-----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, UM5hwprym0QpY77TS6P7v/Zm52v2ejV8QAtlk2a8xm2zagFpEOnoHY8gLFtos1GQ nRnydX/pKBvXF8Tn7z5FzA== 0000930661-98-000624.txt : 19980330 0000930661-98-000624.hdr.sgml : 19980330 ACCESSION NUMBER: 0000930661-98-000624 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 001-08424 FILM NUMBER: 98576565 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-K405 1 FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] 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 OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) TRUST DIVISION NATIONSBANK OF TEXAS, N.A. NATIONSBANK PLAZA 17TH FLOOR 901 MAIN STREET DALLAS, TEXAS 75202 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 508-2400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- UNITS OF BENEFICIAL INTEREST NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ------- At March 16, 1998, there were 14,579,345 units of beneficial interest outstanding and the aggregate market value of such units (based on the closing sale price on the New York Stock Exchange) held by non-affiliates of the registrant was approximately $209,578,084. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ TABLE OF CONTENTS PAGE ---- PART I Item 1. Business........................................................ 1 Description of the Trust........................................ 1 Assets of the Trust............................................ 2 Liabilities of the Trust....................................... 2 Duties and Limited Powers of Trustee........................... 2 Liabilities of Trustee......................................... 2 Duration of Trust.............................................. 3 Voting Rights of Unit Holders.................................. 3 Description of Units........................................... 3 Distributions of Net Income.................................... 4 Transfer....................................................... 4 Reports to Unit Holders........................................ 4 Liability of Unit Holders...................................... 4 Possible Divestiture of Units.................................. 5 Federal Taxation................................................ 5 State Law and Tax Considerations................................ 6 Regulation and Prices.......................................... 7 Regulation..................................................... 7 Prices......................................................... 8 Item 2. Properties...................................................... 9 Title........................................................... 9 Reserves........................................................ 9 Item 3. Legal Proceedings............................................... 13 Item 4. Submission of Matters to a Vote of Security Holders............. 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................... 13 Item 6. Selected Financial Data......................................... 13 Item 7. Trustee's Discussion and Analysis of Financial Condition and Results of Operations....................................... 14 Item 8. Financial Statements and Supplementary Data..................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 25 PART III Item 10. Directors and Executive Officers of the Registrant.............. 25 Item 11. Executive Compensation.......................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 25 Item 13. Certain Relationships and Related Transactions.................. 26 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form..... 26 (i) PART I ITEM 1. BUSINESS. DESCRIPTION OF THE TRUST Sabine Royalty Trust (the "Trust") is an express trust formed under the laws of the State of Texas by the Sabine Corporation Royalty Trust Agreement (the "Trust Agreement") made and entered into effective as of December 31, 1982, between Sabine Corporation, as trustor, and InterFirst Bank Dallas, N.A. ("InterFirst"), as trustee. The current trustee of the Trust is NationsBank of Texas, N.A. ("NationsBank"). In accordance with the successor trustee provisions of the Trust Agreement, NationsBank, as trustee of the Trust (the "Trustee"), is subject to all the terms and conditions of the Trust Agreement. The principal office of the Trust (sometimes referred to herein as the "Registrant") is located at NationsBank Plaza, 17th Floor, 901 Main Street, Dallas, Texas 75202. The telephone number of the Trust is (214) 508-2400. On November 12, 1982, the shareholders of Sabine Corporation approved and authorized Sabine Corporation's transfer 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 "Royalty Properties") to the Trust. The conveyances of the Royalty Properties to the Trust were effective with respect to production as of 7:00 a.m. (local time) on January 1, 1983. In order to avoid uncertainty under Louisiana law as to the legality of the Trustee's holding record title to the Royalty Properties located in that state, title to such properties is held by a separate trust formed under the laws of Louisiana, the sole beneficiary of which is the Trust. Sabine Louisiana Royalty Trust is a passive entity, with the trustee thereof, Hibernia National Bank in New Orleans, having only such powers as are necessary for the collection of and distribution of revenues from and the protection of the Royalty Properties located in Louisiana and the payment of liabilities of Sabine Louisiana Royalty Trust. A separate trust also was established to hold record title to the Royalty Properties located in Florida. Legislation was adopted in Florida in 1992 that eliminated the provision of Florida law that prohibited the Trustee from holding record title to the Royalty Properties located in that state. In November 1993, record title to the Royalty Properties held by the trustee of Sabine Florida Land Trust was transferred to the Trustee. As used herein, the term "Royalty Properties" includes the Royalty Properties held directly by the Trust and the Royalty Properties located in Louisiana and Florida that are or were held indirectly through the Trust's ownership of 100 percent beneficial interest of Sabine Louisiana Royalty Trust and Sabine Florida Land Trust. In discussing the Trust, this report disregards the technical ownership formalities described in this paragraph, which have no effect on the tax or accounting treatment of the Royalty Properties, since the observance thereof would significantly complicate the information presented herein without any corresponding benefit to Unit holders. Certificates evidencing units of beneficial interest (the "Units") in the Trust were mailed on December 31, 1982 to the shareholders of Sabine Corporation of record on December 23, 1982, on the basis of one Unit for each outstanding share of common stock of Sabine Corporation. The Units are listed and traded on the New York Stock Exchange under the symbol "SBR". In May 1988, Sabine Corporation was acquired by Pacific Enterprises, a California corporation. Through a series of mergers, Sabine Corporation was merged into Pacific Enterprises Oil Company (USA) ("Pacific (USA)"), a California corporation and a wholly owned subsidiary of Pacific Enterprises, effective January 1, 1990. This acquisition and the subsequent mergers had no effect on the Units. Pacific (USA), as successor to Sabine Corporation, assumed by operation of law all of Sabine Corporation's rights and obligations with respect to the Trust. References herein to Pacific (USA) shall be deemed to include Sabine Corporation where appropriate. In connection with the transfer of the Royalty Properties to the Trust upon its formation, Sabine Corporation 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 of Pacific (USA)'s producing oil an gas assets to Hunt Oil Company. The sale did not include the executive rights relating to the Royalty Properties, and Pacific (USA)'s ownership of such rights was not affected by the sale. The following summaries of certain provisions of the Trust Agreement are qualified in their entirety by reference to the Trust Agreement itself, which is an exhibit to the Form 10-K and available upon request from the Trustee. The definitions, formulas, accounting procedures and other terms governing the Trust are complex and extensive and no attempt has been made below to 1 describe all such provisions. Capitalized terms not otherwise defined herein are used with the meanings ascribed to them in the Trust Agreement. ASSETS OF THE TRUST The Royalty Properties are the only assets of the Trust, other than cash being held for the payment of expenses and liabilities and for distribution to the Unit holders. Pending such payment of expenses and distribution to Unit holders, cash may be invested by the Trustee only in certificates of deposit, United States government securities or repurchase agreements secured by United States government securities. See "Duties and Limited Powers of Trustee" below. LIABILITIES OF THE TRUST Because of the passive nature of the Trust's assets and the restrictions on the power of the Trustee to incur obligations, it is anticipated that the only liabilities the Trust will incur are those for routine administrative expenses, such as insurance and trustee's fees, and accounting, engineering, legal and other professional fees. The total general and administrative expenses of the Trust for 1997 were $1,350,231 of which, pursuant to the terms of the Trust Agreement, $203,962 was paid to NationsBank, as Trustee, and $611,895 was paid to NationsBank, as escrow agent. DUTIES AND LIMITED POWERS OF TRUSTEE The duties of the Trustee are specified in the Trust Agreement and by the laws of the State of Texas. The basic function of the Trustee is to collect income from the Trust properties, to pay out of the Trust's income and assets all expenses, charges and obligations, and to pay available income to Unit holders. Since Pacific (USA) has retained the executive rights with respect to the minerals included in the Royalty Properties and the right to receive any future bonus payments or delay rentals resulting from leases with respect to such minerals, the Trustee is not required to make any investment or operating decision with respect to the Royalty Properties. The Trust has no employees. Administrative functions of the Trust are performed by the Trustee. The Trustee has the discretion to establish a cash reserve for the payment of any liability that is contingent or uncertain in amount or that otherwise is not currently due and payable. The Trustee has the power to borrow funds required to pay liabilities of the Trust as they become due and pledge or otherwise encumber the Trust's properties if it determines that the cash on hand is insufficient to pay such liabilities. Borrowings must be repaid in full before any further distributions are made to Unit holders. All distributable income of the Trust is distributed on a monthly basis. The Trustee is required to invest any cash being held by it for distribution on the next Distribution Date or as a reserve for liabilities in certificates of deposit, United States government securities or repurchase agreements secured by United States government securities. The Trustee furnishes Unit holders with periodic reports. See "Item 1--Description of Units--Reports to Unit Holders". The Trust Agreement grants the Trustee only such rights and powers as are necessary to achieve the purposes of the Trust. The Trust Agreement prohibits the Trustee from engaging in any business, commercial or, with certain exceptions, investment activity of any kind and from using any portion of the assets of the Trust to acquire any oil and gas lease, royalty or other mineral interest other than the Royalty Properties. The Trustee may sell Trust properties only as authorized by a vote of the Unit holders, or when necessary to provide for the payment of specific liabilities of the Trust then due or upon termination of the Trust. Pledges or other encumbrances to secure borrowings are permitted without the authorization of unit holders if the Trustee determines such action is advisable. Any sale of Trust properties must be for cash unless otherwise authorized by the Unit holders or unless the properties are being sold to provide for the payment of specific liabilities of the Trust then due, and the Trustee is obligated to distribute the available net proceeds of any such sale to the Unit holders. LIABILITIES OF TRUSTEE The Trustee is to be indemnified out of the assets of the Trust for any liability, expense, claim, damage or other loss incurred by it in the performance of its duties unless such loss results from its negligence, bad faith or fraud or from its expenses in carrying out such duties exceeding the compensation and reimbursement it is entitled to under the Trust Agreement. The Trustee can be reimbursed out of the Trust assets for any liability imposed upon the Trustee for its failure to ensure that the Trust's liabilities are satisfiable only out of Trust assets. In no event will the Trustee be deemed to have acted negligently, fraudulently or in bad faith if it takes or suffers action in good faith in reliance upon and in accordance with the advice of parties considered to be qualified 2 as experts on the matters submitted to them. The Trustee is not entitled to indemnification from Unit holders except in certain limited circumstances related to the replacement of mutilated, destroyed, lost or stolen certificates. See "Item 1--Description of Units--Liability of Unit Holders". DURATION OF TRUST The Trust is irrevocable and Pacific (USA) has no power to terminate the Trust or, except with respect to certain corrective amendments, to alter or amend the terms of the Trust Agreement. The Trust will exist until it is terminated by (i) two successive fiscal years in which the Trust's gross revenues from the Royalty Properties are less than $2,000,000 per year, (ii) a vote of Unit holders as described below under "Voting Rights of Unit Holders" or (iii) operation of provisions of the Trust Agreement intended to permit compliance by the Trust with the "rule against perpetuities". Upon the termination of the Trust, the Trustee will continue to act in such capacity until all the assets of the Trust are distributed. The Trustee will sell all Trust properties for cash (unless the Unit holders authorize the sale for a specified non-cash consideration, in which event the Trustee may, but is not obligated to, consummate such non-cash sale) in one or more sales and, after satisfying all existing liabilities and establishing adequate reserves for the payment of contingent liabilities, will distribute all available proceeds to the Unit holders. VOTING RIGHTS OF UNIT HOLDERS Although Unit holders possess certain voting rights, their voting rights are not comparable to those of shareholders of a corporation. For example, there is no requirement for annual meetings of Unit holders or for annual or other periodic re-election of the Trustee. The Trust Agreement may be amended by the affirmative vote of a majority of the outstanding Units at any duly called meeting of Unit holders. However, no such amendment may alter the relative rights of Unit holders unless approved by the affirmative vote of 100 percent of the Unit holders and by the Trustee. In addition, certain special voting requirements can be amended only if such amendment is approved by the holders of at least 80 percent of the outstanding Units and by the Trustee. Removal of the Trustee requires the affirmative vote of the holders of a majority of the Units represented at a duly called meeting of Unit holders. In the event of a vacancy in the position of Trustee or if the Trustee has given notice of its intention to resign, a successor trustee of the Trust may be appointed by similar voting approval of the Unit holders. The sale of all or any part of the assets of the Trust must be authorized by the affirmative vote of the holders of a majority of the outstanding Units. However, the Trustee may, without a vote of the Unit holders, sell all or any part of the Trust assets upon termination of the Trust or otherwise if necessary to provide for the payment of specific liabilities of the Trust then due. The Trust can be terminated by the Unit holders only if the termination is approved by the holders of a majority of the outstanding Units. Meetings of Unit holders may be called by the Trustee at any time at its discretion and must be called by the Trustee at the written request of holders of not less than 10 percent of the then outstanding Units. The presence of a majority of the outstanding Units is necessary to constitute a quorum and Unit holders may vote in person or by proxy. Notice of any meeting of Unit holders must be given not more than 60 nor less than 20 days prior to the date of such meeting. The notice must state the purposes of the meeting and no other matter may be presented or acted upon at the meeting. DESCRIPTION OF UNITS Each Unit represents an equal undivided share of beneficial interest in the Trust and is evidenced by a transferable certificate issued by the Trustee. Each Unit entitles its holder to the same rights as the holder of any other Unit, and the Trust has no other authorized or outstanding class of equity security. At March 16, 1998, there were 14,579,345 Units outstanding. The Trust may not issue additional Units unless such issuance is approved by the holders of at least 80 percent of the outstanding Units and by the Trustee. Under limited circumstances, Units may be redeemed by the Trust and canceled. See "Possible Divestiture of Units" below. 3 DISTRIBUTIONS OF NET INCOME The identity of Unit holders entitled to receive distributions of Trust income and the amounts thereof are determined as of each Monthly Record Date. 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 the related Monthly Period no later than 10 business days after the Monthly Record Date. The Monthly Income Amount is the excess of (i) revenues from the Trust properties plus any decrease in cash reserves previously established for contingent liabilities and any other cash receipts of the Trust over (ii) the expenses and payments of liabilities of the Trust plus any increase in cash reserves for contingent liabilities. TRANSFER Units are transferable on the records of the Trustee upon surrender of any certificate in proper form for transfer and compliance with such reasonable regulations as the Trustee may prescribe. No service charge is made to the transferor or transferee for any transfer of a Unit, but the Trustee may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in relation to such transfer. Until any such transfer, the Trustee may conclusively treat the holder of a Unit shown by its records as the owner of that Unit for all purposes. Any such transfer of a Unit will, as to the Trustee, vest in the transferee all rights of the transferor at the date of transfer, except that the transfer of a Unit after the Monthly Record Date for a distribution will not transfer the right of the transferor to such distribution. The transfer of Units by gift and the transfer of Units held by a decedent's estate, and distributions from the Trust in respect thereof, may be restricted under applicable state law. See "Item 1--State Law and Tax Considerations". Chemical Mellon Shareholder Services Group, Inc. serves as transfer agent and registrar for the Units. REPORTS TO UNIT HOLDERS As promptly as practicable following the end of each fiscal year, the Trustee mails to each person who was a Unit holder on any Monthly Record Date during such fiscal year, a report showing in reasonable detail on a cash basis the receipts and disbursements and income and expenses of the Trust for federal and state tax purposes for each Monthly Period during such fiscal year and containing sufficient information to enable Unit holders to make all calculations necessary for federal and state tax purposes. As promptly as practicable following the end of each of the first three fiscal quarters of each year, the Trustee mails a report for such fiscal quarter showing in reasonable detail on a cash basis the assets and liabilities, receipts and disbursements, and income and expenses of the Trust for such fiscal quarter to Unit holders of record on the last Monthly Record Date immediately preceding the mailing thereof. Within 120 days following the end of each fiscal year, or such shorter period as may be required by the New York Stock Exchange, the Trustee mails to Unit holders of record on the last Monthly Record Date immediately preceding the mailing thereof, an annual report containing audited financial statements of the Trust and an audited statement of fees and expenses paid by the Trust to NationsBank, as Trustee and escrow agent. See "Federal Taxation" below. Each Unit holder and his or her duly authorized agent has the right, during reasonable business hours at his or her own expense, to examine and make audits of the Trust and the records of the Trustee, including lists of Unit holders, for any proper purpose in reference thereto. LIABILITY OF UNIT HOLDERS As regards the Unit holders, the Trustee, in engaging in any activity or transaction that results or could result in any kind of liability, will be fully liable if the Trustee fails to take reasonable steps necessary to ensure that such liability is satisfiable only out of the Trust assets (even if the assets are inadequate to satisfy the liability) and in no event out of amounts distributed to, or other assets owned by, Unit holders. However, the Trust might be held to constitute a "joint stock company" under Texas law, which is unsettled on this point, and therefore a Unit holder may be jointly and severally liable for any liability of the Trust if the satisfaction of such liability was not contractually limited to the assets of the Trust and the assets of both the Trust and the Trustee are not adequate to satisfy such liability. In view of the substantial value and passive nature of the Trust assets, the restrictions on the power of the Trustee to incur liabilities and the required financial net worth of any trustee of the Trust, the imposition of any liability on a Unit holder is believed to be extremely unlikely. 4 POSSIBLE DIVESTITURE OF UNITS The Trust Agreement imposes no restrictions based on nationality or other status of the persons or entities which are eligible to hold Units. However, the Trust Agreement provides that if at any time the Trust or the Trustee is named a party in any judicial or administrative proceeding seeking the cancellation or forfeiture of any property in which the Trust has an interest because of the nationality, or any other status, of any one or more Unit holders, the following procedure will be applicable: 1. The Trustee will give written notice to each holder whose nationality or other status is an issue in the proceeding of the existence of such controversy. The notice will contain a reasonable summary of such controversy and will constitute a demand to each such holder that he or she dispose of his or her Units within 30 days to a party not of the nationality or other status at issue in the proceeding described in the notice. 2. If any holder fails to dispose of his or her Units in accordance with such notice, the Trustee shall have the preemptive right to redeem and shall redeem, at any time during the 90-day period following the termination of the 30-day period specified in the notice, any Unit not so transferred for a cash price equal to the closing price of the Units on the stock exchange on which the Units are then listed or, in the absence of any such listing, the mean between the closing bid and asked prices for the Units in the over-the- counter market, as of the last business day prior to the expiration of the 30-day period stated in the notice. 3. The Trustee shall cancel any Unit acquired in accordance with the foregoing procedures. 4. The Trustee may, in its sole discretion, cause the Trust to borrow any amount required to redeem Units. FEDERAL TAXATION In May 1983, the Internal Revenue Service (the "Service") ruled that the Trust would be classified as a grantor trust for federal income tax purposes and not as an association taxable as a corporation. Accordingly, the income and deductions of the Trust are reportable directly by Unit holders for federal income tax purposes. The Service also ruled that Unit holders would be entitled to deduct cost depletion with respect to their investment in the Trust and that the transfer of a Unit in the Trust would be considered to be a transfer of a proportionate part of the properties held by the Trust. Transferees of Units transferred after October 11, 1990 may be eligible to use the percentage depletion deduction on oil and gas income thereafter attributable to such Units, if the percentage depletion deduction would exceed cost depletion. However, no Unit holders were eligible to claim percentage depletion deductions for 1990 or any subsequent year because cost depletion has exceeded percentage depletion. If a taxpayer disposes of any "section 1254 property" (certain oil, gas, geothermal or other mineral property), and if the adjusted basis of such property includes adjustments for deductions for depletion under section 611 of the Internal Revenue Code (the "Code"), the taxpayer generally must recapture the amount deducted for depletion in ordinary income (to the extent of gain realized on the disposition of the property). This depletion recapture rule applies to any disposition of property that was placed in service by the taxpayer after December 31, 1986. Detailed rules set forth in Sections 1.1254-1 through 1.1254-6 of the United States Treasury regulations govern dispositions of property after March 13, 1995. The Service will likely take the position that a Unit holder who purchases a Unit subsequent to December 31, 1986 must recapture depletion upon the disposition of that Unit. In order to facilitate creation of the Trust and to avoid the administrative expense and inconvenience of daily reporting to Unit holders by the Trustee, the conveyances by Sabine Corporation of the Royalty Properties located in five of the six states provided for the execution of an escrow agreement by Sabine Corporation and InterFirst (the initial trustee of the Trust), in its capacities as trustee of the Trust and as escrow agent. The conveyances by Sabine Corporation of the Royalty Properties located in Louisiana provided for the execution of a substantially identical escrow agreement by Sabine Corporation and Hibernia National Bank in New Orleans, in the capacities of escrow agent and of trustee of Sabine Louisiana Royalty Trust. Pursuant to the terms of the escrow agreements and the conveyances of the Royalty Properties, the proceeds of production from the Royalty Properties 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 5 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 the 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 and the escrow agents may not be able to cause third party expenses to be incurred on each Monthly Record Date in all instances. Cash basis Unit holders, however, should be treated as having paid all expenses and fees only when such expenses and fees are actually paid. Even if the escrow arrangement is recognized for federal income tax purposes, however, accrual basis Unit holders might be considered to have accrued expenses when such expenses are incurred rather than on each Monthly Record Date when paid. No ruling was requested from the Service with respect to the effect of the escrow arrangement. Due to the absence of direct authority and the factual nature of the characterization of the relationship among the escrow agent, Pacific (USA) and the Trust, no opinion has been expressed by legal counsel with respect to the tax consequences of the escrow arrangement. In the absence of the escrow arrangement, the 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. If the escrow arrangement is recognized, the income from the Royalty Properties for a calendar month and interest income thereon will be taxed to the holder of the Unit on the next Monthly Record Date without regard to the ownership of the Unit prior to that date. The Trustee is treating the escrow arrangement as effective for tax purposes and has furnished tax information to Unit holders on that basis. The Service might take the position that the escrow arrangement should be ignored for tax purposes. In such case, the Trustee could be required to report the proceeds from production and interest income thereon to the Unit holders on a daily basis resulting in a substantial increase in the administrative expense of the Trust. In the event of a transfer of a Unit, the income and the depletion deduction attributable to the Royalty Properties for the period up to the date of transfer would be allocated to the transferor, and the income and depletion deduction attributable to the Royalty Properties on and after the date of transfer would be allocated to the transferee, even though the transferee was the holder of the Unit on the next Monthly Record Date and, therefore, would be entitled to the monthly income distribution. Thus, if the escrow arrangement is not recognized, a mismatching of such income and deduction could occur between a transferor and a transferee upon the transfer of a Unit. Unit holders of record on each Monthly Record Date are entitled to receive monthly distributions. See "Description of Units -- Distributions of Net Income"' above. The terms of the escrow agreements and the Trust Agreement, as described above, seek to assure that taxable income attributable to such distributions will be reported by the Unit holder who receives such distributions, assuming that such holder is the holder of record on the Monthly Record Date. In certain circumstances, however, a Unit holder may be required to report taxable income attributable to his or her Units but the Unit holder will not receive the distribution attributable to such income. For example, if the Trustee establishes a reserve or borrows money to satisfy debts and liabilities of the Trust, income used to establish such reserve or to repay such loan will be reported by the Unit holder, even though such income is not distributed to the Unit holder. Interest and royalty income attributable to ownership of Units and any gain on the sale thereof are considered portfolio income, and not income from a "passive activity," and therefore generally may not be offset by losses from any passive activities. Individuals may deduct "miscellaneous itemized deductions" (including, in general, investment expenses) only to the extent that such expenses exceed two percent of the individual's adjusted gross income. Although the Trustee believes that no portion of a Unit holder's share of administrative expenses of the Trust is subject to the floor, it is possible that the Service could take such a position. The foregoing summary is not exhaustive, and many other provisions of the federal tax laws may affect individual Unit holders. Each Unit holder should consult his or her personal tax adviser with respect to the effects of his or her ownership of Units on his or her personal tax situation. STATE LAW AND TAX CONSIDERATIONS The following is intended as a brief summary of certain information regarding state income taxes and other state law matters affecting the Trust and the Unit holders. Unit holders are urged to consult their own legal and tax advisers with respect to these matters. 6 Texas. Texas does not impose an income tax. Therefore, no part of the income produced by the Trust is subject to an income tax in Texas. However, corporations and limited liability companies doing business in Texas are subject to the Texas franchise tax, which includes a calculation based upon the company's taxable income for federal income tax purposes (or comparable amounts, in the case of limited liability companies). It is currently unclear whether the ownership of Units would be sufficient to subject a corporate Unit holder who is not otherwise doing business in Texas to the franchise tax. Under certain circumstances, Texas inheritance tax may be applicable to property in Texas (including intangible personal property such as the Units) of both resident and nonresident decedents. Louisiana. Units held by residents of Louisiana, to the extent that they represent a proportionate share of mineral royalties from mineral interests located in Louisiana, are subject to Louisiana inheritance and other taxes and probate, community property, forced heirship and other rules. Units held of record by a person who was not domiciled in Louisiana at the date of death generally are not subject to Louisiana inheritance taxes or probate, community property or forced heirship rules, and Units transferred inter vivos by non- domiciliaries of Louisiana generally are not subject to Louisiana gift tax. Income of the Units attributable to interests located in Louisiana will, subject to applicable minimum filing requirements, be subject to Louisiana income tax, and the Trustee is required to file with Louisiana a return reflecting the income of the Trust attributable to mineral interests located in Louisiana. Florida, Mississippi, New Mexico and Oklahoma. Florida imposes an income tax on resident and nonresident corporations but not individuals. Mississippi, New Mexico and Oklahoma each impose an income tax applicable to both resident and nonresident individuals and corporations which will be applicable to royalty income allocable to a Unit holder from properties located within that state. Although the Trust may be required to file information returns with taxing authorities in those states and provide copies of such returns to the Unit holders, the Trust should be considered a grantor trust for state income tax purposes and the Royalty Properties that are located in such states should be considered economic interests in minerals for state income tax purposes. Generally, the state income tax in these states is computed as a percentage of taxable income attributable to the particular state. Furthermore, even though there are variances from state to state, taxable income for state purposes is often computed in a manner similar to the computation of taxable income for federal income tax purposes. Some of these states give credit for taxes paid by their residents on income from sources in other states. In certain of these states, a Unit holder is required to file a state income tax return if income is attributable to the Unit holder even though no tax is owed. REGULATION AND PRICES REGULATION General Exploration for and production and sale of oil and gas are extensively regulated at the national, state and local levels. Oil and gas development and production activities are subject to various state laws and regulations (and orders of regulatory bodies pursuant thereto) governing a wide variety of matters, including allowable rates of production, marketing, pricing, prevention of waste, and pollution and protection of the environment. These laws, regulations and orders may restrict the rate of oil and gas production below the rate that would otherwise exist in the absence of such laws, regulations and orders. Laws affecting the oil and gas industry are under constant review for amendment or expansion, frequently increasing the regulatory burden. Numerous governmental departments and agencies are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry which often are difficult and costly to comply with and which carry substantial penalties for the failure to comply. Natural Gas On January 1, 1993, pursuant to the Natural Gas Wellhead Decontrol Act of 1989, the maximum lawful prices prescribed for the sale of natural gas under the Natural Gas Policy Act of 1978 were eliminated. Consequently, prices for the sale of natural gas, like the sale of other commodities, are governed by the marketplace and the provisions of applicable gas sales contracts. The Federal Energy Regulatory Commission ("FERC") has taken significant steps in the implementation of a policy to restructure the natural gas pipeline industry to promote full competition in the sales of natural gas, so that all natural gas suppliers, including pipelines, can compete equally for sales customers. This policy, set forth principally in Order 636, issued on April 8, 7 1992, and its progeny, is being implemented largely through restructuring proceedings for each pipeline. These factors make the future effect of that order upon the natural gas markets uncertain. There are many other statutes, rules, regulations and orders that affect the pricing or transportation of natural gas. Some of the provisions are and will be subject to court or administrative review. Consequently, uncertainty as to the ultimate impact of these regulatory provisions on the prices and production of natural gas from the Royalty Properties is expected to continue for the foreseeable future. Environmental Regulation General. Activities on the Royalty Properties are subject to existing federal, state and local laws (including case law), rules and regulations governing health, safety, environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations regulating health, safety, the release of materials into the environment or otherwise relating to the protection of the environment will not have a material adverse effect upon the Trust or Unit holders. The Trustee cannot predict what effect additional regulation or legislation, enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from operations on the Royalty Properties could have on the Trust or Unit holders. Even if the Trust were not directly liable for costs or expenses related to these matters, increased costs of compliance could result in wells being plugged and abandoned earlier in their productive lives, with a resulting loss of reserves and revenues to the Trust. Superfund. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the current or previous owner and operator of a site and companies that disposed, or arranged for the disposal, of the hazardous substance found at a site. CERCLA also authorizes the Environmental Protection Agency and, in some cases, private parties to take actions in response to threats to the public health or the environment and to seek recovery from such responsible classes of persons of the costs of such action. In the course of operations, the working interest owner and/or the operator of Royalty Properties may have generated and may generate wastes that may fall within CERCLA's definition of "hazardous substances". The operator of the Royalty Properties or the working interest owners may be responsible under CERCLA for all or part of the costs to clean up sites at which such substances have been disposed. Although the Trust is not the operator of any Royalty Properties, or the owner of any working interest, its ownership of royalty interests could cause it to be responsible for all or part of such costs to the extent CERCLA imposes responsibility on parties as "owners". Solid and Hazardous Waste. The Royalty Properties have produced oil and/or gas for many years, and, although the Trust has no knowledge of the procedures followed by the operators of the Royalty Properties in this regard, hydrocarbons or other solid or hazardous wastes may have been disposed or released on or under the Royalty Properties by the current or previous operators. Federal, state and local laws applicable to oil- and gas-related wastes and properties have become increasingly more stringent. Under these laws, removal or remediation of previously disposed wastes or property contamination could be required. PRICES Oil Crude oil prices are affected by a variety of factors. Since domestic crude oil price controls were lifted in 1981, the principal factors influencing the prices received by producers of domestic crude oil have been the pricing and production of the members of the Organization of Petroleum Exporting Countries ("OPEC"). The Trust's average per barrel oil price increased from $17.31 in 1996 to $18.77 in 1997. The Trustee believes that the higher average price per barrel of crude oil realized by the Trust in 1997 can be attributed to normal market fluctuations. Natural Gas Substantial competition in the natural gas marketplace continued in 1997. Competition with alternative fuels and excess gas supplies persists. Natural gas prices, which once were determined largely by governmental regulations, are now being generally governed by the marketplace. The average price received by the Trust in 1997 on natural gas volumes sold of $2.45 per Mcf represented an increase from the $1.98 per Mcf received in 1996, due in part to continued high demand resulting from a relatively severe 1996-1997 winter season and predictions of extreme weather conditions in the latter half of 1997. 8 FERC is the federal agency responsible for implementing regulations governing the natural gas industry. The current policy of FERC is designed to promote increased competition among gas industry participants. Accordingly, Order 636 and various other orders have been proposed and implemented to encourage nondiscriminatory open-access transportation by interstate pipelines, to provide for the release of natural gas dedicated to long-term contracts but not required by pipelines to meet near-term system supply needs, and to provide for the unbundling of pipeline services so that such services may also be furnished by nonpipeline suppliers on a competitive basis. Certain of these orders have been or will be challenged in the courts, and no prediction can be made regarding the future impact on the industry of FERC's current or proposed regulations. ITEM 2. PROPERTIES. The assets of the Registrant consist principally of the Royalty Properties, which constitute interests in gross production of oil, gas and other minerals free of the costs of production. The Royalty Properties consist 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. These properties are represented by approximately 5,400 tracts of land. Approximately 2,950 of the tracts are in Oklahoma, 1,750 in Texas, 330 in Louisiana, 200 in New Mexico, 150 in Mississippi and 12 in Florida. The following table summarizes total developed and proved undeveloped acreage represented by the Royalty Properties at February 17, 1998.
Mineral and Royalty ---------------------- State Gross Acres Net Acres ----- ----------- --------- Florida................................. 5,448 697 Louisiana............................... 244,391 23,682 Mississippi............................. 75,489 9,713 New Mexico.............................. 112,294 9,141 Oklahoma................................ 381,538 67,558 Texas................................... 1,273,132 105,760 --------- ------- Total................................... 2,092,292 216,551 ========= =======
Detailed information concerning the number of wells on royalty properties is not generally available to the owner of royalty interests. Consequently, the Registrant does not have an accurate count of the number of wells located on the Royalty Properties and cannot readily obtain such information. TITLE The conveyances of the Royalty Properties to the Trust covered the royalty and mineral properties located in the six states that were vested in Sabine Corporation on the effective date of the conveyances and that were subject to existing oil, gas and other mineral leases other than properties specifically excluded in the conveyances. Since Sabine Corporation may not have had available to it as a royalty owner information as to whether specific lands in which it owned a royalty interest were subject to an existing lease, minimal amounts of nonproducing royalty properties may also have been conveyed to the Trust. Sabine Corporation did not warrant title to the Royalty Properties either expressly or by implication. RESERVES The Registrant has obtained from DeGolyer and MacNaughton, independent petroleum engineering consultants, a study of the proved oil and gas reserves attributable as of January 1, 1998 to the Royalty Properties. The following letter report summarizes such reserve study and sets forth information as to the assumptions, qualifications, procedures and other matters relating to such reserve study. See Note 8 of the Notes to Financial Statements in Item 8 hereof for additional information regarding the proved oil and gas reserves of the Trust. 9 DeGolyer and MacNaughton One Energy Square Dallas, Texas 75206 February 26, 1998 NationsBank of Texas, N.A. P.O. Box 830650 Dallas, Texas 75283-0650 Gentlemen: Pursuant to your request, we have prepared estimates of the extent and value of the proved crude oil, condensate, natural gas liquids (NGL), and natural gas reserves, as of January 1, 1998, of certain royalty interests owned by Sabine Royalty Trust (the Trust). The properties appraised consist of royalties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. NationsBank of Texas, N.A. (NationsBank) acts as trustee of the Trust. Information used in the preparation of this report was obtained from NationsBank, from records on file with the appropriate regulatory agencies, and from public sources. During this investigation, we consulted freely with officers and employees of NationsBank and were given access to such accounts, records, geological and engineering reports, and other data as were desired for examination. In the preparation of this report we have relied, without independent verification, upon information furnished by NationsBank with respect to property interests owned by the Trust, production from such properties, current prices for production, agreements relating to current and future operations and sale of production, and various other information and data that were accepted as represented. It was not considered necessary to make a field examination of the physical condition and operation of the properties in which the Trust owns interests. Our reserves estimates are based on a detailed study of the properties and were prepared by the use of standard geological and engineering methods generally accepted by the petroleum industry. The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, consideration of the state of development, and the quality and completeness of basic data. The Trust owns several thousand royalty interests. In view of the limited information available to a royalty owner and the small reserves attributable to many of these interests, certain of them representing approximately 32 percent of the total reserves of the properties included herein were summarized by state or field and worked in total rather than being appraised individually. Historical records of net production and revenue and experience with similar properties were used in analyzing these properties. Reserves estimated in this report are expressed as gross and net reserves. Gross reserves are defined as the total estimated petroleum to be produced from these properties after December 31, 1997. Net reserves are defined as that portion of the gross reserves attributable to the interests owned by the Trust after deducting royalties and other interests owned by others. Gas volumes shown herein are sales gas volumes and are expressed at a temperature base of 60 degrees Fahrenheit and at the legal pressure bases of the states in which the interests are located. Sales gas is defined as the total gas to be produced from the reservoirs, measured at the point of delivery, after reduction for fuel usage, flare, and shrinkage resulting from field separations and processing. Condensate reserves estimated herein are those to be obtained from normal separator recovery. NGL reserves are those attributable to the leasehold interests according to processing agreements. Petroleum reserves included in this report are classified as proved and are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs as of the date the estimate is made, including consideration of changes in existing prices provided only by contractual arrangements but not including escalations based upon future conditions. The petroleum reserves are classified as follows: Proved--Reserves that have been proved to a high degree of certainty by analysis of the producing history of a reservoir and/or by volumetric analysis of adequate geological and engineering data. Commercial productivity has been established by actual production, successful testing, or in certain cases by favorable core analyses and electrical-log interpretation when the producing characteristics of the formation are known from nearby fields. Volumetrically, the structure, areal extent, volume, and characteristics of the reservoir are well defined by a reasonable interpretation of adequate subsurface well control and by known continuity of hydrocarbon-saturated material above known fluid contacts, if any, or above the lowest known structural occurrence of hydrocarbons. Developed--Reserves that are recoverable from existing wells with current operating methods and expenses. 10 Developed reserves include both producing and nonproducing reserves. Estimates of producing reserves assume recovery by existing wells producing from present completion intervals with normal operating methods and expenses. Developed nonproducing reserves are in reservoirs behind the casing or at minor depths below the producing zone and are considered proved by production from other wells in the field, by successful drill-stem tests, or by core analyses from the particular zones. Nonproducing reserves require only moderate expense to be brought into production. Undeveloped--Reserves that are recoverable from additional wells yet to be drilled. Undeveloped reserves are those considered proved for production by reasonable geological interpretation of adequate subsurface control in reservoirs that are producing or proved by other wells but are not recoverable from existing wells. This classification of reserves requires drilling of additional wells, major deepening of existing wells, or installation of enhanced recovery or other facilities. Reserves recoverable by enhanced recovery methods, such as injection of external fluids to provide energy not inherent in the reservoirs, may be classified as proved developed or proved undeveloped reserves depending upon the extent to which such enhanced recovery methods are in operation. These reserves are considered to be proved only in cases where a successful fluid-injection program is in operation, a pilot program indicates successful fluid injection, or information is available concerning the successful application of such methods in the same reservoir and it is reasonably certain that the program will be implemented. The development status shown herein represents the status applicable on January 1, 1998. In the preparation of this study, data available from wells drilled on the appraised properties through December 31, 1997, were used in estimating gross ultimate recovery. When applicable, gross production estimated to January 1, 1998, was deducted from gross ultimate recovery to arrive at the estimates of gross reserves as of January 1, 1998. In most fields, this required that the production rates be estimated for up to 4 months since production data were available only through August 1997. Future oil, condensate, NGL, and gas producing rates estimated for this report are based on production rates considering the most recent figures available. The rates used for future production are rates that we feel are within the capacity of the well or reservoir to produce. This information has been considered in arriving at the rate projected. Net proved reserves, as of January 1, 1998, attributable to the Trust from the properties appraised are estimated in barrels (bbl) or thousands of cubic feet (Mcf) as follows:
Proved Developed and Proved Developed Undeveloped Reserves Reserves -------------------------- -------------------------- Oil, Oil, Condensate, Sales Condensate, Sales State and NGL (bbl) Gas (Mcf) and NGL (bbl) Gas (Mcf) - ------------- ------------- ----------- ------------- ----------- Florida...... 110,082 206,322 110,082 206,322 Louisiana.... 49,940 2,014,267 49,940 2,014,267 Mississippi.. 64,246 1,879,364 64,246 1,879,364 New Mexico... 263,129 2,236,571 263,129 2,236,571 Oklahoma..... 608,947 10,244,699 608,947 10,244,699 Texas ...... 5,086,748 17,783,726 5,074,536 17,707,135 --------- ---------- --------- ---------- Total...... 6,183,092 34,364,949 6,170,880 34,288,358
Revenue values in this report are expressed in terms of estimated future net revenue and present worth of future net revenue. These values are based on the continuation of prices in effect on December 31, 1997. Future gross revenue is defined as that revenue to be realized from the production and sale of the estimated net reserves. Future net revenue is calculated by deducting estimated severance and ad valorem taxes from the future gross revenue. Present worth of future net revenue is calculated by discounting the future net revenue at the arbitrary rate of 10 percent per year compounded monthly over the expected period of realization. Revenue values in this report were estimated using the initial prices and costs provided by NationsBank. Future prices were estimated using guidelines established by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). The initial and future prices used in this report are based on receipts by the Trust in December 1997 and NationsBank has represented that the prices used herein are those that the Trust could reasonably expect to receive. The assumptions used for estimating future prices and costs are as follows: 11 Oil, Condensate, Natural Gas Liquids, and Natural Gas Prices Oil, condensate, natural gas liquids, and natural gas prices were furnished by NationsBank. These prices are based on receipts by the Trust in December 1997 and are held constant for the lives of the properties. A projection of the estimated future net revenue from the properties appraised, as of January 1, 1998, based on the aforementioned assumptions concerning prices and costs is summarized as follows:
Future Net Revenue ------------------------- Year Total Proved Ending Proved Developed December 31 ($) ($) - ----------------- ------------ ----------- 1998................................ 23,990,603 23,961,834 1999................................ 20,195,158 20,167,207 2000................................ 17,184,982 17,163,445 ----------- ----------- Subtotal............................ 61,370,743 61,292,486 Remaining........................... 125,993,129 125,638,180 ----------- ----------- Total............................... 187,363,872 186,930,666
The present worth of future net revenue, as of January 1, 1998, is estimated as follows:
Present Worth at 10 Percent ($) ----------------- Total Proved................................. 104,912,482 Proved Developed............................. 104,725,043
Estimates of oil, condensate, NGL and gas reserves and future net revenue should be regarded only as estimates that may change as further production history and additional information become available. Not only are such reserves and revenue estimates based on that information which is currently available, but such estimates are also subject to the uncertainties inherent in the application of judgmental factors in interpreting such information. In our opinion, the information relating to estimated proved reserves, estimated future net revenue from proved reserves, and present worth of estimated future net revenue from proved reserves of oil, condensate, natural gas liquids, and gas contained in this report has been prepared in accordance with Paragraphs 10-13, 15 and 30(a)-(b) of Statement of Financial Accounting Standards No. 69 (November 1982) of the FASB and Rules 4-10(a)(1)-(13) of Regulation S-X and Rule 302(b) of Regulation S-K of the SEC; provided, however, (i) certain estimated data have not been provided with respect to changes in reserve information, (ii) future income tax expenses have not been taken into account in estimating the future net revenue and present worth values set forth herein, and (iii) at the request of NationsBank and because of the limited availability of data, proved reserves, future net revenue therefrom, and the present worth thereof for certain royalty interests accounting for approximately 32 percent of the Trust's total proved reserves have been estimated in the aggregate by state or field rather than on a property-by-property basis using net production and revenue data and our general knowledge of producing characteristics in the geographic areas in which such interests are located. To the extent the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature or information beyond the scope of our report, we are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficient therefor. Submitted, DeGOLYER and MacNAUGHTON ______________________ There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production and timing of development. The preceding reserve data in the letter regarding the study represent estimates only and should not be construed to be exact. The estimated present worth of future net revenue amounts shown by the study should not be construed as the current fair market value of the estimated oil and gas reserves since a market value determination would include many additional factors. 12 Reserve estimates may be adjusted from time to time as more accurate information on the volume or recoverability of existing reserves becomes available. Actual reserve quantities do not change, however, except through production. The Trust continues to own only the Royalty Properties that were initially transferred to the Trust at the time of its creation and is prohibited by the Trust Agreement from acquiring additional oil and gas interests. The future net revenue shown by the study has not been reduced for administrative costs and expenses of the Trust in future years. The costs and expenses of the Trust may increase in future years, depending on the amount of income from the Royalty Properties, increases in the Trustee's and escrow agents' fees and expenses, accounting, engineering, legal and other professional fees, and other factors. It is expected that the costs and expenses of the Trust in 1998 will be approximately $1,350,000. The volatile nature of the world energy markets makes it difficult to estimate future prices of oil and gas. The prices obtained for oil and gas depend upon numerous factors, including the domestic and foreign supply of oil and gas and the price of foreign imports, market demand, the price and availability of alternative fuels, the availability of pipeline capacity and the effect of governmental regulations. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Registrant is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Units are listed and traded on the New York Stock Exchange under the symbol "SBR." The following table sets forth the high and low sales prices for the Units and the aggregate amount of cash distributions paid by the Trust during the periods indicated.
- -------------------------------------------------------------------------------- Sales Price Distributions ------------------ 1997 High Low Per Unit - --------------------------- -------- -------- -------- First Quarter..................... $13.375 $11.750 $.47428 Second Quarter.................... 14.625 12.500 .45869 Third Quarter..................... 16.438 14.125 .41136 Fourth Quarter.................... 17.000 12.625 .30023 1996 - -------------------------------------------------------------------------------- First Quarter..................... $ 9.125 $ 8.000 $.27340 Second Quarter.................... 10.125 9.125 .35717 Third Quarter..................... 11.750 9.500 .42173 Fourth Quarter.................... 12.875 10.875 .31833 - --------------------------------------------------------------------------------
At March 16, 1998, there were 14,579,345 Units outstanding and approximately 3,543 Unit holders of record. ITEM 6. SELECTED FINANCIAL DATA.
- ------------------------------------------------------------------------------------------------ Years Ended December 31 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Royalty Income...................$25,688,064 $22,173,492 $16,088,936 $18,669,739 $22,140,733 Distributable Income............. 24,499,892 20,972,323 14,829,839 17,441,297 20,893,820 Distributable Income per Unit.... 1.68 1.44 1.02 1.20 1.43 Total Assets at Year End......... 6,936,828 6,868,761 6,598,427 7,172,645 7,446,908 Distributions per Unit........... 1.64 1.37 1.03 1.20 1.46 - ------------------------------------------------------------------------------------------------
13 ITEM 7. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Sabine Royalty Trust (the "Trust") makes monthly distributions to its Unit holders 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 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. The Trust's royalty income represents payments received during a particular time period for oil and gas production from the Trust's properties. Because of various factors which influence the timing of the Trust's receipt of payments, royalty income for any particular time period will usually include payments for oil and gas produced in prior periods. The price and volume figures that follow represent the volumes and prices for which the Trust received payment during 1997. Royalty income during 1997 increased approximately $3,515,000, or 15.9 percent, compared to 1996 royalty income, which had increased approximately $6,085,000, or 37.8 percent, from 1995 royalty income. Revenues generated by sales of oil and gas increased in 1997 from 1996 as the result of higher oil and gas prices and increased volumes of gas sold, somewhat offset by a slight decline in oil sales. Gas volumes sold increased from 6,565,302 thousand cubic feet ("Mcf") in 1996 to 7,154,510 Mcf in 1997, after increasing from 5,936,059 in 1995. The average price per Mcf of gas received by the Trust increased from $1.45 in 1995 and $1.98 in 1996 to $2.45 in 1997. The Trustee believes that continued high demand from the prior winter season and predictions of volatile weather conditions in the latter half of 1997 contributed to the increase in gas prices. Oil volumes sold decreased to 614,976 barrels in 1997 from 660,521 barrels in 1996, having increased from 534,266 barrels in 1995. The effect of this volume decline was offset by an increase in the average price per barrel of oil received by the Trust to $18.77 in 1997 from $17.31 in 1996 and $15.65 in 1995. An increase in domestic crude oil prices, which began in 1996, continued into early 1997, but prices declined in the second quarter and continued at lower levels throughout the remainder of 1997. Due to an increase in funds available for temporary investment, interest income increased in 1997 compared to 1996. General and administrative expenses were relatively unchanged in 1997 compared to 1996. YEAR 2000 ISSUE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. If a company or organization does not successfully address its Year 2000 issues, it may face material adverse consequences. The Trust is reliant on the performance of third party vendors for the receipt of Royalty income, payment of expenses and disbursement of distributable income. The Trustee can provide no assurance as to whether third party vendors will successfully address the Year 2000 issue. Failure to successfully address the Year 2000 issue by third party vendors could have a material adverse impact on the Trust and its Unit holders. The Trust is making every effort that the systems that it has in its direct control are being addressed and will be ready for Year 2000. The Trustee does not believe that the cost of these efforts will be material. FORWARD-LOOKING STATEMENTS This Annual 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 Annual Report are forward-looking statements. Such statements include, without limitation, certain reserve information and other statements contained in Item 2, "Properties", and certain statements regarding the Trust's financial position, industry conditions and other matters contained in this Item 7. 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 this Annual Report 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. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS' REPORT UNIT HOLDERS OF SABINE ROYALTY TRUST AND NATIONSBANK OF TEXAS, N.A., TRUSTEE: We have audited the statements of assets, liabilities and trust corpus of Sabine Royalty Trust (the "Trust") as of December 31, 1997 and 1996, and the related statements of distributable income and changes in trust corpus for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Trustee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 2 to the financial statements, these statements were prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, such financial statements present fairly, in all material respects, the assets, liabilities and trust corpus of the Trust at December 31, 1997 and 1996, and the distributable income and changes in trust corpus for each of the three years in the period ended December 31, 1997, on the basis of accounting described in Note 2. /SIG/DELOITTE & TOUCHE LLP Dallas, Texas March 20, 1998 15 FINANCIAL STATEMENTS SABINE ROYALTY TRUST STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
Year Ended December 31, - -------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------- Cash and short-term investments............. $3,857,558 $3,321,723 Royalty interests in oil and gas properties less accumulated amortization of $19,315,915 (1997) and $18,848,147 (1996)........................ 3,079,270 3,547,038 - -------------------------------------------------------------------- Total....................................... $6,936,828 $6,868,761 ==================================================================== - -------------------------------------------------------------------- LIABILITIES AND TRUST CORPUS - -------------------------------------------------------------------- Trust expenses payable...................... $ 222,322 $ 232,493 Other payables (Note 4)..................... 774,399 750,725 Trust corpus (14,579,345 units of beneficial interest authorized and outstanding).......................... 5,940,107 5,885,543 - -------------------------------------------------------------------- Total....................................... $6,936,828 $6,868,761 ====================================================================
STATEMENTS OF DISTRIBUTABLE INCOME - --------------------------------------------------------------------
Year Ended December 31, - -------------------------------------------------------------------- 1997 1996 1995 Royalty income............. $25,688,064 $22,173,492 $16,088,936 Interest income............ 162,059 142,079 108,213 - -------------------------------------------------------------------- Total...................... 25,850,123 22,315,571 16,197,149 General and administrative expenses (Note 6)........ 1,350,231 1,343,248 1,367,310 - -------------------------------------------------------------------- Distributable income....... $24,499,892 $20,972,323 $14,829,839 ==================================================================== Distributable income per unit (Basic and Assuming Dilution) (14,579,345 units) (Note 1)................. $ 1.68 $ 1.44 $ 1.02 ==================================================================== Distributions per unit (Note 3)................. $ 1.64 $ 1.37 $ 1.03 ====================================================================
STATEMENTS OF CHANGES IN TRUST CORPUS
Year Ended December 31, - ------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------ Trust corpus, beginning of $ 5,885,543 $ 5,447,142 $ 6,129,697 year..................... Amortization of royalty (467,768) (543,094) (536,164) interests................ Distributable income....... 24,499,892 20,972,323 14,829,839 Distributions to unit (23,977,560) (19,990,828) (14,976,230) holders (Note 3)......... - ------------------------------------------------------------------------ Trust corpus, end of year.. $ 5,940,107 $ 5,885,543 $ 5,447,142 ========================================================================
The accompanying notes are an integral part of these financial statements. 16 NOTES TO FINANCIAL STATEMENTS 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, 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 Enterprises, 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. 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 and 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). 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 17 NOTES TO FINANCIAL STATEMENTS (Continued) 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 agreement is recognized for Federal income tax purposes and that the Trustee and the 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. 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 taxes, 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 the 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. 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. 18 NOTES TO FINANCIAL STATEMENTS (Continued) IMPAIRMENT The Trustee routinely reviews the Trust's royalty interests in oil and gas properties for imparement 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. Should the aggregate dollar amount of the Trust's reserves decline, an additional impairment provision, which could be material, will be required. There can be no assurance such a writedown will not occur. DISTRIBUTABLE INCOME PER UNIT The Trust has adopted the new computation and disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 128 -- "Earnings Per Share." Basic earnings per share is computed by dividing net income by the weighted average shares outstanding. Earnings per share assuming dilution is computed by dividing net income by the weighted average number of shares and equivalent shares outstanding. The Trust had no equivalent shares outstanding for any period presented and accordingly, the adoption of SFAS No. 128 had no impact on previously reported distributable income per unit. 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. 3. DISTRIBUTIONS 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. OTHER PAYABLES Other payables consist of the following:
- ------------------------------------------------------------------- December 31, 1997 1996 - ------------------------------------------------------------------- Funds due to payors for royalties erroneously forwarded to the Trust............ $ 1,806 $ -0- Royalty receipts in suspense pending verification of ownership interest or title... $772,593 $750,725 - ------------------------------------------------------------------- Total................................... $774,399 $750,725 ===================================================================
The Trustee believes that these amounts represent an ordinary operating condition of the Trust and that they will be paid or released in the normal course of business. 5. SUBSEQUENT EVENTS Subsequent to December 31, 1997, the Trust declared the following distributions: 19 NOTES TO FINANCIAL STATEMENTS (Continued)
Monthly Record Date Payment Date Distribution per Unit - --------------------- ------------ --------------------- January 15 January 29 $.19698 February 17 February 27 .18597 March 16 March 30 .14231
6. TRUSTEE'S FEES AND EXPENSES Fees and expenses for the years ended December 31, associated with the Trustee's services for the Trust pursuant to the Trust Agreement, were as follows:
- ---------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------- Trustee's fee............. $203,962 $205,750 $187,966 Escrow agent's fee........ 611,895 617,264 563,908 - ---------------------------------------------------------- Total fees and expenses... $815,857 $823,014 $751,874 ==========================================================
7. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth the royalty income, distributable income and distributable income per Unit of the Trust for each quarter in the years ended December 31, 1997 and 1996 (in thousands, except per Unit amounts):
- ---------------------------------------------------- Calendar Royalty Distributable Distributable Quarter Income Income Income per Unit - ---------------------------------------------------- 1997 - ---- First...... $ 7,440 $ 7,118 $ .49 Second..... 6,793 6,507 .45 Third...... 5,654 5,356 .37 Fourth..... 5,801 5,519 .37 - ---------------------------------------------------- $25,688 $24,500 $1.68 ==================================================== 1996 - ---- First...... $ 5,171 $ 4,862 $ .33 Second..... 5,970 5,554 .38 Third...... 5,921 5,673 .39 Fourth..... 5,111 4,883 .34 - ---------------------------------------------------- $22,173 $20,972 $1.44 ====================================================
8. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) RESERVE QUANTITIES Information regarding estimates of the proved oil and gas reserves attributable to the Trust are based on reports prepared by DeGolyer and MacNaughton, independent petroleum engineering consultants. Estimates were prepared in accordance with Statement of Financial Accounting Standards No. 69 and the guidelines established by the Securities and Exchange Commission. Oil and gas reserve quantities (all located in the United States) are estimates based on information available at the time of their preparation. Such estimates are subject to change as additional information becomes available. Reserves actually recovered, 20 NOTES TO FINANCIAL STATEMENTS (Continued) and the timing of the production of those reserves, may differ substantially from original estimates. The following schedule presents changes in the Trust's total proved reserves (in thousands):
- ------------------------------------------------------ Oil Gas (Barrels) (Mcf) - ------------------------------------------------------ January 1, 1995..................... 5,657 35,472 Revisions of previous estimates... 462 6,628 Production........................ (581) (5,651) - ------------------------------------------------------ December 31, 1995................... 5,538 36,449 Revisions of previous estimates... 1,010 2,980 Production........................ (573) (5,729) - ------------------------------------------------------ December 31, 1996................... 5,975 33,700 Revisions of previous estimates... 820 7,592 Production........................ (612) (6,927) - ------------------------------------------------------ December 31, 1997................... 6,183 34,365 ======================================================
Estimated quantities of proved developed reserves of oil and gas as of the dates indicated were as follows (in thousands):
- ---------------------------------------------------- Oil Gas (Barrels) (Mcf) - ---------------------------------------------------- Proved developed reserves: January 1, 1995............. 5,176 35,135 December 31, 1995............. 5,061 35,606 December 31, 1996............. 5,885 33,572 December 31, 1997............. 6,171 34,288
DISCLOSURE OF A STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS The following is a summary of a standardized measure (in thousands) of discounted future net cash flows related to the Trust's total proved oil and gas reserve quantities. Information presented is based upon a valuation of proved reserves by using discounted cash flows based upon current oil and gas prices ($17.81 per bbl and $2.72 per Mcf, respectively) and severance and ad valorem taxes, if any, and economic conditions, discounted at the required rate of 10 percent. As the Trust is not subject to taxation at the trust level, no provision for income taxes has been made in the following disclosure. The impact of changes in current prices on reserves could vary significantly from year to year. Accordingly, the information presented below should not be viewed as an estimate of the fair market value of the Trust's oil and gas properties nor should it be viewed as indicative of any trends.
- -------------------------------------------------------------------------- December 31, 1997 1996 1995 - -------------------------------------------------------------------------- Future net cash inflows.................... $187,364 $175,010 $131,627 Discount of future net cash flows at 10% (82,452) (80,383) (62,362) - -------------------------------------------------------------------------- Standardized measure of discounted future net cash flows.................... $104,912 $ 94,627 $ 69,265 ==========================================================================
21 NOTES TO FINANCIAL STATEMENTS (Continued) The change in the standardized measure of discounted future net cash flows for the years ended December 31, 1997, 1996 and 1995 is as follows (in thousands):
- --------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------- Standardized measure of discounted future net cash flows, January 1.......... $ 94,627 $ 69,265 $ 70,188 Royalty income, net of severance and ad valorem taxes...................... (25,688) (22,173) (16,089) Changes in prices, net of related costs..... 3,479 25,715 (470) Revisions of previous estimates and other... 23,031 14,894 8,617 Accretion of discount....................... 9,463 6,926 7,019 - --------------------------------------------------------------------------- Standardized measure of discounted future net cash flows, December 31,....... $104,912 $ 94,627 $ 69,265 ===========================================================================
Subsequent to year end, the price of oil decreased significantly. As of March 18, 1997, published oil prices were approximately $13.23 per barrel. The use of such price, as compared to $17.81 per barrel, which was used to calculate the above information, would result in a lower standardized measure of discounted future net cash flows. 22 REPORT OF INDEPENDENT ACCOUNTANTS TO THE UNIT HOLDERS OF SABINE ROYALTY TRUST: We have audited the accompanying statements of fees and expenses (as defined in Exhibit C to the Sabine Royalty Trust Agreement) paid by Sabine Royalty Trust to NationsBank of Texas, N.A., as trustee and escrow agent, for the years ended December 31, 1997, 1996 and 1995. These statements are the responsibility of the Trustee's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the statements of fees and expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of fees and expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the statements of fees and expenses audited by us present fairly, in all material respects, the fees and expenses paid by Sabine Royalty Trust to NationsBank of Texas, N.A., as trustee and escrow agent, for the years ended December 31, 1997, 1996 and 1995, in conformity with the Trust Agreement. /SIG/PRICE WATERHOUSE LLP Dallas, Texas March 20, 1998 23 STATEMENTS OF FEES AND EXPENSES PAID BY SABINE ROYALTY TRUST TO NATIONSBANK OF TEXAS, N.A., AS TRUSTEE AND ESCROW AGENT, FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995 - --------------------------------------------------------------------------- Trustee's fee.............................. $203,962 $205,750 $187,966 Escrow agent's fee......................... 611,895 617,264 563,908 - --------------------------------------------------------------------------- Total fees paid $815,857 $823,014 $751,874 Reimbursement for expenses -- -- -- - --------------------------------------------------------------------------- Total fees and expenses paid to NationsBank of Texas, N.A. $815,857 $823,014 $751,874 ===========================================================================
The accompanying notes are an integral part of these statements. NOTES 1. Sabine Royalty Trust (the "Trust") is an express trust formed under the laws of Texas by the Sabine Corporation Royalty Trust Agreement (the "Trust Agreement") made and entered into effective as of December 31, 1982, between Sabine Corporation ("Sabine"), as trustor, and InterFirst Bank Dallas, N.A. ("InterFirst"), as trustee (the "Trustee"). Contemporaneously with the execution of the Trust Agreement, Sabine, the Trustee and InterFirst, as escrow agent (the "Escrow Agent"), entered into an escrow agreement which establishes an escrow (the "Escrow"). Prior to distribution of units of beneficial interest (the "Units") in the Trust to Sabine's shareholders, Sabine transferred to the Trust royalty and mineral interests, including landowner's royalties, overriding royalty interests, minerals (other than executive rights, bonuses and delay rentals), production payments and other similar, non-participatory interests, in certain producing and proved undeveloped oil and gas properties in six states (the "Royalty Properties"). In May 1988, Sabine was acquired by Pacific Enterprise ("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. In connection with the transfer of the Royalty Properties 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 the executive rights relating to the Royalty Properties, and Pacific (USA)'s ownership of such rights was not affected by the sale. In June 1987, InterFirst was merged with RepublicBank Dallas, National Association. RepublicBank Dallas, National Association was the survivor of the merger and, in connection therewith, changed its name to First RepublicBank Dallas, National Association. First RepublicBank Dallas, National Association ("First Republic"), as successor to InterFirst, served as Trustee of the Trust and as Escrow Agent from June 1987 until July 1988. On July 29, 1988, First Republic was declared insolvent by the Federal Deposit Insurance Corporation (the "FDIC") and certain assets and liabilities of First Republic were transferred to NCNB Texas National Bank ("NCNB Texas"), which was established as a bridge bank by the FDIC pursuant to authority granted under the Competitive Equality Banking Act of 1987. NCNB Texas was subsequently acquired from the FDIC by NCNB Corporation. The name of NCNB Texas was changed effective December 31, 1991 to NationsBank of Texas, N.A. (the "Bank"). The Bank, as successor to First Republic, now serves as Trustee of the Trust and as Escrow Agent. The compensation agreement under the Trust Agreement provides for a "cost plus" fee payable to the Bank for all services rendered in its capacities as Trustee and as Escrow Agent. Generally, the fees payable to the Bank are calculated by dividing the expenses incurred by the Bank, as Trustee and as Escrow Agent, solely for services provided by the Bank in the administration of the Trust and the Escrow by seven-tenths (0.7). Professional and other noncontributing (out-of-pocket) expenses incurred by the Bank, as Trustee or as Escrow Agent, as the case may be, in the performance of its duties in the foregoing 24 capacities are charged to the Trust or the Escrow, as the case may be, at cost. These expenses do not contribute to the fees payable to the Bank described above. Annually, the Trustee must estimate Trust and Escrow expenses contributing to the fee for the forthcoming year and publish this amount in the Trust's first quarterly report to Unit holders. The Trustee can be penalized by forfeiture of reimbursement for part of its expenses if such expenses exceed the estimate. The Trustee also can earn a bonus by administering the Trust for total costs that are lower than the estimate. 2. Escrow Agent's fees and Trustee's fees consist of a profit margin plus all fully allocated costs incurred by the Bank, as Trustee and as Escrow Agent, in performing administrative services to the Trust as specified in the Trust Agreement. Administrative costs do not include any professional and related expenses to third parties. All costs incurred by the Bank in its capacities as Trustee and as Escrow Agent are accumulated in one account. Fees based thereon are allocated between the Trustee function and the Escrow Agent function according to the actual administrative services rendered by the Bank in each capacity. Any determinations by the Bank as to the allocation of the fee between the Trustee and the Escrow Agent are conclusive and binding on the Unit holders and Pacific (USA), but in no event does the Bank's allocation affect the aggregate fee payable to the Bank. 3. The Bank did not earn a bonus for 1997, 1996 or 1995; therefore, none will be taken in 1998 and none was taken in 1997 or 1996. A total of $132,174 of Trustee's fees and Escrow Agent's fees paid to the Bank in January and February 1998 was based on expenses incurred in 1997. Of this amount, $65,084 is included in the 1997 statement and the remaining $67,090 will be included in the subsequent year's statement. Similarly, a total of $145,397 of Trustee's fees and Escrow Agent's fees paid to the Bank in January and February 1997 was based on expenses incurred in 1996. Of this amount, $71,008 was included in the 1996 statement, and the remaining $74,389 is reflected in the 1997 statement. A total of $129,746 of Trustee's fees and Escrow Agent's fees paid to the Bank in January and February 1996 was based on expenses incurred in 1995. Of this amount, $67,675 was included in the 1995 statement and the remaining $62,071 was included in the 1996 statement. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant has no directors or executive officers. The Trustee is a corporate trustee which may be removed, with or without cause, by the affirmative vote at a meeting duly called and held of the holders of a majority of the Units represented at the meeting. ITEM 11. EXECUTIVE COMPENSATION. Not applicable. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) Security Ownership of Certain Beneficial Owners. As of March 16, 1998 there were no Unit holders known to the Trustee to be beneficial owners of more that 5% of the outstanding Units. (b) Security Ownership of Management. The Trust has no directors or executive officers. NationsBank of Texas, N.A., the Trustee, held as of March 16, 1998 an aggregate of 78,641 Units in various fiduciary capacities, and it had sole voting and investment power with respect to all 78,641 of such Units. 25 (c) Changes in Control. The Trustee knows of no arrangements the operation of which may at a subsequent date result in a change in control of the Registrant. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: 1. Financial Statements (included in Item 8 of this report) Independent Auditors' report Statements of Assets, Liabilities and Trust Corpus at December 31, 1997 and 1996 Statements of Distributable Income for Each of the Three Years in the Period Ended December 31, 1997 Statements of Changes in Trust Corpus for Each of the Three Years in the Period Ended December 31, 1997 Notes to Financial Statements Report dated March 1, 1998 of the Trustee containing interim tax information for each of the 12 months in the year ending December 31, 1997. 2. Financial Statement Schedules Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and notes thereto. 3. Exhibits (4) (a)* -- Sabine Corporation Royalty Trust Agreement effective as of December 31, 1982, by and between Sabine Corporation and InterFirst Bank Dallas, N.A., as trustee. (b)* -- Sabine Corporation Louisiana Royalty Trust Agreement effective as of December 31, 1982, by and between Sabine Corporation and Hibernia National Bank in New Orleans, as trustee, and joined in by InterFirst Bank Dallas, N.A., as trustee. (23) -- Consent of DeGolyer and MacNaughton. (27)**-- Financial Data Schedule. (99) -- Report dated March 1, 1998 of the Trustee containing interim tax information for each of the 12 months in the year ending December 31, 1997. - ------------ * Exhibits 4(a) and 4(b) are incorporated herein by reference to Exhibits 4(a) and 4(b), respectively, of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. ** Included with EDGAR version of Form 10-K only. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. 26 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. SABINE ROYALTY TRUST BY: NATIONSBANK OF TEXAS, N.A. (as successor), Trustee By: /s/ Ron E. Hooper --------------------- Ron E. Hooper Vice-President Date: March 27, 1998 (THE REGISTRANT HAS NO DIRECTORS OR EXECUTIVE OFFICERS.) 27 EX-23 2 CONSENT EXHIBIT 23 DeGolyer and McNaughton One Energy Square Dallas, Texas 75206 March 27, 1998 Sabine Royalty Trust NationsBank of Texas, N.A. NationsBank Plaza-17th Floor 901 Main Street Dallas, Texas 75202 Gentlemen: We hereby consent to the inclusion of our letter report dated February 26, 1998, concerning the reserves and revenue, as of January 1, 1998, of certain royalty interests owned by Sabine Royalty Trust in the Annual Report on Form 10- K for the year ended December 31, 1997, of the Sabine Royalty Trust to be filed with the Securities and Exchange Commission. We also consent to the references to our firm under "Properties--Reserves" in Item 2 and under "Supplemental Oil and Gas Information (Unaudited)--Reserve Quantities" in Item 8 of the Form 10-K. Very truly yours, /s/ DeGolyer and MacNaughton DeGOLYER and MacNAUGHTON EX-99 3 TAX INFORMATION EXHIBIT 99 [LOGO OF SABINE ROYALTY TRUST APPEARS HERE] TAX INFORMATION 1997 This booklet contains tax information relevant to ownership of Units of Sabine Royalty Trust and should be retained. SABINE ROYALTY TRUST MARCH 1, 1998 TO UNIT HOLDERS: This booklet provides 1997 tax information which will allow you to determine your pro rata share of income and deductions attributable to your investment in Sabine Royalty Trust (the "Trust"). Each Unit holder is encouraged to read the entire booklet very carefully. The material included in this booklet enables you to compute the information to be included in your Federal and state income tax returns. This booklet is the only information source for Unit holders to determine their share of the items of income and expense of the Trust for the entire 1997 calendar year. The Trust does not file nor does it furnish a Form 1099 to Unit holders (except where Federal backup withholding is required). Unit holders should retain this booklet as part of their tax records. The material herein is not intended and should not be construed as professional tax or legal advice. Unit holders are encouraged to consult their own tax advisors concerning its use. Very truly yours, Sabine Royalty Trust, By NationsBank of Texas N.A., Trustee 1-800-365-6541 SABINE ROYALTY TRUST TABLE OF CONTENTS
PAGE ---- 1997 TAX INFORMATION . Reading the Income and Expense Schedules................................ 1 . Identifying Which Income and Expense Schedules to Use................... 1 . Applying the Data From the Income and Expense Schedules................. 1 . Computing Depletion..................................................... 1 . Sale or Exchange of Units............................................... 3 . Classification of Investment............................................ 3 . Nonresident Foreign Unit Holders........................................ 3 . Backup Withholding...................................................... 3 . State Income Tax........................................................ 3 . Table of 1997 Monthly Record Dates and Cash Distributions Per Unit...... 3 . Tax Computation Worksheet............................................... 4 . Supplement to Tax Computation Worksheet................................. 5 . Tax Information Schedules............................................... 6 . .Form 1041, Grantor Trust for Calendar Year 1997....................... 6 . .Form 1041, Grantor Trust for January 1997............................. 7 . .Form 1041, Grantor Trust for February 1997............................ 8 . .Form 1041, Grantor Trust for March 1997............................... 9 . .Form 1041, Grantor Trust for April 1997............................... 10 . .Form 1041, Grantor Trust for May 1997................................. 11 . .Form 1041, Grantor Trust for June 1997................................ 12 . .Form 1041, Grantor Trust for July 1997................................ 13 . .Form 1041, Grantor Trust for August 1997.............................. 14 . .Form 1041, Grantor Trust for September 1997........................... 15 . .Form 1041, Grantor Trust for October 1997............................. 16 . .Form 1041, Grantor Trust for November 1997............................ 17 . .Form 1041, Grantor Trust for December 1997............................ 18 . .Depletion Schedule I.................................................. 19 . .Depletion Schedule II................................................. 19 . .Depletion Schedule III................................................ 20 . .Depletion Schedule IV................................................. 20 . .Depletion Schedule V.................................................. 21 . .Depletion Schedule VI................................................. 21 . .Depletion Schedule VII................................................ 22 . .Depletion Schedule VIII............................................... 22 . .Depletion Schedule IX................................................. 23 . .Depletion Schedule X.................................................. 23 . .Depletion Schedule XI................................................. 24 . .Depletion Schedule XII................................................ 24 . .Depletion Schedule XIII............................................... 25 . .Depletion Schedule XIV................................................ 25 . .Depletion Schedule XV................................................. 26 . .Depletion Schedule XVI................................................ 26 . .Depletion Schedule XVII............................................... 27 . Sample Tax Forms for Individual Unit Holders............................ 28 . Comprehensive Example................................................... 30 DISCUSSION OF TAX CONSIDERATIONS PERTAINING TO THE OWNERSHIP OF UNITS IN SABINE ROYALTY TRUST . Effect of Tax Reform.................................................... A-1 . Taxation of the Original Distribution of Units.......................... A-1 . Tax Background Information.............................................. A-1 . .Effect of Escrow Arrangement.......................................... A-2 . Depletion............................................................... A-2 . .Cost Depletion........................................................ A-2 . .Percentage Depletion.................................................. A-3 . Nonresident Foreign Unit Holders........................................ A-3 . Sale or Exchange of Units............................................... A-4 . Backup Withholding...................................................... A-4 . State Income Tax........................................................ A-4
(SRT 1997 TAX) SABINE ROYALTY TRUST 1997 TAX INFORMATION READING THE INCOME AND EXPENSE SCHEDULES The accompanying income and expense schedules reflect tax information attributable to Sabine Royalty Trust (the "Trust") for 1997. This information has been assembled on a per Unit basis and is expressed in decimal fractions of one dollar. A cumulative schedule for the twelve months ended December 31, 1997, and separate noncumulative schedules for the months of January through December 1997 are enclosed. Separate depletion schedules are enclosed which provide the necessary information for Unit holders to compute cost depletion with respect to their interests in the Trust. IDENTIFYING WHICH INCOME AND EXPENSE SCHEDULES TO USE Pursuant to the terms of the Trust agreement and the escrow agreement, the Trust receives income and incurs expenses only on Monthly Record Dates. Furthermore, only Unit holders of record on Monthly Record Dates are entitled to cash distributions. On the basis of these agreements, both cash and accrual basis Unit holders should be considered as realizing income and incurring expenses only on Monthly Record Dates. Therefore, if you were not the Unit holder of record of the Units on a specified Monthly Record Date, you should not use the tax information for the month in which that Monthly Record Date falls. A table of Monthly Record Dates and cash distributions per Unit is included on page 3. The appropriate schedules to be used by a Unit holder will depend upon (i) the date the Unit holder became a holder of record of the Units, (ii) if applicable, the date the Unit holder ceased to be the holder of record of the Units, and (iii) the tax year end of the Unit holder. For instance, a Unit holder reporting on the calendar year basis who acquired Units and became a Unit holder of record on June 16, 1997 and who still owned only those Units on December 15, 1997 must use each of the separate monthly schedules for June through December 1997, and Depletion Schedule XVII for such Units. However, Unit holders reporting on a calendar year basis who became Unit holders of record prior to January 15, 1997 and who continued to own only those Units on December 15, 1997, must use only the cumulative schedule for calendar year 1997 and the appropriate depletion schedule(s). APPLYING THE DATA FROM THE INCOME AND EXPENSE SCHEDULES The tax data, other than depletion, specifically applicable to a Unit holder may be determined by multiplying the appropriate decimal fractions times the number of Units owned. Unit holders who must use the separate monthly income and expense schedules should combine the individual income and expense factors from the monthly schedules for each month during which the Units were owned on a Monthly Record Date. For a worksheet approach to computing these decimal fractions, see the Supplement to Tax Computation Worksheet on page 5. COMPUTING DEPLETION Depletion schedules are included which provide information for Unit holders to compute cost depletion deductions with respect to their interests in the Trust. To compute depletion for any taxable period, Unit holders should multiply the depletion factor indicated on the relevant schedule times their original tax basis in the respective Unit(s), reduced by the cost depletion that was allowable as a deduction (whether or not deducted) in prior calendar years during which they owned the Units. A factor for percentage depletion is not included, as cost depletion exceeded the percentage depletion calculated. (SRT 1997 TAX) 1 Noncorporate Unit holders who acquired Units in the original distribution from Sabine Corporation ("Sabine") should use Depletion Schedule I to compute 1997 depletion on those Units. Corporate Unit holders that acquired Units in the original distribution from Sabine should use Depletion Schedule II to compute 1997 depletion on those Units. The proper depletion schedule to be utilized for Units owned is reflected below.
DATE(S) UNITS DEPLETION SCHEDULE WERE ACQUIRED TO BE UTILIZED ------------- ------------------ Original Distribution Before12/16/83 See preceding paragraph I 12/16/83--12/17/84 III 12/18/84--12/16/85 IV 12/17/85-- 3/17/86 V 3/18/86--12/15/86 VI 12/16/86--12/15/87 VII 12/16/87--12/15/88 VIII 12/16/88--12/15/89 IX 12/16/89--12/17/90 X 12/18/90--12/16/91 XI 12/17/91--12/15/92 XII 12/16/92--12/15/93 XIII 12/16/93--12/15/94 XIV 12/16/94--12/15/95 XV 12/16/95--12/16/96 XVI 12/17/96--12/15/97 XVII 12/16/97--12/31/97 No 1997 depletion allowed
As discussed at page A-3 in the back portion of this booklet, the composite depletion factors are determined on the basis of a weighted average ratio of current production from each Trust property to the estimated future production from such property. This method of weighting the depletion factors permits the presentation of a single depletion factor for all Unit holders acquiring Units during a period in which there is no substantial change in the relative fair market values of the Trust properties. Primarily as a result of the decline in oil prices which occurred during 1986, there was a change in the relative fair market values of the Trust properties. Accordingly, two mutually exclusive depletion schedules are included herein reflecting the composite depletion factors required to compute depletion for Units acquired in 1986. The proper depletion schedule to use in computing 1997 depletion is dependent upon the date upon which the Units were acquired as reflected in the preceding paragraph. The amount of depletion attributable to a specific state may be determined by multiplying the depletion factor indicated for the particular state times the Federal tax basis in the Unit(s) held, reduced by prior calendar years' allowable Federal depletion, if any. The Federal and state depletion factors contained on Depletion Schedule I through Depletion Schedule XVI are presented on a cumulative basis for 1997. However, the Federal and state depletion factors contained on Depletion Schedule XVII are summarized separately; and the state factors are presented on a noncumulative basis. If you are using Depletion Schedule XVII for your state income tax return(s), you may either calculate the applicable state depletion for each month and add the monthly depletion amounts together, or you may add together the applicable monthly depletion factors for the relevant state and multiply this created composite depletion factor times your adjusted basis in your Units. The result should be the same using either method. Different depletion schedules may be required to be used for Units acquired in different years by a Unit holder. Therefore, Unit holders are encouraged to maintain records indicating the date of acquisition and the acquisition price for each Unit or lot of Units acquired. (SRT 1997 TAX) 2 SALE OR EXCHANGE OF UNITS A discussion concerning the tax consequences associated with the sale or exchange of Units is presented on page A-4 in the back portion of this booklet. CLASSIFICATION OF INVESTMENT Tax Reform measures enacted in 1986 and 1987 require items of income and expense to be categorized as "passive," "active" or "portfolio" in nature. An explanation of the application of these rules to the items of income and expense reported by the Trust are contained on page A-1 in the back portion of this booklet. NONRESIDENT FOREIGN UNIT HOLDERS Nonresident alien individual and foreign corporation Unit holders ("Foreign Taxpayer(s)") are subject to special tax rules with respect to their investments in the Trust. These rules are outlined beginning on page A-3 in the back portion of this booklet. BACKUP WITHHOLDING Unit holders who have had amounts withheld in 1997 pursuant to the Federal backup withholding provisions should have received a Form 1099-MISC from the Trust. The Form 1099-MISC reflects the total Federal income tax withheld from distributions. The amount reported on the Form 1099-MISC should not be included as additional income in computing taxable income, as such amount is already included in the per Unit income items on the income and expense schedules. The Federal income tax withheld, as reported on the Form 1099-MISC, should be considered as a credit by the Unit holder in computing any Federal income tax liability. Individual Unit holders should include the amount of backup withholding on line 54 of page 2 of the 1997 Form 1040. For a further discussion of backup withholding, see page A-4 in the back portion of this booklet. STATE INCOME TAX Since the Trust holds royalty interests and receives income that is attributable to various states, Unit holders may be obligated to file a return and may have a tax liability in states in addition to their state of residence. The accompanying schedules have been prepared in such a manner that income and deductions attributable to the various states may be determined by each Unit holder. State income tax matters are more fully discussed on page A- 5 in the back portion of this booklet. TABLE OF 1997 MONTHLY RECORD DATES AND CASH DISTRIBUTIONS PER UNIT Unit holders, as reflected in the transfer books of the Trust on a Monthly Record Date, received the following per Unit cash distributions for 1997. The per Unit cash distributions reflected below have not been reduced by any taxes that may have been withheld from distributions to Foreign Taxpayers or from distributions to Unit holders subject to the Federal backup withholding rules. The distribution checks were dated and mailed on the corresponding Date Payable.
MONTHLY RECORD DISTRIBUTION DATE DATE PAYABLE PER UNIT -------------- ------------ ------------ January 15, 1997 January 29, 1997 $.12625 February 18, 1997 February 28, 1997 $.18552 March 17, 1997 March 31, 1997 $.16251 April 15, 1997 April 29, 1997 $.14383 May 15, 1997 May 29, 1997 $.19078 June 16, 1997 June 30, 1997 $.12408 July 15, 1997 July 29, 1997 $.14499 August 15, 1997 August 29, 1997 $.15155 September 15, 1997 September 29, 1997 $.11482 October 15, 1997 October 29, 1997 $.11836 November 17, 1997 November 28, 1997 $.10268 December 15, 1997 December 29, 1997 $.07919
(SRT 1997 TAX) 3 SABINE ROYALTY TRUST TAX COMPUTATION WORKSHEET 1997 (RETAIN THIS WORKPAPER AS PART OF YOUR PERMANENT TAX RECORDS) PART I INCOME AND EXPENSE
A B C AMOUNTS PER UNIT NUMBER OF FROM APPROPRIATE UNITS OWNED SCHEDULE(S) WHERE TO REFLECT ON ITEM (NOTE 1) (NOTE 2) TOTALS 1997 FORM 1040 (NOTE 3) - ---- ----------- ---------------- ------ ----------------------- Gross Royalty Income.... X = Line 4, Part I,Schedule E ----------- ---------------- ------ Severance Tax........... X = Line 16, Part I,Schedule E ----------- ---------------- ------ Interest Income......... X = Line 1, Part I,Schedule B ----------- ---------------- ------ Administrative Expense.. X = Line 18, Part I,Schedule E ----------- ---------------- ------
PART II COST DEPLETION (NOTE 4)
COST DEPLETION ALLOWABLE IN PRIOR ADJUSTED BASIS FOR APPROPRIATE 1997 CALENDAR YEARS COST DEPLETION COST DEPLETION FACTOR ORIGINAL BASIS (NOTE 5) PURPOSES (NOTE 4) 1997 COST DEPLETION* - -------------- ------------------ ------------------ --------------------- -------------------- - = X = - -------------- ------------------ ------------------ --------------------- --------------------
*Reflect cost depletion on 1997 Form 1040, line 20, Part 1, Schedule E (Note 3). PART III COMPUTATION OF GAIN OR (LOSS) FOR UNITS SOLD
NET WHERE TO REFLECT ON SALES ADJUSTED BASIS GAIN 1997 FORM 1040 PRICE (NOTE 6) (LOSS) (NOTE 3) ----- -------------- ------ ------------------- - = Form 4797 ----- -------------- ------
NOTES - ----- (1) In order to correctly calculate total income and expense to be reported on your 1997 Federal and, if applicable, state income tax returns, it is recommended that you reproduce and complete a separate Tax Computation Worksheet for each block of Units acquired at different times. Only the total of each item of income and expense obtained by adding the separate Tax Computation Worksheet totals, if more than one is required, should be reported on your applicable 1997 income tax returns. (2) If you did not become a Unit holder of record of any Unit(s) or did not cease to be a Unit holder of record of any Unit(s) during the period from January 15, 1997 through December 15, 1997, then the amounts reflected on the cumulative schedule for 1997 should be used to complete Part I. If any Units were held of record for only part of the period defined above, the Supplement to Tax Computation Worksheet on page 5 should be used to derive the income and expense factors to be inserted in column B. (3) The Trustee believes that individual Unit holders owning the Units as an investment should report the amounts determined in this manner. The U.S. Corporation Income Tax Return (Form 1120) does not require that royalty income and related expenses be separately identified on any specific schedules. Note: Schedule D should be utilized to report the Sale of Units acquired before January 1, 1987. (See "Sale or Exchange of Units" on page A-4.) (4) The appropriate depletion schedule(s) to be utilized is generally dependent upon the date on which the Units were acquired. See "Computing Cost Depletion" on page 1 to determine the proper schedule(s) to be used. (5) Cost depletion allowable in prior calendar years cannot be computed from the schedules contained in this booklet. Depletion schedules contained in prior years' Sabine Royalty Trust Tax Information Booklet(s) should be used in order to determine the appropriate cost depletion amount(s) allowable in prior calendar years. (6) The adjusted basis is equal to the cost or other basis of the Unit(s) less the cost depletion allowable from the date of acquisition through the date of sale (whether or not deducted). (SRT 1997 TAX) 4 SABINE ROYALTY TRUST SUPPLEMENT TO TAX COMPUTATION WORKSHEET 1997 FOR UNITS HELD FOR ONLY PART OF THE YEAR This worksheet should be used by Unit holders who became holders of record of Units or ceased to be holders of record of Units during the period from January 15, 1997 through December 15, 1997. This worksheet is designed to assist Unit holders in determining the proper income and expense factors to be used on the Tax Computation Worksheet-- Part I, under the heading entitled "Amounts Per Unit from Appropriate Schedule(s)". In order to complete this schedule, Unit holders should insert only the individual income and expense factors from the monthly schedules (pages 7-18) for each month during which the Units were owned on a Monthly Record Date. (See page 3 for a list of Monthly Record Dates).
MONTH(S) DURING WHICH UNITS WERE OWNED ON A MONTHLY RECORD DATE CALCULATED ---------------------------------------------------------------------------------------------- FACTOR JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER PER UNIT* ------- -------- ------ ------ ------ ------ ------ ------ --------- ------- -------- -------- ---------- Gross Royalty Income......... ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Severance Tax... ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Interest Income......... ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Administrative Expense........ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
- ------- * This column of calculated factors per Unit should be inserted in column B of the Income and Expense section (Part I) of the Tax Computation Worksheet on page 4. (SRT 1997 TAX) 5 CUMULATIVE 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE ----------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ --------- --------- --------- -------- -------------- Florida.................. $ .041435 $.011371 $ .030064 $ * $.003103 Louisiana................ .180960 .011761 .169199 .001217 .018363 Mississippi.............. .065631 .005021 .060610 * .005768 New Mexico............... .095345 .004661 .090684 * .009045 Oklahoma................. .359375 .039631 .319744 * .031058 Texas.................... 1.212589 .071879 1.140710 .009595 .109926 --------- -------- --------- -------- -------- TOTAL.................. $1.955335 $.144324 $1.811011 $.010812 $.177263 ========= ======== ========= ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $1.811011 2. Interest Income................................................... .010812 3. Administrative Expense............................................ (.177263) --------- 4. Cash Distribution Per Unit **..................................... $1.644560 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 6 FOR JANUARY 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.003009 $.000285 $.002724 $ * $.000317 Louisiana.................. .009643 .000360 .009283 .000103 .001303 Mississippi................ .003540 .000179 .003361 * .000373 New Mexico................. .008189 .000687 .007502 * .000863 Oklahoma................... .026605 .003071 .023534 * .002805 Texas...................... .100277 .005045 .095232 .000745 .010573 -------- -------- -------- -------- -------- TOTAL.................... $.151263 $.009627 $.141636 $.000848 $.016234 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .141636 2. Interest Income................................................... .000848 3. Administrative Expense............................................ (.016234) --------- 4. Cash Distribution Per Unit **..................................... $ .126250 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 7 FOR FEBRUARY 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida................. $.003866 $.000748 $.003118 $ * $.000167 Louisiana............... .033591 .001341 .032250 .000190 .001739 Mississippi............. .011103 .000810 .010293 * .000480 New Mexico.............. .011173 .001075 .010098 * .000483 Oklahoma................ .027881 .002455 .025426 * .001206 Texas................... .118673 .006253 .112420 .000935 .005135 -------- -------- -------- -------- -------- TOTAL................. $.206287 $.012682 $.193605 $.001125 $.009210 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- -------- 1. Total Net Royalty Payments......................................... $.193605 2. Interest Income.................................................... .001125 3. Administrative Expense............................................. (.009210) -------- 4. Cash Distribution Per Unit **...................................... $.185520 ========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 8 FOR MARCH 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.004279 $.000788 $.003491 $ * $.000152 Louisiana.................. .010411 .000489 .009922 .000082 .000656 Mississippi................ .005508 .000312 .005196 * .000196 New Mexico................. .007427 .000691 .006736 * .000264 Oklahoma................... .030068 .002259 .027809 * .001070 Texas...................... .121642 .006515 .115127 .000813 .004328 -------- -------- -------- -------- -------- TOTAL.................... $.179335 $.011054 $.168281 $.000895 $.006666 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .168281 2. Interest Income................................................... .000895 3. Administrative Expense............................................ (.006666) --------- 4. Cash Distribution Per Unit **..................................... $ .162510 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 9 FOR APRIL 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.000163 $.000017 $.000146 $ * $.000010 Louisiana.................. .024795 .001138 .023657 .000140 .001746 Mississippi................ .006145 .000463 .005682 * .000362 New Mexico................. .007139 .000691 .006448 * .000420 Oklahoma................... .038864 .002650 .036214 * .002288 Texas...................... .085470 .004974 .080496 .000905 .005032 -------- -------- -------- -------- -------- TOTAL.................... $.162576 $.009933 $.152643 $.001045 $.009858 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments....................................... $ .152643 2. Interest Income.................................................. .001045 3. Administrative Expense........................................... (.009858) --------- 4. Cash Distribution Per Unit **.................................... $ .143830 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 10 FOR MAY 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.006502 $.000873 $.005629 $ * $.000240 Louisiana.................. .016705 .000514 .016191 .000121 .000902 Mississippi................ .004854 .000328 .004526 * .000179 New Mexico................. .010646 .000881 .009765 * .000392 Oklahoma................... .033945 .002579 .031366 * .001251 Texas...................... .138323 .008142 .130181 .001063 .005098 -------- -------- -------- -------- -------- TOTAL.................... $.210975 $.013317 $.197658 $.001184 $.008062 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .197658 2. Interest Income................................................... .001184 3. Administrative Expense............................................ (.008062) --------- 4. Cash Distribution Per Unit **..................................... $ .190780 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 11 FOR JUNE 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.007117 $.005330 $.001787 $ * $.000296 Louisiana.................. .014863 .001286 .013577 .000112 .000905 Mississippi................ .007283 .000589 .006694 * .000303 New Mexico................. .006200 .001288 .004912 * .000258 Oklahoma................... .048762 .014554 .034208 * .002030 Texas...................... .074814 .006076 .068738 .000958 .003114 -------- -------- -------- -------- -------- TOTAL.................... $.159039 $.029123 $.129916 $.001070 $.006906 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .129916 2. Interest Income................................................... .001070 3. Administrative Expense............................................ (.006906) --------- 4. Cash Distribution Per Unit **..................................... $ .124080 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 12 FOR JULY 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE ---------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.005192 $.001833 $.003359 $ * $.000250 Louisiana.................. .010092 .000621 .009471 .000086 .000772 Mississippi................ .004425 .000313 .004112 * .000213 New Mexico................. .002650 (.004635) .007285 * .000128 Oklahoma................... .026044 .000746 .025298 * .001253 Texas...................... .110337 .007874 .102463 .000841 .005309 -------- -------- -------- -------- -------- TOTAL.................... $.158740 $.006752 $.151988 $.000927 $.007925 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- ------ 1. Total Net Royalty Payments........................................ $ .151988 2. Interest Income................................................... .000927 3. Administrative Expense............................................ (.007925) --------- 4. Cash Distribution Per Unit **..................................... $ .144990 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 13 FOR AUGUST 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE - ------ -------- --------- -------- -------- -------------- Florida..................... $.002022 $.000150 $.001872 $ * $.000097 Louisiana................... .012814 .000697 .012117 .000114 .000901 Mississippi................. .004166 .000458 .003708 * .000200 New Mexico.................. .011538 .000996 .010542 * .000554 Oklahoma.................... .029805 .002437 .027368 * .001431 Texas....................... .111864 .008295 .103569 .000815 .005372 -------- -------- -------- -------- -------- TOTAL..................... $.172209 $.013033 $.159176 $.000929 $.008555 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .159176 2. Interest Income................................................... .000929 3. Administrative Expense............................................ (.008555) --------- 4. Cash Distribution Per Unit **..................................... $ .151550 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 14 FOR SEPTEMBER 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.003013 $.000606 $.002407 $ * $.000518 Louisiana.................. .015919 .000822 .015097 .000092 .003022 Mississippi................ .007421 .000787 .006634 * .001276 New Mexico................. .007765 .000565 .007200 * .001335 Oklahoma................... .027888 .004153 .023735 * .004794 Texas...................... .090987 .005451 .085536 .000705 .015641 -------- -------- -------- -------- -------- TOTAL.................... $.152993 $.012384 $.140609 $.000797 $.026586 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .140609 2. Interest Income................................................... .000797 3. Administrative Expense............................................ (.026586) --------- 4. Cash Distribution Per Unit **..................................... $ .114820 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 15 FOR OCTOBER 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.002777 $.000389 $.002388 $ * $.000141 Louisiana.................. .013503 .003555 .009948 .000054 .000974 Mississippi................ .003517 .000278 .003239 * .000179 New Mexico................. .007449 .001069 .006380 * .000379 Oklahoma................... .024956 .001700 .023256 * .001271 Texas...................... .084259 .004537 .079722 .000608 .004291 -------- -------- -------- -------- -------- TOTAL.................... $.136461 $.011528 $.124933 $.000662 $.007235 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments....................................... $ .124933 2. Interest Income.................................................. .000662 3. Administrative Expense........................................... (.007235) --------- 4. Cash Distribution Per Unit **.................................... $ .118360 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 16 FOR NOVEMBER 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE - ------ -------- --------- -------- -------- -------------- Florida..................... $.002724 $.000320 $.002404 $ * $.000714 Louisiana................... .009257 .000486 .008771 .000064 .002712 Mississippi................. .004930 .000350 .004580 * .001292 New Mexico.................. .008993 .000830 .008163 * .002357 Oklahoma.................... .026531 .001725 .024806 * .006953 Texas....................... .099054 .005935 .093119 .000762 .025961 -------- -------- -------- -------- -------- TOTAL..................... $.151489 $.009646 $.141843 $.000826 $.039989 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .141843 2. Interest Income................................................... .000826 3. Administrative Expense............................................ (.039989) --------- 4. Cash Distribution Per Unit **..................................... $ .102680 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 17 FOR DECEMBER 1997 SABINE ROYALTY TRUST EIN 75-6297143 FORM 1041, GRANTOR TRUST Federal and State Income Tax Information See Instructions for Use SECTION I INCOME AND EXPENSE PER UNIT
OTHER INCOME ROYALTY INCOME AND EXPENSE AND EXPENSE --------------------------- ----------------------- NET GROSS SEVERANCE ROYALTY INTEREST ADMINISTRATIVE SOURCE INCOME TAX PAYMENTS INCOME EXPENSE ------ -------- --------- -------- -------- -------------- Florida.................... $.000771 $.000032 $.000739 $ * $.000201 Louisiana.................. .009367 .000452 .008915 .000059 .002731 Mississippi................ .002739 .000154 .002585 * .000715 New Mexico................. .006176 .000523 .005653 * .001612 Oklahoma................... .018026 .001302 .016724 * .004706 Texas...................... .076889 .002782 .074107 .000445 .020072 -------- -------- -------- -------- -------- TOTAL.................... $.113968 $.005245 $.108723 $.000504 $.030037 ======== ======== ======== ======== ========
SECTION II RECONCILIATION OF CASH DISTRIBUTIONS PER UNIT
ITEM AMOUNT ---- --------- 1. Total Net Royalty Payments........................................ $ .108723 2. Interest Income................................................... .000504 3. Administrative Expenses........................................... (.030037) --------- 4. Cash Distribution Per Unit **..................................... $ .079190 =========
- -------- * Revenue attributable to these states was invested and earned interest income. Since the investments were made in Dallas, Texas, and the interest was paid there, such interest is included in the Texas interest income. ** Includes amounts withheld by the Trust from distributions to nonresident alien individuals and foreign corporations and remitted directly to the United States Treasury. This also includes amounts withheld pursuant to the backup withholding provisions. (SRT 1997 TAX) 18 SABINE ROYALTY TRUST DEPLETION SCHEDULE I The cumulative depletion factors reflected in Depletion Schedule I should be used to compute 1997 federal and state depletion amounts attributable to Units acquired by noncorporate Unit holders in the original distribution from Sabine Corporation and all other Units purchased in 1983 by any Unit holder for which the Unit holder was entitled to one or more 1983 monthly distributions. This schedule should not be used to compute depletion amounts for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .012017 .028697 .040141 .049374 .063849 .075404 .090210 .105400 .117989 .128861 .140299 .149960 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000005 .000012 .000019 .000019 .000030 .000049 .000060 .000064 .000073 .000080 .000085 .000088 Louisiana....... .000457 .001873 .002379 .003108 .003599 .004236 .004696 .005366 .006120 .006629 .007073 .007569 Mississippi..... .000343 .001176 .001490 .001887 .002215 .002867 .003235 .003615 .004362 .004684 .005103 .005301 New Mexico...... .000192 .000443 .000572 .000712 .000927 .001090 .001112 .001442 .001683 .001885 .002108 .002267 Oklahoma........ .001107 .002303 .003240 .004416 .005537 .007609 .008736 .010133 .011377 .012498 .013610 .014351 Texas........... .009913 .022890 .032441 .039232 .051541 .059553 .072371 .084780 .094374 .103085 .112320 .120384
DEPLETION SCHEDULE II The cumulative depletion factors reflected in Depletion Schedule II should be used to compute 1997 federal and state depletion amounts attributable to Units acquired in the original distribution from Sabine Corporation by corporate Unit holders. This schedule should not be used to compute depletion amounts for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .012810 .033256 .045427 .056732 .071541 .086240 .101351 .117524 .133149 .145051 .157707 .167807 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... -- -- -- -- -- -- -- -- -- -- -- -- Louisiana....... .001185 .004858 .006172 .008064 .009337 .010990 .012183 .013920 .015877 .017197 .018348 .019634 Mississippi..... .001727 .005918 .007499 .009498 .011149 .014433 .016287 .018202 .021963 .023584 .025691 .026687 New Mexico...... .000241 .000557 .000720 .000896 .001167 .001372 .001400 .001815 .002119 .002373 .002653 .002852 Oklahoma........ .001647 .003427 .004822 .006572 .008240 .011323 .013001 .015080 .016931 .018599 .020254 .021357 Texas........... .008010 .018496 .026214 .031702 .041648 .048122 .058480 .068507 .076259 .083298 .090761 .097277
(SRT 1997 TAX) 19 SABINE ROYALTY TRUST DEPLETION SCHEDULE III The cumulative depletion factors reflected in Depletion Schedule III should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1984. This schedule should not be used to compute depletion amounts for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011222 .027019 .037754 .046453 .059978 .070748 .084635 .098822 .110614 .120776 .131438 .140507 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000005 .000012 .000020 .000020 .000031 .000050 .000062 .000066 .000075 .000082 .000087 .000090 Louisiana....... .000552 .002262 .002874 .003755 .004348 .005118 .005674 .006483 .007394 .008009 .008545 .009144 Mississippi..... .000302 .001035 .001312 .001662 .001951 .002526 .002850 .003185 .003843 .004127 .004496 .004670 New Mexico...... .000120 .000277 .000358 .000445 .000579 .000681 .000695 .000901 .001052 .001178 .001317 .001416 Oklahoma........ .000963 .002004 .002820 .003843 .004818 .006621 .007602 .008818 .009900 .010875 .011842 .012487 Texas........... .009280 .021429 .030370 .036728 .048251 .055752 .067752 .079369 .088350 .096505 .105151 .112700
DEPLETION SCHEDULE IV The cumulative depletion factors reflected in Depletion Schedule IV should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1985. This schedule should not be used to compute depletion amounts for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011715 .027869 .039023 .060706 .074848 .085982 .100472 .115246 .127490 .138048 .149200 .158592 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000005 .000012 .000019 .000020 .000030 .000047 .000057 .000061 .000069 .000075 .000080 .000082 Louisiana....... .000336 .001377 .001749 .003223 .003584 .004053 .004391 .004883 .005438 .005812 .006138 .006503 Mississippi..... .000389 .001333 .001689 .002765 .003137 .003877 .004295 .004726 .005573 .005938 .006413 .006637 New Mexico...... .000184 .000425 .000549 .000854 .001060 .001216 .001237 .001553 .001784 .001977 .002190 .002342 Oklahoma........ .000961 .002000 .002814 .005296 .006270 .008069 .009048 .010261 .011341 .012314 .013280 .013924 Texas........... .009840 .022722 .032203 .048548 .060767 .068720 .081444 .093762 .103285 .111932 .121099 .129104
(SRT 1997 TAX) 20 SABINE ROYALTY TRUST DEPLETION SCHEDULE V The cumulative depletion factors reflected in Depletion Schedule V should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions on the January 15, February 17 or March 17, 1986 Monthly Record Date. This schedule should not be used to compute depletion amounts for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011220 .026520 .037197 .045607 .059185 .069720 .083627 .097775 .109392 .119484 .130147 .139142 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000006 .000014 .000022 .000022 .000034 .000055 .000067 .000071 .000081 .000089 .000095 .000098 Louisiana....... .000255 .001046 .001329 .001737 .002011 .002367 .002624 .002998 .003420 .003704 .003952 .004229 Mississippi..... .000319 .001093 .001385 .001754 .002059 .002665 .003007 .003361 .004056 .004355 .004744 .004928 New Mexico...... .000186 .000430 .000555 .000690 .000899 .001057 .001079 .001399 .001633 .001829 .002045 .002199 Oklahoma........ .000888 .001848 .002600 .003544 .004443 .006105 .007009 .008130 .009128 .010027 .010919 .011514 Texas........... .009566 .022089 .031306 .037860 .049739 .057471 .069841 .081816 .091074 .099480 .108392 .116174
DEPLETION SCHEDULE VI The cumulative depletion factors reflected in Depletion Schedule VI should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions after the March 17, 1986 Monthly Record Date and before the January 15, 1987 Monthly Record Date. This schedule should not be used to compute depletion amounts for any other units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .010663 .025309 .035453 .043494 .056381 .066427 .079591 .093059 .104158 .113765 .123910 .132468 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000005 .000012 .000019 .000019 .000029 .000047 .000057 .000061 .000070 .000076 .000081 .000083 Louisiana....... .000291 .001192 .001514 .001978 .002290 .002695 .002988 .003414 .003894 .004218 .004500 .004815 Mississippi..... .000319 .001094 .001386 .001756 .002061 .002668 .003011 .003365 .004060 .004360 .004749 .004933 New Mexico...... .000209 .000482 .000623 .000775 .001009 .001187 .001211 .001570 .001833 .002053 .002295 .002468 Oklahoma........ .000833 .001733 .002438 .003323 .004166 .005725 .006573 .007624 .008560 .009403 .010239 .010797 Texas........... .009006 .020796 .029473 .035643 .046826 .054105 .065751 .077025 .085741 .093655 .102046 .109372
(SRT 1997 TAX) 21 SABINE ROYALTY TRUST DEPLETION SCHEDULE VII The cumulative depletion factors reflected in Depletion Schedule VII should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1987. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011334 .026778 .037565 .046063 .059786 .070462 .084497 .098799 .110527 .120734 .131505 .140595 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= === STATE DEPLETION FACTORS Florida......... .000016 .000038 .000061 .000062 .000095 .000153 .000187 .000199 .000227 .000248 .000264 .000272 Louisiana....... .000270 .001106 .001405 .001835 .002125 .002501 .002772 .003167 .003612 .003912 .004174 .004467 Mississippi..... .000296 .001015 .001286 .001629 .001912 .002476 .002794 .003123 .003769 .004047 .004409 .004580 New Mexico...... .000204 .000471 .000609 .000758 .000987 .001161 .001185 .001536 .001793 .002008 .002245 .002414 Oklahoma........ .000920 .001915 .002694 .003672 .004604 .006326 .007263 .008425 .009459 .010391 .011315 .011931 Texas........... .009628 .022233 .031510 .038107 .050063 .057845 .070296 .082349 .091667 .100128 .109098 .116931
DEPLETION SCHEDULE VIII The cumulative depletion factors reflected in Depletion Schedule VIII should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1988. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011487 .027121 .038041 .046726 .060602 .071596 .085777 .100281 .112184 .122559 .133481 .142681 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= === STATE DEPLETION FACTORS Florida......... .000020 .000048 .000077 .000078 .000120 .000193 .000237 .000252 .000288 .000315 .000335 .000345 Louisiana....... .000302 .001240 .001575 .002058 .002383 .002805 .003110 .003553 .004053 .004390 .004684 .005012 Mississippi..... .000272 .000932 .001181 .001496 .001756 .002273 .002565 .002867 .003460 .003715 .004047 .004204 New Mexico...... .000207 .000478 .000618 .000769 .001001 .001177 .001201 .001557 .001818 .002036 .002276 .002447 Oklahoma........ .001100 .002288 .003219 .004387 .005501 .007559 .008679 .010067 .011303 .012417 .013522 .014258 Texas........... .009586 .022135 .031371 .037938 .049841 .057589 .069985 .081985 .091262 .099686 .108617 .116415
(SRT 1997 TAX) 22 SABINE ROYALTY TRUST DEPLETION SCHEDULE IX The cumulative depletion factors reflected in Depletion Schedule IX should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1989. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011430 .027015 .037857 .046612 .060352 .071675 .085727 .100131 .112119 .122478 .133384 .142475 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000034 .000081 .000130 .000132 .000203 .000326 .000399 .000424 .000484 .000529 .000563 .000580 Louisiana....... .000290 .001189 .001510 .001973 .002284 .002688 .002980 .003405 .003884 .004207 .004488 .004803 Mississippi..... .000363 .001243 .001575 .001995 .002342 .003032 .003421 .003823 .004613 .004953 .005395 .005604 New Mexico...... .000193 .000445 .000575 .000715 .000931 .001095 .001117 .001448 .001690 .001893 .002117 .002276 Oklahoma........ .001331 .002769 .003896 .005310 .006657 .009147 .010502 .012182 .013677 .015024 .016360 .017251 Texas........... .009219 .021288 .030171 .036487 .047935 .055387 .067308 .078849 .087771 .095872 .104461 .111961
DEPLETION SCHEDULE X The cumulative depletion factors reflected in Depletion Schedule X should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1990. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011338 .026864 .037618 .046333 .059973 .071223 .085090 .099427 .111332 .121640 .132464 .141511 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000047 .000112 .000179 .000181 .000279 .000449 .000550 .000585 .000668 .000730 .000777 .000800 Louisiana....... .000356 .001461 .001856 .002425 .002808 .003305 .003664 .004186 .004775 .005172 .005518 .005905 Mississippi..... .000305 .001046 .001325 .001678 .001970 .002551 .002879 .003218 .003883 .004170 .004542 .004718 New Mexico...... .000259 .000598 .000773 .000962 .001253 .001473 .001503 .001948 .002274 .002547 .002848 .003062 Oklahoma........ .001317 .002740 .003855 .005254 .006588 .009052 .010393 .012055 .013535 .014868 .016191 .017073 Texas........... .009054 .020907 .029630 .035833 .047075 .054393 .066101 .077435 .086197 .094153 .102588 .109953
(SRT 1997 TAX) 23 SABINE ROYALTY TRUST DEPLETION SCHEDULE XI The cumulative depletion factors reflected in Depletion Schedule XI should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1991. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011271 .026946 .037569 .046414 .059899 .071309 .084695 .099108 .111136 .121485 .132317 .141342 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000057 .000136 .000217 .000220 .000338 .000542 .000663 .000705 .000805 .000880 .000936 .000964 Louisiana....... .000513 .002102 .002670 .003488 .004039 .004754 .005270 .006021 .006867 .007438 .007936 .008492 Mississippi..... .000288 .000987 .001250 .001583 .001858 .002405 .002714 .003033 .003660 .003930 .004281 .004447 New Mexico...... .000541 .001248 .001612 .002005 .002611 .003070 .003133 .004061 .004741 .005309 .005936 .006383 Oklahoma........ .001415 .002944 .004142 .005646 .007079 .009728 .011169 .012955 .014545 .015978 .017399 .018347 Texas........... .008457 .019529 .027678 .033472 .043974 .050810 .061746 .072333 .080518 .087950 .095829 .102709
DEPLETION SCHEDULE XII The cumulative depletion factors reflected in Depletion Schedule XII should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1992. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011460 .026821 .037510 .046465 .060089 .071946 .085437 .100081 .112178 .122700 .133740 .142797 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000030 .000072 .000115 .000116 .000178 .000286 .000350 .000372 .000425 .000465 .000495 .000510 Louisiana....... .000274 .001124 .001428 .001866 .002161 .002544 .002820 .003222 .003675 .003980 .004246 .004544 Mississippi..... .000269 .000922 .001168 .001480 .001737 .002249 .002538 .002836 .003422 .003675 .004003 .004158 New Mexico...... .000588 .001357 .001753 .002181 .002840 .003339 .003408 .004418 .005158 .005776 .006458 .006944 Oklahoma........ .001909 .003972 .005588 .007616 .009549 .013122 .015066 .017475 .019620 .021553 .023470 .024748 Texas........... .008390 .019374 .027458 .033206 .043624 .050406 .061255 .071758 .079878 .087251 .095068 .101893
(SRT 1997 TAX) 24 SABINE ROYALTY TRUST DEPLETION SCHEDULE XIII The cumulative depletion factors reflected in Depletion Schedule XIII should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1993. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011651 .027868 .038805 .048123 .061985 .074291 .087922 .102871 .115442 .126235 .137483 .146769 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000092 .000219 .000350 .000354 .000543 .000871 .001066 .001134 .001294 .001415 .001505 .001550 Louisiana....... .000593 .002432 .003090 .004037 .004675 .005503 .006100 .006970 .007950 .008611 .009187 .009831 Mississippi..... .000282 .000966 .001224 .001550 .001819 .002355 .002657 .002969 .003582 .003846 .004190 .004352 New Mexico...... .000659 .001521 .001965 .002444 .003182 .003741 .003818 .004949 .005778 .006470 .007234 .007778 Oklahoma........ .001836 .003820 .005375 .007326 .009185 .012621 .014491 .016808 .018871 .020730 .022574 .023803 Texas........... .008189 .018910 .026801 .032412 .042581 .049200 .059790 .070041 .077967 .085163 .092793 .099455
DEPLETION SCHEDULE XIV The depletion factors reflected in Depletion Schedule XIV should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1994. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011559 .028216 .039171 .048685 .062434 .075095 .088733 .103524 .116258 .127050 .138204 .147461 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= === STATE DEPLETION FACTOR Florida......... .000154 .000367 .000586 .000593 .000911 .001462 .001789 .001903 .002172 .002374 .002526 .002601 Louisiana....... .000892 .003657 .004646 .006070 .007029 .008274 .009172 .010480 .011953 .012947 .013813 .014781 Mississippi..... .000312 .001068 .001353 .001714 .002012 .002604 .002938 .003283 .003961 .004253 .004633 .004813 New Mexico...... .000505 .001166 .001506 .001873 .002439 .002868 .002927 .003794 .004429 .004960 .005546 .005963 Oklahoma........ .001887 .003926 .005524 .007529 .009440 .012972 .014894 .017276 .019397 .021308 .023203 .024467 Texas........... .007809 .018032 .025556 .030906 .040603 .046915 .057013 .066788 .074346 .081208 .088483 .094836
(SRT 1997 TAX) 25 SABINE ROYALTY TRUST DEPLETION SCHEDULE XV The depletion factors reflected in Depletion Schedule XV should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1995. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011611 .027926 .038923 .048241 .062137 .075300 .089120 .103839 .116685 .127539 .138781 .147914 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000281 .000669 .001068 .001081 .001660 .002664 .003261 .003469 .003960 .004329 .004606 .004742 Louisiana....... .000610 .002500 .003176 .004149 .004804 .005654 .006268 .007162 .008169 .008848 .009440 .010102 Mississippi..... .000420 .001438 .001822 .002308 .002709 .003507 .003957 .004422 .005336 .005730 .006242 .006484 New Mexico...... .000512 .001181 .001526 .001898 .002471 .002905 .002965 .003843 .004486 .005024 .005617 .006039 Oklahoma........ .002036 .004237 .005961 .008124 .010186 .013997 .016071 .018641 .020929 .022991 .025036 .026400 Texas........... .007752 .017901 .025370 .030681 .040307 .046573 .056598 .066302 .073805 .080617 .087840 .094147
DEPLETION SCHEDULE XVI The depletion factors reflected in Depletion Schedule XV should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1996. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 ---------------------------------------------------------------------------------------------------- JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- FEDERAL DEPLETION FACTOR......... .011526 .027618 .038464 .047949 .061614 .075092 .088595 .103277 .116027 .126877 .138056 .147101 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= STATE DEPLETION FACTORS Florida......... .000251 .000597 .000953 .000964 .001481 .002377 .002910 .003095 .003533 .003862 .004109 .004231 Louisiana....... .000678 .002780 .003532 .004614 .005343 .006289 .006972 .007966 .009086 .009841 .010499 .011235 Mississippi..... .000315 .001080 .001368 .001733 .002034 .002633 .002971 .003320 .004006 .004302 .004686 .004868 New Mexico...... .000551 .001272 .001643 .002044 .002661 .003129 .003193 .004139 .004832 .005411 .006050 .006505 Oklahoma........ .002542 .005289 .007441 .010142 .012716 .017474 .020063 .023272 .026128 .028702 .031255 .032957 Texas........... .007189 .016600 .023527 .028452 .037379 .043190 .052486 .061485 .068442 .074759 .081457 .087305
(SRT 1997 TAX) 26 SABINE ROYALTY TRUST DEPLETION SCHEDULE XVI The cumulative depletion factors reflected in Depletion Schedule XVII should be used to compute 1997 federal and state depletion amounts attributable to Units purchased for which the Unit holder initially became entitled to distributions in 1997. This schedule should not be used to compute depletion for any other Units owned. (See the accompanying information for computation instructions.)
FIRST MONTH IN WHICH UNITS WERE OWNED ON THE LAST MONTH IN WHICH UNITS WERE OWNED ON THE MONTHLY RECORD DATE IN 1997 MONTHLY RECORD ---------------------------------------------------------------------------------------------------- DATE IN 1997 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER - ----------------- ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- January.......... .012232 .029948 .041573 .051721 .066285 .080284 .094736 .110335 .124007 .135515 .147352 .157083 February......... -- .017716 .029341 .039489 .054053 .068052 .082504 .098103 .111775 .123283 .135120 .144851 March............ -- -- .011625 .021773 .036337 .050336 .064788 .080387 .094059 .105567 .117404 .127135 April............ -- -- -- .010148 .024712 .038711 .053163 .068762 .082434 .093942 .105779 .115510 May.............. -- -- -- -- .014564 .028563 .043015 .058614 .072286 .083794 .095631 .105362 June............. -- -- -- -- -- .013999 .028451 .044050 .057722 .069230 .081067 .090798 July............. -- -- -- -- -- -- .014452 .030051 .043723 .055231 .067068 .076799 August........... -- -- -- -- -- -- -- .015599 .029271 .040779 .052616 .062347 September........ -- -- -- -- -- -- -- -- .013672 .025180 .037017 .046748 October.......... -- -- -- -- -- -- -- -- -- .011508 .023345 .033076 November......... -- -- -- -- -- -- -- -- -- -- .011837 .021568 December......... -- -- -- -- -- -- -- -- -- -- -- .009731 STATE DEPLETION FACTORS JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER - ----------------- ------- -------- ------- ------- ------- ------- ------- ------- --------- ------- -------- -------- Florida.......... .000268 .000370 .000381 .000012 .000552 .000958 .000569 .000198 .000468 .000352 .000264 .000130 Louisiana........ .000993 .003077 .001101 .001585 .001067 .001385 .001000 .001455 .001639 .001106 .000964 .001077 Mississippi...... .000371 .000901 .000340 .000430 .000355 .000706 .000399 .000412 .000809 .000349 .000453 .000214 New Mexico....... .000521 .000681 .000351 .000378 .000583 .000442 .000061 .000894 .000655 .000547 .000604 .000430 Oklahoma......... .002220 .002399 .001880 .002359 .002249 .004156 .002261 .002803 .002495 .002248 .002230 .001487 Texas............ .007859 .010288 .007572 .005384 .009758 .006352 .010162 .009837 .007606 .006906 .007322 .006393 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL........... .012232 .017716 .011625 .010148 .014564 .013999 .014452 .015599 .013672 .011508 .011837 .009731 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(SRT 1997 TAX) 27 [SAMPLE TAX FORM APPEARS HERE] 28 [SAMPLE TAX FORM APPEARS HERE] 29 COMPREHENSIVE EXAMPLE 1 The following example illustrates the computations necessary for an individual to determine income and expense attributable to Units acquired in March of 1984 and held throughout 1997. COMPUTATION OF INCOME AND EXPENSE FOR UNITS OWNED ON ALL MONTHLY RECORD DATES IN 1997 SABINE ROYALTY TRUST TAX COMPUTATION WORKSHEET 1997 (RETAIN THIS WORKPAPER AS PART OF YOUR PERMANENT TAX RECORDS) PART I INCOME AND EXPENSE
A B C AMOUNTS PER UNIT NUMBER OF FROM APPROPRIATE UNITS OWNED SCHEDULE(S) WHERE TO REFLECT ON ITEM (NOTE 1) (NOTE 2) TOTALS 1997 FORM 1040 (NOTE 3) ---- ----------- ---------------- ---------- ----------------------------- Gross Royalty Income.... 100 X $1.955335 = $195.53 Line 4, Part I, Schedule E ---------- -------------- ---------- Severance Tax........... 100 X $ .144324 = $ 14.43 Line 16, Part I, Schedule E ---------- -------------- ---------- Interest Income......... 100 X $ .010812 = $ 1.08 Line 1, Part I, Schedule B ---------- -------------- ---------- Administrative Expense.. 100 X $ .177263 = $ 17.73 Line 18, Part I, Schedule E ---------- -------------- ----------
PART II COST DEPLETION (NOTE 4)
COST DEPLETION ALLOWABLE IN PRIOR ADJUSTED BASIS FOR CALENDAR YEARS COST DEPLETION APPROPRIATE 1997 OIGINAL BASISR (NOTE 5) PURPOSES COST DEPLETION FACTOR 1997 COST DEPLETION* -------------- ------------------ ------------------ --------------------- -------------------- $2,100.00 - $1,806.99 = $293.01 X .140507 = $41.17 ---------- ------------- -------------- ---------------- ----------------
*Reflect cost depletion on 1997 Form 1040, line 20, Part 1, Schedule E (Note 3). PART III COMPUTATION OF GAIN OR (LOSS) FOR UNITS SOLD
WHERE TO REFLECT ON NET SALES ADJUSTED BASIS GAIN 1997 FORM 1040 PRICE (NOTE 6) (LOSS) (NOTE 3) ---------- -------------- ------ ------------------- Not Appli- cable - -- = -- Form 4797 ---------- ----------- --
See Page 4 for Applicable Notes. (SRT 1997 TAX) 30 COMPREHENSIVE EXAMPLE 2 The following example illustrates the computations necessary for an individual to determine income and expenses and gain or loss on units disposed of during 1997.
ACQUISITION UNITS ORIGINAL SALES UNITS SALES DATE ACQUIRED BASIS DATE SOLD PRICE - ----------- -------- -------- ----- ----- ----- 03-21-84 100 $2,100.00 04-3-97 100 $1,275.00
COMPUTATION OF INCOME AND EXPENSE FOR UNITS SOLD IN 1997 SABINE ROYALTY TRUST TAX COMPUTATION WORKSHEET 1997 (RETAIN THIS WORKPAPER AS PART OF YOUR PERMANENT TAX RECORDS) PART I INCOME AND EXPENSE
A B C AMOUNTS PER UNIT NUMBER OF FROM APPROPRIATE UNITS OWNED SCHEDULE(S) WHERE TO REFLECT ON ITEM (NOTE 1) (NOTE 2) TOTALS 1997 FORM 1040 (NOTE 3) ---- ----------- ---------------- ---------- ----------------------------- Gross Royalty Income.... 100 X $.536885 = $53.69 Line 4, Part I, Schedule E ---------- -------------- ---------- Severance Tax........... 100 X $.033363 = $ 3.34 Line 16, Part I, Schedule E ---------- -------------- ---------- Interest Income......... 100 X $.002868 = $ .29 Line 1, Part I, Schedule B ---------- -------------- ---------- Administrative Expense.. 100 X $.032110 = $ 3.21 Line 18, Part I, Schedule E ---------- -------------- ----------
PART II COST DEPLETION (NOTE 4)
COST DEPLETION ALLOWABLE IN PRIOR ADJUSTED BASIS FOR CALENDAR YEARS COST DEPLETION APPROPRIATE 1997 OIGINAL BASISR (NOTE 5) PURPOSES COST DEPLETION FACTOR 1997 COST DEPLETION* -------------- ------------------ ------------------ --------------------- -------------------- $2,100.00 - $1,806.99 = $293.01 X .037754 = $11.06 ---------- ------------- -------------- ---------------- ----------------
*Reflect cost depletion on 1997 Form 1040, line 20, Part 1, Schedule E (Note 3). PART III COMPUTATION OF GAIN OR (LOSS) FOR UNITS SOLD
WHERE TO REFLECT ON NET SALES ADJUSTED BASIS GAIN 1997 FORM 1040 PRICE (NOTE 6) (LOSS) (NOTE 3) --------- -------------- ------- ------------------- $1,275.00 - $281.95 = $993.05 Form 4797 --------- ------------ -------
See Page 4 for Applicable Notes. (SRT 1997 TAX) 31 COMPREHENSIVE EXAMPLE 2 (CONTINUED) SABINE ROYALTY TRUST SUPPLEMENT TO TAX COMPUTATION WORKSHEET 1997 FOR UNITS HELD FOR ONLY PART OF THE YEAR This worksheet should be used by Unit holders who became holders of record of Units or ceased to be holders of record of Units during the period from January 15, 1997 through December 15, 1997. This worksheet is designed to assist Unit holders in determining the proper income and expense factors to be used on the Tax Computation Worksheet-- Part I, under the heading entitled "Amounts Per Unit from Appropriate Schedule(s)". In order to complete this schedule, Unit holders should insert only the individual income and expense factors from the monthly schedules (pages 7-18) for each month during which the Units were owned on a Monthly Record Date. (See page 3 for a list of Monthly Record Dates.)
MONTH(S) DURING WHICH UNITS WERE OWNED ON A MONTHLY RECORD DATE CALCULATED ----------------------------------------------------------------------------------------------- FACTOR JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER PER UNIT* ------- -------- ------- ------ ------ ------ ------ ------ --------- ------- -------- -------- ---------- Gross Royalty Income......... .151263 .206287 .179335 -- -- -- -- -- -- -- -- -- .536885 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- Severance Tax... .009627 .012682 .011054 -- -- -- -- -- -- -- -- -- .023363 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- Interest Income......... .000848 .001125 .000895 -- -- -- -- -- -- -- -- -- .002868 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- Administrative Expense........ .016234 .009210 .006666 -- -- -- -- -- -- -- -- -- .032110 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
- ------- * This column of calculated factors per Unit should be inserted in column B of the Income and Expense section (Part I) of the Tax Computation Worksheet on page 4. (SRT 1997 TAX) 32 SABINE ROYALTY TRUST DISCUSSION OF TAX CONSIDERATIONS PERTAINING TO THE OWNERSHIP OF UNITS IN SABINE ROYALTY TRUST The tax law requires individuals, estates, trusts, closely held C corporations and personal service corporations to categorize income and expense into one of three classes, "active," "portfolio" or "passive", based upon the nature of the activity and the involvement of the taxpayer in such activity. Since the Trust is a grantor trust, the Unit holders are deemed to hold the investment in the royalty interests directly and the proper classification of the Trust income and expense will be dependent upon the relevant facts and circumstances of each Unit holder. Generally, income or loss resulting from an interest in the Trust is properly classified as portfolio and as such can be reported as directed on the tax computation worksheet (page 4). However, under certain limited circumstances a different classification may be appropriate, accordingly Unit holders should consult their tax advisor concerning this matter. TAXATION OF THE ORIGINAL DISTRIBUTION OF UNITS A detailed discussion of the Federal income tax consequences arising from the original distribution of Units was included in the 1983 tax information booklet of the Trust. The majority of that discussion was applicable only to Unit holders who received Units in the distribution from Sabine Corporation ("Sabine"). Unit holders who desire a copy of this material may obtain copies of the information by writing the Trustee of the Trust at: Sabine Royalty Trust 1983 Tax Booklet NationsBank of Texas N.A., Trustee P.O. Box 830650 Dallas, Texas 75283-0650 TAX BACKGROUND INFORMATION Sabine received a private letter ruling from the Internal Revenue Service, dated May 2, 1983 (the "Ruling"), concerning certain tax considerations relevant to the creation and continued existence of the Trust. Pursuant to the Ruling, the Trust is classified for Federal income tax purposes as a "grantor trust" and not as an association taxable as a corporation. A grantor trust is not subject to Federal income tax. Instead, its beneficiaries (the Unit holders in the case of the Trust) are generally considered to own the trust's income and principal as though no trust were in existence. A grantor trust simply files an information return reflecting all items of income and/or deductions that will be included in the returns of the beneficiaries. Accordingly, each Unit holder of the Trust is taxable on his pro rata share of the Trust income and/or deductions. The income received or accrued and deductions paid or incurred by the Trust are deemed to be received or accrued and paid or incurred, respectively, by each Unit holder at the same time as the Trust. Thus, the taxable year for reporting a Unit holder's share of the Trust's income and deductions is controlled by the Unit holder's taxable year and method of accounting rather than the taxable year and method of accounting of the Trust. For example, a cash basis Unit holder should recognize income attributable to his Units as such income is received by the Trust; and deductions attributable to his Units should be claimed when such deductions are paid by the Trust. (SRT 1997 TAX) A-1 Effect of Escrow Arrangement The assets of the Trust include royalty and mineral interests in certain producing and proved undeveloped oil and gas properties (the "Properties"), which constitute economic interests in gross production of oil, gas and other minerals free of the costs of production. The Properties are located in six states and were not carved out of any of Sabine's working interests in effecting the distribution. In order to facilitate creation of the Trust and avoid the administrative expense and inconvenience of daily reporting to Unit holders, the conveyances by Sabine of the Properties located in five of the six states provided for the execution of an escrow agreement by Sabine, the Trustee and InterFirst Bank Dallas, N.A., in its capacity as escrow agent. The conveyances by Sabine of the Properties 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 Properties located in Louisiana. Pursuant to the terms of the escrow agreement and the conveyances of the Properties by Sabine, the proceeds of production from the Properties 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 for each calendar month only on the 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 the escrow arrangement is recognized for Federal income tax purposes and the Trustee and the escrow agents are able to control the timing of income and expenses, as stated above, both cash and accrual basis Unit holders will be treated as realizing income only on each Monthly Record Date. The Trustee is treating the escrow arrangement as effective for tax purposes and the accompanying tax information has been presented accordingly. If the escrow arrangement is not recognized for Federal income tax purposes, a mismatching of income and deductions could occur between a transferor and a transferee upon the sale or exchange of Units. In addition, the Trustee would be required to report the proceeds from production, interest income thereon and any deductions to the Unit holders on a daily basis, resulting in a substantial increase in the administrative expenses of the Trust. DEPLETION Cost Depletion Pursuant to the previously mentioned Ruling, each Unit holder is entitled to deduct cost depletion with respect to his pro rata interest in the Properties. This cost depletion deduction is computed by reference to the Unit holder's basis in each of his Units. The deduction for cost depletion must be computed by a Unit holder with respect to each separate property in the Trust. A Unit holder's tax basis in each separate property generally must be determined at the time each Unit is acquired by allocating such Unit holder's cost in each Unit among all properties in the Trust based on their relative fair market values. However, a corporate Unit holder that acquired Units in the distribution from Sabine must determine its tax basis in each separate property in the Trust at the time of the distribution by reference to Sabine's tax basis in each separate property included in the distribution. The cost depletion deduction attributable to each separate property is calculated for a taxable year by multiplying the tax basis of the property times the decimal derived when estimated total (SRT 1997 TAX) A-2 equivalent units of production (barrels of oil and MCF's of gas) expected to be recovered from the property as of the beginning of the taxable year is divided into the number of equivalent units produced and sold from such property during the taxable year. The resulting deduction for cost depletion cannot exceed the adjusted tax basis in the property. The composite depletion factors presented herein were derived in a manner that encompasses this separate property concept. Percentage Depletion Prior to the Revenue Reconciliation Act of 1990, Unit holders were prohibited from claiming percentage depletion on transferred proven oil and gas properties. Since substantially all of the properties were "proven properties" on the date of the original distribution, the percentage depletion deduction has limited applicability to Unit holders which became Unit holders prior to October 12, 1990. For Unit holders which become Unit owners from transfers of Units occurring after October 11, 1990, the Revenue Reconciliation Act of 1990 repeals the prohibition on claiming percentage depletion. A computation of percentage depletion has been made with respect to the post October 11, 1990 transfers. However, since cost depletion exceeds any otherwise allocable percentage depletion, percentage depletion factors have not been presented by reference to the number of units a Unit holder owns. Percentage depletion will continue to be computed and compared to cost depletion on an annual basis for applicable transfers occurring after October 11, 1990. NONRESIDENT FOREIGN UNIT HOLDERS Nonresident alien individual and foreign corporation Unit holders ("Foreign Taxpayer(s)"), in general, are subject to tax on the gross income attributable to the Trust at a rate equal to 30 percent (or the lower rate under any applicable treaty) without any deductions. This tax is withheld by the Trust and remitted directly to the United States Treasury. Foreign Taxpayers who have had tax withheld in 1997 should have received a Form 1042S from the Trust. The Form 1042S will reflect the total Federal income tax withheld from distributions. The amount reported on the Form 1042S should not be included as additional income in computing taxable income, as such amount is already included in the per Unit income items on the income and expense schedules. The Federal income tax withheld, as reported on the Form 1042S, should be considered as a credit by the Unit holder in computing any Federal income tax liability. A Foreign Taxpayer holding income producing real property may elect to treat the income from such real property as effectively connected with the conduct of a United States trade or business. The income attributable to the Properties is considered as income produced from real property. Therefore, this election should be available to Foreign Taxpayers with respect to the taxable income resulting from the ownership of Units. A Unit holder so electing is entitled to claim all deductions with respect to such income, but must file a United States income tax return to claim such deductions. This election once made is generally irrevocable unless an applicable treaty allows the election to be made periodically. The Foreign Investment in Real Property Tax Act of 1980, as amended ("FIRPTA"), generally treats interests in trusts owning United States real property as United States real property interests. However, pursuant to applicable Treasury regulations, Units in Trust, for purposes of FIRPTA only, are not considered United States real property interests unless they are owned by a Unit holder having greater than a 5% interest in the Trust. Additionally, certain reporting provisions are applicable with respect to Foreign Taxpayers owning a greater than 5% interest in the Trust. Generally, income tax is required to be withheld from any proceeds distributed to Foreign Taxpayers at the rate of 10% of the amount realized by Foreign Taxpayers upon the sale, exchange (SRT 1997 TAX) A-3 or other disposition of a Unit. This withholding is required only when the FIRPTA provisions apply, as described in the preceding paragraph. In addition, distributions, if any, that represent the Foreign Taxpayer's allocable share of gain realized upon the sale, exchange or other disposition of a United States real property interest by the Trust, will generally be subject to withholding tax at a 34% rate. In order to avoid such withholding when the FIRPTA provisions apply, Foreign Taxpayers will be required to furnish the applicable withholding agent with an exemption statement certifying why such withholding is not required. Foreign Taxpayers are encouraged to consult their own tax advisors concerning the tax consequences of their investment in the Trust. SALE OR EXCHANGE OF UNITS Generally, a Unit Holder realizes gain or loss upon the sale or exchange of any Unit measured by the difference between the amount realized from the sale or exchange and the adjusted tax basis of such Unit. The adjusted tax basis of a Unit is the original basis of such Unit reduced by depletion deductions allowable (whether deducted or not) with respect to such Unit. Trust income allocable to such Unit to the date of sale is taxable to the selling Unit holder. The purchaser of a Unit is taxable on Trust income allocable to such Unit from the date of purchase forward. For Federal income tax purposes, Trust income should generally be allocable only to the holder of record of a Unit on each Monthly Record Date. Gain or loss on the sale of a Unit by a Unit holder who acquired the Unit(s) prior to January 1, 1987 who is not a "dealer" with respect to such Unit, who holds it as a capital asset and who has held it for the required amount of time will, in general, be treated as a long-term capital gain or loss. A Unit holder who is not a dealer who sells a Unit acquired on or after January 1, 1987 must recapture the depletion deductions taken with respect to such Unit by recognizing as ordinary income the lesser of (1) the depletion deductions taken or (2) the amount realized upon the sale less the adjusted basis of the Unit. Gain in excess of the recaptured depletion deduction will, in general, be treated as a capital gain. Units acquired after 1987 qualifying as capital assets must be owned more than 1 year to qualify for long-term capital gain or loss treatment. BACKUP WITHHOLDING A payer is required under specified circumstances to withhold tax at the rate of 31% on "reportable interest or dividend payments" and "other reportable payments" (including certain oil and gas royalty payments). Generally, this "backup withholding" is required on payments if the payee has failed to furnish the payer a taxpayer identification number or if the payer is notified by the Secretary of the Treasury to withhold taxes on such payments with respect to the payee. Amounts withheld by payers pursuant to the backup withholding provisions are remitted to the Internal Revenue Service and are considered a credit against the payee's Federal income tax liability. If the payee does not incur a Federal income tax liability for the year in which the taxes are withheld, the payee will be required to file the appropriate income tax return to claim a refund of the taxes withheld. STATE INCOME TAX Unit holders may be required to file state income tax returns and may be liable for state income tax as a result of their ownership of Units. The Properties are located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas. The tax information included in this booklet is being presented in (SRT 1997 TAX) A-4 a manner to enable Unit holders to compute the income and deductions of the Trust attributable to each of these states. Unit holders will need this information to comply with the state income tax filing requirements in those states imposing a state income tax. The laws pertaining to income tax in any given state may vary from those of another state and from those applicable to Federal income tax. Accordingly, Unit holders are urged to consult their own tax advisors concerning this matter. The Trustee has been informed that certain states have contacted Unit holders regarding underpayments of the state income tax imposed on the Unit holders' income from the Trust. Failure by Unit holders to properly report their state tax liability could result in the direct withholding of state taxes from Trust distributions. Accordingly, Unit holders are urged to carefully review the various filing requirements of the states listed below in order to determine if a current or prior year state income tax liability exists as a result of the ownership of Units in the Trust. The state of Texas does not impose an individual income tax; therefore, no part of the income attributable to the Trust will be subject to state income tax in Texas for individuals. However, corporations (and Limited Liability Companies) doing business in Texas are subject to the Texas Franchise Tax which now includes a calculation based on the corporation's taxable income for Federal income tax purposes. The state of Florida imposes an income tax on resident and nonresident corporations but not individuals. Each of the other states in which the Properties are located imposes an income tax applicable to both resident and nonresident individuals and corporations. Generally, the state income tax in these states is computed as a percentage of taxable income attributable to the particular state. Furthermore, even though there are variances from state to state, taxable income for state purposes is often computed in a manner similar to the computation of taxable income for Federal income tax purposes. All states have not adopted Federal law with respect to the percentage method of computing depletion nor are such methods consistent among the various states. It should be noted, however, that cost depletion is allowed by those states indicated above which impose a state income tax. Included herein is information to assist you in determining the respective allowable cost depletion deductions by state. The following table reflects calendar year corporate and individual income tax return due dates for the states in which the Properties are located. The state income tax return due dates for fiscal year taxpayers will generally allow the same period of time following the end of their respective fiscal years as is allowed for calendar year taxpayers. However, the Texas franchise tax return is generally due for all corporations on May 15.
CORPORATE INDIVIDUAL STATE TAXPAYER TAXPAYER ----- --------- ---------- Texas May 15 Not Applicable Florida April 1 Not Applicable Louisiana April 15 May 15 Mississippi March 15 April 15 Oklahoma March 15 April 15 New Mexico March 15 April 15
Unit holders should consult their own tax advisors concerning the type of state income tax returns that may be required and their applicable due dates. (SRT 1997 TAX) A-5 Following is a list of names and addresses of the various state taxing authorities from which you may obtain additional information: Florida Florida Department of Revenue 5050 W. Tennessee Street, Bldg K Tallahassee, Florida 32399-0135 (904) 488-6800 New Mexico Individuals: State of New Mexico Taxation and Revenue Department 1200 Saint Francis Drive P.O. Box 630 Santa Fe, New Mexico 87509-0630 (505) 827-0700, (505) 827-0830 Corporations: New Mexico Taxation and Revenue Department Attention: Corporate Income and Franchise Tax P.O Box 25127 Santa Fe, New Mexico 87504-5127 (505) 827-0939 Mississippi Mississippi State Tax Commission Bureau of Revenue P.O. Box 23050 Jackson, Mississippi 39225-3050 (601) 359-1105, (601) 359-1141 Louisiana Individuals: Department of Revenue and Taxation State of Louisiana P.O Box 3440 Baton Rouge, Louisiana 70823-3440 (504) 925-4611 Corporations: Secretary of Revenue and Taxation State of Louisiana P.O. Box 91011 Baton Rouge, Louisiana 70821-9011 (504) 925-4611 Oklahoma Individuals: Income Tax Division Connors Bldg. 2501 N. Lincoln Blvd. Oklahoma City, OK 73194 Corporations: Oklahoma Tax Commission P.O. Box 26800 Oklahoma City, Oklahoma 73126-0800 (405) 521-3125 Texas Texas Comptroller of Public Accounts Austin, Texas 78774-0100 (800) 252-5555
(SRT 1997 TAX) A-6 EX-27 4 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 3,857,558 0 0 0 0 3,857,558 22,395,185 19,315,915 6,936,828 996,721 0 0 0 0 5,940,107 6,936,828 25,688,064 25,850,123 0 1,350,231 0 0 0 24,499,892 0 0 0 0 0 24,499,892 1.68 1.68
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