ITEM 1. BUSINESS.
Toreador Royalty Corporation, a Delaware corporation (the "Company" or "Toreador"), is engaged in oil and gas exploration, development and production activities. The Company conducts its business primarily through its ownership of perpetual oil and gas mineral and royalty interests in approximately 870,000 gross (530,000 net) acres in four geologic provinces located in the Texas Panhandle and West Texas. The properties and mineral interests owned by the Company are set forth under Item 2

ITEM 2. PROPERTIES.
NORTHERN RANCH MINERALS
SOUTHERN DALHART BASIN. The southern Dalhart Basin, where Toreador owns mineral interests under approximately 400,000 gross acres located in Oldham and Hartley Counties, Texas, is a moderate depth depression that formed in early Pennsylvanian time. Commercial oil has been established in Pennsylvanian and Permian age reservoirs in this basin. Porous reservoir rocks are present in granite washes, carbonate banks and dolomites, which provide multiple drilling targets. In the central part of the basin, source rocks are buried at depths sufficient to generate oil. Wrench fault tectonism across the basin formed early structural features capable of trapping later migrating oil. Oil accumulations in several formations between 4,000 feet and 8,000 feet have been found through exploratory drilling. Most of this drilling has been concentrated in east-central Oldham County, Texas. There have been relatively few exploratory wells in wide expanses of the basin west of the main producing area and many of these were drilled prior to 1970. Much of this lightly explored area includes Toreador acreage, a majority of which is located on the west flank of the basin updip from the main concentration of production to the east. Most of the reserves in the basin have been discovered in granite wash reservoirs trapped on fault associated structural closures.
Oil accumulations in the basin have been found on structural highs. Therefore, defining structural uplifts is the prime objective in exploring for new reserves in the southern Dalhart Basin. In recent years, the oil and gas industry's increasingly widespread use of 3-D seismic technology has enhanced its ability to find and delineate structural prospects. Toreador, with other parties, introduced 3-D seismic exploration to the southern Dalhart Basin in July 1993 with an 18,000 acre project on the Company's acreage. The three wells drilled on this project, while dry, proved that porous reservoirs exist within the area and that 3-D seismic data could correctly image the structures.
In April 1994, Toreador acquired an oil and gas lease on the 95,000 acre Fulton Ranch under which it already holds 75% of the mineral rights. Toreador has approximately 300 miles of 2-D seismic coverage on the ranch, and using this data, has generated several prospects and geologic leads which justify more detailed 3-D seismic surveys. The P.D. Walker Field, under which Toreador has a 15% royalty interest, is also located on the ranch, but is not included in this lease.
In the third quarter of 1995, Toreador acquired in the aggregate an 18.93% working interest in the four-well Proctor Ranch Field located in Hartley County, Texas. In addition to this acquisition, Toreador holds an 18.75% royalty interest in this property. Under the terms of the agreement, Toreador invested $90,600, adding an estimated 21,100 net Bbls to its reserves at an acquisition cost of $4.29 per Bbl.
In August 1996, Toreador entered into two exploratory agreements covering in excess of 50,000 acres in the Dalhart Basin. The first was an 8,935 acre option-farmout agreement, being a portion of Toreador's 47,600 acre lease on the Smith (formerly Proctor) Ranch located in Oldham and Hartley Counties, Texas. This acreage, which had an earlier 3-D seismic study conducted on it, was divided into four blocks. Under the terms of the agreement, the operator elected to drill a well earning a 75% working interest in the initial prospect. This well, in which Toreador was carried for a 25% working interest, resulted in a dry hole, and the operator allowed its option on this 8,338 acres to expire in January 1997. Toreador finalized a second agreement in December 1996, with the same operator covering a contiguous 41,900 acre block, under the terms of which the operator has up to 18 months to conduct 3-D geophysical surveys. Toreador is carried for a 25% working interest through the geophysical phase of the project and also has a 15% royalty interest resulting from its mineral ownership.
SOUTHERN RANCH MINERALS
PALO DURO BASIN. The Palo Duro Basin, where Toreador owns mineral interests under approximately 195,000 gross acres located in Motley and Cottle Counties, Texas, is a moderate depth depression between the Matador Arch on the south and the Amarillo uplift complex to the north. Limited exploration to date has resulted in discovery of three Canyon age reef fields. In the past four years, several companies have conducted 3-D seismic surveys along these reef trends.
MATADOR ARCH. The Matador Arch, where Toreador owns mineral interests under approximately 90,000 gross acres, is a prominent east-west structural positive traversing North Texas and southern Oklahoma. It is bounded on the north and south by large vertical faults that have an orientation characteristic of regional scale wrench faulting. Between the faults, basement blocks have been uplifted and folded into a complex of structural highs that fostered reef growth from Middle Pennsylvanian age into the Permian Wolfcamp section.
Toreador's acreage covers part of the Matador Arch trending through Motley County, Texas. Nearby reef production in the Roaring Springs Fields complex has recovered approximately nine million Bbls of oil from a depth of 4,200 feet. For the period of June 1994 through March 1997, Toreador has participated in nine Wolfcamp test wells of which five have been successfully completed.
In October, 1995, Toreador acquired an additional 12.5% working interest in the five-well Matador Field located in Motley County, Texas. Prior to this acquisition, Toreador held a 25% working interest as well as a 15% royalty interest in this property. Under the terms of the agreement, Toreador invested $225,700, adding an estimated 46,100 net Bbls to its reserves at an acquisition cost of $4.90 per Bbl.
In March 1997 Toreador entered into an exploration agreement with Apache Corporation covering approximately 22,500 acres located on the Matador Arch north and east of the Roaring Springs Fields complex. Apache serves as the operator in this joint venture and has a 56.25% working interest in the acreage. Toreador has retained a 43.75% working interest. In addition, the Company has a 15% royalty interest in approximately 86% of the acreage through its 75% mineral ownership. Seismic data acquisition on the first phase of the project is expected to begin in May 1997, covering approximately 9,500 acres. The five well Matador Field is included in this initial survey. If positive interpretation is obtained from the survey, the first well on the project could be drilled by the second half of 1997.
EASTERN SHELF. The Eastern Shelf of the Midland Basin, where Toreador owns mineral interests under approximately 185,000 gross acres located primarily in Dickens County, Texas, is prospective for shallow Permian age oil accumulations in the Tannehill Sand. Five Tannehill fields have been discovered on Toreador minerals since 1986, the largest of which consists of eight wells. The 16 existing wells averaged daily production of 13 Bbls of oil per well in December 1996.
In 1994, Toreador entered into an option agreement with an industry partner covering approximately 11,000 acres on the Pitchfork Ranch located in Dickens County. Tannehill production near this block has recovered over 2.5 million Bbls of oil from a cluster of three fields located directly to the west of this block and over 1 million Bbls of oil from another field located two miles to the east. The industry partner conducted a 3-D seismic survey across this acreage block during 1995 and Toreador was carried for a 25% working interest through the seismic acquisition, processing and interpretation phase of the project. Following the interpretative phase of the project, the operator selected 2,000 acres for lease. Toreador also owns a 46.9% mineral interest under 1,800 acres. The first well was drilled on this acreage in March 1996, and was abandoned as a dry hole. A second well, in which Toreador elected not to participate as a working interest partner, was also dry. In early 1997, the operator indicated plans to drill a third well offsetting Toreador acreage, in which Toreador also elected not to participate as a working interest partner.
In September 1996, Toreador entered into an exploration agreement with Louis Dreyfus Natural Gas Corporation ("LDNG") covering approximately 37,000 acres located on the Eastern Shelf of the Midland Basin, including all of Toreador's mineral interest under the Pitchfork Ranch that is not currently held by production nor under lease or option. Under the terms of the agreement, Toreador is carried for a 10.5% working interest through
the 3-D seismic acquisition, processing and interpretation phases of the project. LDNG, as operator, plans to initially conduct a 20,000 acre 3-D survey, tentatively scheduled to begin in the first quarter of 1997. As a result of its 46.9% mineral ownership covering a portion of the Pitchfork Ranch, Toreador will also have a 9.4% royalty interest in any leases selected by LDNG on Toreador acreage. The Toreador acreage currently contains five commercial oil fields, all of which produce from Tannehill (Permian) sands above 5,000 feet. LDNG has indicated that they also plan to evaluate deeper objectives with its geophysical program.
NATURE OF PROPERTY INTEREST
On the Northern and Southern Ranches, the Company generally owns fee interests in the minerals that include rights to receive portions of lease bonuses, delay rentals and royalties, but generally not the executive rights -- the rights to sign leases -- which are typically held by surface owners. Therefore, the Company must rely on the owners of the executive rights to execute leases of the acreage. In situations in which the Company has acquired working interests in acreage in which it has mineral rights, it has acquired those interests through the signing of leases by holders of the executive rights. The majority of the owners of executive rights work closely with the Company; however, each acts independently of the Company in deciding to execute leases.
GEOLOGIC DATABASE
Under the terms of a typical lease granted on its minerals, Toreador is entitled to receive copies of all data, including seismic lines, well logs, cores and tests. The Company has approximately 33,000 acres of 3-D seismic data and approximately 1,500 miles of 2-D seismic data relating to the Northern and Southern Ranches.
Toreador uses its database to generate specific drilling prospects and geologic leads to encourage further exploration on its mineral acreage. In particular, geologic leads based on 2-D seismic data are important in marketing large 3-D seismic surveys. The Company makes its database available to third parties interested in generating exploration projects on its acreage. Management estimates that it would be costly to duplicate this data, which is carried at no cost on its balance sheet.
OTHER PROPERTIES AND ACQUISITIONS
In 1996, a number of significant events occurred in areas where the Company owns working interests and royalty interests outside of the Company's Northern and Southern Ranch minerals. In a well located in the Welch field of Dawson County, Texas, where the Company already held a 50% working interest, the Company acquired the remaining 50% working interest and became operator. Average daily production from this well was 15 gross (12 net) Bbls of oil in 1996. In the Hrubetz (Tannehill) field waterflood, Taylor County, Texas, the Company participated with a 22.1% working interest in the drilling of a successful infill well which increased average daily unit production from 10 gross (1.6 net) Bbls of oil in June 1996 to 180 gross (29 net) Bbls of oil in October 1996. In Caddo County, Oklahoma, the Company owns approximately a 1.2% royalty interest in a gas well that was restimulated in the later part of 1996 which resulted in daily gas production increasing from an average of 667 Mcf gross (8 net) in February 1996 to over 5,300 Mcf gross (62 net) in December 1996. Cumulative gross production from this well since 1982 has been over 11 Bcf of natural gas.
Since May 1996, the Company acquired a combination of royalty and overriding royalty interests totaling approximately 0.04% and approximately a 0.25% working interest in the SACROC Unit of the Kelly-Snyder field in Scurry County, Texas. This unit is a large, tertiary CO2 (carbon dioxide) flood which averaged approximately 9,200 gross (22 net) Bbls of oil per day in December 1996. Production is on an incline as the operator continues to enhance flood performance through improved reservoir management and reducing operating costs.
From 1988 until December 31, 1996, Toreador has spent approximately $3.7 million to acquire producing, mineral and overriding royalty interests totaling 6.4 Bcfe for an acquisition cost of $0.58/Mcfe.
OIL AND GAS RESERVES
Since 1991, the Company has retained the independent petroleum consulting firm, Harlan Consulting Inc., to prepare estimates of its oil and gas reserves for the producing mineral interests owned by the Company. Utilizing current available data, these estimates of proved reserves were made using geological and engineering methods generally accepted in the petroleum industry. At December 31, 1996, the Company's net proved developed producing reserves were estimated to be 791,272 Bbls of oil and 3,052,940 Mcf of natural gas. Additional information concerning the Company's estimated proved oil and gas reserves is included in Item 8. - Financial Statements and Supplementary Data. No estimates of total proved net oil or gas results have been filed with or included in reports to any federal authority or agency.
Petroleum engineering is not an exact science and involves estimates based upon numerous factors, many of which are inherently variable and uncertain. Consequently, reserve estimates are imprecise and are subject to change as additional information becomes available. Estimates based upon short periods of production may not be as reliable as those based upon longer production histories. Further, estimates of oil and gas reserves, of necessity, are projections based on engineering data. As a result of the uncertainties inherent in the interpretation of such data, there can be no assurance that the Company's estimated oil and gas reserves will ultimately be developed. Estimates of the reserves and future net revenues involve projecting future results by estimating future events. Actual production, revenues, taxes, development expenditures and operating expenses may not occur as estimated.
VOLUMES, PRICES AND COSTS
The following table sets forth certain information regarding volumes of the Company's production of oil and natural gas, the Company's average sales price per Bbl of crude oil and average sales price per Mcf of natural gas, together with the Company's average production cost per BOE for the three years ended December 31, 1996 from producing interests:
_________________
(1) A BOE means one barrel of oil equivalent using the ratio of one barrel of oil to six Mcf of gas.
WELLS DRILLED
The following table sets forth for each of the last three years the number of net exploratory and development wells drilled by or on behalf of the Company. An exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. A development well is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. The number of wells drilled refers to the number of wells completed at any time during the respective year, regardless of when drilling was initiated; and "completion" refers to the installation of permanent equipment for the production of oil or gas, or, in the case of a dry hole, to the reporting of abandonment to the appropriate agency.
_______________
(1) A productive well is an exploratory or a development well that is not a dry hole.
(2) A dry hole is an exploratory or development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.
PRODUCING WELLS AND ACREAGE
The following table sets forth the gross and net producing oil and gas wells in which the Company owned an interest and the developed and undeveloped gross and net leasehold acreage held by the Company as of December 31, 1996. A "gross" well or acre is a well or acre in which the Company has a working interest. The number of gross wells is the total number of wells in which a working interest is owned. A "net" well or acre is deemed to exist when the sum of fractional ownership working interests and/or royalty interests in gross wells or acres equals one. The number of net wells or acres is the sum of the fractional working interests and/or royalty interests owned in gross wells or acres expressed as whole numbers and fractions thereof. A "royalty interest" is a share of production, free of expenses of production. A "working interest" is the operating interest under an oil and gas lease.
__________________________________
(1) Excludes wells or acres in which the Company owns less than a 1% working or royalty interest.
(2) Includes one multiple completion. One or more completions in the same bore holes is counted as one well.
(3) Undeveloped acreage is considered to be those leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not the acreage contains proved reserves.
PRESENT ACTIVITIES
From January 1, 1997 through March 21, 1997, the Company participated with a 25% working interest in drilling one gross (.35 net) exploratory well, which was dry. This well is located on the Company's minerals in Hartley County, Texas. This well had an objective ranging from approximately 5500 to 6000 feet. The estimated dry hole cost to the Company in this well is approximately $46,300.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject of, any legal proceedings, actual or threatened, which would have a material adverse effect on the business and affairs of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year ended December 31, 1996 to a vote of the Company's security holders, through solicitation of proxies or otherwise.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $.15625 per share, is traded in the over-the-counter market, NASDAQ trading symbol "TRGL." The table below sets forth the high and low sales prices per share for the periods indicated as reported by the NASDAQ National Market System.
The approximate number of record holders of the Common Stock as of March 17, 1997, was 570.
Dividends on the Common Stock may be declared and paid out of funds legally available when and as determined by the Company's Board of Directors. No cash dividends have been paid on the Company's Common Stock to date. Management plans to continue its policy of holding and investing corporate funds on a conservative basis.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data with respect to the Company's financial condition and results of operations for the periods indicated. The selected financial data should be read in conjunction with the financial statements and related notes set forth in Item 8 of this Part II.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under "Business and Properties" regarding estimated proved reserves, the Company's financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Any forward-looking statements herein are subject to certain risks and uncertainties inherent in petroleum exploration, development and production, including, but not limited to the risk that no commercially productive oil and gas reservoirs will be encountered; inconclusive results from 3-D seismic projects; delays or cancellation of drilling operations as a result of a variety of factors; volatility of oil and gas prices due to economic and other conditions; intense competition in the oil and gas industry; operational risks (e.g., fires, explosions, blowouts, cratering and loss of production); insurance coverage limitations and requirements; and potential liability imposed by intense governmental regulation of oil and gas production; all of which are beyond the control of the Company. Any one or more of these factors could cause actual results to differ materially from those expressed in any forward-looking statement. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements disclosed in this paragraph and otherwise in this report.
LIQUIDITY AND CAPITAL RESOURCES
Historically, most of the exploration activity on the Company's acreage has been funded and conducted by other oil companies and this activity is expected to continue. Exploration activity typically generates lease bonus and option income to the Company. If drilling is successful, the Company receives royalty income from the oil or gas production but bears none of the capital or operating costs. In order to accelerate the evaluation of its acreage as well as increase its ownership in any reserves discovered, the Company has increased and intends to further increase its level of participation in exploring its acreage by acquiring working interests. The extent to which the Company may acquire working interests will depend on the availability of outside capital and cash flow from operations. Currently, the primary sources of capital for the financing of the Company's operations are cash flow provided from revenues generated by its proportionate share in oil and natural gas sales and existing cash, including that from a private offering completed in May 1994. In addition, the Company may reinvest proceeds from option and lease bonuses by taking a working interest in 3-D seismic projects or in wells. To the extent cash flow from operations does not significantly increase and external sources of capital are limited or unavailable, the Company's ability to make the capital investment to participate in 3-D seismic surveys and increase its interest in projects on its acreage will be limited. Future funds are expected to be provided through production from existing producing properties and new producing properties that may be discovered through exploration of the Company's acreage by third parties or by the Company itself. Funds may also be provided through external financing in the form of debt or equity. There can be no assurance as to the extent and availability of these sources of funding.
The Company presently has no debt and maintains its excess cash funds in interest-bearing deposits. The Company is not aware of any demands, commitments or events which will result in its liquidity increasing or decreasing in a material way. From time to time, the Company may receive lease bonuses which cannot be anticipated, and when funds are available, the Company may elect to participate in exploratory ventures. The Company also may acquire producing oil and gas assets which could require the use of debt.
Management believes that sufficient funds are available internally to meet anticipated capital requirements for fiscal 1997.
The Company has used $527,365 of its cash reserves to purchase 208,200 shares of its Common Stock as of December 31, 1996. These purchases were made pursuant to a stock repurchase programs authorized by the Board of Directors on October 10, 1995, of up to 100,000 shares of Common Stock, and a second stock repurchase program on April 22, 1996, of up to 150,000 shares of Common Stock. As of March 17, 1997, the Company has purchased an aggregate of 112,600 shares at a purchase price of $296,738 under the second repurchase program. The repurchases of the Company's shares of Common Stock were made in unsolicited open-market purchases, at market (not premium) prices, without fixed terms and not contingent upon the tender of a fixed minimum number of shares or in response to a third party bid and otherwise in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Total revenues for 1996 were $3,114,085 compared with $1,730,658 in 1995. Revenues from oil and gas sales increased to $2,306,791 in 1996 from $1,378,390 in 1995. This 67.4% increase reflects increased oil and gas volumes from recent acquisitions, new well completions and higher oil and gas prices. The Company's net oil production rose 11% to 68,318 Bbls in 1996 from 61,537 Bbls in 1995. Net natural gas production increased 26% to 348,539 Mcf from 277,621 Mcf in 1995. On an oil equivalent basis, net production increased 17% to 126 MBOE in 1996 from 108 MBOE in 1995. Lease bonuses and delay rentals were $118,430 in 1996, down from $138,804 in 1995. Distributions from marketable securities decreased to $12,253 in 1996 from $30,358 in 1995. This 59.6% decrease reflects the Company's sale of 100% of its units in the San Juan Basin Royalty Trust which was completed in August 1996. The Company recognized pretax gains from the sale of all units in the San Juan Basin Royalty Trust of $516,867 and a $9,700 sale of other assets. In the absence of such gains, net income in 1996 would have been $340,143. Distributions from and sales of marketable securities will no longer be a source of funds in 1997 or beyond.
Reflecting lower rates, interest income from investments was $138,720 in 1996 versus $183,106 in 1995.
Total costs and expenses were $2,124,235 in 1996 as compared with $2,348,025 in 1995 representing a 9.5% decrease. The largest percentage decrease came in dry hole and abandonments, where expenses decreased 63.5% to $130,647 in 1996 versus $358,210 in 1995, reflecting the reduced number of dry holes in which in which the Company participated. Geological and geophysical expenses decreased 23.3% to $227,744 in 1996 versus $297,047 in 1995. The Company's general and administrative expenses decreased $171,085 or 15.9 % to $907,086 in 1996 from $1,078,171 in 1995, approximately $200,000 of which were incurred in connection with a proxy contest in May 1995. Lease operating expenses increased 53.8% to $585,732 in 1996 versus $380,888 in 1995, as a result of acquiring more working interest properties. In 1996 depreciation, depletion and amortization increased to $273,026 compared to $233,709 in 1995 reflecting more property owned by the Company.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 were $1,730,658 compared with $1,941,762 in 1994. Revenues from oil and gas sales increased from $1,323,129 in 1994 to $1,378,390 in 1995. This 4.2% increase reflects higher oil production from newer wells and recent acquisitions offset by lower gas prices and lower gas production. Lease bonuses and delay rentals were $138,804 in 1995, down from $396,106 in 1994. Distributions from marketable securities decreased from $51,393 in 1994 to $30,358 in 1995.
Reflecting the Company's investment of the proceeds from the private placement and partially offset by lower rates, interest income was $183,106 in 1995 versus $122,106 in 1994.
Total costs and expenses were $2,348,025 in 1995 as compared with $1,842,816 in 1994 representing a 27.4% increase. Of this increase, 38% is attributable to general and administrative expenses primarily resulting from a proxy contest, which created first-time shareholder relations expenses of $199,342 in 1995. The Company completed its participation in the evaluation of certain drilling commitments resulting in expenses from dry holes and abandonments of $358,210 in 1995 versus $125,838 in 1994, representing 46.0% of the increase in total costs and expenses. Geological and geophysical costs increased $61,328, to $297,047 from $235,719, or 12.1% of the increase in total costs and expenses. The remaining components, contributing 3.9% of the increase in total costs and expenses, are lease operating expense which increased $33,830 to $380,888 in 1995 from $347,058 in 1994, partly offset by the decline in depreciation, depletion and amortization of $13,945 to $233,709 in 1995 from $247,654 in 1994.
Net loss was $410,431 or $0.08 per share in 1995 versus net income of $125,584 or $0.02 per share in 1994. The major difference in net income stems from the increase and cost associated with dry holes and abandonments from $125,838 in 1994 to $358,210 in 1995 and increases in general and administrative expenses from $886,547 in
1994 to $1,078,171 up primarily due to costs associated with the proxy contest in connection with the 1995 Annual Meeting of Stockholders.
ACCOUNTING CHANGES
INVESTMENTS IN MARKETABLE SECURITIES
In January 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair market values and for all investments in debt securities. The Company has designated its investment in the San Juan Basin Royalty Trust as "securities available for sale." At December 31, 1996, the Company no longer owned any marketable securities in the San Juan Basin Royalty Trust. The Company sold all of its units and reported a pre-tax gain of $516,867 in 1996. At December 31, 1995, the market value of these securities was $661,501, resulting in a gross unrealized gain in the amount of $535,243 and an unrealized gain, net of tax effects, of $353,268.
ENVIRONMENTAL MATTERS
No environmental liabilities are recorded at December 31, 1996 and 1995. Additionally, the Company is not aware of a material unrecorded liability for any expected environmental costs.
CAPITAL AND EXPLORATION EXPENDITURES
In 1996, the Company's geological and geophysical expenses were $227,744, compared to $297,047 in 1995. Its expenditures on oil and gas property and equipment decreased to $893,418 from $1,048,757, reflecting decreased participation in the exploration and development activity on its mineral acreage. The Company's 1997 capital and exploratory budget, excluding any acquisitions the Company may make, could range from $500,000 to $1,000,000, depending on the timing of the drilling of wells.
In 1995, the Company's geological and geophysical expenses were $297,047, compared to $235,719 in 1994. Its expenditures on oil and gas property and equipment increased to $1,048,757 from $553,020 in 1994, reflecting its increased participation in the exploration and development activity on its mineral acreage and, to a lesser extent, acquisitions.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS 123 requires the recording or disclosure of the value of stock options or other equity instruments issued to employees. The Company adopted the disclosure provisions of SFAS 123 in the first quarter of 1996.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants and Consolidated Financial Statements are set forth on pages through of this Report and are incorporated herein.
The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes to the Financial Statements.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the Company's directors, nominees for directors and executive officers is set forth under the heading "Election of Directors" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 15, 1997, which will be filed with the Securities and Exchange Commission on or about April 18, 1997, and which is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth under the heading "Executive Compensation and Other Transactions" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 15, 1997, which will be filed with the Securities and Exchange Commission on or about April 18, 1997, and which is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners and management is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 15, 1997, which will be filed with the Securities and Exchange Commission on or about April 18, 1997, and which is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions is set forth under the heading "Executive Compensation and Other Transactions" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 15, 1997, which will be filed with the Securities and Exchange Commission on or about April 18, 1997, and which is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Index Report of Independent Accountants Consolidated Balance Sheet - December 31, 1996 and 1995 Consolidated Statement of Operations for the three years ended December 31, 1996 Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996 Consolidated Statement of Cash Flows for the three years ended December 31, 1996 Notes to Consolidated Financial Statements
2. The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes to Financial Statements.
3. Exhibits: No.
3.1 - Certificate of Incorporation of Toreador Royalty Corporation dated July 13, 1951, as amended March 16, 1981 and June 4, 1987 (previously filed as Exhibit 3.1 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
3.2 - Certificate of Amendment of Certificate of Incorporation, as amended, of Toreador Royalty Corporation dated July 3, 1990 (previously filed as Exhibit 3.2 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference).
3.3 - Certificate of Amendment of Certificate of Incorporation, as amended, of Toreador Royalty Corporation dated August 13, 1992 (previously filed as Exhibit 3.3 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference).
3.4 - Certificate of Designations of Series A Junior Participating Preferred Stock of Toreador Royalty Corporation, dated April 3, 1995 (previously filed as Exhibit 3 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference).
3.5 - Amended and Restated Bylaws of Toreador Royalty Corporation (previously filed as Exhibit 3.3 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference).
3.6 - Amendment to Bylaws of Toreador Royalty Corporation (previously filed as Exhibit 3.5 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference).
4.1 - Rights Agreement dated as of April 3, 1995, between Toreador Royalty Corporation and Continental Stock Transfer & Trust Company (previously filed as Exhibit 1 to Toreador Royalty Corporation Current Report on Form 8-K dated April 3, 1995, and incorporated herein by reference).
10.1+ - Stock Option Agreement dated August 1, 1988 between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.B to Toreador Royalty Corporation Current Report on Form 8-K dated August 11, 1988, and incorporated herein by reference).
10.2+ - Stock Grant Agreement dated August 1, 1988 between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.C to Toreador Royalty Corporation Current Report on Form 8-K dated August 11, 1988, and incorporated herein by reference).
10.3+ - Incentive Stock Option Agreement dated as of September 8, 1994 between Toreador Royalty Corporation and Peter R. Vig, as amended by Letter Agreement dated as of May 15, 1995 (previously filed as Exhibit 10.2 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
10.4+ - Form of Stock Option Agreement by and between Toreador Royalty Corporation and Donald E. August, John V. Ballard, J.W. Bullion, John Mark McLaughlin, and Jack L. Woods (previously filed as Exhibit 4.6 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.5+ - Stock Option Agreement dated February 17, 1994, by and between Toreador Royalty Corporation and Thomas P. Kellogg, Jr. (previously filed as Exhibit 4.7 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.6 - Form of Stock Option Agreement by and between Toreador Royalty Corporation and Edward C. Marhanka and Earl V. Tessem, as amended (previously filed as Exhibit 4.8 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.7+ - Employment Agreement effective August 1, 1990 between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.7 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
10.8+ - Second Amendment to Executive Employment Agreement dated as of December 27, 1993 between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.4 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference).
10.9+ - Third Amendment to Executive Employment Agreement between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.5 to the Toreador Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference).
10.10+ - Fourth Amendment to Executive Employment Agreement between Toreador Royalty Corporation and Peter R. Vig dated as of April 25, 1995 (previously filed as Exhibit 10.7 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
10.11+ - Fifth Amendment to Executive Employment Agreement between Toreador Royalty Corporation and Peter R. Vig dated as of October 2, 1995 (previously filed as Exhibit 10.8 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
10.12+ - Sixth Amendment to Executive Employment Agreement between Toreador Royalty Corporation and Peter R. Vig dated as of March 2, 1996 (previously filed as Exhibit 10.9 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
10.13+ - Seventh Amendment to Executive Employment Agreement between Toreador Royalty Corporation and Peter R. Vig dated as of December 31, 1996.
10.14 - Employment Agreement dated February 9, 1989, as amended by Agreement dated February 28, 1990, between Toreador Royalty Corporation and James S. Blair (previously filed as Exhibit 4.5 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.15 - Joint Venture Agreement dated March 1, 1989, among Toreador Royalty Corporation, Bandera Petroleum, et al. (previously filed as Exhibit 10.9 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
10.16+ - Toreador Royalty Corporation 1990 Stock Option Plan (previously filed as Exhibit 10.7 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference).
10.17+ - Toreador Royalty Corporation 1994 Non-Employee Director Stock Option Plan, as amended (previously filed as Exhibit 10.12 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
10.18 - Warrant for the Purchase of Shares of Common Stock issued to Petrie Parkman & Co. dated May 23, 1994 (previously filed as Exhibit 10.1 to Toreador Royalty Corporation Registration on Form S-3, and incorporated herein by reference (No. 33-80572) filed with the Securities and Exchange Commission on June 22, 1994, and incorporated herein by reference).
10.19+ - Form of Indemnification Agreement dated as of April 25, 1995 between Toreador Royalty Corporation and each of the members of its Board of Directors (previously filed as Exhibit 10 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference).
10.20 - Severance Agreement by and between Toreador Royalty Corporation and James S. Blair dated March 2, 1996 (previously filed as Exhibit 10.16 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
21.1 - Subsidiary of Toreador Royalty Corporation.
23.1 - Consent of Price Waterhouse LLP.
23.2 - Consent of Harlan Consulting Inc.
27.1 - Financial Data Schedule
_______________
+ Management contract or compensatory plan
(b) Reports on Form 8-K:
None.
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.
TOREADOR ROYALTY CORPORATION Date: March 25, 1997
By /s/ PETER R. VIG ---------------------------------------- Peter R. Vig, Chairman, President and Chief Executive Officer
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.
Capacity in Signature which signed Date - --------- ------------ ----
/s/ PETER R. VIG Chairman, President, Treasurer - --------------------------- and Chief Executive Officer Peter R. Vig (Principal Executive Officer and Principal Financial and Accounting Officer)
/s/ DONALD E. AUGUST Director - --------------------------- Donald E. August
/s/ JOHN V. BALLARD Director - --------------------------- John V. Ballard
/s/ J.W. BULLION Director - --------------------------- J.W. Bullion
/s/ THOMAS P. KELLOGG, JR. Director - --------------------------- Thomas P. Kellogg, Jr.
/s/ JOHN MARK MCLAUGHLIN Director - --------------------------- John Mark McLaughlin
/s/ JACK L. WOODS Director - --------------------------- Jack L. Woods
TOREADOR ROYALTY CORPORATION
ITEM 14(a)(1) and (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as all required information has been included in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Toreador Royalty Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Toreador Royalty Corporation and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas March 17, 1997
F - 2 TOREADOR ROYALTY CORPORATION CONSOLIDATED BALANCE SHEET
The Company uses the successful efforts method of accounting for its oil and gas producing activities.
See accompanying notes to the consolidated financial statements.
F - 3 TOREADOR ROYALTY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
See accompanying notes to the consolidated financial Statements.
F - 4 TOREADOR ROYALTY CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
F - 5 TOREADOR ROYALTY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
F - 6 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Toreador Royalty Corporation (the "Company") explores for and produces oil and gas reserves principally in the southwestern part of the United States. The Company owns in excess of 530,000 net mineral acres located primarily in the Texas Panhandle and West Texas. In addition, the Company owns working or royalty interests in Texas, New Mexico, Oklahoma, Arkansas, and Louisiana. The Company's business activities are with industry partners located within the United States.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of Toreador Royalty Corporation and its wholly-owned subsidiary, Toreador Exploration & Production Inc.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for oil and gas exploration and development expenditures. Under this method, costs of successful exploratory wells and all development wells are capitalized. Costs to drill exploratory wells which do not find proved reserves are expensed. Acquisition costs of mineral interests in oil and gas properties remain capitalized until they are impaired or a determination has been made to discontinue exploration of the lease, at which time all related costs are charged to expense. Impairment of unproved properties is assessed and recorded on a property-by-property basis. Upon sale or abandonment of units of property or the disposition of miscellaneous equipment, the cost is removed from the asset account, the related reserves relieved of the accumulated depreciation or depletion and the gain or loss is credited to or charged against operations. Maintenance and repairs are charged to expense; betterments of property are capitalized and depreciated as described below.
REVENUE RECOGNITION
Oil and natural gas revenues are accounted for using the sales method. Under this method, sales are recorded on all production sold by the Company regardless of the Company's ownership interest in the respective property. Imbalances result when sales differ from the seller's net revenue interest in the particular property's reserves and are tracked to reflect the Company's balancing position. At December 31, 1996 and 1995, the imbalance and related value were immaterial.
F - 7 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASE BONUSES
The Company defers bonuses received from leasing minerals in which unrecovered costs remain by recording the bonuses as a reduction of the unrecovered costs. Bonuses received from leasing mineral interests previously expensed are taken into income currently. For federal income tax purposes, lease bonuses are regarded as advance royalties (ordinary income).
DEPRECIATION, DEPLETION AND AMORTIZATION
The Company provides for depreciation, depletion and amortization of its investment in producing oil and gas properties on the unit-of-production method, based upon independent reserve engineers' estimates of recoverable oil and gas reserves from the property. Depreciation expense for fixed assets is generally calculated on a straight-line basis based upon estimated useful lives of five years.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate fair value, unless otherwise stated, as of December 31, 1996 and 1995.
MARKETABLE SECURITIES
In January 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The Company has designated its investment in the San Juan Basin Royalty Trust as "securities available for sale." At December 31, 1995, these securities are reported at their fair market value with the related unrealized gain, net of tax effects, excluded from income and reported as a separate component of stockholders' equity. The securities were sold in 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and all highly liquid investments with original maturities of three months or less. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of common shares outstanding and common share equivalents (except where inclusion of such common share equivalents would have an antidilutive effect).
F - 8 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in the fourth quarter of 1995. SFAS 121 requires the write-down to market value of certain long-lived assets. The adoption of SFAS 121 had no effect on the Company's financial position or results of operations for 1996 or 1995.
In 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS 123 requires the recording or disclosure of the value of stock options or other equity instruments issued to employees. See Note 11 "Restricted Stock Grant Agreement and Stock Option Agreement."
2. MARKETABLE SECURITIES
Marketable securities were comprised of 105,840 shares in the San Juan Basin Royalty Trust at December 31, 1995. The Company's cost in this royalty trust was $126,258. At December 31, 1995, the market value of these securities which were designated as available for sale aggregated $661,501, resulting in a gross unrealized gain in the amount of $535,243 and an unrealized gain, net of tax effects, of $353,268.
During 1996, the Company sold all shares in the San Juan Basin Royalty Trust for proceeds of $643,125 resulting in a gain of $516,867.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Accounts receivable consist primarily of amounts arising from oil and gas sales. Receivables are due from companies engaged principally in oil and gas activities, with payment terms on a short-term basis and in accordance with industry standards.
As all ownership interests were for sale in a property in which the Company owned a 50% interest, the Company purchased a 100% interest in the property in December 1996. In February 1997, the Company was refunded its original interest in the property equivalent to $183,227.
F - 9 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTIES AND EQUIPMENT
Properties include mineral fee interests acquired by the Company during 1951 and 1958. These interests totaled approximately 535,000 net mineral acres underlying approximately 882,000 surface acres in the Texas Panhandle, West Texas, Montana and Colorado. It is recognized that the ultimate realization of the investment in these properties is dependent upon future exploration and development operations which are dependent upon satisfactory leasing and drilling arrangements with others.
Properties and equipment consist of the following:
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
F - 10 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTEREST AND OTHER INCOME
Interest and other income consists of:
7. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses incurred by the Company are as follows:
8. INCOME TAXES
The Company's provision (benefit) for income taxes was comprised of the following:
F - 11 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The primary reasons for the difference between tax expense at the statutory federal income tax rate and the Company's provision for income taxes were:
In 1995, the net operating loss for tax purposes totaled $698,357, of which $198,994 was carried back and utilized against prior year taxable income. The remaining $499,363 was carried forward to 1996. The Company has $42,599 of tax credit and $19,030 in alternative minimum tax carryforwards at December 31, 1996 that may be carried forward indefinitely.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1996, 1995 and 1994 were as follows:
Of the change in deferred taxes, $181,982 was credited to net unrealized gain on marketable securities classified in stockholder's equity for 1996 and $9,982 was debited to net unrealized gain on marketable securities in stockholder's equity for 1995.
F - 12 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which covers all Company employees. The benefits are based on years of service and the employee's compensation. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. At December 31, 1996, the Company recognized a minimum pension liability for its underfunded plan. The minimum liability is equal to the excess of the accumulated benefit obligation over the fair value of plan assets. This amount plus any deferred pension asset was recognized as a reduction to stockholder's equity of $88,543 at December 31, 1996. No minimum pension liability was required for 1995 or 1994. Net periodic pension expense includes the following components:
The assumptions used to develop the net periodic pension expense were as follows:
F - 13 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the funded status of the plan and the related asset and liability amounts for the plan as of December 31, 1996, 1995 and 1994:
In 1996, the Company established a Supplemental Executive Retirement Plan ("SERP") covering certain key employees. The SERP provides for incremental pension payments from the Company's funds so that retirement benefit payments are equal to amounts that would have been payable from the Company's principal pension plan if it were not for limitations on those payments imposed by income tax regulations.
10. LEASE COMMITMENT
In November 1993, the Company signed a lease agreement to lease new office space for a period of sixty-three months, beginning January 6, 1994 and ending March 31, 1999. Minimum annual rentals at December 31, 1996 are as follows:
1997 38,242 1998 38,242 1999 9,561 2000 -- 2001 and thereafter --
F - 14
TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. RESTRICTED STOCK GRANT AGREEMENT AND STOCK OPTION AGREEMENT
The Company entered into an agreement, effective August 1, 1988, with the Company's Chairman, granting him stock options to purchase 200,000 shares of common stock at a price of $3.00 per share, the market value on that date. In accordance with this agreement, the options become exercisable in equal increments over a three year period commencing August 1, 1988. Subject to certain termination provisions, these options expire July 31, 1998. As of December 31, 1996, none of these options have been exercised.
On March 1, 1989, the Company entered into an agreement with an employee granting stock options to purchase 50,000 shares of common stock at a price of $2.46875 per share, the market value on that date. The options become exercisable in equal increments over a three-year period commencing March 1, 1990. The options expire on March 1, 1999. As of December 31, 1996, 7,500 options have been exercised.
In May 1990, the Company adopted the 1990 Stock Option Plan ("the Plan"). The aggregate number of shares of common stock issuable under the Plan is 225,000. The Plan provides for the granting of stock options at exercise prices equal to the market price of the stock at the date of the grant. On May 24, 1992, the Company entered into an agreement with the Company's Chairman granting stock options under the Plan to purchase 10,000 shares of common stock at a price of $3.625 per share, the market value on that date. All options granted under the Plan are exercisable in equal increments over a three-year period commencing on May 24, 1992. The options expire on May 24, 2002. As of December 31, 1996, none of these options have been exercised.
On May 22, 1992, the Company entered into an agreement with the Company's then six members of the board of directors, excluding the Chairman, granting stock options to purchase 10,000 shares each of common stock at a price of $3.625 per share, the market value on that date. All options granted under the Plan are exercisable in equal increments over a three-year period commencing on May 22, 1992. The options expire on May 22, 2002. As of December 31, 1996 none of these options have been exercised.
On February 17, 1994, the Company entered into an agreement with a member of the board of directors granting an option to purchase 10,000 shares of common stock at a price of $3.625 per share, the market value on that date. The option granted under the Plan is exercisable in equal increments over a three-year period commencing February 17, 1994. The option expires on February 17, 2004. As of December 31, 1996, this option has not been exercised.
On September 8, 1994, the Company entered into an agreement with the Company's Chairman granting a stock option to purchase 50,000 shares of common stock and with the Company's two other employees granting stock options to purchase 10,000 shares each of common stock at a price of $3.25 per share. These options were issued under the 1990 Stock Option Plan. All options granted under the Plan are exercisable in equal increments over a three-year period commencing
F - 15 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 8, 1995. The options expire on September 8, 2004. As of December 31, 1996, 10,000 options were forfeited while the remainder of the options have not been exercised. Compensation expense related to the issuances of these options is immaterial.
On September 8, 1994, the Company entered into an agreement with the Company's two consultants granting options to purchase 10,000 shares each of common stock at a price of $3.25 per share. The options granted are exercisable in equal increments over a three-year period commencing September 8, 1995. The options expire on September 8, 2004. As of December 31, 1996, none of these options have been exercised. Compensation expense related to the issuances of these options is immaterial.
In September 1994, the Company adopted the 1994 Nonemployee Director Stock Option Plan ("Nonemployee Director Plan"). The number of shares of common stock issuable under the Nonemployee Director Plan is 200,000 shares in the aggregate. The Nonemployee Director Plan provides for the granting of stock options at exercise prices equal to the market price of the stock at the grant date. On September 8, 1994, the Company entered into an agreement with the seven members of the board of directors, excluding the chairman, granting stock options under the Nonemployee Director Plan to purchase 10,000 shares each of common stock at a price of $3.50 per share, the market value on that date. The options granted are exercisable in equal increments over a three-year period commencing September 8, 1995. The options expire on September 8, 2004. As of December 31, 1996, none of these options have been exercised.
Pro forma information regarding net income and earnings per share as a result of the adoption of FAS 123 is not presented as there were no stock option grants in 1996 or 1995.
A summary of stock option transactions under the Company's plans are as follows:
F - 16 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the fixed price stock options outstanding at December 31, 1996:
At December 31, 1996, 155,000 shares were available for grant under the Stock Option Plan and 140,000 shares were available for grant as options under the Nonemployee Director Plan.
12. CAPITAL
On May 23, 1994, the Company privately placed 809,071 shares of common stock for an aggregate consideration of $2,831,749. In its private placement agreement with the purchasers, the Company granted them registration rights, pursuant to which a registration statement on Form S-3 covering all the shares was filed on June 22, 1994. The registration statement was declared effective July 11, 1994 and the Company was obligated to maintain such effectiveness until May 23, 1996. The Company filed a registration statement on Form S3 deregistering 439,642 shares of common stock that remained unsold on May 23, 1996. In connection with the private placement, the Company's placement agent received a five-year warrant to purchase 106,867 shares of common stock at a price of $4.375 per share.
The placement agent has rights to participate in registered offerings of common stock by the Company. The net proceeds to the Company from the private placement (after deducting the placement agent's fee of $141,112 and expenses of approximately $75,000) were approximately $2,616,000.
The Company adopted a stockholder rights plan on April 3, 1995 designed to assure that the Company's stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers and other abusive takeover tactics to gain control of the Company without paying all stockholders a fair price. Under the rights plan, the Company declared a dividend of one right ("Right") on each share of Company common stock. Each Right will entitle the holder to purchase one one-hundredth of a share of a new Series A Junior Participating Preferred Stock, par value $1.00 per share, at an exercise price of $12.00. The Rights are not currently exercisable and will become exercisable only in the event a person or group acquires beneficial ownership of 20 percent or more of Toreador's outstanding common stock or announces a tender offer or exchange offer to acquire such ownership level. The Rights are subject to redemption by the Company for $.01 per Right at any
F - 17 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
time prior to the tenth day after the first public announcement of the acquisition by any person or group of beneficial ownership of 20 percent or more of Company common stock. The dividend distribution was made on April 13, 1995 to stockholders of record at the close of business on that date. The rights will expire on April 13, 2005.
In October 1995, the Company's Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock. This repurchase was completed in April 1996.
In April 1996, the Company's Board of Directors authorized the repurchase of an additional 150,000 shares of the Company's common stock. As of December 31, 1996, the Company had repurchased 108,200 shares of its common stock from the second repurchase program. Management anticipates that any future repurchases of the Company's common stock will be funded from the Company's cash flow from operations and working capital.
13. OIL AND GAS INFORMATION (UNAUDITED)
The following information is presented pursuant to SFAS No. 69, "Disclosures about Oil and Gas Producing Activities."
RESULTS OF OPERATIONS
Results of operations from oil and gas producing activities were as follows:
F - 18 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES:
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT ACTIVITIES:
OIL AND GAS RESERVES:
The following table identifies the Company's net interest in estimated quantities of proved oil and gas reserves and changes in such estimated quantities. Reserve estimates were prepared by independent petroleum engineers and such estimates were reviewed and adjusted by Company management. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. Estimated proved developed and undeveloped oil and gas reserves at December 31, 1996 and 1995 are tabulated below. Crude oil includes condensate and natural gas liquids and is stated in barrels (bbl). Natural gas is stated in thousands of cubic feet (mcf).
F - 19 TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no proved undeveloped reserves at December 31, 1996 or 1995.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS REVENUES
Pursuant to SFAS No. 69, the Company has developed the following information titled "Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Quantities" (Standardized Measure). Accordingly, the Standardized Measure has been prepared assuming year-end selling prices adjusted for future fixed and determinable contractual price changes, year-end development and production costs, year-end statutory tax rates adjusted for future tax rates already legislated and a 10% annual discount rate. The Standardized Measure does not purport to be an estimate of the fair market value of the Company's reserves. An estimate of fair value would also have taken into account, among other things, the expected recovery of reserves in excess of proved reserves, anticipated changes in future prices and costs and a discount factor representative of the time value of money and risks inherent in producing oil and gas.
F - 20
TOREADOR ROYALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The average oil and gas prices used to calculate future net cash inflows at December 31, 1996 were $24.62 per barrel and $3.34 per mcf, respectively. At December 31, 1996 and March 17, 1997, respectively, the NYMEX price for oil was $25.92 per barrel and $20.92 per barrel and the NYMEX price for gas was $2.76 per MMBtu and $1.90 per MMBtu.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH RELATING TO PROVED OIL AND GAS RESERVES
The following are the principal sources of change in the standardized measure:
F - 21
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
EXHIBITS TO
FORM 10-K
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
TOREADOR ROYALTY CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 75-0991164 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
530 PRESTON COMMONS WEST 8117 PRESTON ROAD DALLAS, TEXAS 75225
(Address of principal executive offices) (Zip Code)
INDEX TO EXHIBITS
_______________
* Filed herewith.