A notable accomplishment of the New York Central was that in 1958 it reduced its debt in excess of $50 million, the greatest net reduction in any year in his history, and yet improved its cash position by over $4 million from the prior year end.

The brighter economic picture and the prospects for 1959 may permit the Central to resume its modernization program which it was forced to curtail drastically during 1958. The completion of this program will put the railroad in a position to capitalize on its potential profitability as traffic increases.

MISSOURI PACIFIC RAILROAD

Your corporation's holding of 2,200 shares of Missouri Pacific class A stock together with 20,325 shares of Missouri Pacific class B stock, or more than 50 percent of the class B outstanding, constituted 7.7 percent of the total value of assets at yearend. While your corporation's interest in the Missouri Pacific has continued in one form or another for almost 30 years, the fact that it exists today is due to the long struggle carried on by your management to enforce the rights of Missouri Pacific shareholders. Missouri Pacific occupies a strategic place in the growing freight operation of the gulf State and southwestern sections of our country and, unlike the Central, does not have to contend with a major passenger service problem.

WEBB & KNAPP, INC.

The interest your corporation holds in this giant real estate company and its affiliates in the form of promissory notes and the warrants which give us the right to acquire 10 million shares of the common stock of this company accounts for 17.9 percent of the value of the corporate assets.

While Webb & Knapp will report a disappointingly large operating loss for the year 1958, the long-term potential of this company is unusually attractive. The company has continued active in the field of large-scale urban renewal, both as a private developer and as a participant in title I slum-clearance projects. During the course of the year, one of these projects, Park West Apartments in New York City, began rental operations with extremely encouraging results.

In addition, the year just closed saw the wholly owned subsidiary, Zeckendorf Hotels Corp., which had purchased the Hotel Manhattan (formerly Lincoln) in 1956, acquire the Hotels Taft, Chatham, Commodore, Astor, and Drake in New York City. The last named of these hotels is being sold in the form of cooperative apartments, while Webb & Knapp management looks forward to the operation of the remaining hotels as a source of recurring income. The huge shopping center at Roosevelt Field, Long Island, in which Webb & Knapp has a 66-percent stock interest, also appears to offer considerable encouragement for the future. Your corporation's investment in Webb & Knapp is indeed unique, providing it with a participation in the equity of Webb & Knapp through the right to purchase 10 million shares of Webb & Knapp common stock at $2.50 per share by exercising the warrants and, in the meantime, maintain the more sheltered status of a creditor.

INVESTORS DIVERSIFIED SERVICES, INC.

Your corporation's interest in Investors Diversified Services, Inc., which had a year-end market value of $63,569,318, constitutes 47.5 percent of the assets. IDS continued to show a strong rate of growth in 1958. Net operating income, based on preliminary figures and subject to final audit, amounted to $8.80 per share, compared with $7.59 per share for 1957. After adjustment for capital gains and losses on portfolio investments, net income for 1958 was $8.81 per share, compared with $7.64 per share for the preceding year. Sales of shares of the mutual funds managed by IDS totaled $231,297,482, and new investment certificates issued by subsidiaries aggregated $311,003,160 in maturity values.

Growth in assets of the company's investment certificate subsidiaries and its mutual fund affiliates was a principal factor in the expansion of earnings. Total assets of the companies under IDS management increased by $672,202,962 during the year to a record high of $2,742,770,734 as of December 31, 1958.

The new life insurance subsidiary, Investors Syndicate Life Insurance & Annuity Co., which was formed late in 1957, is now in active operation and has been making excellent progress. By the close of 1958, licenses had been received in 19 States and 1 Territory, and were pending in 17 others. As soon as statutory and regulatory requirement can be fulfilled, applications will be filed in additional States with the objective of obtaining nationwide distribution.

LITIGATION

After contending for over 4 years with a multitude of varied lawsuits great progress in clearing them away has been accomplished.

One suit in the Federal court was voluntarily withdrawn after the corporation had counterclaimed against the plaintiff. In another suit, involving the administrative status of your corporation, the stand of your management was completely vindicated and the suit dismissed by the Federal court-after the Supreme Court of the United States had twice upheld your corporation's position.

Following lengthy hearings, a settlement proposal made in the corporate derivative suits was recommended on November 18, 1958, by court-appointed Referee Fitzsimmons. This settlement offer is now awaiting final judicial approval. The concluding portion of Referee Robert J. Fitzsimmons' opinion is of interest to all:

"I have considered the argumented offer of settlement in the light of the current probability of success or failure of the various courses of action alleged herein. So evaluated it appears to me that the amended offer of settlement constitutes a fair, reasonable, and adequate basis for a settlement of this litigation and is worthy of judicial approval. In my considered judgment, it would be for the best interest of Alleghany and its stockholders to have this substantial settlement judicially approved so as to bring an end to this protracted litigation with its attendant expenses and its constant demands on the time of Alleghany's officers, who for many months have been prevented by this litigation from devoting all of their time and efforts to the business and affairs of the corporation."

It is hoped that the current year will see the last vestiges of the aforementioned litigation cleared away.

TAX STATUS OF DIVIDENDS

Last year current and accrued dividends were paid on all three classes of preferred stock of the corporation. Counsel for the corporation has advised us as to their opinion of the taxability of these distributions under the Internal Revenue Code in accordance with the following table:

Any dividend or portion thereof constituting a return of capital shall be taxable to the recipient only if it exceeded the cost basis of his stock and then as capital gain. It is presently expected that regular preferred dividends will be paid in 1959 and will be taxable to the recipients as ordinary dividend income.

Although many of the difficult problems of the past year have been overcome we know that there is yet much to be done. However, with the loyal and hardworking officers and employees that this corporation has, ably supported by an excellent board of directors, there is no reason why great progress should not be made and the fulfillment of our ambitions for the year 1959 realized-to say nothing of the long-term future.

ALLAN P. KIRBY, Chairman and President.

42560-$9- -35

Balance sheet Dec. 31, 1958, with comparative figures at Dec. 31, 1957

Provision for estimated Federal taxes on unrealized appreciation of securities

Total..

Stockholders' equity:

Capital stock:

$4 prior preferred convertible stock, no par value-authorized
28,367 shares; outstanding 24,337 shares; stated value $80 per
share..

6-percent convertible preferred stock, $10 par value-authorized
1,367,440 shares; outstanding 1,321,135 shares..
Preferred-authorized 1,500,000 shares, $100 par value; outstand-
ing 4,400 shares of cumulative 532-percent preferred stock, series
A, less 460 shares held in treasury.

Common-authorized 22,000,000 shares, par value $1, at Dec. 31,
1958, 8,635,627 shares were reserved for conversion and pur-
chase rights and 4,762,642 shares were outstanding.

Additional paid-in capital.......

145, 455 145, 45,5

3, 998, 645

331, 200 6,300

337,500

4,668, 800

15, 000, 000

17, 000, 000

18, 998, 645

127, 128 11,300,000

21, 668, 800 297,053

127,722, 708

127, 500, 679

(24, 401, 760)

(67, 156, 555)

103, 320, 948
(7)
133, 746, 721

60, 344, 124 ('17)

82, 309, 977

Balance sheet Dec. 31, 1958, with comparative figures at Dec. 31, 1957-Con. STATEMENT OF INCOME (EXCLUSIVE OF SECURITY TRANSACTIONS)

Net profit on security transactions transferred to retained earnings (deficit).

STATEMENT OF ADDITIONAL PAID-IN CAPITAL

Balance at beginning of year..

Stated value of 500 shares in 1958 and 350 shares in 1957 of $4 prior preferred convertible stock, less par value of 8,000 shares in 1958 and 5, 600 shares in 1957 of common stock into which converted...

Excess of proceeds over par value of 100,000 shares of common stock sold under stock option plan ..

Excess of par value over cost of 460 shares of cumulative 51⁄2 percent preferred stock series A reacquired and held in treasury.

Total.....

107, 425, 996

Less net charge applicable to acquisition and conversion of 6 percent convertible preferred stock..

107, 184, 794

18, 240

Balance at end of year.

107, 407, 756

107, 184, 794

STATEMENT OF RETAINED EARNINGS

Balance at beginning of year (deficit)...

Net income for year, exclusive of net profit on security transactions ..
Net profit on security transactions..

Unrealized appreciation of securities, less provision for Federal taxes of $11,300,000 in 1958 1

Balance at end of year (deficit), including unrealized appreciation of securities.

For footnotes see p. 542.

(81, 410, 519)

57, 008, 759

(78,975, 341) 11, 818, 786

1 Investments in corporate securities and joint ventures: Although investments are shown at indicated market quotations at the balance sheet date, Alleghany Corp. makes no representation as to realization of such values. Book value represents cost determined on a first-in, first-out basis, less a reserve of $23,082,799 in the case of the investment in Missouri Pacific RR. Co. class B stock.

Pursuant to an order of the Interstate Commerce Commission, the corporation has deposited all of its Missouri Pacific RR. Co. stock with an independent voting trustee.

The agreements to the various joint ventures provide that each of the 2 parties is to own a 50 percent interest and share equally in gains. The other parties to the agreements have guaranteed that Alleghany Corp. shall be indemnified from loss on its contributions and, in addition, shall receive capital gains, dividends, and/or other income equal to at least 4 to 5 percent per annum as set forth in the several agreements. The corporation has loaned to the other parties their share of the cost on promissory notes secured by the interest of such other parties and payable upon the termination of the ventures. Notes receivable: Notes receivable, other than from participants in joint ventures, were comprised as follows:

Fully secured (note 2(a)).
Unsecured (note 2(b))–

Subtotal---

Less reserve__

Total.

$4, 800, 000 20, 539, 100

25, 339, 100 600, 000

24, 739, 100

(a) Alleghany holds a 4 percent 20-year subordinated $4,000,000 note of the 52026 Corp. whose only asset is approximately 87 percent of the outstanding common stock of Gulf States Land & Industries, Inc., substantially all of which is pledged as collateral for the note. Based on the market value of Gulf States Land & Industries, Inc., stock at Dec. 31, 1958, the note is considered fully secured. Interest on the note, however, will not be recorded until received.

(b) Pursuant to an agreement with Webb & Knapp, Inc., dated May 25, 1956, as amended, the corporation has purchased to date $19,950,000 principal amount of Webb & Knapp, Inc., 5 percent promissory notes due Dec. 31, 1974. Under the aforementioned agreement the corporation is obligated to purchase a total of $20,000,000 principal amount of such notes on or before Dec. 31, 1959, and upon such event will receive stock option warrants evidencing the right to purchase, for a period of 15 years, 10,000,000 shares of Webb & Knapp, Inc., common stock at $2.50 per share.

35 percent sinking fund debentures: The debentures may be redeemed from time to time, in whole or in part, at par plus accrued interest and a premium of 2 percent to and including Nov. 1, 1959, such premium decreasing at the rate of 2 percent per annum until Nov. 1, 1961, after which the debentures may be redeemed at par. Sinking fund provisions require a deposit of $1,000,000 with the trustee annually on Nov. 1, through 1961; in lieu of cash, debentures may be deposited with the trustee at par.

The indenture provides that the corporation will not, without written consent of holders of % of the aggregate principal amount of the debentures at the time outstanding, pay or declare any dividend (except in stock of the corporation) or make any distribution on or redeem, retire, purchase, or otherwise acquire, directly or indirectly, any of its stock, unless after giving effect to such payments or distributions, the fair value of the corporation's total assets, less liabilities other than capital indebtedness, would equal 150 percent of the corporation's total capital indebtedness, as defined therein.

Notes payable to banks: On Mar. 24, 1958, under the terms of a collateral loan agreement with a group of banks, the corporation borrowed $15,000,000 at an interest rate of 5 percent. The loan is due on May 24, 1960, and among the restrictive clauses of the agreement are the following:

(a) The collateral pledged shall have a value of at least twice the principal amount of the outstanding loan.

(b) Dividends shall not be declared or paid unless the principal amount of the loan has an asset coverage, as defined, of 200 percent in respect to preferred stock dividends and 300 percent in respect to common stock dividends, after deducting the amount of such dividends.

(c) The aggregate of any dividends declared or paid on preferred and common stock in any year shall not be greater than the amount of the corporation's net income and realized profit on security transactions in the preceding year, except that dividends may be declared or paid not in excess of $1,000,000 on the outstanding preferred stocks.

(d) The amount of indebtedness the corporation may incur directly or indirectly is limited to $22,000,000.

Federal taxes: The tax liability for all years through 1952 has been settled. No provision for Federal taxes is necessary for the current year's income due to the application of the corporate dividends received deduction. Provision has been made for the estimated Federal income tax on unrealized appreciation of securities assuming no direct distribution of such securities to stockholders.

Capital stock: (a) The $4 prior preferred convertible stock, semiannual dividends on which are cumulative and have been paid to Oct. 1, 1958, is redeemable on call at and is entitled in voluntary and involuntary dissolution to $80 per share plus accumulated unpaid dividends. Each share of this stock is convertible into 16 shares of common stock.

(b) The 6 percent convertible preferred stock, semiannual dividends on which are cumulative and have been paid to Oct. 1, 1958, may be redeemed at the option of Alleghany Corp. at any time subsequent to May 1, 1970, at $10.50 per share or in involuntary dissolution at $10 per share plus, in each instance, accumulated and unpaid dividends. Each share of this stock is convertible into 4.7 shares of common stock upon payment of $3.75 per share of common stock. No fractional shares shall be issued, however, upon the conversion of any share or shares of 6 percent stock.

(c) The 52-percent preferred stock, series A, quarterly dividends on which are cumulative and have been paid to Nov. 1, 1958, is redeemable on call at $105 per share or in involuntary dissolution at $100 per share plus, in each instance, accumulated and unpaid dividends.

(d) At Dec. 31, 1958, there were outstanding 1,999,400 warrants for the purchase of 1,999,400 shares of common stock at $3.75 per share.

(e) During the year, under a stock option plan adopted by the corporation in 1951, an optionu to purchase 12,500 shares of common stock was granted and an option to purchase 100,000 shares of common stock at $3.0625 was exercised. At Dec. 31, 1958, options to purchase 25,000 shares of common stock at $8.375 and 12,500 shares at $4.375 were outstanding.

7 Contingent liabilities: The corporation is defendant in various lawsuits and claims including those of stockholders. Liability has been denied and the amounts, if any, which may ultimately be paid are indeterminable.