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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended March 31, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




Commission File Number: 1-10982





Cross Timbers Royalty Trust


(Exact name of registrant as specified in its charter)





Texas

756415930(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)





Bank of America, N.A., P.O. Box 830650, Dallas, Texas

75283-0650(Address of principal executive offices)

(Zip Code)





(877) 228-5084


---

(Registrants telephone number, including area code)





NONE


---

(Former name, former address and former fiscal year, if change since last report)





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 the number of units of beneficial interest outstanding, as of the latest practicable date:





Outstanding as of May 1, 2002


---

6,000,000





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CROSS TIMBERS ROYALTY TRUST





FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002





TABLE
 OF CONTENTS





PageGlossary of Terms

3PART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements

4Report of Independent Public Accountants

5Condensed Statements of Assets, Liabilities and Trust Corpus at March 31, 2002 and December 31, 2001

6Condensed Statements of Distributable Income for the Three Months Ended March 31, 2002 and 2001

7Condensed Statements of Changes in Trust Corpus for the Three Months Ended March 31, 2002 and 2001

8Notes to Condensed Financial Statements

9Item 2.

Trustees Discussion and Analysis

11Item 3.

Quantitative and Qualitative Disclosures about Market Risk

14PART II.

OTHER INFORMATIONItem 6.

Exhibits and Reports on Form 8-K

15Signatures

16




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CROSS TIMBERS ROYALTY TRUST





GLOSSARY OF TERMS





The following are definitions of significant terms used in this Form 10-Q:





|Bbl | Barrel (of oil)
|--- | ---------------




|Bcf | Billion cubic feet (of natural gas)
|--- | -----------------------------------




|Mcf | Thousand cubic feet (of natural gas)
|--- | ------------------------------------




|MMBtu | One million British Thermal Units, a common energy measurement
|----- | --------------------------------------------------------------




|net proceeds | Gross proceeds received by XTO Energy from sale of production from the underlying properties, less applicable costs, as defined in the net profits interest conveyances
|------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|net profits income | Net proceeds multiplied by the applicable net profits percentage of 75% or 90% and paid to the trust by XTO Energy. Net profits income is referred to as
royalty income for income tax purposes.
|------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|net profits interest | An interest in an oil and gas property measured by net profits from the sale of production, rather than a specific portion of production. The following defined net profits
interests were conveyed to the trust from the underlying properties:
|-------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 90% net profits interests  interests that entitle the trust to receive 90% of the net proceeds from the underlying properties that are royalty or overriding royalty
interests in Texas, Oklahoma and New Mexico
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 75% net profits interests  interests that entitle the trust to receive 75% of the net proceeds from the underlying properties that are working interests in Texas
and Oklahoma
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|royalty interest (and overriding royalty interest) | A nonoperating interest in an oil and gas property that provides the owner a specified share of production without any production or development costs
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------




|underlying properties | XTO Energys interest in certain oil and gas properties from which the net profits interests were conveyed. The underlying properties include royalty and overriding
royalty interests in producing and nonproducing properties in Texas, Oklahoma and New Mexico, and working interests in producing properties located in Texas and Oklahoma.
|--------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|working interest | An operating interest in an oil and gas property that provides the owner a specified share of production that is subject to all production and development costs
|---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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CROSS TIMBERS ROYALTY TRUST





PART I  FINANCIAL INFORMATION





Item 1.    Financial Statements.





The condensed financial statements included herein are presented, without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and
regulations, although the trustee believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto
included in the trusts latest annual report on Form 10K. In the opinion of the trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus of the Cross
Timbers Royalty Trust at March 31, 2002, and the distributable income and changes in trust corpus for the three-month periods ended March 31, 2002 and 2001, have been included. Distributable income for such interim periods is not necessarily
indicative of distributable income for the full year.




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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





Bank of America, N.A., as Trustee for the
Cross Timbers Royalty Trust:





We have reviewed the accompanying condensed statement of assets, liabilities and trust corpus of the Cross Timbers Royalty
Trust as of March 31, 2002 and the related condensed statements of distributable income and changes in trust corpus for the three-month periods ended March 31, 2002 and 2001. These financial statements are the responsibility of the trustee.





We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.





The accompanying condensed financial statements are prepared on a modified cash basis as described in Note 1 which is a comprehensive basis of accounting other than accounting
principles generally accepted in the United States.





Based on our review, we are not aware of any material modifications that should be made to the
financial statements referred to above for them to be in conformity with the basis of accounting described in Note 1.





We have previously audited, in
accordance with auditing standards generally accepted in the United States, the statement of assets, liabilities and trust corpus of the Cross Timbers Royalty Trust as of December 31, 2001 included in the trusts 2001 annual report on Form
10-K, and in our report dated March 19, 2002, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2001 is
fairly stated in all material respects in relation to the statement of assets, liabilities and trust corpus included in the trusts 2001 annual report on Form 10-K from which it has been derived.





ARTHUR ANDERSEN LLP





Fort Worth, Texas


May 1, 2002




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CROSS TIMBERS ROYALTY TRUST


---




Condensed Statements of Assets, Liabilities and Trust Corpus





March 31, 2002

December 31, 2001(Unaudited)ASSETSCash and short-term investments

$
472,771

$
852,349Interest to be received


221


479Net profits interests in oil and gas propertiesnet


28,410,542


28,895,086$
28,883,534

$
29,747,914LIABILITIES AND TRUST CORPUSDistribution payable to unitholders

$
472,992

$
852,828Trust corpus (6,000,000 units of beneficial interest authorized and outstanding)


28,410,542


28,895,086$
28,883,534

$
29,747,914











The
accompanying notes to condensed financial statements are an integral part of these statements.




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CROSS TIMBERS ROYALTY TRUST


---




Condensed Statements of Distributable Income (Unaudited)





Three Months Ended March 312002

2001Net profits income

$
1,879,550

$
4,107,459Interest income


926


7,036Total income


1,880,476


4,114,495Administration expense


75,730


65,593Distributable income

$
1,804,746

$
4,048,902Distributable income per unit (6,000,000 units)

$
0.300791

$
0.674817











The
accompanying notes to condensed financial statements are an integral part of these statements.




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CROSS TIMBERS ROYALTY TRUST


---




Condensed Statements of Changes in Trust Corpus (Unaudited)





Three Months Ended March 312002


2001Trust corpus, beginning of period

$
28,895,086


$
30,755,456Amortization of net profits interests


(484,544
)


(508,573
)Distributable income


1,804,746



4,048,902Distributions declared


(1,804,746
)


(4,048,902
)Trust corpus, end of period

$
28,410,542


$
30,246,883











The
accompanying notes to condensed financial statements are an integral part of these statements.




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CROSS TIMBERS ROYALTY TRUST


---




Notes to Condensed Financial Statements (Unaudited)





1.    Basis of Accounting





The financial statements of Cross Timbers Royalty Trust are prepared on the following basis and are not intended to present financial
position and results of operations in conformity with generally accepted accounting principles (GAAP):





| |  |  | Net profits income recorded for a month is the amount computed and paid by the interest owner, XTO Energy Inc., to Bank of America, N.A., as trustee for the trust. Net profits
income consists of net proceeds received by XTO Energy Inc. from the underlying properties in the prior month, multiplied by net profit percentages of 90% for the 90% net profits interests, and 75% for the 75% net profits interests.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Costs deducted in the calculation of net proceeds for the 90% net profits interests generally include applicable taxes, transportation, marketing and legal costs, and do not
include other production and development costs. For the 75% net profits interests, costs deducted in the calculation of net proceeds include production expenses, development costs, applicable taxes, operating charges and other costs.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Net profits income is computed separately for each of five conveyances under which the net profits interests were conveyed to the trust. If monthly costs exceed revenues for
any conveyance, such excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net proceeds from the other conveyances. See Note 3.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Interest income, interest to be received and distribution payable to unitholders include interest to be earned from the monthly record date (last business day of the month)
through the date of the next distribution to unitholders.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Trust expenses are recorded based on liabilities paid and cash reserves established by the trustee for liabilities and contingencies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Distributions to unitholders are recorded when declared by the trustee.
| | - |  | -----------------------------------------------------------------------




The financial statements of the trust differ from those prepared in conformity with GAAP because revenues are not accrued in the month of production, expenses are recognized when paid
rather than when incurred, and certain cash reserves may be established for contingencies which would not be accrued under GAAP.





The initial carrying value of the net profits interests of $61,100,449 represents XTO Energys historical net book value on February 12, 1991, the creation date of the trust. Amortization of the net profits interests is calculated on a
unitof-production basis and is charged directly to trust corpus. Accumulated amortization was $32,689,907 as of March 31, 2002 and $32,205,363 as of December 31, 2001.




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2.    Coal Seam Tax Credit





XTO Energy has advised the trustee that the trust receives net profits income from coal seam gas wells. Production from coal seam gas wells drilled after December 31, 1979, and prior to
January 1, 1993, qualifies for the federal income tax credit for producing nonconventional fuels under Section 29 of the Internal Revenue Code. This tax credit, which was approximately $1.08 per MMBtu of gas produced from qualifying wells for 2001,
is recalculated annually based on each years qualified production through the year 2002. Such credit, based on the unitholders pro rata share of qualifying production, may not reduce the unitholders regular tax liability (after the
foreign tax credit and certain other nonrefundable credits) below his tentative minimum tax. Any part of the Section 29 credit not allowed for the tax year solely because of this limitation may be carried over indefinitely as a credit against the
unitholders regular tax liability, subject to the tentative minimum tax limitation. Unitholders should consult their tax advisors regarding use of this credit and other trust tax compliance matters.





Congress is considering an extension of existing Section 29 tax credits beyond the scheduled December 31, 2002 expiration date, as well as the creation
of similar new tax credits. During 2001, the U.S. House passed a bill that would extend existing Section 29 tax credits on certain production, while the U.S. Senate has passed a separate bill proposing new Section 29 tax credits. The potential
effect of any final legislation on unitholders is unknown.





Based on 2002 qualifying sales volumes and the factors used in the
calculation of the 2001 coal seam tax credit, the credit is estimated to be $0.025 per unit for the quarter ended March 31, 2002. The actual coal seam tax credit was $0.025 per unit for first quarter 2001. Final 2002 coal seam tax credit data will
be provided to unitholders with year-end tax information.





3.    Excess Costs





During first quarter 2002, costs exceeded revenues by $66,867 ($50,150 net to the trust) for the Texas 75% net profits interests as a result of lower
oil prices. In the April 2002 distribution, $17,311 ($12,983 net to the trust) of excess costs were recovered, resulting in cumulative excess costs of $49,556 ($37,167 net to the trust) and accrued interest of $416. These costs and accrued interest
must be recovered from future net proceeds of the Texas 75% net profits interests before they can again contribute to net profits income. There were no excess costs in 2001.




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Item 2.    Trustees Discussion and Analysis.





The following discussion should be read in conjunction
with the trustees discussion and analysis contained in the trusts 2001 annual report, as well as the condensed financial statements and notes thereto included in this quarterly report on Form 10-Q.





Distributable Income





For the quarter ended March 31, 2002, net profits
income was $1,879,550 compared to $4,107,459 for first quarter 2001. This 54% decrease in net profits income is primarily the result of lower oil and gas prices. See Net Profits Income below.





After considering interest income of $926 and administration expense of $75,730, distributable income for the quarter ended March 31, 2002 was $1,804,746, or $0.300791 per unit
of beneficial interest. Administration expense for the quarter increased 15% from the prior year quarter primarily because of the timing of expenditures; interest income decreased 87% over these periods because of the decline in net profits income
and interest rates. For first quarter 2001, distributable income was $4,048,902, or $0.674817 per unit. Distributions to unitholders for the quarter ended March 31, 2002 were:





Record Date

Payment Date

Distributionper UnitJanuary 31, 2002

February 14, 2002

$
0.104850February 28, 2002

March 14, 2002


0.117109March 29, 2002

April 12, 2002


0.078832$
0.300791





Net Profits Income





Net profits income is recorded when received by the trust, which is the month following receipt by XTO Energy, and generally two months after oil production and three months after gas production. Net profits income is
generally affected by three major factors:





| |  |  | oil and gas sales volumes,
| | - |  | --------------------------




| |  |  | oil and gas sales prices, and
| | - |  | -----------------------------




| |  |  | costs deducted in the calculation of net profits income.
| | - |  | --------------------------------------------------------




Because properties underlying the 90% net profits interests are royalty and overriding royalty interests, they generally bear no costs other than production and property taxes, related legal costs, and marketing and transportation charges.
In addition to these costs, the 75% net profits interests are subject to production and development costs, since the properties underlying the 75% net profits interests are working interests.




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The following is a summary of the calculation of net profits income received by the trust:





Three Months Ended March 31(a)

Increase (Decrease)2002


2001Sales VolumesOil (Bbls) (b)Underlying properties


83,111



82,869

Average per day


903



901

Net profits interests


27,302



41,591

(34
%)Gas (Mcf) (b)Underlying properties


780,720



663,188

18
%Average per day


8,486



7,209

18
%Net profits interests


685,423



574,709

19
%Average Sales PricesOil (per Bbl)

$
17.28


$
28.73

(40
%)Gas (per Mcf)

$
2.54


$
6.11

(58
%)RevenuesOil sales

$
1,436,108


$
2,381,067

(40
%)Gas sales


1,984,366



4,049,705

(51
%)Total Revenues


3,420,474



6,430,772

(47
%)CostsTaxes, transportation and other


337,754



843,541

(60
%)Production expense (c)


750,531



711,220

6
%Development costs


282,548



162,807

74
%Excess costs


(66,867
)




Total Costs


1,303,966



1,717,568

(24
%)Net Proceeds

$
2,116,508


$
4,713,204

(55
%)Net Profits Income

$
1,879,550


$
4,107,459

(54
%)


---




|(a) |  | Because of the interval between time of production and receipt of royalty income by the trust, oil and gas sales for the quarter ended March 31 generally represent oil
production for the period November through January and gas production for the period October through December.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(b) |  | Oil and gas sales volumes are allocated to the net profits interests based upon a formula that considers oil and gas prices and the total amount of production expenses and
development costs. Changes in any of these factors may result in disproportionate fluctuations in volumes allocated to the net profits interests. Therefore, comparative discussion of oil and gas sales volumes is based on the underlying properties.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(c) |  | Includes an overhead fee which is deducted and retained by XTO Energy. This fee is currently $23,925 per month and is subject to adjustment each May based on an oil and gas
industry index.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following are explanations of significant variances from first quarter 2001 to 2002:





Sales Volumes





First quarter 2002 oil sales volumes remained relatively
flat as compared with first quarter 2001. First quarter 2002 gas sales volumes were 18% higher than first quarter 2001 primarily because of the timing of cash receipts.





Sales Prices





Oil





The first quarter 2002 average oil price was $17.28 per Bbl, a 40% decrease from the first quarter 2001 price of $28.73 per Bbl. Oil prices were significantly higher in first quarter 2001 as a result of global demand outpacing supply.
Lagging demand, resulting from a worldwide economic slowdown, caused oil prices to decline in 2001. OPEC members agreed to cut daily production by one million barrels in April 2001 and an additional one million barrels in September 2001 to adjust
for weak demand and excess supply. The economic decline was accelerated by the terrorist attacks in the U.S. on September 11, 2001, placing additional downward pressure on oil prices. In December 2001, OPEC announced additional production cuts of
1.5 million barrels per day for six months effective January 1, 2002. With economic recoveries in the U.S. and global markets, as well as rising concerns over tension in the Middle East, oil prices have strengthened during 2002. The average NYMEX
price for February through April 2002 was $23.81. At May 1, 2002, the average NYMEX futures price for the following twelve months was $25.41. Recent trust oil prices have averaged approximately $2.70 lower than the NYMEX price.





Gas





The first quarter 2002 average gas price was $2.54 per
Mcf, a 58% decrease from the first quarter 2001 price of $6.11. Gas prices were unusually high in first quarter 2001 as winter demand strained gas supplies. Gas prices declined in 2001 because of fuel switching due to higher prices, milder weather
and a weaker economy, which reduced demand for gas and resulted in sharply increased gas storage levels. Despite the winter of 2001-2002 being one of the warmest on record and the likely result that storage levels will be higher than historical
averages, gas prices have increased during 2002 and are expected to remain volatile. The average NYMEX price for January through March 2002 was $2.48 per MMBtu. At May 1, 2002, the average NYMEX futures price for the following twelve months was
$3.93 per MMBtu. Recent trust gas prices have averaged approximately $0.10 higher than the NYMEX price.





Costs





Taxes





Taxes, transportation and other decreased 60% for the first quarter
because of lower production taxes related to decreased revenues and a reduction in property taxes.





Production Expenses





Production expenses were 6% higher for the first quarter because of the timing of maintenance projects, partially offset by decreased fuel costs associated with lower gas
prices.




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Development





Development costs were 74% higher for the first quarter primarily because of drilling activity on two of the properties underlying the Texas 75% net profits interests.





Excess Costs





During first quarter 2002, costs exceeded revenues by $66,867 ($50,150 net to the trust) for the
Texas 75% net profits interests as a result of lower oil prices. In the April 2002 distribution, $17,311 ($12,983 net to the trust) of excess costs were recovered, resulting in cumulative excess costs of $49,556 ($37,167 net to the trust) and
accrued interest of $416. These costs and accrued interest must be recovered from future net proceeds of the Texas 75% net profits interests before they can again contribute to net profits income. There were no excess costs in 2001.





Forward-Looking Statements





This report on Form 10-Q includes
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included
in this Form 10-Q including, without limitation, statements regarding the net profits interests, underlying properties, development costs, oil and gas prices, and industry and market conditions, are forward-looking statements that are subject to
risks and uncertainties which are detailed in Part II, Item 7 of the trusts annual report on Form 10-K for the year ended December 31, 2001, which is incorporated by this reference as though fully set forth herein. Although XTO Energy believes
that the expectations reflected in such forward-looking statements are reasonable, neither XTO Energy nor the trustee can give any assurance that such expectations will prove to be correct.





I
tem. 3.    Quantitative and Qualitative Disclosures about Market Risk





There have been no material changes
in the trusts market risks, as disclosed in the trusts Form 10-K for the year ended December 31, 2001.




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PART IIOTHER INFORMATION





Items 1 through 5. Not Applicable.





Item 6.    Exhibits and Reports on Form 8-K.





(a)  Exhibits.





Exhibit Numberand Description

Page(15)

Awareness letter of Arthur Andersen LLP

17





(b)  Reports on Form 8-K.





No reports on Form 8-K have been filed during the quarter for which this report is filed.




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SIGNATURES





Pursuant to the requirements 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.





CROSS TIMBERS ROYALTY TRUST BY BANK OF AMERICA, N.A., TRUSTEEBy

/s/     RON E. HOOPER Ron E. Hooper Senior Vice PresidentXTO ENERGY INC.Date: May 8, 2002

By

/s/    LOUIS G. BALDWIN Louis G. Baldwin Executive Vice President and Chief Financial Officer




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