SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended
December 31, 2006 Commission File Number 1-5447
PITTSBURGH & WEST VIRGINIA RAILROAD
(Exact name of registrant as specified in its charter)
Pennsylvania 25-6002536
(State of organization) (I.R.S. Employer Identification No.)
#2 Port Amherst Drive, Charleston, WV 25306-6699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 926-1124
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Shares of beneficial interest, American Stock Exchange
without par value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes X No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes No X
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer,
and accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act. Yes No X
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 2, 2007 was $ 13,816,500.
At February 2, 2007, there were 1,510,000 outstanding shares of beneficial
interest.
Notices and communications from the Securities and Exchange Commission for
the registrant may be sent to Robert A. Hamstead, Vice President and
Secretary-Treasurer, #2 Port Amherst Drive, Charleston, WV 25306.
The information required by Part III hereof is incorporated by reference
from Registrant's Proxy Statement, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 2006.
PART I
Item 1 BUSINESS
Pittsburgh & West Virginia Railroad (the Registrant) was organized in
Pennsylvania in 1967, as a business trust, for the purpose of acquiring the
business and property of a small leased railroad. The railroad was leased in
1964 to Norfolk and Western Railway Company, now known as Norfolk Southern
Corporation ("NSC"), by Registrant's predecessor company for 99 years with
the right of unlimited renewal for additional 99 year periods under the same
terms and conditions, including annual rent payments.
Registrant's business consists solely of the ownership of the properties
subject to the lease, and of collection of rent thereon. The rent received is
$915,000 per year, in cash, which amount is fixed and unvarying for the life
of the lease, including any renewal periods. In addition, the lease provides
that certain non-cash items be recorded as rent income each year. These
entries are equal in amount to the sum of (1) Registrant's federal income tax
deductions for depreciation, retirements, and amortization of debt discount
expense, and (2) all other expenses of the Registrant, except those expenses
incurred for the benefit of its shareholders. For financial reporting
purposes, only the cash income is reported, as the non-cash items, although
recorded under the terms of the lease, have no financial value because of the
indeterminate settlement date.
Registrant has elected to be treated for tax purposes as a real estate
investment trust. As such, the trust itself is exempt from federal income
tax, to the extent that its income is distributed to shareholders. However,
dividends paid by Registrant are ordinary taxable income to its shareholders.
In order to maintain qualified status, at least 90% of ordinary taxable
income must be distributed. It is Registrant's policy to distribute annually
approximately 100% of ordinary taxable income.
Item 1B Unresolved Staff Comments
None
Item 2 PROPERTIES
The properties leased to NSC consist of 112 miles of main line road
extending from Pittsburgh Junction, Ohio, through parts of West Virginia, to
Connellsville, Pennsylvania; approximately 20 miles of branch lines; and
other assets used in the operation of the railroad, such as real estate,
machinery and equipment, and supplies, but excluding rolling stock all of
which was sold to NSC prior to the effective date of the lease.
The more significant provisions of the lease applicable to the properties
are:
NSC at its own expense and without deduction from the rent, will maintain,
manage and operate the leased property and make such improvements thereto as
it considers desirable. Such improvements made by NSC become the property of
the Registrant, and the cost thereof constitutes a recorded indebtedness of
Registrant to NSC. The indebtedness is offset when non-cash rental is
recorded over the depreciable life of the improvements. Such part of the
leased property as is, in the opinion of NSC, not necessary, may be disposed
of. The proceeds of any disposition are retained by NSC and constitute an
indebtedness of NSC to Registrant. These amounts are due and payable upon
termination of the lease, whether by default or expiration. Because of the
indeterminate settlement date for these items, such transactions and balances
have not been reported in the financial statements since 1982.
Upon termination of the lease, all properties covered by the lease would
be returned to Registrant, together with sufficient cash and other assets to
permit operation of the railroad for one year.
Following is summary financial data for Norfolk Southern Corporation
(NSC), the lessee of the Registrant's properties, as reported in the NSC
Form 10-K filed February 23, 2006:
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
($ in millions, except per share amounts)
2006 2005 2004 2003 2002
RESULTS OF OPERATIONS
Railway operating revenues $ 9,407 $ 8,527 $ 7,312 $ 6,468 $ 6,270
Railway operating expenses 6,850 6,410 5,610 5,402 5,112
Income from railway operations 2,557 2,117 1,702 1,064 1,158
Other income-net 149 74 76 19 66
Interest expense on debt 476 494 489 497 518
Income from continuing
operations before income tax
and accounting changes 2,230 1,697 1,289 586 706
Provision for income taxes 749 416 379 175 246
Income from continuing
operations before accounting
changes 1,481 1,281 910 411 460
Discontinued operations - - - 10 -
Cumulative effect of changes in
accounting principles,
net of taxes - - - 114 -
Net income $ 1,481 $ 1,281 $ 910 $ 535 $ 460
PER SHARE DATA
Income from continuing
operations before accounting
changes - basic $ 3.63 $ 3.17 $ 2.31 $ 1.05 $ 1.18
- diluted $ 3.57 $ 3.11 $ 2.28 $ 1.05 $ 1.18
Net income - basic $ 3.63 $ 3.17 $ 2.31 $ 1.37 $ 1.18
- diluted $ 3.57 $ 3.11 $ 2.28 $ 1.37 $ 1.18
Dividends $ 0.68 $ 0.48 $ 0.36 $ 0.30 $ 0.26
Stockholders' equity at
Year end $ 24.19 $ 22.63 $ 19.92 $ 17.83 $ 16.71
FINANCIAL POSITION
Total assets $ 26,028 $ 25,859 $ 24,748 $ 20,596 $ 19,956
Total long-term debt,
including current
maturities $ 6,600 $ 6,930 $ 7,525 $ 7,160 $ 7,364
Stockholders' equity $ 9,615 $ 9,276 $ 7,977 $ 6,976 $ 6,500
Item 3 LEGAL PROCEEDINGS
There were no legal proceedings.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter to a vote of security
holders.
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Registrant's shares are listed for trading on the American Stock Exchange
under the symbol of "PW". At February 2, 2007, there were approximately 784
holders of record of registrant's shares of beneficial interest.
Stock Market and Dividend information per share of beneficial interest.
2006 Quarters Ended
3/31 6/30 9/30 12/31
Sales price of traded shares
High............... $ 9.40 $ 9.25 $ 9.30 $ 9.19
Low................ 8.90 8.20 8.66 8.65
Dividends paid .13 .13 .13 .13
2005 Quarters Ended
3/31 6/30 9/30 12/31
Sales price of traded shares
High............... $ 9.80 $ 9.49 $ 9.44 $ 9.75
Low................ 9.10 9.02 8.95 9.03
Dividends paid .14 .12 .13 .13
It is the Registrant's intention to continue distributing quarterly
dividends. A quarterly dividend of $.13 per share is payable March 30, 2007
to shareholders of record on March 9, 2007.
Item 6 SELECTED FINANCIAL DATA
($Thousands, except per share amounts)
2006 2005 2004 2003 2002
Revenues $ 915 $ 915 $ 915 $ 915 $ 915
Income available for
distribution 789 780 805 799 821
Net income 789 780 805 799 821
Total assets 9,199 9,204 9,209 9,190 9,190
Per share amounts:
Net income .52 .52 .53 .53 .54
Income available for
distribution .52 .52 .53 .53 .54
Cash dividends .52 .52 .51 .53 .55
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All of the Registrant's railroad properties are leased to Norfolk and
Western Railway Company, now known as Norfolk Southern Corporation (NSC), for
99 years, with unlimited renewals on the same terms. Cash rental is a fixed
amount of $915,000 per year, with no provision for change during the term of
the lease and any renewal periods. This cash rental is the only source of
funds. Although the lease provides for additional rentals to be recorded,
these amounts do not increase cash flow or net income as they are charged to
NSC's settlement account with no requirement for payment, except at termination
or non renewal of the lease. Due to the indeterminate settlement date, these
additional rental amounts are not recorded for financial reporting purposes.
Income available for distribution in 2006 and in 2005 was approximately
$789,000 and $780,000, respectively.
Registrant's only cash outlays, other than dividend payments, are for
general and administrative expenses, which include professional fees, office
rental and director's fees. Professional fees have increased primarily due to
the costs of complying with the requirements of the Sarbanes-Oxley Act of 2002.
The leased properties are maintained entirely at NSC's expense.
Since cash revenue is fixed in amount and outlays for general and
administrative expenses are relatively modest, inflation has had no material
impact on Registrant's reported net income for the past three years.
Although recent inflationary trends have been relatively low, annual rental
income is a fixed amount for the current lease term and any renewal periods,
and inflation could affect the real dollar value of the rental income over
time. Changes in inflationary trends could also affect the general and
administration expenses.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly financial data (in $thousands, except per share amounts)
2006 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Revenues $ 229 $ 229 $ 229 $ 228
Net income 173 195 210 211
Per share .11 .12 .14 .14
2005
Revenues $ 229 $ 229 $ 229 $ 228
Net income 164 202 207 209
Per share .11 .13 .14 .14
Detailed financial statements of Registrant appear on pages F-3 through F-8
of this report. Per share data for the year is slightly different from the
sum of four quarters due to rounding.
Item 9 CHANGES IN AND DISAGREEMENTS WITH AUDITORS' ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
Item 9a CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining effective
internal controls over financial reporting. Within 90 days prior to the date
of this report, the Registrant carried out an evaluation under the supervision
and with the participation of the Registrant's management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the disclosure controls and procedures pursuant to
Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures are
adequate and effective in timely alerting them to material information
relating to the Registrant required to be included in the Registrant's
periodic filings with the SEC.
There was no change in Registrant's internal control over financial
reporting identified in connection with the evaluation required by paragraph
(d) of Rules 13a-15 and 15d-15 under the Exchange Act during Registrant's
last fiscal quarter that materially affected, or is reasonably likely to
materially affect, Registrant's internal control over financial reporting.
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
This information is incorporated herein by reference to Registrant's 2007
Proxy Statement.
Item 11 EXECUTIVE COMPENSATION
Not applicable.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Management's ownership of Registrant's shares of beneficial interest as of
February 2, 2007.
Shares Percent of
Beneficially Outstanding
Name Owned Shares
Virgil E. Wenger, Trustee 200 0.013
Herbert E. Jones, Jr.,Trustee 4,000 0.265
Larry R. Parsons, Trustee 12,500 0.828
C. Howard Capito, Trustee 1,000 0.066
Herbert E. Jones, III, Trustee
and President 0 0.000
All trustees and officers
as a group (6 persons) 17,700 1.172
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is set forth in Registrant's 2006 Proxy Statement, which
is incorporated herein by reference.
Item 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is set forth in Registrant's 2006 Proxy Statement, which
is incorporated herein by reference.
PART IV
Item 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Exhibits
Exhibit 1.1 A list of all financial statements and financial
statement schedules filed as part of this report is set forth on page F-1
herein.
Exhibit 1.2 - all the exhibits listed below are incorporated
herewith by reference to Form 8 Amendment to Annual Report on
Form 10-K for the year ended December 31, 1988:
3.1 Pittsburgh & West Virginia Railroad Declaration of Trust
dated February 18, 1967.
3.2 Pittsburgh & West Virginia Railroad Regulations.
3.3 Plan and Agreement of Reorganization, dated February 18,
1967, between Pittsburgh & West Virginia Railroad and The
Pittsburgh and West Virginia Railway Company
3.4 Amendment No. 1 to Plan and Agreement of Reorganization
dated February 18, 1967, between The Pittsburgh and West
Virginia Railway Company and Pittsburgh & West Virginia
Railroad.
10.1 Lease of railroad properties, dated July 12, 1962, between
the Pittsburgh and West Virginia Railway Company and Norfolk
and Western Railway Company.
10.2 Assignment of lease by The Pittsburgh and West Virginia
Railway Company to Pittsburgh & West Virginia Railroad.
Exhibit 1.3 - Section 302 Certification for Herbert E. Jones, Jr.
Exhibit 1.4 - Section 302 Certification for Herbert E. Jones, III
Exhibit 1.5 - Section 302 Certification for Robert A. Hamstead
Exhibit 1.6 - Section 906 Certification for Herbert E. Jones, Jr.,
Herbert E. Jones, III, and Robert A. Hamstead
(b) No report on Form 8-K was filed during the fourth quarter of 2006.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PITTSBURGH & WEST VIRGINIA RAILROAD
By /s/ Robert A. Hamstead
Robert A. Hamstead
Vice President and Secretary-Treasurer
Date: March 29, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Herbert E. Jones, Jr. /s/ Herbert E. Jones, III
Herbert E. Jones, Jr. Herbert E. Jones, III
Chairman of the Board and Trustee President and Trustee
Date:March 29,2007
Audited Financial Statements
Pittsburgh & West Virginia Railroad
Years Ended December 31, 2006 and 2005
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Shareholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7 - F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders
Pittsburgh & West Virginia Railroad
We have audited the accompanying balance sheet of Pittsburgh & West
Virginia Railroad, a Pennsylvania business trust (the Trust), as of
December 31, 2006 and 2005, and the related statements of operations,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2006. These financial statements are
the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pittsburgh & West
Virginia Railroad as of December 31, 2006 and 2005, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
s/ Gibbons & Kawash
Charleston, West Virginia
March 26, 2007
F-2
PITTSBURGH & WEST VIRGINIA RAILROAD
BALANCE SHEET
December 31, 2006 and 2005
ASSETS 2006 2005
Net investment in capital lease $ 9,150,000 $ 9,150,000
Cash 49,389 54,343
$ 9,199,389 $ 9,204,343
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ - $ 8,950
Shareholders' equity:
Shares of beneficial interest, without
par value:
Authorized number of shares - unlimited;
issued and outstanding - 1,510,000
shares at December 31, 2006 and 2005 9,145,359 9,145,359
Retained earnings 54,030 50,034
9,199,389 9,195,393
$ 9,199,389 $ 9,204,343
The accompanying notes are an integral part
of these financial statements.
F-3
PITTSBURGH & WEST VIRGINIA RAILROAD
STATEMENT OF OPERATIONS
Years Ended December 31, 2006, 2005, 2004
2006 2005 2004
Interest income from capital lease $ 915,000 $ 915,000 $ 915,000
Less general and administrative
expenses 125,804 134,763 110,034
Net income $ 789,196 $ 780,237 $ 804,966
Per share:
Net income $ 0.52 $ 0.52 $ 0.53
The accompanying notes are an integral part
of these financial statements.
F-4
PITTSBURGH & WEST VIRGINIA RAILROAD
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2006, 2005, and 2004
Shares of
Beneficial Retained
Interest Earnings
Balance at December 31, 2003 $ 9,145,359 $ 20,131
Net income - 804,966
Cash dividends paid ($.53 per share) - (770,100)
Balance at December 31, 2004 9,145,359 54,997
Net income - 780,237
Cash dividends paid ($.51 per share) - (785,200)
Balance at December 31, 2005 9,145,359 50,034
Net income - 789,196
Cash dividends paid ($.52 per share) - (785,200)
Balance at December 31, 2006 $ 9,145,359 $ 54,030
The accompanying notes are an integral part
of these financial statements.
F-5
PITTSBURGH & WEST VIRGINIA RAILROAD
STATEMENT OF CASH FLOWS
Years Ebded December 31, 2006, 2005 and 2004
2006 2005 2004
Cash flows from operating activities:
Net income $ 789,196 $ 780,237 $ 804,966
Adjustments to reconcile net
income to net cash provided by
operating activities:
Decrease in accounts payable
and accrued liabilities (8,950) - (16,000)
Net cash provided by
operating activities 780,246 780,237 788,966
Cash flows used in financing activities
Dividends paid (785,200) (785,200) (770,100)
Net increase (decrease)
in cash (4,954) (4,963) 18,866
Cash, beginning of year 54,343 59,306 40,440
Cash, end of year $ 49,389 $ 54,343 $ 59,306
The accompanying notes are an integral part
of these financial statements.
F-6
PITTSBURGH & WEST VIRGINIA RAILROAD
NOTES TO FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pittsburgh & West Virginia Railroad (the Trust) is a business trust
organized under the laws of Pennsylvania on February 18, 1967, for the
purpose of leasing railroad properties to Norfolk Southern Corporation.
The leased properties consist of a railroad line 112 miles in length,
extending from Connellsville, Washington, and Allegheny Counties in the
Commonwealth of Pennsylvania, Brooke County in the State of West Virginia,
and Jefferson and Harrison Counties in the State of Ohio, to Pittsburgh
Junction, Harrison County, State of Ohio. There are also branch lines
that total 20 miles in length located in Washington County and Allegheny
County in Pennsylvania and Brooke County, West Virginia. The lease
provides the Trust's source of revenue, which is received in quarterly
installments.
Revenue Recognition
Interest on the capital lease is recognized as earned based on an
implicit rate of 10% over the life of the lease which is assumed to be
perpetual.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
2 - CAPITAL LEASE
Under the terms of a lease which became effective October 16, 1964
(the "lease"), Norfolk Southern Corporation (formerly Norfolk and Western
Railway Company) (Norfolk Southern) - (the "lessee") leased all of
Pittsburgh & West Virginia Railroad's (the "Trust") real properties,
including its railroad lines, for a term of 99 years, renewable by the
lessee upon the same terms for additional 99-year terms in perpetuity.
The lease provides for a cash rental of $915,000 per annum for the current
99 year lease period and all renewal periods. The leased properties are
maintained entirely at Norfolk Southern's expense.
F-7
PITTSBURGH & WEST VIRGINIA RAILROAD
NOTES TO FINANCIAL STATEMENTS
(Continued)
2 - CAPITAL LEASE (Continued)
Prior to 1983, the lease was accounted for as an operating lease in
accordance with the Statement of Financial Accounting Standards (SFAS)
No. 13, "Accounting for Leases," because the railroad assets as accounted
for under "betterment accounting" were considered similar to land.
Effective January 1, 1983, the Interstate Commerce Commission (ICC)
changed the method of accounting for railroad companies from "betterment
accounting" (which was previously used by the Trust and most railroads) to
"depreciation accounting." The leased assets, under "depreciation
accounting," are no longer similar to land; and, effective January 1, 1983,
under the provisions of Statement No. 13, the lease is considered a capital
lease and the property deemed sold in exchange for rentals receivable under
the lease. The lease may be terminated by the lessee either by expiration
of the initial or any renewal term, or by default of Norfolk Southern. In
the event of termination, Norfolk Southern is obligated to return to the
Trust all properties covered by the lease, together with sufficient cash
and other assets to permit operation of the railroad for a period of one
year, and to settle the noncash settlement account described in Note 3.
The Trust has determined that the lease term is perpetual based on
these substantial penalties to the lessee upon nonrenewal. Accordingly,
as of January 1, 1983, the rentals receivable of $915,000 per annum,
recognizing renewal options by the lessee in perpetuity, were estimated
to have a present value of $9,150,000, assuming an implicit interest rate
of 10%.
3 - NONCASH RENTAL SETTLEMENT
Under the terms of the lease, a noncash settlement account is
maintained to record amounts due to or due from Norfolk Southern upon
termination of the lease. The amount is credited with noncash rent
equivalent to: (a) the deductions allowable to the Trust, for tax
purposes for depreciation, amortization or retirements of the leased
properties and amortization of debt discount and expense; and (b) all
other expenses of the Trust, except those incurred for the benefit of
the shareholders. The settlement account is charged with the cost of
capital asset acquisitions and expenses of the Trust paid for by Norfolk
Southern on behalf of the Trust.
At December 31, 2006 and 2005, the noncash settlement account had a
balance of $14,229,640 and $13,885,185, respectively, receivable from
Norfolk Southern. The account will not be settled until the expiration of
the lease, whether by default or nonrenewal. Because of the indeterminate
settlement date of the account, no values have been reported in the
accompanying financial statements for the balance of the account or the
transactions affecting the balance.
F-8
PITTSBURGH & WEST VIRGINIA RAILROAD
NOTES TO FINANCIAL STATEMENTS
(Continued)
4 - INCOME TAXES
The Trust was organized as a Pennsylvania business trust and has
elected to be treated under the Internal Revenue Code as a real estate
investment trust. As such, the Trust is exempt from Federal taxes on
taxable income and capital gains to the extent that they are distributed
to shareholders. In order to maintain qualified status, at least 90% of
ordinary taxable income must be distributed; it is the intention of the
Trustees to continue to make sufficient distributions of ordinary taxable
income. Dividends distributed for the years ended December 31, 2006,
2005, and 2004, were comprised entirely of ordinary income.
5 - RELATED PARTY TRANSACTIONS
A Trustee of the Trust serves as Chairman and CEO of Wheeling &
Lake Erie Railway Company which subleases from Norfolk Southern
Corporation the right of way and real estate owned by the Trust. The
Sublease is substantially similar by virtue of assignment and assumption
of rights and obligations as the Lease between the Trust and Norfolk
Southern Corporation. As Chairman and CEO of Wheeling & Lake Erie
Railway, the Trustee exercises the rights and obligations under the
Sublease to maintain the property, to operate the property, and to sell
or dispose of the property not needed for ongoing operations in
accordance with the provisions of the Lease and Sublease.
The Trust leases office space and equipment from a company related
to its Chairman. Rent is paid on a month to month basis in the amount of
$1,500 per month.
6 - CONTINGENCY
Under the provisions of the lease, the Trust may not issue, without
the prior written consent of Norfolk Southern, any shares or options to
purchase shares or declare any dividends on its shares of beneficial
interest in an amount exceeding the value of the assets not covered by
the lease plus the annual cash rent of $915,000 to be received under the
lease, less any expenses incurred for the benefit of shareholders. At
December 31, 2006, all net assets are covered by the lease.
The Trust may not borrow any money or assume any guarantees except
with the prior written consent of Norfolk Southern.
F-9
PITTSBURGH & WEST VIRGINIA RAILROAD
NOTES TO FINANCIAL STATEMENTS
(Continued)
7 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 2006 and 2005.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Year Ended
December 31, 2006
Revenue $ 228,750 $ 228,750 $ 228,750 $ 228,750
Net income $ 172,884 $ 195,426 $ 210,115 $ 210,771
Net income
per share $ 0.11 $ 0.13 $ 0.14 $ 0.14
Year Ended
December 31, 2005
Revenue $ 228,750 $ 228,750 $ 228,750 $ 228,750
Net income $ 163,470 $ 202,046 $ 206,323 $ 208,398
Net income
per share $ 0.11 $ 0.13 $ 0.14 $ 0.14
F-10