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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 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 November 13, 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 September 30, 2003 and December 31, 2002 ...... 1
Statement of Loss for the Three and Nine Months Ended
September 30, 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 ....... 5
Item 4. Controls and Procedures .......................................... 5
PART II
Item 6. Exhibits and Reports on Form 8-K ................................. 5
TREASURE ISLAND ROYALTY TRUST
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 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 $ 25,490 $ 44,438
Loan payable to Newfield 82,989 --
Interest payable 1,989 --
Trust corpus (42,574,298 units of
beneficial interest authorized
and outstanding) 835,745 835,745
Retained deficit (110,468) (44,438)
--------- ---------
Total liabilities and trust corpus $ 835,745 $ 835,745
========= =========
The accompanying notes are an integral part of this financial statement.
TREASURE ISLAND ROYALTY TRUST
STATEMENT OF LOSS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2003
---- ----
Royalty income $ -- $ --
General and administrative expense 21,741 64,041
Interest expense 1,457 1,989
----------- -----------
Net loss $ 23,198 $ 66,030
=========== ===========
Distributable income -- --
Distributable income per trust unit -- --
Outstanding trust units 42,574,298 42,574,298
The accompanying notes are an integral part of this financial statement.
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 has had no revenue. During the third quarter and the first nine
months of 2003, the trust accrued $23,198 and $66,030, respectively, of
administrative and interest expenses.
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 September 30, 2003, the trust had
borrowed $82,989 to pay administrative expenses, none of which had been repaid.
RECENT DEVELOPMENTS
BP has stated its intent to not drill an initial Treasure Island test
well in 2003. Pursuant to the agreement between BP and Newfield, if BP does not
commence drilling the initial well by December 31, 2003, the agreement will
terminate and the interests in the 20 leases assigned to BP under the agreement
will be reassigned to Newfield for nominal consideration. Newfield and BP are
discussing alternatives.
4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
31.1 Certification of Vice President of Trustee of Treasure Island
Royalty Trust pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 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.
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: November 14, 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.
5
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
31.1 Certification of Vice President of Trustee of Treasure Island
Royalty Trust pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 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