PITTSBURGH & WEST VIRGINIA RAILROAD
(a Pennsylvania business trust)
2010
ANNUAL REPORT and 10-K
UNITED STATES
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, 2010
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 on which registered
American Stock Exchange
Title of each class
Shares of beneficial interest, 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 No X
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,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer, accelerated filer, and
smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company 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 non-affiliates of the
registrant as of June 30, 2010 was $15,553,000.00.
At February 25, 2011, 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 David H. Lesser, CEO and Chairman of the Board
of Trustees, PWV, c/o Richard Baumann, Morrison & Cohen LLP, 909 Third
Avenue, New York, New York 10022.
DOCUMENTS INCORPORATED BY REFERENCE
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, 2010.
PART I
Item 1 BUSINESS
Pittsburgh & West Virginia Railroad (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 current business consists of the ownership of a railroad which
is subject to a 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.
There are no employees. The accounting services and other general
administrative services are provided through a contract with the Vice
President, Secretary/Treasurer. Transfer agent services are provided by a
third-party shareholder services company.
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 and approximately 20 miles of branch lines and
real estate used in the operation of the railroad.
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. 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 of the lease. 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. In addition, the balance of
the settlement account as described in the preceding paragraph would be
provided to the Registrant. The amount of the settlement account was
$15,882,651 at December 31, 2010.
Following is summary financial data for Norfolk Southern Corporation
(NSC), the lessee of the Registrant's properties, as reported in the NSC Form
10-K filed February 16, 2011.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
($ in millions, except per share amounts)
2010 2009 2008 2007 2006
RESULTS OF OPERATIONS
Railway operating revenues $ 9,516 $ 7,969 $ 10,661 $ 9,432 $ 9,407
Railway operating expenses 6,840 6,007 7,577 6,847 6,850
Income from railway
operations 2,676 1,962 3,084 2,585 2,557
Other income-net 153 127 110 93 149
Interest expense on debt 462 467 444 441 476
Income from continuing
operations before income
taxes 2,367 1,622 2,750 2,237 2,230
Provision for income taxes 871 588 1,034 773 749
Net income $ 1,496 $ 1,034 $ 1,716 $ 1,464 $ 1,481
PER SHARE DATA
Net income - basic $ 4.06 $ 2.79 $ 4.58 $ 3.73 $ 3.62
- diluted $ 4.00 $ 2.76 $ 4.52 $ 3.68 $ 3.57
Dividends $ 1.40 $ 1.36 $ 1.22 $ 0.96 $ 0.68
Stockholders' equity at
year end $ 29.85 $ 28.06 $ 26.23 $ 25.64 $ 24.19
FINANCIAL POSITION
Total assets $ 28,199 $ 27,369 $ 26,297 $ 26,144 $ 26,028
Total debt $ 7,025 $ 7,153 $ 6,667 $ 6,368 $ 6,600
Stockholders' equity $ 10,699 $ 10,353 $ 9,607 $ 9,727 $ 9,615
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,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Registrant's shares are listed for trading on the American Stock Exchange
under the symbol of "PW". At February 25, 2011, there were approximately 600
registered holders of registrant's common shares of beneficial interest.
Stock Market and Dividend information per share of beneficial interest.
2010 Quarters Ended
3/31 6/30 9/30 12/31
Sales price of traded shares
High........ $ 11.40 $ 11.51 $ 13.00 $ 11.97
Low......... 10.31 9.41 10.30 10.55
Dividends paid .12 .12 .13 .13
2009 Quarters Ended
3/31 6/30 9/30 12/31
Sales price of traded shares
High........ $ 14.28 $ 11.61 $ 11.10 $ 11.91
Low......... 10.10 10.01 9.69 10.19
Dividends paid .12 .12 .13 .13
February 25, 2011
Sales price of traded shares
High........ $ 11.75
Low......... 11.25
It is the Registrant's intention to continue distributing quarterly
dividends. A quarterly dividend of $.10 per share is payable March 31, 2011
to shareholders of record on February 25, 2011.
Item 6 SELECTED FINANCIAL DATA
($Thousands, except per share amounts)
2010 2009 2008 2007 2006
Revenues $ 915 $ 915 $ 915 $ 915 $ 915
Income available for
distribution 764 750 770 781 789
Net income 764 750 770 781 789
Total assets 9,199 9,190 9,195 9,196 9,199
Per share amounts:
Net income .51 .50 .51 .52 .52
Income available for
distribution .51 .50 .51 .52 .52
Cash dividends paid .50 .50 .51 .52 .52
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are those that predict or describe future events
or trends and that do not relate solely to historical matters. You can
generally identify forward-looking statements as statements containing the
words "believe," "expect," "will," "anticipate," "intend," "estimate,"
"project," "plan," "assume" or other similar expressions, or negatives of
those expressions, although not all forward-looking statements contain these
identifying words. All statements contained in this report regarding our
future strategy, future operations, projected financial position, estimated
future revenues, projected costs, future prospects, the future of our
industries and results that might be obtained by pursuing management's
current or future plans and objectives are forward-looking statements.
You should not place undue reliance on any forward-looking statements because
the matters they describe are subject to known and unknown risks,
uncertainties and other unpredictable factors, many of which are beyond our
control. Our forward-looking statements are based on the information
currently available to us and speak only as of the date of the filing of this
report. New risks and uncertainties arise from time to time, and it is
impossible for us to predict these matters or how they may affect us. Over
time, our actual results, performance or achievements will likely differ from
the anticipated results, performance or achievements that are expressed or
implied by our forward-looking statements, and such difference might be
significant and materially adverse to our security holders.
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
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 current
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, as previously discussed in Item 2. Income
available for distribution in 2010 and in 2009 was approximately $764,000 and
$750,000, respectively.
Registrant's cash outlays, other than dividend payments, are for general and
administrative expenses, which include professional fees, consultants, 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. Stock exchange fees and costs related to shareholder services have also
increased. The leased properties are maintained entirely at NSC's expense.
Currently, substantially all of Registrant's income consists of fixed-rate
rental payments that it receives pursuant to the lease of its only
substantial asset. There are no rent escalations provided for in the lease.
The lease has a 99-year term and can be renewed by the lessee for an
unlimited number of additional 99-year periods. For all these reasons,
Registrant faces substantial constraints on its income. Nevertheless,
Registrant's expenses continue to rise, including in particular its costs of
complying with the laws, regulations and rules that apply as a result of
Registrant's public company status. As a result of the foregoing, the amount
of free cash flow available to Registrant's shareholders is expected to
decline over time.
Accordingly, in order to justify continuing as a public company, Registrant
is seeking to broaden its business to include new investments. On February
25, 2011, Registrant filed a Form S-3/A with the SEC to raise capital via a
rights offering (the "Rights Offering"). On March 16, 2011, the Registrant
closed the Rights Offering. The Registrant will have 1,623,250 common shares
outstanding after completing the rights offering. There can be no assurance
that the Registrant will be successful in broadening its business. See Note
Regarding Forward-Looking Statements and additional risk factors that are
more fully disclosed in Registrant's Form S-3/A filed with the SEC on
February 25, 2011.
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)
2010 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Revenues $ 229 $ 229 $ 229 $ 228
Net income 158 190 202 214
Per share .10 .13 .13 .14
2009
Revenues $ 229 $ 229 $ 229 $ 228
Net income 152 179 208 212
Per share .10 .12 .14 .14
Detailed financial statements of Registrant appear on pages F-3 through F-10
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 ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Item 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective
disclosure controls and procedures. As of the end of the period covered by
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-15 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 to ensure that information required to be disclosed in
the Registrant's required SEC filings is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms.
There have been no significant changes in the Registrant's internal controls
or in other factors that that could significantly affect internal controls
subsequent to the date the Registrant carried out its evaluation.
Changes in Internal Control over Financial Reporting
We maintain a system of internal accounting controls that is designed to
provide reasonable assurance that our books and records accurately reflect
the transactions of the Registrant and that our policies and procedures are
followed. There have been no changes in our internal control during the
fourth quarter that have materially affected, or are reasonably likely to
materially affect such controls.
Management's Annual Report on Internal Control over Financial Reporting
This annual report does not include an attestation report of the Registrant's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
the Registrant's independent registered public accounting firm pursuant to
rules of the Securities and Exchange Commission that permit the Registrant to
provide only management's report in this annual report.
The management of Pittsburgh & West Virginia Railroad is responsible for
establishing and maintaining adequate internal control over financial
reporting. The Registrant's internal control system was designed to provide
reasonable assurance to management and the Trustees regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.
All internal control systems, no matter how well designed, have inherent
limitations. Even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement presentation and
preparation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
Management conducted an evaluation of the effectiveness of the Registrant's
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the Company's internal control over financial
reporting was effective as of December 31, 2010.
PART III
Item 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
On February 14, 2011, our Board of Trustees appointed our Chairman, David H.
Lesser (45), to serve as Chief Executive Officer until our next annual
meeting of shareholders. On March 11, 2011, the Trust appointed Arun Mittal
(34) as its new Secretary-Treasurer and Vice President of Business
Development effective March 31, 2011. The Trust will enter into a consulting
agreement with Mr. Mittal and will pay him $7,500.00 per month for his
services. On the same day, the Trust accepted the resignation of its
existing Vice President and Secretary-Treasurer, Robert McCoy, and
termination of its current rental arrangement with an effective date of March
31, 2011.
Additional information in response to this item is incorporated by reference
from the registrant's definitive proxy statement to be filed with the
Commission within 120 days after the close of registrant's fiscal year.
Item 11 EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission
within 120 days after the close of registrant's fiscal year.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information in response to this item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission
within 120 days after the close of registrant's fiscal year.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Information in response to this item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission
within 120 days after the close of registrant's fiscal year.
Item 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
Information in response to this item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission
within 120 days after the close of registrant's fiscal year.
PART IV
Item 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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:
2.1 Plan and Agreement of Reorganization, dated February
18, 1967, between Pittsburgh & West Virginia Railroad
and The Pittsburgh and West Virginia Railway Company
2.2 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.
3.1 Pittsburgh & West Virginia Railroad Declaration of Trust
dated February 18, 1967.
3.2 Pittsburgh & West Virginia Railroad Regulations.
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 - Our Current Reports on Form 8-K filed on July 13, 2010, August
11, 2010, October 5, 2010, December 7, 2010, February 4, 2011, February 15,
2011, March 11, 2011 and March 17, 2011 are incorporated by reference.
Exhibit 1.4 - Amendment No.1 to Form S-3 filed on February 25, 2011 is
incorporated by reference.
Exhibit 31.1 - Section 302 Certification for David H. Lesser.
Exhibit 31.2 - Section 302 Certification for Robert R. McCoy
Exhibit 99 - Section 906 Certification for David H. Lesser and Robert R. McCoy
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 R. McCoy
Robert R. McCoy
Vice President and Secretary-Treasurer
Date: March 28, 2011
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.
By: /s/ David H. Lesser
David H. Lesser
CEO and Chairman of the Board
Date: March 28, 2011
Audited Financial Statements
PITTSBURGH & WEST VIRGINIA RAILROAD
Years Ended December 31, 2010 and 2009
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 of
Pittsburgh & West Virginia Railroad
We have audited the accompanying balance sheets of Pittsburgh & West Virginia
Railroad, a Pennsylvania business trust (the Trust), as of December 31, 2010
and 2009, 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, 2010. The Trust's management is responsible for these financial
statements. 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 audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Trust 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 Trust'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, 2010 and 2009, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 2010, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Gibbons and Kawash
Charleston, West Virginia
March 28, 2011
F-2
BALANCE SHEET
December 31, 2010 and 2009
ASSETS 2010 2009
Cash $ 48,961 $ 39,951
Net investment in capital lease 9,150,000 9,150,000
_________ _________
$9,198,961 $9,189,951
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity:
Shares of beneficial interest, without par value:
Authorized number of shares - unlimited;
issued and outstanding - 1,510,000 shares
at December 31, 2010 and 2009
9,145,359 9,145,359
Retained earnings 53,602 44,592
_________ _________
$9,198,961 $9,189,951
The accompanying notes are an integral part
of these financial statements.
F-3
STATEMENT OF OPERATIONS
December 31, 2010, 2009, and 2008
2010 2009 2008
Interest income from capital lease $915,000 $915,000 $915,000
Less general and administrative expenses 150,990 164,554 144,665
Net income $764,010 $750,446 $770,335
Per share:
Net income $ 0.51 $ 0.50 $ 0.51
The accompanying notes are an integral part
of these financial statements.
F-4
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
December 31, 2010, 2009, and 2008
Shares of
Beneficial Retained
Interest Earnings
Balance at December 31, 2007 $9,145,359 $ 48,911
Net income - 770,335
Cash dividends paid ($.51 per share) - (770,100)
Balance at December 31, 2008 9,145,359 49,146
Net income - 750,446
Cash dividends paid ($.50 per share) - (755,000)
Balance at December 31, 2009 9,145,359 44,592
Net income - 764,010
Cash dividends paid ($.50 per share) - (755,000)
Balance at December 31, 2010 $9,145,359 $ 53,602
The accompanying notes are an integral part
of these financial statements.
F-5
STATEMENT OF CASH FLOWS
December 31, 2010, 2009, and 2008
2010 2009 2008
Cash flows from operating activities:
Net income $ 764,010 $ 750,446 $ 770,335
Cash flows used in financing activities:
Dividends paid (755,000) (755,000) (770,100)
Net increase (decrease) in cash 9,010 (4,554) 235
Cash beginning of year 39,951 44,505 44,270
Cash, end of year $ 48,961 $ 39,951 $ 44,505
The accompanying notes are an integral part
of these financial statements.
F-6
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.
Prior to 1983, the lease was accounted for as an operating lease in
accordance with the Financial Accounting Standards Board [FASB] ASC 840,
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
F-7
2 - CAPITAL LEASE (Continued)
railroad companies from "betterment accounting" (which was previously used
by the Trust and most railroads) to "depreciationaccounting". The
leased assets, under "depreciation accounting," are no longer similar
to land; and, effective January 1, 1983, under the provisions of
ASC 840, 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 settlemen
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, 2010 and 2009, the noncash settlement account
had a balance of $15,882,651 and $15,609,762, 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.
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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, 2010, 2009,
and 2008, were comprised entirely of ordinary income. In accordance with the
terms of the lease, Norfolk Southern Corporation will reimburse the lessor,
in the form of additional rent, for all taxes and governmental charges
imposed upon the leased assets of the lessor except for taxes relating to
cash rent payments made by the lessee. Due to the treatment of the lease as
a direct financing lease for financial reporting purposes, the tax basis of
the leased property is higher than the basis in the leased property reported
in these financial statements.
Effective January 1, 2009, the Trust implemented the accounting
guidance for uncertainty in income taxes using the provisions of FASB ASC
740, Income Taxes. Using that guidance, tax positions initially need to be
recognized in the financial statements when it is more-likely-than-not the
position will be sustained upon examination by the tax authorities.
As of December 31, 2010, the Trust had no uncertain tax positions
that qualified for either recognition or disclosure in the financial
statements. The Trust is generally no longer subject to examination by
income taxing authorities for years ended prior to December 31, 2007.
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 the individual who served as its Chairman during 2009 and
through July 8, 2010. Rent is paid on a quarterly basis in the amount of
$4,500 per quarter.
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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, 2010, 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.
7 - SUBSEQUENT EVENTS
On February 15, 2011, the Trust filed a Form S-3 with the SEC to
raise capital via a rights offering (the "Rights Offering"). On March 16,
2011, the Trust closed the Rights Offering. The Trust will have 1,623,250
common shares outstanding after final completion of the rights offering.
Further information is included in the Trust's Form S-3 dated February 25,
2011, and Form 8-K, dated March 17, on file with the SEC.
8 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 2010 and 2009:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Year Ended December 31, 2010
Revenue $ 228,750 $ 228,750 $ 228,750 $ 228,750
Net income $ 157,644 $ 190,155 $ 202,000 $ 214,211
Net income per share $ .10 $ .13 $ .13 $ .14
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Year Ended December 31, 2009
Revenue $ 228,750 $ 228,750 $ 228,750 $ 228,750
Net income $ 152,255 $ 178,526 $ 207,837 $ 211,828
Net income per share $ .10 $ .12 $ .14 $ .14
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