ITEM 1. BUSINESS
(a) General Development of Business.
Esterline Technologies Corporation (the "Company") conducts business through 13 principal domestic and foreign subsidiaries in three business segments described in sub-item (c) below. The Company was organized in August 1967.
On March 30, 1992 the Company sold substantially all of the assets of Hollis Automation Co., an Esterline subsidiary which was not significant to the Company in terms of operations or financial condition. Hollis was in the Company's Automation Group.
In the fourth quarter of 1993, the Company recorded a $40.6 million restructuring charge ($27.2 million net of income tax effect). It provided for the sale or shutdown of certain small operations in each of the Company's three business segments. On a pretax basis, $21.1 million of the restructuring charge related to the Aerospace and Defense Group, $8.9 million to the Instrumentation Group and $8.4 million to the Automation Group. The affected operations represented approximately 10% of the Company's fiscal 1993 sales. The charge further provided for the consolidation of plants and product lines, including employees' severance, write-off of intangible assets which no longer had value and the write-down and sale of two vacant facilities.
Actions completed through fiscal 1994 associated with the restructuring included the sale of Republic Electronics Co. (an Aerospace and Defense Group operation), the sale of a vacant facility in Torrance, California (an Automation Group property), most elements of employees' severance, and the intangibles write-off, and comprised $19.1 million (before tax) of the recorded provision.
(b) Financial Information About Industry Segments.
A summary of net sales to unaffiliated customers, operating earnings and identifiable assets attributable to the Company's business segments for the fiscal years ended October 31, 1994, 1993 and 1992 is incorporated herein by reference to Note 12 to the Company's Consolidated Financial Statements on pages 41 and 42 of the Annual Report to Shareholders for the fiscal year ended October 31, 1994.
(c) Narrative Description of Business.
The Company consists of 13 individual businesses whose results can vary widely based on a number of factors, including domestic and foreign economic conditions and developments affecting the specific industries and customers they serve. The products sold by most of these businesses represent capital investment by either the initial customer or the ultimate end user. Also, a significant portion of the sales and profitability of some Company businesses is derived from defense and other government contracts or the commercial aircraft industry. Changes in general economic conditions or conditions in specific industries, capital acquisition cycles, and government policies, collectively or individually, can have a significant effect on the Company's performance.
Specific comments covering all of the Company's fiscal 1994 business segments and operating units are set forth below.
AUTOMATION GROUP
This Group produces and markets automated drilling equipment for the printed circuit board (PCB) manufacturing industry (principally computer, telecommunications and automotive equipment); and automated metal fabrication equipment for transportation, heavy equipment and other related markets.
Excellon Automation produces automated drilling equipment for the PCB manufacturing industry. Excellon's products emphasize productivity and are designed to provide a highly efficient automated production system for PCB manufacturers. Excellon's latest product development combines multiple spindle microdrilling of circuit boards, automatic board loading and unloading, and fully integrated material handling capabilities. During fiscal 1994, Excellon acquired Amtech, a manufacturer of unique material handling systems used in PCB production.
Excellon products are sold worldwide to the PCB manufacturing industry, including both large and small electronics equipment manufacturers as well as component manufacturers, independent circuit board fabricators and custom drilling operations.
In fiscal 1994, 1993 and 1992, printed circuit board drilling equipment accounted for 18%, 16% and 12%, respectively, of the Company's consolidated net sales.
Tulon produces tungsten carbide drill and router bits, commonly ranging in size from 5.6mm down to .25mm--some as small as .10mm--for use in PCB drilling equipment. Tulon utilizes computerized equipment which automatically inspects drill bits and provides the product consistency customers need for higher-technology drilling.
W.A. Whitney produces automated equipment for the fabrication of structural steel, sheet metal and plate components and related material-handling equipment. This equipment performs such functions as punching, cutting, shearing and tapping. W.A. Whitney historically has specialized in equipment for punching and cutting mid- to heavy-guage plate metal, utilizing plasma-arc air torch systems and hydraulic punching. Its customers consist principally of large metal fabricators, such as truck, farm implement and construction equipment manufacturers, and a wide range of independent fabricators.
W.A. Whitney also produces a line of specialized screw machine and turret lathe tooling attachments under the Boyar-Schultz name. These products are sold to a wide range of customers primarily for use in tool room and production operations.
Equipment Sales Co. acts as a sales representative for various manufacturers' products sold to the PCB assembly industry, including high-speed assembly equipment.
At October 31, 1994, the backlog of the Automation Group (all of which is expected to be filled during fiscal 1995) was $29.9 million compared with $9.2 million one year earlier. The increase was primarily attributable to strengthening markets and strong customer acceptance of newer products at key Group companies.
AEROSPACE AND DEFENSE GROUP
This Group provides a broad range of measuring and sensing devices, high-performance elastomers and clamping systems, and specialized metal finishing principally for commercial aircraft and jet engine manufacturers; also combustible ammunition components and electronic and electrical cable assemblies for both domestic and foreign defense agencies and contractors. During fiscal 1994, a group operating company, Republic Electronics Co., was sold in connection with the Company's 1993 restructuring plan.
Armtec Defense Products manufactures molded fiber cartridge cases, mortar increments, igniter tubes and other combustible ammunition components for the United States armed forces and domestic and foreign defense contractors. Armtec currently is the sole U.S. producer of combustible ordnance, including the 120mm combustible case used on the main armament system on the Army's M-1A1 tank and of 120mm, 81mm and 60mm combustible mortar increments for the U.S. Army. The majority of Armtec's sales are to ordnance suppliers to the U.S. Armed Forces.
In fiscal 1994, 1993 and 1992, combustible ordnance components accounted for 9%, 9% and 12%, respectively, of the Company's consolidated net sales.
Auxitrol, headquartered in France, manufactures temperature and pressure sensors for use in aerospace and aviation applications, liquid level measurement devices for ships and storage tanks, pneumatic accessories (including pressure gauges and regulators) and industrial alarms, as well as electrical penetration devices and alarm systems for European and other foreign nuclear power plants. This subsidiary also distributes products manufactured by others, including valves, temperature and pressure switches and flow gauges. The markets served by Auxitrol principally consist of jet engine manufacturers, aerospace equipment manufacturers, shipbuilders, petroleum companies, process industries and electric utilities. Auxitrol has a joint venture with a Russian company to facilitate use of Auxitrol technology in retrofitting the aging nuclear plants in Eastern Europe. Exhaust gas temperature sensing equipment for a jet engine manufacturer constitute a significant portion of Auxitrol's sales.
Hytek Finishes provides specialized metal finishing and inspection services, including plating, anodizing, polishing, non-destructive testing and organic coatings, primarily to the commercial aircraft, aerospace and electronics markets. Hytek also has an automated tin-lead plating line, employing the latest automated plating technology, to serve the semi- conductor industry.
Midcon Cables manufactures electronic and electrical cable assemblies and cable harnesses for the military, government contractors and the commercial electronics market, offering both product design services and assembly of product to customer specifications.
TA Mfg. designs and manufactures specialty clamps and elastomeric compounds in custom molded shapes for wiring and tubing installations for airframe and jet engine manufacturers as well as military and commercial airline aftermarkets. TA's products include elastomers which are specif- ically formulated for various applications, including high-temperature environments.
At October 31, 1994, the backlog of the Aerospace and Defense Group (of which $4.1 million is expected to be filled after fiscal 1995) was $38.9 million, compared with $40.8 million one year earlier.
INSTRUMENTATION GROUP
This Group designs and manufactures a variety of meters, gauges and measurement and analysis equipment for public utilities and industrial manufacturers; also lighted indicators, switches and control components for the commercial aerospace and defense industries.
Korry Electronics designs and manufactures illuminated information and control components, and integrated thin-panel data systems, such as switches, indicators, panels and keyboards which act as man-machine interfaces in a broad variety of control and display applications. Korry's customers include original equipment manufacturers and the aftermarkets (equipment operators and spare parts distributors), primarily in the commercial aviation, general aviation, military airborne, ground- based military equipment and shipboard military equipment markets. A significant portion of Korry's sales are to suppliers of military equipment to the U.S. Government and to a commercial aircraft manufacturer.
Federal Products manufactures a broad line of high-precision analog and digital dimensional and surface measurement and inspection instruments and systems for a wide range of industrial quality control and scientific applications. Federal also distributes certain products which complement its manufactured product lines. These products constitute three major business segments: gauging, which includes dial indicators, air gauges and other precision gauges; instrumentation, which includes electronic gauges for use where ultra-precision measurement is required; and engineered products, which include custom-built and dedicated semi- automatic and automatic gauging systems. Distributed products manufac- tured by others include laser interferometer systems used primarily to check machine tool calibrations. Federal Products' equipment is used extensively in precision metal working. Its customers include the automotive, farm implement, construction equipment, aerospace, ordnance and bearing industries.
In each of fiscal years 1994, 1993 and 1992, gauge products manufac- tured by Federal Products accounted for 13% of the Company's consolidated net sales.
Scientific Columbus (formerly Jemtec Electronics) produces analog and digital meters, electrical transducers and instruments for the monitoring, controlling and billing of electrical power. Included among these products are solid-state devices for calibration of electric utility instrumentation and a line of solid state-meters, including programmable multi-function billing meters. The latest products of Scientific Columbus are multi- function, microprocessor-based meters which offer a broad range of features on a modular basis. Scientific Columbus' products are sold to electrical utilities and industrial power users.
Angus Electronics manufactures recording instruments together with other analytical and process and environmental monitoring instrumentation. These include analog strip chart and digital printout recorders as well as electronic and multi-channel microprocessor-based recording equipment. Customers of Angus Electronics include industrial equipment manufacturers, electric utilities, scientific laboratories, pharmaceutical manufacturers and process industries.
At October 31, 1994, the backlog of the Instrumentation Group (of which $7.2 million is expected to be filled after fiscal 1995) was $28 million compared with $24.4 million one year earlier.
MARKETING AND DISTRIBUTION
Automation Group products manufactured by Excellon are marketed domestically principally through employees and in foreign markets through employees, independent distributors, and affiliated distributors. Tulon products are marketed in the United States through employees and independent distributors and elsewhere principally through independent distributors. W.A. Whitney products are sold principally through independent distributors and representatives.
Aerospace and Defense Group products manufactured by Auxitrol are marketed through employees, independent representatives, and an affiliated U.S. distributor. The products of Armtec Defense Products are marketed domestically and abroad by employees and independent representatives. Midcon Cables' products are marketed domestically by employees and independent representatives. Hytek's services are marketed domestically through employees. TA Mfg. products are marketed domestically and abroad by employees and independent representatives.
Instrumentation Group products manufactured by Angus Electronics are marketed domestically through employees, independent representatives and distributors, and abroad through independent representatives and employees of Esterline's Auxitrol subsidiary. Scientific Columbus' products are sold through independent representatives. The products of Federal Products are marketed domestically principally through employees, and in foreign markets through both employees and independent representatives. Korry Electronics' products are marketed domestically and abroad principally through employees and independent representatives.
For most of the Company's products, the maintenance of a service capability is an integral part of the marketing function.
RESEARCH AND DEVELOPMENT
The Company's subsidiaries conduct product development and design programs with approximately 175 professional engineers, technicians and support personnel, supplemented by independent engineering and consulting firms when needed. In fiscal 1994, approximately $13.7 million was expended for research, development and engineering, compared with $14 million in 1993 and $13.4 million in 1992.
FOREIGN OPERATIONS
The Company's principal foreign operations consist of manufacturing facilities of Auxitrol located in France and Spain, a manufacturing facility of Tulon located in Mexico, sales and service operations of Excellon located in England, Germany and Japan, and sales offices of TA Mfg and Korry Electronics located in England and France, respectively. In addition, W.A. Whitney has a small manufacturing and distribution facility in Italy. For information as to sales, operating results and assets by geographic area and export sales, reference is made to Note 1 to the Consolidated Financial Statements on page 33, and Note 12 to the Consolidated Financial Statements on pages 41, 42 and 43, of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1994, which is incorporated herein by reference.
EMPLOYEES
During fiscal 1994, restructuring plan actions included the sale of a small operating company and most elements of employees' severance, as discussed earlier in this report. Notwithstanding these actions, the Company and its subsidiaries had approximately 2,800 employees at October 31, 1994, level with the prior year.
COMPETITION AND PATENTS
The Company's subsidiaries experience varying degrees of competition with respect to all of their products and services. Most subsidiaries are in specialized market niches with relatively few competitors. In automated drilling equipment for printed circuit board manufacturing, Excellon Automation is a leader in its field and believes it has the largest installed base in the world of automated drilling machines for the production of printed circuit boards. In molded fiber cartridge cases, mortar increments and other combustible ammunition components, Armtec currently is the sole supplier to the U.S. Army. In addition, Hytek is one of the largest metal finishers on the West Coast, and Korry Electronics, Federal Products, W.A. Whitney, and TA Mfg. are among the leaders in their respective markets.
The Company's subsidiaries generally compete with many larger companies with substantially greater volume and financial resources. The Company believes the main competitive factors for the Company's products is product performance and service. Overall, the Company believes its ongoing product development and design programs, coupled with a strong customer service orientation, keep its various product groups competitive in the marketplace.
The subsidiaries hold a number of patents but in general rely on technical superiority, exclusive features in their equipment and marketing and service to customers to meet competition. Licenses which help maintain a significant advantage over competition include a long- term license agreement under which Auxitrol manufactures and sells electrical penetration assemblies.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS
The Company's subsidiaries are not materially dependent for their raw materials and components upon any one source of supply except for certain components and supplies such as hydraulic components purchased by W.A. Whitney and certain other raw materials and components purchased by other subsidiaries. In such instances, ongoing efforts are conducted to develop alternative sources or designs to help avoid the possibility of any business impairment.
(d) Financial Information About Foreign and Domestic Operations and Export Sales. 	 See "Foreign Operations" above.
ITEM 2.

ITEM 2. PROPERTIES
The following table summarizes the principal properties (in excess of 15,000 square feet) owned or leased by the Company and its subsidiaries as of October 31, 1994:
- -----------------
The Company group (business segment) operating each facility described above is indicated by the letter following the description of the facility, as follows:
(A) - Automation (D) - Aerospace and Defense (I) - Instrumentation
In addition to the properties listed above, a 64,000 square foot facility in Nashua, NH is owned by the Company and planned for sale. Liabilities have been accrued for environmental remediation costs expected to be incurred in the disposition of this facility.
In the opinion of the management of the Company, the subsidiaries' plants and equipment are in good condition, adequate for current operations and provide sufficient capacity for up to 25% expansion at most locations.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company has various lawsuits and claims, both offensive and defensive, and contingent liabilities arising from the conduct of business, including those associated with government contracting activities, none of which, in the opinion of management, is expected to have a material effect on the Company's financial position or results of operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended October 31, 1994.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information which appears in the Company's Annual Report to Shareholders for fiscal 1994 is hereby incorporated by reference:
(a)	The high and low market prices of the Company's common stock for each quarterly period during the fiscal years ended October 31, 1994 and 1993, respectively (page 28 of the Annual Report to Shareholders).
	(b)	The approximate number of holders of common stock (page 28 of 		the Annual Report to Shareholders).
	(c)	Restrictions on the ability to pay future cash dividends 		(Note 4 to Consolidated Financial Statements, pages 34 and 		35 of the Annual Report to Shareholders).
No cash dividends were paid during the fiscal years ended October 31, 1994 and 1993 as the Company continued its policy of retaining all internally generated funds to support the long-term growth of the Company and to retire debt obligations.
The principal market for the Company's common stock is the New York Stock Exchange.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The Company hereby incorporates by reference the Selected Financial Data of the Company which appears on page 28 of the Company's Annual Report to Shareholders for fiscal 1994.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company hereby incorporates by reference Management's Discussion and Analysis of Results of Operations and Financial Condition which is set forth on pages 25, 26 and 27 of the Company's Annual Report to Shareholders for fiscal 1994.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company hereby incorporates by reference the Consolidated Financial Statements and the report thereon of Deloitte & Touche LLP, dated December 5, 1994, which appear on pages 29 - 44 of the Company's Annual Report to Shareholders for fiscal 1994, including Note 13, page 43, which contains unaudited quarterly financial data.
ITEM 9.

ITEM 9.	 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	(a) Directors.
The Company hereby incorporates by reference the information set forth under "Election of Directors" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 8, 1995, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 13, 1995.
(b) Executive Officers.
The names and ages of all executive officers of the Company and the positions and offices held by such persons as of January 25, 1995 are as follows:
Mr. Hurlbut has been Chairman, President and Chief Executive Officer since January 1993. From February 1989 through December 1992, he was President and Chief Executive Officer.
Mr. Stevenson has been Executive Vice President and Chief Financial Officer, Secretary and Treasurer since October 1987.
Mr. Cremin has been Senior Vice President and Group Executive since December 1990. From October 1987 to December 1990, he was Group Vice President.
Mr. Kring has been Group Vice President since August 1993. For more than five years prior to that date, he was President of Heath Tecna Aerospace Co., a unit of Ciba Composites Division, Anaheim, California.
Mr. Larson has been Group Vice President since April 1991. For more than five years prior to that date, he held various executive positions with Korry Electronics, including President and Executive Vice President, Marketing.
Ms. Greenberg has been Vice President, Human Relations since March 1993. For more than five years prior to that date, she was a partner in the law firm of Bogle & Gates, Seattle, Washington.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information set forth under "Executive Compensation" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 8, 1995, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 13, 1995.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information with respect to stock ownership set forth under "Security Ownership of Certain Beneficial Owners and Management" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 8, 1995, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 13, 1995.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
The following consolidated financial statements, together with the report thereon of Deloitte & Touche LLP, dated December 5, 1994, appearing on pages 29 - 44 of the Company's Annual Report to Shareholders for fiscal 1994, are hereby incorporated by reference:
(a) (2) Financial Statement Schedules.
The following additional financial data should be read in conjunction with the consolidated financial statements in the Annual Report to Shareholders for the fiscal year ended October 31, 1994:
Independent Auditors' Report Schedule VIII-- Valuation and Qualifying Accounts and Reserves
	(a) (3) Exhibits.
	(b) Reports on Form 8-K.
	No reports on Form 8-K were filed during the fourth quarter of fiscal 	1994.
				 SIGNATURES
	Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
				ESTERLINE TECHNOLOGIES CORPORATION 		 (Registrant)
			 By /s/ Robert W. Stevenson ---------------------------- 				Robert W. Stevenson 				Executive Vice President and 				Chief Financial Officer, Secretary 				and Treasurer (Principal Financial 				and Accounting Officer)
	Dated: January 27, 1995 ----------------
	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.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Esterline Technologies Corporation Bellevue, Washington
We have audited the consolidated financial statements of Esterline Technologies Corporation as of October 31, 1994 and 1993, and for each of the three years in the period ended October 31, 1994, and have issued our report thereon dated December 5, 1994; such financial statements and report are included in your 1994 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of Esterline Technologies Corporation, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP - ------------------------- Seattle, Washington December 5, 1994
	 ESTERLINE TECHNOLOGIES CORPORATION AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
For Years Ended October 31, 1994, 1993 and 1992
			 ESTERLINE TECHNOLOGIES CORPORATION 		 Form 10-K Report for Fiscal Year Ended October 31, 1994
		 INDEX TO EXHIBITS -----------------


Item 1. Business --------
Missouri Pacific Railroad Company (the "Registrant") includes the Registrant, a Class I Railroad incorporated in Delaware and a wholly-owned, indirect subsidiary of Union Pacific Corporation (the "Corporation"), as well as a number of wholly-owned and majority-owned subsidiaries of the Registrant engaged in various railroad and related operations, and various terminal companies in which the Registrant has minority interests.
The Registrant operates in the midwestern and southwestern states of Arkansas, Colorado, Illinois, Kansas, Louisiana, Missouri, Nebraska, Oklahoma, Tennessee and Texas. The Registrant maintains coordinated schedules with other carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada and Mexico. Export and import traffic is moved through Gulf Coast ports and across the Texas-Mexico border. The Registrant's operations have been coordinated with those of Union Pacific Railroad Company ("UPRR"), another wholly-owned, indirect subsidiary of the Corporation. The two railroads operate as a unified system. See Note 2 to the Registrant's Financial Statements for information on related party transactions.
In 1994, the Registrant had transportation revenues of $2.3 billion, approximately 98.4 percent of which were derived from rail freight operations. Percentages of revenue ton-miles ("RTM") and rail commodity revenue for major commodities during 1994, 1993 and 1992 were as follows:
1994 1993 1992 ----------------- ----------------- ----------------- Commodity Commodity Commodity RTM Revenue RTM Revenue RTM Revenue ----- --------- ----- --------- ----- --------- (Percent of Total)
Energy 29.9% 15.4% 29.0% 14.8% 26.7% 14.6% Chemicals 22.6 29.2 22.3 29.1 22.6 30.1 Metals/Minerals/ Forest 16.9 18.7 17.7 20.2 19.0 20.6 Grain and Grain Products 15.9 10.1 16.7 10.9 17.5 11.0 Intermodal 6.1 8.7 5.2 7.4 5.0 6.5 Automotive 4.2 12.6 4.6 12.1 4.4 11.7 Food/Consumer/ Government 4.4 5.3 4.5 5.5 4.8 5.5 ------ ------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ====== ====== Amount in Billions 89.6 $2.3 82.3 $2.1 78.2 $2.1 ====== ====== ====== ====== ====== ======
By order issued March 7, 1995, the Interstate Commerce Commission ("ICC") approved the application of the Corporation and Chicago and North Western Transportation Company ("CNW") for an order authorizing the common control of the rail subsidiaries of the Corporation and CNW. The ICC's order is scheduled to become effective on April 6, 1995 and will permit the Corporation to (i) convert its 29.13 percent equity ownership interest in CNW, currently in the form of non-voting common stock, into shares of voting common stock of CNW (the "CNW Shares"), (ii) acquire additional CNW Shares and (iii) increase its representation on the CNW Board of Directors from one director out of seven to three directors out of nine. The ICC's order is subject to a standard labor protection condition and a requirement that the Soo Line Railroad Company ("Soo") be permitted to admit third parties to certain joint facilities operated by Soo and CNW.
On March 16, 1995, the Corporation and CNW entered into a definitive merger agreement (the "Merger Agreement"), pursuant to which UP Rail, Inc., a subsidiary of the Corporation, will acquire 100 percent of the outstanding CNW Shares not otherwise owned by the Corporation or its affiliates for $35 per share in cash pursuant to a tender offer and a second-step merger. Following consummation of the tender offer, UP Rail, Inc. will be merged into CNW with CNW being the surviving corporation and CNW will become a wholly-owned subsidiary of the Corporation. In addition, following consummation of the tender offer, and in accordance with the Merger Agreement, the Corporation intends to elect a majority of the directors on the CNW Board of Directors.
The tender offer for the CNW Shares was commenced on March 23, 1995 and will expire on April 19, 1995 unless extended. The tender offer is conditioned upon, among other things, (i) there having been validly tendered and not withdrawn prior to the expiration of the offer a number of CNW Shares which, when added to the shares of non-voting common stock of CNW beneficially owned by the Corporation and its subsidiaries (assuming conversion thereof into CNW Shares and the exercise of outstanding options for CNW Shares) constitutes at least a majority of the CNW Shares outstanding on a fully-diluted basis (assuming conversion of the non-voting common stock into CNW Shares) and (ii) the ICC's March 7, 1995 order approving the common control of the Corporation's and CNW's rail subsidiaries having become final and effective prior to the expiration of the tender offer. The second-step merger is also conditioned upon a number of things, including without limitation (i) the consummation of the tender offer, (ii) approval of the merger by CNW stockholders (which will not be required if 90 percent or more of the CNW Shares, including CNW Shares now owned by the Corporation, are acquired pursuant to the offer or otherwise) and (iii) the ICC either having determined that the terms of the merger are just and reasonable or having issued a declaratory order that such a determination is not required.
UP Rail, Inc. and CNW have also entered into a Company Stock Option Agreement, dated as of March 16, 1995 (the "Option Agreement"). Subject to UP Rail, Inc. and its affiliates owning at lease 85 percent of the outstanding CNW Shares (assuming the conversion of the non-voting common stock to CNW Shares), the Option Agreement will permit UP Rail, Inc. to purchase from CNW, at the tender offer price, a sufficient number of additional CNW Shares such that the CNW Shares purchased pursuant to the Option Agreement plus the CNW Shares owned by the Corporation or UP Rail, Inc. would represent 90.01 percent of the outstanding CNW Shares (assuming conversion of the non-voting common stock into CNW Shares).
The Corporation, UP Rail, Inc., CNW and CNW's directors have been named as defendants in five lawsuits commenced on March 9 and 13, 1995 in the Court of Chancery in and for New Castle County, Delaware. Each suit purports to be a class action brought on behalf of all public stockholders of CNW except for the defendants and their affiliates. The complaints allege, among other things, that (i) directors of CNW breached their fiduciary duties to the CNW stockholders in considering approving the acquisition and (ii) as the controlling stockholder of CNW, the Corporation and UP Rail, Inc. breached their fiduciary duties to the other stockholders of CNW in agreeing to enter into the acquisition. In particular, the complaints allege that the directors agreed to sell CNW at an inadequate price and without proper information concerning the true value of CNW and its shares because they failed to use an auction or an active market check or to explore other strategic alternatives, and failed to create a special committee of fully disinterested directors. One complaint adds the claim that the whole CNW Board is disqualified from acting because of various contractual agreements with the Corporation. Another complaint alleges that the Corporation's 29 percent control of CNW permitted the Corporation to control the terms of any buyout transaction and no bona fide negotiations could take place. In addition, all claim the Corporation and UP Rail, Inc. had access to confidential and proprietary non-public information about CNW and used that information to acquire CNW at an inadequate price in violation of the Corporation's obligations as a controlling stockholder of CNW to assure that the transaction be entirely fair and at the best price. On March 28, 1995, an amended complaint was filed in two of the suits reiterating the claims made in the earlier complaints which it amended, and alleging, among other things, (i) that the investment bank retained by the CNW directors to render a fairness opinion in connection with the tender offer was not disinterested or independent and had a conflict of interest with regard to the tender offer, (ii) that the CNW directors breached or aided and abetted breaches of their duties of good faith and loyalty by approving for themselves and members of CNW's senior management lucrative compensation packages and other financial benefits, (iii) that the defendants structured the transaction in such a way as to prevent CNW's public stockholders from voting on the merger or exercising dissenters' rights, and (iv) that the defendants breached their duties of candor and full disclosure by failing adequately to disclose, among other things, the information described above, the reasons why the CNW's Board failed to implement a stockholders' rights plan and the reasons for alleged discrepancies and variations between valuation ranges for CNW Shares as prepared by the financial advisors of the Corporation and CNW, respectively.
As relief, the complaints seek, among other things, an injunction against consummation of the transacton and damages in an unspecified amount. The Corporation and CNW believe that all of the lawsuits are without merit, and both companies intend to vigorously defend such actions.
Competition -----------
The Registrant is subject to competition from other railroads, motor carriers and barge operators, based on both price and service. Most of its railroad operations are conducted in corridors served by competing railroads and by motor carriers. Motor carrier competition is particularly strong for intermodal traffic. Because of the proximity of the Registrant's routes to major inland and Gulf Coast waterways, barge competition can be particularly pronounced for bulk commodities.
Employees ---------
As is true with employees of all the principal railroads in the country, the majority of the Registrant's employees are organized along craft lines and represented by national labor unions. The Registrant continues to adapt agreements from the previous round of national negotiations to meet local requirements throughout its system. The Registrant has implemented two-person crews for all through-freight trains and for a portion of yard and local operations. Expansion of two-person crews is planned for other areas of the system.
With respect to 1995 national negotiations, both the unions and the carriers have taken the necessary steps to commence labor negotiations, with the filing of their initial bargaining positions. Whether unions are required to bargain nationally with all railroads at once, or can bargain with individual railroads, is currently being litigated with two unions. Negotiations on substantive issues are proceeding with other unions. The negotiations will likely continue through 1995 and beyond.
Governmental Regulation -----------------------
The Registrant's operations are subject to the regulatory jurisdiction of the ICC, other Federal agencies and various state agencies. The ICC has jurisdiction over rates charged on certain regulated rail traffic; freight car compensation; issuance or guarantee of railroad and certain railroad holding company securities; transfer, extension or abandonment of rail lines; and acquisition of control of rail common carriers and motor carriers by rail common carriers. The United States Congress and Clinton Administration appear to be in agreement that the ICC should be eliminated and that some of its rail and truck regulatory functions should be transferred to other Federal agencies. It is unclear whether the transfer of such functions, in particular the jurisdiction over the acquisition of control of rail common carriers and motor carriers, will involve the imposition of different or more burdensome regulatory requirements and what effect such transfer will have on the Registrant's operations.
Other Federal agencies have jurisdiction over safety, movement of hazardous materials, movement and disposal of hazardous waste, and equipment standards. State agencies regulate intrastate rail freight rates to the extent that such agencies have adopted Federal standards and procedures and continue to follow such procedures. However, several states in which railroad operations are conducted have ceded intrastate rail rate regulation to the ICC. Various state and local agencies also have jurisdiction over disposal of hazardous wastes and seek to regulate movement of hazardous materials.
Item 2.

Item 2. Properties ----------
Operating Equipment -------------------
At December 31, 1994 the Registrant owned or leased from others 1,168 locomotives, 29,442 freight cars and 1,967 units of work equipment. Substantially all of the Registrant's railroad rolling stock is subject to the liens of the Registrant's First Mortgage and General (Income) Mortgage as well as the lien of the First Mortgage of the Texas and Pacific Railway Company, its predecessor in interest (collectively the "Mortgages"). In addition, a portion
of this property is subject to various equipment obligations which are superior to the liens of one or more of the Mortgages.
Rail Property -------------
The Registrant operates approximately 9,600 miles of track, including 7,900 miles of main line and 1,700 miles of branch line. Approximately 10 percent of the main line track consists of trackage rights over track owned by others. The Registrant's right-of-way and tracks are subject to one or more of the Mortgages.
Item 3.

Item 3. Legal Proceedings -----------------
In December 1992, the Texas Natural Resources Conservation Commission ("TNRCC") served the Registrant with a Notice of Violation for alleged discharges and fuel spills at the Registrant's San Antonio, Texas railyard. The TNRCC proposed penalties totalling $500,000. The Registrant and the TNRCC settled this matter for a penalty payment of $300,000 plus the implementation of certain supplemental environmental projects in Texas costing $275,000.
In addition to the foregoing, the Registrant has received notices from the Environmental Protection Agency ("EPA") and state environmental agencies alleging that it is or may be liable under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and/or other Federal or state environmental legislation for the remediation costs associated with alleged contamination or for violations of environmental requirements at various sites throughout the United States. There are approximately 13 sites for which such notices have been received which are currently on the Superfund National Priorities List or state superfund lists. Although specific claims have been made by the EPA and state regulators with respect to some of these sites, the ultimate impact of these proceedings and suits by third parties cannot be predicted at this time because of the number of potentially responsible parties involved, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites and/or the speculative nature of remediation costs. Nevertheless, at some of the superfund sites, the Registrant believes it will have little or no exposure because no liability should be imposed under applicable law, one or more other financially able parties generated all or most of the contamination, or a settlement of the Registrant's exposure has been reached although regulatory proceedings at the sites involved have not been formally terminated. Additional information relating to the Registrant's potential environmental costs is set forth in Note 9 to the Financial Statements, contained on page of this report.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
Omitted in accordance with General Instruction J of Form 10-K.
PART II -------
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ---------------------------------------------------------------------
All of the Common Stock and Class A Stock of the Registrant is owned by a wholly-owned indirect subsidiary of the Corporation. Accordingly, there is no market for the Registrant's capital stock. Dividends on the Registrant's Common Stock, which are paid on a quarterly basis, totalled $90.6 million in 1994 and $90 million in 1993. Through 1993, no dividends had been declared or paid on the Registrant's Class A Stock; however, a $3.4 million special cash dividend was paid in 1994 and a $6.3 million special cash dividend will be paid on the Class A Stock in 1995. See Notes 5 and 7 to the Registrant's financial statements for a discussion of dividend restrictions on the Common Stock and Class A Stock.
Item 6.

Item 6. Selected Financial Data -----------------------
Omitted in accordance with General Instruction J of Form 10-K.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ---------------------
Omitted in accordance with General Instruction J of Form 10-K. In lieu thereof, a narrative analysis is presented on Page.
Item 8.

Item 8. Financial Statements and Supplementary Data -------------------------------------------
The financial statements and supplementary information related thereto, listed on the Index to Financial Statements, are incorporated herein by reference.
Item 9.

Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------
Omitted in accordance with General Instruction J of Form 10-K.
Item 11.

Item 11. Executive Compensation ----------------------
Omitted in accordance with General Instruction J of Form 10-K.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------------------------------
Omitted in accordance with General Instruction J of Form 10-K.
Item 13.

Item 13. Certain Relationships and Related Transactions ----------------------------------------------
Omitted in accordance with General Instruction J of Form 10-K.
PART IV -------
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ---------------------------------------------------------------
(a) (1) and (2) Financial Statements and Schedules ----------------------------------------------
See Index to Financial Statements.
(a) (3) Exhibits ------------
(3)(a) - Registrant's Certificate of Incorporation, amended effective as of August 12, 1988, is incorporated herein by reference to Exhibit 3(i) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1988.
(3)(b) - Registrant's By-laws, amended effective as of September 1, 1992, are incorporated herein by reference to Exhibit 3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1992.
(4) - Pursuant to various indentures and other agreements, the Registrant has issued long-term debt; however, no such agreement has securities or obligations covered thereby which exceed 10% of the Registrant's total consolidated assets. The Registrant agrees to furnish the Commission with a copy of any such indenture or agreement upon request by the Commission.
(24) - Powers of attorney executed by the directors of the Registrant.
(27) - Financial Data Schedule.
(b) Reports on Form 8-K -------------------
No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1994.
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, on this 30th day of March, 1995.
MISSOURI PACIFIC RAILROAD COMPANY
By /s/ Richard K. Davidson ------------------------------------ Richard K. Davidson, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, on this 30th day of March, 1995, by the following persons on behalf of the Registrant and in the capacities indicated.
By /s/ Richard K. Davidson ------------------------------------ Richard K. Davidson, Chairman and Chief Executive Officer and a Director
/s/ L. White Matthews, III ------------------------------------ L. White Matthews, III, Chief Financial Officer and a Director
/s/ Morris B. Smith ------------------------------------ Morris B. Smith, Vice President-Finance
/s/ Charles E. Billingsley ------------------------------------ Charles E. Billingsley, Chief Accounting Officer
SIGNATURES - (Continued)
Robert P. Bauman* Drew Lewis*
Richard B. Cheney* Richard J. Mahoney*
E. Virgil Conway* Claudine B. Malone*
Spencer F. Eccles* Jack L. Messman*
Elbridge T. Gerry, Jr.* John R. Meyer*
William H. Gray III* Thomas A. Reynolds, Jr.*
Judith R. Hope* James D. Robinson III*
Lawrence M. Jones* Robert W. Roth*
Richard D. Simmons*
* By /s/ Judy L. Swantak ----------------------------------------- Judy L. Swantak, Attorney-in-fact
EXHIBIT INDEX -------------
Exhibit Number --------------
(3)(a) - Registrant's Certificate of Incorporation, amended effective as of August 12, 1988, is incorporated herein by reference to Exhibit 3(i) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1988.
(3)(b) - Registrant's By-laws, amended effective as of September 1, 1992, are incorporated herein by reference to Exhibit 3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1992.
(4) - Pursuant to various indentures and other agreements, the Registrant has issued long-term debt; however, no such agreement has securities or obligations covered thereby which exceed 10% of the Registrant's total consolidated assets. The Registrant agrees to furnish the Commission with a copy of any such indenture or agreement upon request by the Commission.
(24) - Powers of attorney executed by the directors of the Registrant.
(27) - Financial Data Schedule.
MISSOURI PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
Page ----
Independent Auditors' Report
Financial Statements:
Statement of Consolidated Financial Position - December 31, 1994 and 1993 -
Statement of Consolidated Income and Retained Earnings - For the Years Ended December 31, 1994, 1993 and 1992
Statement of Consolidated Cash Flows - For the Years Ended December 31, 1994, 1993 and 1992
Accounting Policies
Notes to Consolidated Financial Statements -
Management's Narrative Analysis of the Results of Operations
No schedules are required to be filed because of the absence of conditions under which they would be required or because the required information is set forth in the financial statements referred to above.
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors Missouri Pacific Railroad Company Omaha, Nebraska
We have audited the accompanying statements of consolidated financial position of Missouri Pacific Railroad Company (a wholly-owned indirect subsidiary of Union Pacific Corporation) and subsidiary companies (the "Registrant") as of December 31, 1994 and 1993, and the related statements of consolidated income and retained earnings and of consolidated cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Registrant's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Registrant at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Registrant changed its method of accounting for postretirement benefits other than pensions, income taxes and transportation revenue and expense recognition in January 1993.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska January 19, 1995
MISSOURI PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
ACCOUNTING POLICIES -------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Missouri Pacific Railroad Company and all subsidiaries (the "Registrant"). The Registrant is a wholly-owned, indirect subsidiary of Union Pacific Corporation (the "Corporation"). Investments in affiliated companies (20% to 50% owned) are accounted for on the equity method. All material intercompany transactions are eliminated.
INVENTORIES
Inventories consist primarily of materials and supplies carried at the lower of average cost or market.
REVENUE RECOGNITION
Transportation revenues are recognized on a percentage-of-completion basis, while delivery costs are recognized as incurred (See Note 1).
PROPERTIES
Properties are stated at cost. Upon sale or retirement of units of depreciable operating property, gains and losses are charged to accumulated depreciation. With respect to all other property sold or retired (principally land sold for industrial development or as surplus property), cost and any related accumulated depreciation are removed from the accounts and a gain or loss is recognized upon disposition.
DEPRECIATION
Provisions for depreciation are computed principally on the straight-line method based on estimated service lives of depreciable properties.
INTANGIBLE ASSETS
Intangible and other assets include the cost in excess of fair value of net assets of acquired businesses associated with the Registrant's 1988 purchase of The Missouri-Kansas-Texas Railroad Company (the "Katy"). Amortization is recorded over 40 years on a straight-line basis. The Registrant regularly assesses the recoverability of costs in excess of net assets of acquired businesses through a review of cash flows and fair values of those businesses.
HEDGING TRANSACTIONS
The Registrant periodically hedges hydrocarbon purchases (See Note 3). Gains and losses from these transactions are recognized upon receipt of the commodity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
1. Accounting Changes
In January 1993, the Registrant adopted the following accounting changes with a cumulative after-tax charge to earnings of $125.2 million.
Other Postretirement Benefits ("OPEB") (See Note 8)
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", requires that the cost of non-pension benefits for retirees be accrued during their period of employment. The adoption of this Statement does not affect future cash funding requirements for these benefits. The OPEB component of the cumulative effect adjustment was a $73.5 million charge.
Income Taxes (See Note 4)
SFAS No. 109, "Accounting For Income Taxes", requires the balance-sheet approach of accounting for income taxes, whereby assets and liabilities are recorded at the tax rates currently enacted. The Registrant's future results may be affected by changes in the corporate income tax rate. The income tax component of the cumulative effect adjustment was a $42.2 million charge.
Revenue Recognition
The Registrant changed its method of transportation revenue and expense recognition from accruing both revenues and expenses at the inception of service to the industry practice of allocating revenues between reporting periods based on relative transit time, while recognizing expenses as incurred. The revenue recognition component of the cumulative effect adjustment was a $9.5 million charge.
2. Related Party Transactions
The Registrant is an affiliate of Union Pacific Railroad Company ("UPRR") and has significant interline rail shipments, equipment rents, and fuel and diesel power exchanges with that railroad. These transactions are settled in a manner similar to that used for comparable transactions with nonaffiliated railroads. Balances representing interline receivables and payables with UPRR are classified as due to affiliated companies.
Certain management and staff functions of the Registrant have been combined with those of UPRR. In addition, the affiliated railroads have centralized purchasing and disbursing functions which are handled by UPRR. Also, repairs to locomotives and freight cars are made on a system-wide basis without regard to ownership or usage. Marketing, administrative and other expenses (including, but not limited to, those discussed above) are allocated to the Registrant based on revenue contribution, gross ton-miles or time in service.
A summary of directly-incurred and allocated costs included in operating expenses is as follows:
Amounts due to and from affiliates, including the Corporation, bear interest at an annually determined rate which considers the Corporation's cost of debt. Net intercompany interest expense on such amounts was $65.2 million, $65.5 million and $71.1 million in 1994, 1993 and 1992, respectively.
3. Financial Instruments
Hedging
The Registrant uses derivative financial instruments to protect against diesel fuel price increases. While the use of these hedging arrangements limits the downside risk of adverse price movements, it may also limit benefits from
favorable movements. All hedging is accomplished pursuant to exchange-traded contracts or master swap agreements based on standard forms. The Registrant does not hold or issue financial instruments for trading purposes and addresses market risk by selecting instruments whose value fluctuations correlate strongly with the underlying item or risk being hedged. Credit risk related to hedging activities, which is minimal, is managed by requiring minimum credit standards for counterparties, periodic settlements and/or mark-to-market evaluations. The Registrant has not been required to provide, nor has it received any significant amount of collateral relating to its hedging activity.
Hedging arrangements fix diesel fuel prices using price swaps in which the Registrant pays fixed prices in exchange for market prices for equivalent notional amounts of fuel; however, at December 31, 1994, the Registrant had no hedging agreements in place.
Fair Value of Financial Instruments
The fair market value of the Registrant's long and short-term debt has been estimated using quoted market prices or current borrowing rates. At December 31, 1994, the carrying value of total debt exceeded the fair market value by approximately 48%. The carrying value of all other financial instruments approximates fair market value.
Off-Balance-Sheet Risk
The Registrant has sold, on a revolving basis, an undivided ownership interest in a designated pool of its accounts receivable to UPRR. The undivided ownership interest has been sold by UPRR to third parties. Collection risk on the pool of receivables is minimal. Under the terms of the agreement, UPRR acts as a collection agent for the Registrant. At both December 31, 1994 and 1993, accounts receivable are presented net of $137 million in proceeds generated from the receivables sold.
4. Income Taxes
The Registrant is included in the consolidated income tax return of the Corporation. The consolidated income tax liability of the Corporation is allocated among the parent and its subsidiaries on the basis of their separate contributions to the consolidated income tax liability, with full benefit of tax losses and credits made available through consolidation being allocated to the individual companies generating such losses and credits.
In August 1993, President Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law raising the Federal corporate income tax rate to 35 percent from 34 percent retroactive to January 1, 1993. As a result, 1993 income tax expense increased by $26.5 million: $23.1 million for the one-time non-cash recognition of deferred income taxes related to prior periods and $3.4 million of incremental 1993 Federal income tax expense.
Components of income tax expense for the Registrant are as follows:
The 1992 components of tax expense (in thousands), which have not been restated to reflect the adoption of SFAS No. 109 (see Note 1), were $59,952 for current Federal income tax expense and $38,916 for deferred Federal income tax expense.
The tax effect of differences in the timing of revenues and expenses for tax and financial reporting purposes is as follows:
A reconciliation between statutory and effective tax rates is as follows:
Payments of income taxes were $108.2 million in 1994 and $101.8 million in 1993. No taxes were paid for the year 1992. The Corporation believes it has adequately provided for income taxes.
5. Debt
Total debt at December 31, 1994 and 1993 is summarized below:
Maturities of long-term debt (in thousands of dollars) for each year 1996 through 1999 are $24,462, $23,934, $7,178 and $6,446, respectively. Substantially all properties secure the outstanding equipment obligations and mortgage bonds.
Certain debt agreements impose dividend restrictions on the Registrant. The amount of retained earnings available for dividends at December 31, 1994 was $961.3 million. See Note 7 for other dividend restrictions.
Terms of certain of the Registrant's mortgage bonds, the 5% income debentures and the 5-1/2% subordinated income debentures require that interest be paid only from "available income", as defined in the indenture agreements. The mortgage bonds and 5% income debentures impose sinking fund and other restrictions in the event all interest is not paid. All interest was paid on the mortgage bonds and 5% income debentures for each of 1994, 1993 and 1992.
The Registrant assumed the 5-1/2% subordinated income debentures (the "Debentures") in connection with the Katy acquisition. Current interest must be paid only to the extent that there is available income remaining after allocation to a capital fund for the purpose of reimbursing the Registrant for certain capital expenditures. Unpaid interest accumulates to an amount not in excess of 16-1/2% of the principal amount of the Debentures and is paid only to the extent that there is available income remaining after payment of the current interest.
The certificates constituting a charge on income (the "Certificates"), which were also assumed as part of the Katy acquisition, do not bear interest and payments to a sinking fund for the Certificates are made only from available income, as defined in such Certificates. Available income must be applied to the capital fund, current and accumulated interest on the Debentures and a sinking fund for the Debentures before any payment is made to the sinking fund for the Certificates.
Available income of $19.1 million was generated in 1994 with respect to the Debentures and the Certificates. As a result, an interest payment on the Debentures of $1.5 million will be made in 1995, representing 1994 interest. In addition, $7.4 million of available income will be applied to the capital fund, $3.9 million will be applied to the sinking funds for the Debentures and the Certificates, and $6.3 million will be applied as dividends on the Registrant's Class A stock (See Note 7). Amounts applied to sinking funds may be covered by the cost of securities previously repurchased by the Registrant or the Katy. Amounts in the capital fund which are unused or unappropriated for the reimbursement of capital expenditures may not exceed $4.0 million at any time, and after the application of 1994 available income, there will be no unused or unappropriated capital fund balance. During 1994, $866,000 of the outstanding Debentures were reacquired.
The Registrant's total interest payments approximate interest expense net of intercompany interest described in Note 2.
6. Lease Commitments
The Registrant leases a general office building, computer equipment and transportation equipment under long-term and contingent lease agreements. The following amounts relating to capital leases are included in properties:
Future minimum lease payments for capital and operating leases with initial or remaining noncancellable lease terms in excess of one year as of December 31, 1994 are as follows:
A summary of rental expense charged to operations is as follows:
7. Capital Stock
Concurrent with the acquisition of the Katy, 80 shares of the Registrant's $1.00 par value common stock were exchanged for 80 shares of $1.00 par value Class A stock. The remaining 920 shares of common stock outstanding and the 80 shares of Class A stock have identical voting rights and other privileges except with respect to dividends.
The Class A stock is entitled to a cash dividend whenever a dividend is declared on the common stock, in an amount which equals 8% of the sum of the dividends on both the Class A stock and the common stock. However, dividends may be declared and paid on the Class A stock only when there is unappropriated available income in respect of prior calendar years which is sufficient to make a sinking fund payment equal to 25% of such dividend for the benefit of the Debentures or the Certificates (see Note 5). To the extent that dividends are paid on the common stock but not the Class A stock because the amount of unappropriated available income is insufficient to make such a sinking fund payment, a special cash dividend on the Class A stock shall be paid when sufficient unappropriated available income exists to make the sinking fund payment. Such insufficiency does not affect the Registrant's right to declare dividends on the common stock. Available income for 1994 will be sufficient to provide for a $6.3 million special cash dividend on the Class A stock to be paid in 1995. After such payment, dividends in arrears on the Class A stock will total $26.6 million.
There are no other dividend restrictions on the Registrant's capital stock other than those described in Note 5.
8. Retirement Plans
The Registrant participates in the Corporation's defined benefit pension plans covering substantially all salaried employees. Pension plan benefits are based on years of service and compensation during the last years of employment.
Company contributions to the plans are calculated based on the Projected Unit Credit actuarial funding method and are not less than the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974, as amended. Pension expense allocated to the Registrant under the Corporation's plans amounted to $19.7 million in 1994, $17.7 million in 1993, and $14.8 million in 1992. In addition, the Registrant's employees are covered by the Railroad Retirement System. Contributions made to the system are expensed as incurred.
The Registrant provides postretirement health care and life insurance benefits to substantially all salaried and certain hourly employees through participation in the Corporation's postretirement benefit plans. The Corporation adopted the provisions of SFAS No. 106 (See Note 1) in January 1993. Agreement employees' health care benefits are covered by a separate multiemployer plan and therefore are not subject to the provisions of this Statement. The Corporation does not currently prefund health care and life insurance benefit costs. The Registrant's cash payments for these benefits were $5 million in each of 1994 and 1993 and its 1994 and 1993 postretirement benefit expenses were $5 million and $9 million, respectively. At December 31, 1994 and 1993, the Registrant's Accumulated Postretirement Benefit Obligations were $92 million and $93 million, respectively, while its total OPEB liability on each of the same dates was $119 million.
9. Contingent Liabilities
There are various lawsuits pending against the Registrant. In addition, the Registrant generates, transports, remediates and disposes of hazardous and non- hazardous waste in its current and former operations, and is subject to Federal, state and local environmental laws and regulations. The Registrant is currently participating in the investigation and remediation of numerous sites. Where the remediation costs can be reasonably determined, and where such remediation is probable, the Registrant has recorded a liability. The liability includes future costs for remediation and restoration of sites as well as for ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates were based on information available for each site, financial viability of other potentially responsible parties, and existing technology, laws and regulations. Certain Federal legislation imposes joint and several liability for the remediation of identified sites; consequently, the Registrant's ultimate environmental liability may include costs relating to other parties in addition to costs relating to its own activities at each site. The Registrant believes that it has adequately accrued for its ultimate share of costs at sites subject to joint and several liability. The Registrant does not expect that the lawsuits or environmental costs will have a material material adverse effect on its consolidated financial condition or results of operations.
10. Supplemental Quarterly Financial Information (Unaudited)
Selected unaudited quarterly financial information for 1994 and 1993 are as follows:
MISSOURI PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
1994 COMPARED TO 1993 ---------------------
Net income for the Registrant was $247.5 million in 1994. Before the effects of the 1993 accounting adjustments (comprising the changes in accounting principles described in Note 1 to the Financial Statements and the $23.1 million one-time recognition of deferred income taxes related to prior periods described in Note 4 to the Financial Statements), earnings would have improved $25.4 million (11%) from $222.1 million a year ago. 1993 results also included the adverse effects of the flooding in the Midwest and the severe winter.
OPERATING REVENUES ------------------ Operating revenues increased $172 million (8%) to $2.3 billion, reflecting a 10% increase in carloadings offset by a 1% decline in average revenue per car, principally resulting from volume growth for lower-rated commodities (intermodal and energy). Carloadings increased in intermodal (24%), energy (17%), automotive (15%), chemicals (6%) and food/consumer/government (5%), while decreases occurred in grain and grain products (3%), and metals/minerals/forest (1%).
OPERATING EXPENSES ------------------ Operating expenses totaled $1.9 billion, $116 million (7%) higher than a year ago. Volume growth and inflation accounted for a $50 million rise in equipment and other rents. Employee injury expense rose $19 million as continuing declines in the number of injuries were more than offset by higher average settlement costs per injury. In addition, other costs grew $29 million due to a reduction in cost offsets associated with car repairs for other carriers and other services performed for outside parties. Wage and benefit costs also rose $10 million, as higher volumes and inflation were partially offset by continued improvements in labor productivity. Depreciation expense grew $9 million because of continued investment in equipment and capacity. Fuel and utilities costs rose only $1 million as lower fuel prices and an improved consumption rate combined to offset the impact of volume growth.
OPERATING INCOME ---------------- Operating income rose $56 million (14%) to $466 million as a result of volume growth and improved operating efficiencies and labor productivity.
OTHER CHANGES ------------- Interest expense decreased $8 million, primarily as a result of lower interest on equipment trust obligations. Other income decreased $15 million, due to reduced gains on extinguishment of debt and other miscellaneous items. Income taxes were essentially unchanged as higher pretax earnings offset last year's recognition of deferred income taxes relating to prior periods.