March 6, 1941.

To THE Stockholders of the

HUDSON & MANHATTAN RAILROAD COMPANY:

Your attention Is invited to the appended report of your Company's fiscal opera¬
tions for the year ended December 31, 1940, as audited by Messrs. Haskins & Sells,
Certified Public Accountants.

Due in large measure to increased competition from additional trans-Hudson bus
services authorized by the Interstate Commerce Commission, also to the persistent
contraction of business activities in lower Manhattan, 310,915 fewer passengers were
carried by your Company's railroad in 1940 than in 1939, but because of the increased
patronage upon the uptown line, at the maximum fare of ten cents, much of which
increase was attributable to the World's Fair, gross passenger fares were only $1,340.26
less than in 1939.

Total railroad operating revenues, which, in addition to passenger fares, include
advertising, car and station privileges, and miscellaneous items, aggregated $21,096.67
more than in 1939. Moreover, by the exercise of rigid economies, railroad operating
expenses were held to an increase of only $5,309.23. But the resulting increase of
$15,787.44 in net revenue from railroad operations was more than wiped out by the
increase in taxes applicable to railroad operations.

Net income from other than railroad operations, which is chiefly net revenue
from Hudson Terminal Buildings, amounted to $24,034.42 less than in 1939, due
largely to non-recurring expense items for steam cleaning and pointing up the exterior
walls of Hudson Terminal Buildings.

After paying fifteen different kinds of direct Pvlunicipal, State and Federal taxes,
aggregating $1,236,927.37, a sum equal to $2.73 on each share of capital stock out¬
standing, your Company's deficit resulting from all operations was $961,235.26, or
$32,158.40 less than the deficit in 1939.

Full interest on the First Mortgage and First Lien and Refunding Bonds in the
hands of the public was earned and paid. No dividends wci'c paid upon cither tlie
Preferred or Common Stocks of the Company.

Upon the Adjustment Income Bonds, which bear cumulati^"e interest at 5 per
cent per annum, payments have been made and authorized as follows: For the first
six months of 1940, ^ of 1 per cent, or $7.50 per thousand dollar bond, was paid
October 1, 1940, and for the last six months of the year, the same amount will be paid
on April 1, 1941.    The total payment of l}/^ per cent, or $15.00 per thousand dollar