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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-91014-01
TREASURE ISLAND ROYALTY TRUST
(Exact name of registrant as specified in its charter)
TEXAS 02-6148888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WACHOVIA BANK, NATIONAL ASSOCIATION 77057
AS TRUSTEE OF THE TREASURE ISLAND ROYALTY TRUST (Zip Code)
CORPORATE TRUST DEPARTMENT
5847 SAN FELIPE, SUITE 1050
HOUSTON, TEXAS
(Address of principal executive office)
(713) 278-4320
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of May 14, 2003, there were 42,574,298 trust units outstanding.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Unaudited Financial Statements:
Balance Sheet at December 31, 2002 and March 31, 2003.............................................. 1
Statement of Loss for the Three Months Ended March 31, 2003........................................ 2
Notes to Financial Statements...................................................................... 3
Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations...................... 4
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................. 4
Item 4. Controls and Procedures................................................................................. 4
PART II
Item 6. Exhibits and Reports on Form 8-K........................................................................ 5
TREASURE ISLAND ROYALTY TRUST
BALANCE SHEET
(UNAUDITED)
AT AT
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Assets
Cash................................................... $ 100 $ 100
Overriding royalty interests in gas properties......... 835,645 835,645
------------- -------------
Total assets................................................ $ 835,745 $ 835,745
============= =============
Liabilities and trust corpus
Trust expenses payable................................. $ 62,600 $ 44,438
Loan payable to Newfield............................... 11,788 --
Interest payable....................................... 147 --
Trust corpus (42,574,298 units of beneficial interest
authorized and outstanding).......................... 835,745 835,745
Retained deficit....................................... (74,535) (44,438)
------------- -------------
Total liabilities and trust corpus.......................... $ 835,745 $ 835,745
============= =============
The accompanying notes are an integral part of these financial statements.
TREASURE ISLAND ROYALTY TRUST
STATEMENT OF LOSS
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31, 2003
--------------
Royalty income.............................................. $ --
General and administrative expense (Note 3)................. 29,950
Interest expense............................................ 147
-------------
Net loss.................................................... $ (30,097)
=============
Distributable income........................................ --
Distributable income per trust unit......................... --
Outstanding trust units..................................... 42,574,298
The accompanying notes are an integral part of these financial statements.
2
TREASURE ISLAND ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND PURPOSE OF THE TRUST
Treasure Island Royalty Trust was established in connection with
Newfield Exploration Company's November 2002 acquisition of EEX Corporation to
provide the shareholders of EEX with the option to receive an interest in an
exploration concept being pursued by EEX prior to the acquisition. The concept,
referred to as "Treasure Island," targets "ultra deep" prospects in the shallow
waters of the Gulf of Mexico. The trust owns, or has the right to receive,
non-expense bearing overriding royalty interests to be paid from Newfield's
interest in any future production that may be achieved from horizons below
specified depths in the Treasure Island area. Treasure Island remains an
exploration concept and there are no proved reserves or production currently
associated with the royalty interests.
The trust was created under the laws of the State of Texas pursuant to
a trust agreement entered into in June 2002 between Newfield, as grantor, and
several employees of Newfield, as trustees. The beneficial interest in the trust
is divided into 42,574,298 trust units, each of which represents an equal
undivided portion of the trust. At the time of Newfield's acquisition of EEX,
Newfield and Wachovia Bank, National Association, as successor trustee, entered
into an amended and restated trust agreement with respect to the trust and the
trust issued all 42,574,298 trust units to Newfield. Newfield subsequently
transferred all of the trust units to the holders of EEX stock who elected to
receive trust units as a portion of their consideration in the acquisition.
The sole purpose of the trust is to hold the overriding royalty
interests, which are passive in nature. The trustee of the trust and the trust's
unitholders have no control over, or responsibility for any costs related to,
the drilling, development or operations. Neither Newfield nor any other operator
of Treasure Island properties has any contractual commitment to the trust to
conduct drilling on the properties or to maintain its ownership interest in any
of the properties.
These unaudited financial statements reflect, in the opinion of the
trustee, all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the trust's financial position as of, and results of
operations for, the period presented. These financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all disclosures required for financial statements prepared in conformity
with generally accepted accounting principles.
Interim period results are not necessarily indicative of results for a
full year.
These financial statements and notes should be read in conjunction with
the trust's financial statements and the notes thereto at December 31, 2002 and
for the period from inception through December 31, 2002 included in the trust's
Annual Report on Form 10-K.
2. BASIS OF PRESENTATION
The financial statements of the trust are prepared in conformity with
accounting principles generally accepted in the United States of America.
3. FEDERAL INCOME TAX
Under current law, the trust is taxable as a grantor trust and not as a
business entity, although there is a remote possibility that the Internal
Revenue Service would attempt to treat the trust as a business entity. A grantor
trust is not subject to tax at the trust level. For tax purposes, trust
unitholders are considered to own the trust's income and principal as though no
trust were in existence.
3
ITEM 2. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Treasure Island Royalty Trust was established in connection with
Newfield Exploration Company's November 2002 acquisition of EEX Corporation to
provide the shareholders of EEX with the option to receive an interest in the
"Treasure Island" concept being pursued by EEX prior to the acquisition.
"Treasure Island" refers to a concept developed to explore for oil and gas in
"ultra deep" horizons below a salt weld typically found at 18,000, but sometimes
as deep as 22,200, feet true vertical depth in the Gulf of Mexico. The Treasure
Island area covers horizons below specified depths generally coinciding with the
base of the salt weld in 116 lease blocks located offshore Louisiana in the
South Timbalier, Ship Shoal, South Marsh Island and Eugene Island areas.
The trust owns, or has the right to receive, non-expense bearing
overriding royalty interests to be paid from Newfield's interest in any future
Treasure Island production. The sole purpose of the trust is to hold the
overriding royalty interests, which are passive in nature. The trustee of the
trust, Wachovia Bank, National Association, and the trust's unitholders have no
control over, or responsibility for any costs related to, drilling, development
or operations. Neither Newfield nor any other operator of Treasure Island
properties has any contractual commitment to the trust to conduct drilling on
the properties or to maintain its ownership interest in any of the properties.
The beneficial interest in the trust is divided into 42,574,298 trust units,
each of which represents an equal undivided portion of the trust.
No wells have been drilled to test the Treasure Island concept and there
are no proved reserves or production currently associated with the royalty
interests. Any Treasure Island exploratory wells that are ultimately drilled
will require significant lead time to plan and drill and will be very expensive
and technically challenging because of the depth of the targeted horizons and
expected harsh conditions such as high temperature and pressure. Due to the
risks and costs associated with drilling a Treasure Island exploratory well,
Newfield does not currently anticipate drilling any wells without a significant
partner. If Newfield's current agreement with BP Exploration & Production Inc.
is terminated, Newfield may not find another acceptable partner. Because of the
lengthy lead time required to test one or more prospects and the scheduled
expiration of the leases on which identified prospects are located, Newfield
would have a limited time to find a new partner.
RESULTS OF OPERATIONS
The trust had no revenue and accrued $30,097 of administrative and
interest expense during the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The trust's only sources of income are revenue, if any, attributable to
the overriding royalty interests, income from the investment of cash on hand and
net proceeds from the disposition of royalty interests. Because none of the
properties underlying the royalty interests are at present producing any oil or
gas and the trust has only a very small amount of cash on hand, the trust has no
source of revenue. Therefore, it must rely on Newfield for the funding of its
administrative expenses. Any material adverse change in Newfield's financial
condition or results of operations could materially and adversely affect the
trust and the trust's unitholders. No distributions will be made by the trust to
unitholders until the trust receives revenue from the royalty interests.
Newfield has agreed to make loans as may be requested by the trustee in
amounts expected to be incurred over the next 90 days. In addition, if after
such time as the royalty interests commence generating cash proceeds, 8% of the
cash held by the trust at the end of a calendar quarter is insufficient to cover
the administrative expenses of the trust, Newfield will lend the difference to
the trust. Loans from Newfield will bear interest at an annual rate of 8% and
will be senior unsecured obligations of the trust. The loans will be repaid in
quarterly installments only from the excess, if any, of an amount equal to 8% of
the cash received by the trust in a given quarter over the administrative
expenses of the trust for that quarter. As of March 31, 2003, the trust had
borrowed $11,788 to pay administrative expenses, none of which had been repaid.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
4
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
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99.1 Certification of Trustee of Treasure Island
Royalty Trust pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
5
SIGNATURE
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.
TREASURE ISLAND ROYALTY TRUST
Date: May 15, 2003 By: Wachovia Bank,
National Association, as trustee
By: /s/ Kevin M. Dobrava
------------------------------------
Kevin M. Dobrava
Vice President
Note: Because the registrant is a trust without officers or employees, only
the signature of an officer of the trustee of the registrant is
available and has been provided.
6
CERTIFICATION
I, Kevin M. Dobrava, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Treasure Island
Royalty Trust, for which Wachovia Bank, National
Association, acts as trustee;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, distributable income and
changes in trust corpus of the registrant as of, and for, the periods
presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14), or
for causing such procedures to be established and maintained, for the
registrant and I have:
a) designed such disclosure controls and procedures, or caused
such controls and procedures to be designed, to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves persons who
have a significant role in the registrant's internal controls;
and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
In giving the certifications in paragraphs 4, 5 and 6 above, I have relied to
the extent I consider reasonable on information provided to me by Newfield
Exploration Company.
Date: May 15, 2003 By: /s/ Kevin M. Dobrava
-----------------------------------
Kevin M. Dobrava
Vice President
Wachovia Bank, National Association
7
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
99.1 Certification of Trustee of Treasure Island Royalty Trust
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002