#### **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-Q**
| **(Mark One)**                                                                                                                                    | ** ** | ** **                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                              | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2004**                                                                                           |
| ** **                                                                                                                                        | ** ** | ** **                                                                                              |
| **Or**                                                                                                                                            |
| ** **                                                                                                                                        | ** ** | ** **                                                                                              |
|  ̈                                                                                                                                            | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                              |       |                                                                                                    |
| **For the  transition period from          to        ** |

**Commission file number 1-13531**

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### **Trammell Crow Company**(Exact name of registrant as specified in its charter)

| **Delaware******(State or other jurisdiction of  incorporation or organization)                     | ** ** | **75-2721454******(IRS Employer  Identification No.) |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|
| ** **                                                                                          | ** ** | ** **                                           |
| **2001  Ross Avenue****Suite 3400 Dallas, Texas**(Address of principal executive offices) | ** ** | **75201******(Zip Code)                              |

 

**(214) 863-3000**(Registrant’s telephone number, includingarea code)

 

**Not applicable**(Former name, former address and formerfiscal year, if changed since last report)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No  ̈

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes x   No  ̈

Therewere 37,216,067 shares of the registrant’s common stock outstanding as of May 3,2004.

 

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**TRAMMELL CROWCOMPANY AND SUBSIDIARIES**INDEX
| ** **    | ** ** | ** **                                                                                                                                                            | ** ** | **Page  Number** | ** ** |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| PART I.  |       | Financial  Information                                                                                                                                                |       |             |       |
| Item 1.       |       | Financial  Statements                                                                                                                                                 |       |             |       |
|          |       | Condensed Consolidated  Balance Sheets as of March 31, 2004 (unaudited) and December 31,  2003                                                              |       | 3                |       |
|          |       | Condensed Consolidated  Statements of Income for the three months ended March 31, 2004 and 2003  (unaudited)                                                     |       | 4                |       |
|          |       | Condensed  Consolidated Statements of Stockholders’ Equity for the three months ended  March 31, 2004 (unaudited) and the year ended December 31, 2003 |       | 5                |       |
|          |       | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2004 and 2003 (unaudited)                                                 |       | 6                |       |
|          |       | Condensed  Consolidated Statements of Comprehensive Income for the three months ended  March 31, 2004 and 2003 (unaudited)                                       |       | 7                |       |
|          |       | Notes to Condensed Consolidated  Financial Statements (unaudited)                                                                                                     |       | 8                |       |
| Item 2.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                           |       | 25               |       |
| Item 3.       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                           |       | 34               |       |
| Item 4.       |       | Controls and Procedures                                                                                                                                               |       | 34               |       |
| PART II. |       | Other Information                                                                                                                                                     |       |             |       |
| Item 1.       |       | Legal Proceedings                                                                                                                                                     |       | 35               |       |
| Item 6.       |       | Exhibits  and Reports on Form 8-K                                                                                                                                |       | 35               |       |

 

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1.   *Financial Statements***

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per sharedata)**
| ** **                                                                                                                                                                                                 | ** ** | **March 31,  2004** | ** ** | **December 31,   2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **(Unaudited)**          | ** ** | **(Note 1)**                 | ** ** |
| **ASSETS**                                                                                                                                                                                                 |       |                     |       |                              |       |   |   |   |   |
| Current assets                                                                                                                                                                                             |       |                     |       |                              |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                  |       |                     | $          | 67,537                            |       |   |   | $ | 105,616 |   |   |
| Restricted cash                                                                                                                                                                                            |       |                     | 7,351      |                              |       |   | 7,647 |   |   |
| Accounts receivable, net  of allowance for doubtful accounts of $3,162 in 2004 and $3,886 in 2003                                                                                                          |       |                     | 93,559     |                              |       |   | 97,479 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |                     | 2,936      |                              |       |   | 1,593 |   |   |
| Notes and other  receivables                                                                                                                                                                               |       |                     | 8,087      |                              |       |   | 9,919 |   |   |
| Deferred income taxes                                                                                                                                                                                      |       |                     | 3,760      |                              |       |   | 3,754 |   |   |
| Real estate under  development                                                                                                                                                                             |       |                     | 56,998     |                              |       |   | 49,208 |   |   |
| Real estate and other  assets held for sale                                                                                                                                                                |       |                     | 24,203     |                              |       |   | 35,584 |   |   |
| Other current assets                                                                                                                                                                                       |       |                     | 20,576     |                              |       |   | 21,764 |   |   |
| Total current assets                                                                                                                                                                                       |       |                     | 285,007    |                              |       |   | 332,564 |   |   |
| Furniture and equipment,  net                                                                                                                                                                              |       |                     | 20,465     |                              |       |   | 21,305 |   |   |
| Deferred income taxes                                                                                                                                                                                      |       |                     | 19,754     |                              |       |   | 19,898 |   |   |
| Real estate under  development                                                                                                                                                                             |       |                     | 7,748      |                              |       |   | 6,345 |   |   |
| Real estate held for investment                                                                                                                                                                            |       |                     | 83,037     |                              |       |   | 77,334 |   |   |
| Investments in  unconsolidated subsidiaries                                                                                                                                                                |       |                     | 65,656     |                              |       |   | 65,025 |   |   |
| Goodwill, net                                                                                                                                                                                              |       |                     | 74,345     |                              |       |   | 74,346 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |                     | 17,722     |                              |       |   | 14,485 |   |   |
| Other assets                                                                                                                                                                                               |       |                     | 18,881     |                              |       |   | 18,824 |   |   |
|                                                                                                                                                                                                       |       |                     | $          | 592,615                           |       |   |   | $ | 630,126 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                             |       |                     |       |                              |       |   |   |   |   |
| Current liabilities                                                                                                                                                                                        |       |                     |       |                              |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                           |       |                     | $          | 18,070                            |       |   |   | $ | 16,183 |   |   |
| Accrued expenses                                                                                                                                                                                           |       |                     | 83,885     |                              |       |   | 116,074 |   |   |
| Payables to affiliates                                                                                                                                                                                     |       |                     | 44         |                              |       |   | 104 |   |   |
| Income taxes payable                                                                                                                                                                                       |       |                     | 1,354      |                              |       |   | 7,468 |   |   |
| Current portion of long-term  debt                                                                                                                                                                         |       |                     | 895        |                              |       |   | 1,081 |   |   |
| Current portion of  capital lease obligations                                                                                                                                                              |       |                     | 653        |                              |       |   | 1,297 |   |   |
| Current portion of notes  payable on real estate                                                                                                                                                           |       |                     | 65,911     |                              |       |   | 68,192 |   |   |
| Liabilities related to  real estate and other assets held for sale                                                                                                                                         |       |                     | 15,062     |                              |       |   | 24,737 |   |   |
| Other current liabilities                                                                                                                                                                                  |       |                     | 8,612      |                              |       |   | 9,869 |   |   |
| Total current liabilities                                                                                                                                                                                  |       |                     | 194,486    |                              |       |   | 245,005 |   |   |
| Long-term debt,  less current portion                                                                                                                                                                      |       |                     | 12         |                              |       |   | 10,014 |   |   |
| Capital lease  obligations, less current portion                                                                                                                                                           |       |                     | 666        |                              |       |   | 714 |   |   |
| Notes payable on real  estate, less current portion                                                                                                                                                        |       |                     | 21,353     |                              |       |   | 11,409 |   |   |
| Other liabilities                                                                                                                                                                                          |       |                     | 7,574      |                              |       |   | 6,459 |   |   |
| Total liabilities                                                                                                                                                                                          |       |                     | 224,091    |                              |       |   | 273,601 |   |   |
| Minority interest                                                                                                                                                                                          |       |                     | 36,033     |                              |       |   | 28,896 |   |   |
| Stockholders’ equity                                                                                                                                                                                  |       |                     |       |                              |       |   |   |   |   |
| Preferred stock; $0.01  par value; 30,000,000 shares authorized; none issued or outstanding                                                                                                           |       |                     | —     |                              |       |   | — |   |   |
| Common stock; $0.01 par  value; 100,000,000 shares authorized; 37,783,595 shares issued and 37,051,067  shares outstanding in 2004 and 37,783,595 shares issued and 36,862,242 shares  outstanding in 2003 |       |                     | 377        |                              |       |   | 377 |   |   |
| Paid-in capital                                                                                                                                                                                            |       |                     | 192,411    |                              |       |   | 192,336 |   |   |
| Retained earnings                                                                                                                                                                                          |       |                     | 153,453    |                              |       |   | 151,560 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                    |       |                     | 1,305      |                              |       |   | 1,106 |   |   |
| Less:Treasury stock                                                                                                                                                                                        |       |                     | (6,653     | )                                 |       |   | (8,363 | ) |   |
|          Unearned stock compensation, net                                                                                                                          |       |                     | (8,402     | )                                 |       |   | (9,387 | ) |   |
| Total stockholders’  equity                                                                                                                                                                           |       |                     | 332,491    |                              |       |   | 327,629 |   |   |
|                                                                                                                                                                                                       |       |                     | $          | 592,615                           |       |   |   | $ | 630,126 |   |   |

 

See accompanying notes.

3

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**TRAMMELL CROW COMPANY ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except share and per share data)**(Unaudited)
| ** **                                                                                                                                   | ** ** | **For the Three Months   Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                                                 | ** ** | **2003** | ** ** |
| **REVENUES**                                                                                                                                 |       |                                                                     |       |   |   |
| ***User  Services:***                                                                                                                        |       |                                                                     |       |   |   |
| Facilities management                                                                                                                        |       | $                                                                        | 50,756     |   | $ | 51,463 |   |
| Corporate advisory services                                                                                                                  |       | 22,534                                                                   |       | 22,672 |   |
| Project management services                                                                                                                  |       | 17,962                                                                   |       | 14,447 |   |
|                                                                                                                                         |       | 91,252                                                                   |       | 88,582 |   |
| ***Investor  Services:***                                                                                                                    |       |                                                                     |       |   |   |
| Property management                                                                                                                          |       | 34,562                                                                   |       | 37,423 |   |
| Brokerage                                                                                                                                    |       | 22,149                                                                   |       | 17,494 |   |
| Construction management                                                                                                                      |       | 1,718                                                                    |       | 2,040 |   |
|                                                                                                                                         |       | 58,429                                                                   |       | 56,957 |   |
| Development and construction                                                                                                                 |       | 8,329                                                                    |       | 9,825 |   |
|                                                                                                                                         |       | 158,010                                                                  |       | 155,364 |   |
| Gain on disposition of real estate                                                                                                           |       | 468                                                                      |       | 4,768 |   |
| Other                                                                                                                                        |       | 887                                                                      |       | 654 |   |
|                                                                                                                                         |       | 159,365                                                                  |       | 160,786 |   |
| **COSTS AND EXPENSES**                                                                                                                       |       |                                                                     |       |   |   |
| Salaries, wages and benefits                                                                                                                 |       | 116,152                                                                  |       | 109,647 |   |
| Commissions                                                                                                                                  |       | 20,022                                                                   |       | 17,351 |   |
| General and administrative                                                                                                                   |       | 26,421                                                                   |       | 25,670 |   |
| Depreciation and amortization                                                                                                                |       | 3,231                                                                    |       | 4,169 |   |
| Interest                                                                                                                                     |       | 904                                                                      |       | 2,278 |   |
|                                                                                                                                         |       | 166,730                                                                  |       | 159,115 |   |
| Income (loss) from continuing operations before  income taxes, minority interest and income from investments in unconsolidated  subsidiaries |       | (7,365                                                                   | )          | 1,671 |   |
| Income tax (expense) benefit                                                                                                                 |       | 3,091                                                                    |       | (728 | ) |
| Minority interest, net of income tax (expense)  benefit of $25 and $(169) in 2004 and 2003, respectively                                     |       | (35                                                                      | )          | 220 |   |
| Income from investments in unconsolidated  subsidiaries, net of income tax expense of $4,316 and $40 in 2004 and 2003,  respectively         |       | 5,970                                                                    |       | 52 |   |
| Income from continuing operations                                                                                                            |       | 1,661                                                                    |       | 1,215 |   |
| Income (loss) from discontinued operations, net of  income tax (expense) benefit of $(317) and $54 in 2004 and 2003, respectively            |       | 438                                                                      |       | (71 | ) |
| Net income                                                                                                                                   |       | $                                                                        | 2,099      |   | $ | 1,144 |   |
| Income per share from  continuing operations:                                                                                                |       |                                                                     |       |   |   |
| Basic                                                                                                                                        |       | $                                                                        | 0.05       |   | $ | 0.03 |   |
| Diluted                                                                                                                                      |       | $                                                                        | 0.05       |   | $ | 0.03 |   |
| Income (loss) per  share from discontinued operations, net of income taxes:                                                                  |       |                                                                     |       |   |   |
| Basic                                                                                                                                        |       | $                                                                        | 0.01       |   | $ | — |   |
| Diluted                                                                                                                                      |       | $                                                                        | 0.01       |   | $ | — |   |
| Net income per  share:                                                                                                                       |       |                                                                     |       |   |   |
| Basic                                                                                                                                        |       | $                                                                        | 0.06       |   | $ | 0.03 |   |
| Diluted                                                                                                                                      |       | $                                                                        | 0.06       |   | $ | 0.03 |   |
| Weighted average  common shares outstanding:                                                                                                 |       |                                                                     |       |   |   |
| Basic                                                                                                                                        |       | 35,498,197                                                               |       | 36,125,964 |   |
| Diluted                                                                                                                                      |       | 37,390,140                                                               |       | 36,799,238 |   |

See accompanying notes.

4

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**TRAMMELL CROW COMPANY ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYThree Months ended March 31, 2004 (Unaudited) and Year ended December 31,2003 (Note 1)(in thousands, except share data)**
| ** **                                                        | ** ** | ** **             | ** ** | ** **         | ** ** | ** **  | ** ** | ** **   | ** ** | ** **               | ** ** | **Accumulated**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|-------------|------------|--------------|------------|--------------------------|------------|------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                                        | ** ** | ** **             | ** ** | ** **         | ** ** | **Common**  | ** ** | ** **   | ** ** | ** **               | ** ** | **Other**              | ** ** | ** ** | ** ** | **Unearned**     | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Common Shares** | ** ** | **Stock Par** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Comprehensive**        | ** ** | **Treasury**           | ** ** | **Stock**  | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Issued**             | ** ** | **Treasury**       | ** ** | **Value**   | ** ** | **Capital**  | ** ** | ** Earnings ** | ** ** | **Income (Loss)** | ** ** | **Stock**  | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| Balance at January 1, 2003                                   |       | 36,227,820             |       | 48,647             |       |        | $          | 362          |       |                     | $          | 178,977                |       |       | $          | 130,874          |       |       |       | $ | (589 | ) |   | $ | (464 | ) |   | $ | (806 | ) |   | $ | 308,354 |   |
| Net income                                                        |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | 21,040     |       |       |             | —     |       |       | — |   |   | — |   |   | 21,040 |   |
| Issuance of restricted stock                                      |       | 1,413,000              |       | (223,500           | )          |        | 14         |         |       | 12,269                   |       |                   | —     |       |       |             | —     |       |       | 2,028 |   |   | (14,311 | ) |   | — |   |
| Forfeiture of restricted stock                                    |       | —                 |       | 237,570            |       |        | —     |         |       | (26                      | )          |                   | —     |       |       |             | —     |       |       | (1,996 | ) |   | 1,807 |   |   | (215 | ) |
| Amortization of unearned stock compensation                       |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | —     |       |       | — |   |   | 3,923 |   |   | 3,923 |   |
| Issuance of common stock                                          |       | 142,775                |       | (275,764           | )          |        | 1          |         |       | 1,116                    |       |                   | (354       | )          |       |             | —     |       |       | 2,504 |   |   | — |   |   | 3,267 |   |
| Stock repurchase                                                  |       | —                 |       | 1,134,400          |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | —     |       |       | (10,435 | ) |   | — |   |   | (10,435 | ) |
| Foreign currency translation adjustment, net of tax               |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | 1,358      |       |       | — |   |   | — |   |   | 1,358 |   |
| Change in fair value of interest rate swap agreement,  net of tax |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | 337        |       |       | — |   |   | — |   |   | 337 |   |
| Balance at December 31, 2003                                 |       | 37,783,595             |       | 921,353            |       |        | 377        |         |       | 192,336                  |       |                   | 151,560    |       |       |             | 1,106      |       |       | (8,363 | ) |   | (9,387 | ) |   | 327,629 |   |
| Net income                                                        |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | 2,099      |       |       |             | —     |       |       | — |   |   | — |   |   | 2,099 |   |
| Issuance of restricted stock                                      |       | —                 |       | (15,000            | )          |        | —     |         |       | 75                       |       |                   | —     |       |       |             | —     |       |       | 136 |   |   | (211 | ) |   | — |   |
| Forfeiture of restricted stock                                    |       | —                 |       | 798                |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | —     |       |       | (12 | ) |   | — |   |   | (12 | ) |
| Amortization of unearned stock compensation                       |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | —     |       |       | — |   |   | 1,196 |   |   | 1,196 |   |
| Issuance of common stock                                          |       | —                 |       | (174,623           | )          |        | —     |         |       | —                   |       |                   | (206       | )          |       |             | —     |       |       | 1,586 |   |   | — |   |   | 1,380 |   |
| Foreign currency translation adjustment, net of tax               |       | —                 |       | —             |       |        | —     |         |       | —                   |       |                   | —     |       |       |             | 199        |       |       | — |   |   | — |   |   | 199 |   |
| Balance at March 31,  2004                                   |       | 37,783,595             |       | 732,528            |       |        | $          | 377          |       |                     | $          | 192,411                |       |       | $          | 153,453          |       |       |       | $ | 1,305 |   |   | $ | (6,653 | ) |   | $ | (8,402 | ) |   | $ | 332,491 |   |

 

See accompanying notes.

5

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**TRAMMELL CROW COMPANY ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(in thousands)(Unaudited)
| ** **                                                                | ** ** | **For the  Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                                       | ** ** | **2003** | ** ** |
| **Operating activities**                                                  |       |                                                           |       |   |   |
| Cash flows from earnings:                                                 |       |                                                           |       |   |   |
| Net income                                                                |       | $                                                              | 2,099      |   | $ | 1,144 |   |
| Reconciliation  of net income to net cash provided by (used in) earnings: |       |                                                           |       |   |   |
| Depreciation and amortization                                             |       | 3,257                                                          |       | 4,221 |   |
| Amortization of employment contracts and unearned  stock compensation     |       | 1,491                                                          |       | 929 |   |
| Amortization of contract intangibles                                      |       | 525                                                            |       | 513 |   |
| Bad debt expense (recovery)                                               |       | (320                                                           | )          | 483 |   |
| Provision for losses and writedowns for impairment on  real estate        |       | 31                                                             |       | 2,697 |   |
| Gain on disposition of real estate held for  investment                   |       | (556                                                           | )          | — |   |
| Minority interest                                                         |       | 60                                                             |       | (389 | ) |
| Deferred income tax provision (benefit)                                   |       | (10                                                            | )          | 8 |   |
| Income from investments in unconsolidated  subsidiaries                   |       | (10,286                                                        | )          | (92 | ) |
| Net cash provided by (used in) earnings                                   |       | (3,709                                                         | )          | 9,514 |   |
| Changes  in operating assets and liabilities:                             |       |                                                           |       |   |   |
| Restricted cash                                                           |       | 296                                                            |       | 42 |   |
| Accounts receivable                                                       |       | 4,240                                                          |       | 22,384 |   |
| Receivables from affiliates                                               |       | (4,580                                                         | )          | (566 | ) |
| Notes receivable and other assets                                         |       | 1,809                                                          |       | (1,473 | ) |
| Real estate held for sale and under development                           |       | (12,130                                                        | )          | 2,078 |   |
| Notes payable on real estate held for sale and under  development         |       | 6,670                                                          |       | 172 |   |
| Accounts payable and accrued expenses                                     |       | (30,736                                                        | )          | (28,613 | ) |
| Payables to affiliates                                                    |       | (60                                                            | )          | — |   |
| Income taxes payable                                                      |       | (6,114                                                         | )          | (3,900 | ) |
| Other liabilities                                                         |       | (138                                                           | )          | (737 | ) |
| Net cash flows from changes in working capital                            |       | (40,743                                                        | )          | (10,613 | ) |
| Net cash used in operating activities                                     |       | (44,452                                                        | )          | (1,099 | ) |
| **Investing  activities**                                                 |       |                                                           |       |   |   |
| Expenditures for furniture and equipment                                  |       | (1,387                                                         | )          | (887 | ) |
| Additions to real estate held for investment                              |       | (1,902                                                         | )          | (83 | ) |
| Net proceeds from disposition of real estate held for  investment         |       | 11,335                                                         |       | — |   |
| Investments in unconsolidated subsidiaries                                |       | (575                                                           | )          | (587 | ) |
| Distributions from unconsolidated subsidiaries                            |       | 10,670                                                         |       | 4,308 |   |
| Net cash provided by investing activities                                 |       | 18,141                                                         |       | 2,751 |   |
| **Financing  activities**                                                 |       |                                                           |       |   |   |
| Principal payments on long-term debt and  capital lease obligations       |       | (46,109                                                        | )          | (10,047 | ) |
| Proceeds from long-term debt                                              |       | 34,929                                                         |       | 5,000 |   |
| Contributions from minority interest                                      |       | 7,144                                                          |       | 51 |   |
| Distributions to minority interest                                        |       | (67                                                            | )          | (5,596 | ) |
| Proceeds from notes payable on real estate held for  investment           |       | 584                                                            |       | — |   |
| Payments on notes payable on real estate held for  investment             |       | (9,629                                                         | )          | (229 | ) |
| Proceeds from exercise of stock options                                   |       | 140                                                            |       | — |   |
| Proceeds from issuance of common stock                                    |       | 1,240                                                          |       | 1,092 |   |
| Net cash used in financing activities                                     |       | (11,768                                                        | )          | (9,729 | ) |
| Net decrease in cash and cash equivalents                                 |       | (38,079                                                        | )          | (8,077 | ) |
| Cash and cash equivalents, beginning of period                            |       | 105,616                                                        |       | 78,005 |   |
| Cash and cash  equivalents, end of period                                 |       | $                                                              | 67,537     |   | $ | 69,928 |   |

 

See accompanying notes.

6

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**TRAMMELL CROWCOMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**(in thousands)(Unaudited)
| ** **                                                                                     | ** ** | **For the  Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| Net income                                                                                     |       | $                                                    | 2,099      |   | $ | 1,144 |   |
| Other  comprehensive income:                                                                   |       |                                                 |       |   |   |
| Foreign currency translation adjustments, net of tax  expense of $148 in 2004 and  $39 in 2003 |       | 199                                                  |       | 74 |   |
| Change in fair value of interest rate swap  agreement, net of tax expense of   $229 in 2003    |       | —                                               |       | 337 |   |
| Comprehensive income                                                                           |       | $                                                    | 2,298      |   | $ | 1,555 |   |

 

See accompanying notes.

7

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.   General**

The condensed consolidated interim financialstatements of Trammell Crow Company and subsidiaries (the “Company”) includedherein have been prepared in accordance with the requirements for interimfinancial statements and do not include all disclosures required underaccounting principles generally accepted in the United States (“GAAP”) forcomplete financial statements. These financial statements should be read inconjunction with the consolidated financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003. Inthe opinion of management, all adjustments and eliminations, consisting only ofrecurring adjustments, necessary for a fair presentation of the financialstatements for the interim periods have been made. Interim results ofoperations are not necessarily indicative of the results to be expected for thefull year.

The Company hasexperienced and expects to continue to experience quarterly variations inrevenues and net income as a result of several factors. The Company’s quarterlyrevenues tend to increase throughout the year, particularly in the last quarterof the year, because its clients have demonstrated a tendency to closetransactions toward the end of the year. The timing and introduction of newcontracts, the disposition of investments in real estate assets and otherfactors may also cause quarterly fluctuations in the Company’s results ofoperations.

*Reclassifications*

In accordance withFinancial Accounting Standard Board (“FASB”) Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*(“FAS 144”),certain assets and liabilities at December 31, 2003, and certain revenuesand expenses for the three months ended March 31, 2003, have beenreclassified to conform to the presentation at and for the three months ended March 31,2004 (see Notes 7 and 9). As a result, certain balances differ from theamounts reported in previously filed documents.

*Use of Estimates*

The preparation of thefinancial statements in accordance with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

*Consolidation*

As of March 31, 2004,the Company completed the adoption of FASB Interpretation No. 46 (revised December 2003),*Consolidation of Variable Interest Entities*(“FIN 46R”), which did not require the Company to change its previousaccounting method for any of its subsidiaries. The Company determines whetheran entity is a variable interest entity (“VIE”) and, if so, whether it shouldbe consolidated by utilizing judgments and estimates that are inherentlysubjective. If the Company made different judgments or utilized differentestimates in these evaluations, it could result in differing conclusions as towhether or not an entity is a VIE and whether or not to consolidate suchentity.

8

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General (Continued)

The accompanying consolidated financial statementsinclude the accounts of the Company, its wholly-owned subsidiaries, and othersubsidiaries that are not considered VIEs and over which the Company hascontrol. In addition, the Company consolidates any VIEs of which it is theprimary beneficiary in accordance with FIN 46R (see Note 3). Intercompanyaccounts and transactions have been eliminated. The Company’s investments insubsidiaries (including VIEs of which the Company is not the primarybeneficiary) in which it has the ability to exercise significant influence overoperating and financial policies, but does not control (including subsidiarieswhere the Company has less than 20% ownership), are accounted for on the equitymethod. The Company eliminates transactions with such equity methodsubsidiaries to the extent of its ownership in such subsidiaries. Accordingly,the Company’s share of the earnings or losses of these equity basissubsidiaries is included in consolidated net income. Investments in othersubsidiaries are carried at cost. The Company’s unconsolidated subsidiariesprimarily own or invest in real estate development projects.

In May 2003, the Company entered into a purchaseagreement with an independent third party (“seller entity”) to acquire parcelsof undeveloped land for a purchase price of $19,500. In conjunction with theagreement, the Company has deposited $750 in escrow which is non-refundable inthe event the Company decides not to purchase the land. This non-refundabledeposit is considered to be a variable interest in the seller entity, which maybe a VIE. However, based upon its evaluation, the Company is not the primarybeneficiary of the seller entity, and therefore has not consolidated the sellerentity that owns the property under contract. As or March 31, 2004, theCompany’s total exposure to loss as a result of its involvement with this VIEis limited to its deposit of $750.

The Company is part of aco-lender group with an independent third party that has issued a mezzanineloan to the owner of two office buildings. In April 2000, the Companyprovided its $567 share of the total $5,667 mezzanine loan. At that time,another independent third party lender provided the primary financing of $19,100to the owner. The Company also provides building management and leasingservices for the properties under a long-term contract at market rates for suchservices. The mezzanine loan arrangement is considered to be a variableinterest in the entity that owns the properties, which the Company believes isa VIE. However, based upon its evaluation, the Company is not the primarybeneficiary of the entity. Therefore, the Company has not consolidated theentity that owns the office properties for which it has provided financing. TheCompany’s total outstanding loan balance exposed to loss as a result of itsinvolvement with this VIE is $567 as of March 31, 2004. Also, see Note 3for discussion on an equity investment in a VIE.

*Income Taxes*

The Company accounts forincome taxes using the liability method. Deferred income taxes result fromtemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for federal income taxpurposes, and are measured using the enacted tax rates and laws that will be ineffect when the differences reverse.

9

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General (Continued)

*Earnings Per Share*

The weighted-averagecommon shares outstanding used to calculate diluted earnings per share for thethree months ended March 31, 2004 and 2003, include 1,891,943 and 673,274shares, respectively, to reflect the dilutive effect of unvested restrictedstock and options to purchase shares of common stock.

*Stock-BasedCompensation*

The Company has elected to use the intrinsic methodunder Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB25”), to account for its stock-based compensation arrangements.Compensation expense for stock options is recognized to the extent the marketprice of the underlying stock on the date of grant exceeds the exercise priceof the option. The Company recognizes compensation expense related torestricted stock awards over the vesting period of the underlying award in anamount equal to the fair market value of the Company’s stock on the date ofgrant.

Proforma information regarding net income (loss) and net income (loss) per share,shown in the table below, has been determined as if the Company had applied thefair value recognition provisions of Statement of Financial AccountingStandards No. 123, *Accounting for Stock-BasedCompensation*.
| ** **                                                                                                                              | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| Net income, as  reported                                                                                                                |       | $                                            | 2,099      |   | $ | 1,144 |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                     |       | 694                                          |       | 279 |   |
| Deduct: Stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       | 1,206                                        |       | 1,462 |   |
| Pro forma net  income (loss)                                                                                                            |       | $                                            | 1,587      |   | $ | (39 | ) |
| Net income (loss) per  share:                                                                                                           |       |                                         |       |   |   |
| Basic—as reported                                                                                                                  |       | $                                            | 0.06       |   | $ | 0.03 |   |
| Basic—pro forma                                                                                                                    |       | $                                            | 0.04       |   | $ | — |   |
| Net income (loss) per  share:                                                                                                           |       |                                         |       |   |   |
| Diluted—as reported                                                                                                                |       | $                                            | 0.06       |   | $ | 0.03 |   |
| Diluted—pro forma                                                                                                                  |       | $                                            | 0.04       |   | $ | — |   |

 

*Non-ControllingInterests in Consolidated Limited Life Subsidiaries*

In May 2003, the FASBissued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“FAS 150”). Certainprovisions of FAS 150 would have required the Company to classifynon-controlling interests in consolidated limited life subsidiaries asliabilities adjusted to their settlement values in the Company’s 

10

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General (Continued)

financialstatements. In November 2003, the FASB indefinitely deferred applicationof the measurement and recognition provisions (but not the disclosurerequirements) of FAS 150 with respect to these non-controlling interests. As ofMarch 31, 2004, the estimated settlement value of non-controllinginterests in the Company’s consolidated limited life subsidiaries is $10,348,as compared to book value (included in minority interest on the Company’sbalance sheet) of $8,357. The excess of settlement value over book value isdriven by an even larger estimated appreciation of certain consolidated realestate assets and investments from the Company’s book value, offset by sellingcosts and debt prepayment penalties, if any.

**2.   Real Estate**

Allreal estate is included in the Company’s Development and Investment segment(see Note 12). Real estate owned by the Company consists of the following:
| ** **                                                         | ** ** | **March 31,   2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| Real estate under  development (current)                           |       | $                              | 56,998     |                        |       | $ | 49,208 |   |   |
| Real estate  included in assets held for sale (see Note 7)(1) |       | 22,836                         |       |                        | 34,068     |   |   |
| Real estate under  development (non-current)                       |       | 7,748                          |       |                        | 6,345      |   |   |
| Real estate held  for investment(2)                                |       | 83,037                         |       |                        | 77,334     |   |   |
|                                                               |       | $                              | 170,619    |                        |       | $ | 166,955 |   |   |

----

(1)          Net of allowances of$964 and $1,048 at March 31, 2004, and December 31, 2003,respectively, to reduce the carrying value of assets to fair value less cost tosell.

(2)          Net of accumulateddepreciation of $1,158 and $1,066 at March 31, 2004, and December 31,2003, respectively.

In the three months ended March 31, 2004 and2003, the Company recorded provisions for losses on real estate of $31 and$1,452, respectively, to increase the allowances on real estate held for saleto reduce the carrying value of assets to fair value less cost to sell. Of theamount recorded in the three months ended March 31, 2003, $1,395 wasincluded in discontinued operations in the consolidated statements of income asit related to a real estate project that is considered a discontinued operationunder FAS 144. All remaining amounts are included in general and administrativeexpenses in the consolidated statements of income.

In the three months ended March 31, 2003, theCompany recorded writedowns for impairment of real estate (not classified asheld for sale at the time of such writedowns) totaling $1,245, which isincluded in general and administrative expenses in the consolidated statementsof income. There were no writedowns for impairment of real estate in the threemonths ended March 31, 2004. The 2003 writedown for impairment related toa single-tenant office/industrial real estate project. The non-recourse notepayable related to the real estate project had matured and the Companysubsequently conveyed the underlying 

11

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**2.**   Real Estate (Continued)

property to the lender tosatisfy the note. The fair value of the asset was determined based on adiscounted cash flow projection prior to the conveyance of the property to thelender.

In December 2003, the Company sold a parcel ofland for $1,750, of which $1,125 of the consideration received was in the formof an interest-bearing note from the buyer. The Company retained a unilateralright to repurchase the property at any time through 2006, in addition tomaintaining the right to approve any plans for development on the property. Ifthe Company exercises its repurchase option, the Company would repay the amountit received from the buyer, plus a return on the buyer’s investment. Because ofthe Company’s continuing involvement in and option to repurchase the property,the transaction did not qualify as a sale and as a result, a financingtransaction was recorded. As of March 31, 2004, real estate and otherassets held for sale includes $844 of real estate and $1,125 of notes receivable,and liabilities related to real estate and other assets held for sale includes$1,750 of notes payable, all related to this parcel of land.

In the three months ended March 31,2003, the Company sold its 50% partnership interest in a consolidated subsidiaryto the other partner in the partnership for a net sales price of $1,032. Thetransaction resulted in a non-cash decrease in real estate and other assetsheld for sale of $11,004 (accounts receivable of $4 and real estate of$11,000), a decrease in cash (included in real estate and other assets held forsale) of $92, and a non-cash reduction in liabilities related to real estateand other assets held for sale of $11,804 (decrease in accounts payable of $61,increase in accrued expenses of $164, decrease in notes payable on real estateof $11,907), and a non-cash increase in minority interest of $210. The Companyrecognized a gain on disposition of $1,530 as a result of this transaction.

**3.   Investments inUnconsolidated Subsidiaries**

Investmentsin unconsolidated subsidiaries consist of the following:
| ** **  | ** ** | **March 31,  2004** | ** ** | **December 31,  2003** | ** ** |   |
|-------------|------------|--------------------------|------------|-----------------------------|------------|--------|
| Real estate |       |                     | $          | 35,382                      |       |   |   | $ | 35,546 |   |   |
| Other       |       |                     | 30,274     |                        |       |   | 29,479 |   |   |
|        |       |                     | $          | 65,656                      |       |   |   | $ | 65,025 |   |   |
|             |            |                          |            |                             |            |        |  |  |  |  |  |  |  |

 

The Company owns approximately 10.0% of theoutstanding stock of Savills plc (“Savills”), a property services firmheadquartered in the United Kingdom and a leading provider of real estateservices in Europe, Asia-Pacific and Australia. The investment is classified asan “other” investment in the table above.

During 1999, the Companyformed a limited liability company (the “LLC”) with a private investment groupto develop approximately 120 acres of land adjacent to a metropolitan airportfor a mixed-use business park. The land development was being jointly funded bythe LLC and three public agencies, for a total expected funding ofapproximately $155,800. Sources for the LLC’s share of total funding included a

12

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**3.**   Investments in UnconsolidatedSubsidiaries (Continued)

senior debt obligation ofapproximately $28,200, a junior debt obligation of approximately $13,200 andequity contributions of $1,000, of which $50 was made by the Company. Theprivate investment group provided the remaining $950 in equity contributions tothe LLC and has made working capital loans to the LLC. The Company also provideddevelopment management, construction management, marketing and leasing servicesfor the project under a long-term contract at market rates for such services.The Company’s equity investment is considered to be a variable interest in theLLC, which the Company believes is a VIE. However, based upon its evaluation,the Company is not the primary beneficiary of the LLC and therefore, has notconsolidated the LLC. The Company’s maximum exposure to loss as a result of itsinvolvement in this VIE is limited to its investment of $50. In April 2004, theCompany terminated its interest in and its service agreements with the LLC.

Summarized operatingresults for unconsolidated subsidiaries accounted for on the equity method areas follows:
| ** **        | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|-------------------|------------|--------------------------------------------------------------------|------------|
| ** **        | ** ** | **2004**                                                           | ** ** | **2003** | ** ** |
| **Real  Estate:** |       |                                                               |       |   |   |
| Total revenues    |       | $                                                                  | 43,661     |   | $ | 15,300 |   |
| Total expenses    |       | 5,707                                                              |       | 9,474 |   |
| Net income        |       | $                                                                  | 37,954     |   | $ | 5,826 |   |
| **Other:**        |       |                                                               |       |   |   |
| Total revenues    |       | $                                                                  | 123,182    |   | $ | 82,319 |   |
| Total expenses    |       | 119,310                                                            |       | 82,002 |   |
| Net income        |       | $                                                                  | 3,872      |   | $ | 317 |   |
| **Total:**        |       |                                                               |       |   |   |
| Total revenues    |       | $                                                                  | 166,843    |   | $ | 97,619 |   |
| Total expenses    |       | 125,017                                                            |       | 91,476 |   |
| Net income        |       | $                                                                  | 41,826     |   | $ | 6,143 |   |

 

13

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**4.**   Accrued Expenses

Accruedexpenses consist of the following:
| ** **                                                                                                         | ** ** | ** March 31,  2004 ** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| Payroll and  bonuses                                                                                               |       |                                 | $          | 27,233                      |       |   |   | $ | 42,316 |   |   |
| Commissions                                                                                                        |       |                                 | 22,669     |                        |       |   | 38,337 |   |   |
| Development costs                                                                                                  |       |                                 | 9,739      |                        |       |   | 15,045 |   |   |
| Deferred income                                                                                                    |       |                                 | 8,267      |                        |       |   | 5,691 |   |   |
| Interest                                                                                                           |       |                                 | 922        |                        |       |   | 1,175 |   |   |
| Insurance                                                                                                          |       |                                 | 3,176      |                        |       |   | 3,032 |   |   |
| Restructuring  charges (see Note 13)                                                                          |       |                                 | 1,750      |                        |       |   | 1,864 |   |   |
| Other                                                                                                              |       |                                 | 10,384     |                        |       |   | 9,584 |   |   |
|                                                                                                               |       |                                 | 84,140     |                        |       |   | 117,044 |   |   |
| Less accrued  expenses included in liabilities related to real estate and other assets held  for sale (see Note 7) |       |                                 | 255        |                        |       |   | 970 |   |   |
|                                                                                                               |       |                                 | $          | 83,885                      |       |   |   | $ | 116,074 |   |   |

 

**5.**   Long-Term Debt

Long-termdebt consists of the following:
| ** **                                                                                                  | ** ** | **March 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Borrowings under  $150,000 line of credit with a bank (the “Credit Facility”)                     |       |                     | $          | —                      |       |   |   | $ | 10,000 |   |   |
| Borrowings under  $25,000 discretionary line of credit with a bank                                          |       |                     | —     |                        |       |   | — |   |   |
| Borrowings under  £1,100 short-term borrowing facility with a bank (the “European Facility”) |       |                     | 29         |                        |       |   | — |   |   |
| Other                                                                                                       |       |                     | 878        |                        |       |   | 1,095 |   |   |
| Total long-term  debt                                                                                       |       |                     | 907        |                        |       |   | 11,095 |   |   |
| Less current  portion of long-term debt                                                                     |       |                     | 895        |                        |       |   | 1,081 |   |   |
|                                                                                                        |       |                     | $          | 12                          |       |   |   | $ | 10,014 |   |   |

 

The Company is subject to various covenants associatedwith the Credit Facility, such as maintenance of minimum equity and liquidityand certain key financial data. In addition, the Company may not pay dividendsor make other distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization, and there arecertain restrictions on investments and acquisitions that can be made by theCompany. At March 31, 2004, the Company is in compliance with allcovenants of the Credit Facility.

The covenants associatedwith the Credit Facility and the amount of the Company’s other borrowings andcontingent liabilities may have the effect of limiting the borrowing capacityavailable to the Company 

14

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**5.**   Long-Term Debt(Continued)

underthe Credit Facility to an amount less than the $150,000 commitment. At March 31,2004, the Company has unused borrowing capacity of $128,209 (taking intoaccount letters of credit outstanding and limitations from certain financialcovenants) under its Credit Facility.

**6.**   Notes Payable on Real Estate

TheCompany has loans secured by real estate consisting of the following:
| ** **                                                                                                                | ** ** | **March 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Current portion  of notes payable on real estate                                                                          |       | $                        | 65,911     |                        |       | $ | 68,192 |   |   |
| Notes payable on  real estate included in liabilities related to real estate and other assets  held for sale (see Note 7) |       | 14,702                   |       |                        | 23,666     |   |   |
| Total notes  payable on real estate, current portion                                                                      |       | 80,613                   |       |                        | 91,858     |   |   |
| Notes payable on real estate, non-current portion                                                                         |       | 21,353                   |       |                        | 11,409     |   |   |
| Total notes payable on  real estate                                                                                       |       | $                        | 101,966    |                        |       | $ | 103,267 |   |   |

 

Notes payable on real estate held for sale areincluded in liabilities related to real estate and other assets held for sale.Notes payable on real estate under development (current) are included incurrent portion of notes payable on real estate. Notes payable on real estateunder development (non-current) and real estate held for investment areclassified according to payment terms and maturity date.

At March 31, 2004, $10,424 of the current portionand $611 of the non-current portion of notes payable on real estate arerecourse to the Company. With respect to a project to which $3,322 of thecurrent recourse obligations relate, the Company has an agreement with aninvestor customer to purchase the project upon completion, the proceeds ofwhich will be used to repay the related note payable.

The Company has aparticipating mortgage loan obligation related to a real estate project that isclassified as real estate under development (current). The participatingmortgage loan is subordinate to a construction loan on the underlying project.The lender participates in net operating cash flow of the mortgaged real estateproject, if any, and capital proceeds, net of related expenses, upon the saleof the project, after payment of amounts due under the construction loan. Thelender receives 6% fixed interest on the outstanding balance of its note,compounded monthly, and participates in 35% to 80% of proceeds remaining afterthe construction loan is paid, based on reaching various internal rates ofreturn. The amount of the participation liability and the related debt discountare $2,800 and $1,400, respectively, at March 31, 2004.

**7.**   Real Estate and Other Assets Held forSale and Related Liabilities

Real estate and other assets held for sale includecompleted real estate projects or land for sale in their present condition thathave met all of the “held for sale” criteria of FAS 144 and other assetsdirectly related to such projects. Liabilities related to real estate and otherassets held for sale have been included 

15

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**7.**   Real Estate andOther Assets Held for Sale and Related Liabilities (Continued)

as a single line item inthe Company’s balance sheet. In accordance with FAS 144, balances relatedto assets classified as held for sale at March 31, 2004, or sold in thethree months ended March 31, 2004, that were not classified as held forsale at December 31, 2003, have been reclassified to real estate and otherassets held for sale in the Company’s balance sheet as of December 31,2003 presented herein.

Realestate and other assets held for sale and related liabilities are as follows:
| ** **                                                               | ** ** | ** March 31,  2004 ** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| **Assets:**                                                              |       |                                 |       |                        |       |   |   |   |   |
| Notes and other receivables                                              |       |                                 | $          | 1,154                       |       |   |   | $ | 1,150 |   |   |
| Real estate held for sale (see Note 2)                                   |       |                                 | 22,836     |                        |       |   | 34,068 |   |   |
| Other current assets                                                     |       |                                 | 200        |                        |       |   | 366 |   |   |
| Other assets                                                             |       |                                 | 13         |                        |       |   | — |   |   |
| Total real estate  and other assets held for sale                        |       |                                 | 24,203     |                        |       |   | 35,584 |   |   |
| **Liabilities:**                                                         |       |                                 |       |                        |       |   |   |   |   |
| Accrued expenses (see Note 4)                                            |       |                                 | 255        |                        |       |   | 970 |   |   |
| Notes payable on real estate held for sale (see Note  6)                 |       |                                 | 14,702     |                        |       |   | 23,666 |   |   |
| Other current liabilities                                                |       |                                 | 105        |                        |       |   | 101 |   |   |
| Total liabilities  related to real estate and other assets held for sale |       |                                 | 15,062     |                        |       |   | 24,737 |   |   |
| **Net real estate and other  assets held for sale**                      |       |                                 | $          | 9,141                       |       |   |   | $ | 10,847 |   |   |

 

**8.**   Stockholders’ Equity

Asummary of the Company’s stock option activity for the three months ended March 31,2004, is as follows:
| ** **                                      | ** ** | **Exercise Price  of $3.85 (below  market price  at grant date)** | ** ** | **Exercise Price  of $9.74 to  $14.50 (at  market price  at grant date)** | ** ** | **Exercise Price  of $14.51 to  $22.75 (at  market price  at grant date)** | ** ** | **Exercise Price  of $22.76 to  $36.00 (at  market price  at grant date)** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| **Options outstanding:**                        |       |                                                                                            |       |                                                                                                         |       |                                                                                                          |       |                                                                                                          |       |      |       |   |   |   |   |   |   |   |   |
| December 31,  2003                         |       |                                                                                            | 956,649    |                                                                                                         |       |                                                                                                          | 3,207,925  |                                                                                                          |       |      | 2,086,341  |   |   |   | 151,739 |   |   | 6,402,654 |   |
| Granted                                         |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                       |       |                                                                                            | (36,427    | )                                                                                                            |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   | (36,427 | ) |
| Forfeited                                       |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | (8,125     | )                                                                                                             |       |      | (61,376    | ) |   |   | — |   |   | (69,501 | ) |
| March 31,  2004                            |       |                                                                                            | 920,222    |                                                                                                         |       |                                                                                                          | 3,199,800  |                                                                                                          |       |      | 2,024,965  |   |   |   | 151,739 |   |   | 6,296,726 |   |
| **Options exercisable at  March 31, 2004** |       |                                                                                            | 920,222    |                                                                                                         |       |                                                                                                          | 1,843,467  |                                                                                                          |       |      | 1,988,298  |   |   |   | 151,739 |   |   | 4,903,726 |   |

 

16

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**9.**   Gain on Disposition of Real Estate andDiscontinued Operations

During the three months ended March 31, 2004, theCompany sold one real estate project for a net sales price of $533, resultingin a gain on disposition of $187. In addition, the Company recognized $281 ofdeferred gain from dispositions in prior periods. During the three months ended March 31, 2003, the Company sold fourreal estate projects for an aggregate net sales price of $5,133, resulting inan aggregate gain on disposition of $4,511, and recognized $257 of deferredgain resulting from a previous period disposition.

The Company’s discontinued operations include theoperations and gains on disposition of real estate projects held for sale orsold subsequent to the adoption of FAS 144 effective January 1, 2002,that are considered “components of an entity” as defined by FAS 144 andfor which the Company does not have or expect to have any significantinvolvement in the operations of the project after the disposal. As required byFAS 144, certain revenues and expenses for the three months ended March 31,2003, have been reclassified to conform to the presentation for the threemonths ended March 31, 2004.

In the three months ended March 31, 2004, theCompany sold one real estate project that was considered a discontinuedoperation under FAS 144. The net sales price for this project was $11,335,and the Company recognized a gain on disposition of $821, including interestforgiveness of $326. In the three months ended March 31, 2003, the Companysold two real estate projects that were considered discontinued operationsunder FAS 144. The aggregate sales price for these two projects was$12,380, and the Company recognized an aggregate gain on disposition of $1,723.The aggregate gain on disposition related to these projects has been reportedas discontinued operations, net of applicable income taxes, in the consolidatedstatements of income.

17

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**9.**   Gain onDisposition of Real Estate and Discontinued Operations (Continued)

The components ofdiscontinued operations are as follows:
| ** **                                                       | ** ** | **For the  Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                                                       | ** ** | **2003** | ** ** |
| **Revenues:**                                                    |       |                                                           |       |   |   |
| Development and  construction                                    |       | $                                                              | —     |   | $ | 124 |   |
| Gain on  disposition of real estate                              |       | 821                                                            |       | 1,723 |   |
| Other                                                            |       | 51                                                             |       | 17 |   |
|                                                             |       | 872                                                            |       | 1,864 |   |
| **Expenses:**                                                    |       |                                                           |       |   |   |
| Salaries, wages  and benefits                                    |       | —                                                         |       | 55 |   |
| Commissions                                                      |       | —                                                         |       | 197 |   |
| General and  administrative                                      |       | 20                                                             |       | 1,487 |   |
| Depreciation and  amortization                                   |       | 26                                                             |       | 52 |   |
| Interest                                                         |       | 71                                                             |       | 198 |   |
|                                                             |       | 117                                                            |       | 1,989 |   |
| Income (loss)  from discontinued operations, before income taxes |       | 755                                                            |       | (125 | ) |
| Income tax  (expense) benefit                                    |       | (317                                                           | )          | 54 |   |
| Income (loss) from  discontinued operations, net of income taxes |       | $                                                              | 438        |   | $ | (71 | ) |

 

**10.**   Financial Instruments

As required under the Company’s Credit Facility, theCompany has entered into various interest rate agreements to manage marketrisks related to changes in interest rates. The Company’s participation inderivative transactions has been limited to hedging purposes. Derivativeinstruments are not held or issued for trading purposes.

On March 24, 2001, an existing interest rate swapagreement was renewed for a 24-month period ending March 24, 2003,with a notional amount of $150,000. This interest rate swap agreementestablished a fixed interest pay rate of 4.68% on a portion of the Company’svariable rate debt. Under the interest rate swap agreement, if the actual LIBOR-basedrate was less than the specified fixed interest rate, the Company was obligatedto pay the differential interest amount, such amount being recorded asincremental interest expense. Conversely, if the LIBOR-based rate wasgreater than the specified fixed interest rate, the differential interestamount was paid to the Company and recorded as a reduction of interest expense.The weighted average receive rate under the interest rate swap agreement forthe three months ended March 31, 2003 was 1.37%. In connection with thisagreement, the Company recorded incremental interest expense, excluding theliability reduction described below, of $567 for the three months ended March 31,2003.

18

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**10.**   FinancialInstruments (Continued)

Prior to November 1, 2001, the interest rate swapagreement was not effectively designated as a hedge (although it was enteredinto for hedging purposes), and the Company recognized changes in fair value incurrent period earnings. For the period from January 1, 2001 through October 31,2001, $4,809 was charged to expense due to a change in fair value of theinterest rate swap agreement. As of November 1, 2001, in accordance withStatement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“FAS 133”), the Company designated the interestrate swap agreement as a cash flow hedge of the Company’s variable interestflow exposure, and began assessing effectiveness of the cash flow hedge inaccordance with the hypothetical derivative method of FAS 133Implementation Issue G7. The hypothetical derivative method captured the impactof the $4,809 swap liability already existing at November 1, 2001, asfuture hedge ineffectiveness of the newly designated hedge relationship becausethe liability originated from interest rate movements prior to the applicationof hedge accounting. Accordingly, changes in fair value of the interest rateswap agreement attributable solely to the passage of time and payments made tosettle the liability serve to reduce the liability, therefore benefiting netincome in future periods. During the three months ended March 31, 2003,the Company recorded $588 of payments against its liability that would havebeen recorded to interest expense had the interest rate swap agreement beendesignated as a hedge since its inception. Changes in the fair value of theinterest rate swap agreement attributable to changes in benchmark marketinterest rates represented the effective portion of the hedge relationship. Thesechanges in fair value were recorded in other comprehensive income in accordancewith FAS 133 and were fully amortized over the remaining life of theinterest rate swap agreement. Any hedge ineffectiveness was recorded in currentperiod earnings. The interest rate swap agreement expired on March 24,2003, therefore the liability balance is zero at March 31, 2004.

In March 2004, the Company entered into aninterest rate cap agreement with a notional amount of $10,000 expiring June 24,2004, under which the Company will receive payments if the 30-day LIBORbased interest rate exceeds 1.3%. The interest rate cap agreement has beendesignated an effective hedge, and, to the extent the hedging relationshipremains effective, changes in fair value of the interest rate cap agreementwill be recorded in other comprehensive income.

In March 2003, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest raterelated to a consolidated real estate project. The interest rate cap agreementhas a notional amount of $11,400 and the Company will receive payments if theLIBOR-based interest rate exceeds 3.5%. The interest rate cap agreementhas not been designated as an effective hedge, and therefore the interest ratecap agreement will be marked to market each period with the change in fairmarket value recognized in current period earnings. The interest rate capagreement expires on March 1, 2005. Through March 31, 2004, amountsrecorded by the Company related to this interest rate cap agreement were notmaterial.

A consolidated real estate subsidiary of the Company hasissued a mandatorily redeemable financial instrument. The instrument allowsformer lenders to the underlying real estate project to participate inoperating cash flows and the proceeds of the future sale of the property, afterpayment of a separate mortgage loan on the property and certain otherdistribution preferences to the Company, with no 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**10.**   Financial Instruments (Continued)

maximum amount specifiedin the instrument. The instrument is redeemable at the discretion of the formerlenders upon sale of the real estate project, refinancing of the mortgage loanor maturity of the instrument on September 28, 2006. As of March 31,2004, the fair value of the financial instrument is zero, based on hypotheticalliquidation of the underlying real estate project on March 31, 2004.

Accountsreceivable, accounts payable and accrued expenses and other liabilities arecarried at amounts that reasonably approximate their fair values. The fairvalues of the Company’s long-term debt and notes payable on real estatereasonably approximate their fair values based on the Company’s incrementalborrowing rates for similar types of borrowing arrangements.

**11.   Commitments andContingencies**

At March 31, 2004, the Company has guaranteedrepayment of a maximum of $5,715 of real estate notes payable of itsunconsolidated subsidiaries of which $4,883 of the underlying notes payable isoutstanding as of March 31, 2004. These notes are secured by theunderlying real estate and have maturity dates through May 2005. At March 31,2004, the Company has outstanding letters of credit totaling $16,017, of which$5,044 collateralizes amounts recorded in other current liabilities. Theletters of credit expire at varying dates through March 2005. The Companydid not issue or modify any guarantees or letters of credit in the firstquarter of 2004 that were required to be recorded at fair value in the Company’sfinancial statements.

In addition, at March 31, 2004, the Company hasnumerous completion and budget guarantees relating to development projects.Each of these guarantees requires the Company to complete construction of therelevant project within a specified time frame and/or within a specifiedbudget, with the Company potentially being liable for costs to complete inexcess of such budget. However, the Company generally has “guaranteed maximumprice” contracts with reputable general contractors, which are intended to passthe budget risk to such contractors. Management does not expect to incur anymaterial losses under these guarantees.

From time to time, the Company acts as a generalcontractor with respect to construction projects. The Company does not considerthese activities to be a material part of its business. In connection withthese activities, the Company seeks to subcontract construction work forcertain projects to reputable subcontractors. Should construction defects ariserelated to the underlying projects, the Company could potentially be liable tothe customer for the costs to repair such defects, but the Company wouldgenerally look to the subcontractor that performed the work to remedy thedefect. Management does not expect to incur material losses with respect toconstruction defects.

The Company has made refundable and non-refundableearnest money deposits totaling $3,514 in conjunction with contracts to acquireapproximately $139,836 of real estate from independent third party entities,some of which may be VIEs. Except as disclosed in Note 1, the Company hasdetermined that it does not have any significant variable interests in any ofthese entities. The Company’s maximum exposure 

20

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**11.**   Commitments and Contingencies(Continued)

to loss as a result of itsinvolvement with these entities is limited to the total of its non-refundabledeposits, or $2,344.

The Company and one of itssubsidiaries are defendants in a lawsuit styled* **Bank One Oklahoma, N.A.*(the “Bank”)*, et al. v.Trammell Crow Services, Inc. and Trammell Crow Company*, No. 03C 3624, pending in the US District Court for the Northern District of Illinois,originally filed on April 2, 2003. The claims asserted by the plaintiffsrelate to a sale/leaseback transaction involving a property in Oklahoma Citypreviously owned by the Bank. The suit alleges breach of contract, breach offiduciary duty, negligent misrepresentation, fraudulent misrepresentation andfraudulent concealment against the Company and/or its subsidiary and allegesthat the plaintiffs have been damaged in an unspecified amount in excess of$15,000. The plaintiffs seek to recover actual damages, punitive damages andreasonable attorneys’ fees. The suit is in the process of discovery, and notrial date has been set. As of the date of this Form 10-Q, the outcome ofthe suit cannot be predicted with any certainty, and the Company cannot at thistime estimate an amount or range of potential loss in the event of an unfavorableoutcome. While the Company cannot predict with any certainty the outcome ofthis matter, the Company currently believes the plaintiffs’ claims are withoutmerit and is vigorously defending the lawsuit.

From time to time, theCompany is involved in other litigation matters that arise in the ordinarycourse of its business, some of which involve claims for damages which aresubstantial in amount. The ultimate liability for these matters cannot bedetermined. However, based on the information currently available, the Companydoes not believe that the resolution of any such matters to which it iscurrently a party will have a material adverse effect on the Company’s resultsof operations, financial condition or liquidity.

**12.   SegmentInformation**

*Description ofServices by Segment*

The Global Servicessegment includes property and facilities management, brokerage and corporateadvisory, and project and construction management services delivered to bothuser and investor customers. The Development and Investment segment includesdevelopment activities performed on behalf of investor and user customers on afee basis, as well as development activity pursuant to which the Company takesan ownership position. The Development and Investment segment also includesactivities related to the Company’s operating real estate projects prior todisposition.

*Measurement ofSegment Profit or Loss and Segment Assets*

The Company evaluatesperformance and allocates resources among its two reportable segments based onincome before income taxes. The accounting policies of the reportable segmentsare the same as those described in the summary of significant accountingpolicies.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**12.**   Segment Information (Continued)

*Factors ManagementUsed to Identify the Company’s Reportable Segments*

The Company’s reportable segments are defined by thenature of the service provided and activities conducted. Because developmentservices require specialized knowledge, the Company’s organizational structureallows the group of individuals with specialized knowledge and experience indevelopment activities to perform these services with greater focus through theCompany’s Development and Investment segment. The organizational structure ofthe Global Services segment allows the Company to leverage resources inspecific geographic areas, as non-development services provided to user andinvestor customers often require similar expertise.

Virtually all of theCompany’s revenues are from customers located in the United States. In thethree months ended March 31, 2004, one individual customer accounts for$16,494, or 10%, of the Company’s consolidated revenues. Revenues from thiscustomer are included primarily in the Company’s Global Services segment. Noindividual customer accounted for more than 10% of the Company’s consolidatedrevenues in the three months ended March 31, 2003.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**12.**   Segment Information (Continued)

Summarized financialinformation for reportable segments is as follows:
| ** **                                                                                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| **Global  Services:**                                                                                                                               |       |                                             |       |   |   |
| Total revenues                                                                                                                                      |       | $                                                | 150,211    |   | $ | 147,286 |   |
| Costs and  expenses(1)                                                                                                                              |       | 151,645                                          |       | 143,939 |   |
| Income (loss)  from continuing operations before income taxes, minority interest and income  (loss) from investments in unconsolidated subsidiaries |       | (1,434                                           | )          | 3,347 |   |
| Minority  interest, before income taxes                                                                                                             |       | —                                           |       | (142 | ) |
| Income (loss)  from investments in unconsolidated subsidiaries, before income taxes                                                            |       | 1,204                                            |       | (1,169 | ) |
| Income (loss)  from continuing operations, before income taxes                                                                                      |       | (230                                             | )          | 2,036 |   |
| Income from  discontinued operations, before income taxes                                                                                           |       | —                                           |       | 253 |   |
| Income (loss)  before income taxes                                                                                                                  |       | $                                                | (230       | ) | $ | 2,289 |   |
| **Development and Investment:**                                                                                                                     |       |                                             |       |   |   |
| Total revenues                                                                                                                                      |       | $                                                | 9,154      |   | $ | 13,500 |   |
| Costs and  expenses(1)                                                                                                                              |       | 15,085                                           |       | 15,176 |   |
| Loss from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries                 |       | (5,931                                           | )          | (1,676 | ) |
| Minority  interest, before income taxes                                                                                                             |       | (60                                              | )          | 531 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                        |       | 9,082                                            |       | 1,261 |   |
| Income from  continuing operations, before income taxes                                                                                             |       | 3,091                                            |       | 116 |   |
| Income (loss)  from discontinued operations, before income taxes                                                                                    |       | 755                                              |       | (378 | ) |
| Income (loss)  before income taxes                                                                                                                  |       | $                                                | 3,846      |   | $ | (262 | ) |
| **Total:**                                                                                                                                          |       |                                             |       |   |   |
| Total revenues                                                                                                                                      |       | $                                                | 159,365    |   | $ | 160,786 |   |
| Costs and  expenses(1)                                                                                                                              |       | 166,730                                          |       | 159,115 |   |
| Income (loss)  from continuing operations before income taxes, minority interest and income  from investments in unconsolidated subsidiaries        |       | (7,365                                           | )          | 1,671 |   |
| Minority  interest, before income taxes                                                                                                             |       | (60                                              | )          | 389 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                        |       | 10,286                                           |       | 92 |   |
| Income from  continuing operations, before income taxes                                                                                             |       | 2,861                                            |       | 2,152 |   |
| Income (loss)  from discontinued operations, before income taxes                                                                                    |       | 755                                              |       | (125 | ) |
| Income before income  taxes                                                                                                                         |       | $                                                | 3,616      |   | $ | 2,027 |   |

 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2004 (in thousands, except share and per share data) (Unaudited)**

**12.**   Segment Information (Continued)
| ** **                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2004**           | ** ** | **2003**              | ** ** |
| **Total  Assets:**         |       |               |       |                  |       |   |   |
| Global Services            |       | $                  | 262,461    |                  |       | $ | 296,876 |   |   |
| Development and Investment |       | 330,154            |       |                  | 333,250    |   |   |
| Total consolidated assets  |       | $                  | 592,615    |                  |       | $ | 630,126 |   |   |

----

(1)    Costs andexpenses for the three months ended March 31, 2004 and 2003 includenon-cash compensation expense related to the amortization of employmentcontracts and unearned stock compensation of $1,016 and $821 related to theGlobal Services segment and $475 and $108 related to the Development andInvestment segment, respectively.

**13.**   Restructuring Changes

During 2001, the Companyannounced an internal reorganization of its business designed to consolidateall of the property and facilities management, brokerage and corporateadvisory, and construction and project management services delivered to bothuser and investor customers under a single leadership structure. As part of itsrestructuring plans, primarily during the fourth quarter of 2001, the Companyclosed several offices and identified offices with excess space that it intendsto sublease to third parties. The Company recorded restructuring chargesprimarily comprised of lease obligations, costs to sublease excess space(offset by estimated future sublease income) and miscellaneous furniture andequipment writeoffs. These accruals will be relieved over the remaining termsof the underlying leases through March 2012.

No restructuringcharges have been incurred or recorded since 2001. Activity related to theCompany’s lease obligations and related costs included in restructuringaccruals for the quarter ended March 31, 2004, is as follows:
| Balance at  December 31, 2003 |   | $   | 1,864  |   |
|------------------------------------|--------|-----|--------|--------|
| Cash payments                      |   | 114 |   |
| Balance at  March 31, 2004    |   | $   | 1,750  |   |

 

**14.**   Supplemental Cash Flow Information

Supplementalcash flow information is summarized below:
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| **Non-cash activities:**                              |       |                                                 |       |   |   |
| Issuance of restricted stock, net of forfeitures      |       | $                                                    | 199        |   | $ | 11,763 |   |
| Capital lease obligations                             |       | 300                                                  |       | 651 |   |
| Amortization of  participating mortgage loan discount |       | 1,400                                                |       | — |   |
|                                                       |            |                                                      |            |  |  |  |  |

 

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***ITEM 2.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

The following discussion should be read in conjunctionwith the Company’s unaudited Condensed Consolidated Financial Statements andthe notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

**Overview**

Trammell Crow Company (the “Company”) is one of thelargest diversified commercial real estate service companies in the UnitedStates. The Company delivers a comprehensive range of services to leadingmultinational corporations, institutional investors and other users of realestate services. In the United States, the Company is a leading provider ofcommercial property and facilities management services, commercial propertybrokerage and transaction management services, commercial property developmentand construction services and project management services. In addition to itsfull service offices located throughout the United States, the Company hasoffices in Canada, Europe, Asia and Latin/South America focused on the deliveryof real estate services to users of commercial real estate. The Companydelivers brokerage services outside the United States through strategicalliances with leading providers—in Europe and Asia, through Savills plc, (“Savills”)a leading property services company based in the United Kingdom; and in Canada,through JJ Barnicke, a leading Canadian real estate services provider. TheCompany delivers four core services—building management services, brokerageservices, project management services and development services—to both user andinvestor customers. The Company’s business is organized under two separatenational leadership structures. The Global Services Group includessubstantially all of the building management services, brokerage services, andproject management services delivered to both user and investor customers.Substantially all of the Company’s real estate development, capital markets andinvestment activities are conducted through the Company’s Development and InvestmentGroup.

Within the Global Services segment, with approximately5,800 full-time equivalent (“FTE”) employees, the Company provides services touser customers, including multinational corporations, hospitals anduniversities, who are typically the primary occupants of commercial properties,and investor customers that are not typically the primary occupants of thecommercial properties with respect to which services are performed. Thebuilding management services provided to user customers consist primarily offacilities management, which entails providing comprehensive day-to-dayoccupancy related services, principally to large corporations, healthcaresystems and other users that occupy commercial facilities in multiplelocations. These services include administration and day-to-day maintenance andrepair of customer-occupied facilities. Brokerage services provided touser customers include corporate advisory services such as portfolio managementand tenant representation. Project management services provided to usercustomers include facility planning and project management, such asconstruction oversight, space planning, site consolidations, facilities design,and workplace moves, adds, and changes. The building management servicesprovided to investor customers include property management services relating toall aspects of building operations, tenant relations and oversight of buildingimprovement processes. Brokerage services provided to investor customersinclude project leasing and investment sales services whereby the Companyadvises buyers, sellers and landlords in connection with the leasing and saleof office, industrial and retail space, and land. Project management servicesprovided to investor customers include construction management services such asspace planning and tenant finish and coordination.

Within the Development andInvestment segment, encompassing approximately 190 FTE employees, the Companyprovides development services to both investor and user customers—both thosepursuant to which the Company takes an ownership position in a project andthose pursuant to which the Company provides development services to others inexchange for fees. The Company provides comprehensive project developmentservices and acquires and disposes of commercial real estate projects. Thedevelopment services provided include financial planning, site acquisition,procurement of approvals and 

25

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permits,design and engineering coordination, construction bidding and management,tenant finish coordination, project closeout and project finance coordination.The Company will continue to focus its efforts in this area on risk-mitigatedopportunities for investor customers and fee development and build-to-suitprojects for user customers, including those in higher education and healthcare.From time to time, the Company may pursue development and investmentactivities, including opportunistic property acquisitions and new development,for its own account. With an organization comprised of professionals dedicatedfully to development and investment activities, the Company is positioned topursue and execute new development business, particularly programmatic businesswith the Company’s large investor customers, and exploit niche marketopportunities. 

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**Results of Operations—Three Months Ended March 31,2004 Compared to Three Months Ended March 31, 2003**

Inaccordance with Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(“FAS144”), certain revenues and expenses for the quarterly period ended March 31,2003, have been reclassified to conform to the presentation for the quarterlyperiod ended March 31, 2004. As a result, certain balances differ from theamounts reported in previously filed documents. See *Income(Loss) from Discontinued Operations, Net of Income Taxes*, below, foradditional information.
| ** **                                                                                                                                   | ** ** | **For the Three  Months Ended  March 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                                       | ** ** | **2003**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                                   | ** ** | **($ in millions)**                                  | ** ** |
| **REVENUES:**                                                                                                                                |       |                                                           |       |       |       |              |       |   |   |   |   |   |   |
| ***User  Services:***                                                                                                                        |       |                                                           |       |       |       |              |       |   |   |   |   |   |   |
| Facilities  management                                                                                                                       |       | $                                                              | 50.7       |       | $          | 51.5              |       |   | $ | (0.8 | ) |   |   | (1.6 | )% |   |
| Corporate  advisory services                                                                                                                 |       | 22.5                                                           |       | 22.7       |       |              | (0.2       | ) |   |   | (0.9 | )% |   |
| Project  management services                                                                                                                 |       | 18.0                                                           |       | 14.4       |       |              | 3.6        |   |   |   | 25.0 | % |   |
|                                                                                                                                         |       | 91.2                                                           |       | 88.6       |       |              | 2.6        |   |   |   | 2.9 | % |   |
| ***Investor  Services:***                                                                                                                    |       |                                                           |       |       |       |              |       |   |   |   |   |   |   |
| Property management                                                                                                                          |       | 34.6                                                           |       | 37.4       |       |              | (2.8       | ) |   |   | (7.5 | )% |   |
| Brokerage                                                                                                                                    |       | 22.1                                                           |       | 17.5       |       |              | 4.6        |   |   |   | 26.3 | % |   |
| Construction  management                                                                                                                     |       | 1.7                                                            |       | 2.0        |       |              | (0.3       | ) |   |   | (15.0 | )% |   |
|                                                                                                                                         |       | 58.4                                                           |       | 56.9       |       |              | 1.5        |   |   |   | 2.6 | % |   |
|                                                                                                                                         |       |                                                           |       |       |       |              |       |   |   |   |   |   |   |
| Development and  construction                                                                                                                |       | 8.3                                                            |       | 9.8        |       |              | (1.5       | ) |   |   | (15.3 | )% |   |
|                                                                                                                                         |       | 157.9                                                          |       | 155.3      |       |              | 2.6        |   |   |   | 1.7 | % |   |
|                                                                                                                                         |       |                                                           |       |       |       |              |       |   |   |   |   |   |   |
| Gain on  disposition of real estate                                                                                                          |       | 0.5                                                            |       | 4.8        |       |              | (4.3       | ) |   |   | (89.6 | )% |   |
| Other                                                                                                                                        |       | 0.9                                                            |       | 0.7        |       |              | 0.2        |   |   |   | 28.6 | % |   |
|                                                                                                                                         |       | 159.3                                                          |       | 160.8      |       |              | (1.5       | ) |   |   | (0.9 | )% |   |
| **COST  AND EXPENSES:**                                                                                                                      |       |                                                           |       |       |       |              |       |   |   |   |   |   |   |
| Salaries, wages  and benefits                                                                                                                |       | 116.2                                                          |       | 109.6      |       |              | 6.6        |   |   |   | 6.0 | % |   |
| Commissions                                                                                                                                  |       | 20.0                                                           |       | 17.3       |       |              | 2.7        |   |   |   | 15.6 | % |   |
| General and  administrative                                                                                                                  |       | 26.4                                                           |       | 25.7       |       |              | 0.7        |   |   |   | 2.7 | % |   |
| Depreciation and  amortization                                                                                                               |       | 3.2                                                            |       | 4.2        |       |              | (1.0       | ) |   |   | (23.8 | )% |   |
| Interest                                                                                                                                     |       | 0.9                                                            |       | 2.3        |       |              | (1.4       | ) |   |   | (60.9 | )% |   |
|                                                                                                                                         |       | 166.7                                                          |       | 159.1      |       |              | 7.6        |   |   |   | 4.8 | % |   |
| Income (loss)  from continuing operations before income taxes, minority interest and income  from investments in unconsolidated subsidiaries |       | (7.4                                                           | )          | 1.7        |       |              | (9.1       | ) |   |   | (535.3 | )% |   |
| Income tax  (expense) benefit                                                                                                                |       | 3.1                                                            |       | (0.7       | )          |              | 3.8        |   |   |   | 542.9 | % |   |
| Minority  interest, net of income taxes                                                                                                      |       | —                                                         |       | 0.2        |       |              | (0.2       | ) |   |   | (100.0 | )% |   |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                                 |       | 6.0                                                            |       | —     |       |              | 6.0        |   |   |   | — |   |   |
| Income from  continuing operations                                                                                                           |       | 1.7                                                            |       | 1.2        |       |              | 0.5        |   |   |   | 41.7 | % |   |
| Income (loss)  from discontinued operations, net of income taxes                                                                        |       | 0.4                                                            |       | (0.1       | )          |              | 0.5        |   |   |   | 500.0 | % |   |
| **Net  income**                                                                                                                              |       | $                                                              | 2.1        |       | $          | 1.1               |       |   | $ | 1.0 |   |   |   | 90.9 | % |   |

*** ***

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***Revenues.*****  **Facilitiesmanagement revenue decreased slightly in the first quarter of 2004. Managementfee revenue decreased $1.9 million, while reimbursement of salaries, wages,benefits, and out-of-pocket general and administrative costs increased$1.2 million in the first quarter of 2004, compared to the same period in2003. The composition of facilities management revenue, including managementfees and reimbursements, may vary significantly from period to period based onthe terms of the underlying management agreements in effect each period.

Corporate advisory services revenue remainedrelatively flat in the first quarter of 2004.  Commission revenue decreased approximately$0.7 million from the prior period. This decrease was partially offset byincreases in transaction management fees and reimbursement revenues due toexpansions of transaction management services provided to existing customerssubsequent to the first quarter of 2003. 

Project management revenue growth in 2004 wasprimarily due to the expansion of services provided to existing customerssubsequent to the first quarter of 2003. 

The decrease in property management revenue waspartially the result of decreased occupancy levels and rents in buildingsmanaged by the Company, which drive this revenue. In addition, the revenuedecrease was impacted by a reduction in square footage under management in thefirst quarter of 2004 as compared to 2003. The reduction in square footage wasprimarily driven by sales of buildings in the Company’s management portfolio toREITs or other investors that self-manage their properties. 

Brokerage revenue in the first quarter of 2004 wasahead of the comparable period in the prior year, with the increase primarilydriven by investment sales revenue. This is in part the result of an increasein the number of brokers, as part of the Company’s focus on expanding itsbrokerage network. In addition, the Company was successful in closing severalsignificant transactions in the first quarter of 2004, driven by favorablecapital market factors including low interest rates.

Construction management revenue is generated fromservices such as space planning and tenant finish coordination for investorcustomers in conjunction with property management and leasing assignments, andis directly related to tenants’ real estate demands. This revenue remainedrelatively flat from the first quarter of 2003 to 2004. 

Development and construction revenue decreased fromthe prior year due to a decrease in the Company’s development starts in recentyears. Typically, the impact of decreases and increases in the Company’sdevelopment starts is not reflected in results immediately, and the Companyexperienced the consequences of reduced previous periods’ starts in itsdevelopment and construction revenue for the first quarter of 2004. 

Some of the Company’s development resources focus onproviding development services to investor customers that invest in speculativecommercial real estate projects. Since the latter part of 1999, speculativereal estate development has declined significantly. The decline reflects thefact that demand for new product in many of the markets in which the Companyoperates has declined as vacancy rates have risen with the overall downturn inthe economy. As a result, the Company has responded by shifting focus andresources to user-driven development areas such as development and constructionactivities for healthcare and higher education customers and fee developmentfor user customers. 

The Company’s gain on disposition of real estatedecreased significantly in the first quarter of 2004 from 2003. In the firstquarter of 2004, the Company sold one real estate project for a net sales priceof $0.5 million, resulting in a gain on disposition of $0.2 millionand recognized deferred gain of $0.3 million relating to dispositions inprevious periods. In the first quarter of 2003, the Company sold four realestate projects for an aggregate net sales price of $5.1 million,resulting in an aggregate gain on disposition of $4.5 million, andrecognized deferred gain of $0.3 million relating to a disposition in aprevious period. 

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***Costsand Expenses.*****  **Salaries, wages and benefitsexpense includes all compensation paid to Company employees other thanbrokerage commissions. As such, it includes salaries, benefits and annualincentive bonuses for employees whose compensation is reimbursed by customers (“reimbursedemployees”); salaries, benefits and annual incentive bonuses for employeeswhose compensation is not so reimbursed (“unreimbursed employees”); andtransaction-related incentive compensation other than brokeragecommissions, primarily paid in connection with development and investmenttransactions. The increase in the first quarter of 2004 was driven by a$3.2 million increase in salaries, wages and benefits for unreimbursedemployees and a $3.4 million increase in salaries, wages and benefits forreimbursed employees. The increase in unreimbursed salaries, wages and benefitsis a result of new hiring beginning in the second half of 2003, merit increasesfor existing employees and 2003 restricted stock grants to senior management ofthe Company. In addition, unreimbursed incentive compensation also increased in2004, driven by an increase in the Company’s income from investments inunconsolidated subsidiaries due to sales of real estate held by suchunconsolidated subsidiaries. The increase in reimbursed salaries, wages andbenefits is driven by an increase in project management services provided tocustomers. 

The increase in commission expense was primarilydriven by the increase in the Company’s brokerage revenue, which was the resultof an increase in headcount of project leasing and investment sales brokers andthe closing of several significant transactions during the first quarter of2004 as a result of the economy beginning to stabilize in the second half of2003. 

The overall increase in general and administrativeexpenses was comprised of a $1.0 million increase in out-of-pocket generaland administrative expenses that are reimbursed by customers, offset by a $0.3million decrease in costs that are not reimbursed by customers. The decrease inunreimbursed general and administrative expenses for the first quarter of 2004is the result of a decrease in writedowns due to impairment of real estate andprovisions to reduce the carrying value of real estate held for sale assets tofair value less cost to sell. The Company recorded $0.03 million of suchwritedowns and provisions in 2004, as compared to $1.3 million in 2003. Thisdecrease was partially offset by a $1.1 million increase in insuranceexpense, mainly due to higher insurance premiums. The increase in reimbursedgeneral and administrative expenses is due to an increase in project managementservices provided to customers. 

Depreciation and amortization expense decreased in2004 as compared to the prior year. The Company has replaced many of itscomputer assets at a lower cost than the assets that were retired, which hasreduced the Company’s depreciation expense. This was partially offset by aslight increase in depreciation expense related to real estate assets classifiedas held for investment, in accordance with FAS 144.

The decrease in interest expense is primarily theresult of the expiration of the interest rate swap at the end of the firstquarter of 2003 for which the Company recorded $0.6 million of interest expensein 2003. The Company also had lower average outstanding balances on itsrevolving line of credit. 

***Income(Loss) from Continuing Operations Before Income Taxes, Minority Interest andIncome from Investments in Unconsolidated Subsidiaries.***   The Company’s income (loss) from continuingoperations before income taxes, minority interest and income from investmentsin unconsolidated subsidiaries decreased due to the fluctuations in revenuesand expenses described above.

***MinorityInterest, Net of Income Taxes.*****  **Minorityinterest fluctuated from income in the first quarter of 2003 to expense in 2004.This change is primarily a result of improved 2004 results of operations ofcertain consolidated real estate entities in which outside parties have aninterest. The improved results were driven by charges for impairment of realestate held by these entities in 2003, as compared to no charges for impairmentof real estate held by these entities in 2004. 

***Incomefrom Investments in Unconsolidated Subsidiaries, Net of Income Taxes.*****  **In the ordinary course of business, a significantportion of the Company’s development and investment activities are conducted, 

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and are expected to beconducted in future periods, through unconsolidated subsidiaries. The Companyalso has certain investments in unconsolidated subsidiaries which are notrelated to its development and investment activities. Income from investmentsin unconsolidated subsidiaries fluctuates from period to period based on thevolume and profitability of transactions carried out by the underlyingunconsolidated subsidiaries. The Company’s share of income from suchtransactions is typically driven by its ownership percentage in theunconsolidated subsidiaries. The increase in the first quarter of 2004 wasprimarily driven by significant income from an unconsolidated real estatesubsidiary that sold its building portfolio.

***Incomefrom Continuing Operations.*****  **TheCompany’s income from continuing operations in the first quarter of 2004increased from the comparable period in the prior year due to the fluctuationsin revenues and expenses described above. 

***Income(Loss) from Discontinued Operations, Net of Income Taxes.*****  **Income(loss) from discontinued operations includes the operations of real estateproperties and gain on disposition of real estate properties held for sale orsold subsequent to the adoption of FAS 144 effective January 1, 2002,that were considered components of an entity under FAS 144 and in whichthe Company has not retained or does not expect to retain significantcontinuing involvement. Dispositions of real estate assets have been and willcontinue to be a significant part of the Company’s activities and, as a resultof applying the provisions of FAS 144, the Company expects a greateramount of these activities to be classified as discontinued operations infuture periods as fewer asset dispositions will qualify for grandfatheredtreatment under FAS 144. In the first quarter of 2004, the Company soldone real estate project that was considered a discontinued operation for a netsales price of $11.3 million. This sale resulted in a gain on disposition ofreal estate (before income taxes) of $0.8 million, including interestforgiveness of $0.3 million. In the first quarter of 2003, the Company sold tworeal estate projects with an aggregate net sales price of $12.4 million for anaggregate gain on disposition of real estate (before income taxes) of $1.7million. Income (loss) from discontinued operations for the first quarter of2003 also included a provision for loss of $1.4 million to reflect a realestate held for sale asset at fair value less cost to sell. The related realestate asset was sold in the first quarter of 2004, as described above. 

***Net Income.*****  **Netincome increased due to the fluctuations in revenues and expenses describedabove.  

**Quarterly Results of Operations and Seasonality**

The results of operationsfor any quarter are not necessarily indicative of results for any futureperiod. Revenues and net income during the fourth fiscal quarter historicallyhave been somewhat greater than in each of the first three fiscal quarters,primarily because the Company’s customers have demonstrated a tendency to closetransactions toward the end of the fiscal year. The timing and introduction ofnew contracts, the disposition of investments in real estate assets, therecognition of incentive fees towards the latter part of the fiscal year ascontractual targets are met and other factors may also cause quarterlyfluctuations in the Company’s results of operations. 

**Liquidity and Capital Resources**

The Company’s liquidity and capital resourcesrequirements include the funding of working capital needs, primarily costsincurred in providing services to its customers before collection of relatedbillings; the funding of capital investments, including the acquisition of orinvestments in other real estate service companies; the repurchase of itsshares if authorized by the Board of Directors; expenditures for real estateand payments on notes payable associated with its development and investmentactivities; and expenditures related to upgrading the Company’s managementinformation systems. The Company finances its operations with internallygenerated funds and borrowings under the Credit Facility (described below). Theportion of the Company’s development and investment business that includes theacquisition 

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and development of realestate is financed with loans secured by underlying real estate, externalequity, internal sources of funds, or a combination thereof. 

Net cash used in operating activities totaled$44.4 million for the first quarter of 2004, compared to $1.1 millionfor the same period in 2003. Cash used in operating activities, excluding thechange in real estate and related borrowings, increased to $39.0 millionin 2004 as compared to $3.4 million in 2003, primarily due to greatercollections of accounts receivable in 2003, due to higher average receivablebalances in 2003. Also, although net income for the first quarter of 2004exceeded net income for the first quarter of 2003, cash provided by (used in)earnings decreased from cash provided of $9.5 million in the first quarter of2003 to cash used of $3.7 million for the comparable period in 2004. This decreasewas largely due to $10.3 million (before income taxes) of the Company’searnings for the first quarter of 2004 being generated from investments inunconsolidated subsidiaries, for which the related cash provided is reflectedas an investing activity (as described below), as compared to $0.1 million(before income taxes) in the same period of 2003. In addition, cash used inreal estate activities, net of related borrowings, was $5.4 million in thefirst quarter of 2004, compared to cash provided of $2.3 million for thesame period in 2003 as a result of fewer real estate dispositions in 2004. 

Net cash provided by investing activities totaled$18.1 million for the first quarter of 2004, compared to $2.8 million forthe same period in 2003. This increase in cash is partially due to proceeds of$11.3 million from the disposition of a real estate project classified as “heldfor investment” at the time of the disposition, in accordance with FAS 144,offset by $1.9 million of expenditures made in 2004 related to real estateclassified as “held for investment,” as compared to similar expenditures of$0.1 million in 2003. The increase in cash provided was also the result ofdistributions from investments in unconsolidated subsidiaries, net ofcontributions, of $10.1 million in 2004, compared to $3.7 million in 2003, as aresult of a significant disposition of an underlying real estate project by anunconsolidated subsidiary in 2004. 

Net cash used in financing activities totaled$11.8 million for the first quarter of 2004, compared to $9.7 millionfor the same period in 2003. In 2004, the Company made principal payments, netof additional borrowings, of $11.2 million, primarily under the CreditFacility (described below), compared to principal payments, net of additionalborrowings, of $5.0 million in 2003. In addition, the Company madepayments, net of borrowings, of $9.1 million on notes payable on real estateheld for investment, primarily due to the disposition of a real estate project,noted above, as compared to payments of $0.2 million in 2003. These uses ofcash were offset by contributions, net of distributions, from minority interestholders of $7.1 million in 2004, compared to distributions, net ofcontributions, of $5.6 million in 2003. This increase in cash is primarilythe result of contributions received related to the Company’s new discretionarydevelopment and investment fund formed in 2004. The Company also received $1.4million in proceeds in 2004 from the exercise of stock options and issuance of commonstock, compared to $1.1 million in 2003. 

In June 2002, the Company obtained a$150.0 million revolving line of credit (the “Credit Facility”) arrangedby Bank of America, N.A., as the administrative agent (the “AdministrativeAgent”), which replaced the Company’s previous $150.0 million revolvingline of credit. Under the terms of the Credit Facility, the Company can obtainloans, which are Base Rate Loans or Eurodollar Rate Loans. Base Rate Loans bearinterest at a base rate plus a margin up to 0.75% depending on the Company’sleverage ratio. The base rate is the higher of the prime lending rate announcedfrom time to time by the Administrative Agent or an average federal funds rateplus 0.5%. Eurodollar Rate Loans bear interest at the Eurocurrency rate plus amargin, which ranges from 1.75% to 2.5%, depending upon the Company’s leverageratio. The Credit Facility contains various covenants such as the maintenanceof minimum equity, liquidity, revenues, interest coverage ratios and fixedcharge ratios. The Credit Facility also includes restrictions on recourseindebtedness and total indebtedness, restrictions on liens and certainrestrictions on investments and acquisitions that can be made by the Company. Inaddition, the Company may not pay dividends, repurchase common shares, or makeother distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization. The CreditFacility 

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is guaranteed by certainsignificant subsidiaries of the Company and is secured by a pledge of a stockof such significant subsidiaries and a pledge of certain intercompanyindebtedness. 

The Company’s participation in derivative transactionshas been limited to hedging purposes, and derivative instruments are not heldfor trading purposes. The Credit Facility requires the Company to enter intoone or more interest rate agreements for the Company’s floating rateindebtedness in excess of $30.0 million (other than construction loansunder which interest is capitalized in accordance with accounting principlesgenerally accepted in the United States (“GAAP”)) ensuring the net interest onsuch excess is fixed, capped or hedged. In March 2001, the Company renewedan existing interest rate swap agreement for a two-year period, with a fixedinterest pay rate of 4.68% and a notional amount of $150.0 million. Theinterest rate swap agreement expired on March 24, 2003, and the weightedaverage receive rate was 1.37% for the three months ended March 31, 2003.Subsequent to the expiration of the interest rate swap agreement, the Companyhas entered into various short-term interest rate agreements to comply with therequirements of the Credit Facility. In March 2004, the Company enteredinto an interest rate cap agreement with a notional amount of $10.0 millionexpiring June 24, 2004, under which the Company will receive payments ifthe 30-day LIBOR based interest rate exceeds 1.3%. The interest rate capagreement has been designated an effective hedge, and, to the extent thehedging relationship remains effective, changes in fair value of the interestrate cap agreement will be recorded in other comprehensive income. 

The Company also has a $25.0 milliondiscretionary line of credit (the “Discretionary Line”) with Bank of America,N.A. Each loan obtained by the Company under the Discretionary Line matures infive business days, but no later than June 28, 2004, and bears interest ata rate agreed upon between the Company and the bank. Borrowings under theDiscretionary Line are unsecured and reduce borrowing capacity under the CreditFacility. 

At March 31, 2004, the Company had no borrowingsoutstanding under the Credit Facility or the Discretionary Line. The covenantscontained in the Credit Facility and the amount of the Company’s otherborrowings and contingent liabilities may have the effect of limiting thecredit available to the Company under the Credit Facility to an amount lessthan the $150.0 million commitment. As it takes longer for the Company todispose of real estate investments in a weaker economy, the recent economicslowdown could adversely impact the Company’s ability to comply with certain ofthe real estate-related financial covenants in the Company’s CreditFacility, which could negatively impact the Company’s borrowing capacity. Also,since many of the financial covenants in the Credit Facility are dependent onthe Company’s “EBITDA”, as defined in the Credit Facility agreement andcalculated on a trailing four quarter basis, a decline in the Company’s overalloperations could adversely impact the Company’s ability to comply with thesefinancial covenants and, in turn, the Company’s borrowing capacity or theamount of its investments in real estate. The Company’s unused borrowingcapacity (taking into account letters of credit outstanding and limitationsfrom certain financial covenants) under the Credit Facility was$128.2 million at March 31, 2004. The Company expects to continue toborrow under the Credit Facility to finance future strategic acquisitions, fundits co-investment activities and provide the Company with an additional sourceof working capital. 

In March 2003, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest raterelated to a consolidated real estate project. The interest rate cap agreementhas a notional amount of $11.4 million and the Company will receive payments ifthe LIBOR-based interest rate exceeds 3.5%. The interest rate capagreement has not been designated as an effective hedge, and therefore theinterest rate cap agreement will be marked to market each period with thechange in fair market value recognized in current period earnings. The interestrate cap agreement expires on March 1, 2005. Through March 31, 2004,amounts recorded by the Company related to this interest rate cap agreementwere not material. 

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As of March 31,2004, the Company has various commitments that could impact its liquidity assummarized below (in millions): 
| ** **                 | ** ** | ** **                    | ** ** | **Amount of Commitments by  Time of Expiration** | ** ** |
|----------------------------|------------|-------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Total  Amounts  Committed** | ** ** | **Less than  1 year**                                           | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5  years** | ** ** |
| Standby letters  of credit |       |                          | $          | 11.0                                                                      |       |   |   | $ | 11.0 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Guarantees                 |       |                          | 4.9        |                                                                      |       |   | 3.2 |   |   |   | 1.7 |   |   |   | — |   |   |   | — |   |   |
| Total Commitments          |       |                          | $          | 15.9                                                                      |       |   |   | $ | 14.2 |   |   |   | $ | 1.7 |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

The Company does notanticipate paying any dividends in the foreseeable future. The Company believesthat funds generated from operations, together with existing cash and availablecredit under the Credit Facility and loans secured by underlying real estatewill be sufficient to finance its current operations, planned capitalexpenditure requirements, payment obligations for development purchases, sharerepurchases, acquisitions of service companies, signing bonuses or loans fornew employees and internal growth for the foreseeable future. The Company’sneed, if any, to raise additional funds to meet its working capital and capitalrequirements will depend upon numerous factors, including the success and paceof its implementation of its growth strategy. The Company regularly considerscapital raising alternatives to be able to take advantage of available avenuesto supplement its working capital, including strategic corporate partnershipsor other alliances, bank borrowings and the sale of equity and/or debtsecurities.

**Off-balance Sheet Arrangements**

The Company does not haveany off-balance sheet arrangements, as defined in Regulation S-K Item 303(a)(4)(ii)(A)-(D),that have or are reasonably likely to have a current or future effect on theCompany’s financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors.

**Forward-Looking Statements**

Certain statementscontained or incorporated by reference in this Quarterly Report on Form 10-Q,including without limitation statements containing the words “believe,” “anticipate,”“forecast,” “will,” “may,” “expect,” “envision,” “project,” “budget,” “target,”“estimate,” “should,” “intend,” “foresee,” “look for” and words of similarimport, are forward-looking statements within the meaning of the federalsecurities laws. Such forward-looking statements involve known andunknown risks, uncertainties and other matters which may cause the actualresults, performance or achievements of the Company or industry results to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Such risks,uncertainties and other matters include, but are not limited to (i) thetiming of individual transactions, (ii) the ability of the Company toidentify, implement and maintain the benefit of cost reduction measures andachieve economies of scale, (iii) the ability of the Company to competeeffectively in the international arena, (iv) the ability of the Company toretain its major customers and renew is contracts, (v) the ability of theCompany to attract new user and investor customers, (vi) the ability ofthe Company to manage fluctuations in net earnings and cash flow which couldresult from the Company’s participation as a principal in real estateinvestments, (vii) the Company’s ability to continue to pursue its growthstrategy, (viii) the Company’s ability to pursue strategic acquisitions onfavorable terms and manage challenges and issues commonly encountered as aresult of those acquisitions, (ix) the Company’s ability to compete inhighly competitive national and local business lines, and (x) the Company’sability to attract and retain qualified personnel in all areas of its business(particularly senior management). In addition, the Company’s ability to achievecertain anticipated results 

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will besubject to other factors affecting the Company’s business that are beyond theCompany’s control, including but not limited to general economic conditions(including the cost and availability of capital for investment in real estateand customers’ willingness to make real estate commitments) and the effect ofgovernment regulation on the conduct of the Company’s business. Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements. The Company disclaims any obligation toupdate any such statements or publicly announce any updates or revisions to anyof the forward-looking statements contained herein to reflect any changein the Company’s expectation with regard thereto or any change in events,conditions, circumstances or assumptions underlying such statements. Referenceis hereby made to the disclosures contained under the heading “Risk Factors” in“Item 1. Business” of the Company’s Annual Report on Form 10-K filed withthe Securities and Exchange Commission on March 15, 2004.

***ITEM 3.*   Quantitativeand Qualitative Disclosures About Market Risk**

The Company’s primarymarket risk exposure is to changes in interest rates. The Company is exposed tomarket risk related to its Credit Facility and loans secured by real estateproperties as discussed in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” and inNotes 5 and 6 to the Company’s Condensed Consolidated Financial Statements. TheCredit Facility and the majority of the loans secured by real estate bearinterest at variable rates and are subject to fluctuations in the market. Fromtime to time, the Company purchases interest rate agreements to hedge aportion, but not all, of its exposure to fluctuations in interest rates, and,as such, the effects of interest rate changes are expected to be limited. TheCompany’s earnings are also somewhat affected by fluctuations in the value ofthe U.S. dollar as compared to foreign currencies as a result of its operationsin Canada, Europe, Asia and Australia. There have been no significant changesin the interest rate or foreign currency market risks since December 31,2003.

***ITEM 4.*   Controlsand Procedures**

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of management, including its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures (as defined in 13a-15(e) of the Securities Exchange Act of1934 (the “Exchange Act”)). Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic filings with the Securitiesand Exchange Commission. There were no changes in the Company’s internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that occurred during the Company’s last fiscal quarter thathave materially affected or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

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**PART II—OTHER INFORMATION**

***ITEM 1.  *LegalProceedings**

The Company and one of itssubsidiaries are defendants in a lawsuit styled*Bank One Oklahoma, N.A.*(the “Bank”)*, et al. v. Trammell Crow Services, Inc. and Trammell Crow Company*,No. 03 C 3624, pending in the US District Court for the Northern Districtof Illinois, originally filed on April 2, 2003. The claims asserted by theplaintiffs relate to a sale/leaseback transaction involving a property inOklahoma City previously owned by the Bank. The suit alleges breach ofcontract, breach of fiduciary duty, negligent misrepresentation, fraudulentmisrepresentation and fraudulent concealment against the Company and/or itssubsidiary and alleges that the plaintiffs have been damaged in an unspecifiedamount in excess of $15.0 million. The plaintiffs seek to recover actualdamages, punitive damages and reasonable attorneys’ fees. The suit is in theprocess of discovery, and no trial date has been set. As of the date of this Form 10-Q,the outcome of the suit cannot be predicted with any certainty, and the Companycannot at this time estimate an amount or range of potential loss in the eventof an unfavorable outcome. While the Company cannot predict with any certaintythe outcome of this matter, the Company currently believes the plaintiffs’claims are without merit and is vigorously defending the lawsuit.

From time to time, theCompany is involved in other litigation matters that arise in the ordinarycourse of its business, some of which involve claims for damages which aresubstantial in amount. The ultimate liability for these matters cannot bedetermined. However, based on the information currently available, the Companydoes not believe that the resolution of any such matters to which it iscurrently a party will have a material adverse effect on the Company’s resultsof operations, financial condition or liquidity.

***ITEM 6.******  *Exhibits andReports on Form***8-K*

(a)           Exhibits:
| 3.1(1)   |   | Certificate of Incorporation of the Company                                                                     |
|----------|--------|-----------------------------------------------------------------------------------------------------------------|
| 3.2(1)   |   | Bylaws of the Company                                                                                           |
| 3.2.1(2) |   | First Amendment to the Bylaws of the Company                                                                    |
| 3.2.1(3) |   | Second Amendment to the Bylaws of the Company                                                                   |
| 3.2.1(4) |   | Third Amendment to the Bylaws of the Company                                                                    |
| 4.1(5)   |   | Form of Certificate for Shares of Common Stock  of the Company                                             |
| 10.1     |   | Employment Agreement dated as of November 24,  2003, between the Company and William F. Concannon          |
| 10.1.1   |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and William F. Concannon |
| 10.2     |   | Employment Agreement dated as of April 6, 2004,  between the Company and T. Christopher Roth          |
| 10.3     |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Robert E. Sulentic   |
| 10.4     |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Derek R. McClain     |
| 10.5     |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and James R. Groch       |
| 10.6     |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Michael J. Lafitte   |
| 10.7     |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and John A. Stirek       |

35

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| 10.8 |   | Employment Agreement  dated as of April 27, 2004, between the Company and Diane Paddison                                                                            |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification by the Chief Executive Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              |
| 31.2 |   | Certification by the Chief Financial Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              |
| 32.1 |   | Certification by the Chief Executive Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of  the Sarbanes- Oxley Act of 2002 |
| 32.2 |   | Certification by the Chief Financial Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of  the Sarbanes- Oxley Act of 2002 |

 

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(1)          Previously filed as anexhibit to the Company’s Registration Statement on Form S-1 (FileNumber 333-34859) filed with the Securities and Exchange Commissionon September 3, 1997 and incorporated herein by reference.

(2)          Previously filed as anexhibit to the Company’s Form 10-Q filed with the Securities andExchange Commission on August 11, 2000, and incorporated herein byreference.

(3)          Previously filed as anexhibit to the Company’s Form 10-K filed with the Securities andExchange Commission on March 31, 2003, and incorporated herein byreference.

(4)          Previously filed as Exhibit 3.2.3to the Company’s Form 10-K filed with the Securities and ExchangeCommission on March 15, 2004, and incorporated herein by reference.

(5)          Previously filed as Exhibit 4.1to the Company’s Registration Statement on Form S-1/A (FileNumber 333-34859) filed with the Securities and Exchange Commissionon October 23, 1997 and incorporated herein by reference.

(b)          Reports on Form 8-Kfiled during the three months ended March 31, 2004:

On February 26, 2004, the Company filed a CurrentReport on Form 8-K furnishing the Company’s press release announcingits financial results for the three months and year ended December 31,2003 and furnishing the following financial statements: (i) Statements ofIncome for the Three Months and Years Ended December 31, 2003 and 2002; (ii) BalanceSheet as of December 31, 2003 and 2002; (iii) Summarized OperatingData by Segment for the Three Months and Years Ended December 31, 2003 and2002; and (iv) Other Data as of December 31, 2003 and 2002.

36

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|   | Trammell Crow Company |
|--------|-----------------------|
|   |                  |   |
|   | By:                   | /s/ Derek R. McClain |
|   |                  | Derek R. McClain*Chief Financial Officer  (Principal Financial Officer and duly authorized to sign this report on  behalf of the Registrant)* |
|   |                  |   |

Date: May 10, 2004

37

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**Exhibit Index**
| **Exhibit  Number** | ** ** | ** **                                                                                                                                                              | ** ** | ** ** | ** ** | **Description** |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|
|                |       |                                                                                                                                                                    |
| 3.1(1)              |       | Certificate of Incorporation of the Company                                                                                                                             |
| 3.2(1)              |       | Bylaws of the Company                                                                                                                                                   |
| 3.2.1(2)            |       | First Amendment to the Bylaws of the Company                                                                                                                            |
| 3.2.1(3)            |       | Second Amendment to the Bylaws of the Company                                                                                                                           |
| 3.2.1(4)            |       | Third Amendment to the Bylaws of the Company                                                                                                                            |
| 4.1(5)              |       | Form of Certificate for Shares of Common Stock  of the Company                                                                                                     |
| 10.1                |       | Employment Agreement dated as of November 24,  2003, between the Company and William F. Concannon                                                                  |
| 10.1.1              |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and William F. Concannon                                                         |
| 10.2                |       | Employment Agreement dated as of April 6, 2004,  between the Company and T. Christopher Roth                                                                       |
| 10.3                |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Robert E. Sulentic                                                      |
| 10.4                |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Derek R. McClain                                                        |
| 10.5                |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and James R. Groch                                                          |
| 10.6                |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Michael J. Lafitte                                                           |
| 10.7                |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and John A. Stirek                                                          |
| 10.8                |       | Employment Agreement dated as of April 27,  2004, between the Company and Diane Paddison                                                                           |
| 31.1                |       | Certification by the Chief Executive Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
| 31.2                |       | Certification by the Chief Financial Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
| 32.1                |       | Certification by the Chief Executive Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |
| 32.2                |       | Certification by the Chief Financial Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |
|                     |            |                                                                                                                                                                         |            |            |            |                 |  |

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(1)          Previously filed as anexhibit to the Company’s Registration Statement on Form S-1 (FileNumber 333-34859) filed with the Securities and Exchange Commissionon September 3, 1997 and incorporated herein by reference.

(2)          Previously filed as anexhibit to the Company’s Form 10-Q filed with the Securities andExchange Commission on August 11, 2000, and incorporated herein byreference.

(3)          Previously filed as anexhibit to the Company’s Form 10-K filed with the Securities andExchange Commission on March 31, 2003, and incorporated herein byreference.

(4)          Previously filed as Exhibit 3.2.3to the Company’s Form 10-K filed with the Securities and ExchangeCommission on March 15, 2004, and incorporated herein by reference.

(5)          Previously filed as Exhibit 4.1to the Company’s Registration Statement on Form S-1/A (FileNumber 333-34859) filed with the Securities and Exchange Commissionon October 23, 1997 and incorporated herein by reference.

38

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