================================================================================
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 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 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 the 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the trust units held by non-affiliates of the
registrant was approximately $11,921,000 as of June 30, 2003.
As of March 29, 2004, there were 42,574,298 trust units outstanding.
Documents Incorporated by Reference: None.
================================================================================
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I
Item 1. Business......................................................................................... 1
Creation and Purpose of the Trust............................................................. 1
Treasure Island............................................................................... 1
Overriding Royalty Interests.................................................................. 2
Distributions................................................................................. 2
Disposition of Overriding Royalty Interests................................................... 3
Duration of the Trust......................................................................... 3
The Trustee................................................................................... 3
Item 2. Properties....................................................................................... 4
Item 3. Legal Proceedings................................................................................ 5
Item 4. Submission of Matters to a Vote of Unitholders................................................... 5
PART II
Item 5. Market for the Registrant's Units and Related Unitholder Matters................................. 6
Item 6. Selected Financial Data.......................................................................... 6
Item 7. Trustee's Discussion and Analysis of Financial Condition and Results of Operations............... 6
Overview...................................................................................... 6
Liquidity and Capital Resources............................................................... 6
Results of Operations......................................................................... 7
Other Factors Affecting the Trust and its Unitholders......................................... 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................................... 9
Item 8. Financial Statements and Supplementary Data...................................................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 16
Item 9A. Controls and Procedures.......................................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 16
Item 11. Executive Compensation........................................................................... 16
Item 12. Unit Ownership of Certain Beneficial Owners and Management....................................... 16
Item 13. Certain Relationships and Related Transactions................................................... 16
Item 14. Principal Accountant Fees and Services........................................................... 17
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 17
</Table>
PART I
ITEM 1. BUSINESS
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,
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.
CREATION AND PURPOSE OF THE TRUST
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 non-expense bearing overriding
royalty interests in any future production from a specified area. The royalty
interests 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,
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.
TREASURE ISLAND
"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 federal Outer
Continental Shelf of the Gulf of Mexico. The Treasure Island area covers
horizons below specified depths in 116 lease blocks located offshore Louisiana
in the South Timbalier, Ship Shoal, South Marsh Island and Eugene Island areas.
The specified depth or depths for each of the blocks vary and were agreed upon
by EEX and Newfield prior to Newfield's acquisition of EEX. The depths do not
correspond exactly to the location of the base of the salt weld in all cases.
No wells have been drilled to test the Treasure Island concept. 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. Dry hole costs
are expected to range from $35 - $70 million per well. Because of these risks
and high drilling costs, Newfield does not currently anticipate drilling any
Treasure Island wells without one or more partners to carry all or a substantial
portion of the drilling costs of one or more wells.
In May 2002, EEX and BP entered into an Asset Purchase, Farmout and
Joint Exploration Agreement pursuant to which BP acquired 75% of EEX's then
current interest in 23 leases in the Treasure Island area, three of which have
since expired. Pursuant to this agreement, BP agreed, subject to several
conditions, to drill one or more wells to test the Treasure Island concept.
Because BP elected to not commence drilling an initial test well by December 31,
2003, this agreement terminated and the interests in the 20 leases assigned to
BP under the agreement were reassigned to Newfield for nominal consideration.
Newfield has a limited time to reach agreement with one or more acceptable
partners because of the required lead time and the scheduled expiration in
either 2005 or 2006 of the leases on which identified prospects are located.
Newfield is currently discussing proposed alternatives with several potential
partners with respect to one prospect. Newfield also is discussing potential
transactions with respect to several other prospects with a number of third
parties. However, Newfield may be unable to timely reach agreement with any of
these parties.
OVERRIDING ROYALTY INTERESTS
The overriding royalty interests entitle the trust to a percentage of
all of the oil and gas produced from covered leases at Treasure Island
production depths without reduction for drilling, development and operating
costs. However, the proceeds received by the trust for its portion of produced
oil and gas will be net of transportation and marketing costs and production and
similar taxes. Each overriding royalty interest will be paid out of Newfield's
(or its transferee's) interest in the applicable lease.
With respect to a particular lease block located within the Treasure
Island area, the trust will receive 1.25% of all oil and gas production from
below the specified depth or depths for the lease if:
o Newfield owned as of November 26, 2003, or acquires prior to
November 26, 2007, an interest in the production;
o Newfield's interest includes a working interest in the
production of at least 25%; and
o Newfield's interest includes a net revenue interest in the
production equal to no less than its working interest
percentage multiplied by 80%.
If Newfield's working interest is less than 25%, the percentage of production
the trust is entitled to receive is equal to 1.25% multiplied by the result of
Newfield's working interest percentage divided by 25%. If Newfield's net revenue
interest is less than 80% but more than 70% of its working interest percentage,
the trust's overriding royalty interest is reduced as described under "Item 2.
Properties" below. If Newfield's net revenue interest is 70% or less of its
working interest percentage, the trust is not entitled to an overriding royalty
interest in production from the lease.
Newfield currently holds an interest in 26 lease blocks within the
Treasure Island area. The trust's overriding royalty interest with respect to
Treasure Island production from 25 of these leases is 1.25%. With respect to the
remaining lease, Newfield's working interest is 100% and its net revenue
interest is 78.32%. Because Newfield's net revenue interest is less than 80% of
its working interest percentage, the trust's overriding royalty interest is
reduced to approximately 1.22%.
DISTRIBUTIONS
No distributions will be made until the trust receives revenue from the
royalty interests. Each quarter thereafter, the trustee will determine the
amount of cash available for distribution to the trust's unitholders. In
general, available cash equals the cash received by the trust from the royalty
interests and other sources during the quarter over the expenses and other
obligations (including debt) of the trust paid during the quarter and any cash
used during the quarter to establish or increase a reserve for liabilities
payable or potentially payable in the future. However, the cash received by the
trust during the quarter attributable to the royalty interests will not be
reduced by more than 8% for administrative expenses and the repayment of
Newfield loans to pay administrative expenses. Trust unitholders of record as of
the close of business on the last business day of each calendar quarter will
receive a pro rata distribution of the cash available for distribution for that
quarter no later than ten business days after the end of the quarter.
If a liability is contingent or uncertain in amount or not yet
currently due and payable, the trustee may create a cash reserve to pay for the
liability. If the trustee determines that cash on hand and cash to be received
is insufficient to cover any extraordinary expenses or liabilities of the trust,
the trustee may borrow funds required to pay those expenses or liabilities. The
trustee may borrow the funds from any person, including Newfield or itself. The
trustee may also encumber the assets of the trust to secure payment of the
indebtedness. If the trustee borrows funds to cover extraordinary expenses or
liabilities, the trust unitholders will not receive distributions until the
borrowed funds are repaid. The trust agreement provides for special borrowing
and repayment procedures with respect to Newfield's funding of ordinary
administrative expenses, which are described below under "Item 7.
2
Trustee's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DISPOSITION OF OVERRIDING ROYALTY INTERESTS
At the request of Newfield, the trustee must sell royalty interests
that burden interests then in commercial production if Newfield proposes to sell
the burdened interests to an unaffiliated third party. The net proceeds from the
sale would be allocated to Newfield and the trust based upon the relative
ownership percentage of each in the aggregate net revenue interest of Newfield
and the trust included in the sale. However, the trustee will not be required to
sell any royalty interests if:
o the value of the interests to be sold during any calendar year
exceeds 10% of the value of all royalty interests attributed
with proved reserves; or
o the cumulative value of all royalty interests sold pursuant to
such requests exceeds 25% of the value of all royalty
interests attributed with proved reserves.
In each case, the value of royalty interests will be equal to the discounted
present value of the future net revenues attributable to the proved reserves
attributable to the royalty interests using a discount rate of 10% or such other
rate required by the SEC, as set forth in the most recent reserve report of the
trust.
The trustee also may sell any of the royalty interests if it determines
that the sale is in the best interests of the trust's unitholders and holders of
at least 60% of all trust units outstanding approve the sale. However, any sale
of all or substantially all of the royalty interests, whether in a single
transaction or series of transactions, requires the approval of holders of at
least 80% of all outstanding trust units.
After satisfying the liabilities and obligations of the trust, the
trustee will distribute to the trust's unitholders the net proceeds from any
sale of royalty interests.
DURATION OF THE TRUST
The trust will terminate if:
o all of the royalty interests are sold;
o cash proceeds received by the trust with respect to the
royalty interests are less than $1,000,000 per year for each
of two successive years after the first full year during which
any of the covered leases produce oil and gas in commercial
quantities;
o the trust does not receive any cash proceeds attributable to
the royalty interests at any time prior to the third
anniversary of the date that no covered leases remain in their
respective primary terms;
o the holders of 80% or more of the outstanding trust units vote
in favor of termination; or
o the trust violates the "rule against perpetuities."
Upon termination of the trust, the trustee will sell all of the trust's assets,
either by private sale or public auction, and then distribute the net proceeds
of the sale to the trust's unitholders.
THE TRUSTEE
The duties of the trustee are specified in the trust agreement and by
the laws of Texas. The trustee's principal duties consist of:
o collecting revenue attributable to the royalty interests;
o paying expenses, charges and obligations of the trust from the
trust's revenue and assets;
3
o distributing available cash to the trust's unitholders;
o investing cash on hand;
o establishing cash reserves;
o borrowing funds under specified circumstances;
o prosecuting, defending or settling any claim of or against the
trustee, the trust or the royalty interests; and
o taking any other action not otherwise prohibited that it deems
necessary or advisable to best achieve the purposes of the
trust.
The trustee has no authority to incur any contractual liabilities on
behalf of the trust that are not limited solely to claims against the assets of
the trust. The only assets the trust may acquire are the overriding royalty
interests and the only investment activity the trustee may engage in is the
investment of cash on hand.
The trustee has the right to require any trust unitholder to dispose of
his trust units if an administrative or judicial proceeding seeks to cancel or
forfeit any of the property in which the trust holds an interest because of the
nationality or any other status of a trust unitholder. If a trust unitholder
fails to dispose of his trust units, the trust will be obligated to purchase
them at a price determined in accordance with a formula set forth in the trust
agreement.
The trustee is authorized to agree to modifications of the terms of the
conveyances of the royalty interests to the trust or to settle disputes
involving such conveyances, so long as any modifications or settlements do not
alter the nature of the royalty interests as rights to receive a share of the
oil and gas, or proceeds thereof, from the underlying properties free of any
obligation for drilling, development or operating expenses.
The trustee is entitled to annual compensation of $15,000, plus
reimbursement of its reasonable out-of-pocket expenses incurred in connection
with the administration of the trust. The trustee also is entitled to a fee of
$5,000 upon the termination of the trust. The trustee's compensation is paid out
of the trust's assets.
ITEM 2. PROPERTIES
The trust's properties will consist solely of the overriding royalty
interests described under "Item 1. Business" above. Newfield currently holds an
interest in 26 Treasure Island lease blocks, 14 of which expire in 2005, six of
which expire in 2006 and six of which expire in 2007. The trust is currently
entitled to receive 1.25% of all Treasure Island production from 25 of the
leases and approximately 1.22% from the remaining lease.
With respect to a particular lease block located within the Treasure
Island area, the trust will receive 1.25% of all oil and gas production from
below the specified depth or depths for the lease if:
o Newfield owned as of November 26, 2003, or acquires prior to
November 26, 2007, an interest in the production;
o Newfield's interest includes a working interest in the
production of at least 25%; and
o Newfield's interest includes a net revenue interest in the
production equal to no less than its working interest
percentage multiplied by 80%.
If Newfield's working interest is less than 25%, the percentage of production
the trust is entitled to receive is equal to 1.25% multiplied by the result of
Newfield's working interest percentage divided by 25%. If Newfield's net revenue
interest is less than 80% but more than 70% of its working interest percentage,
the trust's overriding royalty interest is reduced as described below. If
Newfield's net revenue interest is 70% or less of its working interest
percentage, the trust is not entitled to an overriding royalty interest in
production from the lease.
If Newfield's net revenue interest is at least 74.667% but less than
80% of its working interest percentage, the trust's overriding royalty interest
is equal to its overriding royalty interest prior to any reduction associated
with
4
Newfield's net revenue interest multiplied by the result of Newfield's net
revenue interest percentage (as a percentage of its working interest percentage)
divided by 80%. For example, if Newfield owned a 20% working interest and a net
revenue interest equal to 75% of its working interest percentage (a 15% net
revenue interest), the trust's overriding royalty interest would be 0.9375%. The
royalty interest is determined by first multiplying 1.25% by the result of 20%
(Newfield's working interest percentage) divided by 25%, which results in an
overriding royalty interest of 1%. The royalty interest is then further reduced
by multiplying 1% by the result of 75% (Newfield's net revenue interest as a
percentage of its working interest percentage) divided by 80%.
If Newfield's net revenue interest is less than 74.667% but greater
than 70% of its working interest percentage, the trust's overriding royalty
interest is equal to the lesser of 25% and Newfield's working interest
percentage multiplied by the difference between Newfield's net revenue interest
percentage and 70%. For example if Newfield owned a 20% working interest and a
net revenue interest of 72% of its working interest percentage (a 14.4% net
revenue interest), the trust's overriding royalty interest would be 0.4%. The
royalty interest is determined by multiplying 20% (Newfield's working interest
percentage) by 2% (the difference between Newfield's net revenue interest
percentage of 72% (as a percentage of its working interest percentage) and 70%.
However, if Newfield owned a 50% working interest and a net revenue interest of
72% of its working interest percentage (a 36% net revenue interest), the trust's
overriding royalty interest would be 0.5% (25% (because Newfield's working
interest percentage is greater than 25%) multiplied by 2% (72% minus 70%)).
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS
None.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS
Currently, there is no established public trading market for the trust
units. Trust units have been traded on a limited basis from time to time
over-the-counter on the National Quotation Bureau, commonly referred to as the
"Pink Sheets," under the symbol "TISDZ.PK" This limited trading activity may not
represent a reliable indicator of the market value of the trust units.
As of March 19, 2004, there were 182 unitholders of record.
No cash distributions have been paid to the trust's unitholders. 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. To date, the trust has
received no revenue and there are no proved reserves or production associated
with the royalty interests. The timing, duration and amount of any future cash
distributions will be dependent on the many and varied factors discussed
throughout Part I of this report.
The trust has no directors, officers or employees and no equity
compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents in summary form selected financial
information regarding the trust at December 31, 2003 and 2002 and for the year
ended December 31, 2003 and for the period from the inception of the trust
through December 31, 2002.
<Table>
<Caption>
AT AND FOR THE YEAR OR PERIOD ENDED
-----------------------------------
2003 2002
-------- --------
Revenues ............................... $ -- $ --
Cash distributions to unitholders ...... -- --
Cash distributions per unit ............ -- --
Trust corpus ........................... 835,745 835,745
Trust assets ........................... 835,745 835,745
Trust liabilities ...................... 139,257 44,438
Trust retained deficit ................. 139,257 44,438
</Table>
ITEM 7. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The sole purpose of the trust is to hold 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. The royalty interests 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, drilling, development or operations. Treasure Island is an
exploration concept and there are no proved reserves or production currently
associated with the royalty interests. 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.
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 unitholders.
6
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.
RESULTS OF OPERATIONS
The trust has had no revenue. The trust accrued $94,819 and $44,438 of
administrative and interest expenses in 2003 and 2002, respectively.
Administrative expense consists primarily of legal, accounting and trustee fees
and printing and mailing costs.
OTHER FACTORS AFFECTING THE TRUST AND ITS UNITHOLDERS
THERE IS NO ESTABLISHED PUBLIC MARKET FOR THE TRUST UNITS, WHICH LIMITS
THEIR MARKET PRICE AND UNITHOLDERS' ABILITY TO SELL THEM FOR THEIR INHERENT
VALUE. Trust units have been traded on a limited basis from time to time
over-the-counter on the National Quotation Bureau, commonly referred to as the
"Pink Sheets." This limited trading activity may not represent a reliable
indicator of the market value of the trust units.
THE TRUST MAY NOT RECEIVE ANY ROYALTIES. The only assets of, and
sources of income to, the trust are the royalty interests, which generally
entitle the trust to receive a share of the oil and gas production from the
underlying properties if production is achieved. There is no production and
there are no proved reserves currently associated with the royalty interests and
no wells have been drilled to test the Treasure Island concept. As a result,
ultimate commercialization of any one or more of the currently identified
prospects may never be realized because the prospects are never tested, because
oil or gas is not discovered or, if discovered, because the costs of development
make commercialization uneconomic.
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. Dry hole costs
are expected to range from $35 - $70 million per well. Because of these risks
and high drilling costs, Newfield does not currently anticipate drilling any
Treasure Island wells without one or more partners to carry all or a substantial
portion of the drilling costs of one or more wells. Newfield has a limited time
to reach agreement with one or more acceptable partners because of the required
lead time and the scheduled expiration in either 2005 or 2006 of the leases on
which identified prospects are located. Newfield is currently discussing
proposed alternatives with several potential partners with respect to one
prospect. Newfield also is discussing potential transactions with respect to
several other prospects with a number of third parties. However, Newfield may be
unable to timely reach agreement with any of these parties.
ANY FUTURE DISTRIBUTIONS FROM THE TRUST WILL BE SUBJECT TO FLUCTUATING
PRICES FOR OIL AND GAS. Oil and gas prices fluctuate widely in response to
changes in supply, weather conditions, economic conditions, the price and
availability of alternative fuels and a variety of additional factors. To the
extent there is production of oil and gas associated with the royalty interests,
the royalties that the trust receives from its share of production will be
affected by changes in the prices of oil and gas. As a result, future
distributions from the trust to the holders of the trust units may vary
significantly from quarter to quarter and could be reduced or discontinued. In
addition, lower oil and gas prices may reduce the likelihood that the underlying
properties will be developed or that any oil and gas discovered will be economic
to produce. The volatility of energy prices will make it difficult to estimate
future cash distributions to trust unitholders and the value of the trust units.
These difficulties may have an adverse effect on the value of the trust units.
THE OCCURRENCE OF DRILLING, PRODUCTION OR TRANSPORTATION ACCIDENTS OR
OTHER PROBLEMS AT ANY OF THE UNDERLYING PROPERTIES COULD REDUCE TRUST
DISTRIBUTIONS. Drilling is a high risk activity and the development and
operation of oil and gas properties involves numerous risks. While the trust, as
the owner of overriding royalty interests, should not be responsible for the
costs associated with any accidents or other problems, an accident or other
problem could result in the loss of the trust's portion of oil or gas in
transit, the loss of a productive well and associated reserves or the
interruption of production. Generally, the operator is obligated to undertake
remedial
7
operations only to the extent that such actions would be undertaken by a prudent
operator under similar circumstances in accordance with good oilfield practices.
THE TRUST WILL BE DEPENDENT ON NEWFIELD FOR FUNDING UNTIL IT HAS
REVENUE. Because none of the underlying properties are at present producing any
oil or gas, the trust has no source of income. Therefore, it must rely on
Newfield for funding to pay 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 unitholders. Newfield
has agreed to make loans to the trust as described above under "--Liquidity and
Capital Resources."
NO DISTRIBUTIONS WILL BE MADE TO TRUST UNITHOLDERS IF THE TRUST BORROWS
FUNDS TO COVER EXTRAORDINARY EXPENSES OR LIABILITIES UNTIL THAT INDEBTEDNESS IS
PAID IN FULL. In addition to the trustee's authority to borrow funds from
Newfield to cover administrative expenses, if the trustee determines that cash
on hand and cash to be received is insufficient to cover any extraordinary
expenses or liabilities of the trust, the trustee may borrow funds required to
pay those expenses or liabilities. The trustee may borrow the funds from any
person, including Newfield or itself. The trustee may also encumber the assets
of the trust to secure payment of the indebtedness. If the trustee borrows funds
to cover extraordinary expenses or liabilities, the trust unitholders will not
receive distributions until the borrowed funds are repaid.
TRUST UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND THE TRUST HAS NO
INFLUENCE OVER THE OPERATION OR FUTURE DEVELOPMENT OF THE UNDERLYING PROPERTIES.
The voting rights of trust unitholders are more limited than those of
stockholders of most public companies. For example, there is no requirement for
annual meetings of trust unitholders or for an annual or other periodic
re-election of the trustee. The royalty interests 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, 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.
NEWFIELD'S INTERESTS AND THE INTERESTS OF THE TRUST UNITHOLDERS MAY NOT
ALWAYS BE ALIGNED. Because Newfield has interests in oil and gas properties not
included in the trust, Newfield's interests and the interests of the trust
unitholders may not always be aligned. For example, in setting budgets for
development and production expenditures for Newfield's properties, including the
underlying properties, Newfield may make decisions that could adversely affect
future production from the underlying properties. Moreover, Newfield could
decide to sell or abandon some or all of the underlying properties, and that
decision may not be in the best interests of the trust unitholders.
NEWFIELD MAY TRANSFER OR ABANDON UNDERLYING PROPERTIES. Newfield may at
any time transfer all or part of the underlying properties. Trust unitholders
will not be entitled to vote on any transfer, and the trust will not receive any
proceeds of the transfer. Following any such transfer, the underlying properties
will continue to be subject to the overriding royalty interests of the trust,
but the net proceeds from the transferred property would be calculated
separately and paid by the transferee. The transferee would be responsible for
all of Newfield's obligations relating to the overriding royalty interests on
the portion of the underlying properties transferred, and Newfield would have no
continuing obligation to the trust for those properties. In addition, subject to
the limitations described above under "Item 1. Business--Disposition of
Overriding Royalty Interests," at the request of Newfield, the trustee must sell
royalty interests that burden interests then in commercial production if
Newfield proposes to sell the burdened interests to an unaffiliated third party.
TRUST UNITHOLDERS HAVE LIMITED ABILITY TO ENFORCE THEIR RIGHTS. The
trust agreement and Texas trust law permit the trustee and the trust to sue
Newfield or any other future owner of the underlying properties to honor the
royalty interests. If the trustee does not take appropriate action to enforce
the royalty interests, the unitholders' recourse would likely be limited to
bringing a lawsuit against the trustee to compel the trustee to take specified
actions. Unitholders probably would not be able to sue Newfield or any future
owner of the underlying properties directly to enforce the trust's rights.
LIMITED LIABILITY OF TRUST UNITHOLDERS IS UNCERTAIN. It is unclear
under Texas law whether a trust unitholder could be held personally liable for
the trust's liabilities if those liabilities exceeded the value of the trust's
assets. While Newfield believes it is highly unlikely that the trust could incur
such excess liabilities, the trust unitholders could be held liable for their
respective pro rata portions of any of such excess liabilities. The trust's
royalty interests
8
are generally not subject to operational and environmental liabilities and
obligations. The trust conducts no active business that would give rise to other
business liabilities. The trustee has limited ability to incur obligations on
behalf of the trust. The trustee has no authority to incur any contractual
liabilities on behalf of the trust that are not limited solely to claims against
the assets of the trust.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Trustee of Treasure Island Royalty Trust:
In our opinion, the accompanying balance sheet and the related
statement of loss present fairly, in all material respects, the financial
position of Treasure Island Royalty Trust (the "Trust") at December 31, 2003 and
2002, and the results of its operations for the year ended December 31, 2003 and
for the period from inception through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by the Trustee, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Notes 3 and 4 to the financial statements, the Trust
has a contractual relationship with, and is dependent for funding on, Newfield
Exploration Company.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 30, 2004
10
TREASURE ISLAND ROYALTY TRUST
BALANCE SHEET
<Table>
<Caption>
AT DECEMBER 31,
------------------------
Assets 2003 2002
--------- ---------
Cash ................................................. $ 100 $ 100
Overriding royalty interests in gas properties ....... 835,645 835,645
--------- ---------
Total assets ............................................. $ 835,745 $ 835,745
========= =========
Liabilities and trust corpus
Current trust expenses payable ....................... $ 18,494 $ 44,438
Loan payable to Newfield ............................. 116,853 --
Interest payable ..................................... 3,910 --
Commitments and contingencies ........................ -- --
Trust corpus (42,574,298 units of beneficial
interest authorized and outstanding) ............... 835,745 835,745
Retained deficit ..................................... (139,257) (44,438)
--------- ---------
Total liabilities and trust corpus ....................... $ 835,745 $ 835,745
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
11
TREASURE ISLAND ROYALTY TRUST
STATEMENT OF LOSS
<Table>
<Caption>
YEAR ENDED FROM INCEPTION THROUGH
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------------
Royalty income ............................ $ -- $ --
General and administrative expense (Note 3) 90,909 44,438
Interest expense .......................... 3,910 --
----------------- -----------------
Net loss .................................. $ 94,819 $ 44,438
================= =================
Distributable income ...................... -- --
Distributable income per trust unit ....... -- --
Outstanding trust units ................... 42,574,298 42,574,298
</Table>
The accompanying notes are an integral part of these financial statements.
12
TREASURE ISLAND ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND DURATION 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,
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 non-expense bearing overriding
royalty interests in any future production from a specified area. The royalty
interests 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.
The trust will terminate if:
o all of the royalty interests are sold;
o cash proceeds received by the trust with respect to the
royalty interests are less than $1,000,000 per year for each
of two successive years after the first full year during which
any of the covered leases produce oil and gas in commercial
quantities;
o the trust does not receive any cash proceeds attributable to
the royalty interests at any time prior to the third
anniversary of the date that no covered leases remain in their
respective primary terms;
o the holders of 80% or more of the outstanding trust units vote
in favor of termination; or
o the trust violates the "rule against perpetuities."
Upon termination of the trust, the trustee will sell all of the trust's assets,
either by private sale or public auction, and then distribute the net proceeds
of the sale to the trust's unitholders.
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. FUNDING OF THE TRUST AND DISTRIBUTIONS
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
underlying properties are at present producing any oil or gas, the trust has no
source of revenue.
13
TREASURE ISLAND ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 unitholders. 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.
No distributions will be made until the trust receives revenue from the
royalty interests. Each quarter thereafter, the trustee will determine the
amount of cash available for distribution to the trust's unitholders. In
general, available cash equals the cash received by the trust from the royalty
interests and other sources during the quarter over the expenses and other
obligations (including debt) of the trust paid during the quarter and any cash
used during the quarter to establish or increase a reserve for liabilities
payable or potentially payable in the future. However, the cash received by the
trust during the quarter attributable to the royalty interests will not be
reduced by more than 8% for administrative expenses and the repayment of
Newfield loans to pay administrative expenses. Trust unitholders of record as of
the close of business on the last business day of each calendar quarter will
receive a pro rata distribution of the cash available for distribution for that
quarter no later than ten business days after the end of the quarter.
If a liability is contingent or uncertain in amount or not yet
currently due and payable, the trustee may create a cash reserve to pay for the
liability. If the trustee determines that the cash on hand and the cash to be
received is insufficient to cover any extraordinary expenses or liabilities of
the trust, the trustee may borrow funds required to pay those expenses or
liabilities. The trustee may borrow the funds from any person, including
Newfield or itself. The trustee may also encumber the assets of the trust to
secure payment of the indebtedness. If the trustee borrows funds to cover
extraordinary expenses or liabilities, the trust unitholders will not receive
distributions until the borrowed funds are repaid.
4. DISPOSITION OF OVERRIDING ROYALTY INTERESTS
At the request of Newfield, the trustee must sell royalty interests
that burden interests then in commercial production if Newfield proposes to sell
the burdened interests to an unaffiliated third party. The net proceeds from the
sale would be allocated to Newfield and the trust based upon the relative
ownership percentage of each in the aggregate net revenue interest of Newfield
and the trust included in the sale. However, the trustee will not be required to
sell any royalty interests if:
o the value of the interests to be sold during any calendar year
exceeds 10% of the value of all royalty interests attributed
with proved reserves; or
o the cumulative value of all royalty interests sold pursuant to
such requests exceeds 25% of the value of all royalty
interests attributed with proved reserves.
In each case, the value of royalty interests will be equal to the discounted
present value of the future net revenues attributable to the proved reserves
attributable to the royalty interests using a discount rate of 10% or such other
rate required by the SEC, as set forth in the most recent reserve report of the
trust.
The trustee also may sell any of the royalty interests if it determines
that the sale is in the best interests of the trust's unitholders and holders of
at least 60% of all trust units outstanding approve the sale. However, any sale
of all or substantially all of the royalty interests, whether in a single
transaction or series of transactions, requires the approval of holders of at
least 80% of all outstanding trust units.
After satisfying the liabilities and obligations of the trust, the
trustee will distribute to the trust's unitholders the net proceeds from any
sale of royalty interests.
14
TREASURE ISLAND ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. 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.
6. TRUST UNITHOLDER VOTING RIGHTS
The voting rights of trust unitholders are more limited than those of
stockholders of most public companies. For example, there is no requirement for
annual meetings of trust unitholders or for an annual or other periodic
re-election of the trustee.
7. TRUSTEE COMPENSATION
The trust paid the trustee an aggregate of $12,272 in 2003 for trustee
fees and to reimburse the trustee for reimbursable expenses. The trust made no
payments to the trustee in 2002.
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the trustee carried
out an evaluation of the effectiveness of the design and operation of the
trust's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
and 15d-15. Based upon that evaluation, the trustee concluded that the trust's
disclosure controls and procedures are effective in timely alerting the trustee
to material information relating to the trust required to be included in the
trust's periodic filings with the SEC. In its evaluation of disclosure controls
and procedures, the trustee has relied, to the extent considered reasonable, on
information provided by Newfield. There has not been any change in the trust's
internal controls over financial reporting during the period covered by this
report that has materially effected, or is reasonably likely to materially
effect, the trust's internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The trust has no directors, executive officers or audit committee. The
trustee is a corporate trustee that may be removed, with or without cause, by
the affirmative vote of the holders of a majority of all the units then
outstanding.
Because the trust has no employees, it does not have a code of ethics.
Officers, directors and employees of the trustee, Wachovia Bank, National
Association, must comply with the bank's Code of Conduct & Ethics. The code is
available on Wachovia's website at www.wachovia.com under the tab "Inside
Wachovia -- Investor Relations" and then under the heading "Corporate Governance
- -- Code of Conduct & Ethics."
ITEM 11. EXECUTIVE COMPENSATION
The trust has no employees. The trustee is entitled to annual
compensation of $15,000, plus reimbursement of its reasonable out-of-pocket
expenses incurred in connection with the administration of the trust. The
trustee also is entitled to a fee of $5,000 upon the termination of the trust.
The trustee's compensation is paid out of the trust's assets.
ITEM 12. UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth beneficial ownership information as of
March 24, 2004, with respect to each person known by the trustee to own
beneficially 5% or more of the outstanding trust units. The trust has no
directors, officers or employees and no equity compensation plans. Wachovia
Bank, National Association, the trustee of the trust, owns no units.
<Table>
<Caption>
BENEFICIAL OWNERSHIP
--------------------
NAME OF BENEFICIAL OWNER UNITS PERCENT
- ------------------------ ---------- -------
Richard C. McKenzie, Jr. (1) ........... 16,845,261 39.6%
</Table>
(1) All information in the table above and in this note with respect to Richard
C. McKenzie, Jr. is based solely on the Schedule 13D/A he filed with the
SEC on January 28, 2004 and the Form 4s he filed with the SEC on February
2, 2004, February 10, 2004 and February 20, 2004. Mr. McKenzie's address is
118 John St., Greenwich, CT 06831.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
16
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees for services performed by PricewaterhouseCoopers LLP for the trust
for the year ended December 31, 2003 and for the period from inception of the
trust through December 31, 2002 are:
<Table>
<Caption>
FOR THE YEAR OR
PERIOD ENDED
-------------------
2003 2002
------- -------
Audit fees ............. $22,050 $15,200
Audit-related fees ..... -- --
Tax fees ............... -- --
All other fees ......... -- --
------- -------
$22,050 $15,200
</Table>
As referenced in Item 10, above, the trust has no audit committee, and
as a result, has no audit committee pre-approval policy with respect to fees
paid to PricewaterhouseCoopers LLP.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and
Exhibits
(1) Financial Statements (included in Item 8 of this
report):
Report of Independent Auditors
Balance Sheet
Statement of Loss
Notes to Financial Statements
(2) Financial Statement Schedules: Financial statement
schedules listed under SEC rules but not included in
this report are omitted because they are not
applicable or the required information is provided in
the notes to the financial statements.
(3) Index of Exhibits: See "Index of Exhibits" below for
a list of those exhibits filed herewith or
incorporated herein by reference.
(b) Reports on Form 8-K
None.
(c) Index of Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER TITLE
- ------- -----
4.1 Form of Amended and Restated Trust Agreement of the Treasure
Island Royalty Trust by and between Newfield and Wachovia
Bank, National Association, as successor trustee (incorporated
by reference to Exhibit 4.7 to the Registration Statement on
Form S-4 filed by Newfield and the trust with the SEC on June
24, 2002 (File No. 333-91014))
10.1 Form of Master Conveyance of Overriding Royalty Interest
between EEX and Treasure Island Royalty Trust (incorporated by
reference to Exhibit 10.1 to the Registration Statement on
Form S-4 filed by Newfield and the trust with the SEC on
September 27, 2002 (File No. 333-91014))
*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
</Table>
17
<Table>
<Caption>
EXHIBIT
NUMBER TITLE
- ------- -----
*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
</Table>
- --------
* Filed herewith.
SUPPLEMENTAL INFORMATION TO BE FURNISHED
This report will be provided to unitholders. No other annual report or
proxy material will be provided to unitholders.
18
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: March 30, 2004 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.
19
INDEX OF EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER TITLE
- ------- -----
4.1 Form of Amended and Restated Trust Agreement of the Treasure
Island Royalty Trust by and between Newfield and Wachovia
Bank, National Association, as successor trustee (incorporated
by reference to Exhibit 4.7 to the Registration Statement on
Form S-4 filed by Newfield and the trust with the SEC on June
24, 2002 (File No. 333-91014))
10.1 Form of Master Conveyance of Overriding Royalty Interest
between EEX and Treasure Island Royalty Trust (incorporated by
reference to Exhibit 10.1 to the Registration Statement on
Form S-4 filed by Newfield and the trust with the SEC on
September 27, 2002 (File No. 333-91014))
*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
</Table>
- --------
* Filed herewith.