================================================================= FLYI BANKRUPTCY NEWS Issue Number 2 ----------------------------------------------------------------- Copyright 2005 (ISSN XXXX-XXXX) November 14, 2005 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 215-945-7000 FAX 215-945-7001 ----------------------------------------------------------------- FLYI BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 572 Fernwood Lane, Fairless Hills, Pennsylvania 19030, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. New issues are prepared by Rose Mae Ireen S. Mayol, Christopher G. Patalinghug, Frauline S. Abangan and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of FLYI BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00015] DEBTORS' MOTION FOR INVESTMENT OR SALE PROCEDURES [00016] DEBTORS' MOTION TO CONTINUE CASH MANAGEMENT SYSTEM [00017] DEBTORS' MOTION TO USE EXISTING BANK ACCOUNTS & FORMS [00018] DEBTORS' MOTION TO WAIVE INVESTMENT & DEPOSIT GUIDELINES [00019] DEBTORS' MOTION TO HONOR TRANSFERS & PAY BANK FEES [00020] DEBTORS' MOTION TO GRANT PRIORITY TO INTERCOMPANY CLAIMS [00021] DEBTORS' MOTION TO PAY PREPETITION WAGES AND BENEFITS [00022] DEBTORS' MOTION TO PAY CRITICAL VENDOR CLAIMS [00023] DEBTORS' MOTION TO PAY PREPETITION TAXES & FEES [00024] DEBTORS' MOTION TO HONOR PREPETITION CUSTOMER OBLIGATIONS [00025] DEBTORS' MOTION TO CONTINUE EXISTING INSURANCE POLICIES [00026] DEBTORS' APPLICATION TO EMPLOY JONES DAY AS LEAD COUNSEL [00027] DEBTORS' APPLICATION TO EMPLOY YOUNG CONAWAY AS COUNSEL KEY DATE CALENDAR ----------------- 11/07/05 Voluntary Petition Date 11/27/05 Deadline to Provide Utilities With Adequate Assurance 12/07/05 Deadline to File Schedules of Assets & Liabilities 12/07/05 Deadline to File Statements of Financial Affairs 12/07/05 Deadline to File Lists of Leases and Contracts 02/05/06 Deadline to remove actions under FRBP 9027 03/07/06 Deadline to make decisions about lease depositions 03/07/06 Expiration of Exclusive Plan Proposal Period 05/06/06 Expiration of Exclusive Solicitation Period 11/07/07 Deadline to Commence Avoidance Actions Organizational Meeting to Form Creditors' Committees First Meeting of Creditors under 11 USC Sec. 341 Bar Date for filing Proofs of Claim ----------------------------------------------------------------- [00015] DEBTORS' MOTION FOR INVESTMENT OR SALE PROCEDURES ----------------------------------------------------------------- Paul D. Leake, Esq., at Jones Day, in New York, reminds the Court that the Debtors have taken significant steps in the 17 months since the commencement of independent operations to attempt to improve revenues, reduce costs and increase liquidity. The Debtors believe that the value of their estates will be maximized in a going concern transaction, whether pursuant to an investment proposal or a going concern sale proposal. At the same time, Mr. Leake says, the Debtors recognize that an investor or going concern purchaser may not materialize and that a sale of individual assets may maximize the value of their estates. Accordingly, the Debtors and their financial advisors have determined to pursue a multi-track strategy to be implemented -- the solicitation of bids for: (a) an investment in the Debtors' business sufficient to permit the Debtors to reorganize pursuant to a plan, (b) the sale of all or substantially all of the Debtors' business or assets as a going concern, or (c) a sale of select assets of the Debtors. "The Debtors see little benefit to an extended stay in chapter 11. The sooner an investor or purchaser can be located, the sooner the Debtors can undertake operational or other changes in chapter 11 to implement a transaction. The Debtors intend to diligently and expeditiously continue this process in [their] chapter 11 cases and request that the Court provide expedited hearing dates to improve the Bidding Procedures and related transactions. Additionally, given the costs of remaining in chapter 11, the Debtors believe that it would be in the best interests of their stakeholders to quickly conclude the process," Mr. Leake says. The Debtors propose to implement uniform bidding procedures designed to promote competitive bidding for investment or sale proposals with respect to their business and assets to maximize the value of their estates. The salient terms of Bidding Procedures are: (a) Parties seeking to become a qualified bidder and to submit a bid must deliver, among others, an executed confidentiality agreement, a written non-biding expression of interest, and written evidence of financial capacity to consummate an investment or sale transaction, by Dec. 1, 2005; (b) Bids must be delivered to: Miller Buckfire & Co., LLC 250 Park Avenue, 20th Floor New York, New York 10177 Attn: Lloyd A. Sprung with a copy to: Jones Day 222 East 41st Street New York, New York 10017-6702 Attn: Paul D. Leake, Esq. (c) The Debtors reserve the right to require Qualified Bidders to provide an earnest money deposit not to exceed $10,000,000; (d) Formal binding unconditional bids must be submitted no later than 5:00 p.m. (Eastern Standard Time) on Dec. 16, 2005, by Miller Buckfire and Jones Day; (e) The Debtors must file a motion seeking approval of an investment or sale proposal on or before December 9, 2005; and (f) If more than one Qualified Bid has been received, the Debtors will conduct an auction on January 3, 2006, at 10:00 a.m.; Miller Buckfire is preparing an informational package for all persons that have expressed an interest in submitting investment or sale proposals. If the Debtors enter into a stalking horse agreement with a bidder, the Debtors propose to provide bidding protections to that bidder. A full-text copy of the Proposed Bidding Procedures is available for free at http://bankrupt.com/misc/FLYibiddingprotocol.pdf ----------------------------------------------------------------- [00016] DEBTORS' MOTION TO CONTINUE CASH MANAGEMENT SYSTEM ----------------------------------------------------------------- The funds collected by the Debtors in the ordinary course of their businesses are deposited into a principal operating account maintained at Wachovia Bank, National Association. The Debtors also maintain, prior to their Petition Date, 67 other bank accounts and investment accounts, out of which they manage their daily cash receipts and disbursements, including disbursement accounts, accounts for excise taxes, Transportation Security Administration fees, and passenger facility charges, and other deposit accounts. Independence Air, Inc., which operates the Debtors' airline business, uses most of the Bank Accounts to collect, transfer and disburse funds generated from operations on a daily basis and record those collections, transfers and disbursements. A flow chart summarizing the Debtors' Cash Management System is available at no cost at: http://bankrupt.com/misc/FLYi_Independence_CMS.pdf A. Main Operating Account As the focal point of the Debtors' Cash Management System, the Main Operating Account is used to collect most of the Debtors' revenue and to process wire and electronic fund transfers made, and in some instances, to issue checks, in connection with: (a) debt and lease payments; (b) fuel payments; (c) accounts payable; and (d) tax obligations, including payroll tax, use tax, and passenger facilities charges. Most of the Debtors' revenues are generated through credit card sales. Funds due to the Debtors from the credit card processors are deposited into the Main Operating Account. Any other receipts, other than cash received from the Debtors' customers are also deposited into the Main Operating Account. The Debtors pay their expenses with funds that are disbursed directly from the Main Operating Account or disbursed from disbursement accounts that are funded by the Main Operating Account. B. Disbursement Accounts Independence maintains four disbursement accounts at Wachovia: 1. Accounts Payable Account 2. Payroll Account 3. Benefits Account 4. Passenger Draft Account Except for the Payroll Account, all of the Disbursement Accounts are "zero balance" accounts that are funded on an "as needed" basis from the Main Operating Account. Independence pre-funds the Payroll Account prior to paying its employees. The Debtors use the Accounts Payable Account to pay their vendors, and certain other third parties, by check. Any payment by wire or electronic fund transfer, including payments to vendors and other third parties, is made by the Debtors from the Main Operating Account, not the Accounts Payable Account. The Debtors pay most of their vendors by check. The Debtors also make payments by check directly from the Main Operating Account. The Debtors use the Payroll Account to pay their employees, either by electronic funds transfer or by check. Employee benefits that are not paid directly to the employees are paid or funded from the Main Operating Account and, in certain instances, from the Accounts Payable Account. The Debtors use the Benefits Account to pay certain benefits that the Debtors offer to their employees, some of which are on account of payroll deductions. The provider of those benefits, Ceridian Benefits Services, withdraws amounts from the Benefits Account on a daily basis. The Passenger Draft Account is used by the Debtors to compensate passengers in certain rare circumstances, like misplaced or damaged luggage or to reimburse expenses incurred as a result of delayed or cancelled flights. C. Tax and Fee Accounts Independence also maintains three accounts at UBS Financial Services, Inc., for the collection and payment of certain taxes and fees imposed by federal law and collected at the time of sale from its passengers. These taxes and fees are: (a) federal excise tax on the amounts paid for air transportation; (b) fees charged by the Transportation Security Administration; and (c) fees on passenger tickets charged by airports for general passenger facilities at those airports. D. Money Market Account At the conclusion of each business day, Independence invests any excess cash in the Main Operating Account in an overnight money market fund maintained by The Reserve Funds. The funds in the Money Market Account are invested overnight and made available for business operations the following day. E. Outstation Accounts Independence also maintains other bank accounts at various banking institutions including Wachovia, Bank One Corporation, Bank of America Corp., and SunTrust Bank, Inc. to collect cash generated on a daily basis. These bank accounts are used as local depositories in each of the 38 destinations to which Independence currently flies. The Outstation Accounts maintained with Wachovia are "zero balance" accounts that are part of the Cash Management System. However, the Outstation Accounts not maintained at Wachovia are not integrated into the Cash Management System and funds in those accounts are not automatically transferred on a regular basis. As of the Petition Date, the Debtors estimate that the deposits in these Outstation Accounts are less than $150,000. F. Investment Accounts Independence maintains investment accounts with UBS. The UBS account invests in auction rate securities and commercial paper. G. Charter and Clearing House Accounts Independence also maintains an account with National City Bank of Michigan/Illinois for its charter services. The Charter Account is an escrow trust account used to hold deposits for future charter flights to be provided to its charter customers until completed. Independence also maintains an airline clearing house account with JP Morgan Chase to make or receive payments to or from the airline clearing house for services provided to and by other airlines, including ground handling and maintenance. H. Parent Accounts FLYi, Inc., maintains an operating account with Wachovia to collect, transfer and disburse funds. FLYi maintains a money market account with Wachovia Evergreen Investments and an investment account with UBS. The UBS account invests in auction rate securities and commercial paper. The Debtors maintain current and accurate accounting records of intercompany transactions. Brendan Linehan Shannon, Esq., at Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware, tells the Court that through their Cash Management System, the Debtors are able to: (a) control and monitor corporate funds; (b) invest idle cash; (c) ensure cash availability; and (d) reduce administrative expenses by facilitating the movement of funds. The benefits that the Debtors derived from their Cash Management Systems are important given the significant volume of cash transactions, including transfers in and out of the investment accounts aggregating approximately $1,000,000,000 annually, Mr. Shannon emphasizes. Because of the substantial size and complexity of the Debtors' operations, the Debtors' efforts to preserve and enhance the value of their estates will be hampered if their cash management procedures are disrupted, Mr. Shannon points out. "Changing their Cash Management System may disrupt payments to key vendors, like those providing fuel for the Debtors' aircraft. The resulting delay could negatively impact the travel experience of the Debtors' customers. Therefore, it is essential that the Debtors be permitted to continue to use their Cash Management System in accordance with their existing cash management procedures." By this motion, the Debtors seek the Court's permission to continue using their cash management system. The Debtors further ask Judge Walrath for permission to: -- implement ordinary course changes to their Cash Management System, including integrating the non-Wachovia Outstation Accounts into their Cash Management System; and -- make other changes beneficial to their business without further Court order. * * * The Court grants the Debtors' requests. Judge Walrath rules that the Wachovia Deposit Agreement will continue to govern the postpetition case management relationship between the Debtors and Wachovia. All of the provisions of the Agreement, including the termination and fee provisions, but excluding provisions within the scope of Section 365(b)(2) of the Bankruptcy Code, will remain in full force and effect, provided that the Debtors will not assume the Agreement. Judge Walrath directs the Debtors to maintain sufficient balances in accounts at Wachovia to secure their obligations to the Bank for cash management and related services to the Debtors. ----------------------------------------------------------------- [00017] DEBTORS' MOTION TO USE EXISTING BANK ACCOUNTS & FORMS ----------------------------------------------------------------- The United States Trustee has established certain operating guidelines for debtors-in-possession that operate their businesses. One of the provisions requires a Chapter 11 debtor in possession to open new bank accounts and close all existing accounts. The Guidelines also require that the new bank accounts only be opened in certain financial institutions designated as authorized depositories by the U.S. Trustee. Brendan Linehan Shannon, Esq., at Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware, relates that the Debtors utilize approximately 68 bank accounts on a daily basis. The Debtors intend to use their existing Bank Accounts with the same account numbers for a smooth transition to operating under Chapter 11, Mr. Shannon tells the Court. To protect against the possible inadvertent payment of prepetition claims, Mr. Shannon informs the Court that all of the Debtors' Banks will be advised immediately not to honor checks issued prepetition, except as otherwise expressly permitted by the Court and the Debtors. Mr. Shannon notes that the Debtors have the capacity to draw the necessary distinctions between prepetition and postpetition obligations and payments without closing the Bank Accounts and opening new ones. Mr. Shannon further relates that the Debtors use, in the ordinary course of their businesses, a multitude of checks and other business forms. Because of the nature and scope of the Debtors' business operations and the large number of the Debtors' suppliers of goods and services, Mr. Shannon believes that it is important that the Debtors should continue to use their existing checks and other business forms without alteration or change. By this motion, the Debtors seek the Court's authority to continue to use their Bank Accounts and their existing checks and other business forms to avoid disruption of their cash management system and unnecessary expense. The Debtors also ask the Court not to require them to include the legend "D.I.P." and the corresponding bankruptcy case number on any business forms or checks. Judge Walrath grants the Debtors' requests. ----------------------------------------------------------------- [00018] DEBTORS' MOTION TO WAIVE INVESTMENT & DEPOSIT GUIDELINES ----------------------------------------------------------------- Pursuant to Section 345(b) of the Bankruptcy Code, any deposit or other investment made by a debtor must be secured by a bond in favor of the United States that is secured by: -- the undertaking of a corporate surety approved by the United States Trustee for the relevant district; or -- the deposit of securities of the kind specified in Section 9303 of the Money and Finance Code. Section 345(b) provides that a bankruptcy court may allow the use of alternatives to certain approved investment guidelines "for cause," Brendan Linehan Shannon, Esq., at Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware, notes. Consistent with Section 345(b), Mr. Shannon points out, Rule 1007-2(b) provides that no waiver of "section 345 [will] be granted by the Court, except upon notice with an opportunity for hearing, in accordance with these rules." Nevertheless, Rule 1007-2(b) further provides that "if a motion for such waiver is filed on the first day of a chapter 11 case in which there are more than 200 creditors, the Court may grant an interim waiver until a hearing on the Debtors' motion can be held." Pursuant to Section 345(a) and Rule 1007-2(b), the Debtors ask the Court to approve, on an interim basis, these proposed investment guidelines: (i) Overnight investments in instruments with an AAA rating; (ii) Short-term investments in instruments with a rating of at least Al/Pl; (iii) longer term investments in instruments with a rating of at least AA/Aa2; and (iv) other deposits in financial institutions comparable to those already utilized by the Debtors, in each case without the need for any depository or holder of those investments to provide a bond, undertaking or deposit of securities of any kind. The maximum maturity of any investments would be one year. Additionally, the Debtors ask the Court to: -- authorize and direct applicable institutions to accept and hold or invest those funds, at the Debtors' direction, in accordance with the Investment Guidelines; and -- approve, on a final and permanent basis, the Investment and Deposit Guidelines, after notice and hearing. * * * Judge Walrath authorizes the Debtors to invest and deposit funds in accordance with their Deposit and Investment Guidelines for the next 30 days, pending a final hearing on their request. ----------------------------------------------------------------- [00019] DEBTORS' MOTION TO HONOR TRANSFERS & PAY BANK FEES ----------------------------------------------------------------- According to Brendan Linehan Shannon, Esq., at Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware, the Debtors have asked the Court for authorization to pay certain prepetition debts. With respect to these prepetition debts, prior to the Petition Date, the Debtors issued checks, and those checks have yet to clear the banking system. In other cases, the Debtors will issue checks on account of certain prepetition debts once the Court permits the Debtors to do so. The Debtors intend to inform their banks which prepetition checks should be honored pursuant to the Court's order authorizing payment. Accordingly, at the Debtors' request, Judge Walrath authorizes the Debtors' Banks to: a. accept and honor all of the Debtors' representations as to which checks, drafts, wires, or ACH transfers should be honored or dishonored consistent with the Court's Order and governing law; b. charge prepetition and postpetition service and other fees, costs, charges and expenses to which the Debtors' Banks may be entitled; and c. charge back returned items to the Bank Accounts in the normal course of business. The Court permits the Debtors to pay the Banks' Fees. Judge Walrath rules that the Banks will not be liable to any party on account of: (a) following the Debtors' instructions or representations as to any Court order; (b) honoring any prepetition check or item in a good faith belief that the Court has authorized that prepetition check or item to be honored; or (c) an innocent mistake made despite implementation of reasonable item handling procedures. ----------------------------------------------------------------- [00020] DEBTORS' MOTION TO GRANT PRIORITY TO INTERCOMPANY CLAIMS ----------------------------------------------------------------- Most of the Debtors' revenues are generated, and expenses incurred, by Independence Air, Inc. Brendan Linehan Shannon, Esq., at Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware, relates, FLYi, Inc., has periodically provided Independence Air with funding for its operations. Mr. Shannon notes that the intercompany funding reduces the administrative costs incurred by the Debtors. By contrast, if the intercompany funding were to be discontinued, the Debtors' Cash Management System and related administrative controls would be disrupted to the detriment of the Debtors and their estates. Transfers among the Debtors represent extensions of intercompany credit, Mr. Shannon says. "According administrative expense status to Intercompany Claims will ensure that each individual Debtor utilizing funds flowing through the Cash Management System will continue to bear ultimate repayment responsibility for such borrowings." Pursuant to Section 503(b)(1) of the Bankruptcy Code, the Debtors ask the Court to grant administrative expense priority status to all intercompany claims against a Debtor by another Debtor arising after the Petition Date as a result of intercompany transactions through the Cash Management System. The Debtors also ask the Court to permit them to continue to maintain current records of all transfers of cash so as to readily ascertain, trace and account for all intercompany transactions. Accordingly, the Court approves the Debtors' request. Judge Walrath authorizes the Debtors to continue to engage in intercompany transactions provided that Independence Air will not engage in any transfer of funds to FLYi absent Court order. ----------------------------------------------------------------- [00021] DEBTORS' MOTION TO PAY PREPETITION WAGES AND BENEFITS ----------------------------------------------------------------- As of the Petition Date, the Debtors had 3,283 employees, of which 1,375 are covered by collective bargaining agreements. As a result of the Debtors' Chapter 11 filing, certain employee obligations have accrued or remained unpaid. These employee obligations include prepetition compensation, business expenses, employee benefits, severance obligations and other privileges. Prepetition Compensation Brendan Linehan Shannon, Esq., at Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware, relates that many of the Debtors' employees have accrued various sums for prepetition compensation in the form of wages, salaries, overtime pay, incentive pay, bonuses, other contractual compensation, sick pay, vacation pay, holiday pay, and other accrued compensation. The Debtors estimate $2,751,000 in total unpaid gross Prepetition Compensation as of the Petition Date. Prepetition Business Expenses The Debtors customarily reimburse their employees for a variety of business expenses incurred in the ordinary course of business. Reimbursed business expenses include, but are not limited to those incurred in connection with travel, relocation, and long- distance and cellular phone charges. The Debtors estimate that their obligation for Prepetition Business Expenses to non-flight crew employees was approximately $350,000 as of the Petition Date and approximately $365,000 with respect to the hourly allowances for flight crews. Prepetition Benefits The Debtors' employee benefit programs include: (a) health, dental, vision, prescription drug, life, accident, property and disability benefits and insurance; (b) 401(k) savings plans for certain of their employees; and (c) flexible spending accounts and college savings plans. The Debtors estimate that the value of the unpaid Prepetition Benefits was $2,100,000 as of the Petition Date. Prepetition Administrative Costs The Debtors use the services of consultants to facilitate the administration and maintenance of their employee benefits. The Debtors estimate that the amount of unpaid Prepetition Administrative Costs was $200,000 as of the Petition Date. Severance and Retention Payments Prior to the Petition Date, the Debtors decided to reduce their operations and, as a consequence, reduced their non-union Workforce. Although those persons were paid prior to the Petition Date for wages, benefits and severance, some checks issued to those persons have not yet been presented to, or cleared, the relevant bank. The Debtors believe that those amounts do not exceed $225,000. Prepetition Station Closing Obligations The Debtors want to pay their employees who remain at stations to be closed closing severance and retention payments in an amount not to exceed $100,000 in the aggregate. None of those employees is an insider, and the Debtors expect the average severance and retention payment to equal $1,400 per employee. Employees Severance The Debtors also want to pay to non-union employees terminated postpetition up to two weeks pay in lieu of notice. However, any severance payable to an employee will be reduced, dollar for dollar, by any amounts paid to that employee under any applicable law related to the termination of that employee's employment. With respect to their union employees, the Debtors intend to pay severance in accordance with the terms of the collective bargaining agreements. Travel Privileges The Debtors have agreed to provide travel privileges to their terminated employees. The Debtors also offer travel privileges to their employees, including their dependents, whose employment may be terminated in the future. Employee Obligations Must be Paid The Debtors believe that payment of their employee obligations is necessary to sustain the morale of their current employees during the pendency of their bankruptcy proceedings, Mr. Shannon tells the Court. "At this early stage, the Debtors simply cannot risk the substantial damages to their businesses that would likely attend any decline in their employees' moral attributable to the Debtors' failure to pay these severance-related items." Accordingly, the Debtors sought and obtained Judge Walrath's permission to pay their prepetition employee obligations as well as honor the travel privileges for the benefit of eligible employees. ----------------------------------------------------------------- [00022] DEBTORS' MOTION TO PAY CRITICAL VENDOR CLAIMS ----------------------------------------------------------------- The Debtors purchase goods or services from vendors or service providers that may be the only supplier available to the Debtors. These goods and services are essential for the Debtors to continue to provide safe and reliable air transportation with the level of service standards their customers expect, Brendan Linehan Shannon, Esq., at Young, Conaway, Stargatt & Taylor, LLP, in Wilmington, Delaware, says. "Because the Debtors do not have any viable alternatives to obtain substitute goods or services from other suppliers or parties, the Debtors have determined that they must have the authority to satisfy the prepetition claims of the Critical Vendors to ensure that these essential goods and services will continue to be available to them without interruption." Mr. Shannon tells the Court that many of the Critical Vendors have arrangements with the Debtors for, among other things: (i) the reciprocal exchange and billing among different airlines for ground handling services, airport facility rent, on-call and scheduled maintenance, skycap, and other related services; (ii) telephone reservations services; (iii) sales of airline tickets through various travel distribution channels; and (iv) the management and maintenance of ticket inventory, flight schedules, airport check-in systems, and numerous related operational matters. The Debtors estimate that the aggregate amount of the outstanding Critical Vendor Claims will not exceed $2,000,000. The Debtors believe that some of their suppliers may be entitled to reclamation pursuant to Section 546(c) of the Bankruptcy Code or administrative priority pursuant to Section 503(b)(9) of the Bankruptcy Code. The Debtors cannot estimate the aggregate amount of the Reclamation and Administrative Priority Claims at this time. By this motion, the Debtors seek the Court's authority to pay the prepetition claims of Critical Vendors in an amount not to exceed $2,000,000, and the prepetition claims of Priority Vendors to the extent they are entitled to reclamation or their claims are entitled to priority. Where the Debtors and a Critical Vendor are members of the Airlines Clearing House, IATA Clearing House, or a similar payment settlement system, the Debtors and that Critical Vendor typically are involved in an ongoing mutual billing, settlement and adjustment process that necessarily entails continuing submission of billings to the Debtors and continuing setoffs and recoupments of obligations owed to, and obligations owed by, the Debtors. Accordingly, the Debtors also ask the Court to modify the automatic stay to the extent necessary to enable those Critical Vendors to participate in routine billing and settlements through payment and settlement systems in accordance with their prepetition business relationship. Mr. Shannon assures the Court that the payment of the prepetition claims of the priority vendors is justified as the payment will not prejudice unsecured creditors. ----------------------------------------------------------------- [00023] DEBTORS' MOTION TO PAY PREPETITION TAXES & FEES ----------------------------------------------------------------- In the ordinary course of business, the Debtors incur and collect various taxes, fees, and charges. Specifically, the Debtors: (a) incur and collect payroll and employment-related taxes on behalf of various taxing authorities, (b) are responsible for the collection of an excise tax on the amount paid for air transportation, (c) are charged fees by various federal governmental agencies, including the passenger civil aviation security service fees charged by Transportation Security Administration, and (d) collect fees on passenger tickets charged by airports for general passenger facilities at those airports. The Payroll Taxes, Transportation Taxes, Governmental Fees, and PFCs are paid to various taxing, licensing, and airport authorities on a periodic basis. The Debtors estimate that, as of the Petition Date: -- the total amount of prepetition Payroll Taxes incurred and collected from prepetition operations but not yet remitted is approximately $835,000, -- the total amount of prepetition Transportation Taxes collected from prepetition air transportation but not yet remitted is approximately $3,500,000, -- the total amount of prepetition Governmental Fees incurred for prepetition air transportation and sales but not yet remitted is approximately $1,000,000, and -- the total amount of prepetition PFCs collected but not yet remitted is approximately $1,470,000. The Debtors ask the Court for permission to pay the Payroll Taxes, Transportation Taxes, Governmental Fees and the PFCs collected during or attributable to the prepetition period, but not yet remitted by the Debtors to the applicable Authorities. The Debtors explain that the amounts to be paid were held in trust for third parties to whom payment is owed. Those funds do not constitute property of the Debtors' estates within the meaning of Section 541 of the Bankruptcy Code. Thus, the Debtors contend, the payment of these Governmental Obligations does not disadvantage the Debtors' creditors because those funds are not otherwise available for general distribution to the creditors. If the Debtors don't remit the funds, their officers and directors may be subject to lawsuits or even criminal prosecution, which will result in a significant distraction to the Debtors' efforts to stabilize their postpetition business operations. ----------------------------------------------------------------- [00024] DEBTORS' MOTION TO HONOR PREPETITION CUSTOMER OBLIGATIONS ----------------------------------------------------------------- Steven Westberg, FLYi, Inc.'s vice president for restructuring, tells Judge Walrath that unlike older carriers, the Debtors do not have years of accumulated goodwill with their customers. Rather, the Debtors must earn goodwill everyday by providing reliable and affordable air transportation. In this regard, the Debtors seek the Court's authority to pay prepetition obligations to their customers in the ordinary course of business. The Debtors' Customer Obligations relate to future air travel, including creditors issued from time to time, as compensation for cancelled or delayed flights, lost or damaged luggage, and denied boarding. The Debtors also want to maintain their iCLUB frequent flyer program and other marketing and promotional programs. Maintaining the Debtors' customer programs and honoring their obligations to customers are essential if the Debtors are to succeed in their reorganization, Mr. Westberg says. Air Traffic and Related Obligations The Debtors do not issue traditional tickets in advance. When customers book a flight in advance, they receive a confirmation number. At that time, the customers' credit card is charged, and the Debtors record an obligation to provide air transportation. Although the Debtors' Air Traffic Obligations reflect the full value of tickets booked but not yet flown, under the Debtors' arrangement with their credit card processors, the card processors withhold a substantial portion of the revenue until the air travel has been provided. As a result, carrying a passenger postpetition that booked a ticket prepetition will generally result in a postpetition receipt of cash. "Most of the Debtors' cash comes from credit card processors after the respective passenger's flight has commenced. The failure to honor prepetition bookings will only reduce the Debtors' cash flow with no benefits," Mr. Westberg says. Under the Debtors' current policy, customers may cancel reservation for a fee, with the balance of any overpayment applied as a credit for travel within 12 months. The Debtors estimate the outstanding credits for customers that cancelled or changed reservations to be $12,800,000. The Debtors may also issue vouchers, credits or checks to customers as compensation for denied boarding and misplaced or damaged luggage. The Debtors anticipate paying $950,000 for outstanding compensation amounts. iCLUB & Other Promos Independence Air, Inc., maintains the iCLUB frequent flyer program. Members earn a point for each dollar spent on their own tickets when flown. Members can earn free roundtrip flights upon accumulating certain number of points within a given period. The iCLUB program is an important marketing tool that does not involve significant cash expenses, Mr. Westberg tells the Court. Awards can be taken only on existing flights as long as the flight has not been sold out at the time the reservation is made. Hence, most awards result in an expense equal to the low marginal cost of carrying a passenger. Independence has over 1,043,000 iCLUB members, who have accumulated over 303,385,000 unexpired and unused points in the aggregate. Approximately 31,300 awards are outstanding. Mr. Westberg relates that about 21,200 awards have been redeemed. The Debtors estimate the direct costs to fly award passengers, as of the Petition Date, to be de minimis. The Debtors also offer several promotional programs to generate publicity and induce customers to fly. The Debtors may sponsor events, give away prizes like air travel or other items in contests, distribute coupons, and donate air travel to be used or auctioned by charities. Around 12,400 roundtrip flights have been awarded under these promotional programs but have not yet been taken. ----------------------------------------------------------------- [00025] DEBTORS' MOTION TO CONTINUE EXISTING INSURANCE POLICIES ----------------------------------------------------------------- The Debtors maintain insurance policies that provide coverage for liability from aircraft operations, aircraft damage, automobile damage and liability, property damage, directors and officers liability, employment practices liability, fiduciary liability, key man life, disability, and risk of war. The Debtors also maintain a high-deductible workers' compensation insurance program for all of their employees. The Debtors maintain the Insurance Policies through several different insurance carriers. The annual Premiums under all of the Insurance Polices aggregate $11,046,201. Premiums for the Insurance Policies, other than the Workers' Compensation Program, are paid in advance, either on an annual or monthly basis. The Workers' Compensation Program is insured and administered primarily by AIG Insurance Company and its affiliates. The annual premium under the Program is $995,829, subject to retroactive adjustment after an audit of the actual number of employees employed by the Debtors during the term of the Program. The current policy term runs from February 1, 2005 through February 1, 2006. Under the Workers' Compensation Program (a) insurance coverage is provided by AIG for workers' compensation claims subject to the policy limits, with a per-incident deductible of $250,000; (b) AIG processes and pays the workers' compensation claims and also pays amounts billed directly by doctors and medical facilities; and (c) the Debtors are obligated to (i) pay the Workers' Compensation Premium, and (ii) reimburse AIG, up to $250,000 per claim, for the loss payments that AIG makes in respect of coverage deductibles, all in accordance with the terms of the Workers' Compensation Program. The Debtors have provided a $5,500,000 letter of credit for AIG's benefit as collateral for the Debtors' obligation to reimburse AIG under the Workers' Compensation Program. As of October 31, 2005, approximately 137 open workers' compensation claims were pending against the Debtors under the Workers' Compensation Program with AIG, and AIG has reserved $5,170,000 on account of the claims. In addition, there may be other claims by employees relating to prepetition injuries that have not yet been processed. The Debtors have been current in the payment of their workers' compensation reimbursement obligations to AIG. However, the Debtors estimate that, as of the Petition Date, they will owe $110,000 in additional workers' compensation reimbursement obligations to AIG for amounts accrued through that date. In addition, the Debtors may, in the event of a retroactive adjustment to the Workers' Compensation Premium, owe additional amounts. The Debtors have also provided a $200,000 letter of credit -- which should be reduced to $50,000 in the near future -- for the benefit of Reliance Insurance Company, which is in liquidation before the Commonwealth Court of Pennsylvania. The RIC Letter of Credit represents collateral for the Debtors' obligation to reimburse RIC under their former workers' compensation program, which RIC insured and administered. The Debtors believe that, as of the Petition Date, there are no open claims under the RIC Workers' Compensation Program. Insurance Policies Must Be Continued Steven Westberg, FLYi, Inc.'s vice president for restructuring, tells Judge Walrath that the Insurance Policies, including the Workers' Compensation Program, are essential for the preservation of the Debtors' business, and are, in some cases, required by various laws, regulations, or contracts that govern the Debtors' business. By this motion, the Debtors ask the Court for authority to: (a) continue their Insurance Policies, including their Workers' Compensation Program; (b) pay any related prepetition obligations, including, any payments to AIG, the other insurers, letter of credit issuers, or employees required as result of any claims against the Debtors, as the obligations become due in the ordinary course of business; and (c) liquidate in an appropriate forum or settle Prepetition Insurance Claims. The Debtors further request that any party holding a letter of credit to secure any of the Debtors' obligations under the Insurance Policies be authorized to use the letter of credit to secure the Debtors' postpetition insurance obligations. Mr. Westberg explains that without insurance, the Debtors and their estates could be exposed to catastrophic liability. If the Insurance Policies were to lapse, the Debtors would be unable to carry on their business as they would no longer have liability insurance coverage required by government regulation and their aircraft leases. Rather, the Debtors would be required immediately to obtain replacement insurance, likely at a greater cost than to maintain the current Insurance Policies. Mr. Westberg also notes that the guidelines of the Office of the United States Trustee require the Debtors to maintain their Insurance Policies. A schedule of the Debtors' Insurance Policies is available at no charge at http://bankrupt.com/misc/FLYipolicies.pdf ----------------------------------------------------------------- [00026] DEBTORS' APPLICATION TO EMPLOY JONES DAY AS LEAD COUNSEL ----------------------------------------------------------------- The Debtors seek the Court's permission to employ Jones Day as their bankruptcy counsel, nunc pro tunc to October 28, 2005, pursuant to an engagement letter dated August 3, 2005. The Debtors anticipate that Jones Day will render general legal services as needed throughout the course of their Chapter 11 cases, including bankruptcy, corporate, employee benefits, environmental, finance, intellectual property, labor and employment, litigation, real estate, securities, and tax advice. In particular, Jones Day will: (a) advise the Debtors of their rights, powers, and duties in continuing to operate and manage their businesses and properties under Chapter 11; (b) prepare on the Debtors' behalf all necessary and appropriate applications, motions, draft orders, other pleadings, notices, schedules, and other documents, and review all financial and other reports to be filed in the Debtors' Chapter 11 cases; (c) advise the Debtors concerning, and preparing responses to, applications, motions, other pleadings, notices, and other papers that may be filed by other parties in the Debtors' Chapter 11 cases; (d) advise the Debtors with respect to, and assisting in the negotiation and documentation of, financing agreements and related transactions; (e) review the nature and validity of any liens asserted against the Debtors' property and advising the Debtors concerning the enforceability of those liens; (f) advise the Debtors regarding their ability to initiate actions to collect and recover property for the benefit of their estates; (g) advise the Debtors in connection with the formulation, negotiation, and promulgation of a plan or plans of reorganization, and related transactional documents; (h) advise and assist the Debtors in connection with any sales and potential property dispositions; (i) advise the Debtors concerning executory contract and unexpired lease assumptions, assignments, and rejections, and lease restructurings and recharacterizations; (j) assist the Debtors in reviewing, estimating, and resolving claims asserted against the Debtors' estates; (k) commence and conduct litigation necessary and appropriate to assert rights held by the Debtors, protect assets of the Debtors' Chapter 11 estates, or otherwise further the goal of completing the Debtors' successful reorganization; (l) provide non-bankruptcy services for the Debtors to the extent requested by the Debtors; and (m) perform all other necessary and appropriate legal services in connection with the Debtors' Chapter 11 cases for or on behalf of the Debtors. Jones Day will charge the Debtors in accordance with its ordinary and customary hourly rates: Professional Title Rate ------------ ----- ---- Paul D. Leake Partner $725 John R. Cornell Partner $725 Erica M. Ryland Partner $630 Brad B. Erens Partner $605 Jane Rue Wittstein Partner $560 Thomas E. Gillespie Partner $550 Troy B. Lewis Partner $525 Richard F. Shaw Partner $425 Scott J. Friedman Associate $430 Helena C. Huang Associate $380 Jill S. Vorobiev Associate $375 Robbin S. Rahman Associate $315 Ross S. Barr Associate $260 Mark H. Robinson Associate $195 Denise M. Sciabarassi Paralegal $205 Steven Westberg, FLYi, Inc.'s vice president for restructuring, relates that Jones Day assisted with the Debtors' pre-Chapter 11 restructuring efforts, including the restructuring efforts in 2004 and early 2005, and the preparations to commence the Chapter 11 cases. The Debtors have provided Jones Day with various retainer funds for services to be rendered and for reimbursement of expenses. The Retainer was replenished from time to time to $500,000. On October 20, 2005, pursuant to the terms of the Engagement Letter, the Retainer was increased to $750,000. Mr. Leake attests that Jones Day is a "disinterested person" as that term is defined in Section 101(14) of the Bankruptcy Code and as required by Section 327(a) of the Bankruptcy Code. ----------------------------------------------------------------- [00027] DEBTORS' APPLICATION TO EMPLOY YOUNG CONAWAY AS COUNSEL ----------------------------------------------------------------- The Debtors seek the Court's authority to employ Young Conaway Stargatt & Taylor, LLP, as their local counsel, nunc pro tunc to October 28, 2005. Young Conaway is expected to: a. provide legal advice to the Debtors' powers and duties as debtors-in-possession in the continued operation of their business and management of their properties; b. prepare and pursue confirmation of one or more plans and approval of corresponding disclosure statements; c. prepare, on the Debtors' behalf, necessary applications, motions, answers, orders, reports and other legal papers; d. appear in Court and protect the Debtors' interests before the Court; and e. perform all other legal services for the Debtors, which may be necessary and proper in the Debtors' bankruptcy proceedings. The current hourly rates of the Young Conaway professionals designated to represent the Debtors are: Professional Rate ----------------- ---- Brendan Linehan Shannon, Esq. $460 M. Blake Cleary, Esq. $385 Matthew B. Lunn, Esq. $290 Ian S. Fredericks, Esq. $225 Debbie E. Laskin, Paralegal $175 FLYi, Inc.'s Vice President for Restructuring, Steven Westberg, relates that Young Conaway will be employed under a general security retainer. Young Conaway was engaged on October 21, 2005, and has represented the Debtors in connection with their restructuring efforts. Young Conaway received a $150,000 retainer in connection with the planning and preparation of initial documents and its proposed postpetition representation of the Debtors. Young Conaway has become familiar with the Debtors' businesses and affairs and many of the potential legal issues that may arise in the Debtors' Chapter 11 cases, Mr. Westberg says. According to Mr. Cleary, Young Conaway is a "disinterested person" as that term is defined in Section 101(14) of the Bankruptcy Code. *** End of Issue No. 2 ***