Item 1. Description of Business.
The Company
General
The Company operates a short-line railroad, which transports freight via
rail/barges across New York Harbor and a regional trucking company in the
business of short-haul freight transportation and landfill management.
Background
The Company was incorporated as Best Sellers Group, Inc. in Delaware on April
19, 1994 and changed its name to New York Regional Rail Corporation, upon the
acquisition of all of the capital stock of New York Regional Rail Corporation
("NYRR") in May 1996. NYRR operates a short-line railroad. NYRR owns the
majority of the capital stock of New York Cross Harbor Railroad, Inc. ("NYCH"),
which owns the operational railroad and CH Proprietary, Inc. ("CHP"), which owns
substantially all of the Company's rail freight transportation equipment.
In April 1999, the Company purchased 51% of the capital stock in JS
Transportation, Inc. ("JST"), a regional trucking company. In February 2004, the
Company purchased the remaining 49% of JST. In September 2000, JST acquired the
assets of MHT Inc., a small regional trucking company engaged in waste
transportation.
Unless otherwise indicated, any references to the Company also include NYRR,
NYCH, CHP and JST.
The Company's headquarters are located at 4302 First Avenue, Brooklyn, NY,
11232. The Company's telephone number is (718) 788-3690 and its fax number is
(718) 788-4462.
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BUSINESS OF REGISTRANT
Business Strategy-Rail
The Company intends to capitalize on the New York City metropolitan area's need
for faster, lower cost services for the movement of freight between New York
City and New Jersey. Based upon the implementation of recommendations of studies
prepared by the City of New York, Port Authority of NY/NJ and the Army Corps of
Engineers, reconstruction and expansion of the rail infrastructure is underway
and additional projects may be commenced. The studies recommend that a
substantial portion of freight which is presently transported by truck be
transported by rail. The Company believes that there will be significant
opportunity for growth as a result of these projects.
The Company plans to seek opportunities for growth based on New York City's need
to find alternative means for the removal of the approximately 26,000 tons of
waste that it produces daily. New York City has completed plans for the disposal
of its waste. The main impetus for the plans was the closing of New York City's
primary landfill, the Fresh Kills Landfill, in March 2001. Although New York
City's plan intends for such waste to be shipped to out-of-state landfills, this
plan has encountered several roadblocks, including litigation, a fragile highway
and bridge infrastructure and resistance from the public. New York City has been
soliciting long-term proposals and plans to handle the shipping of waste. The
Company's plan is to utilize its services to assist New York City in such plans
while addressing the issues and concerns raised by proponents of such plans.
The Company is exploring expanding its services to include providing barge
unloading facilities. Management believes that barge unloading services are
synergistic with the Company's rail and trucking operations and offer a
significant opportunity to increase revenue from new services as well as
increase revenue from its existing services.
Based upon these opportunities and the Company's independent development of
originating shipments including containerized freight, the Company believes that
the Company's rail operations are positioned to attain profitability. However,
there can be no assurance that the Company will achieve profitability in the
next 12 months, or at all.
THE FUTURE POTENTIAL OF RAIL
In April 2004, the Environmental Defense and East of Hudson Rail Freight
Operations Task Force released a new report on freight rail investment in New
York City and northern New Jersey. The report outlined the region's growing
congestion problem and how to address it through investments in freight rail and
roadway pricing. A number of major projects were recommended in the report,
including the expansion and modernization of cross-harbor float operations. The
improvements in the report are intended to revitalize the freight rail network
east of the Hudson River and improve regional mobility by shifting freight
traffic from trucks to rail.
In May 2000 the City of New York published a Major Investment Study entitled
"Cross Harbor Freight Movement". The study was conducted by the New York City
Economic Development Corporation to address shortcomings in New York City's
freight transportation network and sighted specific problems due to the region's
reliance on trucking. Among the findings of the study were:
1 The New York City metropolitan region is the only major
economic area in the United States that has a freight
transportation system that is almost completely dependent on
2
its highway system. In the New York City metropolitan area,
97% of freight is moved by truck as compared to 3% by rail. In
other major metropolitan regions approximately 60% of freight
is moved by truck and approximately 40% by rail,
2 There are an estimated 10,950,000 truck crossings per year in
the New York City metropolitan area (a truck crossing occurs
when a truck travels over a bridge or through a tunnel). In
contrast, rail traffic into the New York City metropolitan
area is estimated to be 19,500 railcars per year (a railcar
holds the equivalent of three to four truckloads),
3 The region has significant traffic congestion, which causes
delays in freight shipments,
4 The substantial truck traffic causes excess burdens on the
regions' infrastructure and results in additional maintenance
costs on its roadways and brides,
5 Modern "high-cube" cargo containers on trailers reach 13' in
height, exceeding Lincoln and Holland Tunnel vertical
clearances, forcing more heavy-duty truck traffic on the
George Washington and Verazanno Narrows Bridges, increasing
distance, time and truck freight costs into the region,
6 Increased use of a cross-harbor rail/float operation, such as
that provided by the Company, is the most efficient means of
moving rail freight throughout the New York City region. The
2.5 mile float barge trip across the New York City harbor
takes approximately 45 minutes and eliminates a 35 to 50 mile
truck trip across the New York City regional bridge, highway
and tunnel system, and
7 The study's analytical findings on the alternatives evaluated,
stipulated that a railcar float operation, such as the
Company's, provides an 8.38 to 1 benefit to cost ratio. This
ratio was over 223% higher than any other alternative
valuated.
(The full text of the Major Investment Study can be found on the internet at
www.crossharborstudy.org/reports.html).
Current Projects
As a result of studies done by The City of New York, the U.S. Army Corps of
Engineers and the Port Authority of New York and New Jersey a complete
rehabilitation program for the Port of New York and New Jersey, has been
commenced. In the first phase of this plan in March 2000, the City of New York
completed more than $20 million in improvements on the 65th Street Rail Yard
facility, including construction of two new rail transfer bridges. This facility
includes the rail transfer bridges as well as intermodal tracks and loading
docks.
In March 2002, the City of New York leased the 65th Street Rail Yard to the
Canadian Pacific Railroad. However, Canadian Pacific informed the City that it
would not use the float bridges. The City and the Company are in negotiations
for use of the float portion of the yard. However, if the Company is not
successful in these negotiations, the Company believes that the operator chosen
for the float portion of the yard will have to contract with the Company because
the Company's Greenville Yard is currently the only facility on the New Jersey
side of the harbor which is capable of handling rail cars transported by float
barges.
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In March 2003, the City of New York unveiled the Brooklyn Waterfront Rail
improvement Plan. This plan calls for the reconstruction and development of a
majority of the South Brooklyn waterfront. Under the Plan, the City, in
cooperation with the Federal Government under the Transportation Equity Act for
the 21st Century and New York State Rail Preservation Fund, will spend
approximately $19 million to remove all of the street access trackage on 41st
Street and along Second Avenue. New rail access will be constructed along First
Avenue to the South Brooklyn Marine Terminal at 29th to 39th Streets. The plan
also provides for on-dock rail access and improvements to the yard. In addition,
the plan provides for the rehabilitation of the trackage at the Brooklyn Army
Terminal between 58th and 65th Streets and the links between these two yards.
In March 2003 the Port Authority of New York and New Jersey ("PANYNJ") announced
plans to enhance the Howland Hook Marine Terminal in Staten Island, New York.
The plans include building a ship to rail facility at the terminal. PANYNJ has
allocated $72.5 million to build this facility, has allocated an additional $32
million to the New York City Economic Development Corporation ("NYCEDC") to
rehabilitate portions of the Staten Island Railroad, for restoration of freight
service from Staten Island to the national freight network in New Jersey, and
has set aside an additional $57 million to build a new connection to the
national freight network in New Jersey. PANYNJ's overall plan for the
reconstruction of the Port of New York and New Jersey provides for an investment
in excess of $1.5 billion dollars and is expected to be completed in 2005.
PANYNJ has also announced that it will spend up to $75 million for enhanced
railcar float operations in the Port of New York and New Jersey. These funds are
expected to allow connections between all the existing and new on-dock rail
systems planned for the greater Metropolitan New York region.
Additional phases of the rehabilitation programs are expected to continue until
2010.
RAILROAD OPERATIONS
The Company is part of the national railroad system and holds a Surface
Transportation Board ("STB") certificate of convenience and necessity for the
movement of rail freight by rail barge across New York Harbor. The Company
operates from its Greenville Terminal Yard in Jersey City, New Jersey, and Bush
Terminal Yard in Brooklyn, New York. On the West Side of New York Harbor, the
Company exchanges (interchanges) rail cars with the Canadian Pacific ("CP"), CSX
Transportation ("CSX") and Norfolk Southern ("NS") railroads at Conrail Shared
Asset Operations' ("CSAO") Oak Island interchange yard, New Jersey. On the East
Side of New York Harbor, the Company interchanges rail cars with CP and the New
York and Atlantic Railroad ("NYA") at Bay Ridge Junction interchange yard and
the 65th Street Intermodal Yard, Brooklyn, New York.
The Company functions as a transfer station for freight on to and from the
national railroad system. Most of the Company's "bridge traffic" (defined below)
or "transfer" freight arrives at its Greenville yard and is destined for points
east. The primary commodities that the Company "transferred" from West to East,
during 2002 and 2003 were forest products, such as paper and lumber, plastic
resins, and gases, such as propane and freon. The chief commodities that the
Company "transferred" from East to West, during 2002 and 2003 were cocoa, scrap
products, such as scrap metal and recycled paper. For the years ended December
31, 2002 and December 31, 2003, cocoa shipments accounted for approximately 14%
and 15%, respectively of NYCH's revenue.
The Company provides transloading services at its rail terminal facility.
Transloading involves the unloading of freight from rail cars on to trucks for
delivery or the loading of freight from trucks on to rail cars for shipment.
During the year ended December 31, 2003 the Company had contracts with Unified
Environmental Services Group, LLC ("Unified") and Transload Services, LLC for
transloading services that involved both JST and NYCH. During the year ended
December 31, 2003, direct billed transload revenue accounted for approximately
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27.4% of NYCH's sales. The Company believes that offering transloading services
to its customers provides a turn-key solution to its customers and increases the
Company's revenue from both its trucking and rail operations, (See Item 6 -
Management's Discussion and Analysis or Plan of Operation for further details).
NYCH has four distinct areas of business:
1) Bridge Traffic. Bridge Traffic has historically been the core of the
rail operations revenue. In 1999 Norfolk Southern ("NS") and CSX Transportation
("CSX") acquired Conrail's operations and since then have used the Company more
frequently to transport freight between New Jersey and the New York/Long Island
areas. At both its terminals, the Company receives rail cars, which are loaded
on to float barges, and are ferried by tugboat between the Greenville Terminal
New Jersey and the Bush Terminal Yard in New York.
a) Westbound Freight: Railcars arrive either from local customers or
from the Bayridge Junction interchange yard. They are then loaded on
to float barges, and are ferried by tugboat to Greenville Terminal
where they are sorted for local New Jersey delivery or are
interchanged with CSAO for destinations on the national rail network.
b) Eastbound Freight. When the railcars arrive at the Greenville Yard
from the national rail network they are loaded on to float barges, and
are ferried by tugboat to Bush Terminal where they are sorted for
local New York delivery or are interchanged with the NYA for
destinations in Long Island or the Northeast.
2) Transload Operations. At both its terminals, the Company receives rail
cars that are destined for transload operation.
a) Greenville Operations:
i) Containers. Rail cars arrive at Greenville Terminal and are
set aside on holding tracks. Trucks carrying loaded containers
from various locations in the New York Metropolitan Region arrive
at the Greenville facility where the containers are loaded on to
the rail cars by means of a forklift. Empty containers are then
placed on the trucks for reloading. Once the rail cars are loaded
they are interchanged with CSAO for destinations on the national
rail network.
b) Bush Terminal:
i) Pipe. Loaded rail cars arrive at Bush Terminal and are set
aside on warehouse tracks. Trucks are loaded with the pipe using
a crane for local delivery. Pipe is sometimes warehoused for
future delivery. Once the rail cars are emptied they are
interchanged with CSAO for their reload destination.
ii) Scrap Metal. Empty rail cars arrive at Bush Terminal where
they are placed on holding tracks. Truckloads of scrap metal are
unloaded into the waiting rail cars by means of a magnetic crane.
Once the rail cars are loaded they are interchanged for final
shipping.
iii) Lumber. Loaded rail cars arrive at Bush Terminal and are set
aside on warehouse tracks. Using a forklift, trucks are loaded
with lumber for local delivery.
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3) Shipside & Dockside. The Company can, by means of its float barges,
anchor shipside or dockside for receipt or delivery of various types of cargo.
If the cargo is destined for local delivery it can be ferried to the appropriate
terminal for offloading or transported to its final destination. During 2003,
the Company used the shipside method of transfer for large electrical
transformers, structural steel under a multi-year contract with Balfour Beatty.
The Company regularly uses the dockside method for cocoa. During the year ended
December 31, 2003, direct billed Shipside/Dockside deliveries, excluding cocoa,
accounted for approximately 7.2% of NYCH's revenue.
a) Cocoa- The Company is the "originating" railroad for the majority
of the country's supply of cocoa. Empty rail cars arrive in Greenville
where they are loaded on to float barges for ferrying to the Brooklyn
docks at Red Hook. At Red Hook, the Company in conjunction with
American Stevedoring and the Port Authority of New York & New Jersey
have developed an efficient system whereby the Company's float barges
are docked pier-side. Then, using a system of ramps or conveyor belts,
the beans are loaded directly from the warehouses. Once loaded they
are ferried back to Greenville Terminal and are placed on the national
rail network for final destination across the country. During the year
ended December 31, 2003, cocoa shipments accounted for approximately
15% of NYCH's revenue.
b) Bridge Steel- The Company is the "destination" railroad for
oversized steel beams and other heavy steel structures used in the
re-construction of a bridge over the Housitanic River in Connecticut.
Railcars laden with oversized and over weight structural steel are
received at the Company's Greenville Yard facility by rail from the
foundry. These railcars are stored until needed at the project. Then
they are loaded on to the Company's carfloat and ferried to a ship
anchored in the Harbor for loading and transportation to the project
site.
4) Local Deliveries. At both its Greenville and Bush Terminal facilities
the Company receives rail cars destined for its local customers in Brooklyn.
Rail cars received in Greenville are transported via float barge to Bush
Terminal. From Bush Terminal, all rail cars are delivered directly to the
Company's rail served customers.
CURRENT BUSINESS
Since Norfolk Southern and CSX Transportation acquired Conrail's operations in
June 1999, both NS and CSX have used the Company more frequently to transport
freight between New Jersey and the New York/Long Island areas. The Company
believes, although there can be no assurance, that this trend will continue as
the Company has a fast and reliable delivery system able to fulfill its
customer's needs.
Most freight that is transported by rail travels substantial distances, usually
over more than one railroad. To facilitate pricing, Class 1 railroads, such as
NS and CSX, price and collect freight charges on behalf of all railroads along
the route. The portion that belongs to each railroad is known as their tariff
division. The Company comprises part of the traffic route for most rail freight
transported across the New York City harbor. During the year ended December 31,
2003, NS and CSX collected approximately 51% and 7%, respectively of NYCH's
tariff division. During the year ended December 31, 2002, NS and CSX collected
approximately 52% and 13%, respectively of NYCH's tariff division.
As of December 31, 2003, the Company's rail operation had approximately 48
active customers. During the periods listed below the following customers
accounted for more than 10% of the Company's revenues from its railroad
operations:
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Year ended December 31,
2003 2002
Bloomer Chocolate Co. 10% 9%
Balfour Beatty * 3% 15%
Transload Services** (1) 2% 11%
Unified (1)*** 18% 12%
* Balfour Beatty began shipments in May 2002.
** Transload Services began shipments in March 2002.
*** Since September 2003, Consolidated Logistics and
Transportation, Inc., an affiliate of Ronald Bridges, a director of the Company
has acted as a broker for Unified's business.
(1) Does not include the JST portion of the revenue.
The Company's current cross-harbor operating capacity is approximately 2,000
carloads per month. For the month ended March 31, 2004, the Company was
transporting approximately 271 carloads per month (a carload refers to one
loaded rail car). This is an increase from periods prior to March 31, 2003 when
the Company was transporting approximately 203 carloads per month. (During 2003
car volume was adversely affected due to mechanical failure of the Company's
Bush Terminal Float Bridge, which was out of service for approximately 12 weeks
during the year.) The Company charges between $250 and $1,500 per carload
depending upon the length and weight of the railcar, and the type of commodity
being shipped and method of shipment. The Company estimates that depending on
the mix, it needs to handle 250 to 350 carloads per month in order to achieve
profitability.
OPERATING PROPERTY AND EQUIPMENT
The Company's rail operational equipment, including leased equipment, consists
of two locomotives, two float bridges and four float barges. The Company has
approximately 13 miles of track on the New Jersey and Brooklyn waterfronts. The
Company's track is operational and in good working order. Float bridges serve as
the rail link between the Company's float barges and the Company's land-based
rail tracks. Each float barge contains three rail tracks and can hold between
seven and eighteen railcars depending upon the size of the railcars being loaded
and the size of the car float used. Two of the Company's float barges are 40 ft.
by 290 ft. and two are 41 ft. by 360 ft. The two diesel-fueled locomotives are
owned by the Company and used to switch railcars at the Bush Terminal and
Greenville facilities. Tugboat services are subcontracted from John Brown & Sons
on a monthly basis.
The Company on a month-to-month permit with New York City operates the Bush
Terminal. Although this facility is fully operational, it currently operates at
less than 10% of its total capacity. The monthly rental of the Bush Terminal is
$2,200. (See Note H and Note I of the Financial Statements for further details).
The Greenville Yard serves as the primary rail car float facility in New Jersey
and connects by rail to the Oak Island freight yard in Newark, New Jersey. In
September 2003, the Company exercised its option for additional acreage in
Greenville. The Company's Greenville Yard is approximately 27-acres and is
leased to the Company until 2023 at a rental rate of $62,500 for 2004, with
annual escalations thereafter. The lease agreement with Conrail also transferred
all real property associated with the operation of the rail yard to the Company
for $1.00. (See Note H of the Financial Statements for further details).
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TRUCKING OPERATIONS
Business Strategy- Trucking
The Company's primary strategy to expand the Company's trucking operations is to
focus on increasing revenues by providing dispatching services and transloading
services in conjunction with the Company's rail operations. The Company's
strategy to expand its trucking operations and to meet its future equipment and
manpower needs also includes subcontracting with additional companies, leasing
equipment directly and acquiring other smaller trucking companies. In 2003 the
Company commenced utilizing the Company's relationships with independent
operators and subcontractors to provide dispatching services. These services are
provided to assist larger companies which often need trucks and drivers, in
times of peak demand, and companies, which do not own fleets or employ drivers.
The Company's strategy is to have these companies (which include waste,
container and shipping companies) retain JST to provide them with such
transportation needs for a fixed rate. Management believes that it can charge
premium rates for its dispatching services. The dispatching services provide the
Company with the opportunity to fully utilize its own fleet as well as those of
its independent operators and contractors. During the year ended December 31,
2003, the Company provided dispatching services for Unified and Transload
Services, LLC. As of March 31, 2004, the Company did not have any definitive
agreements relating to the acquisition of any other trucking companies. (See