UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File Number: 1-8424
SABINE ROYALTY TRUST
(Exact name of registrant as specified in its charter)
Texas 75-6297143
(State or other jurisdiction (I.R.S. Employer Identi-
of incorporation or fication No.)
organization)
Trust Division
Bank of America, N.A.
Bank of America Plaza
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip Code)
(214) 209-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of units of beneficial interest outstanding at August 5, 2003:
14,579,345
SABINE ROYALTY TRUST
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared by
Bank of America, N.A. (as successor to NationsBank, N.A.), as Trustee (the
"Trustee") of Sabine Royalty Trust (the "Trust"), pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements have been
condensed or omitted pursuant to such rules and regulations, although the
Trustee believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Trust's latest annual report on Form 10-K. The December
31, 2002 balance sheet is derived from the audited balance sheet of that date.
In the opinion of the Trustee, all adjustments necessary to present fairly the
assets, liabilities and trust corpus of the Trust as of June 30, 2003, the
distributable income for the three-month and six-month periods ended June 30,
2003 and 2002 and the changes in trust corpus for the six-month periods ended
June 30, 2003 and 2002, have been included. The distributable income for such
interim periods is not necessarily indicative of the distributable income for
the full year.
The condensed financial statements as of June 30, 2003 and for the
three-month and six-month periods ended June 30, 2003 and 2002, included herein,
have been reviewed by Deloitte & Touche LLP, independent public accountants, as
stated in their report appearing herein.
2
INDEPENDENT ACCOUNTANTS' REPORT
UNIT HOLDERS OF SABINE ROYALTY TRUST AND BANK OF AMERICA, N.A., TRUSTEE
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of Sabine Royalty Trust as of June 30, 2003, and the related
condensed statements of distributable income for the three-month and six-month
periods ended June 30, 2003 and 2002 and changes in trust corpus for the
six-month month periods ended June 30, 2003 and 2002. These financial statements
are the responsibility of the Trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
As described in Note 2 to the condensed financial statements, these condensed
financial statements have been prepared on a modified cash basis of accounting,
which is a comprehensive basis of accounting other than accounting principles
generally accepted in the United States of America.
Based on our review, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
the basis of accounting described in Note 2.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the statement of assets, liabilities
and trust corpus of Sabine Royalty Trust as of December 31, 2002, and the
related statements of distributable income and changes in trust corpus for the
year then ended (not presented herein); and in our report dated March 17, 2003,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed statement of
assets, liabilities and trust corpus as of December 31, 2002, is fairly stated,
in all material respects, in relation to the statement of assets, liabilities
and trust corpus from which it has been derived.
/s/ Deloitte & Touche LLP
Dallas, Texas
August 11, 2003
3
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS,
LIABILITIES AND TRUST CORPUS
JUNE 30,
2003 DECEMBER 31,
ASSETS NOTES (UNAUDITED) 2002
- ------ ----- ------------- ------------
Cash and short-term investments 4,481,328 $ 3,898,379
Royalty interests in oil
and gas properties
(less accumulated
amortization of
$21,009,298 and
$20,902,284 at
June 30, 2003 and
December 31, 2002) 1,385,887 1,492,901
---------- -----------
TOTAL $5,867,215 $ 5,391,280
========== ===========
LIABILITIES AND TRUST CORPUS
- ----------------------------
Trust expenses payable 4 $ 158,294 $ 408,121
Other payables 4 496,431 379,940
---------- -----------
654,725 788,061
Trust corpus - 14,579,345
units of beneficial
interest authorized, issued
and outstanding 5,212,490 4,603,219
---------- -----------
TOTAL $5,869,215 $ 5,391,280
========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
4
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------------
NOTES 2003 2002
----- ----------- -----------
Royalty income $11,552,312 $ 6,091,686
Interest income 16,388 10,431
----------- -----------
Total 11,568,700 6,102,117
General and administrative
expenses (497,304) (448,725)
----------- -----------
Distributable income $11,071,396 $ 5,653,392
=========== ===========
Distributable income
per unit (basic and
assuming dilution)
(14,579,345 units) 1,3,5 $ .76 $ .39
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
5
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------------
NOTES 2003 2002
----- ----------- -----------
Royalty income $20,114,306 $13,063,140
Interest income 26,433 20,881
----------- -----------
Total 20,140,739 13,084,021
General and administrative
expenses (1,019,777) (868,578)
----------- -----------
Distributable income $19,120,962 $12,215,443
=========== ===========
Distributable income
per unit (basic and
assuming dilution)
(14,579,345 units) 1,3,5 $ 1.31 $ .84
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
6
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------------
NOTE 2003 2002
---- ----------- ------------
Trust corpus, beginning
of period $ 4,603,219 $ 5,677,097
Amortization of royalty
interests (107,014) (113,410)
Distributable income 19,120,962 12,215,443
Distributions 3 (18,404,677) (14,031,754)
------------ ------------
Trust corpus, end
of period $ 5,212,490 $ 3,747,376
============ ============
Distributions per unit
(14,579,345 units) 3 $ 1.26 $ .96
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
7
SABINE ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. TRUST ORGANIZATION AND PROVISIONS
Sabine Royalty Trust (the "Trust") was established by the Sabine
Corporation Royalty Trust Agreement (the "Trust Agreement"), made and entered
into effective as of December 31, 1982, to receive a distribution from Sabine
Corporation ("Sabine") of royalty and mineral interests, including landowner's
royalties, overriding royalty interests, minerals (other than executive rights,
bonuses and delay rentals), production payments and any other similar,
nonparticipatory interest, in certain producing and proved undeveloped oil and
gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma
and Texas (the "Royalties").
Certificates evidencing units of beneficial interest (the "Units") in the
Trust were mailed on December 31, 1982 to Sabine's shareholders of record on
December 23, 1982, on the basis of one Unit for each share of Sabine's
outstanding common stock. In May 1988, Sabine was acquired by Pacific
Enterprises ("Pacific"), a California corporation. Through a series of mergers,
Sabine was merged into Pacific Enterprises Oil Company (USA) ("Pacific (USA)"),
a California corporation and a wholly owned subsidiary of Pacific, effective
January 1, 1990. This acquisition and the subsequent mergers had no effect on
the Units. Pacific (USA), as successor to Sabine, has assumed by operation of
law all of Sabine's rights and obligations with respect to the Trust. The Units
are listed and traded on the New York Stock Exchange.
In connection with the transfer of the Royalties to the Trust upon its
formation, Sabine had reserved to itself all executive rights, including rights
to execute leases and to receive bonuses and delay rentals. In January 1993,
Pacific (USA) completed the sale of substantially all its producing oil and gas
assets to a third party. The sale did not include executive rights relating to
the Royalties, and Pacific (USA)'s ownership of such rights was not affected by
the sale.
Bank of America, N.A. (the "Trustee"), acts as trustee of the Trust. The
terms of the Trust Agreement provide, among other things, that:
- - The Trust shall not engage in any business or commercial activity of any kind
or acquire assets other than those initially transferred to the Trust.
- - The Trustee may not sell all or any part of its assets unless approved by the
holders of a majority of the outstanding Units in which case the sale must be
for cash and the proceeds, after satisfying all existing liabilities,
promptly distributed to Unit holders.
- - The Trustee may establish a cash reserve for the payment of any liability
that is contingent or uncertain in amount or that otherwise is not currently
due or payable.
- - The Trustee will use reasonable efforts to cause the Trust and the Unit
holders to recognize income and expenses on monthly record dates.
- - The Trustee is authorized to borrow funds to pay liabilities of the Trust
provided that such borrowings are repaid in full before any further
distributions are made to Unit holders.
- - The Trustee will make monthly cash distributions to Unit holders of record on
the monthly record date (see Note 3).
8
Because of the passive nature of the Trust and the restrictions and
limitations on the powers and activities of the Trustee contained in the Trust
Agreement, the Trustee does not consider any of the officers and employees of
the Trustee to be "officers" or "executive officers" of the Trust as such terms
are defined under applicable rules and regulations adopted under the Securities
Exchange Act of 1934.
The proceeds of production from the Royalties are receivable from hundreds
of separate payors. In order to facilitate creation of the Trust and to avoid
the administrative expense and inconvenience of daily reporting to Unit holders,
the conveyances by Sabine of the Royalties located in five of the six states
provided for the execution of an escrow agreement by Sabine and the initial
trustee of the Trust, in its capacities as trustee of the Trust and as escrow
agent. The conveyances by Sabine of the Royalties located in Louisiana provided
for the execution of a substantially identical escrow agreement by Sabine and a
Louisiana bank in the capacities of escrow agent and of trustee under the name
of Sabine Louisiana Royalty Trust. Sabine Louisiana Royalty Trust, the sole
beneficiary of which is the Trust, was established in order to avoid uncertainty
under Louisiana law as to the legality of the Trustee's holding record title to
the Royalties located in Louisiana. As of December 31, 2001, Bank of America has
assumed the responsibilities and functions as escrow agent and trustee of the
Sabine Louisiana Royalty Trust.
Pursuant to the terms of the escrow agreements and the conveyances of
the properties by Sabine, the proceeds of production from the Royalties for each
calendar month, and interest thereon, are collected by the escrow agents and are
paid to and received by the Trust only on the next monthly record date. The
escrow agents have agreed to endeavor to assure that they incur and pay expenses
and fees for each calendar month only on the next monthly record date. The
Trust Agreement also provides that the Trustee is to endeavor to assure that
income of the Trust will be accrued and received and expenses of the Trust will
be incurred and paid only on each monthly record date. Assuming that the escrow
agreement is recognized for Federal income tax purposes and that the Trustee
and escrow agents are able to control the timing of income and expenses, as
stated above, cash and accrual basis Unit holders should be treated as realizing
income only on each monthly record date. The Trustee is treating the escrow
agreement as effective for tax purposes. However, for financial reporting
purposes, royalty and interest income are recorded in the calendar month in
which the amounts are received by either the escrow agents or the Trust.
Distributable income as determined for financial reporting purposes for a
given quarter will not usually equal the sum of distributions made during that
quarter. Distributable income for a given quarter will approximate the sum of
the distributions made during the last two months of such quarter and the first
month of the next quarter.
9
2. ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Trust are prepared on the following basis
and are not intended to present financial position and results of operations in
conformity with accounting principles generally accepted in the United States
of America:
- - Royalty income, net of severance and ad valorem tax, and interest income are
recognized in the month in which amounts are received by the Trust (see Note
1).
- - Trust expenses, consisting principally of routine general and administrative
costs, include payments made during the accounting period. Expenses are
accrued to the extent of amounts that become payable on the next monthly
record date following the end of an accounting period. Reserves for
liabilities that are contingent or uncertain in amount may also be
established if considered necessary.
- - Royalties that are producing properties are amortized using the unit-of-
production method. This amortization is shown as a reduction of Trust corpus.
- - Distributions to Unit holders are recognized when declared by the Trustee
(see Note 3).
The financial statements of the Trust differ from financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America because of the following:
- - Royalty income is recognized in the month received rather than in the month
of production.
- - Expenses other than those expected to be paid on the following monthly record
date are not accrued.
- - Amortization of the Royalties is shown as a reduction to Trust Corpus and not
as a charge to operating results.
- - Reserves may be established for contingencies that would not be recorded
under accounting principles generally accepted in the United States of
America.
Use of Estimates
The preparation of financial statements in conformity with the basis of
accounting described above requires management to make estimates and assumptions
that affect reported amounts of certain assets, liabilities, revenues and
expenses as of and for the reporting periods. Actual results may differ from
such estimates.
Impairment
Trust management routinely reviews its royalty interests in oil and gas
properties for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If an impairment event
occurs and it is determined that the carrying value of the Trust's royalty
interests may not be recoverable, an impairment will be recognized as measured
by the amount by which the carrying amount of the royalty interests exceeds the
fair value of these assets, which would likely be measured by discounting
projected cash flows.
New Accounting Standards
SFAS No. 149, " Accounting for Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133" was issued in April 2003 and
is effective for contracts entered into after June 20, 2003. The statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts. The Trust has no derivative instruments and accordingly, the impact
of this new standard will not be material to the financial statements of the
Trust.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued in May 2003, and is
effective for fiscal quarters beginning after June 15, 2003. The Trust has no
Financial Instruments and accordingly, the impact of this new standard will not
be material to the financial statements of the Trust.
FASB interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," requires disclosures beginning with financial statements ending after
December 15, 2002 and requires liability recognition beginning January 1, 2003.
The Trust had no such guarantees outstanding as of June 30, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," applies immediately to variable interest
entities created after January 31, 2003 and applies to the first period
beginning after June 15, 2003 to entities acquired before February 1, 2003. This
FIN does not affect the Trust as it has no unconsolidated subsidiaries accounted
for under the equity method of accounting.
Distributable Income per Unit
Basic earnings per Unit is computed by dividing net income by the weighted
average Units outstanding. Earnings per Unit assuming dilution is computed by
dividing net income by the weighted average number of Units and equivalent
Units outstanding. The Trust had no equivalent Units outstanding for any period
presented. Basic and assuming dilution distributable income per Unit are the
same.
Federal Income Taxes
The Internal Revenue Service has ruled that the Trust would be classified
as a grantor trust for Federal income tax purposes and therefore is not subject
to taxation at the trust level. The Unit holders are considered, for Federal
income tax purposes, to own the Trust's income and principal as though no trust
were in existence. Accordingly, no provision for Federal income tax expense has
been made in these financial statements. The income of the Trust will be deemed
to have been received or accrued by each Unit holder at the time such income is
received or accrued by the Trust if the escrow arrangements discussed in Note 1
to these financial statements are respected by the Internal Revenue Service.
In the absence of the escrow arrangements, Unit holders would be deemed to
receive or accrue income from production from the royalty properties (and
interest income) on a daily basis, in accordance with their method of
accounting, as the proceeds from production and interest thereon were received
or accrued by the Trust. The Trustee is treating the escrow arrangements as
effective for tax purposes and furnishes tax information to Unit holders on
that basis.
Each Unit holder should consult his tax advisor regarding Trust tax
compliance matters.
10
3. DISTRIBUTION TO UNIT HOLDERS
The amount to be distributed to Unit holders ("Monthly Income Amount") is
determined on a monthly basis. The Monthly Income Amount is an amount equal to
the sum of cash received by the Trust during a monthly period (the period
commencing on the day after a monthly record date and continuing through and
including the next succeeding monthly record date) attributable to the
Royalties, any reduction in cash reserves and any other cash receipts of the
Trust, including interest, reduced by the sum of liabilities paid and any
increase in cash reserves. Unit holders of record as of the monthly record date
(the 15th day of each calendar month except in limited circumstances) are
entitled to have distributed to them the calculated Monthly Income Amount for
such month on or before 10 business days after the monthly record date. The
Monthly Income Amount per Unit is declared by the Trust no later than 10 days
prior to the monthly record date.
The cash received by the Trust from purchasers of the Trust's oil and gas
production consists of gross sales of production less applicable severance
taxes.
4. PAYABLES
Other payables consist primarily of royalty receipts suspended pending
verification of ownership interest or title.
The Trustee believes that these other payables represent an ordinary
operating condition of the Trust and that such payables will be paid or released
in the normal course of business.
5. SUBSEQUENT EVENTS
Subsequent to June 30, 2003, the Trust declared the following
distributions:
Monthly
Record Payment Distribution
Date Date per Unit
----------- --------- ------------
July 15 July 29 $.20257
August 15 August 29 $.27487
The Trust received a refund of approximately $312,000 subsequent to
June 30, 2003. This refund was for the Oklahoma non-resident tax on royalties
received in 2002 on Oklahoma properties.
The distribution that will be made on August 29, 2003, is subject to a new
5% withholding tax that applies to the Oklahoma share of the Trust's income
that is distributed to Unit holders who are not Oklahoma residents. This
withholding tax will reduce the amount of cash that such Unit holders will
receive either in this distribution or, if the necessary withholding procedures
are not yet in place, in the next distribution. The amount of tax that is
withheld will reduce the 2003 Oklahoma income tax otherwise payable by Unit
holders who are not Oklahoma residents.
11
Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
Sabine Royalty Trust (the "Trust") makes monthly distributions to the
holders of units of beneficial interest in the Trust ("Units") of the excess of
the preceding month's revenues received over expenses incurred. Upon receipt,
royalty income is invested in short-term investments until its subsequent
distribution. In accordance with the Trust Agreement, the Trust's only long-term
assets consist of royalty interests in producing and proved undeveloped oil and
gas properties. Although the Trust is permitted to borrow funds if necessary to
continue its operations, borrowings are not anticipated in the foreseeable
future.
Results of Operations
Distributable income consists of royalty income plus interest income plus
any decrease in cash reserves established by the Trustee less general and
administrative expenses of the Trust less any increase in cash reserves
established by the Trustee. Distributable income for the three months ended
June 30, 2003 was $11,071,396 or $.76 per Unit. Royalty income amounted to
$11,552,312 while interest income was $16,388. General and administrative
expenses for the three months ended June 30, 2003 totaled $497,304.
Distributions during the period were $.24613, $.26979, and $.29147 per
Unit to Unit holders of record on April 15, May 15, and June 16, respectively.
Royalty income for the quarter ended June 30, 2003 increased approximately
$5,461,000, or 90%, compared with the second quarter of 2002 due to increases in
oil and gas prices as well as increases in both oil and gas production. Compared
to the preceding quarter ended March 31, 2003, royalty income increased
approximately $2,990,000, or 35%, due to increases in the price of both oil and
gas as well as an increase in gas production. This increase was tempered by a
decrease in oil production. Royalty income for the six-month period ended June
30, 2003 increased approximately $7,051,000 or 54% compared to the first six
months in 2002 due primarily to an increase in the price of both oil and gas as
well as increases in the production of both oil and gas.
The following tables illustrate average prices received for the periods
discussed above and the related oil and gas production volumes:
Quarter Ended
----------------------------------------------------------
June 30, June 30, March 31,
2003 2002 2003
Production
Oil (Bbls) 129,900 104,183 139,354
Gas (Mcfs) 1,854,708 1,441,334 1,321,251
Average Price
Oil (per Bbl) $ 28.27 $ 21.85 $ 23.29
Gas (per Mcf) $ 4.74 $ 2.32 $ 4.05
Six-Months Ended
----------------------------------------------------------
June 30, 2003 June 30, 2002
Production
Oil (Bbls) 269,254 242,473
Gas (Mcfs) 3,175,959 3,173,370
Average Price
Oil (per Bbl) $ 25.69 $ 19.50
Gas (per Mcf) $ 4.46 $ 2.36
Gas revenues received for the three months ended June 30, 2003, related
primarily to production for January through March. The average price of gas
reported by the Henry Hub for the same time period was $5.67 per Mcf. The
average price of gas for the Henry Hub was $6.30 per Mcf for January 2003
through June 2003. Oil revenues for the three months ended June 30, 2003
related primarily to production for February through April. The average price
of oil as reported by Nymex for that time period was $32.41 per barrel. The
average price of oil was $31.35 per barrel for January 2003 through June 2003.
As of August 5, 2003, the average price of gas for the Henry Hub was $4.33 per
Mcf and the average price of oil reported by Nymex was $31.74 per barrel. It is
difficult to accurately estimate future prices of oil and gas, and any
assumptions concerning future prices may prove to be incorrect.
Interest income for the quarter ended June 30, 2003 increased approximately
$6,000 compared with the second quarter of 2002. Compared to the preceding
quarter ended March 31, 2003, interest income increased approximately $6,300.
Interest income for the six-month period ended June 30, 2003 increased
approximately $5,600 over the same time period in 2002. Changes in interest
income are the result of changes in interest rates and funds available for
investment.
General and administrative expenses for the quarter ended June 30, 2003
increased by $48,600 compared to the same quarter of 2002 primarily due to the
timing of payment of expenses for printing and professional services. Compared
to the preceding quarter ended March 31, 2003 general and administrative
expenses decreased approximately $25,200. This decrease was primarily due to
the net effect of normal fluctuations in trust expenses. General and
administrative expenses for the six-month period ended June 30, 2003 increased
approximately $151,200 compared with the six-month period ended June 30, 2002
due primarily to the timing of invoices for professional fees and increases in
engineering services and unit holder information services.
Critical Accounting Policies and Estimates
The Trust's financial statements reflect the selection and application of
accounting policies that require the Trust to make significant estimates and
assumptions. The following are some of the more critical judgement areas in the
application of accounting policies that currently affect the Trust's financial
condition and results of operations.
Basis of Accounting
The financial statements of the Trust are prepared on the following basis
and are not intended to present financial position and results of operations in
conformity with accounting principles generally accepted in the United States
of America:
o Royalty income, net of severance and ad valorem taxes, and interest
income are recognized in the month in which amounts are received by
the Trust.
o Trust expenses, consisting principally of routine general and
administrative costs, include payments made during the accounting
period. Expenses are accrued to the extent of amounts that become
payable on the next monthly record date following the end of the
accounting period. Reserves for liabilities that are contingent or
uncertain in amount may also be established if considered necessary.
o Royalties that are producing properties are amortized using the
unit-of-production method. This amortization is shown as a reduction
of Trust corpus.
o Distributions to Unit holders are recognized when declared by the
Trustee.
The financial statements of the Trust differ from financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America because of the following:
o Royalty income is recognized in the month received rather than in the
month of production.
o Expenses other than those expected to be paid on the following
monthly record date are not accrued.
o Amortization of the Royalties is shown as a reduction to Trust corpus
and not as a charge to operating results.
o Reserves may be established for contingencies that would be recorded
under accounting principles generally accepted in the United States of
America.
Revenue Recognition
Revenues from Royalty Interests are recognized in the period in which
amounts are received by the Trust. Royalty income received by the Trust in a
given calendar year will generally reflect the proceeds, on an entitlements
basis, from natural gas produced for the twelve-month period ended September
30th in that calendar year.
Reserve Disclosure
Independent petroleum engineers estimate the net proved reserves
attributable to the Royalty Interest. In accordance with Statement of Financial
Standards No. 69, "Disclosures About Oil and Gas Producing Activities",
estimates of future net revenues from proved reserves have been prepared using
year-end contractual gas prices and related costs. Numerous uncertainties are
inherent in estimating volumes and the value of proved reserves and in
projecting future production rates and the timing of development of
non-producing reserves. Such reserve estimates are subject to change as
additional information becomes available. The reserves actually recovered and
the timing of production may be substantially different from the reserve
estimates.
Contingencies
Contingencies related to the Royalty Properties that are unfavorably
resolved would generally be reflected by the Trust as reductions to future
royalty income payments to the Trust with corresponding reductions to cash
distributions to Unit holders. The Trustee is aware of no such items as of
June 30, 2003.
Use of Estimates
The preparation of financial statements in conformity with the basis of
accounting described above requires management to make estimates and assumptions
that affect reported amounts of certain assets, liabilities, revenues and
expenses as of and for the reporting periods. Actual results may differ from
such estimates.
Impairment
Trust management routinely reviews its royalty interests in oil and gas
properties for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If an impairment event
occurs and it is determined that the carrying value of the Trust's royalty
interests may not be recoverable, an impairment will be recognized as measured
by the amount by which the carrying amount of the royalty interests exceeds the
fair value of these assets, which would likely be measured by discounting
projected cash flows.
New Accounting Standards
SFAS No. 149, "Accounting for Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133" was issued in April 2003 and
is effective for contracts entered into after June 20, 2003. The statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts. The Trust has no derivative instruments and accordingly, the impact
of this new standard will not be material to the financial statements of the
Trust.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued in May 2003, and is
effective for fiscal quarters beginning after June 15, 2003. The Trust has no
Financial Instruments and accordingly, the impact of this new standard will not
be material to the financial statements of the Trust.
FASB interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," requires disclosures beginning with financial statements ending after
December 15, 2002 and requires liability recognition beginning January 1, 2003.
The Trust had no such guarantees outstanding as of June 30, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," applies immediately to variable interest
entities created after January 31, 2003 and applies to the first period
beginning after June 15, 2003 to entities acquired before February 1, 2003. This
FIN does not affect the Trust as it has no unconsolidated subsidiaries accounted
for under the equity method of accounting.
Forward Looking Statements
This Report includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are intended to be
covered by the safe harbor created thereby. All statements other than statements
of historical fact included in this Report are forward-looking statements.
Although the Trustee believes that the expectations reflected in such forward-
looking statements are reasonable, such expectations are subject to numerous
risks and uncertainties and the Trustee can give no assurance that they will
prove correct. There are many factors, none of which is within the Trustee's
control, that may cause such expectations not to be realized, including, among
other things, factors identified in the Trust's most recent Annual Report on
Form 10-K affecting oil and gas prices and the recoverability of reserves,
general economic conditions, actions and policies of petroleum-producing nations
and other changes in the domestic and international energy markets.
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The Trust created an Internet website in early 2003 and has made available
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act at http://www.sbr-sabineroyalty.com
as soon as reasonably practicable after such information is electronically filed
with or furnished to the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Trust invests in no derivative financial instruments, and has no
foreign operations or long-term debt instruments. The Trust is a passive entity
and other than the Trust's ability to periodically borrow money as necessary to
pay expenses, liabilities and obligations of the Trust that cannot be paid out
of cash held by the Trust, the Trust is prohibited from engaging in borrowing
transactions. The amount of any such borrowings is unlikely to be material to
the Trust. The Trust periodically holds short term investments acquired with
funds held by the Trust pending distribution to Unitholders and funds held in
reserve for the payment of Trust expenses and liabilities. Because of the
short-term nature of these borrowings and investments and certain limitations
upon the types of such investments which may be held by the Trust, the Trustee
believes that the Trust is not subject to any material interest rate risk. The
Trust does not engage in transactions in foreign currencies which could expose
the Trust or Unitholders to any foreign currency related market risk.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, the Trustee carried
out an evaluation of the effectiveness of the design and operation of the
Trust's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
and 15d-15. Based upon that evaluation, the Trustee concluded that the Trust's
disclosure controls and procedures are effective in timely alerting the Trustee
to material information relating to the Trust required to be included in the
Trust's periodic filings with the Securities and Exchange Commission. There has
not been any change in the Trust's internal control over financial reporting
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Trust's internal control over
financial reporting.
PART II - OTHER INFORMATION
Items 1-5 not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
and Description
(31) Trustee Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(32) Trustee Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On May 21, 2003, the Trust furnished a report on Form 8-K dated May 5,
2003, to announce its monthly cash distribution to Unit holders of
record on May 15, 2003.
On June 9, 2003, the Trust furnished a report on Form 8-K dated June 4,
2003, to announce its monthly cash distribution to Unit holders of
record on June 16, 2003.
On July 8, 2003, the Trust furnished a report on Form 8-K dated July 3,
2003, to announce its monthly cash distribution to Unit holders of
record on July 15, 2003.
On August 7, 2003, the Trust furnished a report on Form 8-K dated
August 5, 2003 to announce its monthly cash distribution to Unit
holders of record on August 15, 2003.
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SIGNATURES
Pursuant to the requirements 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.
SABINE ROYALTY TRUST
By: Bank of America, N.A.
Trustee
By: /s/ Ron E. Hooper
--------------------------------------
Ron E. Hooper
Senior Vice President and
Trust Administrator
Date: August 14, 2003
(The Trust has no directors or executive officers.)
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