Financial Condition and Results of Operations” and the Financial Statements and Notes thereto incorporated by reference in Item 8 “Financial Statements and Supplementary Data.”
The Trust’s primary sources of income are revenue derived from sales of land, either for cash or a combination of cash and mortgage notes, and revenue derived from the Trust’s land and mineral interests. Revenue from sales of land increased $18,648,035 or 1,144.6% in 2004 compared to 2003. Oil and gas royalty income increased $1,122,774 or 20.7% over the previous year. The Trust’s gross income for 2004 increased by $19,187,281 or 192.8% compared to 2003. The Trust’s revenue for 2003 included $264,578 of oil and gas royalties for past production resulting from an audit of an oil and gas lease and $655,921 of sundry income resulting from
settlement of claims with respect to three other oil and gas leases. The Trust purchased and retired 54,100 Sub-shares during 2004, leaving 2,194,275 Sub-shares outstanding at December 31, 2004.
Earnings per Sub-share certificate for 2004 were $7.89 compared to $2.34 in 2003, and $2.09 in 2002. Total revenues in 2004 were $29,140,610, in 2003 $9,953,329, and in 2002 $9,122,098.
Land sales in 2004 were $20,277,226 compared to $1,629,191 in 2003 and $3,050,784 in 2002. A total of 12,023 acres were sold in 2004 at an average price of $1,687 per acre, compared to 7,841 acres in 2003 and 9,295 acres in 2002 at average prices per acre of $208 and $328, respectively. The significant increase in land sales in 2004 compared to 2003 and 2002 was due to a sale of approximately 1,429 acres of land suitable for development located in El Paso County for $19,234,300. The Trust’s remaining holdings of land suitable for development in metropolitan areas are limited.
Land sales 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 and 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 economies, the rate of residential and commercial development in nearby areas, livestock carrying capacity, and the condition 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.
Rentals, royalties and other income were $8,863,384 in 2004, compared to $8,324,138 in 2003 and $6,071,314 in 2002.
Oil and gas royalty revenue in 2004 was $6,534,455, compared to $5,411,681 in 2003 and $3,710,409 in 2002. As discussed above, the 2003 revenue figure includes $264,578 related to past production which resulted from an audit of an oil and gas lease. Oil royalty revenue was $4,303,704 and gas royalty revenue was $2,230,751 in 2004. Crude oil production from Trust royalty wells decreased 5.8% in 2004, but this decrease in the volume of crude oil production was more than offset by a 29.6% increase in the average price for crude oil during 2004 compared to 2003. Total gas production increased 28.8% in 2004 which more than offset an 8.1% decrease in the average price of gas in 2004. The average price per royalty barrel of crude oil for 2004, 2003, and 2002 was $37.82, $29.18, and $23.28, 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.
Grazing lease income in 2004 was $244,103, compared to $477,664 in 2003. Prior to 2004, grazing lease rentals were recorded on the cash method which approximated the accrual method. For 2004, the Trust recorded a one-time charge in the amount of $228,418 to record grazing lease rental on the accrual method. Since the amount is deemed immaterial to the financial statements as a whole, the financial statements for prior periods have not been restated.
6
Interest revenue was $1,138,307 in 2004, compared to $972,064 in 2003 and $979,948 in 2002. Interest on notes receivable amounted to $1,066,395 in 2004, compared to $924,228 in 2003, and $925,453 in 2002. At year end 2004, notes receivable from land sales were $22,251,684, compared to $10,501,601 in 2003 and $11,923,998 in 2002. Sundry interest amounted to $71,912 in 2004, $47,836 in 2003, and $54,495 in 2002. Total principal cash payments on notes receivable were $3,241,938 in 2004.
Easement and sundry income revenue in 2004 was $946,519, compared to $1,462,729 in 2003 and $895,175 in 2002. Sundry revenue includes $330,496 in 2004 and $655,921 in 2003, respectively, related to the settlement of claims with respect to oil and gas leases.
Taxes, other than Federal income taxes were $603,301 in 2004, compared to $563,621 in 2003 and $480,575 in 2002. Oil and gas production taxes were $365,273 in 2004, compared to $303,673 in 2003 and $208,413 in 2002. Ad valorem taxes were $194,236 in 2004, compared to $218,748 in 2003 and $232,689 in 2002. Basis in real estate sold was $715,712 in 2004, $232,372 in 2003, and $98,165 in 2002. All other expenses were $2,049,162 in 2004, $1,562,093 in 2003, and $1,449,738 in 2002.
Liquidity
The Trust’s principal sources of liquidity are its revenues from oil and gas royalties, lease rentals and receipts of interest and principal payments on the notes receivable arising from its sales of land. In the past these sources have generated more than adequate amounts of cash to meet the Trust’s needs and, in the opinion of management, should continue to do so in the foreseeable future.
Off-Balance Sheet Arrangements
The Trust has not engaged in any off-balance sheet arrangements.
Tabular Disclosure of Contractual Obligations
As of December 31, 2004, the Trust’s known contractual obligations were as follows:
| Payment Due by Period
|
|---|
Contractual Obligations
|
Total
| Less than
1 Year
| 1-3
Years
| 3-5
Years
| More than
5 Years
|
|---|
| Long-term debt obligations | | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | $ | -- | |
| Capital lease obligations | | | | -- | | | -- | | | -- | | | -- | | | -- | |
| Operating lease obligations | | | | 230,982 | | | 48,498 | | | 155,358 | | | 27,126 | | | -- | |
| Purchase obligations | | | | -- | | | -- | | | -- | | | -- | | | -- | |
Other long-term liabilities
reflected on the Trust's balance
sheet under GAAP | | | | -- | | | -- | | | -- | | | -- | | | -- | |
|
| |
| |
| |
| |
| |
| Total | | | $ | 230,982 | | $ | 48,498 | | $ | 155,358 | | $ | 27,126 | | $ | -- | |
|
| |
| |
| |
| |
| |
7
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. It is our opinion that we fully disclose our significant accounting policies in the Notes to the Financial Statements. Consistent with our disclosure policies, we include the following discussion related to what we believe to be our most critical accounting policies that require our most difficult, subjective or complex judgment.
Valuation of Notes Receivable — Management of the Trust monitors delinquencies to assess the propriety of the carrying value of its notes receivable. At the point in time that notes receivable become delinquent, management reviews the operations information of the debtor and the estimated fair value of the collateral held as security to determine whether an allowance for losses is required. Any required allowance for losses is recorded in the period of determination. At December 31, 2004, and 2003, there were no significant delinquencies and, as such, no allowances for losses have been recorded.
Valuation of Real Estate Acquired Through Foreclosure — The value of real estate acquired through foreclosure is established 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 and interest, past due ad valorem taxes and other fees associated with the foreclosure. Subsequent to the foreclosure date, valuations are periodically performed or obtained by management when events or changes in circumstances indicate that the full carrying amount may not be recoverable. At such time, a valuation allowance is established to reduce the carrying value to the estimated fair value. Valuation of the real estate is based on the estimates of management and is subject to judgment. At December 31, 2004 and 2003, no valuation allowances were recorded.
Gain Recognition on Land Sales — Accounting principles generally accepted in the United States of America dictate the manner in which the gain or loss on the sale of land is recorded. The Trust has established policies for the sale of land which result in the full accrual method of gain recognition. This policy generally requires that the Trust receive a minimum cash down payment of 25% of the sales price on each sale and that any related notes receivable require regular principal and interest payments, payable over terms from 5 to 15 years.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.
The Trust’s primary market risk exposure relates to changes in interest rates related to its notes receivable. To limit the impact of interest rate changes, the Trust enters into fixed rate notes receivable that approximate the current interest rate for land sales at the time. As a result, the Trust’s only interest rate risk is the opportunity loss should interest rates increase. The following table summarizes expected maturities of the Trust’s notes receivable. As the interest rates represent rates which management believes are current rates on similar land sales, the Trust believes the fair values of its notes receivable approximate the carrying amounts.
8
Year Ending December 31
| Maturity
|
|---|
| 2005 | | | $ | 1,310,899 | |
| 2006 | | | | 1,414,598 | |
| 2007 | | | | 1,478,617 | |
| 2008 | | | | 1,575,223 | |
| 2009 | | | | 1,601,806 | |
| Thereafter | | | | 14,870,541 | |
|
| |
| | | | $ | 22,251,684 | |
|
| |
The Trust’s remaining financial instruments consist of cash, temporary cash investments and accounts payable and other liabilities and the carrying amounts of these instruments approximate fair value due to the short-term nature of these instruments.
Item 8: Financial Statements and Supplementary Data.
See the Index to Financial Statements included in Item 15. The Financial Statements listed therein are incorporated herein by reference to pages F-1 through F-16 of this Report on Form 10-K.
Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Information with respect to a change in the Trust’s certifying accountant was previously reported in the Trust’s Current Report on Form 8-K filed on October 13, 2004.
Item 9A: Controls and Procedures.
(a) Disclosure Controls and Procedures.
Pursuant to Rule 13a-15, management of the Trust under the supervision and with the participation of Roy Thomas, the Trust’s Chief Executive Officer, and David M. Peterson, the Trust’s Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of the end of the Trust’s fiscal year covered by this Report on Form 10-K. Based upon that evaluation, Mr. Thomas and Mr. Peterson concluded that the Trust’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Trust required to be included in the Trust’s periodic SEC filings.
(b) Management’s Report on Internal Control over Financial Reporting.
Management of the Trust is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Management has assessed the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2004 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal
9
Control-IntegratedFramework. Based on that assessment, management believes that the Trust’s internal control over financial reporting was effective as of December 31, 2004.
(c) Attestation Report of Registered Public Accounting Firm.
The Trust’s independent public accountants have issued an audit report on management’s assessment of the Trust’s internal control over financial reporting. This audit report appears on page F-1 of this Report.
(d) Changes in Internal Control over Financial Reporting.
There were no changes in the Trust’s internal control over financial reporting during the fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.
Item 9B: Other Information.
Not applicable.
PART III
Item 10: Directors and Executive Officers of the Registrant.
(a) Trustees:
Name
| Age
| Position and Offices Held
With Registrant
| Period During Which
Person Has Served
in Office
|
|---|
| Maurice Meyer III | 69 | Trustee, Chairman of the
Trustees and Member of
Audit Committee | Trustee since February 28,
1991; Chairman of
Trustees since May 28,
2003. |
Joe R. Clark |
77 |
Trustee, Vice Chairman of
the Trustees and Chairman
of Audit Committee |
Trustee since February 20,
1987; Vice Chairman of
Trustees since May 28,
2003. Mr. Clark served as
Chairman of the Trustees
from June 7, 2000 through
May 27, 2003. |
| |
| John R. Norris III | 51 | Trustee | Trustee since June 7, 2000. |
10
(b) Executive Officers.
Name
| Age
| Position and Offices Held
With Registrant
| Period During Which
Person Has Served
in Office
|
|---|
| Roy Thomas | 58 | General Agent, Chief
Executive Officer and
Secretary | General Agent and
Secretary of the Trust since
January 1, 1995 and Chief
Executive Officer since
November 12, 2002. Mr.
Thomas had previously
served as Assistant General
Agent from December 1,
1992 through December 31,
1994. |
David M. Peterson |
39 |
Assistant General Agent
and Chief Financial Officer |
Assistant General Agent
since January 1, 1997 and
Chief Financial Officer
since November 12, 2002. |
The Trustees hold office until their death, resignation or disqualification. The General Agent, Chief Executive Officer and Secretary and the Assistant General Agent and Chief Financial Officer hold office until their death, resignation, discharge or retirement pursuant to the 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 are no family relationships among any of the Trustees and executive officers of the Trust.
(e) Business Experience.
Name of Trustee or
Executive Officer
| Principal Occupation or Employment
During the Past Five Years
|
|---|
| Maurice Meyer III | Former Vice Chairman of Henderson Brothers; personal investments |
| Joe R. Clark | Former President of Texas Pacific Oil
Company, Inc.; personal investments |
11
| |
|---|
John R. Norris III |
Attorney; Calloway, Norris & Burdette, Dallas, Texas |
Roy Thomas |
General Agent, Chief Executive Officer
and Secretary of Texas Pacific Land Trust |
David M. Peterson |
Assistant General Agent and Chief Financial Officer of Texas Pacific Land Trust |
(f) Involvement in Certain Legal Proceedings. During the past five years, no Trustee or executive officer has been involved in any event reportable under this caption.
(g) Promoters and Control Persons. Not applicable.
(h) Audit Committee Financial Expert. The Board of Trustees has determined that no current member of the Board of Trustees serving on the Trust’s Audit Committee would meet the requirements of the definition of “audit committee financial expert” set forth in the applicable rules of the SEC. The terms of the Trust, which was established in 1888, and governing law would require an amendment of the Trust in order to add new Trustees who would satisfy the requirements of the definition. Any amendment of the Trust to do so would necessarily involve judicial proceedings and an expensive time-consuming process with no assurance that an individual meeting the requirements of the definition, who would be willing to serve as Trustee given the modest compensation offered ($2,000 per annum, $4,000 per annum for the Chairman), could be located. The Audit Committee consists of two independent Trustees, each of whom has been determined by the Board of Trustees to be qualified, in their judgment, to monitor the performance of management, the Trustee’s internal accounting operations and the independent auditors and to be qualified to monitor the disclosures of the Trust. In addition, the Audit Committee has the ability to retain its own independent accountants, attorneys and other advisors, whenever it deems appropriate, to advise it. As a result, the Board of Trustees believes that the time and expense involved in an amendment of the Trust, with no assurance that an individual meeting the requirements of the definition of “audit committee financial expert” could be persuaded to become a member of the Board of Trustees, would not be in the best interests of the Trust at this time.
(i) Audit Committee. The Trust has a standing Audit Committee of its Board of Trustees. The current members of the Audit Committee are Messrs. Meyer and Clark.
(j) Changes in Procedures Regarding Nomination of Trustees. Not applicable.
Code of Ethics
The Trust has adopted a code of ethics applicable to its chief executive officer, chief financial officer and certain other employees. The Trust will provide a copy of the code of ethics free of charge to any person upon written request addressed to: Texas Pacific Land Trust, 1700 Pacific Avenue, Suite 1670, Dallas, Texas 75201, Attention: General Agent.
12
Item 11: Executive Compensation.
Summary Compensation Table
The following table sets forth information concerning compensation for services in all capacities awarded to, earned by, or paid to, the Trust’s Chief Executive Officer and its other most highly compensated executive officers (collectively, the “Named Executive Officers”):
| Annual Compensation
|
|---|
Name and Position
| Year
| Salary ($)
| Bonus ($)
| Other Annual
Compensation
($)(1)
| All Other
Compensation(2)
|
|---|
| | | | | |
|---|
| Roy Thomas | | | 2004 | | | $ | 170,417 | | $ | 17,000 | | | -- | | $ | 10,225 | |
| General Agent, Chief Executive | | | 2003 | | | $ | 160,833 | | | -- | | | -- | | $ | 9,650 | |
| Officer and Secretary | | | 2002 | | | $ | 154,500 | | | -- | | | -- | | $ | 9,270 | |
David M. Peterson | | |
2004 | | |
$ |
100,833 | |
$ |
10,000 | | |
-- | |
$ |
6,050 | |
| Assistant General Agent and | | | 2003 | | | $ | 91,200 | | | -- | | | -- | | $ | 5,472 | |
| Chief Financial Officer | | | 2002 | | | $ | 87,283 | | | -- | | | -- | | $ | 5,237 | |
| (1) | The aggregate value of the perquisites and other personal benefits, if any, received by the Named Executive Officers for all years presented have not been reflected in this table because the amount was below the Securities and Exchange Commission’s threshold for disclosure (i.e., the lesser of $50,000 or 10% of the total of annual salary and bonus for the Named Executive Officer for the year). |
| (2) | Represents contributions by the Trust to the account of the Named Executive Officer under the Trust’s defined contribution retirement plan. |
Retirement Plans
The registrant maintains the 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 contributions, payments or accruals with respect to Mr. Thomas and Mr. Peterson are 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 $62,205.98 per year upon retirement at age 65, and Mr. Peterson is estimated to have retirement benefits of $48,618.56 per year upon retirement at age 65. Total compensation paid during 2004 to the eight (8) employees covered by the Employees’ Pension Plan was $661,942. The remuneration covered by the plan is salary.
Effective January 1, 1998, the Trust implemented a defined contribution plan available to all regular employees having one or more years of continuous service. Contributions are at the discretion of the Trustees of the Trust. The amounts contributed to this Plan on behalf of Messrs. Thomas and Peterson are included in the Summary Compensation Table. During 2004, the Trust contributed an aggregate of $37,347 on behalf of all employees, including Messrs. Thomas and Peterson.
13
Trustee Compensation
The Chairman of the Trustees receives the sum of $4,000 per year as compensation for his services, and each of the other two Trustees receives the sum of $2,000 per year for their services.
Employment Agreements
The Trust is not a party to any employment agreements with any of its Named Executive Officers. There is no compensation plan or arrangement with respect to any individual named in the Summary Compensation 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 from a change in the individual’s responsibilities following a change in control of Texas Pacific.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters.
The Trust does not maintain any compensation plans (or individual compensation arrangements) under which equity securities are authorized for issuance.
(a) Security Ownership of Certain Beneficial Owners. The following table sets forth information as to all persons known to the Trust to be the beneficial owner of more than 5% of the Trust’s voting securities (Certificates of Proprietary Interest and Sub-share Certificates). The Certificates of Proprietary Interest and Sub-share Certificates 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.
Name and Address
| Number of
Securities
Beneficially Owned
| Type of
Securities
| Percent
of Class
|
|---|
Mercury Real Estate Advisors L.L.C
100 Field Point Road
Greenwich, CT 06830 | | | 130,650 | | | Sub-share
certificates | | | | 5.9 | % |
| | | | | | | | | | | |
| | | | | |
(1) The information set forth herein with respect to the securities beneficially owned by Mercury Real Estate Advisors L.L.C. (“Mercury”) is based on a Schedule 13G filed by Mercury, dated January 6, 2005. The Schedule 13G indicates that it is a joint filing on behalf of Mercury and Messrs. David R. Jarvis and Malcolm F. MacLean IV. The Schedule 13G indicates that Mercury is an investment advisor and that the shares reported in the Schedule 13G are held by certain entities of which Mercury is the investment advisor. The Schedule 13G further indicates that Messrs. Jarvis and MacLean are the managing members of Mercury. The Schedule 13G states that Mercury, Mr. Jarvis and Mr. MacLean have shared voting and dispositive power with respect to all of the Sub-shares reported. The address of Messrs. Jarvis and MacLean is the same as the address of Mercury.
14
(b) Security Ownership of Management: The following table sets forth information as to equity securities (Certificates of Proprietary Interest and Sub-share Certificates) beneficially owned directly or indirectly by all Trustees, naming them, and by all Trustees and executive officers of the registrant, as a group:
Title and Class (1)
| Name of
Beneficial Owner
| Amount and Nature
of Ownership
on January 31, 2005
| Percent
of Class
|
|---|
| Sub-share certificates: | Maurice Meyer III | 14,950(2) | * |
| Sub-share certificates: | Joe R. Clark | 500 | * |
| Sub-share certificates: | John R. Norris III | 200 | * |
| Sub-share certificates: | Roy Thomas | 100 | * |
| Sub-share certificates: | David M. Peterson | -- | -- |
| Sub-share certificates: | All Trustees and Officers as a Group | 15,750 | .72% |
___________________________
*Indicates ownership of less than 1% of the class.
| (1) | The Certificates of Proprietary Interest and Sub-share Certificates 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. The figures set forth in the table represent Sub-share certificates. On January 31, 2005, no trustee or executive officer was the beneficial owner, directly or indirectly, of any Certificates of Proprietary Interest. |
| (2) | Does not include 2,300 Sub-shares owned by the wife of Mr. Meyer in which Mr. Meyer disclaims any beneficial ownership. |
(c) Changes in Control. Texas Pacific has no knowledge of any arrangement that may result in any change of control of the Trust.
Item 13: Certain Relationships and Related Transactions.
(a) Transactions 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 security holder of Texas Pacific or any member of the immediate family of the foregoing persons.
(b) Certain Business Relationships. No relationships exist with any 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 that are required to be disclosed under this paragraph.
15
(d) Transactions with Promoters. Not applicable.
Item 14: Principal Accountant Fees and Services.
All professional services rendered by KPMG LLP (“KPMG”) and Lane Gorman Trubitt L.L.P. (“Lane Gorman Trubitt”) during 2004 and 2003 were furnished at customary rates. A summary of the fees which KPMG and Lane Gorman Trubitt billed the Trust for services provided in 2004 and 2003 is set forth below:
Audit Fees. KPMG billed the Trust approximately $31,755 in 2004 and $67,300 in 2003, respectively, in connection with its audits of the financial statements of the Trust in those years and its review of financial statements included in the Trust’s quarterly reports on Form 10-Q in 2003 and the first two quarters of 2004. Lane Gorman Trubitt billed the Trust approximately $50,000 in 2004 in connection with its audits of the financial statements and internal controls over financial reporting of the Trust in 2004 and its review of financial statements included in the Trust’s quarterly report on Form 10-Q for the third quarter of 2004.
Audit-Related Fees. KPMG and Lane Gorman Trubitt did not bill the Trust any amount for audit-related services in either 2004 or 2003 not included in “Audit Fees”, above.
Tax Fees. KPMG billed the Trust approximately $12,300 in 2004 and $12,300 in 2003, respectively, in connection with the preparation and review of the Trust’s Federal income tax filings.
Other Fees. Neither KPMG nor Lane Gorman Trubitt billed the Trust any other fees in either 2004 or 2003.
The Audit Committee has established a policy requiring approval by it of all fees for audit and non-audit services to be provided by the Trust’s independent accountants, prior to commencement of such services. Consideration and approval of fees generally occurs at the Committee’s regularly scheduled meetings or, to the extent that such fees may relate to other matters to be considered at special meetings, at those special meetings.
None of the fees described above under the captions “Audit-Related Fees,” “Tax Fees” and “Other Fees” were approved by the Committee pursuant to the “de minimis” exception set forth in Rule 2-01(c)(7)(i)(C) under SEC Regulation S-X.
PART IV
Item 15: Exhibits, Financial Statement Schedules.
(a) Financial Statements.
The following financial statements are filed as a part of this Report on Form 10-K and appear on pages F-1 through F-16 hereof:
Report of Lane Gorman Trubitt L.L.P.
16
Report of KPMG LLP
Balance Sheets - December 31, 2004 and 2003
Statements of Income – Years Ended December 31, 2004, 2003 and 2002
Statements of Net Proceeds from All Sources – Years Ended December 31, 2004, 2003 and 2002
Statements of Cash Flows – Years Ended December 31, 2004, 2003 and 2002
Notes to Financial Statements
All schedules have been omitted because the required information is contained in the financial statements or related notes, or is not applicable or immaterial.
(b) Exhibits.
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report on Form 10-K.
(c) Not applicable.
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, on the 16th day of March, 2005.
| | | By:/s/ Roy Thomas
Roy Thomas,
General Agent, Chief Executive
Officer and Secretary |
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 indicated on the 16th day of March, 2005.
Signature
| Title(s)
|
|---|
/s/ Roy Thomas
| General Agent, Chief Executive Officer
and Secretary (Principal Executive Officer) |
| Roy Thomas | |
| |
/s/ David M. Peterson
| Assistant General Agent and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer) |
| David M. Peterson | |
| |
/s/ Maurice Meyer III
| Chairman of the Trustees |
| Maurice Meyer III |
| |
/s/ Joe R. Clark
| Trustee |
| Joe R. Clark |
| |
/s/ John R. Norris III
| Trustee |
| John R. Norris III |
18
Item 15(a): Financial Statements
Table of Contents
| Page |
|---|
Report of Lane Gorman Trubitt L.L.P |
F-1 |
| Report of KPMG LLP | F-3 |
| Balance Sheets - December 31, 2004 and 2003 | F-4 |
| Statements of Income - Years Ended December 31, 2004, 2003 and 2002 | F-5 |
Statements of Net Proceeds From All Sources - Years Ended
December 31, 2004, 2003 and 2002 | F-6 |
| Statements of Cash Flows - Years Ended December 31, 2004, 2003 and 2002 | F-7 |
| Notes to Financial Statements | F-8 |
All schedules have been omitted because the required information is contained in the financial statements or related notes, or is not applicable or immaterial.
19
Report of Independent Registered Public Accounting Firm
To the Trustees and Certificate Holders
Texas Pacific Land Trust
We have audited the accompanying balance sheet of Texas Pacific Land Trust (the Trust) as of December 31, 2004 and the related statements of income, net proceeds from all sources, and cash flows for the year ended December 31, 2004. We have also audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that the Trust maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Trust’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Trust’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A trust’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A trust’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the trust; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the trust are being made only in accordance with authorizations of management and trustees of the trust; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the trust’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
F-1
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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, 2004 and the results of its operations and its cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that the Trust maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established inInternal Control – Integrated Frameworkissued by COSO. Furthermore, in our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control – Integrated Framework issued by COSO.
/s/ Lane Gorman Trubitt, L.L.P.
Dallas, Texas
January 26, 2005
F-2
Report of Independent Registered Public Accounting Firm
The Trustees and Certificate Holders
Texas Pacific Land Trust:
We have audited the accompanying balance sheet of Texas Pacific Land Trust (the Trust) as of December 31, 2003, and the related statements of income, net proceeds from all sources, and cash flows for each of the years in the two-year period ended December 31, 2003. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 2003, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Dallas, Texas
January 23, 2004
F-3
TEXAS PACIFIC LAND TRUST
BALANCE SHEETS
December 31, 2004 and 2003
| ASSETS | 2004
| 2003
|
|---|
| Cash | | | $ | 342,945 | | $ | 163,250 | |
| Temporary cash investments - at cost which approximates fair value | | | | 5,600,000 | | | 4,350,000 | |
Notes receivable for land sales ($1,310,899 due in 2005 and
$731,181 due in 2004) (note 1) | | | | 22,251,684 | | | 10,501,601 | |
| Prepaid insurance | | | | 100,859 | | | 57,423 | |
| Other assets | | | | 1,211,287 | | | 929,317 | |
| Prepaid Federal income taxes | | | | 42,870 | | | -- | |
| Real estate acquired through foreclosure (note 3) | | | | 1,522,824 | | | 2,238,536 | |
| Water wells, leasehold improvements, furniture, and equipment - | | |
| at cost less accumulated depreciation | | | | 76,709 | | | 81,773 | |
| Property, no value assigned (note 1): | | | | | | | | |
| Land (surface rights) situated in twenty counties in Texas - | | |
| 986,101 acres in 2004 and 996,638 acres in 2003 | | | | -- | | | -- | |
| 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 | | | | -- | | | -- | |
|
| |
| |
| Total assets | | | $ | 31,149,178 | | $ | 18,321,900 | |
|
| |
| |
| LIABILITIES AND CAPITAL | | |
Accounts payable and other liabilities (note 1) | | |
$ |
562,855 | |
$ |
31,434 | |
| Federal income taxes | | | | -- | | | 205,562 | |
| Other taxes | | | | 43,421 | | | 34,521 | |
| Deferred taxes (note 5) | | | | 7,837,643 | | | 4,059,410 | |
|
| |
| |
| Total liabilities | | | | 8,443,919 | | | 4,330,927 | |
|
| |
| |
| Capital (notes 1 and 6): | | |
Certificates of Proprietary Interest, par value $100 each;
Outstanding 0 Certificates | | | |
-- | | |
-- | |
| Sub-share Certificates in Certificates of Proprietary Interest, | | |
| par value $.16 2/3 each; outstanding 2,194,275 Sub-shares | | |
| in 2004 and 2,248,375 Sub-shares in 2003 | | | | -- | | | -- | |
| Net proceeds from all sources | | | | 22,705,259 | | | 13,990,973 | |
|
| |
| |
| Total capital | | | | 22,705,259 | | | 13,990,973 | |
|
| |
| |
| Total liabilities and capital | | | $ | 31,149,178 | | $ | 18,321,900 | |
|
| |
| |
F-4
TEXAS PACIFIC LAND TRUST
STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
| 2004
| 2003
| 2002
|
|---|
| Income: | | | | | | | | | | | |
| Oil and gas royalties | | | $ | 6,534,455 | | $ | 5,411,681 | | $ | 3,710,409 | |
| Grazing lease rentals | | | | 244,103 | | | 477,664 | | | 485,782 | |
| Land sales | | | | 20,277,226 | | | 1,629,191 | | | 3,050,784 | |
| Interest | | | | 1,138,307 | | | 972,064 | | | 979,948 | |
| Easements and sundry income | | | | 946,519 | | | 1,462,729 | | | 895,175 | |
|
| |
| |
| |
| | | | | 29,140,610 | | | 9,953,329 | | | 9,122,098 | |
|
| |
| |
| |
| Expenses: | | |
| Taxes, other than Federal income taxes | | | | 603,301 | | | 563,621 | | | 480,575 | |
| Salaries and related employee benefits | | | | 818,757 | | | 657,475 | | | 680,889 | |
| General expense, supplies, and travel | | | | 442,646 | | | 405,613 | | | 445,148 | |
| Basis in real estate sold | | | | 715,712 | | | 232,372 | | | 98,165 | |
| Legal and professional fees | | | | 741,092 | | | 390,563 | | | 265,048 | |
| Commissions to local agents | | | | 493 | | | 49,513 | | | 688 | |
| Depreciation | | | | 38,174 | | | 50,929 | | | 49,965 | |
| Trustees' compensation | | | | 8,000 | | | 8,000 | | | 8,000 | |
|
| |
| |
| |
| | | | | 3,368,175 | | | 2,358,086 | | | 2,028,478 | |
|
| |
| |
| |
| Income before Federal income taxes | | | | 25,772,435 | | | 7,595,243 | | | 7,093,620 | |
|
| |
| |
| |
| Federal income taxes (note 5): | | |
| Current | | | | 4,581,244 | | | 2,792,133 | | | 2,008,864 | |
| Deferred | | | | 3,778,233 | | | (527,041 | ) | | 183,970 | |
|
| |
| |
| |
| | | | | 8,359,477 | | | 2,265,092 | | | 2,192,834 | |
|
| |
| |
| |
| Net income | | | $ | 17,412,958 | | $ | 5,330,151 | | $ | 4,900,786 | |
|
| |
| |
| |
| Net income per Sub-share Certificate | | | $ | 7.89 | | $ | 2.34 | | $ | 2.09 | |
|
| |
| |
| |
See accompanying notes to financial statements.
F-5
TEXAS PACIFIC LAND TRUST
STATEMENTS OF NET PROCEEDS FROM ALL SOURCES
Years Ended December 31, 2004, 2003 and 2002
| 2004
| 2003
| 2002
|
|---|
| Balance at beginning of year | | | $ | 13,990,973 | | $ | 13,983,119 | | $ | 13,197,642 | |
| Add: Net income for year | | | | 17,412,958 | | | 5,330,151 | | | 4,900,786 | |
|
| |
| |
| |
| | | | | 31,403,931 | | | 19,313,270 | | | 18,098,428 | |
|
| |
| |
| |
| Deduct: | | |
| Cost of Sub-share Certificates in Certificates | | |
| of Proprietary Interest purchased and | | |
| cancelled - 54,100 Sub-shares in 2004, | | |
| 73,612 Sub-shares in 2003 and | | |
| 81,006 Sub-shares in 2002 | | | | 3,737,308 | | | 3,604,427 | | | 3,158,314 | |
Dividends paid - per Certificate of
Proprietary Interest - $0 in 2004, 2003 and 2002;
per Sub-share Certificate - $2.25 in 2004,
$0.75 in 2003 and $0.40 in 2002 | | | | 4,961,364 | | | 1,717,870 | | | 956,995 | |
|
| |
| |
| |
| | | | | 8,698,672 | | | 5,322,297 | | | 4,115,309 | |
|
| |
| |
| |
| Balance at end of year | | | $ | 22,705,259 | | $ | 13,990,973 | | $ | 13,983,119 | |
|
| |
| |
| |
See accompanying notes to financial statements.
F-6
TEXAS PACIFIC LAND TRUST
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
| 2004
| 2003
| 2002
|
|---|
| Cash flows from operating activities: | | | | | | | | | | | |
| Net income | | | $ | 17,412,958 | | $ | 5,330,151 | | $ | 4,900,786 | |
| Adjustments to reconcile net income to net | | |
| cash provided by operating activities: | | |
| Depreciation | | | | 38,174 | | | 50,929 | | | 49,965 | |
| Deferred taxes | | | | 3,778,233 | | | (527,041 | ) | | 183,970 | |
| Basis in real estate sold | | | | 715,712 | | | 232,372 | | | 98,165 | |
| Changes in assets and liabilities: | | |
| New notes receivable from land sales | | | | (14,992,021 | ) | | (1,000,049 | ) | | (2,023,413 | ) |
| Payments received on notes receivable | | | | 3,241,938 | | | 2,422,446 | | | 1,500,724 | |
| Prepaid insurance and other assets | | | | (325,406 | ) | | (96,567 | ) | | (76,330 | ) |
| Accounts payable and other liabilities | | | | 531,421 | | | 21,314 | | | 2,583 | |
| Federal income and other taxes payable | | | | (239,532 | ) | | 84,466 | | | 284,764 | |
|
| |
| |
| |
| Net cash provided by operating | | |
| activities | | | | 10,161,477 | | | 6,518,021 | | | 4,921,214 | |
|
| |
| |
| |
| Cash flows from investing activities: | | |
Additions to water wells, leasehold
improvements, furniture, and equipment | | | | (33,110 | ) | | (30,220 | ) | | (43,224 | ) |
|
| |
| |
| |
| Net cash used in investing activities | | | | (33,110 | ) | | (30,220 | ) | | (43,224 | ) |
Cash flows from financing activities: | | |
Purchase of Sub-share Certificates in
Certificates of Proprietary Interest | | | | (3,737,308 | ) | | (3,604,427 | ) | | (3,158,314 | ) |
| Dividends | | | | (4,961,364 | ) | | (1,717,870 | ) | | (956,995 | ) |
|
| |
| |
| |
| Net cash used in financing activities | | | | (8,698,672 | ) | | (5,322,297 | ) | | (4,115,309 | ) |
|
| |
| |
| |
| Net increase in cash and | | |
| temporary cash investments | | | | 1,429,695 | | | 1,165,504 | | | 762,681 | |
Cash and temporary cash investments
at beginning of year | | | | 4,513,250 | | | 3,347,746 | | | 2,585,065 | |
|
| |
| |
| |
| Cash and temporary cash investments | | |
| at end of year | | | $ | 5,942,945 | | $ | 4,513,250 | | $ | 3,347,746 | |
|
| |
| |
| |
| Supplemental disclosure of non-cash transactions: | | |
Conversion of notes receivable and accrued
interest receivable to real estate acquired
through foreclosure (note 3) | | | $ | -- | | $ | -- | | $ | 20,022 | |
|
| |
| |
| |
See accompanying notes to financial statements.
F-7
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements
December 31, 2004, 2003 and 2002
| (1) | Summary of Significant Accounting Policies |
| | | 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 the accounting standards generally accepted in the Unites States of America 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. |
| | | Critical accounting policies in general are those that require estimates that are more difficult for management to determine or have the potential to result in materially different statements under different assumptions and conditions. Our critical accounting policies outlined below include gain recognition on land sales and valuation of notes receivable (note 1(b)) and valuation of real estate acquired through foreclosure (note 3). |
| | (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 using the full accrual method of gain recognition. 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. |
| | | Notes receivable related to land sales bear interest rates ranging from 7.0% to 11.0% as of December 31, 2004 and are secured by first lien deeds of trust on the properties sold. The weighted average interest rate is 7.46% as of December 31, 2004. The annual installments on notes are generally payable over terms of 10 to 15 years. There is no penalty for prepayment of principal, and prepayments in 2004, 2003 and 2002 were $2,395,754, $1,648,383, and $651,178, respectively. The interest rates on notes receivable are considered |
F-8
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| | | comparable with current rates on similar land sales and, accordingly, the carrying value of such notes receivable approximates fair value. Management of the Trust monitors delinquencies to assess the propriety of the carrying value of its notes receivable. At the point in time that notes receivable become delinquent, management reviews the operations information of the debtor and the estimated fair value of the collateral held as security to determine whether an allowance for losses is required. There was no allowance for uncollectible accounts at December 31, 2004, 2003, or 2002. One customer represented approximately 64% and 37% and another represented approximately 15% and 11% of the Trust’s notes receivable balance at December 31, 2004 and 2003, respectively. |
| | | The maturities of notes receivable for each of the five years subsequent to December 31, 2004 are: |
| Year ending December 31: | |
|---|
| 2005 | | | $ | 1,310,899 | |
| 2006 | | | | 1,414,598 | |
| 2007 | | | | 1,478,617 | |
| 2008 | | | | 1,575,223 | |
| 2009 and thereafter | | | | 16,472,347 | |
|
| |
| | | | $ | 22,251,684 | |
|
| |
| | | As of December 31, 2004, 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 received income in 2004 of $330,496 due to settlement of claims for unpaid oil and gas royalties. The Trust received income in 2003 of $264,578 for oil and gas royalties relating to past production due to an audit of an oil and gas lease and $655,921 sundry income due to a settlement of claims on three oil and gas leases. The Trust’s oil and gas royalty interest, and easement and sundry income are recorded on the cash basis, which approximates the accrual method. Prior to 2004, grazing lease and sundry lease rentals were recorded on the cash basis which approximated the accrual method. For 2004, the Trust recorded a one-time charge in the amount of $228,418 to record grazing lease rentals and $73,592 to record sundry lease rentals under the accrual method of accounting. The effect of this change in accounting method was to decrease 2004 grazing and sundry lease rentals revenue by $302,010. Since the amount is deemed immaterial to the financial statements as a whole, the financial statements for prior periods have not been restated. The $302,010 is included in accounts payable and other liabilities on the balance sheet at December 31, 2004. |
F-9
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| | (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 (2,208,190 in 2004, 2,274,212 in 2003, and 2,347,467 in 2002). |
| | | Temporary cash investments at December 31, 2004 and 2003 consist primarily of overnight investments in loan participations. 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 2004, 2003 and 2002 was $4,829,676, $2,711,767, and $1,734,000, respectively. |
| | | 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. |
| | | 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) | New Accounting Standards and Pronouncements |
| | | In December 2004, the FASB issued FASB Statement No. 153, “Exchanges of Nonmonetary Assets, — An amendment of APB Opinion No. 29,” (FAS 153) which is effective for the Trust for asset-exchange transactions beginning July 1, 2005. Under APB 29, assets received in certain types of nonmonetary exchanges were permitted to be recorded at the carrying value of the assets that were exchanged (i.e., recorded on the carryover basis). As amended by FAS 153, assets received in some circumstances will have to be recorded instead at their fair values. In the past, the Trust has not engaged in a large number of nonmonetary asset exchanges for significant amounts. The Trust is evaluating the impact of FAS 153 on its financial statements for 2005. |
F-10
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| Segment information has been considered in accordance with Statement of Financial Accounting Standards (SFAS) No. 131,Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments. SFAS No. 131 utilizes the management approach as a basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The Trust’s management views its operations as one segment and believes the only significant activity is managing the land, which was conveyed to the Trust in 1888. Managing the land 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, 2004, 2003 or 2002) 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, 2004 and 2003: |
| 2004
| 2003
|
|---|
| Acres
| Book Value
| Acres
| Book Value
|
|---|
| Balance at January 1: | | | | 8,086.78 | | $ | 2,238,536 | | | 8,089.24 | | $ | 2,470,908 | |
Additions | | | | -- | | | -- | | | -- | | | -- | |
| Sales | | | | (1,514.86 | ) | | (715,712 | ) | | (2.46 | ) | | (232,372 | ) |
|
| |
| |
| |
| |
| Balance at December 31: | | | | 6,571.92 | | $ | 1,522,824 | | | 8,086.78 | | $ | 2,238,536 | |
|
| |
| |
| |
| |
F-11
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| (4) | Employee Benefit Plans |
| The Trust has a defined contribution plan available to all regular employees having one or more years of continuous service. Contributions are at the discretion of the Trustees of the Trust. The Trust contributed $37,346, $35,336 and $33,904 in 2004, 2003, and 2002, respectively. |
| 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 services expected in the future. Plan assets consist primarily of investments in Banc of America Common Trust Fund. |
| The following table sets forth the Plan’s changes in benefit obligation, changes in fair value of plan assets, and funded status as of December 31, 2004 and 2003 using a measurement date of December 21, 2004: |
| 2004
| 2003
|
|---|
| Change in projected benefits obligation: | | | | | | | | |
| Projected benefit obligation at beginning of year | | | $ | 2,012,135 | | $ | 1,789,040 | |
| Service cost | | | | 70,500 | | | 62,488 | |
| Interest cost | | | | 124,316 | | | 113,840 | |
| Actuarial loss | | | | 98,779 | | | 73,013 | |
| Benefits paid | | | | (97,649 | ) | | (91,031 | ) |
| Plan amendment | | | | -- | | | 64,785 | |
|
| |
| |
| Projected benefit obligation at end of year | | | $ | 2,208,081 | | $ | 2,012,135 | |
|
| |
| |
| Change in plan assets: | | |
| Fair value of plan assets at beginning of year | | | $ | 1,588,017 | | $ | 1,391,723 | |
| Actual return on plan assets | | | | 126,715 | | | 199,128 | |
| Contributions by employer | | | | 200,000 | | | 88,197 | |
| Benefits paid | | | | (97,649 | ) | | (91,031 | ) |
|
| |
| |
| Fair value of plan assets at end of year | | | $ | 1,817,083 | | $ | 1,588,017 | |
|
| |
| |
| Funded (unfunded) status | | | $ | (390,998) | | $ | (424,118 | ) |
| Unrecognized net actuarial loss | | | | 413,714 | | | 348,516 | |
| Unrecognized prior service cost | | | | 112,811 | | | 130,598 | |
|
| |
| |
| Prepaid benefit cost | | | $ | 135,527 | | $ | 54,996 | |
|
| |
| |
F-12
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
Amounts recognized in the balance sheet consist of:
| 2004
| 2003
|
|---|
| Prepaid benefit cost | | | $ | 135,527 | | $ | 54,996 | |
| Accrued benefit cost | | | | -- | | | -- | |
| Intangible asset | | | | -- | | | -- | |
| Accumulated other comprehensive income | | | | -- | | | -- | |
|
| |
| |
| Net amounts recognized | | | $ | 135,527 | | $ | 54,996 | |
|
| |
| |
The accumulated benefit obligation of the Plan was $1,711,334 and $1,572,500 as of December 31, 2004 and 2003, respectively.
Net periodic benefit costs for the years ended December 31, 2004, 2003 and 2002 include the following components:
| 2004
| 2003
| 2002
|
|---|
| Components of net periodic benefit costs | | | | | | | | | | | |
| (benefits): | | |
| Service cost | | | $ | 70,500 | | $ | 62,488 | | $ | 53,232 | |
| Interest cost | | | | 124,316 | | | 113,840 | | | 111,516 | |
| Expected return on plan assets | | | | (107,768 | ) | | (94,276 | ) | | (107,921 | ) |
| Amortization of the unrecognized | | |
| transition assets | | | | -- | | | -- | | | (23,211 | ) |
| Amortization of unrecognized gains | | | | 14,634 | | | 18,579 | | | -- | |
| Amortization of prior service cost | | | | 17,787 | | | 13,466 | | | 13,466 | |
| Termination benefits | | | | -- | | | -- | | | -- | |
|
| |
| |
| |
| Net periodic benefit costs | | | $ | 119,469 | | $ | 114,097 | | $ | 47,082 | |
|
| |
| |
| |
| 2004
| 2003
| 2002
|
|---|
| Weighted average assumptions used to | | | | | | | | | | | |
| determine benefit obligations as of | | |
| December 31: | | |
| Discount rate | | | | 6.00 | % | | 6.25 | % | | 6.50 | % |
| Rate of compensation increase | | | | 7.29 | | | 7.29 | | | 7.29 | |
Weighted average assumptions used to
determine benefit costs for the years
ended December 31: | | | | | | | | | | | |
| | |
| Discount rate | | | | 6.25 | % | | 6.50 | % | | 7.25 | % |
| Expected return on plan assets | | | | 7.00 | | | 7.00 | | | 7.00 | |
| Rate of compensation increase | | | | 7.29 | | | 7.29 | | | 7.79 | |
F-13
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| | The Plan’s Asset allocations at December 31, 2004, and 2003 by asset category are as follows: |
| Percentage of Plan
Assets at December 31
|
|---|
| 2004
| 2003
|
|---|
| Asset Category | | | | | | | | |
| Equity securities | | | | 31 | % | | 32 | % |
| Debt securities | | | | 57 | | | 60 | |
| Other (cash) | | | | 12 | | | 8 | |
|
| |
| |
| Total | | | | 100 | % | | 100 | % |
|
| |
| |
| The Plan has a formal investment policy statement. The Plan’s investment objective is balanced income, with a moderate risk tolerance. This objective emphasizes current income through a 60% to 80% allocation to fixed income securities, complemented by a secondary consideration for capital appreciation through an equity allocation in the range of 20% to 40%. Diversification and liquidity are achieved through investment in mutual funds rather than individual securities. The asset allocation is reviewed annually with respect to the target allocations and rebalancing adjustments and/or target allocation changes are made as appropriate. The Trust’s current funding policy is to maintain the Plan’s fully funded status on an ERISA minimum funding basis. |
| The expected return on plan assets assumption of 7% was selected by the Trust based on historical real rates of return for the current asset mix and an assumption with respect to future inflation. The rate was determined based on a long-term allocation of about two-thirds fixed income and one-third equity securities; historical real rates of return of about 2.5% and 8.5% for fixed income and equity securities, respectively; and assuming a long-term inflation rate of 2.5%. |
| The required minimum contribution under ERISA is expected to be zero for 2005; however, the Trust may make some discretionary contributions to the Plan, the amounts of which have not yet been determined. |
| (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 income before Federal income taxes as a result of the following: |
| 2004
| 2003
| 2002
|
|---|
| Computed tax expense at the statutory rate | | | $ | 8,762,628 | | $ | 2,582,383 | | $ | 2,411,831 | |
| Reduction in income taxes resulting from: | | |
| Statutory depletion | | | | (354,514 | ) | | (297,114 | ) | | (208,540 | ) |
| Other, net | | | | (48,637 | ) | | (20,177 | ) | | (10,457 | ) |
|
| |
| |
| |
| | | | $ | 8,359,477 | | $ | 2,265,092 | | $ | 2,192,834 | |
|
| |
| |
| |
F-14
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities at December 31, 2004 and 2003 are as follows: |
| 2004
| | 2003
|
|---|
| Basis differences in real estate acquired through foreclosure | | | $ | 451,242 | | | | | $ | 657,854 | |
| Deferred installment revenue on land sales for tax purposes | | | | 7,386,401 | | | | | | 3,401,556 | |
|
| | |
| |
| Total deferred tax liability | | | $ | 7,837,643 | | | | | $ | 4,059,410 | |
|
| | |
| |
| 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 2004 and 2003. |
| 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. |
| (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, 2004, 2003 and 2002, respectively: oil (in barrels) – 113,794, 120,883, and 103,221, and gas (in thousands of cubic feet) –528,614, 410,514, and 478,708. Reserves related to the Trust’s royalty interests are not presented because the information is unavailable. |
F-15
TEXAS PACIFIC LAND TRUST
Notes to Financial Statements (continued)
December 31, 2004, 2003 and 2002
| (8) | Selected Quarterly Financial Data (Unaudited) |
| The following tables present unaudited financial data of the Trust for each quarter of 2004 and 2003: |
| Quarter ended
|
|---|
| December 31,
2004
| September 30,
2004
| June 30,
2004
| March 31,
2004
|
|---|
| Income | | | $ | 2,672,496 | | $ | 21,630,083 | | $ | 2,600,247 | | $ | 2,237,784 | |
|
| |
| |
| |
| |
| Income before Federal income taxes | | | $ | 1,819,609 | | $ | 20,235,081 | | $ | 2,069,821 | | $ | 1,647,924 | |
|
| |
| |
| |
| |
| Net income | | | $ | 1,331,302 | | $ | 13,446,147 | | $ | 1,457,736 | | $ | 1,177,773 | |
|
| |
| |
| |
| |
| Net income per Sub-share Certificate | | | | $0.61 | | | $6.10 | | | $0.65 | | | $0.53 | |
|
| |
| |
| |
| |
| Quarter ended
|
|---|
| December 31,
2003
| September 30,
2003
| June 30,
2003
| March 31,
2003
|
|---|
| Income | | | $ | 2,899,080 | | $ | 2,654,935 | | $ | 2,584,117 | | $ | 1,815,197 | |
|
| |
| |
| |
| |
| Income before Federal income taxes | | | $ | 2,176,801 | | $ | 2,140,863 | | $ | 2,040,696 | | $ | 1,236,883 | |
|
| |
| |
| |
| |
| Net income | | | $ | 1,527,600 | | $ | 1,506,993 | | $ | 1,419,138 | | $ | 876,420 | |
|
| |
| |
| |
| |
| Net income per Sub-share Certificate | | | | $0.68 | | | $0.66 | | | $0.62 | | | $0.38 | |
|
| |
| |
| |
| |
F-16
INDEX OF EXHIBITS
| 3.1 | | Texas Pacific Land Trust, Declaration of Trust, dated February 1, 1888, by Charles J. Canda, Simeon J. Drake, and William Strauss, Trustees (incorporated herein by reference to Exhibit 3.1 to the Trust's Annual Report on Form 10-K for the year ended December 31, 2002). |
| 10.1 | | Option Agreement, dated December 7, 2004, between the Trust and Vaquero GP, LLC. |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act. |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act. |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
