Atlas Air Worldwide 10Q 2004 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Atlas Air Worldwide Holdings, Inc.
(Exact name of registrant as specified in its charter)


Delaware	0-25732	13-4146982
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

2000 Westchester Avenue, Purchase, New York		10577
(Address of principal executive offices)		(Zip Code)

(914) 701-8000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yeso Noþ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b- 2). Yeso Noþ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS: As of June 1, 2005, there were 3,650,149 shares of the registrant’s Common Stock outstanding.

EXPLANATORY NOTE

Atlas Air Worldwide Holdings, Inc., after having filed a voluntary bankruptcy petition for relief under Chapter 11 of the United States Bankruptcy Code on January 30, 2004 and emerging from bankruptcy on July 27, 2004, did not timely file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. On February 10, 2005, we filed a Current Report on Form 8-K (the “Form 8-K”) containing, in Exhibit 99.2 furnished thereto, certain financial and other information relating to such quarter, consisting of unaudited Consolidated Financial Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk and Controls and Procedures, all as required by Part I, Items 1-4 of Form 10-Q. Also on February 10, 2005, we issued a press release relating to the information provided in the Form 8-K, which press release was furnished as Exhibit 99.1 to the Form 8-K. This Quarterly Report on Form 10-Q contains similar information to what was provided in the Form 8-K, as well as the remainder of the disclosure required by Form 10-Q, and also additional information relating to various developments that have occurred since the period covered by this report. The information reported herein is as of June 30, 2004 unless otherwise noted.

TABLE OF CONTENTS


			Page


PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003 (unaudited)	1

		Consolidated Balance Sheets at June 30, 2004 (unaudited) and December 31, 2003	2

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)	3

		Notes to Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

	Item 3.	Quantitative And Qualitative Disclosures About Market Risk	54

	Item 4.	Controls and Procedures	55

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	58

	Item 2.	Changes in Securities and Use of Proceeds	58

	Item 3.	Defaults upon Senior Securities	58

	Item 4.	Submission of Matters to a Vote of Securities Holders	58

	Item 5.	Other Information	58

	Item 6.	Exhibits and Reports on Form 8-K	58

		Signatures	60

		Exhibit Index	61

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.
(Debtor-in-Possession)
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)


	For the Three Months Ended June 30, 2004			For the Three Months Ended June 30, 2003			For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2003

Operating Revenues
Scheduled service	$	155,491		$	118,268		$	300,559		$	221,100
ACMI lease contracts		84,871			70,320			168,101			137,403
AMC charter		78,069			118,841			131,182			258,120
Charter Service		8,254			12,816			13,852			32,332
Other revenue		11,623			6,159			22,069			22,574

Total operating revenues		338,308			326,404			635,763			671,529

Operating Expenses
Aircraft fuel		81,417			74,670			151,253			160,106
Salaries, wages & benefits		51,056			46,130			103,921			98,682
Maintenance, materials and repairs		61,999			46,313			114,877			88,163
Aircraft rent		34,159			43,159			71,814			95,594
Ground handling		23,433			20,403			46,014			40,714
Landing fees and other rent		23,530			22,326			45,608			43,525
Depreciation and amortization		15,404			19,341			29,671			36,107
Travel		12,643			15,341			24,789			33,973
Pre-petition and post-emergence costs and related professional fees		—			12,091			9,439			21,588
Other		26,463			36,068			52,035			81,154

Total operating expenses		330,104			335,842			649,421			699,606

Operating income (loss)		8,204			(9,438	)		(13,658	)		(28,077	)

Non-operating Expenses
Interest income		(280	)		(1,154	)		(470	)		(2,162	)
Interest expense (excluding post-petition contractual interest of $10,678 and $17,797 for the three and six month periods ended June 30, 2004, respectively)		19,563			22,049			43,131			41,466
Other, net		961			1,013			992			1,856
Reorganization items, net		39,388			—			51,580			—

Total non-operating expenses		59,632			21,908			95,233			41,160

Loss before income tax expense		(51,428	)		(31,346	)		(108,891	)		(69,237	)
Income tax expense		—			—			1,117			—

Net loss	$	(51,428	)	$	(31,346	)	$	(110,008	)	$	(69,237	)


Basic and diluted loss per share:
Net loss	$	(1.34	)	$	(0.82	)	$	(2.87	)	$	(1.81	)

See accompanying notes to Consolidated Financial Statements.

Atlas Air Worldwide Holdings, Inc.
(Debtor-in-Possession)
Consolidated Balance Sheets
(in thousands, except share data)


	June 30, 2004			December 31, 2003

	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	158,262		$	93,297
Accounts receivable, net of allowance of $15,928 and $24,304, respectively		134,532			159,393
Prepaid maintenance		84,952			86,876
Deferred taxes		18,759			8,508
Prepaid expenses and other current assets, net of accumulated amortization of $31,413 and $28,689, respectively		40,008			41,274

Total current assets		436,513			389,348

Property and Equipment
Flight equipment		954,076			833,079
Ground equipment		39,649			40,783
Less: accumulated depreciation		(101,905	)		(78,768	)

Total property and equipment, net		891,820			795,094

Other Assets
Route acquisition costs		42,238			42,238
Deposits and other assets		17,540			59,760
Prepaid aircraft rent		92,332			114,167

Total Assets	$	1,480,443		$	1,400,607


Liabilities and Stockholders’ Deficit
Current Liabilities
Accounts payable	$	32,829		$	35,530
Accrued liabilities		178,883			176,817
Liabilities subject to compromise		596,157			—
Debt		685,702			964,557

Total current liabilities		1,493,571			1,176,904
Other Liabilities
Deferred gains		106,403			170,363
Accrued maintenance		—			62,119
Deferred tax liabilities		18,759			8,508
Other liabilities		—			10,995

Total other liabilities		125,162			251,985

Commitments and Contingencies (Note 10)
Stockholders’ Deficit
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued		—			—
Common stock, $0.01 par value; 50,000,000 shares authorized; 38,377,504 shares issued and outstanding		384			384
Treasury stock, at cost; 1,050 shares		(4	)		(4	)
Additional paid-in-capital		306,303			306,303
Accumulated deficit		(444,973	)		(334,965	)

Total Stockholders’ Deficit		(138,290	)		(28,282	)

Total Liabilities and Stockholders’ Deficit	$	1,480,443		$	1,400,607

See accompanying notes to Consolidated Financial Statements.

Atlas Air Worldwide Holdings, Inc.
(Debtor-in-Possession)
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)


	For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2003

Cash Flows from Operating Activities:
Net loss	$	(110,008	)	$	(69,237	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization		29,671			36,107
Reorganization items, net		29,005			—
Provision for doubtful accounts		(323	)		11,001
Amortization of debt issuance cost and lease financing deferred gains		1,232			(5,026	)
Recognition of compensation from restricted stock units		—			216
Other, net		239			(1,856	)
Changes in operating assets and liabilities:
Accounts receivable and other current assets		25,184			45,344
Prepaids and other current assets		475			(5,170	)
Deposits and other assets		18,403			(48,750	)
Accrued liabilities related to reorganization items		22,574			—
Accounts payable and accrued liabilities		54,524			(27,962	)

Net cash provided (used) by operating activities		70,976			(65,333	)

Cash Flows from Investing Activities:
Capital expenditures		(9,475	)		(4,029	)
Proceeds from sale of property and equipment		—			10,000
Maturity of investments		—			31,004

Net cash (used) provided by investing activities		(9,475	)		36,975

Cash Flows from Financing Activities:
Proceeds from loan		18,000			—
Issuance of common stock		—			240
Purchase of treasury stock		—			(217	)
Payment of debt issuance costs		(2,510	)		—
Payment on debt		(12,026	)		(52,770	)

Net cash provided (used) by financing activities		3,464			(52,747	)

Net increase (decrease) in cash and cash equivalents		64,965			(81,105	)
Cash and cash equivalents at the beginning of period		93,297			222,392

Cash and cash equivalents at end of period	$	158,262		$	141,287


Supplemental disclosure of cash flow information:
Cash paid for interest	$	20,762		$	21,974


Cash paid for reorganization items	$	22,574		$	—


Supplemental disclosure of non cash flow financing and investing information:
Increase in debt and flight equipment	$	204,964		$	60,540

See accompanying notes to Consolidated Financial Statements.

Atlas Air Worldwide Holdings, Inc.
(Debtor-in-Possession)

Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying interim Consolidated Financial Statements (the “Financial Statements”) are unaudited and have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. As permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”), the Financial Statements contain certain financial information and exclude certain footnote disclosures normally included in audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, the Financial Statements contain all adjustments, including normal recurring accruals, necessary to fairly present the financial position of Atlas Air Worldwide Holdings, Inc. (“Holdings” or “AAWW”) and its consolidated subsidiaries as of June 30, 2004, and the results of operations for the three and six month periods ended June 30, 2004 and 2003 and cash flows for the six month periods ended June 30, 2004 and 2003. The Financial Statements include the accounts of Holdings and its consolidated subsidiaries. All significant inter-company accounts and transactions have been eliminated. The Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2004 included in the Annual Report on Form 10-K of Holdings that was filed with the SEC on June 30, 2005. Except for per share data, all dollar amounts are in thousands unless otherwise noted. The Company’s quarterly results have in the past been subject to seasonal and other fluctuations and, thus, the operating results for any quarter are not necessarily indicative of results for any future fiscal period.

Holdings is the parent company of two principal operating subsidiaries, Atlas Air, Inc. (“Atlas”) and Polar Air Cargo, Inc. (“Polar”). Holdings, Atlas, Polar and Holdings’ other subsidiaries are referred to collectively as the “Company.” The Company provides air cargo and related services throughout the world, serving Asia, Australia, the Pacific Rim, Europe, South America and the United States through two principal means: (i) airport-to-airport scheduled air cargo service (“Scheduled Service”); and (ii) contractual lease arrangements in which the Company provides the aircraft, crew, maintenance and insurance (“ACMI”, “ACMI contracts”, or in some circumstances “wet leases”). The Company also furnishes seasonal, commercial, military and ad-hoc Charter Services. (See Note 9.) The Company operates only Boeing 747 freighter aircraft.

The Financial Statements also have been prepared in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Accordingly, all pre-bankruptcy petition (“pre-petition”) liabilities believed to be subject to compromise have been segregated in the Consolidated Balance Sheets (the “Balance Sheets”) and classified as “liabilities subject to compromise” at the estimated amount of allowable claims under the Chapter 11 Cases (defined in Note 2). Liabilities not believed to be subject to compromise in the bankruptcy proceedings are separately classified as “current” and “non-current”, as appropriate. Expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as “Reorganization items”. Also, interest expense is reported only to the extent that it was to be paid during the pending Chapter 11 Cases or where it was probable that it would be an allowed claim in the Chapter 11 Cases. Cash used for reorganization items is disclosed separately in Note 3.

2. Background and Bankruptcy

The sustained weakness of both the United States and international economies that began in early 2001 and continued through the beginning of 2004, coupled with the lingering impact of the September 11, 2001 terrorist attacks, had a negative impact on both international trade demand and the airline industry, including the ACMI and air cargo Scheduled Service markets, which are vital to the Company’s results. Because of the resulting negative impact on the Company’s financial condition and as part of a comprehensive financial restructuring of our aircraft debt and lease obligations, among other things, the Company defaulted on its reporting covenants and payment obligations under substantially all of its debt and lease arrangements. As a result, all debt outstanding was classified as a current liability at June 30, 2004 and December 31, 2003.

In January 2003, the Company commenced a financial restructuring through negotiations with the lenders under its Aircraft Credit Facility (defined in Note 6) and AFL III Credit Facility (also defined in Note 6) regarding impending principal payments and covenant defaults, as well as the suspension of lease payments on six Boeing 747-200 aircraft. These negotiations were also held in conjunction with negotiations with certain other aircraft lessors to reduce or defer operating lease payments.

In March 2003, the Company implemented a moratorium on substantially all of its aircraft debt and lease payments to provide time to negotiate restructured agreements with the Company’s significant creditors and lessors. Subsequent to the implementation of this moratorium, the Company made payments on certain debt and lease obligations pursuant to forbearance agreements. The continuation of the moratorium beyond what was permitted in the forbearance agreements resulted in additional events of default with respect to substantially all of the Company’s aircraft debt and lease agreements. These defaults allowed the parties to these arrangements to exercise certain rights and remedies, including the right to demand immediate payment of such obligations in full and the right to repossess certain assets, including all of the Company’s owned and leased aircraft.

In order to formalize its restructuring efforts, in March 2003 the Company embarked on a comprehensive operational and financial restructuring program that included the following key elements: (i) reorganizing the management team and management functions; (ii) enhancing profitability through operational restructuring initiatives; (iii) reducing fixed financial costs through the restructuring of aircraft-related debt and lease obligations; and (iv) de-leveraging through the conversion of Senior Notes (defined in Note 6) and other unsecured obligations into equity in Holdings.

Through the course of 2003, the management team refocused the commercial strategies of the Company’s key business segments, implemented operational cost saving initiatives and, with the assistance of its financial and legal advisors, negotiated with its secured aircraft creditors to reduce the rents and payments on its aircraft.

On January 30, 2004 (the “Bankruptcy Petition Date”), Holdings, Atlas, Polar, Airline Acquisition Corp I (“Acquisition”) and Atlas Worldwide Aviation Logistics, Inc. (“Logistics,” and together with Holdings, Atlas, Polar and Acquisition, the “Debtors”), each filed voluntary bankruptcy petitions for relief under chapter 11 (“Chapter 11”) of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the “Bankruptcy Code”), in the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”). The Bankruptcy Court jointly administered these cases as “In re Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., Polar Air Cargo, Inc., Airline Acquisition Corp I, and Atlas Worldwide Aviation Logistics, Inc., Case No. 04-10792” (collectively, the “Chapter 11 Cases”). During the course of the Chapter 11 Cases, the Debtors operated their respective businesses and managed their respective properties and assets as debtors-in-possession (“DIPs”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the orders of the Bankruptcy Court. The Bankruptcy Court entered an order confirming the Final Modified Second Amended Joint Plan of Reorganization of the Debtors dated July 14, 2004 (the “Plan of Reorganization”) and the Debtors emerged from bankruptcy on July 27, 2004 (the “Effective Date”). The Consolidated Financial Statements include data for all subsidiaries of the Company, including those that did not participate in the Chapter 11 Cases.

While in Chapter 11, the Debtors, as DIPs, were authorized to continue to operate as ongoing businesses, but could not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

During the course of the Chapter 11 Cases, the Debtors were generally not permitted to make payments on debt deemed to be pre-petition debt. However, to the extent the Debtors had reached agreements with certain lenders and lessors on specific aircraft governed by Section 1110 of the Bankruptcy Code, the Debtors continued to make payments on their aircraft lease and debt financings with the approval of the Bankruptcy Court. In addition, the Debtors received the approval of the Bankruptcy Court to pay pre-petition obligations of certain foreign and critical vendors. Also during the Chapter 11 Cases, the Debtors rejected or abandoned ten aircraft (tail numbers N507MC, N518MC, N535MC, N24837, N354MC, N922FT, N923FT, N924FT, N858FT and N859FT) that were originally financed under secured notes or leases and that no longer formed part of the Company’s aircraft fleet plan. Subsequently, the Company purchased two of these rejected aircraft (tail numbers N858FT and N859FT).

On February 10, 2004, the United States Trustee for the Southern District of Florida appointed two official committees of unsecured creditors (together, the “Creditors’ Committees”), one each for Atlas and Polar. The

Creditors’ Committees and their respective legal representatives had a right to be heard on all matters that came before the Bankruptcy Court concerning the Debtors’ reorganization. Pursuant to a global settlement between the Creditors’ Committees and the Debtors, all litigation between the Creditors’ Committees was abated pending final documentation of the settlement terms and submission of a revised Disclosure Statement and Plan of Reorganization. By virtue of the global settlement, the Creditors’ Committees supported confirmation of the Plan of Reorganization. On June 8, 2004, the Debtors’ Disclosure Statement was approved by the Bankruptcy Court, thereby allowing the Debtors to solicit votes to accept the Plan of Reorganization. The Bankruptcy Court entered an order confirming the Plan of Reorganization, which became effective on the Effective Date.

Pursuant to the Plan of Reorganization, the holders of outstanding equity of Holdings prior to the Effective Date are to receive no distributions.

As part of the global settlement and pursuant to the Plan of Reorganization, the holders of allowed unsecured claims against Polar will receive a 60.0% cash distribution. The Company anticipates that the total cash payments under the settlement will be between $25 and $35 million. The cash settlement payments were funded by the Company with cash on hand, which includes proceeds of approximately $20.2 million derived from a subscription offering of Holdings new common stock (“New Common Stock”) to unsecured creditors of Atlas completed in July 2004. Under the global settlement, the percentage of Holdings’ common stock initially anticipated to be allocated to unsecured creditors of Polar were offered for sale and sold to the unsecured creditors of Atlas through this subscription with the proceeds placed in a trust for the benefit of the Polar Creditors. The holders of allowed general unsecured claims against Holdings, Atlas, Acquisition and Logistics will receive, collectively, approximately 17,202,666 shares of the New Common Stock, which, excluding the shares acquired under the subscription, were valued under the Plan of Reorganization at approximately $216.2 million (at the Plan of Reorganization value of $12.57 per share).

The actual recovery percentage under the Plan of Reorganization to be realized by holders of general unsecured claims against Atlas and Holdings will depend upon the aggregate amount of general unsecured claims that will ultimately be allowed against Holdings, Atlas, Acquisition and Logistics and the actual market value attributable to stock received by each creditor (See Note 3 for a further discussion of claims).

On July 14, 2004, Holdings, on behalf of Atlas and Polar (collectively, the “Borrowers”), among others, signed a commitment letter with Congress Financial Corporation (“Congress”) and Wachovia Bank National Association (“Wachovia”) for a $60 million secured revolving credit facility. The consummation of the revolving credit facility was predicated upon the Debtors’ emergence from bankruptcy, among other things. On November 30, 2004, the Borrowers, and Holdings and Acquisition, as guarantors (collectively, the “Guarantors”), entered into the secured revolving credit facility with Congress, as agent for the lenders party thereto, and Wachovia, as lead arranger (the “Revolving Credit Facility”) effective December 31, 2004. The Revolving Credit Facility provides the Borrowers with revolving loans of up to $60 million in the aggregate, including up to $10 million of letter of credit accommodations. Availability under the Revolving Credit Facility will be based on a borrowing base, which will be calculated as a percentage of eligible accounts receivable. At December 31, 2004, based on the borrowing base, the Company had $19 million available for borrowing under the Revolving Credit Facility. There was no balance outstanding at December 31, 2004. The Revolving Credit Facility has an initial four-year term after which the parties can agree to enter into additional one-year renewal periods. See Note 6.

3. Reorganization

Since the Effective Date, the Company has devoted significant effort to reconcile claims to determine the validity, extent, priority and amount of asserted claims against the Debtors’ bankruptcy estates. To further this process, the Company has filed omnibus objections to general unsecured claims and to cure claims. Specifically, the Company filed (i) a First Omnibus Objections to Claims and Supplement thereto on June 16, 2004 and November 12, 2004, respectively, (ii) a Second Omnibus Objections to Claims and Supplement thereto on September 17, 2004 and September 24, 2004, respectively, (iii) a Third Omnibus Objections to Claims on November 12, 2004, and (iv) a Reorganized Debtors’ objection to claims of Internal Revenue Service (the “IRS”) on November 12, 2004. As described below, however, there remain certain claims disputed by the Company.

On November 12, 2004, the Company also filed a Motion to Determine the Remaining Balance of Scheduled Claims Subject to Critical and Foreign Vendor Payments and Other Adjustments (the “Schedules

Motion”). The Schedules Motion seeks to reconcile liabilities set forth in the Debtors’ schedules against payments to critical and foreign vendors made during the pendency of the Chapter 11 Cases. Finally, the Company has entered into agreements pursuant to which the Debtors has resolved cure claims arising from the assumption of executory contracts and unexpired leases.

Total Claims

As of May 19, 2005, the Company had reviewed over 3,000 scheduled and filed claims aggregating approximately $7.5 billion, with a maximum of $850.8 million of claims that could potentially be allowed. Approximately $657.9 million of claims have been allowed to date, including $12.4 of cure claims and $1.0 million of other secured and priority claims. Claims of $192.9 million remain unresolved, including $116.0 million of unresolved IRS claims discussed below; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process.

Atlas Unsecured Claims

Pursuant to the Plan of Reorganization, the Company will make a pro rata distribution of 17,202,666 shares of New Common Stock to holders of allowed general unsecured claims against Holdings, Atlas, Acquisition and Logistics. General unsecured claims of approximately $2.6 billion were filed against these entities. As of May 19, 2005, claims of $604.6 million have been allowed, claims of $60.4 million remain disputed, and the balance of claims have been withdrawn or disallowed; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process.

Polar Unsecured Claims

Pursuant to the Plan of Reorganization, the Company will pay cash equal to sixty cents on the dollar for allowed unsecured claims against Polar. General unsecured claims of approximately $408.4 million were filed against Polar. As of May 19, 2005, claims of $39.9 million have been allowed, claims of $16.5 million remain disputed, and the balance of claims have been withdrawn or disallowed; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process. The Company estimates the additional allowed claims against Polar will ultimately be under $1 million.

Administrative, Priority, Secured and Governmental Claims

By order dated November 16, 2004, the Bankruptcy Court extended to February 1, 2005 the deadline for the Company to object to: (i) administrative claims, (ii) priority unsecured claims, (iii) secured claims and (iv) governmental claims.

IRS Claim

As part of an ongoing audit and in conjunction with the claims process of the Chapter 11 Cases, the submitted proofs of claim with the Bankruptcy Court for approximately $228.0 million of alleged income tax, employee withholding tax, Federal Unemployment Tax Act (“FUTA”) and excise tax obligations, including penalties and interest. In June 2004, the IRS amended its original proofs of claim with new claims (the “Amended IRS Claims”), reducing its total claim amount to approximately $104.3 million. The Amended IRS Claims are principally composed of a $56.4 million income tax claim and a $40.5 million employment tax claim. The Company disputed the amounts claimed and filed with the Bankruptcy Court several claim objections and a motion under Section 505 of the Bankruptcy Code, challenging the IRS’ claims. For purposes of the confirmation of the Plan of Reorganization, the employment tax portion of the Amended IRS Claims was reduced to $5.3 million. The IRS subsequently filed amended and/or additional proofs of claim against Holdings, Atlas and Polar asserting claims for income tax, employee withholding tax, FUTA tax and excise taxes of approximately $11.1 million as administrative claims, $102.0 million as a priority unsecured claim and $2.9 million as a general unsecured claim. On November 12, 2004, the Company filed its Supplemental Objection to Claims of the IRS, objecting to these additional claims. The Company believes that the IRS’ claims are substantially without merit and intends to defend against them vigorously.

SEC Claim

On October 17, 2002, the SEC commenced an investigation arising out of the Company’s October 16, 2002 announcement that the Company would restate its 2000 and 2001 financial statements. In October 2002, the

Company’s board of directors appointed a special committee which in turn retained the law firm of Skadden, Arps, Slate, Meagher and Flom, LLP for the purpose of performing an internal review concerning the restatement issues and assisting Holdings in its cooperation with the SEC investigation. A Formal Order of Investigation was subsequently issued authorizing the SEC to take evidence in connection with its investigation. The SEC has served several subpoenas on Holdings requiring the production of documents and witness testimony, and the Company has been fully cooperating with the SEC throughout its investigation.

On October 28, 2004, the SEC issued a Wells Notice to Holdings indicating that the SEC staff is considering recommending to the SEC that it bring a civil action against Holdings alleging that it violated certain financial reporting provisions of the federal securities laws from 1999 to 2002. In addition, the SEC had filed a proof of claim in the amount of $107.0 million, but the SEC has since amended its proof of claim to $15.0 million. Holdings is currently engaging in discussions with the SEC regarding the Wells Notice and the possible resolution of this matter, and will continue to cooperate fully with the SEC in respect of the investigation. Any economic consequences of this matter will be treated as a general unsecured claim in the Company’s bankruptcy proceedings.

On July 22, 2004, the Company and certain former officers and directors commenced an adversary proceeding in the Bankruptcy Court against Genesis Insurance Company, which was the Company’s directors’ and officers’ insurance carrier until October 2002. The complaint filed in that action addresses various coverage disputes between Genesis and the plaintiffs with respect to the SEC investigation and the class action shareholder litigation described above. While the case remains pending, the parties are engaged in mediation in an attempt to settle this matter.

Equity Distribution

Shares of Holdings common stock that have been or are to be issued pursuant to the Plan of Reorganization as a result of emergence of the Debtors from bankruptcy are referred to as New Common Stock. Shares of common stock that were outstanding prior to the Effective Date are referred to as Old Common Stock.

The Plan of Reorganization contemplates the distribution of 17,202,666 shares of New Common Stock to holders of allowed general unsecured claims of Atlas, Holdings, Acquisitions and Logistics on a pro rata basis in the same proportion that each holder’s allowed claim bears to the total amount of all allowed claims. The exact number of shares that each claimholder ultimately receives is dependent on the final total of allowed, unsecured claims and other factors such as unclaimed distributions and fractional share interests.

In accordance with the Plan of Reorganization, on the Effective Date, Holdings issued and distributed 740,000 shares of the New Common Stock to GE Capital Aviation Services, Inc. (“GECAS”) and 320,000 shares of New Common Stock to certain bank lenders under one loan that was made to Atlas Freighter Leasing III, Inc. (“AFL III”) (the “AFL III Credit Facility”) and another loan made to Atlas (the “Aircraft Credit Facility”). Additionally, pursuant to the terms of the Plan of Reorganization 1,737,334 shares of New Common Stock were offered for subscription and sold to certain Atlas, Holdings, Acquisition and Logistics unsecured creditors. New Common Stock will not be distributed to holders of Polar general unsecured claims since each such holder will receive a fixed cash recovery equal to 60.0% of the amount of their respective allowed claim.

Excluding the long-term incentive plan and the shares issued to DVB Bank, AG (“DVB”) discussed below, as of June 1, 2005, including the initial distribution described in the preceding paragraph, the Company has 2,797,334 shares issued, or about 15.0% of the approximately 20,000,000 shares to be issued under the Plan of Reorganization.

Excluding the long-term incentive plan, the proposed allocation of New Common Stock under the Plan of Reorganization is illustrated in the chart below:


Party	Equity Ownership %			Shares

ACF/AFL III		1.6	%		320,000
GECAS		3.7	%		740,000
General Unsecured Claims		86.0	%		17,202,666
Shares sold under Subscription		8.7	%		1,737,334

Total		100	%		20,000,000

In addition to the above-referenced shares of New Common Stock allocated above and pursuant to the Plan of Reorganization, as of December 31, 2004, an aggregate of 2,772,559 shares of New Common Stock have been reserved for equity-based awards, of which 610,600 shares of restricted stock and options for 826,663 shares have been issued to directors, management and employees under a management incentive plan and the employee stock option plan.

In addition, on August 26, 2004, the Bankruptcy Court entered an order approving the issuance of 200,000 shares of New Common Stock to DVB as part of a settlement involving the restructuring of the lease of aircraft tail number N409MC. (See Note 6.) These shares were not part of the original 20,000,000 shares of New Common Stock allocated in the Plan of Reorganization discussed above.

Distributions of shares of New Common Stock to holders of allowed Senior Notes (defined in Note 6) claims (relating to Atlas’ 10.75% Notes due 2005, 9.375% Notes due 2006, and 9.25% Notes due 2008) will be made to the indenture trustee, which will transmit the shares to the appropriate claimholders in accordance with the plan of Reorganization and the respective indentures. Distributions to holders of other allowed general unsecured claims will be made directly to such claimholders in accordance with the Plan of Reorganization.

Reorganization Items

In accordance with SOP 90-7, the Company has segregated and classified certain income and expenses as reorganization items. The following reorganization items were incurred for the three months ended June 30, 2004 and for the period of January 31, 2004 through June 30, 2004 (in thousands):


	For the Three Months Ended June 30, 2004			For the period January 31, 2004 through June 30, 2004

Legal and Professional Fees	$	16,282		$	22,574
Rejection of CF6-80 PBH engine agreement (a)		—			(59,552	)
Claims related to rejection of owned and capital leased aircraft (b)		13,887			50,554
Claims related to rejection of aircraft leases (c)		9,272			38,104
Other		(53	)		(100	)

Total	$	39,388		$	51,580


	(a)	The Company rejected a CF6-80 Power-By-The-Hour engine maintenance agreement and wrote off the associated accrued liability of $59.6 million.

	(b)	The Company rejected two owned aircraft, tail numbers N354MC and N535MC, which were financed and wrote off the assets, liabilities and net book value of $34.0 million. The Company also rejected a capital lease on aircraft tail number N924FT and wrote off the asset, liability and net book value of $16.6 million.

	(c)	The Company rejected six leased aircraft, tail numbers N507MC, N24837, N922FT, N858FT, N859FT and N923FT that resulted in unsecured claims of $38.1 million.

Also in accordance with SOP 90-7, interest expense of $10.7 million for the three months ended June 30, 2004 and $17.8 million for the period January 31, 2004 through June 30, 2004, has not been recognized on approximately $437.5 million of Senior Notes (defined in Note 6) as such interest will not be an allowed claim nor paid. Also, during the same period the Company paid approximately $22.6 million in cash in respect of Reorganization items listed above.

Pursuant to SOP 90-7, the Company had segregated and classified certain pre-petition obligations as liabilities subject to compromise. The following table sets forth the Debtors’ estimated liabilities subject to compromise as of June 30, 2004 (in thousands of dollars) (definitions are set forth in Note 6):


Pre-Petition Obligations	June 30, 2004

9 1/4% Senior Notes due 2008	$	153,000
9 3/8% Senior Notes due 2006		147,000
10 3/4% Senior Notes due 2005		137,475
Accrued Interest Payable		56,147
Accounts Payable		22,041
Accrued Expenses		80,494

Total liabilities subject to compromise	$	596,157

4. Summary of Significant Accounting Policies

The Company’s accounting policies conform to GAAP. Significant policies followed are described below.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the Financial Statements and footnotes thereto. Actual results may differ from those estimates. Important estimates include asset lives, valuation allowances (including, but not limited to, those related to receivables, inventory and deferred taxes), income tax accounting, self-insurance employee benefit accruals and contingent liabilities.

Revenue Recognition

We recognize revenue when a sales arrangement exists, services have been rendered, the sales price is fixed and determinable, and collectibility is reasonably assured.

Revenue for Scheduled Service and Charter Services is recognized upon flight departure. ACMI contract revenue is recognized as the actual block hours are operated on behalf of a customer during a calendar month.

Other revenue includes rents from dry leases of owned aircraft and is recognized in accordance with the Statement of Financial Accounting Standard (“SFAS”) No. 13,Accounting for Leases.

Allowance for Doubtful Accounts

We periodically perform an evaluation of our composition of accounts receivable and expected credit trends and establish an allowance for doubtful accounts for specific customers that we determine to have significant credit risk. Past due status of accounts receivable is determined primarily based upon contractual terms. We provide allowances for estimated credit losses resulting from the inability or unwillingness of our customers to make required payments and charge off receivables when they are deemed uncollectible. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less at acquisition.

Investments

The Company holds a minority interest (49%) in a private company, which is accounted for under the equity method and is included in other assets on the consolidated balance sheet.

The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is determined to be other than temporary, the investment is written down to fair value and the amount of the write-down is included in the Consolidated Statements of Operations (the “Statements of Operations”).

Inventories

Spare parts, materials and supplies for flight equipment are carried at average acquisition cost, which are expensed when used in operations and are included in prepaid expenses and other current assets in the consolidated balance sheet. Rotable parts are written off when beyond economic repair. At June 30, 2004 and December 31, 2003, the reserve for expendable obsolescence was $1.3 and $1.4 million, respectively. Allowances for obsolescence for spare parts expected to be on hand at the date aircraft are retired from service, are provided over the estimated useful lives of the related aircraft and engines. Allowances are also provided for spare parts currently identified as excess or obsolete. These allowances are based on management estimates, which are subject to change as conditions in our business evolve. Rotable inventory is recorded in “Property and Equipment”.

Property and Equipment

The Company records its property and equipment at cost and depreciates these assets on a straight-line basis over their estimated useful lives to their estimated residual values, over periods not to exceed forty years for flight equipment (from date of original manufacture) and three to five years for ground equipment, once the asset is placed in service. Property under capital leases and related obligations are recorded at the lesser of an amount equal to (a) the present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing rate or, when known, the interest rate implicit in the lease or (b) the fair value of the asset. Amortization of property under a capital lease is on a straight-line basis over the lease term and is included in depreciation expense, unless ownership takes place or a purchase option exists. In that case, amortization is over the remaining manufacturer’s life of the aircraft from date of acquisition.

Expenditures for major additions, improvements and flight equipment modifications are generally capitalized and depreciated over the shorter of the assets remaining lives or lease lives in the event that any modifications or improvements are on operating lease equipment. Substantially all property and equipment is specifically pledged as collateral for indebtedness of the Company.

Measurement of Impairment of Long-Lived Assets

When events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, the Company records impairment losses on those long-lived assets used in operations.

The impairment charge is determined based upon the amount by which the net book value of the assets exceeds their estimated fair value. In determining the fair value of the assets, the Company considers market trends, published values for similar assets, recent transactions involving sales of similar assets or quotes from third-party appraisers. In making these determinations, the Company also uses certain assumptions, including, but not limited to, the estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations and estimated residual values.

Intangible Assets

Route acquisition costs represent the allocation of purchase price in connection with the Polar acquisition attributable to operating rights (takeoff and landing slots) at Narita Airport in Tokyo, Japan. Since the operating rights are considered to have an indefinite life, no amortization has been recorded.

Under SFAS No. 142, intangibles with indefinite lives are not amortized but reviewed for impairment annually, or more frequently, if impairment indicators arise. The carrying value and ultimate realization of these assets is dependent upon estimates of future earnings and benefits that the Company expects to generate from their use. If the Company’s expectations of future results and cash flows change and are significantly diminished, intangible assets may be impaired and the resulting charge to operations may be material. The estimation of useful lives and expected cash flows requires the Company to make significant judgments regarding future periods that are subject to some factors outside its control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material changes to the results of operations.The Company reviews its route acquisition costs annually in accordance with SFAS No.142,Goodwill and Other Intangible Assets(“SFAS No. 142”). The analysis has not resulted in any impairment charges to the date of this report.

Concentration of Credit Risk and Significant Customers

The United States Military Airlift Mobility Command (“AMC”) charters accounted for 23.1% and 36.4% for the three month periods ended June 30, 2004 and 2003, respectively and 20.6% and 38.4% for the six month periods ended June 30, 2004 and 2003, respectively, of the Company’s total revenues. Accounts receivable from the United States Military were $18.2 million and $15.3 million at June 30, 2004 and December 31, 2003, respectively.

Income Taxes

We provide for income taxes using the asset and liability method. 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. If necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance. In addition, tax reserves are based on significant estimates and assumptions as to the relative filing positions and potential audit and litigation exposures thereto. The effect on deferred taxes of a change in tax laws or tax rates is recognized in the results of operations in the period that includes the enactment date.

Debt Issuance 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. Amortization of debt issuance costs was $2.9 million and $1.0 million, for the three month periods ended June 30, 2004 and 2003, respectively, and $4.3 million and $2.1 million for the six month periods ended June 30, 2004 and 2003, respectively, and is included as a component of interest expense on the Statements of Operations.

Aircraft Maintenance and Repair

Maintenance and repair costs for both owned and leased aircraft are charged to expense as incurred, except Boeing 747-400 engine (GE CF6-80C2) overhaul costs through January 2004. These were performed under a fully outsourced power-by-the-hour maintenance agreement. The costs thereunder were accrued based on the hours flown. This contract was rejected in the Chapter 11 Cases.

Foreign Currency Transactions

The Company’s results of operations are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency denominated operating revenues and expenses. The Company’s largest exposure comes from the British pound, the Euro, the Japanese yen and various Asian currencies. The Company does not currently have a foreign currency hedging program related to its foreign currency-denominated sales. Gains or losses resulting from foreign currency transactions are included in other non-operating expenses, net and have not been significant to our operating results for any period.

Stock-Based Compensation

The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees and its related interpretations (“APB 25”). The Company had adopted the disclosure only provisions of SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS No. 123”), as amended by SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure(“SFAS No.148”). Had the Company elected to adopt the fair value recognition provisions of SFAS No. 123 and SFAS No.148, pro forma net loss and loss per share for the three and six months ended June 30, 2004 and 2003 would be as follows:


	For the three Months ended						For the six Months ended

	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003

Net loss, as reported	$	(51,428	)	$	(31,346	)	$	(110,008	)	$	(69,237	)
Add: Restricted stock expense, net of tax		—			216			—			216
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(1,755	)		(2,614	)		(3,509	)		(5,012	)

Pro forma net loss	$	(53,183	)	$	(33,744	)	$	(113,517	)	$	(74,033	)

Basic and diluted loss per share:
As reported	$	(1.34	)	$	(0.82	)	$	(2.87	)	$	(1.81	)

Pro forma	$	(1.39	)	$	(0.88	)	$	(2.96	)	$	(1.93	)

On the Effective Date, the Predecessor Company’s stock-based employee compensation plans were terminated and all outstanding options and restricted stock were cancelled.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004),“Share-Based Payment”(“FAS 123R”), which replaces FAS 123 and supersedes APB 25. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. On April 14, 2005, the SEC decided to delay the implementation date to the beginning of the first fiscal year beginning after December 15, 2005. The Company has the option to choose either the modified prospective or modified retrospective method. The Company expects to adopt FAS 123R in the first quarter of 2006, using the modified prospective method of adoption which requires that compensation expense be recorded over the expected remaining life of all unvested stock options and restricted stock and for any new grants thereof at the beginning of the first quarter of adoption of FAS 123R. We are currently evaluating the impact FAS 123R will have on the Company, and based on our preliminary analysis, expect to incur additional compensation expense as a result of the adoption of this new accounting standard that may be material to the 2006 financial statements.

Consolidation of Variable Interest Entities

In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”) (“FIN 46-(R)”), delaying the effective date for certain entities created before February 1, 2003 and making other amendments to clarify the application of the guidance. The Company has adopted FIN 46 for entities created subsequent to January 31, 2003 as of December 31, 2003 and adopted FIN 46-(R) as of the end of the interim period ended March 31, 2004. The adoptions of FIN 46 and FIN 46-(R) did not result in the consolidation of any variable interest entities.

Twelve of the Company’s forty-four operating aircraft are owned and leased through trusts established specifically to purchase, finance and lease aircraft to the Company. These leasing entities meet the criteria for variable interest entities. All fixed price options were restructured to reflect a fair market value purchase option, and as such, the Company is not the primary beneficiary of the leasing entities. The Company is generally not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and the leases do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates the Company to absorb decreases in value or entitles the Company to participate in increases in the value of the aircraft. The Company has not consolidated the related trusts upon application of FIN 46 because the Company is not the primary beneficiary based on the option price restructurings. The Company’s maximum exposure under these leases is the remaining lease payments, which amounts are reflected in future lease commitments described in Note 7.

5. Investments

At December 31, 2003, the Company held a restricted guaranteed investment contract in the amount of $26.0 million. In 2004, an aircraft lessor exercised its rights due to a rent payment default on aircraft N496MC and drew down on the guaranteed investment contracts in the amount of $26.0 million (see Note 6).

6. Debt

The Company’s debt obligations, including capital leases, as of June 30, 2004 and December 31, 2003, were as follows:


	June 30, 2004			December 31, 2003

Debt Obligations
Aircraft Credit Facility	$	41,890		$	43,578
AFL III Credit Facility		158,588			162,856
9 1/4% Senior Notes due 2008		153,000			152,886
9 3/8% Senior Notes due 2006		147,000			147,000
10 3/4% Senior Notes due 2005		137,475			137,475
2000 EETCs		60,002			59,916
1999 EETCs		151,665			87,258
1998 EETCs		200,768			73,470
Capital leases		40,533			52,270
Other		14,256			47,848
DIP Financing Facility		18,000			—

Total Debt		1,123,177			964,557
Less: liabilities subject to compromise		(437,475	)		—

Total debt	$	685,702		$	964,557

Description of the Company’s Debt Obligations

The following paragraphs provide a summary of the treatment in the Financial Statements for the restructuring of the Company’s debt obligations and changes that have occurred as a result of the Chapter 11 Cases. It should be noted that, for accounting purposes, the restructuring described below was given effect upon entering into binding term sheets with the respective lender or lessor as the parties to such agreements were operating under the revised terms of the agreements as if they were completed. In certain instances the agreements only became legally binding on the Effective Date or upon the occurrence of certain events after such date.

Many of our financing instruments contain certain limitations on Holdings and its subsidiaries’ ability to, among other things: incur additional indebtedness, enter into leases, make capital expenditures, pay dividends or make certain other restricted payments, consummate certain asset sales, incur liens, 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 their assets.

Deutsche Bank Trust Company

Deutsche Bank Trust Company (“Deutsche Bank”) is the administrative agent for two syndicated loans to Atlas and its affiliates. One loan was made to AFL III (a wholly owned subsidiary of Atlas) and the other loan was made through the Aircraft Credit Facility (“Aircraft Credit Facility” or “ACF”). The obligations under these two credit facilities are secured by 15 Boeing 747-200’s and one Boeing 747-300 aircraft and several spare General Electric CF6-50E2 and CF6-80 engines. AFL III leases the collateral securing the AFL III Credit Facility, including aircraft and related equipment, to Atlas. AFL III has collaterally assigned those leases and the proceeds thereof to Deutsche Bank as security for the AFL III Credit Facility.

Atlas, AFL III, Deutsche Bank, as administrative agent, and a majority of the lenders comprising the bank group under each credit facility, executed forbearance agreements dated July 3, 2003, which contained the terms of the initial loan restructurings. In January, February and March 2004, the parties entered into letter agreements that further amended the original forbearance agreements (as amended, the “Forbearance Agreements”). At March 31, 2004, the Company was in default under the AFL III Credit Facility and the Aircraft Credit Facility although Atlas and AFL III were performing and in compliance with the Forbearance Agreements. The defaults were cured on July 27, 2004.

Aircraft Credit Facility

Under the Forbearance Agreement, with respect to the Aircraft Credit Facility, the lenders agreed to accept lower monthly principal payments over a longer term. As additional consideration for the restructuring, the lenders under the Aircraft Credit Facility received, among other things, (i) 66,800 shares of New Common Stock and (ii) guarantees of the loan obligations from Holdings and its affiliates upon confirmation of the Plan of Reorganization. Atlas and the ACF lenders executed an amended and restated credit agreement on July 27, 2004.

On November 30, 2004, Holdings and Atlas entered into amendments (the “ACF Amendments”) to the Aircraft Credit Facility by and among Atlas, the lenders party thereto and Deutsche Bank. The ACF Amendments increased the capital expenditure limitations included in the Aircraft Credit Facility to $25 million (from $20 million), subject to certain adjustments.

The Aircraft Credit Facility is secured by a first priority security interest in one Boeing 747-300 aircraft (tail number N355MC) and two Boeing 747-200 aircraft (tail numbers N536MC and N540MC).

AFL III Credit Facility

Under the Forbearance Agreements, the AFL III lenders agreed to accept lower monthly principal payments over a longer term including a deferral of up to $20.3 million in principal payments otherwise due in 2004 and early 2005, provided that Atlas performs certain maintenance events on the aircraft collateral during such period. The deferred amount is due December 31, 2009, unless Atlas exceeds certain financial targets, in which case part of the deferred amount may become due earlier. AFL III and its lenders executed an amended and restated credit agreement on July 27, 2004. As additional consideration for the restructuring, the lenders under the AFL III Credit Facility received 253,200 shares of New Common Stock to be issued under the Plan of Reorganization.

The AFL III Credit Facility is secured by a first priority security interest in thirteen Boeing 747-200F aircraft, plus nine spare CF6-50E2 engines and three CF6-80C engines. The aircraft tail numbers securing the AFL III Credit Facility as of December 31, 2004 and 2003 were: N505MC, N509MC, N512MC, N517MC, N522MC, N523MC, N524MC, N526MC, N527MC, N528MC, N534MC, N808MC and N809MC.

On November 30, 2004, AFL III entered into an amendment (the “AFL III Amendment”) to the AFL III Credit Facility. The AFL III Amendment increased the annual capital expenditure limitations included in the AFL III Credit Facility to $25 million subject to certain adjustments. Fifteen leases relating to the thirteen aircraft and two engine pools from AFL III to Atlas pursuant to the AFL III Credit Facility were also amended to comply with the AFL III Amendments.

Senior Notes

The various senior notes issued by Atlas (collectively, the “Senior Notes”) as of June 30, 2004, in the aggregate principal amount of $437.5 million, were general unsecured obligations of Atlas, which ranked pari passu in right of payment to any of Atlas’ existing and future unsecured senior indebtedness. Interest on the Senior Notes was payable semi-annually in arrears; however, no interest payments were made after March 28, 2003. The Senior Notes were cancelled under the Plan of Reorganization on the Effective Date and are entitled to receive a significant portion of the New Common Stock pursuant to the Plan of Reorganization (See Note 3 above).

Enhanced Equipment Trust Certificate Transactions

Overview of EETC Transactions

In three separate transactions in 1998, 1999 and 2000, Atlas issued pass-through certificates, also known as Enhanced Equipment Trust Certificates (“EETCs”). These securities were issued for the purpose of financing the acquisition of a total of 12 Boeing 747-400 aircraft. In the 1998 EETC transaction, $538.9 million of EETCs were issued to finance five of these aircraft, one of which Atlas then owned, with the remaining four being leased by Atlas pursuant to leveraged leases. In the 1999 EETC transaction, $543.6 million of EETCs were issued to finance five of these aircraft, one of which Atlas then owned, with the remaining four being leased by Atlas pursuant to leveraged leases. In the 2000 EETC transaction, $217.3 million of EETCs were issued to finance the remaining two of these aircraft, both pursuant to leveraged leases. Historically, the debt obligations relating solely to owned EETC aircraft have been reflected on the Company’s balance sheet while the debt obligations related to

the leased EETC aircraft have not been reflected on the Company’s balance sheet because such obligations previously constituted operating leases. Through the restructuring however, Atlas became the beneficial owner of four of the previously leased aircraft (see Restructuring of EETCs below) resulting in a total of six aircraft reflected on the Company’s balance sheet.

Leverage Lease Structure

In a leveraged lease, the owner trustee is the owner of record for the aircraft. Wells Fargo Bank Northwest, National Association (“Wells Fargo”) serves as the owner trustee with respect to the leveraged leases in each of Atlas’s EETC transactions. As the owner trustee of the aircraft, Wells Fargo serves as the lessor of the aircraft under the EETC lease between Atlas and the owner trustee. Wells Fargo also serves as trustee for the beneficial owner of the aircraft, the owner participant. The original owner participant for each aircraft invested (on an equity basis) approximately 20% of the original cost of the aircraft. The remaining approximately 80% of the aircraft cost was financed with debt issued by the owner trustee on a non-recourse basis in the form of equipment notes.

The equipment notes were generally issued in three series, or “tranches,” for each aircraft, designated as Series A, B and C equipment notes. The loans evidenced by the equipment notes were funded by the public offering of EETCs. Like the equipment notes, the EETCs were issued in three series for each EETC transaction designated as Series A, B and C EETCs. Each class of EETCs was issued by the trustee for separate Atlas Pass Through Trusts with the same designation as the class of EETCs issued. Each of these Pass Through Trustees is also the holder and beneficial owner of the equipment notes bearing the same class designation.

With respect to the two EETC financed aircraft previously and currently owned by Atlas, there is no leveraged lease structure or EETC lease. Atlas is the beneficial owner of the aircraft and the issuer of the equipment notes with respect thereto. The equipment notes issued with respect to the owned aircraft are with full recourse to Atlas.

Restructuring of EETCs

On September 12, 2003, the Company and a majority in interest of its Class A EETC holders from the 1998, 1999 and 2000 EETC transactions entered into three restructuring agreements, one for each then existing EETC transaction. Each restructuring agreement was subsequently amended as of November 4, 2003, December 15, 2003, February 5, 2004 and March 31, 2004. As of February 5, 2004, the Company also entered into a term sheet (the “OP Term Sheet”) with the owner participants with respect to six of the ten aircraft leased under the EETC transactions. Each of the restructuring agreements, together with the OP Term Sheet, are collectively referred to herein as the “EETC Restructuring Agreements”.

Pursuant to the EETC Restructuring Agreements, the aircraft leases were amended to provide for basic rent of $725,000 per month for the first sixty months beginning on January 1, 2003, and basic rent of $830,000 per month thereafter, until the equipment notes underlying the EETCs are paid or satisfied in full, subject to adjustment during 2005 for repayment of a $23.0 million EETC deferred rent obligation. The equipment notes underlying the EETCs relating to two aircraft which were owned originally by Atlas will be amortized based on the same monthly payment amounts as the leased aircraft. The term of the leases and equipment notes underlying the EETCs were generally extended to fully amortize the underlying equipment notes on the leased aircraft and the owned aircraft. A number of factors can affect the timing of payments to the EETCs, including the appraised value and the future appraised fair market lease rates for the aircraft underlying the EETC and any sale of an aircraft pursuant to the terms of the EETC Restructuring Agreements and the financial performance of the Company. For example, the Class C EETCs were originally scheduled to be paid first, followed by the Class B EETCs and then the Class A EETCs. Following a triggering event caused by the Company’s bankruptcy filing and the adjustments to payments as a result of appraised values of the EETC aircraft, it is now expected that on an average life basis, the Class A EETCs will generally be paid first, followed by the Class B EETCs and then the Class C EETCs. Total yield on the EETCs will be affected by the changes in timing of their payments.

Under the terms of the EETC Restructuring Agreements, once the EETCs from any of the EETC transactions are paid in full, any remaining balances on the related underlying equipment notes will be forgiven.

The EETC Restructuring Agreements provide that, for the leased aircraft underlying the EETCs, lease payments will continue following payment or forgiveness of the related underlying equipment notes. This so called “equity rent” is paid to the owner trust and distributed to the owner participant. Equity rent provides an economic

return to the owner participants based on their original investment in the aircraft, in addition to the residual value of the aircraft and any tax benefits related to ownership. Prior to their restructuring, the EETC transactions had provided for periodic payments of equity rents over the term of the leases of the aircraft underlying the EETCs. Pursuant to the EETC Restructuring Agreements, all equity rents are delayed until payment of the related underlying equipment notes, or their forgiveness following payment of the EETCs. Pursuant to the OP Term Sheet, adjusted rent schedules providing equity rents and lease extensions were negotiated with respect to several leased aircraft in the EETC transactions. The lease agreements relating to those aircraft were filed with the Bankruptcy Court in connection with stipulations under Section 1110(b) of the Bankruptcy Code as to such aircraft.

In addition, pursuant to the EETC Restructuring Agreements, Atlas has entered into airframe and engine maintenance agreements applicable to the aircraft underlying the EETCs.

Concurrent with the consummation of the Revolving Credit Facility and related events described above, certain amendments to the Company’s EETC agreements, as described in the Company’s Second Amended Disclosure Statement Under 11 U.S.C. §1125 in Support of the Debtors’ Plan of Reorganization, automatically took effect on November 30, 2004.

2000 EETCs

In April 2000, Atlas completed an offering of $217.3 million of Enhanced Equipment Trust Certificates (“2000 EETCs”). The cash proceeds from the 2000 EETCs were used to finance (through two leveraged lease transactions) two new 747-400 freighter aircraft which were delivered to Atlas during the second quarter of 2000. Subsequent to the financing, Atlas completed a sale-leaseback transaction on both aircraft and issued a guarantee to the owner participant of one of the aircraft. In connection with this secured debt financing, Atlas executed equipment notes with original interest rates ranging from 8.71% to 9.70%, payable monthly as of June 30, 2004, and previously payable semi-annually.

In July 2003, Atlas defaulted on the lease payments with respect to an aircraft leased in the 2000 EETC transaction, tail number N409MC (“N409MC”), and, as a result, the owner participant for such aircraft liquidated collateral that secured its owner participant interest. This collateral consisted of a $22.6 million guaranteed investment contract and a $15.4 million letter of credit. The letter of credit was issued by DVB and guaranteed by Atlas, resulting in DVB becoming the new owner participant when it was drawn and funded to the original owner participant.

During the Company’s Chapter 11 Cases, various disputes arose between Atlas and DVB concerning the claim asserted by DVB for reimbursement of the amounts DVB paid under the letter of credit (the “DVB Claim”) and the contemplated restructuring of the obligations related to N409MC. These disputes ultimately resulted in the commencement of legal proceedings involving Atlas and DVB.

Shortly after confirmation of the Plan of Reorganization, Atlas and DVB reached a settlement of their pending disputes, which settlement was memorialized in the Binding Term Sheet Agreement Regarding Atlas B747-400F Aircraft N409MC (the “DVB Term Sheet”). This compromise paved the way for the contemplated restructuring of the 2000 EETC Transaction. The Bankruptcy Court entered an order approving the compromise embodied in the DVB Term Sheet on August 16, 2004. The Company accounted for such settlement on the Effective Date. The following is a summary of the material terms of the DVB Term Sheet, all of which have been consummated by the parties:


	a.	DVB sold its owner participant interest (the “OP Interest”) in N409MC to Atlas pursuant to the terms and conditions outlined in the DVB Term Sheet. The purchase price for the OP Interest was $11.5 million, consisting of a $9 million unsecured promissory note (the “409 OP Note”) plus 200,000 shares of New Common Stock. The principal amount of the 409 OP Note is payable in equal quarterly installments commencing on October 2, 2004, with the final installment due on July 2, 2011. The 409 OP Note bears interest on the principal amount at an annual rate equal to the 3-month LIBOR rate plus 475 basis points, and will be adjusted quarterly in accordance with the 3-month LIBOR rate in effect on each interest determination date. The 409 OP Note is guaranteed by Holdings and Polar;

	b.	DVB, Atlas, and certain third parties dismissed the legal proceedings that were pending among them;

	c.	Atlas released DVB from any claims it might have for the period before the closing of the purchase of the OP Interest (the “OP Closing”). DVB and Atlas released any claims (including tax indemnity


		claims) they may have against each other, their respective officers, directors, employees, attorneys, and representatives arising out of or in connection with (i) the purchase transaction other than the payment obligations evidenced by the OP Note and any sales or transfer taxes, which shall be Atlas’s responsibility; (ii) any prior Atlas payment default; and (iii) any prior acts or omissions of Atlas or DVB or their respective officers, directors, employees, attorneys, and representatives; and

	d.	DVB was allowed a general unsecured claim under the Plan of Reorganization in the amount of $16.8 million on account of the DVB Claim, which represents approximately 444,690 shares of New Common Stock.

	The table below summarizes the fair market value of the obligations recorded for the aircraft at July 27, 2004:


Aircraft Tail Number	Description	Fair Value of the Debt and stock at Date of Modification

N409MC	EETC Note A	$	51,528
	EETC Note B		7,833
	EETC Note C		2,147
	409 OP Note		9,000
	New Common stock		8,104

	Total	$	78,612

In connection with this financing, the Company has a blended effective interest rate of 11.31% and 14.86% as of June 30, 2004 and December 31, 2003, respectively, payable monthly. According to the terms of the equipment notes, principal payments vary and are payable through 2021.

As contemplated under the DVB Term Sheet, holders of the majority of Senior Notes purchased the 409 OP Note and the 200,000 shares from DVB for $9,000,000 in cash. This sale of the 409 OP Note and the shares to third parties was concluded as part of the transactions that closed at the OP Closing.

1999 EETCs

In 1999, Atlas completed an offering of Enhanced Equipment Trust Certificates (“1999 EETCs”). As of March 31, 2004 the outstanding balance of the 1999 EETCs relate to two owned Boeing 747-400F aircraft numbers N495MC and N496MC. As of December 31, 2003, the outstanding balance of the 1999 EETCs relate to one owned Boeing 747-400F aircraft number N495MC. In connection with this secured debt financing, Atlas executed equipment notes with original interest rates ranging from 6.88% to 8.77%, payable monthly as of June 30, 2004, and previously payable semi-annually.

The owner participant with respect to one of the aircraft leased in the 1999 EETC transaction (tail number N496MC) liquidated the $26.0 million guaranteed investment contact that was collateral for the financing in August 2003. Subsequently, on January 30, 2004 the owner participant transferred its owner participant interest to Bankers Commercial Corporation (“BCC”). At the same time, Atlas acquired an option (which was subsequently exercised in August, 2004) to purchase the owner participant interest from BCC at any time prior to December 31, 2007, subject to earlier termination. In connection with that option transaction, BCC agreed to support and consent to the restructuring contemplated by the EETC Restructuring Agreement relating to the 1999 EETC transaction and incorporated by reference certain provisions of the OP Term Sheet. The changes to the owner participant described above resulted in Atlas effectively acquiring the aircraft on January 30, 2004 with the asset and related liabilities being recorded on the balance sheet at their respective fair values. In connection with this financing, the Company has a blended effective interest rate of 13.94%. According to the terms of the equipment notes, principal payments vary and are payable monthly through 2020. The table below summarizes the fair market value of the obligations recorded for the aircraft at January 30, 2004:


Aircraft Tail Number	Description	Fair Value of the Debt at Date of Modification

N496MC	EETC Note A	$	50,054
	EETC Note B		9,429
	EETC Note C		5,562

	Total	$	65,045

1998 EETCs

In 1998, Atlas completed an offering of Enhanced Equipment Trust Certificates (the “1998 EETCs”). As of June 30, 2004 the outstanding balance of the 1998 EETCs relates to three owned B747-400F aircraft numbers N491MC, N493MC and N494MC. As of December 31, 2003, the outstanding balance of the 1998 EETCs relates to one owned B747-400F aircraft number N494MC. In connection with this secured debt financing, Atlas executed equipment notes with original interest rates ranging from 7.38% to 8.01%, payable monthly as of June 30, 2004, and previously payable semi-annually.

Pursuant to the Plan of Reorganization, as of January 30, 2004, FINOVA Capital Corporation (“FINOVA”), the owner participant with respect to two leased aircraft in the 1998 EETC transaction, sold its owner participant interests in such aircraft to Atlas for $5.0 million each, payable in installments over a ten year term commencing in 2007 (the “491 and 493 OP Notes”). In connection with this transaction, FINOVA agreed to support and consent to the restructuring contemplated by the EETC Restructuring Agreement relating to the 1998 EETC transaction (relating to aircraft tail numbers N491MC and NM493MC). The changes to the owner participant described above resulted in both aircraft being effectively acquired by Atlas on January 30, 2004 with the asset and related liabilities being recorded on the balance sheet at their respective fair values. The Company has a blended effective interest rate of 13.89% for aircraft tail number N491MC and according to the terms of the equipment notes, principal payments vary and are payable monthly through 2020. The Company has a blended effective interest rate of 13.72% for aircraft tail number N493MC and according to the terms of the equipment notes, principal payments vary and are payable monthly through 2019.

�� The table below summarizes the fair market value of the obligations recorded for both aircraft at January 30, 2004:


Aircraft Tail Number	Description	Fair Value of the Debt at Date of Modification

N491MC	EETC Note A	$	49,465
	EETC Note B		10,195
	EETC Note C		5,625
	491 OP Note		5,000

	Total	$	70,285


N493MC	EETC Note A	$	49,626
	EETC Note B		10,200
	EETC Note C		4,706
	493 OP Note		5,000

	Total	$	69,532

Capital Leases

Capital lease obligations with an aggregate net present value of $40.5 million and $52.3 million were outstanding at June 30, 2004 and December 31, 2003, respectively. Payments are due monthly through 2009. The underlying assets related to capital lease obligations as of December 31, 2003 were five aircraft and a flight simulator. The aircraft tail numbers are N508MC, N516MC, N518MC, N920FT and N924FT. During the six month period ended June 30, 2004, N924FT was rejected in bankruptcy. During 2004, the capital leases for tail numbers N508MC and N516MC were amended.

Other Debt

Other debt consists of various term loans aggregating $14.3 million and $47.8 million as of June 30, 2004 and December 31, 2003, respectively. Other debt was secured separately by aircraft tail numbers N535MC, N354MC and N537MC at December 31, 2003. During the three month period ended March 31, 2004, N535MC and N354MC were rejected in bankruptcy. The debt secured by tail number N537MC was amended on March 20, 2003 to extend the loan term to June 30, 2006. All previous defaults on the loan were waived at such time. Both Atlas and Polar signed guaranty agreements on July 27, 2004. Included in other debt are the 491 and 493 OP Notes for $10.0 million discussed above.

DIP Financing Facility

With respect to post-bankruptcy petition financing, the Company had obtained $50.0 million of DIP financing from CIT Group/Business Credit, Inc. and Abelco Finance LLC, an affiliate of Cerberus Capital Management, LLP (together, the “DIP Lenders”). The DIP financing facility was structured as an $18.0 million term loan facility and a $32.0 million revolving credit facility. The Company borrowed the $18.0 million term loan but did not draw down under the $32.0 million revolver. The term loan had a maturity date of the earlier of September 25, 2005 or the confirmation of the Plan of Reorganization and to the extent amounts were drawn upon bore interest at the rate of the higher of either (i) the DIP Lenders prime rate plus 6.5%, or (ii) 10.5%. The revolver had a maturity date of the earlier of September 25, 2005 or the confirmation of the Plan of Reorganization and to the extent amounts were drawn upon as (a) a prime borrowing bore interest at the rate of the higher of either (i) the DIP Lenders prime rate plus 2.25%, or (ii) 6.25%, or (b) a LIBOR borrowing bore interest at the rate of the higher of either (i) LIBOR plus 3.75%, or (ii) 5.75%. The Company paid fees of $2.5 million in connection with the draw against the term loan.

The term loan was repaid and the commitments under the DIP financing facility were terminated on July 27, 2004.

Revolving Credit Facility

On November 30, 2004, the Borrowers and Guarantors entered into the Revolving Credit Facility. The Revolving Credit Facility provides the Borrowers with revolving loans of up to $60 million, including up to $10 million of letter of credit accommodations. Availability under the Revolving Credit Facility will be based on a borrowing base, which will be calculated as a percentage of certain eligible accounts receivable. The Revolving Credit Facility has an initial four-year term after which the parties can agree to enter into additional one-year renewal periods.

Borrowings under the Revolving Credit Facility bear interest at varying rates based on either the prime rate of Wachovia Bank, National Association (the “Prime Rate”), or the rate of deposits of US dollars in the London interbank market (the “Adjusted Eurodollar Rate”). Interest on outstanding borrowings is determined by adding a margin to either the Prime Rate or the Adjusted Eurodollar Rate, as applicable, in effect at the interest calculation date. The margins are arranged in three pricing levels, based on the excess availability under the Revolving Credit Facility, that range from .25% below to .75% above the Prime Rate and 1.75% to 2.75% above the Adjusted Eurodollar Rate.

The obligations under the Revolving Credit Facility are secured by each Borrower’s and Guarantor’s present and future assets and all products and proceeds thereof other than (i) real property, (ii) aircraft, flight simulators, spare aircraft engines and related assets that are subject to security interests of other creditors and (iii) some or all of the capital stock of certain of Holdings’ subsidiaries.

The Revolving Credit Facility contains usual and customary covenants for transactions of this kind. At December 31, 2004, the Company had $19.0 million available for borrowing under the Revolving Credit Facility. No borrowings have been incurred to date.

The following table summarizes the contractual maturities of the Company’s debt obligations reflecting the terms that were in effect as of June 30, 2004:


Years Ending December 31,
2004	$	33,609
2005		181,350
2006		197,203
2007		56,405
2008		223,355
Thereafter		431,255

	$	1,123,177

7. Leases

The Company’s restructuring efforts in 2003 resulted in new agreements with most of its aircraft lessors. In certain cases, such negotiations led to the extension of the lease term and in others the lease term remained the same. In most cases, the revised terms reduced the total future obligation under the lease, in some cases substantially. (See Notes 2 and 3.)

Aircraft/Real Estate Capital and Operating Leases

During 2003 and as more fully described in Note 2, as part of a comprehensive restructuring of the Company’s debt and lease obligations, the Company initiated a moratorium on substantially all of its debt and lease payments. As provided under Section 365 of the Bankruptcy Code, the Company was allowed to assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain other conditions.

As previously noted, the Company has accounted for the revised lease agreements upon reaching a binding term sheet, not withstanding the fact that certain of these revised agreements only became legally binding upon the effective date or, in certain cases, subsequent thereto.

At June 30, 2004, twenty-one of the forty-four aircraft registered to the Company were leased, of which four were capitalized leases and seventeen were operating leases with initial lease term expiration dates ranging from 2004 to 2025.

The following table summarizes the minimum annual rental commitments as of the periods indicated under capital leases and non-cancelable aircraft, real estate and other operating leases with initial or remaining terms of more than one year, reflecting the terms that were in effect as of June 30, 2004:


Years Ending December 31,	Capital Leases		Aircraft Operating Leases		Other Operating Leases		Total Leases

2004	$	7,665	$	64,251	$	4,389	$	76,305
2005		11,615		139,809		7,482		158,906
2006		11,850		128,052		5,644		145,546
2007		12,000		128,052		4,810		144,862
2008		12,000		143,277		4,578		159,855
Thereafter		10,000		2,048,000		13,299		2,071,299

Total minimum lease payments	$	65,130	$	2,651,441	$	40,202	$	2,756,773

Less amounts representing interest	$	24,597

Present value of future minimum capital lease payments	$	40,533

The effective interest rates on the capitalized leases for aircraft tail numbers N508MC, N516MC, N518MC and N920FT are 13.9%, 11.6%, 37.4% and 18.76%, respectively.

In addition to the above commitments, the Company leases engines under short-term lease agreements on an as needed basis.

8. Related Party Transactions

All of the non-employee directors of the Company, namely Brian H. Rowe, Lawrence W. Clarkson, Richard A. Galbraith, Joseph J. Steuert, Stephen A. Greene, John S. Blue and Linda Chowdry, who served on the Company’s Board prior to July 27, 2004, resigned from the Board at or prior to the Effective Date. The Company was party to two separate consulting agreements with Joseph J Steuert, one of these former directors, who is chairman and chief executive officer of The Transportation Group, an investment bank focused on the aviation industry. Effective March 1, 2003, the Company entered into a consultancy agreement (“First Agreement”), whereby the director agreed to provide the Company with consultancy services in connection with the restructuring of financial obligations with its debt holders and aircraft lessors. Pursuant to the terms of the First Agreement, the Company was required to pay a monthly fee of $95,000, as well as a success fee in the amount not less than $500,000 nor more than $800,000, which amount was determined at the sole discretion of the Company’s Board

of Directors. The First Agreement had a four-month term and was automatically renewable for additional one-month terms unless either party provided notice of non-renewal of the First Agreement by the 20th day of the preceding month. The Company incurred consulting fees and expenses to this director of zero and $0.3 million, for the three month periods ended June 30, 2004 and 2003, respectively, and $0.8 million and $0.4 million for the six month periods ended June 30, 2004 and 2003, respectively. The agreement was rejected in bankruptcy and the Company is no longer subject to the agreement or the agreement’s automatic renewal.

Effective October 1, 2003, the Company entered into a second consultancy agreement (“Second Agreement”), whereby such director agreed to provide the Company with consultancy services in connection with the arrangement of investments in the Company’s equity or convertible debt securities (collectively, “Equity Investment”) in conjunction with the restructuring of its debt and lease obligations. Pursuant to the terms of the Second Agreement, the Company was required to pay a success fee of 0.75% of the funded amount of each consummated Equity Investment regardless of whether the investors for the Equity Investments were introduced by the director to the transaction. The Second Agreement had an initial term expiring upon the later of February 1, 2004 or the date of confirmation of the Company’s Plan of Reorganization. The Second Agreement was terminated on January 29, 2004 and the Company did not incur any consulting fees under the Second Agreement.

Another former director of the Company, Stephen A. Greene, is a partner in a law firm, Cahill, Gordon and Reindel, that acted as outside counsel to the Company. The Company paid legal fees and expenses to this law firm of $0.7 million and $1.2 million for the three month periods ended June 30, 2004 and 2003, respectively, and $1.9 million and $2.7 million for the six month periods ending June 30, 2004 and 2003, respectively.

Effective July 27, 2004, the Company elected a new Board of Directors. The new Board includes James S. Gilmore III, a non-employee director of the Company, who is a partner at the law firm of Kelley Drye & Warren, LLP, current outside counsel to the Company, and Robert F. Agnew, also a non-employee director of the Company, who is an executive officer of Morten Beyer & Agnew, a consulting firm with which the Company transacts business. Neither Mr. Gilmore nor Mr. Agnew serves on the Audit and Governance Committee of the Board of Directors.

The Company dry leases three owned aircraft to a company in which we own a minority investment as of June 30, 2004. The investment is accounted for under the equity method. The leases have terms that mature at various dates through July 2007 and contain options for renewal by the lessor. The leases provide for payment of rent and a provision for maintenance costs associated with the aircraft. Total rental income for the three aircraft was $10.8 million and $9.0 million for the three month periods ended June 30, 2004 and 2003, respectively, and $21.6 million and $16.7 million for the six month periods ended June 30, 2004 and 2003, respectively.

9. Segment Reporting

The Company has four reportable segments: Scheduled Service, ACMI contract, Charter Service, and AMC Charter. All reportable segments are engaged in the business of transporting air cargo, but have different operating and economic characteristics which are separately reviewed by the Company’s management. The Company evaluates performance and allocates resources to its segments based upon pre-tax income (loss), excluding pre-petition and post-emergence costs and related professional fees, unallocated corporate and other and reorganization items (“Fully Allocated Contribution” or “FAC”). Management views FAC as the best measure to analyze profitability and contribution to net income or loss of the Company’s individual segments. The table provided at the end of this note shows FAC by segment and reconciles it to loss before income taxes as required pursuant to Item 10(e) of Regulation S-K. Management allocates the cost of operating aircraft between segments on an average cost per aircraft basis.

The Scheduled Service segment involves time definite airport-to-airport scheduled airfreight and available on-forwarding services provided primarily to freight forwarding customers. In transporting cargo in this way, the Company carries all of the commercial revenue risk (yields and cargo loads) and bears all of the direct costs of operation, including fuel. Distribution costs include direct sales costs through the Company’s own sales force and through commissions paid to general sales agents. Commission rates are typically between 2.5% and 5% of commissionable revenue sold. Scheduled Service is highly seasonal, with peak demand coinciding with the retail holiday season, which traditionally begins in September and lasts through mid December.

The ACMI contract segment involves the provision of aircraft, crew, maintenance and insurance services whereby customers receive use of an aircraft and crew in exchange for, in most cases, a guaranteed monthly level of operation at a predetermined rate for defined periods of time. The customer bears the commercial revenue risk and the obligation for other direct operating costs, including fuel.

The AMC Charter segment involves providing full-planeload charter flights to the U.S. Military through the AMC. The AMC Charter business is similar to the commercial charter business in that the Company is responsible for the direct operating costs of the aircraft. However, in the case of AMC operations, the price of fuel used during AMC flights is fixed by the military. The contracted charter rates (per mile) and fuel prices (per gallon) are established and fixed by the AMC for twelve-month periods running from October through September each year. The AMC buys capacity on a fixed basis annually and on an ad hoc basis continuously. The Company competes for this business through a teaming arrangement devised for the allocation of AMC flying among competing carriers. There are two groups of carriers or teams that compete for the business. The Company is a member of the team led by FedEx Corporation (“FedEx”). The Company pays a commission to FedEx based upon the revenues it receives under such contracts.

The Charter Service segment involves providing full-planeload airfreight capacity on one or multiple flights to freight forwarders, airlines and other air cargo customers. Charters typically are contracted in advance of the flight, and as with Scheduled Service, the Company bears the direct operating costs (except as otherwise defined in the charter contracts).

All other revenue includes dry lease income and other incidental revenue, including risk sharing wet lease arrangements, not allocated to any of the four segments described above.

Since assets are readily moved and are often shared, the Company does not report information about identifiable assets or capital expenditures at the segment level. Similarly it is impracticable to report revenue by geographic region other than scheduled service. Depreciation is allocated to each segment based on aircraft utilization during the periods reported.

The following table sets forth revenues, FAC, operating income (loss) and loss before income tax expense for the Company’s four reportable segments for the three and six month periods ended June 30, 2004 and 2003:


	For the Three Months Ended						For the Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003

Revenues:
Scheduled service	$	155,491		$	118,268		$	300,559		$	221,100
ACMI contracts		84,871			70,320			168,101			137,403
AMC charter		78,069			118,841			131,182			258,120
Charter Service		8,254			12,816			13,852			32,332
All Other		11,623			6,159			22,069			22,574

Total operating revenues	$	338,308		$	326,404		$	635,763		$	671,529
FAC:
Scheduled service	$	(28,665	)	$	(18,636	)	$	(52,819	)	$	(46,269	)
ACMI contracts		1,091			(7,759	)		(11,087	)		(19,472	)
AMC charter		9,995			13,097			12,252			34,738
Charter Service		(436	)		(1,416	)		(2,445	)		(2,778	)

Total FAC		(18,015	)		(14,714	)		(54,099	)		(33,781	)
Unallocated other		5,975			(4,541	)		6,227			(13,868	)
Pre-petition and post-emergence costs and related professional fees		—			(12,091	)		(9,439	)		(21,588	)
Interest income		(280	)		(1,154	)		(470	)		(2,162	)
Interest expense		19,563			22,049			43,131			41,466
Other, net		961			1,013			992			1,856

Operating income (loss)		8,204			(9,438	)		(13,658	)		(28,077	)
Interest income		(280	)		(1,154	)		(470	)		(2,162	)
Interest expense		19,563			22,049			43,131			41,466
Other, net		961			1,013			992			1,856
Reorganization items, net		39,388			—			51,580			—

Loss before income tax expense	$	(51,428	)	$	(31,346	)	$	(108,891	)	$	(69,237	)

10. Commitments and Contingencies

Aircraft Purchase Commitments

Under the terms of the October 2000 purchase agreement between Boeing and Atlas, one remaining Boeing 747-400 freighter aircraft was to be delivered to the Company in October 2003. In February 2003, Atlas and Boeing reached a Supplemental Agreement (the “Supplemental Agreement”) to defer the delivery date of the remaining aircraft to October 2006. As part of the Supplemental Agreement, approximately $2.9 million of purchase deposits on this aircraft were applied as a slide fee for deferring the delivery and expensed in 2003. The remaining $0.5 million of purchase deposits made as of December 31, 2003 were to be applied to a new deferred advance payment schedule on the aircraft. The Company has rejected the agreement with Boeing with respect to delivery of the aircraft and has restructured its financial arrangement on remaining deposits for future services.

Guarantees and Indemnifications

General

In the ordinary course of business, the Company enters into numerous real estate leasing and aircraft financing arrangements that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities. In both leasing and financing transactions, the Company typically indemnifies the lessors, and any financing parties against tort liabilities that arise out of the use, occupancy, manufacture, design, operation or maintenance of the leased premises or financed aircraft, regardless of whether these liabilities (or taxes) relate to the negligence of the indemnified parties. Currently, the Company believes that any future payments required under these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). Additionally, certain leased premises such as maintenance and storage facilities include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premise. The Company also provides standard indemnification agreements to officers and directors in the ordinary course of business.

Financings and Guarantees

The Company’s loan agreements and other LIBOR-based financing transactions (including certain leveraged aircraft leases) generally obligate the Company to reimburse the applicable lender for incremental increased costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with, or credit extended by such lender related to the loan, (ii) any tax, duty, or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, the Company’s loan agreements, derivative transactions and other financing arrangements typically contain a withholding tax provision that requires the Company to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.

These increased costs and withholding tax provisions continue for the entire term of the applicable transaction, and there is no limitation in the maximum additional amount the Company could be required to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default, and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.

Restricted Cash and Letters of Credit

The Company had $4.6 million and $4.3 million of restricted cash either pledged under standby letters of credit related to collateral or for certain deposits required in the normal course for items, including, but not limited to, surety and customs bonds, airfield privileges and insurance at June 30, 2004 and December 31, 2003, respectively. This amount is included in deposits and other assets in the balance sheets.

Labor

The Airline Pilots Association (“ALPA”) represents all of the Company’s U.S. pilots (“U.S. Pilots”) at both Atlas and Polar. Collectively, these employees represent approximately 50% of the Company’s workforce as of June 30, 2004. Polar’s collective bargaining agreement with ALPA became amendable in May 2003, and the Company cannot accurately predict the outcome of any negotiations with ALPA. Negotiations since July 2003 have been under the direction of a mediator appointed by the National Mediation Board. Although the Company

has never had a work interruption or stoppage, the Company is subject to risks of work interruption or stoppage and may incur additional administrative expenses associated with union representation of its employees. If the Company is unable to reach agreement with its crewmembers on the terms of Polar’s collective bargaining agreement, or if Atlas were unable to negotiate future contracts with its crewmembers, the Company may be subject to work interruptions or stoppages.

In November 2004, in order to increase efficiency and assist in controlling certain costs, the Company initiated steps to combine the ALPA represented bargaining units of Atlas and Polar. Any such combination will be in accordance with the terms and conditions of Atlas’s and Polar’s collective bargaining agreements, which agreements provide for a seniority integration process and the negotiation of a single collective bargaining agreement. Given the Company’s decision to integrate the two crewmember workforces, no negotiation sessions between the Polar and ALPA are currently scheduled by the mediator.

Legal Proceedings

In re: Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., Polar Air Cargo, Inc., Airline Acquisition Corp. I and Atlas Worldwide Aviation Logistics, Inc.

As discussed above in Note 2, on the Bankruptcy Petition Date, Holdings, Atlas, Polar and two other wholly owned subsidiaries filed voluntary bankruptcy petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases were jointly administered under the caption “In re Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., Polar Air Cargo, Inc. Airline Acquisition Corp. I, and Atlas Worldwide Aviation Logistics, Inc., Case No. 04-10792.” As of the Bankruptcy Petition Date, virtually all pending litigation (including most of the actions described below) were stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, was able to take any action to recover on pre-petition claims against the Company. Pursuant to a global settlement that resolved differences between the Atlas and Polar Creditors’ Committees and the Company regarding the Company’s initial Plan of Reorganization filed on April 19, 2004, all litigation between the parties named above was abated pending final documentation of the settlement terms and submission of a revised disclosure statement and the Plan of Reorganization. The requisite creditors having voted in favor of the Plan, on July 16, 2004, the Bankruptcy Court entered the Order Confirming the Final Modified Second Amended Joint Plan of Reorganization of the Debtors, and the Company emerged from the bankruptcy proceedings on the Effective Date.

Shareholder Litigation

Shareholder Derivative Actions

On October 25, 2002 and November 12, 2002, shareholders of Holdings filed two separate derivative actions on behalf of Holdings against various former officers and former members of the Company’s Board of Directors in the Supreme Court of New York, Westchester County. Both derivative actions charge that members of the Board of Directors violated: (1) their fiduciary duties of loyalty and good faith, (2) generally accepted accounting principles, and (3) the Company’s Audit Committee Charter by failing to implement and maintain an adequate internal accounting control system. Furthermore, the actions allege that a certain named former director breached her fiduciary duties of loyalty and good faith by using material non-public information to sell shares of the Company’s common stock at artificially inflated prices. On February 3, 2004, Holdings provided notice of its January 30, 2004 bankruptcy filing to the court hearing the consolidated action. Because these derivative actions are property of the Company’s estate at the time of filing bankruptcy, all proceedings were stayed during the bankruptcy case. Under the Plan of Reorganization, Holdings became the holder of these claims and will decide whether to pursue some or all of the derivative claims against former officers and directors.

Securities Class Action Complaints

Seven putative class action complaints have been filed against Holdings and several of its former officers and former directors in the United States District Court for the Southern District of New York. The seven class actions were filed on behalf of purchasers of the Company’s publicly traded common stock during the period April 18, 2000 through October 15, 2002. These class actions alleged, among other things, that during the time period asserted, Holdings and the individual defendants knowingly issued materially false and misleading statements to the market in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The class actions included claims under the Securities Act of 1933 on behalf of purchasers of common stock issued by Holdings in

a September 2000 secondary public offering pursuant to, or traceable to, a prospectus supplement dated September 14, 2000 and filed with the SEC on September 18, 2000 (the “September Secondary Offering”). The complaints sought unspecified compensatory damages and other relief. On May 19, 2003, these seven class actions were consolidated into one proceeding. A lead plaintiff and a lead counsel were appointed by that court.

Plaintiffs filed a single consolidated amended class action complaint in August 2003. Before any response thereto was made by any defendant, plaintiffs filed a second consolidated amended class action complaint in October 2003. The second consolidated amended class action complaint in October 2003 supersedes and replaces all prior complaints, and alleges: (i) violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Holdings and six of its current or former officers or directors on behalf of all persons who purchased or otherwise acquired the common stock of Holdings between April 18, 2000 and October 15, 2002, inclusive, and (ii) violation of Sections 11 and 15 of the Securities Act of 1933 against Holdings, four of its former officers or directors and Morgan Stanley Dean Witter on behalf of all persons who purchased or otherwise acquired Atlas common stock issued in the September Secondary Offering. Each defendant moved to dismiss the second consolidated amended class action complaint on or about December 17, 2003. On February 3, 2004, Holdings notified the court hearing the consolidated action of the Company’s January 30, 2004 bankruptcy filing staying the litigation against Holdings.

Initial disclosures have been filed by all parties and discovery has commenced. The parties are currently negotiating a stay of discovery in contemplation of a mediation of plaintiffs’ claims. Since confirmation of the Plan of Reorganization, the Bankruptcy Court has entered an order subordinating claims arising from these class action proceedings to general unsecured claims. The Plan of Reorganization provides that subordinated claims receive no distribution.

SEC Investigation

On October 17, 2002, the SEC commenced an investigation arising out of the Company’s October 16, 2002 announcement that it would restate its 2000 and 2001 financial statements. In October 2002, the Company’s board of directors appointed a special committee which in turn retained the law firm of Skadden, Arps, Slate, Meagher & Flom, LLP for the purpose of performing an internal review concerning the restatement issues and assisting Holdings in its cooperation with the SEC investigation. A Formal Order of Investigation was subsequently issued authorizing the SEC to take evidence in connection with its investigation. The SEC has served several subpoenas on Holdings requiring the production of documents and witness testimony, and the Company has been fully cooperating with the SEC throughout the investigation.

On October 28, 2004, the SEC issued a Wells Notice to Holdings indicating that the SEC staff is considering recommending to the SEC that it bring a civil action against Holdings alleging that it violated certain financial reporting provisions of the federal securities laws from 1999 to 2002. In addition, the SEC has filed one or more proofs of claim in the Chapter 11 Cases. Any recovery on these claims will be in the form of stock distributions to unsecured creditors. Holdings is currently engaging in discussions with the SEC regarding the Wells Notice and the possible resolution of this matter, and will continue to cooperate fully with the SEC in respect of its investigation. (See Note 3.)

Other Litigation

On August 7, 2001, Atlas sued Southern Air, Inc. (“Southern”) and Hernan Galindo in Miami-Dade County Circuit Court seeking damages in excess of $13.0 million. Atlas’ complaint alleged, among other things, that the defendants engaged in unfair competition and conspiracy, and committed tortious interference with Atlas contracts and/ or business relationships with Aerofloral, Inc. Atlas subsequently filed a second amended complaint joining additional defendants James K. Neff, Randall P. Fiorenza, Jay Holdings LLC, and EFF Holdings LLC, on the same legal theories asserted in the original complaint. On November 15, 2002, Southern filed a bankruptcy

petition for relief under Chapter 11 of the Bankruptcy Code, and thus, the lawsuit has been stayed against Southern. The Miami-Dade County Circuit Court, however, denied the other defendants’ motions to dismiss, and all have answered the second amended complaint denying any liability to Atlas. Southern also filed a counter-claim against Atlas and a third party complaint against Holdings. The counterclaim and third party complaint alleged, among other things, that Atlas and Holdings are alter egos of each other and committed various torts against Southern, including tortious interference with contract and with advantageous business relationships, unfair competition, conspiracy, and other anti-competitive acts in violation of Florida law. The trial court granted Holdings’ motion to dismiss (without prejudice), for lack of personal jurisdiction over Holdings, and also granted Atlas’ motion to dismiss (without prejudice), for failure to state a cause of action. Southern has not, at this time, filed an amended counterclaim or an amended third party claim. Southern has emerged from bankruptcy and reorganized. Should the reorganized Southern file a counterclaim against Atlas which is not dismissed, Atlas is permitted to proceed against Southern in this litigation and set-off any recovery Atlas obtains against Southern against any recovery that may be obtained by Southern against Atlas. In addition, Atlas has filed a third party amended complaint joining the law firm of Greenberg & Traurig, PA and three of its shareholders (the “GT Defendants”) as additional defendants. These claims include tortious interference, aiding and abetting tortious interference, conspiracy, fraud and other related claims. The GT Defendants have moved to dismiss Atlas’ Third Amended Complaint as have the other defendants. Atlas is in the process of preparing opposition memoranda with respect to all of the Defendants’ Motions to Dismiss, which are set for hearing in late July or August 2005.

To complement its existing Benelux trademark registration and obtain broader geographic protection, Atlas, in late 2003, filed an application to register its name and logo with the European Union. The application was recently opposed by Atlas Transport GmbH, a German-based surface transportation company that has an EU trademark registration dating back to 1997. Atlas Transport has also advised the Company that it may seek a preliminary injunction against the Company’s continued use of the Atlas name in the EU. The Company has filed a protective letter with the German courts, asserting its prior and continuing use of the Atlas name on flights to and from Germany.

ALPA filed a labor grievance against Polar challenging the permissibility under the Polar-ALPA collective bargaining agreement of certain wet lease flying performed by Atlas on behalf of Polar. This matter was presented to an arbitrator in February 2004 before the Polar Air Cargo, Inc. Crewmembers’ System Board of Adjustment (“SBA”). A preliminary decision was issued by the arbitrator denying ALPA’s grievance. ALPA requested an executive session of the SBA to challenge the arbitrator’s preliminary decision. A final decision was issued by the arbitrator on June 5, 2004, denying the grievance, and this matter is now closed.

There were contested matters and legal proceedings between the Company and the Polar Creditors’ Committee in the Company’s Bankruptcy Case. By stipulation approved by the Bankruptcy Court, the Debtors assigned to such committee the authority to pursue all actions on Polar’s behalf necessary to the resolution of the inter-company claims scheduled by the Debtors as owing by Polar to Atlas and by Atlas to Polar, and the Atlas Creditors’ Committee has been similarly authorized to represent the interests of Atlas. The Debtors’ Schedules of Assets and Liabilities, as amended, list claims asserted by Atlas against Polar of approximately $188 million and claims asserted by Polar against Atlas of approximately $52 million. On May 7, 2004, the Polar Creditors’ Committee filed its Objection to Claim and Complaint for Avoidance and Recovery of Preferential Transfer, Avoidance and Recovery of Fraudulent Transfers and Obligations, Equitable Subordination of Claim, and Re-characterization of Claim (“Polar Committee Claim Objection”).The validity and allowance of the inter-company claims and the Polar Committee Claim Objection were rendered moot by the global settlement reached among the Debtors, the Atlas Creditors’ Committee and the Polar Creditors’ Committee, and approved by the Bankruptcy Court. In accordance with the global settlement, the Plan of Reorganization eliminated all inter-company claims among the Debtors; however, certain lenders and lessors alleged that some inter-company claims asserted by Atlas against Polar were excluded from the global settlement’s release. The Debtors settled these inter-company claims asserted by East Trust Sub 12 (an affiliate of GATX, “East Trust”) and Goldman Sachs Credit Partners L.P. (successor in interest to Bank One Leasing, “GSCP”), by inter alia, granting East Trust a claim against Polar of $1,250,000, and by liquidating GSCP’s claim against Polar at zero.

In addition to the proofs of claim filed by the IRS as described in Note 3, incident to administering the Company’s bankruptcy estates, the Company is currently reconciling the proofs of claim filed in the bankruptcy. As part of this reconciliation process, the Company has objected to a multitude of claims, which will result in liti-

gation between the Company and the various claimants that will be resolved by the Bankruptcy Court. A number of these claims, if resolved against the Company, could require significant cash payments or could require the Company to fund additional cash into the trust established for Polar’s creditors. Except for the IRS claims, described in Note 3, the Company does not believe that any one of these claims, if resolved against the Company, will, individually, have a material adverse effect on the Company’s business. However, if a number of these claims are resolved against the Company, they could, in the aggregate, have a material adverse effect on the Company’s business.

Total Claims

As of May 19, 2005, the Company had reviewed over 3,000 scheduled and filed claims aggregating approximately $7.5 billion, with a maximum of $850.8 million of claims that could potentially be allowed. Approximately $657.9 million of claims have been allowed to date, including $12.4 of cure claims and $1.0 million of other secured and priority claims. Claims of $192.9 million remain unresolved, including $116.0 million of unresolved IRS claims discussed previously; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process.

Atlas Unsecured Claims

Polar Unsecured Claims

The Company has certain other contingencies resulting from litigation and claims incident to the ordinary course of business. Management believes that the ultimate disposition of these contingencies, with the exception of those noted above, is not expected to materially affect the Company’s consolidated financial condition, results of operations and liquidity.

11. Loss Per Share and Number of Common Shares Outstanding

Basic loss per share represents the loss divided by the weighted average number of common shares outstanding during the measurement period. Diluted loss per share represents the loss divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period. Potentially dilutive common securities consist of 1.8 million and 2.9 million stock options outstanding, for the three and six month periods ended June 30, 2004 and 2003, respectively. The impact of these potentially dilutive securities would be anti-dilutive due to losses incurred and are not included in the diluted loss per share calculation.

The calculations of basic and diluted loss per share for the three and six month periods ended June 30, 2004 and 2003 are as follows:


	For the Three Months Ended						For the Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003

Numerator:
Net loss	$	(51,428	)	$	(31,346	)	$	(110,008	)	$	(69,237	)

Denominator – basic and diluted shares:
Weighted average common shares outstanding		38,378			38,357			38,378			38,344

Basic and diluted loss per share	$	(1.34	)	$	(0.82	)	$	(2.87	)	$	(1.81	)

As previously described, “old” equity interests will receive no distribution under the Plan of Reorganization and, therefore, were effectively cancelled. “New” equity, in the form of New Common Stock, has been and will be issued to creditors. The following table shows the pro forma calculations of basic and diluted loss per share for the three and six month periods ending June 30, 2004 and 2003 for the number of shares issued and to be issued as a result the Company’s emergence from bankruptcy:


	For the Three Months Ended						For the Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003

Numerator:
Net loss	$	(51,428	)	$	(31,346	)	$	(110,008	)	$	(69,237	)

Denominator – basic and diluted shares:
Weighted average common shares outstanding		20,212			20,212			20,212			20,212

Pro forma basic and diluted loss per share:	$	(2.54	)	$	(1.55	)	$	(5.44	)	$	(3.43	)

The above table includes 11,669 shares representing the vested portion of the restricted stock issued to outside directors pursuant to the Plan of Reorganization and excludes 493,945 shares of restricted stock issued to certain executives and outside directors, which have not yet vested. It also does not include 540,100 options issued as their impact would be anti-dilutive due to the losses recorded in each period.

12. Subsequent Events

On May 12, 2005 the Company entered into a slot conversion agreement with Israel Aircraft Industries Ltd. (“IAI”) and PSF Conversions LLP under which the Company would be able to convert four Boeing 747-400 passenger aircraft to freighter configuration during the period from late 2007 to mid-2008. The agreement also includes an option covering the modification of up to six additional Boeing 747-400 passenger aircraft to Boeing 747 special freighter (“747SF”) aircraft during the period from 2009 to 2011.

One of the Company’s Boeing 747 200 aircraft (tail number N808MC) was damaged when it landed during poor winter weather conditions at Dusseldorf airport on January 24, 2005. As a result of this incident, the airframe and two of its engines were damaged beyond economic repair. Atlas has negotiated a $12.6 million cash-in-lieu-of-repair settlement with its insurance carriers and expects to receive the proceeds before the end of 2005. On May 31, 2005, Atlas paid $12.25 million to its secured lender in exchange for release of its lien on this aircraft. Since the settlement amount exceeds the net book value of the aircraft, Atlas expects to record a gain on disposition in its results of operations in the period of receipt of the insurance proceeds.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited Financial Statements and notes thereto appearing in this report and our audited Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2004 included in our Annual Report on Form 10-K filed with the SEC on June 30, 2005.

In this report, references to “we,” “our” and “us” are references to Atlas Air Worldwide Holdings, Inc. and its subsidiaries, as applicable.

Forward Looking Statements

This report may contain forward looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “will,” “may,” “plan,” “project,” “should,” “would,” “could,” “target,” “goal,” “expect,” “anticipate,” “intend,” “believe”, “estimate” or similar language. These forward looking statements are subject to management decisions and various assumptions, risks and uncertainties, including, but not limited to those described in this report under Risk Factors and Quantitative and Qualitative Disclosures about Market Risks and those detailed from time to time in our filings with the SEC. Actual results could differ materially from those anticipated in such forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Background and Bankruptcy

The sustained weakness of both the United States and international economies that began in early 2001 and continued through the beginning of 2004, coupled with the lingering impact of the September 11, 2001 terrorist attacks, had a substantial negative impact on both international trade demand, and the airline industry in particular, including the ACMI and air cargo Scheduled Service markets that are vital to our results of operation and financial condition. Due to the negative impact on our financial condition and as part of a comprehensive financial restructuring of our aircraft debt and lease obligations, among other things, we defaulted on our covenants and payment obligations under all of our debt and lease arrangements. As a result, all debt outstanding had been reclassified as a current liability at June 30, 2004 and December 31, 2003.

In January 2003, we commenced our financial restructuring through negotiations with the lenders under the Aircraft Credit Facility and the AFL III Credit Facility (see Description of the Company’s debt obligations, below) regarding impending principal payments and covenant defaults, as well as the suspension of lease payments on six Boeing 747-200 aircraft. In addition, we negotiated with certain other aircraft lessors to reduce or defer operating lease payments.

In March 2003, we implemented a moratorium on substantially all of our aircraft debt and lease payments to provide time to negotiate restructured agreements with our significant creditors and lessors. Subsequent to the implementation of this moratorium, we made payments on certain debt and lease obligations pursuant to forbearance agreements or otherwise. However, the continuation of the moratorium beyond what was permitted in the forbearance agreements resulted in additional events of default with respect to substantially all of our debt and lease agreements. These defaults allowed the parties to these arrangements to exercise certain rights and remedies, including the right to demand immediate payment of such obligations in full and the right to repossess certain assets, including all of our owned and leased aircraft.

In order to formalize our restructuring efforts, in March 2003 we embarked on a comprehensive operational and financial restructuring program that included the following key elements: (i) reorganizing the management team and management functions; (ii) enhancing profitability through operational restructuring initiatives, and (iii) reducing fixed financial costs through the restructuring of aircraft-related debt and lease obligations.

Through the course of 2003, management refocused the commercial strategies of our key business segments, implemented operational cost saving initiatives and, with the assistance of our financial and legal advisors, negotiated with our secured aircraft creditors to reduce the rents and payments on our aircraft.

On January 30, 2004, AAWW, Atlas, Polar, Airline Acquisition Corp I and Atlas Worldwide Aviation Logistics, Inc. (Logistics, and together with AAWW, Atlas, Polar and Acquisition,), each filed voluntary bankruptcy petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq., in the United States Bankruptcy Court for the Southern District of Florida. The Bankruptcy Court jointly administered these cases as “In re Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., Polar Air Cargo, Inc., Airline Acquisition Corp I, and Atlas Worldwide Aviation Logistics, Inc., Case No. 04-10792”. During the course of the proceedings, the Debtors operated their respective businesses and managed their respective properties and assets as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. The Bankruptcy Court entered an order confirming the Final Modified Second Amended Joint Plan of Reorganization of the Debtors dated July 14, 2004 and the Debtors emerged from bankruptcy on July 27, 2004. The Financial Statements include data for all of our subsidiaries, including those that did not file for relief under Chapter 11.

On February 10, 2004, the United States Trustee for the Southern District of Florida appointed two official committees of unsecured creditors, one each for Atlas and Polar. The Creditors’ Committees and their respective legal representatives had a right to be heard on all matters that came before the Bankruptcy Court concerning the Debtors’ reorganization. Pursuant to a global settlement between the Creditors’ Committees and the Debtors, all litigation between the Creditors’ Committees was abated pending final documentation of the settlement terms and submission of a revised Disclosure Statement and Plan of Reorganization. By virtue of the global settlement, the Creditors’ Committees supported confirmation of the Plan of Reorganization. On June 8, 2004, the Debtors’ original Disclosure Statement was approved by the Bankruptcy Court, thereby allowing the Debtors to solicit votes to accept the Plan of Reorganization. The Bankruptcy Court entered an order confirming the Plan of Reorganization, which became effective when the Company emerged from bankruptcy on the Effective Date.

Total Claims

As of May 19, 2005, we had reviewed over 3,000 scheduled and filed claims aggregating approximately $7.5 billion, with a maximum of $850.8 million of claims that could potentially be allowed.
Approximately $657.9 million of claims have been allowed to date, including $12.4 of cure claims and $1.0 million of other secured and priority claims. Claims of $192.9 million remain unresolved, including $116.0 million of unresolved IRS claims discussed previously; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process.

Atlas Unsecured Claims

Pursuant to the Plan of Reorganization, we will make a pro rata distribution of 17,202,666 shares of New Common Stock to holders of allowed general unsecured claims against Holdings, Atlas, Acquisition and Logistics. General unsecured claims of approximately $2.6 billion were filed against these entities. As of May 19, 2005, claims of $604.6 million have been allowed, claims of $60.4 million remain disputed, and the balance of claims have been withdrawn or disallowed; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process.

Polar Unsecured Claims

Pursuant to the Plan of Reorganization, we will pay cash equal to sixty cents on the dollar for allowed unsecured claims against Polar. General unsecured claims of approximately $ 408.4 million were filed against Polar. As of May 19, 2005, claims of $39.9 million have been allowed, claims of $16.5 million remain disputed, and the balance of claims have been withdrawn or disallowed; however, this figure has been, and continues to be, reduced by virtue of the ongoing claims reconciliation process. We estimate the additional allowed claims against Polar will ultimately be under $1 million.

Pursuant to the Plan of Reorganization, the incumbent holders of Old Common Stock of AAWW are to receive no distributions of New Common Stock.

Certain Terms

The following terms represent industry-related items and statistics specific to the airline and cargo industry sectors. They are used by management for statistical analysis purposes to better evaluate and measure operating levels, results, productivity and efficiency.


Glossary

ATM		Available Ton Miles represent the maximum available tons (capacity) per actual miles flown. It is calculated by multiplying the available capacity (tonnage) of the aircraft against the miles flown by the aircraft.

Block Hours		The time interval between when an aircraft departs the terminal until it arrives at the destination terminal.

RATM		Revenue per Available Ton Mile represents the average revenue received per available ton mile flown. It is calculated by dividing operating revenues by ATMs.

Revenue Per Block Hour		Calculated by dividing operating revenues by Block Hours.

RTM		Revenue Ton Mile, calculated by multiplying actual revenue tons carried against miles flown.

Load Factor		The average amount of weight flown per the maximum available capacity. It is calculated by dividing RTMs by ATMs.

Yield		The average amount a customer pays to fly one ton of cargo one mile. It is calculated by dividing operating revenues by RTMs.

A/B Checks		Low level maintenance checks performed on aircraft at an interval of approximately 400 to 1,100 flight hours.

C Checks		High level or “heavy” airframe maintenance checks which are more intensive in scope than an A/B Check and are generally performed on a 15 to 24 month interval.

D Checks		High level or “heavy” airframe maintenance checks which are the most intensive in scope and are generally performed on an interval of 5 to 10 years or 25,000 to 28,000 flight hours, whichever comes first.

Business Overview

Our principal business is the airport-to-airport transportation of heavy freight cargo. We have four primary lines of business, each constituting its own reportable segment. These segments are (i) ACMI or wet lease contracts, (ii) Scheduled Service, (iii) AMC Charters for the U.S. Military and (iv) Commercial Charter. In addition, we occasionally “dry lease” aircraft to other airlines. We do not consider dry leasing to be a core segment of our business.

In our ACMI contract business, customers receive an aircraft which is crewed, maintained and insured by us in exchange for an agreed level of operation over a defined period of time. We are paid a defined hourly rate for the time the aircraft is operated or a minimum contractual rate when hour activity falls below minimum guaranteed levels. All other direct operating expenses, such as aviation fuel, landing fees and ground handling costs, are absorbed by the customer, who also bears the commercial risk of load factor and yield. Our ACMI contracts typically have terms ranging from several months to five years. At December 31, 2004 the terms of our existing contract maturities profile ranged from 1 month to 4.3 years. Average length of remaining ACMI contracts was 22.1 months as of December 31, 2004. We measure the performance of our ACMI contract business in terms of revenue per Block Hour and Fully Allocated Contribution (“FAC”) (defined as pre-tax income (loss), excluding pre-petition and post-emergence costs and related professional fees, unallocated corporate and other and reorganization items). FAC is also used to analyze the profitability and contribution to net income or loss of our other business segments.

We operate our Scheduled Services business primarily through Polar. We operate airport-to-airport specific routes on a specific schedule and customers pay to have their freight carried on that route and schedule. Our

Scheduled Service all-cargo network serves four principal economic regions: North America, South America, Asia and Europe. We offer access to Japan through route and operating rights at Tokyo’s Narita Airport, and, as of December 2, 2004, to the People’s Republic of China through route and operating rights at Shanghai’s Pudong Airport. As of December 31, 2004, our Scheduled Services operation provides approximately 18 daily departures to 14 different cities in eight countries across four continents. Our Scheduled Service business is designed to provide:


	•	prime time arrivals and departures on key days of consolidation for freight forwarders and shippers; and

	•	connection or through-service between economic regions to achieve higher overall unit revenues.

Our Scheduled Service business creates both load and yield risk. We measure performance of our Scheduled Service business in terms of RATM and FAC.

Our AMC Charter business continues to be a profitable but unpredictable line of business. AMC Charter revenues are driven by the rate per flown mile. The AMC Charter rate is set by the U.S. Government each October, based on an audit of all AMC carriers and an assumed fuel price. Block Hours are difficult to predict and are subject to certain minimum levels set by the U.S. Government. We bear the direct operating costs of AMC flights, however, the price of fuel consumed in AMC operations is fixed at the annual agreed upon rate.

Our Commercial Charter business provides full-planeload airfreight capacity on one or multiple flights to freight forwarders, airlines and other air cargo customers. The revenue associated with our Commercial Charter business is contracted in advance of the flight, and, as with Scheduled Service, we bear the direct operating costs (except as otherwise agreed in the charter contracts).

Our AMC and Commercial Charter businesses complement our ACMI contract and Scheduled Service businesses by:


	•	increasing aircraft utilization during slow seasons;

	•	positioning flights for Scheduled Service operations in directionally weak markets;

	•	enabling the performance of extra flights to respond to peak season Scheduled Service demand; and

	•	diversifying revenue streams.

We measure performance of our AMC and Commercial Charter businesses in terms of revenue per Block Hour and FAC.

The most significant trends that are evident when comparing our operations for the year ended 2004 to 2003 are:


	•	improved performance in our Scheduled Service and ACMI contract businesses, due primarily to improvement in Scheduled Service revenue, a reduction in overhead costs per Block Hour and the elimination of non-productive or “parked” aircraft; and

	•	the material reduction in AMC Block Hour activity resulting from the continued reduction in the high AMC demand that existed in 2003, which was partially offset by higher ACMI contracts and Scheduled Service Block Hour activity.

Overall, Block Hours decreased 3.0% for 2004 compared to 2003. Specifically, Block Hours increased 20.2% for ACMI contracts, increased 1.6% for Scheduled Service, decreased 36.0% for AMC charters and decreased 37.5% for Commercial Charters for the year ended 2004 compared with the same period in 2003. The reduction in total Block Hour activity was due, in part, to a 16.2% reduction in our operating fleet, from an average of 45.0 aircraft for 2003 to 37.7 aircraft in 2004. The reduction in the fleet is associated with the rejection of aircraft through bankruptcy, which had the effect of reducing our fleet of Boeing 747 aircraft from 52 aircraft pre-bankruptcy to 43 aircraft as of December 31, 2004.

Average aircraft is calculated by factoring in the time that aircraft were parked before being returned to active status.

The improvement in profitability from year to year is a function of a general improvement in the demand for our cargo services, the elimination of the costs associated with the burden of non-operating, or “parked,” aircraft,

the restructuring of our debt and lease agreements and the elimination of non-profitable flying in the Scheduled Service and ACMI contract businesses segments.

Outlook

Our primary focus is to maintain a safe and efficient operation, streamline operations, restore and sustain profitability and rebuild stockholder value. We are undertaking a number of significant strategic measures designed to achieve these objectives. These measures include the following:


	•	optimizing our Scheduled Service network so that this business segment can ultimately attain profitability;

	•	continuing our efforts to reduce our overhead and operating costs;

	•	improving our operating procedures in several key facets of flight operations, ground operations and maintenance;

	•	selectively disposing of unproductive assets, which may include aging aircraft;

	•	pursuing growth opportunities, which may include forming strategic alliances with synergistic carriers offering customers new services and fleet types, and entry into passenger ACMI business

	•	continuing our efforts to maximize our financial flexibility, which may include refinancing certain indebtedness and issuing new debt and/or equity securities.

While we still face a number of significant challenges, a number of which are beyond our control (see “Risk Factors” in this Item 2), we believe that implementing these and other strategic measures will enable us to become one of the world’s most efficient, capable and diversified operator of long-haul freighter aircraft.

Our focus is to optimize the allocation of assets between our four lines of business to maximize profitability and minimize risk. One of the significant challenges that we face is the cost of aviation fuel in the Scheduled Service business. During 2004, the average price per gallon for aviation fuel was 125 cents, an increase of 27.6% over the average price of 98 cents per gallon during 2003. Generally, we expect no more than 60% of the price-related increase in Scheduled Service fuel expense will be recovered through aircraft fuel surcharges (recorded as revenue). In response to the impact of increased aircraft fuel prices in the Scheduled Service business and to the increased opportunities for entering into profitable ACMI contracts, we expect to continue to optimize capacity allocations between the least profitable Scheduled Service markets and new ACMI opportunities.

In addition to the impact of aviation fuel prices, another significant change to our Scheduled Service business in 2004 is the commencement of operations in China under the route authority granted to us on October 18, 2004 by the Department of Transportation (“DOT”). As a result, we were designated as the fourth U.S. freighter operator under the U.S.-China bilateral air services agreement and were awarded a total of nine weekly frequencies (six for use in 2004 and an additional three commencing March 25, 2005). On March 25, 2005, the DOT granted us three additional weekly flights commencing in March 2006, which will increase the total weekly flights to twelve. We anticipate that China will improve the profitability of our Scheduled Service business as a whole.

We expect the ACMI contract business, particularly the ACMI contract opportunities for 747-400 aircraft, to continue to strengthen into 2005, with demand for widebody freighter capacity exceeding supply over the near term.

While we expect that the demand for AMC Charter business will be strong in 2005, total AMC Block Hour activity for 2004 was 36.0% lower than 2003. The 2003 activity was a function of the commencement of U.S. military operations in and around Iraq. Block Hour activity has declined and is expected to continue to decline in conjunction with the reduction in military-related activity in the Middle East.

We expect our Commercial Charter business to provide incremental utilization for our aircraft fleet and to make a positive pre-tax contribution in 2005.

Results of Operations

The following discussion should be read in conjunction with the Financial Statements and the notes to those statements and other financial information appearing and referred to elsewhere in this report.

Three Months Ended June 30, 2004 and 2003

Consolidated Results

Total operating revenue.Our total operating revenues were $338.3 million for the second quarter of 2004, compared with $326.4 million for the second quarter of 2003, an increase of $11.9 million, or 3.7%. This increase was primarily due to strength in our Scheduled Service revenue, which was $155.5 million for the second quarter of 2004, compared with $118.3 million for the second quarter of 2003, an increase of $37.2 million or 31.5%. ACMI contracted revenue was $84.9 million for the second quarter of 2004, compared with $70.3 million for the second quarter of 2003, an increase of $14.6 million, or 20.8%. These increases were partially offset by reductions in revenue from our AMC business, which had revenue of $78.1 million for the second quarter of 2004, compared with $118.8 million for the second quarter of 2003, a decrease of $40.7 million, or 34.3%. Commercial charter revenue was $8.3 million for the second quarter of 2004, compared with $12.8 million for the second quarter of 2003, a decrease of $4.5 million, or 35.2%. Other revenue was $11.6 million for the second quarter of 2004, compared with $6.2 million for the second quarter of 2003, an increase of $5.4 million, or 87.1%.

Scheduled Service revenue.Scheduled Service revenues were $155.5 million for the second quarter of 2004, compared with $118.3 million for the second quarter of 2003, an increase of $37.2 million, or 31.5%, primarily due to higher capacity, higher yields and higher load factors. RTMs in the Scheduled Service segment were 529.9 million on a total capacity of 846.4 million ATMs in the second quarter of 2004, compared with RTMs of 425.5 million on a total capacity of 749.0 million ATMs in the second quarter of 2003. Load factor was 62.6% with a yield of $0.293 in the second quarter of 2004, compared with a load factor of 56.8% and a yield of $0.278 in the second quarter of 2003. RATM in our Scheduled Service segment was $0.184 in the second quarter of 2004, compared with $0.158 in the second quarter of 2003, representing an increase of 16.5%. The material increase in the revenue performance of the Scheduled Service segment, as measured by RATM, was attributable to the positive impact of the scheduled network restructuring that was accomplished in the 2003 fourth quarter and 2004 first quarter, a general increase in the demand for air cargo services in 2004, an increase in fuel surcharge revenue in 2004, and specific improvement in load factor for flights from the U.S. to Asia and Europe, caused, in part, by the weakening of the US dollar against foreign currencies.

ACMI contract revenue.ACMI contracted revenues were $84.9 million for the second quarter of 2004, compared with $70.3 million for the second quarter of 2003, an increase of $14.6 million, or 20.8%, primarily due to increases in both the volume of ACMI contracts and our corresponding rates. ACMI block hours were 15,742 for the second quarter of 2004, compared with 13,217 for the second quarter of 2003, an increase of 2,525, or 19.1%. Revenue per block hour was $5,391 for the second quarter of 2004, compared with $5,320 for the second quarter of 2003, an increase of $71 per block hour, or 1.3%. Total aircraft supporting ACMI contracts as of June 30, 2004 were eight 747-200 aircraft and six 747-400 aircraft, compared with June 30, 2003 when we had seven 747-200 aircraft and five 747-400 aircraft supporting ACMI contracts.

AMC charter revenue.AMC charter revenues were $78.1 million for the second quarter of 2004, compared with $118.8 million for the second quarter of 2003, a decrease of $40.7 million, or 34.3%, primarily due to a lower volume of AMC charter flights partially offset by an increase in AMC charter rates. AMC charter block hours were 6,237 for the second quarter of 2004, compared with 9,832 for the second quarter of 2003, a decrease of 3,595, or 36.6%. Revenue per block hour was $12,517 for the second quarter of 2004, compared with $12,088 for the second quarter of 2003, an increase of $429 per block hour, or 3.6%. The reduction in AMC charter activity was primarily due to the reduction in the peak AMC demand that existed in the first half of 2003 attributable to the build-up to the military conflict in Iraq.

Commercial charter revenue.Commercial charter revenues were $8.3 million for the second quarter of 2004, compared with $12.8 million for the second quarter of 2003, a decrease of $4.5 million, or 35.2%, primarily as a result of a lower volume of commercial charter flights offset by an increase in revenue per block hour. Commercial charter block hours were 659 for the second quarter of 2004, compared with 1,287 for the second

quarter of 2003, a decrease of 628, or 48.8%. Revenue per block hour was $12,525 for the second quarter of 2004, compared with $9,960 for the second quarter of 2003, an increase of $2,565 per block hour, or 25.8%. The improvement in the demand for air cargo in 2004 had the effect of improving rates, but the lack of available capacity due to the increased flying in the ACMI lease contract and Scheduled service businesses, and reduction in our aircraft fleet size through bankruptcy, caused a reduction in Commercial charter revenue for the second quarter of 2004, compared with the second quarter of 2003.

Aircraft fuel expense.Aircraft fuel expense was $81.4 million for the second quarter of 2004, compared with $74.7 million for the second quarter of 2003, an increase of $6.7 million, or 9.0%, as a result of increased fuel prices. Average fuel price per gallon was $1.13 for the second quarter of 2004, compared with $0.93 for the second quarter of 2003, an increase of $0.20 or 21.5%, partially offset by a 7.5 million gallon, or 9.3% decrease in fuel consumption to 72.9 million gallons for the second quarter of 2004 from 80.4 million gallons during the second quarter of 2003. The decrease in fuel consumption corresponds to the decrease in Non-ACMI block hours.

Salaries, wages and benefits expense.Salaries, wages and benefits were $51.1 million for the second quarter of 2004, compared with $46.1 million for the second quarter of 2003, an increase of $4.5 million, or 10.9%. Salaries, wages and benefits for air crew employees increased by $4.4 million, or 15.3%, during the second quarter of 2004, compared with the second quarter of 2003. The increase was primarily due to contractual pay rate increases for crewmembers and higher worker’s compensation coverage necessary for crewmember employees operating AMC charters.

Maintenance, materials and repairs.Maintenance, materials and repairs was $62.0 million for the second quarter of 2004, compared with $46.3 million for the second quarter of 2003, an increase of $15.7 million, or 33.9%. The increase in maintenance expense was primarily the result of an increase in engine overhaul expense and an increase in expense for D checks. There were five additional D check airframe maintenance events in the second quarter of 2004, compared with the second quarter of 2003.

Aircraft rent.Aircraft rents were $34.2 million for the second quarter of 2004, compared with $43.2 million for the second quarter of 2003, a decrease of $9.0 million or 20.8%, as a result of our rejection, pursuant to the Plan of Reorganization, of three aircraft (tail numbers N507MC, N922FT and N923FT) in the first quarter of 2004 and one aircraft (tail number N24837) in the second quarter of 2004 that were originally financed under lease agreements. We also rejected leases on two aircraft (tail numbers N858FT and N859FT) in the first quarter of 2004 pursuant to the Plan of Reorganization, and subsequently purchased them in the third quarter of 2004. We also capitalized two operating leases (tail numbers N491MC and N493MC) in the first quarter of 2004. See also Note 6 to the Financial Statements.

Ground handling and airport fees.Ground handling and airport fees were $23.4 million for the second quarter of 2004, compared with $20.4 million for the second quarter of 2003, an increase of $3.0 million, or 14.7%. The primary cause of the increase was a significant increase in Scheduled service flight activity into Liege, Belgium in the fourth quarter of 2003 and into 2004, which, given Liege’s location in Europe, caused a significant increase in expense related to truck transportation purchased from outside vendors.

Landing fees and other rent.Landing fees and other rent was $23.5 million for the second quarter of 2004, compared with $22.3 million for the second quarter of 2003, an increase of $1.2 million, or 5.4%, as a result of an increase in landing fees, overfly fees and equipment rent.

Depreciation expense.Depreciation expense was $15.4 million for the second quarter of 2004, compared with $19.3 million for the second quarter of 2003, a decrease of $3.9 million, or 20.2%, as a result of the rejection of aircraft from our fleet during the first quarter of 2004.

Other operating expense.Other operating expenses were $26.5 million for the second quarter of 2004, compared with $36.1 million for the second quarter of 2003, a decrease of $9.6 million, or 26.6%, due primarily to a $2.3 million decrease in bad debt expense, a $2.7 million decrease in commissions due to reduced AMC and Scheduled Service related commission expense and a $1.0 million decrease in temporary personnel costs.

Interest income.Interest income was $0.3 million for the second quarter of 2004, compared with $1.2 million for the second quarter of 2003, a decrease of $0.9 million, or 75.0%, due primarily to decreases in interest rates and a decline in our available cash balances and investments.

Interest expense.Interest expense was $19.6 million for the second quarter of 2004, compared with $22.0 million for the second quarter of 2003, a decrease of $2.4 million, or 10.9%, resulting primarily from $7.1 million of interest expense not being recorded on the Senior Notes that have been reclassified as “Liabilities subject to compromise.” Interest is not being accrued on these notes pursuant to SOP 90-7 as it is not expected to be paid or allowed as a claim. This decrease is partially offset by the increase in interest expense related to capital leases for the second quarter of 2004 that were previously classified as operating leases for the second quarter of 2003.

See Note 3 to our Financial Statements for a description of reorganization items.

Net loss.As a result of the foregoing, we recorded a net loss of $51.4 million, or $1.34 per share, during the second quarter of 2004, which compares to a net loss of $31.3 million, or $0.82 per share, for the same period in 2003.

Scheduled Service Segment

The Scheduled Service segment had an FAC loss of $28.7 million for the second quarter 2004, compared with an FAC loss of $18.6 million for the same period in 2003 (see FAC reconciliation and explanation in Note 9 to the Financial Statements). Despite the improvement in revenue performance, total profitability declined year-over-year due primarily to the impact of fuel prices. Total fuel cost for Scheduled service increased by $18.5 million, or 49.0%, on a 15.6% increase in block hours in the second quarter of 2004 over the same period in 2003.

ACMI Contract Segment

FAC relating to the ACMI contract segment was income of $1.1 million for the second quarter of 2004, compared with a loss of $7.8 million for the same period in 2003. The improvement in FAC is primarily the result of a slight increase in revenue rates per block hour, an increase in block hours flown of 19.1%, lower overhead costs per block hour and the elimination of the costs associated with parked and non-productive aircraft in 2004.

AMC Charter Segment

��FAC relating to the AMC charter segment was income of $10.0 million for second quarter of 2004, compared with income of $13.1 million for the same period in 2003. The reduction in FAC was primarily the result of 36.6% lower block hours and 34.3% lower revenue in the second quarter of 2004, compared with the second quarter of 2003. The reduction in AMC charter activity was primarily due to the reduction in the peak AMC demand that existed in the first and second quarter of 2003 attributable to the build-up to the military conflict in Iraq.

Commercial Charter Segment

FAC relating to the commercial charter segment was a loss of $0.4 million for the second quarter of 2004, compared with a loss of $1.4 million for the same period in 2003. FAC improved marginally as an increase in operating expenses, primarily caused by the effect of higher fuel prices, was more than offset by a 25.8% increase in revenue per block hour.

Six Months Ended June 30, 2004 and 2003

Consolidated Results

Total operating revenue.Our total operating revenues were $635.8 million for the first half of 2004, compared with $671.5 million for the first half of 2003, a decrease of $35.7 million, or 5.3%. This decrease in our total operating revenue was primarily due to continuing reduction in AMC charter revenues, which were $131.2 million for the first half of 2004, compared with $258.1 million for the first half of 2003, a decrease of $126.9 million, or 49.2%. Commercial charter revenue also declined and totaled $13.9 million for the first half of 2004, compared with $ 32.3 million for the first half of 2003, a decrease of $18.4 million, or 57.0%. These decreases are partially offset by increases in Scheduled service revenue, which was $300.6 million for the first half of 2004, compared with $221.1 million for the first half of 2003, an increase of $79.5 million, or 36.0% and ACMI contracted revenue, which was $168.1 million for the first half of 2004, compared with $137.4 million for the first half of 2003, an increase of $30.7 million, or 22.3%.

Scheduled Service revenue.Scheduled Service revenues were $300.6 million for the first half of 2004, compared with $221.1 million for the first half of 2003, an increase of $79.5 million, or 36.0%, primarily due to higher capacity, higher yields and higher load factors. RTMs in the Scheduled Service segment were 1,020 million on a total capacity of 1,662 million ATMs in the first half of 2004, compared with RTMs of 808 million on a total capacity of 1,395 million ATMs in the first half of 2003. Load factor was 61.4% with a yield of $0.295 for the first half of 2004, compared with a load factor of 57.9% and a yield of $0.274 for the first half of 2003. RATM in our Scheduled Service segment was $0.181 in the first half of 2004, compared with $0.159 in the first half of 2003, representing an increase of 13.8%. The material increase in the revenue performance of the Scheduled Service segment, as measured by RATM, was attributable to the positive impact of the Scheduled Service network restructuring that was accomplished in the fourth quarter of 2003 and the first quarter of 2004, a general increase in the demand for air cargo services in 2004, an increase in fuel surcharge revenue in 2004, and specific improvement in load factor for flights from the U.S. to Asia and Europe, caused, in part, by the weakening of the U.S. dollar against foreign currencies.

ACMI contract revenue.ACMI contracted revenues were $168.1 million for the first half of 2004, compared with $137.4 million for the first half of 2003, an increase of $30.7 million, or 22.3%, as a result of increases in both the volume of ACMI contracts and corresponding rates. ACMI block hours were 31,454 for the first half of 2004, compared with 25,972 for the first half of 2003, an increase of 5,482, or 21.1%. Revenue per block hour was $5,344 for the first half of 2004, compared with $5,290 for the first half of 2003, an increase of $54 per block hour, or 1.0%. Total aircraft supporting ACMI contracts as of June 30, 2004 were eight 747-200 aircraft and six 747-400 aircraft, compared with June 30, 2003 when we had seven 747-200 aircraft and five 747-400 aircraft supporting ACMI contracts.

AMC charter revenue.AMC charter revenues were $131.2 million for the first half of 2004, compared with $258.1 million for the first half of 2003, a decrease of $126.9 million, or 49.2%, primarily due to a lower volume of AMC charter flights. AMC charter block hours were 10,774 for the first half of 2004, compared with 21,169 for the first half of 2003, a decrease of 10,395, or 49.1%. Revenue per block hour was $12,176 for the first half of 2004, compared with $12,194 for the first half of 2003, a decrease of $18 per block hour, or 0.2%. The reduction in AMC charter activity was primarily due to the reduction in the peak AMC demand from that which existed in the first and second quarter of 2003 attributable to the buildup to the military conflict in Iraq.

Commercial Charter revenue.Commercial Charter revenues were $13.9 million for the first half of 2004, compared with $ 32.3 million for the first half of 2003, a decrease of $18.4 million, or 57.0%, primarily as a result of a lower volume of commercial charter flights partially offset by an increase in revenue per block hour. Commercial Charter block hours were 1,268 for the first half of 2004, compared with 3,202 for the first half of 2003, a decrease of 1,934, or 60.4%. Revenue per block hour was $10,928 for the first half of 2004, compared with $10,099 for the first half of 2003, an increase of $829 per block hour, or 8.2%. The improvement in the demand for air cargo had the effect of improving rates in 2004, but the lack of available capacity brought about by the increased flying in the ACMI lease contract and Scheduled Service businesses and reduction in our aircraft fleet size through bankruptcy, caused a reduction in Commercial Charter revenue for the first half of 2004, compared with the first half of 2003.

Aircraft fuel expense.Aircraft fuel expense was $151.3 million for the first half of 2004, compared with $160.1 million for the first half of 2003, a decrease of $8.8 million, or 5.5%, as a result of an increase in average fuel price, which was more than offset by a decrease in consumption. Average fuel price per gallon was $1.12 for the first half of 2004, compared with $0.98 for the first half of 2003, an increase of $0.14, or 14.3%, offset by a decrease in fuel consumption to 134.9 million gallons for the first half of 2004, compared with 164.2 million gallons for the first half of 2003, a decrease of 29.3 million gallons, or 17.8% due to reduced non ACMI block hours during the period.

Salaries, wages and benefits expense.Salaries, wages and benefits were $103.9 million for the first half of 2004, compared with $98.7 million for the first half of 2003, an increase of $5.2 million, or 5.3%. Salaries, wages and benefits for air crew employees increased by $2.2 million, or 3.7%, during the first half of 2004, compared with the first half of 2003. The increase was due to contractual pay rate increases for crew members and higher worker’s compensation coverage necessary for crewmember employees operating AMC charters.

Maintenance, materials and repairs.Maintenance, materials and repairs was $114.9 million for the first half of 2004, compared with $88.2 million for the first half of 2003, an increase of $26.7 million, or 30.3%. The

increase in maintenance expense was the result of an increase in engine overhaul expense and an increase in expense for D checks. There were eight D check events in the first half of 2004 as opposed to two events taking place during the first half of 2003. The increase in D check activity was primarily related to the reactivation of aircraft that were parked prior to the Bankruptcy Petition Date.

Aircraft rent.Aircraft rents were $71.8 million for the first half of 2004, compared with $95.6 million for the first half of 2003, a decrease of $23.8 million, or 24.9% as a result of our rejection, pursuant to the Plan of Reorganization, of three aircraft (tail numbers N507MC, N922FT and N923FT) in the first quarter of 2004 and one aircraft (tail number N24837 ) in the second quarter of 2004 that were originally under operating lease agreements. We also rejected leases on two aircraft (tail numbers N858FT and N859FT) in the first half of 2004 pursuant to the Plan of Reorganization and subsequently purchased them in the 2004 third quarter. In addition we converted two operating leases (tail numbers N491MC and N493MC) to owned aircraft in the first quarter of 2004. See also Note 6 to the Financial Statements.

Ground handling and airport fees.Ground handling and airport fees were $46.0 million for the first half of 2004, compared with $40.7 million for the first half of 2003, an increase of $5.3 million, or 13.0%. The primary cause of the increase was a significant increase in Scheduled service flight activity into Liege, Belgium in the fourth quarter of 2003 and into 2004, which, given Liege’s location in Europe, caused a significant increase in expense related to truck transportation purchased from outside vendors.

Landing fees and other rent.Landing fees and other rent were $45.6 million in the first half of 2004, compared with $43.5 million for the first half of 2003, an increase of $2.1 million, or 4.8%, as a result of an increase in landing fees, overfly fees and equipment rent.

Depreciation expense.Depreciation expense was $29.7 million for the first half of 2004, compared with $36.1 million for the first half of 2003, a decrease of $6.4 million, or 17.7%, principally as a result of the rejection of aircraft from our fleet during the first quarter of 2004.

Other operating expense.Other operating expenses were $52.0 million for the first half of 2004, compared with $81.2 million for the first half of 2003, a decrease of $29.2 million, or 36.0%, due primarily to a $3.7 decrease in bad debt expense, a $4.4 million decrease in non-bankruptcy restructuring legal fees, a $6.0 million decrease in contractors expense as more contractors were converted to employees, a $7.7 million decrease in commission expense relating to the lower volume of AMC charter flights, a $4.9 million decrease in loss from minority owned subsidiaries and a $1.2 million decrease in temporary personnel costs as more temporary personnel were converted to permanent employee status.

Interest income.Interest income was $0.5 million for the first half of 2004, compared with $2.2 million for the first half of 2003, a decrease of $1.7 million, or 77.3%, due primarily to decreases in interest rates and a decline in our available cash balances and investments.

Interest expense.Interest expense was $43.1 million for the first half of 2004, compared with $41.5 million for the first half of 2003, an increase of $1.6 million, or 3.9% resulting primarily from an increase in interest expense related to capital leases for the first half of 2004 that were previously classified as operating leases for the first half of 2003, partially offset by $10.7 million of interest expense not being recorded on the Senior Notes that have been reclassified as “Liabilities subject to compromise.” Interest is not being accrued on these notes pursuant to SOP 90-7 as it is not expected to be paid or allowed as a claim.

See Note 3 to our Financial Statements for a description of reorganization items.

Net loss.As a result of the foregoing, we recorded a net loss of $110.0 million, or $2.87 per basic share, during the first half of 2004, which compares with a net loss of $69.2 million, or $1.81 per basic share, for the same period in 2003. The increase in the Net loss is the result of the factors discussed above.

Scheduled Service Segment

The Scheduled Service segment had an FAC loss of $52.8 million for the first half of 2004, compared with an FAC loss of $46.3 million for the same period in 2003. (See FAC reconciliation and explanation in Note 9 to the Financial Statements). Despite the improvement in revenue performance, total profitability was reduced year-over-year due primarily to the impact of fuel prices. Fuel expense for Scheduled service increased $29.7 million or 38.8% on a 21.5% increase in block hours in the first six months of 2004 over the same period in 2003.

ACMI Contract Segment

FAC relating to the ACMI charter segment was a loss of $11.1 million for the first half of 2004, compared with a loss of $19.5 million for the same period in 2003. The improvement in FAC was due to a slight increase in revenue rates per block hour, a 21.1% increase in block hours flown, and increased maintenance expense on the 747-200 fleet being more than offset by the savings associated with lower per-block-hour-overhead costs and the elimination of costs associated with parked and non-productive aircraft in 2004.

AMC Charter Segment

FAC relating to the AMC Charter segment totaled $12.3 million for first half of 2004, compared with income of $34.7 million for the same period in 2003. The reduction in FAC was primarily the result of 49.1% lower block hours and 49.2% lower revenue in the first half of 2004, compared with the first half of 2003. The reduction in AMC Charter activity was primarily due to the reduction in the peak AMC demand that existed in the first and second quarter of 2003 attributable to the buildup to the military conflict in Iraq.

Commercial Charter Segment

FAC relating to the commercial charter segment was a loss of $2.4 million for the first half of 2004, compared with a loss of $2.8 million for the same period in 2003. The improvement in FAC was caused primarily by an increase in the rate per block hour partially offset by an increase in average fuel prices in 2004 and an increase in the maintenance expense on 747-200 aircraft in 2004, caused primarily by increased D check expense.

Operating Statistics

The table below sets forth selected operating data for the three and six months ended June 30, 2004 and 2003.


OPERATING STATISTICS	For the Three Months Ended June 30, 2004			For the Three Months Ended June 30, 2003			% Change			For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2003			% Change

Block Hours
Scheduled Service		14,374			12,433			15.6	%		28,284			23,280			21.5	%
AMC		6,237			9,832			(36.6	%)		10,774			21,169			(49.1	%)
ACMI		15,742			13,218			19.1	%		31,454			25,972			21.1	%
Commercial Charter		659			1,287			(48.8	%)		1,268			3,202			(60.4	%)
Non Revenue		290			499			(42.2	%)		589			2,399			(75.4	%)

Total Block Hours		37,302			37,269			0.1	%		72,369			76,022			(4.8	%)

Revenue Per Block Hour
AMC		12,516.9			12,087.5			3.6	%		12,175.8			12,193.5			(0.1	%)
ACMI		5,391.2			5,320.4			1.3	%		5,344.3			5,290.4			1.0	%
Commercial Charter		12,525.0			9,959.6			25.8	%		10,927.7			10,098.7			8.2	%

Scheduled Service Traffic
RTM’s (000’s)		529,933.7			425,539.9			24.5	%		1,019,668.8			807,799.6			26.2	%
ATM’s (000’s)		846,374.1			749,000.3			13.0	%		1,661,598.9			1,394,920.9			19.1	%
Load Factor		62.61	%		56.81	%		10.2	%		61.37	%		57.91	%		6.0	%
RATM		$0.184			$0.158			16.5	%		$0.181			$0.159			13.8	%
Yield		$0.293			$0.278			5.4	%		$0.295			$0.274			7.7	%

Average fuel cost per gallon		$1.13			$0.93			21.5	%		$1.12			$0.98			14.3	%
Fuel gallons consumed (000’s)		72,867			80,416			(9.4	%)		134,905			164,191			(17.8	%)

Operating Fleet (average during the period)
Aircraft count		36.7			44.2			(17.0	%)		37.8			44.7			(15.4	%)

Dry Leased		4.0			3.3			21.2	%		4.0			3.8			0.0	%
Out of service		4.0			4.5			(11.1	%)		5.1			3.5			45.7	%

Note dry leased and parked aircraft are not included in the operating fleet aircraft count average.

For the first half of 2004 our operating fleet decreased 15.4%, compared with the first half of 2003, from 44.7 average aircraft to 37.8 average aircraft operated. The decrease was primarily due to the rejection and return of ten aircraft in connection with the Plan of Reorganization and the subsequent repurchase of two aircraft, one of which is deactivated and excluded entirely from the fleet count.

Liquidity and Capital Resources

At June 30, 2004, we had cash and cash equivalents of $158.3 million, compared with $93.3 million at December 31, 2003, an increase of $65.0 million. The increase in cash is primarily the result of increased collection efforts to reduce accounts receivable by $20.1 million and the borrowing of $18.0 million under the DIP financing facility. With the suspension of principal payments on debt and reduction of cash payments to creditors as the result of our bankruptcy filing, we have been able to generate additional cash reserves to position ourselves for our emergence from bankruptcy. The amount available to be borrowed under our Revolving Credit Facility, when combined with our available cash reserves after our exit from Bankruptcy, should provide us with adequate liquidity to resume payments on debt. See Note 6 to the Financial Statements for a description of the Revolving Credit Facility. We expect cash on hand, cash generated from operations and cash available under the Revolving Credit Facility to be sufficient to meet our debt and lease obligations and to finance capital expenditures for 2005. To the extent that these levels of cash prove insufficient to meet those obligations, we would be required to scale

back operations, curtail capital spending or borrow additional funds in amounts to be determined and on terms that may not be favorable to us.

Operating Activities. Net cash provided by operating activities for the first half of 2004 was $71.0 million, compared with net cash used by operating activities of $65.3 million for the first half of 2003, which increase was primarily due to increased profitability from improved market conditions. The increase in cash provided by operating activities is primarily related to the reduction of accounts receivable through improved collection efforts and an increase in accounts payable as a result of our filing for bankruptcy. The reduction in accounts receivable was driven primarily by a reduction of day’s sales outstanding on receivables, change in terms on accounts and the elimination of lower quality credit accounts.

Investing Activities. Net cash expenditures for investing activities were $9.5 million for the first half of 2004, which reflect capital expenditures. Net cash provided by investing activities was $37.0 million for the first half of 2003, which reflect capital expenditures of $4.0 million, offset by proceeds from the sale of property and equipment of $10.0 million and net maturing investments of $31.0 million.

Financing Activities. Net cash provided by financing activities was $3.5 million for the first half of 2004, which consisted primarily of $12.0 million of payments on long-term debt and capital lease obligations, offset by $18.0 million in loan proceeds from the DIP Credit Facility. Net cash used for financing activities were $52.7 million for the first half of 2003, which consisted primarily of $52.8 million of payments on long-term debt and capital lease obligations. The reduction in debt and lease payments relates directly to the moratorium that was placed on these agreements in March 2003 to provide time to negotiate restructured agreements with our significant creditors and lessors. See Note 2 to our Financial Statements for more information on such moratorium.

Revolving Credit Facility

On November 30, 2004, we entered into the Revolving Credit Facility. The Revolving Credit Facility provides us with revolving loans of up to $60 million, including up to $10 million of letter of credit accommodations. Availability under the Revolving Credit Facility will be based on a borrowing base, which will be calculated as a percentage of certain eligible accounts receivable. The Revolving Credit Facility has an initial four-year term after which the parties can agree to enter into additional one-year renewal periods.

Borrowings under the Revolving Credit Facility bear interest at varying rates based on either the Prime Rate or the Adjusted Eurodollar Rate. Interest on outstanding borrowings is determined by adding a margin to either the Prime Rate or the Adjusted Eurodollar Rate, as applicable, in effect at the interest calculation date. The margins are arranged in three pricing levels, based on the amount available to be borrowed under the Revolving Credit Facility, that range from ..25% below to .75% above the Prime Rate and 1.75% to 2.75% above the Adjusted Eurodollar Rate.

The obligations under the Revolving Credit Facility are secured by our present and future assets and all products and proceeds thereof other than (i) real property, (ii) aircraft, flight simulators, spare aircraft engines and related assets that are subject to security interests of other creditors and (iii) some or all of the capital stock of certain of Holdings’ subsidiaries.

The Revolving Credit Facility contains usual and customary covenants for transactions of this kind. At December 31, 2004, we had $19.0 million available for borrowing under the Revolving Credit Facility. No borrowings have been incurred to date.

Litigation

We are a party to a number of claims, lawsuits and pending actions, most of which are routine and all of which are incidental to our businesses. See Note 10 to the Financial Statements for information regarding legal proceedings, which could impact our financial condition and results of operations.

Critical Accounting Policies

Discussion of Critical Accounting Policies

The preparation of the Financial Statements are in conformity with GAAP and require management to make estimates and judgments that affect the amounts reported in the Financial Statements and footnotes thereto. Actual results may differ from those estimates. Important estimates include asset lives, valuation allowances (including, but not limited to, those related to receivables, inventory and deferred taxes), income tax accounting, self-insurance employee benefit accruals, liabilities subject to compromise and contingent liabilities.

The Financial Statements have also been prepared in accordance with SOP 90-7. Accordingly, all pre-petition liabilities believed to be subject to compromise have been segregated in the Consolidated Balance Sheet and classified as liabilities subject to compromise at the estimated amount of allowable claims. Liabilities not believed to be subject to compromise are separately classified as current and non-current. Revenues and expenses, including professional fees, realized gains and losses, and any provisions for losses resulting from the reorganization are reported separately as Reorganization Items. Also, interest expense is reported only to the extent that it will be paid during the Chapter 11 Cases or that it is probable that it will be an allowed claim. Cash used for reorganization items is disclosed separately in the Statements of Consolidated Cash Flows. The Financial Statements do not reflect any fresh-start adjustments since they will be adopted on the Effective Date. The amount of allowable claims may differ significantly from the amounts claims that may be settled at and the settlement or resolution of the disputed claims are expected to occur in 2005.

Revenue Recognition

We recognize revenue when a sales arrangement exists, services have been rendered, the sales price is fixed and determinable, and collectibility is reasonably assured.

Revenue for Scheduled Services and Charter Services is recognized upon flight departure. ACMI contract revenue is recognized as the actual Block Hours are operated on behalf of a customer during a calendar month.

Other revenue includes rents from dry leases of owned aircraft and is recognized in accordance with SFAS No. 13,Accounting for Leases.

Allowance for Doubtful Accounts

Inventories

Spare parts, materials and supplies for flight equipment are carried at average acquisition cost and are expensed when used in operations. Allowances for obsolescence for spare parts expected to be on hand at the date aircraft are retired from service, are provided over the estimated useful lives of the related aircraft and engines. Allowances are also provided for spare parts currently identified as excess or obsolete. These allowances are based on management estimates, which are subject to change as conditions in our business evolve. Inventories are included in prepaid expenses and other current assets in the consolidated balance sheet, except for rotable inventory that is recorded in “Property and Equipment.”

Property and Equipment

We record our property and equipment at cost and depreciate these assets on a straight-line basis over their estimated useful lives to their estimated residual values, over periods not to exceed forty years for flight equipment (from date of original manufacture) and three to five years for ground equipment, once the asset is placed in service. Property under capital leases and related obligations are recorded at the lesser of an amount equal to (a)

the present value of future minimum lease payments computed on the basis of our incremental borrowing rate or, when known, the interest rate implicit in the lease, or (b) the fair value of the asset. Amortization of property under capital leases is on a straight-line basis over the lease term and is included in depreciation expense, unless ownership takes place or a purchase option exists. In that case, amortization is over the remaining manufacturer’s life of the aircraft from the date of acquisition.

Expenditures for major additions, improvements and flight equipment modifications are generally capitalized and depreciated over the shorter of the assets remaining life or lease life in the event that any modifications or improvements are on operating lease equipment. Substantially all property and equipment is specifically pledged as collateral for our indebtedness.

Measurement of Impairment of Long-Lived Assets

When events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, we record impairment losses on those long-lived assets used in operations.

The impairment charge is determined based upon the amount by which the net book value of the assets exceeds their estimated fair value. In determining the fair value of the assets, we consider market trends, published values for similar assets, recent transactions involving sales of similar assets or quotes and third party appraisals. In making these determinations, we also use certain assumptions, including, but not limited to the estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in our operations and estimated residual values.

Intangible Assets

We review our route acquisition costs annually in accordance with SFAS No.142. The analysis has not resulted in any impairment charge to the date of this report.

Income Taxes

Aircraft Maintenance and Repair

Maintenance and repair cost for both owned and leased aircraft are charged to expense as incurred, except Boeing 747-400 engine (GE CF6-80C2) overhaul costs through January 2004. These were performed under a fully outsourced power-by-the-hour maintenance agreement. The costs thereunder were accrued based on the hours flown. This contract was rejected in the Chapter 11 Cases.

Recent Accounting Pronouncements

The information required in response to this item is set forth in Note 4 to the Financial Statements contained in this report.

Related Party Transactions

The information required in response to this item is set forth in Note 8 to the Financial Statements contained in this report.

Off-Balance Sheet Arrangements

The information required in response to this item is set forth in Notes 4 and 7 to the Financial Statements contained in this report.

Risk Factors

You should carefully consider each of the following risk factors and all other information in this report. These risk factors are not the only ones facing us. Our operations could also be impaired by additional risks and uncertainties. If any of the following risks and uncertainties develop into actual events, our business, financial condition and results of operations could be materially and adversely affected.

Risks Related to Our Business

We are highly leveraged and our substantial debt and other obligations could limit our financial resources and ability to compete and may make us more vulnerable to adverse economic events.

While we obtained significant relief as a result of our restructuring efforts, we remain highly leveraged and have substantial debt, lease and other obligations, which could have negative consequences, including:


	•	making it more difficult to pay principal and interest with respect to our debt;

	•	requiring us to dedicate a substantial portion of our cash flow from operations for interest, principal and lease payments and reducing our ability to use our cash flow to fund working capital and other general corporate requirements;

	•	increasing our vulnerability to general adverse economic and industry conditions;

	•	limiting our flexibility in planning for, or reacting to, changes in business and our industry;

	•	placing us at a disadvantage to many of our competitors who have less debt; and

	•	exposing us to fluctuations in interest rates with respect to that portion of our debt, including our bank loans, which is at a variable rate of interest.

Our ability to service our debt and meet our other obligations depends on certain factors beyond our control.

Our ability to service our debt and meet our lease and other obligations as they come due is dependent on our future financial and operating performance. This performance is subject to various factors, including factors beyond our control such as changes in global and regional economic conditions, changes in our industry, changes in interest or currency exchange rates, the price and availability of aviation fuel and other costs, including labor and insurance.

If our cash flow and capital resources are insufficient to enable us to service our debt and leases and meet these obligations as they become due, we could be forced to:


	•	restructure or refinance our debt;

	•	obtain additional debt or equity financing;

	•	reduce or delay capital expenditures;

	•	limit or discontinue, temporarily or permanently, business plans or operations; or

	•	sell assets or businesses.

We cannot assure you as to the timing of such actions or the amount of proceeds that could be realized from such actions. Accordingly, we cannot assure you that we will be able to meet our debt service and other obligations as they become due or otherwise.

We are subject to restrictive covenants under our debt instruments and aircraft lease agreements. These covenants could significantly affect the way in which we conduct our business. Our failure to comply with these covenants could lead to an acceleration of our debt and termination of our aircraft leases.

Certain of our debt instruments and lease agreements contain a number of covenants that, among other things, significantly restrict our ability to:


	•	incur additional debt or issue new lease obligations above threshold amounts;

	•	invest in new capital assets above certain limitations;


	•	pay dividends or make other restricted payments;

	•	create or permit certain liens;

	•	sell assets; and

	•	consolidate or merge with or into other companies or sell all or substantially all of our assets.

These restrictions could limit our ability to finance our future operations or capital needs, to make acquisitions or to pursue future business opportunities. In addition, our Revolving Credit Facility with Congress Financial Corporation (“Congress”) (the “Revolving Credit Facility”), a certain loan that was made to Atlas Freighter Leasing III, Inc. (“AFL III”) (the “AFL III Credit Facility”), another loan made to Atlas (the “Aircraft Credit Facility” or “ACF”), and certain leases require us to maintain specified financial ratios and/or satisfy certain financial covenants (See Note 6 to the Financial Statements). We may be required to take action to reduce our debt or to act in a manner contrary to our business objectives to meet these ratios and to satisfy these covenants. Events beyond our control, including changes in the economic and business conditions in the markets in which we operate, may affect our ability to do so. While we are currently in compliance with these ratios and covenants, we cannot assure you that we will continue to meet these ratios or satisfy these covenants or that the lenders or lessors will waive any failure to do so. A breach of any of the covenants in, or our inability to maintain the required financial ratios under, our debt instruments, including the Revolving Credit Facility, and certain of our leases would prevent us from borrowing under the Revolving Credit Facility and could result in a default under it and the leases. Moreover, if the lenders under a facility or other agreement in default were to accelerate the debt outstanding under that facility, it could result in a cross default under other debt facilities or leases. If all or any part of our debt were to be accelerated, we may not have, or be able to obtain, sufficient funds to repay such debt. A default under the leases could result in a reversion to the original lease terms without regard to the restructuring of the lease payments and an acceleration of any amounts owed under the leases.

Our financial condition could suffer if we experience unanticipated costs as a result of the SEC investigation and other lawsuits and claims.

On October 28, 2004, the SEC issued a Wells Notice to us indicating that the SEC staff is considering recommending to the SEC that it bring a civil action against us alleging that we violated certain financial reporting provisions of the federal securities laws from 1999 to 2002. In addition, the SEC has filed one or more proofs of claim in the Chapter 11 Cases. We are currently engaged in discussions with the SEC regarding the Wells Notice and the possible resolution of this matter, and continue to cooperate fully with the SEC in respect of its investigation. However, we cannot assure you as to the outcome of this investigation or that we will be able to resolve this matter on terms favorable to us.

See Note 10 to Financial Statements for information regarding other legal proceedings that could have a material adverse effect on our financial condition and results of operations. We are also party to a number of other claims, lawsuits and pending actions, which we consider to be routine and incidental to our business.

Volatility of aircraft values may affect our ability to obtain financing secured by our aircraft.

We have historically relied upon the market value of our aircraft as a source of additional capital. The market for used aircraft, however, is volatile, and can be negatively affected by excess capacity due to factors such as a slow down in global economic conditions. As a result, the value of aircraft reflected on our consolidated balance sheet may not reflect the current fair market value or appraised value of these aircraft.

Our access to capital may be limited.

Our operations are capital intensive. They are financed from operating cash flow, and if required from borrowings pursuant to the Revolving Credit Facility. Many airlines, including us, have defaulted on debt securities and bank loans in recent years and have had their equity eliminated in bankruptcy reorganizations. This history has led to limited access to the capital markets by companies in our industry. Our access to the capital markets may also be limited for the foreseeable future due to the lack of current SEC periodic reporting and limited liquidity in our securities. Restrictions on our ability to access capital and obtain sufficient financing to fund our operations may diminish our financial and operational flexibility, and could curtail our operations and adversely affect our ability to take advantage of opportunities for expansion of our business. We cannot assure you, however, that any additional replacement financing will be available on terms that are favorable or acceptable to us.

We have material weaknesses in our internal controls over financial reporting.

In connection with our initial procedures to comply with Section 404 of the Sarbanes-Oxley Act of 2002, we have identified a substantial number of significant deficiencies and material weaknesses in our internal controls over financial reporting. We are committed to addressing these deficiencies and material weaknesses, which have required us to hire additional personnel and outside advisory services and have resulted and will continue to result over at least the next twelve months in additional accounting and legal expenses. If we are unsuccessful in our focused effort to permanently and effectively remediate these deficiencies and material weaknesses, or otherwise fail to maintain adequate internal controls over financial reporting, our ability to accurately and timely report our financial condition may be adversely impacted, which could, among other things, result in a default under our Revolving Credit Facility and limit our access to the capital markets. In addition, if we do not remediate these weaknesses, we will not be able to conclude, pursuant to Section 404 of Sarbanes-Oxley and Item 308 of Regulation S-K, that our internal controls over financial reporting are effective. We cannot assure you as to what conclusions our management or independent registered public accounting firm might reach with respect to the effectiveness of our internal controls over financial reporting at the compliance deadline. In the event of non-compliance, we may lose the trust of our customers, suppliers and security holders, and our stock price could be adversely impacted. For more information, see “Controls and Procedures” in Item 4 of Part I of this report.

Labor disputes with union employees could result in a work interruption or stoppage, which could materially adversely impact our results of operations.

All of our U.S. crewmembers are represented by unions. Collectively, these employees represent approximately 54% of our workforce as of December 31, 2004. Although we have never had a work interruption or stoppage, we are subject to risks of work interruption or stoppage and may incur additional expenses associated with the union representation of our employees. Moreover, we cannot assure you that disputes, including disputes with any certified collective bargaining representatives of our employees, will not arise in the future or will result in agreement on terms satisfactory to us. Such disputes and the inherent costs associated with their resolution could have a material adverse effect on our results of operations and financial condition.

In November 2004, in order to increase efficiency and assist in controlling certain costs, we initiated preliminary steps to combine the U.S. crewmembers bargaining units of Atlas and Polar. These actions are in accordance with the terms and conditions of Atlas’ and Polar’s collective bargaining agreements, which agreements provide for a seniority integration process and the negotiation of a single collective bargaining agreement. In the event that we are unsuccessful in reaching agreement on a single collective bargaining agreement, any unresolved issues will be submitted to binding arbitration. While we cannot assure you as to the outcome of such arbitration, any decision by the arbitrator could materially impact our crew costs.

Our operating cash flows may be subject to fluctuations related to the seasonality of our business and our ability to promptly collect accounts receivable. A significant decline in operating cash flows may require us to seek additional financing sources to fund our working capital requirements.

Our Scheduled Service and Commercial Charter operations are seasonal in nature, with peak activity occurring during the retail holiday season, which traditionally begins in September and lasts through mid-December. This typically results in a significant decline in demand for these services in the first quarter. As a result, our revenues typically decline in the first quarter of the calendar year as our minimum contractual aircraft utilization level temporarily decreases. Our ACMI contracts typically allow our customers to cancel a maximum of 5% of the guaranteed hours of aircraft utilization over the course of a year. Our customers often exercise such cancellation options early in the first quarter of the year, when the demand for air cargo capacity has been historically low following the seasonal holiday peak in the latter part of the fourth quarter.

Historically, we have experienced fluctuations in our operating cash flows as the result of fluctuations in our collection of accounts receivable. These fluctuations have been due to various issues, including amendments and changes to existing contracts and the commencement of operations under new agreements. If we cannot successfully collect a significant portion of such accounts receivable over 90 days old, we may be required to set aside additional reserves or write off a portion of such receivables. If we are not able to maintain or reduce our aged receivables, our ability to borrow against the Revolving Credit Facility may be restricted because borrowings are limited to 85.0% of “eligible” domestic receivables, excluding receivables aged over 90 days old. If our operating

cash flows significantly decline as a result of such fluctuations, we may be required to seek alternative financing sources, in addition to the Revolving Credit Facility, to fund our working capital requirements. We cannot assure you that we would be able to successfully obtain such alternative financing on terms favorable to us or at all.

We depend on continued business with certain customers in each of our business segments. If our business with any of these customers declines significantly, it could have a material adverse effect on our financial condition and results of operations.

During the years ended December 31, 2004 and 2003, AMC accounted for approximately 20.0% and 31.1%, respectively, of our total operating revenues. We expect that revenues from AMC will continue to be a significant source of our revenue for the foreseeable future. However, our revenues from AMC are derived from one-year contracts that AMC is not obligated to renew. In addition, AMC can typically terminate or modify its contract with us for convenience, if we fail to perform, or if we fail to pass biannual inspections. Any such termination would result in a loss of revenue, could also expose us to significant liability and could hinder our ability to compete for future contracts with the federal government. If our AMC business declines significantly, it could have a material adverse effect on our results of operations and financial condition. Even if AMC continues to award business to us, we cannot assure you that we will continue to generate the same level of revenues we currently derive from our AMC Charter operations. The volume of AMC business is sensitive to changes in national and international political priorities and the U.S. federal budget.

During the years ended December 31, 2004 and 2003, ACMI contracts accounted for approximately 26.6% and 22.1%, respectively, of our consolidated operating revenues. No ACMI customer accounted for 10% or more of our total operating revenues. Our significant ACMI customers included Emirates, Qantas, Air New Zealand, Cargolux, Korean Air, British Airways and Lan Cargo. While we believe that our relationships with these and our other customers are mutually satisfactory, our failure to renew any of our contracts with them, or the renewal of any of those contracts on less favorable terms, could have a material adverse effect on our results of operations and financial condition.

A significant decline in our AMC business transporting cargo for delivery to military locations could have a material adverse effect on our results of operations and financial condition.

During the years ended December 31, 2004 and 2003, approximately 20.0% and 31.1%, respectively, of our consolidated operating revenues were derived from AMC business, including expansion mission requests transporting cargo for delivery to military locations in Germany, Bahrain, Qatar and Kuwait or near Afghanistan, Iraq, and elsewhere in the Middle East. A material decline in such business, including one-way missions, could have a material adverse effect on our results of operations and financial condition.

Our revenues from AMC could decline as a result of the system AMC uses to allocate business to commercial airlines that participate in the Civil Reserve Air Fleet (“CRAF”).

Each year, AMC grants a certain portion of its business to different airlines based on a point system. The number of points an airline can accrue is determined by the amount and type of aircraft pledged to the CRAF Program. We participate in CRAF through a teaming arrangement with other airlines, led by FedEx. Our team is currently entitled to 43% of all widebody 747 U.S. military business. The formation of competing teaming arrangements, an increase by other air carriers in their commitment of aircraft to the program, or the withdrawal of our team’s current partners, especially FedEx, could adversely affect the amount of our AMC business in future years. In addition, if any of our team members were to cease or restructure their operations, the number of planes pledged to CRAF by our team could be reduced. As a result, the number of points allocated to our team could be reduced and our allocation of AMC business would likely decrease, resulting in a material adverse effect on our results of operations and financial condition.

Many of our arrangements with customers are not long-term contracts. As a result, we cannot assure you that we will be able to continue to generate similar revenues from these arrangements.

We generate a large portion of our revenues from arrangements with customers with terms of less than one year, ad hoc arrangements or “call when needed” contracts. A large portion of our AMC revenues are from expansion business, which is not fixed by contract and is dependent on AMC requirements which cannot be predicted. The scheduled termination dates for ACMI contracts range from one month to 4.3 years as of December 31, 2004. While we believe that our relationships with these and our other customers are mutually satisfactory, we cannot

assure you that our customers will continue to seek the same level of services from us as they have in the past or that they will renew these arrangements or not terminate them on short notice, if permitted. In the past, several of our larger contracts have not been renewed due to reasons unrelated to our performance, such as the financial position of our customers or their decision to move the services we previously provided to them in-house. Accordingly, we cannot assure you that in any given year we will be able to generate similar revenues from our customers as we did in the previous year.

As a U.S. government contractor, we are subject to a number of procurement and other rules and regulations.

In order to do business with government agencies, we must comply with and are affected by many laws and regulations, including those relating to the formation, administration and performance of U.S. government contracts. These laws and regulations, among other things:


	•	require, in some cases, certification and disclosure of all cost and pricing data in connection with contract negotiations;

	•	impose accounting rules that define allowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts; and

	•	restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

These laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of these laws and regulations could result in the imposition of fines and penalties or the termination of our contracts. In addition, the violation of certain other generally applicable laws and regulations could result in our suspension or debarment as a government contractor.

We depend on the availability of our wide-body aircraft for the majority of our flight revenues. The loss of one or more of these aircraft for any period of time could have a material adverse effect on our results of operations and financial condition.

In the event that one or more of our Boeing 747 aircraft are out of service for an extended period of time, we may have difficulty fulfilling our obligations under one or more of our existing contracts. As a result, we may have to lease or purchase replacement aircraft or, if necessary, convert an aircraft from passenger to freighter configuration. We cannot assure you that suitable replacement aircraft could be located quickly or on acceptable terms. The loss of revenue resulting from any such business interruption or costs to replace aircraft could have a material adverse effect on our results of operations and financial condition.

We do not have insurance against the loss arising from any business interruption. If we fail to keep our aircraft in service, we may have to take impairment charges in the future and our results of operations would be adversely affected. The loss of our aircraft or the grounding of our fleet could reduce our capacity utilization and revenues, require significant capital expenditures to replace such aircraft and could have a material adverse affect on us and our ability to make payments on the debt or lease related to the aircraft. Moreover, any aircraft accident could cause a public perception that some or all of our aircraft are less safe or reliable than other carriers’ aircraft, which could have a material adverse effect on our results of operations and financial condition.

We are subject to the risks of having a limited number of suppliers for our aircraft.

Our current dependence on a single type of aircraft for all of our flights makes us particularly vulnerable to any problems associated with the Boeing 747-400 and Boeing 747-200 aircraft, including design defects, mechanical problems, and contractual performance by the manufacturer or in actions by the Federal Aviation Administration (“FAA”) resulting in an inability to operate our aircraft. Carriers that operate a more diversified fleet are better positioned than we are to manage such events.

Our fleet includes older aircraft which have higher maintenance costs than new aircraft and which could require substantial maintenance expenses.

Our fleet includes 43 aircraft manufactured between 1970 and 2003. As of December 31, 2004, the average age of our B747-200 operating aircraft was approximately 25.2 years and the average age of our B747-400 operating aircraft was approximately 4.6 years. Because many aircraft components wear out and are required to be

replaced after a specified number of flight hours or takeoff and landing cycles, and because older aircraft may need to be refitted with new aviation technology, older aircraft tend to have higher maintenance costs and lower available flight hours than newer aircraft. Maintenance and related costs can vary significantly from period to period as a result of government-mandated inspections and maintenance programs and the time needed to complete required maintenance checks. In addition, the age of our aircraft increases the likelihood that we will need significant capital expenditures in the future to replace our older aircraft. The incurrence of substantial additional maintenance expenses for our aircraft, or the incurrence of significant capital expenditures to replace our aircraft, could have a material adverse effect on our results of operations and financial condition.

Our business outside of the U.S. exposes us to uncertain conditions in overseas markets.

A significant portion of our revenues comes from air-freight services to customers outside the U.S., which exposes us to significant risks, including the following:


	•	potential adverse changes in the diplomatic relations between foreign countries and the U.S.;

	•	risks of insurrections or hostility from local populations directed at U.S. companies and their property;

	•	government policies against businesses owned by foreigners;

	•	expropriations of property by foreign governments;

	•	the instability of foreign governments or economies; and

	•	adverse effects of currency exchange controls.

In addition, at some foreign airports, we are required by local governmental authorities or market conditions to contract with third parties for ground and cargo handling and other services. The performance by these third parties or boycott of such services is beyond our control and any operating difficulties experienced by these third parties could adversely affect our reputation and/or business.

Volatility in international currency markets may adversely affect demand for our services.

We provide services to numerous industries and customers that experience significant fluctuations in demand based on regional and global economic conditions and other factors beyond our control. The demand for our services could be materially adversely affected by downturns in the businesses of our customers. Although we price the majority of our services and receive the majority of our payments in U.S. dollars, many of our customers’ revenues are denominated in foreign currencies. Any significant devaluation in such currencies relative to the U.S. dollar could have a material adverse effect on such customers’ ability to pay us or on their level of demand for our services, which could have a material adverse effect on our results of operations and financial condition. Conversely, if there is a significant decline in the value of the U.S. dollar against foreign currencies, the demand for some of the products we transport could decline. Such a decline could reduce demand for our services and thereby have a material adverse effect on our results of operations and financial condition.

The market for air cargo services is highly competitive. If we are unable to compete effectively, we may lose current customers, fail to attract new customers and experience a decline in our market share.

Our industry is highly competitive and susceptible to price discounting due to periodic excess capacity. New freighter aircraft and passenger converted freighters will add to the supply of lift available to the market. Since we offer a broad range of aviation services, our competitors vary by geographic market and type of service. Each of the markets we serve is highly competitive, fragmented and, other than ground handling and logistics, can be capital intensive. In addition, air cargo companies are able to freely enter domestic markets. We believe that the most important elements 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 cargo transportation services. In addition, some of our contracts are awarded based on a competitive bidding process. Competition arises primarily from other international and domestic contract carriers, regional and national ground handling and logistics companies, internal cargo units of major airlines and third party cargo providers, some of which have substantially greater financial resources and more extensive fleets and facilities than we do. Some of our airline competitors are currently facing financial difficulties and as a result could resort to drastic pricing measures with which we may not be able to compete.

Our ability to attract and retain business also is affected by whether, and to what extent, our customers decide to coordinate and service their own transportation needs. Some of our existing customers maintain transportation departments that could be expanded to manage freight transportation in-house. If we cannot successfully compete against companies providing services similar to, or that are substitutes for, our own or if our customers begin to provide for themselves the services we currently provide to them, our results of operations and financial condition, may be materially adversely affected.

In addition, traffic rights to many foreign countries are subject to bilateral air services agreements between the U.S. and foreign countries and are allocated only to a limited number of U.S. carriers and are subject to approval by the applicable foreign regulators. Consequently, our ability to provide air cargo service in some foreign markets depends, in part, on the willingness of the DOT to allocate limited traffic rights to us rather than to competing U.S. airlines and on the approval of the applicable foreign regulators. If we are unable to compete successfully, we may not be able to generate sufficient revenues and cash flow to sustain or expand our operations.

The success of our business depends on the services of certain key personnel.

We believe that our success depends to a significant extent upon the services of Mr. Jeffrey H. Erickson, our President and Chief Executive Officer, and certain other key members of our senior management including those with primary responsibility for each business segment. We believe that our success in acquiring ACMI contracts, expanding our product line to include a broader array of products and services, providing Scheduled Service to international markets, and managing our operations will depend substantially upon the continued services of many of our present executive officers and our ability to attract and retain talented personnel in the future. The loss of the services of Mr. Erickson, or other key members of our management, could have a material adverse effect on our business.

We operate in dangerous locations and carry hazardous cargo, either of which could result in a loss of, or damage to, our aircraft.

Our operations are subject to conditions that could result in losses of, or damage to, our aircraft, or death or injury to our personnel. These conditions include:


	•	geopolitical instability in areas through which our flight routes pass, including areas where the U.S. is conducting military activities;

	•	future terrorist attacks; and

	•	casualties incidental to the services we provide in support of U.S. military activities, particularly in or near Afghanistan, Iraq, Kuwait and elsewhere in the Middle East.

We regularly carry sensitive military cargo, including weaponry, ammunition and other volatile materials. The inherently dangerous nature of this cargo increases the risk of damage to or loss of our aircraft.

Our insurance coverage does not cover all risks.

Our operations involve inherent risks that subject us to various forms of liability. We carry insurance against those risks for which we believe other participants in our industry commonly insure; however, we can give no assurance that we are adequately insured against all risks. If our liability exceeds the amounts of our coverage, we would be required to pay any such excess amounts, which amounts could be material to our business and operations.

Risks Relating to Our Industry

The cost of fuel is a major operating expense, and fuel shortages and price volatility could adversely affect our business and operations.

Although the price of aviation fuel only impacts the Scheduled Service and Commercial Charter segments of our operations, to the extent that we are unable to recover increased costs through fuel surcharges to our customers, it is one of our most significant expenses. During the years ended December 31, 2004 and 2003, fuel costs were approximately 25.6% and 23.5%, respectively, of our total operating expenses. The price of aviation fuel is directly influenced by the price of crude oil and to a lesser extent by refining capacity relative to demand, which are influenced by a wide variety of macroeconomic and geopolitical events and is completely beyond our control. Additionally, hostilities

in the Middle East and terrorist attacks in the U.S. and abroad could cause significant disruptions in the supply of crude oil and have had a significant impact on the price and availability of aviation fuel. We have not regularly entered into fuel hedging arrangements to date. If we elect to hedge fuel prices in the future, through the purchase of futures contracts or options or otherwise, there can be no assurance that we will be able to do so successfully.

We generally attempt to pass on increases in the price of aviation fuel to our Scheduled Service customers through the imposition of a surcharge, but we bear a portion of price increases over the short term. There can be no assurance that we will be able to continue to impose such surcharges in the future. In addition, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find less costly alternatives for cargo delivery, such as land and sea carriers.

ACMI contracts require our customers to pay for aviation fuel. However, if the price of aviation fuel increases, our customers may reduce their use of aircraft subject to such ACMI contractual provisions or our ability to renew contracts thereby having an impact on our ACMI business. Accordingly, an increase in fuel costs could have a material adverse effect on our customers’ results of operations and financial condition. Similarly, a reduction in the availability of fuel, resulting from a disruption of oil imports or other events, could have a material adverse effect on our customers’ results of operations and financial condition, which, in turn, could significantly impact their ability and willingness to continue to do business with us.

We are subject to extensive governmental regulation and our failure to comply with these regulations in the U.S. and abroad, or the adoption of any new laws, policies or regulations or changes to such regulations, may have an adverse effect on our business. Failure to utilize our economic rights in limited-entry markets also could result in a loss of such rights.

Our operations are subject to complex aviation and transportation laws and regulations, including Title 49 of the U.S. Code (formerly the Federal Aviation Act of 1958, as amended), under which the DOT and the FAA exercise regulatory authority over air carriers such as Atlas and Polar. In addition, our activities fall within the jurisdiction of various other federal, states, local and foreign authorities, including the U.S. Department of Defense, the Transportation Security Administration (“TSA”), U.S. Customs and Border Protection, the Treasury Department’s Office of Foreign Assets Control and the Environmental Protection Agency. These laws and regulations may require us to maintain and comply with the terms of a wide variety of certificates, permits, licenses, noise abatement standards and other requirements, and our failure to do so could result in substantial fines or other sanctions. The DOT, the FAA, the TSA, and foreign aviation regulatory agencies have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with provisions of law or applicable regulations, and may impose civil or criminal penalties for violations of applicable rules and regulations. Such actions, if taken, could have a material adverse effect on our mode of conducting business, results of operations and financial condition. In addition, governmental authorities such as the DOT, the TSA and the FAA may adopt new regulations, directives or orders that could require us to take additional and potentially costly compliance steps or result in the grounding of some of our aircraft, which could increase our costs or result in a loss of revenues, which could have a material adverse effect on our results of operations, financial condition. This is true, in particular, in the area of security.

In response to the terrorist attacks of September 11, 2001, various government agencies, including U.S. Customs and Border Protection, the Food and Drug Administration and the TSA have adopted, and may in the future adopt, new rules, policies or regulations or changes in the interpretation or application of existing laws, rules, policies or regulations, compliance with which could increase our costs or result in loss of revenues, or have a material adverse effect on our results of operations and financial condition. The TSA has increased security requirements in response to September 11 and has recently proposed comprehensive new regulations governing air cargo transportation, including all-cargo services, in such areas as cargo screening and security clearances for individuals with access to cargo or who board and travel on all-cargo aircraft. These new regulations, and others that potentially might be adopted, could have an adverse impact on our ability to efficiently process cargo or could increase our costs. Furthermore, the U.S. Congress is considering air transportation security provisions that could have similar impacts.

A significant amount of our business is conducted in limited-entry international markets with U.S.-negotiated rights that have been awarded in competitive carrier selection proceedings. This includes Polar’s new China rights and its “5th-freedom” rights to serve Hong Kong third country markets. Because such rights typically are subject to loss

for underutilization, there is a risk of constriction of our operating rights if it is determined that economic conditions preclude full use. The DOT and foreign government agencies may also consider or adopt new laws, regulations and policies with respect to limited-entry markets (such as China and Japan). Any adverse change or modification to our limited-entry market rights (or governmental trade barriers in such markets) could negatively affect our profitability.

Our insurance coverage has become increasingly expensive and difficult to obtain.

Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general and the insured carrier in particular. Since September 11, 2001, our premiums have increased significantly. Future terrorist attacks involving aircraft, or the threat of such attacks, could result in further increases in insurance costs, and could affect the price and availability of such coverage.

Although we believe our current insurance coverage is adequate and consistent with current industry practice, there can be no assurance that we will be able to maintain our existing coverage on terms favorable to us, that the premiums for such coverage will not increase substantially or that we will not bear substantial losses and lost revenues from accidents. Substantial claims resulting from an accident in excess of related insurance coverage or a significant increase in our current insurance expense could have a material adverse effect on our results of operations and financial condition.

Risks Related to Ownership of Our Common Stock

Equity based awards will dilute the ownership interests of other stockholders.

We have adopted a long-term incentive plan for our directors, officers, key management employees and certain other employees providing for the issuance of up to 12.175% of New Common Stock. A management incentive plan authorizes the issuance of up to 10% of the New Common Stock to participants through a combination of restricted stock, stock options and other equity-based awards. As of December 31, 2004, we have awarded 610,600 shares of restricted stock and granted options to acquire an additional 526,700 shares of New Common Stock under this management incentive plan as required pursuant to the Plan of Reorganization. In addition, we have adopted an employee stock option plan for our other employees, which authorizes the issuance of up to 2.175% of the New Common Stock to participants through stock option grants. As of December 31, 2004, we have granted options to acquire 299,963 share of New Common Stock under the employee stock option plan. The balance of available restricted stock and stock options under these plans (totaling approximately 1.2 million shares) will be reserved for future new hires, performance awards or other awards to be determined in the discretion of Holdings’ Board of Directors. If these stock options are exercised, additional grants of options to acquire additional New Common Stock are made or additional restricted stock is awarded, the ownership percentage of the other holders of New Common Stock will be diluted.

The market price of our New Common Stock could be negatively affected upon the issuance of a substantial portion of the remaining shares of New Common Stock to be issued pursuant to the Plan of Reorganization.

The Plan of Reorganization contemplates the issuance of 17,202,666 shares, exclusive of stock grants to our employees and directors, of New Common Stock to holders of allowed general unsecured claims of Atlas, AAWW, Acquisitions and Logistics on a pro rata basis in the same proportion that each holder’s allowed claim bears to the total amount of all allowed claims. None of such shares have yet been issued. The issuance of all or a substantial portion of such shares may cause the market price of our common stock to decline. If the market price of our New Common Stock declined significantly, it could, among other things, also result in an impairment in our ability to access the capital markets should we desire or need to raise additional capital.

We cannot assure you that an active trading market will develop or continue for the New Common Stock and we cannot predict with certainty when we will file our periodic reports on a timely basis.

The New Common Stock is currently quoted on the Pink Sheets and, as a result, there is limited liquidity therein. There can be no assurance that an active market for any of the New Common Stock will develop or continue, and no assurance can be given as to the prices at which it might be traded. Moreover, there can be no assurance that we will be successful in any attempt to have the New Common Stock listed on a national securities exchange or a foreign securities exchange, or quoted on the NASDAQ Stock Market.

At the present time we are unable to file, on a timely basis, our required reports on Forms 10-K and 10-Q. While we are working to improve the timeliness of our filings, we cannot predict with certainty when this will occur.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISLCOSURES ABOUT MARKET RISK

We do not currently hedge against foreign currency fluctuations, interest rate movements or aviation fuel prices.

The risk inherent in our market-sensitive instruments and positions is the potential loss arising from adverse changes to the price and availability of aviation fuel and interest rates as discussed below. The sensitivity analyses presented herein do not consider the effects that such adverse changes might have on our overall financial performance, nor do they consider additional actions we may take to mitigate our exposure to such changes. Variable-rate leases are not considered market-sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below. Actual results may differ. See Note 4 to our Financial Statements for accounting policies and additional information.

Foreign Currency.We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices that could affect our results of operations and financial condition. The Company’s largest exposure comes from the British pound, the Euro, the Japanese yen and various Asian currencies. The Company does not currently have a foreign currency hedging program related to its foreign currency-denominated sales.

Aviation fuel.Our results of operations are affected by changes in the price and availability of aviation fuel. Market risk is estimated at a hypothetical 10% increase in the 2004 average cost per gallon of fuel. Based on actual 2004 fuel consumption for the Scheduled Service and Commercial Charter business segments, such an increase would result in an increase to annual aviation fuel expense of approximately $35.1 million in 2004. Fuel prices for AMC are set each September by the military and are fixed for the year. ACMI does not present a market risk, as the cost of fuel is borne by the customer.

Interest.Our earnings are subject to market risk from exposure to changes in interest rates on our variable-rate debt instruments and on interest income generated from our cash and investment balances. At December 31, 2004, approximately $207.3 million of our debt at face value had floating interest rates. If interest rates increase a hypothetical 20% in the underlying rate as of December 31, 2004, our annual interest expense would increase for 2005 by approximately $2.4 million.

Market risk for fixed-rate long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 20% increase in interest rates, and amounts to approximately $41.7 million as of December 31, 2004. The fair value of our fixed rate debt was $451.3 at December 31, 2004. The fair values of our long-term debt were estimated using quoted market prices and discounted future cash flows.

Borrowings under the Revolving Credit Facility bear interest at varying rates based on either the Prime Rate or the Adjusted Eurodollar Rate. Interest on outstanding borrowings is determined by adding a margin to either the Prime Rate or the Adjusted Eurodollar Rate, as applicable, in effect at the interest calculation date. The margins are arranged in three pricing levels, based on the excess availability under the Revolving Credit Facility. There is no balance outstanding on this facility and changes in interest rates therefore would have had no impact on our reported consolidated income to date.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

Disclosure Controls and Internal Controls

Rule 13a-15(b) under the Exchange Act and Item 307 of Regulation S-K require management to evaluate the effectiveness of the design and operation of our disclosure controls and procedures (“disclosure controls”) as of the end of each fiscal quarter. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Rule 13a-15(c) and (d) and Item 308 of Regulation S-K require management to evaluate the effectiveness of the operation of our “internal controls over financial reporting” (“internal controls”) as of the end of each fiscal year, and any changes that occurred during each fiscal quarter. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized; (ii) our assets are safeguarded against unauthorized or improper use; and (iii) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with U.S. GAAP.

The certifications of the CEO and CFO required pursuant to Rule 13a-14(d)/15d-14(a) under the Exchange Act and 18 U.S.C. Section 1350 (the “Certifications”) are furnished as exhibits to this report. This section of the report contains the information concerning the evaluation of our disclosure controls and changes to our internal controls referred to in the Certifications, and this information should be read in conjunction with the Certifications for a more complete understanding of the topics presented.

We have taken a number of steps to ensure that all information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In particular, we have formed a Disclosure Committee, which is governed by a written charter. Senior management meets on a weekly basis to report, review and discuss material aspects of its business. In addition, the Disclosure Committee, comprised of key management, is now holding regular quarterly meetings, and key members of the Disclosure Committee meet in person or correspond electronically upon the occurrence of an event that may require disclosure with the SEC. Additionally, management has implemented a “sub-certification” process to ensure that the persons required to sign the Certifications in periodic reports are provided with timely and accurate information and to provide them with the opportunity to address the quality and accuracy of our operating and financial results. Finally, with respect to internal controls, we have implemented a “Sarbanes-Oxley 404 Project,” which is further described below.

General Limitations on the Effectiveness of Controls

We are committed to maintaining effective disclosure controls and internal controls. However, management, including the CEO and CFO, does not expect and cannot assure that our disclosure controls or our internal controls will prevent or detect all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, any system of controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Remediation of Material Weaknesses

At the conclusion of each of the audits of our consolidated financial statements for the years ended December 31, 2003 and 2002, our independent registered public accounting firm, Ernst & Young, LLP (“E&Y”), noted in a letter to management and the audit committee of our Board of Directors, a copy of which was presented to our Board of Directors, certain matters involving internal controls that they consider to be “material weaknesses” and “reportable conditions” under standards established by the AICPA. However, E&Y has not been engaged to perform an audit of the Company’s internal controls over financial reporting. Accordingly they have not expressed an opinion on the effectiveness of the Company’s internal controls over financial reporting. “Reportable conditions” involve matters relating to significant deficiencies in the design or operation of internal controls that could adversely affect our ability to record, process, summarize, and report financial data consistent with the assertions of management in our consolidated financial statements. A “material weakness” is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by errors or fraud in amounts that would be material in relation to the consolidated financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

On March 9, 2004, the Public Company Accounting Oversight Board adopted Auditing Standard No. 2 “An Audit of Internal Controls Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements” (“PCAOB No.2”), which somewhat modified the definition of material weakness, and added the terms “significant deficiency” and “internal control deficiency”. Under PCAOB No. 2, an internal control deficiency (or a combination of internal control deficiencies) should be classified as a significant deficiency if, by itself or in combination with other internal control deficiencies, such deficiencies result in more than a remote likelihood that a misstatement of a company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. A significant deficiency should be classified as a material weakness if, by itself or in combination with other control deficiencies, such deficiency results in more than a remote likelihood that a material misstatement in the company’s annual or interim financial statements will not be prevented or detected.

Management, with the assistance of a professional services firm, has implemented a “Sarbanes-Oxley 404 Project” to address, among other things, the matters noted in E&Y’s letter to management, as well as to prepare us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. The documentation phase of the Sarbanes-Oxley 404 Project, which was initiated to evaluate the design effectiveness of our internal controls over financial reporting, has identified internal control deficiencies that would likely meet the PCAOB No. 2 definition of a material weakness or significant deficiency. These material weaknesses and significant deficiencies are comprised of items that had been previously identified by E&Y, as well as several additional matters that were identified separately by management as part of the Sarbanes-Oxley 404 Project.

As of June 15, 2005, we have identified, among other things, material weaknesses in the processes and procedures associated with our purchasing and payables, billing and receivables, inventory, the financial accounting close process, payroll and human resources, and certain weaknesses in the information technology general control environment. Examples of the issues identified include, among many others, inadequate segregation of duties, insufficient staffing in the finance department, failure to reconcile or analyze accounts, lack of effective review of the reconciliations and analysis that are prepared and, in some instances, poor design of controls and poor compliance with existing policies and procedures. As we progress with the Sarbanes-Oxley 404 Project and begin to evaluate the operating effectiveness of existing controls, it is possible that management will identify additional deficiencies that meet the definition of a material weakness or significant deficiency.

Management has initiated substantial efforts to remediate the identified deficiencies and to establish adequate disclosure controls and internal controls over financial reporting as soon as reasonably practicable. Management has significantly increased the number of resources dedicated to our remediation efforts and has established a separate branch of the Sarbanes-Oxley 404 Project to focus exclusively on process transformation and remediation. Dedicated project teams and specific project plans for each process area have been created as part of this effort to address the control deficiencies in their respective areas and to work cross-functionally to address broad remediation items. This project provides for continuous updates as new processes and systems, improvements to internal controls over financial reporting, or changes to the existing processes and systems are implemented to remediate the identified deficiencies. Management is firmly committed to ensuring that improving the internal controls of all of our business processes, including those impacting financial reporting, and establishing and maintaining an effective overall control environment at our company remains a top priority. In that regard, we have also established a steering committee and executive sub-committee that have been tasked with monitoring and driving the progress of the Sarbanes-Oxley 404 Project and its project teams. These committees meet on a regular basis to receive reports and provide feedback and instruction for further progress. Management also provides regular reports to the Audit and Governance Committee on the Sarbanes-Oxley 404 Project. We will provide appropriate updates regarding our general progress with the remediation efforts in future filings.

Additional matters

We have recently hired a Senior Vice President and CFO, Michael L. Barna. Mr. Barna joins the Company from Trafin Corporation and GE Capital Corporation. In addition, we have hired Gordon L. Hutchinson, formerly a Controller of Amtrak, effective May 2, 2005, as Vice President and Controller.

Mr. Hutchinson is a certified public accountant. We believe that the hiring of Mr. Barna and Mr. Hutchinson will have a positive impact on the rapidity with which we can improve our internal controls and address the various matters described above.

Conclusions

As described above, significant deficiencies and material weaknesses exist in our internal controls. We are in the process of taking various steps to remediate the items communicated by E&Y and identified by management as part of our Sarbanes-Oxley 404 Project. Additionally, we continue to take steps to improve our disclosure controls. However, a substantial effort will be required before all such items and matters are fully addressed. Accordingly we cannot provide any assurance that there will be no material weaknesses as of December 31, 2005 when management will report on its assessment of the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required in response to this Item is set forth in Note 10 to the Financial Statements contained in this report.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Pursuant to the Plan of Reorganization, all of our outstanding equity and debt securities were cancelled on the Effective Date.

The issuance of our shares of New Common Stock on the Effective Date was exempt from the registration requirements of the Securities Act of 1933, as amended, and equivalent provisions of state securities laws, under Section 1145(a) of the Bankruptcy Code. Such Section generally exempts from registration the issuance of securities if the following conditions are satisfied: (i) the securities are issued by a debtor under a plan of reorganization, and (ii) the securities are issued in exchange for a claim against, or interest in, the debtor, or are issued principally in such exchange and partly for cash or property.

See Note 3 to the Financial Statements contained in this report for additional information regarding these matters.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES


	a.	Indebtedness

As discussed in Note 2 to the Financial Statements contained in this report, on the Bankruptcy Petition Date, we filed for reorganization under Chapter 11. At June 30, 2004, we were in default under all of our debt arrangements, including the Senior Notes and EETCs. These defaults were cured on the Effective Date of the Plan of Reorganization. See Note 6 to the Financial Statements contained in this report for additional information regarding these securities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarterly period ended June 30, 2004 other than matters voted on by holders of our debt securities in the ordinary course of the Chapter 11 Cases.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


	a.	Exhibits

See accompanying Exhibit Index included after the signature page of this report for a list of exhibits filed or furnished with this report.


	b.	Reports on Form 8-K

	The following reports on Form 8-K were filed during the period for which this Form 10-Q is filed:

	1.	Current Report on Form 8-K dated April 22, 2004 under Items 7 and 9, disclosing the filing of the Debtors’ Joint Plan of Reorganization and accompanying Disclosure Statement, and the issuance of a press release relating thereto.

	2.	Current Report on Form 8-K dated May 5, 2004 under Item 5, disclosing the resignation of Scott J. Dolan as Chief Operating Officer (“COO”).


	3.	Current Report on Form 8-K dated May 24, 2004 under Items 5 and 7, filing a press release announcing that the Company had reached a settlement with the unsecured creditors committees of Atlas and Polar in the ongoing Chapter 11 Cases.

	4.	Current Report on Form 8-K dated June 1, 2004 under Items 5 and 7 disclosing that the Company had filed with the Bankruptcy Court the First Amended Joint Plan of Reorganization and the First Amended Disclosure Statement with respect thereto.

	5.	Current Report on Form 8-K dated June 9, 2004 under Items 5 and 7, filing a press release announcing the approval by the Bankruptcy Court of the Second Amended Disclosure Statement.

	6.	Current Report on Form 8-K dated June 25, 2004 under Item 5 and 7, filing a press release announcing the promotion of Wake Smith to COO.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the date set forth below.


		Atlas Air Worldwide Holdings, Inc.

Dated: July 7, 2005	By:	/s/ Jeffrey H. Erickson

		Jeffrey H. Erickson
		President and Chief Executive Officer


Dated: July 7, 2005	By:	Michael L. Barna

		Michael L. Barna
		Senior Vice President and Chief Financial Officer


EXHIBIT INDEX

Exhibit No.		Description


31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer, furnished herewith.

31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer, furnished herewith.

32.1		Section 1350 Certifications, furnished herewith.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Atlas Air Worldwide (AAWW) 10-Q2004 Q2 Quarterly report

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