Union Pacific 2003 Annual Report Download

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UNION PACIFIC CORPORATION 2003 ANNUAL REPORT

Table of contents

  • Page 1
    UNION PACIFIC CORPORATION 2003 ANNUAL REPORT

  • Page 2
    ... Share-Basic: Income from Continuing Operations Income from Discontinued Operations Cumulative Effect of Accounting Change Net Income Per Share-Diluted: Income from Continuing Operations Income from Discontinued Operations Cumulative Effect of Accounting Change Net Income Dividends Per Share Capital...

  • Page 3
    ... trends in our business mix and the surcharges. Despite economic headwinds during the first part of the year, Union Pacific's great franchise and execution of our Yield Strategy helped the Company attain a number of volume and revenue records in 2003. • Total carloads topped 9.2 million for the...

  • Page 4
    ... the Overnite initial public offering. Overnite is a great company with a terrific management team, but it shared few synergies with the Railroad. Over the last few years, we explored ways to monetize Overnite, and in 2003, the timing was right. The market for less-than-truckload companies picked up...

  • Page 5
    ... transportation sector. A driving force behind Union Pacific's strong corporate governance ranking has been our Board of Directors. The Board will see some changes in 2004, complement each other very well. Rob Knight will succeed Jim as Executive Vice President and Chief Financial Officer. This new...

  • Page 6
    ... Benefits 3. Audit 4. Finance 5. Corporate Governance and Nominating OFFICERS Richard K. Davidson Chairman, President and Chief Executive Officer Union Pacific Corporation Chairman and Chief Executive Officer Union Pacific Railroad Company Dennis J. Duffy Executive Vice President - Operations...

  • Page 7
    ...Address of principal executive offices) 68179 (Zip Code) (402) 271-5777 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each Class Common Stock (Par Value $2.50 per share) Name of each exchange on which registered New York...

  • Page 8
    ...Executive Officers of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management ...Certain Relationships and Related Transactions ...Principal Accounting Fees and Services ...PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form...

  • Page 9
    ... of the United States. Union Pacific Corporation was incorporated in Utah in 1969 with its principal executive offices located at 1416 Dodge Street, Omaha, NE 68179. The telephone number at that address is (402) 271-5777. The common stock of Union Pacific Corporation is listed on the New York Stock...

  • Page 10
    ... which vehicles are delivered to all major western U.S. cities. These centers serve as railcar-to-truck haulaway operations for major domestic and international automotive manufacturers. In addition to transporting finished vehicles, UPRR currently provides expedited handling of automobile materials...

  • Page 11
    ... on the consumer price index) and progressive employee health and welfare cost sharing rates. In August 2002, the carriers reached an agreement with the United Transportation Union (UTU) that incorporated wage increases. The agreement also provided for the operation of remote control locomotives 5

  • Page 12
    ...of Locomotive Engineers (BLE). A January 2003 arbitration decision held that the operation of remote control locomotives in terminals does not violate the BLE agreement. In November 2003, agreement was reached with the UTU on employee health and welfare cost sharing rates and plan design changes. In...

  • Page 13
    ... estate, equipment and other property (properties) are owned or leased to support our rail operations. We believe that our properties are in good condition and are adequate for current operations. We operate facilities and equipment designated for both maintenance and repair, including locomotives...

  • Page 14
    ...: Equipment Owned or leased at year-end: Locomotives ...Freight cars: Covered hoppers ...Boxcars ...Open-top hoppers ...Gondolas ...Other ...Work equipment and other ...Purchased or leased during the year: Locomotives ...Freight cars ...Average age of equipment (years): Locomotives ...Freight cars...

  • Page 15
    ... and 5650.1, California Health and Safety Code section 25189(d) and Public Nuisance, California Civil Code section 3480. The claims arise from a February 16, 2000 derailment in Stockton, California in which a locomotive struck an object on the tracks, resulting in the puncture of a fuel tank. The...

  • Page 16
    ... related to many of the sites, and/or the speculative nature of remediation costs. Information concerning environmental claims and contingencies and estimated remediation costs is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting...

  • Page 17
    ...-Corporate Relations Senior Vice President, General Counsel and Secretary Vice President-Taxes Vice President-External Relations Vice President and Controller Vice President and Treasurer President and Chief Operating Officer of the Railroad Vice Chairman of the Board of the Railroad Executive Vice...

  • Page 18
    ... 2000. Prior thereto, he was Vice President- Public Affairs of Champion International Corporation, a paper and forest products company. (5) Mr. Putz was elected Vice President and Controller of UPC and Chief Accounting Officer and Controller of the Railroad effective December 1, 1999. Prior thereto...

  • Page 19
    PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters Our common stock is traded on the New York Stock Exchange under the symbol "UNP". The following table presents, for the quarters indicated, the dividends declared and the high and low sales prices of our common...

  • Page 20
    ... 13.3 222.4 42.2 10.6 213.2 45.1 10.1 [a] Data included the effects of the acquisitions of Southern Pacific Rail Corporation as of October 1, 1996 and Chicago and North Western Transportation Company as of May 1, 1995. [b] 2002 net income includes $214 million pre-tax ($133 million after-tax) gains...

  • Page 21
    ...upgrade - The Corporation's long-term unsecured credit rating was upgraded by Moody's to Baa2, which followed an upgrade by Standard and Poor's to BBB in 2002. These upgrades reflect our improved balance sheet and will provide us more flexibility with respect to access to capital markets and meeting...

  • Page 22
    ... used to maintain track and structures, continue capacity expansions on our main lines, upgrade and augment equipment to better meet customer needs, build infrastructure and develop and implement new technologies. Our 2004 capital expenditures and debt service requirements are expected to be funded...

  • Page 23
    ...service provided. While we must build or acquire and maintain our rail system, trucks and barges are able to use public rights-of-way maintained by public entities. Any future improvements or expenditures materially increasing the quality of these alternative modes of transportation in the locations...

  • Page 24
    ...- The railroad industry is capital intensive. Properties are carried at cost. Provisions for depreciation are computed principally on the straight-line method based on estimated service lives of depreciable property. The lives are calculated using a separate composite annual percentage rate for each...

  • Page 25
    ... Board (FASB) Statement No. 109, "Accounting for Income Taxes", these expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as a change in the corporate tax rate...

  • Page 26
    ... retirements. We also provide other postretirement benefits (OPEB). All non-union and certain of our union employees participate in defined contribution medical and life insurance programs for retirees. We account for our pension plans in accordance with FASB Statement No. 87, "Employers' Accounting...

  • Page 27
    ... ...Salary Increase: 0.25% increase ...0.25% decrease ...Health Care Cost Trend Rate: 1% increase ...1% decrease ... Cash Contributions - We follow FAS 87 rules to record the expense and liability associated with our pension plans. However, actual cash funding is governed by employee benefit and...

  • Page 28
    ... 18.5% Income from Continuing Operations - The decrease in income from continuing operations in 2003 compared to 2002 was driven by higher fuel prices, inflation, network costs (including expenses associated with increased volumes), lower gains from real estate sales (2002 asset sales with the Utah...

  • Page 29
    ... include subsidiary revenue from various companies that are wholly owned or majority owned by the Railroad, revenue from the Chicago commuter rail operations and accessorial revenue earned due to customer detainment of Railroad owned or controlled equipment. We recognize commodity revenues on...

  • Page 30
    ... for finished vehicles, where carloads were up 11% despite a decline in U.S. light vehicle sales. Materials shipments declined 1%, due primarily to reduced production in Mexico. Market share gains partially offset the decline. ARC increased as a result of a shift in mix, resulting from increased...

  • Page 31
    ...higher equipment rents, depreciation expenses and increased purchased services and other costs. These increases were partially offset by a 3% reduction in employment levels, lower fuel prices and cost control efforts. Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits were...

  • Page 32
    ... cycle time for equipment and other rents is defined as the average number of accumulated days that loaded and empty cars from other railroads spend on UPRR's system. The higher locomotive lease expense in both years is attributable to the Railroad's increased leasing of new, more reliable and fuel...

  • Page 33
    ... of services purchased from outside contractors, state and local taxes, net costs of operating facilities jointly used by UPRR and other railroads, transportation and lodging for train crew employees, trucking and contracting costs for intermodal containers, leased automobile maintenance expenses...

  • Page 34
    ... to 2003 is due to working capital performance and cash from the discontinued operations, partially offset by lower income from continuing operations. The increase from 2001 to 2002 was primarily due to higher net income partially offset by pension plan funding. Cash used in investing activities was...

  • Page 35
    ... CPS were issued in April 1998 by our wholly owned subsidiary, Union Pacific Capital Trust, at a price of $50 each and paid quarterly cash dividends at an annual rate of 6 1⁄ 4%. The redemption was funded with a combination of cash from operations, the issuance of $500 million of debt in June 2003...

  • Page 36
    ...the Consolidated Statements of Financial Position. [b] Represents total obligations, including interest component. [c] Purchase obligations include locomotive maintenance contracts, purchase commitments for locomotives, ties, ballast and track and agreements to purchase other goods and services. 30

  • Page 37
    .... Should our credit rating fall below investment grade, the amount of receivables sold would be reduced, and, in certain cases, the investors have the right to discontinue this reinvestment. The investors have designated the Railroad to service the sold receivables; however, no servicing asset or...

  • Page 38
    ...movements. We use interest rate swaps to manage our exposure to interest rate changes. The purpose of these programs is to protect our operating margins and overall profitability from adverse fuel price changes or interest rate fluctuations. Market and Credit Risk - We address market risk related to...

  • Page 39
    ... evaluating the issuance of and managing outstanding callable fixed-rate debt securities. At December 31, 2003 and 2002, we had variable-rate debt representing approximately 10% and 12%, respectively, of our total debt. If variable interest rates average one percentage point higher in 2004 than our...

  • Page 40
    ... trainmen and engineers, combined with an expanded summer track maintenance program and fourth quarter record-level volumes. Additional operating expenses were incurred as crew utilization costs and car cycle times increased due to slower network train speed. As discussed under Operating Expenses in...

  • Page 41
    ... in securities and capital markets; natural events such as severe weather, fire, floods, earthquakes or other disruptions of our operating systems, structures and equipment; any adverse economic or operational repercussions from terrorist activities and any governmental response thereto; war or risk...

  • Page 42
    ...Consolidated Statements of Income For the Years Ended December 31, 2003, 2002 and 2001 ...Consolidated Statements of Financial Position At December 31, 2003 and 2002 ...Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001 ...Consolidated Statements of Changes in...

  • Page 43
    ... Pacific Corporation, its Directors and Shareholders: We have audited the accompanying consolidated statements of financial position of Union Pacific Corporation and Subsidiary Companies (the Corporation) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes...

  • Page 44
    CONSOLIDATED STATEMENTS OF INCOME Union Pacific Corporation and Subsidiary Companies Millions, Except Per Share Amounts, for the Years Ended December 31, Operating revenues ...Operating expenses: Salaries, wages and employee benefits ...Equipment and other rents ...Depreciation ...Fuel and utilities...

  • Page 45
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Union Pacific Corporation and Subsidiary Companies Millions of Dollars, as of December 31, Assets Current assets: Cash and temporary investments ...Accounts receivable, net ...Inventories ...Current deferred income taxes ...Other current assets ...Total ...

  • Page 46
    ... ...Cumulative effect of accounting change ...Depreciation ...Deferred income taxes ...Cash paid to fund pension plan ...Other, net ...Changes in current assets and liabilities, net ...Cash provided by operating activities ...Investing Activities Capital investments ...Proceeds from asset sales...

  • Page 47
    CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY Union Pacific Corporation and Subsidiary Companies Accumulated Other Comprehensive Income (Loss) Minimum Foreign Pension Currency Paid-in- Retained Treasury Liability Translation Derivative Surplus Earnings Stock [b] Adjustments ...

  • Page 48
    ... other than trading purposes, to manage risk related to changes in fuel prices and interest rates. Stock-Based Compensation - At December 31, 2003, we had several stock-based employee compensation plans, which are described more fully in note 7. We account for those plans under the recognition and...

  • Page 49
    ...of grant. Stock-based employee compensation expense related to restricted stock, units and other incentive plans is reflected in net income. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Financial Accounting...

  • Page 50
    ...price index) and progressive employee health and welfare cost sharing rates. In August 2002, the carriers reached an agreement with the United Transportation Union (UTU) that incorporated wage increases. The agreement also provided for the operation of remote control locomotives by trainmen that was...

  • Page 51
    ... held that the operation of remote control locomotives in terminals does not violate the BLE agreement. In November 2003, agreement was reached with the UTU on employee health and welfare cost sharing rates and plan design changes. In November 2002, the International Brotherhood of Boilermakers...

  • Page 52
    ...movements. We use interest rate swaps to manage our exposure to interest rate changes. The purpose of these programs is to protect our operating margins and overall profitability from adverse fuel price changes or interest rate fluctuations. Market and Credit Risk - We address market risk related to...

  • Page 53
    ... ...Number of gallons hedged for 2004 ...Average cap price for 2004 collars outstanding [b] ...Average floor price for 2004 collars outstanding [b] ...Average ceiling price for 2004 collars outstanding [b] ...[a] Fuel hedges which were in effect during 2002. [b] Excludes taxes, transportation costs...

  • Page 54
    .... Should our credit rating fall below investment grade, the amount of receivables sold would be reduced, and, in certain cases, the investors have the right to discontinue this reinvestment. The investors have designated the Railroad to service the sold receivables; however, no servicing asset or...

  • Page 55
    ... ...Net long-term deferred income tax liability ...Net deferred income tax liability ...2003 $ (518) 8,526 612 31 9,169 $8,651 2002 $ (498) 8,170 611 (231) 8,550 $8,052 For the years ending December 31, 2003, 2002 and 2001, a reconciliation between statutory and effective tax rates for continuing...

  • Page 56
    ... as collateral for the capital leases and other types of equipment obligations in accordance with the secured financing arrangements utilized to acquire such railroad equipment. As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January 1, 1997, and pursuant...

  • Page 57
    ... statement filed in 2002, we may issue, from time to time, any combination of debt securities, preferred stock, common stock or warrants for debt securities or preferred stock in one or more offerings. During February 2003, under the shelf registration we issued $250 million of 3 7⁄ 8% fixed rate...

  • Page 58
    ... the latest years of employment with specific reductions made for early retirements. Other Postretirement Benefits (OPEB) - All non-union and certain of our union employees participate in defined contribution medical and life insurance programs for retirees. These costs are funded as paid. Medicare...

  • Page 59
    ... liabilities are not affected by salary increases. Changes in our projected benefit obligation are as follows for the years ended December 31: Pension Millions of Dollars Projected benefit obligation at beginning of year ...Service cost ...Interest cost ...Plan amendments ...Actuarial loss ...Gross...

  • Page 60
    ... plans was $1.8 billion and $1.7 billion as of December 31, 2003 and 2002, respectively. Assumptions - The weighted-average actuarial assumptions used to determine benefit obligations at December 31, 2003, 2002 and 2001 were as follows: Pension Percentages Discount rate ...Salary increase ...Health...

  • Page 61
    ... based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. With respect to the value of pension plan assets, the expected long-term rate of return on plan assets is...

  • Page 62
    ... market conditions. A one-percentage point change in the expected health care cost trend rates would have the following effects on OPEB: One % pt. Increase $ 5 59 One % pt. Decrease $ (4) (49) Millions of Dollars Effect on total service and interest cost components ...Effect on accumulated benefit...

  • Page 63
    ...Allocation Asset Category Equity securities ...Debt securities ...Real estate ...Other ...Total ...2004 65% to 75% 25% to 35% 0% 0% The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to achieve our target of an average long-term rate of return of...

  • Page 64
    ... 1,246,819 retention shares and stock units (the right to receive shares of common stock) outstanding under the 1993 Plan. There are 10,710 restricted shares outstanding under the 1992 Restricted Stock Plan for Non-Employee Directors of Union Pacific Corporation (1992 Directors Plan). We no longer...

  • Page 65
    ... Directors Plan, each non-employee director, upon his or her initial election to the Board of Directors, receives a grant of 1,000 shares of restricted shares or restricted stock units. Additionally, each non-employee director receives annually an option to purchase at fair value a number of shares...

  • Page 66
    ... fair market value of our common stock as of the date of the grant. Options are granted with a 10-year term and are generally exercisable one to two years after the date of the grant. A summary of the stock options issued under the 1988 Plan, the 1993 Plan, the UP Shares Plan, the Directors Plan and...

  • Page 67
    Restricted Stock and Other Incentive Plans - Our plans provide for awarding retention shares of common stock or stock units to eligible employees. These awards are subject to forfeiture if employment terminates during the prescribed retention period, generally three or four years, or, in some cases,...

  • Page 68
    ...average number of shares outstanding: Basic ...Dilutive effect of stock options ...Dilutive effect of retention shares, stock units and restricted shares ...Dilutive effect of CPS ...Diluted ...Earnings per share - basic Income from continuing operations before cumulative effect of accounting change...

  • Page 69
    ... data related to many of the sites, and/or the speculative nature of remediation costs. The impact of current obligations is not expected to have a material adverse effect on our results of operations or financial condition. Remediation of identified sites previously used in operations, used by...

  • Page 70
    ... gain of $141 million related to the sale of land, track, operating rights and facilities to the Utah Transit Authority (UTA) for $185 million, which included approximately 175 miles of track that stretches from Brigham City, Utah, through Salt Lake City, Utah, south to Payson, Utah. The transaction...

  • Page 71
    ... our accounting related to the implementation of FIN 46. 12. Cumulative Effect of Accounting Change Surface Transportation Board (STB) accounting rules require that railroads accrue the cost of removing track structure over the expected useful life of these assets. Railroads historically used this...

  • Page 72
    ...1.49 1.41 [a] In the fourth quarter of 2003, we completed the sale of our entire trucking interest. We recorded a gain on the sale of $211 million, including an income tax benefit of $126 million. [b] Cumulative effect of accounting change is shown net of income tax expense of $167 million. 66

  • Page 73
    ...the Corporation's management, including the Corporation's Chief Executive Officer (CEO) and Executive Vice President - Finance and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rule 13a...

  • Page 74
    ... Table, Defined Benefit Plans and Change in Control Arrangements segments of the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information as to the number of shares of our equity securities authorized for issuance...

  • Page 75
    ... - related fees, (iii) tax fees and (iv) all other fees, is set forth in the Audit Committee Report segment of the Proxy Statement and is incorporated herein by reference. Information concerning our Audit Committee's policies and procedures pertaining to pre-approval of audit and non-audit services...

  • Page 76
    ... Securities issued by the Union Pacific Capital Trust. * On November 5, 2003, Union Pacific Corporation filed a Current Report on Form 8-K announcing the completion of the sale of its Overnite trucking interest through an initial public offering.* On October 31, 2003, Union Pacific Corporation filed...

  • Page 77
    ..., Chairman, President, Chief Executive Officer and Director PRINCIPAL FINANCIAL OFFICER: /s/ Robert M. Knight, Jr. Robert M. Knight, Jr., Executive Vice President-Finance and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: /s/ Richard J. Putz Richard J. Putz, Vice President and Controller...

  • Page 78
    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Union Pacific Corporation and Subsidiary Companies Millions of Dollars, for the Years Ended December 31, 2003 2002 2001 99 17 (6) Allowance for doubtful accounts: Balance, beginning of period ...$ 108 $ 110 $ Charged to expense ...13 16 Write-offs, ...

  • Page 79
    ... such instrument upon request by the Commission. 10(b) Overnite Transportation Company Employee Stock Purchase Plan, as amended, effective as of November 19, 1998, is incorporated by reference to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002. 73...

  • Page 80
    ...Effective Amendment No. 2 to UPC's Registration Statement on Form S-4 (No. 33-64707). Agreement, dated September 25, 1995, among UPC, UPRR, Missouri Pacific Railroad Company (MPRR), SP, Southern Pacific Transportation Company (SPT), The Denver & Rio Grande Western Railroad Company (D&RGW), St. Louis...

  • Page 81
    ..., 1998. Form of 2001 Long Term Plan Stock Unit and Cash Award Agreement dated January 25, 2001, is incorporated herein by reference to Exhibit 10(u) to the Corporation's Annual Report of Form 10-K for the year ended December 31, 2000. Motor Cargo Industries, Inc. Employee Stock Purchase Plan, dated...

  • Page 82
    ... FIXED CHARGES Union Pacific Corporation And Subsidiary Companies Millions of Dollars, Except for Ratio Earnings from continuing operations ...Undistributed equity (earnings) loss ...Total earnings ...Income taxes ...Fixed charges: Interest expense including amortization of debt discount ...Portion...

  • Page 83
    Exhibit 21 SIGNIFICANT SUBSIDIARIES OF UNION PACIFIC CORPORATION Name of Corporation State of Incorporation Union Pacific Railroad Company ...Delaware Southern Pacific Rail Corporation ...Utah 77

  • Page 84
    ... an explanatory paragraph relating to change in method of accounting for asset retirement obligations in 2003), appearing in this Annual Report on Form 10-K of Union Pacific Corporation for the year ended December 31, 2003. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Omaha, Nebraska February 18...

  • Page 85
    ... 24 UNION PACIFIC CORPORATION Powers of Attorney Each of the undersigned directors of Union Pacific Corporation, a Utah corporation (the "Company"), do hereby appoint each of James R. Young, Carl W. von Bernuth and Thomas E. Whitaker his or her true and lawful attorney-in-fact and agent, to sign on...

  • Page 86
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2004 /s/ Richard K. Davidson Richard K. Davidson Chairman, President and Chief Executive Officer Union Pacific Corporation 80

  • Page 87
    ..., that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2004 /s/ Robert M. Knight, JR. Robert M. Knight, Jr. Executive Vice President-Finance and Chief Financial Officer Union Pacific Corporation 81

  • Page 88
    ... Annual Report of Union Pacific Corporation (the Corporation) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert M. Knight, Jr., Executive Vice President - Finance and Chief Financial Officer...

  • Page 89
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  • Page 90
    ... MEETING OF SHAREHOLDERS New York Stock Exchange Ticker Symbol: UNP April 16, 2004, 8:30 a.m. Little America Hotel 500 South Main Street Salt Lake City, UT INFORMATION SOURCES The contact for media and public relations inquiries is Corporate Relations at (402) 271-3475. Institutional investors...

  • Page 91
    ...Francisco Denver U TA H COLORADO Topeka KANSAS St. Louis Kansas City K MISSOURI Fresno CALIFORNIA Las Vegas Wichita OKLAHOMA TENNESSEE ARKANSAS Los Angeles Long Beach Colton ARIZONA NEW MEXICO Oklahoma City Amarillo Memphis Phoenix Lubbock Calexico Tucson Ft.Worth Little Rock Pine Bluff...

  • Page 92
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