Exhibit 10.56

 

Pursuant to 17 CFR 240.24b-2, confidential information (indicated by [***]) has
been omitted and has been filed separately with the Securities and Exchange
Commission pursuant to a Confidential Treatment Application filed with the
Commission.

 

J41 RVA FINAL SETTLEMENT AGREEMENT

[RVA Backed J41 Leases and Related Matters]

 

1.0       DATE AND PARTIES

 

1.1       Date.                                            This Agreement is
effective March 1, 2005.

 

1.2       Parties.                             The parties to this Agreement
are:

 

A.            Independence Air, Inc., a corporation formed and validly existing
under the laws of California (“Independence”), attention Chief Financial
Officer, 45200 Business Court, Suite 100, Dulles, VA  20166, tel: 703-650-6006;
fax: 703-650-6249.

 

B.            FLYi, Inc., a corporation formed and validly existing under the
laws of Delaware (“FLYi”), attention Chief Financial Officer, 45200 Business
Court, Suite 100, Dulles, VA  20166, tel: 703-650-6006; fax: 703-650-6249.

 

C.            BAE Systems Regional Aircraft, Inc., a corporation formed and
validly existing under the laws of Delaware (“BAE”), attention Senior Vice
President, Asset Management, 13850 McLearen Road, Herndon, VA 20171, tel:
703-736-2512; fax: 703-736-2549, acting on its behalf and on behalf of its
affiliate BAE SYSTEMS (Operations) Limited (formerly British Aerospace
(Operations) Limited) (“BAE OPS”).

 

D.            Each of Independence, FLYi, and BAE are occasionally generically
referred to herein as a “Party” and all of Independence, FLYi, and BAE are
occasionally collectively referred to herein as the “Parties”.

 

2.0       RECITALS

 

2.1       BAE OPS entered into several Residual Value Agreements (each an “RVA”)
each relating to a lease of a BAe Jetstream Model 4101 turboprop aircraft (each
an “Aircraft”) to Independence (collectively, the “Leases”).   The RVAs are
described on Exhibit A hereto.

 

2.2       FLYi and Independence (collectively, the “Lessee”) recently completed
a multi-party financial restructuring of various of Lessee’s contractual
obligations (the “Restructuring”).  The Restructuring included the coordinated
termination by default of each of the Leases.

 

1

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2.3       As part of the Restructuring, Lessee requested that BAE OPS issue
certain written assurances to the various J41 lessors that were the
beneficiaries of the RVAs (the “Lessors”).  Those written assurances took the
form of letter agreements that were issued to the Lessors on February 18, 2005
(except with respect to the RVA applying to that aircraft bearing manufacturer’s
serial number 41026).  Those written assurances (the “Beneficiary Letters”) are
substantially in the form attached hereto as Exhibit B.

 

2.4       BAE and Lessee agreed to additional mutual obligations pursuant to the
terms of the Memorandum of Understanding by and between the Parties dated
February 18, 2005, and attached as Exhibit C hereto (the “MOU”).

 

2.5       While the MOU is intended to be a fully enforceable contract, it
contemplates the execution of more definitive documentation.  This J41 RVA Final
Settlement Agreement, and the Exhibits hereto, constitute the “Final Settlement”
as such term is defined in paragraph 10 of the MOU.

 

3.0       REPRESENTATIONS AND WARRANTIES

 

3.1       Independence Representations and Warranties.  Independence represents
and warrants that:

 

A.            Independence is a corporation duly formed and in good standing
under the laws of the State of California.  Independence has duly authorized the
execution, delivery, and performance of this Agreement, and Independence has the
full power and authority to execute, deliver and comply with the terms of this
Agreement.

 

B.            Independence is unaware of any circumstance or claim that might
prevent its performing its obligations under this Agreement.

 

C.            This Agreement constitutes the legal, valid and binding obligation
of Independence which is enforceable against it in accordance with the terms
hereof.  This Agreement does not breach any obligation of Independence under any
contract to which it is a party.  No consent of any person or entity is required
to enable Independence’s performance of its closing obligations under this
Agreement.

 

3.2       FLYi Representations and Warranties.  FLYi represents and warrants
that:

 

A.            FLYi is a corporation duly formed and in good standing under the
laws of the State of Delaware.  FLYi has duly authorized the execution,
delivery, and performance of this Agreement, and FLYi has the full power and
authority to execute, deliver and comply with the terms of this Agreement.

 

2

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B.            FLYi is unaware of any circumstance or claim that might prevent
its performing its obligations under this Agreement.

 

C.            This Agreement constitutes the legal, valid and binding obligation
of FLYi which is enforceable against it in accordance with the terms hereof. 
This Agreement does not breach any obligation of FLYi under any contract to
which it is a party.  No consent of any person or entity is required to enable
FLYi’s performance of its closing obligations under this Agreement.

 

D.            The terms of the Convertible Note to be issued by FLYi pursuant to
paragraph 1 of the MOU are substantially identical to the terms of the other
convertible notes to be issued by FLYi in connection with the Restructuring,
including, without limitation, those in respect of dilution, conversion and
voting rights.

 

3.3       BAE Representations and Warranties.  BAE represents and warrants that:

 

A.            BAE is a corporation duly formed and in good standing under the
laws of the State of Delaware.  BAE has duly authorized the execution, delivery,
and performance of this Agreement, and BAE has the full power and authority to
execute, deliver and comply with the terms of this Agreement.

 

B.            BAE is unaware of any circumstance or claim that might prevent its
performing its obligations under this Agreement.

 

C.            This Agreement constitutes the legal, valid and binding obligation
of BAE which is enforceable against it in accordance with the terms hereof. 
This Agreement does not breach any obligation of BAE under any contract to which
it is a party.  No consent of any person or entity is required to enable BAE’s
performance of its closing obligations under this Agreement.

 

4.0       INCORPORATION OF TERMS BY REFERENCE, MUTUAL RVA RELEASE, BILLS OF
SALE, BROKERS

 

4.1       Incorporation of MOU Terms by Reference. The terms of the MOU are
incorporated, mutatis mutandis, into this Agreement.

 

4.2       Incorporation of Schedules to MOU by Reference.  The Schedules to the
MOU are hereby incorporated into this Agreement by reference as Exhibit C-1
hereto.  The cover sheet to Exhibit C-1 hereto contains a brief description, for
convenient reference only, of the Schedules to the MOU.

 

4.3       Form of Bill of Sale.  The MOU contemplates Lessee’s sale, in certain
installments, of various spare engines, parts, and tooling inventory, with such
parts described on Schedule 7 to the MOU (the “J41 Spare Parts”).  In
conjunction with each sale and delivery of the J41 Spare Parts, the

 

3

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party selling such J41 Spare Parts (be it FLYi or Independence) will issue to
BAE a bill of sale in the form of Exhibit D hereto.

 

4.4       Termination of Residual Value Agreement
[41101].                                The Residual Value Agreement [41101]
dated September 28, 1998 between Independence (formerly known as Atlantic Coast
Airlines) and BAE OPS (“RVA [41101]”) is hereby terminated as of February 18,
2005.

 

4.5       Assignment of Security.  For each RVG Aircraft (as such term is
defined in the MOU) that BAE OPS elects to purchase pursuant to the applicable
RVA, Independence hereby assigns to BAE OPS all of Independence’s right, title,
and interest in and to any cash collateral (“Security Deposits”) or other
security provided by Independence to the applicable Lessor in respect of
Independence’s obligations under the applicable Lease (the Security Deposits
together with such other security (if any) being the “Assigned Collateral”). 
Without limiting the foregoing, the Parties acknowledge that with respect to
certain Lessors, Lessee has separately consented to the Lessor’s retention and
application of the Security Deposits, but in each instance such consent is
conditioned upon such Lessors only being entitled to deduct and apply from such
Security Deposits the amounts authorized by (i) the applicable Lease and
applicable Beneficiary Letter, and (ii) any future agreement between such Lessor
and BAE OPS (it being understood, as a matter of clarification, that BAE OPS
does not currently contemplate entering into any such future agreement). 
Independence warrants that, except as provided above, (1) it has not previously
assigned the Assigned Collateral, (2) to the best of its knowledge the Assigned
Collateral is not subject to any valid lien or encumbrance of any third person,
and (3) it knows of no fact which impairs BAE OPS’s rights to the Assigned
Collateral as provided herein.

 

4.6       Brokers.                      Lessee and BAE each agree that there are
no third parties involved as brokers and finders in this transaction, and Lessee
and BAE agree to indemnify and hold the other harmless from and against all
claims, suits, damages, costs, and expenses (including but not limited to,
reasonable attorney’s fees) asserted by any broker, agent, finder, or other
third party for any commission, fee, or compensation of any nature whatsoever
which in any way may result from, pertain to, or arise in any manner out of, or
are in any manner related to, the making of this Agreement, if such claim,
damage, costs, or expense arises out of any action or alleged action by the
indemnifying Party, its officers, directors, shareholders, agents, or employees
or its successors and assigns.

 

4.7       Mutual RVA Release.  By their execution of this Agreement, FLYi and
Independence each agree that they and their affiliates (the “FLYi Parties”)
hereby forever release BAE, BAE OPS and their affiliates (the “BAE Parties”) for
all claims any of the FLYi Parties might otherwise enjoy against any of the BAE
Parties relating to (1) the RVG Aircraft (as

 

4

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such term is defined in the MOU - the “RVG Aircraft”), other than claims arising
directly from the settlement contemplated under this Agreement, (2) RVA [41101],
and (3) the MACRO/Spares/Other Support Obligations to the extent specifically
provided in paragraph 5 of the MOU (collectively, the “J41 Transactions”).  By
its execution of this Agreement, BAE agrees that the BAE Parties hereby forever
release the FLYi Parties for all claims any of the BAE Parties might otherwise
enjoy against any of the FLYi Parties relating to the J41 Transactions.  
Without limiting the foregoing, no Party will owe any obligation to the other
Parties with respect to the RVG Aircraft other than as set forth in this
Agreement.  For the avoidance of doubt, Independence and FLYi each acknowledge
and agree that in no event shall this release apply to any rights that BAE OPS
may have or subsequently acquire (by subrogation or otherwise) against
Independence and/or FLYi in respect of or related to that Mortgage Residual
Value Agreement [41101] dated September 28, 1998 between Fleet National Bank (as
successor in interest to Summit Bank) and BAE OPS.

 

5.0       GENERAL PROVISIONS

 

5.1       Amendments and Waivers.                       To amend this Agreement
or waive any provision of this Agreement, all Parties must sign a written
amendment or waiver that identifies by section or paragraph number the provision
that it purports to amend or waive.  No non-complying course of dealing may be
construed to amend or waive any provisions of this Agreement.

 

5.2       Assignment.   No Party may assign its rights under this Agreement
without the prior written consent of the other Party.  Any attempt to assign
this Agreement in violation of the preceding sentence will be ineffective to
transfer any rights under this Agreement to the purported assignee.

 

5.3       Notices.                            Notices required or permitted
under this Agreement must be in writing.  Notices may be given by Federal
Express next business day courier (or equivalent overnight courier), fee
prepaid, addressed to the intended recipient at its address in ¶ 1.2, or to such
other notice address as that party designates by notice to the other party, and
any notice so given will be effective one business day after deposit with
Federal Express.  A business day is any day other than a Saturday, Sunday, or
legal holiday in Virginia or New York.  A notice given by other means will be
effective only when actually received by the addressee.

 

5.4       Applicable Law.                                   The law of the State
of Virginia applies to this Agreement, without regard to principles of conflicts
of law.  The Parties agree that this Agreement is made and delivered in Fairfax
County, Virginia, and that any suit, action or proceeding arising out of or in
relation to this Agreement may be instituted in any State or Federal Court of
competent jurisdiction within the State of Virginia.

 

5

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5.5       Construction.

 

A.            When used in this Agreement, defined terms (in quotation marks
within parentheses immediately following the defining term or phrase) have the
defined meaning unless the context clearly indicates otherwise.  Defined terms
may be used in the singular or plural.  Unless otherwise clearly indicated,
paragraph (“¶ ”) references are to paragraphs of this Agreement.

 

B.            If any provision of this Agreement is invalid or unenforceable,
the remaining provisions of this Agreement will be enforceable.

 

C.            This Agreement binds the Parties and their respective successors
and permitted assigns.

 

D.            This Agreement is the entire agreement between the Parties with
respect to the termination of the Leases and the Beneficiary Letters, and merges
and supersedes all former agreements, letters, promises or representations,
whether oral or written, express or implied, that relate to the same.

 

E.              All representations and warranties contained in this Agreement
will survive investigation and closing.

 

F.              No waiver of a claim or default under this Agreement may be
construed to be a waiver of any other claim or default.

 

G.            No rule of construction against a drafting party will apply.

 

H.            Titles and headings are for convenient reference and are not to be
construed in interpretation.

 

I.                 Exhibits A, B, C, C-1, and D are attached to this Agreement
are incorporated by reference.  In the event of a conflict between the terms of
any Exhibit hereto and the main body of this Agreement (being that portion of
the Agreement preceding the Parties’ signatures hereto), the main body of this
Agreement will be given first priority in the event of such a conflict, then the
terms of the Exhibits will control.

 

J.              The term mutatis mutandis, as used in this Agreement, means that
while the affected document will remain generally the same, the parties will
import all necessary changes in points of detail as to names, offices, dates,
addresses, and the like, so as to render such document consistent with the
transaction otherwise contemplated in this Agreement.

 

[Remainder of Page Intentionally Left Blank]

 

6

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SO AGREED:

 

 

 

Independence Air, Inc.

FLYi, Inc.

 

 

 

 

x

 

 

x

 

Name:

 

 

 

Name:

 

 

Title:

 

 

 

Title:

 

 

 

 

BAE SYSTEMS Regional Aircraft, Inc.

 

 

 

 

 

x

 

 

Name:

 

 

 

Title:

 

 

 

 

Signature Page

 

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

 

Exhibit A

 

Description of RVAs

 

Manufacturer’s
Serial No.

 

RVA Title

41015

 

Residual Value Agreement [41015] dated December 30, 1997 between Banc of America
Leasing & Capital, LLC, as successor by merger to NationsBanc Leasing
Corporation and BAE SYSTEMS (Operations) Limited (formerly British Aerospace
(Operations) Limited.

 

 

 

41017

 

Residual Value Agreement [41017] dated December 30, 1997 between Banc of America
Leasing & Capital, LLC, as successor by merger to NationsBanc Leasing
Corporation and BAE SYSTEMS (Operations) Limited (formerly British Aerospace
(Operations) Limited.

 

 

 

41019

 

Residual Value Agreement [41019] dated December 30, 1997 between Banc of America
Leasing & Capital, LLC, as successor by merger to NationsBanc Leasing
Corporation and BAE SYSTEMS (Operations) Limited (formerly British Aerospace
(Operations) Limited.

 

 

 

41098

 

Residual Value Agreement [41098] dated August 1, 1997 between U.S. Bank National
Association, as Loan Trustee, as successor to State Street Bank and Trust
Company (as assignee of First Union National Bank, as Owner Trustee for ICX
Corporation as Owner Participant) for Fleet Business Credit, LLC, as Loan
Participant, as successor to Sanwa Business Credit Corporation and BAE SYSTEMS
(Operations) Limited (formerly British Aerospace (Operations) Limited.

 

Exhibit A

 

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

 

41099

 

Residual Value Agreement [41099] dated August 1, 1997 between U.S. Bank National
Association, as Loan Trustee, as successor to State Street Bank and Trust
Company (as assignee of First Union National Bank, as Owner Trustee for ICX
Corporation as Owner Participant) for Fleet Business Credit, LLC, as Loan
Participant, as successor to Sanwa Business Credit Corporation and BAE SYSTEMS
(Operations) Limited (formerly British Aerospace (Operations) Limited.

 

 

 

41100

 

Residual Value Agreement [41100] dated August 1, 1997 between U.S. Bank National
Association, as Loan Trustee, as successor to State Street Bank and Trust
Company (as assignee of First Union National Bank, as Owner Trustee for ICX
Corporation as Owner Participant) for Fleet Business Credit, LLC, as Loan
Participant, as successor to Sanwa Business Credit Corporation and BAE SYSTEMS
(Operations) Limited (formerly British Aerospace (Operations) Limited.

 

 

 

41022

 

Residual Value Agreement [41022] dated September 15, 1997 between Chase
Equipment Leasing, Inc. (formerly Banc One Leasing Corporation) and BAE SYSTEMS
(Operations) Limited (formerly British Aerospace (Operations) Limited.

 

 

 

41023

 

Residual Value Agreement [41023] dated September 15, 1997 between Chase
Equipment Leasing, Inc. (formerly Banc One Leasing Corporation) and BAE SYSTEMS
(Operations) Limited (formerly British Aerospace (Operations) Limited.

 

 

 

41021

 

Residual Value Agreement [41021] dated September 30, 1997 between The Fifth
Third Leasing Company and BAE SYSTEMS (Operations) Limited (formerly British
Aerospace (Operations) Limited.

 

 

 

41025

 

Residual Value Agreement [41025] dated September 30, 1997 between The Fifth
Third Leasing Company and BAE SYSTEMS (Operations) Limited (formerly British
Aerospace (Operations) Limited.

 

 

 

41026

 

Residual Value Agreement [41026] dated February 13, 1998 between IBJ Whitehall
Business Credit Corporation (as assignee of The Fifth Third Leasing Company) and
BAE SYSTEMS (Operations) Limited (formerly British Aerospace (Operations)
Limited.*

 

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

*Beneficiary Letter for this RVA not issued as of time of execution of this
Agreement.

 

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

 

Exhibit B

 

Beneficiary Letter

 

February       , 2005

 

VIA FACSIMILE
[number]

[Name and address of Beneficiary]

 

Re:                               Residual Value Agreement [           ] dated
            (the “Residual Value Agreement”) between              (the
“Beneficiary”) and BAE SYSTEMS (Operations) Limited (formerly British Aerospace
(Operations) Limited (“Operations”); Capitalized terms used herein and not
defined have the meanings set forth in the Residual Value Agreement.

 

Ladies and Gentlemen:

 

Reference is made to the above-mentioned Residual Value Agreement.  As
requested, Operations hereby acknowledges and agrees that:  (i) a “bona fide
Event of Default” has occurred under the Lease, (ii) upon Beneficiary’s
cancellation of the Lease (including by agreement with ACA) and Beneficiary’s
obtaining of lawful possession of and control over the Aircraft and the right
and power to transfer it in compliance with Section 5 of the Residual Value
Agreement, the “Lease Termination Date” under the Residual Value Agreement will
occur, and (iii) if and after Beneficiary notifies Operations of the Lease
Termination Date and in such notice exercises its option to require Operations
to pay the Shortfall in accordance with Section 2(a) of the Residual Value
Agreement, Operations will comply with its obligations under Section 2 of the
Residual Value Agreement, at all times on the terms and subject to the
conditions set forth in the Residual Value Agreement, and either, as Operations
in its sole discretion may elect, pay the Shortfall or purchase the Aircraft.

 

In addition, you are hereby irrevocably notified that, if Operations purchases
the Aircraft, Operations has agreed with ACA that Operations has waived its
right to any assignment of the Beneficiary’s rights against ACA with respect to
the Lease and any related documents, or to exercise any right of subrogation
against ACA under the Lease and any related documents; provided, however, that
if Operations elects to purchase the Aircraft, ACA has assigned irrevocably,
unconditionally and absolutely to Operations the balance of any collateral or
other security provided by ACA in respect of its obligations under the Lease
(including any “Security Deposit”), remaining after deduction therefrom of any
Basic Rent payment which has become due prior to the date hereof and has not
been made by ACA, after deduction of the Return Condition Adjustment (if any)
under the Residual Value Agreement if it would otherwise be deducted from the
Agreed Value of the Aircraft in calculating the purchase price therefor payable
by Operations and after deduction of any reasonable out-of-pocket expenses
incurred by Beneficiary prior to the date hereof in the exercise of its rights
under the Lease due to the Event of Default thereunder (the “Collateral
Balance”).  In connection with the foregoing, if Operations elects to purchase
the Aircraft, ACA hereby irrevocably instructs Beneficiary (i) to pay the
Collateral Balance to Operations at account no.                  at
            , (ii) that Operations is solely and exclusively

 

Exhibit B

 

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

 

entitled to exercise all of ACA’s rights, titles, interest, claims and remedies
with respect to such collateral or other security, including with respect to the
Collateral Balance, including, without limitation, the right to obtain a refund
or return thereof from Beneficiary or any other Person, and (iii) to deal solely
and exclusively with Operations with respect to such collateral and other
security, including the Collateral Balance.

 

This letter is limited to the precise terms hereof, and does not constitute
(directly or indirectly (by any course of dealing or otherwise)), an amendment,
waiver or other modification of the Residual Value Agreement except to the
extent expressly provided above, or an agreement to provide any amendment,
waiver or other modification (whether similar or dissimilar to the waiver set
forth above) of the Residual Value Agreement in the future.  This letter may be
executed in counterparts and shall be governed by the laws of the State of New
York.

 

 

BAE SYSTEMS (OPERATIONS) LIMITED

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

ACKNOWLEDGED AND AGREED:

 

 

 

BAE SYSTEMS PUBLIC LIMITED COMPANY

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

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

 

INDEPENDENCE AIR, INC.

 

(f/k/a Atlantic Coast Airlines)

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

 

FLYi, INC.

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

S:IA/Beneficiary Letter 02142005

 

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Exhibit C

 

Memorandum of Understanding

 

[As Attached]

 

MEMORANDUM OF UNDERSTANDING

 

FLYi, INC.

INDEPENDENCE AIR, INC.

BAE SYSTEMS REGIONAL AIRCRAFT INC.

 

BAE SYSTEMS Regional Aircraft Inc. (“BAE”), Independence Air, Inc. (“IA”), and
FLYi, Inc. (“FLYi”) agree to the following terms and conditions to settle all
claims and disputes among IA and FLYi and their affiliates, on one hand, and BAE
and its affiliates, including, without limitation, BAE SYSTEMS (Operations)
Limited (“BAE OPS”) on the other hand, with respect to the matters described
below.  Without limiting the binding nature of this agreement, the parties agree
to enter into detailed documentation, including a settlement agreement and other
related agreements and instruments (the “Final Settlement”) to implement the
terms of this agreement (which is itself intended to be legally binding).

 

1.               RVG Aircraft – IA will deliver cash and other assets and
consideration to BAE and BAE OPS, as the case may be, in respect of the eleven
(11) Jetstream 41 aircraft (the “RVG Aircraft”) identified on Schedule 1 to this
MOU upon BAE OPS’ execution and delivery of a letter substantially in the form
of Schedule 2 to this MOU (a “Beneficiary Letter”) to the applicable lessors and
lenders on the ten (10)RVG Aircraft bearing Tail/Serial Numbers N303UE/41015,
N305UE/41019, N307UE/41021, N308UE/41023, N309UE/41022, N312UE/41025,
N324UE/41017, N330UE/41098, N331UE/41099 and N332UE/41100.  Said cash payments
and other consideration will be comprised of:

 

•                  $2,000,000 in cash in full satisfaction of any claim that
BAE, BAE OPS, or their affiliates have or may in the future have against IA,
FLYi, or their affiliates in respect of any of the 11 RVG Aircraft, including
any such claim should BAE become subrogated to the rights of any lessor/lender
under any of the 11 RVG Aircraft through exercise of its rights under the
Residual Value Agreements but subject to the provisions of paragraph 8 below;

 

•                  An unsecured, interest bearing note in the form attached as
Schedule 3 to this MOU issued by FLYi in the face amount of $3,500,000;

 

•                  A convertible note, in the form attached as Schedule 4 to
this MOU, issued by FLYi in the face amount of $5,000,000, convertible into
1,000,000 shares of FLYi common stock on the terms and conditions described
therein (the “Convertible Note”), it being understood that if NASDAQ notice
requirements do not allow for issuing the note as otherwise contemplated
hereunder, such Convertible Note will be issued at the soonest possible date
thereafter allowed by NASDAQ; and

 

•                  Conveyance to BAE, in their AS IS, WHERE IS CONDITION, WITH
NO WARRANTY OF MERCHANTABILITY OR FITNESS OF PURPOSE OR OTHER

 

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WARRANTY AS TO CONDITION, of all of IA’s or FLYi’s unique J41 spare engines,
parts and tooling inventory as [***] (and in no event [***] those items listed)
outlined in the list that IA provided to BAE on February 17, 2005 attached
hereto as Schedule 7 (the “J41 Spare Parts”); provided, however, that [***] not
listed on Schedule 5 to this MOU, [***] J41 aircraft return condition
obligations, strictly subject to IA [***] (i) the respective [***] and/or [***]
and (ii) any [***].  In any event IA shall [***] items listed on Schedule 5 to
this MOU, and IA shall [***] as outlined in Schedule 5 to this MOU.  With
respect to the [***] hereunder, IA shall [***], except that IA and BAE shall
mutually agree [***] seven J41 aircraft have been returned to Trident Turboprop
(Dublin) Limited.

 

•                  From the date hereof until all J41 Spare Parts are returned,
IA shall permit BAE to [***] J41 spare parts and tooling held by IA, that IA
shall return to BAE.  BAE shall [***] for J41 returns in accordance with the
terms herein, and IA and BAE shall [***] J41 Spare Parts list [***], starting
[***].  Upon return of the J41 Spare Parts on [***], IA shall [***] any J41
Spare Part except as previously agreed.

 

The parties acknowledge that certain units (identified in Schedule 8 hereto) of
the Spare Parts were damaged as a result of the activation of a fire control
system (the “Saturated Spares”).  IA is presenting a claim of casualty loss
relating to the Saturated Spares, and will work to negotiate a settlement with
its insurers relating to the saturation of such Saturated Spares.  Upon the
conclusion of such negotiations, IA will offer BAE the option of either
authorizing the settlement (in which case the full settlement amount for the
Saturated Spares will be paid to BAE) or accepting the Saturated Spares in their
AS IS, WHERE IS condition.

 

2.               RVG Aircraft N313UE/41026 – Upon the written request of IA, BAE
OPS will execute and deliver to the then current Beneficiary under Residual
Value Agreement [41026] a letter in the form of one of the letters executed and
delivered by BAE OPS ([***]) pursuant to Paragraph 1 of this MOU, in conjunction
with IA’s cancellation or termination of the lease for the applicable Aircraft.

 

3.               EETC Aircraft - The seven (7) J41 aircraft (the “EETC
Aircraft”) identified on Schedule 6 to this MOU that are the subject of certain
BAE OPS Residual Value Agreements and that are financed through IA’s EETC
offering will remain on lease or mortgage with IA, and IA shall remain current
on all payment and other obligations thereunder and shall not, [***] the EETC
Aircraft [***] for a period of [***] from the date of the Final Settlement.

 

4.               J41 msn 41101/N333UE - IA will permanently waive its right to
exercise the owner RVG on Aircraft msn 41101/N333UE (“N333UE”).  IA will use
[***] N333UE [***] at the earliest practical time [***], but in no event later
than [***].  IA will, at the time of any such [***] N333UE [***].  Until the
aircraft is [***], IA shall [***] in respect of the N333UE.  Upon such [***],
neither IA, FLYi, BAE, nor BAE OPS (or any of their respective affiliates) [***]
with respect to N333UE.

 

5.               MACRO/Spares/Other Support Obligations – These matters shall,
upon the execution and delivery of the Beneficiary Letters as referenced in
Paragraph 1 above, be settled as follows:

 

17

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•                  IA shall pay BAE $[***] to settle all outstanding invoices in
respect of the MACRO Agreement and its spares account with BAE and any past and
future differences related to the MACRO Agreement; and

 

•                  IA shall [***] in respect of (1) [***] the MACRO Agreement
[***],  (2) [***] and (3) [***] in the amount of $[***] pertaining to the early
termination of J32 aircraft.

 

•                  IA shall pay BAE $[***] to settle invoice numbers [***],
relating to [***] upon execution of this MOU.  Additionally IA shall [***] upon
execution of the Final Settlement.

 

6.               Form S-3 Filing – FLYi shall file with the SEC no later than
May 16, 2005 a registration statement on Form S-3 covering resales of the common
shares to be issued upon conversion of the Convertible Note and use commercially
reasonable efforts to obtain resale rights for those shares, and shall use
commercially reasonable efforts to continue the effectiveness of such
registration statement until the second anniversary of the date of the Final
Settlement (or such shorter period as required for SEC Rule 144(k) to be
available).

 

7.               Representation regarding Convertible Note – FLYi shall
represent and warrant at the time of the Final Settlement that the terms of the
Convertible Note [***] the terms of the [***] IA’s February 2005 restructuring
of certain lease obligations, including, without limitation, those in respect of
[***].

 

8.               Assignment of Security - If BAE OPS elects to purchase any RVG
Aircraft, IA shall irrevocably, unconditionally and absolutely assign to BAE OPS
the balance of any cash collateral or other security provided by IA in respect
of its obligations under the related leases remaining [***] of (1) any [***] by
IA, (2) [***] (if any) [***] in connection with [***] and (3) any [***] prior to
the date of any such [***] due to the occurrence of [***] thereunder.  [See
Schedule 1]

 

9.               IA shall reimburse BAE/BAE OPS [***] in connection with [***]
in an amount not to exceed $[***] (the “[***]”).

 

10.         Without limiting the binding nature of this MOU, IA’s counsel shall
prepare the Final Settlement to implement the terms of this MOU. The Final
Settlement documentation shall contain mutual global releases from the
respective parties releasing all claims relating to the RVG Aircraft and the
transactions identified in paragraph 4 above (other than claims arising directly
from the settlement and such other provisions customarily contained in similar
agreements) and shall be negotiated by BAE and FLYi/IA and executed by each of
them before March 1, 2005.

 

[Signature Page Follows]

 

18

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The foregoing is agreed to as of February    , 2005.

 

 

 

INDEPENDENCE AIR, INC.

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

FLYI, INC.

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

BAE SYSTEMS REGIONAL AIRCRAFT INC.

 

 

 

 

 

By:

 

 

 

19

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SCHEDULE 1

 

RVG Aircraft

 

Tail

 

Serial
Number

 

Lessor

 

Lease Start
Date

N303UE

 

41015

 

Bank of America

 

30-Dec-97

N305UE

 

41019

 

Bank of America

 

30-Dec-97

N307UE

 

41021

 

Fifth Third

 

30-Sep-97

N308UE

 

41023

 

BancOne

 

15-Sep-97

N309UE

 

41022

 

BancOne

 

15-Sep-97

N312UE

 

41025

 

Fifth Third

 

30-Sep-97

N313UE

 

41026

 

IBJ

 

13-Feb-98

N324UE

 

41017

 

Bank of America

 

30-Dec-97

N330UE

 

41098

 

RBS-ICX

 

01-Aug-97

N331UE

 

41099

 

RBS-ICX

 

01-Aug-97

N332UE

 

41100

 

RBS-ICX

 

01-Aug-97

 

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SCHEDULE 2

 

Form of Beneficiary Letter

 

February       , 2005

 

VIA FACSIMILE
[number]

 

[Name and address of Beneficiary]

 

 

Re:                               Residual Value Agreement [                   ]
dated                    (the “Residual Value Agreement”) between
                  (the “Beneficiary”) and BAE SYSTEMS (Operations) Limited
(formerly British Aerospace (Operations) Limited (“Operations”); Capitalized
terms used herein and not defined have the meanings set forth in the Residual
Value Agreement.

 

Ladies and Gentlemen:

 

Reference is made to the above-mentioned Residual Value Agreement.  As
requested, Operations hereby acknowledges and agrees that:  (i) a “bona fide
Event of Default” has occurred under the Lease, (ii) upon Beneficiary’s
cancellation of the Lease (including by agreement with ACA) and Beneficiary’s
obtaining of lawful possession of and control over the Aircraft and the right
and power to transfer it in compliance with Section 5 of the Residual Value
Agreement, the “Lease Termination Date” under the Residual Value Agreement will
occur, and (iii) if and after Beneficiary notifies Operations of the Lease
Termination Date and in such notice exercises its option to require Operations
to pay the Shortfall in accordance with Section 2(a) of the Residual Value
Agreement, Operations will comply with its obligations under Section 2 of the
Residual Value Agreement, at all times on the terms and subject to the
conditions set forth in the Residual Value Agreement, and either, as Operations
in its sole discretion may elect, pay the Shortfall or purchase the Aircraft.

 

In addition, you are hereby irrevocably notified that, if Operations purchases
the Aircraft, Operations has agreed with ACA that Operations has waived its
right to any assignment of the Beneficiary’s rights against ACA with respect to
the Lease and any related documents, or to exercise any right of subrogation
against ACA under the Lease and any related documents; provided, however, that
if Operations elects to purchase the Aircraft, ACA has assigned irrevocably,
unconditionally and absolutely to Operations the balance of any collateral or
other security provided by ACA in respect of its obligations under the Lease
(including any “Security Deposit”), remaining after deduction therefrom of any
Basic Rent payment which has become due prior to the date hereof and has not
been made by ACA, after deduction of the Return Condition Adjustment (if any)
under the Residual Value Agreement if it would otherwise be deducted from the
Agreed Value of the Aircraft in calculating the purchase price therefor payable
by Operations and after

 

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

 

deduction of any reasonable out-of-pocket expenses incurred by Beneficiary prior
to the date hereof in the exercise of its rights under the Lease due to the
Event of Default thereunder (the “Collateral Balance”).  In connection with the
foregoing, if Operations elects to purchase the Aircraft, ACA hereby irrevocably
instructs Beneficiary (i) to pay the Collateral Balance to Operations at account
no.               at                 , (ii) that Operations is solely and
exclusively entitled to exercise all of ACA’s rights, titles, interest, claims
and remedies with respect to such collateral or other security, including with
respect to the Collateral Balance, including, without limitation, the right to
obtain a refund or return thereof from Beneficiary or any other Person, and
(iii) to deal solely and exclusively with Operations with respect to such
collateral and other security, including the Collateral Balance.

 

This letter is limited to the precise terms hereof, and does not constitute
(directly or indirectly (by any course of dealing or otherwise)), an amendment,
waiver or other modification of the Residual Value Agreement except to the
extent expressly provided above, or an agreement to provide any amendment,
waiver or other modification (whether similar or dissimilar to the waiver set
forth above) of the Residual Value Agreement in the future.  This letter may be
executed in counterparts and shall be governed by the laws of the State of New
York.

 

 

 

BAE SYSTEMS (OPERATIONS) LIMITED

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

ACKNOWLEDGED AND AGREED:

 

 

 

BAE SYSTEMS PUBLIC LIMITED COMPANY

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

2

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

 

INDEPENDENCE AIR, INC.

(f/k/a Atlantic Coast Airlines)

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

FLYi, INC.

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

3

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SCHEDULE 3

 

Promissory Note

 

US$3,500,000.00

 

 

FEBRUARY 18, 2005

 

FOR VALUE RECEIVED, FLYi , Inc., a Delaware corporation, (the “Maker”) by this
promissory note (this “Note”) hereby unconditionally and irrevocably promises to
pay to the order of BAE SYSTEMS (Operations) Limited, the principal sum of Three
Million Five Hundred Thousand United States Dollars ($3,500,000) in installments
as hereinafter provided and to pay interest on the principal balance hereof from
time to time outstanding, as hereinafter provided, at the rate of six and
seventy-five hundredths percent (6.75%) per annum.

 

The principal hereof shall be paid in twelve (12) installments on the dates
(each a “Principal Payment Date”) and in the amounts as follows:

 

Principal Payment Date

 

Amount

June 30, 2006

 

US$ [***]

July 31, 2006

 

US$ [***]

August 31, 2006

 

US$ [***]

September 30, 2006

 

US$ [***]

October 31, 2006

 

US$ [***]

November 30, 2006

 

US$ [***]

December 31, 2006

 

US$ [***]

February 28, 2007

 

US$ [***]

March 31, 2007

 

US$ [***]

April 30, 2007

 

US$ [***]

May 31, 2007

 

US$ [***]

June 30, 2007

 

US$ [***]

 

Interest on amounts outstanding from time to time under this Note shall be due
and payable on the last day of each month, beginning on March 31, 2005. 
Interest will be calculated on the basis of the actual number of days elapsed
(including the first day, but excluding the last day) over a year of 360 days.

 

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

 

In the event that any amount of principal hereof or accrued interest on this
Note is not paid in full when due (whether at stated maturity, by acceleration
or otherwise), the Maker shall pay to the holder on demand interest on such
unpaid amount (to the extent permitted by applicable law) for the period from
the date such amount was due until such amount shall have been paid in full at
an interest rate per annum equal to [***] percent ([***]%).

 

All payment received hereunder shall be applied first to interest due pursuant
to the fourth paragraph of this Note, second to interest due pursuant to the
third paragraph of this Note and lastly to installments of principal
outstanding.

 

Whenever any payment falls due on a day, which is not a Business Day, the due
date for payment shall be extended to the next following Business Day.  For
purposes of this Note, “Business Day” shall mean a day on which commercial banks
in New York City are open for domestic and foreign exchange transactions.

 

All payments to be made by the Maker under this Note shall be made in United
States Dollars in immediately available and freely transferable funds no later
than 11:00 A.M. (New York City time) on the date on which due, without set-off,
counterclaim, deduction, withholding, restriction and conditions of whatever
nature.

 

The Maker may from time to time prepay on any Principal Payment Date all, but
not part, of the principal amount of this Note; provided that the Maker shall
have paid in full all amounts due under this Note as of the date of such
prepayment, including interest which has accrued to the date of prepayment.

 

Upon default in the prompt and full payment of any installment of principal
hereof or interest on this Note, the entire outstanding principal amount hereof
and interest on this Note to the date of payment shall immediately become due
and payable at the option and upon the demand of the holder.

 

The Maker hereby waives demand, diligence, presentment, protest and notice of
every kind, and warrants to the holder that all action and approvals required
for execution and delivery hereof as a legal, valid and binding obligation of
the undersigned, enforceable in accordance with the terms hereof, have been duly
taken and obtained.  The failure of the holder to exercise any of its rights
hereunder in any instance shall not constitute a waiver thereof in that or any
other instance.

 

To the maximum extent permitted by law, the Maker agrees to pay on demand all
costs and expenses of the holder hereunder that are incurred in connection with
the enforcement of this Note, including, but not limited to (a) reasonable
attorneys’ fees and (b) expenses related thereto.

 

2

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

 

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE COMMONWEALTH OF VIRGINIA.

 

 

 

FLYi, Inc.

 

 

 

 

 

By:

 

 

 

 

(Signature)

 

 

 

 

 

 

 

 

Name:

 

 

 

 

(Print)

 

 

 

 

 

 

 

 

Title:

 

 

 

 

(Print)

 

 

 

S:IA/Promissory Note – BAE OPS

 

3

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

 

SCHEDULE 4

 

CONVERTIBLE NOTE

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY
STATES.  THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE TERMS
OF THIS NOTE, THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM.  INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.  THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL TO
THE HOLDER IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT, ANY
APPLICABLE STATE SECURITIES LAWS AND THE TERMS OF THE NOTE.

 

Convertible Note

 

$5,000,000

 

February    , 2005

 

FLYi, INC., a Delaware corporation (herein called the “Issuer,” which term
includes any successor Person), for value received, hereby promises to pay to
BAE Systems Regional Aircraft Inc. (or its permitted and registered successors
and assigns, “Holder”), the principal sum of Five Million Dollars ($5,000,000)
on or before January 1, 2015 as specified herein (the “Maturity Date”), without
interest, subject to the automatic conversion feature and conversion right set
forth below.  Principal shall be payable in full on the Maturity Date upon
presentation of this Note.  Capitalized terms used herein and not otherwise
defined have the meanings ascribed to them in Section 10 hereof.

 

1.               Conversion upon Maturity.  Unless this Note has been converted
pursuant to the provisions of Section 2 hereof, and provided that on the
Maturity Date neither the Issuer nor Independence Air, Inc. (“IA”) is a debtor
in any bankruptcy or insolvency proceeding, then on December 31, 2014 this Note
shall automatically be converted into a whole number of fully paid and
non-assessable shares of the Issuer’s common stock, par value $0.02 per share
(“Common Stock”), determined by dividing such unpaid principal amount by the
Conversion Price then in effect as determined pursuant to Section 2 and the
indebtedness represented by this Note shall thereupon be discharged in full;
provided, however, that this Section 1 shall not apply in the event of a default
under Section 4.

 

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

 

2.               Conversion Right.

 

2.1.           Conversion to Common Stock.  Provided that on the date of
conversion neither the Issuer nor IA is a debtor in any bankruptcy or insolvency
proceeding, the Holder shall have the right to convert all of the unpaid
principal amount of this Note into a whole number of fully paid and
non-assessable shares of the Issuer’s Common Stock determined by dividing such
unpaid principal amount by the Conversion Price (such right being referred to
herein as the “Conversion Right”).  For purposes of this Note, the “Conversion
Price” on the Issue Date shall be $5.00, and thereafter shall be adjusted only
as provided in this Section 2.

 

2.2.           Adjustments Upon Changes in Capitalization.  The Conversion Right
and the Conversion Price shall be adjusted by the Issuer from time to time as
follows:

 

2.2.1.       Common Stock Splits and Combinations.  If the Issuer at any time or
from time to time after the Issue Date effects a subdivision of the outstanding
shares of Common Stock, then the Conversion Price in effect immediately before
that subdivision shall be proportionately decreased, and conversely, if the
Issuer at any time or from time to time after the Issue Date combines the
outstanding shares of Common Stock, the Conversion Price then in effect
immediately before the combination shall be proportionately increased.  Any
adjustment under this subsection 2.2.1 shall become effective as of the opening
of business on the day following the day upon which such subdivision or
combination becomes effective.

 

2.2.2.       Dividends and Distributions.  In the event the Issuer at any time
or from time to time after the Issue Date makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, without
consideration, a dividend or other distribution payable in additional Common
Stock, then the Conversion Price then in effect shall be decreased as of the
opening of business on the day following the day of such issuance or, in the
event such a record date is fixed, as of the opening of business on the day
following such record date, by multiplying the Conversion Price then in effect
by a fraction (i) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (ii) the denominator
of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock
constituting such dividend or distribution; provided, however, that if such
record date is fixed and such dividend is not fully paid or such distribution is
not fully made on the date fixed therefore, the Conversion Price shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price shall be adjusted pursuant to this
subsection 2.2.2 as of the time of actual payment of such dividend or
distribution.

 

2

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

 

2.2.3.       Recapitalization or Reclassification.  If the shares of Common
Stock issuable upon the conversion of this Note are changed into the same or a
different number of shares of any class or classes of securities of the Issuer,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of Common Stock or dividend payable in Common Stock
provided for in Section 2.2.1 or in Section 2.2.2), then the Conversion Right
and the Conversion Price shall thereafter refer to the right to convert the
unpaid principal amount of this Note into such number and kind of securities as
would have been issuable to Holder as a result of such change if, immediately
prior to such change, the Holder had exercised the Conversion Right as to the
entire unpaid principal amount hereof, and the Conversion Price shall be fixed
by dividing such unpaid principal amount of this Note on the date of such event
by the number of shares or other units of such securities determined thereby,
subject to further adjustment with respect to any other event as provided
herein.

 

2.2.4.       Reorganization or Sale of Issuer.  If there is a capital
reorganization of the Issuer (other than a recapitalization, subdivision,
combination, reclassification or exchange of Common Stock provided for elsewhere
in this Section 2.2) or a merger or consolidation of the Issuer with or into
another company, or the sale of all or substantially all of the Issuer’s
properties and assets to any other Person and there is a resulting distribution
of cash and/or securities and/or property in exchange for, payment of or
cancellation of the Common Stock (other than a cash dividend, and other than a
dividend or distribution of shares of Common Stock provided for in Section 2.2.1
or in Section 2.2.2) and if the Issuer shall not exercise its mandatory
conversion right (if applicable) pursuant to Section 2.3, then the Conversion
Right shall refer to the right to convert the unpaid principal amount of this
Note into such amount, number and kind of cash, securities and/or property as
would have been issuable or distributable to Holder on account of such
reorganization, merger, consolidation, sale or distribution if, immediately
prior to the record date for such event, or in the absence of a record date,
immediately prior to such event, the Holder had exercised the Conversion Right
as to the entire unpaid principal amount under the Note.  In any such case, the
Issuer shall make an appropriate adjustment in the application of the provisions
of this Section 2.2 with respect to the rights of Holder after the
reorganization, merger, consolidation, sale or distribution to the end that the
provisions of this Section 2.2 shall be applicable after that event and be as
nearly equivalent to the provisions hereof as may be practicable.  This
Section 2.2.4 shall have no application in the context of a bankruptcy or in an
insolvency proceeding involving the Issuer.

 

2.2.5.       Limitation on Rights.  Notwithstanding any provision of this Note
to the contrary, before such time as the Note is converted pursuant to Section 1
hereof, or the Holder exercises the Conversion Right or the Issuer exercises its
mandatory conversion right (if applicable) pursuant to Section 2.3, and

 

3

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

 

shares of Common Stock are issued to Holder (or in such name as specified by
Holder) pursuant to Section 2.4, nothing set forth herein shall be interpreted
as vesting in Holder or in any other person any voting or other rights as a
holder of Common Stock or of any other equity interests in Issuer pursuant
hereto for any purpose.  No other provisions for the adjustment of the
Conversion Right and/or the Conversion Price shall be provided to the Holder nor
shall the consent of the Holder be required for any of the transactions
described in Section 2.2 or Section 2.3 or for any other corporate transaction.

 

2.2.6.       Calculation of Adjustments.  All calculations under this
Section 2.2 shall be made by the Issuer and shall be made to the nearest cent or
to the nearest one-thousandth (1/1,000) of a share (or if there is not a nearest
one-thousandth of a share, to the next lower one-thousandth of a share),
whichever of the foregoing results in the rounding process having the least
effect, as the case may be.  No adjustment to the Conversion Price shall be
required unless such adjustment would require an increase or decrease of at
least one percent (1%) therein; provided, however, that any adjustments that by
reason of this subparagraph are not required to be made shall be carried forward
and taken into account in any subsequent adjustment.  The Issuer shall upon
request by the Holder notify the Holder of the Conversion Price and provide a
brief statement of the facts requiring such adjustment and the calculation of
any adjustment thereto.

 

2.3.           Mandatory Conversion Right.  In the event of a corporate
transaction or event (whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification or otherwise) in
which the Issuer will cease to have a class of equity securities registered
pursuant to Section 12 or 15(d) of the Securities Exchange Act of 1934 or in
which the Issuer will survive only as a subsidiary of another entity that prior
to such transaction or event was unaffiliated with the Issuer, then the Issuer
shall have the right immediately prior to the closing of such corporate
transaction or the occurrence or effectiveness of such event to convert this
Note into the Common Stock based upon the Conversion Price in effect at the time
of such conversion; provided that the Issuer is not a debtor in bankruptcy or in
an insolvency proceeding on such date.

 

2.4.           Conversion Procedures.  In order to exercise the Conversion Right
with respect to the Note, the Issuer must receive at the office of the Issuer at
45200 Business Court, Suite 100, Dulles, Virginia, or at such other office or
agency as the Issuer may maintain for such purpose and specify to Holder, the
original of the form entitled “Conversion Notice” in the form attached as
Exhibit B to the Note, duly completed and manually signed, together with the
Note duly endorsed for transfer, or accompanied by a written instrument of
transfer in the form attached as Exhibit A to the Note and duly executed, by
Holder or his attorney duly authorized in writing, with signature guaranteed. 
Such notice shall also state the name or names (with address or addresses) in
which the certificate or

 

4

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

 

certificates for Common Stock which shall be issuable on such conversion shall
be issued, and shall be accompanied by transfer or similar taxes, if required by
law.  The Issuer shall issue and deliver to the Holder a certificate or
certificates for the number of whole shares of Common Stock issuable upon any
conversion of this Note, no later than the fifth (5th) business day following
the date that the Issuer receives the documents and information as required in
this Section 2.4 or, if the Note is converted upon the Maturity Date pursuant to
Section 1 or the Issuer exercises its mandatory conversion right pursuant to
Section 2.3, no later than the fifth (5th) business day following the date of
such conversion, at the office of the Issuer at 45200 Business Court, Suite 100,
Dulles, Virginia, or at such other office or agency as the Issuer may maintain
for such purpose and specify to Holder; provided, however, that such certificate
or certificates may be delivered at the option of the Issuer to Holder at such
other account as shall be designated by Holder at the time of such conversion.

 

3.               Restrictions on Transfer.  Holder shall not make any
disposition of this Note unless (i) such disposition relates to the entire
unpaid principal amount of the Note, (ii) such disposition is made in compliance
with applicable securities laws, and (iii) Holder shall have notified the Issuer
of the proposed disposition and shall have furnished the Issuer with a detailed
statement of the circumstances surrounding the proposed disposition and an
opinion of counsel to the Holder in form and substance reasonably satisfactory
to the Issuer to the effect that any proposed transfer or resale is in
compliance with the Act, any applicable state securities laws and the terms of
the Note.

 

4.               Defaults and Remedies.  The occurrence of any default hereunder
shall, at the option of Holder, cause the entire unpaid balance of this Note to
become immediately due and payable.  A default shall occur hereunder upon the
occurrence of any of the following events:  (i) failure to convert the Note into
Common Stock as provided for hereunder within ten business days after written
notice from Holder to Issuer of the failure to perform such obligation under
this Note if such failure has not been cured before the end of such ten business
day period, (ii)  the commencement of any voluntary proceedings under any
bankruptcy or insolvency laws by the Issuer or IA, or (iii) the commencement of
any involuntary proceedings under any bankruptcy or insolvency laws against the
Issuer or IA, if the same have not been fully discharged within sixty days after
the commencement thereof.

 

5.               Amendments and Waivers.  This Note and the rights and
obligations of the Issuer or Holder may be amended only pursuant to a written
agreement between the Issuer and Holder.  Holder may waive compliance by the
Issuer with any or all provisions of this Note and with any or all past defaults
under this Note and their consequences, if such waiver is in writing.  Any such
written consent or written waiver by Holder shall be conclusive and binding upon
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange hereof or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.

 

5

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

 

6.               Denominations, Transfer, Exchange.  This Note may not be
transferred or resold except as expressly permitted under the terms of this
Note, the Act and applicable state securities laws, and only as to the entire
unpaid principal amount thereof.  The Note may be transferred (a) only to a
“Qualified Institutional Buyer” as defined in Rule 144A (or any successor rule)
under the Act, or (b) in a transaction not involving a distribution (pursuant to
an exemption from the Act) provided that the Holder shall have delivered an
opinion of counsel to the Holder in form and substance reasonably satisfactory
to the Issuer to the effect that any proposed transfer or resale is in
compliance with the Act, any applicable state securities laws and the terms of
the Note.    The transfer of this Note shall be effective only upon surrender of
this Note to the Issuer for registration of transfer at the office of the Issuer
at 45200 Business Court, Suite 100, Dulles, Virginia, or at such other office or
agency of the Issuer as the Issuer may maintain for such purpose and specify to
Holder, accompanied by a written instrument of transfer in the form attached as
Exhibit A to the Note and duly executed by Holder or his attorney duly
authorized in writing, with signature guaranteed, and such other documents or
opinions as provided for herein or as reasonably requested by the Issuer, and
thereupon a new Note in the form hereof, mutatis mutandis, will be issued to the
designated transferee.

 

7.               Place and Form of Payment.  If the Issuer shall elect to pay
the principal payable under the Note or the principal shall otherwise become due
and payable pursuant to Section 4 hereof, such principal will be paid to the
Person in whose name this Note is registered at the close of business on the
last business day immediately prior to the date for such payment of principal. 
Payment of principal on this Note will be made at the office of the Issuer at
45200 Business Court, Suite 100, Dulles, Virginia, or at such other office or
agency of the Issuer as the Issuer may maintain for such purpose and specify to
Holder, and such payment shall be made in immediately available funds and in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
such payment may be made at the option of the Issuer to Holder at such other
account as shall be designated by Holder at least ten (10) business days prior
to the Maturity Date.

 

8.               Persons Deemed Owners.  The Issuer and any agent of the Issuer
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note shall be overdue, and neither the
Issuer nor any agent of Issuer shall be affected by notice to the contrary.

 

9.               Governing Law.  This Note shall be governed by and construed in
accordance with the law of the State of New York, including all matters of
construction, validity, and performance.

 

10.         Definitions.  For purposes of this Note, the following terms shall
have the meanings set forth below:

 

“Issue Date” means February [    ], 2005.

 

6

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

 

“Person” means any individual, corporation, association, partnership, limited
liability company, joint venture, trust, estate or other entity or organization.

 

[SIGNATURE PAGE FOLLOWS]

 

7

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

 

SIGNATURE

 

IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed.

 

Dated:

 

, 2005

FLYi, INC.

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

 

 

Signature Page

 

8

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

 

Exhibit A

 

FORM OF ASSIGNMENT

 

For value received, the undersigned hereby sells, assigns and transfers unto
                                         the within Note of FLYi, Inc. and all
rights thereunder, and hereby irrevocably constitutes and appoints
                                    attorney to transfer the said Note, with
full power of substitution in the premises.

 

 

Dated:

 

 

 

 

Social Security or other tax identification
number of transferee

 

 

Assignor’s Signature:

 

 

 

 

Name:

 

NOTICE:                The assignor’s signature to this assignment must
correspond with the name as it appears upon the face of the within Note in every
particular without alteration or any change whatever.

 

Signature Guaranteed:

 

 

 

 

By:

 

Form of Assignment

 

9

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

 

Exhibit B

 

CONVERSION NOTICE

 

The undersigned hereby irrevocably exercises the option to convert the
FLYi, Inc. Convertible Note dated February [     ], 2005 (the “Note”) with an
original principal amount of [Inset Principal Amount] Dollars ($[Insert
Principal Amount]) into shares of Common Stock of FLYi in accordance with the
terms of the Note, and directs that such shares be delivered to and be
registered in, the name of the Holder or such name as specified below.

 

 

 

HOLDER

 

 

Dated:

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

 

 

Form of Coversion Notice

 

10

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

 

SCHEDULE 5

 

J41 SPARE PARTS – [***]

 

1.         [***], identified by Serial Number as follows:

 

[***]

[***]

[***]

[***]

[***]

[***]

[***]

[***]

[***]

 

2.         [***]

 

3.         [***]

 

4.         [***] as noted below:

 

 

 

Part Number

 

Description

 

Quantity

 

Fire
Damage

 

FLYI to
hold th.
[***]

 

Return
to BAE
by
[***]

 

Return to
BAE by
[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

 

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

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

 

 

[***]

 

[***]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[***]

 

 

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

*[***] in the quantity noted in this column [***]

 

2

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

 

SCHEDULE 6

 

EETC Aircraft

 

Tail

 

Serial
Number

 

Lessor

 

Lease or
Loan Start
Date

 

41033

 

N315UE

 

Loan

 

26-Sep-97

 

41031

 

N317UE

 

Loan

 

26-Sep-97

 

41045

 

N321UE

 

Loan

 

26-Sep-97

 

41097

 

N329UE

 

Loan

 

26-Sep-97

 

41020

 

N306UE

 

RBS-ICX

 

26-Sep-97

 

41029

 

N311UE

 

RBS-ICX

 

26-Sep-97

 

41027

 

N314UE

 

RBS-ICX

 

26-Sep-97

 

 

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

 

SCHEDULE 7

 

J-41 Spare Parts

 

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

 

SCHEDULE 8

 

Saturated Spares

 

Part Number

 

Serial
Number

 

Description

 

Part Status

 

Reason

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

[***]

 

[***]

 

[***]

 

[***]

 

Saturated Part

 

 

Exhibit C

 

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

 

Exhibit C-1

Schedules to MOU

 

Schedule 1

 

Eleven (11) Jetstream 41 aircraft (the “RVG Aircraft”)

 

Schedule 2

 

Beneficiary Letter

 

Schedule 3

 

Unsecured, interest bearing note in the face amount of $3,500,000

 

Schedule 4

 

Convertible note in the face amount of $5,000,000

 

Schedule 5

 

J41 Spare Parts – [***]

 

Schedule 6

 

EETC Aircraft

 

Schedule 7

 

J41 Spare Parts

 

Schedule 8

 

Saturated Spares

 

 

Exhibit C-1

 

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

 

Exhibit D

 

Form of Bill of Sale

 

AIRCRAFT PARTS WARRANTY BILL OF SALE

 

KNOW ALL MEN BY THESE PRESENTS:

 

THAT Independence Air, Inc., a California corporation, whose address is 45200
Business Court, Suite 100, Dulles, VA  20166 (“Seller”), is the owner of those
[spare engine(s)][propeller(s)][aircraft parts] as further described in
Attachment I to this bill of sale (the “Parts”).

 

THAT for and in consideration of the sum of Ten United States Dollars ($10
U.S.D.) and other valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, pursuant to Paragraph 4.3 of that J41 RVA Final
Settlement Agreement by and between Independence Air, Inc., FLYi, Inc., and BAE
Systems Regional Aircraft, Inc. effective as of March 1, 2005, Seller does this
         day of               , 2005, grant, convey, transfer, bargain and sell,
deliver and set over unto BAE Systems Regional Aircraft, Inc. (“Buyer”), whose
address is BAE Systems Regional Aircraft, Inc., 13850 McLearen Road, Herndon,
VA  20171, and unto its successors and assigns, all of Seller’s right, title,
and interest in and to the above described Parts in their “AS IS”, “WHERE IS”
condition, without any representation as to airworthiness, design, material,
fitness for use for a particular purpose, the absence therefrom of latent or
other defects (whether or not discoverable) , or as to any other representation
or warranty of any kind or nature whatsoever (express or implied) except the
warranty of title expressly set forth herein.

 

THAT Seller hereby warrants to Buyer, its successors and assigns, that there is
hereby conveyed to Buyer on the date hereof good title to the aforesaid Parts,
free and clear of liens and encumbrances.

 

THIS Bill of Sale is delivered by Seller to Buyer at Seller’s Virginia
headquarters, and will be governed by the laws of the State of Virginia,
exclusive of any choice of law rule of that or any other jurisdiction which
would cause any matter to be referred to the law of any jurisdiction other than
the State of Virginia.

 

IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be executed in its
name this        day of                   , 2005.

 

 

SELLER:

 

 

 

INDEPENDENCE AIR, INC.

 

 

 

 

 

 

x

 

 

Print:

 

 

 

Title:

 

 

 

Exhibit D

 

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

 

Attachment I to Exhibit D

 

Description of Parts

 

[Brief description of Parts then sold]

 

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