
Manufacturer Service Bulletins ("Service Bulletins") and the Federal Aviation
Administration's ("FAA") Airworthiness Directives ("Directives") issued under
its "Aging Aircraft" program cause Boeing 747-200 aircraft operators to be
subject to extensive aircraft examinations and require Boeing 747-200 aircraft
to undergo structural inspections and modifications to address problems of
corrosion and structural fatigue at specified times. For instance, in November
1994, Boeing issued Nacelle Strut Modification Service Bulletins
2
<PAGE> 10
which have been converted into Directives by the FAA. Eleven of the Company's
Boeing 747-200 aircraft will have to be brought into compliance with such
Directives within the next three years at an estimated aggregate cost of
approximately $5.5 million. Other Directives have been issued that require
inspections and minor modifications to Boeing 747-200 aircraft. It is possible
that additional Service Bulletins or Directives applicable to the types of
aircraft or engines included in the Company's fleet could be issued in the
future. The cost of compliance with Directives and of following Service
Bulletins cannot currently be estimated, but could be substantial.
Employee Relations
The Company believes it operates with lower incremental personnel costs
than many established international airlines and cargo carriers, principally due
to the flexibility and high productivity of its workforce, arising in part as a
result of the Company's emphasis on providing financial incentives to its
personnel that are focused on the Company's financial performance rather than on
base wages. The Company's employees are not currently subject to a collective
bargaining agreement; however, many airline industry employees are subject to
such agreements and the Company's employees have been solicited from time to
time by union representatives seeking to organize them, the most recent
solicitation having resulted in the Atlas pilots rejecting representation by the
Air Line Pilots Association ("ALPA") on January 27, 1998. There can be no
assurance that the Company's employees will not become subject to a collective
bargaining agreement and the extent to which, if any, such collective bargaining
agreement may adversely impact the Company's operations or cost structure.
Regulatory Matters
Under the Federal Aviation Act of 1958, as amended and recodified (the
"Aviation Act"), the Department of Transportation ("DOT") and the FAA exercise
regulatory authority over the Company. The Company has obtained the necessary
authority to conduct flight operations, including a Certificate of Public
Convenience and Necessity from the DOT and an Air Carrier Operating Certificate
from the FAA; however, the continuation of such authority is subject to
continued compliance by the Company with applicable statutes, rules and
regulations pertaining to the airline industry, including any new rules and
regulations that may be adopted in the future. All air carriers are subject to
the strict scrutiny and inspection by FAA officials and to the imposition of new
regulatory requirements that can negatively affect their operations. DOT and FAA
approval is required for each of the Company's long-term ACMI Contracts. In
addition, FAA approval is required for each of the Company's short-term seasonal
ACMI Contracts. In order to provide service to foreign points, the Company must
also obtain permission for such operations from the applicable foreign
governments and certain airport authorities. See "Business -- Governmental
Regulation." In addition, DOT regulates the transportation of hazardous
materials by air cargo carriers. Although customers are required to label
shipments that contain hazardous materials, customers may not inform the Company
when their cargo includes hazardous materials. Although the Company has never
had such an incident, the transportation of unmanifested hazardous materials
could result in fines, penalties, banning hazardous materials from Company
aircraft for a period of time, possible damage to the Company's aircraft or
other liability.
Control by Principal Stockholder
Michael A. Chowdry, the founder, Chief Executive Officer, President and
Chairman of the Board of Directors of the Company, beneficially owns
approximately 59.1% of the outstanding common stock of the Company. As a result,
Mr. Chowdry will be able to direct and control the policies of the Company,
including the election of directors, and mergers, sales of assets and other such
transactions.
Dependence upon Key Management Personnel
The Company believes that its success in acquiring ACMI Contracts and
managing its operations will depend substantially upon the continued services of
certain of the present executive officers of the Company. The loss of the
services of any of such persons could have a material adverse effect on the
Company. The Company has employment agreements with such officers, which are
generally terminable at any time by either party.
3
<PAGE> 11
Seasonality of Customers' Cargo Operations
The cargo operations of the Company's airline customers are seasonal in
nature, with peak activity traditionally in the second half of the year, and
with a significant decline occurring in the first quarter. As a result, the
Company's revenues typically decline in the first quarter of the year as its
minimum contractual aircraft utilization level temporarily decreases. The
Company's ACMI Contracts typically allow the Company's customers to cancel a
maximum of 5% of the guaranteed hours of aircraft utilization over the course of
a year. The Company's customers most often exercise such cancellation options
early in the first quarter of the year, when the demand for air cargo capacity
has been historically low or following the seasonal holiday peak in the latter
part of the fourth quarter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK FACTORS RELATING TO THE NEW CERTIFICATES
Consequences of Failure to Exchange
Holders of Old Certificates who do not exchange their Old Certificates for
New Certificates pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Certificates as set forth in the legend
thereon as a consequence of the issuance of the Old Certificates pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Certificates may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the Old
Certificates under the Securities Act. To the extent that Old Certificates are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Certificates could be adversely affected.
Appraisals and Realizable Value of Aircraft
Appraisals in respect of the Aircraft (without physical inspection thereof)
have been prepared by Aircraft Information Services, Inc. ("AISI"), Aviation
Solutions, Inc. ("AvS") and Morton Beyer & Agnew ("MBA", and together with AISI
and AvS referred to as the "Appraisers"). According to the appraisals of the
three firms, the Aircraft had an aggregate appraised value of $863,180,000,
$769,890,000 and $790,395,000, respectively, dated as of January 23, 1998,
December 5, 1997, and January 14, 1998, respectively. See "Description of the
Aircraft and the Appraisals." The appraised value of each Aircraft and,
accordingly, the initial aggregate Aircraft value as referred to herein, is
based upon the lesser of the average and median value of such Aircraft as
appraised by the Appraisers and projected as of the scheduled delivery month of
such Aircraft. Such aggregate appraised values also assume depreciation of
approximately 2% of the initial appraised value for Aircraft delivered more than
one year prior to the scheduled Delivery Period Termination Date (although no
assurance can be given as to the actual market value rate of depreciation, which
may differ from 2% during such period). Appraisals that are based on different
assumptions and methodologies may result in valuations that are materially
different from those contained in the appraisals of the Appraisers. However, an
appraisal is only an estimate of value and should not be relied upon as a
measure of realizable value; the proceeds realized upon a sale of any Aircraft
may be less than the appraised value thereof. The value of the Aircraft in the
event of the exercise of remedies under the applicable Indenture will depend on
market and economic conditions, the availability of buyers, the condition of the
Aircraft and other factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise with respect to the Equipment Notes and
the Aircraft pursuant to the applicable Pass Through Trust Agreement and the
applicable Indenture would be sufficient to satisfy in full payments due on the
Certificates.
Priority of Distributions; Subordination
Certain provisions of the Intercreditor Agreement, which provides for the
subordination of the Class B Certificates to the Class A Certificates and the
subordination of the Class C Certificates to the Class B Certificates, and if
Class D Certificates have been issued, the subordination of the Class D
Certificates to the Class C Certificates, may result in the holders of the
subordinated Classes of Certificates receiving less than
4
<PAGE> 12
the full amount due to them after the occurrence of a payment default under any
Equipment Note or a Triggering Event, even if all of the Equipment Notes
eventually are paid in full.
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent (as defined herein) and the Liquidity Providers (as defined
herein) are parties, on each Distribution Date, so long as no Triggering Event
shall have occurred, all payments in respect of Equipment Notes received by the
Subordination Agent will be distributed in the following order: (1) to the
Liquidity Providers to the extent required to pay certain Liquidity Obligations;
(2) to the Class A Trustee to the extent required to pay Expected Distributions
on the Class A Certificates; (3) to the Class B Trustee to the extent required
to pay Expected Distributions on the Class B Certificates; (4) to the Class C
Trustee to the extent required to pay Expected Distributions on the Class C
Certificates; (5) if Class D Certificates have been issued, to the Class D
Trustee to the extent required to pay "Expected Distributions" (to be defined in
a manner equivalent to the definition for other Classes of Certificates) on the
Class D Certificates; and (6) to the Subordination Agent and each Trustee for
the payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Providers in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder, (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; (5) to the Class C Trustee to the extent required to pay
Adjusted Expected Distributions on the Class C Certificates; and (6) if Class D
Certificates have been issued, to the Class D Trustee to the extent required to
pay "Adjusted Expected Distributions" (to be defined in a manner equivalent to
the definition for other Classes of Certificates) on the Class D Certificates.
Accordingly, the priority of distributions after a payment default under
any Equipment Note or a Triggering Event will have the effect in certain
circumstances of requiring the distribution to more senior Classes of
Certificates of payments received in respect of one or more junior series of
Equipment Notes. If this should occur, the interest accruing on the remaining
Equipment Notes would in the aggregate be less than the interest accruing on the
remaining New Certificates because such New Certificates include a relatively
greater proportion of junior Classes with relatively higher interest rates. As a
result of this possible interest shortfall, the holders of one or more junior
Classes of New Certificates may not receive the full amount due to them after a
payment default under any Equipment Note even if all Equipment Notes are
eventually paid in full.
Payments in respect of the Deposits are not subject to the subordination
provisions of the Intercreditor Agreement.
Control over Collateral; Sale of Collateral
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Providers have agreed that, with respect to any Indenture at any given time, the
Loan Trustee (as defined herein) will be directed (a) in taking, or refraining
from taking, any action thereunder, by the holders of at least a majority of the
outstanding principal amount of the Equipment Notes issued thereunder as long as
no Indenture Default (as defined herein) has occurred and is continuing
thereunder and (b) subject to certain conditions, in exercising remedies under
such Indenture (including acceleration of such Equipment Notes or foreclosing
the lien on the Aircraft securing such Equipment Notes) insofar as an Indenture
Default has occurred and is continuing under such Indenture, by the Controlling
Party (as defined herein). See "Description of the New Certificates -- Indenture
Defaults and Certain Rights Upon an Indenture Default" for a description of the
rights of the Certificateholders of each Trust to direct the respective Trustee.
Notwithstanding the foregoing, at any time after 18 months from the earlier to
occur of (x) the date on which the entire available amount under any Liquidity
Facility (as defined herein) shall have been drawn (for any reason other than a
Downgrade Drawing (as defined herein) or a Non-Extension Drawing (as defined
herein)) and remain unreimbursed and (y) the date on which all Equipment Notes
shall have been accelerated, the Liquidity
5
<PAGE> 13
Providers with at least a majority of the unreimbursed Liquidity Obligations
will have the right to elect to become the Controlling Party with respect to
such Indenture. For purposes of giving effect to the foregoing, the Trustees
(other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) shall be deemed to agree by virtue of their purchase of
Certificates, to exercise their voting rights as directed by the Controlling
Party. For a description of certain limitations on the Controlling Party's
rights to exercise remedies, see "Description of the Equipment
Notes -- Remedies."
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions described in the last sentence of this paragraph, sell all (but not
less than all) of the Equipment Notes issued under such Indenture to any person.
The market for Equipment Notes at the time of the existence of any Indenture
Default may be very limited, and there can be no assurance as to the price at
which they could be sold. If the Controlling Party sells any such Equipment
Notes for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions than
anticipated and will not have any claim for the shortfall against Atlas, any
Owner Trustee (as defined herein), any Owner Participant (as defined herein) or
any Trustee. So long as any Certificates are outstanding, during nine months
after the earlier of (x) the acceleration of the Equipment Notes under any
Indenture and (y) the bankruptcy or insolvency of Atlas, without the consent of
each Trustee, (a) no Aircraft subject to the lien of such Indenture or such
Equipment Notes may be sold, if the net proceeds from such sale would be less
than the Minimum Sale Price (as defined herein) for such Aircraft or such
Equipment Notes, and (b) with respect to each Aircraft, the amount and payment
dates of rentals payable by Atlas under the Lease for such Aircraft may not be
adjusted, if, as a result of such adjustment, the discounted present value of
all such rentals would be less than 75% of the discounted present value of the
rentals payable by Atlas under such Lease before giving effect to such
adjustment, in each case, using the weighted average interest rate of the
Equipment Notes issued under such Indenture as the discount rate.
The Equipment Notes will not be cross-collateralized (except in certain
cases, if any, where the related Owner Participant and Atlas shall agree to
cross-collateralization) and, consequently, proceeds from the sale of an
Aircraft in excess of the amounts due on Equipment Notes related to such
Aircraft will not be available to cover losses, if any, on any other Equipment
Notes.
Owner Participant; Revisions to Agreements
Atlas plans to seek commitments of one or more companies to act as the
Owner Participant with respect to leveraged leases for the Aircraft. Atlas may
select one or more Owner Participants for some or all of the Aircraft or finance
such Aircraft as Owned Aircraft rather than Leased Aircraft. Such Owner
Participants may request revisions to the forms of the Participation Agreement
(as defined herein), the Lease and the Leased Aircraft Indenture (as defined
herein) that are contemplated by the Note Purchase Agreement (as defined
herein), so that the terms of such agreements applicable to any particular
Leased Aircraft may differ from the description of such agreements contained in
this Prospectus. However, under the Note Purchase Agreement, the terms of such
agreements are required to (i) contain the Mandatory Document Terms and (ii) not
vary the Mandatory Economic Terms. In addition, Atlas is obligated (i) to
certify to the Trustee that any such modifications do not materially and
adversely affect the Certificateholders and (ii) to obtain written confirmation
from each Rating Agency (as defined herein) that the use of versions of such
agreements modified in any material respect will not result in a withdrawal,
suspension or downgrading of the rating of any Class of Certificates. See
"Description of the New Certificates -- Obligation to Purchase Equipment Notes."
Each Owner Participant will have the right to sell, assign or otherwise
transfer its interests as Owner Participant in any of such leveraged leases,
subject to the terms and conditions of the relevant Participation Agreement and
related documents.
Ratings of the Certificates
It was a condition to the issuance of the Old Certificates that the Class A
Certificates be rated A3 by Moody's Investors Services, Inc. ("Moody's"), AA- by
Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Inc.
("Standard & Poor's"), and AA- by Fitch IBCA, Inc. ("Fitch") (each of
6
<PAGE> 14
Moody's, Standard & Poor's and Fitch being referred to herein as a "Rating
Agency"), the Class B Certificates be rated Baa3 by Moody's, A- by Standard &
Poor's and A- by Fitch and the Class C Certificates be rated Ba3 by Moody's,
BBB- by Standard & Poor's and BBB- by Fitch. A rating is not a recommendation to
purchase, hold or sell Certificates, inasmuch as such rating does not address
market price or suitability for a particular investor. There is no assurance
that a rating will remain for any given period of time or that a rating will not
be lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future (including the downgrading of Atlas, the Depositary
or a Liquidity Provider) so warrant. The rating of the Certificates is based
primarily on the default risk of the Equipment Notes and the Depositary, the
availability of the Liquidity Facility for the benefit of holders of the
Certificates, the collateral value provided by the Aircraft relating to the
Equipment Notes and the subordination in right of payment under the
Intercreditor Agreement of the Class B Certificates to the Class A Certificates
and of the Class C Certificates to the Class B Certificates. Standard & Poor's
has indicated that its rating applies to a unit consisting of Certificates
representing the property of a Trust (the "Trust Property") and escrow receipts
initially representing undivided interests in certain rights to $538,915,000 of
Deposits (the "Escrow Receipts"). Amounts deposited under the Escrow Agreements
are not property of Atlas and are not entitled to the benefits of Section 1110
of the U.S. Bankruptcy Code. Neither the Certificates nor the Escrow Receipts
may be separately assigned or transferred.
Atlas' ability to pay any premium due upon distribution of Deposits not
used to acquire Equipment Notes during the Delivery Period has not been rated by
either of the Rating Agencies.
Unused Deposits
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the New Certificates -- Obligation to Purchase Equipment Notes".
Since the Aircraft are scheduled for delivery from time to time during the
Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to Boeing's right to postpone deliveries
under its agreement with Atlas. Boeing has recently announced that it is
experiencing delays in deliveries of Aircraft, and the current delivery schedule
for the Aircraft described in this Prospectus reflects adjustments made by
Boeing as a result of such delays. See "Description of the Aircraft and
Appraisals -- Deliveries of Aircraft." Atlas cannot predict whether further
adjustments in such schedule will be required. Depending on the circumstances of
the financing of each Aircraft, the maximum aggregate principal amount of
Equipment Notes may not be issued. In addition, Atlas' obligations under the
predelivery deposit facility are secured by Atlas' purchase agreement with
Boeing relating to the Aircraft. Accordingly, if Atlas should breach its
obligations secured thereby, the secured parties could exercise remedies and
prevent delivery of Aircraft to Atlas. If any funds remain as Deposits with
respect to any Trust at the Delivery Period Termination Date, they will be
withdrawn by the Escrow Agent for such Trust and distributed, with accrued and
unpaid interest thereon, to the Certificateholders of such Trust. In addition,
if such remaining Deposits with respect to all of the Trusts exceed the Par
Redemption Amount, such distribution will include a premium payable by Atlas
equal to the Deposit Make-Whole Premium with respect to the remaining Deposits
related to such Trust in excess of such Trust's proportionate share of the Par
Redemption Amount. Since the maximum principal amount of Equipment Notes may not
be issued with respect to an Aircraft and, in any such case, the Series C
Equipment Notes are more likely not to be issued in the maximum principal amount
as compared to the other Equipment Notes, it is more likely that a distribution
of unused Deposits will be made with respect to the Class C Certificates as
compared to the other Certificates. In addition, notwithstanding the Par
Redemption Amount limitation, if any Aircraft is not delivered by the
manufacturer prior to the Delivery Period Termination Date due to any reason not
occasioned by Atlas' fault or negligence and no Substitute Aircraft is provided
in lieu of such Aircraft, no Deposit Make-Whole Premium will be paid with
respect to the unused Deposits to be distributed as a result of such failure to
deliver in an amount equal to the maximum principal amount of Equipment Notes
that could have been issued and acquired by such Trust with respect to such
Aircraft in accordance with the Mandatory Economic
7
<PAGE> 15
Terms and such unused Deposits shall not be included in the calculation of the
Par Redemption Amount. See "Description of the Deposit Agreements -- Unused
Deposits; Prepayment of Deposits."
Absence of a Public Market for the Certificates
Prior to the Exchange Offer, there has been no public market for the
Certificates and neither Atlas nor any Trust has applied or intends to apply for
listing of the Certificates on any securities exchange or for quotation of the
Certificates on the National Association of Security Dealers Automated Quotation
System or otherwise. Atlas has been advised by the Initial Purchasers that each
of them have made a market in the Old Certificates and intends to make a market
in the New Certificates, as permitted by applicable laws and regulations, after
consummation of the Exchange Offer. None of the Initial Purchasers are
obligated, however, to make a market in the Old Certificates or the New
Certificates and any such market-making activity may be discontinued at any time
without notice at the sole discretion of each Initial Purchaser. There can be no
assurance as to the liquidity of the public market for the New Certificates or
that any active public market for the New Certificates will develop or continue.
If an active public market does not develop or continue, the market price and
liquidity of the New Certificates may be adversely affected.
8
<PAGE> 16
THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
General
In connection with the issuance of the Old Certificates pursuant to a
purchase agreement dated as of January 26, 1998, between the Company and the
Initial Purchasers (the "Purchase Agreement"), the Initial Purchasers and their
respective assignees became entitled to the benefits of the Registration Rights
Agreement.
Under the Registration Rights Agreement, the Company is obligated to use
its best efforts (i) to file the Registration Statement of which this Prospectus
is a part for a registered exchange offer with respect to an issue of new
certificates identical in all material respects to the Old Certificates (except
that the New Certificates would not contain terms with respect to transfer
restrictions or interest rate increases) within 120 calendar days after February
9, 1998, the date the Old Certificates were issued (the "Issue Date") and (ii)
to cause the Registration Statement to become effective within 60 days after
filing of the Registration Statement. The Company will keep the Exchange Offer
open for a period of not less than 30 calendar days after the date notice of the
Exchange Offer is mailed to the holders of the Certificates. The Exchange Offer
being made hereby, if commenced and consummated within the time periods
described in this paragraph, will satisfy those requirements under the
Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
all Old Certificates validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date will be accepted for exchange. New
Certificates of the same class will be issued in exchange for an equal principal
amount of outstanding Old Certificates accepted in the Exchange Offer. Old
Certificates may be tendered only in integral multiples of $1,000. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders as of June 24, 1998. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Certificates being tendered for
exchange. However, the obligation to accept Old Certificates for exchange
pursuant to the Exchange Offer is subject to certain conditions as set forth
herein under "-- Conditions."
Old Certificates shall be deemed to have been accepted as validly tendered
when, as and if the Trustee has given oral or written notice thereof to the
Exchange Agent (as defined herein). The Exchange Agent will act as agent for the
tendering holders of Old Certificates for the purposes of receiving the New
Certificates and delivering New Certificates to such holders.
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, including the Exchange Offer
No-Action Letters, the Company believes that the New Certificates issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than a broker-dealer who acquires such New
Certificates directly from the Trustee for resale pursuant to Rule 144A under
the Securities Act or any other available exemption under the Securities Act or
any holder that is an "affiliate" of the Company as defined under Rule 405 of
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Certificates
are acquired in the ordinary course of such holders' business and such holders
are not engaged in, and do not intend to engage in, a distribution of such New
Certificates and have no arrangement with any person to participate in a
distribution of such New Certificates and with respect to holders of New
Certificates of the Class C Trust, such holders will not transfer such New
Certificates in an aggregate principal amount of less than $100,000. By
tendering the Old Certificates in exchange for New Certificates, each holder,
other than a broker-dealer, will represent to the Company that: (i) it is not an
affiliate of the Company (as defined under Rule 405 of the Securities Act) nor a
broker-dealer tendering Old Certificates acquired directly from the Company for
its own account; (ii) any New Certificates to be received by it will be acquired
in the ordinary course of its business; and (iii) it is not engaged in, and does
not intend to engage in, a
9
<PAGE> 17
distribution of such New Certificates and has no arrangement or understanding to
participate in a distribution of the New Certificates. In addition, by tendering
the Old Certificates of the Class C Trust in exchange for New Certificates of
the Class C Trust, such holder will represent to the Company that it will not
transfer such New Certificates in an aggregate principal amount of less than
$100,000. If a holder of Old Certificates is engaged in or intends to engage in
a distribution of the New Certificates or has any arrangement or understanding
with respect to the distribution of the New Certificates to be acquired pursuant
to the Exchange Offer or with respect to a holder of New Certificates of the
Class C Trust, transfer such New Certificates in an aggregate principal amount
of less than $100,000, such holder may not rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each Participating
Broker-Dealer that receives New Certificates for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Certificates. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Certificates received in exchange for Old
Certificates where such Old Certificates were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit Atlas to effect the Exchange Offer, if
the Registration Statement is not declared effective within 60 calendar days
after the filing thereof with the Commission under certain circumstances or the
Exchange Offer is not consummated within 30 days after the effectiveness of the
Registration Statement under certain other circumstances, at the request of a
holder not eligible to participate in the Exchange Offer or under certain other
circumstances described in the Registration Rights Agreement, Atlas will, in
lieu of effecting the registration of the New Certificates pursuant to the
Registration Statement and at no cost to the holders of Old Certificates, (a) as
promptly as practicable, file with the Commission a shelf registration statement
(the "Shelf Registration Statement") covering resales of the Old Certificates,
(b) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act by the 180th calendar day after the
Issue Date and (c) use its best efforts to keep effective the Shelf Registration
Statement for a period of two years after its effective date (or for such
shorter period as shall end when all of the Old Certificates covered by the
Shelf Registration Statement have been sold pursuant thereto or may be freely
sold pursuant to Rule 144 under the Securities Act).
In the event that neither the consummation of the Exchange Offer nor the
declaration by the Commission of the Shelf Registration Statement to be
effective (each a "Registration Event") occurs on or prior to the 180th calendar
day following the Issue Date, the interest rate per annum borne by the Equipment
Notes and passed through to holders of Old Certificates shall be increased by
0.50% effective from and including August 9, 1998, to but excluding the date on
which a Registration Event occurs. In the event that the Shelf Registration
Statement ceases to be effective at any time, during the period the Company is
required to keep such Shelf Registration Statement effective, for more than 60
days, whether or not consecutive, during any 12-month period, the interest rate
per annum borne by the Equipment Notes shall be increased by 0.50% from the 61st
day of the applicable 12-month period such Shelf Registration Statement ceases
to be effective until such time as the Shelf Registration Statement again
becomes effective.
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Certificates who do not exchange their Old Certificates for New
Certificates in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Old Certificates, unless such
Old Certificates are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will have no obligation to
do), except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. See "Risk
Factors -- Risk Factors Relating to the New Certificates -- Consequences of
Failure to Exchange."
10
<PAGE> 18
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean August 1, 1998 (30 calendar days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated by August 9, 1998, the interest rate borne by the Equipment
Notes and passed through to the Certificateholders is subject to increase. See
"-- General."
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Certificates an announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old
Certificates, to extend the Exchange Offer or to terminate the Exchange Offer
and not permit acceptance of Old Certificates not previously accepted if any of
the conditions set forth herein under "-- Conditions" shall have occurred and
shall not have been waived by the Company, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Certificates. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the Exchange Agent. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment in a manner reasonably calculated
to inform the holders of the Old Certificates of such amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW CERTIFICATES
The New Certificates will accrue interest at the applicable per annum rate
for such Trust set forth on the cover page of this Prospectus, from the last
date on which interest was paid on the Old Certificates surrendered in exchange
therefor. Interest on the New Certificates is payable on January 2 and July 2 of
each year commencing upon the consummation of the Exchange Offer, subject to the
terms of the Intercreditor Agreement.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Certificates must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Certificates, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD CERTIFICATES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD CERTIFICATES
11
<PAGE> 19
SHOULD BE SENT TO THE COMPANY. Delivery of all documents must be made to the
Exchange Agent at its address set forth below. Holders may also request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect such tender for such holders.
The tender by a holder of Old Certificates will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Certificates may tender such Old Certificates in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Old Certificates are registered on the books of the Company
or any other person who has obtained a properly completed bond power from the
registered holder.
Any beneficial owner whose Old Certificates are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Certificates, either
make appropriate arrangements to register ownership of the Old Certificates in
such owners name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Certificates tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Certificates listed therein, such Old Certificates
must be endorsed or accompanied by bond powers and a proxy which authorizes such
person to tender the Old Certificates on behalf of the registered holder, in
each case as the name of the registered holder or holders appears on the Old
Certificates.
If the Letter of Transmittal or any Old Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Certificates will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Certificates not properly tendered or any Old Certificates which, if accepted,
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive any irregularities or conditions of tender
as to particular Old Certificates. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Certificates must be
cured within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Old Certificates, nor
shall any of them incur any liability for failure to give such notification.
Tenders of Old Certificates will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Certificates received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent to the tendering holders of Old Certificates,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
12
<PAGE> 20
In, addition, the Company reserves the right in its sole discretion,
subject to the provisions of the Indenture, to (i) purchase or make offers for
any Old Certificates that remain outstanding subsequent to the Expiration Date
or, as set forth under "-- Conditions," to terminate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement and (ii) to the
extent permitted by applicable law, purchase Old Certificates in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD CERTIFICATES FOR EXCHANGE; DELIVERY OF NEW CERTIFICATES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Certificates properly tendered will be accepted, promptly after the
Expiration Date, and the New Certificates will be issued promptly after
acceptance of the Old Certificates. See "-- Conditions" below. For purposes of
the Exchange Offer, Old Certificates shall be deemed to have been accepted
validly tendered for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of New Certificates for Old Certificates that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Certificates
or a timely Book-Entry Confirmation of such Old Certificates into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Old Certificates are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Certificates are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Certificates will be returned without expense to the tendering
holder thereof (or, in the case of Old Certificates tendered by book-entry
transfer procedures described below, such nonexchanged Old Certificates will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Certificates at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Certificates by causing
the Book-Entry Transfer Facility to transfer such Old Certificates into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Certificates may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "-- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Certificates desires to tender such Old
Certificates, and the Old Certificates are not immediately available, or time
will not permit such holder's Old Certificates or other required documents to
reach the Exchange Agent before the Expiration Date, or the procedures for book-
entry transfer cannot be completed on a timely basis, a tender may be effected
if (i) the tender is made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Certificates and the amount of Old
Certificates tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Certificates, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of
13
<PAGE> 21
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent and (iii) the certificates for all physically tendered Old Certificates,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three NYSE trading days after the date of execution of
the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Certificates may be withdrawn at any time prior to 5:00
p.m., New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "-- Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Old Certificates to be withdrawn, identify the Old Certificates to
be withdrawn (including the principal amount of such Old Certificates) and
(where certificates for Old Certificates have been transmitted) specify the name
in which such Old Certificates are registered, if different from that of the
withdrawing holder. If certificates for Old Certificates have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Certificates have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Certificates and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Certificates so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Certificates which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Certificates tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Certificates will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Certificates) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Certificates may be retendered by
following one of the procedures described under "-- Procedures for Tendering"
and "-- Book-Entry Transfer" above at any time on or prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Certificates will
not be required to be accepted for exchange, nor will New Certificates be issued
in exchange for, any Old Certificates and the Company may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old
Certificates, if because of any change in law, or applicable interpretations
thereof by the Commission, the Company determines that it is not permitted to
effect the Exchange Offer, and the Company has no obligation to, and will not
knowingly, permit acceptance of tenders of Old Certificates from affiliates of
the Company (within the meaning of Rule 405 under the Securities Act) or from
any other holder or holders who are not eligible to participate in the Exchange
Offer under applicable law or interpretations thereof by the Commission, or if
the New Certificates to be received by such holder or holders of Old
Certificates in the Exchange Offer, upon receipt, will not be tradable by such
holder without restriction under the Securities Act and the Exchange Act and
without material restrictions under the "blue sky" or securities laws of
substantially all of the states of the United States.
14
<PAGE> 22
EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail, Overnight Delivery: By Hand:
Wilmington Trust Company Wilmington Trust Company
1100 North Market Street 1105 North Market Street, 1st Floor
Wilmington, Delaware 19890-0001 Wilmington, Delaware 19890
Attention: Corporate Trust Operations Attention: Corporate Trust Operations
</TABLE>
Facsimile Transmission:
(302) 651-1079
Confirm by Telephone:
(302) 651-1562
Corporate Trust Operations
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Certificates, and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Certificates pursuant to the Exchange Offer. If, however, certificates
representing New Certificates or Old Certificates for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Old Certificates tendered, or if tendered Old Certificates are registered
in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Certificates pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
15
<PAGE> 23
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data presented below have been derived from the
consolidated financial statements of the Company. The data for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 were derived from the Company's
audited consolidated financial statements and related notes, and other financial
information included herein. The data for the three months ended March 31, 1998
and 1997 were derived from the Company's unaudited consolidated financial
statements, which, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information set forth herein. The results of operations for
the interim periods presented are not indicative of the results that may be
expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total operating revenues..... $ 41,263 $102,979 $171,267 $315,659 $401,041 $ 82,049 $ 79,634
Operating expenses:
Flight crew salaries and
benefits................. 4,243 8,887 14,584 25,020 30,153 6,817 6,757
Other flight-related
expenses................. 7,844 9,270 12,361 27,404 28,784 6,366 6,519
Maintenance................ 8,052 24,517 42,574 84,305 123,820 23,328 20,521
Aircraft and engine
rentals.................. 1,758 14,044 22,902 27,341 31,644 7,776 1,241
Fuel and ground handling... 4,575 9,747 5,027 10,554 10,816 3,166 2,002
Depreciation and
amortization............. 5,647 7,451 14,793 25,515 42,945 9,477 12,230
Other...................... 8,698 15,169 16,352 27,457 49,777 7,977 8,821
Write-off of capital
investment and other..... -- -- -- -- 27,100 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses..... 40,817 89,085 128,593 227,596 345,039 64,907 58,091
-------- -------- -------- -------- -------- -------- --------
Operating income............. 446 13,894 42,674 88,063 56,002 17,142 21,543
Other income (expense):
Interest income............ 244 490 2,025 7,102 7,365 1,909 1,661
Interest expense........... (10,101) (10,784) (18,460) (35,577) (52,834) (11,157) (14,775)
-------- -------- -------- -------- -------- -------- --------
Total other income
(expense).................. (9,857) (10,294) (16,435) (28,475) (45,469) (9,248) (13,114)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes...................... (9,411) 3,600 26,239 59,588 10,533 7,894 8,429
Income tax benefit
(expense).................. 1,388 (14) (8,408) (21,750) (3,844) (2,881) (3,119)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item......... (8,023) 3,586 17,831 37,838 6,689 5,013 5,310
Extraordinary item: Gain from
extinguishment of debt, net
of applicable taxes of
$9,622(1).................. -- -- -- -- 16,740 -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............ $ (8,023) $ 3,586 $ 17,831 $ 37,838 $ 23,429 $ 5,013 $ 5,310
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(2).................... $ 6,093 $ 21,345 $ 57,467 $113,578 $127,608 $ 26,886 $ 33,921
Ratio of EBITDA to interest
expense(2)................. 0.60x 1.98x 3.11x 3.19x 2.42x 2.41x 2.30x
Ratio of earnings to fixed
charges(3)................. --(4) 1.21x 1.86x 2.11x 1.30x 1.53x 1.00x
OPERATING DATA:
Total block hours flown(5)... 7,907 19,049 33,265 59,445 75,254 15,443 15,388
Revenue per block hour....... $ 5,219 $ 5,406 $ 5,149 $ 5,310 $ 5,329 $ 5,313 $ 5,175
EBITDA per block hour(2)..... $ 771 $ 1,121 $ 1,728 $ 1,911 $ 1,696 $ 1,740 $ 2,204
Average aircraft
operated(6)................ 2.1 5.2 7.7 14.7 19.5 17.2 17.0
Total aircraft (at end of
period).................... 3 6 10 17 17 18 17
</TABLE>
16
<PAGE> 24
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................ $ 6,198 $ 10,524 $ 96,990 $124,663 $ 152,969 $ 90,339
Net property and equipment........... 114,255 131,237 319,751 584,270 1,063,210 1,176,812
Total assets......................... 125,005 162,731 447,323 773,707 1,297,415 1,359,702
Total debt(7)........................ 130,690 163,615 351,261 484,429 776,075 775,216
Deferred aircraft obligations........ -- -- -- -- 163,167 225,936
Stockholders' equity (deficit)....... (19,339) (15,753) 68,715 215,785 238,829 245,215
</TABLE>
- ---------------
(1) In May 1997, the Company recognized an extraordinary gain, net of applicable
taxes of $9,622, as a result of the extinguishment of a portion of the
Company's debt.
(2) EBITDA represents income (loss) before income taxes, depreciation and
amortization, and total other income (expense), as adjusted to exclude the
"Write-off of capital investment and other" in the second quarter of 1997.
EBITDA is not a recognized measure of performance under GAAP and should not
be considered in isolation or as an alternative to, or more meaningful than,
operating income or operating cash flows prepared in accordance with GAAP as
an indicator of the Company's operating performance or liquidity. The
Company believes that EBITDA may provide additional information about the
Company's ability to meet its future requirements for debt service, capital
expenditures and working capital. When evaluating EBITDA, investors should
consider, among other factors, (i) increasing or decreasing trends in
EBITDA, (ii) whether EBITDA has remained at positive levels historically and
(iii) how EBITDA compares to levels of interest expense. Other companies may
define EBITDA differently, and as a result, such measures may not be
comparable to the Company's EBITDA.
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) prior to income tax benefit (expense), as adjusted to exclude
the "Write-off of capital investment and other" in the second quarter of
1997, and fixed charges (excluding capitalized interest for the period).
Fixed charges consist of interest expense (including amounts capitalized),
amortization of debt issuance costs and one-third of rental payments on
operating leases (such one-third portion having been deemed by the Company
to represent the interest portion of such payments).
(4) Earnings were insufficient to cover fixed charges by $9,411 for the year
ended December 31, 1993.
(5) Total block hours flown for an aircraft represents the elapsed time from the
moment the aircraft first moves at the point of origin to the time it comes
to rest at its destination.
(6) Average aircraft operated represents the total number of aircraft operated
during each day of a given period divided by the number of days in such
period.
(7) The Certificates are not direct obligations of, or guaranteed by, the
Company and therefore will not be included in the Company's consolidated
financial statements. If, at delivery of an aircraft to which the
Certificates relate, the Company does not enter into a leveraged lease
transaction in connection with any such aircraft, the Company will take
ownership of such aircraft and the corresponding Certificates will revert to
a direct obligation of the Company.
17
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The cargo operations of the Company's airline customers are seasonal in
nature, with peak activity occurring traditionally in the second half of the
year, and with a significant decline occurring in the first quarter. This
decline in cargo activity is largely due to the decrease in shipping that occurs
following the December and January holiday seasons associated with the
celebration of Christmas and the Chinese New Year. Certain of the Company's
customers have, in the past, elected to use that period of the year to exercise
their contractual options to cancel a limited number (generally not more than 5%
per year) of guaranteed hours with the Company, and are expected to continue to
do so in the future. As a result, the Company's revenues typically decline in
the first quarter of the year as its contractual aircraft utilization level
temporarily decreases. The Company seeks to schedule, to the extent possible,
its major aircraft maintenance activities during this period to take advantage
of any unutilized aircraft time.
The aircraft acquisitions, lease arrangements and modification schedule are
described in Note 6 of the Company's December 31, 1997 Consolidated Financial
Statements. The timing of when an aircraft enters the Company's fleet can affect
not only annual performance, but can make quarterly results vary, thereby
affecting the comparability of operations from period to period.
The tables below set forth selected financial and operating data for the
first quarter of 1998 and the four quarters of the years ended December 31,
1997, 1996 and 1995 (dollars in thousands).
<TABLE>
<CAPTION>
1998
--------
1ST
QUARTER
--------
<S> <C>
Total operating revenues.................................... $ 79,634
Operating expenses.......................................... 58,091
Operating income............................................ 21,543
Other income (expense)...................................... (13,114)
Net income.................................................. 5,310
Block hours................................................. 15,388
Average aircraft operated................................... 17.0
Operating margin............................................ 27.1%
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
4TH 3RD 2ND 1ST
CUMULATIVE QUARTER QUARTER QUARTER QUARTER
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Total operating revenues.............. $401,041 $120,893 $104,197 $ 93,902 $82,049
Operating expenses.................... 345,039 93,112 82,464 104,556 64,907
Operating income (loss)............... 56,002 27,781 21,733 (10,654) 17,142
Other income (expense)................ (45,469) (13,383) (11,930) (10,908) (9,248)
Net income............................ 23,429 9,143 6,225 3,048 5,013
Block hours........................... 75,254 22,333 19,937 17,541 15,443
Average aircraft operated............. 19.5 20.9 20.4 19.5 17.2
Operating margin (deficit)............ 14.0% 23.0% 20.9% (11.4)% 20.9%
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
4TH 3RD 2ND 1ST
CUMULATIVE QUARTER QUARTER QUARTER QUARTER
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Total operating revenues.............. $315,659 $104,715 $ 79,681 $ 72,614 $58,649
Operating expenses.................... 227,596 74,775 59,635 49,947 43,239
Operating income...................... 88,063 29,940 20,046 22,667 15,410
Other income (expense)................ (28,475) (8,569) (7,207) (6,982) (5,717)
Net income............................ 37,838 13,397 8,201 10,037 6,203
Block hours........................... 59,445 18,803 15,444 14,073 11,125
Average aircraft operated............. 14.7 18.4 15.4 14.0 10.8
Operating margin...................... 27.9% 28.6% 25.2% 31.2% 26.3%
</TABLE>
18
<PAGE> 26
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
4TH 3RD 2ND 1ST
CUMULATIVE QUARTER QUARTER QUARTER QUARTER
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Total operating revenues.............. $171,267 $ 56,142 $ 47,769 $ 38,418 $28,938
Operating expenses.................... 128,593 39,982 34,844 28,370 25,397
Operating income...................... 42,674 16,160 12,925 10,048 3,541
Other income (expense)................ (16,435) (4,014) (4,805) (4,287) (3,330)
Net income............................ 17,831 8,352 5,568 3,861 50
Block hours........................... 33,265 10,809 9,076 7,568 5,812
Average aircraft operated............. 7.7 9.4 8.2 6.9 6.1
Operating margin...................... 24.9% 28.8% 27.1% 26.2% 12.2%
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Operating Revenues and Results of Operations. Total operating revenues for
the quarter ended March 31, 1998 decreased to $79.6 million from $82.0 million
for the same period in 1997, or approximately 3%. The average number of aircraft
in the Company's fleet during the first quarter of 1998 was 17.0 compared to
17.2 during the same period in 1997. Total block hours for the first quarter of
1998 were 15,388 compared to 15,443 for the same period in 1997, a decrease of
less than 1%, principally reflecting the comparability in the size of the
Company's fleet period over period. Revenue per block hour decreased by
approximately 3% to $5,175 for the first quarter of 1998 compared to $5,313 for
the first quarter of 1997. This was substantially due to the decrease in the
volume of scheduled service operations period over period, for which the rate
per block hour is higher due to additional operating costs borne by the Company
under such arrangements. Scheduled service operations are performed on an ad hoc
basis and are dependent upon excess availability of the Company's aircraft and
customer demand.
The Company's operating results improved by 26% from a $17.1 million
operating profit for the first quarter of 1997 to an operating profit of $21.5
million for the first quarter of 1998. Results of operations were favorably
impacted by lower maintenance costs due to the return of the five aircraft ( the
"FedEx Aircraft") which the Company had leased from Federal Express Corporation
("FedEx") upon lease termination at the beginning of 1998. The FedEx Aircraft
experienced significantly higher maintenance costs compared to the other
aircraft in the Company's fleet. In addition, operating results improved due to
the increase in the percentage of owned aircraft compared to leased aircraft in
the Company's fleet period over period. Net income of $5.0 million for the first
quarter of 1997 increased to a net income of $5.3 million for the first quarter
of 1998.
Operating Expenses. The Company's principal operating expenses include
flight crew salaries and benefits; other flight-related expenses; maintenance;
aircraft and engine rentals; fuel costs and ground handling; depreciation and
amortization; and other expenses.
Flight crew salaries and benefits include all such expenses for the
Company's pilot work force. Flight crew salaries and benefits of $6.8 million in
the first quarter of 1998 was comparable to the same period of 1997, due to the
comparability in the number of aircraft in the Company's fleet and aircraft
block hours. On a block hour basis, this expense declined by less than 1% to
$439 per hour for the first quarter of 1998 from $441 per hour for the same
period in 1997.
Other flight-related expenses include hull and liability insurance on the
Company's fleet of Boeing 747 aircraft, crew travel and meal expenses, initial
and recurring crew training costs and other expenses necessary to conduct its
flight operations.
Other flight-related expenses increased slightly to $6.5 million in the
first quarter of 1998 from $6.4 million in 1997, or approximately 2%, primarily
due to the comparable fleet size. On a block hour basis, other flight-related
expenses increased by approximately 3% to $424 per hour for the first quarter of
1998 from $412 per hour for the same period in 1997.
Maintenance expenses include all expenses related to the upkeep of the
aircraft, including maintenance, labor, parts, supplies and maintenance
reserves. The costs of C Checks and engine overhauls not otherwise covered by
maintenance reserves are capitalized as they are incurred and amortized over the
life of the
19
<PAGE> 27
maintenance event. In addition, in January 1995 the Company contracted with KLM
for a significant part of its regular maintenance operations and support on a
fixed cost per flight hour basis. Effective October 1996, certain additional
aircraft engines were accepted into the GE engine maintenance program, also on a
fixed cost per flight hour basis, pursuant to a 10 year maintenance agreement.
Maintenance expense decreased to $20.5 million in the first quarter of 1998
from $23.3 million in the same period of 1997, or approximately 12%, primarily
due to the return of the FedEx Aircraft upon lease termination at the beginning
of the first quarter of 1998. In addition, there were approximately $1.2 million
of maintenance charges recorded in the first quarter of the year-earlier period
associated with the return of two leased aircraft to the lessors. Excluding the
one-time charges in the year-earlier period, on a block hour basis, maintenance
expense decreased by 7% in the first quarter of 1998 compared to the first
quarter of 1997.
Aircraft and engine rentals include the cost of leasing aircraft and spare
engines, as well as the cost of short-term engine leases required to replace
engines removed from the Company's aircraft for either scheduled or unscheduled
maintenance and any related short-term replacement aircraft lease costs.
Aircraft and engine rentals were $1.2 million in the first quarter of 1998
compared to $7.8 million in the same period of 1997, or a decrease of
approximately 84%. During the first quarter of 1998, the Company leased one
aircraft as compared to the first quarter of 1997 in which the Company leased
five aircraft. In addition, the Company did not incur any cost for engine
rentals in the first quarter of 1998 due to the increase in spare engines over
the year-earlier period.
Because of the nature of the Company's ACMI contracts with its airline
customers, under which the Company is responsible only for the ownership cost
and maintenance of the aircraft and for supplying aircraft crews and insurance,
the Company's airline customers bear all other operating expenses, including
fuel and fuel servicing; marketing costs associated with obtaining cargo;
airport cargo handling; landing fees; ground handling; aircraft push-back and
de-icing services; and specific cargo and mail insurance. As a result, the
Company incurs fuel and ground handling expenses only when it operates on its
own behalf, either in scheduled services, for ad hoc charters or for ferry
flights. Fuel expenses for the Company's non-ACMI contract services include both
the direct cost of aircraft fuel as well as the cost of delivering fuel into the
aircraft. Ground handling expenses for non-ACMI contract service include the
costs associated with servicing the Company's aircraft at the various airports
to which it operates as well as other direct flight related costs.
Fuel and ground handling costs decreased by 37% to $2.0 million for the
first quarter of 1998 from $3.2 million for the first quarter of 1997. This was
primarily due to a 38% decrease in scheduled service, charter and other non-ACMI
block hours to 379 block hours in the first quarter of 1998 from 614 block hours
in the year-earlier period.
Depreciation and amortization expense includes depreciation on aircraft,
spare parts and ground equipment, and the amortization of capitalized major
aircraft maintenance and engine overhauls.
Depreciation and amortization expense increased to $12.2 million in the
first quarter of 1998 from $9.5 million in the same period of 1997, or
approximately 29%. This increase reflects the increase in owned aircraft and
engines for the first quarter of 1998 over the same period in 1997.
Other operating expenses include salaries, wages and benefits for all
employees other than pilots; accounting and legal expenses; supplies; travel and
meal expenses, excluding those of the aircraft crews; commissions; and other
miscellaneous operating costs.
Other operating expenses increased to $8.8 million in the first quarter of
1998 from $8.0 million in the same period of 1997, or approximately 11%,
reflecting the increase in the Company's operations. On a block hour basis,
these expenses increased to $573 per hour in the first quarter of 1998 from $517
per hour in the same period of 1997, or 11%. This increase in cost was due
primarily to additional personnel and other resources necessary to properly
manage the Company's increased operations and to prepare for the introduction of
the 747-400 aircraft into the Company's fleet in the second half of 1998.
Other Income (Expense). Other income (expense) consists of interest income
and interest expense. Interest income decreased to $1.7 million in the first
quarter of 1998 from $1.9 million in the same period of
20
<PAGE> 28
1997, primarily due to the use of the Company's cash and cash equivalents and
short-term investments for the purchase of aircraft and general corporate
purposes. Interest expense increased to $14.8 million in the first quarter of
1998 from $11.2 million in the same period of 1997, or approximately 32%,
resulting from the increase in financed flight equipment between these periods.
Income Taxes. Pursuant to the provisions of the Financial Accounting
Standards Board's (the "FASB") Statement of Financial Accounting Standards
("SFAS") No. 109 "Accounting for Income Taxes," the Company has recorded a tax
provision based on tax rates in effect during the period. Accordingly, the
Company accrued taxes at the rate of 37.0% during the first quarter of 1998 and
36.5% during the first quarter of 1997. Due to significant capital costs, which
are depreciated at an accelerated rate for tax purposes, a significant portion
of the Company's tax provision in the first quarters of 1998 and 1997 is
deferred.
1997 Compared to 1996
Operating Revenues and Results of Operations. Total operating revenues for
the year ended December 31, 1997 increased to $401.0 million compared to $315.7
million for 1996, an increase of approximately 27%. The average number of
aircraft in the Company's fleet during 1997 was 19.5 compared to 14.7 during
1996. Total block hours for 1997 were 75,254 compared to 59,445 for 1996, an
increase of approximately 27%, principally reflecting the increase in the size
of the Company's fleet. Revenue per block hour increased by approximately .4% to
$5,329 for 1997 compared to $5,310 for 1996. The Company's operating results
decreased from an $88.1 million operating profit in 1996 to a $56.0 million
operating profit in 1997, primarily due to the largely non-cash charge to
earnings of $27.1 million in the second quarter of 1997. The after-tax effect of
this second quarter charge was substantially offset by the after-tax effect of
the extraordinary gain on early extinguishment of debt in the same quarter of
1997. Net income of $37.8 million for 1996 declined to a net income of $23.4
million for 1997, primarily due to the increase in interest expense associated
with the increase in aircraft in service year over year and the higher
maintenance costs with respect to the aircraft sub-leased from FedEx.
Operating levels increased during the second quarter of 1997 as a result of
placing in service two additional aircraft upon completion of their respective
cargo modifications by Boeing, one in March 1997 and one in May 1997. In
addition, the Company placed in service the fifth FedEx aircraft in April 1997.
In August 1997 and at the end of September 1997, the Company took delivery of
the fifth and sixth Thai Aircraft (as defined herein), respectively, upon
completion by Boeing of its modification to cargo configuration. At the end of
1997, the Company removed from revenue service the five aircraft sub-leased from
FedEx in preparation for the return of these aircraft to FedEx in the first
quarter of 1998, as provided for in the sub-leases.
The Company's operating levels increased moderately during 1997 as a result
of these aircraft acquisitions. Block hours increased from 15,443 in the first
quarter of 1997 to 22,333 in the fourth quarter of 1997, reflecting the growth
in the average fleet size from 17.2 aircraft to 20.9 aircraft for the two
periods. Total operating revenue increased from $82.0 million in the first
quarter to $120.9 million in the fourth quarter, representing slightly higher
block hour rates for the fourth quarter compared to those of the first quarter
of 1997, primarily due to the seasonality of the business of the Company's
customers. The Company achieved $27.8 million operating income and $9.1 million
net income in the fourth quarter of 1997, compared to $17.1 million operating
income and $5.0 million net income in the first quarter of 1997.
In the second quarter of 1997, the Company recorded a largely non-cash
charge of $27.1 million to operating income. This charge included the write-off
of the Company's remaining balance sheet investment in the five aircraft
sub-leased from FedEx, as well as the establishment of certain reserves
associated with costs necessary to return the aircraft in the first quarter of
1998 and other non-recurring items. Excluding this charge, operating income was
$83.1 million for 1997 compared to $88.1 million for 1996, or a decrease of
approximately 6%. There were an average of 4.4 aircraft sub-leased from FedEx
operating in 1997 compared to an average of 1.7 aircraft sub-leased from FedEx
operating in 1996. Maintenance costs with respect to the FedEx aircraft were
substantially higher than for the rest of the Company's fleet. In addition, the
Company incurred $1.2 million of costs in the first quarter of 1997 related to
the return of two leased aircraft to their
21
<PAGE> 29
respective lessors. In the second quarter of 1997, the realization of an
after-tax extraordinary gain of $16.7 million, resulting from the receipt of a
prepayment incentive credit associated with the refinancing of approximately
$228 million of indebtedness during the second quarter, for the most part offset
the $17.2 million after-tax impact of the non-recurring charge discussed above.
Operating Expenses. Flight crew salaries and benefits include all such
expenses for the Company's pilot work force. Flight crew salaries and benefits
increased to $30.2 million in 1997 compared to $25.0 million in 1996, due to
increases in the number of aircraft in the Company's fleet and aircraft block
hours. While actual expense increased by approximately 21% during 1997, on a
block hour basis this expense declined by approximately 5% to $401 per block
hour for 1997 from $421 per block hour for 1996. This reduction was due to
increased efficiency in staffing levels and scheduling resulting from the
increased level of operations.
Other flight-related expenses increased to $28.8 million in 1997 compared
to $27.4 million in 1996, or approximately 5%. The impact of the larger fleet
size for 1997 compared to the prior year was partially offset by a reduction in
the Company's aircraft hull and liability insurance rates based on its increased
size and favorable operating history. As a result of this and other operating
efficiencies, on a block hour basis, other flight-related expenses declined by
approximately 17% to $383 per block hour for 1997 compared to $461 per block
hour for 1996.
Maintenance expense increased to $123.8 million in 1997 from $84.3 million
in 1996, or approximately 47%, partially due to the increase in the Company's
average fleet size and partially due to the higher maintenance costs with
respect to the aircraft sub-leased from FedEx. On a block hour basis,
maintenance expense increased year over year by approximately 16%, primarily due
to higher maintenance costs associated with the aircraft sub-leased from FedEx.
Aircraft and engine rentals were $31.6 million in 1997 compared to $27.3
million in 1996, or an increase of approximately 16%, of which approximately
$2.6 million was due to higher lease rates in 1997 compared to 1996 and $3.1
million was due to an additional .5 aircraft leased in 1997 over 1996. This
increase was partially offset by a $1.4 million decrease in engine rentals year
over year, due to additional spare engines purchased by the Company in 1997.
Fuel and ground handling costs increased to $10.8 million for 1997 compared
to $10.6 million for 1996, or an increase of approximately 3%. This was due to
higher fuel prices in 1997 compared to 1996, partially offset by the relative
decrease in scheduled service, charter and other non-ACMI block hours to 1,787
block hours in 1997 from 2,042 block hours in 1996.
Depreciation and amortization expense increased to $42.9 million in 1997
from $25.5 million in 1996, or approximately 68%. This increase reflected an
increase of approximately 50% in owned aircraft, an approximate two-fold
increase in owned spare engines and an increase of approximately 100% in spare
parts for 1997 over 1996. In addition, Other Revenues include $1.5 million of
depreciation for 1997, associated with the net lease of two owned aircraft which
were in passenger configuration.
Other operating expenses increased to $49.8 million in 1997 from $27.5
million in 1996, or approximately 81%, reflecting the increase in the Company's
operations. On a block hour basis, these expenses increased to $661 per block
hour in 1997 from $462 per block hour in 1996, or approximately 43%. This
increase in cost was due primarily to additional personnel and other resources
necessary to properly manage the Company's increased operations and to prepare
for the introduction of the 747-400 aircraft.
Other Income (Expense). Interest income for 1997 was $7.4 million compared
to $7.1 million for 1996, due to achieving higher interest rates in 1997
compared to 1996 on a slightly lower short-term investment level in 1997
compared to 1996. Interest expense increased to $52.8 million in 1997 from $35.6
million in 1996, or approximately 49%, primarily resulting from an increase of
approximately 50% in financed flight equipment between these periods.
Income Taxes. Pursuant to the provisions of SFAS No. 109 "Accounting for
Income Taxes," the Company has recorded a tax provision based on tax rates in
effect during the period. Accordingly, the Company accrued taxes at the rate of
36.5% during 1997 and 1996. Due to significant capital costs, which are
22
<PAGE> 30
depreciated at an accelerated rate for tax purposes, a majority of the Company's
tax provision in these periods is deferred.
1996 Compared to 1995
Operating Revenues and Results of Operations. Total operating revenues for
the year ended December 31, 1996 increased to $315.7 million compared to $171.3
million for 1995, an increase of approximately 84%. The average number of
aircraft in the Company's fleet during 1996 was 14.7, compared to 7.7 during
1995. Total block hours for 1996 were 59,445 compared to 33,265 for 1995, an
increase of approximately 79%. Revenue per block hour increased by 3% to $5,310
for 1996 compared to $5,149 for the year-earlier period reflecting a slight
increase in the level of charter and scheduled service hours. While charter and
scheduled service activity provides a higher revenue rate per block hour, costs
are also higher due to fuel and ground handling costs which the Company must
bear. The Company's operating results improved from a $42.7 million operating
profit for 1995 to an operating profit of $88.1 million for 1996, or
approximately 106%. Net income of $17.8 million for 1995 improved to a net
income of $37.8 million for 1996, or approximately 112%.
Operating levels increased during the first quarter of 1996 as a result of
placing in service four additional aircraft. In January 1996, the Company placed
in service one aircraft upon completion of its cargo modification by Hong Kong
Aircraft Engineering Company. Two additional aircraft were re-delivered to the
Company upon completion of their modification by Boeing in March 1996. Finally,
at the close of the first quarter, the Company took delivery of the first
aircraft sub-leased from FedEx. During the third quarter of 1996, the Company
placed in service the next three aircraft sub-leased from FedEx. At the end of
the third quarter the Company took delivery of a Boeing 747-200 passenger
aircraft acquired from Thai Airways International Public Company Limited ("Thai
Airways") upon completion by Boeing of its modification to cargo configuration.
In the fourth quarter of 1996, a second Boeing 747-200 passenger aircraft
acquired from Thai Airways was placed in service upon its delivery by Boeing
subsequent to modification to cargo configuration. At the end of 1996, two
leased aircraft were taken out of service for required maintenance prior to
re-delivery to the lessors.
The Company's operating levels increased significantly during 1996 as a
result of these aircraft acquisitions. Block hours increased from 11,125 in the
first quarter of 1996 to 18,803 in the fourth quarter of 1996, relative to the
growth in average fleet size from 10.8 aircraft to 18.4 aircraft for the two
periods. Total operating revenue increased from $58.6 million in the first
quarter to $104.7 million in the fourth quarter, representing slightly higher
block hour rates for the fourth quarter compared to those of the first quarter
of 1996, primarily due to the seasonality of the business of the Company's
customers. The Company achieved $29.9 million operating income and $13.4 million
net income in the fourth quarter of 1996, compared to $15.4 million operating
income and $6.2 million net income in the first quarter of 1996.
The Company's operating levels increased substantially during 1995 also as
a result of aircraft acquisitions. Block hours rose from 5,812 hours in the
first quarter of 1995 to 10,809 in the fourth quarter, as the average number of
aircraft in the Company's fleet grew from 6.1 aircraft to 9.4 aircraft over the
corresponding period. Total operating revenue increased from $28.9 million in
the first quarter of 1995 to $56.1 million in the fourth quarter, with the
Company's operating income increasing from $3.5 million to $16.2 million and its
net income improving from $0.1 million to $8.4 million over that same period.
For the year 1995, total block hours were 33,265 and the average fleet size was
7.7 aircraft. Total operating revenue was $171.3 million, operating income was
$42.7 million and net income was $17.8 million.
Operating Expenses. Expenses for flight crew salaries and benefits
increased to $25.0 million in 1996 from $14.6 million in 1995, primarily as a
result of the increase in the Company's fleet of Boeing 747 aircraft from an
average of 7.7 aircraft in 1995 to 14.7 aircraft in 1996, while aircraft block
hours increased from 33,265 to 59,445, or 79%, over such period. On a block hour
basis, this expense declined to $421 per hour for 1996 from $438 per hour for
1995, or approximately 4%, due to increased staffing and scheduling efficiencies
associated with increased operations.
Other flight-related expenses rose to $27.4 million in 1996 from $12.4
million in 1995, or approximately 120%, primarily due to fleet expansion and
higher travel costs associated with operational difficulties related to
23
<PAGE> 31
the aircraft sub-leased from FedEx. On a per block hour basis, other
flight-related expenses increased from $372 per block hour in 1995 to $461 per
block hour in 1996, or approximately 24%.
Maintenance expense increased to $84.3 million in 1996 from $42.6 million
in 1995, or approximately 98%, due to the increase in average fleet size and
certain increased costs associated with introducing the aircraft sub-leased from
FedEx into the Company's fleet and higher ongoing maintenance costs. The
aircraft sub-leased from FedEx are not covered by the Company's maintenance
contracts with KLM and GE described above. On a block hour basis, maintenance
expense increased by 11%, primarily due to parts support requirements associated
with scheduled and unscheduled maintenance events, and due to the maintenance
costs for the aircraft sub-leased from FedEx discussed above.
Aircraft and engine rentals were $27.3 million in 1996 compared to $22.9
million in 1995, representing an increase of 19%. Lease costs in 1996 for the
aircraft sub-leased from FedEx represented $9.7 million of this increase, offset
by a $2.4 million decrease in sub-service rentals in 1996 compared to 1995. In
addition, the lease costs for one aircraft in 1995 exceeded the lease costs in
1996 by $1.6 million, due to the Company's purchase of the aircraft in the
second quarter of 1996. Engine rentals decreased by $1.8 million in 1996 to $1.8
million, due to the purchase of eight spare engines which reduced the Company's
need for leased engines.
Fuel and ground handling costs increased to $10.6 million in 1996 from $5.0
million in 1995, or approximately 110%. This increase was primarily due to an
increase in block hours for scheduled service, charters, ferry and other from
1,070 in 1995 to 2,042 in 1996, or approximately 91%. In addition, the airline
industry experienced a rise in fuel costs over the period.
Depreciation and amortization expense increased to $25.5 million in 1996
from $14.8 million in 1995, reflecting the increase in the number of owned
aircraft in the Company's fleet. On a per block hour basis, this expense
decreased from $445 per block hour in 1995 to $429 per block hour in 1996, or
approximately 4%. The proportion of owned aircraft to leased aircraft was
relatively the same for 1996 as it was for 1995.
Other operating expenses increased to $27.5 million in 1996 from $16.4
million in 1995, or approximately 68%. On a block hour basis, other operating
expenses decreased from $492 per block hour in 1995 to $462 per block hour in
1996, or approximately 6%, reflecting a lower rate of growth in the Company's
overhead as compared to its operational growth.
Other Income (Expense). Interest income increased to $7.1 million for 1996
from $2.0 million in 1995. This increase was primarily due to the investment of
$99.6 million of funds received from the secondary public offering ("SPO") in
May 1996, as well as funds retained from the Company's initial public offering
("IPO") in August 1995. Interest expense increased to $35.6 million in 1996 from
$18.5 million in 1995, resulting from the increase in financed flight equipment
between these periods.
Income Taxes. Pursuant to the provisions of SFAS No. 109, "Accounting for
Income Taxes," the Company has recorded a tax provision based on tax rates in
effect during the period. Accordingly, the Company accrued taxes at the rate of
36.5% in 1996 and 32.0% in 1995. Due to significant capital costs, which are
depreciated at an accelerated rate for tax purposes, a majority of the Company's
tax provision in 1996 and 1995 is deferred.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of
approximately $62.0 million, short-term investments of approximately $28.4
million and working capital of approximately $6.2 million. During the first
quarter of 1998, cash and cash equivalents increased approximately $20.6
million, principally reflecting cash provided from operations of $22.0 million,
proceeds from equipment financings of $6.8 million, net proceeds from the
maturity and purchase of short-term investments of $83.3 million and proceeds
from the exercise of stock options of $1.0 million, partially offset by
investments in flight and other equipment of $63.2 million, principal reductions
of indebtedness of $7.7 million and deferred lease costs associated with the
financing of the 747-400 freighter aircraft of $21.6 million.
24
<PAGE> 32
At December 31, 1997, the Company had cash and cash equivalents of
approximately $41.3 million, short-term investments of approximately $111.6
million and working capital of approximately $80.4 million. During 1997, cash
and cash equivalents increased approximately $31.5 million, principally
reflecting cash provided from operations of $87.7 million, proceeds from
equipment financings of $815.8 million and net proceeds from the sale and
purchase of short-term investments of $3.2 million, partially offset by the net
sale and purchase of investments in flight and other equipment of $364.0
million, principal reductions of indebtedness of $494.1 million, debt issuance
costs of $16.6 million and net treasury stock purchases of $0.4 million.
At December 31, 1996, the Company had cash and cash equivalents of
approximately $9.8 million, short-term investments of approximately $114.9
million and working capital of approximately $98.7 million. During 1996, cash
and cash equivalents decreased $87.2 million, principally reflecting investments
in flight and other equipment of $289.7 million, the net purchase of $114.9
million of short-term investments, debt issuance costs of $6.0 million,
principal reductions of indebtedness of $21.6 million and net treasury stock
purchases of $0.5 million, partially offset by cash provided from operations of
$84.4 million, proceeds from equipment financings of $154.8 million, net common
stock issuances of $106.3 million, including the $99.6 million received from the
SPO in the second quarter of 1996.
In May 1996, the Company entered into a $175 million revolving credit
facility (the "Aircraft Credit Facility") with Goldman Sachs Credit Partners
L.P. ("Goldman Sachs"), as Syndication Agent, and Bankers Trust Company
("BTCo"), as Administrative Agent. This revolving loan facility provides for the
acquisition and conversion of flight equipment. The Aircraft Credit Facility was
subsequently amended and restated in conjunction with certain refinancings. The
Aircraft Credit Facility provides for a $250 million revolving credit facility
as of September 5, 1997 with a two-year revolving period and a subsequent
three-year term loan period in the event that permanent financing has not been
obtained for any flight equipment financed under the facility. At the time of
each borrowing, the Company must select either a Base Rate Loan (prime rate,
plus 1.5% through May 8, 1998, thereafter plus 2.0%) or a Eurodollar Rate Loan
(Eurodollar rate, plus 2.5% through May 8, 1998, thereafter plus 3.0%). The
Eurodollar Rate Loan was selected by the Company for substantially all
borrowings in 1996 and 1997. The weighted average interest rate on borrowings
outstanding under the Aircraft Credit Facility was 8.2% at March 31, 1998. Each
borrowing is secured by a first priority security interest in the collateral
flight equipment of that borrowing. Certain tests must be met before each
purchase of aircraft and related drawdown on the facility. To date, the Company
has met these tests. If in the future, the Company cannot meet all the tests
because of the difficult sequencing of aircraft acquisition, aircraft conversion
and customer contracts, the Company believes that other financing sources would
be available to the Company or that it would acquire aircraft using its internal
cash or seek a waiver of any necessary conditions. As of March 31, 1998, the
Company had $88.3 million outstanding under the Aircraft Credit Facility.
Covenants with respect to the Aircraft Credit Facility require specific levels
of insurance, as well as contain requirements regarding possession, maintenance,
and lease or transfer of the flight equipment. Certain covenants applicable to
the Company include, among other restrictions, limitations on indebtedness,
liens, investments, contingent obligations, restricted junior payments, capital
expenditures and leases. The Company was in compliance with all of its covenants
at March 31, 1998.
In March 1997, the Company refinanced one of its aircraft with Nationsbanc
Leasing Corporation ("Nationsbanc"). This aircraft was previously financed
through the Aircraft Credit Facility. As such, this refinancing increased the
availability of funds under the Aircraft Credit Facility by approximately $25
million. The Nationsbanc financing is a seven year term loan (extendible under
certain circumstances to ten years) which provides for a fixed interest rate of
9.2%. The loan is secured by a first priority security interest in this
aircraft.
In April 1997, the Company purchased the fifth and sixth aircraft from Thai
Airways. These aircraft were placed into service in the third quarter of 1997
subsequent to undergoing modification to cargo configuration by Boeing. These
aircraft were initially financed under the Aircraft Credit Facility and were
subsequently refinanced as part of the AFL II Term Loan Facility (as defined
herein).
25
<PAGE> 33
In May 1997, the Company acquired from Citicorp Investor Lease, Inc.
("Citicorp") one 747-200 passenger aircraft for a purchase price of $25 million,
including two spare engines. In connection with the purchase of the aircraft
from Citicorp, the Company agreed to assume Citicorp's lessor interest in the
lease of such aircraft to Philippine Airlines ("PAL") for the remainder of the
lease term. This aircraft is financed under the Aircraft Credit Facility.
In May 1997, the Company formed a wholly-owned subsidiary, Atlas Freighter
Leasing, Inc. ("AFL"), for the purpose of entering into the $185 million AFL
Term Loan Facility (the "AFL Term Loan Facility") to refinance six Boeing
747-200 aircraft previously financed through Internationale Nederlanden Aviation
Lease B.V. ("ING Bank"). Concurrent with entering into the AFL Term Loan
Facility, the proceeds of the AFL Term Loan Facility were used to repay all
existing principal and interest due under the ING Bank debt. Interest is based
on the Eurodollar rate, plus 2.5% for the first three years and 3.0% thereafter,
and is payable quarterly. The interest rate on borrowings outstanding under the
AFL Term Loan Facility was 8.2% at March 31, 1998. Quarterly scheduled principal
payments of $2.5 million commenced in February 1998 and increase to $5.7 million
in August 1998 with a final payment of $50.0 million in May 2004. The AFL Term
Loan Facility is secured by a first priority interest in the six subject
aircraft and is restrictive with respect to limitations on indebtedness, liens,
investments, contingent obligations, restricted junior payments, capital
expenditures, amendments of material agreements, leases, transactions with
shareholders and affiliates and the conduct of business. AFL was in compliance
with all of its covenants as of March 31, 1998.
In June 1997, the Company entered into the Boeing Purchase Agreement to
purchase 10 new 747-400 freighter aircraft to be powered by GE engines. These 10
firmly ordered 747-400 freighter aircraft are currently scheduled to be
delivered as follows: five in 1998, four in 1999 and one in 2000. Due to
production problems at Boeing, some of the 1998 delivery positions of the
747-400 aircraft have been delayed up to 60 days. While Boeing will compensate
the Company for defined delays in delivery of the 747-400 aircraft, any further
delays may adversely impact the Company's ability to initiate service with
prospective customers in a timely fashion. The Boeing Purchase Agreement also
provides the Company with options to purchase up to 10 additional 747-400
freighter aircraft for delivery from 2000 through 2002. As a result of the
Company being the largest purchaser of 747-400 freighter aircraft to date, it
was able to negotiate from Boeing and GE a significant discount off the
aggregate list price of $1.7 billion for the 10 747-400 freighter aircraft, four
installed engines per aircraft and five spare engines. In addition, the Company
also obtained certain ancillary products and services at advantageous prices.
The Boeing Purchase Agreement requires that the Company pay pre-delivery
deposits ("Pre-Delivery Deposits") to Boeing prior to the delivery date of each
747-400 freighter aircraft in order to secure delivery of the 747-400 freighter
aircraft and to defray a portion of the manufacturing costs. The Company expects
the maximum total amount of Pre-Delivery Deposits at any time outstanding will
be approximately $162.3 million, approximately $155.7 million of which was paid
as of May 31, 1998. For the remainder of 1998 and for the year 1999, the Company
expects to pay $46.5 million and $11.8 million, respectively, in accordance with
the Pre-Delivery Deposits schedule. In addition, the Boeing Purchase Agreement
provides for a deferral of a portion of the Pre-Delivery Deposits (Deferred
Aircraft Obligations) for which the Company accrues and pays interest quarterly
at 6-month LIBOR, plus 2.0%. As of May 31, 1998, there was $279.1 million of
Deferred Aircraft Obligations outstanding and the combined interest rate was
7.8%.
In August 1997, the Company completed the offering of its unsecured 10 3/4%
Senior Notes due 2005 ("Senior Notes"). The proceeds from the offering of the
Senior Notes were used to, among other things, repay short-term indebtedness
incurred by the Company to make Pre-Delivery Deposits to Boeing for the purchase
of 10 new freighter aircraft and for additional Pre-Delivery Deposits as they
become due. Interest on the Senior Notes began to accrue from their date of
original issuance and is payable semi-annually in arrears on February 1 and
August 1 of each year, commencing February 1, 1998, at the rate of 10 3/4% per
annum. The Senior Notes are redeemable, in whole or in part, at the option of
the Company, on or after August 1, 2001, at established redemption prices, plus
accrued interest to the date of redemption. In addition, at any time on or prior
to August 1, 2000, the Company, at its option, may redeem up to 35% of the
aggregate principal amount of the Senior Notes originally issued with the net
cash proceeds of one or more public equity offerings, at a redemption price
equal to 110.75% of the principal amount thereof plus accrued interest to the
date of
26
<PAGE> 34
redemption; provided that at least 65% of the aggregate principal amount of the
Senior Notes originally issued remains outstanding immediately after any such
redemption. The Senior Notes are general unsecured obligations of the Company
which rank pari passu in right of payment to any existing and future unsecured
senior indebtedness of the Company. The Senior Notes are effectively
subordinated, however, to all secured indebtedness of the Company and to all
indebtedness of the Company's subsidiaries. Covenants with respect to the Senior
Notes contain certain limitations on the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, create
restrictions on the ability of a subsidiary to pay dividends or make certain
payments, sell or issue preferred stock of subsidiaries to third parties, merge
or consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company. The
Company was in compliance with all of its covenants as of March 31, 1998.
In September 1997, the Company formed another wholly-owned subsidiary,
Atlas Freighter Leasing II, Inc. ("AFL II") for the purpose of entering into the
$185 million AFL II Term Loan Facility (the "AFL II Term Loan Facility") to
refinance four of the aircraft previously financed under the Aircraft Credit
Facility, plus nine spare engines, in order to provide the Company with greater
financial flexibility in anticipation of the financing requirements for the
future acquisition of additional freighter aircraft. Interest is based on the
Eurodollar rate, plus 2.3%, less a pricing reduction, if any, in effect from
time to time, and is payable quarterly. The interest rate on borrowings
outstanding under the AFL II Term Loan Facility was 7.9% at March 31, 1998.
Quarterly scheduled principal payments of $2.5 million commenced in February
1998 and increase to $5.7 million in August 1998 with a final payment of $50.0
million in May 2004. The AFL II Term Loan Facility is secured by a first
priority interest in the four subject aircraft, plus nine spare engines, and is
restrictive with respect to limitations on indebtedness, liens, investments,
contingent obligations, restricted junior payments, capital expenditures,
amendments of material agreements, leases, transactions with shareholders and
affiliates and the conduct of business. AFL II was in compliance with all of its
covenants as of March 31, 1998.
In October 1997, Atlas Flightlease, Inc. ("AFI"), a wholly owned subsidiary
of the Company, secured a 2-year LIBOR based financing with Bankers Trust
Company for approximately 80% of the purchase price of a 1988 Canadair
Challenger passenger aircraft (the "Challenger"). AFI purchased the Challenger
from MAC Flightlease, Inc. ("MAC Flightlease"), an entity wholly-owned by the
wife of the Company's Chairman, President and CEO (see Note 7 to the
Consolidated Financial Statements), in the third quarter of 1997. In December
1997, AFI refinanced the Challenger for approximately 100% of its purchase price
with Nationsbanc under a 5-year loan which was guaranteed by the Company.
Interest is based on the Eurodollar rate, plus 2.4%, and is payable quarterly
with concurrent scheduled payments of principal. The interest rate on borrowings
outstanding under the Nationsbanc debt was 8.3% at March 31, 1998. The loan is
secured by a first priority security interest in the Challenger. Covenants with
respect to this financing require specific levels of insurance, as well as
contain requirements regarding use, maintenance, configuration, liens and
disposition of the Challenger, among other things. AFI was in compliance with
all of its covenants as of March 31, 1998.
In January and February 1998, pursuant to an early lease termination
agreement negotiated in November 1997, the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from Marine Midland
Bank in December 1996 and the aircraft acquired from Citicorp Investor Lease,
Inc. in May 1997. The first aircraft was re-delivered to the Company at the end
of April 1998 and the second aircraft is expected to be re-delivered to the
Company early in the third quarter of 1998. The financing for the modification
to cargo configuration is secured under the Aircraft Credit Facility, for which
the Company borrowed a total of $3.3 million during the first quarter of 1998
with respect to these aircraft. At the end of April 1998, the Company borrowed
an additional $13.8 million associated with the final payment for the
modification of the first aircraft upon its re-delivery to the Company.
In February 1998, the Company completed an offering of $538.9 million of
Pass Through Certificates (i.e. the Old Certificates which are subject to the
Exchange Offer), also known as enhanced equipment trust certificates. The Old
Certificates are not direct obligations of, or guaranteed by, the Company and
therefore are not included in the Company's consolidated financial statements.
The cash proceeds from the transaction
27
<PAGE> 35
were deposited with an escrow agent and will be used to finance (through either
leveraged leases or secured debt financings) the debt portion of the acquisition
cost of five of the 10 new 747-400 freighter aircraft from Boeing scheduled to
be delivered to the Company during the period July 1998 through December 1998.
In connection therewith, the Company intends to seek certain owner participants
who will commit lease equity financing to be used in leveraged leases of such
aircraft. In November and December 1997, the Company entered into three Treasury
Note hedges, approximating $300 million of principal, for the purpose of
minimizing the risk associated with the fluctuations in interest rates, which
are the basis for the pricing of the Old Certificates which were priced in
January 1998. The effect of the hedge resulted in a deferred cost of $6.3
million, which will be amortized over the expected twenty-year life associated
with this financing. There can be no assurance that the Company will be able to
obtain sufficient financing to fund the purchase of the remaining five 747-400
freighter aircraft, or if such financing is available, that it will be available
on a commercially reasonable basis. If it is unable to do so, the Company could
be required to modify its expansion plans or to incur higher than anticipated
financing costs, which could have a material adverse effect on the Company.
In April 1998, the Company consummated the offering of $175 million of
unsecured 9 1/4% Senior Notes due 2008 (the "9 1/4% Senior Notes"). The proceeds
of the offering will be used to repay $80 million of the Aircraft Credit
Facility and for general corporate purposes, which may include the partial
funding of the redemption of the Company's outstanding 12 1/4% Pass Through
Certificates due 2002, which are subject to redemption at the option of the
Company on or after December 1, 1998. Interest on the 9 1/4% Senior Notes is
payable semi-annually on April 15 and October 15 of each year, commencing
October 15, 1998. The 9 1/4% Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after April 15, 2003, initially
at 104.625% of their principal amount, plus accrued interest, declining ratably
to 100% of their principal amount, plus accrued interest, on or after April 15,
2006. In addition, at any time prior to April 15, 2001, the Company may redeem
up to 35% of the aggregate principal amount of the 9 1/4% Senior Notes
originally issued with the net cash proceeds of one or more public equity
offerings at 109.25% of their principal amount, plus accrued interest; provided
that after any such redemption at least $113.75 million aggregate principal
amount of 9 1/4% Senior Notes remains outstanding. The 9 1/4% Senior Notes will
be unsubordinated indebtedness of the Company, ranking pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
The 9 1/4% Senior Notes are effectively subordinated, however, to all secured
indebtedness of the Company and all existing and future liabilities of the
Company's subsidiaries. Covenants with respect to the 9 1/4% Senior Notes
contain certain limitations on the ability of the Company and its subsidiaries
to, among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur liens, create restrictions on the
ability of a subsidiary to pay dividends or make certain payments, sell or issue
preferred stock of subsidiaries to third parties, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company.
In May 1998, the Company agreed to purchase a Boeing Business Jet ("BBJ")
from Boeing for approximately $30 million. As of May 31, 1998, the Company had
paid approximately $9.0 million in Pre-Delivery Deposits and there was
approximately $7.0 million of Deferred Aircraft Obligations outstanding. This
aircraft will be used to transport Company executives on business trips
throughout the world. The Company intends to sell the Challenger business jet
(currently owned by a subsidiary of the Company and recently appraised at
approximately $15 million), upon delivery of the BBJ in January 1999 and the
Company's Chief Executive Officer has agreed to purchase a 50% interest and to
share operating costs of the BBJ. Therefore, after sale of the Challenger and
with a 50% interest in the BBJ, the Company expects its financial exposure to
this new aircraft to be equivalent to its existing Challenger aircraft.
The Company recently entered into a sublease and ramp use agreement with
American Airlines, Inc. for 145,000 square feet of hangar, office and parking
space at Miami International Airport in support of the Company's increased
operations. The lease is for a period in excess of four years and commences July
1, 1998, at a monthly rate of approximately $105,000, subject to an annual
escalation factor. Additionally, effective August 1, 1998 the Company will lease
an additional 5,000 square feet at its existing facility located at John F.
28
<PAGE> 36
Kennedy International Airport ("JFK") and the monthly rate will increase from
approximately $55,000 to approximately $70,000.
Due to the contractual nature of the Company's business, the Company's
management does not consider its operations to be highly working
capital-intensive in nature. Because most of the non-ACMI costs normally
associated with operations are borne by and directly paid for by the Company's
customers, the Company does not incur significant costs in advance of the
receipt of corresponding revenues. Moreover, ACMI costs, which are the
responsibility of the Company, are generally incurred on a regular, periodic
basis ranging from flight hours to months. These costs are largely matched by
revenue receipts, as the Company's contracts require regular payments from its
customers, based upon current flight activity, generally every two to four
weeks. As a result, the Company has not in the past had a requirement for a
working capital facility. The Company is exploring the possibility of entering
into an unsecured line of credit for general working capital purposes.
Under the FAA's Directives issued under its Aging Aircraft program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the problem of corrosion and
structural fatigue. In November 1994, Boeing issued Nacelle Strut Modification
Service Bulletins which have been converted into Directives by the FAA. Eleven
of the Company's Boeing 747-200 aircraft will have to be brought into compliance
with such Directives within the next three years at an estimated cost of
approximately $5.5 million. As part of the FAA's overall aging aircraft program,
it has issued Directives requiring certain additional aircraft modifications to
be accomplished prior to the aircraft reaching 20,000 cycles. The average cycle
time for the 18 aircraft in service is approximately 12,000 cycles and the
average cycles operated per year is approximately 800 cycles. The Company
estimates that the modification costs per aircraft will range between $2 million
and $3 million. Between now and the year 2000, only one aircraft is expected to
reach the 20,000 cycle limit and nine additional aircraft will require
modification prior to 2009. The remaining eight aircraft in service have already
undergone such modifications. The one aircraft undergoing modification to
freighter configuration will receive the Nacelle Strut Modification as part of
the freighter conversion. Other Directives have been issued that require
inspections and minor modifications to Boeing 747-200 aircraft. It is possible
that additional Directives applicable to the types of aircraft or engines
included in the Company's fleet could be issued in the future, the cost of which
could be substantial. Upon acquisition of an aircraft, the Company determines
whether or not the aircraft is in compliance with Airworthiness Directives and
tries to anticipate all future compliance requirements. The necessary work to
bring the aircraft into compliance is then scheduled at the time of conversion
of the aircraft to freighter configuration, in order to minimize unscheduled
maintenance events.
The Company has initiated a review of its internal information systems for
any Year 2000 transition problems through a company-wide effort, assisted by
Year 2000 experienced consultants, to address internal Year 2000 system issues,
and jointly with industry trade groups, to address issues related to key
business partners which are common to other air carriers. The Company has not
completed the development of the remediation approach for all affected areas. As
a result, the Company cannot estimate what the total cost will be to implement
remediation efforts for all critical operational systems. However, due to the
Company's relatively young systems, the Company's advanced client server and
data base architecture, and the Company's partial reliance on vendor
representations regarding Year 2000 compliant third-party systems, the Company
is confident that such remediation efforts will not be material. The Company
expects to complete the assessment and development stages of this plan by
mid-1998, at which time it expects to be able to make a reasonable cost
estimate. Implementation of all remediation efforts is scheduled to be completed
in early 1999.
The Company has started an ongoing program to review the status of key
supplier Year 2000 compliance efforts. While the Company believes it is taking
all appropriate steps to assure Year 2000 compliance, it is dependent on key
business partner compliance to some extent. The Year 2000 problem is pervasive
and complex, as virtually every computer operation will be affected in some way.
Consequently, no assurance can be given that Year 2000 compliance can be
achieved without costs that might affect future financial results or cause
reported financial information not to be necessarily indicative of future
operating results or future financial condition.
29
<PAGE> 37
The Company is finalizing negotiations for the refinancing of one aircraft
in the amount of approximately $45 million, currently financed under the
Aircraft Credit Facility. There is no assurance that this refinancing will be
completed.
From time to time the Company engages in discussions with third parties
regarding possible acquisitions of aircraft that could expand the Company's
operations. The Company is in discussions with third parties for the possible
acquisition of additional aircraft for delivery in 1998 and beyond.
The Company believes that cash on hand, the cash flow generated from its
operations and the proceeds from the May 1996 public offering of its Common
Stock, the August 1997 placement of the Senior Notes and the April 1998
placement of the Old Notes, coupled with availability under the Aircraft Credit
Facility and the proceeds of the EETCs, will be sufficient to meet its normal
ongoing liquidity needs, at least through 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share,"
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The purpose of SFAS No. 128 is to simplify the
computation of earnings per share ("EPS") and to make the U.S. standard for
computing EPS more compatible with the EPS standards of other countries and with
that of the International Accounting Standards Committee. SFAS No. 128 requires
the dual presentation of basic earnings per share ("basic EPS"), which replaces
primary earnings per share, and diluted earnings per share ("diluted EPS").
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Diluted
EPS is computed similar to basic EPS except that the weighted-average number of
common shares outstanding during the period is adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity of
an enterprise that result from transactions and other economic events of the
period other than transactions with owners. Comprehensive income includes net
income plus other comprehensive income (other revenues, expenses, gains, and
losses that under generally accepted accounting principles bypass net income).
The Company does not expect other comprehensive income to be material. The
effective date for the application of SFAS No. 130 for both interim and annual
periods is for fiscal years beginning after December 15, 1997 with earlier
application permitted.
FORWARD-LOOKING STATEMENTS
To the extent that any of the statements contained herein relating to the
Company's expectations, assumptions and other Company matters are
forward-looking, they are made in reliance upon the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on current expectations that involve a number of uncertainties and risks that
could cause actual results to differ materially from those projected in the
forward-looking statements, including, but not limited to, risks associated
with: worldwide business and economic conditions; product demand and the rate of
growth in the air cargo industry; the impact of competitors and competitive
aircraft and aircraft financing availability; the ability to attract and retain
new and existing customers; normalized aircraft operating costs and reliability;
management of growth; the continued productivity of its workforce; dependence on
key personnel; and regulatory matters.
30
<PAGE> 38
BUSINESS
THE COMPANY
Atlas is the world's largest air cargo outsourcer, with an all Boeing fleet
of 747 freighter aircraft. The Company provides reliable airport-to-airport
cargo transportation services throughout the world to major international air
carriers generally under three- to five-year fixed-rate U.S. dollar denominated
contracts which typically require that the Company supply aircraft, crew,
maintenance and insurance. The Company's customers currently include China
Airlines, KLM, Lufthansa, British Airways World Cargo ("British Airways"),
Scandinavian Airlines System ("SAS"), The International Airline of the United
Arab Emirates ("Emirates"), Thai Airways, Fast Air, Lineas Aereas Suramericanas,
S.A. ("LAS") and Linee Aeree Italiane S.p.A. ("Alitalia"). The Company is able
to provide efficient, cost effective service to its customers primarily as a
result of its productive work force, the outsourcing of a significant part of
its regular maintenance work on a fixed-cost basis and the advantageous cost
economies realized in the operation of its fleet, comprised solely of Boeing 747
aircraft which are configured for service in long-haul cargo operations. For the
year ended December 31, 1997, the Company had total operating revenues and
EBITDA of approximately $401.0 million and $127.6 million, respectively.
The Company's fleet currently consists of 18 Boeing 747-200 freighter
aircraft in service and one 747-200 passenger aircraft undergoing conversion to
freighter configuration. The 747-200 passenger aircraft undergoing conversion to
freighter configuration is expected to be placed in service early in the third
quarter of 1998. On June 9, 1997, the Company entered into an agreement with
Boeing to purchase 10 new 747-400 freighter aircraft to be powered by engines
acquired from GE, with options to purchase up to 10 additional 747-400 aircraft.
The 747-400 aircraft has significantly longer range, greater payload capability,
lower maintenance costs and increased fuel efficiency compared to the Boeing
747-200 freighter aircraft. The Company expects to place the 747-400 aircraft in
service with both existing and prospective customers, who the Company believes
should be willing to pay higher ACMI Contract rates to achieve operating
benefits derived from the unique performance capabilities of the 747-400
aircraft.
The Company attributes its leading market position and continued
opportunities for growth to the following competitive strengths:
- Long-Term Customer Contracts Which Provide Revenue Stability. The
Company's ACMI Contracts with its customers, which accounted for 96% of
the Company's total operating revenues in 1997, generally provide for its
customers to guarantee monthly minimum aircraft utilization levels at
fixed hourly rates and are typically in force for periods of three to
five years, subject in certain limited cases to early termination
provisions. These ACMI Contracts typically require that the Company
supply aircraft, crew, maintenance and insurance and that its customers
bear all other operating expenses, including fuel and fuel servicing;
marketing costs associated with obtaining cargo; airport cargo handling;
landing fees; ground handling, aircraft push-back and de-icing services;
and specific cargo and mail insurance. The Company's customers are also
responsible under these contracts for utilizing the cargo capacity of
each of the contracted aircraft. The ACMI Contracts, therefore, minimize
for the Company the load factor, yield risk and fuel cost risk
traditionally associated with the air cargo business and provide the
Company with a minimum annual revenue base and more predictable profit
margins. The Company also periodically engages in ad hoc charter or
scheduled air service depending on availability of aircraft for these
uses. In addition, the Company differentiates itself from other air cargo
companies by not directly or indirectly competing with its customers by
offering its services to freight forwarders or shippers who do business
with the Company's customers.
- Low Cost Structure. The Company has established itself as a low cost,
efficient and reliable provider of air cargo transportation primarily due
to the outsourcing of many of its own required services, the advantageous
economies of scale realized from the operation of a standardized fleet of
long-haul Boeing 747-200 aircraft, and its productive work force. The
uniformity of the 747-200 aircraft fleet allows for standardization in
maintenance and crew training, resulting in substantial cost savings in
these areas. In particular, Atlas has advantageous, long-term contracts
on a fixed-cost per flight hour basis with leading maintenance providers
such as GE and KLM for a significant portion of its on-going
31
<PAGE> 39
aircraft and engine maintenance requirements. As a result of these
efficiencies, the Company's high service standards and increased airline
industry pressure to reduce costs, the Company's airline customers have
determined that outsourcing portions of their air cargo business to the
Company can be significantly less costly and offer greater operational
flexibility than expanding their cargo operations by purchasing
additional aircraft and adding other resources such as personnel and
systems. The new 747-400 aircraft are expected to have even greater
operational capabilities than the Boeing 747-200 aircraft and will allow
the Company to continue to maintain its low cost structure. The new
aircraft's higher level of operational reliability and warrantied
condition will result in lower maintenance costs during the early years
of operation, typically for at least five years. In addition, the
acquisition of the 10 747-400 freighter aircraft will make Atlas the
largest operator of this aircraft type to date and will enable the
Company to achieve economies of scale from the standardization in
maintenance and crew training.
- Expanding Business Base. The growth in demand for air cargo services,
combined with the lower rate of growth in passenger-airline cargo
capacity and the continuing pressure on the airline industry to reduce
operating costs, is expected to provide the Company with the opportunity
to expand its air cargo outsourcing services. The primary business focus
of most of the Company's customers is on the transportation of
passengers, not air cargo. Nevertheless, most passenger airlines have air
cargo customers that require quick and dependable air cargo service
between hubs serviced by these carriers. To the extent that airlines have
cargo capacity on their scheduled flights, which are generally scheduled
for the convenience of passengers rather than for the needs of air cargo
customers, air cargo service can be provided by them to meet such demand.
However, there is a growing trend in the passenger-airline business
toward replacing existing widebody passenger aircraft and combination
passenger/cargo aircraft with smaller, more efficient (for passenger
operations) twin-engine aircraft which have limited cargo space. The
Company's customers have therefore found that outsourcing to meet their
additional cargo transportation needs rather than allocating significant
resources and expanding their fleet of freighter aircraft to effectively
service their air cargo customers provides a cost-effective alternative
for them to maintain and expand that portion of their business.
- Increasing Cargo Market Share. The Company has successfully increased its
customer base from a single customer in 1992 to nine customers in 1998.
In addition, the Company has operated under short-term, seasonal ACMI
Contracts with FedEx, Kitty Hawk Air Cargo, Inc. ("Kitty Hawk") and
United Parcel Service ("UPS") and anticipates providing other short-term,
seasonal service. This increased market share is a result of the
Company's ability to provide a cost-effective service which has gained
acceptance within the industry due to the Company's successful market
development efforts. The addition of the 747-400 aircraft will provide
the Company with the opportunity to increase its market share to new and
existing customers who have a need for the greater payload, extended
range and operational reliability of the 747-400, but for whom the
purchase of a limited number of 747-400 freighter aircraft would not be
cost-effective. In addition, the 747-400 aircraft will give the Company a
competitive advantage with new customers who choose to utilize only new
or relatively new aircraft or are restricted by local regulations
limiting the operation of older aircraft.
- Dramatic Industry Growth. While the air cargo industry is highly
competitive, the Company believes that current industry trends are
favorable to the continued growth of its business. According to reports
prepared by Boeing, the world air cargo market is expected to more than
triple over the next 20 years. Such reports indicate that the world air
cargo market has grown at an average rate of 7.2% per year from 1986 to
1997. The average annual percentage growth through 2017 is expected to
average 6.5%, with international air cargo market growth outpacing U.S.
domestic growth. The Company believes this growth has been fueled, in
part, by economic growth, the relaxation of international trade barriers
(as indicated by the passage of the NAFTA and GATT treaties), reductions
in the price of shipping by air, manufacturers' search for low-cost labor
in developing countries, and the increasingly time-sensitive nature of
product-delivery schedules due to shorter product life-cycles and
"just-in-time" inventory management. In addition to growth in the global
air cargo market, the Company expects to benefit from growth in the
export-driven economies of the countries in the Pacific Rim, where the
32
<PAGE> 40
Company has focused a significant amount of its flight operations.
According to Boeing reports, eastbound and westbound Trans-Pacific cargo
volumes grew at an average annual rate of 6.9% and 14.3%, respectively,
between 1986 and 1996, and are projected to grow at an average annual
rate of 8.0% and 8.1%, respectively, between 1996 and 2016. Similarly,
northbound and southbound air cargo volumes between North America and
South America increased at an average annual rate of 9.4% and 8.8%,
respectively, between 1986 and 1996, and are projected to grow at an
average annual rate of 6.5% and 6.7%, respectively, from 1996 to 2016.
Additionally, eastbound and westbound North Atlantic air cargo volumes
increased at an average annual rate of 8.4% and 5.9%, respectively,
between 1986 and 1996 and are projected to grow at average annual rates
of 6.7% and 7.2%, respectively, from 1996 to 2016. The Company believes
that, as a U.S. certificated "flag" carrier, it is well positioned to
benefit from the progressive expansion of international trade and the
consequential growth in global air cargo markets, particularly in Asia,
South America and Europe, where the Company has concentrated a
significant portion of its resources. The Company has not experienced any
adverse impact on its business as a result of the recent turmoil in the
Asian financial markets, although there can be no assurances that there
will not be any future impact.
747-400 AIRCRAFT ACQUISITION
In June 1997, the Company entered into the Boeing Purchase Agreement to
purchase 10 new 747-400 freighter aircraft to be powered by GE engines. The
747-400 freighter aircraft are currently scheduled to be delivered as follows:
five in 1998, four in 1999 and one in 2000. Due to production problems at
Boeing, the Company believes that each of the 1998 delivery positions of the
747-400 aircraft may be delayed up to 60 days. While Boeing will compensate the
Company for defined delays in delivery of the 747-400 aircraft, any such delays
may adversely impact the Company's ability to initiate service with prospective
customers in a timely fashion. The Boeing Purchase Agreement also provides the
Company with options to purchase up to 10 additional 747-400 freighter aircraft
for delivery from 1999 through 2002. As a result of the Company being the
largest purchaser of 747-400 freighter aircraft to date, it was able to
negotiate from Boeing and GE a significant discount off the aggregate list price
of $1.7 billion for the 10 747-400 freighter aircraft, four installed engines
per aircraft and five spare engines. In addition, the Company also obtained
certain ancillary products and services at advantageous prices.
ACMI CONTRACTS
The Company's ACMI Contracts with its customers, which accounted for 96% of
the Company's operating revenues in 1997, typically provide for its customers to
guarantee monthly minimum aircraft utilization levels at fixed hourly rates and
are typically in force for periods of three to five years, subject in certain
limited cases to early termination provisions. These contracts typically require
that the Company supply aircraft, crew, maintenance and insurance and that its
customers bear all other operating expenses, including fuel and fuel servicing;
marketing costs associated with obtaining cargo; airport cargo handling; landing
fees; ground handling, aircraft push-back and de-icing services; and specific
cargo and mail insurance. These contracts, therefore, minimize for the Company
the load factor and yield risk traditionally associated with the air cargo
business. The ACMI Contracts typically require minimum air freight capacity to
be provided to its customers by the Company. All of the Company's revenues, and
virtually all of its costs, are in U.S. dollars, thus avoiding currency risks
normally associated with doing business primarily overseas.
The Company is currently operating under 17 ACMI Contracts: six with China
Airlines, two each with Fast Air and LAS and one each with Alitalia, British
Airways, Emirates, KLM, Lufthansa, SAS and Thai Airways. In most cases, one
aircraft is dedicated under each contract. China Airlines, Fast Air and
Lufthansa accounted for approximately 34%, 11% and 8%, of the Company's total
revenues, respectively, for the year ended December 31, 1997. In addition, the
Company has also operated short-term, seasonal ACMI Contracts with FedEx, Kitty
Hawk and UPS and anticipates doing so in the future from time to time.
Certain of the Company's ACMI Contracts allow the Company's customers to
cancel up to a maximum of approximately 5% of the guaranteed hours of aircraft
utilization over the course of a year. The Company's
33
<PAGE> 41
customers most often exercise such cancellation options early in the first
quarter or late in the fourth quarter of the year, when the demand for air cargo
capacity has been historically lower. The Company has found that such
cancellations provide a timely opportunity for the scheduling of maintenance on
its aircraft, to the extent possible. See "-- Maintenance." The ACMI Contracts
are typically in force for periods of three to five years, subject in certain
limited cases to early termination provisions. The Company believes that its
relationships with its customers are mutually satisfactory, as evidenced by the
fact that within the last three years, it has renewed twelve ACMI Contracts and
added nine ACMI Contracts with its existing customers, although there can be no
assurance that future such contracts will not be canceled in accordance with
their terms.
All of the ACMI Contracts provide that each of the Company's aircraft be
deemed to be at all times under the exclusive operating control, possession and
direction of the Company and that, in order to service the routes designated by
the contract, the Company obtain the authority from the governments having
jurisdiction over the route. See "-- Governmental Regulation." Additionally, if
the Company is required to use the customer's "call sign" in identifying itself
throughout its route, the customer must also have obtained underlying authority
from the governments having jurisdiction over the route. Therefore, the
Company's route structure is limited to areas in which it can gain access from
the appropriate governments.
OTHER FLIGHT OPERATIONS
To the extent the Company has available excess aircraft capacity at any
time, it will seek to obtain ad hoc charter service contracts, which the Company
believes are generally readily available. In addition, in the past the Company
has provided service to FedEx, Kitty Hawk and UPS pursuant to short-term,
seasonal ACMI Contracts during periods of excess aircraft capacity.
AIRCRAFT
The Company's utilization of Boeing 747 aircraft provides significant
marketing advantages because these aircraft, relative to most other cargo
aircraft that are commercially available, have higher maximum payload and cubic
capacities, and longer range. The uniformity of the Company's current Boeing
747-200 aircraft fleet allows for standardization in maintenance and crew
training, resulting in substantial cost savings in these areas. The new 747-400
aircraft are expected to have greater operational capabilities than the 747-200
aircraft and will allow the Company to continue to maintain its low cost
structure despite their higher acquisition cost. The new aircraft's limited
maintenance requirements will provide a higher level of operational reliability
with lower maintenance costs during the early years of operation, typically for
at least five years. In addition, the acquisition of the 10 747-400 freighter
aircraft will make Atlas the largest operator of this aircraft type to date and
will enable the Company to capitalize on economies of scale from the
standardization in maintenance and crew training.
In January 1998, the Company's leases for five Boeing 747-200 from FedEx
expired and the aircraft were returned. The Company expects to make up this loss
of capacity through the utilization of one 747-200 aircraft re-delivered to the
Company upon its conversion to freighter configuration at the end of April 1998,
one 747-200 aircraft in conversion to be re-delivered to the Company early in
the third quarter of 1998, and with the delivery of five 747-400 aircraft during
the second half of 1998.
34
<PAGE> 42
The following table describes, as of May 31, 1998, the Company's existing
fleet, aircraft currently undergoing passenger to freighter modification and the
747-400 aircraft subject to the Boeing Purchase Agreement.
FLEET PROFILE
<TABLE>
<CAPTION>
NUMBER AIRCRAFT YEAR OF
OF AIRCRAFT TYPE OWNED/LEASED MANUFACTURE
----------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Existing fleet:............................. 17 747-200 Owned(1) 1974-1986
1 747-200 Leased(2) 1976
Modification aircraft:...................... 1 747-200 Owned(3) 1979
747-400 aircraft on order:.................. 10 747-400 (4) 1998-2000
</TABLE>
- ---------------
(1) Two aircraft are powered by Pratt & Whitney ("P&W") engines and 15 are
powered by GE engines.
(2) The aircraft is leased from a third party under a lease expiring in March
2010 and is powered by GE engines.
(3) This passenger aircraft is powered by GE engines and is currently undergoing
conversion to freighter configuration by Boeing. The aircraft is expected to
be placed in service early in the third quarter of 1998.
(4) The Company has agreed to purchase 10 new Boeing 747-400 freighter aircraft,
with options to purchase an additional 10 aircraft. The first 10 aircraft
are scheduled to be delivered as follows: five in 1998, four in 1999 and one
in 2000. See "-- 747-400 Aircraft Acquisition." These aircraft will be
powered by GE engines. A portion of the financing for the first five
aircraft has been secured through the EETCs. In addition, the Company may
arrange for tax-oriented long-term leases on some or all of these aircraft.
The Company has been successful in obtaining new customers, or additional
arrangements with existing customers coincident with the delivery of aircraft
into the fleet, or soon thereafter. However, from time to time, the Company
accepts delivery of aircraft that have not been committed to a particular ACMI
Contract. These aircraft have been utilized temporarily as replacement aircraft
during scheduled and unscheduled maintenance of other aircraft, as well as for
ad hoc charter arrangements. Although the Company intends to have new ACMI
Contracts in place upon delivery of aircraft, including the 747-400 aircraft,
there can be no assurance that such arrangements will have been made.
From time to time, the Company engages in discussions with third parties
regarding possible acquisitions of aircraft that could expand the Company's
operations. The Company is in discussions with third parties for the possible
acquisition of additional aircraft for delivery in 1998 and beyond.
SALES AND MARKETING
From its offices in Colorado, New York and Miami, the Company services its
air cargo customers and solicits ACMI Contract business. The Company's efforts
to obtain new ACMI Contract business focus principally on international airlines
with established air cargo customers, high operating costs and hub and spoke
systems which gather cargo at a particular location and which have the need for
long-distance capacity to move such cargo to another distribution point. On
occasion, the Company may utilize independent cargo brokers to obtain new ACMI
Contracts. The Company markets its services by guaranteeing its customers a
reliable, low-cost dedicated aircraft with the capacity to ensure the efficient
linkage of such customers' distribution points without the customers having to
purchase and maintain additional aircraft, schedule additional flights and add
other resources. The Company expects to place the 747-400 aircraft in service
with both existing and prospective customers, which the Company believes should
be willing to pay higher ACMI Contract rates to achieve operating benefits
derived from the unique performance capabilities of the 747-400 aircraft such as
its longer range, greater payload and increased fuel efficiency.
35
<PAGE> 43
MAINTENANCE
Due to the average age of the Company's Boeing 747-200 fleet, it is likely
that the aircraft will require greater maintenance than newer aircraft such as
the 747-400 aircraft. See "-- Aircraft." Aircraft maintenance includes, among
other things, routine daily maintenance, maintenance every six weeks (an "A
Check"), significant maintenance work every 18 months (a "C Check") and major
maintenance events every five years or 25,000 flight hours, whichever comes
later if the aircraft is over the age of 18 years, or every six years or 25,000
flight hours, whichever comes later for aircraft under the age of 18 years, with
a maximum interval in either case of nine years (a "D Check"). The Company
attempts to schedule major maintenance on its aircraft in the first quarter of
the calendar year, when the demand for air cargo capacity has historically been
lower, taking advantage of cancellations of flights by the Company's customers
that generally occur most frequently during these periods.
Pursuant to a maintenance contract with KLM (the "Maintenance Contract") in
effect until January 2005, a significant part of the regular maintenance
(principally C Checks and engine overhauls, excluding D Checks) of certain of
the Company's aircraft and their GE engines is undertaken by KLM, primarily at
its maintenance base located at Schiphol International Airport in Amsterdam, The
Netherlands. KLM supplies engineering and diagnostic testing for each aircraft
and its components in compliance with the FAA and other applicable regulations.
The Maintenance Contract provides that KLM, subject to certain terms and
conditions, will perform repairs and maintenance of the Company's aircraft on
the same basis and order of priority as repairs to its own fleet. Such service
is provided to the Company at a cost, for which a large part is a fixed rate per
flight hour, subject to a 3.5% annual escalation factor for the first five
years. P&W engines are serviced elsewhere, each at a cost based upon the actual
time and material necessary for such service. Under the terms of the Maintenance
Contract, in the event that the Company wishes to maintain more than 12 of its
aircraft under such contract, the terms of the contract are subject to
adjustment by KLM. Twelve of the Company's aircraft are currently subject to the
Maintenance Contract.
In June 1996, the Company entered into a ten year engine maintenance
agreement with GE for the engine maintenance of up to 15 aircraft powered by
CF6-50E2 engines at a fixed rate per flight hour, subject to an annual formula
increase. The agreement commenced in the third quarter of 1996 with the
acceptance of engines associated with aircraft acquired in the third and fourth
quarter of 1996. Effective in the year 2000, the Company has an option to add
not less than 40 engines to the program.
During the initial operating period, the 747-400 aircraft's airframe will
be covered under manufacturer's warranties. As a result, the Company does not
expect to incur significant maintenance expense in connection with the 747-400
airframe during the warranty period. In addition, the 747-400 airframe limited
maintenance requirements will provide a higher operational reliability with
lower maintenance costs during the early years of operation, typically for at
least five years. The Company will incur expenses associated with routine daily
maintenance of both the airframe and the engines. In connection with the GE
engine purchase agreement, the Company has also entered into an agreement with
GE to provide ongoing maintenance on the 747-400 aircraft engines at a fixed
rate per flight hour, subject to an annual formula increase.
The Company believes that fixed-cost contracts provide the most efficient
means of ensuring the continued service of its aircraft fleet and the most
reliable way by which to predict its maintenance costs; however, the Company
believes it is more cost effective for routine line maintenance and A Checks to
be performed on a time and material basis due to the frequency of such
maintenance. The Company also has a contract with B.F. Goodrich Co. to perform
maintenance on its brakes and for the replacement of tires.
The Company has an agreement, subject to acceptable rates, terms and
conditions, with Alitalia to utilize, or find other parties to utilize, an
amount of Alitalia's maintenance services with an aggregate cost of $25 million
over a five-year period ending in June 2000.
GOVERNMENTAL REGULATION
Under the Aviation Act, the DOT and the FAA exercise regulatory authority
over the Company. The DOT's jurisdiction extends primarily to economic issues
related to the air transportation industry, including,
36
<PAGE> 44
among other things, air carrier certification and fitness, insurance, certain
leasing arrangements, the authorization of proposed scheduled and charter
operations, tariffs, consumer protection, unfair methods of competition, unjust
discrimination and deceptive practices. The FAA's regulatory authority relates
primarily to air safety, including aircraft certification and operations, crew
licensing/training and maintenance standards.
To provide air cargo transportation services under long-term contracts with
major international airlines, the Company relies primarily on its worldwide
charter authorities. The Company requires separate DOT and FAA approval for each
long-term ACMI Contract. In addition, FAA approval is required for each of the
Company's short-term, seasonal ACMI Contracts.
In order to engage in its air transportation business, the Company is
required to maintain a Certificate of Public Convenience and Necessity (a
"CPCN") from the DOT. Prior to issuing a CPCN, the DOT examines a company's
managerial competence, financial resources and plans and compliance disposition
in order to determine whether a carrier is fit, willing and able to engage in
the transportation services it has proposed to undertake, and whether a carrier
conforms with the Aviation Act requirement that the transportation services
proposed are consistent with the public convenience and necessity. Among other
things, a company holding a CPCN must qualify as a United States citizen, which
requires that it be organized under the laws of the United States or a State,
Territory or Possession thereof; that its Chief Executive Officer and at least
two-thirds of its Board of Directors and other managing officers be United
States citizens; that not more than 25% of its voting stock be owned or
controlled, directly or indirectly, by foreign nationals; and that it not
otherwise be subject to foreign control. The DOT may impose conditions or
restrictions on such a CPCN.
The DOT has issued the Company a CPCN to engage in interstate and overseas
air transportation of property and mail, and a CPCN to engage in foreign air
transportation of property and mail between the U.S. and Taiwan. Both CPCNs are
subject to standard terms, conditions and limitations. By virtue of holding
those CPCNs, the Company possesses worldwide charter authorities. It also holds
limited-term DOT exemption authority to engage in scheduled air transportation
of property and mail between certain points in the U.S. and Hong Kong.
International air services are generally governed by a network of bilateral
civil air transport agreements in which rights are exchanged between
governments, which then select and designate air carriers authorized to exercise
such rights. Insofar as scheduled service is involved, bilateral agreements may
prohibit services to certain countries. For countries in which service is
authorized, these bilateral agreements specify the city-pair markets that may be
served; may restrict the number of carriers that may be designated; may provide
for prior approval by one or both governments of the prices the carriers may
charge; may limit frequencies or the amount of capacity to be offered in the
market; and, in various other ways, may impose limitations on the operations of
air carriers. To obtain authority under a bilateral agreement, it is often
necessary to compete against other carriers in a DOT proceeding. At the
conclusion of the proceeding, the DOT awards all route authorizations. The
provisions of bilateral agreements pertaining to charter services vary
considerably from country to country. Some agreements limit the number of
charter flights that carriers of each country may operate. The Company is
subject to various international bilateral air services agreements between the
U.S. and the countries to which the Company provides service. The Company also
operates on behalf of foreign flag air carriers between various foreign points
without serving the U.S. These services are subject to the bilateral agreements
of the respective governments. Furthermore, these services require FAA approval
but not DOT approval. The Company must obtain permission from the applicable
foreign governments to provide service to foreign points.
The Company has obtained an operating certificate issued by the FAA
pursuant to Part 121 of the Federal Aviation Regulations. The FAA has
jurisdiction over the regulation of flight operations generally, including the
licensing of pilots and maintenance personnel; the establishment of minimum
standards for training and retraining; maintenance of technical standards for
flight, communications and ground equipment; security programs; and other
matters affecting air safety. In addition, the FAA mandates certain
recordkeeping procedures. The Company must obtain and maintain FAA certificates
of airworthiness for all of its aircraft. The Company's aircraft, flight
personnel and flight and emergency procedures are subject to periodic
37
<PAGE> 45
inspections and tests by the FAA. All air carriers operating to, from or within
the United States are subject to the strict scrutiny of the FAA to ensure proper
compliance with FAA regulations.
The DOT and the FAA have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended and recodified, and under the Airport Noise
and Capacity Act of 1990, to monitor and regulate aircraft engine noise. All of
the Company's existing fleet of aircraft comply with Stage III Standards -- the
highest standard issued by the FAA.
Under the FAA's Directives issued under its Aging Aircraft program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the problem of corrosion and
structural fatigue. In November 1994, Boeing issued Nacelle Strut Modification
Service Bulletins which have been converted into Directives by the FAA. Eleven
of the Company's Boeing 747-200 aircraft will have to be brought into compliance
with such Directives within the next three years at an estimated cost of
approximately $5.5 million. As part of the FAA's overall Aging Aircraft program,
it has issued Directives requiring certain additional aircraft modifications to
be accomplished prior to the aircraft reaching 20,000 cycles. The average cycle
time for the 18 aircraft in service is approximately 12,000 cycles and the
average cycles operated per year is approximately 800 cycles. The Company
estimates that the modification costs per aircraft will range between $2 million
and $3 million. Between now and the year 2000, only one aircraft is expected to
reach the 20,000 cycle limit and nine additional aircraft will require
modification prior to the year 2009. The remaining eight aircraft have already
undergone such modifications. The one aircraft undergoing modification to
freighter configuration will receive the Nacelle Strut Modification as part of
the freighter conversion. Other Directives have been issued that require
inspections and minor modifications to Boeing 747-200 aircraft. It is possible
that additional Directives applicable to the types of aircraft or engines
included in the Company's fleet could be issued in the future, the cost of which
could be substantial.
The Company is also subject to the regulations of the Environmental
Protection Agency regarding air quality in the U.S. With respect to aircraft
that it operates, the Company meets the fuel venting requirements and smoke
emissions standards established by the Environmental Protection Agency.
COMPETITION
The market for air cargo services is highly competitive. A number of
airlines currently provide services for themselves and for others similar to the
services offered by the Company and new airlines may be formed that would also
compete with the Company. Such airlines may have substantially greater financial
resources than the Company. The Company believes that the most important factors
for competition in the air cargo business are the range, payload and cubic
capacities of the aircraft and the price, flexibility, quality and reliability
of service. The ability of the Company to achieve its strategic plan depends in
part upon its success in convincing major international airlines that
outsourcing some portion of their air cargo business remains more cost-
effective than undertaking cargo operations with their own incremental capacity
and resources and the ability of the Company to obtain higher ACMI Contract
rates in connection with the 747-400 aircraft compared to those currently
obtained in connection with existing Boeing 747-200 aircraft. The Company
believes that such higher rates will be obtainable as a result of the unique
operating benefits associated with the 747-400 aircraft. These operational
benefits include a longer range, greater payload capability and increased fuel
efficiency relative to the Boeing 747-200 aircraft.
FUEL
Although fuel costs are typically the largest operating expense for
airlines, the Company has limited exposure to the fluctuation of fuel costs and
disruptions in supply as a result of its ACMI Contracts, which require the
customers to provide fuel for the aircraft. However, an increase in fuel costs
could reduce the Company's cost advantages because of its older Boeing 747-200
aircraft fleet, which are not as fuel-efficient as newer cargo aircraft such as
the 747-400 aircraft. In addition, to the extent the Company operates scheduled
cargo or ad hoc charter services, or positions its aircraft, it is responsible
for fuel and other costs that are normally borne by the customers under the ACMI
Contracts. In 1997, approximately 2% of the Company's
38
<PAGE> 46
block hours represented scheduled cargo, ad hoc charter services or positioning
its aircraft for its own account. The Company may, at times, have excess
capacity in which case it may deploy such aircraft in scheduled cargo or ad hoc
charter services.
EMPLOYEES
As of May 31, 1998, the Company had 712 employees, 412 of whom were air
crew members. The Company expects to hire additional pilots in 1998 associated
with the delivery of additional aircraft, including the 747-400 aircraft. The
Company maintains a comprehensive training program for its pilots in compliance
with FAA requirements in which each pilot regularly attends update programs. The
Company believes that its current training program can be sufficiently modified
to provide training required for pilots for the 747-400 aircraft. In addition,
as part of the Boeing Purchase Agreement, to defray a portion of the costs,
Boeing will train a limited number of the Company's pilots and crew to be
assigned to the 747-400 aircraft. However, the Company may incur incremental
costs associated with ongoing training with regard to the 747-400 aircraft.
The Company believes that its employees' participation in the growth and
profitability of its business is essential to maintain its productivity and low
cost structure, and has therefore established programs for that purpose such as
a profit sharing plan, a stock purchase plan, and a Company percentage
contribution of the employee deferral contribution to a retirement plan
(Internal Revenue Code of 1986, as amended, Section 401(k) plan). Such programs
are designed to allow employees to share financially in the Company's success
and to augment base salary levels and retirement income. The Company considers
its relations with its employees to be good.
The Company's labor relations are covered under Title II of the Railway
Labor Act of 1926, as amended, and are subject to the jurisdiction of the
National Mediation Board. None of the Company's employees is subject to a
collective bargaining agreement; however, many airline industry employees are
subject to such agreements and the Company's employees have been and are
routinely solicited by union representatives seeking to organize them. In
January 1998, the Company's pilots rejected union representation by the ALPA.
INSURANCE
The Company is vulnerable to potential losses which may be incurred in the
event of an aircraft accident. Any such accident could involve not only repair
or replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also potential claims involving injury to persons or
property. The Company is required by the DOT to carry liability insurance on
each of its aircraft, and each of the Company's aircraft leases and ACMI
Contracts also requires the Company to carry such insurance. While the Company
carries this insurance, any extended interruption of the Company's operations
due to the loss of an aircraft could have a material adverse effect on the
Company. The Company currently maintains public liability and property damage
insurance and aircraft hull and liability insurance for each of the aircraft in
the fleet in amounts consistent with industry standards. The Company maintains
baggage and cargo liability insurance if not provided by its customers under
ACMI Contracts. Although the Company believes that its insurance coverage is
adequate, there can be no assurance that the amount of such coverage will not be
changed upon renewal or that the Company will not be forced to bear substantial
losses from accidents. Substantial claims resulting from an accident could have
a material adverse effect on the Company's financial condition and could affect
the ability of the Company to obtain insurance in the future. The Company
believes that it has good relations with its insurance providers.
FACILITIES
The Company's principal executive offices are located in a 7,000 square
foot office building owned by the Company at 538 Commons Drive, Golden,
Colorado. The Company also rents 2,500 square feet of office space in an
adjacent building.
The Company presently occupies a 22,000 square foot facility located at
JFK. This facility includes administrative offices, maintenance work areas and
hangar and parts storage facilities, as well as flight dispatch operations. The
Company occupies this facility pursuant to a lease agreement with Japan Airlines
("JAL")
39
<PAGE> 47
for a five-year period with two five-year renewal rights from JAL, which began
on June 1, 1995, at a monthly rate of approximately $55,000. Effective August 1,
1998 the Company will lease an additional 5,000 square feet and the monthly rate
will increase to approximately $70,000. The Company believes the JAL facility is
adequate to support the near term growth in operations that will result from the
anticipated acquisition of additional aircraft. In addition, the Company leases
7,750 square feet of warehouse space at JFK for the storage of aircraft
components, tires and other aircraft related equipment at a monthly lease rate
of $5,000. The initial lease term expires at the end of August 1999 and provides
for two one-year renewal option periods beginning September 1, 1999.
Due to increased operations at Miami International Airport ("MIA"), the
Company entered into a month-to-month office lease and a month-to-month
warehouse lease with Dade County, Florida in March 1997 at a combined monthly
lease rate of approximately $6,000. The leased warehouse space is used to store
aviation equipment and aircraft components used to maintain aircraft operated by
the Company. In addition, the Company recently entered into a sublease and ramp
use agreement with American Airlines, Inc. for 145,000 square feet of hangar,
office and parking space at MIA in support of the Company's increased
operations. The lease is for a period in excess of four years and commences July
1, 1998, at a monthly rate of approximately $105,000, subject to an annual
escalation factor.
LEGAL PROCEEDINGS
On February 24, 1997, the Company filed a complaint for declaratory
judgment in the Colorado District Court, Jefferson County against Israel
Aircraft Industries Ltd. ("IAI") for mechanical problems the Company experienced
with respect to an aircraft the Company sub-leased from IAI. The Company is
seeking approximately $4 million in damages against IAI to be offset by the
amount, if any, the Company owes IAI pursuant to the sub-lease. IAI had the case
removed to the U.S. District Court, District of Colorado on April 21, 1997 and
has filed counterclaims alleging damages of approximately $9 million based on
claims arising from the sub-lease. The Company intends to vigorously defend
against all of IAI's claims.
In March 1997, Air Support International, Inc. ("ASI") filed a complaint
against the Company in the U.S. District Court, Eastern District of New York
alleging actual and punitive damages of approximately $13.5 million arising from
the Company's refusal to pay commissions which ASI claims it is owed for
allegedly arranging certain ACMI Contracts. The Company intends to vigorously
defend against all of ASI's claims.
While the Company is from time to time involved in litigation in the
ordinary course of its business, there are no other material legal proceedings
pending against the Company or to which any of its property is subject.
40
<PAGE> 48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Michael A. Chowdry..................... Chairman of the Board, Chief Executive Officer, President and
Director
Richard H. Shuyler..................... Executive Vice President -- Strategic Planning, Treasurer and
Director
James T. Matheny....................... Senior Vice President -- Operations
R. Terrence Rendleman.................. Senior Vice President -- Flight and Technical Operations
Stanley G. Wraight..................... Senior Vice President -- Marketing
Stephen C. Nevin....................... Vice President and Chief Financial Officer
Berl Bernhard.......................... Director
Lawrence W. Clarkson................... Director
David K.P. Li.......................... Director
David T. McLaughlin.................... Director
Brian Rowe............................. Director
</TABLE>
Michael A. Chowdry, 43, has been Chairman of the Board of Directors and
Chief Executive Officer of the Company since its inception in August 1992, and
served as President from July 1995 to May 1996 and September 1997 to the
present. He is also Chairman of the Board (since its inception in April 1985) of
Aeronautics Leasing, Inc., an affiliate of the Company ("ALI"). Prior to his
founding of ALI, he formed a Colorado-based certificated commuter air carrier in
1981, and was the principal stockholder of Skybus, Inc., the certificated air
carrier successor to Frontier Horizon Airlines, from 1984 to 1985. He has been
involved in the operation, acquisition, financing and disposition of aircraft
and aviation assets since 1978.
Richard H. Shuyler, 51, has been a member of the Company's Board of
Directors since March 1995 and was Senior Vice President -- Finance, Chief
Financial Officer and Treasurer of the Company from June 1994 to February 1998.
As of February 1998, Mr. Shuyler became Executive Vice President -- Strategic
Planning of the Company and also retained his position as Treasurer. From
January 1993 to June 1994, he was Senior Vice President -- Finance and Chief
Financial Officer at Trans World Airlines, Inc. ("TWA"). From 1975 to 1992, he
held various management and executive positions with Continental Airlines, Inc.,
and various of its affiliates and corporate predecessors, including Texas
International Airlines, Inc., Texas Air Corporation and New York Air, serving as
Senior Vice President -- Finance and Chief Financial Officer at those entities.
James T. Matheny, 58, has been Senior Vice President -- Operations of the
Company since December 1992. From 1991 to 1992, he was Director -- Quality
Assurance and subsequently, Vice President -- Maintenance and Engineering for
Eastern Airlines, Inc. From 1961 to 1991, he served in the United States Navy,
rising to Commanding Officer of an aircraft squadron, two air wings and an
aircraft carrier, and Operations Officer of the Seventh Fleet based in Japan.
R. Terrence Rendleman, 53, has been Senior Vice President -- Technical
Services and Flight Operations since January 1, 1997. From June 1993 to December
1996, he was Senior Vice President for Maintenance Operations at United
Airlines. Prior to that, he served as Senior Vice President -- Technical
Operations at Northwest Airlines from April 1985 to June 1993. From January 1983
to April 1985, he served as Vice President of Engineering and Maintenance at
Braniff Airlines, where he was a Boeing 727 pilot from 1979 to 1983.
Stephen C. Nevin, 48, has been Vice President and Chief Financial Officer
since February 16, 1998. From May 1994 to January 1998, he was Senior Vice
President of Finance and Chief Financial Officer at AirTran Holdings, Inc. From
December 1982 to April 1994, he served as a Vice President at McDonnell Douglas
Finance Corporation.
Stanley G. Wraight, 51, has been Senior Vice President -- Marketing since
May 1997. From 1995 to 1997, he led KLM's worldwide sales efforts. From 1965 to
1995, he was employed by KLM in various capacities, including Vice President of
KLM's sales, marketing and operations in Asia, Australia and the Middle East.
41
<PAGE> 49
Berl Bernhard, 68, has been a member of the Washington based law firm of
Verner, Liipfert, Bernhard, McPherson and Hand since 1960 and has served as its
Chairman since 1982. He was nominated by President Kennedy and confirmed by the
Senate in 1961 to serve as Staff Director of the U.S. Commission on Civil
Rights. He was Special Advisor to Secretary of State Dean Rusk and Under
Secretary of State W. Averell Harriman (1963-65), and was Senior Advisor to
Secretary of State Edmund S. Muskie (1980-81). He also served as a Trustee of
Dartmouth College (1974-1984). He acted as special counsel to the Trustees of
Eastern Airlines and special counsel to the Chairman of Northwest Airlines, and
served as Trustee of the Federal City Council from 1988-1992. Mr. Bernhard
served as Chairman of the Aspen Institute from 1991-1996 as well as Chairman of
its Executive Committee. He was a director of Uniroyal Chemical Company, Inc.
and UNC Inc.
Lawrence W. Clarkson, 60, has been President of Boeing Enterprises since
February 1997, where he is responsible for establishing and directing new
commercial airplane-related business acquisitions, joint ventures and other
relationships outside of the traditional business scope of Boeing. Since April
1992 he has also been a Senior Vice President of Boeing. He previously held
various management and executive positions with Boeing which he joined in 1987.
Prior to that, for twenty years he held various management and executive
positions with Pratt & Whitney. He serves as Vice Chairman of the National
Bureau of Asian Research, Chairman of U.S.-Pacific Economic Cooperation Council
and Chairman of the National Center for APEC, and as a Director of the
U.S.-China Business Council, the National Association of Manufacturers and the
Atlantic Council. He also serves on the U.S.-Japan Joint High Level Advisory
Panel and is a member of the Council on Foreign Relations, the Pacific Council
on International Policy and the National Research Council -- Committee on Japan.
David K.P. Li, 58, has been a member of the Company's Board of Directors
since April 16, 1998. He has been Chairman of the Bank of East Asia, Limited
since 1997 and a director and the Chief Executive of the Bank of East Asia,
Limited since 1981. He is a director of Campbell Soup Company, CATIC Shenzhen
Holdings Limited, CBS Corporation, Chelsfield Plc., China Merchants China Direct
Investments Limited, China Overseas Land & Investment Limited, Dow Jones &
Company, Inc., Guangnan (Holdings) Limited, The Hong Kong and China Gas Company
Limited. The Hong Kong and Shanghai Hotels, Limited, Hong Kong Interbank
Clearing Limited, The Hong Kong Mortgage Corporation Limited, Hong Kong
Telecommunications Limited (Deputy Chairman), KTP Holdings Limited, New World
Infrastructure Limited, PowerGen Plc., San Miguel Brewery Hong Kong Limited,
Sime Darby Berhad and Sime Darby Hong Kong Limited, South China Morning Post
(Holdings) Limited and Vitasoy International Holdings Limited. Mr. Li serves on
the international advisory boards of Avon Products Inc., Bank Austria, Bank of
Montreal, Carlos P. Romulo Foundation for Peace and Development, Daimler-Benz
AG, Federal Reserve Bank of New York's International Capital Markets Advisory
Committee, Gulfstream Aerospace, IBM, Jardine Fleming Asian Property Company,
Lafarge, PowerGen and Rolls-Royce Plc.
David T. McLaughlin, 66, has been a member of the Company's Board of
Directors since September 1995. He has been President and Chief Executive
Officer of The Aspen Institute since his appointment in 1988, as well as
Chairman of its Board of Trustees since 1994. From 1972 to 1977 he served as
Chief Executive Officer of The Toro Company, and served as its Chairman from
1977 to 1981. From 1981 to 1987, he served as president of Dartmouth College. He
is currently a director of ARCO, Chase Manhattan Corporation, Westinghouse
Electric Corporation, CBS Inc., Standard Fusee Corporation, and PartnerRe, Inc.
and serves as a member of the Board of Trustees of the Asia Foundation Center
for Asian Pacific Affairs.
Brian Rowe, 67, has been a member of the Company's Board of Directors since
March 1995. He retired as Chairman of the General Electric Aircraft Engines
division of the General Electric Company in January 1995, a position he held
since September 1993, where he was in charge of world-wide sales of GE engines.
Prior to that, he held various management and executive positions with General
Electric, which he joined in 1957, including President of General Electric
Aircraft Engines (from 1979 to 1993), Vice President and General Manager of the
Aircraft Engineering Division (from 1976 to 1979), Vice President and General
Manager of the Airline Programs Division (from 1974 to 1976) and Vice President
and General Manager of the Commercial Engine Projects Division (from 1972 to
1974).
42
<PAGE> 50
SUMMARY OF TERMS OF THE NEW CERTIFICATES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
<S> <C> <C> <C>
Aggregate Face Amount........................ $300,254,000 $115,481,000 $123,180,000
Ratings:
Moody's.................................... A3 Baa3 Ba3
Standard & Poor's.......................... AA- A- BBB-
Fitch...................................... AA- A- BBB-
Initial Loan to Aircraft Value
(cumulative)(1)............................ 37.7% 51.8% 66.1%
Expected Principal Distribution Window (in
years)..................................... 0.9-19.9 0.9-15.9 0.9-11.9
Initial Average Life (in years).............. 14.5 10.6 6.0
Regular Distribution Dates................... January 2 January 2 January 2
and July 2 and July 2 and July 2
Final Expected Regular Distribution Date..... January 2, 2018 January 2, 2014 January 2, 2010
Final Maturity Date.......................... July 2, 2019 July 2, 2015 July 2, 2011
Minimum Denomination......................... $1,000 $1,000 $100,000
Section 1110 Protection(2)................... Yes Yes Yes
Liquidity Facility Coverage(3)............... 3 semiannual 3 semiannual 3 semiannual
interest interest interest
payments payments payments
Liquidity Facility Amount at January 2,
1999(3).................................... $35,490,023 $14,169,519 $15,723,927
</TABLE>
- ------------
(1) Determined as of January 2, 1999, assuming that all Aircraft have been
delivered. The Mandatory Economic Terms require that the initial loan to
Aircraft value, based on the foregoing appraisals, for each Aircraft as of
its delivery date be not in excess of 38.1% in the case of the Series A
Equipment Notes, 52.8% in the case of Series B Equipment Notes and 68.4% in
the case of the Series C Equipment Notes.
(2) Following the delivery of each Aircraft, the benefits of Section 1110 of the
U.S. Bankruptcy Code will be available to the applicable Loan Trustee with
respect to such Aircraft.
(3) For each Class of New Certificates, the initial amount of the Liquidity
Facilities, taken together, will cover three consecutive semiannual interest
payments (without regard to any future payments of principal on such New
Certificates), except that the Liquidity Facilities with respect to each
Trust will not cover interest payable by the Depositary on the Deposits
relating to such Trust. The scheduled payments of interest on the Equipment
Notes held by a Trust and on the Deposits relating to such Trust, taken
together, will be sufficient to pay accrued interest on the outstanding
Certificates issued by such Trust at the rate per annum applicable thereto,
including any increase to such rate resulting from Atlas' failure to cause
the occurrence of a Registration Event. In aggregate for Class A, B and C
New Certificates, the amount of the Liquidity Facilities at January 2, 1999,
assuming that Equipment Notes in the maximum principal amount with respect
to all Aircraft are acquired by the Trusts and that all interest and
principal due on or prior to January 2, 1999 is paid, will be $65,383,469.
DESCRIPTION OF THE NEW CERTIFICATES
The New Certificates will be issued pursuant to three separate Pass Through
Trust Agreements. The following summary describes all material terms of the New
Certificates and the Pass Through Trust Agreements. The summary does not purport
to be complete and is qualified in its entirety by reference to all of the
provisions of the New Certificates, the Pass Through Trust Agreements, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement and the
pass through trust agreements applicable to the Successor Trusts. Capitalized
terms used herein but not defined herein have the meanings ascribed to them in
the Pass Through Trust Agreements.
43
<PAGE> 51
Except as otherwise indicated, the following summary relates to each of the
Trusts and the New Certificates issued by each Trust. The terms and conditions
governing each of the Trusts will be substantially the same, except as described
under " -- Subordination" below and except that the principal amount and
scheduled principal repayments of the Equipment Notes held by each Trust and the
interest rate and maturity date of the Equipment Notes held by each Trust will
differ.
GENERAL
The New Certificates of each Trust will be issued in fully registered form
only and will be subject to the provisions described below under
" -- Book-Entry; Delivery and Form". Each New Certificate will represent a
fractional undivided interest in the Trust created by the Pass Through Trust
Agreement pursuant to which such New Certificate is issued. The Trust Property
of each Trust will consist of (i) subject to the Intercreditor Agreement,
Equipment Notes acquired under the Note Purchase Agreement and issued at Atlas'
election in connection with the delivery of each Aircraft during the Delivery
Period either (a) on a nonrecourse basis by an Owner Trustee in each separate
leveraged lease transaction with respect to each Leased Aircraft to finance a
portion of the purchase price of such Leased Aircraft by the Owner Trustee or on
a recourse basis by a subsidiary of Atlas, in which case the applicable Leased
Aircraft will be leased to Atlas or (b) on a recourse basis by Atlas in
connection with each separate secured loan transaction with respect to each
Owned Aircraft to finance a portion of the purchase of such Owned Aircraft by
Atlas, (ii) the rights of such Trust to acquire Equipment Notes under the Note
Purchase Agreement, (iii) the rights of such Trust under the applicable Escrow
Agreement to request the Escrow Agent to withdraw from the Depositary funds
sufficient to enable such Trust to purchase Equipment Notes on the delivery of
each Aircraft during the Delivery Period, (iv) the rights of such Trust under
the Intercreditor Agreement (including all monies receivable in respect of such
rights), (v) all monies receivable under the Liquidity Facility for such Trust
and (vi) funds from time to time deposited with the Trustee in accounts relating
to such Trust. New Certificates will represent fractional undivided interests in
the related Trust and will be issued only in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof, except New Certificates of the
Class C Trust will be issued only in minimum denominations of $100,000, and that
one New Certificate of each Trust may be issued in a different denomination.
On the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a substantially identical Successor Trust, and
the New Trustee will assume the obligations of the related Original Trustee
under each transaction document to which such Original Trustee was a party. Upon
the effectiveness of such transfer, assignment and assumption, each of the
Original Trusts will be liquidated and each of the New Certificates will
represent the same percentage interest in the Successor Trust as it represented
in the Original Trust immediately prior to such transfer, assignment and
assumption. Unless the context otherwise requires, all references in this
Prospectus to the Trusts, the Trustees, the Pass Through Trust Agreements and
similar terms shall be applicable to the Original Trusts until the effectiveness
of such transfer, assignment and assumption and thereafter shall be applicable
to the Successor Trusts. See
" -- Liquidation of Original Trusts."
The New Certificates represent interests in the respective Trusts, and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. The New Certificates do not represent an interest in or
obligation of Atlas, the Trustees, any of the Loan Trustees or Owner Trustees in
their individual capacities, any Owner Participant or any affiliate of any
thereof.
Pursuant to the Escrow Agreement applicable to each Trust, the
Certificateholders of such Trust as holders of the Escrow Receipts affixed to
each New Certificate are entitled to certain rights with respect to the Deposits
relating to such Trust. Accordingly, any transfer of a New Certificate will have
the effect of transferring the corresponding rights with respect to the
Deposits, and rights with respect to the Deposits may not be separately
transferred by Certificateholders. Rights with respect to the Deposits and the
Escrow Agreement relating to a Trust, except for the right to request
withdrawals for the purchase of Equipment Notes, will not constitute Trust
Property of such Trust.
44
<PAGE> 52
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Providers are parties, on each
Distribution Date, so long as no Triggering Event shall have occurred (whether
or not continuing), all payments received by the Subordination Agent in respect
of Equipment Notes and certain other payments under the related Indenture will
be distributed under the Intercreditor Agreement in the following order: (1) to
the Liquidity Providers to the extent required to pay certain Liquidity
Obligations; (2) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates; (3) to the Class B Trustee to the
extent required to pay Expected Distributions on the Class B Certificates; (4)
to the Class C Trustee to the extent required to pay Expected Distributions on
the Class C Certificates; (5) if Class D Certificates have been issued, to the
Class D Trustee to the extent required to pay "Expected Distributions" (to be
defined in a manner equivalent to the definition for other Classes of
Certificates) on the Class D Certificates; and (6) to the Subordination Agent
and each Trustee for the payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Providers in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; (5) to the Class C Trustee to the extent required to pay
Adjusted Expected Distributions on the Class C Certificates; and (6) if Class D
Certificates have been issued, to the Class D Trustee to the extent required to
pay "Adjusted Expected Distributions" (to be defined in a manner equivalent to
the definition for other Classes of Certificates) on the Class D Certificates.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the New Certificates of any Trust, any premium
paid on the Equipment Notes held in such Trust that has not been distributed to
the Certificateholders of such Trust (other than such premium or a portion
thereof applied to the payment of interest on the New Certificates of such Trust
or the reduction of the Pool Balance (as defined herein) of such Trust) shall be
added to the amount of Expected Distributions or Adjusted Expected
Distributions.
The priority of distributions after a payment default under any Equipment
Note or a Triggering Event will have the effect in certain circumstances of
requiring the distribution to more senior Classes of Certificates of payments
received in respect of one or more junior series of Equipment Notes. If this
should occur, the interest accruing on the remaining Equipment Notes would in
the aggregate be less than the interest accruing on the remaining New
Certificates because such New Certificates include a relatively greater
proportion of junior Classes with relatively higher interest rates. As a result
of this possible interest shortfall, the holders of one or more junior Classes
of New Certificates may not receive the full amount due to them after a
Triggering Event even if all Equipment Notes are eventually paid in full.
Payments in respect of the Deposits relating to a Trust will not be subject
to the subordination provisions of the Intercreditor Agreement.
PAYMENTS AND DISTRIBUTIONS
Payments of interest on the Deposits with respect to each Trust and
payments of principal, premium (if any) and interest on the Equipment Notes or
with respect to other Trust Property held in each Trust will be distributed by
the Paying Agent (as defined herein) (in the case of the Deposits) or by the
Trustee (in the case of Trust Property of such Trust) to Certificateholders of
such Trust on the date receipt of such payment is confirmed, except in the case
of certain types of Special Payments.
The Deposits held with respect to each Trust and the Equipment Notes held
in each Trust will accrue interest at the applicable rate per annum for New
Certificates to be issued by such Trust set forth on the cover
45
<PAGE> 53
page of this Prospectus, payable on January 2 and July 2 of each year,
commencing on July 2, 1998 (or, in the case of Equipment Notes issued after such
date, commencing with the first such date to occur after initial issuance
thereof). Such interest payments will be distributed to Certificateholders of
such Trust on each such date until the final Distribution Date for such Trust,
subject in the case of payments on the Equipment Notes to the Intercreditor
Agreement. Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months. Payments of interest applicable to the New Certificates to
be issued by each of the Trusts will be supported by a separate Liquidity
Facility to be provided by the applicable Liquidity Provider for the benefit of
the holders of such New Certificates in an aggregate amount sufficient to pay
interest thereon at the Stated Interest Rate for such Trust on up to three
successive Regular Distribution Dates (without regard to any future payments of
principal on such New Certificates), except that the Liquidity Facility with
respect to such Trust will not cover interest payable by the Depositary on the
Deposits relating to such Trust. The Liquidity Facility for any Class of New
Certificates does not provide for drawings thereunder to pay for principal of or
premium on the New Certificates of such Class, any interest on the New
Certificates of such Class in excess of the applicable Stated Interest Rate, or,
notwithstanding the subordination provisions of the Intercreditor Agreement,
principal of or interest or premium on the New Certificates of any other Class.
Therefore, only the holders of the New Certificates to be issued by a particular
Trust will be entitled to receive and retain the proceeds of drawings under the
Liquidity Facility for such Trust. See "Description of the Liquidity
Facilities."
Payments of principal of the Equipment Notes held in each Trust are
scheduled to be received by the Trustee on January 2 and July 2 in certain years
depending upon the terms of the Equipment Notes held in such Trust, commencing
on January 2, 1999. Scheduled payments of interest on the Deposits and of
interest or principal on the Equipment Notes are herein referred to as
"Scheduled Payments", and January 2 and July 2 of each year are herein referred
to as "Regular Distribution Dates". See "Description of the Equipment
Notes -- Principal and Interest Payments". The "Final Maturity Date" for the
Class A Certificates is July 2, 2019, for the Class B Certificates is July 2,
2015 and for the Class C Certificates is July 2, 2011.
The Paying Agent with respect to each Escrow Agreement will distribute on
each Regular Distribution Date to the Certificateholders of the Trust to which
such Escrow Agreement relates all Scheduled Payments received in respect of the
related Deposits, the receipt of which is confirmed by the Paying Agent on such
Regular Distribution Date. The Trustee of each Trust will distribute, subject to
the Intercreditor Agreement, on each Regular Distribution Date to the
Certificateholders of such Trust all Scheduled Payments received in respect of
Equipment Notes held on behalf of such Trust, the receipt of which is confirmed
by the Trustee on such Regular Distribution Date. Each Certificateholder of each
Trust will be entitled to receive a pro rata share of any distribution in
respect of Scheduled Payments of interest on the Deposits relating to such Trust
and, subject to the Intercreditor Agreement, of principal or interest on
Equipment Notes held on behalf of such Trust. Each such distribution of
Scheduled Payments will be made by the applicable Paying Agent or Trustee to the
Certificateholders of record of the relevant Trust on the Record Date (as
defined herein) applicable to such Scheduled Payment subject to certain
exceptions. If a Scheduled Payment is not received by the applicable Paying
Agent or Trustee on a Regular Distribution Date but is received within five days
thereafter, it will be distributed on the date received to such holders of
record. If it is received after such five-day period, it will be treated as a
Special Payment and distributed as described below.
Any payment in respect of, or any proceeds of, any Equipment Note or the
Trust Indenture Estate under (and as defined in) each Indenture other than a
Scheduled Payment (each, a "Special Payment") will be scheduled to be
distributed on, in the case of an early redemption or a purchase of any
Equipment Note, the date of such early redemption or purchase (which shall be a
Business Day), and otherwise on the Business Day specified for distribution of
such Special Payment pursuant to a notice delivered by each Trustee as soon as
practicable after the Trustee has received funds for such Special Payment (each
a "Special Distribution Date"), subject to the Intercreditor Agreement. If an
Aircraft is not delivered on the scheduled (or rescheduled) delivery date, the
portion of the Deposits relating to such Aircraft, together with accrued
interest thereon, shall be withdrawn and distributed to the Certificateholders
upon not less than 15 days' notice, unless, subject to certain conditions, Atlas
elects to extend such delivery date to a date not later than the Delivery Period
Termination Date. Any unused Deposits to be distributed after the Delivery
Period Termination Date
46
<PAGE> 54
or the occurrence of a Triggering Event, together with accrued and unpaid
interest thereon and any premium payable by Atlas (each, also a "Special
Payment"), will be distributed on a date 35 days after the Paying Agent has
received notice of the event requiring such distribution (also a "Special
Distribution Date") unless such date is within 10 days before or after a Regular
Distribution Date, in which case such Special Payment shall be made on such
Regular Distribution Date. Each Paying Agent, in the case of the Deposits, and
each Trustee, in the case of Trust Property or any premium payable by Atlas in
connection with certain distributions of unused Deposits, will mail a notice to
the Certificateholders of the applicable Trust stating the scheduled Special
Distribution Date, the related Record Date, the amount of the Special Payment
and the reason for the Special Payment. In the case of a redemption or purchase
of the Equipment Notes held in the related Trust or any distribution of unused
Deposits after the Delivery Period Termination Date or the occurrence of a
Triggering Event, such notice will be mailed not less than 15 days prior to the
date such Special Payment is scheduled to be distributed, and in the case of any
other Special Payment, such notice will be mailed as soon as practicable after
the Trustee has confirmed that it has received funds for such Special Payment.
Each distribution of a Special Payment, other than a final distribution, on a
Special Distribution Date for any Trust will be made by the Paying Agent or the
Trustee, as applicable, to the Certificateholders of record of such Trust on the
Record Date applicable to such Special Payment. See "-- Indenture Defaults and
Certain Rights Upon an Indenture Default" and "Description of the Equipment
Notes -- Redemption."
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more non-interest bearing accounts (the "Certificate
Account") for the deposit of payments representing Scheduled Payments received
by such Trustee. Each Pass Through Trust Agreement requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments received by
such Trustee, which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such account in certain
permitted investments. Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating to
the applicable Trust received by it in the Certificate Account of such Trust and
to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. All amounts so deposited will be distributed by the
Trustee on a Regular Distribution Date or a Special Distribution Date, as
appropriate.
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the Receiptholders (as defined herein), one or more
accounts (the "Paying Agent Account"), which shall be non-interest bearing.
Pursuant to the terms of the Escrow Agreement, the Paying Agent is required to
deposit interest on Deposits relating to such Trust and any unused Deposits
withdrawn by the Escrow Agent in the Paying Agent Account. All amounts so
deposited will be distributed by the Paying Agent on a Regular Distribution Date
or Special Distribution Date, as appropriate.
The final distribution for each Trust will be made only upon presentation
and surrender of the New Certificates for such Trust at the office or agency of
the Trustee specified in the notice given by the Trustee of such final
distribution. The Trustee will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for such final
distribution and the amount of such distribution. See "-- Termination of the
Trusts" below. Distributions in respect of New Certificates issued in global
form will be made as described in "-- Book-Entry; Delivery and Form" below.
If any Regular Distribution Date or Special Distribution Date is a
Saturday, Sunday or other day on which commercial banks are authorized or
required to close in New York, New York, Chicago, Illinois, Wilmington, Delaware
or Denver, Colorado (any other day being a "Business Day"), distributions
scheduled to be made on such Regular Distribution Date or Special Distribution
Date will be made on the next succeeding Business Day without additional
interest.
POOL FACTORS
The "Pool Balance" for each Trust or for the New Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the New
Certificates of such Trust less the aggregate amount of all
47
<PAGE> 55
payments made in respect of the New Certificates of such Trust or in respect of
Deposits relating to such Trust other than payments made in respect of interest
or premium or reimbursement of any costs and expenses in connection therewith.
The Pool Balance for each Trust or for the New Certificates issued by any Trust
as of any Regular Distribution Date or Special Distribution Date shall be
computed after giving effect to any special distribution with respect to unused
Deposits, payment of principal of the Equipment Notes or payment with respect to
other Trust Property held in such Trust and the distribution thereof to be made
on that date.
The "Pool Factor" for each Trust as of any Regular Distribution Date or
Special Distribution Date is the quotient (rounded to the seventh decimal place)
computed by dividing (i) the Pool Balance by (ii) the original aggregate face
amount of the New Certificates of such Trust. The Pool Factor for each Trust or
for the New Certificates issued by any Trust as of any Regular Distribution Date
or Special Distribution Date shall be computed after giving effect to any
special distribution with respect to unused Deposits, payment of principal of
the Equipment Notes or payment with respect to other Trust Property held in such
Trust and the distribution thereof to be made on that date. The Pool Factor for
each Trust will be 1.0000000 on the date of issuance of the New Certificates;
thereafter, the Pool Factor for each Trust will decline as described herein to
reflect reductions in the Pool Balance of such Trust. The amount of a
Certificateholder's pro rata share of the Pool Balance of a Trust can be
determined by multiplying the par value of the holder's New Certificate of such
Trust by the Pool Factor for such Trust as of the applicable Regular
Distribution Date or Special Distribution Date. Notice of the Pool Factor and
the Pool Balance for each Trust will be mailed to Certificateholders of such
Trust on each Regular Distribution Date and Special Distribution Date.
The following table sets forth an illustrative aggregate principal
amortization schedule for the Equipment Notes held in each Trust (the "Assumed
Amortization Schedule") and resulting Pool Factors with respect to such Trust.
The actual aggregate principal amortization schedule applicable to a Trust and
the resulting Pool Factors with respect to such Trust may differ from those set
forth below, since the amortization schedule for the Equipment Notes issued with
respect to an Aircraft may vary from such illustrative amortization schedule so
long as it complies with the Mandatory Economic Terms. In addition, the table
set forth below assumes that each Aircraft is delivered in the month scheduled
for its delivery (see "Description of the Aircraft and the Appraisals -- The
Appraisals" for the delivery schedule), that Equipment Notes in the maximum
principal amount in respect of all of the Aircraft are purchased by the Trusts
and that no early redemption or purchase, or default in the payment of
principal, in respect of any Equipment Notes occurs. Actual circumstances may
vary from these assumptions, which would result in differences in the aggregate
principal amortization schedule applicable to a Trust and in the resulting Pool
Factors.
48
<PAGE> 56
<TABLE>
<CAPTION>
1998-1 A TRUST 1998-1 B TRUST 1998-C TRUST
EQUIPMENT EQUIPMENT EQUIPMENT
NOTES SCHEDULED 1998-1 A TRUST NOTES SCHEDULED 1998-1 B TRUST NOTES SCHEDULED 1998-1 C TRUST
PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED
DATE PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR
- --------------- --------------- -------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
January 2, 1999 $ 2,397,500 0.9920151 $ 3,848,330 0.9666756 $ 9,840,000 0.9201169
July 2, 1999 1,202,214 0.9880111 462,390 0.9626716 1,857,739 0.9050354
January 2, 2000 4,802,928 0.9720149 924,780 0.9546635 8,946,554 0.8324055
July 2, 2000 1,202,214 0.9680109 462,390 0.9506595 1,929,568 0.8167409
January 2, 2001 4,802,928 0.9520147 924,780 0.9426514 9,654,226 0.7383659
July 2, 2001 1,202,214 0.9480107 462,390 0.9386474 1,977,429 0.7223127
January 2, 2002 4,802,928 0.9320145 924,780 0.9306393 10,368,798 0.6381368
July 2, 2002 1,202,214 0.9280105 462,390 0.9266353 2,013,610 0.6217899
January 2, 2003 3,600,714 0.9160183 1,225,560 0.9160226 10,351,430 0.5377549
July 2, 2003 2,404,428 0.9080103 924,780 0.9080146 2,042,816 0.5211709
January 2, 2004 3,600,714 0.8960181 1,384,890 0.8960222 10,981,357 0.4320220
July 2, 2004 2,404,428 0.8880101 924,780 0.8880141 2,067,365 0.4152387
January 2, 2005 3,600,714 0.8760178 4,658,111 0.8476775 8,545,109 0.3458678
July 2, 2005 2,404,428 0.8680099 924,780 0.8396695 2,088,574 0.3289124
January 2, 2006 3,600,714 0.8560176 10,807,954 0.7460787 4,557,132 0.2919167
July 2, 2006 2,404,428 0.8480097 1,061,139 0.7368898 2,107,268 0.2748094
January 2, 2007 3,600,714 0.8360174 11,521,480 0.6371204 5,340,120 0.2314573
July 2, 2007 2,404,428 0.8280095 1,314,296 0.6257393 2,123,996 0.2142142
January 2, 2008 3,600,714 0.8160172 12,161,923 0.5204239 6,353,247 0.1626373
July 2, 2008 2,404,428 0.8080092 1,592,973 0.5066297 2,139,143 0.1452713
January 2, 2009 3,600,714 0.7960170 9,774,504 0.4219880 7,440,749 0.0848658
July 2, 2009 2,404,428 0.7880090 1,896,919 0.4055618 2,152,993 0.0673874
January 2, 2010 3,600,714 0.7760168 4,479,836 0.3667689 8,300,777 0.0000000
July 2, 2010 2,404,428 0.7680088 2,225,904 0.3474939 0 0.0000000
January 2, 2011 9,843,155 0.7352261 5,385,566 0.3008579 0 0.0000000
July 2, 2011 3,716,432 0.7228484 2,579,723 0.2785190 0 0.0000000
January 2, 2012 22,558,848 0.6477159 7,766,713 0.2112637 0 0.0000000
July 2, 2012 4,125,102 0.6339772 2,958,186 0.1856474 0 0.0000000
January 2, 2013 26,190,164 0.5467505 7,473,591 0.1209304 0 0.0000000
July 2, 2013 4,546,731 0.5316075 3,361,120 0.0918250 0 0.0000000
January 2, 2014 27,026,626 0.4415950 10,604,042 0.0000000 0 0.0000000
July 2, 2014 4,980,851 0.4250062 0 0.0000000 0 0.0000000
January 2, 2015 30,758,116 0.3225659 0 0.0000000 0 0.0000000
July 2, 2015 5,427,034 0.3044911 0 0.0000000 0 0.0000000
January 2, 2016 29,278,052 0.2069801 0 0.0000000 0 0.0000000
July 2, 2016 5,884,893 0.1873804 0 0.0000000 0 0.0000000
January 2, 2017 13,015,118 0.1440334 0 0.0000000 0 0.0000000
July 2, 2017 6,354,074 0.1228711 0 0.0000000 0 0.0000000
January 2, 2018 36,892,528 0.0000000 0 0.0000000 0 0.0000000
</TABLE>
The actual schedule of principal payments and the resulting schedule of
Pool Balances and Pool Factors may differ from that set forth above. In
addition, the Pool Factor and Pool Balance of each Trust will be recomputed if
there has been an early redemption, purchase, or default in the payment of
principal or interest in respect of one or more of the Equipment Notes held in a
Trust, as described in "-- Indenture Defaults and Certain Rights Upon an
Indenture Default" and "Description of the Equipment Notes -- Redemption," or a
special distribution attributable to unused Deposits after the Delivery Period
Termination Date or the occurrence of a Triggering Event, as described in
"Description of the Deposit Agreements." In the event of (i) any such change in
the scheduled repayments or (ii) any such redemption, purchase, default or
special distribution, the Pool Factors and the Pool Balances of each Trust so
affected will be recomputed after giving effect thereto and notice thereof will
be mailed to the Certificateholders of such Trust promptly after any such change
in scheduled repayments or after the occurrence of any event described in clause
(ii), as the case may be.
49
<PAGE> 57
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the applicable Paying Agent and Trustee will
include with each distribution by it of a Scheduled Payment or Special Payment
to Certificateholders of the related Trust a statement, giving effect to such
distribution to be made on such Distribution Date, setting forth the following
information (per $1,000 aggregate principal amount of New Certificate for such
Trust, as to (ii), (iii), (iv) and (v) below):
(i) the aggregate amount of such funds distributed on such
Distribution Date under the Pass Through Trust Agreement and the Escrow
Agreement, indicating the amount allocable to each source;
(ii) the amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to premium
(including any premium paid by Atlas with respect to unused Deposits), if
any;
(iii) the amount of such distribution under the Pass Through Trust
Agreement allocable to interest;
(iv) the amount of such distribution under the Escrow Agreement
allocable to interest;
(v) the amount of such distribution under the Escrow Agreement
allocable to unused Deposits (if any); and
(vi) the Pool Balance and the Pool Factor for such Trust.
So long as the New Certificates are registered in the name of DTC or its
nominee, on the Record Date prior to each Distribution Date, the applicable
Trustee will request from DTC a securities position listing setting forth the
names of all DTC Participants (as defined herein) reflected on DTC's books as
holding interests in the New Certificates on such record date. On each
Distribution Date, the applicable Paying Agent and Trustee will mail to each
such DTC Participant the statement described above and will make available
additional copies as requested by such DTC Participant for forwarding to New
Certificateholders.
In addition, after the end of each calendar year, the applicable Trustee
and Paying Agent will furnish to each Certificateholder of each Trust at any
time during the preceding calendar year a report containing the sum of the
amounts determined pursuant to clauses (i), (ii), (iii), (iv) and (v) above with
respect to the Trust for such calendar year or, in the event such person was a
Certificateholder during only a portion of such calendar year, for the
applicable portion of such calendar year, and such other items as are readily
available to such Trustee and which a Certificateholder shall reasonably request
as necessary for the purpose of such Certificateholder's preparation of its U.S.
federal income tax returns. Such report and such other items shall be prepared
on the basis of information supplied to the applicable Trustee by the DTC
Participants and shall be delivered by such Trustee to such DTC Participants to
be available for forwarding by such DTC Participants to New Certificateholders
in the manner described above. At such time, if any, as the New Certificates are
issued in the form of definitive certificates, the applicable Paying Agent and
Trustee will prepare and deliver the information described above to each
Certificateholder of record of each Trust as the name and period of ownership of
such Certificateholder appears on the records of the registrar of the New
Certificates.
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
An event of default under an Indenture (an "Indenture Default") will, with
respect to the Leased Aircraft Indentures, include an event of default under the
related Lease (a "Lease Event of Default"). See "Description of the Equipment
Notes -- Indenture Defaults, Notice and Waiver." Since the Equipment Notes
issued under an Indenture will be held in each Trust, a continuing Indenture
Default under such Indenture would affect the Equipment Notes held by each
Trust. There are no cross-default provisions in the Indentures or in the Leases
(unless otherwise agreed between an Owner Participant and Atlas). Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default under any other Indenture, and a Lease
Event of Default under any particular Lease may or may not constitute a Lease
Event of Default under any other Lease. If an Indenture Default occurs in fewer
than all of the Indentures, notwithstanding the treatment of Equipment Notes
issued under any Indenture under which an Indenture Default has occurred,
payments of principal and interest on the Equipment Notes issued
50
<PAGE> 58
pursuant to Indentures with respect to which an Indenture Default has not
occurred will continue to be distributed to the holders of the New Certificates
as originally scheduled, subject to the Intercreditor Agreement. See
"Description of the Intercreditor Agreement -- Priority of Distributions."
With respect to each Leased Aircraft, the applicable Owner Trustee and
Owner Participant will, under the related Leased Aircraft Indenture, have the
right under certain circumstances to cure Indenture Defaults that result from
the occurrence of a Lease Event of Default under the related Lease. If the Owner
Trustee or the Owner Participant exercises any such cure right, the Indenture
Default will be deemed to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Wilmington Trust Company will be the initial Trustee under each
Trust.
Upon the occurrence and continuation of an Indenture Default, the
Controlling Party will direct the Indenture Trustee under such Indenture in the
exercise of remedies thereunder and may accelerate and sell all (but not less
than all) of the Equipment Notes issued under such Indenture to any person,
subject to certain limitations. See "Description of the Intercreditor
Agreement -- Intercreditor Rights -- Sale of Equipment Notes or Aircraft". The
proceeds of such sale will be distributed pursuant to the provisions of the
Intercreditor Agreement. Any such proceeds so distributed to any Trustee upon
any such sale shall be deposited in the applicable Special Payments Account and
shall be distributed to the Certificateholders of the applicable Trust on a
Special Distribution Date. The market for Equipment Notes at the time of the
existence of an Indenture Default may be very limited and there can be no
assurance as to the price at which they could be sold. If any such Equipment
Notes are sold for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions than
anticipated and will not have any claim for the shortfall against Atlas, any
Liquidity Provider, any Owner Trustee, any Owner Participant or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Trust by the Subordination Agent on account of any Equipment Note or Trust
Indenture Estate (as defined in each Indenture) held in such Trust following an
Indenture Default will be deposited in the Special Payments Account for such
Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date. In addition, if, following an Indenture Default under
any Leased Aircraft Indenture, the applicable Owner Participant or Owner Trustee
or Atlas subsidiary exercises its option to redeem or purchase the outstanding
Equipment Notes issued under such Leased Aircraft Indenture, the price paid by
such Owner Participant or Owner Trustee or Atlas subsidiary for the Equipment
Notes issued under such Leased Aircraft Indenture and distributed to such Trust
by the Subordination Agent will be deposited in the Special Payments Account for
such Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date.
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. Such permitted investments are defined as obligations of the United States
or agencies or instrumentalities thereof for the payment of which the full faith
and credit of the United States is pledged and which mature in not more than 60
days or such lesser time as is required for the distribution of any such funds
on a Special Distribution Date.
Each Pass Through Trust Agreement provides that the Trustee of the related
Trust will, within 90 days after the occurrence of any default known to the
Trustee, give to the Certificateholders of such Trust notice, transmitted by
mail, of all uncured or unwaived defaults with respect to such Trust known to
it, provided that, except in the case of default in a payment of principal,
premium, if any, or interest on any of the Equipment Notes held in such Trust,
the applicable Trustee will be protected in withholding such notice if it in
good faith determines that the withholding of such notice is in the interests of
such Certificateholders. The term "default" as used in this paragraph only with
respect to any Trust means the occurrence of an Indenture Default under any
Indenture pursuant to which Equipment Notes held by such Trust were issued, as
described
51
<PAGE> 59
above, except that in determining whether any such Indenture Default has
occurred, any grace period or notice in connection therewith will be
disregarded.
Each Pass Through Trust Agreement contains a provision entitling the
Trustee of the related Trust, subject to the duty of such Trustee during a
default to act with the required standard of care, to be offered reasonable
security or indemnity by the holders of the New Certificates of such Trust
before proceeding to exercise any right or power under such Pass Through Trust
Agreement at the request of such Certificateholders.
Subject to certain qualifications set forth in each Pass Through Trust
Agreement and to the Intercreditor Agreement, the Certificateholders of each
Trust holding New Certificates evidencing fractional undivided interests
aggregating not less than a majority in interest in such Trust shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee with respect to such Trust or pursuant to the
terms of the Intercreditor Agreement, or exercising any trust or power conferred
on such Trustee under such Pass Through Trust Agreement or the Intercreditor
Agreement, including any right of such Trustee as Controlling Party under the
Intercreditor Agreement or as holder of the Equipment Notes.
In certain cases, the holders of the New Certificates of a Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of such Trust may on behalf of the holders of all the New Certificates of such
Trust waive any past Indenture Default under any Indenture pursuant to which
Equipment Notes held by such Trust were issued or, if the Trustee of such Trust
is the Controlling Party, may direct the Trustee to instruct the applicable Loan
Trustee to waive any past Indenture Default and its consequences and thereby
annul any direction given by such holders or Trustee to such Loan Trustee with
respect thereto, except (i) a default in the deposit of any Scheduled Payment or
Special Payment or in the distribution thereof, (ii) a default in payment of the
principal, premium, if any, or interest with respect to any of the Equipment
Notes and (iii) a default in respect of any covenant or provision of the Pass
Through Trust Agreement that cannot be modified or amended without the consent
of each Certificateholder of such Trust affected thereby. Each Indenture will
provide that, with certain exceptions, the holders of the majority in aggregate
unpaid principal amount of the Equipment Notes issued thereunder may on behalf
of all such holders waive any past default or Indenture Default thereunder.
Notwithstanding such provisions of the Indentures, pursuant to the Intercreditor
Agreement only the Controlling Party will be entitled to waive any such past
default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class, (i) the Class B Certificateholders will have the right to purchase all,
but not less than all, of the Class A Certificates, (ii) the Class C
Certificateholders will have the right to purchase all, but not less than all,
of the Class A Certificates and the Class B Certificates and (iii) if the Class
D Certificates are issued, the Class D Certificateholders shall have the right
to purchase all, but not less than all, of the Class A Certificates, the Class B
Certificates and the Class C Certificates, in each case at a purchase price
equal to the Pool Balance of the relevant Class or Classes of Certificates plus
accrued and unpaid interest thereon to the date of purchase without premium but
including any other amounts due to the Certificateholders of such Class or
Classes. In each case, if prior to the end of the ten-day period, any other
Certificateholder of the same Class notifies the purchasing Certificateholder
that the other Certificateholder wants to participate in such purchase, then
such other Certificateholder may join with the purchasing Certificateholder to
purchase the New Certificates pro rata based on the interest in the Trust held
by each Certificateholder.
PTC EVENT OF DEFAULT
A PTC Event of Default is defined under the Pass Through Trust Agreements
as the failure to pay: (i) the outstanding Pool Balance of the applicable Class
of New Certificates within 10 Business Days of the Final Maturity Date for such
Class or (ii) interest due on such Class of New Certificates within 10 Business
Days of any Distribution Date (unless the Subordination Agent shall have made
Interest Drawings (as defined
52
<PAGE> 60
herein), or withdrawals from the Cash Collateral Accounts (as defined herein)
for such Class of New Certificates, with respect thereto in an aggregate amount
sufficient to pay such interest and shall have distributed such amount to the
Trustee entitled thereto). Any failure to make expected principal distributions
with respect to any Class of New Certificates on any Regular Distribution Date
(other than the Final Maturity Date) will not constitute a PTC Event of Default
with respect to such New Certificates. A PTC Event of Default with respect to
the most senior outstanding Class of New Certificates resulting from an
Indenture Default under all Indentures will constitute a Triggering Event. See
"Description of the Intercreditor Agreement -- Priority of Distributions" for a
discussion of the consequences of the occurrence of a Triggering Event.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Atlas is prohibited from consolidating with or merging into any other
corporation or transferring substantially all of its assets as an entirety to
any other corporation unless (i) the surviving successor or transferee
corporation shall (a) be validly existing under the laws of the United States or
any state thereof, (b) be a "citizen of the United States" (as defined in Title
49 of the United States Code relating to aviation (the "Transportation Code"))
holding an air carrier operating certificate issued by the Secretary of
Transportation pursuant to Chapter 447 of Title 49, United States Code, if, and
so long as, such status is a condition of entitlement to the benefits of Section
1110 of the Bankruptcy Code, and (c) expressly assume all of the obligations of
Atlas contained in any Pass Through Trust Agreement, the Note Purchase
Agreement, the Owned Aircraft Indentures, the Participation Agreements and the
Leases, and any other operative documents; and (ii) Atlas shall have delivered a
certificate and an opinion or opinions of counsel indicating that such
transaction, in effect, complies with such conditions. In addition, after giving
effect to such transaction, no Lease Event of Default, in the case of a Leased
Aircraft, or Indenture Default, in the case of an Owned Aircraft, shall have
occurred and be continuing.
The Pass Through Trust Agreements and the Note Purchase Agreement do not,
and the Indentures, the Participation Agreements and the Leases will not contain
any covenants or provisions which may afford the applicable Trustee or
Certificateholders protection in the event of a highly leveraged transaction,
including transactions effected by management or affiliates, which may or may
not result in a change in control of Atlas.
MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting, at the
request of the Company, the execution of amendments or supplements to such Pass
Through Trust Agreement or, if applicable, to the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement, the Note Purchase Agreement or any
Liquidity Facility, without the consent of the holders of any of the New
Certificates of such Trust, (i) to evidence the succession of another
corporation to Atlas and the assumption by such corporation of Atlas'
obligations under such Pass Through Trust Agreement or the Note Purchase
Agreement, (ii) to add to the covenants of Atlas for the benefit of holders of
such New Certificates or to surrender any right or power conferred upon Atlas in
such Pass Through Trust Agreement, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility, (iii) to correct or supplement any
provision of such Pass Through Trust Agreement, the Deposit Agreements, the
Escrow Agreements, the Intercreditor Agreement, the Note Purchase Agreement or
any Liquidity Facility which may be defective or inconsistent with any other
provision in such Pass Through Trust Agreement, the Intercreditor Agreement, or
any Liquidity Facility, as applicable, or to cure any ambiguity or to modify any
other provision with respect to matters or questions arising under such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility,
provided that such action shall not materially adversely affect the interests of
the holders of such New Certificates; to correct any mistake in such Pass
Through Trust Agreement, the Intercreditor Agreement or any Liquidity Facility;
or, as provided in the Intercreditor Agreement, to give effect to or provide for
a Replacement Facility (as defined herein), (iv) to comply with any requirement
of the Commission, any applicable law, rules or regulations of any exchange or
quotation system on which the New Certificates are listed, or any regulatory
body, (v) to modify, eliminate or add to the provisions of such Pass Through
Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility
53
<PAGE> 61
to such extent as shall be necessary to continue the qualification of such Pass
Through Trust Agreement (including any supplemental agreement) under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), or any similar
federal statute enacted after the execution of such Pass Through Trust
Agreement, and to add to such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility such other provisions as may be
expressly permitted by the Trust Indenture Act, and (vi) to evidence and provide
for the acceptance of appointment under such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility by a successor Trustee and to add
to or change any of the provisions of such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility as shall be necessary to provide
for or facilitate the administration of the Trusts by more than one Trustee,
provided that in each case, such modification or supplement does not adversely
affect the status of the Trust as a grantor trust under Subpart E, Part I of
Subchapter J of Chapter 1 of Subtitle A of the Code for U.S. federal income tax
purposes.
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the New Certificates of the
related Trust evidencing fractional undivided interests aggregating not less
than a majority in interest of such Trust, and with the consent of the
applicable Owner Trustee (such consent not to be unreasonably withheld), of
amendments or supplements adding any provisions to or changing or eliminating
any of the provisions of such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility to the extent applicable to such
Certificateholders or of modifying the rights and obligations of such
Certificateholders under such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility, except that no such amendment or
supplement may, without the consent of the holder of each New Certificate so
affected thereby, (a) reduce in any manner the amount of, or delay the timing
of, any receipt by the Trustee (or, with respect to the Deposits, the
Receiptholders) of payments with respect to the Deposits, the Equipment Notes
held in such Trust or distributions in respect of any New Certificate related to
such Trust, or change the date or place of any payment in respect of any New
Certificate, or make distributions payable in coin or currency other than that
provided for in such New Certificates, or impair the right of any
Certificateholder of such Trust to institute suit for the enforcement of any
such payment when due, (b) permit the disposition of any Equipment Note held in
such Trust, except as provided in such Pass Through Trust Agreement, or
otherwise deprive such Certificateholder of the benefit of the ownership of the
applicable Equipment Notes, (c) alter the priority of distributions specified in
the Intercreditor Agreement in a manner materially adverse to such
Certificateholders, (d) reduce the percentage of the aggregate fractional
undivided interests of the Trust provided for in such Pass Through Trust
Agreement, the consent of the holders of which is required for any such
supplemental trust agreement or for any waiver provided for in such Pass Through
Trust Agreement, (e) modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or receipt of
payment or (f) adversely affect the status of any Trust as a grantor trust under
Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for
U.S. federal income tax purposes.
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Lease, any Equipment Note or any other related document, the Trustee shall
forthwith send a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of the date of
such notice. The Trustee shall request from the Certificateholders a direction
as to (a) whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a holder of
such Equipment Note or the Controlling Party has the option to take, (b) whether
or not to give or execute (or direct the Subordination Agent to give or execute)
any waivers, consents, amendments, modifications or supplements as a holder of
such Equipment Note or as Controlling Party and (c) how to vote (or direct the
Subordination Agent to vote) any Equipment Note if a
54
<PAGE> 62
vote has been called for with respect thereto. Provided such a request for
Certificateholder direction shall have been made, in directing any action or
casting any vote or giving any consent as the holder of any Equipment Note (or
in directing the Subordination Agent in any of the foregoing), (i) other than as
Controlling Party, the Trustee shall vote for or give consent to any such action
with respect to such Equipment Note in the same proportion as that of (x) the
aggregate face amount of all Certificates actually voted in favor of or for
giving consent to such action by such direction of Certificateholders to (y) the
aggregate face amount of all outstanding New Certificates of the relevant Trust
and (ii) as the Controlling Party, the Trustee shall vote as directed in such
Certificateholder direction by the Certificateholders evidencing fractional
undivided interests aggregating not less than a majority in interest in the
relevant Trust. For purposes of the immediately preceding sentence, a New
Certificate shall have been "actually voted" if the Certificateholder has
delivered to the Trustee an instrument evidencing such Certificateholder's
consent to such direction prior to two Business Days before the Trustee directs
such action or casts such vote or gives such consent. Notwithstanding the
foregoing, but subject to certain rights of the Certificateholders under the
relevant Pass Through Trust Agreement and subject to the Intercreditor
Agreement, the Trustee may, in its own discretion and at its own direction,
consent and notify the relevant Loan Trustee of such consent (or direct the
Subordination Agent to consent and notify the relevant Loan Trustee of such
consent) to any amendment, modification, waiver or supplement under the relevant
Indenture, Participation Agreement or Lease, any relevant Equipment Note or any
other related document, if an Indenture Default under any Indenture shall have
occurred and be continuing, or if such amendment, modification, waiver or
supplement will not materially adversely affect the interests of the
Certificateholders.
OBLIGATION TO PURCHASE EQUIPMENT NOTES
The Trustees will be obligated to purchase the Equipment Notes issued with
respect to the Aircraft during the Delivery Period, subject to the terms and
conditions of the Note Purchase Agreement. Under the Note Purchase Agreement,
Atlas agrees to finance each Aircraft in the manner provided therein and in
connection therewith will have the option of entering into a leveraged lease
financing or a secured debt financing with respect to each Aircraft. The Note
Purchase Agreement will provide for the relevant parties to enter into (i) with
respect to each Leased Aircraft, a Participation Agreement, a Lease and a Leased
Aircraft Indenture relating to the financing of such Leased Aircraft and (ii)
with respect to each Owned Aircraft, a Participation Agreement and an Owned
Aircraft Indenture relating to the financing of such Owned Aircraft. The
description of such agreements in this Prospectus is based on the forms of such
agreements to be utilized pursuant to the Note Purchase Agreement. In the case
of a Leased Aircraft, the terms of the agreements actually entered into may
differ from the forms of such agreements and, consequently, may differ from the
description of such agreements contained in this Prospectus. See "Risk
Factors -- Risk Factors Relating to the New Certificates -- Owner Participant;
Revisions to Agreements". However, under the Note Purchase Agreement, the terms
of such agreements are required to (i) contain the Mandatory Document Terms and
(ii) not vary the Mandatory Economic Terms. In addition, Atlas is obligated (i)
to certify to the Trustees that any such modifications do not materially and
adversely affect the Certificateholders and (ii) to obtain written confirmation
from each Rating Agency that the use of versions of such agreements modified in
any material respect will not result in a withdrawal, suspension or downgrading
of the rating of any Class of Certificates. Further, under the Note Purchase
Agreement, it is a condition precedent to the obligation of each Trustee to
purchase the Equipment Notes related to the financing of an Aircraft that no
Triggering Event shall have occurred. The Trustees will have no right or
obligation to purchase Equipment Notes after the Delivery Period Termination
Date.
The "Mandatory Economic Terms", as defined in the Note Purchase Agreement,
require, among other things, that:
(i) the maximum principal amount of all the Equipment Notes issued
with respect to an Aircraft not exceed the maximum principal amount of
Equipment Notes indicated for each such Aircraft as set forth in "Summary
of Terms of the New Certificates" under the column "Aggregate Face Amount";
(ii) the initial loan to aircraft value with respect to an Aircraft
(with the value of any Aircraft for these purposes to equal the value for
such Aircraft set forth in "Summary of Terms of the New
55
<PAGE> 63
Certificates" under the column "Initial Loan to Aircraft Value"), not
exceed 38.1% in the case of Series A Equipment Notes, 52.8% in the case of
Series B Equipment Notes and 68.4% in the case of Series C Equipment Notes;
(iii) the loan to Aircraft value for an Aircraft at the beginning of
the term of any Lease with respect to such Aircraft must not exceed the
initial loan to Aircraft values set forth in (ii) above with respect to the
then current estimated fair market values;
(iv) the initial average life per Aircraft of the Series A Equipment
Notes shall not be less than 11.5 years or extend beyond 15 years, of the
Series B Equipment Notes shall not be less than 8.5 years or extend beyond
12 years, and of the Series C Equipment Notes shall not be less than 4.5
years or extend beyond 7.5 years, in each case from the Issuance Date;
(v) as of the Delivery Period Termination Date (or if earlier, the
date of the occurrence of a Triggering Event), the average life of the
Class A Certificates, the Class B Certificates and the Class C Certificates
shall not be less than, respectively, 13.5 years, 10 years and 5 years or
shall not extend beyond, respectively, 15 years, 11 years and 6.5 years
from the Issuance Date (computed without regard to the acceleration of any
Equipment Notes and after giving effect to any special distribution on the
Certificates thereafter required in respect of unused Deposits);
(vi) the Final Expected Regular Distribution Date of (a) the Series A
Equipment Notes not be in excess of 20 years after the Issuance Date, (b)
the Series B Equipment Notes not be in excess of 16 years after the
Issuance Date and (c) the Series C Equipment Notes not be in excess of 12
years after the Issuance Date;
(vii) the original aggregate principal amount of all of the Equipment
Notes of each Series shall not exceed the original aggregate face amount of
the Certificates issued by the corresponding Trust;
(viii) the interest rate applicable to each Series of Equipment Notes
must be equal to the rate applicable to the Certificates issued by the
corresponding Trust;
(ix) the payment dates for the Equipment Notes and basic rent under
the Leases must be January 2 and July 2.
(x) basic rent, stipulated loss values and termination values under
the Leases must be sufficient to pay amounts due with respect to the
related Equipment Notes;
(xi) the amounts payable under the all-risk aircraft hull insurance
maintained with respect to each Aircraft must be sufficient to pay the
applicable stipulated loss value, subject to certain rights of self-
insurance; and
(xii) (a) the past due rate in the Indentures and the Leases, (b) the
Make-Whole Premium payable under the Indentures, (c) the provisions
relating to the redemption and purchase of Equipment Notes in the
Indentures, (d) the minimum liability insurance amount on Aircraft in the
Leases subject to certain rights of self-insurance, (e) the interest rate
payable, if any, with respect to stipulated loss value in the Leases, and
(f) the indemnification of the Loan Trustees, Subordination Agent,
Liquidity Providers, Trustees, Escrow Agents and registered holders of the
Equipment Notes (in such capacity, the "Note Holders") with respect to
certain taxes and expenses, in each case be provided as set forth in the
form of Participation Agreements, Lease and Indentures (collectively, the
"Aircraft Operative Agreements").
The "Mandatory Document Terms" prohibit modifications in any material
adverse respect to certain specified provisions of the Aircraft Operative
Agreements contemplated by the Note Purchase Agreement, as follows:
In the case of the Indentures, modifications are prohibited (i) to the
Granting Clause of the Indentures so as to deprive the Note Holders of a
first priority security interest in the Aircraft, certain of Atlas's rights
under its purchase agreement with the Aircraft manufacturer and, in the
case of a Leased Aircraft, the Lease or to eliminate the obligations
intended to be secured thereby, (ii) to certain
56
<PAGE> 64
provisions relating to the issuance, redemption, purchase, payments, and
ranking of the Equipment Notes (including the obligation to pay the
Make-Whole Premium in certain circumstances), (iii) to certain provisions
regarding Indenture Defaults, remedies relating thereto and rights of the
Owner Trustee and Owner Participant in such circumstances, (iv) to certain
provisions relating to any replaced airframe or engines with respect to an
Aircraft and (v) to the provision that New York law will govern the
Indentures.
In the case of the Lease, modifications are prohibited to certain
provisions regarding the obligation of Atlas (i) to pay basic rent,
stipulated loss value and termination value to the Aircraft Trustee, (ii)
to record the Indenture with the Federal Aviation Administration and to
maintain such Indenture as a first-priority perfected mortgage on the
related Aircraft, (iii) to furnish certain opinions with respect to a
replacement airframe and (iv) to consent to the assignment of the Lease by
the Owner Trustee as collateral under the Indenture, as well as
modifications which would either alter the provision that New York law will
govern the Lease or would deprive the Loan Trustee of rights expressly
granted to it under the Leases.
In the case of the Participation Agreement, modifications are
prohibited (i) to certain conditions to the obligations of the Trustees to
purchase the Equipment Notes issued with respect to an Aircraft involving
good title to such Aircraft, obtaining a certificate of airworthiness with
respect to such Aircraft, entitlement to the benefits of Section 1110 with
respect to such Aircraft and filings of certain documents with the Federal
Aviation Administration, (ii) to the provisions restricting the Note
Holder's ability to transfer such Equipment Notes, (iii) to certain
provisions requiring the delivery of legal opinions and (iv) to the
provision that New York law will govern the Participation Agreement.
In the case of all of the Aircraft Operative Agreements, modifications
are prohibited in any material adverse respect as regards the interest of
the Note Holders, the Subordination Agent, the Liquidity Providers or the
Loan Trustee in the definition of Make-Whole Premium. Notwithstanding the
foregoing, any such Mandatory Document Term may be modified to correct or
supplement any such provision which may be defective or to cure any
ambiguity or correct any mistake, provided that any such action shall not
materially adversely affect the interests of the Note Holders, the
Subordination Agent, the Liquidity Providers, the Mortgagee or the
Certificateholders.
POSSIBLE ISSUANCE OF CLASS D CERTIFICATES
Atlas may elect to issue Series D Equipment Notes in connection with the
financing of Owned Aircraft. Atlas may elect to fund the sale of the Series D
Equipment Notes through the sale of Class D Certificates. The Note Purchase
Agreement provides that Atlas' ability to issue any Series D Equipment Notes is
contingent upon its obtaining written confirmation from each Rating Agency that
the issuance of such Series D Equipment Notes will not result in a withdrawal or
downgrading of the rating of any Class of Certificates. If the Class D
Certificates are issued, the Trustee with respect to such Certificates will
become a party to the Intercreditor Agreement. See "Description of the
Intercreditor Agreement."
LIQUIDATION OF ORIGINAL TRUSTS
At the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a Successor Trust with substantially identical
terms, except that (i) the Successor Trusts will not have the right to purchase
new Equipment Notes and (ii) Delaware law will govern the Original Trusts and
New York law will govern the Successor Trusts. The Trustee of each of the
Original Trusts will also act as Trustee of the corresponding Successor Trust,
and each New Trustee will assume the obligations of the Original Trustee under
each transaction document to which such Original Trustee was a party. Upon the
effectiveness of such transfer, assignment and assumption, each of the Original
Trusts will be liquidated and each of the New Certificates will represent the
same percentage interest in the Successor Trust as it represented in the
Original Trust immediately prior to such transfer, assignment and assumption.
Unless the context otherwise requires, all references in this Prospectus to the
Trusts, the Trustees, the Pass Through Trust Agreements and similar terms shall
be applicable with respect to the Original Trusts until the effectiveness of
such transfer, assignment and assumption and thereafter shall be applicable with
respect to the Successor Trusts. If for any reason such
57
<PAGE> 65
transfer, assignment and assumption cannot be effected to any Successor Trust,
the related Original Trust will continue in existence until it is effected. The
Original Trusts may be treated as partnerships for U.S. federal income tax
purposes. The Successor Trusts will, in the opinion of Tax Counsel, be treated
as grantor trusts. See "Certain U.S. Federal Income Tax Consequences."
TERMINATION OF THE TRUSTS
The obligations of Atlas and the applicable Trustee with respect to a Trust
will terminate upon the distribution to Certificateholders of such Trust of all
amounts required to be distributed to them pursuant to the applicable Pass
Through Trust Agreement and the disposition of all property held in such Trust.
The applicable Trustee will send to each Certificateholder of such Trust notice
of the termination of such Trust, the amount of the proposed final payment and
the proposed date for the distribution of such final payment for such Trust. The
final distribution to any Certificateholder of such Trust will be made only upon
surrender of such Certificateholder's New Certificates at the office or agency
of the applicable Trustee specified in such notice of termination.
THE TRUSTEES
The Trustee for each Trust is Wilmington Trust Company.
BOOK-ENTRY; DELIVERY AND FORM
The New Certificates of each Trust will be represented by a single,
permanent global Certificate, in definitive, fully registered form without
interest coupons (the "Global Certificates"), to be deposited with the Trustee
as custodian for DTC and registered in the name of Cede, as nominee of DTC.
DTC has advised Atlas as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of the New York Banking law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provision of Section 17A
of the Exchange Act. DTC was created to hold securities for DTC Participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly.
Upon the issuance of the Global Certificates, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Certificates to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests Global Certificates is limited to persons who have accounts
with DTC ("DTC Participants") or persons who hold interests through
participants. Ownership of beneficial interests in the Global Certificates is
shown on, and the transfer of that ownership is effected only through, records
maintained by DTC or its nominee (with respect to interests of DTC Participants)
and the records of DTC Participants (with respect to interests of persons other
than DTC Participants). The laws of some states require that certain purchasers
of securities take physical delivery of such securities. Such limits and such
laws may limit the market for beneficial interests in the Global Certificates.
58
<PAGE> 66
DESCRIPTION OF THE DEPOSIT AGREEMENTS
The following summary describes all material terms of the Deposit
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Deposit Agreements. The
provisions of the Deposit Agreements are substantially identical except as
otherwise indicated. Capitalized terms used herein but not defined herein have
the meanings ascribed to them in the Deposit Agreements.
GENERAL
Under the Escrow Agreements, the Escrow Agent with respect to each Trust
entered into a separate Deposit Agreement with the Depositary pursuant to which
the Depositary established separate accounts into which the proceeds of the
offering of the Old Certificates attributable to New Certificates of such Trust
were deposited on behalf of such Escrow Agent, from which the Escrow Agent, upon
request from the Trustee of such Trust, will make withdrawals and into which
such Trustee will make re-deposits during the Delivery Period. Pursuant to the
Deposit Agreement with respect to each Trust, on each Regular Distribution Date
the Depositary will pay to the Paying Agent on behalf of the applicable Escrow
Agent, for distribution to the Certificateholders of such Trust, an amount equal
to interest accrued on the New Certificates issued by such Trust during the
relevant interest period at the rate per annum applicable to such New
Certificates. The interest rates payable on the Deposits are subject to change
under certain circumstances to the same extent as the interest rates for the
Equipment Notes. Upon each delivery of an Aircraft during the Delivery Period,
the Trustee for each Trust will request the Escrow Agent relating to such Trust
to withdraw from the Deposits relating to such Trust funds sufficient to enable
the Trustee of such Trust to purchase the Equipment Note of the series
applicable to such Trust issued with respect to such Aircraft. Accrued but
unpaid interest on all such Deposits withdrawn will be paid on the next Regular
Distribution Date. Any portion of any Deposit withdrawn which is not used to
purchase such Equipment Note will be re-deposited by each Trustee into an
account relating to the applicable Trust. The Deposits relating to each Trust
and interest paid thereon will not be subject to the subordination provisions of
the Intercreditor Agreement and will not be available to pay any other amount in
respect of the New Certificates.
UNUSED DEPOSITS; PREPAYMENT OF DEPOSITS
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the New Certificates -- Obligation to Purchase Equipment Notes".
Since the Aircraft are scheduled for delivery from time to time during the
Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to the Aircraft manufacturer's right to
postpone deliveries under its agreement with Atlas. See "Description of the
Aircraft and the Appraisals -- Deliveries of Aircraft." Depending on the
circumstances of the financing of each Aircraft, the maximum aggregate principal
amount of Equipment Notes may not be issued. If an Aircraft is not delivered on
the scheduled (or rescheduled) delivery date, the portion of the Deposits
relating to such Aircraft, together with accrued interest thereon, shall be
withdrawn and distributed to the Certificateholders upon not less than 15 days'
notice, unless, subject to certain conditions, Atlas elects to extend such
delivery date to a date not later than the Delivery Period Termination Date. If
any funds remain as Deposits with respect to any Trust at the Delivery Period
Termination Date, they will be withdrawn by the Escrow Agent and distributed,
with accrued and unpaid interest thereon to the Certificateholders of such Trust
after at least 15 days prior written notice. In addition, if such remaining
Deposits exceed the Par Redemption Amount with respect to all of the Trusts,
such distribution will include a premium payable by Atlas equal to the Deposit
Make-Whole Premium with respect to the remaining Deposits applicable to such
Trust in excess of such Trust's proportionate share of the Par Redemption
Amount. Since the maximum principal amount of Equipment Notes may not be issued
with respect to an Aircraft and, in any such case, the Series C Equipment Notes
are more likely not to be issued in the maximum principal amount as compared to
the other Equipment Notes, it is more likely that a distribution of unused
Deposits will be made with respect to the Class C Certificates as compared to
the other New Certificates. In addition, notwithstanding the Par
59
<PAGE> 67
Redemption Amount limitation, if any Aircraft is not delivered by the
manufacturer on or prior to the Delivery Period Termination Date due to any
reason not occasioned by Atlas' fault or negligence and no Substitute Aircraft
is provided in lieu of such Aircraft, no Deposit Make-Whole Premium will be paid
with respect to the unused Deposits to be distributed as a result of such
failure to deliver in an amount equal to the maximum principal amount of
Equipment Notes that could have been issued and acquired by such Trust with
respect to such Aircraft in accordance with the Mandatory Economic Terms and
such unused Deposits shall not be included in the calculation of the Par
Redemption Amount.
"Deposit Make-Whole Premium" means, with respect to the distribution of
unused Deposits to holders of any Class of Certificates, as of any date of
determination, an amount equal to the excess, if any, of (a) the present value
of the excess of (i) the scheduled payment of principal and interest to maturity
of the Equipment Notes, assuming the maximum principal amount thereof (the
"Maximum Amount") minus such Class of Certificates' proportionate share (in the
same proportion that the amount of unused Deposits with respect to such Class of
Certificates bears to the unused Deposits with respect to all Classes of
Certificates) of the Par Redemption Amount were issued, on each remaining
Regular Distribution Date for such Class under the Assumed Amortization Schedule
over (ii) the scheduled payment of principal and interest to maturity of the
Equipment Notes actually acquired by the Trustee for such Class on each such
Regular Distribution Date, such present value computed by discounting such
excess on a semiannual basis on each Regular Distribution Date (assuming a
360-day year of twelve 30-day months) using a discount rate equal to the
Treasury Yield plus 175 basis points in the case of the Class A Certificates,
205 basis points in the case of the Class B Certificates and 250 basis points in
the case of the Class C Certificates, over (b) the amount of such unused
Deposits to be distributed to the holders of such New Certificates, minus such
Class of Certificates' proportionate share of the Par Redemption Amount, plus
accrued and unpaid interest on such net amount to but excluding the date of
determination from and including the preceding Regular Distribution Date (or if
such date of determination precedes the first Regular Distribution Date, the
date of issuance of the New Certificates).
DISTRIBUTION UPON OCCURRENCE OF TRIGGERING EVENT
If a Triggering Event shall occur prior to the Delivery Period Termination
Date, the Escrow Agent for each Trust will withdraw any funds then held as
Deposits with respect to such Trust and cause such funds, with accrued and
unpaid interest thereon but without any premium, to be distributed to the
Certificateholders of such Trust by the Paying Agent on behalf of the Escrow
Agent, after at least 15 days' prior written notice. Accordingly, if a
Triggering Event occurs prior to the Delivery Period Termination Date, the
Trusts will not acquire Equipment Notes issued with respect to Aircraft
delivered after the occurrence of such Triggering Event.
DEPOSITARY
ABN AMRO Bank N.V., acting through its Chicago branch, will act as
Depositary.
ABN AMRO Bank N.V. is a direct subsidiary of ABN AMRO Holding N.V., an
international multi-bank holding company. At December 31, 1996, ABN AMRO Holding
N.V. reported consolidated assets amounting to approximately $317 billion (based
on the exchange rate at March 31, 1997 of U.S. $1.00 to NLG 1.88). The
accounting principles applied in the preparation of the financial statements of
ABN AMRO Bank N.V. may not conform to U.S. generally accepted accounting
principles.
ABN AMRO Bank N.V. has long-term unsecured debt ratings of Aa1 from
Moody's, AA from S&P and AA+ from Fitch and short-term unsecured debt ratings of
P-1 from Moody's, A-1+ from S&P and F1+ from Fitch.
ABN AMRO Bank N.V.'s Chicago branch was initially licensed by the
Commissioner of Banks and Real Estate for the State of Illinois on October 1,
1973. The Chicago branch is an unincorporated branch of ABN AMRO Bank N.V. and
is not a separate subsidiary. The branch is located at 135 South LaSalle Street,
Chicago, Illinois 60674-9135.
60
<PAGE> 68
DESCRIPTION OF THE ESCROW AGREEMENTS
The following summary describes all material terms of the Escrow
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Escrow Agreements. The
provisions of the Escrow Agreements are substantially identical except as
otherwise indicated. Capitalized terms used herein but not defined herein have
the meanings ascribed to them in the Escrow Agreements.
Each Escrow Agent, each Paying Agent, each Trustee and the Initial
Purchasers entered into a separate Escrow Agreement for the benefit of the
Certificateholders of each Trust as holders of the Escrow Receipts affixed
thereto (in such capacity, a "Receiptholder"). The cash proceeds of the offering
of the Old Certificates of each Trust were deposited on behalf of the Escrow
Agent (for the benefit of Receiptholders) with the Depositary as Deposits
relating to such Trust. The Escrow Agent of each Trust was given irrevocable
instructions (i) to permit the Trustee of such Trust to cause funds to be
withdrawn from such Deposits on or prior to the Delivery Period Termination Date
solely for the purpose of enabling such Trustee to purchase Equipment Notes on
and subject to the terms and conditions of the Note Purchase Agreement and (ii)
to direct the Depositary to pay interest on the Deposits accrued in accordance
with the Deposit Agreement to the Paying Agent for distribution to the
Receiptholders.
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the related Receiptholders, one or more paying
agent account(s) (each, a "Paying Agent Account"), which shall be
non-interest-bearing. Pursuant to the terms of the Escrow Agreement, the Paying
Agent is required to deposit interest on Deposits relating to each Trust and any
unused Deposits withdrawn by the Escrow Agent in the Paying Agent Account. All
amounts so deposited will be distributed by the Paying Agent on a Regular
Distribution Date or Special Distribution Date, as appropriate.
Upon receipt by the Depositary on behalf of the Escrow Agent of the cash
proceeds from the offering of the Old Certificates as described above, the
Escrow Agent issued one or more Escrow Receipts which will be affixed by the
relevant Trustee to each New Certificate. Each Escrow Receipt evidences a
fractional undivided interest in amounts from time to time deposited into the
Paying Agent Account and is limited in recourse to amounts deposited into such
Account. An Escrow Receipt may not be assigned or transferred except in
connection with the assignment or transfer of the New Certificate to which it is
affixed. Each Escrow Receipt will be registered by the Escrow Agent in the same
name and manner as the New Certificate to which it is affixed.
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities and certain provisions of the Intercreditor Agreement relating to the
Liquidity Facilities. The summary does not purport to be complete and is
qualified in its entirety by reference to all of the provisions of the Liquidity
Facilities and the Intercreditor Agreement. The provisions of the Liquidity
Facilities are substantially identical except as otherwise indicated.
Capitalized terms used herein but not defined herein have the meanings ascribed
to them in the Revolving Credit Agreement in connection with the respective
Liquidity Facilities.
GENERAL
ABN AMRO Bank N.V., acting through its Chicago branch, entered into a
Liquidity Facility with the Subordination Agent with respect to the Class A
Trust and Morgan Stanley Capital Services, Inc. ("MSCS") entered into separate
Liquidity Facilities with the Subordination Agent with respect to the Class B
Trust and the Class C Trust (each, a "Liquidity Facility"). Pursuant to the
applicable Liquidity Facility, ABN AMRO Bank N.V. or MSCS, as the case may be,
will make one or more advances to the Subordination Agent to fund the payment of
interest on the New Certificates, subject to certain limitations. The Liquidity
Facility for each Trust is intended to enhance the likelihood of timely payment
by such Trust of the interest payable on the New Certificates of such Trust at
the Stated Interest Rate therefor. If interest payment defaults occur which
exceed the amount covered by or available under the applicable Liquidity
Facility for any Trust, the such Trust will bear their allocable share of the
deficiencies to the extent that there are no other sources of funds. Although
ABN AMRO Bank N.V., acting through its Chicago branch, is the Liquidity Provider
for the
61
<PAGE> 69
Class A Trust and MSCS is the Liquidity Provider for the Class B Trust and the
Class C Trust, each may be replaced by one or more other entities with respect
to such Trusts under certain circumstances. The obligations of MSCS under its
Liquidity Facilities will be fully and unconditionally guaranteed by Morgan
Stanley, Dean Witter, Discover & Co. ("MSDWD").
DRAWINGS
The initial aggregate amount available under the Liquidity Facilities for
the Class A Trust, the Class B Trust and the Class C Trust at January 2, 1999,
assuming that Equipment Notes in the maximum principal amount with respect to
all Aircraft are acquired by the Trusts and that all interest and principal due
on or prior to January 2, 1999, is paid, will be $35,490,023, $14,169,519, and
$15,723,927, respectively (each, an initial "Maximum Available Commitment").
Except as otherwise provided below, the Liquidity Facility for each Trust will
enable the Subordination Agent to make Interest Drawings thereunder promptly
after any Regular Distribution Date to fund the payment of interest then due and
payable on the New Certificates of such Trust at the Stated Interest Rate for
such Trust to the extent that the amount, if any, available to the Subordination
Agent on such Regular Distribution Date is not sufficient to pay such interest;
provided, however, that the maximum amount available to be drawn under a
Liquidity Facility with respect to any Trust on any Regular Distribution Date to
fund any shortfall of interest on Certificates of such Trust will not exceed the
then Maximum Available Commitment under such Liquidity Facility. The Liquidity
Facility for any Trust does not provide for drawings thereunder to pay for
principal of or premium on the Class of New Certificates of such Trust or any
interest on the Certificates of such Class in excess of the Stated Interest Rate
for such Class or more than three semiannual installments of interest thereon or
principal of or interest or premium on the New Certificates of any other Class.
In addition, the Liquidity Facility with respect to each Trust does not provide
for drawings thereunder to fund the payment of any amounts payable with respect
to the Deposits relating to such Trust.
Each payment by the Liquidity Provider under each Liquidity Facility
reduces by the same amount the Maximum Available Commitment under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under either Liquidity Facility for any Trust, upon payment to
the relevant Liquidity Provider in full for the amount of such Interest Drawings
plus interest thereon, the Maximum Available Commitment under such Liquidity
Facility in respect of interest on the New Certificates of such Trust will be
reinstated to an amount not to exceed the then Required Amount of such Liquidity
Facility; provided, however, that such Liquidity Facility will not be so
reinstated at any time if (i) a Liquidity Event of Default shall have occurred
and be continuing and (ii) less than 65% of the then aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes. With
respect to any other drawings under such Liquidity Facility, amounts available
to be drawn thereunder are not subject to reinstatement. The Required Amount of
the Liquidity Facility for any Trust will be automatically reduced from time to
time to an amount equal to the next three successive interest payments due on
the New Certificates of such Trust (without regard to expected future payment of
principal of such New Certificates) at the Stated Interest Rate for such Trust.
If at any time (i) the short-term unsecured debt rating of any Liquidity
Provider (or, in the case of MSCS, such rating of MSDWD) issued by any of the
Rating Agencies is lower than the Threshold Rating or (ii) the guaranty of
MSCS's obligations under the relevant Liquidity Facilities by MSDWD becomes
invalid or unenforceable, each Liquidity Facility provided by the relevant
Liquidity Provider may be replaced by a Replacement Facility. In the event that
such Liquidity Facility is not replaced with a Replacement Facility, in the case
of ABN AMRO Bank N.V., within 10 days, and in the case of MSCS, within 3 days,
after notice of the downgrading or such guaranty becoming invalid or
unenforceable, as applicable, and as otherwise provided in the Intercreditor
Agreement, the Subordination Agent will request the Downgrade Drawing in an
amount equal to the then Maximum Available Commitment thereunder and will hold
the proceeds thereof in the Cash Collateral Account for such Trust as cash
collateral to be used for the same purposes and under the same circumstances as
cash payments of Interest Drawings under such Liquidity Facility would be used.
A "Replacement Facility" for any Liquidity Facility will mean an
irrevocable liquidity facility (or liquidity facilities) in substantially the
form of the replaced Liquidity Facility, including reinstatement
62
<PAGE> 70
provisions, or in such other form (which may include a letter of credit) as
shall permit the Rating Agencies to confirm in writing their respective ratings
then in effect for the New Certificates (before downgrading of such ratings, if
any, as a result of the downgrading of the applicable Liquidity Provider), in a
face amount (or in an aggregate face amount) equal to the amount of interest
payable on the Certificates of such Trust (at the Stated Interest Rate for such
Trust, and without regard to expected future principal payments) on the three
Regular Distribution Dates following the date of replacement of such Liquidity
Facility and issued by a person having unsecured short-term debt ratings issued
by both Rating Agencies which are equal to or higher than the Threshold Rating.
The provider of any Replacement Facility will have the same rights (including,
without limitation, priority distribution rights and rights as "Controlling
Party") under the Intercreditor Agreement as the replaced initial liquidity
provider.
"Threshold Rating" means the short-term unsecured debt rating of P-1 by
Moody's, A-1+ by Standard & Poor's and F1+ by Fitch, in the case of the Class A
Liquidity Provider, and the short-term unsecured debt rating of P-1 by Moody's,
A-1 by Standard & Poor's and F1 by Fitch, in the case of the Class B Liquidity
Provider and the Class C Liquidity Provider.
The Liquidity Facility for each Trust provides that the relevant Liquidity
Provider's obligations thereunder will expire on the earliest of (i) 364 days
after the Issuance Date (counting from, and including, the Issuance Date) in the
case of the Class A Trust or on the Final Maturity Date in the case of the Class
B Trust or the Class C Trust; (ii) the date on which the Subordination Agent
delivers to such Liquidity Provider a certification that all of the Certificates
of such Trust have been paid in full; (iii) the date on which the Subordination
Agent delivers to such Liquidity Provider a certification that a Replacement
Facility has been substituted for such Liquidity Facility; (iv) the fifth
Business Day following receipt by the Subordination Agent of a Termination
Notice from such Liquidity Provider (see "-- Liquidity Events of Default"); and
(v) the date on which no amount is or may (by reason of reinstatement) become
available for drawing under such Liquidity Facility. The Liquidity Facility for
the Class A Trust provides that the scheduled expiration date thereof may be
extended for additional 364-day periods by mutual agreement.
The Intercreditor Agreement provides for the replacement of the Liquidity
Facility for any Trust if it is scheduled to expire earlier than 15 days after
the Final Maturity Date for the Certificates of such Trust) if such Liquidity
Facility is not extended at least 25 days prior to its then scheduled expiration
date. If such Liquidity Facility is not so extended or replaced by the 25th day
prior to its then scheduled expiration date, the Subordination Agent shall
request a Non-Extension Drawing in an amount equal to the then Maximum Available
Commitment thereunder and hold the proceeds thereof in the Cash Collateral
Account for such Trust as cash collateral to be used for the same purposes and
under the same circumstances, and subject to the same conditions, as cash
payments of Interest Drawings under such Liquidity Facility would be used.
Subject to certain limitations, Atlas may, at its option, arrange for a
Replacement Facility at any time to replace the Liquidity Facility for any Trust
(including without limitation any Replacement Facility described in the
following sentence). In addition, if any liquidity provider shall determine not
to extend any liquidity facility, then such liquidity provider may, at its
option, arrange for a Replacement Facility to replace such liquidity facility
during the period no earlier than 40 days and no later than 25 days prior to the
then scheduled expiration date of such liquidity facility. If any Replacement
Facility is provided at any time after a Downgrade Drawing or a Non-Extension
Drawing under any Liquidity Facility, the funds with respect to such liquidity
facility on deposit in the Cash Collateral Account for such Trust will be
returned to the liquidity provider being replaced.
The Intercreditor Agreement provides that, upon receipt by the
Subordination Agent of a Termination Notice with respect to any Liquidity
Facility from the applicable Liquidity Provider (given as described in
"-- Liquidity Events of Default"), the Subordination Agent shall request a final
drawing under such Liquidity Facility in an amount equal to the then Maximum
Available Commitment thereunder (a "Final Drawning") and will hold the proceeds
thereof in the Cash Collateral Account for the related Trust as cash collateral
to be used for the same purposes and under the same circumstances, and subject
to the same conditions, as cash payments of Interest Drawings under such
Liquidity Facility would be used.
63
<PAGE> 71
Drawings under any Liquidity Facility will be made by delivery by the
Subordination Agent of a certificate in the form required by such Liquidity
Facility. Upon receipt of such a certificate, the relevant Liquidity Provider is
obligated to make payment of the drawing requested thereby in immediately
available funds. Upon payment by any Liquidity Provider of the amount specified
in any drawing under any Liquidity Facility, such Liquidity Provider will be
fully discharged of its obligations under such Liquidity Facility with respect
to such drawing and will not thereafter be obligated to make any further
payments under such Liquidity Facility in respect of such drawing to the
Subordination Agent or any other person.
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of an Interest Drawing
or the Final Drawing will be immediately due and payable, together with interest
on the amount of such drawing, with respect to the period from the date of its
borrowing to (but excluding) the third business day following the applicable
Liquidity Provider's receipt of the notice of such Interest Drawing, at the Base
Rate plus 2.25% per annum, and thereafter, at LIBOR for the applicable Interest
Period plus 2.25% per annum in the case of the Class A Trust and 1.75% per annum
in the case of the Class B Trust or the Class C Trust, provided that, in the
case of a Final Drawing, the Subordination Agent may convert the Final Drawing
into a Drawing bearing interest at the Base Rate plus 2.25% per annum, in the
case of the Class A Trust, and 1.75% per annum, in the case of the Class B Trust
and the Class C Trust, on the last day of an Interest Period for such Drawing;
provided, further, that the Subordination Agent will be obligated to reimburse
such amounts only to the extent that the Subordination Agent has funds available
therefor.
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a business day, for the next preceding business day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day that is a business day, the average of the quotations for such day for
such transactions received by the Liquidity Provider from three Federal funds
brokers of recognized standing selected by it, plus (b) one-quarter of one
percent ( 1/4 of 1%).
"LIBOR" means, with respect to any interest period, the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the rates per annum at
which deposits in dollars are offered to major banks in the London interbank
market at approximately 11:00 A.M. (London time) two business days before the
first day of such interest period in an amount approximately equal to the
principal amount of the advance to which such interest period is to apply and
for a period of time comparable to such interest period.
The amount drawn under any Liquidity Facility for any Trust by reason of a
Downgrade Drawing or a Non-Extension Drawing will be treated as follows: (i)
such amount will be released on any Distribution Date to the relevant Liquidity
Provider to the extent that such amount exceeds the Required Amount; (ii) any
portion of such amount withdrawn from the Cash Collateral Account for such Trust
to fund payment of the interest on such Certificates will be treated in the same
way as Interest Drawings; and (iii) the balance of such amount will be invested
in Eligible Investments. A Downgrade Drawing under any of the Liquidity
Facilities (other than any portion thereof applied to the payment of interest on
the Certificates) will bear interest (x) subject to clause (y) below, at a rate
equal to LIBOR for the applicable Interest Period plus 0.675% per annum in the
case of the Class A Trust or 0.40% in the case of the Class B Trust or the Class
C Trust on the outstanding amount from time to time of such Downgrade Drawing,
and (z) from and after the date, if any, on which it is converted into a Final
Drawing as described below under "-- Liquidity Events of Default", at a rate
equal to LIBOR for the applicable Interest Period (or, as described in the third
preceding paragraph, the Base Rate) plus 2.25% per annum in the case of the
Class A Trust or 1.75% in the case of the Class B Trust or the Class C Trust per
annum; provided that the Subordination Agent will be obligated to pay such
amount only to the extent that the Subordination Agent has funds available
therefor. A Non-Extension Drawing under the Liquidity Facility for the Class A
Trust (other than any portion thereof applied to the payment of interest on the
Certificates) will bear interest (1) during the period from the date of its
borrowing to (but excluding) the date, if any, on which it is converted into a
Final Drawing as described below under "-- Liquidity Events of Default", at a
rate equal to LIBOR for the applicable interest period plus 0.475% per annum on
the
64
<PAGE> 72
outstanding amount from time to time of such Non-Extension Drawing, and (2)
thereafter, at a rate equal to LIBOR for the applicable interest period (or, as
described in the third preceding paragraph, the Base Rate) plus 2.25% per annum;
provided that the Subordination Agent will be obligated to pay such amount only
to the extent that the Subordination Agent has funds available therefor.
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "Liquidity Event
of Default") will consist of: (i) the acceleration of all the Equipment Notes
and (ii) certain bankruptcy or similar events involving Atlas.
If (i) any Liquidity Event of Default under any Liquidity Facility has
occurred and is continuing and (ii) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes, the
applicable Liquidity Provider may, in its discretion, give a notice of
termination of the related Liquidity Facility (a "Termination Notice") the
effect of which will be to cause (i) such Liquidity Facility to expire on the
fifth Business Day after the date on which such Termination Notice is received
by the Subordination Agent, (ii) the Subordination Agent to promptly request,
and the Liquidity Provider to make, a Final Drawing thereunder in an amount
equal to the then Maximum Available Commitment thereunder, (iii) any Drawing
remaining unreimbursed as of the date of termination to be automatically
converted into a Final Drawing under such Liquidity Facility, and (iv) all
amounts owing to such Liquidity Provider automatically to become accelerated.
Notwithstanding the foregoing, the Subordination Agent will be obligated to pay
amounts owing to the Liquidity Providers only to the extent of funds available
therefor after giving effect to the payments in accordance with the provisions
set forth under "Description of the Intercreditor Agreement -- Priority of
Distributions." Upon the circumstances described below under "Description of the
Intercreditor Agreement -- Intercreditor Rights," a Liquidity Provider may
become the Controlling Party with respect to the exercise of remedies under the
Indentures.
LIQUIDITY PROVIDERS
The initial Liquidity Provider for the Class A Trust is ABN AMRO Bank N.V.,
acting through its Chicago branch. The initial Liquidity Provider for the Class
B Trust and the Class C Trust is MSCS. The obligations of MSCS under its
Liquidity Facilities are fully and unconditionally guaranteed by MSDWD.
For a description of ABN AMRO Bank N.V., see "Description of the Deposit
Agreements -- Depositary."
MSCS, a subsidiary of MSDWD, commenced operation in August 1985. MSCS was
established to conduct, primarily as principal, an interest rate, currency and
equity derivatives products business. MSCS also engages in a variety of other
related transactions.
MSDWD, the parent of MSCS and guarantor of its obligations under its
Liquidity Facilities, is a preeminent global financial services firm that
maintains leading market positions in each of its three primary
businesses -- securities, asset management and credit services. MSDWD is a
combination of Dean Witter, Discover & Co. ("Dean Witter Discover") and Morgan
Stanley Group Inc. ("Morgan Stanley") pursuant to a merger of equals that was
effected on May 31, 1997 in which Morgan Stanley was merged with and into Dean
Witter Discover.
Reports, proxy statements and other information filed by MSDWD with the
Securities and Exchange Commission pursuant to the informational requirements of
the Exchange Act can be inspected and copied at the public reference facilities
of the Securities and Exchange Commission at 450 Fifth Street, N.W. Washington,
D.C. 20549, and at the following regional offices of the Securities and Exchange
Commission: New York Regional Office, Suite 1300, 7 World Trade Center, New
York, New York 10048; Los Angeles Regional Office, 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036; and Chicago Regional Office, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street N.W. Washington, D.C. 20549, at prescribed rates.
65
<PAGE> 73
DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes all material provisions of the
Intercreditor Agreement. The summary does not purport to be complete and is
qualified in its entirety by reference to all of the provisions of the
Intercreditor Agreement. Capitalized terms used herein but not defined herein
have the meanings ascribed to them in the Intercreditor Agreement.
INTERCREDITOR RIGHTS
Controlling Party
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Providers have agreed that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder or with respect to the Equipment Notes issued under such
Indenture, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued under such Indenture (provided that, for so
long as the Subordination Agent is the registered holder of the Equipment Notes,
the Subordination Agent will act with respect to this clause (a) in accordance
with the directions of the Trustees (in the case of each such Trustee, with
respect to the Equipment Notes issued under such Indenture and held as Trust
Property of such Trust) constituting, in the aggregate, directions with respect
to such principal amount of Equipment Notes), so long as no Indenture Default
(which, with respect to Leased Aircraft, has not been cured by the applicable
Owner Trustee or Owner Participant) shall have occurred and be continuing
thereunder, and (b) after the occurrence and during the continuance of an
Indenture Default under such Indenture which has not been cured by the
applicable Owner Trustee or Owner Participant, in taking, or refraining from
taking, any action thereunder or with respect to the Equipment Notes issued
under such Indenture, including exercising remedies thereunder or with respect
to such Equipment Notes (including acceleration of such Equipment Notes or
foreclosing the lien on the Aircraft securing such Equipment Notes), by the
Controlling Party, subject to the limitations described below.
"Controlling Party" with respect to any Indenture means: (x) the Class A
Trustee; (y) upon payment of Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon payment of Final Distributions
to the holders of Class B Certificates, the Class C Trustee. See "Description of
the Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustees. Notwithstanding the foregoing, at any time
after 18 months from the earlier to occur of (x) the date on which the entire
available amount under any Liquidity Facility shall have been drawn (for any
reason other than a Downgrade Drawing or a Non-Extension Drawing) and remain
unreimbursed and (y) the date on which all Equipment Notes shall have been
accelerated, the Liquidity Providers with at least a majority of unreimbursed
Liquidity Obligations shall have the right to become the Controlling Party with
respect to any Indenture. For purposes of giving effect to the foregoing, the
Trustees (other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) will be deemed to agree by virtue of their purchase of
Certificates, that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. For a description of certain limitations on
the Controlling Party's rights to exercise remedies, see "Description of the
Equipment Notes -- Remedies."
Sale of Equipment Notes or Aircraft
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any Certificates are outstanding, during nine months after the earlier of (x)
the acceleration of the Equipment Notes under any Indenture and (y) the
bankruptcy or insolvency of Atlas, without the consent of each Trustee, (a) no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes, and (b) with respect to any
Aircraft, the amount and payment dates of rentals payable by Atlas under the
Lease for such Aircraft may not be adjusted, if, as a result of such adjustment,
the discounted present
66
<PAGE> 74
value of all such rentals would be less than 75% of the discounted present value
of the rentals payable by Atlas under such Lease before giving effect to such
adjustment, in each case, using the weighted average interest rate of the
Equipment Notes outstanding under such Indenture as the discount rate.
The Subordination Agent may from time to time during the continuance of an
Indenture Default (and before the occurrence of a Triggering Event) commission
LTV Appraisals with respect to an Aircraft at the request of the Controlling
Party.
PRIORITY OF DISTRIBUTIONS
So long as no Triggering Event shall have occurred, the payments in respect
of the Equipment Notes and certain other payments received on any Distribution
Date will be promptly distributed by the Subordination Agent on such
Distribution Date in the following order of priority:
(i) to the Liquidity Providers to the extent required to pay the
Liquidity Obligations (other than any interest accrued thereon or the
principal amount of any Drawing) (the "Liquidity Expenses");
(ii) to the Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations;
(iii) to the Liquidity Providers to the extent required to pay or
reimburse the Liquidity Providers for the Liquidity Obligations (other than
amounts payable pursuant to clauses (i) and (ii) above) and/or, if
applicable, to replenish each Cash Collateral Account up to the Required
Amount;
(iv) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates;
(v) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates;
(vi) to the Class C Trustee to the extent required to pay Expected
Distributions on the Class C Certificates;
(vii) if Class D Certificates have been issued, to the Class D Trustee
to the extent required to pay "Expected Distributions" (to be defined in a
manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates; and
(viii) to the Subordination Agent and each Trustee for the payment of
certain fees and expenses.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Current Distribution Date, the sum of (x) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (y) the difference between (A) the
Pool Balance of such Certificates as of the immediately preceding Distribution
Date (or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), and (B) the
Pool Balance of such Certificates as of the Current Distribution Date calculated
on the basis that (i) the principal of the Equipment Notes held in such Trust
has been paid when due (whether at stated maturity, upon redemption, prepayment,
purchase or acceleration or otherwise) and such payments have been distributed
to the holders of such Certificates and (ii) the principal of any Equipment
Notes formerly held in such Trust that have been sold pursuant to the
Intercreditor Agreement has been paid in full and such payments have been
distributed to the holders of such Certificates, but without giving effect to
any reduction in the Pool Balance as a result of any distribution attributable
to Deposits occurring after the immediately preceding Distribution Date (or, if
the Current Distribution Date is the first Distribution Date, occurring after
the initial issuance of the Certificates of such Trust). For purposes of
determining the priority of distributions on account of the redemption, purchase
or prepayment of all of the Equipment Notes issued pursuant to an Indenture,
clause (x) of the definition of Expected Distributions shall be deemed to read
as follows: "(x) accrued, due and unpaid interest on such Certificates
(excluding interest, if any, payable with respect to the Deposits relating to
such Trust) together with (without duplication) accrued and unpaid interest on a
portion of such
67
<PAGE> 75
Certificates equal to the outstanding principal amount of the Equipment Notes
being redeemed, purchased or prepaid (immediately prior to such redemption,
purchase or prepayment)".
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other payments
will be promptly distributed by the Subordination Agent in the following order
of priority:
(i) to the Subordination Agent, any Trustee, any Certificateholder and
the Liquidity Providers to the extent required to pay certain out-of-pocket
costs and expenses actually incurred by the Subordination Agent or any
Trustee or to reimburse any Certificateholder or the Liquidity Providers in
respect of payments made to the Subordination Agent or any Trustee in
connection with the protection or realization of the value of the Equipment
Notes or any Trust Indenture Estate (collectively, the "Administration
Expenses");
(ii) to the Liquidity Providers to the extent required to pay the
Liquidity Expenses;
(iii) to the Liquidity Providers to the extent required to pay
interest accrued on the Liquidity Obligations;
(iv) to the Liquidity Providers to the extent required to pay the
outstanding amount of all Liquidity Obligations and/or, if applicable, with
respect to any particular Liquidity Facility, unless (x) less than 65% of
the aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes and a Liquidity Event of Default shall have
occurred and is continuing under such Liquidity Facility or (y) a Final
Drawing shall have occurred under such Liquidity Facility, to replenish the
Cash Collateral Account with respect to such Liquidity Facility up to the
Required Amount for the related Class of Certificates (less the amount of
any repayments of Interest Drawings under such Liquidity Facility while
sub-clause (x) of this clause (iv) is applicable);
(v) to the Subordination Agent, any Trustee or any Certificateholder
to the extent required to pay certain fees, taxes, charges and other
amounts payable;
(vi) to the Class A Trustee to the extent required to pay Adjusted
Expected Distributions on the Class A Certificates;
(vii) to the Class B Trustee to the extent acquired to pay Adjusted
Expected Distributions on the Class B Certificates;
(viii) to the Class C Trustee to the extent required to pay Adjusted
Expected Distributions on the Class C Certificates; and
(ix) if Class D Certificates have been issued, to the Class D Trustee
to the extent required to pay "Adjusted Expected Distributions" (to be
defined in a manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates.
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (2) the greater of:
(A) the difference between (x) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original aggregate
face amount of the Certificates of such Trust) and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the Non-Performing Equipment Notes held in
such Trust has been paid in full and such payments have been distributed to
the holders of such Certificates, (ii) the principal of the Performing
Equipment Notes held in such Trust has been paid when due (but without
giving effect to any acceleration of Performing Equipment Notes) and such
payments have been distributed to the holders of such Certificates and
(iii) the principal of any Equipment Notes formerly held in such Trust that
have been sold pursuant to the Intercreditor Agreement has been paid in
full and such payments have been distributed to the holders
68
<PAGE> 76
of such Certificates, but without giving effect to any reduction in the
Pool Balance as a result of any distribution attributable to Deposits
occurring after the immediately preceding Distribution Date (or, if the
Current Distribution Date is the first Distribution Date, occurring after
the initial issuance of the Certificates of such Trust), and
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), less the
amount of the Deposits for such Class of Certificates as of such preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, the original aggregate amount of the Deposits for such
Class of Certificates) other than any portion of such Deposits thereafter
used to acquire Equipment Notes pursuant to the Note Purchase Agreement,
over (ii) the Aggregate LTV Collateral Amount for such Class of
Certificates for the Current Distribution Date; provided that, until the
date of the initial LTV Appraisals, clause (B) shall not apply.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means (i) the sum of the applicable LTV Collateral Amounts for
each Aircraft, minus (ii) the Pool Balance for each Class of Certificates, if
any, senior to such Class, after giving effect to any distribution of principal
on such Distribution Date with respect to such senior Class or Classes.
"LTV Collateral Amount" of any Aircraft for any Class of Certificates
means, as of any Distribution Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft which has suffered an Event of
Loss under and as defined in the relevant Lease, the amount of the insurance
proceeds paid to the related Loan Trustee in respect thereof to the extent then
held by such Loan Trustee (and/or on deposit in the Special Payments Account) or
payable to such Loan Trustee in respect thereof) and (ii) the outstanding
principal amount of the Equipment Notes secured by such Aircraft after giving
effect to any principal payments of such Equipment Notes on or before such
Distribution Date.
"LTV Ratio" means for the Class A Certificates 38.1%, for the Class B
Certificates 52.8% and for the Class C Certificates 68.4%.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals of the
Aircraft securing such Equipment Note as soon as practicable and additional LTV
Appraisals on or prior to each anniversary of the date of such initial LTV
Appraisals; provided that if the Controlling Party reasonably objects to the
appraised value of the Aircraft shown in such LTV Appraisals, the Controlling
Party shall have the right to obtain or cause to be obtained substitute LTV
Appraisals (including LTV Appraisals based upon physical inspection of such
Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length transaction between an
informed and willing purchaser under no compulsion to buy and an informed and
willing seller under no compulsion to sell and both having knowledge of all
relevant facts.
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the Certificates
of any Trust, will be distributed to the Trustee for such Trust, notwithstanding
the priority of distributions set forth in the Intercreditor Agreement and
otherwise
69
<PAGE> 77
described herein. All amounts on deposit in the Cash Collateral Account for any
Trust that are in excess of the Required Amount, of the applicable Liquidity
Provider, will be paid to the applicable Liquidity Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Lease, the related Participation
Agreement or other related document), (i) if no Indenture Default shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent shall request instructions from the Trustee(s) and shall vote or consent
in accordance with the directions of such Trustee(s) and (ii) if any Indenture
Default shall have occurred and be continuing with respect to such Indenture,
the Subordination Agent will exercise its voting rights as directed by the
Controlling Party, subject to certain limitations, provided that no such
amendment, modification, consent or waiver shall, without the consent of each
Liquidity Provider, reduce the amount of rent, supplemental rent or stipulated
loss values payable by Atlas under any Lease or reduce the amount of principal
or interest payable by Atlas under any Equipment Note issued under any Owned
Aircraft Indenture.
ADDITION OF TRUSTEE FOR CLASS D CERTIFICATES
If the Class D Certificates are issued, the Class D Trustee will become a
party to the Intercreditor Agreement.
THE SUBORDINATION AGENT
Wilmington Trust Company is the Subordination Agent under the Intercreditor
Agreement (the "Subordination Agent). Atlas and its affiliates may from time to
time enter into banking and trustee relationships with the Subordination Agent
and its affiliates. The Subordination Agent's address is One Rodney Square, 1100
North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party may remove the Subordination Agent for cause as
provided in the Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Any resignation or removal of the Subordination Agent and appointment
of a successor Subordination Agent does not become effective until acceptance of
the appointment by the successor Subordination Agent.
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of five Boeing 747-400F aircraft, all of which will be
newly delivered by the manufacturer at the time that the Equipment Notes
relating thereto are issued. The Aircraft have been designed to be in compliance
with Stage 3 noise level standards. The Boeing 747-400F aircraft is a long-range
aircraft with payload capacity of approximately 150 tons. The engine type
expected to be utilized on the Aircraft is the General Electric Model
CF6-80C2B1F.
70
<PAGE> 78
THE APPRAISALS
The table below sets forth the appraised values and certain additional
information regarding the Aircraft.
<TABLE>
<CAPTION>
AIRCRAFT MANUFACTURER'S APPRAISED VALUE
AIRCRAFT ENGINE TAIL SERIAL DELIVERY ------------------------------------------
TYPE TYPE NUMBER NUMBER DATE* AISI AVS MBA
- --------------- ----------- -------- -------------- ------------- ------------ ------------ ------------
<C> <S> <C> <C> <C> <C> <C> <C>
Boeing 747-400F CF6-80C2B1F N491MC 29252 July 1998 $171,540,000 $153,750,000 $157,260,000
Boeing 747-400F CF6-80C2B1F N492MC 29253 August 1998 171,960,000 153,750,000 157,575,000
Boeing 747-400F CF6-80C2B1F N493MC 29254 October 1998 172,810,000 154,130,000 158,205,000
Boeing 747-400F CF6-80C2B1F N494MC 29255 November 1998 173,230,000 154,130,000 158,520,000
Boeing 747-400F CF6-80C2B1F N495MC 29256 December 1998 173,640,000 154,130,000 158,835,000
------------ ------------ ------------
$863,180,000 $769,890,000 $790,395,000
============ ============ ============
</TABLE>
- ---------------
* Reflects current expected delivery dates. The actual delivery date for any
Aircraft may be subject to delay or acceleration. See "-- Deliveries of
Aircraft."
The appraised values set forth in the foregoing chart were determined by
the following three independent aircraft appraisal and consulting firms: AISI,
AvS and MBA. Each Appraiser was asked to provide its opinion as to the appraised
value of each Aircraft projected as of the scheduled delivery month of each such
Aircraft. As part of this process, all three Appraisers performed "desk-top"
appraisals without any physical inspection of the Aircraft. The appraisals are
based on various assumptions and methodologies, which vary among the appraisals.
An appraisal is only an estimate of value, is not indicative of the price
at which an aircraft may be purchased from the manufacturer and should not be
relied upon as a measure of realizable value; the proceeds realized upon a sale
of any Aircraft may be less than the appraised value thereof. The value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft and other similar factors. Accordingly, there can be
no assurance that the proceeds realized upon any such exercise with respect to
the Equipment Notes and the Aircraft pursuant to the applicable Indenture would
equal the appraised value of such Aircraft or be sufficient to satisfy in full
payments due on the Equipment Notes issued thereunder or the Certificates.
DELIVERIES OF AIRCRAFT
The Aircraft are currently scheduled for delivery from July 1998 through
December 1998. See the table under "-- The Appraisals" for the scheduled month
of delivery of each Aircraft. Under the Boeing Purchase Agreement, delivery of
an Aircraft may be delayed due to "Excusable Delay," which is defined to
include, among other things, acts of God, war or armed hostilities, government
acts or priorities, strikes or labor troubles causing cessation, slowdown or
interruption of work, or any other cause beyond Boeing's control or not
occasioned by Boeing's fault or negligence. Boeing has announced that is has
experienced delays in deliveries of aircraft, and the delivery schedule
described above for the Aircraft reflects adjustments made by Boeing as a result
of such delays. Atlas cannot predict whether further adjustments in such
schedule will be required.
The Note Purchase Agreement provides that the Delivery Period will expire
on June 30, 1999, subject to extension, if a labor strike occurs at Boeing prior
to June 30, 1999 by the number of days that such strike continues in effect. If
delivery of any Aircraft is delayed by more than 30 days after the month
scheduled for delivery or beyond June 30, 1999, Atlas has the right to replace
such Aircraft with a Substitute Aircraft, subject to certain conditions. See
"-- Substitute Aircraft." If delivery of any Aircraft is delayed beyond the
Delivery Period Termination Date and Atlas does not exercise its right to
replace such Aircraft with a Substitute Aircraft, there will be unused Deposits
that will be distributed to Certificateholders together with accrued and unpaid
interest thereon from the immediately preceding Regular Distribution Date to the
date of such distribution and, if applicable, a premium. See "Description of the
Deposit Agreements -- Unused Deposits."
71
<PAGE> 79
SUBSTITUTE AIRCRAFT
If the delivery date for any Aircraft is delayed (i) more than 30 days
after the month scheduled for delivery or (ii) beyond June 30, 1999, Atlas may
identify for delivery a substitute aircraft (each, a "Substitute Aircraft")
meeting the following conditions (x) a Substitute Aircraft must be a Boeing
747-400F aircraft manufactured after 1993 so long as such substitution does not
vary the Mandatory Economic Terms and (y) Atlas will be obligated to obtain
written confirmation from each Rating Agency that substituting such Substitute
Aircraft for the replaced Aircraft will not result in a withdrawal, suspension
or downgrading of the ratings of any of the Certificates.
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes.
The summaries make use of terms defined in and are qualified in their entirety
by reference to all of the provisions of the Equipment Notes, the Indentures,
the Leases, the Participation Agreements, the trust agreements under which the
Owner Trustees act on behalf of the Owner Participants (the "Trust Agreements")
and the Note Purchase Agreement. Except as otherwise indicated, the following
summaries relate to the Equipment Notes, the Indenture, the Lease, the
Participation Agreement and the Trust Agreement that may be applicable to each
Aircraft.
Under the Note Purchase Agreement, Atlas has the option of entering into a
leveraged lease financing or a debt financing with respect to each Aircraft. The
Note Purchase Agreement provides for the relevant parties to enter into either
(i) with respect to each Leased Aircraft, a Participation Agreement, a Lease and
a Leased Aircraft Indenture (among other documents) relating to the financing of
such Leased Aircraft and (ii) with respect to each Owned Aircraft, a
Participation Agreement and an Owned Aircraft Indenture relating to the
financing of such Owned Aircraft. The description of such agreements in this
Prospectus is based on the forms of such agreements annexed to the Note Purchase
Agreement.
Atlas plans to seek commitments from one or more companies to act as the
Owner Participant with respect to leveraged leases for certain of the Aircraft.
Atlas may select one or more Owner Participants for some or all of the Aircraft
or finance such Aircraft as Owned Aircraft rather than Leased Aircraft. Such
Owner Participants may request revisions to the forms of the Participation
Agreement, the Lease and the Indenture that are contemplated by the Note
Purchase Agreement, so that the terms of such agreements applicable to any
particular Aircraft may differ from the description of such agreements contained
in this Prospectus. There will not be any cross-default provisions in the
Indentures or in the Leases (unless otherwise required by an Owner Participant
with respect to Indentures and/or Leases affecting Aircraft owned by such Owner
Participant). However, under the Note Purchase Agreement, the terms of such
agreements are required to (i) contain the Mandatory Documents Terms and (ii)
not vary the Mandatory Economic Terms. In addition, Atlas will be obligated (i)
to certify to the Trustees that any such modifications do not materially and
adversely affect the Certificateholders and (ii) to obtain written confirmation
from each Rating Agency that the use of versions of such agreements modified in
any material respect would not result in a withdrawal, suspension or downgrading
of the ratings of any Class of Certificates. See "Description of the New
Certificates -- Obligation to Purchase Equipment Notes." Each Owner Participant
will be required to satisfy certain requirements, including having a minimum
combined capital and surplus or net worth.
GENERAL
The Equipment Notes will be issued in three series with respect to each
Aircraft, provided that Atlas may elect to issue a fourth series with respect to
Owned Aircraft. See "Description of the New Certificates -- Possible Issuance of
Class D Certificates." The Equipment Notes with respect to each Aircraft will be
issued under a separate Indenture between First Security, as Owner Trustee of a
trust for the benefit of the Owner Participant who will be the beneficial owner
of such Aircraft, and Wilmington Trust Company, as Aircraft Trustee. The
Indentures will not provide for defeasance, or discharge upon deposit of cash or
certain obligations of the United States.
72
<PAGE> 80
The related Owner Trustee will lease each Aircraft to Atlas pursuant to a
separate Lease between such Owner Trustee and Atlas with respect to such
Aircraft. Under each Lease, Atlas will be obligated to make or cause to be made
rental and other payments to the related Aircraft Trustee on behalf of the
related Owner Trustee, which rental and other payments will be at least
sufficient to pay in full when due all payments required to be made on the
Equipment Notes issued with respect to such Aircraft. The Equipment Notes issued
with respect to the Aircraft are not, however, direct obligations of, or
guaranteed by, Atlas. Atlas' rental obligations under each Lease will be general
obligations of Atlas.
SUBORDINATION
Series B Equipment Notes issued in respect of an Aircraft will be
subordinated in right of payment to Series A Equipment Notes issued in respect
of such Aircraft, Series C Equipment Notes issued in respect of such Aircraft
will be subordinated in right of payment to such Series B Equipment Notes and,
if Atlas elects to issue Series D Equipment Notes with respect to an Owned
Aircraft, they will be subordinated in right of payment to the Series C
Equipment Notes issued with respect to such Owned Aircraft. On each Equipment
Note payment date, (i) payments of interest and principal due on Series A
Equipment Notes issued in respect of an Aircraft will be made prior to payments
of interest and principal due on Series B Equipment Notes issued in respect of
such Aircraft; (ii) payments of interest and principal due on Series B Equipment
Notes issued in respect of an Aircraft will be made prior to payments of
interest and principal due on Series C Equipment Notes issued in respect of such
Aircraft; and (iii) if Atlas elects to issue Series D Equipment Notes with
respect to an Owned Aircraft, payments of interest and principal due on such
Series C Equipment \Notes will be made prior to payments of interest and
principal due on Series D Equipment Notes issued in respect of such Aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth in this Prospectus with respect to New Certificates issued by such Trust
until the final expected Regular Distribution Date for such Trust. Subject to
the provisions of the Intercreditor Agreement, principal paid on the Equipment
Notes held in each Trust will be passed through to the Certificateholders of
such Trust in scheduled amounts on the dates set forth herein until the final
expected Regular Distribution Date for such Trust.
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on January 2, and July 2 of
each year, commencing on the first such date to occur after initial issuance
thereof. Such interest will be computed on the basis of a 360-day year of twelve
30-day months.
Scheduled principal payments on the Equipment Notes will be made on January
2, and July 2 in certain years, commencing on January 2, 1999. See "Description
of the New Certificates -- Pool Factors" for a discussion of the scheduled
payments of principal of the Equipment Notes and possible revisions thereto.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Atlas under the related Lease (in the case of a Leased Aircraft)
or under the related Owned Aircraft Indenture (in the case of an Owned
Aircraft), the Equipment Notes issued with respect to such Aircraft will be
redeemed, in whole, in each case at a price equal to the aggregate unpaid
principal amount thereof, together with accrued interest thereon to, but not
including, the date of redemption, but without premium, on a Special
Distribution Date.
73
<PAGE> 81
If Atlas exercises its right to terminate a Lease under Section 9 of such
Lease, the Equipment Notes relating to the applicable Leased Aircraft will be
redeemed, in whole, on a Special Distribution Date at a price equal to the
aggregate unpaid principal amount thereof, together with accrued interest
thereon to, but not including, the date of redemption, plus a Make-Whole
Premium. See "-- The Leases and Certain Provisions of the Owned Aircraft
Indentures -- Lease Termination."
All of the Equipment Notes issued with respect to a Leased Aircraft may be
redeemed prior to maturity as part of a refunding or refinancing thereof under
Section 11 of the applicable Participation Agreement, and all of the Equipment
Notes issued with respect to an Owned Aircraft may be redeemed prior to maturity
at any time at the option of Atlas, in each case at a price equal to the
aggregate unpaid principal thereof, together with accrued interest thereon to,
but not including, the date of redemption, plus a Make-Whole Premium. If notice
of such a redemption shall have been given in connection with a refinancing of
Equipment Notes with respect to a Leased Aircraft, such notice may be revoked
not later than three days prior to the proposed redemption date.
If, with respect to a Leased Aircraft, (x) one or more Lease Events of
Default shall have occurred and are continuing, (y) in the event of a bankruptcy
proceeding involving Atlas, (i) during the Section 1110 Period, the trustee in
such proceeding or Atlas does not assume or agree to perform its obligations
under the related Lease or (ii) at any time after assuming or agreeing to
perform such obligations, such trustee or Atlas ceases to perform such
obligations such that the stay period applicable under the U.S. Bankruptcy Code
comes to an end or (z) the Equipment Notes with respect to such Leased Aircraft
have been accelerated or the Leased Aircraft Trustee with respect to such
Equipment Notes takes action or notifies the applicable Owner Trustee that it
intends to take action to foreclose the lien of the related Leased Aircraft
Indenture or otherwise commence the exercise of any significant remedy under
such Indenture or the related Lease, then in each case all, but not less than
all, of the Equipment Notes issued with respect to such Leased Aircraft may be
purchased by the related Owner Trustee or Owner Participant on the applicable
purchase date at a price equal to the aggregate unpaid principal thereof,
together with accrued and unpaid interest thereon to, but not including, the
date of purchase, but without any premium (provided that a Make-Whole Premium
shall be payable pursuant to clause (x) when a Lease Event of Default shall have
occurred and is continuing for less than 180 days). Atlas as owner of the Owned
Aircraft has no comparable right under the Owned Aircraft Indentures to purchase
Equipment Notes under such circumstances.
"Make-Whole Premium" means, with respect to any Equipment Note, an amount
(as determined by an independent investment banker of national standing) equal
to the excess, if any, of (a) the present value of the remaining scheduled
payments of principal and interest to maturity of such Equipment Note computed
by discounting such payments on a semiannual basis on each payment date under
the applicable Indenture (assuming a 360-day year of twelve 30-day months) using
a discount rate equal to the Treasury Yield over (b) the outstanding principal
amount of such Equipment Note plus accrued interest to the date of
determination.
For purposes of determining the Make-Whole Premium and the Deposit
Make-Whole Premium, "Treasury Yield" means, at the date of determination with
respect to any Equipment Note, the interest rate (expressed as a semiannual
decimal and, in the case of United States Treasury bills, converted to a bond
equivalent yield) determined to be the per annum rate equal to the semiannual
yield to maturity for United States Treasury securities maturing on the Average
Life Date of such Equipment Note and trading in the public securities markets
either as determined by interpolation between the most recent weekly average
yield to maturity for two series of United States Treasury securities trading in
the public securities markets, (A) one maturing as close as possible to, but
earlier than, the Average Life Date of such Equipment Note and (B) the other
maturing as close as possible to, but later than, the Average Life Date of such
Equipment Note, in each case as published in the most recent H.15(519) or, if a
weekly average yield to maturity for United States Treasury securities maturing
on the Average Life Date of such Equipment Note is reported in the most recent
H.15(519), such weekly average yield to maturity as published in such H.15(519).
"H.15(519)" means the weekly statistical release designated as such, or any
successor publication, published by the Board of Governors of the Federal
Reserve System. The date of determination of a Make-Whole Premium shall be the
third Business Day prior to the applicable payment or redemption date and the
"most recent H.15(519)"
74
<PAGE> 82
means the H.15(519) published prior to the close of business on the third
Business Day prior to the applicable payment or redemption date.
"Average Life Date" for any Equipment Note shall be the date which follows
the time of determination by a period equal to the Remaining Weighted Average
Life of such Equipment Note. "Remaining Weighted Average Life" on a given date
with respect to any Equipment Note shall be the number of days equal to the
quotient obtained by dividing (a) the sum of each of the products obtained by
multiplying (i) the amount of each then remaining scheduled payment of principal
of such Equipment Note by (ii) the number of days from and including such
determination date to but excluding the date on which such payment of principal
is scheduled to be made, by (b) the then outstanding principal amount of such
Equipment Note.
SECURITY
The Equipment Notes issued with respect to each Leased Aircraft will be
secured by (i) an assignment by the related Owner Trustee to the related
Aircraft Trustee of such Owner Trustee's rights, except for certain limited
rights, under the Lease with respect to the related Aircraft, including the
right to receive payments of rent thereunder, (ii) a mortgage to such Leased
Aircraft Trustee of such Aircraft, subject to the rights of Atlas under such
Lease, and (iii) an assignment to such Leased Aircraft Trustee of certain of
such Owner Trustee's rights under the purchase agreement between Atlas and the
Leased Aircraft manufacturer. Unless and until an Indenture Default with respect
to a Leased Aircraft has occurred and is continuing, the Leased Aircraft Trustee
may not exercise the rights of the Owner Trustee under the related Lease, except
the Owner Trustee's right to receive payments of rent due thereunder. The
assignment by the Owner Trustee to the Leased Aircraft Trustee of its rights
under the related Lease will exclude certain rights of such Owner Trustee and
the related Owner Participant, including the rights of the Owner Trustee and the
Owner Participant with respect to indemnification by Atlas for certain matters,
insurance proceeds payable to such Owner Trustee in its individual capacity or
to such Owner Participant under public liability insurance maintained by Atlas
under such Lease or by such Owner Trustee or such Owner Participant, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under certain casualty insurance maintained by such Owner
Trustee or such Owner Participant under such Lease and certain reimbursement
payments made by Atlas to such Owner Trustee. (Leased Aircraft Indenture,
Granting Clause) The Equipment Notes will not be cross-collateralized (except in
certain cases, if any, where the related Owner Participant and Atlas shall agree
to cross-collateralization), and, consequently, the Equipment Notes issued in
respect of any one Aircraft will not be secured by any of the other Aircraft or
replacement aircraft therefor (as described in "-- The Leases and Certain
Provisions of the Owned Aircraft Indentures -- Events of Loss") or the Leases
related thereto.
The Equipment Notes issued with respect to each Owned Aircraft will be
secured by (i) a mortgage to the Owned Aircraft Trustee of such Aircraft and
(ii) an assignment to the Owned Aircraft Trustee of certain of Atlas' rights
under its purchase agreement with the Aircraft manufacturer.
Funds, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or, in the case of a Leased Aircraft, termination of the Lease, if any,
relating thereto, will be invested and reinvested by such Loan Trustee, at the
direction of the related Owner Trustee in the case of the Leased Aircraft or
Atlas in the case of the Owned Aircraft (except in the case of certain Indenture
Defaults), in investments described in the related Indenture.
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The tables on the following page set forth illustrative loan to Aircraft
value ratios for the Equipment Notes issued in respect of Aircraft as of the
Regular Distribution Dates that occur after the scheduled date of original
issuance of such Equipment Notes, assuming that the Equipment Notes in the
maximum principal amount are issued in respect of each such Aircraft. These
examples were utilized by Atlas in preparing the Assumed Amortization Schedule,
although the amortization schedule for the Equipment Notes issued with respect
to an Aircraft may vary from such assumed schedule so long as it complies with
the Mandatory Economic Terms. Accordingly, the schedules set forth below may not
be applicable in the case of any
75
<PAGE> 83
particular Aircraft. See "Description of the New Certificates -- Pool Factors."
The LTV was obtained by dividing (i) the outstanding balance (assuming no
payment default) of such Equipment Notes determined immediately after giving
effect to the payments scheduled to be made on each such Regular Distribution
Date by (ii) the assumed value (the "Assumed Aircraft Value") of the Aircraft
securing such Equipment Notes.
The following table is based on the assumption that the value of each
Aircraft set forth opposite the initial Regular Distribution Date included in
each table depreciates by approximately 2% of the initial appraised value per
year until the fifteenth year after the year of delivery of such Aircraft, by
approximately 3% of the initial appraised value per year from the fifteenth year
until the twentieth year after the year of delivery of such Aircraft and by
approximately 4% of the initial appraised value per year thereafter. Other rates
or methods of depreciation would result in materially different loan to Aircraft
value ratios, and no assurance can be given (i) that the depreciation rates and
method assumed for the purposes of the tables are the ones most likely to occur
or (ii) as to the actual future value of any Aircraft. Thus the tables should
not be considered a forecast or prediction of expected or likely loan to
Aircraft value ratios, but simply a mathematical calculation based on one set of
assumptions.
<TABLE>
<CAPTION>
INDICATIVE LEASED AIRCRAFT(1) INDICATIVE OWNED AIRCRAFT(1)
------------------------------ ------------------------------
EQUIPMENT LOAN EQUIPMENT LOAN
NOTE ASSUMED TO NOTE ASSUMED TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
---- ----------- -------- ----- ----------- -------- -----
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
February 9, 1998.......................... $107.62 $157.26 68.4% $107.89 $158.21 68.2%
January 2, 1999........................... 99.62 157.26 63.3 107.89 158.21 68.2
January 2, 2000........................... 96.02 154.11 62.3 104.37 155.04 67.3
January 2, 2001........................... 92.13 150.97 61.0 100.77 151.88 66.4
January 2, 2002........................... 87.92 147.82 59.5 97.13 148.71 65.3
January 2, 2003........................... 83.37 144.68 57.6 93.45 145.55 64.2
January 2, 2004........................... 78.45 141.53 55.4 89.74 142.38 63.0
January 2, 2005........................... 73.13 138.39 52.8 86.01 139.22 61.8
January 2, 2006........................... 67.39 135.24 49.8 82.26 136.06 60.5
January 2, 2007........................... 61.19 132.10 46.3 77.89 132.89 58.6
January 2, 2008........................... 54.50 128.95 42.3 73.25 129.73 56.5
January 2, 2009........................... 48.89 125.81 38.9 68.31 126.56 54.0
January 2, 2010........................... 46.96 122.66 38.3 60.90 123.40 49.4
January 2, 2011........................... 45.76 119.52 38.3 57.47 120.24 47.8
January 2, 2012........................... 37.95 116.37 32.6 51.18 117.07 43.7
January 2, 2013........................... 29.44 113.23 26.0 44.10 113.91 38.7
January 2, 2014........................... 20.28 110.08 18.4 33.30 110.74 30.1
January 2, 2015........................... 10.41 105.36 9.9 28.31 106.00 26.7
January 2, 2016........................... 1.80 100.65 1.8 22.89 101.25 22.6
January 2, 2017........................... 1.80 95.93 1.9 17.00 96.51 17.6
January 2, 2018........................... 0.00 91.21 NA 0.00 91.76 NA
</TABLE>
- ------------
(1) Indicative Leased Aircraft schedule assumes the Aircraft in the first
delivery position and the Indicative Owned Aircraft schedule assumes the
Aircraft in the third delivery position.
LIMITATION OF LIABILITY
The Equipment Notes issued with respect to each Leased Aircraft are not
direct obligations of, or guaranteed by, Atlas, any Owner Participant or the
Aircraft Trustees or the Owner Trustees in their individual capacities. None of
the Owner Trustees, the Owner Participants or the Leased Aircraft Trustees, or
any affiliates thereof, will be personally liable to any holder of an Equipment
Note or, in the case of the Owner Trustees and the Owner Participants, to the
Leased Aircraft Trustees for any amounts payable under the Equipment Notes or,
except as provided in each Leased Aircraft Indenture, for any liability under
such Leased Aircraft Indenture. All payments of principal of, premium, if any,
and interest on the Equipment Notes issued with respect to each Leased Aircraft
(other than payments made in connection with an optional
76
<PAGE> 84
redemption or purchase of Equipment Notes issued with respect to each Leased
Aircraft by the related Owner Trustee or the related Owner Participant) will be
made only from the assets subject to the lien of the Indenture with respect to
such Leased Aircraft or the income and Proceeds received by the related Leased
Aircraft Trustee therefrom (including rent payable by Atlas under the Lease with
respect to such Leased Aircraft).
The Equipment Notes issued with respect to the Owned Aircraft will be
direct obligations of Atlas.
Except as otherwise provided in the Indentures, each Owner Trustee and each
Loan Trustee, in its individual capacity, will not be answerable or accountable
under the Indentures or under the Equipment Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
None of the Owner Participants will have any duty or responsibility under any of
the Leased Aircraft Indentures or the Equipment Notes to the Leased Aircraft
Trustees or to any holder of any Equipment Note.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include: (a) in the case of a
Leased Aircraft Indenture, the occurrence of any Lease Event of Default under
the related Lease (other than the failure to make certain indemnity payments and
other payments to the related Owner Trustee or Owner Participant unless a notice
is given by such Owner Trustee that such failure shall constitute an Indenture
Default), (b) the failure by the related Owner Trustee (other than as a result
of a Lease Default or Lease Event of Default) in the case of a Leased Aircraft
Indenture, or Atlas, in the case of an Owned Aircraft Indenture, to pay any
interest or principal or premium, if any, or other amount when due, under such
Indenture or under any Equipment Note issued thereunder that continues for more
than 10 Business Days, in the case of principal, interest or Make-Whole Premium,
and, in all other cases, ten Business Days after the relevant Owner Trustee or
Owner Participant receives written demand from the related Loan Trustee or
holder of an Equipment Note, (c) the failure by the related Owner Participant or
the related Owner Trustee (in its individual capacity) to discharge certain
liens that continue after notice and specified cure periods, (d) any
representation or warranty made by the related Owner Trustee or Owner
Participant in such Indenture, the related Participation Agreement, or certain
related documents furnished to the Loan Trustee or any holder of an Equipment
Note pursuant thereto being false or incorrect in any material respect when made
that continues to be material and adverse to the interests of the Loan Trustee
or Note Holders and remains unremedied after notice and specified cure periods,
(e) failure by Atlas or the related Owner Trustee or Owner Participant to
perform or observe covenants or obligations for the benefit of the Loan Trustee
or holders of Equipment Notes under such Indenture or certain related documents
which continues after notice and specified cure periods and which is material
and adverse to the interests of the Loan Trustee or the Note Holders, (f) if at
any time when the related Aircraft is registered under the laws of the United
States, the registration of the related Aircraft ceasing to be effective as a
result of the Owner Participant (in the case of a Leased Aircraft) or Atlas (in
the case of an Owned Aircraft) not being a citizen of the United States, as
defined in the Transportation Code (subject to a cure period), (g) with respect
to the Owned Aircraft, the lapse or cancellation of insurance required under the
Owned Aircraft Indenture or (h) the occurrence of certain events of bankruptcy,
reorganization or insolvency of the related Owner Trustee or Owner Participant
(in the case of a Leased Aircraft) or Atlas (in the case of an Owned Aircraft).
There will not be cross-default provisions in the Indentures or in the Leases
(unless otherwise required by an Owner Participant with respect to Indentures
and/or Leases affecting Aircraft owned by such Owner Participant). Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default occurring under any other Indenture, and
a Lease Event of Default under any particular Lease may or may not constitute a
Lease Event of Default under any other Lease.
The Loan Trustee will give the holders of the Equipment Notes and, if
applicable, the Owner Trustee and the Owner Participant prompt written notice of
any Indenture Default of which the Loan Trustee has actual knowledge and, in the
case of an indenture related to a Leased Aircraft, if the Indenture Default from
a Lease Event of Default, it will give the holders of the Equipment Notes, the
Owner Trustee and the Owner Participant not less than ten business days' prior
written notice of the date on or after which the Loan Trustee may commence the
exercise of any remedy described in "-- Remedies" below.
77
<PAGE> 85
If Atlas fails to make any semiannual basic rental payment due under any
Lease, within a specified period after such failure the applicable Owner Trustee
may furnish to the Leased Aircraft Trustee the amount due on the Equipment Notes
issued with respect to the related Leased Aircraft, together with any interest
thereon on account of the delayed payment thereof, in which event the Leased
Aircraft Trustee and the holders of outstanding Equipment Notes issued under
such Indenture may not exercise any remedies otherwise available under such
Indenture or such Lease as the result of such failure to make such rental
payment, unless such Owner Trustee has previously cured three or more
immediately preceding semiannual basic rental payment defaults or, in total, six
or more previous semiannual basic rental payment defaults (or, in the case of
certain Owner Participants, six or more immediately preceding semiannual basic
rental payment defaults or, in total, eight or more previous semiannual basic
rental payment defaults). The applicable Owner Trustee also may cure any other
default by Atlas in the performance of its obligations under any Lease that can
be cured with the payment of money.
In the case of a Leased Aircraft Indenture, if an Owner Trustee or Owner
Participant pays the amount due on the Equipment Notes to the Loan Trustee or
cures the Indenture Default, the Owner Trustee, or Owner Participant will be
subrogated to the rights of the Loan Trustee and the holders of the Equipment
Notes in respect of the rent which was overdue at the time of such payment as
well as interest payable by Atlas on account of such rent being overdue, and
thereafter the Owner Trustee or the Owner Participant, as the case may be, will
be entitled to receive such overdue rent and interest thereon upon receipt by
the Loan Trustee; provided, however, that (i) if the principal amount and
interest on the Equipment Notes is due and payable following an Indenture
Default, such subrogation will, until the principal amount of, interest on,
Make-Whole Premium, if any, and all other amounts due with respect to all
Equipment Notes has been paid in full, be subordinate to the rights of the Loan
Trustee and the holders of the Equipment Notes in respect of such payment of
overdue rent and interest and (ii) the Owner Trustee will not be entitled to
recover any such payment except pursuant to the foregoing right of subrogation,
by demand or suit for damages.
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Loan Trustee, may on
behalf of all the holders waive any existing default and its consequences under
the Indenture with respect to such Aircraft, except a default in the payment of
the principal of, or premium or interest on any such Equipment Notes or a
default in respect of any covenant or provision of such Indenture that cannot be
modified or amended without the consent of each holder of Equipment Notes.
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Loan Trustee or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may, subject to the applicable
Owner Participant's or Owner Trustee's right to cure, as discussed above,
declare the principal of all such Equipment Notes issued thereunder immediately
due and payable, together with all accrued but unpaid interest thereon, provided
that in the event of a reorganization proceeding involving Atlas instituted
under Chapter 11 of the U.S. Bankruptcy Code, if no other Lease Event of Default
and no other Indenture Default (other than the failure to pay the outstanding
amount of the Equipment Notes which by such declaration shall have become
payable) exists at any time after the consummation of such proceeding, such
declaration will be automatically rescinded without any further action on the
part of any holder of Equipment Notes. The holders of a majority in principal
amount of Equipment Notes outstanding under an Indenture may rescind any
declaration of acceleration of such Equipment Notes at any time before the
judgment or decree for the payment of the money so due shall be entered if (i)
there has been paid to the related Loan Trustee an amount sufficient to pay all
principal, interest, and premium, if any, on any such Equipment Notes, to the
extent such amounts have become due otherwise than by such declaration of
acceleration and (ii) all other Indenture Defaults and incipient Indenture
Defaults with respect to any covenant or provision of such Indenture have been
cured.
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law,
including (if, in the case of a Leased Aircraft, the corresponding Lease has
78
<PAGE> 86
been declared in default) one or more of the remedies under such Indenture or,
in the case of a Leased Aircraft, such Lease with respect to the Aircraft
subject to such Lease. If a Lease Event of Default shall have occurred and be
continuing under the corresponding Lease, the related Leased Aircraft Trustee's
right to exercise remedies under a Leased Aircraft Indenture is subject, with
certain exceptions, to its having proceeded to exercise one or more of the
dispossessory remedies under the Lease with respect to such Leased Aircraft;
provided that the requirement to exercise one or more of such remedies under
such Lease shall not apply in circumstances where such exercise has been
involuntarily stayed or prohibited by applicable law or court order for a
continuous period in excess of 60 days or such period as may be specified in
Section 1110(a)(1)(A) of the U.S. Bankruptcy Code, plus an additional period, if
any, resulting from (i) the trustee or debtor-in-possession in such proceeding
agreeing to perform obligations under such Lease with the approval of the
applicable court and its continuous performance of such Lease under Section
1110(a)(1) (A-B) of the U.S. Bankruptcy Code or such Leased Aircraft Trustee's
consent to an extension of such period, (ii) such Leased Aircraft Trustee's
failure to give any requisite notice, or (iii) Atlas' assumption of such Lease
with the approval of the relevant court and its continuous performance of the
Lease as so assumed. See "-- The Leases and Certain Provisions of the Owned
Aircraft Indentures -- Remedies Exercisable upon Events of Default Under the
Leases". Such remedies may be exercised by the related Leased Aircraft Trustee
to the exclusion of the related Owner Trustee, subject to certain conditions
specified in such Indenture, and of Atlas, subject to the terms of such Lease.
Any Aircraft sold in the exercise of such remedies will be free and clear of any
rights of those parties, including the rights of Atlas under the Lease with
respect to such Aircraft; provided that no exercise of any remedies by the
related Leased Aircraft Trustee may affect the rights of Atlas under any Lease
unless a Lease Event of Default has occurred and is continuing. The Owned
Aircraft Indentures will not contain such limitations on the Owned Aircraft
Trustee's ability to exercise remedies upon an Indenture Default under an Owned
Aircraft Indenture.
If a bankruptcy proceeding involving Atlas under the U.S. Bankruptcy Code
occurs, all of the rights of the Owner Trustee as lessor under a particular
Lease will be exercised by the Owner Trustee in accordance with the terms
thereof unless (i) during the Section 1110 Period the trustee in such proceeding
or Atlas does not assume or agree to perform its obligations under such Lease,
(ii) at any time after assuming or agreeing to perform such obligations, such
trustee or Atlas ceases to perform such obligations or (iii) the related Loan
Trustee takes action, or notifies the Owner Trustee that such Loan Trustee
intends to take action, to foreclose the lien of the related Leased Aircraft
Indenture or otherwise commence the exercise of any significant remedy in
accordance with the Leased Aircraft Indenture. The Owner Trustee's exercise of
such rights shall be subject to certain limitations and, in no event, reduce the
amount or change the time of any payment in respect of the Equipment Notes or
adversely affect the validity or enforceability of the lien under the related
Leased Aircraft Indenture.
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
Section 1110 of the U.S. Bankruptcy Code provides in relevant part that the
right of lessors, conditional vendors and holders of security interests with
respect to "equipment" (as defined in Section 1110 of the U.S. Bankruptcy Code)
to take possession of such equipment in compliance with the provisions of a
lease, conditional sale contract or security agreement, as the case may be, is
not affected by (a) the automatic stay provision of the U.S. Bankruptcy Code,
which provision enjoins repossessions by creditors for the duration of the
reorganization period, (b) the provision of the U.S. Bankruptcy Code allowing
the trustee in reorganization to use property of the debtor during the
reorganization period, (c) Section 1129 of the U.S. Bankruptcy Code (which
governs the confirmation of plans of reorganization in Chapter 11 cases) and (d)
any power of the bankruptcy court to enjoin a repossession. Section 1110
provides in relevant part, however, that the right of a lessor, conditional
vendor or holder of a security interest to take possession of an aircraft in the
event of an event of default may not be exercised for 60 days following the date
of commencement of the reorganization proceedings (unless specifically permitted
by the bankruptcy court) and may not be exercised at all if, within such 60-day
period (or such longer period consented to by the lessor, conditional vendor or
holder of a security interest), the trustee in reorganization agrees to perform
the debtor's obligations that become due on or after
79
<PAGE> 87
such date and cures all existing defaults (other than defaults resulting solely
from the financial condition, bankruptcy, insolvency or reorganization of the
debtor). "Equipment" is defined in Section 1110 of the U.S. Bankruptcy Code, in
part, as an aircraft, aircraft engine, propeller, appliance, or spare part (as
defined in Section 40102 of Title 49 of the U.S. Code) that is subject to a
security interest granted by, leased to, or conditionally sold to a debtor that
is a citizen of the United States (as defined in Section 40102 of Title 49 of
the U.S. Code) holding an air carrier operating certificate issued by the
Secretary of Transportation pursuant to chapter 447 of Title 49 of the U.S. Code
for aircraft capable of carrying 10 or more individuals or 6,000 pounds or more
of cargo.
It is a condition to the Trustee's obligation to purchase equipment Notes
with respect to each Aircraft that outside counsel to Atlas, Cahill Gordon &
Reindel, provide its opinion to the Trustees that (x) if such Aircraft is a
Leased Aircraft, the Owner Trustee, as lessor under the Lease for such Aircraft,
and the Leased Aircraft Trustee, as assignee upon foreclosure or other taking of
possession of the Owner Trustee's rights of such Owner Trustee's rights under
such Lease pursuant to the related Leased Aircraft Indenture, will be entitled
to the benefits of Section 1110 of the U.S. Bankruptcy Code with respect to the
airframe and engines comprising such Aircraft or (y) if such Aircraft is an
Owned Aircraft, the Owned Aircraft Trustee will be entitled to the benefits of
Section 1110 with respect to the airframe and engines comprising such Owned
Aircraft, in each case, assuming that Atlas is a "citizen of the United States"
as defined in Section 40102 of Title 49 of the U.S. Code holding an air carrier
operating certificate issued by the Secretary of Transportation pursuant to
chapter 447 of Title 49 of the U.S. Code for aircraft capable of carrying 10 or
more individuals or 6,000 pounds or more of cargo and assuming that the Aircraft
and Engines constitute "equipment" as defined in Section 1110 of the U.S.
Bankruptcy Code. For a description of certain limitations on the Loan Trustee's
exercise of rights contained in the Indenture, see "-- Indenture Defaults,
Notice and Waiver."
The opinion of Cahill Gordon & Reindel will not address the possible
replacement of an Aircraft after an Event of Loss in the future, the
consummation of which is conditioned upon the contemporaneous delivery of an
opinion of counsel to the effect that the related Loan Trustee will be entitled
to Section 1110 benefits with respect to such replacement unless there is a
change in law or court interpretation that results in Section 1110 not being
available. See "-- The Leases and Certain Provisions of the Owned Aircraft
Indentures -- Events of Loss." The opinion of Cahill Gordon & Reindel will also
not address the availability of Section 1110 with respect to any possible
sublessee of a Leased Aircraft subleased by Atlas or to any possible lessee of
an Owned Aircraft if it is leased by Atlas.
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture.
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Leased Aircraft is owned by the related Owner Trustee in trust, such
Leased Aircraft and the related Lease and Equipment Notes might become part of
such proceeding. In such event, payments under such Lease or on such Equipment
Notes might be interrupted and the ability of the related Leased Aircraft
Trustee to exercise its remedies under the related Leased Aircraft Indenture
might be restricted, although such Leased Aircraft Trustee would retain its
status as a secured creditor in respect of the related Lease and the related
Leased Aircraft.
MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Subject to certain limitations, certain provisions of any Leased Aircraft
Indenture, and of the Lease, the Participation Agreement, and the Trust
Agreement related thereto, may be amended or modified by the parties thereto
without the consent of any holders of the Equipment Notes outstanding under such
Indenture. In the case of each Lease, such provisions include, among others,
provisions relating to (i) the return to the related
80
<PAGE> 88
Owner Trustee of the related Leased Aircraft at the end of the term of such
Lease (except to the extent that such amendment would affect the rights or
exercise of remedies under the Lease) and (ii) the renewal of such Lease and the
option of Atlas at the end of the term of such Lease to purchase the related
Leased Aircraft so long as the same would not adversely affect the Note Holders.
In addition, any Indenture may be amended without the consent of the holders of
Equipment Notes to, among other things, cure any defect or inconsistency in such
Indenture or the Equipment Notes issued thereunder, provided that such change
does not adversely affect the interests of any such holder.
Without the consent of each Liquidity Provider and the holder of each
Equipment Note outstanding under any Indenture affected thereby, no amendment or
modification of such Indenture may among other things (a) reduce the principal
amount of, or premium, if any, or interest payable on, any Equipment Notes
issued under such Indenture or change the date on which any principal, premium,
if any, or interest is due and payable, (b) permit the creation of any security
interest with respect to the property subject to the lien of such Indenture,
except as provided in such Indenture, or deprive any holder of an Equipment Note
issued under such Indenture of the benefit of the lien of such Indenture upon
the property subject thereto or (c) reduce the percentage in principal amount of
outstanding Equipment Notes issued under such Indenture necessary to modify or
amend any provision of such Indenture or to waive compliance therewith.
INDEMNIFICATION
Atlas will be required to indemnify each Loan Trustee, each Owner
Participant, each Owner Trustee, each Liquidity Provider, the Subordination
Agent, the Escrow Agent and each Trustee, but not the holders of Certificates,
for certain losses, claims and other matters. Atlas will be required under
certain circumstances to indemnify each Owner Participant against the loss of
depreciation deductions and certain other benefits allowable for certain income
tax purposes with respect to the related Leased Aircraft.
THE LEASES AND CERTAIN PROVISIONS OF THE OWNED AIRCRAFT INDENTURES
Each Leased Aircraft will be leased to Atlas by the relevant Owner Trustee
under the relevant lease agreement (each, a "Lease"). A prospective owner
participant for any Leased Aircraft may require revisions to the related Lease
so that the terms of such Lease may differ from the description of such Leases
set forth below.
Lease Term Rentals and Payments
Each Leased Aircraft will be leased separately by the relevant Owner
Trustee to Atlas for a term commencing on the date on which the Aircraft is
acquired by the Owner Trustee and expiring on a date not earlier than the latest
maturity date of the relevant Equipment Notes, unless terminated prior to the
originally scheduled expiration date as permitted by the applicable Lease. The
semiannual basic rent payment under each Lease is payable by Atlas on each
related Lease Payment Date (or, if such day is not a Business Day, on the next
Business Day), and will be assigned by the Owner Trustee under the corresponding
Leased Aircraft Indenture to provide the funds necessary to make scheduled
payments of principal and interest due from the Owner Trustee on the Equipment
Notes issued under such Indenture. In certain cases, the semiannual basic rent
payments under the Leases may be adjusted, but each Lease provides that under no
circumstances will rent payments by Atlas be less than the scheduled payments on
the related Equipment Notes. Any balance of each such semiannual basic rent
payment under each Lease, after payment of amounts due on the Equipment Notes
issued under the Indenture corresponding to such Lease, will be paid over to the
Owner Trustee.
"Lease Payment Date" means, with respect to each Lease, January 2 or July 2
during the term of such Lease.
Semiannual payments of interest on the Equipment Notes issued by Atlas
under an Owned Aircraft Indenture are payable January 2 and July 2 of each year,
commencing on the first such date after issuance thereof. Semiannual payments of
principal under the Equipment Notes issued by Atlas under an Owned Aircraft
Indenture are payable on January 2 and July 2 in certain years, commencing on
January 2, 1999.
81
<PAGE> 89
Net Lease; Maintenance
Under the terms of each Lease, Atlas' obligations in respect of each Leased
Aircraft will be those of a lessee under a "net lease." Accordingly, Atlas is
obligated under each Lease, among other things and at its expense, to keep each
Aircraft duly registered and insured, to pay all costs of operating the Aircraft
and to maintain, service, repair and overhaul the Aircraft so as to keep it in
as good operating condition as when delivered to Atlas under the Lease, ordinary
wear and tear excepted, and in such condition as required to maintain the
airworthiness certificate for the Aircraft in good standing at all times. The
Owned Aircraft Indentures impose comparable maintenance, service and repair
obligations on Atlas with respect to the Owned Aircraft.
Possession, Sublease and Transfer
Each Aircraft may be operated by Atlas or, subject to certain restrictions,
by certain other persons. Normal interchange and pooling agreements customary in
the commercial airline industry with respect to any Engine are permitted.
Subleases, in the case of the Leased Aircraft, and leases, in the case of Owned
Aircraft, are also permitted to U.S. air carriers and foreign air carriers that
have their principal executive office in certain specified countries, subject to
a reasonably satisfactory legal opinion that, among other things, such country
would recognize (in the case of the Leased Aircraft) Owner Trustee's title to,
and the Loan Trustee's lien in respect of, the applicable Aircraft. In addition,
a sublessee may not be subject to insolvency or similar proceedings at the
commencement of such sublease or lease. Permitted foreign air carriers are not
limited to those based in a country that is a party to the Convention on the
International Recognition of Rights in Aircraft (Geneva 1948) (the
"Convention"). It is uncertain to what extent the relevant Loan Trustee's
security interest would be recognized if an Aircraft is registered or located in
a jurisdiction not a party to the Convention. Moreover, in the case of an
Indenture Default, the ability of the related Loan Trustee to realize upon its
security interest in an Aircraft could be adversely affected as a legal or
practical matter if such Aircraft were registered or located outside the United
States.
Registration
Atlas is required to keep each Aircraft duly registered under the
Transportation Code with the FAA, except (in the case of the Leased Aircraft) if
the relevant Owner Trustee or the relevant Owner Participant fails to meet the
applicable citizenship requirements, and to record each Lease (in the case of
the Leased Aircraft) and Indenture and certain other documents under the
Transportation Code. Such recordation of the Indenture and other documents with
respect to each Aircraft will give the relevant Loan Trustee a first-priority,
perfected security interest in such Aircraft whenever it is located in the
United States or any of its territories and possessions. The Convention provides
that such security interest will also be recognized, with certain limited
exceptions, in those jurisdictions that have ratified or adhere to the
Convention.
So long as no Lease Event of Default exists, Atlas has the right to
register the Leased Aircraft subject to such Lease in a country other than the
United States at its own expense in connection with a permitted sublease of the
Aircraft to a permitted foreign air carrier, subject to certain conditions set
forth in the related Participation Agreement. These conditions include a
requirement that the lien of the applicable Indenture continue as a first
priority security interest in the applicable Aircraft. The Owned Aircraft
Indentures contain comparable provisions with respect to the registration of the
Owned Aircraft in connection with a permitted lease of the Owned Aircraft.
Liens
Atlas is required to maintain each Aircraft free of any liens, other than
the rights of the relevant Loan Trustee, the holders of the related Equipment
Notes, Atlas and the Owner Participant and Owner Trustee arising under the
applicable Indenture, the Lease (in the case of the Leased Aircraft) or the
other operative documents related thereto, and other than certain limited liens
permitted under such documents, including but not limited to (i) liens for taxes
either not yet due or being contested in good faith by appropriate proceedings;
(ii) materialmen's, mechanics' and other similar liens arising in the ordinary
course of business and securing
82
<PAGE> 90
obligations that either are not yet delinquent for more than 60 days or are
being contested in good faith by appropriate proceedings; (iii) judgment liens
so long as such judgment is discharged or vacated within 60 days or the
execution of such judgment is stayed pending appeal or discharged, vacated or
reversed within 60 days after expiration of such stay; and (iv) any other lien
as to which Atlas has provided a bond or other security adequate in the
reasonable opinion of the Owner Trustee; provided that in the case of each of
the liens described in the foregoing clauses (i), (ii) and (iii), such liens and
proceedings do not involve any material risk of the sale, forfeiture or loss of
such Aircraft or the interest of any Participant therein or impair the lien of
the relevant Indenture.
Replacement of Parts, Alterations
Atlas is obligated to replace all parts at its expense that may from time
to time be incorporated or installed in or attached to any Aircraft and that may
become lost, damaged beyond repair, worn out, stolen, seized, confiscated or
rendered permanently unfit for use. Atlas or any permitted sublessee has the
right, at its own expense, to make such alterations, modifications and additions
with respect to each Aircraft as it deems desirable in the proper conduct of its
business and to remove parts which it deems to be obsolete or no longer suitable
or appropriate for use, so long as such alteration, modification, addition or
removal does not materially diminish the fair market value, utility or useful
life of the related Aircraft or Engine or invalidate the Aircraft's
airworthiness certificate.
Insurance
Atlas is required to maintain, at its expense (or at the expense of a
permitted lessee, in the case of the Owned Aircraft, or a permitted sublessee,
in the case of the Leased Aircraft), all-risk aircraft hull insurance covering
each Aircraft, at all times in an amount not less than the stipulated loss value
of such Aircraft (which will exceed the aggregate outstanding principal amount
of the Equipment Notes relating to such Aircraft, together with accrued interest
thereon). However, after giving effect to self-insurance permitted as described
below, the amount payable under such insurance may be less than such amounts
payable with respect to the Equipment Notes. In the event of a loss involving
insurance proceeds in excess of $7.5 million, to be adjusted for inflation, per
occurrence such proceeds up to the stipulated loss value of the relevant
Aircraft will be payable to the applicable Loan Trustee, for so long as the
relevant Indenture shall be in effect. In the event of a loss involving
insurance proceeds of up to $7.5 million, to be adjusted for inflation, per
occurrence such proceeds will be payable directly to Atlas so long as an
Indenture Event of Default does not exist with respect to the Owned Aircraft or
(in the case of the Leased Aircraft) the Owner Trustee has not notified the
insurance underwriters that a Lease Event of Default exists. So long as the loss
does not constitute an Event of Loss, insurance proceeds will be applied to
repair or replace the property.
In addition, Atlas is obligated to maintain comprehensive airline liability
insurance at its expense (or at the expense of a permitted lessee, in the case
of the Owned Aircraft, or a permitted sublessee, in the case of the Leased
Aircraft), including without limitation, passenger liability, baggage liability,
cargo and mail liability, hangarkeeper's liability and contractual liability
insurance with respect to each Aircraft. Such liability insurance must be
underwritten by insurers of nationally or internationally recognized
responsibility. The amount of such liability insurance coverage per occurrence
may not be less than the amount of comprehensive airline liability insurance
from time to time applicable to aircraft owned or leased and operated by Atlas
of the same type and operating on similar routes as such Aircraft.
Atlas is also required to maintain war-risk, hijacking or allied perils
insurance if it (or any permitted sublessee or lessee) operates any Aircraft,
Airframe or Engine in any area of recognized hostilities or if Atlas (or any
permitted sublessee or lessee) maintains such insurance with respect to other
aircraft operated on the same routes or areas on or in which the Aircraft is
operated.
Atlas may self-insure under a program applicable to all aircraft in its
fleet, but the amount of such self-insurance in the aggregate may not exceed 50%
of the largest replacement value of any single aircraft in Atlas' fleet or
1- 1/2% of the average aggregate insurable value (during the preceding policy
year) of all aircraft on which Atlas carries insurance, whichever is less,
unless an insurance broker of national standing shall certify
83
<PAGE> 91
that the standard among other major U.S. air cargo carriers is a higher level of
self-insurance, in which case Atlas may self-insure the Aircraft to such higher
level. In addition, Atlas may self-insure to the extent of any applicable
deductible per Aircraft that does not exceed industry standards for major U.S.
air cargo carriers.
In respect of each Aircraft, Atlas is required to name as additional
insured parties the relevant Loan Trustee and holders of the Equipment Notes and
(in the case of the Leased Aircraft) the relevant Owner Participant and Owner
Trustee, in its individual capacity and as owner of such Aircraft, and in some
cases certain other parties under all liability, hull and property and war risk,
hijacking and allied perils insurance policies required with respect to such
Aircraft. In addition, the insurance policies will be required to provide that,
in respect of the interests of such additional insured persons, the insurance
shall not be invalidated or impaired by any act or omission of Atlas, any
permitted sublessee or any other person.
Lease Termination
Unless a Lease Event of Default shall have occurred and is continuing,
Atlas may terminate any Lease on any Lease Payment Date occurring after the
fifth anniversary of the date on which such Lease commenced, if it makes a good
faith determination that the Leased Aircraft subject to such Lease is
economically obsolete or surplus to its requirement or if it is to be disposed
pursuant to a program of fleet renewal. Atlas is required to give notice of its
intention to exercise its right of termination described in this paragraph at
least 90 days prior to the proposed date of termination, which notice may be
withdrawn up to ten Business Days prior to such proposed date; provided that
Atlas may with respect to such Lease give only five such termination notices. In
such a situation, unless the Owner Trustee elects to retain title to such
Aircraft, Atlas is required to use commercially reasonable efforts to sell such
Aircraft as an agent for such Owner Trustee, and Owner Trustee will sell such
Aircraft on the date of termination to the highest cash bidder. If such sale
occurs, the Equipment Notes related thereto are required to be prepaid. If the
net proceeds to be received from such sale are less than the termination value
for such Aircraft (which is set forth in a schedule to each Lease), Atlas is
required to pay to the applicable Owner Trustee an amount equal to the excess,
if any, of the applicable termination value for such Aircraft over such net
proceeds. Upon payment of termination value for such Aircraft and an amount
equal to the Make-Whole Premium, if any payable on such date of payment,
together with certain additional amounts, the lien of the relevant Indenture
will be released, the relevant Lease will terminate, and the obligation of Atlas
thereafter to make scheduled rent payments under such Lease will cease.
The Owner Trustee has the option to retain title to the Leased Aircraft if
Atlas has given a notice of termination under the Lease. In such event, such
Owner Trustee will pay to the applicable Loan Trustee an amount sufficient to
prepay the outstanding Equipment Notes issued with respect to such Aircraft
(including the Make-Whole Premiums), in which case the lien of the relevant
Indenture will be released, the relevant Lease will terminate and the obligation
of Atlas thereafter to make scheduled rent payments under such Lease will cease.
Events of Loss
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Atlas must elect within 60 days after such occurrence
either to make payment with respect to such Event of Loss or to replace such
Airframe and any such Engines. Not later than the first Business Day following
the earliest of (i) the 180th day following the date of occurrence of such Event
of Loss, and (ii) the fourth Business Day following the receipt of the insurance
proceeds in respect of such Event of Loss, Atlas must either (a) pay to the
applicable Owner Trustee (in the case of the Leased Aircraft) or to the Owned
Aircraft Trustee (in the case of the Owned Aircraft) the stipulated loss value
of such Aircraft, together with certain additional amounts, but, in any case,
without any Make-Whole Premium or (b) unless any Lease Event of Default or
failure to pay basic rent under the relevant Lease (in the case of the Leased
Aircraft), an Indenture Event of Default or failure to pay principal or interest
under the Owned Aircraft Indenture (in the case of the Owned Aircraft) or
certain bankruptcy defaults shall have occurred and is continuing, substitute an
airframe (or airframe and one or more engines, as the case may be) for the
Airframe, or Airframe and Engine(s), that suffered such Event of Loss.
84
<PAGE> 92
If Atlas elects to replace an Airframe (or Airframe and one or more
Engines, as the case may be) that suffered such Event of Loss, it shall, in the
case of the Leased Aircraft, convey to the related Owner Trustee title to an
airframe (or airframe and one or more engines, as the case may be) or, in the
case of an Owned Aircraft, subject such an airframe (or airframe and one or more
engines) to the lien of the Owned Aircraft Indenture, and such replacement
airframe or airframe and engines must be the same model as the Airframe or
Airframe and Engines to be replaced or an improved model, with a value, utility
and remaining useful life (without regard to hours or cycles remaining until the
next regular maintenance check) at least equal to the Airframe or Airframe and
Engines to be replaced, assuming that such Airframe and such Engines had been
maintained in accordance with the related Lease or Owned Aircraft Indenture, as
the case may be. Atlas is also required to provide to the relevant Loan Trustee
and (in the case of a Leased Aircraft) the relevant Owner Trustee and Owner
Participant reasonably acceptable opinions of counsel to the effect, among other
things, that (i) certain specified documents have been duly filed under the
Transportation Code and (ii) such Owner Trustee and Leased Aircraft Trustee (as
assignee of lessor's rights and interests under the Lease), in the case of a
Leased Aircraft, or the Owned Aircraft Trustee, in the case of an Owned
Aircraft, will be entitled to receive the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to any such replacement airframe (unless, as a
result of a change in law or court interpretation, such benefits are not then
available).
If Atlas elects not to replace such Airframe, or Airframe and Engine(s),
then upon payment of the outstanding principal amount of the Equipment Notes
issued with respect to such Aircraft (in the case of an Owned Aircraft) or the
stipulated loss value for such Aircraft (in the case of a Leased Aircraft),
together with all additional amounts then due and unpaid with respect to such
Aircraft, which must be at least sufficient to pay in full as of the date of
payment thereof the aggregate unpaid principal amount under such Equipment Notes
together with accrued but unpaid interest thereon and all other amounts due and
owing in respect of such Equipment Notes (but without any Make-Whole Premium),
the lien of the Indenture and (in the case of a Leased Aircraft) the Lease
relating to such Aircraft shall terminate with respect to such Aircraft, the
obligation of Atlas thereafter to make the scheduled rent payments (in the case
of a Leased Aircraft) or interest and principal payments (in the case of an
Owned Aircraft) with respect thereto shall cease and the related Owner Trustee
shall transfer all of its right, title and interest in and to the related
Aircraft to Atlas. The stipulated loss value and other payments made under the
Leases or the Owned Aircraft Indenture, as the case may be, by Atlas shall be
deposited with the applicable Loan Trustee. Amounts in excess of the amounts due
and owing under the Equipment Notes issued with respect to such Aircraft will be
distributed by such Loan Trustee to the applicable Owner Trustee or to Atlas, as
the case may be.
If an Event of Loss occurs with respect to an Engine alone, Atlas will be
required to replace such Engine within 90 days after the occurrence of such
Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the Engine to be replaced, or an improved model, suitable for
installation and use on the Airframe, and having a value, utility and remaining
useful life (without regard to hours or cycles remaining until overhaul) at
least equal to the Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Lease immediately prior to the
occurrence of the Event of Loss.
An Event of Loss with respect to an Aircraft, Airframe or any Engine means
any of the following events with respect to such property: (i) the destruction
of such property, damage to such property beyond economic repair or rendition of
such property permanently unfit for normal use; (ii) the actual or constructive
total loss of such property or any damage to such property or requisition of
title or use of such property which results in an insurance settlement with
respect to such property on the basis of a total loss or a constructive or
compromised total loss; (iii) any theft, hijacking or disappearance of such
property for a period of 180 consecutive days or more; (iv) any seizure,
condemnation, confiscation, taking or requisition of title to such property by
any governmental entity or purported governmental entity (other than a U.S.
government entity or an entity of the country of registration of the relevant
Aircraft) for a period exceeding 180 consecutive days or, if earlier, at the end
of the term of such Lease (in the case of a Leased Aircraft) or the final
maturity of the Equipment Notes (in the case of an Owned Aircraft); (v) in the
case of any Leased Aircraft, any seizure, condemnation, confiscation, taking or
requisition of use of such property by any U.S. government entity (or
governmental entity of the country of registration of the relevant Aircraft)
that continues until the
85
<PAGE> 93
30th day after the last day of the term of the relevant Lease (unless the Owner
Trustee shall have elected not to treat such event as an Event of Loss); (vi) as
a result of any law, rule, regulation, order or other action by the FAA or any
governmental entity, the use of such property in the normal course of Atlas'
business of passenger air transportation is prohibited for 180 consecutive days,
unless Atlas, prior to the expiration of such 180-day period, shall have
undertaken and shall be diligently carrying forward steps which are necessary or
desirable to permit the normal use of such property by Atlas, but in any event
if such use shall have been prohibited for a period of two consecutive years,
provided that no Event of Loss shall be deemed to have occurred if such
prohibition has been applicable to Atlas' entire U.S. registered fleet of
similar property and Atlas, prior to the expiration of such two-year period,
shall have conformed at least one unit of such property in its fleet to the
requirements of any such law, rule, regulation, order or other action and
commenced regular commercial use of the same and shall be diligently carrying
forward, in a manner which does not discriminate against applicable property in
so conforming such property, steps which are necessary or desirable to permit
the normal use of such property by Atlas, but in any event if such use shall
have been prohibited for a period of three years or such use shall be prohibited
at the expiration of the term of the relevant Lease; or (vii) with respect to
any Engine, any divestiture of title to such Engine shall be treated as an Event
of Loss.
Renewal and Purchase Options
At the end of the term of each Lease after final maturity of the related
Equipment Notes and subject to certain conditions, Atlas will have the option to
renew such Lease for additional limited periods (each a "Renewal Term"). Each
Renewal Term shall be for not less than three months and not more than 2 years,
as determined by Atlas. Rent payments during the first Renewal Term shall equal
the lesser of fair market rental and a fixed rate rental as specified in the
Lease. Rent payments during subsequent Renewal Terms shall equal fair market
rental. Atlas will have the right (i) at the end of the term of each Lease, (ii)
at the end of each Renewal Term, (iii) on specified dates prior to the end of
the term of each Lease and (iv) upon certain tax events, to purchase the
Aircraft subject to each such Lease, in each case for an amount to be calculated
in accordance with the terms of such Lease. (Leases, Section 17) In connection
with any such purchase, Atlas shall have the option to assume the obligations of
the Owner Trustee to the Indenture Trustee and the holders under the Indenture
and under the Certificates, on the basis of full recourse to Atlas and
maintaining for the benefit of the holders the security interest in the Aircraft
created by the Indenture. In such case, the Leased Aircraft Indenture relating
to such Equipment Notes will be amended and restated to be substantially the
same as an Owned Aircraft Indenture. See "Certain U.S. Federal Income Tax
Consequences -- Taxation of Certificateholders Generally -- Trusts Classified as
Grantor Trusts" for a discussion of certain tax consequences of such purchase
and assumption.
Events of Default Under the Leases
Lease Events of Default under each Lease include among other things, (i)
failure by Atlas to make any payment of basic rent, stipulated loss value or
termination value under such Lease within ten Business Days after the same shall
have become due, or failure by Atlas to pay any other amount due under such
Lease or under any other related operative document within ten Business Days
from and after the date of any written notice from the Owner Trustee or Loan
Trustee of the failure to make such payment when due; (ii) failure by Atlas to
make any excluded payment (as defined) within ten Business Days after written
notice that such failure constitutes a Lease Event of Default is given by the
relevant Owner Participant to Atlas and the relevant Loan Trustee; (iii) failure
by Atlas to carry and maintain insurance on and in respect of the Aircraft,
Airframe and Engines, in accordance with the provisions of such Lease; (iv)
failure by Atlas to perform or observe any other covenant or agreement to be
performed or observed by it under such Lease or the related Participation
Agreement or any other related operative document (other than the related
tax-indemnity agreement between Atlas and the Owner Participant), and such
failure shall continue unremedied for a period of 30 days after written notice
of such failure by the applicable Owner Trustee or Loan Trustee unless such
failure is capable of being corrected and Atlas shall be diligently proceeding
to correct such failure, in which case there shall be no Lease Event of Default
unless and until such failure shall continue unremedied for a period of 180 days
after the receipt of such notice; (v) any representation or warranty made by
Atlas in such Lease or the related Participation Agreement or in any other
related operative document (other than in the
86
<PAGE> 94
related tax indemnity agreement between Atlas and the Owner Participant) shall
prove to have been untrue or inaccurate in any material respect at the time
made, such representation or warranty is material at the time in question and
the same shall remain uncured (to the extent of the adverse impact thereof) for
more than 30 days after the date of written notice thereof to Atlas; and (vi)
the occurrence of certain voluntary events of bankruptcy, reorganization or
insolvency of Atlas or the occurrence of involuntary events of bankruptcy,
reorganization or insolvency which shall continue undismissed, unvacated or
unstayed for a period of 90 days.
Indenture Events of Default under the Owned Aircraft Indentures are
discussed above under "-- Indenture Defaults, Notice and Waiver."
Remedies Exercisable upon Events of Default Under the Leases
If a Lease Event of Default has occurred and is continuing, the applicable
Owner Trustee may (or, so long as the Indenture shall be in effect, the
applicable Loan Trustee may, subject to the terms of the Indenture) exercise one
or more of the remedies provided in such Lease with respect to the related
Aircraft. These remedies include the right to repossess and use or operate such
Aircraft, to rescind or terminate such Lease, to sell or re-lease such Aircraft
free and clear of Atlas' rights, except as set forth in the Lease, and retain
the proceeds, and to require Atlas to pay, as liquidated damages any due and
unpaid basic rent plus an amount equal to, at such Owner Trustee's (or, subject
to the terms of the relevant Leased Aircraft Indenture, the Leased Aircraft
Trustee's) option, either (i) the excess of the present value of all unpaid rent
during, the remainder of the term of such Lease over the present value of the
fair market rental value of such Aircraft for the remainder of the term of such
Lease or, (ii) the excess of the stipulated loss value of such Aircraft over the
fair market sales value of such Aircraft or, if such Aircraft has been sold, the
net sales proceeds from the sale of such Aircraft. If the Loan Trustee has
validly terminated such Lease, the Loan Trustee may not sell or lease or
otherwise afford the use of such Aircraft to Atlas or any of its affiliates.
Transfer of Owner Participant Interests
Subject to certain restrictions, each Owner Participant may transfer all or
any part of its interest in the related Leased Aircraft.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes the material U.S. federal income tax
consequences to Certificateholders of the purchase, ownership and disposition of
the Certificates offered hereby and in the opinion of Cahill Gordon & Reindel,
special tax counsel to Atlas ("Tax Counsel"), is accurate in all material
respects. Except as otherwise specified, the summary is addressed to beneficial
owners of Certificates ("U.S. Certificateholders") that are citizens or
residents of the United States, corporations, partnerships or other entities
created or organized in or under the laws of the United States or any state
therein, estates the income of which is subject to U.S. federal income taxation
regardless of its source, and trusts that meet the following two tests: (a) a
U.S. court is able to exercise primary supervision over the administration of
the trust and (b) one or more U.S. persons have the authority to control all
substantial decisions of the trust ("U.S. Persons") that will hold the
Certificates as capital assets. This summary does not address the tax treatment
of U.S. Certificateholders that may be subject to special tax rules, such as
banks, insurance companies, dealers in securities or commodities, tax-exempt
entities, holders that will hold Certificates as part of a straddle or holders
that have a "functional currency" other than the U.S. dollar, nor, except as
specifically indicated, does it address the tax treatment of U.S.
Certificateholders that do not acquire Certificates at the public offering price
as part of the initial offering. The summary does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to a decision to purchase Certificates. This summary does not describe any tax
consequences arising under the laws of any state, locality or taxing
jurisdiction other than the United States.
87
<PAGE> 95
The summary is based upon the tax laws of the United States as in effect on
the date of this Offering Memorandum, as well as judicial and administrative
interpretations thereof available on or before such date. All of the foregoing
are subject to change, which change could apply retroactively. Prospective
investors should note that no rulings have been sought from the U.S. Internal
Revenue Service (the "IRS") with respect to the tax consequences described
below, and no assurance can be given that the IRS will not take contrary
positions. The Trusts are not indemnified for any U.S. federal income taxes that
may be imposed upon them, and the imposition of any such taxes on a Trust could
result in a reduction in the amounts available for distribution to the
Certificateholders of such Trust. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Tax Counsel, while there is no authority addressing the
characterization of entities that are similar to the Trusts in all material
respects, each of the Original Trusts should be classified as a grantor trust
for U.S. federal income tax purposes. If, as may be the case, the Original
Trusts are not classified as grantor trusts, they will, in the opinion of Tax
Counsel, be classified as partnerships for U.S. federal income tax purposes and
will not be classified as publicly traded partnerships taxable as corporations
provided that at least 90% of each Original Trust's gross income for each
taxable year of its existence is "qualifying income" (which is defined to
include, among other things, interest income, gain from the sale or disposition
of capital assets held for the production of interest income, and income derived
with respect to a business of investing in securities). Tax Counsel believes
that income derived by the Original Trusts from the Equipment Notes will
constitute qualifying income and that the Original Trusts therefore will meet
the 90% test, assuming that the Original Trusts operate in accordance with the
terms of the Pass Through Trust Agreements and other agreements to which they
are parties. In the opinion of Tax Counsel, the Successor Trusts will be
classified as grantor trusts.
TAXATION OF CERTIFICATEHOLDERS GENERALLY
Trusts Classified as Grantor Trusts
Assuming that a Trust is classified as a grantor trust, a U.S.
Certificateholder will be treated as owning its pro rata undivided interest in
the relevant Deposits and each of the Equipment Notes, the Trust's contractual
rights and obligations under the Note Purchase Agreement, and any other property
held by the Trust. Accordingly, each U.S. Certificateholder's share of interest
paid on Equipment Notes will be taxable as ordinary income, as it is paid or
accrued, in accordance with such U.S. Certificateholder's method of accounting
for U.S. federal income tax purposes, and a U.S. Certificateholder's share of
premium, if any, paid on redemption of an Equipment Note will be treated as
capital gain. Any Deposit Make-Whole Premium will be ordinary income. The
Deposits will likely be subject to the original issue discount and contingent
payment rules, with the result that a U.S. Certificateholder will be required to
include interest income from a Deposit using the accrual method of accounting
regardless of its normal method and with a possible slight deferral in the
timing of income recognition as compared to holding a single debt instrument
with terms comparable to a Certificate. Any amounts received by a Trust under a
Liquidity Facility in order to make interest payments will be treated for U.S.
federal income tax purposes as having the same characteristics as the payments
they replace. An Owner Participant's conveyance of its interest in an owner
trust should not constitute a taxable event to U.S. Certificateholders. However,
if Atlas were to assume an Owner Trust's obligations under the related Equipment
Notes upon a purchase of an Aircraft by Atlas, such assumption would be treated
for federal income tax purposes as a taxable exchange by U.S. Certificateholders
of the Equipment Notes for "new" Equipment Notes resulting in the recognition of
taxable gain or loss equal to the difference between the U.S.
Certificateholder's adjusted basis in its interest in the Equipment Note and the
amount realized on such exchange (except to the extent attributable to accrued
interest, which would be taxable as interest income if not previously included
in income). For this purpose the amount realized (and the issue price of the
"new" Equipment Note) likely would be equal to the fair market value of the U.S.
Certificateholder's pro rata share of the respective Equipment Note at such
time.
88
<PAGE> 96
In the case of a subsequent purchaser of a Certificate, the purchase price
for the Certificate should be allocated among the relevant Deposits and the
assets held by the relevant Trust (including the Equipment Notes and the rights
and obligations under the Note Purchase Agreement with respect to Equipment
Notes not theretofore issued) in accordance with their relative fair market
values at the time of purchase. Any portion of the purchase price allocable to
the right and obligation under the Note Purchase Agreement to acquire an
Equipment Note should be included in the purchaser's basis in its share of the
Equipment Note when issued. Although the matter is not entirely clear, in the
case of a purchaser after initial issuance of the Certificates but prior to the
Delivery Period Termination Date, if the purchase price reflects a "negative
value" associated with the obligation to acquire an Equipment Note pursuant to
the Note Purchase Agreement being burdensome under conditions existing at the
time of purchase (e.g., as a result of the interest rate on the unissued
Equipment Notes being below market at the time of purchase of a Certificate),
such negative value probably would be added to such purchaser's basis in its
interest in the Deposits and the remaining assets of the Trust and reduce such
purchaser's basis in its share of the Equipment Notes when issued. The preceding
two sentences do not apply to purchases of Certificates following the Delivery
Period Termination Date.
A U.S. Certificateholder who is treated as purchasing an interest in a
Deposit or an Equipment Note at a market discount (generally, at a cost less
than its remaining principal amount) that exceeds a statutorily defined de
minimis amount will be subject to the "market discount" rules of the Code. These
rules provide, in part, that gain on the sale or other disposition of a debt
instrument with a term of more than one year and partial principal payments
(including partial redemptions) on such a debt instrument are treated as
ordinary income to the extent of accrued but unrecognized market discount. The
market discount rules also provide for deferral of interest deductions with
respect to debt incurred to purchase or carry a debt instrument that has market
discount. A U.S. Certificateholder who purchases an interest in a Deposit or an
Equipment Note at a premium may elect to amortize the premium as an offset to
interest income on the Deposit or Equipment Note under rules prescribed by the
Code and Treasury regulations promulgated under the Code.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Providers, will be borne by parties other than the Certificateholders. It is
possible that such fees and expenses will be treated as constructively received
by the Trust, in which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata share of such fees
and expenses. If a U.S. Certificateholder is an individual, estate or trust, the
deduction for such holder's share of such fees or expenses will be allowed only
to the extent that all of such holder's miscellaneous itemized deductions,
including such holder's share of such fees and expenses, exceed 2% of such
holder's adjusted gross income. In addition, in the case of U.S.
Certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
Original Trusts Classified as Partnerships
If an Original Trust is classified as a partnership (and not as a publicly
traded partnership taxable as a corporation) for U.S. federal income tax
purposes, income or loss with respect to the assets held by the Trust will be
calculated at the Trust level but the Trust itself will not be subject to U.S.
federal income tax. A U.S. Certificateholder would be required to report its
share of the Trust's items of income and deduction on its tax return for its
taxable year within which the Trust's taxable year (which should be a calendar
year) ends as well as income from its interest in the relevant Deposits. A U.S.
Certificateholder's basis in its interest in the Trust would be equal to its
purchase price therefor (including its share of any funds withdrawn from the
Depositary and used to purchase Equipment Notes), plus its share of the Trust's
net income, minus its share of any net losses of the Trust, and minus the amount
of any distributions from the Trust. In the case of an original purchaser of a
Certificate that is a calendar year taxpayer, income or loss generally should be
the same as it would be if the Trust were classified as a grantor trust, except
that income or loss would be reported on an accrual basis even if the U.S.
Certificateholder otherwise uses the cash method of accounting. A subsequent
purchaser, however, generally would be subject to tax on the same basis as an
original holder with respect to its
89
<PAGE> 97
interest in the Original Trust, and would not be subject to the market discount
rules or the bond premium rules during the duration of the Original Trust.
EFFECT OF SUBORDINATION OF CLASS B AND CLASS C CERTIFICATEHOLDERS
In the event that the Class B Trust or the Class C Trust (such Trusts being
the "Subordinated Trusts" and the related Certificates being the "Subordinated
Certificates") receives less than the full amount of the receipts of interest,
principal or premium paid with respect to the Equipment Notes held by it (any
shortfall in such receipts being the "Shortfall Amounts") because of the
subordination of the Equipment Notes held by such Trust under the Intercreditor
Agreement, the corresponding owners of beneficial interests in the Subordinated
Certificates (the "Subordinated Certificateholders") would probably be treated
for federal income tax purposes as if they had (1) received as distributions
their full share of such receipts, (2) paid over to the relevant preferred class
of Certificateholders an amount equal to their share of such Shortfall Amount,
and (3) retained the right to reimbursement of such amounts to the extent of
future amounts payable to such Subordinated Certificateholders with respect to
such Shortfall Amount.
Under this analysis, (1) Subordinated Certificateholders incurring a
Shortfall Amount would be required to include as current income any interest or
other income of the corresponding Subordinated Trust that was a component of the
Shortfall Amount, even though such amount was in fact paid to the relevant
preferred class of Certificateholders, (2) a loss would only be allowed to such
Subordinated Certificateholders when their right to receive reimbursement of
such Shortfall Amount becomes worthless (i.e., when it becomes clear that funds
will not be available from any source to reimburse such loss), and (3)
reimbursement of such Shortfall Amount prior to such a claim of worthlessness
would not be taxable income to Subordinated Certificateholders because such
amount was previously included in income. These results should not significantly
affect the inclusion of income for Subordinated Certificateholders on the
accrual method of accounting, but could accelerate inclusion of income to
Subordinated Certificateholders on the cash method of accounting by, in effect,
placing them on the accrual method.
DISSOLUTION OF ORIGINAL TRUSTS AND FORMATION OF NEW TRUSTS
Assuming that the Original Trusts are classified as grantor trusts, the
dissolution of an Original Trust and distribution of interests in the related
Successor Trust will not be a taxable event to U.S. Certificateholders, who will
continue to be treated as owing their shares of the property transferred from
the Original Trust to the Successor Trust. If the Original Trusts are classified
as partnerships, a U.S. Certificateholder will be deemed to receive its share of
the Equipment Notes and any other property transferred by the Original Trust to
the Successor Trust in liquidation of its interest in the Original Trust in a
non-taxable transaction. In such case, the U.S. Certificateholder's basis in the
property so received will be equal to its basis in its interest in the Original
Trust, allocated among the various assets received in proportion to their bases
in the hands of the Original Trusts, and the U.S. Certificateholder's holding
period for the Equipment Notes and other property will include the Original
Trust's holding period.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss (subject to the
possible recognition of ordinary income under the market discount rules) equal
to the difference between the amount realized on the disposition (other than any
amount attributable to accrued interest which will be taxable as ordinary
income) and the U.S. Certificateholder's adjusted tax basis in the Note Purchase
Agreement, Equipment Notes and any other property held by the corresponding
Trust. Any gain or loss will be long-term capital gain or loss to the extent
attributable to property held by the Trust for more than one year. In the case
of individuals, estates and trusts, the maximum rate of tax on net long-term
capital gains generally is 20%, except that a maximum rate of 28% applies to
property held for more than one year but not more than 18 months. Any gain with
respect to an interest in a Deposit likely will be treated as ordinary income.
Notwithstanding the foregoing, if the Original Trusts are classified as
partnerships, gain or loss with respect to an interest in an Original Trust will
be calculated and
90
<PAGE> 98
characterized by reference to the U.S. Certificateholder's adjusted tax basis
and holding period for its interest in the Original Trust.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest on the Equipment Notes to, or on behalf of, any
beneficial owner of a Certificate that is not a U.S. Person (a "Non-U.S.
Certificateholder") will not be subject to U.S. federal withholding tax;
provided, in the case of interest, that (i) such Non-U.S. Certificateholder does
not actually or constructively own 10% or more of the total combined voting
power of all classes of Atlas or any Owner Participant or any transferee of such
Owner Participant's interest in the relevant owner trust, (ii) such Non-U.S.
Certificateholder is not a controlled foreign corporation for U.S. tax purposes
that is related to Atlas or any Owner Participant or any transferee of such
Owner Participant's interest in the relevant owner trust and (iii) either (A)
the Non-U.S. Certificateholder certifies, under penalties of perjury, that it is
not a U.S. Person and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and holds the Certificate certifies, under penalties of perjury,
that such statement has been received from the Non-U.S. Certificateholder by it
or by another financial institution and furnishes the payor with a copy thereof.
The IRS issued final regulations on October 6, 1997 which modify the
certification requirements described in clause (iii) with respect to certain
payments made after December 31, 1998.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a Certificate or upon receipt of premium paid on an Equipment
Note by a Non-U.S. Certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the holder and (ii) in the case of an individual, such
holder is not present in the United States for 183 days or more in the taxable
year of the sale, exchange, retirement or other disposition or receipt.
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a backup withholding tax of 31% unless, in
general, the Certificateholder fails to comply with certain reporting procedures
or otherwise fails to establish an exemption from such tax under applicable
provisions of the Code.
CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of Morris, James, Hitchins & Williams,
counsel to the Trustee, under currently applicable law, assuming that the Trusts
will not be taxable as corporations, but, rather, will be classified as grantor
trusts under subpart E, Part I of Subchapter J of the Code or as partnerships
under Subchapter K of the Code, and assuming (a) that the assets of the Trusts
will be treated as held for investment purposes as provided in each Pass Through
Trust Agreement and (b) that the acquisition, management and disposition of the
assets of the Trusts (if the assets were held by a Certificateholder directly)
would not constitute an integral part of the regular trade or business of such
Certificateholder (other than the trade or business of investing), (i) the
Trusts will not be subject to any tax (including, without limitation, net or
gross income, tangible or intangible property, net worth, capital, franchise or
doing business tax), fee or other governmental charge under the laws of the
State of Delaware or any political subdivision thereof and (ii)
Certificateholders that are not residents of or otherwise subject to tax in
Delaware will not be subject to any tax (including, without limitation, net or
gross income, tangible or intangible property, net worth, capital, franchise or
doing business tax), fee or other governmental charge under the laws of the
State of Delaware or any political subdivision thereof as a result of
purchasing, holding (including receiving payments with respect to) or selling a
Certificate.
91
<PAGE> 99
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans subject to
Title I of ERISA ("ERISA Plans"), and on those persons who are fiduciaries with
respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA's
general fiduciary requirements, including, but not limited to, the requirement
of investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, "Plans")) and
certain persons (referred to as "parties in interest" or "disqualified persons")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests (directly or indirectly) in a Certificate, the Plan's assets will
include both the Certificate and an undivided interest in each of the underlying
assets of the corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the Trust by
employee benefit plans (including Plans and entities whose underlying assets
include plan assets by reason of an employee benefit plan's investment in the
entity) is not "significant" within the meaning of the Plan Asset Regulation. In
this regard, the extent to which there is equity participation in a particular
Trust by, or on behalf of, employee benefit plans will not be monitored. If the
assets of a Trust are deemed to constitute the assets of a Plan, transactions
involving the assets of such Trust could be subject to the prohibited
transaction provisions of ERISA and Section 4975 of the Code unless a statutory
or administrative exemption is applicable to the transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party in interest or
a disqualified person, (ii) the sale or exchange of any property between a Plan
and a party in interest or a disqualified person, and (iii) the transfer to, or
use by or for the benefit of, a party in interest or a disqualified person, of
any Plan assets. Such parties in interest or disqualified persons could include,
without limitation, Atlas and its affiliates, the Owner Participants, the
Placement Agents, the Trustees, the Escrow Agent, the Depositary, the Owner
Trustees and the Liquidity Providers. In addition, whether or not the assets of
a Trust are deemed to be Plan assets under the Plan Asset Regulation, if
Certificates are purchased by a Plan and Certificates of a subordinate Class are
held by a party in interest or a disqualified person with respect to such Plan,
the exercise by the holder of the subordinate Class of Certificates of its right
to purchase the senior Classes of Certificates upon the occurrence and during
the continuation of a Triggering Event could be considered to constitute a
prohibited transaction unless a statutory or administrative exemption were
applicable. Depending on the identity of the Plan fiduciary making the decision
to acquire or hold Certificates on behalf of a Plan, Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investments by an
insurance company general account), PTCE 96-23 (relating to transactions
directed by an in-house professional asset manager) or PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) (collectively, the
"Class Exemptions") could provide an exemption from the prohibited transaction
provisions of ERISA and Section 4975 of the Code. However, there can be no
assurance that any of these Class Exemptions or any other exemption will be
available with respect to any particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the provisions of Section 4975
of the Code, may nevertheless be subject to state or other federal
92
<PAGE> 100
laws that are substantially similar to the foregoing provisions of ERISA and the
Code. Fiduciaries of any such plans should consult with their counsel before
purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A Certificates by Plans, provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual administrative
exemptions to certain of the Placement Agents which are substantially the same
as the administrative exemption issued to Morgan Stanley & Co. Incorporated,
Prohibited Transaction Exemption 90-24 (55 Fed. Reg. 20,548 (1990)) (the
"Underwriter Exemption"). The Underwriter Exemption generally exempts from the
application of certain, but not all, of the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Code certain transactions relating
to the initial purchase, holding and subsequent secondary market sale of
pass-through certificates which represent an interest in a trust that holds
secured credit instruments that bear interest or are purchased at a discount in
transactions by or between business entities (including equipment notes secured
by leases) and certain other assets, provided that certain conditions set forth
in the Underwriter Exemption are satisfied.
The Underwriter Exemption sets a number of general and specific conditions
which must be satisfied for a transaction involving the initial purchase,
holding or secondary market sale of Class A Certificates to be eligible for
exemptive relief thereunder. In particular, the acquisition of Class A
Certificates by a Plan must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party;
the rights and interests evidenced by the Certificates must not be subordinated
to the rights and interests evidenced by other Certificates of the same trust
estate; the Certificates at the time of acquisition by the Plan must be rated in
one of the three highest generic rating categories by Moody's, Standard &
Poor's, Fitch or Duff & Phelps Inc.; and the investing Plan must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
In addition, the trust corpus generally must be invested in qualifying
receivables, such as the Equipment Notes, but may not in general include a
pre-funding account (except for a limited amount of pre-funding which is
invested in qualifying receivables within a limited period of time following the
closing not to exceed three months).
With respect to the investment restrictions set forth in the Underwriter
Exemption, an investment in a Certificate will evidence both an interest in the
respective Original Trust as well as an interest in the Deposits held in escrow
by an Escrow Agent for the benefit of the Certificateholder. Under the terms of
the Escrow Agreement, the proceeds from the Offering of the Certificates of each
Class will be paid over by the Placement Agents to the Depositary on behalf of
the Escrow Agent (for the benefit of such Certificateholders as the holders of
the Escrow Receipts) and will not constitute property of the Original Trusts.
Under the terms of each Escrow Agreement, the Escrow Agent will be irrevocably
instructed to enter into the Deposit Agreements with the Depositary and to
effect withdrawals upon the receipt of appropriate notice from the relevant
Trustee so as to enable such Trustee to purchase the identified Equipment Notes
on the terms and conditions set forth in the Note Purchase Agreement. Interest
on the Deposits relating to each Trust will be paid to the Certificateholders of
such Trust as Receiptholders through a Paying Agent appointed by the Escrow
Agent. Pending satisfaction of such conditions and withdrawal of such Deposits,
the Escrow Agent's rights with respect to the Deposits will remain plan assets
subject to the fiduciary responsibility and prohibited transaction provisions of
ERISA and Section 4975 of the Code.
There can be no assurance that the Department of Labor would agree that the
Underwriter Exemption will be applicable to Class A Certificates in these
circumstances. In particular, the Department of Labor might assert that the
escrow arrangement is tantamount to an impermissible pre-funding rendering the
Underwriter Exemption inapplicable. In addition, even if all of the conditions
of the Underwriter Exemption are satisfied
93
<PAGE> 101
with respect to the Class A Certificates, no assurance can be given that the
Exemption would apply with respect to all transactions involving the Class A
Certificates or the assets of the Class A Trust. In particular, it appears that
the Underwriter Exemption would not apply to the purchase by Class B
Certificateholders or Class C Certificateholders of Class A Certificates in
connection with the exercise of their rights upon the occurrence and during the
continuance of a Triggering Event. Therefore, the fiduciary of a Plan
considering the purchase of a Class A Certificate should consider the
availability of the exemptive relief provided by the Underwriter Exemption, as
well as the availability of any other exemptions that may be applicable.
The Underwriter Exemption does not apply to the Class B or Class C
Certificates.
Each person who acquires or accepts a Certificate or an interest therein
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
Each Plan fiduciary (and each fiduciary for a governmental or church plan
subject to rules similar to those imposed on Plans under ERISA) should consult
with its legal advisor concerning an investment in any of the Certificates.
LEGAL MATTERS
The validity of the New Certificates is being passed upon for Atlas by
Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York. Cahill Gordon & Reindel will rely on the opinion of Morris,
James, Hitchins & Williams, counsel for Wilmington Trust Company, as Trustee, as
to matters relating to the authorization, execution and delivery of the New
Certificates under the Pass Through Trust Agreements.
EXPERTS
The audited consolidated financial statements included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The references to AISI, AvS and MBA, and to their respective appraisal
reports, dated as of January 23, 1998, December 5, 1997, and January 14, 1998,
respectively, are incorporated herein in reliance upon the authority of each
such firm as an expert with respect to the matters contained in its appraisal
report.
94
<PAGE> 102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets -- March 31, 1998 and December
31, 1997.................................................. F-25
Consolidated Statements of Operations -- Three Months Ended
March 31, 1998 and 1997................................... F-26
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1998 and 1997................................... F-27
Notes to Consolidated Financial Statements.................. F-28
</TABLE>
F-1
<PAGE> 103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Air, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas Air,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. 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 generally accepted auditing
standards. 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 consolidated financial position of
Atlas Air, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 13, 1998.
F-2
<PAGE> 104
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 41,334 $ 9,793
Short-term investments.................................... 111,635 114,870
Accounts receivable and other, net........................ 55,702 49,603
---------- --------
Total current assets.............................. 208,671 174,266
Property and equipment:
Flight equipment.......................................... 1,154,562 638,630
Other..................................................... 7,607 3,933
---------- --------
1,162,169 642,563
Less accumulated depreciation............................. (98,959) (58,293)
---------- --------
Net property and equipment........................ 1,063,210 584,270
Other assets:
Debt issuance costs, net of accumulated amortization...... 21,705 12,382
Deposits.................................................. 3,829 2,789
---------- --------
25,534 15,171
---------- --------
Total assets...................................... $1,297,415 $773,707
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 40,049 $ 21,561
Accounts payable and accrued expenses..................... 88,105 47,763
Income tax payable........................................ 154 6,267
---------- --------
Total current liabilities......................... 128,308 75,591
Long-term debt, net of current portion...................... 736,026 462,868
Deferred aircraft obligations............................... 163,167 --
Deferred income tax payable................................. 31,085 19,463
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1 par value; 10,000,000 shares
authorized; no shares issued........................... -- --
Common Stock, $0.01 par value; 50,000,000 shares
authorized; 22,450,229 shares issued................... 225 225
Additional paid-in capital................................ 176,253 176,253
Retained earnings......................................... 62,803 39,543
Treasury Stock, at cost; 19,073 and 5,850 shares,
respectively........................................... (452) (236)
---------- --------
Total stockholders' equity........................ 238,829 215,785
---------- --------
Total liabilities and stockholders' equity........ $1,297,415 $773,707
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 105
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Contract services........................................ $383,824 $296,289 $166,070
Scheduled services....................................... 7,171 6,005 1,335
Charters and other....................................... 10,046 13,365 3,862
-------- -------- --------
Total operating revenues......................... 401,041 315,659 171,267
Operating expenses:
Flight crew salaries and benefits........................ 30,153 25,020 14,584
Other flight-related expenses............................ 28,784 27,404 12,361
Maintenance.............................................. 123,820 84,305 42,574
Aircraft and engine rentals.............................. 31,644 27,341 22,902
Fuel and ground handling................................. 10,816 10,554 5,027
Depreciation and amortization............................ 42,945 25,515 14,793
Other.................................................... 49,777 27,457 16,352
Write-off of capital investment and other................ 27,100 -- --
-------- -------- --------
Total operating expenses......................... 345,039 227,596 128,593
-------- -------- --------
Operating income........................................... 56,002 88,063 42,674
Other income (expense):
Interest income.......................................... 7,365 7,102 2,025
Interest expense......................................... (52,834) (35,577) (18,460)
-------- -------- --------
(45,469) (28,475) (16,435)
-------- -------- --------
Income before income taxes................................. 10,533 59,588 26,239
Provision for income taxes................................. (3,844) (21,750) (8,408)
-------- -------- --------
Income before extraordinary item........................... 6,689 37,838 17,831
Extraordinary item:
Gain from extinguishment of debt, net of applicable taxes
of $9,622............................................. 16,740 -- --
-------- -------- --------
Net income....................................... $ 23,429 $ 37,838 $ 17,831
======== ======== ========
Basic earnings per share:
Income before extraordinary item......................... $ .30 $ 1.76 $ 1.06
Extraordinary item....................................... .74 -- --
-------- -------- --------
Net income............................................... $ 1.04 $ 1.76 $ 1.06
======== ======== ========
Weighted average common shares........................... 22,450 21,503 16,783
======== ======== ========
Diluted earnings per share:
Income before extraordinary item......................... $ .30 $ 1.75 $ 1.06
Extraordinary item....................................... .74 -- --
-------- -------- --------
Net income............................................... $ 1.04 $ 1.75 $ 1.06
======== ======== ========
Weighted average common shares........................... 22,536 21,682 16,852
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 106
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
--------------- PAID-IN EARNINGS TREASURY EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK (DEFICIT)
------ ------ ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...................... 15,000 $150 $ -- $(15,903) $ -- $(15,753)
Issuance of Common Stock...................... 4,600 46 66,591 -- -- 66,637
Net income.................................... -- -- -- 17,831 -- 17,831
------ ---- -------- -------- ------- --------
Balance, December 31, 1995...................... 19,600 196 66,591 1,928 -- 68,715
Issuance of Common Stock...................... 2,300 23 99,625 -- -- 99,648
Exercise of stock options, including income
tax benefits of $3,412..................... 550 6 10,037 -- -- 10,043
Purchase of Treasury Stock.................... -- -- -- -- (933) (933)
Issuance of Treasury Stock.................... -- -- -- (223) 697 474
Net income.................................... -- -- -- 37,838 -- 37,838
------ ---- -------- -------- ------- --------
Balance, December 31, 1996...................... 22,450 225 176,253 39,543 (236) 215,785
Purchase of Treasury Stock.................... -- -- -- -- (1,051) (1,051)
Issuance of Treasury Stock.................... -- -- -- (169) 835 666
Net income.................................... -- -- -- 23,429 -- 23,429
------ ---- -------- -------- ------- --------
Balance, December 31, 1997...................... 22,450 $225 $176,253 $ 62,803 $ (452) $238,829
====== ==== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 107
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 23,429 $ 37,838 $ 17,831
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 44,506 25,156 14,793
Amortization of debt issuance costs.................... 3,620 2,278 546
Net gain on disposition of property and equipment...... (1,029) -- --
Write-off of capital investment and other.............. 27,100 -- --
Interest financed...................................... -- -- 1,258
Change in deferred income tax payable.................. 11,622 14,731 8,144
Extraordinary gain..................................... (26,363) -- --
Changes in operating assets and liabilities:
Accounts receivable and other....................... (16,052) (31,009) (10,751)
Deposits............................................ (1,040) 592 5,716
Accounts payable and accrued expenses............... 27,992 28,824 5,770
Income tax payable.................................. (6,113) 6,003 264
----------- --------- ---------
Net cash provided by operating activities...... 87,672 84,413 43,571
INVESTMENT ACTIVITIES:
Purchase of property and equipment....................... (367,787) (289,675) (190,807)
Proceeds from sale of property and equipment............. 3,750 -- --
Purchase of short-term investments....................... (2,505,530) (246,387) --
Maturity of short-term investments....................... 2,508,765 131,517 --
Advances of notes receivable............................. -- -- (550)
----------- --------- ---------
Net cash used in investing activities.......... (360,802) (404,545) (191,357)
FINANCING ACTIVITIES:
Issuance of Common Stock................................. -- 106,279 66,637
Purchase of Treasury Stock............................... (1,051) (933) --
Issuance of Treasury Stock............................... 666 474 --
Borrowings on notes payable.............................. 815,767 154,808 181,680
Principal payments on notes payable...................... (494,121) (21,640) (7,792)
Debt issuance costs...................................... (16,590) (6,053) (4,573)
Advances from affiliate, net............................. -- -- (1,700)
----------- --------- ---------
Net cash provided by financing activities ..... 304,671 232,935 234,252
----------- --------- ---------
Net increase (decrease) in cash................ 31,541 (87,197) 86,466
Cash and cash equivalents at beginning of period......... 9,793 96,990 10,524
----------- --------- ---------
Cash and cash equivalents at end of period............... $ 41,334 $ 9,793 $ 96,990
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 108
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Atlas Air, Inc. (the "Company") provides airport to airport cargo services
throughout the world to major international airlines pursuant to contractual
arrangements with its customers in which the Company provides the aircraft,
crew, maintenance and insurance ("ACMI"), referred to as "contract services."
The Company also provides charter services and scheduled services on an ad hoc
basis. The principal markets served by the Company are Asia and the Pacific Rim
from the United States and Europe, and between South America and the United
States.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Owned aircraft are stated at cost. Expenditures for major additions,
improvements, flight equipment modifications and certain overhaul and
maintenance costs are capitalized. A significant portion of scheduled and
unscheduled maintenance is contracted with two maintenance providers under
long-term agreements pursuant to which monthly reserve payments are made to the
providers based on flight-hours and such amounts are charged to expense
currently. Other maintenance and repairs are charged to expense as incurred,
except for significant engine overhaul maintenance which is capitalized and
charged to expense on a flight-hour basis and D checks which are capitalized and
amortized over the corresponding life. Owned aircraft are depreciated over their
estimated useful lives of 20 years, using the straight-line method and estimated
salvage values of 10% of cost. The cost and accumulated depreciation of property
and equipment disposed of are removed from the related accounts and any gain or
loss is reflected in the results of operations. Substantially all property and
equipment is specifically pledged as collateral for indebtedness of the Company.
Whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, management evaluates the recorded asset
balances, net of accumulated depreciation, for impairment based on the
undiscounted cash flows associated with the asset. Management believes that
there have been no events or changes in circumstances which would require review
of such recoverability.
Capitalized Interest
Interest attributable to funds used to finance the acquisition and
modification of aircraft is capitalized as an additional cost of the related
aircraft. Interest is capitalized at the Company's weighted average interest
rate on long-term debt, or where applicable, the interest rate related to
specific borrowings. Capitalization of interest ceases when the aircraft is
placed in service. Capitalized interest was $16,115,000, $5,347,000, and
$3,573,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-7
<PAGE> 109
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Costs
Costs associated with the issuance of debt are capitalized and amortized
over the life of the respective debt obligation, using the effective interest
method for amortization. In May 1997, $3,647,000 of unamortized deferred loan
costs was charged against the extraordinary gain recognized upon early
extinguishment of certain debt (see Note 3). Amortization of debt issuance costs
was $3,620,000, $2,278,000 and $546,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Cash Equivalents
All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents, except certain investments in debt
securities which are classified as short-term investments.
Short-Term Investments
All investments in debt securities, other than money market funds, with a
current maturity of less than one year, are considered to be short-term
investments (see Note 2).
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
effective for financial statements for both interim and annual periods ending
after December 15, 1997. SFAS No. 128 requires the dual presentation of basic
earnings per share ("basic EPS"), which replaces primary earnings per share, and
diluted earnings per share ("diluted EPS"). Basic EPS is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS is computed similar to basic
EPS except that the weighted-average number of common shares outstanding during
the period is adjusted for the incremental shares attributed to outstanding
options to purchase common stock. Options to acquire 405,000, 399,000 and
294,720 shares in 1997, 1996 and 1995, respectively, were not included in the
computation of diluted EPS because the option price was greater than the average
market price of the Company's common stock.
Income Taxes
The Company provides for income taxes using the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Under this method
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, certificates of
deposit, short-term investments, short-term trade receivables and payables,
long-term debt and deferred aircraft obligations. The carrying values of cash,
certificates of deposit, and short-term trade receivables and payables
approximate fair value. The fair value of long-term debt is estimated based on
current rates available for similar debt with similar maturities and security
(see Note 3). The fair value of deferred aircraft obligations is based upon the
fair value of the purchase contracts associated with the obligations.
F-8
<PAGE> 110
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hedges
The Company may from time to time enter into swaps to reduce exposure to
interest rate fluctuations in connection with certain debt. The cash flows of
the swaps mirror those of the underlying exposures. The premiums on the swaps,
as measured at inception, are amortized over their respective lives as
components of interest expense. Any gains or losses realized upon the early
termination of these swaps are deferred and recognized in income over the
remaining life of the underlying exposure.
Significant Customers and Concentration of Credit Risk
For the year ended December 31, 1997, China Airlines Ltd. ("China
Airlines"), Fast Air Carrier, S.A. ("Fast Air") and Lufthansa Cargo AG
("Lufthansa") accounted for approximately 34%, 11% and 8%, of the Company's
total revenues, respectively. For the year ended December 31, 1996, China
Airlines, KLM Royal Dutch Airlines ("KLM") and Lufthansa accounted for
approximately 34%, 12% and 11%, of the Company's total revenues, respectively.
For the year ended December 31, 1995, China Airlines, KLM and Varig Brazilian
Airlines ("Varig") accounted for approximately 60%, 19% and 11% of the Company's
total revenue, respectively. Accounts receivable from these principal customers
were $18,963,000 and $18,344,000 in the aggregate at December 31, 1997 and 1996,
respectively. The Company is in dispute with one of its customers with respect
to the validity of certain charges for materials and labor that the customer has
invoiced to the Company, and with respect to certain ACMI billings.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
Supplemental Cash Flow Information
The aggregate interest payments made by the Company, net of amounts
capitalized, were $55,097,000, $30,744,000 and $15,563,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Prior to December 1995, the
required monthly payment under the ING Bank loan agreement was less than the
accrued interest, thus causing $1,258,000 of accrued interest in 1995 to be
financed by the lender as an increase in the principal balance (see Note 3).
The Company made federal and state income tax payments of approximately
$7,959,000, $750,000 and $399,000 in the years ended December 31, 1997, 1996 and
1995, respectively.
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of SFAS No. 130 is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Comprehensive income includes net income plus other comprehensive income (other
revenues, expenses, gains, and losses that under generally accepted accounting
principles bypass net income). The Company does not expect other comprehensive
income to be material. The effective date for the application of SFAS No. 130
for both interim and annual periods is for fiscal years beginning after December
15, 1997 with earlier application permitted.
2. SHORT-TERM INVESTMENTS
Proceeds from the secondary public offering of the Company's common stock
("SPO") in May 1996, plus additional funds, were invested in various
held-to-maturity securities, as defined in SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires investments in debt
F-9
<PAGE> 111
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities to be classified as held-to-maturity and measured at amortized cost
only if the reporting enterprise has the positive intent and ability to hold
those securities to maturity. The following table sets forth the aggregate fair
value, gross unrealized holding gains, gross unrealized holding losses, and
amortized/accreted cost basis by major security type as of December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
AGGREGATE GROSS UNREALIZED GROSS UNREALIZED (AMORTIZATION)
SECURITY TYPE FAIR VALUE HOLDING GAINS HOLDING LOSSES ACCRETION
------------- ---------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Commercial Paper............... $ 56,466 $ -- $ 7 $(406)
U.S. Government Agencies....... 16,061 2 1 (138)
Corporate Notes................ 4,995 -- -- (3)
Market Auction Preferreds...... 23,800 -- -- --
Adjustable Rate Mortgages...... 10,000 -- -- --
-------- ---- ---- -----
Totals............... $111,322 $ 2 $ 8 $(547)
======== ==== ==== =====
</TABLE>
In addition, accrued interest on short-term investments at December 31, 1997 was
approximately $307,000. Interest earned on these investments and maturities of
these investments are reinvested in similar securities.
3. LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ING Bank Debt............................................... $ -- $225,112
Lufthansa Debt.............................................. -- 9,556
Equipment Notes............................................. 100,000 100,000
Finova Debt................................................. 30,048 32,503
Aircraft Acquisition Credit Facility........................ 85,000 113,469
Nationsbanc................................................. 23,056 --
AFL Term Loan Facility...................................... 185,000 --
AFL II Term Loan Facility................................... 185,000 --
Senior Notes................................................ 150,000 --
Nationsbanc -- AFI Debt..................................... 14,984 --
Other....................................................... 2,987 3,789
-------- --------
776,075 484,429
Current maturities.......................................... (40,049) (21,561)
-------- --------
Long-term debt, net......................................... $736,026 $462,868
======== ========
</TABLE>
ING Bank Debt
In December 1994, the Company renegotiated its loan agreement with ING
Bank. Pursuant to the new loan agreement, ING Bank agreed to provide up to $231
million of financing to the Company for the purpose of refinancing its existing
loan, financing additional aircraft and the associated costs of converting those
aircraft to freighter configuration, among other things. Subsequently, ING Bank
increased the size of its commitment under the new loan agreement to $232.9
million.
For all but $30,000,000 of the total indebtedness to ING Bank (which amount
was financed at a fixed interest rate of 11.53% through September 1995, at which
time the interest rate was converted to one-month LIBOR ("London Interbank
Offered Rate") plus 2.65%), the loan agreement accrued interest at one-month
LIBOR plus 2.65%. Certain debt covenants under the ING Bank debt precluded one
of the Company's
F-10
<PAGE> 112
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries from declaring dividends, redeeming its own stock for value, or
returning any capital to its stockholders.
In May 1997, the Company used proceeds from the AFL Term Loan Facility (see
below) and approximately $7.6 million in cash to extinguish its ING Bank debt.
The Company recognized an extraordinary gain of $16.7 million (net of taxes of
$9.6 million) as a result of such extinguishment.
Lufthansa Debt
In the first quarter of 1995, the Company purchased two aircraft in
passenger configuration from Lufthansa, which financed approximately $12.5
million of the purchase price of each aircraft, for which the Company accrued
interest at an annual rate of 8.8%. In May 1997, the Company paid $6.3 million
to satisfy the remaining Lufthansa debt balance in conjunction with the
refinancing of these aircraft under the AFL Term Loan Facility (see below).
Equipment Notes
In November 1995, the Company sold $100 million of 12 1/4% Pass Through
Certificates. Each 12 1/4% Pass Through Certificate due 2002 (each a
"Certificate") represents a fractional undivided interest in the Atlas Air Pass
Through Trust (the "Trust") formed pursuant to a pass through trust agreement
between the Company and First Fidelity Bank, N.A., as trustee under the Trust.
The property of the Trust consists of 12 1/4% Senior Secured Notes due 2002 (the
"Equipment Notes") issued by the Company to finance, together with funds from
the Company, the acquisition and conversion cost of three Boeing 747 aircraft
(the "Collateral Aircraft") that were acquired by the Company in the fourth
quarter of 1995 and converted to freighter configuration in the first quarter of
1996. The Company issued the related Equipment Notes during the fourth quarter
of 1995 and the first quarter of 1996 at or prior to the time pre-delivery
deposits and final purchase price payments were required to be made with respect
to the Collateral Aircraft.
Interest on the Equipment Notes is passed through to the Certificateholders
on June 1 and December 1 of each year, at a rate per annum of 12 1/4%. The
Equipment Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after December 1, 1998 at redemption prices ranging from
108% in 1998 to 100% in 2001 and thereafter, together with accrued and unpaid
interest, if any, to the date of redemption. The Company is required to provide
for the retirement of one-third of the aggregate principal amount of the
Equipment Notes on December 1 in each of 2000 and 2001 through the operation of
a sinking fund at a redemption price of 100% of the principal amount thereof,
together with accrued interest thereon to the redemption date.
Covenants with respect to the Collateral Aircraft require specific levels
of insurance, as well as contain requirements regarding possession, maintenance,
lease or transfer of the aircraft. Certain covenants applicable to the Company
include, among other restrictions, limitations on indebtedness, restricted
payments and restriction on certain asset sales. The Company was in compliance
with all of its covenants as of December 31, 1997.
Finova Debt
The Company obtained financing from Finova Capital Corporation for
approximately 80% of the total acquisition and conversion cost of the first of
six aircraft purchased from Thai Airways International Public Company Limited
(the "Thai Aircraft") (see below), or $32.8 million. The loan accrues interest
at 10.13% and matures on October 1, 2003. The loan is secured by a first
priority security interest in the first Thai Aircraft.
F-11
<PAGE> 113
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aircraft Acquisition Credit Facility
In May 1996, the Company entered into a $175 million revolving credit
facility (the "Aircraft Acquisition Credit Facility") with Goldman Sachs Credit
Partners L.P. ("Goldman Sachs"), as Syndication Agent, and Bankers Trust Company
("BTCo"), as Administrative Agent. This revolving loan facility provides for the
acquisition and conversion of flight equipment. The Aircraft Acquisition Credit
Facility was subsequently amended and restated in conjunction with certain
refinancings. The Third Amended and Restated Credit Facility provides for a $250
million revolving credit facility as of September 5, 1997 with a two-year
revolving period and a subsequent three-year term loan period in the event that
permanent financing has not been obtained for any flight equipment financed
under the facility. At the time of each borrowing, the Company must select
either a Base Rate Loan (prime rate, plus 1.5% through May 8, 1998, thereafter
plus 2.0%) or a Eurodollar Rate Loan (Eurodollar rate, plus 2.5% through May 8,
1998, thereafter plus 3.0%). The Eurodollar Rate Loan was selected by the
Company for substantially all borrowings in 1996 and 1997. The weighted average
interest rate on borrowings outstanding under the Aircraft Acquisition Credit
Facility was 8.38% at December 31, 1997. Each borrowing is secured by a first
priority security interest in the collateral flight equipment of that borrowing.
Certain tests must be met before each purchase of aircraft and related drawdown
on the facility. To date, the Company has met these tests. If in the future, the
Company cannot meet all the tests because of the difficult sequencing of
aircraft acquisition, aircraft conversion and customer contracts, the Company
believes that other financing sources would be available to the Company or that
it would acquire aircraft using its internal cash or seek a waiver of any
necessary conditions. As of December 31, 1997, the Company had $85.0 million
outstanding under the Aircraft Acquisition Credit Facility.
Covenants with respect to the Aircraft Acquisition Credit Facility require
specific levels of insurance, as well as contain requirements regarding
possession, maintenance, and lease or transfer of the flight equipment. Certain
covenants applicable to the Company include, among other restrictions,
limitations on indebtedness, liens, investments, contingent obligations,
restricted junior payments, capital expenditures and leases. The Company was in
compliance with all of its covenants at December 31, 1997.
Nationsbanc
In March 1997, the Company refinanced one of its aircraft with Nationsbanc
Leasing Corporation ("Nationsbanc"). This aircraft was previously financed
through the Aircraft Acquisition Credit Facility. As such, this refinancing
increased the availability of funds under the Aircraft Acquisition Credit
Facility by approximately $25 million. The Nationsbanc financing is a seven year
term loan (extendible under certain circumstances to ten years) which provides
for a fixed interest rate of 9.16%. The loan is secured by a first priority
security interest in this aircraft.
AFL Term Loan Facility
In May 1997, the Company formed a wholly-owned subsidiary, Atlas Freighter
Leasing, Inc. ("AFL"), for the purpose of entering into the $185 million AFL
Term Loan Facility (the "AFL Term Loan Facility") to refinance six Boeing
747-200 aircraft previously financed through the ING Bank debt (see above).
Concurrent with entering into the AFL Term Loan Facility, the proceeds of the
AFL Term Loan Facility were used to repay all existing principal and interest
due under the ING Bank debt. Interest is based on the Eurodollar rate, plus 2.5%
for the first three years and 3.0% thereafter, and is payable quarterly. The
interest rate on borrowings outstanding under the AFL Term Loan Facility was
8.38% at December 31, 1997. Quarterly scheduled principal payments of $2.5
million commenced in February 1998 and increase to $5.7 million in August 1998
with a final payment of $50.0 million in May 2004. The AFL Term Loan Facility is
secured by a first priority interest in the six subject aircraft and is
restrictive with respect to limitations on indebtedness, liens, investments,
contingent obligations, restricted junior payments, capital expenditures,
F-12
<PAGE> 114
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amendments of material agreements, leases, transactions with shareholders and
affiliates and the conduct of business. The Company was in compliance with all
of its covenants as of December 31, 1997.
AFL II Term Loan Facility
In September 1997, the Company formed another wholly-owned subsidiary,
Atlas Freighter Leasing II, Inc. ("AFL II") for the purpose of entering into the
$185 million AFL II Term Loan Facility (the "AFL II Term Loan Facility") to
refinance four of the aircraft previously financed under the Aircraft
Acquisition Credit Facility, plus nine spare engines, in order to provide the
Company with greater financial flexibility in anticipation of the financing
requirements for the future acquisition of additional aircraft. Interest is
based on the Eurodollar rate, plus 2.25%, less a pricing reduction, if any, in
effect from time to time and is payable quarterly. The interest rate on
borrowings outstanding under the AFL II Term Loan Facility was 8.13% at December
31, 1997. Quarterly scheduled principal payments of $2.5 million commenced in
February 1998 and increase to $5.7 million in August 1998 with a final payment
of $50.0 million in May 2004. The AFL II Term Loan Facility is secured by a
first priority interest in the four subject aircraft, plus nine spare engines,
and is restrictive with respect to limitations on indebtedness, liens,
investments, contingent obligations, restricted junior payments, capital
expenditures, amendments of material agreements, leases, transactions with
shareholders and affiliates and the conduct of business. The Company was in
compliance with all of its covenants as of December 31, 1997.
Senior Notes
In August 1997, the Company completed the offering of its unsecured 10 3/4%
Senior Notes due 2005 ("Senior Notes"). The proceeds from the offering of the
Senior Notes were used to, among other things, repay short-term indebtedness
incurred by the Company to make Pre-Delivery Deposits to The Boeing Company
("Boeing") for the purchase of 10 new freighter aircraft (see Note 6) and for
additional Pre-Delivery Deposits as they become due.
Interest on the Senior Notes began to accrue from their date of original
issuance and is payable semi-annually in arrears on February 1 and August 1 of
each year, at the rate of 10 3/4% per annum. The Senior Notes are redeemable, in
whole or in part, at the option of the Company, on or after August 1, 2001, at
105.375%, 102.688% and 100.000% for the years 2001, 2002 and 2003 and
thereafter, respectively, plus accrued interest to the date of redemption. In
addition, at any time on or prior to August 1, 2000, the Company, at its option,
may redeem up to 35% of the aggregate principal amount of the Senior Notes
originally issued with the net cash proceeds of one or more public equity
offerings, at a redemption price equal to 110.75% of the principal amount
thereof plus accrued interest to the date of redemption; provided that at least
65% of the aggregate principal amount of the Senior Notes originally issued
remains outstanding immediately after any such redemption.
The Senior Notes are general unsecured obligations of the Company which
rank pari passu in right of payment to any existing and future unsecured senior
indebtedness of the Company. The Senior Notes are effectively subordinated,
however, to all secured indebtedness of the Company and to all indebtedness of
the Company's subsidiaries.
Covenants with respect to the Senior Notes contain certain limitations on
the ability of the Company and its subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, create restrictions on the ability of a subsidiary to
pay dividends or make certain payments, sell or issue preferred stock of
subsidiaries to third parties, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The Company was in compliance
with all of its covenants as of December 31, 1997.
F-13
<PAGE> 115
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nationsbanc - AFI Debt
In October 1997, Atlas Flightlease, Inc. ("AFI"), a wholly-owned subsidiary
of the Company, secured a 2-year LIBOR based financing with Bankers Trust
Company for approximately 80% of the purchase price of a 1988 Canadair
Challenger passenger aircraft (the "Challenger"). AFI purchased the Challenger
from MAC Flightlease, Inc. ("MAC Flightlease"), an entity wholly-owned by the
wife of the Company's Chairman, President and CEO (see Note 7), in the third
quarter of 1997. In December 1997, AFI refinanced the Challenger for
approximately 100% of its purchase price with Nationsbanc under a 5-year loan
which was guaranteed by the Company. Interest is based on the Eurodollar rate,
plus 2.35%, and is payable quarterly with concurrent scheduled payments of
principal. The interest rate on borrowings outstanding under the Nationsbanc
debt was 8.26% at December 31, 1997. The loan is secured by a first priority
security interest in the Challenger. Covenants with respect to this financing
require specific levels of insurance, as well as contain requirements regarding
use, maintenance, configuration, liens and disposition of the Challenger, among
other things. AFI was in compliance with all of its covenants as of December 31,
1997.
Hedges
In September 1997, the Company entered into an interest rate swap with BTCo
for the purpose of hedging its floating rate debt. The notional amount of the
interest rate swap is $210 million, decreasing over a term of eight years. The
Company pays a fixed interest rate of 5.72%, increasing .25% annually, and
receives a floating interest rate based on 3-month LIBOR, whereby the net
interest settles quarterly. The 3-month LIBOR rate for the quarterly interest
period which included December 31, 1997 was 5.88%.
Fair Value of Long-Term Debt
Based on current rates available for similar debt with similar maturities
and security, the fair values of the debt in the above table at December 31,
1997, are estimated to be their carrying values. The Equipment Notes and the
Senior Notes are publicly traded. Based on published trading prices at December
31, 1997, the fair values of the Equipment Notes and the Senior Notes are
estimated to be $111.3 million and $105.6 million, respectively.
Five Year Debt Maturities
At December 31, 1997 principal repayments on long-term debt for the next
five years were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER
------- ------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equipment Notes.......... $ -- $ -- $ 33,333 $ 33,333 $ 33,334 $ --
Finova Debt.............. 2,709 3,001 3,317 3,672 4,084 13,263
Aircraft Acquisition
Credit Facility........ -- 7,083 28,334 28,333 21,250 --
Nationsbanc.............. 2,865 3,139 3,439 3,768 4,128 5,718
AFL Term Loan Facility... 16,350 22,600 22,600 22,600 22,600 78,250
AFL II Term Loan
Facility............... 16,350 22,600 22,600 22,600 22,600 78,250
Senior Notes............. -- -- -- -- -- 150,000
Nationsbanc - AFI Debt... 719 789 1,396 1,516 1,643 8,921
Other.................... 1,056 553 452 488 181 258
------- ------- -------- -------- -------- --------
$40,049 $59,765 $115,471 $116,310 $109,820 $334,660
======= ======= ======== ======== ======== ========
</TABLE>
F-14
<PAGE> 116
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEFERRED AIRCRAFT OBLIGATIONS
In June 1997, the Company entered into an agreement with Boeing to purchase
10 new 747-400 freighter aircraft (the "Boeing Purchase Agreement") (see Note
6). The Boeing Purchase Agreement requires the Company to pay "Pre-Delivery
Deposits" in order to secure delivery of the 747-400 freighter aircraft and to
defray a portion of the manufacturing costs. In addition, the Boeing Purchase
Agreement provides for a deferral of a portion of the Pre-Delivery Deposits
(Deferred Aircraft Obligations) for which the Company accrues and pays interest
quarterly at 6-month LIBOR, plus 2.00%. As of December 31, 1997, there was
$163.2 million of Deferred Aircraft Obligations outstanding and the combined
interest rate was 7.97%. The Company will settle its Deferred Aircraft
Obligations upon delivery of each of the 10 aircraft, which are scheduled for
delivery as follows: five in 1998, two in 1999 and three in 2000. Financing for
the first five aircraft has been secured through the EETCs (see Note 16). In
addition, the Company may arrange for tax-oriented long-term leases on some or
all of these aircraft.
5. INCOME TAXES
The Company had net operating loss carryforwards of approximately
$122,692,000 as of December 31, 1997 which expire between 2008 and 2017. The
Company has generated approximately $8,665,000 of alternative minimum tax credit
carryforwards which are available in subsequent years to reduce its regular tax
liability subject to statutory limitations. All tax years of the Company that
are statutorily open are subject to examination by the Internal Revenue Service
("IRS"), as well as state and local tax authorities. Currently, the fiscal year
ended March 31, 1994, the short year ended December 31, 1994 and the calendar
year ended December 31, 1995 are under examination by the IRS. The Company
believes that it has adequately provided for all income tax liabilities and that
final resolution of any IRS examination will not have a material effect on its
financial position or results of operations.
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 1,704 $ 6,625 $ 251
State and local..................................... 140 394 13
Deferred:
Federal............................................. 11,622 14,731 8,144
State and local..................................... -- -- --
------- ------- -------
Provision for income taxes....................... $13,466 $21,750 $ 8,408
======= ======= =======
</TABLE>
The provisions for income taxes were at rates different from the U.S.
federal statutory rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax provision rate............. 35.00% 35.00% 35.00%
State and local income taxes, net of federal tax
benefit............................................... 1.04 .66 --
Nondeductible items..................................... 2.36 2.04 1.44
Reversal of prior year valuation allowance.............. -- -- (4.83)
Benefit of net operating loss........................... (1.90) (1.20) --
Other................................................... -- -- .43
------ ------ ------
Effective tax provision rate.......................... 36.50% 36.50% 32.04%
====== ====== ======
</TABLE>
F-15
<PAGE> 117
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The net deferred income tax liability components are as follows (in
thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation........... $96,147 $57,127
Other..................................................... 1,372 1,564
------- -------
Total deferred tax liabilities.................... 97,519 58,691
Deferred tax assets:
Tax benefit of net operating loss carryforwards........... 44,218 20,804
Tax benefit of alternative minimum tax credits............ 8,665 7,020
Other..................................................... 13,551 11,404
------- -------
Total deferred tax assets......................... 66,434 39,228
------- -------
Net deferred tax liability........................ $31,085 $19,463
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Aircraft
Minimum annual rental commitments under noncancelable aircraft operating
leases for years ending December 31, are approximately (in thousands):
<TABLE>
<S> <C>
1998 (one Boeing 747-200 aircraft).......................... $ 4,500
1999 (one Boeing 747-200 aircraft).......................... 4,500
2000 (one Boeing 747-200 aircraft).......................... 4,500
2001 (one Boeing 747-200 aircraft).......................... 4,500
2002 (one Boeing 747-200 aircraft).......................... 4,500
Thereafter (one Boeing 747-200 aircraft).................... 32,625
</TABLE>
The above commitments do not include the potential lease financing (if any)
of Boeing 747-400 freighter aircraft scheduled for delivery during 1998, 1999
and 2000. In addition to the above commitments, the Company leases engines under
short-term lease agreements on an as needed basis.
Aircraft and engine rentals, including short-term rentals, were
$31,644,000, $27,341,000 and $22,902,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Boeing Purchase Agreement
In June 1997, the Company entered into the Boeing Purchase Agreement to
purchase 10 new 747-400 freighter aircraft to be powered by GE engines. The
747-400 freighter aircraft are currently scheduled to be delivered as follows:
five in 1998, two in 1999 and three in 2000. Due to production problems at
Boeing, the Company believes that each of the 1998 delivery positions of the
747-400 aircraft may be delayed up to 60 days. While Boeing will compensate the
Company for defined delays in delivery of the 747-400 aircraft, any such delays
may adversely impact the Company's ability to initiate service with prospective
customers in a timely fashion. The Boeing Purchase Agreement also provides the
Company with options to purchase up to 10 additional 747-400 freighter aircraft
for delivery from 1999 through 2002. As a result of the Company being the
largest purchaser of 747-400 freighter aircraft to date, it was able to
negotiate from Boeing and GE a significant discount off the aggregate list price
of $1.7 billion for the 10 747-400 freighter aircraft, four installed engines
per aircraft and five spare engines. In addition, the Company also obtained
certain ancillary
F-16
<PAGE> 118
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products and services at advantageous prices. The Boeing Purchase Agreement
requires that the Company pay Pre-Delivery Deposits to Boeing prior to the
delivery date of each 747-400 freighter aircraft in order to secure delivery of
the 747-400 freighter aircraft and to defray a portion of the manufacturing
costs. The Company expects the maximum total amount of Pre-Delivery Deposits at
any time outstanding will be approximately $155 million, approximately $105.1
million of which was paid as of December 31, 1997. For the years 1998 and 1999,
the Company expects to pay $67.6 million and $42.6 million, respectively, in
accordance with the Pre-Delivery Deposits schedule. In addition, the Boeing
Purchase Agreement provides for a deferral of a portion of the Pre-Delivery
Deposits (Deferred Aircraft Obligations -- see Note 4) for which the Company
accrues and pays interest quarterly at 6-month LIBOR, plus 2.00%. As of December
31, 1997, there was $163.2 million of Deferred Aircraft Obligations outstanding
and the combined interest rate was 7.97%.
Cargo Modification
In December 1997, the Company supplemented its modification contract with
Boeing to provide for the cargo configuration of two aircraft (acquired in
December 1996 and May 1997) under lease to Philippines Airlines Limited ("PAL"),
which were utilized in passenger configuration by PAL during 1997 and in early
1998. The initial deposit for such modification is recorded in Flight Equipment
in the December 31, 1997 balance sheet. The remaining commitments to Boeing and
other vendors as of December 31, 1997 for both of these aircraft totaled
approximately $20.2 million. These commitments are expected to be paid during
the first three quarters of 1998.
Maintenance Agreements
In January 1995, the Company entered into a maintenance agreement with one
of its principal customers. This agreement includes a provision which requires
the Company to remit a fixed amount per flight hour each month to the customer,
subject to a 3.5% annual escalation factor for the first five years, for which
the customer will perform most regular maintenance on a substantial portion of
the aircraft in the Company's fleet. The agreement extends for a period of ten
years. Pursuant to its maintenance agreement, engines may be upgraded when
inducted into the maintenance pool in order to improve engine reliability and to
lower Company operating costs. When such costs are incurred and identified, they
are capitalized and amortized over the remaining life of each applicable engine.
As of December 31, 1997, the Company had paid the customer $7.5 million for such
costs. The Company expects to incur approximately an additional $2 million to $3
million for such upgrades over the term of the contract.
The Company has an agreement, subject to acceptable rates, terms and
conditions, with Linee Aeree Italiane S.p.A. ("Alitalia") to utilize, or find
other parties to utilize, an amount of Alitalia's maintenance services with an
aggregate cost of $25 million over a five-year period ending in June 2000.
In June 1996, the Company entered into a ten year engine maintenance
agreement with GE for the engine maintenance of up to 15 aircraft powered by
CF6-50E2 engines at a fixed rate per flight hour, subject to an annual formula
increase. The agreement commenced in the third quarter of 1996 with the
acceptance of engines associated with aircraft acquired in the third and fourth
quarters of 1996. Pursuant to its maintenance agreement and upon the first time
shop visit, the Company is invoiced for certain one-time charges, which the
Company capitalizes and amortizes over the lesser of the remaining life of the
asset or the remaining life of the maintenance agreement. As of December 31,
1997, the Company had been invoiced for and paid $4.9 million of such charges.
Effective in the year 2000, the Company will have an option to add not less than
40 engines to the program.
Office and Warehouse
In 1995, the Company entered into an operating lease for office space
expiring in the year 2000, with two five year renewal provisions. In addition,
the Company leases warehouse space for which the initial lease term
F-17
<PAGE> 119
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expires at the end of August 1999, and provides for two one-year renewal option
periods. Future minimum rental commitments by year are as follows for the years
ending December 31: 1998 -- $728,000; 1999 -- $708,000; 2000 -- $277,000. Rental
expense, including short-term rentals, was $905,000, $615,000 and $579,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
Employment Agreements
The Company has entered into employment agreements with certain key
employees. Such employment agreements provide for, among other things, base
annual salary, certain bonuses, the grant of options to purchase common stock of
the Company under the 1995 Stock Option Plan (see Note 14), and in certain
circumstances relocation and severance benefits.
FAA Airworthiness Directives
Under the FAA's Directives issued under its "Aging Aircraft" program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the problem of corrosion and
structural fatigue. In November 1994, Boeing issued Nacelle Strut Modification
Service Bulletins which have been converted into Directives by the FAA. Twelve
of the Company's Boeing 747-200 aircraft will have to be brought into compliance
with such Directives within the next three years at an estimated cost of
approximately $6.0 million. As part of the FAA's overall aging aircraft program,
it has issued Directives requiring certain additional aircraft modifications to
be accomplished prior to the aircraft reaching 20,000 cycles. The average cycle
time for the 17 aircraft in service is approximately 12,000 cycles and the
average cycles operated per year is approximately 800 cycles. The Company
estimates that the modification costs per aircraft will range between $2 million
and $3 million. Between now and the year 2000, only one aircraft is expected to
reach the 20,000 cycle limit and nine additional aircraft will require
modification prior to 2009. The remaining seven aircraft in service have already
undergone such modifications. The two aircraft undergoing modification to
freighter configuration will receive the Nacelle Strut Modification as part of
the freighter conversion. Other Directives have been issued that require
inspections and minor modifications to Boeing 747-200 aircraft. It is possible
that additional Directives applicable to the types of aircraft or engines
included in the Company's fleet could be issued in the future, the cost of which
could be substantial.
Upon acquisition of an aircraft, the Company determines whether or not the
aircraft is in compliance with Airworthiness Directives and tries to anticipate
all future compliance requirements. The necessary work to bring the aircraft
into compliance is then scheduled at the time of conversion of the aircraft to
freighter configuration, in order to minimize unscheduled maintenance events.
Legal Proceedings
On February 24, 1997, the Company filed a complaint for declaratory
judgment in the Colorado District Court, Jefferson County against Israel
Aircraft Industries Ltd. ("IAI") for mechanical problems the Company experienced
with respect to an aircraft the Company sub-leased from IAI. The Company is
seeking approximately $4 million in damages against IAI to be offset by the
amount, if any, the Company owes IAI pursuant to the sub-lease. IAI had the case
removed to the U.S. District Court, District of Colorado on April 21, 1997 and
has filed counterclaims alleging damages of approximately $9 million based on
claims arising from the sub-lease. The Company intends to vigorously defend
against all of IAI's claims.
In March 1997, Air Support International, Inc. ("ASI") filed a complaint
against the Company in the U.S. District Court, Eastern District of New York
alleging actual and punitive damages of approximately $13.5 million arising from
the Company's refusal to pay commissions which ASI claims it is owed for
allegedly arranging certain ACMI Contracts. The Company intends to vigorously
defend against all of ASI's claims.
F-18
<PAGE> 120
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While the Company is from time to time involved in litigation in the
ordinary course of its business, there are no other material legal proceedings
pending against the Company or to which any of its property is subject.
7. RELATED PARTY TRANSACTIONS
In June 1995, the Company extended a non-interest bearing loan to an
officer of the Company in the amount of $125,000 in connection with such
officer's relocation to Colorado, which the Company forgave in July 1995.
In August and September 1995, the Company extended demand loans to three
senior vice presidents of the Company in the aggregate amount of $550,000,
bearing interest at an annual rate of 7.50%. Two of the loans plus interest were
paid in full in April and May 1996, and the third loan plus interest was paid in
full in December 1997. A loan of up to $750,000, bearing interest at 5.87%, was
extended in June 1996 to one officer for the purpose of constructing a
residence. As of December 31, 1997, the outstanding balance of officer demand
loans was $735,000.
In November 1995, the Company began renting a Cessna Citation SP, on an as
needed basis, from MAC Flightlease for the purpose of corporate business travel.
MAC Flightlease is wholly-owned by the wife of the Company's Chairman, President
and CEO. The Company paid $265,000 in 1996 and $52,000 in 1995 for such travel,
at rates which are considered by the Company to be at fair market value.
In October 1997, AFI purchased from MAC Flightlease the Challenger for
corporate business travel. Initially, AFI secured a 2-year LIBOR based financing
with BTCo for approximately 80% of the purchase price of the Challenger. In
December 1997, AFI refinanced the Challenger for approximately 100% of its
purchase price with Nationsbanc under a 5-year LIBOR based loan which was
guaranteed by the Company. The Company paid $15.3 million for the Challenger,
which is considered by the Company to be at fair market value.
8. ACCOUNTS RECEIVABLE AND OTHER
The components of accounts receivable and other are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Accounts receivable-trade................................... $58,817 $41,687
Insurance and vendor claims................................. 2,250 5,952
Employee receivables........................................ 771 606
Prepaids and other.......................................... 3,139 1,979
Less: Allowance for doubtful accounts....................... (9,275) (621)
------- -------
$55,702 $49,603
======= =======
</TABLE>
F-19
<PAGE> 121
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Accounts payable-trade...................................... $12,291 $15,745
Accrued salaries and wages.................................. 6,779 5,547
Accrued maintenance......................................... 19,012 11,621
Accrued interest............................................ 13,581 3,348
Loss reserves (see Note 10)................................. 18,550 --
Other accrued expenses...................................... 17,892 11,502
------- -------
$88,105 $47,763
======= =======
</TABLE>
10. WRITE-OFF OF CAPITAL INVESTMENT AND OTHER
In conjunction with the June 1997 agreement with Boeing to purchase 10 new
747-400 freighter aircraft, the Company reassessed the economic viability of
renewing on a longer-term basis its sub-leases with Federal Express Corporation
("FedEx") for five 747-200 freighter aircraft. Based on the results of this
assessment in the second quarter of 1997, the Company decided to schedule the
return of these aircraft in the first quarter of 1998. The Company wrote-off its
remaining investment in the five FedEx aircraft and established certain other
reserves.
The impact of the various largely non-recurring charges was $27.1 million,
or $17.2 million on an after-tax basis, which comprised write-offs of various
leasehold improvements associated with the Company's sub-leases with FedEx of
the five 747-200 aircraft and reserves for costs necessary to return the
aircraft upon the termination of the sub-leases. In addition, the Company
established reserves primarily related to certain customers and vendors for
out-of-period items for which the Company is currently in negotiations. In
addition, the reserves include estimates for litigation costs and other costs
not expected to re-occur.
11. SAVINGS AND RETIREMENT PLAN
The Company implemented a 401(k) Retirement Plan (the "Plan") in June 1994,
under which eligible employees may contribute up to 15% of their total pay. The
Plan covers substantially all employees. The Company did not make contributions
to the Plan in 1995. Effective May 1, 1996, the Plan was amended to provide for
Company contributions equal to 50% of the first 10% of contributions made by
employees, for which the Company incurred an expense of $1,255,000 and $559,000
for the years ended December 31, 1997 and 1996, respectively.
12. BUSINESS SEGMENTS
The Company operates in one business segment, which is to provide the
common carriage of freight over various worldwide routes.
The assets of the Company, principally flight equipment, support its entire
worldwide transportation system and are not readily identifiable by geographic
area. Property and equipment, other than flight equipment, located in foreign
locations is not significant.
Foreign sales accounted for 99%, 98% and 99% of total revenues for the
years ended December 31, 1997, 1996 and 1995, respectively. All foreign sales
were U.S. dollar denominated.
F-20
<PAGE> 122
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PREFERRED STOCK
The Board of Directors is authorized under the restated certificate of
incorporation to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of common stock, including the loss of voting control to others. At
present, the Company has no plans to issue any shares of Preferred Stock.
14. STOCK-BASED COMPENSATION PLANS
Employee Stock Purchase Plan
In 1995, the Company established an Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Employees eligible to participate in the Stock Purchase
Plan are those who have completed at least one year of employment with the
Company, but excluding employees whose customary employment is not more than
five months in any calendar year or 20 hours or less per week. The Stock
Purchase Plan is administered by the Compensation Committee of the Board of
Directors of the Company which determines the terms and conditions under which
shares are offered and corresponding options granted under the Stock Purchase
Plan for any Purchase Period, as defined in the Stock Purchase Plan. Employees
may contribute up to 15% of their gross base compensation subject to certain
limitations. The price per share at which the common stock is purchased pursuant
to the Stock Purchase Plan is the lesser of 85% of the fair market value of the
common stock on the first or last day of the applicable Purchase Period. The
maximum number of shares of common stock which may be issued on the exercise of
options purchased under the Stock Purchase Plan is 1,000,000 shares. As of
December 31, 1997, 47,984 shares were issued at a weighted average cost of
$23.28 to 161 employees who have participated in the Stock Purchase Plan.
1995 Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan ("1995 Plan"),
whereby employees may be granted options, incentive stock options, share
appreciation rights, and restricted shares. The portion of the 1995 Plan
applicable to employees is administered by the Compensation Committee of the
Board of Directors of the Company which also establishes the terms of the
awards. The 1995 Plan also provides for certain automatic grants of nonqualified
stock options to non-employee directors which become exercisable on the date of
grant and expire on the tenth anniversary of the date of grant. Originally, an
aggregate of 1,800,000 shares were reserved for issuance in connection with
awards and director's options under the 1995 Plan. Following shareholder
approval, an additional 300,000 shares were reserved.
Director Stock Plan
In August 1996, the Company established the Director Stock Plan (the
"Director Plan"), which provides the Company's non-employee directors the option
to receive all or a portion of their quarterly remuneration in common stock
instead of cash. If a non-employee director elects at the commencement of any
quarter to receive his quarterly remuneration, or a portion thereof, in common
stock, the number of shares received is determined by dividing the average price
for the 30-day period immediately preceding the end of the quarter into the
amount of compensation earned for the quarter which the non-employee director
chooses not to receive in cash. The effective date of the Director Plan was
January 1, 1997. As of December 31, 1997, 861 shares were issued at a weighted
average cost of $27.62 to two directors who have participated in the Stock
Purchase Plan.
F-21
<PAGE> 123
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
In July 1995, options to purchase 125,000 and 71,430 shares of the
Company's common stock were granted to an officer ("July 1995 Grant"), who
subsequently resigned from his position with the Company to accept a position
with an affiliate of the Company, at exercise prices of $10.00 per share and
$14.00 per share, respectively.
Statement of Financial Accounting Standards No. 123
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, SFAS No. 123 allows the continued measurement of
compensation cost for such plans using the intrinsic value based method
prescribed by Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," provided that pro forma disclosures are made of
net income or loss and net income or loss per share, assuming the fair value
based method of SFAS No. 123 had been applied. The Company has elected to
account for its stock-based compensation plans under APB Opinion No. 25;
accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair value of all options granted during 1997, 1996 and
1995, using the Black-Scholes pricing model and the following weighted average
assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS -- 1995 PLAN 1997 1996 1995
------------------------ ------- -------- ----------
<S> <C> <C> <C>
Risk-free interest rates........................... 6.51% 6.31% 6.04%
Expected dividend yields........................... -- -- --
Expected lives..................................... 5 years 5 years 2.5 years
Expected volatility................................ 65.33% 73.44% 73.44%
</TABLE>
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's pro forma net income and pro forma
net income per common share would have been reported as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Net income (in thousands):................. As Reported $23,429 $37,838 $17,831
Pro Forma 17,875 35,211 15,857
Net income per common share (basic EPS):... As Reported 1.04 1.76 1.06
Pro Forma .80 1.64 .94
Net income per common share (diluted
EPS):.................................... As Reported 1.04 1.75 1.06
Pro Forma .79 1.62 .94
</TABLE>
F-22
<PAGE> 124
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the 1995 Plan and the July 1995 Grant at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- --------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 635,962 $30.09 853,650 $12.99 -- --
Granted.................... 143,146 26.39 369,000 41.44 853,650 $12.99
Exercised.................. -- -- (550,229) 12.11 -- --
Forfeited.................. -- -- (36,459) 16.00 -- --
-------- --------- --------
Outstanding at end of
year..................... 779,108 29.41 635,962 30.09 853,650 12.99
======== ========= ========
Exercisable at end of
year..................... 401,762 22.71 166,273 14.21 561,930 10.54
Weighted average fair value
of options granted....... $ 15.68 $ 27.27 $ 5.02
</TABLE>
The following table summarizes information with regard to the options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$10.00 -- $14.00................... 111,930 3.6 years.. $12.20 111,930 $12.20
16.00 -- 24.00................... 156,032 7.8 years.. 16.05 103,686 16.08
26.00 -- 38.25................... 192,146 6.5 years.. 29.49 117,146 27.11
41.75 -- 56.38................... 319,000 8.3 years.. 41.94 69,000 42.29
------- -------
10.00 -- 56.38................... 779,108 7.1 years.. 29.41 401,762 22.72
</TABLE>
15. PROFIT SHARING PLAN
Employees who have been employed by the Company for at least twelve months
as full-time employees are eligible to participate in the Company's Profit
Sharing Plan, which was adopted in 1994. The Profit Sharing Plan provides for
payments to eligible employees in semiannual distributions based on the
Company's pretax profits. The Company is obligated to make an annual profit
sharing contribution of ten percent of the Company's pretax profits, which is
defined as net income before taxes, but excluding (i) any income or loss related
to charges or credits for unusual or infrequently occurring items or related to
intangible assets, and (ii) extraordinary items. Annual profit sharing
contributions may be in the form of cash or common stock of the Company. For the
years 1997, 1998 and 1999, beginning with an employee's thirteenth month of
employment, an employee is entitled to receive a guaranteed profit sharing
payment of 10% of salary, except for captains, who receive a guarantee of 20%.
The expense for the Profit Sharing Plan for the years ended December 31, 1997,
1996 and 1995 was $4,004,000, $6,779,000 and $2,768,000, respectively.
16. SUBSEQUENT EVENTS (UNAUDITED)
In January and February 1998, pursuant to an early lease termination
agreement negotiated in November 1997, the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from Marine Midland in
December 1996 and the aircraft acquired from Citicorp in May 1997. These
aircraft are expected to be re-delivered to the Company in the second quarter
and early in the third quarter of
F-23
<PAGE> 125
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, respectively. The financing for the modification to cargo configuration is
secured under the Aircraft Credit Facility.
In February 1998, the Company completed an offering of $538.9 million of
pass-through certificates, also known as enhanced equipment trust certificates
(the "EETCs"). The EETCs are not direct obligations of, or guaranteed by, the
Company and therefore will not be included in the Company's consolidated
financial statements. The cash proceeds from the transaction were deposited with
an escrow agent and will be used to finance (through either leveraged leases or
secured debt financings) the debt portion of the acquisition cost of five of the
10 new 747-400 freighter aircraft from Boeing scheduled to be delivered to the
Company during the period July 1998 through December 1998. In connection
therewith, the Company intends to seek certain owner participants who will
commit lease equity financing to be used in leveraged leases of such aircraft.
If any funds remain as deposits with the escrow agent for such EETCs at the end
of the delivery period, such funds will be distributed back to the
certificateholders. Such distribution will include a make-whole premium payable
by the Company. In November and December 1997, the Company entered into three
Treasury Note hedges, approximating $300 million of principal, for the purpose
of minimizing the risk associated with the fluctuations in interest rates, which
are the basis for the pricing of the EETCs which were priced in January 1998.
The effect of the hedge resulted in a deferred cost of $6.3 million, which will
be amortized over the expected twenty-year life associated with this financing.
The Company is currently negotiating for the possibility of refinancing two
aircraft in the amount of approximately $86 million, currently financed under
the Aircraft Acquisition Credit Facility. There is no assurance that this
refinancing will be consummated.
17. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
INCOME
(LOSS) INCOME (LOSS) BEFORE
OPERATING INCOME (LOSS) BEFORE EXTRAORDINARY ITEM NET INCOME
INCOME BEFORE EXTRAORDINARY NET ----------------------- ---------
REVENUE (LOSS) INCOME TAXES ITEM INCOME BASIC EPS DILUTED EPS BASIC EPS
-------- --------- ------------- ------------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
First Quarter............... $ 82,049 $ 17,141 $ 7,894 $ 5,013 $ 5,013 $ .22 $ .22 $.22
Second Quarter.............. 93,902 (10,654) (21,562) (13,692) 3,049 (.61) (.61) .14
Third Quarter............... 104,197 21,733 9,804 6,225 6,225 .28 .28 .28
Fourth Quarter.............. 120,893 27,781 14,397 9,142 9,142 .41 .41 .41
1996
First Quarter............... $ 58,649 $ 15,410 $ 9,693 $ 6,203 $ 6,203 $ .32 $ .31 $.32
Second Quarter.............. 72,614 22,667 15,685 10,037 10,037 .47 .46 .47
Third Quarter............... 79,681 20,046 12,839 8,201 8,201 .37 .36 .37
Fourth Quarter.............. 104,715 29,940 21,371 13,397 13,397 .60 .59 .60
<CAPTION>
NET INCOME
-----------
DILUTED EPS
-----------
<S> <C>
1997
First Quarter............... $.22
Second Quarter.............. .14
Third Quarter............... .28
Fourth Quarter.............. .41
1996
First Quarter............... $.31
Second Quarter.............. .46
Third Quarter............... .36
Fourth Quarter.............. .59
</TABLE>
F-24
<PAGE> 126
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 61,978 $ 41,334
Short-term investments.................................... 28,361 111,635
Accounts receivable and other, net........................ 46,427 55,702
---------- ----------
Total current assets.............................. 136,766 208,671
Property and equipment:
Flight equipment.......................................... 1,269,459 1,154,562
Other..................................................... 7,946 7,607
---------- ----------
1,277,405 1,162,169
Less accumulated depreciation............................. (100,593) (98,959)
---------- ----------
Net property and equipment........................ 1,176,812 1,063,210
Other assets:
Debt issuance costs, net of accumulated amortization...... 20,451 21,705
Deferred lease costs...................................... 21,630 --
Deposits and other........................................ 4,043 3,829
---------- ----------
46,124 25,534
---------- ----------
Total assets...................................... $1,359,702 $1,297,415
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 49,025 $ 40,049
Accounts payable and accrued expenses..................... 79,286 88,105
Income tax payable........................................ 2,208 154
---------- ----------
Total current liabilities......................... 130,519 128,308
Long-term debt, net of current portion...................... 726,191 736,026
Deferred aircraft obligations............................... 225,936 163,167
Deferred income tax payable................................. 31,841 31,085
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1 par value; 10,000,000 shares
authorized; no shares issued........................... -- --
Common Stock, $0.01 par value; 50,000,000 shares
authorized; 22,511,659 and 22,450,229 shares issued,
respectively........................................... 225 225
Additional paid-in capital................................ 177,288 176,253
Retained earnings......................................... 68,098 62,803
Treasury Stock, at cost; 15,906 and 19,073 shares,
respectively.............................................. (396) (452)
---------- ----------
Total stockholders' equity........................ 245,215 238,829
---------- ----------
Total liabilities and stockholders' equity........ $1,359,702 $1,297,415
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 127
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Contract services......................................... $ 77,611 $ 76,816
Scheduled services........................................ 185 3,252
Charters and other........................................ 1,838 1,981
-------- --------
Total operating revenues.......................... 79,634 82,049
Operating expenses:
Flight crew salaries and benefits......................... 6,757 6,817
Other flight-related expenses............................. 6,519 6,366
Maintenance............................................... 20,521 23,328
Aircraft and engine rentals............................... 1,241 7,776
Fuel and ground handling.................................. 2,002 3,166
Depreciation and amortization............................. 12,230 9,477
Other..................................................... 8,821 7,977
-------- --------
Total operating expenses.......................... 58,091 64,907
-------- --------
Operating income............................................ 21,543 17,142
Other income (expense):
Interest income........................................... 1,661 1,909
Interest expense.......................................... (14,775) (11,157)
-------- --------
(13,114) (9,248)
-------- --------
Income before income taxes.................................. 8,429 7,894
Provision for income taxes.................................. (3,119) (2,881)
-------- --------
Net income........................................ $ 5,310 $ 5,013
======== ========
Basic earnings per share:
Net income................................................ $ .24 $ .22
======== ========
Weighted average common shares............................ 22,478 22,450
======== ========
Diluted earnings per share:
Net income................................................ $ .24 $ .22
======== ========
Weighted average common shares............................ 22,556 22,543
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE> 128
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 5,310 $ 5,013
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 12,372 9,818
Amortization of debt issuance costs....................... 1,254 767
Change in deferred income tax payable..................... 756 1,110
Changes in operating assets and liabilities:
Accounts receivable and other.......................... 9,275 (7,149)
Deposits and other..................................... (214) 1,422
Accounts payable and accrued expenses.................. (8,819) (816)
Income tax payable..................................... 2,054 (5,083)
-------- --------
Net cash provided by operating activities......... 21,988 5,082
INVESTMENT ACTIVITIES:
Purchase of property and equipment.......................... (63,205) (39,348)
Purchase of short-term investments.......................... (23,722) (56,428)
Maturity of short-term investments.......................... 106,996 70,073
-------- --------
Net cash provided by (used in) investing
activities...................................... 20,069 (25,703)
FINANCING ACTIVITIES:
Issuance of Common Stock.................................... 1,035 --
Purchase of Treasury Stock.................................. (120) (161)
Issuance of Treasury Stock.................................. 161 163
Borrowings on notes payable................................. 6,801 67,537
Principal payments on notes payable......................... (7,660) (33,144)
Debt issuance costs......................................... -- (1,539)
Deferred lease costs........................................ (21,630) --
-------- --------
Net cash (used in) provided by financing
activities...................................... (21,413) 32,856
-------- --------
Net increase in cash........................................ 20,644 12,235
Cash and cash equivalents at beginning of period............ 41,334 9,793
-------- --------
Cash and cash equivalents at end of period.................. $ 61,978 $ 22,028
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 129
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position of Atlas
Air, Inc. and its wholly-owned subsidiaries (collectively, the "Company") as of
March 31, 1998 and the results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year. Management believes the disclosures made are adequate to
ensure that the information is not misleading, and suggests that these financial
statements be read in conjunction with the Company's December 31, 1997 audited
financial statements included in its Annual Report on Form 10-K.
2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of SFAS No. 130 is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Comprehensive income includes net income plus other comprehensive income (other
revenues, expenses, gains, and losses that under Generally Accepted Accounting
Principles bypass net income). On January 1, 1998, the Company implemented SFAS
No. 130. The Company believes that other comprehensive income is not material
and as such the Company has not included a separate presentation of other
comprehensive income in its financial statements.
4. SHORT-TERM INVESTMENTS
Proceeds from the secondary public offering of the Company's Common Stock
in May 1996, plus additional funds, were invested in various held-to-maturity
securities, as defined in SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires investments in debt securities to be
classified as held-to-maturity and measured at amortized cost in the statement
of financial position only if the reporting enterprise has the positive intent
and ability to hold those securities to maturity. The following table sets forth
the aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses, and amortized/accreted cost basis by major security type as of
March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
AGGREGATE GROSS UNREALIZED GROSS UNREALIZED (AMORTIZATION)
SECURITY TYPE FAIR VALUE HOLDING GAINS HOLDING LOSSES ACCRETION
- ------------- ---------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Medium Term Notes......... $ 4,993 $ -- $ 6 $ --
U.S. Government
Agencies................ 20,085 -- 6 108
Market Auction
Preferreds.............. 2,900 -- -- --
------- ---- --- ----
Totals.......... $27,978 $ -- $12 $108
======= ==== === ====
</TABLE>
In addition, there was approximately $371,000 of accrued interest on
Short-Term Investments at March 31, 1998. Interest earned on these investments
and maturities of these investments are reinvested in similar securities. In
April 1998, the Company invested approximately $169.5 million of proceeds from
the sale of its 9 1/4% Senior Notes in similar securities (see Note 6).
F-28
<PAGE> 130
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. COMMITMENTS AND CONTINGENCIES
In January and February 1998, pursuant to an early lease termination
agreement negotiated in November 1997, the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from Marine Midland
Bank in December 1996 and the aircraft acquired from Citicorp Investor Lease,
Inc. in May 1997. The first aircraft was re-delivered to the Company at the end
of April 1998 and the second aircraft is expected to be re-delivered to the
Company early in the third quarter of 1998. The financing for the modification
to cargo configuration is secured under the Aircraft Acquisition Credit Facility
(as defined in the Company's Form 10-K for 1997), for which the Company borrowed
a total of $3.3 million during the first quarter of 1998 with respect to these
aircraft. At the end of April 1998, the Company borrowed an additional $13.8
million associated with the final payment for the modification of the first
aircraft upon its re-delivery to the Company.
In February 1998, the Company completed an offering of $538.9 million of
Pass Through Certificates, also known as enhanced equipment trust certificates
(the "EETCs"). The EETCs are not direct obligations of, or guaranteed by, the
Company and therefore are not included in the Company's consolidated financial
statements. The cash proceeds from the transaction were deposited with an escrow
agent and will be used to finance (through either leveraged leases or secured
debt financings) the debt portion of the acquisition cost of five of the 10 new
747-400 freighter aircraft from Boeing scheduled to be delivered to the Company
during the period July 1998 through December 1998. In connection therewith, the
Company intends to seek certain owner participants who will commit lease equity
financing to be used in leveraged leases of such aircraft. In November and
December 1997, the Company entered into three Treasury Note hedges,
approximating $300 million of principal, for the purpose of minimizing the risk
associated with the fluctuations in interest rates, which are the basis for the
pricing of the EETCs which were priced in January 1998. The effect of the hedge
resulted in a deferred cost of $6.3 million, which will be amortized over the
expected twenty-year life associated with this financing. There can be no
assurance that the Company will be able to obtain sufficient financing to fund
the purchase of the remaining five 747-400 freighter aircraft, or if such
financing is available, that it will be available on a commercially reasonable
basis. If it is unable to do so, the Company could be required to modify its
expansion plans or to incur higher than anticipated financing costs, which could
have a material adverse effect on the Company.
In April 1998, the Company consummated the offering of $175 million of
unsecured 9 1/4% Senior Notes due 2008 (see Note 6).
The Company recently entered into a sublease and ramp use agreement with
American Airlines, Inc. for 145,000 square feet of hangar, office and parking
space at Miami International Airport in support of the Company's increased
operations. The lease is for a period in excess of four years and commences July
1, 1998, at a monthly rate of approximately $105,000, subject to an annual
escalation factor.
Under the FAA's Directives issued under its "Aging Aircraft" program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the problem of corrosion and
structural fatigue. In November 1994, Boeing issued Nacelle Strut Modification
Service Bulletins which have been converted into Directives by the FAA. Eleven
of the Company's Boeing 747-200 aircraft will have to be brought into compliance
with such Directives within the next three years at an estimated total cost of
approximately $5.5 million. As part of the FAA's overall aging aircraft program,
it has issued Directives requiring certain additional aircraft modifications to
be accomplished. The Company estimates that the modification costs per aircraft
will range between $2 million and $3 million. Between now and the year 2000,
only one aircraft will require modification and nine additional aircraft will
require modification prior to the year 2009. The remaining eight aircraft in
service have already undergone such modifications. The one aircraft undergoing
modification to freighter configuration will receive the Nacelle Strut
Modification as part of the freighter conversion. Other Directives have been
issued that require inspections and minor modifications to Boeing 747-200
aircraft. It is possible that additional Directives
F-29
<PAGE> 131
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
applicable to the types of aircraft or engines included in the Company's fleet
could be issued in the future, the cost of which could be substantial.
On February 24, 1997, the Company filed a complaint for declaratory
judgment in the Colorado District Court, Jefferson County against Israel
Aircraft Industries Ltd. ("IAI") for mechanical problems the Company experienced
with respect to an aircraft the Company sub-leased from IAI. The Company is
seeking approximately $4 million in damages against IAI to be offset by the
amount, if any, the Company owes IAI pursuant to the sub-lease. IAI had the case
removed to the U.S. District Court, District of Colorado on April 21, 1997 and
has filed counterclaims alleging damages of approximately $9 million based on
claims arising from the sub-lease. The Company intends to vigorously defend
against all of IAI's claims.
In March 1997, Air Support International, Inc. ("ASI") filed a complaint
against the Company in the U.S. District Court, Eastern District of New York
alleging actual and punitive damages of approximately $13.5 million arising from
the Company's refusal to pay commissions which ASI claims it is owed for
allegedly arranging certain ACMI Contracts. The Company intends to vigorously
defend against all of ASI's claims.
6. SUBSEQUENT EVENTS
In April 1998, the Company consummated the offering of $175 million of
unsecured 9 1/4% Senior Notes at 99.867% due 2008 (the "9 1/4% Senior Notes").
The proceeds of the offering will be used to repay $80 million of the Aircraft
Acquisition Credit Facility and for general corporate purposes, which may
include the partial funding of the redemption of the Company's outstanding
12 1/4% Pass Through Certificates due 2002 (the "Equipment Notes"), which are
subject to redemption at the option of the Company on or after December 1, 1998.
Interest on the 9 1/4% Senior Notes is payable semi-annually on April 15 and
October 15 of each year, commencing October 15, 1998. The 9 1/4% Senior Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2003, pursuant to a defined schedule. The 9 1/4% Senior Notes
are unsubordinated indebtedness of the Company, ranking pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
The 9 1/4% Senior Notes are effectively subordinated, however, to all secured
indebtedness of the Company and all existing and future liabilities of the
Company's subsidiaries.
The Company is finalizing negotiations for the refinancing of one aircraft
in the amount of approximately $45 million, currently financed under the
Aircraft Acquisition Credit Facility. There can be no assurance that this
refinancing will be completed.
F-30
<PAGE> 132
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
======================================================
======================================================
$538,915,000
ATLASAIR LOGO
ATLASAIR LOGO
OFFER TO EXCHANGE
PASS THROUGH CERTIFICATES
SERIES 1998-1,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OUTSTANDING
PASS THROUGH CERTIFICATES
SERIES 1998-1
--------------------
PROSPECTUS
--------------------
JUNE 24, 1998
======================================================
<PAGE> 133
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Restated Certificate of
Incorporation of Atlas Air, Inc. (the "Charter") provide for indemnification of
directors and officers for liabilities and expenses incurred in defending
actions brought against them in such capacities. The Company's Charter provides
that the Company shall indemnify directors of the Company to the maximum extent
now or hereafter permitted by law, and officers, employees and agents of the
Company to the extent required by law and may, as authorized hereafter by the
Board of Directors, provide further indemnification to officers, employees and
agents of the Company to the maximum extent now or hereafter permitted by law.
The Company maintains directors' and officers' liability insurance covering
all directors and officers of the Company against claims arising out of the
performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+2.1 -- Plan of Reorganization and Merger Agreement dated as of
July 12, 1995 by and between Holdings and the Company.
+3.2 -- Restated Certificate of Incorporation of the Company.
+3.3 -- Amended and Restated By-Laws of the Company.
++4.1 -- Form of Indenture between the Company and First Fidelity
Bank, N.A., as Trustee.
++4.2 -- Form of Second Indenture between the Company and First
Fidelity Bank, N.A., as Trustee.
++4.3 -- Form of Pass Through Trust Agreement between the Company
and First Fidelity Bank, N.A., as Trustee (with form of
Pass Through Certificate attached as exhibit thereto).
++4.4 -- Form of Pass Through Agreement between the Company and
First Fidelity Bank, N.A., as Trustee (with form of Pass
Through Certificate attached as exhibit thereto).
*****5.1 -- Opinion of Cahill Gordon & Reindel as to the legality of
the New Certificates.
5.2 -- Opinion of Morris, James, Hitchens & Williams.
+10.14 -- Boeing 747 Maintenance Agreement dated January 1, 1995,
between the Company and KLM Royal Dutch Airlines, as
amended.
+10.15 -- Atlas Air, Inc. 1995 Long Term Incentive and Stock Award
Plan.
+10.16 -- Atlas Air, Inc. Employee Stock Purchase Plan.
+10.17 -- Atlas Air, Inc. Profit Sharing Plan.
+10.18 -- Atlas Air, Inc. Retirement Plan.
++10.19 -- Employment Agreement between the Company and Michael A.
Chowdry.
++10.20 -- Employment Agreement between the Company and Richard H.
Shuyler.
++10.23 -- Employment Agreement between the Company and James T.
Matheny.
+10.26 -- Maintenance Agreement between the Company and Hong Kong
Aircraft Engineering Company Limited dated April 12,
1995, for the performance of certain maintenance events.
+10.30 -- Conditional Sales Agreement dated as of September 22,
1994 by and between Lufthansa and the Company relating to
B747-230 aircraft, registration D-ABYS.
</TABLE>
II-1
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+10.31 -- Conditional Sales Agreement dated as of September 22,
1994 by and between Lufthansa and the Company relating to
B747-230 aircraft, registration D-ABYL.
*10.36 -- Aircraft Purchase Agreement, dated as of January 19, 1996
between Langdon Asset Management, Inc. and the Company.
***10.52 -- Employment Agreement dated as of November 18, 1996
between the Company and R. Terrence Rendlerman.
***10.53 -- Secured Loan Agreement by and between the Company and
Finova Capital Corporation dated April 11, 1996.
***10.54 -- Second Amended and Restated Credit Agreement among the
Company and the Lenders listed therein, Goldman Sachs
Credit Partners L.P. (as syndication agent) and Bankers
Trust Company (as Administrative Agent) dated February
28, 1997.
***/****10.55 -- Engine Maintenance Agreement between the Company and
General Electric Company dated June 6, 1996.
**10.56 -- Employment Agreement dated as of May 1, 1997 between the
Company and Stanley G. Wraight.
**10.58 -- Third Amended and Restated Credit Agreement among the
Company, the Lenders listed therein, Goldman Sachs Credit
Partners L.P. (as Syndication Agent) and Bankers Trust
Company (as Administrative Agent) dated September 5,
1997.
**10.59 -- Credit Agreement among Atlas Freighter Leasing, Inc., the
Lenders listed therein and Bankers Trust Company, as
agent, dated May 29, 1997.
**10.60 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N516MC.
**10.61 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N508MC.
**10.62 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N507MC.
**10.63 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N509MC.
**10.64 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N808MC.
**10.65 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N505MC.
**10.66 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N808MC.
**10.67 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N507MC.
**10.68 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N509MC.
**10.69 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N505MC.
**10.70 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N508MC.
**10.71 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N516MC.
</TABLE>
II-2
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**10.72 -- Form of Indenture, dated August 13, 1997, between the
Company and State Street Bank and Trust Company, as
Trustee, relating to the 10 3/4% Senior Notes (with form
of Note attached as exhibit thereto)
**10.73 -- Purchase Agreement, dated August 8, 1997, between the
Company and BT Securities Corporation relating to the
10 3/4% Senior Notes.
**10.74 -- Registration Rights Agreement, dated August 13, 1997,
between the Company and BT Securities Corporation
relating to the 10 3/4% Senior Notes.
**10.75 -- Credit Agreement among Atlas Freighter Leasing II, Inc.,
the Lenders listed therein, Bankers Trust Company (as
Administrative Agent) and Goldman Sachs Credit Partners
L.P. (as Syndication Agent) dated September 5, 1997.
**10.76 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N527MC and Spare Engine Nos. 517538,
517539 and 455167.
**10.77 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N523MC and Spare Engine Nos. 530168 and
517530.
**10.78 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N524MC and Spare Engine Nos. 517790 and
517602.
**10.79 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N526MC and Spare Engine Nos. 517544 and
517547.
**10.80 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N523MC and Spare
Engine Nos. 530168 and 517530.
*10.81 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N524MC and Spare
Engine Nos. 517790 and 517602.
**10.82 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N526MC and Spare
Engine Nos. 517544 and 517547.
**10.84 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N527MC and Spare
Engine Nos. 517538, 517539 and 455167.
**10.85 -- First Amendment to Lease Agreement among Atlas Freighter
Leasing, Inc. and Bankers Trust Company, as agent, dated
September 5, 1997
**/****10.86 -- Purchase Agreement Number 2021 between The Boeing Company
and the Company dated June 6, 1997.
**10.87 -- Aircraft General Terms Agreement between The Boeing
Company and the Company dated June 6, 1997.
++10.88 -- Placement Agreement, dated January 26, 1998, among the
Company, Morgan Stanley & Co. Incorporated, BT Alex.
Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. relating
to the Pass Through Certificates Series 1998-1.
</TABLE>
II-3
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
++10.89 -- Registration Rights Agreement, dated February 9, 1998,
among the Company, Morgan Stanley & Co. Incorporated, BT
Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. relating
to the Pass Through Certificates Series 1998-1.
++10.90 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1A-0.
++10.91 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1A-S.
++10.92 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1B-0.
++10.93 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1B-S.
++10.94 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1C-0.
++10.95 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1C-S.
++10.96 -- Deposit Agreement (Class A), dated as of February 9,
1998, between First Security Bank, National Association,
as Escrow Agent, and ABN AMRO Bank N.V., acting through
its Chicago Branch, as Depositary.
++10.97 -- Deposit Agreement (Class B), dated as of February 9,
1998, between First Security Bank, National Association,
as Escrow Agent, and ABN AMRO Bank N.V., acting through
its Chicago Branch, as Depositary.
++10.98 -- Deposit Agreement (Class C), dated as of February 9,
1998, between First Security Bank, National Association,
as Escrow Agent, and ABN AMRO Bank N.V., acting through
its Chicago Branch, as Depositary.
++10.99 -- Indemnity Agreement, dated as of February 9, 1998,
between ABN AMRO Bank N.V., acting through its Chicago
Branch, as Depositary, and the Company.
++10.100 -- Escrow and Paying Agent Agreement (Class A), dated as of
February 9, 1998, among First Security Bank, National
Association, as Escrow Agent, Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as Placement Agents, Wilmington Trust
Company, not in its individual capacity, but solely as
Pass Through Trustee, and Wilmington Trust Company, as
Paying Agent.
++10.101 -- Escrow and Paying Agent Agreement (Class B), dated as of
February 9, 1998, among First Security Bank, National
Association, as Escrow Agent, Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as Placement Agents, Wilmington Trust
Company, not in its individual capacity, but solely as
Pass Through Trustee, and Wilmington Trust Company, as
Paying Agent.
++10.102 -- Escrow and Paying Agent Agreement (Class C), dated as of
February 9, 1998, among First Security Bank, National
Association, as Escrow Agent, Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as Placement Agents, Wilmington Trust
Company, not in its individual capacity, but solely as
Pass Through Trustee, and Wilmington Trust Company, as
Paying Agent.
</TABLE>
II-4
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
++10.103 -- Revolving Credit Agreement (1998-1A), dated as of
February 9, 1998, between Wilmington Trust Company, not
in its individual capacity but solely as Subordination
Agent, as Borrower, and ABN AMRO Bank N.V., acting
through its Chicago Branch as Liquidity Provider.
++10.104 -- Revolving Credit Agreement (1998-1B), dated as of
February 9, 1998, between Wilmington Trust Company, not
in its individual capacity but solely as Subordination
Agent, as Borrower, and Morgan Stanley Capital Services,
Inc., as Liquidity Provider.
++10.105 -- Revolving Credit Agreement (1998-1C), dated as of
February 9, 1998, between Wilmington Trust Company, not
in its individual capacity but solely as Subordination
Agent, as Borrower, and Morgan Stanley Capital Services,
Inc., as Liquidity Provider.
++10.106 -- Guarantee, dated as of February 9, 1998, from Morgan
Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
Pass Through Trust 1998-B relating to Class B Liquidity
Facility.
++10.107 -- Guarantee, dated as of February 9, 1998, from Morgan
Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
Pass Through Trust 1998-C relating to Class C Liquidity
Facility.
++10.108 -- Intercreditor Agreement, dated as of February 9, 1998,
among Wilmington Trust Company, not in its individual
capacity but solely as Trustee, ABN AMRO Bank N.V.,
acting through its Chicago Branch, as Class A Liquidity
Provider, Morgan Stanley Capital Services, Inc., as Class
B Liquidity Provider and Class C Liquidity Provider, and
Wilmington Trust Company.
++10.109 -- Note Purchase Agreement, dated as of February 9, 1998,
among the Company, Wilmington Trust Company and First
Security Bank, National Association.
++10.110 -- Employment Agreement dated as of February 16, 1998
between the Company and Stephen C. Nevin.
*****10.111 -- Form of Indenture, dated April 9, 1998, between the
Company and State Street Bank and Trust company, as
Trustee, relating to the 9 1/4% Senior Notes (with form
of Note attached as exhibit thereto).
*****10.112 -- Placement Agreement, dated April 7, 1998, among the
Company and Morgan Stanley & Co. Incorporated and BT
Alex. Brown Incorporated relating to the 9 1/4% Senior
Notes.
*****10.113 -- Registration Rights Agreement, dated April 9, 1998, among
the Company and Morgan Stanley & Co. Incorporated and BT
Alex. Brown Incorporated relating to the 9 1/4% Senior
Notes.
+16.1 -- Letter dated July 21, 1995 from Ernst & Young to the
Securities and Exchange Commission.
++21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Independent Public Accountants.
*****23.2 -- Consent of Cahill Gordon & Reindel (included in Exhibit
5.1).
*****24.1 -- Powers of Attorney.
*****25.1 -- Statement of Eligibility of Trustee for the 1998-1A Pass
Through Certificates.
*****25.2 -- Statement of Eligibility of Trustee for the 1998-1B Pass
Through Certificates.
*****25.3 -- Statement of Eligibility of Trustee for the 1998-1C Pass
Through Certificates.
</TABLE>
- ---------------
++ Incorporated by reference to the exhibits to the Company's Annual Report
for 1997 on Form 10-K.
+ Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 33-90304).
++ Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 33-97892).
* Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-2810).
II-5
<PAGE> 138
** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-4 (No. 333-36305).
*** Incorporated by reference to the exhibits to the Company's Annual Report
for 1996 on Form 10-K.
**** Portions of this document, for which the Company has been granted
confidential treatment, have been redacted and filed separately with the
Securities and Exchange Commission.
***** Previously filed.
(b) Schedules.
All schedules are omitted as the required information is presented in
the Registrant's consolidated financial statements or related notes or such
schedules are not applicable.
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrants hereby undertake as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrants undertake that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of the
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
The undersigned registrants hereby undertake to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the SEC under Section 305(b)(2) of the Act.
II-6
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized in the City of Denver, State of Colorado
on the 24th day of June, 1998.
ATLAS AIR, INC.
By: /s/ RICHARD H. SHUYLER
----------------------------------
Name: Richard H. Shuyler
Title: Executive Vice
President -- Strategic
Planning, Treasurer and
Director
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, Chief June 24, 1998
- ----------------------------------------------------- Executive Officer, President
Michael A. Chowdry and Director
/s/ RICHARD H. SHUYLER Executive Vice President -- June 24, 1998
- ----------------------------------------------------- Strategic Planning,
Richard H. Shuyler Treasurer and Director
* Chief Financial Officer and Vice June 24, 1998
- ----------------------------------------------------- President
Stephen C. Nevin
* Director June 24, 1998
- -----------------------------------------------------
Berl Bernhard
* Director June 24, 1998
- -----------------------------------------------------
Lawrence W. Clarkson
* Director June 24, 1998
- -----------------------------------------------------
David K.P. Li
* Director June 24, 1998
- -----------------------------------------------------
David T. McLaughlin
* Director June 24, 1998
- -----------------------------------------------------
Brian Rowe
*By: /s/ RICHARD H. SHUYLER
------------------------------------------------
Attorney-in-fact
</TABLE>
II-7
<PAGE> 140
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
+2.1 -- Plan of Reorganization and Merger Agreement dated as of
July 12, 1995 by and between Holdings and the Company.
+3.2 -- Restated Certificate of Incorporation of the Company.
+3.3 -- Amended and Restated By-Laws of the Company.
++4.1 -- Form of Indenture between the Company and First Fidelity
Bank, N.A., as Trustee.
++4.2 -- Form of Second Indenture between the Company and First
Fidelity Bank, N.A., as Trustee.
++4.3 -- Form of Pass Through Trust Agreement between the Company
and First Fidelity Bank, N.A., as Trustee (with form of
Pass Through Certificate attached as exhibit thereto).
++4.4 -- Form of Pass Through Agreement between the Company and
First Fidelity Bank, N.A., as Trustee (with form of Pass
Through Certificate attached as exhibit thereto).
*****5.1 -- Opinion of Cahill Gordon & Reindel as to the legality of
the New Certificates.
5.2 -- Opinion of Morris, Jones, Hitchens & Williams.
+10.14 -- Boeing 747 Maintenance Agreement dated January 1, 1995,
between the Company and KLM Royal Dutch Airlines, as
amended.
+10.15 -- Atlas Air, Inc. 1995 Long Term Incentive and Stock Award
Plan.
+10.16 -- Atlas Air, Inc. Employee Stock Purchase Plan.
+10.17 -- Atlas Air, Inc. Profit Sharing Plan.
+10.18 -- Atlas Air, Inc. Retirement Plan.
++10.19 -- Employment Agreement between the Company and Michael A.
Chowdry.
++10.20 -- Employment Agreement between the Company and Richard H.
Shuyler.
++10.23 -- Employment Agreement between the Company and James T.
Matheny.
+10.26 -- Maintenance Agreement between the Company and Hong Kong
Aircraft Engineering Company Limited dated April 12,
1995, for the performance of certain maintenance events.
+10.30 -- Conditional Sales Agreement dated as of September 22,
1994 by and between Lufthansa and the Company relating to
B747-230 aircraft, registration D-ABYS.
+10.31 -- Conditional Sales Agreement dated as of September 22,
1994 by and between Lufthansa and the Company relating to
B747-230 aircraft, registration D-ABYL.
*10.36 -- Aircraft Purchase Agreement, dated as of January 19, 1996
between Langdon Asset Management, Inc. and the Company.
***10.52 -- Employment Agreement dated as of November 18, 1996
between the Company and R. Terrence Rendlerman.
***10.53 -- Secured Loan Agreement by and between the Company and
Finova Capital Corporation dated April 11, 1996.
</TABLE>
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
***10.54 -- Second Amended and Restated Credit Agreement among the
Company and the Lenders listed therein, Goldman Sachs
Credit Partners L.P. (as syndication agent) and Bankers
Trust Company (as Administrative Agent) dated February
28, 1997.
***/****10.55 -- Engine Maintenance Agreement between the Company and
General Electric Company dated June 6, 1996.
**10.56 -- Employment Agreement dated as of May 1, 1997 between the
Company and Stanley G. Wraight.
**10.58 -- Third Amended and Restated Credit Agreement among the
Company, the Lenders listed therein, Goldman Sachs Credit
Partners L.P. (as Syndication Agent) and Bankers Trust
Company (as Administrative Agent) dated September 5,
1997.
**10.59 -- Credit Agreement among Atlas Freighter Leasing, Inc., the
Lenders listed therein and Bankers Trust Company, as
agent, dated May 29, 1997.
**10.60 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N516MC.
**10.61 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N508MC.
**10.62 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N507MC.
**10.63 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N509MC.
**10.64 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N808MC.
**10.65 -- Lease Agreement between Atlas Freighter Leasing, Inc., as
lessor, and the Company, as lessee, relating to B747-200
aircraft. U.S. Registration No. N505MC.
**10.66 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N808MC.
**10.67 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N507MC.
**10.68 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N509MC.
**10.69 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N505MC.
**10.70 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N508MC.
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
**10.71 -- Security Agreement and Chattel Mortgage between the
Company, Atlas Freighter Leasing, Inc. and Bankers Trust
Company, as agent, relating to B747-200 aircraft. U.S.
Registration No. N516MC.
**10.72 -- Form of Indenture, dated August 13, 1997, between the
Company and State Street Bank and Trust Company, as
Trustee, relating to the 10 3/4% Senior Notes (with form
of Note attached as exhibit thereto)
**10.73 -- Purchase Agreement, dated August 8, 1997, between the
Company and BT Securities Corporation relating to the
10 3/4% Senior Notes.
**10.74 -- Registration Rights Agreement, dated August 13, 1997,
between the Company and BT Securities Corporation
relating to the 10 3/4% Senior Notes.
**10.75 -- Credit Agreement among Atlas Freighter Leasing II, Inc.,
the Lenders listed therein, Bankers Trust Company (as
Administrative Agent) and Goldman Sachs Credit Partners
L.P. (as Syndication Agent) dated September 5, 1997.
**10.76 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N527MC and Spare Engine Nos. 517538,
517539 and 455167.
**10.77 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N523MC and Spare Engine Nos. 530168 and
517530.
**10.78 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N524MC and Spare Engine Nos. 517790 and
517602.
**10.79 -- Lease Agreement dated September 5, 1997 between Atlas
Freighter Leasing II, Inc., as lessor, and the Company,
as lessee, relating to B747-200 aircraft, U.S.
Registration No. N526MC and Spare Engine Nos. 517544 and
517547.
**10.80 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N523MC and Spare
Engine Nos. 530168 and 517530.
*10.81 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N524MC and Spare
Engine Nos. 517790 and 517602.
**10.82 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N526MC and Spare
Engine Nos. 517544 and 517547.
**10.84 -- Security Agreement and Chattel Mortgage dated September
5, 1997 between Atlas Freighter Leasing II, Inc., the
Company and Bankers Trust Company, as Agent, relating to
B747-200 aircraft, U.S. Registration No. N527MC and Spare
Engine Nos. 517538, 517539 and 455167.
</TABLE>
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
**10.85 -- First Amendment to Lease Agreement among Atlas Freighter
Leasing, Inc. and Bankers Trust Company, as agent, dated
September 5, 1997
**/****10.86 -- Purchase Agreement Number 2021 between The Boeing Company
and the Company dated June 6, 1997.
**10.87 -- Aircraft General Terms Agreement between The Boeing
Company and the Company dated June 6, 1997.
++10.88 -- Placement Agreement, dated January 26, 1998, among the
Company, Morgan Stanley & Co. Incorporated, BT Alex.
Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. relating
to the Pass Through Certificates Series 1998-1.
++10.89 -- Registration Rights Agreement, dated February 9, 1998,
among the Company, Morgan Stanley & Co. Incorporated, BT
Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. relating
to the Pass Through Certificates Series 1998-1.
++10.90 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1A-0.
++10.91 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1A-S.
++10.92 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1B-0.
++10.93 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1B-S.
++10.94 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1C-0.
++10.95 -- Pass Through Trust Agreement, dated as of February 9,
1998, between the Company and Wilmington Trust Company,
as Trustee, relating to the Atlas Air Pass Through Trust
1998-1C-S.
++10.96 -- Deposit Agreement (Class A), dated as of February 9,
1998, between First Security Bank, National Association,
as Escrow Agent, and ABN AMRO Bank N.V., acting through
its Chicago Branch, as Depositary.
++10.97 -- Deposit Agreement (Class B), dated as of February 9,
1998, between First Security Bank, National Association,
as Escrow Agent, and ABN AMRO Bank N.V., acting through
its Chicago Branch, as Depositary.
++10.98 -- Deposit Agreement (Class C), dated as of February 9,
1998, between First Security Bank, National Association,
as Escrow Agent, and ABN AMRO Bank N.V., acting through
its Chicago Branch, as Depositary.
++10.99 -- Indemnity Agreement, dated as of February 9, 1998,
between ABN AMRO Bank N.V., acting through its Chicago
Branch, as Depositary, and the Company.
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
++10.100 -- Escrow and Paying Agent Agreement (Class A), dated as of
February 9, 1998, among First Security Bank, National
Association, as Escrow Agent, Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as Placement Agents, Wilmington Trust
Company, not in its individual capacity, but solely as
Pass Through Trustee, and Wilmington Trust Company, as
Paying Agent.
++10.101 -- Escrow and Paying Agent Agreement (Class B), dated as of
February 9, 1998, among First Security Bank, National
Association, as Escrow Agent, Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as Placement Agents, Wilmington Trust
Company, not in its individual capacity, but solely as
Pass Through Trustee, and Wilmington Trust Company, as
Paying Agent.
++10.102 -- Escrow and Paying Agent Agreement (Class C), dated as of
February 9, 1998, among First Security Bank, National
Association, as Escrow Agent, Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as Placement Agents, Wilmington Trust
Company, not in its individual capacity, but solely as
Pass Through Trustee, and Wilmington Trust Company, as
Paying Agent.
++10.103 -- Revolving Credit Agreement (1998-1A), dated as of
February 9, 1998, between Wilmington Trust Company, not
in its individual capacity but solely as Subordination
Agent, as Borrower, and ABN AMRO Bank N.V., acting
through its Chicago Branch as Liquidity Provider.
++10.104 -- Revolving Credit Agreement (1998-1B), dated as of
February 9, 1998, between Wilmington Trust Company, not
in its individual capacity but solely as Subordination
Agent, as Borrower, and Morgan Stanley Capital Services,
Inc., as Liquidity Provider.
++10.105 -- Revolving Credit Agreement (1998-1C), dated as of
February 9, 1998, between Wilmington Trust Company, not
in its individual capacity but solely as Subordination
Agent, as Borrower, and Morgan Stanley Capital Services,
Inc., as Liquidity Provider.
++10.106 -- Guarantee, dated as of February 9, 1998, from Morgan
Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
Pass Through Trust 1998-B relating to Class B Liquidity
Facility.
++10.107 -- Guarantee, dated as of February 9, 1998, from Morgan
Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
Pass Through Trust 1998-C relating to Class C Liquidity
Facility.
++10.108 -- Intercreditor Agreement, dated as of February 9, 1998,
among Wilmington Trust Company, not in its individual
capacity but solely as Trustee, ABN AMRO Bank N.V.,
acting through its Chicago Branch, as Class A Liquidity
Provider, Morgan Stanley Capital Services, Inc., as Class
B Liquidity Provider and Class C Liquidity Provider, and
Wilmington Trust Company.
++10.109 -- Note Purchase Agreement, dated as of February 9, 1998,
among the Company, Wilmington Trust Company and First
Security Bank, National Association.
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
++10.110 -- Employment Agreement dated as of February 16, 1998
between the Company and Stephen C. Nevin.
*****10.111 -- Form of Indenture, dated April 9, 1998, between the
Company and State Street Bank and Trust company, as
Trustee, relating to the 9 1/4% Senior Notes (with form
of Note attached as exhibit thereto).
*****10.112 -- Placement Agreement, dated April 7, 1998, among the
Company and Morgan Stanley & Co. Incorporated and BT
Alex. Brown Incorporated relating to the 9 1/4% Senior
Notes.
*****10.113 -- Registration Rights Agreement, dated April 9, 1998, among
the Company and Morgan Stanley & Co. Incorporated and BT
Alex. Brown Incorporated relating to the 9 1/4% Senior
Notes.
+16.1 -- Letter dated July 21, 1995 from Ernst & Young to the
Securities and Exchange Commission.
++21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Independent Public Accountants.
*****23.2 -- Consent of Cahill Gordon & Reindel (included in Exhibit
5.1).
*****24.1 -- Powers of Attorney.
*****25.1 -- Statement of Eligibility of Trustee for the 1998-1A Pass
Through Certificates.
*****25.2 -- Statement of Eligibility of Trustee for the 1998-1B Pass
Through Certificates.
*****25.3 -- Statement of Eligibility of Trustee for the 1998-1C Pass
Through Certificates.
</TABLE>
- ---------------
++ Incorporated by reference to the exhibits to the Company's Annual Report
for 1997 on Form 10-K.
+ Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 33-90304).
++ Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 33-97892).
* Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-2810).
** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-4 (No. 333-36305).
*** Incorporated by reference to the exhibits to the Company's Annual Report
for 1996 on Form 10-K.
**** Portions of this document, for which the Company has been granted
confidential treatment, have been redacted and filed separately with the
Securities and Exchange Commission.
***** Previously filed.
<PAGE> 1
EXHIBIT 5.2
[LETTERHEAD OF MORRIS, JAMES, HITCHENS & WILLIAMS]
To Each of the Parties Listed
on Schedule A Attached Hereto
Re: ATLAS AIR PASS THROUGH CERTIFICATES, SERIES 1998-1
Ladies and Gentlemen:
We have acted as counsel to Wilmington Trust Company, a Delaware
banking corporation (in its individual capacity, "Wilmington Trust", in its
capacity as Mortgagee, Subordination Agent, and Pass Through Trustee, as the
case may be, the "Trustee"), in connection with the transactions contemplated by
the Pass Through Trust Agreements between Atlas Air, Inc. ("Atlas") and
Wilmington Trust, as Trustee, (the "Pass Through Trust Agreements"), relating to
Atlas Air Pass Through Trust 1998-1A-O, Atlas Air Pass Through Trust 1998-1B-O,
and Atlas Air Pass Through Trust 1998-1C-O (collectively, the "Trusts"), each
dated as of February 9, 1998. This opinion is furnished at your request in
connection with the Pass Through Certificates being issued today. Capitalized
terms used herein and not otherwise defined are used as defined in the Pass
Through Trust Agreements, except that reference herein to any documents shall
mean such document as in effect as of the date hereof.
We have examined executed counterparts of the following documents:
(a) the Pass Through Trust Agreements;
(b) the Intercreditor Agreement;
(c) each of the Liquidity Facilities;
(d) the Registration Rights Agreement;
<PAGE> 2
To Each of the Parties Listed
on Schedule A Attached Hereto
February 9, 1998
Page 2
(e) the Indenture (the documents described in items (a) through (e)
are collectively referred to herein as the "Transaction
Documents"); and
(f) the Certificates being issued today in definitive form by the
Trusts (the "Certificates").
We also have examined and relied on originals or copies of such other
documents and such corporate records, certificates and other statements of
governmental officials and corporate officers and other representatives of the
corporations or entities referred to herein as we have deemed necessary or
appropriate for the purposes of this opinion. Moreover, as to certain facts
material to the opinions expressed herein, we also have relied upon the
representations and warranties contained in the certificates and other documents
referred to in this paragraph.
Based upon the foregoing and upon an examination of such questions of law
as we have considered necessary or appropriate, and subject to the assumptions,
exceptions and qualifications set forth below, we advise you that, in our
opinion:
1. Wilmington Trust is a banking corporation duly organized and validly
existing in good standing under the laws of the State of Delaware, and has the
corporate power and authority to execute, deliver and perform, in its individual
capacity, or as Trustee, as the case may be, the Transaction Documents, and the
Certificates. Wilmington Trust is a "citizen of the United States" as defined in
49 U.S.C. Section 40102.
2. Each of the Transaction Documents has been duly authorized, executed and
delivered by Wilmington Trust in its individual capacity, or as Trustee, as the
case may be, and constitutes the legal, valid and binding obligation of
Wilmington Trust in its individual capacity, or as Trustee, as the case may be,
enforceable against Wilmington Trust in its individual capacity, or as Trustee,
as the case may be, in accordance with its terms.
3. The Pass Through Trust Agreements constitute the legal, valid and
binding obligations of Atlas, enforceable against Atlas in accordance with their
terms.
4. Wilmington Trust, solely in its capacity as Trustee, has duly
authorized, issued, executed and delivered the Certificates to the holder
thereof pursuant to the terms and provisions of the Pass Through Trust
Agreements; the Certificate are duly authorized, legal, valid and binding
obligations of the Trusts, enforceable against the Trusts in accordance with
their terms and the terms of the Pass Through Trust Agreements and are entitled
to the benefits of the Pass Through Trust Agreements; when issued in exchange
for the Certificates pursuant to the Registration Rights Agreement and
authenticated pursuant to the Pass Through Trust
<PAGE> 3
To Each of the Parties Listed
on Schedule A Attached Hereto
February 9, 1998
Page 3
Agreements, the Exchange Certificates will be duly authorized, legal, valid and
binding obligations of the Trusts, enforceable against the Trusts in accordance
with their terms and the terms of the Pass Through Trust Agreements and will be
entitled to the benefits of the Pass Through Trust Agreements.
5. No authorization, consent or approval of, notice to or filing with, or
the taking of any other action in respect of, any governmental authority or
agency of the United States or the State of Delaware governing the banking or
trust powers of Wilmington Trust is required for the execution, delivery or
performance by Wilmington Trust in its individual capacity, or as Trustee, as
the case may be, of the Transaction Documents or the Certificates.
6. Neither the execution, delivery or performance by Wilmington Trust in
its individual capacity, or as Trustee, as the case may be, of the Transaction
Documents or the Certificates, nor compliance with the terms and provisions
thereof, conflicts with the charter or bylaws of Wilmington Trust or results in
a breach or violation of any of the terms, conditions or provisions of any law,
governmental rule or regulation of the United States or the State of Delaware
governing the banking or trust powers of Wilmington Trust or, to our knowledge,
any order, writ, injunction or decree of any court or governmental authority
against Wilmington Trust or by which it or any of its properties is bound or, to
our knowledge, any indenture, mortgage, contract or other agreement or
instrument to which Wilmington Trust is a party or by which it or any of its
properties is bound, or constitutes a default thereunder.
7. Assuming that the Trusts will not be taxable as corporations, but,
rather, will be classified as grantor trusts under subpart E, Part I of
Subchapter J of the United States Internal Revenue Code of 1986 (the "Code"),
as amended, or as partnerships under Subchapter K of the Code, and assuming (a)
that the assets of the Trusts will be treated as held for investment purposes
as provided in each Pass Through Trust Agreement and (b) that the acquisition,
management and disposition of the assets of the Trusts (if the assets were held
by a Certificateholder directly) would not constitute an integral part of the
regular trade or business of such Certificateholder (other than the trade or
business of investing), (i) the Trusts will not be subject to any tax
(including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Delaware or any political
subdivision thereof and (ii) Certificateholders that are not residents of or
otherwise subject to tax in Delaware will not be subject to any tax (including,
without limitation, net or gross income, tangible or intangible property, net
worth, capital, franchise or doing business tax), fee or other governmental
charge under the laws of the State of Delaware or any political subdivision
thereof as result of purchasing, holding (including receiving payments with
respect to) or selling a Certificate.
<PAGE> 4
To Each of the Parties Listed
on Schedule A Attached Hereto
February 9, 1998
Page 4
8. To our knowledge, there are no proceedings pending or threatened against
or affecting Wilmington Trust in any court or before any governmental authority,
agency, arbitration board or tribunal which, if adversely determined,
individually or in the aggregate, would materially and adversely affect the
Trusts or question the right, power and authority of Wilmington Trust in its
individual capacity, or as Trustee, as the case may be, to enter into or perform
its obligations under the Transaction Documents or which would call into
question or challenge the validity of any of the Transaction Documents or the
enforceability thereof.
9. Each of the Equipment Notes (as defined in the Trust Indenture) to be
delivered to and registered in the name of the Subordination Agent pursuant to
the Intercreditor Agreement will be held by the Subordination Agent in trust as
trustee for the Trusts under the Pass Through Trust Agreements on behalf of the
Certificateholder of the Trusts.
The foregoing opinions are subject to the following assumptions, exceptions
and qualifications:
A. We are admitted to practice law in the State of Delaware and do not hold
ourselves out as being experts on the law of any other jurisdiction. The
foregoing opinions are limited to the laws of the State of Delaware and the
federal laws of the United States of America governing the banking and trust
powers of Wilmington Trust (except that we express no opinion with respect to
(i) federal securities laws, including, without limitation, the Securities Act
of 1933, as amended, the Trust Indenture Act of 1939, as amended, and the
Investment Company Act of 1940, as amended, or (ii) state securities or blue sky
laws). Insofar as the foregoing opinions relate to the validity and
enforceability of the Transaction Documents expressed to be governed by the laws
of the State of New York, we have assumed that each such document is legal,
valid, binding and enforceable in accordance with its terms under such laws (as
to which we express no opinion).
B. The foregoing opinions regarding enforceability are subject to (i)
applicable bankruptcy, insolvency, moratorium, receivership, reorganization,
fraudulent conveyance and similar laws relating to or affecting the rights and
remedies of creditors generally, and (ii) principles of equity (regardless of
whether considered and applied in proceeding in equity or at law).
C. We have assumed the due authorization, execution and delivery by each of
the parties thereto (other than Wilmington Trust in its individual capacity, or
as Trustee, as the case may be) of the Transaction Documents, that each of such
parties has the full power, authority and legal right to execute, deliver and
perform each such document.
<PAGE> 5
To Each of the Parties Listed
on Schedule A Attached Hereto
February 9, 1998
Page 5
D. We have assumed that all signatures (other than those of Wilmington
Trust in its individual capacity, or as Trustee, as the case may be) on
documents examined by us are genuine, that all documents submitted to us as
originals are authentic, and that all documents submitted to us as copies or
specimens conform with the originals, which facts we have not independently
verified.
E. We have not participated in the preparation of any offering materials
with respect to the Certificates and assume no responsibility for their
contents.
This opinion may be relied upon by you in connection with the matters set
forth herein. Without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other person or entity for any
purpose.
Very truly yours,
/s/ Morris, James, Hitchens & Williams
--------------------------------------
MML/LCL/lse
<PAGE> 6
SCHEDULE A
ADDRESSEES:
- -----------
Atlas Air, Inc.
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Wilmington Trust Company
First Security Bank, N.A.
ABN AMRO Bank N.V., Chicago Branch
Morgan Stanley Capital Services, Inc.
Morgan Stanley, Dean Witter, Discover & Co.
Standard & Poor's Rating Services
Moody's Investor Services, Inc.
Fitch IBCA, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 13, 1998, and to all references to our Firm included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
June 24, 1998
