**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

----

 

**FORM 10-Q**

**(Mark One)**

 

ý                                    **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF1934**

** **

**For the quarterly period endedSeptember 30, 2001,**

 

**or**

** **

o                                    **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the transition period from____________ to _____________**

** **

## **Commissionfile number 1-13531**

 

----

 

**Trammell Crow Company**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                  |   | **75–2721454**                  |
|---------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction ofIncorporation or organization) |   | (IRS Employer Identification Number) |
|                                                          |   |                                 |
| **2001 Ross Avenue Suite  3400 Dallas, Texas**                |   | **75201**                            |
| (Address of principal executive offices)                      |   | (Zip Code)                           |
|                                                          |   |                                 |
| **(214) 863-3000**                                       |
| (Registrant's telephone number, including area code)          |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

At November 7, 2001 there were 35,647,111 shares ofCommon Stock outstanding.

 

 

**TRAMMELL CROW COMPANY AND SUBSIDIARIES**

## **INDEX**

** **
| PART I.  | Financial Information                                                                                                                                     |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.  | Financial Statements                                                                                                                                      |
|     | Condensed  Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December  31, 2000                                                        |
|     | Condensed  Consolidated Statements of Income for the three and nine months ended  September 30, 2001 and 2000 (unaudited)                                 |
|     | Condensed  Consolidated Statements of Stockholders' Equity for the nine months ended  September 30, 2001 (unaudited) and the year ended December 31, 2000 |
|     | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2001 and 2000 (unaudited)                                       |
|     | Condensed  Consolidated Statements of Comprehensive Income for the three and nine months  endedSeptember 30, 2001 and 2000 (unaudited)                    |
|     | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                         |
| Item  2. | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                                                    |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                                                               |
| PART II. | Other Information                                                                                                                                         |
| Item 1.  | Legal Proceedings                                                                                                                                         |
| Item 6.  | Exhibits  and Reports on Form 8–K                                                                                                                    |
|     |                                                                                                                                                      |

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.  *Financial Statements***

 

#### **TRAMMELL CROWCOMPANY AND SUBSIDIARIES**

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands, except share and per sharedata)**

 
|                                                                                                                                                                                                        |   | **September  30,  2001** |    | **December  31,  2000** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                        |   | **(Unaudited)**          |    |                    |   |
| **ASSETS**                                                                                                                                                                                                  |
| Current assets                                                                                                                                                                                              |   |                     |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                   |   | $                        | 28,217  |                    | $      | 55,637 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $4,864 in 2001 and $4,778 in 2000                                                                                                           |   | 155,115                  |    | 151,069                 |   |
| Receivables from affiliates                                                                                                                                                                                 |   | 2,777                    |    | 4,306                   |   |
| Notes and other receivables                                                                                                                                                                                 |   | 20,348                   |    | 22,072                  |   |
| Deferred income taxes                                                                                                                                                                                       |   | 2,275                    |    | 2,219                   |   |
| Real estate held for sale                                                                                                                                                                                   |   | 225,297                  |    | 220,021                 |   |
| Other current assets                                                                                                                                                                                        |   | 25,844                   |    | 28,345                  |   |
| Total current assets                                                                                                                                                                                        |   | 459,873                  |    | 483,669                 |   |
| Furniture and equipment, net                                                                                                                                                                                |   | 35,077                   |    | 35,200                  |   |
| Deferred income taxes                                                                                                                                                                                       |   | 13,836                   |    | 13,088                  |   |
| Investments in unconsolidated subsidiaries                                                                                                                                                                  |   | 65,952                   |    | 55,603                  |   |
| Goodwill, net                                                                                                                                                                                               |   | 98,722                   |    | 100,440                 |   |
| Other assets                                                                                                                                                                                                |   | 34,034                   |    | 38,434                  |   |
|                                                                                                                                                                                                        |   | $                        | 707,494 |                    | $      | 726,434 |   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                                                                                                                                   |
| Current liabilities                                                                                                                                                                                         |   |                     |    |                    |   |
| Accounts payable                                                                                                                                                                                            |   | $                        | 50,638  |                    | $      | 44,114 |   |
| Accrued expenses                                                                                                                                                                                            |   | 91,267                   |    | 101,157                 |   |
| Payables to affiliates                                                                                                                                                                                      |   | 1,604                    |    | 1,891                   |   |
| Income taxes payable                                                                                                                                                                                        |   | 667                      |    | 3,592                   |   |
| Current portion of long–term debt                                                                                                                                                                      |   | 12,494                   |    | 1,377                   |   |
| Current portion of capital lease obligations                                                                                                                                                                |   | 3,973                    |    | 5,219                   |   |
| Notes payable on real estate held for sale                                                                                                                                                                  |   | 139,956                  |    | 148,098                 |   |
| Other current liabilities                                                                                                                                                                                   |   | 7,246                    |    | 6,808                   |   |
| Total current liabilities                                                                                                                                                                                   |   | 307,845                  |    | 312,256                 |   |
| Long–term debt, less current portion                                                                                                                                                                   |   | 56,000                   |    | 75,105                  |   |
| Capital lease obligations, less current  portion                                                                                                                                                            |   | 3,980                    |    | 6,541                   |   |
| Other liabilities                                                                                                                                                                                           |   | 4,108                    |    | 572                     |   |
| Total liabilities                                                                                                                                                                                           |   | 371,933                  |    | 394,474                 |   |
| Minority interest                                                                                                                                                                                           |   | 35,913                   |    | 41,001                  |   |
| 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; 35,879,515 shares issued and 35,642,111 shares outstanding  in 2001, and 35,850,308 shares issued and 35,349,572 shares outstanding in  2000 |   | 359                      |    | 358                     |   |
| Paid–in capital                                                                                                                                                                                        |   | 176,405                  |    | 176,374                 |   |
| Retained earnings                                                                                                                                                                                           |   | 128,525                  |    | 123,207                 |   |
| Accumulated other comprehensive loss                                                                                                                                                                        |   | (1,529                   | )       | (366                    | )      |
| Less:  Treasury stock                                                                                                                                                                                       |   | (2,368                   | )       | (5,841                  | )      |
| Unearned stock  compensation, net                                                                                                                                                                           |   | (1,744                   | )       | (2,773                  | )      |
| Total stockholders'  equity                                                                                                                                                                                 |   | 299,648                  |    | 290,959                 |   |
|                                                                                                                                                                                                        |   | $                        | 707,494 |                    | $      | 726,434 |   |

 

Seeaccompanying notes.

 

**TRAMMELLCROW COMPANY AND SUBSIDIARIES**

#### **CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

** **
|                                                    |   | **For the  Three Months**                            |       | **For the  Nine Months** |   |
|---------------------------------------------------------|--------|------------------------------------------------------|------------|--------------------------|--------|
|                                                    |   | **Ended  September 30**                              |       | **Ended  September 30**  |   |
|                                                    |   | **2001**                                             |       | **2000**                 |   | **2001** |   | **2000** |   |
|                                                    |   | **(in  thousands, except share and per share data)** | ** ** |
| **REVENUES**                                            |   |                                                 |       |                     |   |   |   |   |   |
| **Global Services:**                                    |   |                                                 |       |                     |   |   |   |   |   |
| *Corporate*:                                            |   |                                                 |       |                     |   |   |   |   |   |
| Facilities management                                   |   | $                                                    | 47,304     |                     | $      | 35,882 |   | $ | 132,172 |   | $ | 96,562 |   |
| Corporate advisory services                             |   | 26,352                                               |       | 35,850                   |   | 79,137 |   | 100,367 |   |
| Project management services                             |   | 12,274                                               |       | 12,393                   |   | 37,852 |   | 31,923 |   |
|                                                    |   | 85,930                                               |       | 84,125                   |   | 249,161 |   | 228,852 |   |
|                                                    |   |                                                 |       |                     |   |   |   |   |   |
| *Institutional:*                                        |   |                                                 |       |                     |   |   |   |   |   |
| Property management                                     |   | 39,860                                               |       | 36,924                   |   | 128,926 |   | 116,415 |   |
| Brokerage                                               |   | 24,774                                               |       | 33,981                   |   | 86,489 |   | 101,694 |   |
| Construction management                                 |   | 2,741                                                |       | 6,189                    |   | 10,707 |   | 15,748 |   |
|                                                    |   | 67,375                                               |       | 77,094                   |   | 226,122 |   | 233,857 |   |
| Income from investments in unconsolidated  subsidiaries |   | 249                                                  |       | 523                      |   | 1,059 |   | 523 |   |
| Other                                                   |   | 161                                                  |       | 100                      |   | 548 |   | 564 |   |
|                                                    |   | 153,715                                              |       | 161,842                  |   | 476,890 |   | 463,796 |   |
|                                                    |   |                                                 |       |                     |   |   |   |   |   |
| **Development and Investment:**                         |   |                                                 |       |                     |   |   |   |   |   |
| Development and construction fees                       |   | 17,095                                               |       | 23,284                   |   | 51,825 |   | 58,936 |   |
| Income from investments in unconsolidated  subsidiaries |   | 831                                                  |       | 612                      |   | 5,550 |   | 3,175 |   |
| Gain on disposition of real estate                      |   | 11,087                                               |       | 16,769                   |   | 15,654 |   | 25,241 |   |
| Other                                                   |   | 312                                                  |       | 250                      |   | 1,091 |   | 943 |   |
|                                                    |   | 29,325                                               |       | 40,915                   |   | 74,120 | ** ** | 88,295 | ** ** |
|                                                    |   | 183,040                                              |       | 202,757                  |   | 551,010 |   | 552,091 |   |
| **COSTS AND EXPENSES**                                  |   |                                                 |       |                     |   |   |   |   |   |
| Salaries, wages and benefits                            |   | 112,529                                              |       | 110,305                  |   | 346,752 |   | 311,470 |   |
| Commissions                                             |   | 19,228                                               |       | 27,976                   |   | 65,679 |   | 80,243 |   |
| General and administrative                              |   | 24,221                                               |       | 26,044                   |   | 81,050 |   | 79,846 |   |
| Depreciation and amortization                           |   | 6,820                                                |       | 6,077                    |   | 20,711 |   | 17,094 |   |
| Interest                                                |   | 3,750                                                |       | 4,020                    |   | 11,971 |   | 11,764 |   |
| Minority interest                                       |   | 3,104                                                |       | 740                      |   | 2,905 |   | 3,920 |   |
| Change in fair value of interest rate swap  agreement   |   | 3,536                                                |       | –                   |   | 3,938 |   | – |   |
| Restructuring charges                                   |   | 3,480                                                |       | –                   |   | 4,427 |   | – |   |
|                                                    |   | 176,668                                              |       | 175,162                  |   | 537,433 | ** ** | 504,337 | ** ** |
| Income before income taxes                              |   | 6,372                                                |       | 27,595                   |   | 13,577 |   | 47,754 |   |
| Income tax expense                                      |   | 2,588                                                |       | 10,960                   |   | 5,508 |   | 19,026 |   |
| Net income                                              |   | $                                                    | 3,784      |                     | $      | 16,635 |   | $ | 8,069 |   | $ | 28,728 |   |
|                                                    |   |                                                 |       |                     |   |   |   |   |   |
| Earnings per share:                                     |   |                                                 |       |                     |   |   |   |   |   |
| Basic                                                   |   | $                                                    | 0.11       |                     | $      | 0.48 |   | $ | 0.23 |   | $ | 0.83 |   |
| Diluted                                                 |   | $                                                    | 0.10       |                     | $      | 0.46 |   | $ | 0.22 |   | $ | 0.80 |   |
|                                                    |   |                                                 |       |                     |   |   |   |   |   |
| Weighted average common shares outstanding:             |   |                                                 |       |                     |   |   |   |   |   |
| Basic                                                   |   | 35,481,625                                           |       | 34,956,918               |   | 35,352,878 |   | 34,798,545 |   |
| Diluted                                                 |   | 36,379,697                                           |       | 36,284,313               |   | 36,440,667 |   | 36,069,390 |   |

 

Seeaccompanying notes.

 

**TRAMMELLCROW COMPANY AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

**NineMonths ended September 30, 2001 (Unaudited) and Year ended December 31,2000**

**(inthousands, except share data)**

** **

 
|                                                 |   |               |   |     |   | Common       |   |     |   |          |   | Accumulated |    |        |   |   |   |         |   |    |   |
|------------------------------------------------------|--------|--------------------|--------|----------|--------|--------------|--------|----------|--------|---------------|--------|-------------|---------|-------------|--------|--------|--------|--------------|--------|---------|--------|
|                                                 |   |               |   |     |   | Stock        |   |     |   |          |   | Other       |    |        |   |   |   | Unearned     |   |    |   |
|                                                 |   | Common Shares |   | Par      |   | Paid–In |   | Retained |   | Comprehensive |   | Treasury    |    | Stockholder |   | Stock  |   |         |   |
|                                                 |   | Issued             |   | Treasury |   | Value        |   | Capital  |   | Earnings      |   | Loss        |    | Stock       |   | Loans  |   | Compensation |   | Total   |   |
|                                                 |   |               |   |     |   |         |   |     |   |          |   |        |    |        |   |   |   |         |   |    |   |
| Balance at January 1, 2000                           |   | 35,581,620         |   | 801,725  |   | $            | 356    |     | $      | 174,645       |   | $           | 88,160  |        | $      | — |   | $            | (9,363 | )       | $      | (98 | ) | $ | (2,048 | ) | $ | 251,652 |   |
| Net income                                           |   | —             |   | —   |   | —       |   | —   |   | 35,454        |   | —      |    | —      |   | — |   | —       |   | 35,454  |   |
| Issuance of restricted stock                         |   | —             |   | (219,053 | )      | —       |   | 11       |   | (49           | )      | —      |    | 2,555       |   | — |   | (2,517       | )      | —  |   |
| Forfeiture of restricted stock                       |   | —             |   | 10,261   |   | —       |   | (110     | )      | —        |   | —      |    | (123        | )      | — |   | 84           |   | (149    | )      |
| Amortization of unearned stock  compensation         |   | —             |   | —   |   | —       |   | —   |   | —        |   | —      |    | —      |   | — |   | 1,708        |   | 1,708   |   |
| Issuance of common stock                             |   | 268,688            |   | (141,997 | )      | 2            |   | 1,828    |   | (358          | )      | —      |    | 1,656       |   | — |   | —       |   | 3,128   |   |
| Stock repurchase                                     |   | —             |   | 49,800   |   | —       |   | —   |   | —        |   | —      |    | (566        | )      | — |   | —       |   | (566    | )      |
| Foreign currency translation  adjustment, net of tax |   | —             |   | —   |   | —       |   | —   |   | —        |   | (366        | )       | —      |   | — |   | —       |   | (366    | )      |
| Collection of stockholder loans                      |   | —             |   | —   |   | —       |   | —   |   | —        |   | —      |    | —      |   | 98     |   | —       |   | 98      |   |
| Balance at December 31, 2000                    |   | 35,850,308         |   | 500,736  |   | 358          |   | 176,374  |   | 123,207       |   | (366        | )       | (5,841      | )      | — |   | (2,773       | )      | 290,959 |   |
|                                                 |   |               |   |     |   |         |   |     |   |          |   |        |    |        |   |   |   |         |   |    |   |
| Net income                                           |   | —             |   | —   |   | —       |   | —   |   | 8,069         |   | —      |    | —      |   | — |   | —       |   | 8,069   |   |
| Issuance of restricted stock                         |   | —             |   | (7,562   | )      | —       |   | —   |   | (2            | )      | —      |    | 88          |   | — |   | (86          | )      | —  |   |
| Forfeiture of restricted stock                       |   | —             |   | 22,123   |   | —       |   | (80      | )      | —        |   | —      |    | (218        | )      | — |   | 153          |   | (145    | )      |
| Amortization of unearned stock  compensation         |   | —             |   | —   |   | —       |   | —   |   | —        |   | —      |    | —      |   | — |   | 962          |   | 962     |   |
| Issuance of common stock                             |   | 29,207             |   | (671,093 | )      | 1            |   | 111      |   | (2,749        | )      | —      |    | 7,593       |   | — |   | —       |   | 4,956   |   |
| Stock repurchase                                     |   | —             |   | 393,200  |   | —       |   | —   |   | —        |   | —      |    | (3,990      | )      | — |   | —       |   | (3,990  | )      |
| Foreign currency translation  adjustment, net of tax |   | —             |   | —   |   | —       |   | —   |   | —        |   | (1,163      | )       | —      |   | — |   | —       |   | (1,163  | )      |
| Balance at September 30, 2001                        |   | 35,879,515         |   | 237,404  |   | $            | 359    |     | $      | 176,405       |   | $           | 128,525 |        | $      | (1,529 | )      | $            | (2,368 | )       | $      | — |   | $ | (1,744 | ) | $ | 299,648 |   |

 

Seeaccompanying notes.

 

**TRAMMELLCROW COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                |   | **For the Nine Months**

** Ended September 30** |       |
|---------------------------------------------------------------------|--------|-------------------------------------------------------|------------|
|                                                                |   | **2001**                                              | ** ** | **2000** | ** ** |
|                                                                |   | **(in thousands)**                                    | ** ** |
| **Operating activities**                                            |   |                                                  |       |   |   |
| Cash flows from  earnings:                                          |   |                                                  |       |   |   |
| Net income                                                          |   | $                                                     | 8,069      |   | $ | 28,728 |   |
| Reconciliation of net  income to net cash provided by earnings:     |   |                                                  |       |   |   |
| Depreciation and  amortization                                      |   | 20,711                                                |       | 17,094 |   |
| Amortization of  employment contracts and unearned compensation     |   | 2,267                                                 |       | 3,339 |   |
| Bad debt expense                                                    |   | 3,087                                                 |       | 1,541 |   |
| Minority interest                                                   |   | 2,905                                                 |       | 3,920 |   |
| Deferred income tax  provision                                      |   | (119                                                  | )          | (72 | ) |
| Change in fair value of  interest rate swap agreement               |   | 3,938                                                 |       | — |   |
| Income from investments  in unconsolidated subsidiaries             |   | (6,609                                                | )          | (3,698 | ) |
| Net cash provided by  earnings                                      |   | 34,249                                                |       | 50,852 |   |
| Cash flows from changes  in working capital, net of acquisitions:   |   |                                                  |       |   |   |
| Accounts receivable                                                 |   | (7,133                                                | )          | (12,185 | ) |
| Receivables from  affiliates                                        |   | 1,529                                                 |       | (1,219 | ) |
| Notes receivable and  other assets                                  |   | 1,257                                                 |       | (31,552 | ) |
| Real estate held for  sale                                          |   | (6,729                                                | )          | (66,491 | ) |
| Notes payable on real  estate held for sale                         |   | (8,142                                                | )          | 55,106 |   |
| Accounts payable and  accrued expenses                              |   | (2,669                                                | )          | 11,010 |   |
| Payables to affiliates                                              |   | (287                                                  | )          | (460 | ) |
| Income taxes payable                                                |   | (2,925                                                | )          | (2,720 | ) |
| Other liabilities                                                   |   | 36                                                    |       | 6,074 |   |
| Net cash flows from  changes in working capital                     |   | (25,063                                               | )          | (42,437 | ) |
| Net cash provided by  operating activities                          |   | 9,186                                                 |       | 8,415 |   |
|                                                                |   |                                                  |       |   |   |
| **Investing activities**                                            |   |                                                  |       |   |   |
| Expenditures for  furniture and equipment                           |   | (9,470                                                | )          | (11,470 | ) |
| Acquisitions of real  estate service companies                      |   | (1,403                                                | )          | (7,981 | ) |
| Investments in  unconsolidated subsidiaries                         |   | (14,153                                               | )          | (36,836 | ) |
| Distributions from  unconsolidated subsidiaries                     |   | 9,429                                                 |       | 10,106 |   |
| Net cash used in  investing activities                              |   | (15,597                                               | )          | (46,181 | ) |
|                                                                |   |                                                  |       |   |   |
| **Financing activities**                                            |   |                                                  |       |   |   |
| Principal payments on long-term  debt and capital lease obligations |   | (287,087                                              | )          | (121,016 | ) |
| Proceeds from long-term  debt                                       |   | 273,105                                               |       | 133,218 |   |
| Contributions from  minority interest                               |   | 1,400                                                 |       | 6,943 |   |
| Distributions to  minority interest                                 |   | (9,393                                                | )          | (9,005 | ) |
| Purchase of common stock                                            |   | (3,990                                                | )          | (566 | ) |
| Proceeds from exercise  of stock options                            |   | 1,149                                                 |       | 287 |   |
| Proceeds from issuance  of common stock                             |   | 3,807                                                 |       | 2,658 |   |
| Collections of  stockholder loans                                   |   | —                                                |       | 98 |   |
| Net cash provided by  (used in) financing activities                |   | (21,009                                               | )          | 12,617 |   |
| Net decrease in cash and  cash equivalents                          |   | (27,420                                               | )          | (25,149 | ) |
| Cash and cash  equivalents, beginning of period                     |   | 55,637                                                |       | 47,528 |   |
| Cash and cash  equivalents, end of period                           |   | $                                                     | 28,217     |   | $ | 22,379 |   |

 

Seeaccompanying notes.

 

**TRAMMELLCROW COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(Unaudited)**

** **
|                                                                                                                                                            |   | **For the Three Months****Ended September 30**      |       | **For the Nine Months****Ended September 30** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|-----------------------------------------------|----------|
|                                                                                                                                                            |   | **2001**                                            |       | **2000**                                      | **2001** |   | **2000** |   |
|                                                                                                                                                            |   | **(in thousands, except share and per share data)** | ** ** |
| Net income                                                                                                                                                      |   | $                                                   | 3,784      |                                          | $        | 16,635 |   | $ | 8,069 |   | $ | 28,728 |   |
| Other comprehensive loss:                                                                                                                                       |   |                                                |       |                                          |     |   |   |   |   |
| Foreign currency  translation adjustments, net of tax benefit (expense) of $(160) and $683 in  the three and nine months ended September 30, 2001, respectively |   | 261                                                 |       | (585                                          | )        | (1,163 | ) | (585 | ) |
|                                                                                                                                                            |   |                                                |       |                                          |     |   |   |   |   |
| Comprehensive income                                                                                                                                            |   | $                                                   | 4,045      |                                          | $        | 16,050 |   | $ | 6,906 |   | $ | 28,143 |   |

 

See accompanyingnotes.

 

**TRAMMELLCROW COMPANY AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

#### **September 30, 2001**

**(inthousands, except share and per share data)**

**(Unaudited)**

 

**1. General**

 

The consolidated interim financial statements ofTrammell Crow Company (the “Company”) included herein have been prepared inaccordance with the requirements for interim financial statements and do notinclude all disclosures required under accounting principles generally acceptedin the United States (“GAAP”) for complete financial statements. Thesefinancial statements should be read in conjunction with the consolidatedfinancial statements included in the Company's annual report on Form 10-Kfor the year ended December 31, 2000. In the opinion of management, all adjustments and eliminations,consisting only of recurring adjustments, necessary for a fair presentation ofthe financial statements for the interim periods have been made.  Interim results of operations are notnecessarily indicative of the results to be expected for the full year.

 

The Company has experienced and expects to continue toexperience quarterly variations in revenues and net income as a result ofseveral factors. The Company's quarterly revenues tend to increase throughoutthe year, particularly in the last quarter of the year, because its clientshave demonstrated a tendency to close transactions toward the end of the year.  The timing and introduction of newcontracts, 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.

 

*Use of Estimates*

 

The preparation of the financial statements inaccordance with GAAP requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

 

*Income Taxes*

 

The Company accounts for income taxes using theliability method. Deferred income taxes result from temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for federal income tax purposes, and are measuredusing the enacted tax rates and laws that will be in effect when thedifferences reverse.

 

*Earnings Per Share*

 

The weighted–average common shares outstandingused to calculate diluted earnings per share for the three and nine monthsended September 30, 2001 include 898,072 and 1,087,789 shares, respectively, toreflect the dilutive effect of options to purchase shares of common stock. Theweighted–average common shares outstanding used to calculate dilutedearnings per share for the three and nine months ended September 30, 2000include 1,327,395 and 1,270,845 shares, respectively, to reflect the dilutiveeffect of options to purchase shares of common stock.

 

*New Accounting Pronouncements*

 

In June 2001, the FinancialAccounting Standards Board issued Statements of Financial Accounting StandardsNo. 141, *Business Combinations*,and No. 142, *Goodwill and Other Intangible Assets*, effective for fiscal years beginning afterDecember 15, 2001. Under the new rules, goodwill and intangible assets deemedto have indefinite lives will no longer be amortized but will be subject toannual impairment tests in accordance with the statements. Other intangibleassets will continue to be amortized over their useful lives.

 

The Company will apply the new rules on accounting forgoodwill and other intangible assets beginning in the first quarter of 2002.Based on goodwill recorded at September 30, 2001, application of thenonamortization provisions of the statement is expected to result in anincrease in net income of $2,770 ($0.08 per share) per year.  The Company will perform the first of therequired impairment tests of goodwill and indefinite lived intangible assets asof January 1, 2002 and, therefore, has not yet determined what the effect ofthese tests will be on the earnings and financial position of the Company.

 

*Reclassifications*

 

The Company reorganized certain elements of itsbusiness effective January 1, 2001. Consequently, the Institutional and Corporate segments reported in 2000have been reorganized into the Global Services segment and the Development andInvestment segment in 2001.  Within theGlobal Services segment, the Company delivers property and facilitiesmanagement, brokerage and corporate advisory, and project and constructionmanagement services for both corporate customers (typically the primaryoccupants of commercial properties) and institutional customers (investors andlandlords who typically do not occupy the properties).  All of the Company’s real estatedevelopment, capital markets and investment activities are conducted throughthe Development and Investment segment. Revenues for the three and nine months ended September 30, 2001 havebeen presented under this segment format. Revenues for the three and nine months ended September 30, 2000 havebeen reclassified to conform to the presentation for 2001.  As a result, the classification of 2000revenue items differs from the amounts reported in previously fileddocuments.  These reclassifications didnot impact net income (see Note 9).

 

**2. Real Estate Held for Sale**

 

During the nine months ended September 30, 2001, theCompany sold 26 real estate projects for an aggregate net sales price of$95,108 resulting in an aggregate gain on disposition of $14,957.  In four other transactions, the Companyrecognized an aggregate of $697 of net deferred gain resulting fromdispositions in prior periods.  Duringthe nine months ended September 30, 2000, the Company sold 23 real estateprojects for an aggregate sales price of $97,836, resulting in an aggregategain on disposition of $25,241.

 

In addition, during the nine months ended September30, 2001, the Company sold 75% of its interest in a partnership that owned realestate at a sales price equal to $2,238 (75% of the partnership’s net bookvalue) and provided partial financing of the purchase in the amount of$186.  During the nine months endedSeptember 30, 2000, the Company received $15,160 from a real estate partnershipin which it has a 10% interest, representing reimbursement of costs expended inexcess of the Company's required capital contribution of $354.  In two other transactions during the ninemonths ended September 30, 2000, the Company sold its interest, at net bookvalue, in partnerships which owned real estate with an aggregate cost of$16,827 and had debt and outstanding payables totaling the same amount.  Also during the nine months ended September30, 2000, the Company entered into two agreements with land sellers whereby theCompany acquired property subject to a nonrecourse purchase money mortgage withthe contractual right to deed back to the seller any property not sold by acertain date.  During the nine monthsended September 30, 2000, in accordance with its rights under this agreement,the Company deeded land with a fair market value of $6,108 back to thelender.  No gains or losses wererecognized on these transactions.

 

**3. Investments in Unconsolidated Subsidiaries**

 

Investments in unconsolidated subsidiaries consist ofthe following:

 
|                    |   | **September 30, 2001** |   | **December 31,**** 2000** |   |
|-------------------------|--------|------------------------|--------|--------------------------------|--------|
| Real estate development |   | $                      | 37,017 |                           | $      | 29,443 |   |
| Other                   |   | 28,935                 |   | 26,160                         |   |
|                    |   | $                      | 65,952 |                           | $      | 55,603 |   |

 

On June 30, 2000, the Company purchased approximately10.0% of the outstanding stock of Savills plc (“Savills”), a property servicesfirm headquartered in the United Kingdom and a leading provider of real estateservices in Europe, Asia-Pacific and Australia, for approximately $21,000.  The investment is classified as an “other”investment in the table above.

 

Summarized operating results for unconsolidatedsubsidiaries accounted for on the equity method are as follows:

 
|                          |   | **For the Three Months Ended September 30** |    | **For the Nine Months Ended September 30** |   |
|-------------------------------|--------|---------------------------------------------|---------|--------------------------------------------|--------|
|                          |   | **2001**                                    |    | **2000**                                   |   | **2001** |   | **2000** |   |
| **Real  Estate Development:** |   |                                        |    |                                       |   |   |   |   |   |
| Total revenues                |   | $                                           | 20,637  |                                       | $      | 12,614 |   | $ | 50,102 |   | $ | 33,487 |   |
| Total expenses                |   | (9,728                                      | )       | (14,434                                    | )      | (30,159 | ) | (23,476 | ) |
| Net income (loss)             |   | $                                           | 10,909  |                                       | $      | (1,820 | )  | $ | 19,943 |   | $ | 10,011 |   |
|                          |   |                                        |    |                                       |   |   |   |   |   |
| **Other:**                    |   |                                        |    |                                       |   |   |   |   |   |
| Total revenues                |   | $                                           | 85,796  |                                       | $      | 67,507 |   | $ | 253,292 |   | $ | 85,432 |   |
| Total expenses                |   | (82,084                                     | )       | (62,128                                    | )      | (239,650 | ) | (78,570 | ) |
| Net income                    |   | $                                           | 3,712   |                                       | $      | 5,379 |   | $ | 13,642 |   | $ | 6,862 |   |
|                          |   |                                        |    |                                       |   |   |   |   |   |
| **Total:**                    |   |                                        |    |                                       |   |   |   |   |   |
| Total revenues                |   | $                                           | 106,433 |                                       | $      | 80,121 |   | $ | 303,394 |   | $ | 118,919 |   |
| Total expenses                |   | (91,812                                     | )       | (76,562                                    | )      | (269,809 | ) | (102,046 | ) |
| Net income                    |   | $                                           | 14,621  |                                       | $      | 3,559 |   | $ | 33,585 |   | $ | 16,873 |   |

 

**4. Accrued Expenses**

 

Accrued expenses consist of the following:

 
|                  |   | **September 30,****2001** |   | **December 31,****2000** |   |
|-----------------------|--------|---------------------------|--------|--------------------------|--------|
| Payroll and bonuses   |   | $                         | 35,292 |                     | $      | 38,422 |   |
| Commissions           |   | 23,101                    |   | 41,475                   |   |
| Deferred income       |   | 13,319                    |   | 6,381                    |   |
| Development costs     |   | 5,369                     |   | 2,724                    |   |
| Insurance             |   | 2,752                     |   | 936                      |   |
| Restructuring charges |   | 2,404                     |   | —                   |   |
| Other                 |   | 9,030                     |   | 11,219                   |   |
|                  |   | $                         | 91,267 | ** **               | $      | 101,157 | ** ** |

 

**5. Long-Term Debt**

 

Long-term debt consists of the following:

 
|                                                    |   | **September 30,**** 2001** |   | **December 31,**** 2000** |   |
|---------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
| Borrowings under a  $150,000 line of credit with a bank |   | $                               | 56,000 |                           | $      | 75,105 |   |
| Other                                                   |   | 12,494                          |   | 1,377                          |   |
| Total long–term  debt                              |   | 68,494                          |   | 76,482                         |   |
| Less current portion of  long–term debt            |   | 12,494                          |   | 1,377                          |   |
|                                                    |   | $                               | 56,000 |                           | $      | 75,105 |   |

 

At September 30, 2001, the Company had an unusedborrowing capacity (taking into account letters of credit and borrowingsoutstanding) under its $150,000 line of credit of approximately $66,432.

 

**6. Stockholders' Equity**

 

A summary of the Company's stock option activity forthe nine months ended September 30, 2001 is as follows: 

 
|                                           |   | **Exercise  Priceof $3.85(belowmarketprice  atgrant date)** |       | **Exercise****Priceof $10.20to $14.50(at marketprice atgrant date)** |   | **Exercise****Priceof $14.51to $22.75(at marketprice atgrant date)** |   | **Exercise****Priceof $22.76to $36.00(at marketprice atgrant date)** |   | **Total** |   |
|------------------------------------------------|--------|-------------------------------------------------------------|------------|----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|-----------|--------|
| **Options outstanding:**                       |   |                                                        |       |                                                                 |   |                                                                 |   |                                                                 |   |      |   |
| December 31, 2000                              |   | 1,613,123                                                   | ** ** | 1,567,343                                                            |   | 3,626,449                                                            |   | 231,416                                                              |   | 7,038,331 |   |
| Granted                                        |   | —                                                      |       | 1,556,793                                                            |   | —                                                               |   | —                                                               |   | 1,556,793 |   |
| Exercised                                      |   | (298,463                                                    | )          | —                                                               |   | —                                                               |   | —                                                               |   | (298,463  | )      |
| Forfeited                                      |   | —                                                      |       | (101,500                                                             | )      | (384,686                                                             | )      | (3,042                                                               | )      | (489,228  | )      |
| September 30, 2001                             |   | 1,314,660                                                   |       | 3,022,636                                                            |   | 3,241,763                                                            |   | 228,374                                                              |   | 7,807,433 |   |
| **Options exercisable at September 30,  2001** |   | 1,314,660                                                   |       | 437,212                                                              |   | 2,449,119                                                            |   | 198,783                                                              |   | 4,399,774 |   |

** **

In May 2001, the Companyannounced that its Board of Directors had approved a stock repurchaseprogram.  The repurchase programauthorized the repurchase of up to $15,000 of the Company’s common stock fromtime to time in open market purchases or through privately negotiatedtransactions.  Through September 30,2001, the Company had repurchased 393,200 shares at an average cost of $10.15per share with funds generated from operations and existing cash.  The Company placed the repurchased shares intreasury.  The Company intends toreissue such shares in connection with the Company’s employee stock purchaseplan and option exercises or restricted stock grants under the Company’sLong-Term Incentive Plan and other equity-based incentive plans, as well as forother corporate purposes.

 

**7. Financial Instruments**

 

The Company’s $150,000 line of credit agreementrequires the Company to maintain an interest rate swap to manage market risksrelated to changes in interest rates. Through March 24, 2000, the Company had an interest rate swapoutstanding with a notional amount of $125,000. This swap agreement establisheda fixed interest pay rate of 5.52% on a portion of the Company's variable ratedebt. On March 24, 2000, the interest rate swap agreement was renewed fora twelve–month period ending March 24, 2001, with a notional amountof $150,000 through June 26, 2000, a notional amount of $125,000 throughSeptember 25, 2000 and a notional amount of $100,000 through March 24, 2001.This swap agreement established a fixed interest pay rate of 6.65% on a portionof the Company's variable rate debt. On March 24, 2001, the interest rate swapagreement was renewed for a twenty-four month period ending March 24, 2003,with a notional amount of $150,000. This swap agreement established a fixed interest pay rate of 4.68% on aportion of the Company’s variable rate debt. Under these swap agreements, if the actual LIBOR–based rate isless than the specified fixed interest rate, the Company is obligated to paythe differential interest amount, such amount being recorded as incrementalinterest expense. Conversely, if the LIBOR–based rate is greater than thespecified fixed interest rate, the differential interest amount is paid to theCompany and recorded as a reduction of interest expense. The weighted averagereceive rates under these swap agreements for the three and nine months endedSeptember 30, 2001 were 3.65% and 4.66%, respectively, and 6.63% and 6.33% forthe three and nine months ended September 30, 2000, respectively.  In connection with these agreements, theCompany recorded incremental interest expense of $395 and $630 for the threeand nine months ended September 30, 2001, respectively, and incrementalinterest expense of $4 for the three months ended September 30, 2000 and areduction to interest expense of $10 for the nine months ended September 30,2000.

 

The Company's participation in derivative transactionshas been limited to hedging purposes. Derivative instruments are not held or issued for trading purposes.  The adoption of Financial AccountingStandards Board Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*(“SFAS 133”), onJanuary 1, 2001 resulted in $3,536 and $3,938 being recognized as expenserelated to the interest rate swap agreement for the three and nine months endedSeptember 30, 2001, respectively, due to a change in fair value of the interestrate swap agreement.

 

Effective November 1, 2001, theCompany has elected hedge accounting treatment as defined by SFAS 133 forits interest rate swap agreement. Provided that a minimum level of effectiveness is maintained, theeffective portion of future changes in fair value of the interest rate swapagreement will be reported as a separate component of other comprehensiveincome.  Any remaining changes in fairvalue of the interest rate swap agreement will be recognized in current period earnings.  The liability recorded prior to the hedgedesignation will be recognized in earnings based on future estimated paymentsover the remaining life of the interest rate swap agreement.

 

**8. Commitments and Contingencies**

 

At September 30, 2001, the Company had guaranteed$20,391 of real estate notes payable of unconsolidated subsidiaries.  These notes are collateralized by theunderlying real estate and have maturity dates through May 2005. The Companyhad outstanding letters of credit totaling $15,910 at September 30, 2001, whichexpire at varying dates through October 2003.

 

In addition, at September 30, 2001, the Company hadseveral completion and budget guarantees relating to development projects.  Management does not expect to incur anymaterial losses under these guarantees.

 

The Company and its subsidiaries are defendants inlawsuits that arose in the normal course of business. In management's judgment,the ultimate liability, if any, from such legal proceedings will not have amaterial effect on the Company's results of operations or financial position.

 

**9. Segment Information**

 

*Description of Services By Segment*

 

During the first quarter of 2001, the Companyannounced an internal reorganization of its business, effective January 1,2001, designed to consolidate all of the property and facilities management,brokerage and corporate advisory, and construction and project managementservices delivered to both corporate and institutional customers under a singleleadership structure referred to as the Global Services Group.  The reorganization also created a nationalorganization, the Development and Investment Group, focused solely on theCompany’s development and investment activities, both those performed on behalfof institutional and corporate customers on a fee basis and those pursuant towhich the Company takes an ownership position. While the services provided by the Company remained the same, thereorganization changed the way the Company’s business is managed and financialresources are allocated.  Therefore, theCompany’s reportable segments, Global Services and Development and Investment,have changed correspondingly for 2001.

 

The Company also separately reports its activities ine-commerce initiatives, including related overhead, in a third segment.  The E-Commerce segment does not includeinvestments in ongoing technology advancements internal to the Company’s othertwo business segments.

 

*Measurement of Segment Profit or Loss and Segment Assets*

 

The Company evaluates performance and allocatesresources among its three reportable segments based on income before incometaxes and EBITDA (as defined in footnote 3 to the table below). The accountingpolicies of the reportable segments are the same as those described in thesummary of significant accounting policies.

 

*Factors Management Used to Identify the Company's ReportableSegments*

 

The Company’s reportable segments are defined by thenature of the service provided and activities conducted.  Because development services requirespecialized knowledge, the new organizational structure allows the group ofindividuals with specialized knowledge and experience in development activitiesto perform these services with greater focus through the Company’s Developmentand Investment segment.  The structureof the Global Services segment allows the Company to better utilize resourcesfor the provision of similar services in specific geographic areas.  The E-Commerce segment captures distincte-commerce business and investments and is separately managed.

 

Virtually all of the Company’s revenues are fromcustomers located in the United States. No individual customer accounts for more than 10% of the Company’srevenues.

 

Summarized financial information for the Company'sthree reportable segments follows:

 
|                                               |   | **Three Months Ended**

**September 30** |    | **Nine Months Ended**

**September 30** |   |
|----------------------------------------------------|--------|------------------------------------------|---------|-----------------------------------------|--------|
|                                               |   | **2001**                                 |    | **2000(1)**                             |   | **2001** |   | **2000(1)** |   |
| **Global Services:**                               |   |                                     |    |                                    |   |   |   |   |   |
| Total revenues                                     |   | $                                        | 153,715 |                                    | $      | 161,842 |   | $ | 476,890 |   | $ | 463,796 |   |
| Costs and expenses (2)                             |   | 152,957                                  |    | 150,196                                 |   | 466,506 |   | 431,118 |   |
| Income before income tax  expense                  |   | 758                                      |    | 11,646                                  |   | 10,384 |   | 32,678 |   |
| Depreciation and  amortization                     |   | 5,978                                    |    | 5,265                                   |   | 18,059 |   | 14,641 |   |
| Interest expense                                   |   | 1,527                                    |    | 1,415                                   |   | 4,490 |   | 3,970 |   |
| EBITDA (3)                                         |   | $                                        | 8,263   |                                    | $      | 18,326 |   | $ | 32,933 |   | $ | 51,289 |   |
|                                                    |   |                                     |    |                                    |   |   |   |   |   |
| **Development and Investment:**                    |   |                                     |    |                                    |   |   |   |   |   |
| Total revenues                                     |   | $                                        | 29,325  |                                    | $      | 40,915 |   | $ | 74,120 |   | $ | 88,295 |   |
| Costs and expenses (2)                             |   | 23,223                                   |    | 24,082                                  |   | 69,183 |   | 71,788 |   |
| Income before income tax  expense                  |   | 6,102                                    |    | 16,833                                  |   | 4,937 |   | 16,507 |   |
| Depreciation and  amortization                     |   | 842                                      |    | 812                                     |   | 2,652 |   | 2,453 |   |
| Interest expense                                   |   | 2,223                                    |    | 2,605                                   |   | 7,481 |   | 7,794 |   |
| EBITDA (3)                                         |   | $                                        | 9,167   |                                    | $      | 20,250 |   | $ | 15,070 |   | $ | 26,754 |   |
|                                                    |   |                                     |    |                                    |   |   |   |   |   |
| **E-Commerce:**                                    |   |                                     |    |                                    |   |   |   |   |   |
| Total revenues                                     |   | $                                        | —  |                                    | $      | — |   | $ | — |   | $ | — |   |
| Costs and expenses (2)                             |   | 488                                      |    | 884                                     |   | 1,744 |   | 1,431 |   |
| Income (loss) before  income tax expense (benefit) |   | (488                                     | )       | (884                                    | )      | (1,744 | ) | (1,431 | ) |
| Depreciation and  amortization                     |   | —                                   |    | —                                  |   | — |   | — |   |
| Interest expense                                   |   | —                                   |    | —                                  |   | — |   | — |   |
| EBITDA (3)                                         |   | $                                        | (488    | )                                       | $      | (884 | ) | $ | (1,744 | ) | (1,431 | ) |

 

 
|                              |   | **Three Months Ended**

**September 30** |    | **Nine Months Ended**

**September 30** |     |
|-----------------------------------|--------|------------------------------------------|---------|-----------------------------------------|----------|
|                              |   | **2001**                                 |    | **2000**                                | **2001** |   | **2000(1)** |   |
| **Total:**                        |   |                                     |    |                                    |     |   |   |   |   |
| Total revenues                    |   | $                                        | 183,040 |                                    | $        | 202,757 |   | $ | 551,010 |   | $ | 552,091 |   |
| Costs and expenses (2)            |   | 176,668                                  |    | 175,162                                 |     | 537,433 |   | 504,337 |   |
| Income before income tax  expense |   | 6,372                                    |    | 27,595                                  |     | 13,577 |   | 47,754 |   |
| Depreciation and  amortization    |   | 6,820                                    |    | 6,077                                   |     | 20,711 |   | 17,094 |   |
| Interest expense                  |   | 3,750                                    |    | 4,020                                   |     | 11,971 |   | 11,764 |   |
| EBITDA (3)                        |   | $                                        | 16,942  |                                    | $        | 37,692 |   | $ | 46,259 |   | $ | 76,612 |   |

 
|                        |   | **September 30,** |    | **December 31,** |       |
|-----------------------------|--------|-------------------|---------|------------------|------------|
|                        |   | **2001**          |    | **2000 (1**)     | ** ** |
| **Total Assets:**           |   |              |    |             |       |
| Global Services             |   | $                 | 325,966 |             | $          | 404,879 |   |
| Development and  Investment |   | 375,828           |    | 319,391          |       |
| E-Commerce                  |   | 5,700             |    | 2,164            |       |
| Total consolidated  assets  |   | $                 | 707,494 |             | $          | 726,434 |   |

 

----

| (1)    |   | The 2000 segment information has been reclassified to  reflect the changes in the Company's reportable segments effective  January 1, 2001 and the addition of the E-Commerce segment in the third  quarter of 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Costs and expenses for the three and nine months ended  September 30, 2001 include non-cash compensation expense related to the  amortization of employment contracts and unearned stock compensation of $599  and $2,013 related to the Global Services segment and $74 and $254 related to  the Development and Investment segment, respectively.  Costs and expenses for the three and nine  months ended September 30, 2000 include non-cash compensation expense related  to the amortization of employment contracts and unearned stock compensation  of $993 and $2,963 related to the Global Services segment and $96 and $376  related to the Development and Investment segment, respectively.  Through September 30, 2001, there had been  no non-cash compensation expense related to the E-Commerce segment. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | EBITDA represents earnings before interest, income  taxes and depreciation and amortization. Management believes that EBITDA can  be a meaningful measure of the Company's operating performance, cash  generation and ability to service debt. However, EBITDA should not be  considered as an alternative to: (i) net earnings (determined in  accordance with GAAP); (ii) operating cash flow (determined in  accordance with GAAP); or (iii) liquidity. There can be no assurance  that the Company's calculation of EBITDA is comparable to similarly titled  items reported by other companies.                                                                                                                                                                                                                |

 

**10. Restructuring Charges**

 

During the first quarter of 2001 the Company announcedan internal reorganization of its business designed to consolidate all of theproperty and facilities management, brokerage and corporate advisory, andconstruction and project management services delivered to both corporate andinstitutional customers under a single leadership structure.  As part of the reorganization, the Companyhas advised approximately 200 employees across all functions and levels thattheir jobs were being eliminated as part of a cost-cutting effort focusing oninefficiencies and redundancies.  Duringthe three and nine months ended September 30, 2001, the Company incurredrestructuring charges of $1,588 and $2,535, respectively, related to theseterminations, consisting primarily of involuntary employee termination benefitsincluding severance and outplacement benefits. At September 30, 2001, approximately 170 employees had been terminatedand the accrual balance was $581.  Theseterminations are expected to be complete by the end of the first quarter of2002.

 

In July 2001, the Company also formalized andcommunicated its previously announced internal reorganization designed tocentralize and improve the efficiency of its accounting operations.  The plan calls for the consolidation ofclient accounting operations into three regional centers in Dallas, Texas,Memphis, Tennessee, and Seattle, Washington, and the consolidation of theCompany’s internal accounting in Dallas, Texas.  The accounting restructuring plan contemplates the termination ofapproximately 200 accounting personnel at 18 locations throughout the UnitedStates, with termination dates ranging from July 2001 through April 2002.  Subsequent to the original communication ofthe plan, approximately 50 employees resigned or were placed into openpositions or onto new customer accounts and therefore became ineligible forseverance.  During the three monthsended September 30, 2001, the Company recognized $1,892 of restructuringcharges, consisting of involuntary termination benefits including severance andoutplacement benefits related to these terminations.  At September 30, 2001, approximately 30 terminations had beencompleted, and the accrual balance was $1,823**.**  During the next year, management expectsthis plan to provide a net reduction in headcount of approximately 70employees, as eliminated positions are replaced by new hires in Dallas, Memphisand Seattle.  The plan is anticipated tobe complete by the end of the second quarter of 2002.

 

**11. Supplemental Cash Flow Information**

 

Supplemental cash flowinformation is summarized below:

 
|                                                                   |   | **Nine Months Ended**

**September 30** |       |
|------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                   |   | **2001**                                | ** ** | **2000** | ** ** |
| Non-cash activities:                                                   |   |                                    |       |   |   |
| Issuance of restricted  stock, net of forfeitures                      |   | $                                       | (130       | ) | $ | 2,249 |   |
| Capital lease  obligations                                             |   | 2,187                                   |       | — |   |
| Recognized deferred  gains related to dispositions in previous periods |   | 697                                     |       | — |   |
|                                                                        |        |                                         |            |  |  |  |  |

 

**12. Subsequent Event**

** **

In October 2001, the Boston-based investment salesbrokerage team that was part of the Company’s Fallon Hines & O’Connor, Inc.acquisition in May 1998 left the Company to join another firm.  During the fourth quarter of 2001, theCompany has lost certain management contracts acquired from the Company’sFaison & Associates and Faison Enterprises, Inc. (“Faison”) acquisition inJuly 1998.  In addition, the Company hasexperienced, and expects to continue to experience, deteriorating financialresults from the retail portions of the Faison acquisition.  The Company is currently evaluating thevalue of its goodwill related to these acquisitions for any potential fourthquarter write off as a result of these events. The total unamortized portion of goodwill related to these twoacquisitions was $59,133 as of September 30, 2001.

**ITEM2.  *Management's Discussion and Analysis of FinancialCondition and Results of Operations***

 

The following discussion should be read in conjunctionwith the Company's unaudited Consolidated Financial Statements and the notesthereto included in Item 1 of this Quarterly Report on Form 10-Q.

 

**Overview**

 

Trammell Crow Company is one of the largestdiversified commercial real estate service firms in North America.  Effective January 1, 2001, the Companyreorganized its business to consolidate all of the property and facilitiesmanagement, brokerage and corporate advisory, and project and constructionmanagement services delivered to both corporate and institutional customersunder a single leadership infrastructure referred to as the Global ServicesGroup.  The reorganization also createda national organization, referred to as the Development and Investment Group,through which all of the Company’s real estate development, capital markets andinvestment activities are conducted. The Company continues to capture all activities related to e-commerce, includingrelated overhead, in a third segment. Because the reorganization changed the way the Company’s business ismanaged and financial resources are allocated, the Company’s reportablesegments changed correspondingly in 2001 although the services provided by theCompany remained the same.

 

Within the Global Services segment, with approximately6,850 employees, the Company provides institutional customers (investors andlandlords who typically do not occupy the properties) with services relating toall aspects of building operations, tenant relations and oversight of buildingimprovement processes.  In addition,corporate customers (typically the primary occupants of commercial properties)are provided with comprehensive day-to-day occupancy-related services,including administration, maintenance and repair of facilities, office services(such as security, reprographics, mail, cafeteria, shipping and receiving, andreception services) and call center services (including work-order, dispatch,vendor management, and emergency response) which are provided 24 hours a daythrough the Company’s centralized call center. The brokerage services provided to institutional customers includeproject leasing (leasing space) and investment sales (buying and selling landor income-producing properties).  Thecorporate advisory services business includes services provided to corporatecustomers, such as tenant representation, acquisition and dispositionbrokerage, portfolio management, lease administration, and lease portfolioaudits.  The Company’s project andconstruction management services include space planning, construction, siteconsolidations, workspace moves, and management of furniture, signage, andcabling requirements.  The GlobalServices group is organized into 14 different geographic and customer-centric“mega markets,” many of which are multi-city. The Company’s focus on establishing itself as a dominant brandfacilitates the accumulation of strong resources within the “mega-markets.”

 

Through the Development and Investment segment,encompassing approximately 250 employees, the Company provides development and investment services,both those performed on behalf of institutional and corporate customers on afee basis, and those pursuant to which the Company takes an ownershipposition.  The Company providescomprehensive project development and construction services and acquires anddisposes of commercial real estate projects. The development services provided include financial planning, siteacquisition, procurement of approvals and permits, design and engineeringcoordination, construction bidding and management, tenant finish coordination,project closeout and project finance coordination.  The Company will continue to focus its efforts in this area onrisk-mitigated opportunities for institutional customers and fee developmentand build-to-suit projects for corporate customers, including those in highereducation and healthcare.  With anorganization comprised of professionals dedicated fully to development andinvestment activities, the Company is better positioned to pursue and executenew development business, particularly programmatic business with the Company’slarge customers, and exploit niche market opportunities.

** **

The Company’s activities related to e-commerce,including related overhead, are captured in the E-Commerce segment.  The E-Commerce segment also includes theCompany’s investments in e-commerce related companies. In 2000, the Companyentered into an alliance with otherleading real estate service companies to develop e-commerce initiatives thatleverage the collective experience and delivery capabilities of the alliancemembers to benefit their customers and the real estate industry generally.  The alliance and its members have madeinvestments in a web-based procurement platform and a web-based transactionplatform, including an Internet listing site for properties available for saleor lease, that are intended to make real estate professionals more effective byhelping them save time in completing their job responsibilities.

 

**Results of Operations—Three and Nine Months Ended September 30,2001 Compared to Three and Nine Months Ended September 30, 2000**

 

***Revenues***.  The Company's total revenues decreased$19.8 million, or 9.8%, to $183.0 million for the three months endedSeptember 30, 2001 and decreased $1.1 million, or 0.2%, to $551.0 million forthe nine months ended September 30, 2001 from the comparable periods in theprior year.

 

###### *Global Services Revenue*

 

*Corporate Revenues*

 

Facilities management revenue, which represented 25.8%and 24.0% of the Company's total revenue for the three and nine months endedSeptember 30, 2001, respectively, increased $11.4 million, or 31.8%, to $47.3million for the three months ended September 30, 2001 and increased $35.6million, or 36.9%, to $132.2 million for the nine months ended September 30,2001 from comparable periods in the prior year. The revenue growth for thethree and nine months ended September 30, 2001 primarily resulted from (i) theaddition of several new customers, (ii) the expansion of services provided toexisting customers, and (iii) the operations of Trammell Crow Savills, a jointventure with Savills plc, headquartered in London, formed in June 2000 toprovide real estate outsourcing services in Europe and Asia.  A significant portion of the overallincrease in facilities management revenue consists of reimbursement ofsalaries, wages and benefits.

 

Corporate advisory services revenue, which represented14.4% of the Company's total revenue for both the three and nine months endedSeptember 30, 2001, decreased $9.5 million, or 26.5%, to $26.4 million for thethree months ended September 30, 2001 and decreased $21.3 million, or 21.2%, to$79.1 million for the nine months ended September 30, 2001 from the comparableperiods in the prior year.  The decreaseis due to a reduction in transaction volume as a result of increasingreluctance on the part of customers and others to make new real estate commitmentsdue to the downturn in the economy, which has resulted in decreased demand forcommercial space.  In addition, thenumber of brokers employed during 2001 has decreased, as compared to 2000.

 

Revenues from project management services totaled$12.3 million and $37.9 million and represented 6.7% and 6.9% of the Company'stotal revenue for the three and nine months ended September 30, 2001,respectively. These revenues decreased $0.1 million, or 0.8%, for the threemonths ended September 30, 2001 and increased $6.0 million, or 18.8%, for thenine months ended September 30, 2001 from comparable periods in the prioryear.  The revenue growth for the ninemonths ended September 30, 2001 was primarily due to the (i) the addition ofseveral new customers, (ii) the expansion of services provided to existingcustomers, and (iii) the operations of Trammell Crow Savills.

 

*Institutional Revenues*

 

Property management revenue, which represented 21.8%and 23.4% of the Company's total revenue for the three and nine months endedSeptember 30, 2001, respectively, increased $3.0 million, or 8.1%, to $39.9million for the three months ended September 30, 2001 and increased $12.5million, or 10.7%, to $128.9 million for the nine months ended September 30,2001 from the comparable periods in the prior year. The increase for the threeand nine months ended September 30, 2001 was primarily due to an overallincrease of 2% from September 30, 2000 to September 30, 2001 in the totalnumber of square feet under management. In addition, there was an increase in the percentage of managed spacerepresented by office product, which generates higher property managementrevenues per square foot than other product types.  Furthermore, a significant portion of the overall increase inproperty management revenue consists of reimbursement of salaries, wages andbenefits.

 

Brokerage revenue, which represented 13.6% and 15.7%of the Company's total revenue for the three and nine months ended September30, 2001, respectively, decreased $9.2 million, or 27.1%, to $24.8 millionfor the three months ended September 30, 2001 and decreased $15.2 million, or14.9%, to $86.5 million for the nine months ended September 30, 2001 from thecomparable periods in the prior year. The decrease is due to a reduction in transaction volume as a result ofincreasing reluctance on the part of customers and others to make new realestate commitments due to the downturn in the economy, which has resulted indecreased demand for commercial space. In addition, the number of brokers employed during 2001 has decreased,as compared to 2000

 

Construction management revenues totaled $2.7 millionand $10.7 million and represented 1.5% and 1.9% of the Company’s total revenuefor the three and nine months ended September 30, 2001, respectively.  These revenues decreased $3.5 million, or56.5%, for the three months ended September 30, 2001 and decreased $5.0million, or 31.8%, for the nine months ended September 30, 2001 from comparableperiods in the prior year.  Constructionmanagement revenues are generated from services including space planning,construction, site consolidations, workspace moves and management of furniture,signage and cabling requirements that are directly related to the customer’sreal estate demands.  The decrease forthe three and nine months ended September 30, 2001 is a result of a reductionin transaction volume due to an increasing reluctance on the part of customersand others to make new real estate commitments due to the downturn in theeconomy. The decrease is further the result of the Company’s closure ordivestiture of several construction business units during the nine months endedSeptember 30, 2001, as a result of the reorganization.

 

# ***Development andInvestment Revenue***

 

Revenues from development and construction feestotaled $17.1 million and $51.8 million and represented 9.3% and 9.4% of theCompany’s total revenue for thethree and nine months ended Sept 30, 2001, respectively.  These revenues decreased $6.2 million, or26.6%, for the three months ended September 30, 2001 and decreased $7.1million, or 12.1%, for the nine months ended September 30, 2001 from comparableperiods in the prior year.  The decreasefor the three and nine months ended September 30, 2001 is primarily due to adecrease of $6.5 million and $13.0 million, respectively, in development feesand incentive development fees as a result of a reduction in transaction volumedue to an increasing reluctance on the part of customers and others to make newreal estate commitments due to the downturn in the economy.  This decrease was partially offset by anincrease of $0.3 million and $3.9 million for the three and nine months endedSeptember 30, 2001, respectively, of rental revenue from real estate propertiesheld for sale, as these operating properties have been held for longer periodsof time than in prior periods as a result of the downturn in the economy.  Also partially offsetting the developmentfee decrease was an increase in revenues generated from services includingconstruction bidding and management, tenant finish coordination, projectcloseout and general contracting of $0.4 million and $3.2 million for the threeand nine months ended September 30, 2001, respectively.

 

Income from investments in unconsolidatedsubsidiaries, which represented 0.4% and 1.0% of the Company’s total revenuefor the three and nine months ended September 30, 2001, respectively, increased$0.2 million, or 33.3%, to $0.8 million for the three months ended September30, 2001 and increased $2.4 million, or 75.0%, to $5.6 million for the nine monthsended September 30, 2001 from the comparable periods in the prior year.  The revenue growth for the three monthsended September 30, 2001 is the result of five transactions with aggregate revenues of $0.7 million compared to two transactions with aggregaterevenues of $0.5 million for the three months ended September 30, 2000.  The revenue growth for thenine months ended September 30, 2001 is primarily the result of a largetransaction that closed in June 2001, resulting in revenue to the Company of$3.8 million.  There were threetransactions for the nine months ended September 30, 2000 with aggregaterevenues of $1.5 million.

 

Gain on disposition of real estate totaled $11.1million and $15.7 million and represented 6.1% and 2.8% of the Company’s totalrevenue for the three and nine months ended September 30, 2001,respectively.  These gains decreased$5.7 million, or 33.9%, for the three months ended September 30, 2001 anddecreased $9.5 million, or 37.7%, for the nine months ended September 30, 2001from comparable periods in the prior year. For the three months ended September 30, 2001, the Company sold ten realestate projects for an aggregate net sales price of $54.2 million, resulting inan aggregate gain on disposition of $11.1 million.  For the three months ended September 30, 2000, the Company soldthirteen real estate projects for an aggregate net sale price of $52.3 million,resulting in an aggregate gain on disposition of $16.8 million. For the ninemonths ended September 30, 2001, the Company sold twenty-six real estateprojects for an aggregate net sales price of $95.1 million, resulting in anaggregate gain on disposition of $15.0 million, and recognized deferred gain of$0.7 million relating to dispositions in previous periods.  For the nine months ended September 30,2000, the Company sold twenty-three real estate projects for an aggregate netsales price of $97.8 million, resulting in an aggregate gain on disposition of$25.2 million.

 

The Company’s corporate development activity has remainedstable with an increase in development and construction activity related tohigher education customers, offset by declines in corporate build-to-suits.Some of the Company’s development resources focus on providing developmentservices to institutional clients that invest in speculative commercial realestate projects.  Since the latter partof 1999, the Company has become more cautious in developing speculative realestate.  The caution reflects the factthat demand for new product in many of the markets in which the Companyoperates has declined with the overall downturn in the economy.

 

***Costs and Expenses.***  The Company's costs and expenses increased $1.5 million, or0.9%, to $176.7 million for the three months ended September 30, 2001 andincreased $33.1 million, or 6.6%, to $537.4 million for the nine months endedSeptember 30, 2001 from the comparable periods in the prior year.

 

The increase in costs and expenses was largely due toa $2.2 million, or 2.0%, and $35.3million, or 11.3%, increase in salaries, wages and benefits for the three andnine months ended September 30, 2001, respectively, from the comparable periodsin the prior year. The increase for the three and nine monthsended September 30, 2001 is primarily due to increases in staffing to supportexpected internal growth in the Company's business, including new assignmentsfor the Company's outsourcing business and the operations of Trammell CrowSavills.  The increase related tosalaries, wages and benefits that were reimbursed by customers for the threeand nine months ended September 30, 2001 was $12.6 million and $43.4 million,respectively.  This was offset by adecrease in bonus expense due to the Company’s institution of a new bonus plan effective as of thebeginning of 2001.  Under the new bonusplan, a substantial majority of employee bonuses will be paid from a pool, thesize of which will be determined by the Company’s pre-bonus income beforeincome taxes.  Consistent with the newplan, the portion of the subject bonuses accrued each quarter is based on thepercentage of targeted pre-bonus income before income taxes achieved in thatquarter.  In 2000 and prior years, therewas no such company-wide bonus plan overlay; as a result, in prior yearsestimated employee annual incentive bonuses were generally accrued evenlythroughout the year.  The new bonus planbenefited income before income taxes by approximately $3.5 million and $17.7million for the three and nine months ended September 30, 2001, respectively,as compared to the same periods in 2000. The increase was further offset by elimination of positions as part ofcompany-wide cost reduction efforts initiated in the second quarter of 2001.

 

Commissions decreased $8.8 million, or 31.4%, to$19.2 million, for the three months ended September 30, 2001 and decreased$14.5 million, or 18.1%, to $65.7 million for the nine months ended September30, 2001 from the comparable periods in the prior year. The decrease incommission expense for the three and nine months ended September 30, 2001corresponds to the decrease in the Company’s corporate advisory services andbrokerage revenue, which was driven by a reduction in transaction volume as aresult of increasing reluctance on the part of customers and others to make newreal estate commitments due to the downturn in the economy, which has resultedin decreased demand for commercial space.

 

General and administrative expenses decreased $1.8million, or 6.9%, to $24.2 million for the three months ended September30, 2001 and increased $1.3 million, or 1.6%, to $81.1 million for the ninemonths ended September 30, 2001 from comparable periods in the prior year.  These changes are primarily due tocompany-wide cost reduction efforts undertaken in the second quarter of 2001,offset by an increase in administrative costs resulting from an overallincrease in the number of employees (average employees at September 30, 2001are approximately 7,200, as compared to 6,800 average employees at September30, 2000).  In addition, bad debtexpense increased $0.7 million and $1.5 million for the three and nine monthsended September 30, 2001, respectively, from the comparable periods in theprior year.  Furthermore, pursuit costsincreased $1.2 million for the nine months ended September 30, 2001 as comparedto the prior year.

 

Depreciation and amortization increased $0.7 million,or 11.5%, to $6.8 million, for the three months ended September 30, 2001 andincreased $3.6 million, or 21.1%, to $20.7 million, for the nine months endedSeptember 30, 2001 from the comparable prior year periods.  The increase in depreciation andamortization for the three and nine months ended September 30, 2001 isprimarily related to depreciation expense on information systems-related assetsaccounted for as capital leases and amortization of transition costs incurredin connection with certain outsourcing contracts.

 

Interest expense decreased $0.2 million, or 5.0%, to$3.8 million, for the three months ended September 30, 2001 and increased $0.2million, or 1.7%, to $12.0 million, for the nine months ended September 30,2001 from the comparable prior year periods. The decrease in interest expense for the three months ended September30, 2001 is a result of lower interest rates related to the Company’s revolvingline of credit from the third quarter 2000 to third quarter 2001.  The increase in interest expense for thenine months ended September 30, 2001 is primarily attributable to an increasein the number of real estate properties held for sale, as operating propertieshave been held for longer periods of time than in prior periods as a result ofthe downturn in the economy (under GAAP, once a property is operational,interest is expensed rather than capitalized as it is during the constructionperiod).  In addition, a portion of theincrease resulted from an increase in capitallease obligations from 2000 to 2001 and higher average outstanding balancesunder the Company’s revolving line of credit in 2001 compared to 2000.  However, the interest rates related to theCompany’s revolving line of credit decreased from 2000 to 2001.

 

Minority interest increased $2.4 million, or 342.9%,to $3.1 million for the three months ended September 30, 2001 and decreased$1.0 million, or 25.6%, to $2.9 million for the nine months ended September 30,2001 from comparable periods in the prior year. The increase for the threemonths ended September 30, 2001 is primarily a result of two large transactionsin 2001 with an aggregate expense of $2.3 million, with no comparable expensein 2000.  The decrease for the ninemonths ended September 30, 2001 is primarily a result of two large transactionsin 2000 with an aggregate expense of $2.5 million compared to three largetransactions in 2001 with an aggregate expense of $2.0 million.

 

Expense related to the interest rate swap agreementwas recognized for the three and nine months ended September 30, 2001 in theamount of $3.5 million and $3.9 million, respectively.  This expense is due to a change in fairvalue of the interest rate swap agreement, recognized as a result of the adoption of FinancialAccounting Standards Board Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, on January 1,2001.

 

During the first quarter of 2001 the Company announcedan internal reorganization of its business designed to consolidate all of theproperty and facilities management, brokerage and corporate advisory, andconstruction and project management services delivered to both corporate andinstitutional customers under a single leadership structure.  As part of the reorganization, the Companyhas advised approximately 200 employees across all functions and levels thattheir jobs were being eliminated as part of a cost-cutting effort focusing oninefficiencies and redundancies.  Duringthe three and nine months ended September 30, 2001, the Company incurredrestructuring charges of $1.6 million and $2.5 million, respectively, relatedto these terminations, consisting primarily of involuntary employee terminationbenefits including severance and outplacement benefits.  At September 30, 2001, approximately 170employees had been terminated and the accrual balance was $.6 million.  These terminations are expected to becomplete by the end of the first quarter of 2002. The Company has made and plansadditional terminations during the fourth quarter of 2001.  The magnitude of these additionalterminations has not yet been determined, and no related amount has beenrecorded at September 30, 2001.

 

In July 2001, the Company also formalized and communicatedits previously announced internal reorganization designed to centralize andimprove the efficiency of its accounting operations.  The plan calls for the consolidation of client accountingoperations into three regionalcenters in Dallas, Texas, Memphis, Tennessee, and Seattle, Washington, and theconsolidation of the Company’s internal accounting in Dallas, Texas.  The accounting restructuring plancontemplates the termination of approximately 200 accounting personnel at 18locations throughout the United States, with termination dates ranging fromJuly 2001 through April 2002. Subsequent to the original communication of the plan, approximately 50employees resigned or were placed into open positions or onto new customeraccounts and therefore became ineligible for severance.  During the three months ended September 30,2001, the Company recognized $1.9 million of restructuring charges, consistingof involuntary termination benefits including severance and outplacementbenefits related to these terminations. At September 30, 2001, approximately 30 terminations had been completed,and the accrual balance was $1.8 million. During the next year, management expects this plan to provide a netreduction in headcount of approximately 70 employees, as eliminated positionsare replaced by new hires in Dallas, Memphis and Seattle.  The plan is anticipated to be complete bythe end of the second quarter of 2002.

 

In October 2001, the Boston-based investment salesbrokerage team that was part of the Company’s Fallon Hines & O’Connor, Inc.acquisition in May 1998 left the Company to join another firm.  During the fourth quarter of 2001, theCompany has lost certain management contracts acquired from the Company’sFaison & Associates and Faison Enterprises, Inc. (“Faison”) acquisition inJuly 1998.  In addition, the Company hasexperienced, and expects to continue to experience, deteriorating financialresults from the retail portions of the Faison acquisition.  The Company is currently evaluating thevalue of its goodwill related to these acquisitions for any potential fourthquarter write off as a result of these events. The total unamortized portion of goodwill related to these twoacquisitions was $59.1 million as of September 30, 2001.

***Income Before Income Taxes.***  The Company's income before income taxesdecreased $21.2 million, or 76.8%, to $6.4 million for the threemonths ended September 30, 2001 and decreased $34.2 million, or 71.5%, to $13.6million for the nine months ended September 30, 2001 from the comparable prior year periods dueto the fluctuations in revenues and expenses above. The Company believes thatthe current quarter results are not indicative of full year results due tochanges in revenue composition and fluctuations in timing and volume of activityfrom quarter to quarter.

 

***Net Income.***  Net income decreased $12.8 million, or 77.1%, to$3.8 million for the three months ended September 30, 2001 as compared tothe same period in the prioryear, and decreased $20.6 million, or 71.8%, to $8.1 million for the ninemonths ended September 30, 2001 for the same period in the prior year, due tothe fluctuations in revenues and expenses described above.

 

**Quarterly Results of Operations and Seasonality**

 

The results of operations for any quarter are not necessarilyindicative of results for any future period. The Company's revenues and netincome during the fourth fiscal quarter historically have been greater than ineach of the first three fiscal quarters, primarily because its clients havedemonstrated a tendency to close transactions toward the end of the fiscalyear. The timing and introduction of new contracts, the disposition ofinvestments in real estate assets, the recognition of incentive fees towardsthe latter part of the fiscal year as contractual targets are met and otherfactors may also cause quarterly fluctuations in the Company's results ofoperations.

 

**Liquidityand Capital Resources**

 

The Company's liquidity and capital resourcesrequirements include the funding of working capital needs, primarily accountsreceivable from its clients; the funding of capital investments, including theacquisition of or investments in other real estate service companies; capitalpayments to obtain service contracts; the repurchase of its shares;expenditures for real estate held for sale and payments on notes payableassociated with its development and investment activities; and expendituresrelated to upgrading the Company's management information systems. The Companyfinances its operations with internally generated funds, capital leases andborrowings under the Credit Facility (described below) and had an unusedborrowing capacity under its line of credit of $66.4 million at September 30,2001. The portion of the Company's development and investment business thatincludes the acquisition and development of real estate is financed with loanssecured by underlying real estate, external equity, internal sources of funds,or a combination thereof.

 

Net cash provided by operating activities totaled$9.2 million for the nine months ended September 30, 2001, compared to$8.4 million for the same period in 2000. This change is primarily the result of less cash expended in 2001 forupfront payments on service contracts and escrow deposits and other pursuitcosts for real estate development than in the comparable period of 2000. Thisincrease is offset by $14.9 million of cash used, net of related borrowings, inthe first nine months of 2001 to acquire real estate held for sale compared to$11.4 used in the same period of 2000.

 

Net cash used in investing activities totaled$15.6 million for the nine months ended September 30, 2001, compared tonet cash used by investing activities of $46.2 million for the same periodin 2000. This change is primarily due to a decrease in cash used forinvestments in unconsolidated subsidiaries, net of distributions, of $4.7million in 2001 compared to $26.7 million in 2000.  Also, there was a decrease of cash used for furniture andequipment expenditures of $9.5 million in 2001 compared to $11.5 million in2000.  Cash used for acquisitions ofreal estate service companies decreased from $8.0 million in 2000 to $1.4million in 2001.

 

Net cash used in financing activities totaled$21.0 million for the nine months ended September 30, 2001, compared tonet cash provided by financing activities of $12.6 million for the sameperiod in 2000. This change is attributable to payments, net of borrowings, in2001 of $14.0 million, primarily under the Credit Facility (describedbelow), compared to borrowings, net of payments, of $12.2 million in 2000.In addition, the Company made distributions to minority interest holders, netof contributions, of $8.0 million in 2001, compared to $2.1 millionin 2000. In addition, the Company repurchased common stock in 2001 for $4.0million compared to $0.6 million in 2000. The Company also received $5.0 million in 2001 compared to$2.9 million in 2000, from the exercise of stock options and issuance ofcommon stock.

 

In December 2000, the Company obtained a $150.0 millionrevolving line of credit (the “Credit Facility”) arranged by Bank of America,N.A., as the administrative agent (the “Administrative Agent”), which replacedthe Company’s prior revolving line of credit. Under the terms of the Credit Facility, the Company can obtain loanswhich are Base Rate Loans, or Eurodollar Rate Loans. Base Rate Loans bearinterest at a base rate plus a margin, which ranges from 0% to 0.50% dependingon the Company’s leverage ratio. The base rate is the higher of theprime-lending rate announced from time–to–time by theAdministrative Agent or an average federal funds rate plus 0.5%. EurodollarRate Loans bear interest at the Eurocurrency rate plus a margin, which rangesfrom 1.625% to 2.25%, depending upon the Company's leverage ratio. The CreditFacility contains various covenants such as the maintenance of minimum equity,liquidity, revenues, interest coverage ratios and fixed charge ratios. TheCredit Facility also includes limitations on payment of cash dividends or otherdistributions of assets, restrictions on recourse indebtedness, restrictions onliens and certain restrictions on investments and acquisitions that can be madeby the Company. The covenants contained in the Credit Facility and the amountof the Company's other borrowings and contingent liabilities may have theeffect of limiting the credit available to the Company under the CreditFacility to an amount less than the $150.0 million commitment.  The Credit Facility is guaranteed by certainsignificant subsidiaries of the Company and is secured by a pledge of the stockof such significant subsidiaries and a pledge of certain intercompanyindebtedness. At September 30, 2001, the Company had outstanding borrowings of$56.0 million under the Credit Facility. The Credit Facility requires theCompany to enter into one or more interest rate swap agreements for theCompany's indebtedness in excess of $50.0 million ensuring the net interest isfixed, capped or hedged. In March 2000, the Company renewed an existinginterest rate swap agreement for a twelve-month period ending March 24, 2001with a fixed interest pay rate of 6.65% and a notional amount of $150.0 millionthrough June 26, 2000, a notional amount of $125.0 million through September25, 2000 and a notional amount of $100.0 million through March 24, 2001.  On March 24, 2001, the interest rate swapagreement was renewed for a twenty-four month period ending March 24, 2003 witha fixed interest pay rate of 4.68% and a notional amount of $150.0million.  The weighted average receiverate for the swap agreement was 4.66% for the nine months ended September 30,2001. The Company's participation in derivative transactions has been limitedto hedging purposes, and derivative instruments are not held for tradingpurposes. The Company expects to continue to borrow under the Credit Facilityto finance future strategic acquisitions, fund its co–investmentactivities and provide the Company with an additional source of workingcapital.

 

In August 1997, Trammell Crow BTS, Inc., awholly–owned subsidiary of the Company (“TC BTS”), obtained a $20.0million credit facility (the “Retail BTS Facility”) from KeyBank NationalAssociation (“KeyBank”). In September 1999, the Retail BTS Facility wasmodified to increase the credit facility to $30.0 million. Under the modifiedterms of the Retail BTS Facility subsidiaries of TC BTS could obtain loans atone of a LIBOR–based interest rate, KeyBank's prime rate or a combinationof the two interest rates.  The RetailBTS Facility expired in July, 2001; therefore no new loans can be obtainedunder the Retail BTS Facility.  OnSeptember 30, 2001, the outstanding balance owed under the Retail BTS Facilitywas $3.7 million. The Retail BTS facility is secured by a first mortgage on andassignment of all rents from the constructed facilities. In addition, TC BTSmust guarantee all obligations of its subsidiaries for loans made pursuant tothe Retail BTS Facility. The Company must also guarantee the repaymentobligations under the Retail BTS Facility with respect to such loans and mustguarantee the timely lien–free completion of each retail facility towhich such loans relate. As guarantor, the Company is subject to variouscovenants such as maintenance of net worth and liquidity and key financialdata. The Retail BTS Facility also contains various covenants, such as themaintenance of a minimum net worth and liquidity of TC BTS and prohibition onother TC BTS guarantees of build–to–suit retail projects.

 

In December 1998, TCC NNN Trading, Inc. (“TCCTriple Net”) obtained a two–year $20.0 million revolving line of credit(“Triple Net Facility”) from KeyBank. Under the terms of the Triple NetFacility, TCC Triple Net could obtain loans at a LIBOR–based interestrate or prime rate, the proceeds of which must have been used for theacquisition of retail properties subject to “triple net” leases. The Triple NetFacility expired in December 2000; therefore, no new loans can be made underthe Triple Net Facility.  On September30, 2001, the outstanding balance under the Triple Net Facility was $2.2million.  During September 2001, thematurity date for these loans was extended to March 2002.  The Triple Net Facility is nonrecourse toTCC Triple Net and is secured by a first mortgage and assignment of all rentsfrom the acquired properties. The Company guaranteed from 10% to 40% of eachsuch loan depending on the credit rating of the tenant occupying the acquiredproperty. The Company's guarantee percentage will be reduced to 10% for anyloan upon the receipt of a qualifying purchase agreement relating to theproperty underlying such loan. The maximum amount of any advance related to asingle property was either (i) 90% of the property's acquisition costs andcertain related costs (if the property's tenant has a debt rating of BBB orhigher), or (ii) 80% of the property's acquisition costs and certainrelated costs (if the property's tenant has a debt rating of BB+ or lower). TheTriple Net Facility also contains various covenants, such as the maintenance ofminimum equity and liquidity of the Company and covenants relating to certainkey financial data of the Company.

 

The Company does not anticipate paying any dividendsin the foreseeable future. The Company believes that funds generated fromoperations, together with existing cash and available credit under the CreditFacility and loans secured by underlying real estate will be sufficient tofinance its current operations, planned capital expenditure requirements,payment obligations for development purchases, acquisitions of servicecompanies, the repurchase of its shares and internal growth for the foreseeablefuture. The Company's need, if any, to raise additional funds to meet itsworking capital and capital requirements will depend upon numerous factors,including the success and pace of its implementation of its business strategy.The Company regularly considers capital raising alternatives to be able to takeadvantage of available avenues to supplement its working capital, includingstrategic corporate partnerships or other alliances, bank borrowings and thesale of equity and/or debt securities.

 

In May 2001, the Company announced that its Board ofDirectors had approved a stock repurchase program.  The repurchase program authorized the repurchase of up to $15.0 millionof the Company’s common stock from time to time in open market purchases orthrough privately negotiated transactions. Through September 30, 2001, the Company had repurchased 393,200 sharesat an average cost of $10.15 per share with funds generated from operations andexisting cash.  The Company placed therepurchased shares in treasury and has reissued shares (and expects to reissueadditional shares) in connection with the Company’s employee stock purchaseplan and option exercises or restricted stock grants under the Company’sLong-Term Incentive Plan and other equity-based incentive plans, as well as forother corporate purposes.

 

**Forward–LookingStatements**

 

Certain statements contained or incorporated byreference in this Quarterly Report on Form 10-Q, including withoutlimitation statements containing the words “believe,” “anticipate,” “expect,”“envision,” “project,” “budget,” “target,” “should,” “foresee,” and words ofsimilar import, are forward–looking statements within the meaning of thefederal securities 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) the timingof individual transactions, (ii) the ability of the Company to identify andimplement cost containment measures (including those undertaken in connectionwith the previously announced internal reorganization) and achieve economies ofscale, (iii) the ability of the Company to implement and manage effectively itse-commerce initiatives, (iv) the ability of the Company to compete effectivelyin the international arena, (v) the ability of the Company to attract newcorporate and institutional customers; (vi) the ability of the Company tomanage fluctuations in net earnings and cash flow which could result from theCompany's participation as a principal in real estate investments, (vii) theCompany's ability to continue to pursue its growth strategy, (viii) theCompany's ability to compete in highly competitive national and local businesslines and (ix) the Company's ability to attract and retain qualified personnelin all areas of its business (particularly management). In addition, theCompany's ability to achieve certain anticipated results will be subject toother factors affecting the Company's business that are beyond the Company'scontrol, including but not limited to general economic conditions (includingthe cost and availability of capital for investment in real estate andcustomers' 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 to update anysuch statements or publicly announce any updates or revisions to any of theforward-looking statements contained herein to reflect any change in theCompany's expectation with regard thereto or any change in events, conditions,circumstances or assumptions underlying such statements. Reference is herebymade to the disclosures contained under the heading “Risk Factors” in “Item 1.Business” of the Company's Annual Report on Form 10-K filed with the Securitiesand Exchange Commission on March 29, 2001.

 

**ITEM3.  *Quantitative and Qualitative Disclosures About MarketRisk***

 

The Company’s primary market risk exposure is tochanges in interest rates.  The Companyis exposed to market risk related to its Credit Facility and loans secured byreal estate properties as discussed in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Liquidity and CapitalResources.”  The Credit Facility and themajority of the loans secured by real estate bear interest at variable ratesand are subject to fluctuations in the market. However, due to its purchase of an interest rate swap agreement, whichthe Company uses to hedge a portion, but not all, of its exposure tofluctuations in interest rate, the effects of interest rate changes are limited.The Company’s earnings are also somewhat affected by fluctuations in the valueof the U.S. dollar as compared to foreign currencies as a result of itsoperations in Europe, Asia, Australia and Latin America.  There have been no significant changes in theinterest rate or foreign currency market risks since December 31, 2000.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.  *Legal Proceedings***

 

From time to time, the Company is involved inlitigation incidental to its business. In the Company's opinion, no litigationto which the Company is currently a party, if decided adversely to the Company,is likely to have a material adverse effect on the Company's results ofoperations, cash flows or financial condition.

 

**ITEM6.  *Exhibits and Reports 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                   |
| 4.1(1)   | Form of Certificate for shares of Common Stock of the  Company |

 

 

----

| (1)    | Previously filed as an exhibit to the Company’s  Registration Statement on Form S-1 (File Number 333-34859) filed with the  Securities and Exchange Commission on September 3, 1997 and incorporated  herein by reference. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                            |
| (2)    | Previously filed as an exhibit to the Company’s Form  10-Q filed with the Securities and Exchange Commission on August 11, 2000 and  incorporated herein by reference.                                                     |

 

 

(b)         Reports on Form 8-K filed since June 30, 2001:

 

None

 

**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly 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: November 14, 2001 |                  |   |

** **