<PAGE>
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, 1996
------------------
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
NationsBank of Texas, N.A.
NationsBank Plaza
901 Main Street
12th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip Code)
(214) 508-2400
(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
--- ---
Number of units of beneficial interest outstanding at November 12, 1996:
14,579,345
<PAGE>
SABINE ROYALTY TRUST
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared by
NationsBank of Texas, 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. The
condensed financial statements of the Trust presented herein are unaudited
except for the balances as of December 31, 1995 and, therefore, are subject to
year-end adjustments. 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, 1995 balance
sheet is derived from the audited balance sheet of that date. In the opinion of
the Trustee, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the assets, liabilities and trust corpus of the
Trust as of September 30, 1996, the distributable income for the three-month and
nine-month periods ended September 30, 1996 and 1995, and the changes in trust
corpus for the nine-month period ended September 30, 1996 and 1995, 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, 1996 and for the
three-month and nine-month periods ended September 30, 1996 and 1995, included
herein, have been reviewed by Deloitte & Touche LLP, independent certified
public accountants, as stated in their report appearing herein.
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
NationsBank of Texas, N.A., as Trustee
of Sabine Royalty Trust:
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of Sabine Royalty Trust as of September 30, 1996, and the related
condensed statements of distributable income for the three-month and nine-month
periods ended September 30, 1996 and 1995 and changes in trust corpus for the
nine-month periods ended September 30, 1996 and 1995. These condensed 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 generally accepted auditing standards, 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 generally accepted
accounting principles.
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 generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of Sabine
Royalty Trust as of December 31, 1995, 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 19, 1996, 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, 1995, 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 8, 1996
3
<PAGE>
SABINE ROYALTY TRUST
- --------------------
CONDENSED STATEMENTS OF ASSETS,
LIABILITIES AND TRUST CORPUS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 DECEMBER 31,
ASSETS NOTES (UNAUDITED) 1995
- ------ ----- ------------- ------------
<S> <C> <C> <C>
Cash and short-term investments $2,786,576 $2,508,295
Royalty interests in oil
and gas properties
(less accumulated
amortization of
$18,794,256 and
$18,305,053 at
September 30, 1996 and
December 31, 1995) 1 3,600,929 4,090,132
---------- ------------
TOTAL $6,387,505 $6,598,427
========== ============
LIABILITIES AND TRUST CORPUS
- ----------------------------
Trust expenses payable $ 90,412 $ 499,110
0ther payables 4 591,997 652,175
Trust corpus - 14,579,345
units of beneficial
interest authorized, issued
and outstanding 5,705,096 5,447,142
---------- ------------
TOTAL $6,387,505 $6,598,427
========== ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
- --------------------------------------------------------------------------------
4
<PAGE>
SABINE ROYALTY TRUST
- --------------------
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
- --------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
NOTES 1996 1995 1996 1995
----- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Royalty income $5,921,727 $4,253,119 $17,062,348 $13,091,798
Interest income 36,856 27,909 106,002 79,336
---------- ---------- ----------- -----------
Total 5,958,583 4,281,028 17,168,350 13,171,134
General and administrative
expenses (285,721) (290,953) (1,078,856) (1,027,182)
---------- ---------- ----------- -----------
Distributable income $5,672,862 $3,990,075 $16,089,494 $12,143,952
========== ========== =========== ===========
Distributable income
per unit
(14,579,345 units) 1,3,5 $ .39 $ .27 $ 1.10 $ .83
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
- --------------------------------------------------------------------------------
5
<PAGE>
SABINE ROYALTY TRUST
- --------------------
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
NOTE 1996 1995
---- ------------ -----------
<S> <C> <C> <C>
Trust corpus, beginning
of period $ 5,447,142 $ 6,129,697
Amortization of royalty
interests (489,203) (462,788)
Distributable income 16,089,494 12,143,952
Distributions (15,342,337) (11,989,714)
------------ -----------
Trust corpus, end
of period $ 5,705,096 $ 5,821,147
============ ===========
Distributions per unit
(14,579,345 units) $ 1.05 $ .82
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
<PAGE>
SABINE ROYALTY TRUST
- --------------------
NOTES TO 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.
NationsBank of Texas, N.A., as trustee, (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).
7
<PAGE>
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 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.
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
arrangement 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
arrangement 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.
Royalty income to the Trust is attributable to the sale of depleting
assets. Accordingly, the proved reserves attributable to the Properties are
expected to decline substantially during the term of the Trust and a portion of
each cash distribution made by the Trust will, therefore, be analogous to a
return of capital. Accordingly, cash yields attributable to the Units are
expected to decline over the term of the Trust.
8
<PAGE>
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 generally accepted accounting principles:
- - 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 generally accepted accounting principles 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 generally accepted accounting principles.
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.
9
<PAGE>
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 on 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. OTHER 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, 1996, the Trust declared the following
distributions:
<TABLE>
<CAPTION>
Monthly
Record Payment Distribution
Date Date per Unit
--------------- ------- ------------
<S> <C> <C>
October 15 October 29 $.13109
November 15 November 29 $.10630
</TABLE>
10
<PAGE>
Item 2. Trustee's Discussion and Analysis of Financial Condition
and Results of Operations.
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.
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, 1996 was $5,672,862 or $.39 per Unit. Royalty income amounted to
$5,921,727 while interest income was $36,856. General and administrative
expenses totaled $285,721.
Distributions during the period were $.16629, $.14052 and $.11492 per Unit
to Unit holders of record on July 15, August 15 and September 16, 1996,
respectively.
Royalty income for the quarter ended September 30, 1996 increased
approximately $1,669,000 or 39% compared with the third quarter of 1995, due
primarily to an increase in the price of oil and gas and to an increase in the
production of oil and gas in the third quarter of 1996 compared to the same
quarter a year ago. Compared to the preceding quarter ended June 30, 1996,
royalty income decreased approximately $48,000. The decrease was due to a
reduction in both oil and gas production partially offset by an increase in oil
and gas prices in the third quarter of 1996. Royalty income for the nine-month
period ended September 30, 1996 increased approximately $3,970,000 or 30%
compared to the same period of 1995 due primarily to a substantial increase in
oil and gas production and prices during the first three quarters of 1996 as
compared to the same period in 1995.
The following table illustrates average prices received for the periods
discussed above and the related oil and gas production volumes:
Quarter Ended
--------------------------------------------------------
September 30, 1996 September 30, 1995 June 30, 1996
------------------ ------------------ ---------------
Production
Oil (Bbls) 145,258 133,203 183,184
Gas (Mcfs) 1,681,993 1,572,464 1,831,117
Average Price
Oil (per bbl) $18.03 $15.60 $17.08
Gas (per Mcf) $2.15 $1.48 $2.05
It continues to be difficult to estimate accurately 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, 1996 increased
approximately $8,900 compared with the third quarter of 1995 due primarily to an
increase in funds available for investment. Interest income for the nine-month
period ended September 30, 1996 increased approximately $27,000 compared to the
same period in 1995 due to an increase in funds available for investment.
General and administrative expenses for the quarter ended September 30,
1996 decreased approximately $5,000 compared to the same quarter of 1995 due
primarily to the timing of the payment of costs related to the preparation and
distribution of annual year end information to Unit holders. Compared to the
preceding quarter ended June 30, 1996, general and administrative expenses
decreased approximately $166,000, due to the timing of the payment of the
aforementioned costs and the payment of funds as a result of a resolution of
questions regarding ownership of certain properties. General and administrative
expenses for the nine-month period ended September 30, 1996 increased
approximately $52,000 for the same period in 1995 due to the above noted annual
costs.
11
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during
the quarter for which this report is filed.
12
<PAGE>
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: NationsBank of Texas, N.A.
(as successor), Trustee
By: /s/ Ron E. Hooper
--------------------------------------
Ron E. Hooper
Vice President and
Trust Administrator
Date: NOVEMBER 12, 1996
(The Trust has no directors or executive officers.)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,786,576
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,786,576
<PP&E> 22,395,185
<DEPRECIATION> 18,794,256
<TOTAL-ASSETS> 6,387,505
<CURRENT-LIABILITIES> 682,409
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 5,705,096
<TOTAL-LIABILITY-AND-EQUITY> 6,387,505
<SALES> 5,921,727
<TOTAL-REVENUES> 5,958,583
<CGS> 0
<TOTAL-COSTS> 285,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,672,862
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,672,862
<EPS-PRIMARY> .39
<EPS-DILUTED> 0
</TABLE>
