-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H3cRNqKsnGcORIq7BzxOOelvAQM6KZYAoOkvX+jF4r2IYPr3SFvVWLBycfS8p6Ge j3+E5ssvXhWSH+FgCd3cTQ== 0000950134-03-014734.txt : 20031110 0000950134-03-014734.hdr.sgml : 20031110 20031110143044 ACCESSION NUMBER: 0000950134-03-014734 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SABINE ROYALTY TRUST CENTRAL INDEX KEY: 0000710752 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 756297143 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08424 FILM NUMBER: 03987854 BUSINESS ADDRESS: STREET 1: PO BOX 830650 CITY: DALLAS STATE: TX ZIP: 75283-0650 BUSINESS PHONE: 2145082400 MAIL ADDRESS: STREET 1: PO BOX 830650 CITY: DALLAS STATE: TX ZIP: 75283-0650 10-Q 1 d09799e10vq.txt FORM 10-Q 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 September 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 November 3, 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 September 30, 2003, the distributable income for the three-month and nine-month periods ended September 30, 2003 and 2002 and the changes in trust corpus for the nine-month periods ended September 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 September 30, 2003 and for the three-month and nine-month periods ended September 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 September 30, 2003, and the related condensed statements of distributable income for the three-month and nine-month periods ended September 30, 2003 and 2002 and changes in trust corpus for the nine-month periods ended September 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 November 7, 2003 3 SABINE ROYALTY TRUST CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
SEPTEMBER 30, 2003 DECEMBER 31, ASSETS NOTES (UNAUDITED) 2002 - ------ ----- ------------- ------------ Cash and short-term investments $4,183,416 $ 3,898,379 Royalty interests in oil and gas properties (less accumulated amortization of $21,065,836 and $20,902,284 at September 30, 2003 and December 31, 2002) 1,329,349 1,492,901 ---------- ----------- TOTAL $5,512,765 $ 5,391,280 ========== =========== LIABILITIES AND TRUST CORPUS - ---------------------------- Trust expenses payable 4 $ 645,797 $ 408,121 Other payables 4 487,232 379,940 ---------- ----------- 1,133,029 788,061 Trust corpus - 14,579,345 units of beneficial interest authorized, issued and outstanding 4,379,736 4,603,219 ---------- ----------- TOTAL $5,512,765 $ 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 SEPTEMBER 30, --------------------------------- NOTES 2003 2002 ----- ----------- ----------- Royalty income $ 9,741,881 $ 7,818,935 Interest income 11,593 13,599 ----------- ----------- Total 9,753,474 7,832,534 General and administrative expenses (372,551) (419,220) ----------- ----------- Distributable income $ 9,380,923 $ 7,413,314 =========== =========== Distributable income per unit (basic and assuming dilution) (14,579,345 units) 1,3,5 $ .64 $ .51 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 5 SABINE ROYALTY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- NOTES 2003 2002 ----- ----------- ----------- Royalty income $29,856,187 $20,882,075 Interest income 38,026 34,480 ----------- ----------- Total 29,894,213 20,916,555 General and administrative expenses (1,392,328) (1,287,798) ----------- ----------- Distributable income $28,501,885 $19,628,757 =========== =========== Distributable income per unit (basic and assuming dilution) (14,579,345 units) 1,3,5 $ 1.95 $ 1.35 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 6 SABINE ROYALTY TRUST CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- NOTE 2003 2002 ---- ----------- ------------ Trust corpus, beginning of period $ 4,603,219 $ 5,677,097 Amortization of royalty interests (163,552) (185,912) Distributable income 28,501,885 19,628,757 Distributions 3 (28,561,816) (21,994,264) ------------ ------------ Trust corpus, end of period $ 4,379,736 $ 3,125,678 ============ ============ Distributions per unit (14,579,345 units) 3 $ 1.96 $ 1.51 ============ ============
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. 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 September 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 ending after December 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 September 30, 2003, the Trust declared the following distributions:
Monthly Record Payment Distribution Date Date per Unit ----------- ----------- ------------ October 15 October 29 $.18215 November 17 November 28 $.23582
6. CONTINGENCIES Oklahoma has enacted legislation to require state income tax withholding from nonresident royalty owners. Such withholding, if applicable to the Trust, would apply to the Oklahoma share of the Trust's income that is distributed to Unit holders who are not Oklahoma residents. Based on temporary emergency rules that were issued by the Oklahoma Tax Commission in October and on the advice of counsel, the Trustee believes that the Trust is not subject to Oklahoma's withholding requirements. However, final regulations have not yet been issued. In the event it is determined that the Trust is required to withhold Oklahoma taxes (or taxes for any other state), distributions to the Unit holders will be reduced by the required amount, subject to the Unit holders' right to file a state tax return to claim any refund due. The Trustee did withhold Oklahoma taxes from the distributions made to nonresident Unit holders on September 29, 2003 and October 29, 2003. Such withholdings reduce the amount of income taxes otherwise payable by nonresident Unit holders to the State of Oklahoma for the 2003 tax year. Any overpayment of Oklahoma taxes caused by such withholding may be claimed as a refund due on the 2003 Oklahoma income tax return filed by a nonresident Unit holder. 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 September 30, 2003 was $9,380,923 or $.64 per Unit. Royalty income amounted to $9,741,881 while interest income was $11,593. General and administrative expenses for the three months ended September 30, 2003 totaled $372,551. Distributions during the period were $.20257, $.27487, and $.21924 per Unit to Unit holders of record on July 15, August 15, and September 15, respectively. Royalty income for the quarter ended September 30, 2003 increased approximately $1,923,000 or 25%, compared with the third quarter of 2002 due to increases in the prices of both oil and gas. This increase was offset somewhat by decreases in both oil and gas production. Compared to the preceding quarter ended June 30, 2003, royalty income decreased approximately $1,810,000, or 16%, due to decreases in the price of both oil and gas as well as a decrease in gas production. This decrease was tempered by an increase in oil production. Royalty income for the nine-month period ended September 30, 2003 increased approximately $8,974,000 or 43% compared to the first nine months in 2002 due primarily to an increase in the price of both oil and gas. This increase was tempered somewhat by a decrease in the production of gas. Oil production was approximately the same for the nine months ended September 30, 2003 as for the same time period in 2002. The following tables illustrate average prices received for the periods discussed above and the related oil and gas production volumes:
Quarter Ended ---------------------------------------------------------- September 30, September 30, June 30, 2003 2002 2003 Production Oil (Bbls) 137,268 163,921 129,900 Gas (Mcfs) 1,707,843 1,979,665 1,854,708 Average Price Oil (per Bbl) $ 27.27 $ 23.53 $ 28.27 Gas (per Mcf) $ 4.44 $ 3.02 $ 4.74
Nine-Months Ended ------------------------------------------------------------ September 30, 2003 September 30, 2002 Production Oil (Bbls) 406,522 406,394 Gas (Mcfs) 4,883,802 5,153,035 Average Price Oil (per Bbl) $ 26.22 $ 21.13 Gas (per Mcf) $ 4.45 $ 2.61
Gas revenues received for the three months ended September 30, 2003, related primarily to production for April through June. The average price of gas as reported by the Henry Hub for the same time period was $5.03 per Mcf. The average price of gas for the Henry Hub was $4.44 per Mcf for January through September. Oil revenues for the three months ended September 30, 2003 related primarily to production for May through July. The average price of oil as reported by Nymex for that time period was $29.70 per barrel. The average price of oil was $30.97 per barrel for January 2003 through September 2003. As of October 31, 2003, the average price of gas for the Henry Hub was $4.00 per Mcf and the average price of oil reported by Nymex was $28.47 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 September 30, 2003 decreased approximately $2,000 compared with the third quarter of 2002. Compared to the preceding quarter ended June 30, 2003, interest income decreased approximately $4,800. Interest income for the nine-month period ended September 30, 2003 increased approximately $3,500 compared to 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 September 30, 2003 decreased by $46,700 compared to the same quarter of 2002 primarily due to the timing of payment of expenses for printing services and a decrease in the trustee and escrow agent fees. Compared to the preceding quarter ended June 30, 2003, general and administrative expenses decreased approximately $124,800. This decrease was primarily due to the net effect of normal fluctuations in trust expenses. General and administrative expenses for the nine-month period ended September 30, 2003 increased approximately $104,500 compared with the nine-month period ended September 30, 2002 due primarily to an increase in professional services, printing and unit holder 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 September 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. 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 September 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 ending after December 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. 12 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. 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. The Trust did not file any reports on Form 8-K during the quarter; however, the Trust furnished the following reports on Form 8-K during and subsequent to the third quarter: 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. On September 11, 2003, the Trust furnished a report on Form 8-K dated September 5, 2003, to announce its monthly cash distribution to Unit holders of record on September 15, 2003. On October 7, 2003, the Trust furnished a report on Form 8-K dated October 3, 2003, to announce its monthly cash distribution to Unit holders of record on October 15, 2003. On November 5, 2003, the Trust furnished a report on Form 8-K dated November 4, 2003, to announce its monthly cash distribution to Unit holders of record on November 17, 2003. 13 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: November 10, 2003 (The Trust has no directors or executive officers.) 14 EX-31 3 d09799exv31.txt TRUSTEE CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31 CERTIFICATIONS I, Ron Hooper, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sabine Royalty Trust, for which Bank of America, N.A. acts as Trustee; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), or for causing such controls and procedures to be established and maintained, for the registrant and I have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves persons who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 By: /s/ Ron Hooper ------------------------------- Ron Hooper Senior Vice President and Trust Administrator Bank of America, N.A. EX-32 4 d09799exv32.txt TRUSTEE CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Sabine Royalty Trust (the "Trust") on Form 10-Q for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, not in its individual capacity but solely as the trustee of the Trust, certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to its knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. BANK OF AMERICA, N.A., TRUSTEE FOR SABINE ROYALTY TRUST By: /s/ Ron E. Hooper ----------------------------------------- Ron E. Hooper, Senior Vice President, Royalty Management Date: November 10, 2003 A signed original of this written statement required by Section 906 has been provided to Sabine Royalty Trust and will be retained by Sabine Royalty Trust and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----