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COLONIAL AIRLINES, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1:
On March 1, 1954 the Civil Aeronautics Board issued its order disapproving the agreement, which had been approved by the stockholders, for sale of the Company's assets to Eastern Air Lines, Inc. The costs incurred to December 31, 1953 in connection with the Civil Aeronautics Board's investigation have been deferred as the above mentioned order did not terminate the investigations in connection with the sale of the Company's assets.

Note 2:
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 brought an action in the United States District Court for the Southern District of New York against Sigmund Janas, Sr. et al. for recovery of damages resulting from their acts, and for the rescission and cancellation of the stock option issued to Sigmund Janas, 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 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 3:
The Company has deposited $24,123 in special bank accounts from which withdrawal is subject to prior approval of the Currency and Exchange Control Board of Bermuda.

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 2.

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 1/2% per annum.