<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year
ended December 31, 1997 Commission file number 1-737
TEXAS PACIFIC LAND TRUST
(Exact name of registrant as specified in its charter)
Not Applicable 75-0279735
-------------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
80 Broad Street, Suite 2700, New York, New York 10004
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (212) 269-2266
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Title of Each Class Exchange on Which Registered
- ------------------- ----------------------------
Sub-shares in Certificate of
Proprietary Interest New York Stock Exchange
(par value $.16-2/3 per share)
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
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<PAGE> 2
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229,405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of January 31, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant is approximately $128,829,618.
Documents Incorporated by Reference: None.
Item 1: Business.
(a) General Development of Business. The registrant (hereinafter called
"Texas Pacific" or the "Trust") was organized under a Declaration of Trust dated
February 1, 1888, to receive and hold title to extensive tracts of land in the
State of Texas, previously the property of the Texas and Pacific Railway
Company, and to issue transferrable Certificates of Proprietary Interest pro
rata to the holders of certain debt securities of the Texas and Pacific Railway
Company. The Trustees are empowered under the Declaration of Trust to manage the
lands with all the powers of an absolute owner, and to use the lands and the
proceeds of sale of the lands, either to pay dividends to the Certificate
holders or to buy in and cancel outstanding Certificates. The Trust's income is
derived primarily from land sales, oil and gas royalties, grazing leases, and
interest. This method of operation has continued through the present. During the
last five years there has not been any reorganization, disposition of any
material amount of assets not in the ordinary course of business (although in
the ordinary course of business Texas Pacific does sell or lease large tracts of
land owned by it), or any material change in the mode of conducting business.
Texas Pacific's income from oil and gas royalties has been limited in
the past by the level of production authorized for prorated wells each year by
the regulations of the Railroad Commission of Texas. The monthly percentage of
allowable production has averaged 100% in recent years but because of the
limited capacity of older wells and other operating problems, the percentage
permitted by the Commission could not be produced by most operators.
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<PAGE> 3
(b) Financial Information about Industry Segments. Texas Pacific does
not have identifiable industry segments, although as shown in the Statements of
Income included in the financial statements, land sales, oil and gas royalties
and interest income are the major contributors to the income of Texas Pacific.
See Statements of Income for additional sources of income for the last three (3)
years of Texas Pacific.
(c) Narrative Description of Business. (1) As previously indicated the
business done and intended to be done by Texas Pacific consists of sales and
leases of land owned by it, retaining oil and gas royalties, temporary cash
investments and the overall management of the land owned by it.
(i) During the last three fiscal years the following items have
accounted for more than fifteen percent (15%) of income.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Land Sales 55% 37% 32%
Oil and Gas Royalties 26% 40% 39%
</TABLE>
(ii) Texas Pacific is not in the business of development of new
products.
(iii) Raw materials are not necessary to the business of Texas
Pacific.
(iv) Patents, trademarks, licenses, franchises or concessions
held are not material to any business of Texas Pacific.
(v) The business of Texas Pacific is not seasonal in nature.
(vi) The business of Texas Pacific does not require Texas Pacific
to maintain any particular amount or item of working
capital.
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<PAGE> 4
(vii) Texas Pacific Land Trust received $988,232 or 29 percent of
its oil and gas royalty income from 87 leases operated by
Texaco Inc.
(viii) Backlogs are not relevant to an understanding of Texas
Pacific's business.
(ix) No material portion of Texas Pacific business is subject to
renegotiation or termination at the election of the
Government.
(x) The Trust does not have competitors as such in that it
sells, leases and generally manages land owned by it and to
that extent any owner of property located in areas
comparable to the Trust is a potential competitor.
(xi) Research activities relating to the development of new
products or services or to the improvement of existing
products or services are not material to the Trust's
business.
(xii) Compliance with Federal, State and local provisions that
have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, have had no material effect
upon the capital expenditures, earnings and competitive
position of Texas Pacific. To date Texas Pacific has not
been called upon to expend any funds for these purposes.
(xiii) Texas Pacific has nine (9) full-time employees.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales. Texas Pacific does not and has not during the preceding three (3)
fiscal years had any export sales or foreign operations and the only geographic
area in the United States in which land is sold or income derived is Texas.
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<PAGE> 5
ITEM 2: PROPERTIES.
Texas Pacific Land Trust owns the surface estate in approximately
1,093,067 acres of land located in 21 counties in the western part of Texas.
Also, the Trust owns a 1/128 nonparticipating perpetual oil and gas royalty
interest under 85,413 acres of land and a 1/16 nonparticipating perpetual oil
and gas royalty interest under 386,988 acres of land in the western part of
Texas. At December 31, 1997, grazing leases were in effect on 97.5 percent or
approximately 1,065,845 acres of the Trust's land. Approximately 10,468 acres of
land were sold in 1997. The Trust leases office space in Dallas and El Paso,
Texas and New York, New York.
ITEM 3: LEGAL PROCEEDINGS.
Texas Pacific is not involved in any material pending legal
proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
This item is not applicable to Texas Pacific.
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<PAGE> 6
ITEM 5: MARKET FOR SUB-SHARE CERTIFICATES AND RELATED SECURITY HOLDER MATTERS.
The range of reported sales for sub-shares on the New York Stock
Exchange for the past two years has been as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $29 3/4 $26 1/2 $32 1/2 $25 5/8
2nd Quarter 36 29 3/8 31 28 1/4
3rd Quarter 58 3/8 34 7/8 29 5/8 27
4th Quarter 56 34 1/2 29 1/4 24 3/4
</TABLE>
Certificates of Proprietary Interest and sub-shares are interchangeable
in the ratio of one certificate for 600 sub-shares or 600 sub-shares for one
Certificate of Proprietary Interest. Texas Pacific has paid a dividend once a
year for the preceding 42 years. The dividend was $.40 per sub-share in 1997 and
$.40 per sub-share in 1996. Texas Pacific is not a party to any agreement that
would limit its ability to pay dividends in the future, although any future
dividends are subject to sufficient earnings of the Trust being accomplished.
The approximate number of holders of Certificates of Proprietary
Interest and sub-shares as of January 31, 1998 were:
<TABLE>
<S> <C>
Certificates of Proprietary Interest 1
Sub-shares in Certificates of Proprietary Interest 1,024
-----
TOTAL 1,025
=====
</TABLE>
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<PAGE> 7
ITEM 6: SELECTED FINANCIAL DATA.
SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Gross revenue $13,075,037 $ 8,581,087 $ 6,440,285 $ 9,102,833 $ 5,262,762
Expenses 3,243,920 2,442,527 1,688,567 1,792,839 1,681,745
----------- ----------- ----------- ----------- -----------
Income before
provision for
Federal income
taxes 9,831,117 6,138,560 4,751,718 7,309,994 3,581,017
Provision for
Federal income
taxes 3,124,376 1,874,287 1,422,817 2,336,325 1,894,131*
----------- ----------- ----------- ----------- -----------
Net income $ 6,706,741 $ 4,264,273 $ 3,328,901 $ 4,973,669 $ 1,686,886
=========== =========== =========== =========== ===========
Net income per
Sub-share $ 2.39 $ 1.46 $ 1.09 $ 1.58 $ .52
Dividends per
Sub-share $ .40 $ .40 $ .40 $ .40 $ .40
Average number
of Sub-shares
outstanding 2,809,313 2,913,913 3,038,847 3,149,609 3,248,709
=========== =========== =========== =========== ===========
Total assets,
exclusive of
property with
no assigned
value $16,673,289 $13,710,234 $13,901,804 $14,971,994 $13,255,288
=========== =========== =========== =========== ===========
</TABLE>
* Includes $812,030, $.25 per sub-share, cumulative effect of
change in accounting for income taxes in 1993.
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<PAGE> 8
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Land sales amounted to $7,152,032 in 1997 compared to $3,164,000 in
1996 and $2,057,764 in 1995. A total of 10,467.69 acres were sold in 1997 at an
average price of $683 per acre, compared to 3,545.51 acres in 1996 and 27,604.37
acres in 1995 at an average price per acre of $892 and $75, respectively.
Land sales may vary widely from year to year and quarter to quarter.
The total dollar amount, the average price per acre, and the number of acres
sold in any one year or quarter should not be assumed to be indicative of land
sales in the future. The Trust is a passive seller of land; it does not actively
solicit sales of land. The demand for and the sales price of any particular
tract of the Trust's land is influenced by many factors including the national
and local economics, the rate of residential and commercial development in
nearby areas, livestock carrying capacity, and the conditions of the local
agricultural industry which itself is influenced by range conditions and prices
for livestock and other agricultural products. Approximately 99% of the Trust's
land is classified as ranch land and intermingled with other ownerships to form
ranching units. Ranch land sales are, therefore, largely dependent on the
actions of the adjoining landowners.
Oil and gas royalty revenue was $3,440,800 in 1997 compared to
$3,416,574 in 1996 and $2,508,663 in 1995. Oil royalty revenue was $2,411,266
and gas royalty revenue amounted to $1,029,534 in 1997. Crude oil production
from Trust royalty wells increased 8/10 of one percent and the average received
for crude oil decreased 1.5%. Total gas production decreased 9.4% and the
average price for gas increased 14.8%. The average price per royalty barrel of
crude oil for 1997, 1996, and 1995 was $19.86, $20.16 and $16.54 respectively.
The Trust's oil and gas royalty income is from perpetual non participating
royalty interests. The Trust has no control over changes in production or prices
of oil and gas. The oil and gas industry has had increased activity in 1997 in
the areas where Trust royalty is held and this may or may not result in
increased oil and gas production to the Trust. Interest revenue was $802,296 in
1997 compared to $486,318 in 1996 and $609,895 in 1995. Interest on notes
receivable amounted to $693,569 in 1997 compared to $379,454 in 1996 and
$480,073 in 1995. At 1997 year end, notes receivable from land sales was
$9,307,218 compared to $5,067,778 in 1996 and $3,509,008 in 1995. Sundry
interest amounted to $108,727 in 1997, $106,864 in 1996 and $129,822 in
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<PAGE> 9
1995. Sundry revenue income in 1997 was $1,154,350 compared to $978,945 in 1996
and $732,036 in 1995. Sundry revenue in 1997 and 1996 increased significantly by
seismic revenue and pipeline easement revenue which are unpredictable as future
sources of income.
Taxes, other than Federal taxes on income, were $522,861 in 1997
compared to $588,369 in 1996 and $558,697 in 1995. Oil and gas production taxes
were $189,912 in 1997 compared to $187,484 in 1996 and $138,018 in 1995. Ad
valorem taxes were $298,406 in 1997 compared to $368,541 in 1996 and $390,122 in
1995. Basis in real estate sold was $1,568,074 in 1997, $809,367 in 1996 and
$-0- in 1995. All other expenses were $1,152,985 in 1997, $1,044,791 in 1996 and
$1,129,870 in 1995.
The Trust's oil and gas royalty revenue, lease rentals, and receipts of
interest and principal payments on notes receivable have generated more than
adequate amounts of cash to meet the Trust's needs and should continue to do so
in the foreseeable future.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements attached hereto.
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<PAGE> 10
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURES.
This item is not applicable to Texas Pacific.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors:
<TABLE>
<CAPTION>
POSITION AND PERIOD DURING
OFFICES HELD WHICH PERSON
NAME AGE WITH REGISTRANT HAS SERVED IN OFFICE
---- --- --------------- --------------------
<S> <C> <C> <C>
George C. Fraser III 75 Trustee and Chairman Trustee since 10/01/61
of the Trustees
Maurice Meyer III 62 Trustee and Member Trustee since 02/28/91
of Audit Committee
Joe R. Clark 70 Trustee and Member Trustee since 02/20/87
of Audit Committee
</TABLE>
The Trustees hold office until their death, resignation or
disqualification. No Trustee was selected to be a Trustee pursuant to any
arrangement or understanding between him and any other person or persons, other
than the Trustees acting solely in their capacity as such.
(b) Executive Officers.
<TABLE>
<CAPTION>
POSITION AND PERIOD DURING
OFFICES HELD WHICH PERSON
NAME AGE WITH REGISTRANT HAS SERVED IN OFFICE
---- --- --------------- --------------------
<S> <C> <C> <C>
George C. Fraser III 75 Trustee and Chairman Chairman of Trustees
of the Trustees since 02/28/91
Roy Thomas 51 General Agent and General Agent of Texas
Secretary Pacific Land Trust
commencing 01/01/95
and Secretary
commencing 01/01/95;
Assistant General
Agent from 12/01/92
through 12/31/94
</TABLE>
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<PAGE> 11
The Chairman of the Trustees holds office until his death, resignation
or disqualification. General Agent and Secretary holds office until his death,
resignation, discharge or retirement pursuant to Texas Pacific Land Trust
Employees' Pension Plan. No executive officer was selected to be an officer
pursuant to any arrangement or understanding between him and any other person or
persons other than the Trustees acting solely in their capacity as such.
(c) Certain Significant Employees. The Trust does not employ any person
who is not an executive officer who makes or is expected to make significant
contributions to the business of the Trust.
(d) Family Relations. There is no family relationship between any
Trustee and any other Trustee or any executive officer of the registrant.
(e) Business Experience.
<TABLE>
<CAPTION>
NAME OF TRUSTEE OR PRINCIPAL OCCUPATION OR EMPLOYMENT
EXECUTIVE OFFICER DURING THE PAST FIVE YEARS
- ------------------ ----------------------------------
<S> <C>
George C. Fraser III Chairman of the Trustees of Texas
Pacific Land Trust; geologist Self-
employed as independent oil & gas
producer and operator, Abilene, Texas
Maurice Meyer III Former Vice Chairman of Henderson
Brothers
Joe R. Clark Personal investments. Former
President of Texas Pacific Oil
Company, Inc.
Roy Thomas Assistant General Agent of Texas
Pacific Land Trust and General Agent
of Texas Pacific Land Trust
</TABLE>
(f) Involvement in Certain Legal Proceedings. During the past five
years, no Director or Executive Officer is or has been involved in any event
reportable under this caption.
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<PAGE> 12
ITEM 11: EXECUTIVE COMPENSATION.
REMUNERATION TABLE
<TABLE>
<CAPTION>
(A) (B) (C) (D)
CASH & CASH EQUIVALENT AGGREGATE OF
NAME OF CAPACITIES FORMS OF REMUNERATION CONTINGENT FORMS
INDIVIDUALS IN WHICH SERVED SERVED OF REMUNERATION
- ----------- --------------- ---------------------- ----------------
(C1) (C2)
Securities of
Salaries, Fees, Property, In-
Director's Fees, surance Benefits
Commissions and or Reimbursements;
Bonuses Personal Benefits
---------------------- ------------------
<S> <C> <C> <C> <C>
Roy Thomas Secretary & $113,166.67 (1) (2)
General Agent
All Officers Trustees in- $121,166.67 (1) (2)
& Directors cluding Chairman;
as a Group General Agent
(four in
number)
</TABLE>
(1) During the year ending December 31, 1997, no Trustee or executive
officer of the registrant received any compensation for services to the
registrant in the form of securities or property, life or health
insurance, medical reimbursement, personal benefits or other unreported
compensation except for certain personal benefits such that the extent
to which they were personal rather than business cannot be specifically
or precisely ascertained without unreasonable effort or expenses and
which did not in any event exceed the minimum reportable amount under
this caption.
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<PAGE> 13
(2) The registrant maintains Texas Pacific Land Trust Employees' Pension
Plan, a non-contributory defined benefit pension plan qualified under
Section 401 of the Internal Revenue Code in which the employees,
excluding the Trustees, participate. The amount of the registrant's
contribution, payment or accrual in respect to Mr. Thomas is not and
cannot readily be separately or individually calculated by the regular
actuaries for the Plan. Based upon the Plan formula of 1-1/2% of each
covered year times the average salary of the last five years, Mr.
Thomas is estimated to have retirement benefits of $45,832.50 per year
upon retirement at age 65. Total compensation paid during 1997 to the
nine (9) employees covered by the Employees' Pension Plan was
$484,779.14. No contribution was made to the plan in 1997. The
remuneration covered by the plan is salary. The Trust does not maintain
any other pension or retirement plan annuity contract, deferred
compensation plan, incentive compensation plan or arrangement, stock
purchase plan, profit sharing or thrift plan, or other similar
arrangement.
(3) The Chairman of the Trustees receives the sum of four thousand dollars
per year as compensation for his services, and the other two trustees
receive the sum of two thousand dollars per year for their services.
(4) There is no compensation plan or arrangement with respect to any
individual named in the remuneration table that results, or will
result, from the resignation, retirement or any other termination of
such individual's employment or from a change in control of Texas
Pacific or in a change in the individual's responsibilities following a
change in control of Texas Pacific.
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<PAGE> 14
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners. No person or group
owns of record, or is known by Texas Pacific to own beneficially, more than 5%
of any class of voting certificates of Texas Pacific, treating the
interchangeable Certificates of Proprietary Interest and Sub-Share Certificates
as a single class for this purpose.
(b) Security Ownership of Management: The following table gives the
information indicated as to equity securities (Certificates of Proprietary
Interest and Sub-Share Certificates) of Texas Pacific beneficially owned
directly or indirectly by all trustees, naming them, and by all trustees and
officers of the registrant, as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF OF OWNERSHIP PERCENT
TITLE AND CLASS (1) BENEFICIAL OWNER ON JANUARY 31, 1997 OF CLASS
- ------------------- ---------------- ------------------- --------
<S> <C> <C> <C>
Sub-share certificates: George C. Fraser III 28,420 (2) 1.03%
Sub-share certificates: Maurice Meyer III 6,000 (3) .20%
Sub-share certificates: Joe R. Clark 500 .01%
Sub-share certificates: All Trustees and
Officers as a Group 34,920 1.23%
</TABLE>
(1) The sub-shares and the Certificates of Proprietary Interest
are freely interchangeable in the ratio of one Certificate of
Proprietary Interest for six hundred sub-shares or six hundred
sub-shares for one Certificate of Proprietary Interest, and
are deemed to constitute a single class. On December 31, 1997,
no trustee or officer was the beneficial owner, directly or
indirectly, of any Certificates of Proprietary Interest.
(2) Does include 600 sub-shares owned by a trust of which Mr.
Fraser is a trustee and beneficiary.
(3) Does not include 2,300 sub-shares owned by the wife of Mr.
Maurice Meyer III in which Mr. Meyer disclaims any beneficial
ownership.
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<PAGE> 15
(c) Changes in Control. Texas Pacific has no knowledge of any
arrangement that may result in any change of the control of the Trust.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transaction with management and others. There are no reportable
transactions or currently proposed transactions between Texas Pacific and any
Trustee or executive officer of Texas Pacific or any nominee for election as
Trustee or any security holder of Texas Pacific or any member of the immediate
family of the foregoing persons.
(b) Certain business relationships. There are no relationships existing
or have ever existed concerning Trustees or nominees for Trustee that are
required to be disclosed under this paragraph.
(c) Indebtedness of Management. There are no persons indebted to Texas
Pacific in an amount in excess of $60,000.00 that are required to be disclosed
under this paragraph.
(d) Transactions with Promoters. Texas Pacific has not been organized
within the last five years and disclosure under this paragraph is not applicable
to Texas Pacific.
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<PAGE> 16
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K.
(a) Financial Statements.
1. All schedules have been omitted because the required
information is contained in the financial statements or
related notes, or is not applicable or immaterial.
2. Exhibits required by Item 7 Regulation S-K
a. Annual Report to Security Holders
b. Copy of Trust Indenture
c. Exhibit No. 27 Financial Data Schedule
(b) No reports on Form 8-K have been filed for the last quarter of the
period covered by this report.
(c) See (a)(2) above.
(d) See (a)(1) above.
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<PAGE> 17
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.
(Registrant) TEXAS PACIFIC LAND TRUST
By:
-------------------------------
George C. Fraser III
Chief Executive Officer
Date:
------------------------------
By:
-------------------------------
ROY THOMAS
Chief Financial and Chief
Accounting Officer
Date:
------------------------------
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<PAGE> 18
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:
--------------------------------
George C. Fraser III, Trustee
Date:
--------------------------------
By:
--------------------------------
Joe R. Clark, Trustee
Date:
--------------------------------
By:
--------------------------------
Maurice Meyer III, Trustee
Date:
--------------------------------
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<PAGE> 19
TEXAS PACIFIC LAND TRUST
Index to Financial Statements
Independent Auditors' Report
Balance Sheets - December 31, 1997, and 1996
Statements of Income - Years ended December 31, 1997, 1996 and 1995
Statements of Net Proceeds from All Sources - Years ended December 31, 1997,
1996, and 1995
Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995
Notes to Financial Statements
Schedules - All schedules have been omitted because the required information is
contained in the financial statements of related notes, or is not
applicable.
<PAGE> 20
TEXAS PACIFIC LAND TRUST
Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE> 21
[KPMG PEAT MARWICK LLP LOGO]
INDEPENDENT AUDITORS' REPORT
The Trustees and Certificate Holders
Texas Pacific Land Trust:
We have audited the accompanying balance sheets of Texas Pacific Land Trust as
of December 31, 1997 and 1996, and the related statements of income, net
proceeds from all sources, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Texas Pacific Land Trust as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Dallas, Texas
January 23, 1998
<PAGE> 22
TEXAS PACIFIC LAND TRUST
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
----------- -----------
<S> <C> <C>
Cash $ 112,591 $ 144,898
Temporary cash investments - at cost which approximates market 1,800,000 1,650,000
Notes receivable for land sales ($799,166 due in 1998 and
$540,744 due in 1997) (note 1) 9,307,218 5,067,778
Prepaid Insurance 45,500 45,740
Other assets 798,455 639,249
Real estate acquired through foreclosure (note 3) 4,466,895 6,034,969
Water wells, leasehold improvements, furniture and equipment -
at cost less accumulated depreciation 142,630 127,600
Property, no value assigned (note 1):
Land (surface rights) situated in twenty-one counties in Texas -
1,065,481.33 acres in 1997 and 1,075,685.03 acres in 1996 -- --
Town lots in Iatan, Loraine, and Morita, Texas - 628 lots
1/16 nonparticipating perpetual royalty interest in
386,987.70 acres -- --
1/128 nonparticipating perpetual royalty interest in
85,413.60 acres -- --
----------- -----------
$16,673,289 $13,710,234
=========== ===========
Liabilities and Capital
Accounts payable and other liabilities $ 93,072 $ 70,034
Federal income taxes 42,783 99,824
Other taxes 24,372 26,338
Deferred taxes (note 5) 4,291,856 3,388,382
----------- -----------
Total liabilities 4,452,083 3,584,578
----------- -----------
Capital (notes 1 and 6):
Certificates of Proprietary Interest, par value $100 each;
outstanding 1 certificate -- --
Sub-share Certificates in Certificates of Proprietary Interest,
par value $.16-2/3 each; outstanding 2,753,205 Sub-shares
in 1997 and 2,848,105 Sub-shares in 1996 -- --
Net proceeds from all sources 12,221,206 10,125,656
----------- -----------
Total capital 12,221,206 10,125,656
----------- -----------
$16,673,289 $13,710,234
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 23
TEXAS PACIFIC LAND TRUST
Statements of Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income
Oil and gas royalties $ 3,440,800 $ 3,416,574 $ 2,508,663
Grazing lease rentals 525,559 535,250 531,927
Land sales 7,152,032 3,164,000 2,057,764
Interest 802,296 486,318 609,895
Easements and sundry income 1,154,350 978,945 732,036
----------- ----------- -----------
13,075,037 8,581,087 6,440,285
----------- ----------- -----------
Expenses:
Taxes, other than federal income taxes 522,861 588,369 558,697
Salaries 484,779 446,637 413,800
General expense, supplies and travel 491,395 430,583 455,972
Basis in real estate sold 1,568,074 809,367 --
Legal and professional fees 103,120 103,870 192,218
Commissions to local agents 16,490 39,975 30,233
Depreciation 49,201 15,726 11,314
Trustees' compensation 8,000 8,000 8,000
Other -- -- 18,333
----------- ----------- -----------
3,243,920 2,442,527 1,688,567
----------- ----------- -----------
Income before provision for
federal income taxes 9,831,117 6,138,560 4,751,718
----------- ----------- -----------
Provision (benefit) for federal income taxes (note 5):
Current 2,220,902 1,780,222 1,894,946
Deferred 903,474 94,065 (472,129)
----------- ----------- -----------
3,124,376 1,874,287 1,422,817
----------- ----------- -----------
Net income $ 6,706,741 $ 4,264,273 $ 3,328,901
=========== =========== ===========
Net income per Sub-share Certificate $ 2.39 $ 1.46 $ 1.09
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 24
TEXAS PACIFIC LAND TRUST
Statements of Net Proceeds from All Sources
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $10,125,656 $10,294,628 $10,869,181
Add net income for year 6,706,741 4,264,273 3,328,901
----------- ----------- -----------
16,832,397 14,558,901 14,198,082
----------- ----------- -----------
Deduct:
Cost of Sub-share Certificates in
Certificates of Proprietary Interest
purchased and cancelled - 94,900
Sub-shares in 1997, 114,300 Sub-shares
in 1996 and 112,900 Sub-shares in 1995 3,476,309 3,254,443 2,680,652
Dividends paid - per Certificate of
Proprietary Interest - $240 in 1997,
1996 and 1995; per Sub-share
Certificate - $0.40 in 1997, 1996 and 1995 1,134,882 1,178,802 1,222,802
----------- ----------- -----------
4,611,191 4,433,245 3,903,454
----------- ----------- -----------
Balance at end of year $12,221,206 $10,125,656 $10,294,628
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 25
TEXAS PACIFIC LAND TRUST
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,706,741 $ 4,264,273 $ 3,328,901
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 49,201 15,726 11,314
Deferred taxes 903,474 94,065 (472,129)
Change in assets and liabilities:
New notes receivable from land sales (4,905,315) (2,217,546) (665,729)
Payments received on notes receivable 665,875 658,776 2,504,668
Real estate acquired through foreclosure 1,568,074 809,367 --
Prepaid insurance and other assets (158,966) (213,560) 29,473
Accounts payable and other liabilities 23,038 14,988 (49,529)
Federal income and other taxes payable (59,007) (131,651) 26,021
----------- ----------- -----------
Net cash provided by operating activities 4,793,115 3,294,438 4,712,990
----------- ----------- -----------
Cash flows from investing activities:
Additions to water wells, leasehold improvements,
furniture and equipment (78,731) (108,653) (19,394)
Retirements of water wells, leasehold improvements,
furniture and equipment 14,500 19,373 --
----------- ----------- -----------
Net cash used in investing activities (64,231) (89,280) (19,394)
----------- ----------- -----------
Cash flows from financing activities:
Purchase of Sub-share Certificates in
Certificates of Proprietary Interest (3,476,309) (3,254,443) (2,680,652)
Dividends (1,134,882) (1,178,802) (1,222,802)
----------- ----------- -----------
Net cash used in financing activities (4,611,191) (4,433,245) (3,903,454)
----------- ----------- -----------
Net increase (decrease) in cash and temporary
cash investments 117,693 (1,228,087) 790,142
Cash and temporary cash investments
at beginning of year 1,794,898 3,022,985 2,232,843
----------- ----------- -----------
Cash and temporary cash investments at end of year $ 1,912,591 $ 1,794,898 $ 3,022,985
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 26
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) General
The fair market value of the Texas Pacific Land Trust's (Trust)
land and royalty interests was not determined in 1888 when the
Trust was formed; therefore, no value is assigned to the land,
town lots, royalty interests, Certificates of Proprietary Interest
and Sub-share Certificates in Certificates of Proprietary Interest
in the accompanying balance sheets. Consequently, in the
statements of income, no allowance is made for depletion and no
cost is deducted from the proceeds of original land sales. Even
though the 1888 value of the real properties cannot be precisely
determined, the Trustees have concluded that the effect of this
matter can no longer be significant to the Trust's financial
position or results of operations. For Federal income tax
purposes, however, deductions are made for depletion, computed on
the statutory percentage basis of income received from royalties.
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Revenue Recognition and Notes Receivable
The Trust generally receives cash payments on land sales of 25% or
more within the first year of such sales. Thereafter, annual
principal and interest payments are required by the Trust.
Accordingly, income is recognized on land sales during the periods
in which such sales are closed and sufficient amounts of cash down
payments are received. For Federal income tax purposes, such sales
are recognized on the installment method. The installment method
is also used for sales not meeting the minimum down payment
requirements in Statement of Financial Accounting Standards No.
66.
Notes receivable related to land sales bear interest rates ranging
from 8.75% to 11% as of December 31, 1997 and are secured by first
lien deeds of trust on the properties sold. The weighted average
interest rate is 9.2% as of December 31, 1997. The annual
installments on notes are generally payable over terms of 3 to 15
years. There is no penalty for prepayment of principal, and
prepayments in 1997, 1996 and 1995 were $105,854, $146,230 and
$1,638,911, respectively. The interest rates on notes receivable
are considered comparable with current rates on similar land sales
and, accordingly, the carrying value of such notes receivable
approximates fair value. There was no allowance for uncollectible
accounts at December 31, 1997, 1996 or 1995. One customer
represented approximately 19% and 16% and another represented
approximately 17% and 14% of the Trust's notes receivable balance
at December 31, 1997 and 1996, respectively.
(Continued)
<PAGE> 27
2
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
The maturities of notes receivable for each of the five years
subsequent to December 31, 1997 are:
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1998 $ 799,166
1999 832,479
2000 835,213
2001 463,265
2002 483,443
</TABLE>
As of December 31, 1997, there were no significant delinquencies
in the Trust's notes receivable. The Trust reviews its aging,
financial operations information on its debtors and estimated fair
value of collateral held as security to determine an appropriate
allowance for delinquencies, if any.
The Trust's oil and gas royalty interest, grazing and lease
rentals and easement and sundry income are recorded on a cash
basis, which approximates the accrual method.
(c) Net Income per Sub-share
The cost of Sub-share Certificates purchased and retired is
charged to net proceeds from all sources. Net income per Sub-share
Certificate is based on the weighted average number of Sub-share
Certificates in Certificates of Proprietary Interest and
equivalent Sub-share Certificates of Proprietary Interest
outstanding during each period (2,809,313 in 1997, 2,913,913 in
1996 and 3,038,847 in 1995).
In 1997, the Trust adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." Because of the
Trust's relatively simple capital structure, the adoption of SFAS
No. 128 had no effect on the Trust's financial statements.
(d) Cash Flows
Temporary cash investments at December 31, 1997 and 1996 consist
primarily of commercial paper. For purposes of the statements of
cash flows, the Trust considers all highly liquid debt instruments
with original maturities of three months or less to be temporary
cash investments. Cash disbursed for income taxes in 1997, 1996
and 1995 was $2,277,943, $1,920,810 and $1,873,242, respectively.
(e) Depreciation
Provision for depreciation of depreciable assets is made by
charges to income at straight-line and accelerated rates
considered to be adequate to amortize the cost of such assets over
their useful lives.
(Continued)
<PAGE> 28
3
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
(f) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(g) Reclassifications
Certain prior year balances have been reclassified to conform
with the 1997 presentation.
(2) Segment Information
The Trust's only significant activity is managing the land which was
conveyed to the Trust in 1888 and includes sales and leases of such
land, and the retention of oil and gas royalties.
(3) Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of
cost or fair value less disposition costs at the date of foreclosure.
Cost is considered to be the aggregate of the outstanding principal
balance, accrued interest, past due ad valorem taxes and other fees
incurred relating to the foreclosure. Valuations are periodically
performed or obtained by management whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable,
and any further losses are recorded by a charge to operations and a
valuation allowance (none at December 31, 1997, 1996 or 1995) if the
carrying value of the property exceeds its estimated fair value.
Real estate acquired through foreclosure included the following
activity for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Acres Book value Acres Book value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance at January 1 27,830.19 $ 6,034,969 28,140.75 $ 6,844,336
Sales 244.24 1,568,074 310.56 809,367
--------- ----------- --------- -----------
Balance at December 31 27,585.95 $ 4,466,895 27,830.19 $ 6,034,969
========= =========== ========= ===========
</TABLE>
(4) Retirement Plan
The Trust has a noncontributory pension plan (Plan) available to all
regular employees having one or more years of continuous service. The
Plan provides for normal retirement at age 65. Contributions to the
Plan reflect benefits attributed to employees' services to date, as
well as
(Continued)
<PAGE> 29
4
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
services expected in the future. Plan assets consist primarily of
investments in NationsBank Texas, N.A. Common Trust Fund.
Net pension cost for the years ended December 31, 1997, 1996 and 1995
includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost $ 40,717 $ 36,641 $ 30,305
Interest cost 90,989 87,167 79,734
Actual return on assets (104,778) (100,524) (88,963)
Net amortization and deferral (12,778) (18,238) (16,273)
--------- --------- ---------
Net periodic pension cost $ 14,150 $ 5,046 $ 4,803
========= ========= =========
</TABLE>
The following is a reconciliation of the funding status of the Plan
for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 1,010,092 $ 998,181
Nonvested benefits 16,151 14,422
----------- -----------
Accumulated benefit obligation $ 1,026,243 $ 1,012,603
=========== ===========
Projected benefit obligation for services rendered to date (1,262,912) (1,214,013)
Plan assets at fair value 1,546,566 1,487,842
----------- -----------
Plan assets in excess of projected benefit obligation 283,654 273,829
Unrecognized net (gain) loss (30,983) 73,926
Unrecognized net asset at transition (139,301) (162,519)
Unrecognized prior service cost 110,389 43,569
----------- -----------
Prepaid pension cost $ 223,759 $ 228,805
=========== ===========
</TABLE>
The actuarial present value of vested and nonvested accrued benefits
is based on an assumed discount rate of 7.5%, and a weighted-average
expected long-term rate of return on Plan assets of 7.0% in 1997 and
1996. The projected benefit obligations were calculated assuming
annual rates of salary increases ranging from 5.3% to 11.0% depending
upon the employee's age category.
(Continued)
<PAGE> 30
5
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
(5) Federal Taxes on Income
The Trust is taxed as if it were a corporation. Total income tax
expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax income before provision for
federal income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed tax expense at the statutory rate $ 3,342,580 $ 2,087,110 $ 1,615,584
Reduction in income taxes resulting from:
Statutory depletion (207,043) (203,688) (149,394)
Other, net (11,161) (9,135) (43,373)
----------- ----------- -----------
$ 3,124,376 $ 1,874,287 $ 1,422,817
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Basis differences in real estate acquired
through foreclosure $1,280,535 $1,775,826
Deferred installment revenue on land sales
for tax purposes 3,011,321 1,612,556
---------- ----------
Total deferred tax liability $4,291,856 $3,388,382
========== ==========
</TABLE>
(6) Capital
Certificates of Proprietary Interest (Certificates) and Sub-share
Certificates in Certificates of Proprietary Interest (Sub-shares) are
exchangeable in the ratio of one Certificate to 600 Sub-shares.
No Certificates were exchanged for Sub-shares in 1997, 1996 or 1995.
The number of Certificates authorized for issuance at a given date is
the number then outstanding plus one/six-hundredth of the number of
Sub-shares then outstanding. The number of Sub-shares authorized for
issuance at a given date is the number then outstanding plus six
hundred times the number of Certificates then outstanding.
The Declaration of Trust was executed and delivered in New York. In the
opinion of counsel for the Trust, under the laws of the State of New
York, the Certificate and Sub-share Certificate holders are not subject
to any personal liability for the acts or obligations of the Trust.
The assets of the Trust are located in Texas. In the opinion of Texas
counsel, under the laws of the State of Texas, the Certificate and
Sub-share Certificate holders may be held personally liable with
respect to claims against the Trust, but only after the assets of the
Trust first have been exhausted.
(Continued)
<PAGE> 31
6
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
(7) Oil and Gas Producing Activities (Unaudited)
The Trust's share of oil and gas produced, all of which is from royalty
interests, was as follows for the years ended December 31, 1997, 1996
and 1995, respectively: oil (in barrels) - 121,415, 120,432 and
107,203; and gas (in thousands of cubic feet) - 402,447, 444,353 and
504,177. Reserves related to the Trust's royalty interests are not
presented because the information is unavailable.
(8) Selected Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Trust for
each quarter of 1997 and 1996:
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Income $ 1,692,622 $ 4,068,850 $ 3,670,579 $3,642,986
============ =========== =========== ==========
Income before provision
for federal income taxes $ 1,340,681 $ 3,683,717 $ 1,615,224 $3,191,495
============ =========== =========== ==========
Net income $ 934,123 $ 2,482,476 $ 1,112,815 $2,177,327
============ =========== =========== ==========
Net income per
Sub-share Certificate $ .34 $ .89 $ .39 $ .77
============ =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------
December 31, September 30, June 30, March 31,
1996 1996 1996 1996
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Income $ 2,648,126 $ 1,780,079 $ 2,744,099 $1,408,783
=========== ============ =========== ==========
Income before provision
for federal income taxes $ 2,264,099 $ 1,383,602 $ 1,533,361 $ 957,498
=========== ============ =========== ==========
Net income $ 1,555,320 $ 969,489 $ 1,058,680 $ 680,784
=========== ============ =========== ==========
Net income per
Sub-share Certificate $ .54 $ .33 $ .36 $ .23
=========== ============ =========== ==========
</TABLE>
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Item
- ------- ----
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,912,591
<SECURITIES> 0
<RECEIVABLES> 10,105,673
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,756,546
<PP&E> 4,466,895
<DEPRECIATION> 49,201
<TOTAL-ASSETS> 16,673,289
<CURRENT-LIABILITIES> 160,227
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,673,289
<SALES> 0
<TOTAL-REVENUES> 13,075,037
<CGS> 0
<TOTAL-COSTS> 3,243,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,831,117
<INCOME-TAX> 3,124,376
<INCOME-CONTINUING> 6,706,741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,706,741
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 0
</TABLE>
