PITTSBURGH & WEST VIRGINIA RAILROAD
(a Pennsylvania business trust)
2009
ANNUAL REPORT and 10-K
PITTSBURGH & WEST VIRGINIA RAILROAD
#2 Port Amherst Drive
Charleston, West Virginia 25306
March 26, 2010
To the Shareholders
Pittsburgh & West Virginia Railroad ("the Trust") has elected to be
treated for tax purposes as a real estate investment trust. As such, the
Trust is not required to pay federal corporate income taxes on any of its
taxable income that is distributed to shareholders. It has been the Trust's
policy to distribute as dividends all of its ordinary taxable income.
The Trust's only line of business is the ownership of a small railroad
running from western Pennsylvania to the eastern section of Ohio. The
railroad is under long-term lease to Norfolk Southern Corporation (NSC)
for a fixed rental of $915,000 per year. This amount, equivalent to 60
cents per share, is the only cash income to the Trust. All cash available,
after payment of administrative expenses, is distributed as dividends.
This net cash flow amounted to $ 750,000 or 50 cents per share in 2009,
and dividends of 50 cents were distributed. Income and distributions in
the prior year were $770,000 and 51 cents respectively. A quarterly
dividend of 12 cents per share will be paid on March 31, 2010, to
shareholders of record March 10, 2010.
The lease with NSC requires accounting for substantial amounts of
non-cash rental. These amounts do not increase cash flow or net income
and are not reported in our published financial statements.
Included in this report is our 2009 annual report to the Securities and
Exchange Commission on Form 10-K.
Enclosed is the proxy material for the Annual Shareholders meeting to
be held in Charleston, West Virginia, on May 13, 2010. Please sign and
return the proxy card promptly.
For the Trustees,
/s/ Herbert E. Jones, Jr. /s/ Herbert E. Jones, III
Herbert E. Jones, Jr. Herbert E. Jones, III
Chairman of the Board President
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, 2009
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
American Stock Exchange 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 nonaffiliates of
the registrant as of June 30, 2009 was $15,568,100.
At February 22, 2010, 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 R. McCoy, 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, 2009.
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 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.
There are no employees. The accounting services and other general
administrative services are provided through a contract with the Vice
President, Secretary/Treasurer. The investor relations 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
$15,609,762 at December 31, 2009.
Following is summary financial data for Norfolk Southern
Corporation (NSC), the lessee of the Registrant's properties, as reported
in the NSC Form 10-K filed February 17, 2010:
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
($ in millions, except per share amounts)
2009 2008 2007 2006 2005
RESULTS OF OPERATIONS
Railway operating revenues $7,969 $10,661 $9,432 $9,407 $8,527
Railway operating expenses 6,007 7,577 6,847 6,850 6,410
Income from railway operations 1,962 3,084 2,585 2,557 2,117
Other income-net 127 110 93 149 74
Interest expense on debt 467 444 441 476 494
Income from continuing
Operations before income tax 1,622 2,750 2,237 2,230 1,697
Provision for income taxes 588 1,034 773 749 416
Net income $1,034 $1,716 $1,464 $1,481 $1,281
PER SHARE DATA
Net income - basic $2.79 $4.58 $3.73 $3.62 $3.17
- diluted $2.76 $4.52 $3.68 $3.57 $3.11
Dividends $1.36 $1.22 $0.96 $0.68 $0.48
Stockholders' equity at
year end $28.06 $26.23 $25.64 $24.19 $22.63
FINANCIAL POSITION
Total assets $27,369 $26,297 $26,144 $26,028 $25,859
Total debt $ 7,153 $6,667 $6,368 $6,600 $6,930
Stockholders' equity $10,353 $9,607 $9,727 $9,615 $9,276
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 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 22, 2010, there were
approximately 630 holders of record of registrant's shares of beneficial
interest.
Stock Market and Dividend information per share of beneficial interest.
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
2008 Quarters Ended
3/31 6/30 9/30 12/31
Sales price of traded shares
High......................$9.50 $10.25 $10.25 $14.90
Low...................... 9.00 9.06 9.05 8.10
Dividends paid .12 .13 .13 .12
Sales price of traded shares February 22, 2010
High...................... $ 10.98
Low...................... 10.97
It is the Registrant's intention to continue distributing quarterly
dividends. A quarterly dividend of $.12 per share is payable March
31, 2010 to shareholders of record on March 10, 2010.
Item 6 SELECTED FINANCIAL DATA
($Thousands, except per share amounts)
2009 2008 2007 2006 2005
Revenues $915 $915 $915 $915 $915
Income available for
distribution 750 770 781 789 780
Net income 750 770 781 789 780
Total assets 9,190 9,195 9,196 9,199 9,204
Per share amounts:
Net income .50 .51 .52 .52 .52
Income available for
distribution .50 .51 .52 .52 .52
Cash dividends .50 .51 .52 .52 .52
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, as previously discussed in Item 2. Income
available for distribution in 2009 and in 2008 was approximately
$750,000 and $770,000, 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. Stock exchange fees and costs related to
shareholder services have also increased. 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)
2009 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Revenues $229 $229 $229 $228
Net income 152 179 208 212
Per share .10 .12 .14 .14
2008
Revenues $229 $229 $229 $228
Net income 163 185 212 210
Per share .11 .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(T) 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 temporary 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, 2009.
PART III
Item 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This information is incorporated herein by
reference to Registrant's 2009 Proxy Statement.
Item 11 EXECUTIVE COMPENSATION
Compensation of Vice President and
Secretary and Treasurer
Robert McCoy currently serves as the Vice
President and Secretary and Treasurer, and is
paid an annual fee of $12,000, which is payable
in quarterly installments of $3,000 by the
Company for his services.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Management's ownership of Registrant's
shares of beneficial interest as of February 22,
2010.
Percent of
Shares 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
Herbert E. Jones, III, Trustee
and President 0 0.000
David H. Lesser, Trustee 22,825 1.512
Robert R. McCoy
Vice President and Secretary-
Treasurer 0
All trustees and officers
as a group (6 persons) 39,525 2.618
Item 13 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
This information is set forth in Registrant's
2009 Proxy Statement, which is incorporated
herein by reference.
Item 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is set forth in Registrant's
2009 Proxy Statement, which is incorporated
herein by reference.
PART IV
Item 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit 1.1 A list of all financial statements
and financial statemen 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 31.1 - Section 302 Certification for Herbert E. Jones, Jr.
Exhibit 31.2 - Section 302 Certification for Herbert E. Jones, III
Exhibit 31.3 - Section 302 Certification for Robert R. McCoy
Exhibit 99 - Section 906 Certification for Herbert E. Jones, Jr.,
Herbert E. Jones, III, and Robert R. McCoy
(b) No report on Form 8-K was filed during the fourth quarter of 2009.
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 26, 2010
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 26, 2010
Audited Financial Statements
PITTSBURGH & WEST VIRGINIA RAILROAD
Years Ended December 31, 2009 and 2008
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-2
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, 2009 and
2008, 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, 2009. 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 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, 2009 and 2008, and the results of its
operations and its cash flows for each of the years
in the three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
/s/Gibbons & Kawash
March 26, 2010
F-3
PITTSBURGH AND WEST VIRGINIA RAILROAD
BALANCE SHEET
December 31, 2009 and 2008
ASSETS 2009 2008
Cash $39,951 $44,505
Net investment in capital lease 9,150,000 9,150,000
$9,189,951 $9,194,505
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, 2009 and 2008 $9,145,359 $9,145,359
Retained earnings 44,592 49,146
$9,189,951 $9,194,505
The accompanying notes are an integral part
of these financial statements.
F-4
PITTSBURGH AND WEST VIRGINIA RAILROAD
STATEMENT OF OPERATIONS
December 31, 2009, 2008, and 2007
2009 2008 2007
Interest income from capital lease $915,000 $915,000 $915,000
Less general and administrative expenses 164,554 144,665 134,919
Net income $750,446 $770,335 $780,081
Per share:
Net income $0.50 $0.51 $0.52
The accompanying notes are an integral part
of these financial statements.
F-5
PITTSBURGH AND WEST VIRGINIA RAILROAD
STATEMENT OF CHANGES IN SHAREHOLDERS'EQUITY
December 31, 2009, 2008, 2007, and 2006
Statement of Changes in Shareholders' Equity
Shares of
Beneficial Retained
Interest Earnings
Balance at December 31, 2006 $9,145,359 $ 54,030
Net income - 780,081
Cash dividends paid ($.52 per share) - (785,200)
Balance at December 31, 2007 9,145,359 48,911
Net income - 770,335
Cash dividends paid ($.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
The accompanying notes are an integral part
of these financial statements.
F-6
PITTSBURGH AND WEST VIRGINIA RAILROAD
STATEMENT OF CASH FLOWS
December 31, 2008, 2007, and 2006
2008 2007 2006
Cash flows from operating activities:
Net income $750,446 $770,335 $780,081
Cash flows used in financing activities
Dividends paid (755,000) (770,100) (785,200)
Net increase (decrease) in cash (4,554) 235 (5,119)
Cash, beginning of year 44,505 44,270 49,389
Cash, end of year $39,951 $44,505 $44,270
The accompanying notes are an integral part
of these financial statements.
F-7
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
F-8
2 - CAPITAL LEASE (Continued)
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 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 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, 2009 and 2008, the noncash settlement account had
a balance of $15,609,762 and $15,271,613, 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-9
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, 2009,
2008, and 2007, were comprised entirely of ordinary income.
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, 2009, the Trust had no uncertain tax positions
that qualified for either recognition or disclosure in the financial
statements.
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 quarterly basis in the amount of $4,500
per quarter.
F-10
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,
2009, 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 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly
financial information for the years ended December 31, 2009 and 2008:
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
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Year Ended December 31, 2008
Revenue $228,750 $228,750 $228,750 $228,750
Net income $163,605 $184,955 $211,692 $210,083
Net income per share $.11 $.12 $.14 $.14