SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
February 18, 2005
FLYi, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21976 13-3621051
State or Other Commission File IRS Employer
Jurisdiction of Number Identification No.
Incorporation
45200 Business Court, Dulles, VA 20166
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(703)650-6000
N/A
(Former Name or Former Address, if Changed Since Last
Report)
Introductory Note
On February 22, 2005, FLYi, Inc. (NASDAQ/NM: FLYI), parent
of low-fare airline Independence Air, issued a press release
stating that on February 18, 2005 it successfully completed
a consensual restructuring of certain of its financial
obligations and filed a Form 8-K to describe certain aspects
of the restructuring. This Form 8-K is filed to provide
information under Items 1.01, 2.03, 3.02 and 8.01 with
respect to the restructuring. FLYi, Inc. and its
subsidiaries are collectively sometimes referred to herein
as the "Company".
This filing on Form 8-K contains forward-looking statements
and is made as of February 25, 2005, and the Company
undertakes no obligation to update its disclosures, whether
as a result of developments in its efforts, or as a result
of any other new information, future events, changed
expectations or otherwise, prior to its next required filing
with the Securities and Exchange Commission. Such forward-
looking statements are subject to risks, uncertainties,
assumptions and other factors that may cause the actual
results of the Company to be materially different from those
reflected in such forward-looking statements. Such risks
and uncertainties include, among others: the ability of the
Company to effectively implement its low-fare business
strategy utilizing regional jets and Airbus aircraft, and to
compete effectively as a low-fare carrier, including
passenger response to the Company's new service, and the
response of competitors with respect to service levels and
fares in markets served by the Company; the ability to
expand the Company's customer base through third party
distribution services; the ability to successfully and
timely complete the acquisition of its Airbus aircraft, and
to successfully integrate these aircraft into its fleet; the
effects of high fuel prices on the Company; the ongoing
deterioration in the industry's revenue environment; and
general economic and industry conditions; and other risk
factors that are more fully disclosed under "Management's
Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Form 10-K for the year ended
December 31, 2003, its Quarterly Report Form 10-Q for the
period ended September 30, 2004 and in subsequently filed
Forms 8-K.
Item 1.01 Entry into a Material Definitive Agreement
A. Lease Termination Agreements
The Company has entered into a series of agreements with GE
Commercial Aviation Services, Inc. and certain of its
affiliates ("GECAS") as owner participant under leveraged
leases relating to 24 50-seat Canadair Regional jets
("CRJs"), and with the various parties as loan participant
under those leveraged leases, providing for the early
termination of the leases. As previously disclosed in a
Form 8-K filed on January 11, 2005, the Company entered into
an agreement relating to 10 such aircraft on January 7,
2005, and on February 18, 2005 the Company entered into
agreements relating to an additional 14 such aircraft.
Those agreements provide for the amendment of the leases to
shorten the term of the leases such that they expire between
February 2005 and July 2005. The agreements also reduce the
rent prior to the date of the lease expiration to the amount
of accrued interest on the underlying leveraged lease loan.
Under the agreements the Company will be required to meet
certain amended return conditions and to deliver the
aircraft by agreed dates, but upon satisfaction of these
obligations will have no further rent obligations with
respect to periods after the amended lease expiration dates
with respect to these aircraft. The termination of the 24
leases will result in an accounting charge now estimated at
$7.5 million to be taken as the leases are terminated to
reverse accruals for prepaid rents net of deferred credits
for these aircraft. This estimate is an update to the $9.0
million estimated in the Company's 8-K filing of January 11,
2005.
B. Milestone Contingent Lease Termination Agreement
On February 18, 2005, the Company has also entered into an
agreement with GECAS that establishes certain financial
milestones applicable to the previous three month period
ending on the eight calendar monthly periods June,
September, October, November and December 2005 and January,
February and March 2006 (Milestone Months). The financial
milestones consist of tests for (1) the Company's
unrestricted cash balance and (2) its earnings before
interest, taxes, depreciation, amortization, wage or other
non-cash expense associated with the expensing of stock
options, and aircraft rents as a percentage of passenger
revenues. Should the Company fail to satisfy the tests for
a Milestone Month, or fail to provide the information
necessary for the measurement of the milestones, GECAS will
have the option, exercisable within ninety days following
the delivery of the financial statements for such Milestone
Month, to terminate the lease for one additional CRJ
aircraft for each Milestone Month, up to a maximum of eight
CRJ aircraft. The terms of the termination of the leases
would be similar to those for the 24 aircraft to be early
terminated as described above.
C. Term Loan and Related Pledge Agreements
On February 18, 2005, the Company's subsidiary Independence
Air entered into a term loan agreement with GECAS, for
$16.17 million and borrowed the full amount available under
the term loan. The term loan is guaranteed by the Company.
The loan bears interest at a spread over three month LIBOR
based on an agreed market rate, and is payable in 60 monthly
installments ranging from approximately 1.4% of principal to
approximately 2.0% of principal, with a final maturity on
February 18, 2010. Independence Air is not permitted to
voluntarily prepay the loan for three years and may do so
thereafter only if it provides a letter of credit or other
acceptable security in an amount equal to the payments that
are being deferred under leases of 13 CRJ aircraft. The
loan is secured by Independence Air's 11 CRJ spare engines
and its CRJ spare parts. The loan agreement also provides
that the sum of the outstanding amounts of the loan and
lease deferral amounts may not exceed specified percentages
of the appraised values of the collateral. If these
percentages are exceeded, Independence Air is required to
make a partial prepayment on the loans or provide additional
collateral to restore compliance. Subject to these
requirements, Independence Air is permitted to dispose of
collateral to the extent they become surplus to normal
operations.
In connection with the term loan, on February 18, 2005,
Independence Air also provided GECAS and its affiliates who
are owner participants under leverage leases with liens on
the CRJ engines and CRJ spare parts collateral as security
for all of its existing and future obligations to GECAS
under 13 CRJ aircraft leases as to which lease payments are
being deferred and for its obligations regarding certain
other CRJ aircraft leased by GECC affiliates which are being
early terminated. These liens are subordinated to the liens
securing the term loan. The collateral documents for the
subordinated liens provide for a release of this collateral
in the absence of events of default at the final maturity of
the term loan or the earlier voluntary prepayment of the
term loan and the provision of acceptable security in an
amount equal to the lease deferral amounts, including
reductions in collateral as such amount declines over time.
The maximum amount of the lease deferral obligations
outstanding during this period is estimated to be
approximately $22.8 million. The Company has guaranteed the
payment and performance of Independence Air's obligations
under the subordinated lien documents.
D. British Aerospace Agreement
The information set forth below in paragraph B.1 under Item
8.01 is incorporated herein by reference.
Item 2.03. Creation of a Direct Financial Obligation.
The information set forth above in paragraph C under Item
1.01 and the information set forth below in paragraph B.1
under Item 8.01 is incorporated herein by reference.
Item 3.02 Unregistered Sales of Equity Securities.
In exchange for concessions from aircraft financing parties,
the Company agreed to issue a total of 8,284,127 additional
shares of FLYi common stock, $0.02 par value, either
directly or under convertible non-interest bearing notes.
The Company entered into agreements to issue 2,165,000 of
these shares on February 18, 2005. The shares of common
stock are to be issued to certain aircraft lessors and
lenders as partial consideration for their agreeing to
participate in the restructuring of the terms of their
respective aircraft loans or leases through certain of the
transactions described above in paragraph A under Item 1.01
and below in paragraph A and C under Item 8.01. The number
of shares of common stock issued to each lessor or lender
was determined through arms-length negotiations, and no
separate valuation was assigned to the issuance of the
shares. None of the shares of common stock were issued in
exchange for cash. The shares were issued in privately
negotiated transactions in reliance upon the exemption from
registration provided under Section 4(2) of the Securities
Act of 1933.
In addition, the Company agreed to issue 6,119,127 shares of
common stock pursuant to non-interest bearing notes. The
Company entered into agreements to issue the non-interest
bearing convertible notes with respect to all but
approximately 321,000 of the shares on February 18, 2005.
The non-interest bearing convertible notes are to be issued
to aircraft lessors and lenders and an aircraft manufacturer
as partial consideration for their agreeing to participate
in the transactions described below in paragraphs B and C
under Item 8.01. The number of shares of common stock
issuable under each of the arrangements was determined
through arms-length negotiations, and was determined
separately from negotiations over the face amount of the non-
interest bearing convertible notes. None of the non-
interest bearing convertible notes was issued in exchange
for cash. With respect to all but approximately 1,821,000
of the shares, the convertible notes reflect a conversion
price of $5 per share, and the effective conversion price
for the remainder of the shares issuable under the
convertible notes is higher than $5 per share. The non-
interest bearing notes are convertible by the holder at any
time and by the Company at maturity and upon certain
corporate transactions. The non-interest bearing
convertible notes mature on January 1, 2015 with respect to
3,688,581 of the shares, and on April 1, 2006 with respect
to 2,430,546 of the shares. The non-interest bearing
convertible notes were issued in privately negotiated
transactions in reliance upon the exemptions from
registration provided under Section 4(2) and Rule 144A of
the Securities Act of 1933, and the shares issuable upon
conversion of the non-interest bearing convertible notes
will be issued in reliance upon the exemption provided under
Section 3(a)(9) of the Securities Act of 1933.
The Company has committed to file by May 16, 2005 a
registration statement covering resales of the shares of
common stock issuable in the foregoing transactions, and to
use its reasonable best efforts to have the registration
statement declared and remain effective until February 19,
2007, subject to certain exceptions.
Item 8.01 Other Events
A. Agreements with CRJ Lenders and Lessors
For a total of 52 CRJ aircraft that are financed through
leveraged leases or through mortgage loan financings, the
Company has amended the operative lease or loan agreements
as of February 18, 2005 to revise the rental and loan
payment structure from semi-annual payments to monthly
payments and to defer approximately $70 million of the rent
or loan payments that would have been due between January
2005 and February 2007. The interest portion of the
payments will be repaid monthly beginning January 1, 2005,
and the principal portion of the deferred rent and loan
payments will be repaid on a monthly basis beginning in May
2006.
B. Jetstream 41 Turboprop Aircraft
The Company has entered into a series of agreements for the
consensual early termination of leases for 21 of the 30
Jetstream 41 ("J41") turboprop aircraft that were previously
retired from the Company's operating fleet and are not
currently used in Independence Air operations. The
agreements are with the lessors of those aircraft, with the
lenders in the leveraged leases covering three of the
aircraft, and with the manufacturer that provided certain
residual support in connection with the leases.
1. Agreement with BAE Systems
BAE Systems (Operations), Limited and its affiliates
("BAE"), the manufacturer of the J41 aircraft, had provided
certain residual value support to the lessors of 10 of the
J41 aircraft that are subject to early termination
agreements. The Company entered into an agreement with BAE
on February 18, 2005 to resolve certain issues relating to
BAE and to the lessors as a result of the early termination
of the leases, and to resolve any claims which BAE may have
against the Company resulting from those agreements. BAE
agreed to accept the applicability of its support agreements
to the lessors upon the early termination of the leases, and
agreed that it would not pursue further claims against the
Company relating to those agreements. The Company agreed to
provide various consideration to BAE, including a cash
payment of $2 million, and the issuance of a promissory note
of $3.5 million bearing interest at 6.75% payable monthly
and with principal repaid between June 2006 and June 2007,
with $3 million in principal repaid in 2006 and the balance
in 2007. The Company also agreed to issue one of the non-
interest bearing promissory notes described above under Item
3.02 in the total amount of $5 million, convertible into 1
million shares of the Company's stock, and agreed to turn
over all of its remaining J41 spare engines, parts and
tooling to BAE. The Company also agreed that should BAE
elect to settle any of its residual value agreements by
purchasing the aircraft from the lessors, the Company would
relinquish its claim to any refund of the security deposits
for all of the aircraft applicable to the purchased
aircraft. The amount of the deposits is further described
below.
2. Agreement with J41 Lenders and Lessors
The agreements with the lessors of the J41 aircraft provide
for the early termination of the leases, the return of the
aircraft to the lessors, and the elimination of future rent
obligations. These agreements were entered into as of
February 18, 2005 for 17 aircraft and as of January 14, 2005
for 4 aircraft. These lease terminations are expected to
reduce the Company's net payments during the period from
January 2005 through February 2007 by $13.5 million. The
Company will be responsible for certain return obligations
with respect to these aircraft, but upon satisfaction of
these obligations will have no further rent obligations with
respect to these aircraft. The Company has posted, at the
time the leases were initially agreed, a total of $3.71
million in security deposits applicable to the J41 aircraft
that are subject to these agreements. The Company has
permanently relinquished its claim to $2.16 million of these
deposits and conditionally relinquished its claim to the
remainder of these deposits, and does not anticipate the
return of any of these deposits. The Company previously
recorded an early retirement charge for the J41 aircraft as
they were removed from operation. The early retirement
charge for these aircraft will be reversed as the actual
costs of the lease terminations are recorded.
The Company agreed to provide consideration to the
counterparties of these agreements including cash payments
totaling approximately $3,451,000 and the issuance of
promissory notes totaling approximately $2.6 million bearing
interest at 6.75% payable monthly and with equal payments of
principal and interest monthly from February 2007 through
June 2010. The Company also agreed to issue non-interest
bearing convertible notes described above under Item 3.02 in
the total amount of $20,952,113, convertible into 3,559,586
shares of the Company's stock. The Company also agreed to
various terms with respect to the redelivery of the aircraft
and to the condition of the aircraft upon return.
In addition to the 21 J41s that were the subject of these
agreements, the Company has possession of 9 other J41s and
has not resolved its obligations with respect to these
aircraft. Of these, 7 J41s are financed by its Enhanced
Equipment Trust Certificate securitizations and were not
subject to negotiations or restructuring agreements between
the Company and its creditors, 1 is leased by a party that
declined to participate in the restructuring, and 1 is owned
by the Company and is being offered for sale.
C. 328Jet Aircraft
The Company had previously disclosed that, as a result of
its Delta Connection agreement being terminated without
cause, it had the right to assign to Delta Air Lines, Inc.
("Delta") leases for 30 Fairchild Dornier 328 regional jet
(328Jet) aircraft formerly used in Delta Connection
operations and to require Delta to assume the leases. In
its prior disclosure, the Company indicated that it would
continue to be liable for future obligations under the
leases in the event that Delta at any time did not fulfill
those obligations. The Company is currently in the process
of delivering these aircraft to Delta in connection with the
assignment and assumption of the lease obligations. As part
of its restructuring effort, the Company has secured
commitments from lenders in the leveraged leases of these
aircraft that, upon Delta's assumption of the 328Jet leases,
the lenders will effectively release the Company from future
obligations to them under the 328Jet leases. While the
owner participant in the leveraged leases, a bankrupt entity
that is in default of its obligations to the lenders and the
Company, has not committed to a release of the Company, the
lenders, which have an assignment of the owner participant's
interest in the leases and have a priority of payment
superior to that of the owner participant, have committed
that they will not assert any claims against the Company
with respect to events occurring after assumption by Delta
and have agreed that, if the Company is required to make any
payments under the leases and the lenders receive any
portion of such payments, they will return those payments to
the Company. In consideration for this arrangement, the
Company committed to issue non-interest bearing promissory
notes (with a one-year maturity from the date of Delta's
lease assumption) in the total amount of $30 million,
convertible into 1.5 million shares of the Company's stock
at the option of the Company prior to the maturity of the
notes. The Company obtained rent deferrals similar to those
reached on its CRJ fleet for the remaining two leased
328Jets that are not being assigned to Delta.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has caused this current report to be
signed on its behalf by the undersigned hereunto duly
authorized.
FLYi, Inc.
Date: February 25, 2005 By: /S/ David W. Asai
David W. Asai
Vice President, Controller
and Chief Accounting Officer