In the annual report for the year 1917 you were advised that in pursuance of the Proclamation
of the President, the Director General of Railroads on December 28th. 1917, assumed possession and
control of your Company's property, which control continued during the year 1918 and up to the date
of the writing of this report. An Act of Congress "to provide for the operation of transportation
systems while under Federal Control, for the just compensation of their owners and for other pur¬
poses," was approved March 21st, 1918. Under the authority of this Act, an Agreement dated June
4, 1919, after many conferences, was entered into with the Director General of Railroads, wherein
the United States Government agrees to pay to your Company an aggregate annual compensation
of $3,003,362.77. The Director General took over the Hudson Terminal Buildings, Nos. 30 and 50
Church Street, as part of the railway property, and the annual compensation is based upon the average
annual operating income of these properties for three years ended June 30th, 1917. So far, no cash
settlement has been effected under the contract with the Director General, except advances to meet
corporate expenses and fixed charges, but it is hoped that such a settlement may be reached at an early
date. In the contract, the United States Government reserves to itself the right to deduct from the
Company's compensation the cost of additions and betterments made by it to the property of the
Company.    During the year 1918 such capital expenditures amounted to $195,195.41.

For the five months ended May 31st, 1918, both the Corporate transactions and the financial
results of Federal operations were recorded in the same books, but the process of separation of accounts
was made retroactive, and from the Corporate books were eliminated all transactions relating to
Federal operations subsequent to January 1st, 1918. The Federal books have been opened to the
Company's Auditors, who have also reviewed the separation of accounts above referred to. The
Director General has furnished the Company with monthly operating reports. Up to June 15th,
1918, the Corporate officers continued to operate the properties, but subsequent to that date there
was a complete separation of the operating and accounting personnel. The Company's Balance
Sheet, Income Account, and various other statements of account are attached hereto, together with
statements and statistics showing the results of operation of the properties by the United States
Government.

For many years there has existed an agreement between your Company and the Pennsylvania
Railroad Company for the joint operation of trains between Hudson Terminal, New York, and Newark,
New Jersey. Under this agreement, there is a provision apportioning the revenues and expenses as
between the two companies. During the latter part of 1918, the Director General modified for the
period of Federal control that portion of this agreement affecting the division of revenue, whereby
on the basis of the volume of traffic obtaining in 1918 the Hudson & Manhattan Railroad (Federal
Administration) received an additional revenue during the last six months of the year approximating
$30,000 a month in excess of the amount it would have received under the terms of the Agreement.
The provision is still in effect and the result of the modification is shown in the attached statements.
The Hudson and Manhattan Railroad Company, however, has not been benefited by this modification
of the existing contract.

The operating expenses in 1918 show substantial increases over 1917, principally due to the
increases in wages by the Federal Administration and increased cost of supplies, especially coal. The
effect of the wage increase may be summarized as follows:
 

1917
1918
 

No. Employe
 

es
 

Railroad
 

Compensation
 

1431
 

11,265,378
 

1560
 

$1,801,828
 


 

129
 

1536,450
 

9%
 

42.3%
 

Increase 1918 over 1917
Per cent, increase

At a meeting of the Board of Directors on September 18th, 1919, Mr. Wilbur C. Fisk resigned
as President, and was elected Chairman of the Board.     Mr. Oren Root was elected President.

The certificate of Messrs. Patterson, Teele & Dennis, independent Accountants and Auditors,
covering the corporation Balance Sheet and Income Account, is attached.

By order of the Board of Directors.

OREN ROOT,

President.