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COLONIAL AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1:
On January 28, 1955 the Board of Directors of the Company entered into an agreement with the Board of Directors of Eastern Air Lines, Inc. whereby Eastern, if the necessary approvals are obtained, will acquire the property and assets of the Company and will assume its liabilities, in exchange for 257,800 shares of Eastern stock(equivalent to one share of Eastern for each two shares of Colonial's stock outstanding at the date of agreement). The sale of the Company's assets to Eastern is subject to approval by the stockholders and to approval being obtained from the Civil Aeronautics Board and the President of the United States. The necessary proceedings are now in process. Provision is made in the agreement for adjustment, on a one for two basis, of the number of shares to be received by the Company in the event of any change in the status of options (which were exercised on February 18, 1955 by an official with respect to 5,000 shares) mentioned in Note 4.
The costs incurred to December 31, 1954, in connection with the Civil Aeronautics Board's investigation of a previous agreement covering the sale of the assets to Eastern, which agreement was disapproved by that Board, have been deferred.
Note 2:
The Board of Directors adopted an insured Retirement Plan, which, if approved by the stockholders and the Internal Revenue Service and if the Civil Aeronautics Board approves the cost for inclusion in the Company's final mail rate, will become effective June 1, 1954. Employees are eligible to participate after three years of service and upon participation contribute to the cost of benefits accruing with respect to benefits arising from services prior to that date but may discontinue payment of premiums at any time. The single premium cost at June 1, 1954 for the prior services benefits was $631,975 and it is the Company's present intention to pay this amount, together with interest, over a period of twenty years. The Company has charged $81,062 against income for the seven months ended December 31, 1954 which amount, together with employees' contributions, will be paid to the insurance company if and when the plan is finally approved. These contributions at December 31, 1954 consisted of:
Employees' contributions:
Received and deposited in special trust account $27,479
Receivable 20,024 $47,503
Company's contributions:
For services prior to June 1, 1954 including interest 22,585
For services subsequent to June 1, 1954 58,477 81,062
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$128,565
The Company has filed an application with the Civil Aeronautics Board requesting an increase, effective from June 1, 1954, in its mail rates. Pending decision by that Board no credit with respect to the seven months ended December 31, 1954.
Note 3:
An investigation of the Company was ordered by the Civil Aeronautics Board on April 13,1951. On June 18, 1951 the Board issued an "Order to Cease and Desist" directed against the Company and its former officers, Sigmund Janas, Sr, and A. M. Hudson, and closed the proceedings without prejudice to the effect and enforcement of the order, or the right to reopen upon motion of the Office of Enforcement for good cause shown. As a result of the investigation Sigmund Janas, Sr. paid $75,000 to the Company, which amounts, on instructions from the Civil Aeronautics Board, have been credited to earned surplus during 1953.
As a result of the above investigation, two criminal actions, which are still pending have been brought in the United States District Court for the Southern District of New York by the United States against the company and Sigmund Janas, Sr., for alleged violations of the Civil Aeronautics Act.
The Company has bought an action in the United States District Court for the Southern District of New York against Sigmund Janas, Sr. et al. for recovery of damagers resulting from their acts, and for the rescission and cancellation of the stock option issued to Sigmund Jana, Sr. covering 80,000 shares of capital stock. Sigmund Janas, Sr. has filed a counter-claim in this action for recovery of the $75,000 paid by him to the Company as mentioned in the first paragraph of this note. Both of these actions were dismissed by the District Court but on appeal therefrom the United States Court of Appeals returned the actions to the District Court for trial.
As it is impossible at this time to determine the outcome of the proceedings mentioned above, the Company has reflected on its balance sheet as a deferred charge the legal accounting and other other expenses incurred in connection with these proceedings, an amount of %15,000 receivable from Canadian Air Express, Ltd. and/or Sigmund Janas, Sr., for which collection by the Company from Canadian Air Express, Ltd. is estopped by the Canadian Foreign Exchange Control Board, and a fine of $10,000 levied against the Company by that Board.
Note 4:
According to the Company's records, options are outstanding to Sigmund Janas, Sr. to purchase 80,000 shares and to an official to purchase 5,000 shares (a total of 85,000 shares) both options at $12.25 per share and expiring February 26, 1955. The Company takes the position that the option to Sigmund Janas, Sr. for 80,000 shares is void and rescission and cancellation is being sought in the action mentioned in Note 3. The option for 5,000 shares was exercised on February 18, 1955.
Note 5:
As of February 1, 1954, the Company entered into a Credit Agreement providing for the establishment of a $300,000 revolving credit to be made available to the Company until August 1, 1955. this credit is secured by Chattel Mortgage on certain aircraft and equipment and the borrowings will bear interest at 3.5% per annum. No borrowings have been made under the agreement.
