13

ACQUISITION OF ADDITIONAL STOCK, AND MODIFICATION OF THE LEASE OF THE
PROPERTIES, OF THE NEW YORK AND HARLEM RAILROAD COMPANY

In 1942 the Company commenced action in the Supreme Court of New York County against The New York
and Harlem Railroad Company (called the Harlem) and representative minority stockholders thereof for a declaratory
judgment that the Company was not liable under the Lease of April 1, 1873, and supplementary contracts, to pay the
income and excess profits taxes of the Harlem and that deduction be made from the semi-annual dividend rental under
the Lease sufficient to provide for payment of such taxes.

With a view to avoiding the necessity for a determination of the questions involved in such litigation as regards
assenting minority stockholders of the Harlem, the Company, under date of June 3, 1943, made an offer to the Harlem,
which the Harlem transmitted to its minority stockholders.

Pursuant to this offer, which was formulated following discussions with independent counsel for the Harlem
and representatives of some of the larger minority stockholders of the Harlem, the Company purchased from the
Harlem at their principal amount $7,820,000 of non-callable 4% Mortgage Bonds of the Harlem, due July 1, 2043,
issued under and secured by a new junior mortgage on the properties of the Harlem covered by the Harlem's First
Mortgage dated June 1, 1897, securing $12,000,000 of 3V2% bonds due May 1, 2000; the new 4% bonds were
guaranteed by the Company, as to payment of principal and interest, and $6,681,125, principal amount, thereof were
delivered, or have been set aside for delivery, to assenting minority stockholders of the Harlem in exchange for
their stock, at the rate of $125 of bonds for each share of Harlem stock, and the balance of $1,138,875 of the bonds
was sold to the New York State Realty and Terminal Company at their principal amount and accrued interest. As a
result of this exchange the Company has acquired 52,493 shares of Harlem stock, of which 51,922 shares were acquired
during 1943, and expects to acquire through exchange as aforesaid 956 additional shares.

In accordance with the conditions of the offer, the Lease was amended by supplementary contract dated July 1,
1943, so as to provide for the purchase and guaranty by the Company of the Harlem's new 4% bonds, for the appli¬
cation by the Harlem of $2,500,000 of the purchase price of the new 4% bonds to a fund established under the new
mortgage for the purchase and eventual retirement of the Harlem's First Mortgage 31/2% bonds, for the refunding
of the new 4% bonds at maturity, and for elimination of the semi-annual dividend rental payment on Harlem stock
to the extent that same would be receivable by the Company as the owner of such stock.

Pursuant to the terms of the offer, the Harlem applied $2,500,000 of the $7,820,000 received for the new 4%
bonds to the establishment under the mortgage of the fund for the purchase and eventual retirement of the Harlem's
First Mortgage 3y2% bonds, and paid the balance of $5,320,000 to the Company in settlement of certain advances
and claims.

The exchange of stock for bonds above described does not settle the pending litigation (which will continue)
as to tax liability above-mentioned so far as non-assenting stockholders of the Harlem are concerned.