Document:

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

 

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

 

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

 

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

 

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

 

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

 

	
  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

 

 

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

 

 

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

 

•                  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

 

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

 

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

  

 

 

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

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

  [***]

  	
   

  	
  [***]

  	
   

  
	
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  [***]

  	
   

  	
  [***]

  	
   

  
	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
   

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  
	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
   

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  
	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  	
   

  	
   

  	
  [***]

  	
   

  	
  [***]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  [***]

  	
   

  

 

*[***]
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]Exhibit
10.57

 

A form of note in substantially this format was provided to certain
lessors and lenders.

 

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.

 

Form of Convertible Note

 

	
  $

  	
                      ,
  20    

  

 

 

FLYi,
INC., a Delaware corporation (herein called the “Issuer,” which term includes
any successor Person), for value received, hereby promises to pay to                     
(or its permitted and registered successors and assigns, “Holder”), the
principal sum of Five                 
Dollars ($                )
on or before                     ,
20     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                     ,
20     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            ,
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.

 

2.2.3.       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 

 

2

 

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 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 

 

3

 

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.  [In addition, in the event
that the Common Stock issuable upon conversion of the Note is subject to an
effective registration statement covering the resale thereof or would be
eligible for resale pursuant to Rule 144(k) (or any successor rule) under the
Act, and the closing price of the Common Stock reported on the Consolidated
Transaction Reporting System for at least 20 trading days in a period of 30
consecutive trading days is more than 120% of the Conversion Price, then the
Issuer shall have the right to convert this Note into the Common Stock based
upon the Conversion Price in effect at the time of such conversion.]

 

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 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 

 

4

 

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.

 

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 

 

5

 

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                     ,
20    .

 

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

 

[SIGNATURE
PAGE FOLLOWS]

 

6

 

SIGNATURE

 

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

 

	
  Dated:
                        ,
  20    

  	
  FLYi,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
								

 

 

Signature Page

 

7

 

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

 

 

Exhibit B

 

CONVERSION NOTICE

 

The
undersigned hereby irrevocably exercises the option to convert the FLYi, Inc.
Convertible Note dated                     ,
20     (the “Note”) with an original principal amount of               
Dollars ($                )
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 Conversion Notice

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