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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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, 2004
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 12, 2004, there were 42,574,298 trust units outstanding.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Unaudited Financial Statements:
Balance Sheet at September 30, 2004 and December 31, 2003............................... 1
Statement of Loss for the three and nine months ended September 30, 2004 and 2003....... 2
Notes to Financial Statements........................................................... 3
Item 2. Trustee's Discussion and Analysis............................................................ 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)
<Table>
<Caption>
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Assets:
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 .................... $ 44,060 $ 18,494
Loan payable to Newfield .......................... 152,249 116,853
Interest payable .................................. 11,843 3,910
Commitments and contingencies ..................... -- --
Trust corpus (42,574,298 units of beneficial
interest authorized and outstanding) ............ 835,745 835,745
Retained deficit .................................. (208,152) (139,257)
--------- ---------
Total liabilities and trust corpus ............ $ 835,745 $ 835,745
========= =========
</Table>
The accompanying notes are an integral part of this financial statement.
1
TREASURE ISLAND ROYALTY TRUST
STATEMENT OF LOSS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Royalty income ......................... $ -- $ -- $ -- $ --
General and administrative expense ..... 17,468 21,741 60,962 64,041
Interest expense ....................... 2,777 1,457 7,933 1,989
----------- ----------- ----------- -----------
Net loss .......................... $ 20,245 $ 23,198 $ 68,895 $ 66,030
=========== =========== =========== ===========
Distributable income ................... -- -- -- --
Distributable income per trust unit .... -- -- -- --
Outstanding trust units ................ 42,574,298 42,574,298 42,574,298 42,574,298
</Table>
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. Generally, the trust owns, or has the right to
receive, overriding royalty interests in any future production that may be
achieved from horizons below specified depths on leases in which Newfield owns
or has owned an interest that are located 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 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.
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 periods 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 audited financial statements and the notes thereto for the year
ended December 31, 2003 included in the trust's annual report on Form 10-K.
2. BASIS OF PRESENTATION
These financial statements have been 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
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 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. Generally, the trust owns, or has the right to
receive, overriding royalty interests in any future production that may be
achieved from horizons below specified depths on leases in which Newfield owns
or has owned an interest that are located 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 sole purpose of the trust is to hold 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.
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. 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 $50-$75 million or more 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 acceptable partners because of the required
lead time and the scheduled expiration (if not extended) in either 2005 or 2006
of the leases on which identified prospects are located.
Newfield has entered into an agreement with Exxon Mobil Corporation, BP
Exploration & Production Inc. and Petrobras America Inc. to drill an exploration
well on a prospect referred to as "Blackbeard West." Under the terms of the
agreement, the exploration well will spud no later than January 31, 2005. The
well is being designed to test prospective objectives that range from 27,000
feet to more than 30,000 feet. The prospect covers multiple blocks in the South
Timbalier and Ship Shoal regions offshore Louisiana. ExxonMobil will operate the
prospect. The prospect is subject to a 1.25% overriding royalty interest held by
the trust.
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.
RESULTS OF OPERATIONS
The trust has had no revenue. The trust accrued $20,245 and $23,198 of
administrative and interest expenses for the third quarter of 2004 and 2003,
respectively, and $68,895 and $66,030 of administrative and interest expenses
for the first nine months of 2004 and 2003, respectively. Administrative expense
consists primarily of legal, accounting and trustee fees and printing and
mailing costs.
LIQUIDITY AND CAPITAL RESOURCES
The trust's only sources of income are revenues, 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.
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
4
administrative expenses of the trust for that quarter. As of September 30, 2004,
the trust had borrowed $152,249 since inception to pay administrative expenses,
none of which had been repaid.
FORWARD LOOKING INFORMATION
This report contains information that is forward-looking or relates to
anticipated future events or results such as drilling and operating plans.
Although Newfield and the trustee believe that the expectations reflected in
this information are reasonable, this information is based upon assumptions and
anticipated results that are subject to numerous uncertainties. Please read the
discussions under the captions "Treasure Island" in Item 1 of Part I and "Other
Factors Affecting the Trust and its Unitholders" in Item 7 of Part II of the
trust's annual report on Form 10-K for the year ended December 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. 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 Securities and Exchange Commission. In its
evaluation of disclosure controls and procedures, the trustee has relied, to the
extent considered reasonable, on information provided by Newfield Exploration
Company. There has not been any change in the trust's internal control over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the trust's internal
control over financial reporting.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
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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:
There were no reports on Form 8-K filed during the three months ended
September 30, 2004.
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: November 15, 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.
6
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