<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 1999
REGISTRATION NO. 333-72925
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TRAMMELL CROW COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2721454
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2001 ROSS AVENUE, SUITE 3400
DALLAS, TEXAS 75201
(214) 863-3000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
--------------------------
GEORGE L. LIPPE
CHIEF EXECUTIVE OFFICER
TRAMMELL CROW COMPANY
2001 ROSS AVENUE, SUITE 3400
DALLAS, TEXAS 75201
(214) 863-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
JEFFREY E. ELDREDGE JI HOON HONG
J. CHRISTOPHER KIRK SHEARMAN & STERLING
VINSON & ELKINS L.L.P. 599 LEXINGTON AVENUE
3700 TRAMMELL CROW CENTER NEW YORK, NEW YORK 10022
2001 ROSS AVENUE (212) 848-4000
DALLAS, TEXAS 75201
(214) 220-7700
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
--------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
--------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an offering in the United States and Canada (the "U.S.
Prospectus"), and the other to be used in connection with a concurrent offering
outside the United States and Canada (the "International Prospectus"). The U.S.
Prospectus and the International Prospectus are identical in all respects except
that they contain different front cover pages.
The form of the U.S. Prospectus is included herein and is followed by the
front cover page to be used in the International Prospectus that differs from
the front cover page in the U.S. Prospectus. The front cover page for the
International Prospectus included herein is labeled "Alternative Cover Page for
International Prospectus."
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
MARCH 22, 1999
4,500,000 SHARES
TRAMMELL CROW COMPANY
COMMON STOCK
--------------
SELLING STOCKHOLDERS ARE OFFERING ALL OF THE SHARES TO BE SOLD IN THE OFFERING.
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE OFFERING. IN 1991, OUR REAL
ESTATE SERVICES BUSINESS WAS SEPARATED FROM THE COMMERCIAL REAL
ESTATE ASSET BASE OWNED BY OUR PREDECESSOR. WE CONTINUED
TO OPERATE THE REAL ESTATE SERVICES BUSINESS WHILE
OWNERSHIP OF THE COMMERCIAL REAL ESTATE
ASSET BASE WAS SEGREGATED INTO
SEPARATE ENTITIES WITH
INDEPENDENT
MANAGEMENT AND
OPERATIONS.
-------------------
THE COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
"TCC."
ON MARCH 19, 1999, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON
THE NEW YORK STOCK EXCHANGE WAS $15 5/8 PER SHARE.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDERS
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE
UP TO AN ADDITIONAL 675,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN STANLEY &
CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON ,
1999.
-------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
BT ALEXQ BROWN
DONALDSON, LUFKIN & JENRETTE
, 1999.
<PAGE>
The artwork on the inside front cover of the gatefold is a landscape-format,
two-page, tan, gray, blue, black, and white-colored depiction of: (a) a map of
the continental United States and the southern portion of Canada, three small
inset maps of Asia, South America and Europe, the Company's logo, "Trammell Crow
Company," presented in white lettering inside a black box that is outlined in
blue and gray, logos of some of the Company's major clients and a small black
inset box with the following text in white block lettering: "Crow Holdings
International" is an entity with which the Company has a strategic alliance but
in which the Company has no ownership interest" (in the upper four-fifths); and
(b) a boxed, black, white and blue-colored listing of the cities and states of
the Company's North American locations (labeled "North American Locations")(in
the lower one-fifth).
Scattered across the map of the continental U.S. are triangles which
correspond to the cities in the boxed listing described above. Within the inset
maps of Asia, South America and Europe, respectively, the countries of Japan and
China; Brazil and Chile; and Hungary, Belgium, Germany and the Netherlands, are
identified by name. Within the box listing the Company's North American
locations, the names of U.S. states and the country of Canada are presented in
blue capital letters and city names are presented in white large and small
letters. The states and cities listed are: Arizona (Phoenix, Tucson); Arkansas
(Little Rock); California (Commerce, Foster City, Irvine, Los Angeles, Newport
Beach, Ontario, Pleasanton, San Diego, San Francisco, San Jose); Canada
(Calgary, Toronto); Colorado (Colorado Springs, Denver); Connecticut (Greenwich,
Hartford, Stamford); Delaware (Wilmington); District of Columbia (Washington,
D.C.); Florida (Boca Raton, Coral Gables, Fort Lauderdale, Fort Myers,
Jacksonville, Miami, Orlando, Sunrise, Tampa, West Palm Beach); Georgia
(Atlanta); Idaho (Boise); Illinois (Barrington, Chicago, Deerfield, Des Plaines,
McGaw Park, Oakbrook Terrace, Round Lake, Waukegan); Indiana (Indianapolis);
Iowa (Des Moines); Kansas (Kansas City, Overland Park, Topeka, Wichita);
Kentucky (Louisville, Winchester); Louisiana (Baton Rouge, Lake Charles, Monroe,
New Orleans, Shreveport); Maine (Portland); Maryland (Baltimore, Bethesda,
Columbia); Massachusetts (Boston); Michigan (Auburn Hills, Southfield);
Minnesota (Eden Prairie, Edina, Golden Valley, Minnetonka); Missouri (Kansas
City, Maryland Heights, Springfield, St. Louis); Nevada (Reno/Sparks); New
Jersey (Carlstadt, Chatham, Cherry Hill, Edison, Newark, Park Ridge); New Mexico
(Albuquerque); New York (Albany, Buffalo, Montgomery, Rochester, Syracuse);
North Carolina (Charlotte); Ohio (Cleveland, Columbus, Hudson); Oklahoma
(Oklahoma City, Tulsa); Oregon (Portland); Pennsylvania (Norristown,
Philadelphia, Pittsburgh, Wayne, Wyomissing); South Carolina (Columbia);
Tennessee (Brentwood, Cordova, Memphis, Nashville); Texas (Amarillo, Austin,
Dallas, Fort Worth, Houston, San Antonio); Utah (Salt Lake City); Vermont
(Burlington); Virginia (Alexandria, Chantilly, Fairfax, Hampton, McLean, Reston,
Richmond, Virginia Beach); Washington (Bellevue, Redmond, Seattle, Tacoma); and
Wisconsin (Milwaukee).
Logos and names of some of the Company's major clients fill the areas
between the maps; identified logos and names are as follows: the Principal
Financial Group, AEW, Allegiance, BankOne, AMB Property Corporation, United
Health Group, ARCHON Group, KeyCorp, EXXON, Travelers Property Casualty,
Allegis, Kennedy Associates Real Estate Counsel, Inc., Sovereign Bank,
Microsoft, Baxter, OfficeMax, CIGNA Investment Management, NationsBank, IBM and
Mobil.
The following asterisk note appears in black block lettering near the lower
lefthand corner of the area around the amp of the U.S.: "The logos are the
official trademarks of these companies and are issued and used with their
permission."
The artwork on the outside cover of the gatefold is a portrait-format, blue
and black-colored depiction of the North American portion of the northern
hemisphere (in the bottom-most two-thirds of the representation) overlaid, in
part, with the five portrait-format boxes presenting summary information about
the areas of service offered by the Company, and (in the uppermost one-third of
the representation) the following text is presented in a gray-colored,
landscape-formatted box: "Trammell Crow Company is one of the largest
diversified commercial real estate service companies in the United States.
Through the Company's 150 offices in the United States and Canada, the Company
is organized to deliver a comprehensive range of service offerings to clients
which include leading multinational corporations, institutional investors and
other users of real estate services. Founded in 1948, the Company has
established itself as a market leader in each of its primary businesses."
Partially overlapping the central part of the bottom line of this box is the
Company's logo: "Trammell Crow Company" which is presented in white lettering
inside a black box that is outlined in blue and gray.
The text of the summary information about the areas of service offered by
Trammell Crow Company listed in the five boxes is as follows: (1) Property
Management Services (Building Management, Tenant Relations, Tenant Finish,
Financial Management); (2) Brokerage Services (Tenant Representation, Investment
Sales, Listings, Land Sales); (3) Infrastructure Management Services (Strategic
Services, Facility Management, Facility Planning and Project Management,
Transaction Services, Office Services); (4) Development and Construction
Services (Project Sourcing, Acquisition and Financial Services, Coordination of
Design and Approvals, Construction Management, Tenant Finish Coordination,
General Contracting); and (5) Retail Services (Brokerage Services, Development
Services, Acquisition, Rehabilitation and Sale of Retail Properties). The titles
within each gray and white-outlined box are printed in blue capital letters; the
items listed within each column are printed in white large and small letters.
The artwork on the inside back cover of the gatefold is a full-page, blue,
gray, black and white-colored, portrait-formatted photograph of several people,
overlaid with two small boxes of text. Centered one-third of the way from the
top of the page is the Company's logo: "Trammell Crow Company" which is
presented in white lettering inside a black box that is outlined in blue and
gray. Toward the lower right-hand corner of the page is an inset box of gray and
white text on a white background which reads: "Mission Statement--To be the
premier customer-driven, full-service real estate company in the industry."
2
<PAGE>
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this Prospectus. Do not rely
on any such unauthorized information. This Prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
Prospectus is current as of March , 1999.
------------------------
Unless the context otherwise requires, all references to the "Company,"
"we," "our," and "us" in this Prospectus are to Trammell Crow Company and its
consolidated subsidiaries.
All references to "EBITDA, as adjusted," in this Prospectus are to earnings
before interest, income taxes, depreciation and amortization, royalty and
consulting fees, profit sharing and non-recurring charges to income related to
an option plan and a terminated stock appreciation rights plan.
In this Prospectus references to "dollar" and "$" are to United States
dollars, and the term "United States" or "U.S." means the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 10
The Company................................................................................................ 15
Use of Proceeds............................................................................................ 19
Dividend Policy............................................................................................ 19
Market for Common Stock.................................................................................... 19
Selected Consolidated Financial Data....................................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23
Business................................................................................................... 38
Management................................................................................................. 53
Principal and Selling Stockholders......................................................................... 56
Description of Capital Stock............................................................................... 59
Shares Eligible for Future Sale............................................................................ 64
Certain U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock............................... 65
Underwriting............................................................................................... 68
Legal Matters.............................................................................................. 71
Experts.................................................................................................... 71
Where You Can Find More Information........................................................................ 71
Incorporation by Reference................................................................................. 72
Index to Financial Statements.............................................................................. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
PLEASE READ THE FOLLOWING SUMMARY CAREFULLY, TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING THE COMPANY AND THE COMMON STOCK AND THE FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
COMPANY OVERVIEW
We are one of the largest diversified commercial real estate services
companies in North America. Through 150 offices in the United States and Canada,
we deliver a comprehensive range of services to leading multinational
corporations, institutional investors and other users of real estate services.
In the United States, we are a leading provider of commercial property
management, commercial property brokerage, infrastructure management and office
and industrial property development and construction services.
For the nine months ended September 30, 1998, our total revenues were $347.0
million (an increase of 62.8% over the same period in 1997), and EBITDA, as
adjusted, was $67.6 million (an increase of 69.8% over the same period in 1997).
Acquisitions contributed 23.5% of our revenue growth and 16.5% of our growth in
EBITDA, as adjusted, over this period. In 1997, total revenues were $313.6
million (an increase of 22.7% over 1996), and our EBITDA, as adjusted, was $59.5
million (an increase of 21.7% over 1996).
We were founded in 1948 by Mr. Trammell Crow to develop, own and manage
industrial, office and retail projects. In 1991, our real estate services
business was separated from our commercial real estate asset base. Today, we
operate the real estate services business while the commercial real estate asset
base is owned by a number of separate entities. Many of these entities are
managed by subsidiaries of Crow Holdings. Because Crow Holdings and its owners
hold significant amounts of our common stock and conduct other real estate
activities in direct competition with us, our relationship with these entities
could give rise to conflicts of interest.
COMPETITIVE ADVANTAGES
We have the following important competitive advantages:
COMPREHENSIVE SERVICE OFFERINGS. Our comprehensive menu of services
provides clients with single-point solutions to all of their commercial real
estate services needs. We often commence client relationships by providing a
single service, and later expand these relationships by anticipating and
satisfying the client's other specific service requirements. By offering a full
array of services, we maximize our effect on our clients' businesses while
becoming highly integrated into their operations. Our comprehensive service
offerings also decrease our exposure to a downturn in any one of our primary
businesses.
GEOGRAPHIC SCOPE. Through our 150 offices, we develop and maintain
extensive knowledge of local real estate markets across the United States and
Canada. Approximately 88% of our employees are based in markets other than
Dallas, Texas, where our executive offices are located. This broad geographic
scope allows us to serve as a single-source, full service provider to
multinational corporations and institutional investors with real estate
interests that span regional and national boundaries. It also tends to limit our
exposure to an economic downturn in any single market.
TECHNOLOGY. We use off-the-shelf and proprietary technology applications to
better meet customer needs. An example is our centralized call center, which is
a vital component of our proprietary total occupancy cost management process
that provides comprehensive cost studies and analyses of building portfolios to
our customers. This call center provides responses to customer needs 24 hours a
day. Use of these applications is intended to enhance sharing of vital market
information and provide significantly enhanced control over clients' expenses.
4
<PAGE>
MANAGEMENT/PERSONNEL. We have a highly qualified management team. Our seven
member executive committee has an average of approximately 16 years of
experience with us. We believe the low turnover among this senior management
group is linked to our collegial internal culture and our history of promoting
talented individuals from within. Our growth strategy, incentive-based
compensation and the high level of ownership by our insiders provides further
motivation to achieve a high level of performance. Immediately following the
offering, our employees will beneficially own approximately 37% of our
outstanding common stock.
BUSINESS
To address the comprehensive real estate services requirements of our
diverse group of clients, we have five principal lines of business.
PROPERTY MANAGEMENT SERVICES
As of September 30, 1998, we managed approximately 266.6 million square feet
of commercial property (excluding malls and facilities occupied by
infrastructure management customers) and served approximately 630 clients and
18,300 tenants through our locally based property management teams present in 70
markets. Revenues from property management services for the nine months ended
September 30, 1998 were $81.9 million, compared to $65.1 million for the same
period in 1997. A substantial portion of this growth in revenues is due to
acquisitions.
BROKERAGE SERVICES
In 1997, we facilitated approximately 6,000 sales and lease transactions. As
of September 30, 1998, we employed 475 brokers, having added 280 brokerage
professionals since the beginning of 1996. Revenues from brokerage services for
the nine months ended September 30, 1998 were $100.8 million, compared to $61.7
million for the same period in 1997. A substantial portion of this growth in
revenues is due to acquisitions.
INFRASTRUCTURE MANAGEMENT SERVICES
As of September 30, 1998, we had approximately 1,300 employees who serviced
62 infrastructure management clients in approximately 16,000 properties
encompassing over 128 million square feet. We have expertise in providing
infrastructure management services to clients in the financial services,
healthcare, higher education, automotive, oil and gas and
technology/communications industries. Revenues from infrastructure management
services for the nine months ended September 30, 1998 were $74.0 million,
compared to $48.0 million for the same period in 1997.
DEVELOPMENT AND INVESTMENT ACTIVITIES
We focus our commercial real estate development business on third party
build-to-suit customers and investors in office, industrial and retail projects.
We have the capability to implement active and sizeable development programs,
primarily on behalf of our clients, but also for our own account. Revenues from
development and investment activities for the nine months ended September 30,
1998 (consisting of development and construction service fees, income from
unconsolidated subsidiaries and gain on disposition of non-retail real estate
projects) were $71.1 million, compared to $29.6 million for the same period in
1997. From January 1, 1993 through September 30, 1998, we developed and
redeveloped approximately 56.9 million square feet of projects with aggregate
project costs of approximately $3.7 billion. From January 1 through September
30, 1998, we started approximately 14.1 million square feet of development
projects with an estimated aggregate cost of $1.2 billion.
5
<PAGE>
RETAIL SERVICES
Our retail services management group was formed in 1996 to better serve
national retail customers (who demand specialized property and market knowledge)
and compete with service providers whose sole focus is retail. Retail revenues
for the nine months ended September 30, 1998 (consisting of service revenues and
gain on disposition of retail build-to-suit real estate projects) were $13.1
million, compared to $2.8 million for the same period in 1997. This increase
resulted primarily from acquisitions in August 1997 and in July 1998. We believe
these acquisitions established us as one of the leading retail services
providers in the Southeastern United States and provided us with the platform
and expertise needed to expand our retail services business.
GROWTH STRATEGY
We are using our broad industry expertise, our recognized brand and our
long-standing client relationships to pursue the following growth strategy:
EXPAND CLIENT RELATIONSHIPS. Our existing clients represent the most
immediate opportunity to increase revenues and earnings through cross-selling
our services. We have dedicated national client services personnel to identify
our most strategically significant customers and focus on expanding the business
generated from these customers. Of the 152 discrete assignments secured from the
16 most strategically significant customers in 1997, 21 were awarded in cities
where we previously did not serve the client making the assignment. Through
September 30, 1998, these customers awarded 130 new business assignments to us
in 1998.
EXPAND THE BREADTH OF SERVICE OFFERINGS. We continuously expand and enhance
our breadth of service offerings, principally by creating new service businesses
internally. For example, we took advantage of the trend toward outsourcing of
real estate services by creating our infrastructure management services
business, which provided 21.9% of total revenues in 1997, up from 9.4% in 1993.
CO-INVESTMENT AND DEVELOPMENT PROGRAMS. We continue to make selective
co-investments of capital alongside corporate and institutional clients. This
leverages our relationships with these clients and our extensive knowledge of
the real estate industry to create new opportunities to invest capital. We seek
co-investments that generate investment returns while still allowing us to earn
fees in exchange for services provided in the development and management of the
project. Since October 1997, we have entered into several development programs
which provide opportunities to earn fees and achieve investment returns over a
series of projects with a single investor, rather than seeking these
opportunities on a transaction-by-transaction basis.
ACQUISITIONS. We actively pursue selective acquisitions of complementary
businesses. The traditionally fragmented real estate services industry is
experiencing rapid consolidation as customers seek national service providers
who can meet their broad range of real estate needs. Capitalizing on this trend,
in 1998 we acquired the following businesses in exchange for an aggregate
consideration of approximately $98.3 million, plus certain contingent payments
and common stock options:
- Tooley & Company, a real estate services company with 190 employees that
manages and leases office space in California;
- James Norman & Company, a property management and brokerage firm with 30
employees concentrating in Seattle's central business district office and
retail markets;
- Fallon, Hines & O'Connor, Inc., a Boston-based commercial real estate
brokerage, consulting and advisory firm with 52 employees;
- CORE Resource, Inc., which provides infrastructure management services to
the automotive industry; and
6
<PAGE>
- A portion of the business conducted by Faison & Associates and Faison
Enterprises, Inc., which develop, lease and manage office and retail
properties located primarily in the Midatlantic and Southeastern regions
of the United States.
Our executive offices are located at 2001 Ross Avenue, Suite 3400, Dallas,
Texas 75201, and our telephone number at that address is (214) 863-3000.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered(1)
U.S. Offering..................... 3,600,000
International Offering............ 900,000
Total........................... 4,500,000
Common stock to be outstanding after
the offering(2)................... 34,914,424
Selling stockholders................ Certain of our current and former employees and
certain affiliates of descendants of Mr. Trammell
Crow. See "Principal and Selling Stockholders."
Use of proceeds(3).................. We will not receive any proceeds from the offering.
New York Stock Exchange Symbol...... TCC
</TABLE>
- ------------------------
(1) Unless otherwise specifically stated, the information in this Prospectus
does not take into account the possible purchase by the underwriters from
the selling stockholders of up to an additional 675,000 shares to cover
over-allotments.
(2) Based upon the number of shares outstanding on January 31, 1999. Includes an
aggregate of 313,123 shares expected to be issued immediately prior to the
closing of the offering upon exercise of options granted under the 1997
Stock Option Plan and the Long-Term Incentive Plan. Excludes other shares
issuable or reserved for future grants or awards under the 1997 Stock Option
Plan, the Long-Term Incentive Plan and the Employee Stock Purchase Plan.
(3) We expect that 313,123 shares of common stock to be sold in the offering
will be issued to certain selling stockholders immediately prior to the
closing of the offering upon the exercise of options. The approximately $1.2
million we expect to receive upon the exercise of such options will be used
for general corporate purposes.
RISK FACTORS
Prospective investors should consider the factors discussed in detail
elsewhere in this Prospectus under the caption "Risk Factors."
7
<PAGE>
SUMMARY FINANCIAL DATA
The following information should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical and pro forma financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 PRO 1998 PRO
1993 1994 1995 1996 1997 FORMA(1) 1997 1998 FORMA(1)
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Property management
services.................. $ 90,954 $ 99,609 $ 92,970 $ 90,179 $ 87,756 $ 157,575 $ 65,055 $ 81,897 $ 106,043
Brokerage services.......... 47,299 48,652 61,960 72,095 91,053 132,786 61,692 100,814 116,527
Infrastructure management
services.................. 16,401 27,063 38,681 50,836 68,719 71,512 47,954 74,008 75,612
Development and construction
services.................. 14,377 12,792 20,382 22,732 40,054 49,024 27,462 42,132 49,390
Retail services............. 1,306 1,966 1,510 2,393 5,318 10,293 1,912 11,487 11,487
Income from unconsolidated
subsidiaries.............. 465 3,141 114 594 512 512 1,467 7,151 7,151
Gain on disposition of real
estate.................... -- 4,646 5,026 6,630 10,241 10,241 1,566 23,455 23,455
Other....................... 3,759 3,039 6,559 9,996 9,986 12,802 6,131 6,012 6,462
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
Total revenues.............. 174,561 200,908 227,202 255,455 313,639 444,745 213,239 346,956 396,127
Salaries, wages and
benefits.................. 106,606 115,330 130,248 137,794 161,425 257,739 114,006 180,509 213,683
Non-recurring compensation
costs..................... -- -- -- -- 33,085 -- -- -- --
Commissions................. 15,856 20,788 23,730 27,119 39,121 42,676 25,379 43,808 46,835
General and
administrative............ 35,365 35,282 40,671 41,421 55,884 73,434 33,779 51,371 60,130
Profit sharing.............. 8,292 16,562 15,893 20,094 23,514 597 15,417 -- --
Other....................... 4,255 7,284 8,526 9,087 17,997 23,653 10,057 18,379 23,515
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
Operating costs and
expenses.................. 170,374 195,246 219,068 235,515 331,026 398,099 198,638 294,067 344,163
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
Income (loss) before income
taxes..................... 4,187 5,662 8,134 19,940 (17,387) 46,646 14,601 52,889 51,964
Income tax expense
(benefit)................. 1,854 2,636 3,793 7,826 (3,367) 18,380 5,747 21,425 21,055
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
Income (loss) before
extraordinary gain........ 2,333 3,026 4,341 12,114 (14,020) 28,266 8,854 31,464 30,909
Extraordinary gain.......... 188 782 -- -- -- -- -- -- --
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
Net income (loss)........... $ 2,521 $ 3,808 $ 4,341 $ 12,114 $ (14,020) $ 28,266 $ 8,854 $ 31,464 $ 30,909
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
--------- --------- --------- --------- ---------- ---------- --------- ---------- ----------
EARNINGS (LOSS) PER
SHARE(2):
Basic....................... $ (.42) $ .83 $ .93 $ .90
Diluted..................... $ (.42) $ .79 $ .87 $ .85
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(2):
Basic....................... 33,583,467 34,024,418 33,984,517 34,297,640
Diluted..................... 33,583,467 35,953,833 36,208,762 36,353,512
OTHER DATA:
EBITDA, as adjusted(3)...... $ 16,969 $ 29,686 $ 32,033 $ 48,915 $ 59,522 $ 68,854 $ 39,795 $ 67,566 $ 71,777
Net cash provided by (used
in) operating
activities................ 7,556 15,907 10,648 25,148 (4,978) 19,189 (10,200) (13,186) (13,672)
Net cash used in investing
activities................ (1,974) (2,748) (646) (5,019) (21,322) (112,074) (25,806) (104,218) (13,796)
Net cash provided by (used
in) financing
activities................ (4,412) 93 (5,457) (1,779) 64,542 154,639 14,961 97,128 4,936
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
DECEMBER 31, ----------------------
----------------------------------------------------- AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(4)
--------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 22,358 $ 35,610 $ 40,155 $ 58,505 $ 96,747 $ 76,471 $ 77,677
Total assets.............................. 55,774 99,867 114,315 194,314 326,236 466,638 467,844
Long-term debt............................ 8,425 9,762 7,065 12,361 2,430 95,275 95,275
Notes payable on real estate held for
sale.................................... -- 22,914 13,182 67,810 76,623 77,297 77,297
Deferred compensation..................... 14,661 21,468 25,883 20,963 8,391 57 57
Total liabilities......................... 43,767 85,516 95,090 160,018 169,305 277,198 277,336
Minority interest......................... 27 278 3,932 3,294 19,859 14,210 14,210
Stockholders' equity...................... 11,980 14,074 15,293 31,002 137,072 175,230 176,298
</TABLE>
- ------------------------------
(1) Gives effect to the Doppelt acquisition, the Tooley acquisition, the Norman
acquisition, the Fallon, Hines & O'Connor acquisition, the Core acquisition,
the Faison acquisition, the reincorporation transactions and the initial
public offering, as though they had occurred on January 1, 1997. Excludes a
non-recurring charge to income of $33.1 million related to an option plan
and a $4.4 million, non-recurring charge to income resulting from the
settlement of claims by certain former employees arising out of a terminated
stock appreciation rights plan. See "The Company--Recent Acquisitions,"
"--Initial Public Offering," "--Reincorporation Transactions",
"Business--Retail Services" and "Pro Forma Consolidated Financial
Statements."
(2) This information for the years prior to 1997 and for the nine months ended
September 30, 1997 is not relevant due to the change in capital structure
effected in connection with the reincorporation transactions in the fourth
quarter of 1997. The weighted average shares outstanding used to calculate
basic and diluted earnings per share for 1997 include the shares issued in
our initial public offering and in the reincorporation transactions as if
they were outstanding for the entire period. See "The Company-- Initial
Public Offering" and "Reincorporation Transactions."
(3) EBITDA, as adjusted, represents earnings before interest, income taxes,
depreciation and amortization, royalty and consulting fees, profit sharing,
the non-cash, non-recurring charge to income related to the stock options
granted under the 1997 Stock Option Plan and the non-recurring charge to
income resulting from the settlement of claims by certain former employees
arising out of a terminated stock appreciation rights plan. While management
believes that EBITDA, as adjusted, can be a meaningful measure of our
operating performance, cash generation and ability to service debt, it
should not be considered as an alternative either to: (i) net earnings
(determined in accordance with GAAP); (ii) operating cash flow (determined
in accordance with GAAP); or (iii) liquidity. Our calculation of EBITDA, as
adjusted, may differ from similarly titled items reported by other
companies.
(4) Adjusted to give effect to the offering as though it occurred on September
30, 1998. See "Pro Forma Consolidated Financial Statements."
RECENT DEVELOPMENTS
On February 18, 1999, we reported results of operations for the quarter and
year ended December 31, 1998. For the year ended December 31, 1998, our total
revenues were $517.5 million, an increase of 65.0% from $313.6 million in 1997.
EBITDA, as adjusted, for the year increased 62.7% to $96.8 million compared with
$59.5 million in 1997. Our net income for 1998 was $46.5 million, as compared to
a net loss in 1997 of $14.0 million. The net loss in 1997 was primarily due to
$37.5 million of non-recurring charges related to an option plan and a
terminated stock appreciation rights plan.
For the three months ended December 31, 1998, our total revenues were $170.6
million, an increase of 69.9% from $100.4 million for the three months ended
December 31, 1997. EBITDA, as adjusted, for the fourth quarter of 1998 increased
48.2% to $29.2 million from $19.7 million in the fourth quarter of 1997. Our net
income for the fourth quarter of 1998 was $15.0 million, as compared to a net
loss in the fourth quarter of 1997 of $22.9 million. The net loss in the fourth
quarter of 1997 was primarily due to $37.5 million of non-recurring charges
related to an option plan and a terminated stock appreciation rights plan.
As anticipated, we recognized a high percentage of our income in the third
and fourth quarters of 1998 due to the closing in those quarters of a
disproportionate number of development and investment transactions (which
typically generate higher margins than transactions in our other business
lines). Specifically, one atypically large and profitable transaction that
closed in the fourth quarter contributed approximately $10.1 million of
revenues, $10.1 million of EBITDA, as adjusted, and $6.2 million of net income.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Recent Developments."
9
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
READ THIS ENTIRE PROSPECTUS CAREFULLY AND SHOULD CONSIDER, AMONG OTHER THINGS,
THE RISKS DESCRIBED BELOW AND THROUGHOUT THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTY. ACTUAL
RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET
FORTH BELOW AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS PROSPECTUS. SEE
"FORWARD-LOOKING STATEMENTS" BELOW.
DEALINGS WITH AND RELIANCE ON AFFILIATES; POTENTIAL CONFLICTS OF INTEREST
Crow Holdings and its affiliates are collectively our largest customer,
accounting for approximately 6.8% of 1997 revenues. We are not certain that Crow
Holdings or its affiliates will continue to transact business with us or that
their ownership of our common stock will not influence the terms on which they
transact business with us in the future.
Because Crow Holdings and its owners hold significant amounts of common
stock and conduct real estate activities in direct competition with us, our
relationship with these entities could give rise to conflicts of interest. These
competing activities may create a conflict with a major customer or cause
confusion in the real estate or capital markets. We have an approval policy
intended to help us manage potential conflicts involving related parties, but we
cannot be sure this policy will be effective.
TRADE NAME LICENSE
We have entered into a License Agreement (the "License Agreement") with an
affiliate of Crow Holdings that allows us to use the name "Trammell Crow"
perpetually throughout the world in any business except the residential real
estate business. This license can be revoked if we fail to maintain certain
quality standards or infringe certain of such affiliate's intellectual property
rights.
If we lose the right to use the Trammell Crow name, our business will suffer
significantly. The License Agreement permits certain existing uses of this name
by affiliates of Crow Holdings. The use of the Trammell Crow name or other
similar names by third parties may create confusion or reduce the value
associated with the Trammell Crow name.
CONTROL BY EXISTING STOCKHOLDERS
Immediately after this offering, our directors, officers and employees will
beneficially own approximately 56% of the common stock outstanding. These
individuals will be able to control our affairs and policies and will be able to
approve or disapprove most matters submitted to a vote of our stockholders,
including the election of directors. This concentration of ownership could delay
or prevent a change in control. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
RAPID GROWTH
We have grown significantly in recent years and intend to continue to pursue
an aggressive growth strategy by:
- increasing revenues from existing clients;
- expanding the breadth of our service offerings;
- seeking selective co-investment opportunities; and
- pursuing strategic acquisitions.
This historical growth and any significant future growth will continue to
place demands on our resources. Our future success and profitability will
depend, in part, on our ability to enhance our
10
<PAGE>
management and operating systems and obtain financing for capital expenditures
or strategic acquisitions. We may not be able to successfully manage any
significant expansion or obtain adequate financing on favorable terms, if at
all.
ACQUISITIONS
We completed five strategic acquisitions in 1998 and intend to pursue other
acquisitions. See "The Company--Recent Acquisitions." In the future we may not
be able to acquire businesses on favorable terms, and may have to use a
substantial portion of our capital resources for any such acquisitions.
Challenges and issues commonly encountered in strategic acquisitions include:
- diversion of management's attention to assimilating the acquired business;
- maintaining employment relationships with the employees of an acquired
business;
- adverse short-term effects on operating results;
- integrating financial and other administrative systems;
- amortization of any acquired intangible assets; and
- maintaining uniform standards, controls, procedures and policies.
In addition, the acquired businesses' customers could cease to do business
with us. Potential conflicts between our customers and those of an acquired
business could threaten our business relationships. If we are not able to manage
these risks, our business could suffer significantly.
REAL ESTATE INVESTMENT AND CO-INVESTMENT ACTIVITIES
Selective investment in real estate projects is an important part of our
strategy. These activities involve the inherent risk of loss of our investment.
As of December 31, 1998, we were involved as a principal in 60 "in process" real
estate development projects with an estimated aggregate cost of approximately
$654.6 million. As of December 31, 1998, we had invested approximately $31.8
million and had assumed approximately $19.0 million in recourse obligations with
respect to such projects.
Because the disposition of a single significant investment can impact our
financial performance in any period, our ownership of real estate investments
could increase fluctuations in our net earnings and cash flow. We have limited
control over the timing of the disposition of these investments and the
recognition of any related gain or loss. For the fourth quarter of 1998, our
gain on disposition of real estate was approximately $8.2 million, compared to
approximately $0.9 million, $10.2 million and $12.4 million for the first,
second and third quarters, respectively. Our income from unconsolidated
subsidiaries (which is primarily generated from development and investment
activity) was approximately $11.3 million in the fourth quarter of 1998,
compared to $2.4 million, $4.0 million and $0.7 million for the first, second
and third quarters, respectively.
The commercial real estate market is cyclical and depends on the perceptions
of real estate investors as to general economic conditions. Because our
investment strategy typically entails making relatively modest investments
alongside our corporate and institutional clients, our ability to conduct these
activities depends in part on the supply of investment capital for commercial
real estate and related assets. In recent months, providers of capital for real
estate investment have taken a more cautious approach regarding investments in
development projects. If this trend continues or accelerates, our investment
activities, as well as our traditional construction and development business,
could be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
11
<PAGE>
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
In recent years our revenues have been lower in the first three quarters
because our clients tend to close transactions toward the end of their fiscal
years (typically the calendar year). This causes us to earn a significant
portion of our revenues under transaction-oriented service contracts in the
fourth quarter. In addition, a growing portion of our property management and
infrastructure management contracts provide for bonus payments if we achieve
certain performance targets. These incentive payments are generally earned in
the fourth quarter. We plan our capital and operating expenditures based on our
expectations of future revenues. If revenues are below expectations in any given
quarter, we may be unable to adjust expenditures to compensate for any
unexpected revenue shortfall. Our business could suffer as a consequence. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Quarterly Results of Operations and Seasonality."
COMPETITION
We compete in several market segments within the commercial real estate
industry, each of which is highly competitive on a national and a local level.
We face competition from other real estate services providers, consulting firms
and in-house corporate real estate and infrastructure management departments. In
recent years, the number of REITs which self-manage their real estate assets has
increased significantly. Continuation of this trend could shrink the asset base
available to be managed by third party service providers, decrease the demand
for our services and thereby significantly increase our competition. See
"Business--Competitive Environment."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The market price of the common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering, or the
perception that such sales could occur. These factors could also make it more
difficult for us to raise funds through future offerings of common stock.
There will be 34,914,424 shares of common stock outstanding immediately
after the offering. Based on information available at January 31, 1999,
approximately 10,934,689 of these shares will be freely transferable without
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by our "affiliates," as
defined in Rule 144 under the Securities Act. Approximately 23,979,735 of the
remaining shares may be sold without registration under the Securities Act to
the extent permitted by Rule 144 or an exemption under the Securities Act.
Certain stockholders have registration rights which allow them to cause us to
register their shares for sale. These stockholders have agreed for our benefit
and for the benefit of the Underwriters that they will not exercise such
registration rights until one year after the offering closes. See "Description
of Capital Stock--Registration Rights of Certain Holders" and "Shares Eligible
for Future Sale--Lock-up Arrangement."
We have filed registration statements with respect to an aggregate of
7,940,246 shares of common stock that, immediately after the offering, will be
reserved for issuance under the 1997 Stock Option Plan, the Long-Term Incentive
Plan and the Employee Stock Purchase Plan. All of these shares could be sold in
the public market by their holders at any time on or after the date such shares
are issued or the restrictions on such shares have lapsed.
RECRUITING AND RETENTION OF QUALIFIED PERSONNEL
Our continued success is highly dependent upon the efforts of our executive
officers and key employees. If any of our key employees leaves, our business may
suffer. The growth of our business is also largely dependent upon our ability to
attract and retain qualified personnel in all areas of our business,
particularly management. If we are unable to attract and retain such qualified
personnel, we may be forced to limit our growth, and our business and operating
results could suffer. See "Management."
12
<PAGE>
RELIANCE ON MAJOR CLIENTS AND CONTRACT RETENTION
A relatively small number of our clients generate a significant portion of
our revenues. Our ten largest clients accounted for approximately 21.9% of our
total 1997 revenues. The loss of one or more of our major clients could have a
material adverse effect on our business.
In 1997, revenue from property management and infrastructure management
contracts constituted approximately 28.0% and 21.9%, respectively, of our total
revenues. Our property management contracts can generally be cancelled upon 30
days notice by either party and our infrastructure management service contracts
are typically for initial terms of three to five years with options to renew.
Accordingly, contracts representing a significant percentage of our revenues are
terminable on short notice or may be scheduled to expire in any one year. We
have been successful in retaining and renewing a significant portion of our
contracts, but may not be able to do so in the future. Moreover, increased
competition may force us to renew such contracts on less favorable terms.
YEAR 2000 COMPLIANCE
The Year 2000 problem refers to the inability of many existing computer
programs to properly recognize or process a year that begins with "20" instead
of the familiar "19." If not corrected, many time-sensitive computer programs
using two digits to indicate the year may recognize "00" as the year 1900 rather
than the year 2000. The failure to recognize the year 2000 and other key dates
could result in a variety of problems, the scope and magnitude of which are not
known. In early 1998, we formed a Year 2000 Task Force comprised of internal
technical, operational, financial and legal representatives and technical and
legal consultants. Under the direction of the task force, we will seek to
mitigate the impact of Year 2000 issues on our operations. We cannot be certain
that these efforts will be successful. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Impact of Year 2000."
ENVIRONMENTAL LIABILITY
Various laws and regulations impose liability on real property owners or
operators for the cost of investigating, cleaning up or removing contamination
caused by hazardous or toxic substances at the property. In our role as a
property manager, we could be held liable as an operator for such costs. This
liability may be imposed without regard to the legality of the original actions
and without regard to whether we knew of, or were responsible for, the presence
of the hazardous or toxic substances. If we fail to disclose environmental
issues, we could also be liable to a buyer or lessee of the property. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs we incur in connection with the
contamination. If we incur any such liability, our business could suffer
significantly. See "Business--Environmental Liability."
ANTI-TAKEOVER CONSIDERATIONS
Some provisions of our certificate of incorporation and certain provisions
of Delaware law may deter or prevent a takeover attempt, including an attempt
that might result in a premium over the market price for our common stock. These
provisions include:
- STAGGERED BOARD OF DIRECTORS. Our Board of Directors is divided into three
classes serving terms currently expiring in 1999, 2000 and 2001. Because
our Board of Directors is divided into classes, members of our Board of
Directors may only be removed from office prior to the expiration of their
term if such removal is for "cause." Therefore, the staggered terms of
directors may limit the ability of holders of common stock to complete a
change of control.
- STOCKHOLDER PROPOSALS. Our stockholders must follow an advance
notification procedure for certain stockholder nominations of candidates
for our Board of Directors and for certain other business to
13
<PAGE>
be conducted at any stockholders' meeting. This limitation on stockholder
proposals could inhibit a change of control.
- PREFERRED STOCK. Our certificate of incorporation authorizes our Board of
Directors to issue up to 30,000,000 shares of preferred stock having such
rights as may be designated by our Board of Directors, without stockholder
approval. The issuance of such preferred stock could inhibit a change of
control.
- DELAWARE ANTI-TAKEOVER STATUTE. Section 203 of the Delaware General
Corporation Law restricts certain business combinations with interested
stockholders upon their acquiring 15% or more of our common stock. This
statute may have the effect of inhibiting a non-negotiated merger or other
business combination. See "Description of Capital Stock--Anti-takeover
Provisions," and
"--Section 203 of the Delaware General Corporation Law."
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to risks, uncertainties, and
assumptions, including, among other things:
- Our anticipated growth strategies,
- Our expected internal growth,
- Our ability to introduce new services,
- Technological advances in the industry,
- Anticipated trends and conditions in the industry,
- Our ability to implement a Year 2000 readiness program,
- Our future financing needs, and
- Our ability to compete.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Prospectus might not occur. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
14
<PAGE>
THE COMPANY
BACKGROUND
The Company is a Delaware corporation that was formed in August 1997 to
become the successor to Trammell Crow Company, a Texas close corporation (the
"Predecessor Company"). In 1948 Mr. Trammell Crow founded the Predecessor
Company, which consisted of a collection of affiliated partnerships and
corporations doing business as "Trammell Crow Company" until 1991. From the
Predecessor Company's founding through the 1970s, the Predecessor Company's
primary business consisted of the development and management of industrial
warehouses. In the 1980s, the Predecessor Company broadened its commercial
property asset base by expanding into retail and office projects, while
continuing to develop its industrial property business. By 1989, the Predecessor
Company had evolved into the largest commercial real estate developer in the
United States, with industrial, office and retail projects that were valued at
more than $11 billion.
Following a severe recession in the United States commercial real estate
industry in the late 1980s, the Predecessor Company determined that a
restructuring was necessary to continue the historic growth of its business
despite the adverse changes in the industry. This restructuring, completed in
1991, entailed the separation of the Predecessor Company's commercial real
estate asset base and related operations from its real estate services business.
The Predecessor Company, existing as a Texas close corporation with a total
capitalization of $18 million following the restructuring, continued to operate
the real estate services business while ownership of the commercial real estate
asset base was segregated into a large number of separate entities distinct from
the Predecessor Company, with independent management and operations. While the
Company no longer has an ownership interest in the commercial real estate asset
base, the entities owning such assets are collectively one of the Company's
largest post-restructuring service customers. Many of these entities are managed
by subsidiaries of Crow Realty Investors, L.P. d/b/a Crow Holdings ("Crow
Holdings") which is wholly owned by certain affiliates and descendants of Mr.
Trammell Crow. See "Risk Factors--Dealings with and Reliance on Affiliates;
Potential Conflicts of Interest."
RECENT ACQUISITIONS
An important component of the Company's growth strategy is the selective
acquisition of complementary real estate services businesses. In 1998, the
Company actively continued to pursue this part of its growth strategy and
consummated the following acquisitions:
In March, 1998, the Company purchased Tooley & Company, Inc. ("Tooley"), a
California real estate services company primarily engaged in office management
and leasing (the "Tooley Acquisition"). In exchange for the stock of Tooley, the
Company paid a cash purchase price of approximately $23.4 million to BCB
Holdings, LLC ("BCB"), a Delaware limited liability company whose members are
William L. Tooley, Craig Ruth and Robert N. Ruth. The Company has also agreed to
pay BCB up to an additional $3.0 million if Tooley achieves certain performance
targets in the future and to make certain payments to BCB based upon the future
performance of certain of Tooley's projects. In connection with the acquisition,
each of Messrs. Tooley, Ruth and Ruth entered into employment agreements with
the Company. Pursuant to the terms of their respective employment agreements,
the Company paid William L. Tooley and Craig Ruth an aggregate of $1.0 million
at closing in exchange for certain covenants not to compete. At the closing of
the Tooley Acquisition, a former employee of Tooley who was retained by the
Company received options to purchase 31,858 shares of the Company's Common
Stock, par value $0.01 per share ("Common Stock"), at an exercise price of
$28.25 per share (the fair market value of the Common Stock on the date of
grant), which vest ratably over a five-year term, and options to purchase an
additional 8,437 shares of Common Stock at an exercise price of $28.25 per
share, which vest ratably over a three-year term.
In May, 1998, the Company acquired (the "FHO Acquisition") the business of
Fallon, Hines & O'Connor, Inc., a Boston, Massachusetts-based commercial real
estate brokerage, consulting and advisory firm ("Fallon, Hines & O'Connor"). In
exchange for substantially all of the assets of Fallon, Hines & O'Connor, the
Company paid approximately $30.6 million in cash and agreed to pay up to an
additional $6.0 million in cash and/or stock options if the acquired business
meets certain performance thresholds. Because the acquired business met its
performance thresholds for 1998, the Company is obligated to pay $2.5 million
and issue certain stock options during the first quarter of 1999. The Company
also paid an aggregate of $2.0 million to the principals of Fallon, Hines &
O'Connor in exchange for certain covenants
15
<PAGE>
not to compete. The Company considers Fallon, Hines & O'Connor to be one of the
premier brokerage firms in the Northeast and believes that the addition of 30
brokerage professionals through this acquisition, including the principals of
Fallon, Hines & O'Connor, enhances its existing brokerage business.
In July, 1998, the Company acquired a portion of the businesses of Faison &
Associates ("Faison") and Faison Enterprises, Inc. ("Faison Enterprises"), which
are engaged in the development, leasing and management of office and retail
properties located primarily in the Midatlantic and Southeast regions of the
United States (the "Faison Acquisition"). In exchange for the acquired
businesses, the Company paid $36.1 million in cash and delivered a $2.0 million
promissory note that bears interest at an annual rate of 6.0%. The note matures
on April 30, 2000 and is payable in eight equal quarterly installments. As of
January 31, 1999, the outstanding principal balance of this note was $1.25
million. In connection with the Faison Acquisition, Mr. Henry Faison and Faison
Enterprises purchased an aggregate of 127,828 shares of Common Stock for $4.0
million (at a price of $31.29 per share). In addition, the Company entered into
a program whereby Faison Enterprises will be given the opportunity to invest in,
and provide the financing for, certain retail projects identified through the
Company's operations purchased in the Faison Acquisition. If any of such
projects are accepted by Faison Enterprises, the Company will be entitled to
receive up to a 40% carried interest in the distributions that Faison
Enterprises receives from such projects, subject to certain limitations. If the
Company receives any such carried interests in 1999, it is required to award 50%
of such interests to certain key Faison employees other than Mr. Faison. The
Company is obligated to pay Faison Enterprises an additional $1.0 million if
retail development construction starts funded through this development program
exceed certain levels in 1999 and 2000. Faison Enterprises also entered into a
long-term services contract with the Company with respect to the properties
developed under this program and certain other properties controlled by Mr.
Faison. In connection with the Faison Acquisition, the Company entered into
employment agreements with four key employees, including Mr. Faison, and in
connection with such employment agreements the Company paid an aggregate of $1.0
million in exchange for certain covenants not to compete. The Company granted to
employees of the acquired businesses who were retained after the closing options
to purchase an aggregate of 36,504 shares of Common Stock at an exercise price
of $32.875 per share and options to purchase an aggregate of 34,920 shares of
Common Stock at an exercise price of $31.50 per share (the fair market value of
the Common Stock on the respective dates of grant). In addition, in August 1998,
the Company granted an aggregate of 63,490 restricted shares of its Common Stock
to certain employees of the acquired businesses who were retained after the
closing. These shares will vest on July 2, 2000 if the grantee has been
continuously employed by the Company from the date of closing. At the closing,
Mr. Faison was elected to serve as a Class III Director on the Company's Board
of Directors with a term expiring at the Company's annual meeting of
stockholders in 2000. The Company believes the Faison Acquisition has
strengthened its position in the strip center and regional mall construction and
development business, has established the Company as one of the leading
providers of retail and office property management and brokerage services in the
Southeastern United States and has provided the Company with a platform and
expertise for expansion of its retail services business.
In March 1998, the Company acquired (the "Norman Acquisition") substantially
all of the assets of James Norman & Company, a real estate services firm with
operations concentrated in Seattle's central business district office and retail
markets ("Norman"). In addition, in June 1998 the Company acquired substantially
all of the assets of CORE Resource, Inc. ("Core"), a Detroit-based real estate
services company that focuses on providing infrastructure management services to
the automotive industry (the "Core Acquisition"). The Company's goal in
effecting the Core Acquisition was to combine its resources and management
experience with the expertise of the former Core employees to become a leading
provider of infrastructure management services in the automotive industry.
As part of the Company's ongoing acquisition strategy, the Company is
continually evaluating certain other potential acquisition opportunities. See
"Risk Factors--Acquisitions" and "Business--Growth Strategy--Acquisitions."
The Tooley Acquisition, the Norman Acquisition, the FHO Acquisition, the
Core Acquisition and the Faison Acquisition are collectively referred to in this
Prospectus as the "Recent Acquisitions." The Recent Acquisitions and the Doppelt
Acquisition are collectively referred to in this Prospectus as the
"Acquisitions." See "Business--Retail Services."
16
<PAGE>
INITIAL PUBLIC OFFERING
On December 1, 1997, the Company closed its initial public offering of
5,750,000 shares of Common Stock (the "Initial Public Offering"). Of the
approximately $90.2 million in net proceeds which the Company raised from the
Initial Public Offering: (i) approximately $31.0 million was used to repay all
outstanding indebtedness under a credit facility that was terminated upon the
closing of the Initial Public Offering; (ii) approximately $25.2 million was
used for development purposes; (iii) approximately $8.4 million was used to
repay other indebtedness of the Company (including approximately $4.7 million
owed to retired Profit Sharing Plan participants); and (iv) approximately $1.6
million was paid to J. McDonald Williams, Chairman of the Company's Board of
Directors, in connection with the termination of the Company's consulting
arrangements with Mr. Williams (see "--Reincorporation Transactions"). The
remaining proceeds were used for working capital.
REINCORPORATION TRANSACTIONS
In connection with the Initial Public Offering, the Company and TCC Merger
Sub, Inc., a wholly owned subsidiary of the Company ("Merger Sub"), entered into
a series of transactions to convert the legal form in which the Predecessor
Company's business and operations were held from a Texas close corporation to a
Delaware corporation. As part of these transactions, Merger Sub was merged (the
"Reincorporation Merger") with and into the Predecessor Company. As a result of
the Reincorporation Merger, the Predecessor Company survived as a wholly-owned
subsidiary of the Company and the Predecessor Company's shareholders immediately
prior to the effective time of the Reincorporation Merger (the "Effective Time")
received, in the aggregate, 25,502,964 shares of Common Stock. Contemporaneously
with the consummation of the Reincorporation Merger, the Company, Crow Family
Partnership, L.P. ("Crow Family"), CFH Trade-Names, L.P. ("CFH"), each
affiliates of Crow Holdings, and J. McDonald Williams entered into a
Stockholders' Agreement. See "Description of Capital Stock-- Stockholders'
Agreement."
The Company and CFH entered into the License Agreement immediately prior to
the closing of the Initial Public Offering. In September 1998, CFH assigned the
License Agreement to CF 98, L.P. ("CF98"). Pursuant to the terms of the License
Agreement, and subject to certain quality standards, the Company was granted the
right to use the name "Trammell Crow" perpetually in any business in any region
around the world except for the residential real estate business. The license
granted pursuant to the License Agreement (the "Trade Name License") is subject
to the Company's continued use and compliance with certain quality standards and
CF98's right to terminate upon the occurrence of certain bankruptcy events. The
Company is not obligated to pay any fees under the License Agreement. However,
in exchange for the grant of the Trade Name License, the Company issued
2,295,217 shares of Common Stock to CFH immediately prior to the closing of the
Initial Public Offering.
Following the initial capitalization of the Company, the issuance of shares
of Common Stock in the Reincorporation Merger and the issuance of shares of
Common Stock in exchange for the Trade Name License, the Predecessor Company's
shareholders immediately prior to the Effective Time received, in the aggregate,
27,799,181 shares of Common Stock, constituting approximately 82.02% of the
outstanding Common Stock after giving effect to the Initial Public Offering.
On August 1, 1997, the Predecessor Company granted to certain of its
employees options to acquire an aggregate of 1,626 shares of its common stock,
which constituted all shares authorized under the 1997 Stock Option Plan (the
"Assumed Option Plan"). At the Effective Time, the Company assumed the
Predecessor Company's obligations with respect to all such options, thereby
becoming obligated to issue 2,423,769 shares of Common Stock at an exercise
price per share of $3.85. All of such options vested upon the closing of the
Initial Public Offering and became exercisable 30 days thereafter. No additional
options will be granted under the Assumed Option Plan. Because the exercise
price established for each assumed option at the time it was granted was less
than the initial price to the public in the Initial Public Offering,
17
<PAGE>
the Company recognized a non-cash, non-recurring charge to earnings of $33.1
million in the fourth quarter of its 1997 fiscal year. As of January 31, 1999,
300,295 shares of Common Stock had been issued upon exercise of such options,
and the Company was obligated to issue up to an aggregate of 2,123,474 shares of
Common Stock upon the exercise of the remainder of such options.
On November 2, 1997, the Company settled claims asserted by certain former
employees arising out of the termination of a stock appreciation rights plan.
Such claims had been asserted in connection with the Initial Public Offering. In
connection with the settlement, the Company accrued approximately $4.4 million
of general and administrative expense, all of which was paid in 1997 and 1998.
Concurrent with the closing of the Initial Public Offering, the Company
granted options under the Trammell Crow Company Long-Term Incentive Plan (the
"Long-Term Incentive Plan") to acquire an aggregate of 2,348,455 shares of
Common Stock to certain employees. The exercise price for such stock options was
$17.50 per share, the initial price to the public in the Initial Public
Offering. The stock option grants include grants to each of the executive
officers of the Company to acquire 58,529 shares and a grant to Mr. Williams to
acquire 40,965 shares. The options vest ratably over a three-year period.
At the Effective Time, the Royalty Agreement (the "Royalty Agreement")
between CFH (as assignee of Crow Family) and the Predecessor Company and all
consulting arrangements entered into between the Predecessor Company and each of
Crow Family and J. McDonald Williams were terminated. In September, 1997, prior
to the assignment of the Royalty Agreement to CFH, the Predecessor Company made
a cash payment in an aggregate amount of approximately $1.4 million to Crow
Family in partial satisfaction of accrued royalty and consulting expenses. The
Royalty Agreement was terminated immediately prior to the closing of the Initial
Public Offering. On April 1, 1998, the Predecessor Company paid CFH and Crow
Family approximately $2.7 million in the aggregate, representing all amounts
owed by the Company to CFH and Crow Family under the Royalty Agreement and such
consulting arrangements. In connection with the Initial Public Offering, the
Predecessor Company paid Mr. Williams approximately $1.6 million in satisfaction
of all of its obligations to Mr. Williams under his consulting arrangements with
the Company.
In connection with the Initial Public Offering, the Company determined to no
longer grant to any past, present or future employees any profit participation
interests under its 1995 Profit Sharing Plan, as amended (the "Profit Sharing
Plan"). In September and October 1997, the Predecessor Company made cash
payments in an aggregate amount of approximately $11.3 million to Profit Sharing
Plan participants in reduction of deferred compensation payables. The payment of
these deferred compensation amounts triggered an obligation on the part of
certain Profit Sharing Plan participants to repay certain loans owed to the
Predecessor Company in an aggregate amount of approximately $0.7 million. At the
closing of the Initial Public Offering, the Predecessor Company had accrued
deferred compensation balances under the Profit Sharing Plan of approximately
$33.6 million, which included approximately $4.7 million (including $0.3 million
of interest) owed to retired Profit Sharing Plan participants that was paid with
a portion of the proceeds from the Initial Public Offering. At January 31, 1999,
the Company had paid approximately $10.3 million of such remaining balances and
had offset another $12.5 million against amounts owed to the Company by
participants in the Profit Sharing Plan. The Company anticipates that it will
pay the remaining balances of approximately $6.1 million in roughly equal
quarterly installments in 1999. The Company maintains its obligation to pay to
certain participants amounts relating to their interests in certain of the
Company's projects.
In October 1997, the Predecessor Company declared and paid dividends to its
stockholders in an aggregate amount of approximately $6.8 million.
Immediately following the Effective Time, the Company issued to Doppelt &
Company ("Doppelt") 342,857 shares of Common Stock (the "Doppelt Shares"). The
Doppelt Shares were issued in payment of the $6.0 million promissory note issued
by the Predecessor Company to Doppelt in connection with the Doppelt
Acquisition. See "Business--Retail Services."
18
<PAGE>
The transactions described above are collectively referred to in this
Prospectus as the "Reincorporation Transactions." The Company undertook these
transactions and the Initial Public Offering to facilitate access to capital
markets, provide greater flexibility for acquisitions and create long-term
liquidity for its stockholders.
USE OF PROCEEDS
All of the shares being offered hereby (the "Offering") are being offered by
stockholders of the Company (the "Selling Stockholders"). Consequently, no
proceeds from the Offering will be received by the Company. However, the Company
expects that 313,123 shares of Common Stock to be sold in the Offering will be
issued to certain Selling Stockholders immediately prior to the closing of the
Offering upon the exercise of options. The approximately $1.2 million the
Company expects to receive upon the exercise of such options will be used for
general corporate purposes.
DIVIDEND POLICY
The Company intends to retain earnings to finance its growth and for general
corporate purposes and, therefore, does not anticipate paying dividends in the
foreseeable future. Any future payment of dividends will be at the discretion of
the Board of Directors and will depend upon the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Board of Directors, including the terms of the Company's indebtedness.
Provisions in agreements governing the Company's long-term indebtedness limit
the amount of dividends that the Company may pay to its stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Prior to 1997, the Predecessor Company declared annual cash dividends which
were paid during the first six months of each year and were based upon the
Predecessor Company's earnings in the prior year. In April 1997, the Predecessor
Company paid dividends based on 1996 earnings in the aggregate amount of
approximately $8.2 million. In October 1997, the Predecessor Company declared
and paid dividends in an aggregate amount of approximately $6.8 million based on
earnings through September 30, 1997. See "The Company--Reincorporation
Transactions." The Company did not pay any dividends in 1998.
MARKET FOR COMMON STOCK
The Common Stock was listed on the New York Stock Exchange ("NYSE") on
November 25, 1997 under the symbol "TCW." On June 3, 1998, the Common Stock
began trading under the symbol "TCC." At January 31, 1999, 34,601,301 shares
were held by 353 stockholders of record. The following table sets forth the high
and low sales prices per share of Common Stock as reported on the NYSE Composite
Transaction Tape on a quarterly basis for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ----------
<S> <C> <C>
1998
First Quarter........................................................ $ 30.875 $ 22.688
Second Quarter....................................................... $ 37.563 $ 25.500
Third Quarter........................................................ $ 33.500 $ 25.375
Fourth Quarter....................................................... $ 28.000 $ 15.000
1999
First Quarter (through March 19)..................................... $ 28.000 $ 14.250
</TABLE>
A recently reported sale price of the Common Stock on the NYSE is set forth
on the cover page of this Prospectus.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below have been derived from the pro
forma consolidated financial statements of the Company and from the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus. The historical consolidated financial statements of the Company as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 have been audited by Ernst & Young LLP, independent
auditors, whose reports thereon appear elsewhere in this Prospectus. The pro
forma data is unaudited but, in the opinion of management, all pro forma
adjustments necessary to reflect the effects of the Acquisitions, the
Reincorporation Transactions, the Initial Public Offering and the Offering have
been made. The selected financial data at September 30, 1998, and for the nine
months ended September 30, 1997 and 1998 have been derived from the unaudited
consolidated financial statements of the Company and reflect all adjustments,
consisting of normal recurring accruals, which management considers necessary
for a fair presentation of the financial position and results of operations for
these periods.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical and pro forma financial statements and notes thereto of the
Company contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1997 PRO
1993 1994 1995 1996 1997 FORMA(1)
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Property management services...... $ 90,954 $ 99,609 $ 92,970 $ 90,179 $ 87,756 $ 157,575
Brokerage services................ 47,299 48,652 61,960 72,095 91,053 132,786
Infrastructure management
services........................ 16,401 27,063 38,681 50,836 68,719 71,512
Development and construction
services........................ 14,377 12,792 20,382 22,732 40,054 49,024
Retail services................... 1,306 1,966 1,510 2,393 5,318 10,293
Income from unconsolidated
subsidiaries.................... 465 3,141 114 594 512 512
Gain on disposition of real
estate.......................... -- 4,646 5,026 6,630 10,241 10,241
Other............................. 3,759 3,039 6,559 9,996 9,986 12,802
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.................... 174,561 200,908 227,202 255,455 313,639 444,745
Salaries, wages and benefits...... 106,606 115,330 130,248 137,794 161,425 257,739
Non-recurring compensation
costs........................... -- -- -- -- 33,085 --
Commissions....................... 15,856 20,788 23,730 27,119 39,121 42,676
General and administrative........ 35,365 35,282 40,671 41,421 55,884 73,434
Profit sharing.................... 8,292 16,562 15,893 20,094 23,514 597
Other............................. 4,255 7,284 8,526 9,087 17,997 23,653
----------- ----------- ----------- ----------- ----------- -----------
Operating costs and expenses...... 170,374 195,246 219,068 235,515 331,026 398,099
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................... 4,187 5,662 8,134 19,940 (17,387) 46,646
Income tax expense (benefit)...... 1,854 2,636 3,793 7,826 (3,367) 18,380
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
gain............................ 2,333 3,026 4,341 12,114 (14,020) 28,266
Extraordinary gain................ 188 782 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................. $ 2,521 $ 3,808 $ 4,341 $ 12,114 $ (14,020) $ 28,266
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
EARNINGS (LOSS) PER SHARE(3):
Basic............................. $ (.42) $ .83
Diluted........................... $ (.42) $ .79
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING(3):
Basic............................. 33,583,467 34,024,418
Diluted........................... 33,583,467 35,953,833
OTHER DATA:
EBITDA, as adjusted(4)............ $ 16,969 $ 29,686 $ 32,033 $ 48,915 $ 59,522 $ 68,854
Net cash provided by (used in)
operating activities............ 7,556 15,907 10,648 25,148 (4,978) 19,189
Net cash used in investing
activities...................... (1,974) (2,748) (646) (5,019) (21,322) (112,074)
Net cash provided by (used in)
financing activities............ (4,412) 93 (5,457) (1,779) 64,542 154,639
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 PRO
1997 1998(2) FORMA(1)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Property management services...... $ 65,055 $ 81,897 $ 106,043
Brokerage services................ 61,692 100,814 116,527
Infrastructure management
services........................ 47,954 74,008 75,612
Development and construction
services........................ 27,462 42,132 49,390
Retail services................... 1,912 11,487 11,487
Income from unconsolidated
subsidiaries.................... 1,467 7,151 7,151
Gain on disposition of real
estate.......................... 1,566 23,455 23,455
Other............................. 6,131 6,012 6,462
----------- ----------- -----------
Total revenues.................... 213,239 346,956 396,127
Salaries, wages and benefits...... 114,006 180,509 213,683
Non-recurring compensation
costs........................... -- -- --
Commissions....................... 25,379 43,808 46,835
General and administrative........ 33,779 51,371 60,130
Profit sharing.................... 15,417 -- --
Other............................. 10,057 18,379 23,515
----------- ----------- -----------
Operating costs and expenses...... 198,638 294,067 344,163
----------- ----------- -----------
Income (loss) before income
taxes........................... 14,601 52,889 51,964
Income tax expense (benefit)...... 5,747 21,425 21,055
----------- ----------- -----------
Income (loss) before extraordinary
gain............................ 8,854 31,464 30,909
Extraordinary gain................ -- -- --
----------- ----------- -----------
Net income (loss)................. $ 8,854 $ 31,464 $ 30,909
----------- ----------- -----------
----------- ----------- -----------
EARNINGS (LOSS) PER SHARE(3):
Basic............................. $ .93 $ .90
Diluted........................... $ .87 $ .85
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING(3):
Basic............................. 33,984,517 34,297,640
Diluted........................... 36,208,762 36,353,512
OTHER DATA:
EBITDA, as adjusted(4)............ $ 39,795 $ 67,566 $ 71,777
Net cash provided by (used in)
operating activities............ (10,200) (13,186) (13,672)
Net cash used in investing
activities...................... (25,806) (104,218) (13,796)
Net cash provided by (used in)
financing activities............ 14,961 97,128 4,936
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
DECEMBER 31, -----------------------
-------------------------------------------------------------- AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 22,358 $ 35,610 $ 40,155 $ 58,505 $ 96,747 $ 76,471 $ 77,677
Total assets............................ 55,774 99,867 114,315 194,314 326,236 466,638 467,844
Long-term debt.......................... 8,425 9,762 7,065 12,361 2,430 95,275 95,275
Notes payable on real estate held for
sale.................................. -- 22,914 13,182 67,810 76,623 77,297 77,297
Deferred compensation................... 14,661 21,468 25,883 20,963 8,391 57 57
Total liabilities....................... 43,767 85,516 95,090 160,018 169,305 277,198 277,336
Minority interest....................... 27 278 3,932 3,294 19,859 14,210 14,210
Stockholders' equity.................... 11,980 14,074 15,293 31,002 137,072 175,230 176,298
</TABLE>
- ------------------------------
Summarized operating data by business line for the year ended December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
DEVELOPMENT
PROPERTY INFRASTRUCTURE AND
MANAGEMENT BROKERAGE MANAGEMENT INVESTMENT RETAIL TOTAL
----------- ----------- ---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service revenues................... $ 87,756 $ 91,053 $ 68,719 $ 40,054 $ 5,318 $ 292,900
Income from unconsolidated
subsidiaries..................... -- -- -- 512 -- 512
Gain on disposition of real
estate........................... -- -- -- 9,004 1,237 10,241
Other.............................. 6,678 189 193 2,915 11 9,986
----------- ----------- ------- ----------- ----------- -----------
Total revenues..................... 94,434 91,242 68,912 52,485 6,566 313,639
Operating costs and expenses(6).... 104,070 100,041 70,800 48,797 7,318 331,026
----------- ----------- ------- ----------- ----------- -----------
Income (loss) before income
taxes............................ $ (9,636) $ (8,799) $ (1,888) $ 3,688 $ (752) $ (17,387)
----------- ----------- ------- ----------- ----------- -----------
----------- ----------- ------- ----------- ----------- -----------
EBITDA, as adjusted(4)............. $ 16,421 $ 10,639 $ 8,471 $ 22,520 $ 1,471 $ 59,522
</TABLE>
Summarized operating data by business line for the nine month periods ended
September 30, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
PROPERTY MANAGEMENT INFRASTRUCTURE MANAGEMENT
BROKERAGE
------------------------- ------------------------- -------------------------
1997 1998 1997 1998 1997 1998(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service revenues........................ $ 65,055 $ 81,897 $ 61,692 $ 100,814 $ 47,954 $ 74,008
Income from unconsolidated
subsidiaries.......................... -- -- -- -- -- --
Gain on disposition of real estate...... -- -- -- -- -- --
Other................................... 4,009 4,560 278 434 143 131
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.......................... 69,064 86,457 61,970 101,248 48,097 74,139
Operating costs and expenses............ 62,900 74,984 61,272 91,244 45,292 66,204
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes....... $ 6,164 $ 11,473 $ 698 $ 10,004 $ 2,805 $ 7,935
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
EBITDA, as adjusted(4).................. $ 14,359 $ 13,899 $ 7,949 $ 12,735 $ 5,835 $ 9,519
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENT AND
INVESTMENT RETAIL TOTAL
------------------------- ------------------------- -------------------------
1997 1998 1997 1998 1997 1998(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service revenues........................ $ 27,462 $ 42,132 $ 1,912 $ 11,487 $ 204,075 $ 310,338
Income from unconsolidated
subsidiaries.......................... 1,467 7,151 -- -- 1,467 7,151
Gain on disposition of real estate...... 650 21,816 916 1,639 1,566 23,455
Other................................... 1,693 834 8 53 6,131 6,012
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.......................... 31,272 71,933 2,836 13,179 213,239 346,956
Operating costs and expenses............ 26,007 51,245 3,167 10,390 198,638 294,067
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes....... $ 5,265 $ 20,688 $ (331) $ 2,789 $ 14,601 $ 52,889
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
EBITDA, as adjusted(4).................. $ 11,270 $ 27,584 $ 382 $ 3,829 $ 39,795 $ 67,566
</TABLE>
21
<PAGE>
- ------------------------------
(1) Gives effect to the Doppelt Acquisition, the Tooley Acquisition, the Norman
Acquisition, the FHO Acquisition, the Core Acquisition, the Faison
Acquisition, the Reincorporation Transactions and the sale of 5,750,000
shares of Common Stock by the Company in the Initial Public Offering and the
receipt and application of the net proceeds therefrom, as though they had
occurred on January 1, 1997, but excludes the non-cash, non-recurring charge
to income of $33.1 million related to options granted under the Assumed
Option Plan, and a $4.4 million non-recurring charge to income resulting
from the settlement of claims by certain former employees arising out of a
terminated stock appreciation rights plan. See "The Company--Recent
Acquisitions," "--Initial Public Offering," "--Reincorporation
Transactions," "Business--Retail Services" and "Pro Forma Consolidated
Financial Statements."
(2) Certain revenues and expenses for the period ended September 30, 1998 have
been reclassified to conform to the presentation for the quarter and year
ended December 31, 1998. As a result, certain revenue and expense items
differ from the amounts reported in previously filed documents. These
reclassifications do not impact net income or EBITDA, as adjusted.
(3) Earnings per share and weighted average common shares outstanding for the
years prior to 1997 and for the nine months ended September 30, 1997 are not
relevant due to the change in capital structure effected in connection with
the Reincorporation Transactions in the fourth quarter of 1997. The weighted
average shares outstanding used to calculate basic and diluted earnings per
share for 1997 include the shares issued in the Initial Public Offering and
in the Reincorporation Transactions as if they were outstanding for the
entire period. See "The Company-- Initial Public Offering" and
"--Reincorporation Transactions."
(4) EBITDA, as adjusted, represents earnings before interest, income taxes,
depreciation and amortization, royalty and consulting fees, profit sharing,
the non-cash, non-recurring charge to income related to the stock options
granted under the Assumed Option Plan and the non-recurring charge to income
resulting from the settlement of claims by certain former employees arising
out of a terminated stock appreciation rights plan. Management believes that
EBITDA, as adjusted, can be a meaningful measure of the Company's operating
performance, cash generation and ability to service debt. However, EBITDA,
as adjusted, should not be considered as an alternative either to: (i) net
earnings (determined in accordance with GAAP); (ii) operating cash flow
(determined in accordance with GAAP); or (iii) liquidity. The Company's
calculation of EBITDA, as adjusted, may differ from similarly titled items
reported by other companies.
(5) As adjusted to give effect to the Offering as though it occured on September
30, 1998. See "Pro Forma Consolidated Financial Statements."
(6) Includes a non-cash, non-recurring charge to compensation expense of $33.1
million related to the stock options granted under the Assumed Option Plan,
which was allocated as follows: Property Management--$13.6 million;
Brokerage--$10.4 million; Infrastructure Management-- $4.1 million;
Development and Investment--$3.8 million; and Retail--$1.2 million. Also
includes a non-recurring charge to general and administrative expense for
payment obligations incurred in connection with the settlement of claims
made pursuant to a terminated stock appreciation rights plan, which was
allocated as follows: Property Management--$1.8 million; Brokerage--$1.4
million; Infrastructure Management--$0.5 million; Development and
Investment--$0.5 million; and Retail--$0.2 million. See "The
Company--Reincorporation Transactions."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto, the Selected
Consolidated Financial Data and the other information included elsewhere in this
Prospectus.
OVERVIEW
Trammell Crow Company is one of the largest diversified commercial real
estate service firms in North America. As a means of addressing the
comprehensive real estate service requirements of its diverse group of clients,
the Company is organized into five principal lines of business. The Company's
property management services business provides services relating to all aspects
of building operations, tenant relations and oversight of building improvement
processes, primarily for building owners who do not occupy the properties
managed by the Company. The brokerage services business advises buyers, sellers,
landlords and tenants in connection with the sale and leasing of office,
industrial and retail space and land. The infrastructure management business
entails providing comprehensive day-to-day occupancy related services,
principally to large corporations which occupy commercial facilities in multiple
locations. These services include administration, day-to-day maintenance and
repair of client occupied facilities and strategic functions such as space
planning, relocation coordination, facilities management and portfolio
management. The Company's development and investment activities include
development and construction services and the acquisition and disposition of
commercial real estate projects. The development and construction services
include financial planning, site acquisition, procurement of approvals and
permits, design and engineering coordination, construction bidding and
management and tenant finish coordination, project close-out and user move
coordination, general contracting and project finance advisory services. The
Company's retail services business provides tenant representation, disposition,
development and financial services to national and global retail customers, as
well as property management and leasing services to regional malls.
The Company's annual revenues increased to $313.6 million in 1997 from
$227.2 million in 1995. This revenue growth was achieved during a period when
the composition of the Company's revenues shifted significantly as the Company
increased the role which brokerage, infrastructure management, development and
investment and retail services play in its overall strategy. From 1995 to 1997,
the percentage of the Company's revenues generated by its property management
services business declined from 40.9% to 28.0%. Over this same period, revenues
from brokerage, infrastructure management, development and investment (including
income from unconsolidated subsidiaries and gain on disposition of non-retail
build-to-suit real estate projects) and retail (including gain on disposition of
retail build-to-suit real estate projects) increased from a combined 56.2% of
total revenues to 68.8% of total revenues.
The Company's revenue streams consist primarily of recurring payments made
pursuant to service contracts and variable transaction-oriented payments. The
Company typically receives base monthly fees from clients for services provided
in its property management services business. A majority of the fees generated
by the Company's infrastructure management services business are contractual and
recurring in nature. The Company typically earns fees from its development and
construction services business which are based upon a negotiated percentage of a
project's cost, and the Company may receive incentive bonuses for completing a
development project under budget and within certain critical time deadlines. The
fees generated in the Company's brokerage and retail services businesses are
typically paid in connection with the consummation of a transaction such as the
purchase or sale of commercial property or the execution of a lease. Although
the fees generated by the Company's brokerage and development and construction
services businesses are not typically recurring in nature, a majority of the
aggregate service fees generated by these businesses in 1997 was earned in the
performance of services relating to properties included in the Company's
approximately 240 million square foot property management and leasing portfolio.
Revenues from the Company's investment activities primarily consist of gain on
disposition of
23
<PAGE>
real estate and income from unconsolidated subsidiaries that hold real estate
assets. The Company has limited control over the timing of the disposition of
these investments and the recognition of any related gain or loss. Because the
disposition of a single significant investment can impact the Company's
financial performance in any period, these investment activities could create
fluctuations in the Company's revenues. Because the Company's investment
strategy typically entails making relatively modest investments alongside its
corporate and institutional clients, its ability to conduct these activities
depends in part on the supply of investment capital for commercial real estate
and related assets. In recent months, providers of capital for real estate
investment have taken a more cautious approach regarding investments in
development projects. If this trend continues or accelerates, the Company's
investment activities, as well as its traditional construction and development
business, could be adversely affected.
For the nine months ended September 30, 1998, the percentage of the
Company's total revenues generated by each of its property management,
brokerage, infrastructure management, development and investment, and retail
businesses (including $6.0 million in other revenues) was 24.9%, 29.2%, 21.4%,
20.7% and 3.8%, respectively. For the nine months ended September 30, 1998, the
percentage of EBITDA, as adjusted, generated by each of the Company's property
management, brokerage, infrastructure management, development and investment,
and retail businesses was 20.6%, 18.8%, 14.1%, 40.8%, and 5.7%, respectively.
The Company's operating expenses consist of salaries, wages and benefits,
commissions, general and administrative expenses, rent, depreciation and
amortization expense, interest, profit sharing, royalty and consulting fees and
minority interest. Salaries, wages and benefits and commissions constitute a
majority of the Company's total operating costs and expenses.
RECENT DEVELOPMENTS
On February 18, 1999, the Company reported its results of operations for the
fourth quarter and year ended December 31, 1998. The data set forth below have
been derived from the historical consolidated financial statements of the
Company. The historical consolidated financial statements of the Company for the
year ended December 31, 1997 have been audited by Ernst & Young LLP, independent
auditors, whose reports thereon appear elsewhere in this Prospectus. The
financial data for the year ended December 31, 1998 and for the three months
ended December 31, 1997 and 1998 have been derived from unaudited consolidated
financial statements of the Company, and reflect all adjustments, consisting of
normal recurring accruals, which management considers necessary for a fair
presentation of the results of operations for these periods.
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, DECEMBER 31,
---------------------- ----------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Property management services.................................. $ 87,756 $ 116,784 $ 22,701 $ 34,887
Brokerage services............................................ 91,053 152,154 29,361 51,340
Infrastructure management services............................ 68,719 105,129 20,765 31,121
Development and construction services......................... 40,054 65,942 12,592 23,810
Retail services............................................... 5,318 19,700 3,406 8,213
Income (loss) from unconsolidated subsidiaries................ 512 18,438 (955) 11,287
Gain on disposition of real estate............................ 10,241 31,658 8,675 8,203
Other......................................................... 9,986 7,718 3,855 1,706
---------- ---------- ---------- ----------
Total revenues................................................ 313,639 517,523 100,400 170,567
Salaries, wages and benefits.................................. 161,425 269,780 47,419 89,271
Non-recurring compensation costs.............................. 33,085 -- 33,085 --
Commissions................................................... 39,121 67,508 13,742 23,700
General and administrative.................................... 55,884 78,344 22,105 26,973
Profit sharing................................................ 23,514 -- 8,097 --
Other......................................................... 17,997 25,766 7,940 7,387
---------- ---------- ---------- ----------
Operating costs and expenses.................................. 331,026 441,398 132,388 147,331
---------- ---------- ---------- ----------
Income (loss) before income taxes............................. (17,387) 76,125 (31,988) 23,236
Income tax expense (benefit).................................. (3,367) 29,674 (9,114) 8,249
---------- ---------- ---------- ----------
Net income (loss)............................................. $ (14,020) $ 46,451 $ (22,874) $ 14,987
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE(1):
Basic....................................................... $ (.42) $ 1.36 $ (.68) $ 0.44
Diluted..................................................... $ (.42) $ 1.28 $ (.68) $ 0.41
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING(1):
Basic....................................................... 33,583,467 34,059,155 33,583,467 34,280,642
Diluted..................................................... 33,583,467 36,216,352 33,583,467 36,241,036
OTHER DATA:
EBITDA, as adjusted(2)........................................ $ 59,522 $ 96,811 $ 19,727 $ 29,245
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities........... (4,978) 7,677 5,222 (13,186)
Net cash provided by (used in) investing activities........... (21,322) (105,694) 4,484 (104,218)
Net cash provided by financing activities..................... 64,542 89,216 49,581 97,128
</TABLE>
Summarized operating data by business line for the year ended December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
DEVELOPMENT
PROPERTY INFRASTRUCTURE AND
MANAGEMENT BROKERAGE MANAGEMENT INVESTMENT RETAIL TOTAL
------------ ----------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $ 116,784 $ 152,154 $ 105,129 $ 65,942 $ 19,700 $ 459,709
Income from unconsolidated
subsidiaries......................... -- -- -- 18,438 -- 18,438
Gain on disposition of real estate..... -- -- -- 29,411 2,247 31,658
Other.................................. 6,059 637 190 756 76 7,718
------------ ----------- ------------- ------------ --------- ---------
Total revenues......................... 122,843 152,791 105,319 114,547 22,023 517,523
Operating costs and expenses........... 108,913 141,254 96,211 75,589 19,431 441,398
------------ ----------- ------------- ------------ --------- ---------
Income before income taxes............. $ 13,930 $ 11,537 $ 9,108 $ 38,958 $ 2,592 $ 76,125
------------ ----------- ------------- ------------ --------- ---------
------------ ----------- ------------- ------------ --------- ---------
EBITDA, as adjusted(2)................. $ 17,394 $ 16,881 $ 10,910 $ 47,424 $ 4,202 $ 96,811
</TABLE>
- ------------------------------
(1) The weighted average shares outstanding used to calculate basic and diluted
earnings per share for 1997 include the shares issued in the Initial Public
Offering and in the Reincorporation Transactions as if they were outstanding
for the entire period. See "The Company--Initial Public Offering" and
"--Reincorporation Transactions."
(2) EBITDA, as adjusted, represents earnings before interest, income taxes,
depreciation and amortization, royalty and consulting fees, profit sharing,
the non-cash, non-recurring charge to income related to the stock options
granted under the Assumed Option Plan and the non-recurring charge to income
resulting from the settlement of claims by certain former employees arising
out of a terminated stock appreciation rights plan. Management believes that
EBITDA, as adjusted, can be a meaningful measure of the Company's operating
performance, cash generation and ability to service debt. However, EBITDA,
as adjusted, should not be considered as an alternative either to: (i) net
earnings (determined in accordance with GAAP); (ii) operating cash flow
(determined in accordance with GAAP); or (iii) liquidity. The Company's
calculation of EBITDA, as adjusted, may differ from similarly titled items
reported by other companies.
25
<PAGE>
For the year ended December 31, 1998, the Company's total revenues were
$517.5 million, an increase of 65.0% from $313.6 million in 1997. EBITDA, as
adjusted, for the year increased 62.7% to $96.8 million, compared with $59.5
million in 1997. Acquisitions contributed 31.1% of the Company's revenue growth
and 18.2% of the Company's growth in EBITDA, as adjusted, for 1998. The
Company's net income for 1998 was $46.5 million, as compared to a net loss in
1997 of $14.0 million. The net loss in 1997 was primarily due to $37.5 million
of non-recurring charges related to an option plan and a terminated stock
appreciation rights plan.
For the three months ended December 31, 1998, the Company's total revenues
were $170.6 million, an increase of 69.9% from $100.4 million for the three
months ended December 31, 1997. EBITDA, as adjusted, for the fourth quarter of
1998 increased 48.2% to $29.2 million from $19.7 million in the fourth quarter
of 1997. Acquisitions contributed 49.4% of the Company's revenue growth and
23.6% of the Company's growth in EBITDA, as adjusted, for the period. Net income
for the fourth quarter of 1998 was $15.0 million, as compared to a net loss in
the fourth quarter of 1997 of $22.9 million. The net loss in the fourth quarter
of 1997 was primarily due to $37.5 million of non-recurring charges related to
an option plan and a terminated stock appreciation rights plan.
As anticipated, the Company recognized a high percentage of its income in
the third and fourth quarters of 1998 due to the closing in those quarters of a
disproportionate number of development and investment transactions (which
typically generate higher margins than transactions in the Company's other
business lines). Specifically, one atypically large and profitable transaction
that closed in the fourth quarter contributed approximately $10.1 million of
revenues, $10.1 million of EBITDA, as adjusted, and $6.2 million of net income.
Primarily because this transaction was atypically large and profitable, the
Company believes that in 1999 its margins on this business activity will be
lower than the margins in 1998.
The Company's positive third and fourth quarter results were partially
offset by an increase in operating expenses. This increase in operating expenses
was attributable in part to expenses incurred in connection with the integration
into the Company's business of the operations acquired in the Faison
Acquisition. The Company expects to continue to incur increased expenses
associated with the Faison integration in 1999, primarily in the first and
second quarters. Operating expenses also increased in the third and fourth
quarters of 1998 due to expenses incurred in connection with several initiatives
begun in those quarters and intended to increase revenues and income in future
periods. These initiatives include upgrading the Company's management
information systems and making targeted investments to enhance its development
and investment, infrastructure management and brokerage businesses. These
investments are expected to exceed $10.0 million in 1999.
As in 1998, the Company anticipates that a disproportionately high
percentage of 1999 transactions in its development and investment business
(which typically generate higher margins than transactions in the Company's
other business lines) will close in the third and fourth quarters. Because of
this anticipated concentration of higher margin development and investment
activity in late 1999 and the increased level of expenses the Company expects to
continue to incur in early 1999 in connection with the Faison integration and
the other initiatives described above, the Company expects to recognize a
greater percentage of its 1999 income in the fourth quarter than was the case in
1998.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Operations for each of the three years in the period ended
December 31, 1997, and for each of the nine month periods ended September 30,
1997 and 1998, as a percent of revenue for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
SEPTEMBER 30,
------------------------------- ----------------------
1995 1996 1997 1997 1998(1)
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Property management services......................................... 40.9% 35.3% 28.0% 30.5% 23.6%
Brokerage services................................................... 27.3 28.2 29.0 28.9 29.1
Infrastructure management services................................... 17.0 19.9 21.9 22.5 21.3
Development and construction services................................ 9.0 8.9 12.8 12.9 12.1
Retail services...................................................... 0.7 0.9 1.7 0.9 3.3
Income from unconsolidated subsidiaries.............................. 0.1 0.2 0.2 0.7 2.1
Gain on sale of real estate.......................................... 2.2 2.6 3.3 0.7 6.8
Other................................................................ 2.8 4.0 3.1 2.9 1.7
--------- --------- --------- --------- -----
Total revenues................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Salaries, wages and benefits......................................... 57.3% 53.9% 62.0% 53.5% 52.0%
Commissions.......................................................... 10.4 10.6 12.5 11.9 12.6
General and administrative........................................... 17.9 16.2 17.8 15.9 14.8
Profit sharing....................................................... 7.0 7.9 7.5 7.2 --
Other................................................................ 3.8 3.6 5.7 4.7 5.3
--------- --------- --------- --------- -----
Total operating costs and expenses............................... 96.4% 92.2% 105.5% 93.2% 84.7%
--------- --------- --------- --------- -----
Income (loss) before income taxes...................................... 3.6% 7.8% (5.5)% 6.8% 15.3%
Income tax expense (benefit)........................................... 1.7 3.1 (1.1) 2.7 6.2
--------- --------- --------- --------- -----
Net income (loss)...................................................... 1.9% 4.7% (4.4)% 4.1% 9.1%
--------- --------- --------- --------- -----
--------- --------- --------- --------- -----
</TABLE>
- ------------------------------
(1) Certain revenues and expenses for the period ended September 30, 1998 have
been reclassified to conform to the presentation for the quarter and year
ended December 31, 1998. As a result, certain revenue and expense items
differ from the amounts reported in previously filed documents. These
reclassifications do not impact net income.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES. The Company's total revenues increased $133.8 million, or 62.8%,
to $347.0 million for the nine months ended September 30, 1998 from $213.2
million for the nine months ended September 30, 1997.
Property management services revenue, which represented 23.6% of the
Company's total revenue for the nine months ended September 30, 1998, increased
$16.8 million, or 25.8%, to $81.9 million for that period from $65.1 million for
the nine months ended September 30, 1997. This increase was primarily due to an
increase in square feet under management in 1998, which resulted primarily from
the acquisitions of Tooley in March of 1998 and Faison in July 1998.
Brokerage services revenue, which represented 29.1% of the Company's total
revenue for the nine months ended September 30, 1998, increased $39.1 million,
or 63.4%, to $100.8 million for that period from $61.7 million for the nine
months ended September 30, 1997. The revenue growth resulted from an increase in
the number of brokerage transactions fueled by an increase of 44.6% in the
average number of brokers employed during the nine months ended September 30,
1998 as compared to the same period in 1997, coupled with an increased focus on
larger transactions.
Infrastructure management services revenues, which represented 21.3% of the
Company's total revenue for the nine months ended September 30, 1998, increased
$26.0 million, or 54.2%, to $74.0 million for that period from $48.0 million for
the nine months ended September 30, 1997. The revenue growth
27
<PAGE>
resulted primarily from (i) the impact in 1998 of the addition of over 25.0
million square feet associated with two significant new customers in the
financial services industry in the third quarter of 1997, (ii) expansion of
services provided to several other major customers, and (iii) the addition of an
infrastructure management contract (the "Penn Contract") with the University of
Pennsylvania ("Penn") commencing in April 1998.
Revenues from development and investment activities (consisting of
development and construction service fees, gain on disposition of non-retail
real estate projects and income from unconsolidated subsidiaries) totaled $71.1
million for the nine months ended September 30, 1998, and represented 20.5% of
the Company's total revenue for that period. These revenues increased $41.5
million, or 140.2%, from $29.6 million for the nine months ended September 30,
1997. The revenue growth was primarily due to a significant increase in the
second and third quarters of 1998 in the number of development projects with
respect to which the Company receives development fees, an increase in gain on
disposition of real estate resulting primarily from four significant sales, two
in the second quarter of 1998 and two in the third quarter of 1998, and an
increase in income from unconsolidated subsidiaries resulting from sale of the
underlying real estate.
A portion of the Company's development and investment activities involves
the provision of development services to companies that invest in commercial
real estate projects. In recent months, the Company has seen some evidence that
providers of capital are beginning to take a more cautious approach regarding
investments in development projects. If this trend should continue or
accelerate, that portion of the Company's development and investment activity,
as well as our traditional construction and development business, could level
off or decline.
Retail revenues (including services revenues and gain on disposition of
retail real estate projects) totaled $13.1 million for the nine months ended
September 30, 1998, and represented 3.8% of the Company's total revenue for that
period. These revenues increased $10.3 million, or 367.9%, from $2.8 million for
the nine months ended September 30, 1997. This revenue growth was primarily a
result of the acquisition of Doppelt in August 1997, an increase in gain on
disposition of build-to-suit real estate projects resulting primarily from four
sales in the third quarter of 1998, and the addition of approximately 10.0
million square feet of regional malls under management due to the Faison
Acquisition in July of 1998.
OPERATING COSTS AND EXPENSES. The Company's operating costs and expenses
increased $95.5 million, or 48.1%, to $294.1 million for the nine months ended
September 30, 1998 from $198.6 million for the nine months ended September 30,
1997.
The increase in operating costs and expenses was primarily due to a 58.3%
increase in salaries, wages, and benefits for the nine months ended September
30, 1998, resulting primarily from an increase in staffing in 1998. The Company
added approximately 2,000 employees in 1998 due to the acquisitions of real
estate service companies, staffing requirements of the infrastructure management
services business and support for internal growth in the Company's other lines
of business. Salaries, wages and benefits also include bonus payments made to
certain employees in 1998 related to the Company's development activities. Such
development-related bonuses totaled $4.2 million for the nine months ended
September 30, 1998. Additionally, compensation increased for the nine months
ended September 30, 1998 from the comparable period in 1997 due to the impact of
the new compensation structure adopted in connection with the Initial Public
Offering in the fourth quarter of 1997.
Commissions increased 72.6% for the nine months ended September 30, 1998,
primarily as a result of the increased brokerage activities giving rise to the
significant growth in the Company's brokerage services revenues.
General and administrative expenses increased $17.6 million, or 52.1%, for
the nine months ended September 30, 1998, as compared with the same period in
the prior year. The increase is primarily due to increases in rent, travel and
overhead costs of the infrastructure management services business resulting
28
<PAGE>
from the addition of three significant customers and the expansion of services
provided to several other significant customers, a company-wide increase in
administrative costs resulting from the overall increase in number of employees,
and costs associated with being a public company. Additionally, general and
administrative expenses increased in part due to increases in management
information systems expenses and related consulting costs as the Company
continues to enhance its systems.
The Company had no profit sharing expense in 1998 as compared to $15.4
million for the nine months ended September 30, 1997, as future profits
participation under the Company's Profit Sharing Plan was terminated in
conjunction with the Initial Public Offering and with the adoption of the
Company's current compensation structure. Additionally, the Company had no
royalty or consulting expenses in 1998 as compared to $3.2 million for the nine
months ended September 30, 1997, because certain royalty and consulting
arrangements to which the Company was a party were terminated in connection with
the Initial Public Offering.
Other expense increased for the nine months ended September 30, 1998
primarily as a result of interest expensed on real estate development projects
that were completed and operated in 1998, as well as contingent interest
incurred upon the sale of a real estate project and interest on debt borrowed
for acquisitions of real estate service companies.
INCOME BEFORE INCOME TAXES. The Company's income before income taxes
increased $38.3 million, to $52.9 million, for the nine months ended September
30, 1998 from $14.6 million for the nine months ended September 30, 1997, due to
the fluctuations in revenues and expenses described above.
NET INCOME. Net income increased $22.6 million, to $31.5 million, for the
nine months ended September 30, 1998 from $8.9 million for the nine months ended
September 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. The Company's total revenues increased $58.1 million, or 22.7%,
to $313.6 million in 1997 from $255.5 million in 1996.
Property management services revenue, which represented 28.0% of the
Company's total revenue in 1997, decreased $2.4 million, or 2.7%, to $87.8
million in 1997 from $90.2 million in 1996. This decrease was primarily due to
an overall decrease in the number of square feet under management, and a
relative increase in the number of square feet under management constituted by
industrial properties, which typically generate lower property management
revenues per square foot than office, retail and other commercial property
types.
Brokerage services revenue, which represented 29.0% of the Company's 1997
total revenue, increased $19.0 million, or 26.4%, to $91.1 million in 1997 from
$72.1 million in 1996. The revenue growth resulted from the increase in tenant
representation fees and in investment sales revenue resulting from
implementation of the Company's strategy to aggressively pursue these business
lines. The Company added approximately 100 brokers in 1997 to support this
growth.
Infrastructure management services revenues, which represented 21.9% of the
Company's 1997 total revenues, increased $17.9 million, or 35.2%, to $68.7
million in 1997 from $50.8 million in 1996. The revenue growth resulted
primarily from the addition of new customers. Additionally, the Company was able
to expand project management and facility management services provided to
existing customers.
Revenues from development and investment activities (consisting of
development and construction service fees, income from unconsolidated
subsidiaries and gain on disposition of non-retail build-to-suit real estate
projects) totalled $49.6 million in 1997, which represented 15.8% of the
Company's 1997 total revenue. These revenues increased $20.4 million, or 69.9%,
from $29.2 million in 1996. This revenue growth was primarily due to a $7.4
million increase in development fees from $9.3 million in 1996 to $16.7 million
in 1997 and an increase in construction management services fees of $2.5 million
to
29
<PAGE>
$11.0 million in 1997 from $8.5 million in 1996. Additionally, gain on sale of
real estate increased $3.1 million, or 52.5%, from $5.9 million in 1996 to $9.0
million in 1997.
Retail revenues (consisting of service revenues and gain on disposition of
retail build-to-suit real estate projects), which represented 2.1% of the
Company's 1997 total revenue, increased $3.4 million, or 109.7%, to $6.5 million
in 1997 from $3.1 million in 1996, primarily as a result of the acquisition of
Doppelt in August 1997.
OPERATING COSTS AND EXPENSES. The Company's operating costs and expenses
increased by $95.5 million, or 40.6%, to $331.0 million in 1997 from $235.5
million in 1996. The increase in operating costs is primarily due to
non-recurring charges resulting from the completion of the Initial Public
Offering in December 1997. The 41.1% increase in salaries and benefits is
primarily due to the $33.1 million non-cash non-recurring charge related to the
stock options granted under the Assumed Option Plan. The remaining increase in
salaries is due to the increased staffing required for the infrastructure
management services business. The increase in commissions is due to the growth
in the Company's brokerage services and retail services businesses resulting
from an increase in the number of brokers. Approximately $4.4 million of the
increase in general and administrative expense relates to the non-recurring
charge to income resulting from the settlement of claims by certain former
employees arising out of a terminated stock appreciation rights plan. The
remaining increase in general and administrative expenses represents
approximately $2.3 million in operating expenses relating to rental properties
which were not operational in 1996 and the increased expenditures associated
with the Company's technological support systems. The Company's profit sharing
expense increased by $3.4 million, or 16.9%, to $23.5 million in 1997 from $20.1
million in 1996 due to the increase in earnings available for profit sharing.
Other operating costs increased due to $3.1 million of interest expense on real
estate held for sale that became operational in 1997, a $1.6 million expense
accrued in connection with the termination of the consulting arrangement with
Mr. Williams and increased amortization as a result of the Doppelt Acquisition.
INCOME (LOSS) BEFORE INCOME TAXES. The Company's income before income taxes
decreased $37.3 million, to a loss of $17.4 million in 1997 from a profit of
$19.9 million in 1996 due to the factors described above.
NET INCOME (LOSS). Net income decreased $26.1 million, to a loss of $14.0
million in 1997 from a profit of $12.1 million in 1996 due to the factors
described above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. The Company's total revenue increased $28.3 million, or 12.4%, to
$255.5 million in 1996 from $227.2 million in 1995.
Property management services revenue, which represented 35.3% of the
Company's total revenue in 1996, decreased $2.8 million, or 3.0%, to $90.2
million in 1996 from $93.0 million in 1995. This decrease was primarily due to
the net reduction in square footage of property management assignments and a
relative increase in the number of square feet under management constituted by
industrial properties, which typically generate lower property management
revenues per square foot than office, retail and other commercial property
types. Recognizing a trend toward a consolidation of service providers utilized
by large institutional owners and investors, the Company implemented a national
marketing program focused on its large customers. The Company believes the
implementation of this strategic initiative increased square footage under
management for these customers by 11.3 million square feet, or 12.9%, to 99.1
million square feet in 1996 from 87.8 million square feet in 1995.
Brokerage services revenue, which represented 28.2% of 1996 total revenues,
increased $10.1 million, or 16.4%, to $72.1 million in 1996 from $62.0 million
in 1995. This revenue growth resulted primarily from an increase in tenant
representation fees of $3.6 million, or 29.0%, to $16.0 million in 1996 from
$12.4 million in 1995 and the increase in investment sales revenue of $4.0
million, or 56.5%, to
30
<PAGE>
$11.1 million in 1996 from $7.1 million in 1995. The Company believes that this
revenue growth is attributable to the continuation of a strategic initiative to
expand its marketing services beyond project leasing to include tenant
representation, investment sales and land sales. This strategy resulted in an
increase in the aggregate number of brokers by 40, or 20.5%, to 235 in 1996 from
195 in 1995.
Infrastructure management services revenue, which represented 19.9% of the
Company's total revenues in 1996 increased $12.1 million, or 31.4%, to $50.8
million in 1996 from $38.7 million in 1995. The revenue growth resulted
primarily from the addition of new customers and expansion of services provided
to existing customers. In addition, in September 1996, the Company acquired the
remaining outstanding stock of Primaris Corporate Services, Ltd., a Canadian
provider of infrastructure management services. This acquisition, accounted for
under the purchase method, increased revenues by approximately $0.9 million in
1996.
Revenues from development and investment activities (consisting of
development and construction service fees, income from unconsolidated
subsidiaries and gain on disposition of non-retail build-to-suit real estate
projects), which represented 11.4% of 1996 total revenue, increased $5.1 million
or 21.2%, to $29.2 million in 1996 from $24.1 million in 1995. The revenue
growth was primarily due to increases in gross profit on general contracting
services of $1.0 million, or 34.8%, to $3.9 million in 1996 from $2.9 million in
1995, a decrease in development fees of $0.5 million, or 5.8%, to $8.5 million
in 1996 from $9.0 million in 1995 and an increase in gain on sale of real estate
of $2.3 million, or 63.9%, to $5.9 million in 1996 from $3.6 million in 1995.
Income from unconsolidated subsidiaries increased $0.5 million or 500%, to $0.6
million in 1996 from $0.1 million in 1995. In general, these service revenues
are affected by the timing of development transactions.
OPERATING COSTS AND EXPENSES. The Company's operating costs and expenses
increased by $16.4 million, or 7.5%, to $235.5 million in 1996 from $219.1
million in 1995. The increase in operating costs and expenses is primarily due
to increased salaries, wages and benefits (associated with the increased
staffing required for the infrastructure management service business) and
increased commissions (associated with increased brokerage services revenues).
The Company's profit sharing increased by $4.2 million, or 26.4%, to $20.1
million in 1996 from $15.9 million in 1995 due to the increase in profitability.
As a percentage of total revenue, operating costs and expenses declined to 92.2%
in 1996 from 96.4% in 1995, primarily as a result of the Company's ability to
spread its fixed costs over a greater revenue base.
INCOME BEFORE INCOME TAXES. The Company's income before income taxes
increased $11.8 million, or 145.1%, to $19.9 million in 1996 from $8.1 million
in 1995 due to the factors described above.
NET INCOME. Net income increased $7.8 million, or 179.1%, to $12.1 million
in 1996 from $4.3 million in 1995. As a percent of total revenue, net income
increased to 4.7% in 1996 from 1.9% in 1995 due to the factors described above.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents unaudited quarterly results of operations data
for the Company for each of the four quarters of 1998, 1997, 1996 and 1995. This
quarterly information is unaudited but, in the opinion of management, reflects
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of results for any
future period. Revenues and income before income taxes during the fourth fiscal
quarter historically have been somewhat greater than in the first three fiscal
quarters, primarily because the Company's clients have a demonstrated tendency
to close transactions toward the end of the fiscal year. The timing and
introduction of new contracts, the disposition of investments in real estate
assets and other factors may also cause quarterly fluctuations in the Company's
results of operations. The fourth quarter of 1997 includes a non-cash,
non-recurring charge to income of $33.1 million related to options granted under
the Assumed Option Plan and a $4.4 million non-recurring
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charge to income resulting from the settlement of claims by certain former
employees arising out of a terminated stock appreciation rights plan.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
1998:
Revenues (1)................................................. $ 88,959 $ 113,536 $ 144,461 $ 170,567
Income before income taxes................................... 10,568 18,141 24,180 23,236
Net income................................................... 6,329 10,851 14,284 14,987
1997:
Revenues..................................................... $ 62,098 $ 69,344 $ 81,797 $ 100,400
Income (loss) before income taxes............................ 2,624 4,402 7,575 (31,988)
Net income (loss)............................................ 1,601 2,685 4,568 (22,874)
1996:
Revenues..................................................... $ 56,397 $ 54,299 $ 65,515 $ 79,244
Income before income taxes................................... 3,025 3,507 5,934 7,474
Net income................................................... 1,876 2,093 3,673 4,472
1995:
Revenues..................................................... $ 47,415 $ 53,692 $ 54,530 $ 71,565
Income before income taxes................................... 663 2,693 2,028 2,750
Net income................................................... 420 1,371 1,082 1,468
</TABLE>
- ------------------------
(1) Certain revenues for the periods ended March 31, June 30 and September 30
have been reclassified to conform to the presentation for the quarter ended
December 31, 1998. As a result, revenues differ from the amounts reported in
previously filed documents. These reclassifications do not impact net
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources requirements include
expenditures for real estate held for sale and payments on notes payable
associated with its development and construction activities; the funding of
working capital needs, primarily accounts receivable from its clients; and the
funding of capital investments, including the acquisition of other real estate
service companies. The Company finances its operations with internally generated
funds and borrowings under its revolving line of credit (described below). The
portion of the Company's development and investment business that includes the
acquisition or development of real estate is financed with loans secured by the
underlying real estate, external equity, internal sources of funds, or a
combination thereof.
Net cash used in operating activities totaled $13.2 million for the nine
months ended September 30, 1998, compared to $10.2 million in the comparable
period in 1997. This increased use of cash in operating activities is primarily
due to a significant increase in development activity and related expenditures
for real estate held for sale, payment in 1998 of profit sharing distributions
totaling $13.1 million which were accrued at December 31, 1997, and working
capital used to support the growth in operations. Net cash used in operating
activities totaled $5.0 million for the year ended December 31, 1997, compared
to net cash provided by operating activities of $25.1 million in 1996. The
primary reason for this change is a decrease in debt proceeds for real estate
held for sale as the Company used internal sources for funding these
transactions. In addition, in 1997 the Company made mid-year royalty, consulting
and profit sharing cash distributions relating to performance through October
1997. Prior to 1997, such distributions were typically paid during the first
quarter of the year following the activity which generated the distributions.
The Company also paid more federal taxes during the year due to a higher net
income (before the effect of the non-cash non-recurring charge related to the
stock options granted under the Assumed Option Plan). Net cash provided by
operating activities totaled $25.1 million and $10.6 million for the years ended
December 31, 1996 and 1995, respectively. The changes in these cash flows for
these periods can be
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attributed primarily to increases in net income, fluctuations in the net
proceeds from real estate development and construction and variations in
accounts receivable, accounts payable and accrued expenses.
Net cash used in investing activities totaled $104.2 million for the nine
months ended September 30, 1998, compared to $25.8 million for the comparable
period in 1997. This change is primarily attributable to the Tooley Acquisition,
the FHO Acquisition and the Faison Acquisition in March, May and July 1998,
respectively. Net cash used in investing activities totaled $21.3 million for
the year ended December 31, 1997 compared to $5.0 million for the same period in
1996. This change is primarily attributable to the Doppelt Acquisition in August
1997, investments in unconsolidated subsidiaries and distributions to minority
interest. These uses were offset by distributions from unconsolidated
subsidiaries and contributions from minority interest. Net cash used in
investing activities totaled $5.0 million and $0.6 million for the years ended
December 31, 1996 and 1995, respectively. The changes in these cash flows for
these periods can be attributed primarily to an increase in technology related
fixed asset expenditures and a decrease in contributions from minority interest.
Net cash provided by financing activities totaled $97.1 million for the nine
months ended September 30, 1998, compared to $15.0 million for the comparable
period in 1997. This increase in cash provided by financing activities is
primarily due to the issuance of common stock for total proceeds of $6.5
million, a $68.3 million increase in the amount of borrowings under the Existing
Credit Facility as described below and a $8.2 million decrease in dividends
paid. Net cash provided by financing activities totaled $64.5 million for the
year ended December 31, 1997 compared to net cash used in financing activities
of $1.8 million for the same period in 1996. The reasons for this change are an
increase of debt proceeds, the repayment of stock loans and the net proceeds
from the Initial Public Offering of $90.2 million. These increases were offset
by increased debt repayments and dividends paid during 1997. Net cash flow used
in financing activities totaled $1.8 million and $5.5 million for the years
ended December 31, 1996 and 1995, respectively. The changes in these cash flows
for these periods can be attributed primarily to an increase in debt proceeds
offset by repurchasing common stock into treasury.
On December 1, 1997, the Company obtained a $150 million revolving line of
credit (the "Existing Credit Facility") arranged by NationsBank of Texas, N.A.
as the administrative agent (the "Administrative Agent"). Under the terms of the
Existing Credit Facility, the Company can obtain loans which are Base Rate Loans
or Eurodollar Rate Loans. Base Rate Loans bear interest at a base rate, which is
the higher of the prime lending rate announced from time-to-time by the
Administrative Agent or an average federal funds rate plus 0.5%. Eurodollar Rate
Loans bear interest at an adjusted Eurodollar rate plus a margin which ranges
from 1.25% to 1.75%, depending upon the Company's leverage ratio at the date the
margin is determined. The Existing Credit Facility contains various covenants
such as the maintenance of minimum equity and liquidity and covenants relating
to certain key financial data. The Existing Credit Facility also includes
limitations on payment of cash dividends or other distributions of assets and
certain restrictions on investments and acquisitions that can be made by the
Company. The covenants contained in the Existing Credit Facility and the amount
of the Company's other borrowings and contingent liabilities may have the effect
of limiting the credit available to the Company under the Existing Credit
Facility to an amount less than the $150 million commitment. Through January 31,
1999, the Company had borrowed approximately $102.1 million under the Existing
Credit Facility, including $10.0 million to fund its co-investment activities
and $92.1 million for the Recent Acquisitions, and repaid $20.0 million of these
amounts. At January 31, 1999, the Company had an unused borrowing capacity
(taking into account letters of credit outstanding) under the Existing Credit
Facility of approximately $61.6 million. The Existing Credit Facility requires
the Company to enter into one or more interest rate agreements for the Company's
indebtedness in excess of $50 million ensuring the net interest is fixed, capped
or hedged. In September 1998, the Company entered into an interest rate swap
agreement with a notional amount of $135.0 million. The swap agreement
establishes a fixed interest pay rate of 5.29% and terminates on June 24, 1999.
The weighted average receive rate for the swap agreement is 5.32% for the period
ended December 31, 1998. The Company's participation in derivative transactions
has been designed for hedging
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purposes, and derivative instruments are not held for trading purposes. The
shares of certain wholly-owned subsidiaries accounting for 5% or more of the
consolidated assets, revenues or earnings of the Company, and subsidiaries which
are engaged primarily in the business of real estate development and ownership,
whose assets are not subject to any financing, accounting for more than 5% of
the consolidated assets, revenues or earnings of the Company, are pledged as
security for this credit facility. The Company expects to continue to borrow
under the Existing Credit Facility to finance future strategic acquisitions,
fund its co-investment activities and provide the Company with an additional
source of working capital.
In August 1997, Trammell Crow BTS, Inc., a wholly-owned subsidiary of the
Company ("TC BTS"), obtained a $20.0 million credit facility (the "Retail BTS
Facility") from KeyBank National Association ("KeyBank"). Under the terms of the
Retail BTS Facility, until May 31, 1999, subsidiaries of TC BTS can obtain loans
at one of a LIBOR-based interest rate, KeyBank's prime rate or a combination of
the two interest rates. The proceeds of any such loans must be used for the
construction of retail facilities. On January 31, 1999, the outstanding balance
owed under the Retail BTS Facility was $4.4 million. The Retail BTS facility is
secured by a first mortgage on and assignment of all rents from the constructed
facilities. In addition, TC BTS must guarantee all obligations of its
subsidiaries for loans made pursuant to the Retail BTS Facility and (i) if the
closing of any loan occurred prior to May 1, 1998, Trammell Crow MW, Inc., a
wholly-owned subsidiary of the Company, is required to guarantee the repayment
obligations under the Retail BTS Facility with respect to such loan and to
guarantee the timely lien free completion of the retail facility to which such
loan relates, and (ii) if the closing of any loan occurs on or after May 1,
1998, the Company must guarantee the repayment obligations under the Retail BTS
Facility with respect to such loan and must guarantee the timely lien free
completion of the retail facility to which such loan relates. The Retail BTS
Facility also contains various covenants, such as the maintenance of a minimum
net worth of TC BTS and prohibition on other TC BTS guarantees of build-to-suit
retail projects.
In December 1998, TCC NNN Trading, Inc., a wholly-owned subsidiary of the
Company ("TCC Triple Net"), obtained a two-year $20.0 million revolving line of
credit ("Triple Net Facility") from KeyBank National Association ("KeyBank").
Under the terms of the Triple Net Facility, TCC Triple Net can obtain loans at a
LIBOR-based interest rate, the proceeds of which must be used for the
acquisition of retail properties subject to "triple net" leases. On January 31,
1999, there was no outstanding balance under the Triple Net Facility. The Triple
Net Facility is nonrecourse to TCC Triple Net and is secured by a first mortgage
and assignment of all rents from the acquired properties. The Company will
guarantee from 10% to 40% of each such loan depending on the credit rating of
the tenant occupying the acquired property. The Company's guarantee percentage
will be reduced to 10% for any loan upon the receipt of a purchase agreement
relating to the property underlying such loan. The maximum amount of any advance
related to a single property will be either (i) 90% of the property's
acquisition costs and certain related costs (if the property's tenant has a debt
rating of BBB- or higher), or (ii) 80% of the property's acquisition costs and
certain related costs (if the property's tenant has a debt rating of BB+ or
lower). The Triple Net Facility also contains various covenants, such as the
maintenance of minimum equity and liquidity of the Company and covenants
relating to certain key financial data of the Company. The restrictions
contained in such financial covenants are identical to those set forth in the
Existing Credit Facility. See "Business--Retail Services."
The Company intends to retain earnings to finance its growth and, therefore,
does not anticipate paying any dividends in the foreseeable future. The Company
believes that funds generated from operations, together with existing cash and
available credit under the Existing Credit Facility, the Retail BTS Facility and
the Triple Net Facility will be sufficient to finance its current operations,
planned capital expenditure requirements, payment obligations for development
purchases, acquisitions of service companies and internal growth for the
foreseeable future. The Company's need, if any, to raise additional funds to
meet its working capital and capital requirements will depend upon numerous
factors, including the success and pace of its implementation of its growth
strategy. The Company regularly monitors capital
34
<PAGE>
raising alternatives to be able to take advantage of available avenues to
supplement its working capital, including strategic corporate partnerships or
other alliances, bank borrowings and the sale of equity and/or debt securities.
IMPACT OF YEAR 2000
The Year 2000 problem refers to the inability of many existing computer
programs to properly recognize or process a year that begins with "20" instead
of the familiar "19." If not corrected, many time-sensitive computer programs
using two digits to indicate the year may recognize "00" as the year 1900 rather
than the year 2000. The failure to recognize the year 2000 and other key dates
could result in a variety of problems from data miscalculations to the failure
of entire systems.
In early 1998, the Company formed a Year 2000 Task Force (the "Task Force")
including internal technical, operational, financial and legal representatives
and technical and legal consultants. Under the direction of the Task Force, the
Company is pursuing multiple Year 2000-related initiatives (collectively, the
"Program") with the goal of mitigating the impact of Year 2000 issues on Company
operations.
INFORMATION TECHNOLOGY SYSTEMS
Prior to the formation of the Task Force, the system services provider that
operates and maintains the Company's central data center had conducted an
assessment of the data center's information technology ("IT") systems for the
purpose of assessing such systems' Year 2000 readiness. The IT systems resident
at the Company's central data center include its central property management
system (hardware and software handling accounting and reporting for
approximately 60% of the Company-managed properties), its central communication
system (e-mail, wide-area network and internet servers) and its central work
order system. On the basis of this assessment and the installation of previously
planned hardware and software upgrades, completed early in 1998, the Company
believes that the data center IT systems should not be materially adversely
affected by Year 2000 issues.
One of the Program initiatives calls for the inventory, assessment and
remediation of IT assets (mainly consisting of PCs, servers and resident
software) at Company locations remote from the data center. Company technical
personnel are currently engaged in the first phase of this initiative, in which
IT assets in the Company's 56 largest offices will be inventoried, assessed and
remediated. Inventory and assessment of PC hardware and inventory of software
for this first phase was completed in February 1999. Assessment of the software
inventory for this phase was completed in March 1999, and the Company has
commenced indicated remediation. Following completion of the first phase
inventory, the Company commenced the second phase, inventorying and assessing IT
assets in those smaller offices where the Company believes that the criticality
of the IT assets warrants the assessment effort. The inventory and assessment of
PC hardware and inventory of software for this second phase and inventory and
assessment of all field office servers is expected to be complete in April 1999.
Assessment of the software inventory for this second phase is also expected to
be complete in April 1999, whereupon the Company will commence the indicated
remediation.
Costs associated with both phases of the field office inventory and
assessment effort, expected to be incurred no later than the first quarter of
1999, are expected to total less than $400,000. These costs include license fees
for application software used in the inventory and assessment process and fees
paid to consultants in connection with the assessment of the software inventory.
Based on earlier inventory and assessment of IT assets conducted by an
independent consultant at two of the Company's larger field offices, the Company
currently estimates that the cost of Year 2000 IT asset remediation at all of
its field offices will be approximately $2.0 million (in excess of normal,
recurring PC acquisitions and replacements). This amount represents anticipated
expenditures for Year 2000-driven PC replacement and commercial application
software upgrades. As this amount is based on a sample, actual remediation costs
may differ materially.
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<PAGE>
MANAGED PROPERTIES--NON-IT SYSTEMS
Another of the Program initiatives calls for the Company to assist owners of
Company-managed properties with the inventory, assessment and remediation of
non-IT systems at such properties. Most of the Company's field offices are in
leased premises in these managed properties. In 1997, owners and tenants of many
of the properties managed by the Company began to contact the Company seeking
information as to the Year 2000 readiness of the properties they own or occupy.
In response to these requests, the Company began making inquiries of vendors of
building systems as to the Year 2000 readiness of such systems, communicating
with owners and tenants as to the results of these inquiries and assisting
owners with the remediation recommended by the vendors or otherwise requested by
the owners. In the summer of 1998, the Company determined to engage a consultant
to serve as a project manager and technical resource for the Company's property
management personnel as work on this initiative continues at Company-managed
properties. Under the direction of the project manager, the Company expects to
complete its inventory and assessment work on this initiative in April 1999.
Following the inventory and assessment work, the Company will assist owners with
the remediation of indicated Year 2000 issues in accordance with owners'
instructions. THIS INFORMATION IS INTENDED SOLELY TO ADVISE THE INVESTMENT
COMMUNITY OF THE STEPS THAT THE COMPANY IS TAKING TO ASSIST OWNERS OF
COMPANY-MANAGED PROPERTIES (IN WHICH MOST OF THE COMPANY'S OFFICES ARE LOCATED)
WITH YEAR 2000 ISSUES RELATING TO NON-IT SYSTEMS. NO OWNER OR TENANT IN A
COMPANY-MANAGED PROPERTY SHOULD RELY ON THIS STATEMENT AS AN INDICATION THAT THE
COMPANY HAS OR WILL INVENTORY OR ASSESS THE MANAGED PROPERTY ON ITS BEHALF OR
THAT, IN FACT, SUCH PROPERTY IS OR WILL BE IN A STATE OF YEAR 2000 READINESS.
QUERIES IN THIS REGARD SHOULD BE ADDRESSED TO APPROPRIATE PROPERTY MANAGEMENT
PERSONNEL.
The Company currently expects that its unreimbursed out-of-pocket costs
relating to this initiative, including the costs of the consultant engaged to
act as the project manager and technical resource, should not exceed $1.0
million. Costs of remediating Year 2000 issues associated with non-IT systems at
managed properties should be borne exclusively by the owners or tenants of such
properties.
YEAR 2000 READINESS OF THIRD PARTIES
The Company is to varying degrees dependent on the Year 2000 readiness of
third parties. Because of the breadth of the Company's customer base, the
success of its business is not closely tied to the success of any particular
customer. Aside from vendors of certain IT systems that have already been
contacted by the Company concerning the Year 2000 compliance of their products,
the Company is in the preliminary stages of identifying the other parties with
which it does business (utilities, other vendors, etc.) whose Year 2000 problems
could adversely impact the Company. Another Program initiative calls for the
Company to make appropriate inquiries of these parties. The Company expects to
complete these inquiries in the second quarter of 1999.
YEAR 2000 RISKS
Significant uncertainty exists concerning the scope and magnitude of
problems associated with Year 2000 issues. While the goal of the Program is to
mitigate the impact of Year 2000 issues on the Company's operations, there can
be no assurance that it will be successful in doing so. For example, there is no
assurance that the Program itself will succeed in accomplishing its purposes or
that unforeseen circumstances will not arise during implementation of the
Program that would materially and adversely affect the Company. Year
2000-related failures of mission-critical systems or at Company-managed
properties could materially adversely affect the Company's operations.
CONTINGENCY PLANS
The Company currently does not have any contingency plans in place. As the
Program initiatives described above are pursued further, the Company will
continue to consider the need for contingency plans.
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EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
37
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BUSINESS
COMPANY OVERVIEW
Trammell Crow Company is one of the largest diversified commercial real
estate services companies in North America. Through 150 offices in the United
States and Canada, the Company delivers a comprehensive range of services to
leading multinational corporations, institutional investors and other users of
real estate services. In addition, the Company has a strategic alliance with
Crow Holdings International, which has eight offices in Europe, Asia and South
America. In the United States, the Company is a leading provider of commercial
property management, commercial property brokerage, infrastructure management
and office and industrial property development and construction services. The
Company, which is headquartered in Dallas, Texas, was founded in 1948 by Mr.
Trammell Crow. From its founding through the 1980's, the Company's primary
business was the development and management of industrial, office and retail
projects. In 1991, the Company was reconstituted as a real estate services
company. This reconstitution entailed the separation of the Company's commercial
real estate asset base and related operations from its real estate services
business. The Company continued to operate the real estate services business
while ownership of the commercial real estate asset base was segregated into a
large number of separate entities distinct from the Company, with independent
management and operations. Many of these entities are managed by subsidiaries of
Crow Holdings. See "Risk Factors--Dealings with and Reliance on Affiliates;
Potential Conflicts of Interest."
As a means of addressing the comprehensive real estate service requirements
of its diverse group of clients, the Company is organized into five principal
lines of business. The Company's property management services business provides
services relating to all aspects of building operations, tenant relations and
oversight of building improvement processes, primarily for building owners who
do not occupy the properties managed by the Company. The brokerage services
business advises buyers, sellers, landlords and tenants in connection with the
sale and leasing of office, industrial and retail space and land. The
infrastructure management business entails providing comprehensive day-to-day
occupancy related services, principally to large corporations which occupy
commercial facilities in multiple locations. These services include
administration, day-to-day maintenance and repair of client occupied facilities
and strategic functions such as space planning, relocation coordination,
facilities management and portfolio management. The Company's development and
investment activities include development and construction services and the
acquisition and disposition of commercial real estate projects. The development
and construction services business includes financial planning, site
acquisition, procurement of approvals and permits, design and engineering
coordination, construction bidding and management and tenant finish
coordination, project close-out and user move coordination, general contracting
and project finance advisory services. The Company's retail services business
provides tenant representation, disposition, development and financial services
to national and global retail customers, as well as property management and
leasing services to regional malls.
COMPETITIVE ADVANTAGES
The Company believes it has the following important competitive advantages:
COMPREHENSIVE SERVICE OFFERINGS. The Company's comprehensive menu of
services provides clients with single-point solutions to all of their commercial
real estate services needs. The Company often commences client relationships by
providing a single service and later expands these relationships by anticipating
and satisfying the client's other specific service requirements. By offering a
full array of services, the Company is able to maximize the effect it has on its
clients' businesses while becoming highly integrated into its clients'
operations. Its comprehensive service offerings also decrease the Company's
exposure to a downturn in any one of its primary businesses.
GEOGRAPHIC SCOPE. Through its 150 offices, the Company develops and
maintains extensive knowledge of local real estate markets across the United
States and Canada. Approximately 88% of the
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Company's employees are based in markets other than Dallas, Texas, where its
executive offices are located. In addition, the Company has a strategic alliance
with Crow Holdings International, which has eight offices in Europe, Asia and
South America. This broad geographic scope allows the Company to serve as a
single-source, full service provider to multinational corporations and
institutional investors with real estate interests that span regional and
national boundaries. It also tends to limit its exposure to an economic downturn
in any single market.
TECHNOLOGY. The Company uses off-the-shelf and proprietary technology
applications to better meet customer needs. An example is its centralized call
center, which is a vital component of the Company's proprietary total occupancy
cost management process that provides comprehensive cost studies and analyses of
building portfolios to the Company's customers. This call center provides
responses to customer needs 24 hours a day. Use of these applications is
intended to enhance sharing of vital market information and provide
significantly enhanced control over clients' expenses.
MANAGEMENT/PERSONNEL. The Company has a highly qualified management team.
Its seven member executive committee has an average of approximately 16 years of
experience with the Company. The Company believes the low turnover among this
senior management group is linked to its collegial internal culture and its
history of promoting talented individuals from within. The Company's growth
strategy, incentive-based compensation and the high level of ownership by
Company insiders provides further motivation to achieve a high level of
performance. Immediately following the Offering, employees will beneficially own
approximately 37% of the Common Stock outstanding.
COMPETITIVE ENVIRONMENT
MARKET FOR REAL ESTATE SERVICES. The real estate industry experienced a
severe downturn in the late 1980s. This downturn caused a sharp reduction in
commercial and industrial property values, the withdrawal of credit, a related
reduction in new development and pressure on fee income derived from servicing
and maintaining all classes of property. In recent years, the industry
experienced a steady recovery that increased growth across all of the Company's
traditional service lines. This recovery stimulated a revival of activity in the
more traditional development and construction business. As demand for office and
industrial space increased and property values rebounded in many of the nation's
principal markets, new construction starts accelerated. If continued, this trend
would provide an opportunity for the Company to earn fees associated with new
development and to participate in development projects as both an advisor and as
principal. In recent months, the Company has seen some evidence that providers
of capital are beginning to take a more cautious approach regarding investments
in development projects. If this trend should continue or accelerate, that
portion of the Company's development activity could level off or decline.
OUTSOURCING. Outsourcing is a rapidly growing trend in the United States.
Through outsourcing, organizations seek to reduce costs, improve profitability
and refocus management and other resources on core competencies. This trend has
resulted in the development of well established providers offering an expanding
range of outsourced services, including information processing, teleservicing
and flexible staffing. Increasingly, organizations are also seeking outside
providers for efficient and expert delivery of real estate management services.
CONSOLIDATION. The traditionally fragmented real estate services industry
is witnessing rapid consolidation in customers' selection of service providers
and in alliances and combinations among providers themselves. When outsourcing
real estate services, corporations and institutions have increasingly sought to
consolidate the number of providers used and engage firms that can offer a full
range of services across a wide geographic area. As the industry becomes more
sophisticated, customers require the flexibility, multi-market perspective and
technological and physical resources that large firms possess.
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<PAGE>
As the real estate services industry has grown, it has been accompanied by
downward pressure on fees and the increased use of fee structures which reflect
shared risk and emphasize the achievement of performance targets. These trends
benefit firms with significant scale and the ability to spread fixed costs over
a larger revenue base, and have accelerated consolidation among real estate
service providers.
The Company believes that few real estate service providers can meet the
demands of large corporate and institutional customers and that many companies
are facing pressure to combine with others to remain competitive. In the
Company's view, the competitive imperatives presented by this consolidation
trend include the need to maintain comprehensive service offerings, serve an
expansive geographic area and operate the business with sufficient scale to
achieve significant cost efficiencies.
GROWTH STRATEGY
The Company is using its broad industry expertise, its recognized brand and
its long-standing client relationships to pursue the following growth strategy:
EXPAND CLIENT RELATIONSHIPS. The Company's existing clients represent the
most immediate opportunity to increase revenues and earnings through
cross-selling the services offered by the Company. The Company has dedicated
national client services personnel to identify the Company's most strategically
significant customers and focus on expanding the business generated from them.
Of the 152 discrete assignments secured from the 16 most strategically
significant customers in 1997, 21 were awarded in cities where the Company
previously did not serve the client making the assignment. Through September 30,
1998, these customers awarded 130 new business assignments to the Company in
1998.
EXPAND THE BREADTH OF SERVICE OFFERINGS. The Company continuously expands
and enhances its breadth of service offerings, principally by creating new
service businesses internally. For example, the Company took advantage of the
trend toward outsourcing of real estate services by creating its infrastructure
management services business, which provided 21.9% of total revenues in 1997, up
from 9.4% in 1993.
CO-INVESTMENT AND DEVELOPMENT PROGRAMS. The Company continues to make
selective co-investments of capital alongside corporate and institutional
clients. This leverages its relationships with these clients and its extensive
knowledge of the real estate industry to create new opportunities to invest
capital. The Company seeks co-investments that generate investment returns while
still allowing it to earn fees in exchange for services provided in the
development and management of the project. Since October 1997, the Company has
entered into several development programs which provide opportunities to earn
fees and achieve investment returns over a series of projects with a single
investor, rather than seeking these opportunities on a
transaction-by-transaction basis.
ACQUISITIONS. In addition to pursuing internal growth, the Company is
committed to a strategy of selective acquisitions of complementary businesses.
The Company bases this strategy on its belief that the traditionally fragmented
real estate services industry is experiencing rapid consolidation as customers
seek service providers who can meet their broad range of real estate needs. The
Company believes that few real estate service providers can meet the demands of
large corporate and institutional customers, and that many smaller companies are
facing pressure to combine with other service providers to remain competitive.
Seeking to capitalize on this consolidation trend, in 1998, the Company
completed the acquisition of five businesses based in Los Angeles, Seattle,
Detroit, Boston and Charlotte. See "The Company--Recent Acquisitions." The
Company continuously surveys the marketplace for other potential acquisitions
which might further enhance the quality or the breadth of services it can offer
clients.
PROPERTY MANAGEMENT SERVICES
As of September 30, 1998, the Company managed approximately 266.6 million
square feet of commercial property (excluding malls and facilities occupied by
infrastructure management customers) and served approximately 630 clients and
18,300 tenants nationwide through its locally based property
40
<PAGE>
management teams present in 70 markets. The approximately 41.0 million square
feet of retail space included in the Company's managed property portfolio make
the Company one of the largest non-REIT managers of retail property in the
United States. 1997 revenues from property management services were $87.8
million (28.0% of 1997 revenues), down from $91.0 million in 1993. Revenues from
property management services for the nine months ended September 30, 1998 were
$81.9 million, compared to $65.1 million for the same period in 1997. A
substantial portion of this growth in revenue is due to acquisitions. In 1998
the Company acquired: (i) Norman, a real estate services firm with operations
concentrated in Seattle's central business district office and retail markets;
(ii) Tooley, a California real estate services company primarily engaged in
office management and leasing; and (iii) a portion of the businesses of Faison
and Faison Enterprises, which are engaged in the development, leasing and
management of office and retail properties located primarily in the Midatlantic
and Southeast regions of the United States. As a result of these acquisitions,
the Company added approximately 41.5 million square feet to its property
management portfolio.
The following charts and table show the total square feet managed by the
Company at year end and the Company's revenues from its property management
business from 1993 through 1997:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SQUARE FEET REVENUES (1)
<S> <C> <C>
1993 215,025 $90,954
1994 207,020 $99,609
1995 212,499 $92,970
1996 210,102 $90,179
1997 204,428 $87,756
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Square Feet...................................... 215,025 207,020 212,499 210,102 204,428
Revenues(1)...................................... $ 90,954 $ 99,609 $ 92,970 $ 90,179 $ 87,756
</TABLE>
- ------------------------
(1) Revenue is not a measure of profitability. Except with respect to
infrastructure management services (which were conducted through a separate
subsidiary), the Company did not accumulate costs by revenue type for years
prior to 1997. Accordingly, a measure of profitability for the Company's
property management services business cannot be shown for such periods. For
summarized operating data by business line in 1997 and 1998, see "Selected
Consolidated Financial Data" and Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments."
The objective of the Company's property management business is to enhance
its clients' investment values by maintaining high levels of occupancy and
lowering property operating costs by offering a wide range of property
management services. The property management services offered by the Company
consist of (i) building management services such as maintenance, landscaping,
security, energy management, owner's insurance, life safety, environmental risk
management and capital repairs; (ii) tenant relations services such as
promotional activities, processing tenant work orders and lease administration
41
<PAGE>
services; (iii) interfacing with the Company's development and construction
services personnel in coordinating tenant finish; and (iv) financial management
services including financial reporting and analysis utilizing software systems
supported by the Company's in-house design and development capability for
customized requirements.
The Company expects that most of its new property management engagements
will result from property transfers, projects that the Company develops for
institutional investors and property management assignments added through
strategic acquisitions. To the extent that institutional investors continue to
make direct investments in real estate, the Company believes that it will be in
an advantageous position to win new property management engagements due to its
existing relationships with large institutional investors and its ability to
provide single-source solutions for their multi-market and multi-functional
requirements.
The properties managed by the Company are typically served by locally based
teams of property managers and maintenance personnel supported by various
corporate level service functions, including technology support and purchasing.
Client accounts are typically managed at the Company's national office to assure
consistency of quality and to promote greater cross-selling of the Company's
services.
The Company typically receives monthly management fees for the property
management services it provides, based upon a specified percentage of the
monthly gross income generated from the property under management. In certain
cases, the Company's property management agreements entitle it to receive a
certain minimum fee based on the net rentable square footage or a percentage of
the expected full occupancy fee of the property. The amount of the management
fee varies depending upon local market conditions, the leasing engagement,
arrangements for expense reimbursements and specific services required.
Incentive fees are sometimes negotiated in turnaround or other unusual
circumstances. The Company also may be reimbursed for a portion of its
administrative and payroll costs directly attributed to the properties under
management.
A typical property management agreement of the Company provides for an
indefinite term, but permits the property owner or the Company to terminate the
agreement upon thirty days prior written notice. The Company believes that these
are customary termination provisions in the industry. The Company historically
has been successful in retaining property management agreements, but has lost
agreements in circumstances where a property has been sold and the new property
owner assumes direct responsibility for managing the property or retains one of
the Company's competitors to manage the property. On a portfolio basis,
excluding new assignments obtained within the last 12 months, the Company's
current average length per property management assignment is approximately five
years.
As part of its strategic alliance with AMB Property L.P. ("AMB"), the
Company has converted all of its property management contracts with AMB from
industry standard contracts terminable upon 30 days notice to contracts with
five year terms terminable only under certain circumstances. See "--Development
and Investment Activities."
BROKERAGE SERVICES
In 1997, the Company facilitated approximately 6,000 sales and lease
transactions. As of September 30, 1998, the Company employed 475 brokers, having
added 280 brokerage professionals since the beginning of 1996. Revenues from
brokerage services increased from $47.3 million in 1993 to $91.1 million in 1997
(29.0% of 1997 revenues). Revenues from brokerage services for the nine months
ended September 30, 1998 were $100.8 million, compared to $61.7 million for the
same period in 1997. A substantial portion of this growth in revenues is due to
acquisitions. In order to enhance its existing brokerage business, in May 1998
the Company acquired Fallon, Hines & O'Connor, a Boston-based commercial real
estate brokerage, consulting and advisory firm with 30 brokerage professionals.
42
<PAGE>
The following charts and table show the number of brokers employed by the
Company at year end and the Company's revenues from its brokerage services
business from 1993 through 1997:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BROKERS REVENUES (1)
<S> <C> <C>
1993 150 $47,299
1994 146 $48,652
1995 195 $61,960
1996 235 $72,095
1997 335 $91,053
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(REVENUES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Brokers.......................................... 150 146 195 235 335
Revenues(1)...................................... $ 47,299 $ 48,652 $ 61,960 $ 72,095 $ 91,053
</TABLE>
- ------------------------
(1) Revenue is not a measure of profitability. Except with respect to
infrastructure management services (which were conducted through a separate
subsidiary), the Company did not accumulate costs by revenue type for years
prior to 1997. Accordingly, a measure of profitability for the Company's
brokerage services business cannot be shown for such periods. For summarized
operating data by business line in 1997 and 1998, see "Selected Consolidated
Financial Data" and Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments."
The Company has historically provided project leasing services (leasing
space in real estate owned by clients and managed by the Company) for the
properties in its property management portfolio. In 1993 the Company began to
expand its brokerage services beyond project leasing to include tenant
representation (representing clients seeking to acquire real estate through
lease or purchase), investment sales (representing clients buying or selling
income producing real estate), listings (representing clients disposing of
surplus space) and land sales (representing clients buying or selling unimproved
land).
The Company typically receives fees for brokerage services based on a
percentage of the value of the lease or sale transaction. Some transactions may
stipulate a fixed fee or include an incentive bonus component based on the
performance of the brokerage professional or client satisfaction. Although
transaction volume can be subject to economic conditions, brokerage fee
structures remain relatively constant through both economic upswings and
downturns.
Project leasing revenues are derived from the steady turnover of tenants in
the Company's property management and leasing portfolio of approximately 334
million square feet at September 30, 1998. Lease terms for these properties
average four years, resulting in approximately 84 million square feet of space
"rolling" each year, providing the Company a commission paid by the owner of the
property for renewing the existing tenant's lease or releasing the space to a
new tenant. The Company's tenant representation revenues are derived from the
other side of the transaction, representing the tenants whose leases are
expiring. Listing revenues generally increase in economic downswings as
companies dispose of surplus space, while investment sales and land revenues
generally increase in economic upswings as available
43
<PAGE>
capital drives the trading of income producing properties and corporate demand
for additional space drives the purchase of land for new development.
The Company regards its brokerage force as an integral part of its delivery
system for the broad services the Company provides to its clients. Access to a
large network of experienced brokers is often a valuable asset when seeking new
property management, infrastructure management, development and construction and
retail services business. The presence of its brokers in on-site project leasing
offices can provide the Company with insights into its customers' non-brokerage
real estate needs and early opportunities to capture the client's real estate
services business. The sheer number of transactions in which its brokers are
involved can also be a source of information from which the Company can seek to
identify business opportunities in specific local or regional markets.
The Company actively engages its brokerage force in the execution of its
marketing strategy. Brokerage personnel often work in close concert with the
Company's "city leaders," who are the professionals with overall responsibility
for operations in major markets. Through this arrangement, key personnel are
kept abreast of national trends and of the full range of services provided to
customers in other areas in the United States. The ongoing dialogue among these
professionals serves to increase their level of expertise, and is supplemented
by other more formal education such as that provided at "Trammell Crow
University," which offers sales and motivational training as well as direct
exposure to personnel from the Company's other lines of business. Moreover, the
brokerage force is financially rewarded for cross-selling efforts which result
in new engagements for the Company, such as a development project, the
acquisition of a new infrastructure management account, or assistance across
geographic service lines which enables the Company to acquire additional
brokerage business. Brokerage personnel also earn commissions and are eligible
for profit sharing programs, participations and other forms of incentive
compensation. These incentives are designed to underscore the Company's belief
that the brokerage business is often a key point of entry for new clients, and
is thus integral to firmwide efforts to cross-sell a full range of services.
The Company intends to more aggressively recruit and hire (either
individually or through acquisitions) additional brokerage professionals
experienced primarily in the areas of investment sales and tenant
representation. The Company believes that the quality brand identification of
its name, the platform of a full range of services to offer clients, the ability
to learn and execute additional real estate services and the Company's
incentive-based compensation system which encourages ownership by Company
personnel create an environment conducive to attracting the most experienced and
capable brokerage professionals.
INFRASTRUCTURE MANAGEMENT SERVICES
As of September 30, 1998, the Company had approximately 1,300 employees who
serviced 62 infrastructure management clients in approximately 16,000 properties
encompassing over 128 million square feet. Revenues from infrastructure
management services have grown from $16.4 million in 1993 to $68.7 million in
1997 (21.9% of 1997 revenues). Revenues from infrastructure management services
for the nine months ended September 30, 1998 were $74.0 million, compared to
$48.0 million for the same period in 1997. The Company has developed expertise
in providing infrastructure management services to clients in the financial
services, healthcare, higher education, automotive, oil and gas and
technology/communications industries. In February 1998, the Company entered into
the Penn Contract, pursuant to which, on April 1, 1998, the Company became the
exclusive provider of certain infrastructure management services with respect to
designated properties and grounds of Penn. In addition, in June 1998, the
Company acquired substantially all of the assets of Core. The Company's goal in
effecting this acquisition was to combine its resources and management
experience with the expertise of the former Core employees to become a leading
provider of infrastructure management services in the automotive industry.
44
<PAGE>
The following charts and table show the growth of the Company's
infrastructure management services business from 1993 through 1997 in terms of
revenues and net income:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REVENUES NET INCOME
<S> <C> <C>
1993 $16,401 $342
1994 $27,063 $391
1995 $38,681 $441
1996 $50,836 $1,620
1997 $68,719 $1,664
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 16,401 $ 27,063 $ 38,681 $ 50,836 $ 68,719
Net Income....................................... 342 391 441 1,620 1,664(1)
</TABLE>
- ------------------------
(1) Excludes the after-tax effect of the following in 1997: (1) the allocation
to the Company's infrastructure management services business of $4,095,000
of the Company's $33,085,000 non-cash, non-recurring charge to compensation
expense and (2) the allocation to the Company's infrastructure management
services business of $539,000 of the Company's $4,355,000 non-recurring
charge to income resulting from the settlement of claims by certain former
employees arising out of a terminated stock appreciation rights plan. For
summarized operating data by business line in 1997 and 1998, see "Selected
Consolidated Financial Data" and Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments."
The goal of the Company's infrastructure management services business is to
align the facilities and support services of its clients with their operational
and strategic business objectives. Occupancy-related costs frequently represent
the largest corporate expense item after compensation and benefits. The Company
believes that organizations are increasingly outsourcing their infrastructure
management functions to reduce costs, improve profitability and refocus
management and other resources on core competencies.
The Company administers infrastructure management services through its
wholly-owned subsidiary, Trammell Crow Corporate Services, Inc., which combines
a centralized administrative, marketing and leadership organization with
client-based delivery systems. The infrastructure management services offered by
the Company consist of (i) strategic services, such as consulting, development,
properties portfolio management, real estate asset management, management of
accounting and information systems and organizational and process strategies;
(ii) facility management (the day-to-day maintenance and repair of facilities);
(iii) facility planning and project management (such as construction, space
planning, site consolidations, facilities design, moves adds and changes and
furniture, signage, and cabling); (iv) transaction services (such as
acquisitions, dispositions, project leasing and subleasing, lease administration
and lease audits where, rather than providing services on a
transaction-by-transaction basis according to the industry's traditional model,
the Company seeks to manage a client's entire firm-wide property acquisition and
divestiture program); (v) office services (such as security, reprographics,
mail, cafeteria, shipping and receiving and reception services); and (vi) call
center services (including work-order, dispatch, vendor management and emergency
response), which are provided 24 hours a day through the Company's centralized
call center.
45
<PAGE>
The Company offers the following infrastructure management service delivery
options: (i) dedicated Company employees located at a client site; (ii) a team
of Company employees dedicated to a client but located off the client's site at
Company offices; and (iii) a flexible, nationwide network of Company personnel
providing the full menu of the Company's real estate services from the Company's
city offices. Most of the Company's infrastructure management engagements
provide for on-site presence of Company employees, which the Company believes
enhances client communication, provides focused personal service, protects the
proprietary information of the client and enables the Company to monitor client
satisfaction on an ongoing basis.
The Company has developed expertise in providing infrastructure management
services to clients in the financial services, healthcare, higher education,
automotive, oil and gas and technology/communications industries. The growth,
consolidation and regulatory changes taking place in these industries have
increased the importance of infrastructure management to these corporations and
have caused them to seek to improve productivity by rationalizing facilities
organization and eliminating redundant assets. The Company believes that there
is opportunity to grow by targeting clients within these industries. For
example, within the financial services industry, the Company has grown from one
client in 1993 to 19 clients as of September 30, 1998, and from 3 million square
feet under management in 1993 to approximately 70 million square feet as of
September 30, 1998.
The Company also believes that it has an opportunity to achieve growth in
its infrastructure management services business by developing expertise in
additional industries. In order to expand into the higher education industry, in
February 1998 the Company entered into the Penn Contract with Penn, pursuant to
which, on April 1, 1998, the Company became the exclusive provider of certain
infrastructure management services with respect to designated properties and
grounds of Penn. The Company provides management of operations, maintenance,
utilities, facilities planning and design, small renovation work,
grounds-keeping, owner representation for construction and accounting and
financial reporting services to Penn. The Company also provides real estate
portfolio and transaction management services, such as property acquisitions and
dispositions. The Penn Contract has a one-year term with a multi-year extension
subject to Penn's receipt of a favorable tax ruling from the Internal Revenue
Service. Penn has engaged in discussions with the Internal Revenue Service and
has informed the Company that it expects to file a private letter ruling request
during April 1999. The Company expects that it and Penn will continue to operate
under the Penn Contract pending consideration of the private letter ruling
request.
The five largest customers for the Company's infrastructure management
services business, measured in 1997 revenues from such customers, collectively
represented 8.4% of the Company's total revenues in 1997. The Company believes
that significant growth opportunity exists within its existing customer base, as
only 25 out of 62 existing customers receive three or more types of services
from the Company out of the five types of infrastructure management services
offered.
The Company seeks to enter into multi-year infrastructure management
contracts with its clients. Most contracts are structured so the Company
receives a monthly base fee and annual incentives if certain agreed-upon
performance targets are satisfied. Most contracts also provide for the
reimbursement of client-related personnel costs and associated overhead
expenses. In many cases, these revenue sources are augmented by variable
commission-based revenues from brokerage, facility planning and project
management activities.
DEVELOPMENT AND INVESTMENT ACTIVITIES
The Company focuses its commercial real estate development business on third
party build-to-suit customers and investors in office, industrial and retail
projects. It has the capability to implement active and sizeable development
programs, primarily on behalf of its clients, but also for its own account. In
1997, revenues from development and investment activities (consisting of service
revenues, income from unconsolidated subsidiaries and gain on disposition of
non-retail real estate projects) were $49.6 million
46
<PAGE>
(15.8% of 1997 revenues). Revenues from development and investment activities
for the nine months ended September 30, 1998 were $71.1 million, compared to
$29.6 million for the same period in 1997. From January 1, 1993 through
September 30, 1998, the Company developed or redeveloped approximately 56.9
million square feet of projects with aggregate project costs of approximately
$3.7 billion. From January 1 through September 30, 1998, the Company started
approximately 14.1 million square feet of development projects with an estimated
aggregate cost of $1.2 billion. In connection with the Faison Acquisition, the
Company entered into a development program with Faison Enterprises which the
Company believes will strengthen its position in the strip center and regional
mall construction and development business.
The following charts and table show the Company's square feet of development
projects started and revenues from its development and construction services
business for 1993 through 1997:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SQUARE FEET OF DEVELOPMENT PROJECT STARTS REVENUES (1)
<S> <C> <C>
1993 2,829 $14,842
1994 5,124 $20,579
1995 10,083 $24,140
1996 12,408 $29,266
1997 12,273 $49,570
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Square Feet of Projects Started.................. 2,829 5,124 10,083 12,408 12,273
Revenues(1)...................................... $ 14,842 $ 20,579 $ 24,140 $ 29,266 $ 49,570
</TABLE>
- ------------------------
(1) Revenue is not a measure of profitability. Except with respect to
infrastructure management services (which were conducted through a separate
subsidiary), the Company did not accumulate costs by revenue type for years
prior to 1997. Accordingly, a measure of profitability for the Company's
development and construction services business cannot be shown for such
periods. For summarized operating data by business line in 1997 and 1998,
see "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent
Developments."
The Company provides its clients with services that are vital in all stages
of the development and construction process, including: (i) evaluating project
feasibility, budgeting, scheduling and cash flow analysis; (ii) site
identification, due diligence and acquisition; (iii) procurement of approvals
and permits, including zoning and other entitlements; (iv) coordination of
project design and engineering; (v) construction bidding and management and
tenant finish coordination; (vi) project close-out and user move coordination;
(vii) general contracting; and (viii) project finance advisory services.
The Company's development and construction services engagements are
typically staffed with a local/ regional team which includes a senior company
executive in the role of project general manager and one or more specialists in
the areas of physical project development and construction. The Company
currently employs approximately 30 senior executives with an average of thirteen
years experience in all aspects of
47
<PAGE>
sourcing development projects and providing general management and project
finance advisory capabilities for those projects. The Company also employs
approximately 78 other individuals with an average of more than 10 years
experience who are responsible for various aspects of the development process,
including the execution of physical development and construction management
responsibilities. The Company has dedicated ten of these full-time employees to
promote and oversee its development and construction services business on a
national basis while continuing to leverage the expertise and contacts of the
Company's local and regional development professionals. This national team will
focus on enhancing the value of large scale development projects, mitigating
development and construction risk in the Company's portfolio of business and
accessing the capital markets to arrange for development programs/ funds with
institutional investors.
The Company typically receives a fee for its development services that is
based on a negotiated percentage of a project's budgeted construction and
development cost. Incentive bonuses may be received for completing a project
under budget and within certain critical time deadlines. The Company has also
been flexible in negotiating other incentive compensation arrangements that
allow the Company to participate in the investment returns on projects it
develops for its clients. The Company may make a co-investment with its clients
(typically no more than 5% of a project's full construction and development
cost), receive its pro rata return on its investment in the project and also
receive an incentive participation in the project because of the Company's role
in sourcing the development project and/or executing a variety of services in
the development process. The Company's investments or co-investments in real
estate projects typically result in an ownership interest substantially greater
than the co-investment percentage. To facilitate development activity and to
further mitigate risk, the Company established three discretionary development
and investment funds which, as of September 30, 1998, had raised $64.0 million,
of which $30.7 million had been invested in projects with an aggregate
construction cost of approximately $377.2 million.
In 1997, the Company entered into a development program pursuant to a
non-binding memorandum of understanding with Kennedy Associates Real Estate
Counsel, Inc. ("Kennedy"). This development program focuses on multi-tenant
office and business park development projects. The Company has also entered into
a strategic alliance with AMB. As part of this strategic alliance, the Company
entered into two development programs pursuant to non-binding memoranda of
understanding, one of which focuses on developing and managing industrial
properties in targeted distribution markets, with particular emphasis placed on
multi-tenant freight forwarding facilities adjacent to major airports and
industrial submarkets of targeted metropolitan areas, while the other
development program focuses on multi-tenant retail redevelopment. The Company
has also entered into development programs pursuant to non-binding memoranda of
understanding with each of CFH Industrial Trust, an affiliate of Crow Holdings,
and LaSalle Advisors, Limited. Each of these development programs focuses on
developing and managing industrial properties in targeted distribution markets.
In connection with the Faison Acquisition, the Company also entered into a
development program with Faison Enterprises focusing on strip center, power
center and regional mall construction and development.
The following table identifies the number of projects which, as of December
31, 1998, had been targeted for inclusion in these development programs but are
pending approval of the development program partner, are under a letter of
intent with a program partner or are in development. To date, no projects have
been completed under these development programs, and there can be no assurance
that the
48
<PAGE>
projects targeted for inclusion in the programs will be accepted by the program
partners or that such projects or those under letters of intent will in fact be
developed.
<TABLE>
<CAPTION>
PROJECTS PENDING APPROVAL PROJECTS UNDER LETTER OF INTENT PROJECTS IN
BY PROGRAM PARTNER WITH DEVELOPMENT PROGRAM PARTNER DEVELOPMENT
-------------------------------- -------------------------------- -------------
NUMBER BUDGETED NUMBER NUMBER
OF DEVELOPMENT AND OF BUDGETED OF
DEVELOPMENT PROGRAM PROJECTS CONSTRUCTION PROJECTS DEVELOPMENT AND PROJECTS
- ---------------------------------- ------------- COSTS ------------- CONSTRUCTION -------------
----------------- COSTS
(IN MILLIONS) -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Kennedy........................... -- $ -- 5 $ 115.6 7
AMB Industrial.................... 2 18.0 -- -- 5
AMB Retail........................ -- -- -- -- --
Faison Retail..................... -- -- -- -- 1
CFH Industrial Trust.............. 3 34.7 -- -- 2
LaSalle Advisors, Limited......... 5 85.2 -- -- --
-- -- --
------ ------
Total........................... 10 $ 137.9 5 $ 115.6 15
-- -- --
-- -- --
------ ------
------ ------
<CAPTION>
BUDGETED
DEVELOPMENT AND
DEVELOPMENT PROGRAM CONSTRUCTION
- ---------------------------------- COSTS
-----------------
<S> <C>
Kennedy........................... $ 126.9
AMB Industrial.................... 64.5
AMB Retail........................ --
Faison Retail..................... 11.8
CFH Industrial Trust.............. 11.5
LaSalle Advisors, Limited......... --
------
Total........................... $ 214.7
------
------
</TABLE>
The market for development and construction services is cyclical and is
driven by various economic conditions. The demand for commercial real estate
properties in suburban office, downtown office and industrial markets has
increased over the last several years, driven mainly by the acquisition
activities of buyers, including real estate investment trusts and other
investors. In recent months, the Company has seen some evidence that providers
of capital are beginning to take a more cautious approach regarding investments
in development projects. If this trend should continue or accelerate, that
portion of the Company's development and investment activity, as well as its
traditional construction and development business, could level off or decline.
The Company's development activities generate business opportunities for the
Company's other service lines which can support the Company's earnings when
development and construction revenues decrease as a result of market conditions.
Because the Company provides development and construction services primarily to
third parties, including clients who invest in build-to-suit projects, the
Company believes that the adverse effect on its revenues when speculative
development activities are curtailed in a market down cycle should be mitigated.
In addition, because the Company's operating costs and expenses for this
business line are relatively small (representing only 14.7% of the Company's
total operating costs and expenses in 1997), the Company believes that the
adverse effect of a market down cycle on its earnings should not be as material
as it would be for other firms whose development overhead expenses constitute a
greater portion of their cost structure. When development activity reaches a
down cycle in the future, the Company intends to use professionals from its
development and construction services business to pursue opportunistic property
acquisitions with its established capital partners.
RETAIL SERVICES
The Company's retail services management group was formed in 1996 to better
serve national retail customers (who demand specialized property and market
knowledge) and compete with service providers whose sole focus is retail. In
furtherance of its goal to be the leading national retail real estate company,
in August 1997 the Company acquired Doppelt, which specializes in supporting the
real estate departments of retail companies by providing tenant representation
and lease disposition services to clients such as OfficeMax, TJX and General
Nutrition Centers. Retail revenues (consisting of service revenue and gain on
disposition of retail build-to-suit real estate projects) in 1997 were $6.5
million (2.1% of 1997 revenues). After giving pro forma effect to the Doppelt
Acquisition as of January 1, 1997, the Company's retail revenues in 1997 would
have been $11.5 million. Retail revenues for the nine months ended September 30,
1998 were $13.1 million, compared to $2.8 million for the same period in 1997.
This increase resulted primarily from the Doppelt Acquisition in August 1997 and
the Faison Acquisition in July 1998. The
49
<PAGE>
Company believes that the Faison Acquisition has established the Company as one
of the leading providers of retail and office property management and brokerage
services in the Southeastern United States and provided the Company with the
platform and expertise to expand its retail services business.
The primary services the Company provides to its retail clients include
brokerage services, such as tenant representation for site acquisition and
surplus space dispositions, and development services, such as predevelopment
activities, project finance advisory services and construction oversight. The
Company also acquires, rehabilitates and sells certain retail properties which
the Company believes to be undervalued. In the future, the Company will seek to
combine the expertise of its retail business leaders with that of its
development services personnel to formulate programs for developing retail
assets, both for the Company's account and for the account of third parties,
including third parties in which the Company may own an equity interest.
As of September 30, 1998, the Company provided retail services to over 48
retail customers and had developed more than 30 retail build-to-suit projects.
The 10 largest customers for the Company's retail services business in terms of
1997 revenues collectively generated $5.8 million of the Company's 1997
revenues. Although the Company is specifically focused on expanding its retail
client base, the Company also believes that there are significant opportunities
to provide additional services to its existing retail clients. Of the 60 major
national retail clients that have engaged the Company's retail services business
since 1993, 48 clients continue to use the Company for the same services on
additional retail projects. Another ten of these major clients have added new
services.
The Company delivers tenant representation services and disposition services
utilizing a network of the Company's local brokers and third-party providers.
The Company generates commission revenue from these services which are shared
with brokers in the local markets. The Company believes that the Doppelt
Acquisition has enhanced its ability to recruit brokerage professionals, build
its local retail brokerage capabilities and capture a greater portion of these
commission revenues.
Development services are delivered through a national retail build-to-suit
subsidiary that specializes in predevelopment activities, including land
acquisition and procurement of entitlements. For its development services to
third parties, the Company typically earns a base fee plus an incentive fee that
is paid out of the sale proceeds upon project completion.
In December 1998, the Company formed TCC Triple Net to acquire freestanding
retail properties and resell those properties within an anticipated hold period
of no more than six months after their acquisition. The Company's goal will be
to generate revenue through this activity by collecting rental income during the
period that the asset is owned and by capturing a spread on the purchase and
sale of the properties. The Company believes that, by providing real estate
services to its national retail customers, it has developed a proficiency in
identifying retail investment opportunities and formulating and implementing
retail development programs. In order to provide a portion of the funds
necessary to conduct these activities, the Company obtained the Triple Net
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
In connection with the Doppelt Acquisition, the Company delivered to Doppelt
(i) approximately $20.7 million in cash, (ii) a subordinated promissory note of
the Predecessor Company, payable to Doppelt in the principal amount of $6.0
million, and (iii) the right to receive up to $2.0 million of additional
purchase price if future commissions collected by the Company from any source
exceed $7.0 million, subject to reduction based on the amount of certain of
Doppelt's uncollected accounts receivable and certain leases executed by Doppelt
as of August 22, 1997, for which a commission is not collected by TCRS prior to
August 22, 1999. The Predecessor Company also paid Mr. Doppelt $2.0 million upon
the execution of an employment agreement. In November 1997, the Company issued
to Doppelt 342,857 shares of Common Stock in payment of the $6.0 million
promissory note.
50
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company had approximately 5,100 employees.
Employees of the Company at certain properties located in San Francisco,
California; Las Vegas, Nevada; Reno, Nevada; and Chicago, Illinois are currently
represented by a labor union. The unions represented at the respective locations
are: International Union of Operating Engineers, Stationary Engineers, Local No.
39 (San Francisco, California); Southern California-Nevada Regional Council of
Carpenters (Las Vegas, Nevada); Carpenters Local Union #971 and Nevada Chapter
Associated General Contractors of America, Inc. and Laborers' International
Union of North America-AFL-CIO local No. 169 (Reno, Nevada); and Itasca Center
III, Limited Partnership; Oakbrook Terrace Tower, Itasca, Illinois and
International Union of Operating Engineers of Chicago, Illinois and Vicinity
Local No. 399. Management believes that its ongoing labor relations are good.
INSURANCE
The Company has the types of insurance coverage, including comprehensive
general liability and excess umbrella liability insurance, that it believes are
appropriate for a company in the lines of business in which it operates. The
Company's management will use its discretion in determining the amounts,
coverage limits and deductibility provisions of appropriate insurance coverage
on the Company's properties and operations at a reasonable cost and on suitable
terms. This might result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full value of the damages
suffered by the Company.
FACILITIES
The Company's executive offices are located at 2001 Ross Avenue, 3400
Trammell Crow Center, Dallas, Texas 75201 and consist of approximately 32,441
square feet of leased office space. The Company's telephone number at such
address is (214) 863-3000. The Company's lease at its executive offices will
expire on December 31, 1999.
TRADEMARKS
The trade name "Trammell Crow" is material to the Company's business. The
Company is a party to a License Agreement with CF98 with respect to such
business and trade names. See "Risk Factors--Trade Name License."
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business. In the Company's opinion, no litigation to which the Company is
currently a party, if decided adversely to the Company, is likely to have a
materially adverse effect on the Company's results of operation or financial
condition.
ENVIRONMENTAL LIABILITY
Various federal, state and local laws and regulations impose liability on
current or previous real property owners or operators for the cost of
investigating, cleaning up or removing contamination caused by hazardous or
toxic substances at the property. In the Company's role as a property manager,
it could be held liable as an operator for such costs. Such liability may be
imposed without regard to the legality of the original actions and without
regard to whether the Company knew of, or was responsible for, the presence of
such hazardous or toxic substances, and such liability may be joint and several
with other parties. If the liability is joint and several, the Company could be
responsible for payment of the full amount of the liability, whether or not any
other responsible party is also liable. Further, any failure by the Company to
disclose environmental issues could subject the Company to liability to a buyer
or lessee of the property. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for
51
<PAGE>
damages and costs it incurs in connection with the contamination. The operator
of a site also may be liable under common law to third parties for damages and
injuries resulting from hazardous substances or environmental contamination at a
site, including liabilities relating to the presence of asbestos-containing
materials. There can be no assurance that any of such liabilities to which the
Company or any of its affiliates may become subject will not have a material
adverse effect on the Company's business and results of operations.
Some of the properties owned, operated, or managed by the Company are on,
adjacent to or near properties that have contained in the past, or currently
contain, underground and/or above-ground storage tanks used to store regulated
substances such as petroleum products or other hazardous or toxic substances.
Some of the properties owned, operated or managed by the Company are in the
vicinity of properties which are currently, or have been, subject to releases of
regulated substances and remediation activity, and the Company is currently
aware of several properties owned, operated or managed by the Company which may
be impacted by regulated substances which may have migrated from adjacent or
nearby properties or which may be within the borders of areas suspected to be
impacted by regional groundwater contamination. In addition, the Company is
aware of the presence or the potential presence of regulated substances at
several properties owned, operated or managed by it which may have resulted from
historical or ongoing soil or groundwater activities on those properties. Based
on the information available to date, the Company believes that the
environmental issues described above are being or have been appropriately
managed and will not have a material adverse effect on the Company.
There can be no assurance that environmental liabilities or claims will not
adversely affect the Company in the future.
GOVERNMENT REGULATION
The Company and its brokers, salespersons and, in some instances, property
managers are regulated by the states in which they do business. These
regulations include licensing procedures, prescribed fiduciary responsibilities
and anti-fraud prohibitions. The Company's activities are also subject to
various federal and state fair advertising, trade, housing and real estate
settlement laws and regulations and are affected by laws and regulations
relating to real estate and real estate finance and development. In particular,
a number of states and localities have imposed environmental controls and zoning
restrictions on the development of real estate.
The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. The Company believes that it has the necessary permits and
approvals to operate each of its properties and their respective businesses.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that its
properties in which it holds an equity interest are substantially in compliance
with these requirements, a determination that such properties are not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Board of
Directors and executive officers of the Company including their respective ages
as of March 22, 1999:
<TABLE>
<CAPTION>
DIRECTOR'S TERM
NAME AGE TITLE ENDING
- ------------------------------------ --- ------------------------------------------------------- ---------------
<S> <C> <C> <C>
George L. Lippe..................... 44 Chief Executive Officer, President and Director 2001
H. Pryor Blackwell.................. 38 Executive Vice President and Chief Operating Officer --
William F. Concannon................ 43 President and Chief Executive Officer of Trammell Crow 2000
Corporate Services, Inc. and Director
Henry J. Faison..................... 64 Executive Vice President and Director 2000
William C. Maddux................... 44 Executive Vice President and President of Brokerage --
Operations
Asuka Nakahara...................... 43 Executive Vice President and Chief Knowledge Officer --
Philip W. Norwood................... 51 Vice Chairman --
William Rothacker................... 47 President and Chief Executive Officer of Trammell Crow --
Retail Services, Inc.
Robert E. Sulentic.................. 42 Executive Vice President, Chief Financial Officer and 2001
Director
James D. Carreker................... 51 Director 1999
Harlan R. Crow...................... 49 Director 1999
James R. Erwin...................... 54 Director 2000
Jeffrey M. Heller................... 59 Director 1999
Rowland T. Moriarty................. 52 Director 2001
J. McDonald Williams................ 57 Chairman of the Board of Directors 2000
</TABLE>
GEORGE L. LIPPE has been the President, Chief Executive Officer and a
director of the Company since its inception and has served as President and
Chief Executive Officer of the Predecessor Company since January 1996. From 1995
to 1996, Mr. Lippe served as Executive Vice President of Operations of the
Predecessor Company. From 1990 to date, Mr. Lippe has served as President and
Chief Executive Officer of the Company's Midwest Region. Mr. Lippe has served in
various other capacities with the Company since 1978.
H. PRYOR BLACKWELL has served as Executive Vice President and Chief
Operating Officer of the Company since September 1, 1998. Mr. Blackwell served
as Executive Vice President and Chief Operating Officer of the Company's Western
Operations from August 1997 through August 1998 and has served as President and
Chief Executive Officer of Trammell Crow Dallas/Fort Worth, Inc. and Trammell
Crow Dallas Industrial, Inc. since 1993. Mr. Blackwell has served on the Board
of Directors of the Predecessor Company since 1993 and as a member of the Board
of Directors served on the Operating Committee, Investment Committee and Audit
Committee of the Predecessor Company. From 1991 to 1993, Mr. Blackwell served as
President and Chief Executive Officer of Trammell Crow Central Office Group,
Inc. From 1987 to 1990, Mr. Blackwell served as the Partner in charge of the
Company's Downtown (Dallas) Office Division. Mr. Blackwell served as the
Company's Marketing Principal from 1986 to 1987 and Leasing Agent from 1984 to
1986.
53
<PAGE>
HENRY J. FAISON has served as Executive Vice President and a director of the
Company since July 1998. From 1994 to 1998, Mr. Faison served as Chairman of
Faison Enterprises. From 1988 to 1994, he served as the Chief Executive Officer
of Faison Enterprises.
WILLIAM F. CONCANNON has been a director of the Company since December 1997
and has served as President and Chief Executive Officer of Trammell Crow
Corporate Services since July 1991. Mr. Concannon has served as a Member of the
Board of Directors of the Predecessor Company since 1991. He joined the
Predecessor Company as Vice President of National Marketing in 1986 and in 1989
became Director and Partner in charge of Trammell Crow Corporate Services.
WILLIAM C. MADDUX has served as Executive Vice President and President of
Brokerage Operations since September 1, 1998. Mr. Maddux served as Executive
Vice President and Chief Operating Officer of the Company's Eastern Operations
from August 1997 through August 1998. Since 1992, Mr. Maddux has served as the
Executive Vice President of Trammell Crow MW, Inc., and has had responsibility
for overseeing the Company's operations in Illinois, Indiana, Michigan and
Wisconsin. Mr. Maddux served the Predecessor Company in various other capacities
from 1985 to 1992, including as Partner in charge of the Predecessor Company's
Carolina division from 1988 to 1992, Marketing Principal in charge of the
Company's Oklahoma City operations from 1987 to 1988 and Leasing Agent in the
Company's Oklahoma City office from 1985 to 1987.
ASUKA NAKAHARA has served as Executive Vice President and Chief Knowledge
Officer since September 1, 1998. Mr. Nakahara served as Executive Vice President
and Chief Financial Officer of the Company from August 1997 through August 1998,
and served as Executive Vice President and Chief Financial Officer of the
Predecessor Company from January 1996 through August 1998. During 1995, Mr.
Nakahara served as the Predecessor Company's Executive Vice President in charge
of National Programs. Mr. Nakahara served as President and Chief Executive
Officer of Trammell Crow Northeast, Inc. from 1991 to 1995 and as the Northeast
Regional Partner for the Predecessor Company from 1987 to 1991. Mr. Nakahara
served the Predecessor Company in various other capacities from 1980 to 1987,
including as the Operating Partner in charge of the Predecessor Company's
Philadelphia division from 1985 to 1987, Finance Associate and Partner in
Houston from 1983 to 1984, and Leasing Agent in Houston from 1980 to 1983.
PHILIP W. NORWOOD has served as Vice Chairman of the Company since July
1998. From 1994 until July 1998, Mr. Norwood served as the President and Chief
Executive Officer of Faison. From 1980 until 1993, Mr. Norwood held various
positions with affiliates of the Predecessor Company, including chairman of
Trammell Crow Realty Advisors in 1993 and its president and Chief Executive
Officer in 1992 and 1993.
WILLIAM ROTHACKER has been President and Chief Executive Officer of Trammell
Crow Retail Services since its formation in December 1996. Since 1994, Mr.
Rothacker has been President of Trammell Crow Denver and has had responsibility
for overseeing the Company's operations in New Mexico and Arizona. Mr. Rothacker
has served on the Predecessor Company's Operating Committee and as Chairman of
its Retail Committee since 1994. Mr. Rothacker served as Managing Director in
charge of the Predecessor Company's Denver operations from 1991 to 1994. From
1987 to 1991, Mr. Rothacker served as Partner in charge of the Denver Division.
Mr. Rothacker served as Partner in charge of the Denver Retail division from
1983 to 1986 and as a Leasing Agent in Denver from 1980 to 1983.
ROBERT E. SULENTIC has served as the Company's Executive Vice President and
Chief Financial Officer since September 1, 1998 and has been a director of the
Company since December 1997. Mr. Sulentic served as the Company's Executive Vice
President and National Director of Development and Investment from December 1997
through August 1998. Mr. Sulentic has been President of Trammell Crow NE, Inc.
since 1995, and has served on the Predecessor Company's Operating Committee and
as Chairman of its Development Committee since 1994. From 1991 to 1994, Mr.
Sulentic served as Managing Director in charge of the Predecessor Company's
Philadelphia Division. From 1987 to 1990, Mr. Sulentic served as the Partner in
charge of the Predecessor Company's New Jersey Division. Mr. Sulentic served in
Houston as a Marketing Director for the Predecessor Company in 1986 and 1987 and
as a Leasing Agent in 1984 and 1985.
54
<PAGE>
JAMES D. CARREKER has been a director of the Company since December 1997.
Mr. Carreker has served as Chairman of the Board and Chief Executive Officer of
Wyndham International, Inc. since January 1998. Mr. Carreker assumed these
positions in connection with the merger with and into Patriot Hospitality, Inc.
of Wyndham Hotel Corporation, for which he has served as President and Chief
Executive Officer since May 1988. As of February 1999, Mr. Carreker has also
assumed the position of Chief Executive Officer of Patriot American Hospitality,
Inc. He also served as Chief Executive Officer of the Predecessor Company from
August 1994 to December 1995.
HARLAN R. CROW has been a director of the Company since its inception. Mr.
Crow is the Chief Executive Officer of Trammell Crow Interests Company, d/b/a
Crow Holdings, a private investment company managing investments in a variety of
real estate-related and other businesses, a position he has held since 1986. Mr.
Crow currently serves as a Director of Patriot American Hospitality, Inc. In any
given year within the past five years, Mr. Crow has indirectly owned interests
in over 1,000 partnerships (or affiliates of partnerships) or corporations. In
the past five years, Mr. Crow was a general partner in 1, and an officer or
director in 56, partnerships or corporations, or affiliates of such partnerships
or corporations, that filed for protection under federal bankruptcy laws. In
addition, in the past five years, Mr. Crow was an executive officer or director
in 15 partnerships or corporations, or affiliates of such partnerships or
corporations, that were placed in receivership. Pursuant to a Stockholders
Agreement to which the Company is a party, Crow Family Partnership, L.P. has
been granted the right to nominate a member of the Board of Directors and each
executive officer of the Company has agreed to vote his shares of Common Stock
in favor of such nominee. Mr. Crow is the initial such nominee. See "Certain
Relationships and Related Transactions--Stockholders' Agreement."
JAMES R. ERWIN has been a director of the Company since December 1997. Mr.
Erwin has served as Vice Chairman Texas and Senior Client Executive--Southwest
of BankAmerica Corporation since October 1998, and was Vice Chairman for Texas
and Corporate Finance Executive-West of NationsBank Corp. since January 1994,
and was Executive Vice President, Manager of Operations and Technology for
NationsBank Corp. from October 1991 to January 1994.
JEFFREY M. HELLER has been a director of the Company since December 1997.
Mr. Heller has served as President and Chief Operating Officer of Electronic
Data Systems Corporation ("EDS") since June 1996. From 1987 to June 1996, Mr.
Heller served as Senior Vice President of EDS with responsibilities for
Technical Operations and Asia-Pacific. Mr. Heller is a member of the Board of
Directors of Mutual of Omaha Insurance Company.
ROWLAND T. MORIARTY has been a director of the Company since December 1997.
Mr. Moriarty has served as Chairman and Chief Executive Officer of Cubex
Corporation, a consulting firm, since 1992. From 1981 to 1992, Mr. Moriarty
served as a professor at the Harvard Business School. Mr. Moriarty is a member
of the Board of Directors of Staples Inc., an office supply retailer, and
Charles River Associates, an economic research firm based in Boston.
J. MCDONALD WILLIAMS has been the Chairman of the Board of Directors of the
Company since its inception and served as Chairman of the Board of Directors of
the Predecessor Company from August 1994 to December 1997. Mr. Williams served
as President and Chief Executive Officer of the Predecessor Company from 1991 to
1994. From 1977 to 1991, Mr. Williams served as Managing Partner of the
Predecessor Company and from 1973 to 1977 Mr. Williams was Managing Partner,
International Projects for the Predecessor Company. Mr. Williams is a member of
the Board of Directors of A.H. Belo Corporation and Blanks Color Imaging, Inc.
In any given year within the past five years, Mr. Williams has indirectly owned
interests in over 1,000 partnerships (or affiliates of partnerships) or
corporations. In the past five years, Mr. Williams was a general partner in 54,
and an officer or director in 16, partnerships or corporations, or affiliates of
such partnerships or corporations, that filed for protection under federal
bankruptcy laws. In addition, in the past five years, Mr. Williams was a general
partner in 14 partnerships or corporations, or affiliates of such partnerships
or corporations, that were placed in receivership.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides certain information with respect to the
beneficial ownership as of January 31, 1999, of the Common Stock as adjusted to
reflect the sale of Common Stock by the Selling Stockholders pursuant to the
Offering. The table sets forth the beneficial ownership by (i) each person known
to the Company to be the beneficial owner of 5% or more of the shares of Common
Stock outstanding; (ii) each director; (iii) each Named Executive Officer; (iv)
directors and executive officers of the Company as a group; and (v) each Selling
Stockholder, including certain former employees of the Company and the
Predecessor Company (the "Former Employees"). Unless otherwise indicated, each
person has sole voting (subject to the terms of the Stockholders' Agreement) and
dispositive power over the shares indicated as owned by such person. Unless
otherwise indicated, all stockholders set forth below have the same principal
business address as the Company, and all Selling Stockholders are Company
employees. See "Management" for a description of the positions the directors and
executive officers hold with the Company.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
------------------------------ ------------------------------
NUMBER OF SHARES NUMBER OF
SHARES PERCENT OF SHARES BEING SHARES PERCENT OF SHARES
NAME OWNED OUTSTANDING(1) OFFERED(2) OWNED OUTSTANDING(1)
- -------------------------------------------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
DIRECTORS, NAMED EXECUTIVE OFFICERS AND
RELATED ENTITIES
Crow Family Partnership, L.P. .............. 4,276,829 12.2% 40,000 4,236,829 12.1%
3200 Trammell Crow Ctr.
2001 Ross Avenue
Dallas, Texas 75201
CFH Trade Names, L.P. ...................... 2,295,217 6.6 1,255,722 1,039,495 3.0
3200 Trammell Crow Ctr.
2001 Ross Avenue
Dallas, Texas 75201
CFH Capital Resources, L.P.................. 1,327,489 3.8 -- 1,327,489 3.8
----------- ----- ----------- ----------- -----
Subtotal.................................. 7,899,535 22.6 1,295,722 6,603,813 18.9
J. McDonald Williams........................ 1,524,789(3) 4.4 -- 1,524,789(3) 4.4
George L. Lippe............................. 827,759( (5) 2.4 125,000 702,759( (5) 2.0
H. Pryor Blackwell.......................... 689,519(5) 2.0 167,791 521,728(5) 1.5
William Concannon........................... 405,448( (6) 1.2 80,000 325,448( (6) *
William C. Maddux........................... 377,412(5) 1.1 89,630 287,782(5) *
Asuka Nakahara.............................. 474,145(5) 1.4 100,000 374,145(5) 1.1
Robert E. Sulentic.......................... 289,614( (7) * 60,000 229,614( (7) *
William R. Rothacker........................ 600,585( (8) 1.7 110,000 490,585( (8) 1.4
Philip W. Norwood........................... 12,698(9) * -- 12,698(9) *
Harlan R. Crow ............................. 7,904,809( 11) 22.6 1,295,722 6,609,087( 11) 18.9
3200 Trammell Crow Ctr.
2001 Ross Avenue
Dallas, Texas 75201
James D. Carreker........................... 163,112(11) * 30,000 133,112(11) *
James R. Erwin.............................. 9,274(11) * -- 9,274(11) *
Henry J. Faison............................. 127,828(12) * -- 127,828(12) *
Rowland T. Moriarty......................... 15,274( 13) * -- 15,274( 13) *
Jeffrey M. Heller........................... 5,274(11) * -- 5,274(11) *
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(15 PERSONS).............................. 13,427,540(14) 38.2 2,058,143 11,369,397(14) 32.4
FORMER EMPLOYEES(15)
Dona, Anthony W............................. 70,308 * 40,000 30,308 *
Hager, Mary M............................... 9,500 * 9,000 500 *
Miller, A. Bryce............................ 567,544 1.6 70,000 497,544 1.4
Sidell, Mark H.............................. 32,532 * 6,000 26,532 *
OTHER SELLING STOCKHOLDERS(16)
Abshier, Dorcey B........................... 177,214 * 34,850 142,364 *
Anderson, Charles A......................... 377,055 1.1 92,731 284,324 *
Apple, James W., Jr......................... 313,091 * 75,000 238,091 *
Baer, Kenneth J............................. 140,933 * 27,500 113,433 *
Bak, Thomas A............................... 173,824 * 42,557 131,267 *
Barnes, Robert W............................ 154,348 * 25,000 129,348 *
Belcher, E. Stevenson....................... 291,801 * 45,000 246,801 *
Bower, Barbara B............................ 32,584 * 7,000 25,584 *
Branch, Alfred C............................ 140,933 * 34,344 106,589 *
Brown, Charles B............................ 107,912 * 20,000 87,912 *
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
------------------------------ ------------------------------
NUMBER OF SHARES NUMBER OF
SHARES PERCENT OF SHARES BEING SHARES PERCENT OF SHARES
NAME OWNED OUTSTANDING(1) OFFERED(2) OWNED OUTSTANDING(1)
- -------------------------------------------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Casey, James M.............................. 140,432 * 27,428 113,004 *
Cataldo, Steven J........................... 33,581 * 1,700 31,881 *
Chagares, Robert Louis...................... 132,058 * 31,903 100,155 *
Clayton, Mark G............................. 51,831 * 6,250 45,581 *
Click, Anthony B............................ 31,301 * 5,000 26,301 *
Coe, Richard H.............................. 262,353 * 40,000 222,353 *
Coley, Elwood B., Jr........................ 313,360 * 77,274 236,086 *
Cooper, Thomas E............................ 30,911 * 6,000 24,911 *
Deutsch, Donald H........................... 118,072 * 22,500 95,572 *
Didion, James............................... 36,907 * 5,000 31,907 *
Doppelt, Jeffrey............................ 253,113 * 50,000 203,113 *
Dunavant, Vincent A......................... 33,035 * 7,000 26,035 *
Elam, Pryse R............................... 140,986 * 34,156 106,830 *
Eliot, John P............................... 33,184 * 7,000 26,184 *
Erwin, Stan K............................... 123,595 * 30,000 93,595 *
Fawcett, Philip J........................... 60,593 * 11,000 49,593 *
Francis, Mary Jo............................ 33,122 * 5,500 27,622 *
Frankfurt, Shaun W.......................... 34,020 * 10,000 24,020 *
Funck, Bernard Ross......................... 87,178 * 10,000 77,178 *
Gaffner, Arlin E............................ 30,729 * 3,341 27,388 *
Genova, Andrew J............................ 72,649 * 17,545 55,104 *
Gillespie, Samuel A......................... 170,719 * 35,000 135,719 *
Glimp, Frederick............................ 89,762 * 15,000 74,762 *
Grantham, Curtis C.......................... 160,328 * 30,000 130,328 *
Groch, James R.............................. 166,122 * 38,338 127,789 *
Ham, Gregory B.............................. 33,740 * 10,000 23,740 *
Hamilton, Philip B.......................... 142,082 * 25,000 117,082 *
Hardy, Jeffrey L............................ 48,538 * 2,500 46,038 *
Haynes, Jeffrey N........................... 164,308 * 25,000 139,308 *
Henry, Patrick T............................ 169,029 * 20,000 149,029 *
Holcomb, Jeffrey E.......................... 93,518 * 10,000 83,518 *
Holland, John A............................. 140,524 * 34,344 106,180 *
Hubbard, Michael K.......................... 33,405 * 5,000 28,405 *
Hudson, Daniel S............................ 139,229 * 44,905 94,324 *
Johnson, Kirk A............................. 217,789 * 50,000 167,789 *
Khourie, Matthew S.......................... 381,243 1.1 40,000 341,243 *
Klein, Steven T............................. 31,041 * 7,466 23,575 *
Koop, Bryan J............................... 202,844 * 49,849 152,995 *
Laigaie, George E........................... 70,897 * 20,345 50,552 *
Latran, Gregory S........................... 187,626 * 45,852 141,774 *
Leiser, Thomas A............................ 253,187 * 58,000 195,187 *
Leiser, William P........................... 273,227 * 25,000 248,227 *
Leonard, W. Trask, Jr....................... 32,691 * 3,000 29,691 *
Lindquist, Thomas M......................... 129,865 * 25,000 104,865 *
Maher, John C............................... 106,787 * 26,302 80,485 *
Matoushek, James H.......................... 69,407 * 15,000 54,407 *
McNearney, Thomas O., III................... 175,117 * 12,000 163,117 *
Moyski, Stephen M........................... 116,298 * 22,000 94,298 *
Murphy, Robert J............................ 137,951 * 33,597 104,354 *
Nave, Joel Bret............................. 27,887 * 8,000 19,887 *
Nelson, Christopher J....................... 115,090 * 27,998 87,092 *
Newman, Linda............................... 216,455 * 53,383 163,072 *
Nickels, Matthew J., III.................... 150,866 * 25,000 125,866 *
Niles, Thomas E............................. 50,028 * 11,946 38,082 *
Noble, David F.............................. 11,532 * 2,240 9,292 *
O'Brien, D. Patrick......................... 229,120 * 56,554 172,566 *
O'Neil, Kevin C............................. 33,566 * 8,000 25,566 *
Peck, Martin C.............................. 29,961 * 6,000 23,961 *
Pustmueller, Joel........................... 33,836 * 4,000 29,836 *
Rodenstein, Barry........................... 91,767 * 18,000 73,767 *
Roth, Terry Christopher..................... 273,906 * 66,620 207,286 *
Ryan, William P............................. 144,786 * 20,000 124,786 *
Santry, Arthur Joseph, III.................. 77,121 * 18,665 58,456 *
Schoenheider, Donald P...................... 79,485 * 18,665 60,820 *
Seiz, Jon T................................. 191,114 * 25,000 166,114 *
Sklow, Robert C............................. 89,849 * 17,500 72,349 *
Smith, Joseph L., III....................... 36,156 * 6,500 29,656 *
Sperling, Ann............................... 238,093 * 35,000 203,093 *
Stirek, John A.............................. 444,113 1.3 109,336 334,777 *
Swain, Mike L............................... 22,800 * 7,538 15,262 *
Tatsch, Daniel L............................ 14,937 * 3,103 11,834 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
------------------------------ ------------------------------
NUMBER OF SHARES NUMBER OF
SHARES PERCENT OF SHARES BEING SHARES PERCENT OF SHARES
NAME OWNED OUTSTANDING(1) OFFERED(2) OWNED OUTSTANDING(1)
- -------------------------------------------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Thiemann, David J........................... 330,969 * 83,391 247,578 *
Thomas, Donald R., II....................... 29,159 * 6,719 22,440 *
Thompson, Donald C.......................... 147,608 * 10,000 137,608 *
Timberlake, Todd A.......................... 33,754 * 2,707 31,047 *
Tipple, David F............................. 33,296 * 3,000 30,296 *
Tucker, Diane S............................. 172,046 * 50,000 122,046 *
Valliere, Ralph R........................... 36,942 * 8,000 28,942 *
Walker, Stanley Denton, III................. 27,930 * 5,000 22,930 *
Williams, George H.......................... 84,817 * 20,532 64,285 *
Woodworth, Tom.............................. 77,844 * 18,633 59,211 *
Woolstenhulme, Roger B...................... 128,506 * 18,750 109,756 *
</TABLE>
- ------------------------
* Less than 1%.
(1) Based on 34,914,424 shares of Common Stock the Company expects to be
outstanding immediately prior to the Offering, including 313,123 shares
which the Company expects to be issued upon the exercise of options and sold
in the Offering.
(2) Includes 313,123 shares issuable upon exercise of options.
(3) Includes 13,655 shares that may be acquired upon the exercise of options,
951 shares held indirectly through the Company's 401(k) Plan and 684 shares
acquired under the Company's Employee Stock Purchase Plan.
(4) Includes 2,252 shares held in trust for the benefit of George L. Lippe's
minor children. Mr. Lippe is the trustee of the trust. Also includes 957
shares acquired under the Company's Employee Stock Purchase Plan.
(5) Includes 19,509 shares that may be acquired upon the exercise of options.
(6) Includes 29,813 shares that may be acquired upon the exercise of options.
(7) Includes 23,000 shares owned by Mr. Sulentic's wife.
(8) Includes 384 shares acquired under the Company's Employee Stock Purchase
Plan.
(9) Includes 12,698 shares that may be acquired upon the exercise of options.
(10) Consists of all shares held by Crow Family Partnership, L.P., all shares
held by CFH Trade-Names, L.P., and all shares held by CFH Capital Resources,
L.P. Crow Family, Inc. is an affiliate of all such partnerships. Mr. Crow is
a director of Crow Family, Inc. and trustee of certain family trusts which
hold a significant equity interest in each such partnership. Mr. Crow
disclaims beneficial ownership of all such shares held by such partnerships.
(11) Includes 5,274 shares that may be acquired upon the exercise of options.
(12) Includes 63,914 shares held of record by Faison Enterprises, a non-profit
corporation of which Mr. Faison is the sole member. Although Mr. Faison
currently has the right to designate all of the members of the board of
directors of Faison Enterprises, he has no pecuniary interest in such shares
of Common Stock. Mr. Faison disclaims ownership of all shares of Common
Stock held by Faison Enterprises.
(13) Includes 2,000 shares held indirectly through a non-issuer profit sharing
plan.
(14) Includes 219,099 shares that may be acquired upon the exercise of options
within the next 60 days.
(15) Share ownership information includes for "Former Employees" (i) before the
Offering, an aggregate of 40,244 shares that may be acquired upon the
exercise of options within the next 60 days, (ii) an aggregate of 6,000
shares being offered that the Company expects to be issued upon the exercise
of such options and (iii) after the Offering, an aggregate of 34,244 shares
that may be acquired upon the exercise of such options. Unless otherwise
indicated, each Former Employee is a former principal level employee of the
Company or one or more of the Company's subsidiaries. The shares
beneficially owned by certain Former Employees named under "Former
Employees" may include shares owned of record by a corporation, partnership
or trust which such Former Employee controls or may be held of record
jointly by such Former Employee and such Former Employee's spouse.
(16) Share ownership information includes for "Other Selling Stockholders" (i)
before the Offering, an aggregate of 2,423,128 shares that may be acquired
upon the exercise of options within the next 60 days, (ii) an aggregate of
307,123 shares being offered that the Company expects to be issued upon the
exercise of such options and (iii) after the Offering, an aggregate of
2,116,005 shares that may be acquired upon the exercise of such options.
Unless otherwise indicated, each Selling Stockholder is a principal level
employee of the Company or one or more of the Company's subsidiaries. The
shares beneficially owned by certain Selling Stockholders named under "Other
Selling Stockholders" may include shares owned of record by a corporation,
partnership or trust which such Selling Stockholder controls or may be held
of record jointly by such Selling Stockholder and such Selling Stockholder's
spouse.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary description is qualified in its entirety by reference
to the Company's Certificate of Incorporation, which is filed as an exhibit to
the Registration Statement. The authorized capital stock of the Company consists
of 100,000,000 shares of Common Stock, par value $0.01 per share, and 30,000,000
shares of preferred stock ("Preferred Stock"), par value $0.01 per share.
The authorized and unissued shares of Common Stock and Preferred Stock may
be used by the Company for various purposes, including possible future
acquisitions. The Company currently does not have any specific plans or
obligations to issue shares of Common Stock or Preferred Stock, other than the
issuance of shares of Common Stock under the Company's benefit plans.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of common stockholders. There is
no provision in the Company's Certificate of Incorporation for cumulative voting
with respect to the election of directors. Accordingly, the holders of more than
50% of the total voting power of the Common Stock can, if they choose to do so,
elect all of the directors of the Company. Each share of Common Stock is
entitled to participate equally in dividends, when, as and if declared by the
Board of Directors, and in the distribution of assets in the event of
liquidation, dissolution or winding up of the Company, subject in all cases to
any prior rights of outstanding shares of Preferred Stock. The shares of Common
Stock have no preemptive or conversion rights, redemption rights or sinking fund
provisions and are not subject to calls, assessments or rights of redemption by
the Company. All shares of Common Stock outstanding are duly authorized, validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
Company's stockholders, to issue Preferred Stock from time to time in one or
more series and to fix, as to any such series, the voting rights, if any,
applicable to such series and such other designations, preferences and special
rights as the Board of Directors may determine, including dividend, conversion,
redemption and liquidation rights and preferences. Upon the closing of this
Offering, there will be no shares of Preferred Stock outstanding. The issuance
of shares of Preferred Stock under certain circumstances could have the effect
of delaying or preventing a change in control of the Company or other corporate
actions. See "--Anti-takeover Provisions."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the DGCL which
provides, with certain exceptions, that a Delaware corporation may not engage in
any of a broad range of business combinations, such as mergers, consolidations
and sales of assets, with a person or an affiliate or associate of such person
who is an "Interested Stockholder" (as defined below) for a period of three
years from the date that such person became an Interested Stockholder unless:
(i) the business combination or the transaction resulting in a person's becoming
an Interested Stockholder is approved by the Board of Directors of the Company
before the person becomes an Interested Stockholder; (ii) upon consummation of
the transaction which results in the person becoming an Interested Stockholder,
the Interested Stockholder owned 85% or more of the voting stock of the Company
outstanding at the time the transaction commenced (excluding shares owned by
persons who are both officers and directors of the Company and shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person became an Interested Stockholder, the business combination is approved by
the Company's Board of Directors and by the holders of at least 66 2/3% of the
Company's outstanding voting stock, excluding shares owned by the Interested
Stockholder,
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<PAGE>
at an annual or special meeting. An "Interested Stockholder" is defined as any
person, other than the Company and any direct or indirect majority-owned
subsidiaries of the Company, that is (i) the owner of 15% or more of the
outstanding voting stock of the Company or (ii) an affiliate or associate of the
Company and was the owner of 15% or more of the outstanding voting stock of the
Company at any time within the three-year period immediately prior to the date
on which it is sought to be determined whether such person is an Interested
Stockholder. This statute would not prohibit the Company from entering into a
business combination with any stockholder who would otherwise have been deemed
to become an "Interested Stockholder" as a result of the Reincorporation
Transactions.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation provides that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases; or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of these provisions is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
The Company has entered into indemnification agreements with each of its
directors. Pursuant to such agreements, the Company will, to the extent
permitted by applicable law, indemnify such persons against all expenses,
judgments, fines and penalties incurred in connection with the defense or
settlement of any actions brought against them by reason of the fact that they
were directors or officers of the Company or assumed certain responsibilities at
the direction of the Company.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation, Delaware
law, the Assumed Option Plan and the Stockholders' Agreement summarized in the
following paragraphs may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in that stockholder's best interests, including attempts that might result in
a premium over the market price to be paid for the shares held by stockholders.
CERTIFICATE OF INCORPORATION
Pursuant to the Certificate of Incorporation, the Board of Directors by
resolution may issue, subject to certain limitations, additional shares of
Common Stock or establish one or more classes or series of Preferred Stock
having the number of shares, designations, relative voting rights, dividend
rates, liquidation and other rights, preferences and limitations that the Board
of Directors fixes without stockholder approval. Any additional issuance of
Common Stock or designation of rights, preferences, privileges and limitations
with respect to Preferred Stock could have the effect of impeding or
discouraging the acquisition of control of the Company by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of
the Company's management. Specifically, if, in the due exercise of its fiduciary
obligations, the Board of Directors were to determine that a takeover proposal
was not in the Company's best interest, such shares could be issued by the Board
of Directors without stockholder approval in one or more transactions that might
prevent or render more difficult or costly the completion of the proposed
takeover transaction by diluting the voting or other rights of the proposed
acquiror or insurgent stockholder group, by putting a substantial voting block
in institutional or other hands that might undertake to support the position of
the incumbent Board of Directors, by effecting an acquisition that might
complicate or preclude the takeover, or otherwise.
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<PAGE>
STAGGERED BOARD OF DIRECTORS
The Certificate of Incorporation provides for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the Board of Directors will be elected each
year.
The Board of Directors believes that a classified Board of Directors will
help to assure the continuity and stability of the Board of Directors and the
business strategies and policies of the Company as determined by the Board of
Directors, because the likelihood of continuity and stability in the composition
of the Company's Board of Directors and in the policies formulated by the Board
of Directors will be enhanced by staggered three-year terms.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company, even though such an attempt might be beneficial to the Company and
its stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years. See "--Number of Directors;
Removal; Filling Vacancies."
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Certificate of Incorporation provides that the number of members of the
Board of Directors shall be fixed from time to time by resolution adopted by a
majority of the directors then in office, but in no event shall the Board of
Directors have less than three or more than thirteen members. Further, subject
to the rights of the holders of any series of Preferred Stock then outstanding,
the Certificate of Incorporation authorizes only a majority of the directors
then in office to fill vacancies, including newly created directorships.
Accordingly, the Board of Directors could prevent a stockholder from obtaining
majority representation on the Board of Directors by enlarging the Board of
Directors and filling the new directorships with its own nominees. The
Certificate of Incorporation also provides that directors of the Company may be
removed only for cause and, even then, only by the affirmative vote of holders
of a majority of the outstanding shares of stock entitled to vote at an election
of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS
The Certificate of Incorporation establishes an advance notice procedure for
the nomination, other than by or at the discretion of the Board of Directors or
a committee thereof, of candidates for election as director, as well as for
other stockholder proposals to be considered at an annual stockholders' meeting.
Notice of stockholder proposals and director nominations must be timely
given in writing to the secretary of the Company prior to the meeting at which
the matters are to be acted upon or the directors are to be elected. To be
timely, notice must be received at the principal offices of the Company not less
than 60, nor more than 90, days prior to the meeting of stockholders; provided,
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the
earlier of (i) the day on which notice of the date of the meeting was mailed or
(ii) the day on which public disclosure was made.
The purpose of requiring advance notice is to afford the Board of Directors
an opportunity to consider the qualifications of the proposed nominees or the
merits of other stockholder proposals and, to the extent deemed necessary or
desirable by the Board of Directors, to inform stockholders about those matters.
SPECIAL MEETINGS OF STOCKHOLDERS
The Certificate of Incorporation provides that special meetings of the
stockholders of the Company may be called only by the Chairman of the Board of
Directors or a majority of the members of the Board
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<PAGE>
of Directors. This provision will make it more difficult for stockholders to
take action opposed by the Board of Directors.
STOCKHOLDERS' AGREEMENT
Contemporaneously with the Reincorporation Transactions (see
"Reincorporation Transactions"), the Company, Crow Family, CFH and Mr. Williams
entered into a Stockholders' Agreement (the "Stockholders' Agreement"), pursuant
to which the Company agreed, subject to certain limitations and under certain
circumstances, to register for sale shares of Common Stock that are held by the
parties thereto (collectively, the "Registrable Securities"). Of the 28,142,038
shares issued in the Reincorporation Transactions, 9,369,035 were Registrable
Securities. 1,295,722 shares of Registrable Securities are being offered and
sold as part of this Offering. The Stockholders' Agreement provides that Crow
Family and Mr. Williams may, from and after the first anniversary of the Initial
Public Offering, require the Company upon written notice to register for sale
such Registrable Securities (a "Demand Registration"), provided that the Company
has no obligation to effect more than six underwritten Demand Registrations and
shall only be obligated to effect the sixth underwritten Demand Registration if
all remaining Registrable Securities of Crow Family are to be registered. The
total amount of Registrable Securities to be included in any underwritten Demand
Registration must have a market value of at least $25.0 million at the time
demand notice is given. The Company has no obligation to (i) effect an
underwritten Demand Registration within nine months (or file such Registration
Statement within seven months) after the effective date of the immediately
preceding Demand Registration or (ii) effect a shelf Demand Registration within
12 months (or file such Registration Statement within ten months) after such
effective date. In addition, the Company is only required to register a number
of shares of Common Stock for sale pursuant to a shelf Demand Registration that
is less than or equal to five times the amount limitation prescribed by Rule 144
at the time demand notice is given. The holders of Registrable Securities may
request an unlimited number of shelf Demand Registrations.
The Stockholders' Agreement also provides that, subject to certain
exceptions, if the Company proposes to file a registration statement with
respect to an offering of any class of equity securities, other than certain
types of registrations, the Company will offer the holders of Registrable
Securities the opportunity to register the number of Registrable Securities they
request to include (a "Piggyback Registration"), provided that the amount of
Registrable Securities requested to be registered may be limited by the
underwriters in an underwritten offering based on such underwriters'
determination that inclusion of the total amount of Registrable Securities
requested for registration exceeds the maximum amount that can be marketed at a
price reasonably related to the current market price of the Common Stock or
without materially and adversely affect the offering. The Company will generally
be required to pay all of the expenses of Demand Registrations and Piggyback
Registrations, other than underwriting discounts and commissions; provided,
however, that after the first three such Demand Registrations the Company and
the holders of Registrable Securities will each pay 50% of the expenses of
underwritten Demand Registrations and all road show expenses in connection with
any Demand Registration will be borne by the holders of Registrable Securities.
The Selling Stockholders are required to pay the expenses of the Offering.
However, as required by the Stockholders' Agreement, the Company will pay the
expenses incurred in connection with the Offering which would otherwise be
allocated to Crow Family and its affiliates.
Under the terms of the Stockholders' Agreement, the Company has granted Crow
Family the right to nominate a member of the Board of Directors. Mr. Harlan Crow
is Crow Family's initial nominee. Each executive officer of the Company has
agreed to vote his shares of Common Stock in favor of the nominee of Crow
Family. Crow Family's right to nominate a director will terminate on the first
date Crow Family's beneficial ownership of Common Stock represents less than the
lesser of (i) 12.5% of the then outstanding Common Stock and (ii) 50% of the
shares of Common Stock owned on the date of execution of the agreement;
provided, however, that in no event will the Company be obligated to nominate a
Crow Family
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designee beyond the first date on which the beneficial ownership of shares of
Common Stock held by Crow Family represents less than 5% of all then outstanding
shares of such class. For purposes of the Stockholders' Agreement, Crow Family's
beneficial ownership of Common Stock is defined as shares of Common Stock owned
by Crow Family, CFH and each of their respective affiliates. In connection with
any private sale of Common Stock by Crow Family, other than to an affiliate,
Crow Family will agree to give the Company 15 days notice prior to effecting
such sale.
Each of Crow Family and the Company has agreed, prior to the fifth
anniversary of the Stockholders' Agreement, not to solicit the other's
officer-level employees concerning potential employment without prior notice to
the other party. In addition, each of Crow Family and the Company has agreed not
to hire any employee that was improperly solicited until the earlier of (i) the
involuntary termination of such officer-level employee by his/her employer and
(ii) the first anniversary of the last incident of solicitation of such employee
in violation of the agreement.
DOPPELT STOCKHOLDERS AGREEMENT
Pursuant to a stockholders agreement entered into among TCRS, the
Predecessor Company, Doppelt & Company and Jeffrey Doppelt (the "Doppelt
Stockholders Agreement"), Doppelt (or permitted transferees of Doppelt) may not,
with the exception of certain permitted transfers, sell, pledge or otherwise
dispose of Common Stock of the Company. These transfer restrictions have lapsed
for 30% of the shares issued to Doppelt, and, as long as Mr. Doppelt remains
employed with the Company, these transfer restrictions will lapse (i) with
respect to 30% of these shares on August 22, 1999, (ii) with respect to 20% of
these shares on August 22, 2000, and (iii) with respect to 10% of these shares
on each of August 22, 2001 and August 22, 2002. These transfer restrictions will
lapse in full if (i) the Company terminates Mr. Doppelt's employment without
cause, (ii) the Company is sold or (iii) Mr. Doppelt's employment is terminated
as a result of his forced resignation, death or permanent disability. Regardless
of these transfer restrictions, Doppelt is entitled to receive all dividend
payments and to exercise all voting and other ownership rights with respect to
this stock. In addition, Mr. Doppelt may not, with the exception of permitted
transfers, sell, pledge or otherwise dispose of his shares of Doppelt & Company
before August 22, 2002. The Doppelt Stockholders Agreement permits certain
transfers to members of Mr. Doppelt's family and limited transfers to employees
of Doppelt pursuant to a trust arrangement. The Doppelt Stockholders Agreement
also provides that, in the event the Company proposes to register any shares of
Common Stock under the Securities Act, Doppelt (or permitted transferees of
Doppelt) will be entitled to include its (or their) shares of Common Stock in
the registration, subject to certain limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company expects to have an aggregate
of 34,914,424 shares of Common Stock outstanding. Of these shares, approximately
10,934,689, including 5,750,000 shares sold in the Initial Public Offering and
the 4,500,000 shares sold in the Offering (assuming no exercise of the U.S.
Underwriter's over-allotment option), will be freely transferable without
restriction or further registration under the Securities Act, except for shares
held by affiliates of the Company.
SALES OF RESTRICTED SHARES
Of the shares of Common Stock issued to certain stockholders of the Company
upon consummation of the Reincorporation Transactions, 23,979,735 will continue
to be held by such stockholders (or their transferees) immediately following the
Offering and will be deemed to be "restricted" securities under Rule 144.
Substantially all of such 23,979,735 shares are currently eligible for sale
under Rule 144. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate of the Company, who
has beneficially owned restricted securities, within the meaning of Rule 144,
for at least one year is entitled to sell within any three-month period a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Company's Common Stock (approximately 349,144 shares immediately
after the Offering) or (ii) the average weekly trading volume of the Common
Stock on the New York Stock Exchange during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to manner
of sale provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed to have been an affiliate of the Company at any time during
the three months immediately preceding the sale is entitled to sell restricted
shares pursuant to Rule 144(k) without regard to the limitations described
above, provided that two years have expired since the later of the date on which
such restricted shares were acquired from the Company or the date they were
acquired from an affiliate of the Company.
SHARES ISSUED UNDER OPTION PLANS
The Company filed registration statements on Form S-8 with respect to (i)
2,423,769 shares of Common Stock which underlie options granted under the
Assumed Option Plan, all of which became exercisable 30 days following the
closing of the Initial Public Offering, (ii) 5,334,878 shares of Common Stock
reserved for issuance under the Long-Term Incentive Plan, including 2,448,713
shares underlying options which were outstanding as of January 31, 1999, (iii)
1,000,000 shares of Common Stock reserved for issuance under the Employee Stock
Purchase Plan, including 188,439 shares which have been issued as of January 31,
1999, and (iv) 63,490 shares of Common Stock issued to certain individuals who
became employees of the Company in connection with the Faison Acquisition,
including 58,728 shares which were outstanding at January 31, 1999. The Company
expects that, at the closing of the Offering, options to purchase 313,123 shares
of Common Stock issued under the Assumed Option Plan will be exercised and that,
immediately following the closing of the Offering, the Company will be obligated
to issue up to an aggregate of 1,810,351 shares of Common Stock upon the
exercise of the remainder of such options. Shares so registered could be sold in
the public market by such holders at any time on or after the date such options
become exercisable.
LOCK-UP ARRANGEMENTS
Crow Family, CFH, CFH Capital Resources, L.P., Harlan R. Crow, James D.
Carreker and each current principal-level employee of the Company holding
"restricted securities" or options granted under the Assumed Option Plan have
entered into lock-up agreements that are effective until one year after the
closing of the Offering. This group includes all Selling Stockholders other than
the Former Employees. After the Offering, this group will beneficially own
approximately 19,157,683 of the outstanding shares of
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Common Stock. Under these lock-up agreements, such persons will not offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock (subject to
certain exceptions) without the prior written consent of the Company and Morgan
Stanley & Co. Incorporated, except for sales made pursuant to this Offering.
James R. Erwin, Henry J. Faison, Jeffrey M. Heller, Rowland T. Moriarty,
Phillip W. Norwood and each of the Selling Shareholders who is a Former Employee
have entered into lock-up agreements that are effective until 120 days after the
closing of the Offering. After the Offering, this group will beneficially own
approximately 662,468 of the outstanding shares of Common Stock. These lock-up
agreements have substantially the same terms as those described above except
that such agreements are effective until 120 days after the closing of the
Offering.
The Company has also entered into a lock-up agreement which is effective
until six months after the Offering closes. Under this lock-up agreement, the
Company will not offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock (subject to certain exceptions) without the prior written
consent of Morgan Stanley & Co. Incorporated. See "Underwriting."
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of Common Stock
generally applicable to "Non-United States Holders." The Company has received an
opinion from Vinson & Elkins L.L.P., that the legal conclusions set forth below
are accurate in all material respects. Subject to the discussion below under
"Estate Tax," a "Non-United States Holder" is any beneficial owner of Common
Stock that, for United States federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership or a foreign
estate or trust as such terms are defined in the Internal Revenue Code of 1986,
as amended (the "Code"). This discussion is based on the Code, existing,
proposed and temporary regulations promulgated thereunder, and administrative
and judicial interpretations, all as of the date hereof, and all of which are
subject to change either retroactively or prospectively. This discussion does
not address all aspects of United States federal income and estate taxation that
may be relevant to Non-United States Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign taxing jurisdiction or the application of any
particular tax treaty. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL INCOME AND OTHER
TAX CONSEQUENCES, AND THE NON-UNITED STATES TAX CONSEQUENCES, OF OWNING AND
DISPOSING OF COMMON STOCK.
DIVIDENDS
Subject to the discussion below (including the discussion of backup
withholding), any dividend paid to a Non-United States Holder generally will be
subject to United States withholding tax either at a rate of 30% of the gross
amount of the dividend or such lower rate as may be specified by any applicable
tax treaty. For purposes of determining whether tax is to be withheld at a 30%
rate or at a reduced rate as specified by an applicable tax treaty, under
current United States Treasury Regulations the Company ordinarily will presume
that dividends paid to a holder with an address in a foreign country are paid to
a resident of such country absent knowledge that such presumption is not
warranted. Under such Regulations, dividends paid to a holder with an address
within the United States generally will be presumed to be paid to a holder who
is not a Non-United States Holder and will not be subject to the 30% withholding
tax, unless the Company has actual knowledge that the holder is a Non-United
States Holder. Under final United States Treasury Regulations, effective January
1, 2000, however, a Non-United States Holder who wishes to claim the benefit of
an applicable treaty rate would be required to satisfy applicable certification
and other requirements, which would include the requirement that the Non-United
States Holder file with the Company a United States Internal Revenue Service
("IRS") Form W-8 which provides the holder's name and address.
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<PAGE>
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder (or, if a tax treaty applies attributable to a permanent
establishment in the United States maintained by such Non-United States Holder)
are exempt from withholding tax if the Non-United States Holder files an IRS
Form 4224 (and, generally for payments made after December 31, 1999, a Form W-8)
with the payor. However, such effectively connected dividends are subject to
regular United States federal income tax in the same manner as if the Non-United
States Holder were a United States person for United States federal income tax
purposes. Effectively connected dividends received by a corporate Non-United
States Holder may be subject to an additional "branch profits tax" at a rate of
30% (or such lower rate as may be specified by an applicable tax treaty) of such
corporate Non-United States Holder's effectively connected earnings and profits
for the taxable year, subject to certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to gain realized upon the sale or other
disposition of Common Stock unless: (i) such gain is effectively connected with
a United States trade or business of the Non-United States Holder (or, if a tax
treaty applies, attributable to a permanent establishment in the United States
maintained by such Non-United States Holder); (ii) the Non-United States Holder
is an individual who holds the Common Stock as a capital asset, is present in
the United States for a period or periods aggregating 183 days or more during
the taxable year in which such sale or disposition occurs, and certain other
conditions are met; or (iii) the Company is or has been a "United States real
property holding corporation" for United States federal income tax purposes at
any time within the shorter of the five-year period preceding such disposition
or such holder's holding period and certain other conditions are met. The
Company has determined that it is not and has never been, and the Company does
not believe that it will become, a "United States real property holding
corporation" for United States federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the recipient. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
For payments made before January 1, 2000, backup withholding generally will
not apply to dividends paid to holders at an address outside the United States
(unless the Company has knowledge that the holder is a United States person).
Unless the Company has actual knowledge that a holder is a Non-United States
Holder, dividends paid during such period to a holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
holder (i) is not a corporation or other "exempt recipient" as defined in
Treasury Regulations and (ii) fails to provide a correct taxpayer identification
number and other information to the Company. For payments made after December
31, 1999, a Non-United States Holder that is not an "exempt recipient" generally
will be subject to backup withholding at a rate of 31%, rather than the
withholding at a 30% rate or lower treaty rate discussed above, unless such
Non-U.S. Holder certifies as to its foreign status (which certification may be
made on IRS Form W-8).
Proceeds from the disposition of Common Stock by a Non-United States Holder
effected by or through a United States office of a broker will be subject to
information reporting and to backup withholding at a rate of 31% of the gross
proceeds unless such Non-United States Holder certifies under penalties of
perjury as to, among other things, its address and status as a Non-United States
Holder or
66
<PAGE>
otherwise establishes an exemption. Generally, United States information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the transaction is effected outside the United States by or through
a non-United States office of a broker. However, if such broker is, for United
States federal income tax purposes, a United States person, a "controlled
foreign corporation," a foreign person which derives 50% or more of its gross
income for certain periods from the conduct of a United States trade or
business, or, for payments after December 31, 1999, a partnership with certain
connections to the United States, information reporting (but not backup
withholding) will apply unless (i) such broker has documentary evidence in its
files that the holder is a Non-United States Holder and certain other conditions
are met or (ii) the holder otherwise establishes an exemption. Under final
United States Treasury Regulations, effective January 1, 2000, a Non-United
States Holder generally would not be subject to backup withholding if the
beneficial owner certifies to such owner's foreign status on a valid Form W-8
filed with the Company.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of United States
income taxes, a refund may be obtained, provided the required documents are
filed with the IRS.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of Common
Stock at the time of such individual's death or has made certain lifetime
transfers of an interest in Common Stock will be required to include the value
of such Common Stock in such individual's gross estate for United States federal
estate tax purposes and may be subject to United States federal estate tax,
unless an applicable tax treaty provides otherwise. For United States federal
estate tax purposes, a "Non-United States Holder" is an individual who is
neither a citizen nor a domiciliary of the United States. Whether an individual
is considered a "domiciliary" of the United States for estate tax purposes is
generally determined on the basis of all of the facts and circumstances.
67
<PAGE>
UNDERWRITING
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, BancBoston
Robertson Stephens Inc., BT Alex. Brown Incorporated and Donaldson, Lufkin &
Jenrette Securities Corporation are acting as U.S. Representatives, and the
International Underwriters named below, for whom Morgan Stanley & Co.
International Limited, BancBoston Robertson Stephens International Limited, BT
Alex. Brown International, a division of Bankers Trust International PLC and
Donaldson, Lufkin & Jenrette International are acting as International
Representatives, have severally agreed to purchase, and the Selling Stockholders
have agreed to sell to them, severally, the respective number of shares of
Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated........................................
BancBoston Robertson Stephens Inc........................................
BT Alex. Brown Incorporated..............................................
Donaldson, Lufkin & Jenrette Securities Corporation......................
Subtotal............................................................... 3,600,000
-----------------
International Underwriters:
Morgan Stanley & Co. International Limited...............................
BancBoston Robertson Stephens International Limited......................
BT Alex. Brown International, a division of Bankers Trust International
PLC....................................................................
Donaldson, Lufkin & Jenrette International...............................
Subtotal............................................................... 900,000
-----------------
Total................................................................ 4,500,000
-----------------
-----------------
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriter's over-allotment option described below), if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein); and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person; and (ii) it has not offered or sold, and will not
offer to sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States or
Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and
an International Underwriter, the foregoing representations and agreements (i)
made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. As used herein, "United States or Canadian Person" means any
68
<PAGE>
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person), and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the Underwriters under the Underwriting
Agreement are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of Shares as may be mutually agreed. The per share price of any Shares so
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
in 1995; (ii) it has complied and will comply with all applicable provisions of
the Financial Services Act 1986 with respect to anything done by it in relation
to the Shares in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the offering of the
Shares to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
of Japanese International Underwriters or dealers except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and
69
<PAGE>
Exchange Law and otherwise in compliance with applicable provisions of Japanese
law, and that such dealer will send to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is contained
in this sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain dealers. After the
Offering, the public offering price, concession and discount may be changed.
Pursuant to the Underwriting Agreement, the Selling Stockholders have
granted to the U.S. Underwriters an option, exercisable for 30 days from the
date of this Prospectus, to purchase up to an aggregate of 675,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each U.S. Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of Common Stock as the number set
forth next to such U.S. Underwriter's name in the preceding table bears to the
total number of shares of Common Stock set forth next to the names of all U.S.
Underwriters in the preceding table.
The Company, the Selling Stockholders, certain holders of options issued
under the Assumed Plan and the Company's directors and executive officers have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, they will not, until 6 months after
the closing of the Offering (in the case of the Company), until 120 days after
the closing of the Offering (in the case of the Former Employees and each of the
Company's directors and executive officers who is neither a Company employee or
holds any "restricted securities" or options granted under the Assumed Plan) and
until 12 months after the closing of the Offering (in the case of Crow Family
and each current principal-level employee of the Company holding "restricted
securities" or options granted under the Assumed Option Plan), (i) offer, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) sales made
pursuant to this Offering, (B) the issuance by the Company of shares of Common
Stock upon the exercise of an option or a warrant or the conversion of a
security outstanding on the date of this Prospectus of which the Underwriters
have been advised in writing, (C) stock or stock option issuance by the Company
pursuant to existing employee benefit plans, (D) the bona fide pledge of shares
of Common Stock by any such stockholder to secure loans extended to or
guaranties made by such stockholder; (E) transactions relating to shares of
Common Stock or other securities acquired in open market transactions after the
closing of the Offering, (F) the contribution of Common Stock to an exchange
fund, capital fund or similar fund in exchange for securities of such fund; (G)
the issuance, grant or sale by the Company of any subsidiary thereof of shares
of Common Stock (or any option, right, warrant or other interest in shares of
Common Stock) to any person as consideration for any acquisition or as an
inducement to be employed by or to not compete with the Company or any
subsidiary thereof; (H) any charitable gift/donation of shares of Common Stock;
or (I) the transfer of shares of Common Stock to the following: (i) if the
stockholder is an individual, a member of the immediate family of such
stockholder, if any, or a trust whose sole beneficiaries are members of the
immediate family of such stockholder, or a partnership whose sole partners are
members of the immediate family of such stockholder; (ii) if the stockholder is
a trust, any
70
<PAGE>
member of the immediate family of such stockholder that is the grantor or
trustee of the trust and (iii) with respect to Crow Family, CFH and CFH Capital
Resources, L.P., any of their respective affiliates; provided, however, that
such stockholder shall first require any transferee described in clause (I)(i),
(I)(ii) or (I)(iii) to execute a similar "lock-up" agreement prior to such
permitted pledge or transfer.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or stabilize the price
of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities and may
end any of these activities at any time.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Vinson & Elkins L.L.P., Dallas, Texas. Certain legal
matters related to the offering will be passed upon for the Underwriters by
Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission pursuant to the Exchange
Act. Those reports, proxy statements and other information can be inspected at
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and the Regional Offices of the
Commission at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511,
and 7 World Trade Center, New York, New York 10048. Please call the Commission
at 1-800-SEC-0300 for further information on the public reference rooms. Copies
of those materials may also be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Commission maintains a World Wide Web site on the Internet at
HTTP://WWW.SEC.GOV that contains reports, proxy and information statements and
other information regarding the Company. Those reports, proxy and information
statements and other information concerning the Company also can be inspected
and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005, on which the Common Stock is listed.
For further information on the Company and the Common Stock being offered,
please review the Registration Statement, including the exhibits that are filed
with it. Statements made in the Registration
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<PAGE>
Statement that describe documents may not necessarily be complete. We recommend
that you review the documents that the Company has filed with the Registration
Statement to obtain a more complete understanding of those documents.
The Commission allows us to "incorporate by reference" information into the
Registration Statement which means that we can disclose important information to
you by referring you to another document filed separately with the Commission.
The information incorporated by reference is deemed to be part of the
Registration Statement, except for any information superseded by information in
the Registration Statement. The Registration Statement incorporates by reference
the documents set forth below that the Company previously filed with the
Commission. These documents contain important information about the Company.
INCORPORATION BY REFERENCE
The following documents have been filed by the Company with the Commission,
and are incorporated herein by reference and made a part hereof:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, filed with the Commission pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act") on March 31, 1998;
(b) The Company's Annual Report on Form 10-K/A (Amendment No. 1) for the
fiscal year ended December 31, 1997, filed with the Commission pursuant
to the Exchange Act on July 2, 1998;
(c) The Company's Quarterly Report on Form 10Q/A (Amendment No. 1) for the
quarterly period ended March 31, 1998, filed with the Commission pursuant
to the Exchange Act on July 17, 1998;
(d) The Company's Quarterly Report on Form 10Q for the quarterly period
ended June 30, 1998, filed with the Commission pursuant to the Exchange
Act on August 14, 1998;
(e) The Company's Quarterly Report on Form 10Q for the quarterly period
ended September 30, 1998, filed with the Commission pursuant to the
Exchange Act on November 16, 1998;
(f) The Company's Current Report on Form 8-K filed with the Commission
pursuant to the Exchange Act on March 18, 1999; and
(g) The description of the Company's Common Stock, $0.01 par value per
share, contained in Item 1 of the Company's Registration Statement on
Form 8-A filed with the Commission pursuant to the Exchange Act on
October 23, 1997.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act prior to the termination of the Offering
shall also be deemed to be incorporated by reference herein and to be a part
hereof from the dates of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Registration Statement
to the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Registration Statement. Upon the written or oral request of any person
to whom a copy of this Registration Statement has been delivered, including a
beneficial owner of Common Stock, the Company will provide without charge to
such person a copy of any and all documents (excluding exhibits thereto unless
such exhibits are specifically incorporated by reference into such documents)
that have been incorporated by reference into this Registration Statement but
not delivered herewith. Requests for such documents should be addressed to
Trammell Crow Company, 2001 Ross Avenue, Suite 3400, Dallas, Texas 75201,
Attention: Secretary, (214) 863-3000.
72
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pro Forma Consolidated Financial Statements of Trammell Crow Company (Unaudited):
Pro Forma Consolidated Balance Sheet as of September 30, 1998............................................ F-3
Pro Forma Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and for the
Year Ended December 31, 1997........................................................................... F-4
Consolidated Financial Statements of Trammell Crow Company (Audited):
Report of Independent Auditors........................................................................... F-7
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-8
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995............... F-9
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995..... F-10
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............... F-11
Notes to Consolidated Financial Statements............................................................... F-12
Condensed Consolidated Financial Statements of Trammell Crow Company (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997..................... F-26
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and 1997.... F-27
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997.... F-28
Notes to Condensed Consolidated Financial Statements..................................................... F-29
</TABLE>
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are
derived from the Company's historical financial statements. The unaudited pro
forma balance sheet is presented as if the Offering had occurred on September
30, 1998. The unaudited pro forma consolidated statements of operations are
presented as if the Offering, the FHO Acquisition, the Core Acquisition, the
Faison Acquisition, the Tooley Acquisition, the Norman Acquisition, the Doppelt
Acquisition, the Reincorporation Transactions and the Initial Public Offering
had occurred on January 1, 1997. The unaudited pro forma consolidated financial
statements should be read in conjunction with the historical financial
statements of the Company and the notes thereto. See "The Company--Recent
Developments," "--Initial Public Offering," "-- Reincorporation Transactions,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Retail Services" and other financial information, all
included elsewhere in this Prospectus.
The unaudited pro forma consolidated financial statements have been prepared
using the purchase method of accounting whereby the assets and liabilities
acquired and assumed in the acquisitions are adjusted to estimated fair value,
based upon preliminary estimates which are subject to change as additional
information is obtained. The allocations of purchase costs are subject to final
determination based upon estimates and other evaluations of fair value.
Therefore, the allocations reflected in the following unaudited pro forma
consolidated financial statements may differ from the amounts ultimately
determined.
The unaudited pro forma consolidated financial statements are presented for
informational purposes only and are not necessarily indicative of what the
Company's actual results of operations and financial position would have been as
of September 30, 1998, or for the year ended December 31, 1997 and the nine
months ended September 30, 1998, had the Company completed the Offering, the FHO
Acquisition, the Core Acquisition, the Faison Acquisition, the Tooley
Acquisition, the Norman Acquisition, the Doppelt Acquisition, the
Reincorporation Transactions and the Initial Public Offering as of the dates
indicated, nor does it purport to represent the future financial position or
results of operations of the Company. In the opinion of the Company's
management, all material adjustments necessary to reflect the effects of these
transactions have been made.
F-2
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 76,471 $ 1,206(A) $ 77,677
Accounts receivable, net...................................................... 70,456 -- 70,456
Receivables from affiliates................................................... 1,394 -- 1,394
Notes and other receivables................................................... 6,205 -- 6,205
Deferred income taxes......................................................... 3,058 -- 3,058
Real estate held for sale..................................................... 128,058 -- 128,058
Other current assets.......................................................... 10,928 -- 10,928
--------- ----------- -----------
Total current assets...................................................... 296,570 1,206 297,776
Furniture and equipment, net.................................................... 12,783 -- 12,783
Deferred income taxes........................................................... 11,866 -- 11,866
Investments in unconsolidated subsidiaries...................................... 13,026 -- 13,026
Goodwill, net................................................................... 103,863 -- 103,863
Other assets.................................................................... 28,530 -- 28,530
--------- ----------- -----------
Total assets.............................................................. $ 466,638 $ 1,206 $ 467,844
--------- ----------- -----------
--------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................................. $ 25,100 $ -- $ 25,100
Accrued expenses.............................................................. 69,246 (174)(B) 69,072
Payables to affiliates........................................................ 4,930 -- 4,930
Income taxes payable.......................................................... 3,555 312(A) 3,867
Current portion of long-term debt............................................. 1,799 -- 1,799
Notes payable on real estate held for sale.................................... 77,297 -- 77,297
Other current liabilities..................................................... 1,493 -- 1,493
--------- ----------- -----------
Total current liabilities................................................. 183,420 138 183,558
Long-term debt, less current portion............................................ 93,476 -- 93,476
Deferred compensation........................................................... 57 -- 57
Other liabilities............................................................... 245 -- 245
--------- ----------- -----------
Total liabilities......................................................... 277,198 138 277,336
Minority interest............................................................... 14,210 -- 14,210
Stockholders' equity
Common stock.................................................................. 342 3(A) 346
1(B)
Paid-in capital............................................................... 157,663 1,999(B) 160,553
891(A)
Retained earnings (deficit)................................................... 18,730 -- 18,730
Less: Stockholder loans....................................................... (1,028) -- (1,028)
Unearned compensation, net............................................... (477) (1,826)(B) (2,303)
--------- ----------- -----------
Total stockholders' equity................................................ 175,230 1,068 176,298
--------- ----------- -----------
Total liabilities and stockholders' equity................................ $ 466,638 $ 1,206 $ 467,844
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- --------------------------
(A) Reflects the exercise by the Selling Stockholders of options to purchase
313,123 shares of Common Stock using a market price on the date of exercise
of $14.4375.
(B) Reflects the issuance of 63,490 shares of Common Stock to certain employees
of Faison who were retained after the Faison Acquisition. The shares were
issued subsequent to September 30, 1998. At September 30, 1998, the Company
accrued $174,000 of compensation expense related to the period from the date
of grant to September 30, 1998.
F-3
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------
HISTORICAL
-------------------------
RECENT
ACQUISITIONS PRO FORMA
COMPANY(A) (B) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Property management services.......................... $ 81,897 $ 25,569 $ (1,423)(C) $ 106,043
Brokerage services.................................... 100,814 16,275 (562)(C) 116,527
Infrastructure management services.................... 74,008 1,604 -- 75,612
Development and construction services................. 42,132 7,414 1,019(D) 49,390
(1,175)(C)
Retail services....................................... 11,487 -- -- 11,487
------------ ----------- ----------- ------------
310,338 50,862 (2,141) 359,059
Income from investments in unconsolidated
subsidiaries........................................ 7,151 -- -- 7,151
Gain on disposition of real estate.................... 23,455 -- -- 23,455
Other income.......................................... 6,012 854 (404)(E) 6,462
------------ ----------- ----------- ------------
346,956 51,716 (2,545) 396,127
EXPENSES:
Salaries, wages and benefits.......................... 180,509 38,487 (644)(C) 213,683
192(F)
(5,437)(G)
576(H)
Commissions........................................... 43,808 3,979 (952)(C) 46,835
General and administrative............................ 51,371 9,017 (258)(C) 60,130
Depreciation.......................................... 3,385 390 (39)(I) 3,719
(17)(C)
Amortization.......................................... 3,510 -- 2,260(I) 5,770
Interest.............................................. 7,782 258 2,284(J) 10,324
Minority interest..................................... 3,702 -- -- 3,702
------------ ----------- ----------- ------------
294,067 52,131 (2,035) 344,163
------------ ----------- ----------- ------------
Income (loss) before income taxes..................... 52,889 (415) (510) 51,964
Income tax expense (benefit).......................... 21,425 (1,702) 1,332(K) 21,055
------------ ----------- ----------- ------------
Net income (loss)..................................... $ 31,464 $ 1,287 $ (1,842) $ 30,909
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
EARNINGS PER SHARE:
Basic................................................. $ 0.93 $ 0.90
------------ ------------
------------ ------------
Diluted............................................... $ 0.87 $ 0.85
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................. 33,984,517 313,123(X) 34,297,640
------------ ----------- ------------
------------ ----------- ------------
Diluted............................................... 36,208,762 144,750(X) 36,353,512
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
F-4
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------------- ADJUSTMENTS FOR
DOPPELT RECENT ACQUISITIONS REINCORPORATION
ACQUISITION ACQUISITIONS AND THE AND IPO
COMPANY (W) (B) OFFERING ADJUSTMENTS PRO FORMA
--------- ------------- ----------- --------------- --------------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Property management services.... $ 87,756 $ -- $ 71,893 $ (2,074)(C) $ -- $ 157,575
Brokerage services.............. 91,053 -- 43,575 (1,842)(C) -- 132,786
Infrastructure management
services...................... 68,719 -- 2,793 -- -- 71,512
Development and construction
services...................... 40,054 -- 6,562 3,098(D) -- 49,024
(690)(C)
Retail services................. 5,318 4,975 -- -- -- 10,293
--------- ------ ----------- --------------- --------------- -----------
292,900 4,975 124,823 (1,508) -- 421,190
Income from investments in
unconsolidated subsidiaries... 512 -- -- -- -- 512
Gain on disposition of real
estate........................ 10,241 -- -- -- -- 10,241
Other income.................... 9,986 30 2,957 (24)(L) (147)(O) 12,802
--------- ------ ----------- --------------- --------------- -----------
313,639 5,005 127,780 (1,532) (147) 444,745
EXPENSES:
Salaries, wages and benefits.... 161,425 4,281 94,645 (2,484)(C) -- 257,739
383(F)
(1,511)(M)
1,000(H)
Non-recurring compensation
costs......................... 33,085 -- -- -- (33,085)(P) --
Commissions..................... 39,121 -- 3,996 (441)(C) -- 42,676
General and administrative...... 55,884 1,232 20,729 (504)(C) 642(Q) 73,434
(194)(N) (4,355)(P)
Profit sharing.................. 23,514 -- -- -- (22,917)(R) 597
Depreciation.................... 3,514 19 1,841 (1,062)(I) -- 4,276
(36)(C)
Amortization.................... 714 -- -- 6,124(I) -- 6,838
Interest........................ 5,515 -- 652 5,913(J) (343)(R) 10,497
(419)(S)
(593)(T)
(228)(U)
Royalty and consulting fees..... 6,212 -- -- -- (6,212)(R) --
Minority interest............... 2,042 -- -- -- -- 2,042
--------- ------ ----------- --------------- --------------- -----------
331,026 5,532 121,863 7,188 (67,510) 398,099
--------- ------ ----------- --------------- --------------- -----------
Income (loss) before income
taxes......................... (17,387) (527) 5,917 (8,720) 67,363 46,646
Income tax expense (benefit).... (3,367) -- 1,913 (3,245)(K) 23,079(V) 18,380
--------- ------ ----------- --------------- --------------- -----------
Net income (loss)............... $ (14,020) $ (527) $ 4,004 $ (5,475) $ 44,284 $ 28,266
--------- ------ ----------- --------------- --------------- -----------
--------- ------ ----------- --------------- --------------- -----------
EARNINGS (LOSS) PER SHARE:
Basic........................... $ (0.42) $ 0.83
--------- -----------
--------- -----------
Diluted......................... $ (0.42) $ 0.79
--------- -----------
--------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic........................... 33,583,467 440,951(X) 34,024,418
--------- --------------- -----------
--------- --------------- -----------
Diluted......................... 33,583,467 209,334(X) 2,161,032(X) 35,953,833
--------- --------------- --------------- -----------
--------- --------------- --------------- -----------
</TABLE>
F-5
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
- ------------------------------
(A) Certain revenues and expenses for the period ended September 30, 1998 have
been reclassified to conform to the presentation for the quarter and year
ended December 31, 1998. As a result, certain revenue and expense items
differ from the amounts reported in previously filed documents. These
reclassifications do not impact net income.
(B) Reflects the historical operations for the periods from January 1, 1998
through the date acquired by the Company and for the year ended December 31,
1997, of Tooley, Norman, Fallon, Hines & O'Connor, Core and Faison, which
were acquired by the Company in 1998.
(C) Adjustments to eliminate operations of a subsidiary of Faison that was not
acquired by the Company.
(D) Reflects development fees the Company would have received pursuant to the
purchase agreement with Faison.
(E) Reflects the elimination of gain on sale of limited partnership interests by
Tooley in connection with the acquisition.
(F) Reflects amortization of payments to certain employees of Faison in
conjunction with their employment agreements.
(G) Adjustment to eliminate non-recurring bonuses paid to employees of Tooley in
conjunction with the acquisition.
(H) Reflects the amortization to salaries expense of the 63,490 restricted
shares of Common Stock granted to certain employees of Faison who were
retained after the acquisition. These shares vest on July 2, 2000 if the
grantee has been continuously employed by the Company from the date of
closing.
(I) Reflects the additional depreciation and amortization resulting from the
allocation of purchase price of the acquired companies, including a decrease
in furniture and equipment and an increase in intangible assets to their
fair value and the recording of goodwill associated with the acquisitions.
Furniture and equipment are being depreciated over the estimated useful
lives (three to five years). The intangible assets are being amortized over
the lives of the related agreements (one to seven years). Goodwill is being
amortized over 30 years.
(J) Adjustments to record interest expense resulting from borrowings under the
Existing Credit Facility associated with the acquisitions, net of interest
expense of the acquired companies on debt not assumed.
(K) Adjustment reflects the increase/decrease in taxes due to the pro forma
adjustments for acquisitions.
(L) Reflects the decrease in interest income related to the Doppelt stockholder
loans which were not included in the acquisition.
(M) Reflects the reduction of historical salaries to the amounts payable under
an employment agreement entered into in connection with the Doppelt
Acquisition and the amortization of the $2.0 million payment to Mr. Doppelt
in conjunction with his employment agreement.
(N) Adjustment to eliminate non-recurring consulting fees paid by Tooley in
conjunction with the acquisition.
(O) Reflects the decrease in interest income resulting from the repayment of
loans owed to the Company by certain 1995 Profit Sharing Plan participants.
(P) Adjustment to eliminate non-recurring charges to: (1) compensation expense
for the difference between the Initial Public Offering price and the
exercise price of options granted in conjunction with the Reincorporation
Transactions and (2) general and administrative expenses for payment
obligations incurred in connection with settlement of claims made pursuant
to a terminated stock appreciation rights plan.
(Q) Reflects the additional costs of being a public company.
(R) Reflects the termination of the Company's policy of granting profit sharing
interest under the 1995 Profit Sharing Plan for key employees, including the
related interest expense on the retired 1995 Profit Sharing Plan
participants' balances, and the termination of royalty and consulting
agreements with affiliates of the Company. The profit sharing expense not
eliminated relates to project distributions for retired Profit Sharing Plan
participants which were not terminated.
(S) Reflects the reduction in interest expense related to the First Tennessee
credit facility repaid with proceeds from the Pre IPO Credit Facility.
(T) Reflects the decrease in interest expense due to the repayment of the Pre
IPO Credit Facility.
(U) Reflects the decrease in interest expense related to the repayment of
capitalization notes, lines of credits and other notes payable.
(V) Reflects the increase in taxes due to the pro forma adjustments to reflect
the Reincorporation Transactions and the Initial Public Offering.
(W) Reflects the historical operations from January 1, 1997 through August 22,
1997, the date acquired by the Company.
(X) Reflects the weighted average additional shares outstanding assuming the
following occurred on January 1, 1997: (1) the sale of Common Stock, the
grant of restricted shares of Common Stock and the issuance of stock options
to certain employees of acquired companies; (2) the exercise by certain
Selling Stockholders of options to purchase 313,123 shares of Common Stock
in connection with the Offering; and (3) the grant of options to purchase
Common Stock in connection with the Initial Public Offering.
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Trammell Crow Company
We have audited the accompanying consolidated balance sheets of Trammell
Crow Company (a Delaware corporation; formerly a Texas close corporation) and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Trammell Crow Company and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1998
F-7
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................... $ 96,747 $ 58,505
Accounts receivable, net of allowance for doubtful accounts of $955 in 1997 and $947 in
1996.................................................................................. 40,602 32,980
Receivables from affiliates............................................................. 926 2,275
Notes and other receivables............................................................. 4,007 4,936
Income taxes recoverable................................................................ 4,939 --
Deferred income taxes................................................................... 3,870 88
Real estate held for sale............................................................... 98,567 71,122
Other current assets.................................................................... 9,220 2,932
---------- ----------
Total current assets.................................................................. 258,878 172,838
Furniture and equipment, net.............................................................. 6,309 6,323
Deferred income taxes..................................................................... 14,397 7,796
Investments in unconsolidated subsidiaries................................................ 11,244 3,831
Goodwill, net............................................................................. 27,111 --
Other assets.............................................................................. 8,297 3,526
---------- ----------
$ 326,236 $ 194,314
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................................................ $ 18,523 $ 12,426
Accrued expenses........................................................................ 56,270 36,128
Payables to affiliates.................................................................. 4,466 5,649
Income taxes payable.................................................................... -- 3,253
Current portion of long-term debt....................................................... 875 3,409
Notes payable on real estate held for sale.............................................. 76,623 67,810
Other current liabilities............................................................... 2,185 1,023
---------- ----------
Total current liabilities............................................................. 158,942 129,698
Long-term debt, less current portion...................................................... 1,555 8,952
Deferred compensation..................................................................... 8,391 20,963
Other liabilities......................................................................... 417 405
---------- ----------
Total liabilities..................................................................... 169,305 160,018
Minority interest......................................................................... 19,859 3,294
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; 33,892,038 shares issued
and outstanding in 1997............................................................... 339 --
Paid-in capital......................................................................... 150,647 24,084
Retained earnings (deficit)............................................................. (12,734) 16,312
Less: Stockholder loans................................................................. (1,180) (9,394)
---------- ----------
Total stockholders' equity................................................................ 137,072 31,002
---------- ----------
$ 326,236 $ 194,314
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-8
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Property management services............................................ $ 87,756 $ 90,179 $ 92,970
Brokerage services...................................................... 91,053 72,095 61,960
Infrastructure management services...................................... 68,719 50,836 38,681
Development and construction services................................... 40,054 22,732 20,382
Retail services......................................................... 5,318 2,393 1,510
------------- ---------- ----------
292,900 238,235 215,503
Income from investments in unconsolidated subsidiaries.................. 512 594 114
Gain on disposition of real estate...................................... 10,241 6,630 5,026
Other income............................................................ 9,986 9,996 6,559
------------- ---------- ----------
313,639 255,455 227,202
COSTS AND EXPENSES:
Salaries, wages and benefits............................................ 161,425 137,794 130,248
Non-recurring compensation costs........................................ 33,085 -- --
Commissions............................................................. 39,121 27,119 23,730
General and administrative.............................................. 55,884 41,421 40,671
Profit sharing.......................................................... 23,514 20,094 15,893
Depreciation............................................................ 3,514 3,196 3,841
Amortization............................................................ 714 -- --
Interest................................................................ 5,515 1,726 1,722
Royalty and consulting fees............................................. 6,212 3,959 2,443
Minority interest....................................................... 2,042 206 520
------------- ---------- ----------
331,026 235,515 219,068
------------- ---------- ----------
Income (loss) before income taxes......................................... (17,387) 19,940 8,134
Income tax expense (benefit).............................................. (3,367) 7,826 3,793
------------- ---------- ----------
Net income (loss)......................................................... $ (14,020) $ 12,114 $ 4,341
------------- ---------- ----------
------------- ---------- ----------
Pro forma loss per share (basic and diluted).............................. $ (.42) * *
------------- ---------- ----------
------------- ---------- ----------
Pro forma weighted average common shares outstanding...................... 33,583,467
-------------
-------------
</TABLE>
- ------------------------
* Information is not relevant due to change in capital structure.
See accompanying notes.
F-9
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON SHARES COMMON COMMON RETAINED
---------------------- STOCK STOCK PAR PAID-IN EARNINGS TREASURY
ISSUED TREASURY SUBSCRIBED VALUE(1) CAPITAL (DEFICIT) STOCK
--------- ----------- ------------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995...... 9,350 675 $ 361 $ -- $ 9,293 $ 5,333 $ (914)
Net income.................... -- -- -- -- -- 4,341 --
Dividends..................... -- -- -- -- -- (2,475) --
Sale of common stock
previously subscribed....... 390 -- (361) -- 361 -- --
Purchase of common stock...... -- 774 -- -- -- -- (1,337)
Sale of common stock.......... -- (400) -- -- -- -- 691
--------- ----------- ----- ----- --------- ----------- -----------
Balance at December 31, 1995.... 9,740 1,049 -- -- 9,654 7,199 (1,560)
Net income.................... -- -- -- -- -- 12,114 --
Dividends..................... -- -- -- -- -- (2,890) --
Purchase of common stock...... -- 2,481 -- -- -- -- (3,943)
Sale of common stock.......... 9,634 (3,530) -- -- 14,430 (111) 5,503
--------- ----------- ----- ----- --------- ----------- -----------
Balance at December 31, 1996.... 19,374 -- -- -- 24,084 16,312 --
Net loss...................... -- -- -- -- -- (14,020) --
Dividends..................... -- -- -- -- -- (15,026) --
Purchase of stock............. -- 963 -- -- -- -- (2,388)
Repayment of stockholder
loans....................... -- -- -- -- -- -- --
Sale of stock in public
offering.................... 5,750,000 -- -- 58 100,567 -- --
Offering costs................ -- -- -- -- (10,420) -- --
Non-cash charge for August
1997 options................ -- -- -- -- 33,085 -- --
Issuance and exchange of
shares in reincorporation
transactions................ 27,779,807 -- -- 278 (278) -- --
Conversion of note payable
into common stock........... 342,857 -- -- 3 5,997 -- --
Retirement of treasury
shares...................... -- (963) -- -- (2,388) -- 2,388
--------- ----------- ----- ----- --------- ----------- -----------
Balance at December 31, 1997.... 33,892,038 -- $ -- $ 339 $ 150,647 $ (12,734) $ --
--------- ----------- ----- ----- --------- ----------- -----------
--------- ----------- ----- ----- --------- ----------- -----------
<CAPTION>
STOCKHOLDER
LOANS TOTAL
------------- ---------
<S> <C> <C>
Balance at January 1, 1995...... $ -- $ 14,073
Net income.................... -- 4,341
Dividends..................... -- (2,475)
Sale of common stock
previously subscribed....... -- --
Purchase of common stock...... -- (1,337)
Sale of common stock.......... -- 691
------------- ---------
Balance at December 31, 1995.... -- 15,293
Net income.................... -- 12,114
Dividends..................... -- (2,890)
Purchase of common stock...... -- (3,943)
Sale of common stock.......... (9,394) 10,428
------------- ---------
Balance at December 31, 1996.... (9,394) 31,002
Net loss...................... -- (14,020)
Dividends..................... -- (15,026)
Purchase of stock............. -- (2,388)
Repayment of stockholder
loans....................... 8,214 8,214
Sale of stock in public
offering.................... -- 100,625
Offering costs................ -- (10,420)
Non-cash charge for August
1997 options................ -- 33,085
Issuance and exchange of
shares in reincorporation
transactions................ -- --
Conversion of note payable
into common stock........... -- 6,000
Retirement of treasury
shares...................... -- --
------------- ---------
Balance at December 31, 1997.... $ (1,180) $ 137,072
------------- ---------
------------- ---------
</TABLE>
- ------------------------------
(1) Common stock par value for 1995 and 1996 rounds to less than $1.
See accompanying notes.
F-10
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................................. $ (14,020) $ 12,114 $ 4,341
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Depreciation..................................................................... 3,514 3,196 3,841
Amortization..................................................................... 714 -- --
Minority interest................................................................ 2,042 206 520
Deferred income tax provision (benefit).......................................... (5,462) 1,602 (2,040)
Income from investments in unconsolidated subsidiaries........................... (512) (594) (114)
Gain on disposition of real estate............................................... (10,241) (6,630) (5,026)
Non-cash charge for August 1997 options.......................................... 33,085 -- --
Changes in operating assets and liabilities
Accounts receivable............................................................ (6,007) (6,757) (8,214)
Receivables from affiliates.................................................... 3,083 (1,585) 1,466
Notes receivable and other assets.............................................. (7,509) (2,286) (2,228)
Expenditures for real estate held for sale..................................... (109,068) (92,975) (37,641)
Proceeds from sale of real estate.............................................. 51,542 48,555 43,472
Proceeds from real estate notes payable........................................ 89,763 91,428 21,705
Payments on real estate notes payable.......................................... (45,550) (36,800) (31,438)
Accounts payable and accrued expenses.......................................... 20,159 4,558 17,277
Payables to affiliates......................................................... (1,275) 1,850 1,203
Income taxes recoverable/payable............................................... (8,192) 2,775 (454)
Deferred compensation.......................................................... (234) 5,750 4,416
Other liabilities.............................................................. (810) 741 (438)
--------- --------- ---------
Net cash provided by (used in) operating activities................................ (4,978) 25,148 10,648
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for furniture and equipment........................................... (3,469) (3,277) (2,077)
Acquisition of Doppelt and Company................................................. (22,658) -- --
Investments in unconsolidated subsidiaries......................................... (7,404) (2,305) (1,873)
Distributions from unconsolidated subsidiaries..................................... 6,912 1,408 170
Contributions from minority interest............................................... 10,350 11 3,631
Distributions to minority interest................................................. (5,053) (856) (497)
--------- --------- ---------
Net cash used in investing activities.............................................. (21,322) (5,019) (646)
--------- --------- ---------
FINANCING ACTIVITIES
Principal payments on debt......................................................... (47,467) (4,538) (5,688)
Proceeds from debt................................................................. 36,146 9,834 2,664
Payment on deferred financing fees................................................. (1,031) -- --
Purchase of common stock........................................................... (730) (3,943) (1,010)
Proceeds from sale of common stock................................................. 100,625 15 1,052
Stock offering costs............................................................... (10,420) (257) --
Collections of stockholder loans................................................... 2,445 -- --
Dividends paid..................................................................... (15,026) (2,890) (2,475)
--------- --------- ---------
Net cash provided by (used in) financing activities................................ 64,542 (1,779) (5,457)
--------- --------- ---------
Net increase in cash and cash equivalents.......................................... 38,242 18,350 4,545
Cash and cash equivalents, beginning of year....................................... 58,505 40,155 35,610
--------- --------- ---------
Cash and cash equivalents, end of year............................................. $ 96,747 $ 58,505 $ 40,155
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-11
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Trammell Crow Company, a Delaware corporation (the Company), was
incorporated on August 21, 1997 to become the successor to Trammell Crow
Company, a Texas close corporation (the Predecessor Company). In connection with
the Company's initial public offering, a wholly-owned subsidiary of the Company
was merged with and into the Predecessor Company (the Reincorporation Merger)
with the Predecessor Company surviving the merger as a wholly-owned subsidiary
of the Company. The Company provides commercial real estate services primarily
in the United States. Its principal lines of business include property
management, brokerage, infrastructure management, development and construction,
and retail services.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries, and other subsidiaries over which
the Company has control. Intercompany accounts and transactions have been
eliminated. The Company's investments in subsidiaries in which it has the
ability to exercise significant influence over operating and financial policies,
but does not have control, are accounted for on the equity method. Accordingly,
the Company's share of the earnings of these subsidiaries is included in
consolidated net income. Investments in other subsidiaries are carried at cost.
These unconsolidated subsidiaries primarily own real estate development
projects.
REVENUE RECOGNITION
The Company recognizes fees from property management services and
infrastructure management services over the terms of the respective management
contracts. Most of the property management contracts are cancelable at will or
with 30 days' notice. The infrastructure management contracts generally range
from three to five years. Brokerage service revenue relating to leasing services
and the related expense are generally recognized half upon the execution of a
lease contract and the remainder upon tenant occupancy. Sales brokerage revenue
is recognized upon closing. Development and construction services includes fees
from development and construction management projects and net construction
revenues, which are gross construction revenues net of subcontract costs. For
projects exceeding three months, fees are recognized using the
percentage-of-completion method. For contracts under three months, fees are
recognized upon completion of the contract. Gross construction revenues totaled
$61,837, $46,034 and $22,335 and subcontract costs totaled $52,853, $41,123 and
$19,397 in 1997, 1996 and 1995, respectively.
F-12
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term, highly liquid
investments with maturities of 90 days or less when purchased.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over useful lives ranging from three to 10 years.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes result from temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
federal income tax purposes, and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse.
PRO FORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share. SFAS 128 replaced
primary and fully diluted earnings per share with basic and diluted earnings per
share.
In accordance with the requirements of the Securities and Exchange
Commission, the weighted average shares outstanding used to calculate basic and
diluted earnings per share included the shares issued in connection with the
Company's initial public offering and related transactions for the full year.
Options to purchase 4,788,046 shares of common stock were outstanding during a
portion of 1997 (see Note 8) but were not included in the computation of diluted
earnings per share because the Company incurred a net loss for the year and
therefore, the effect would be antidilutive.
CONCENTRATION OF CREDIT RISK
The Company provides services to owners of real estate assets primarily in
the United States. The Company performs credit evaluations of its customers and
generally does not require collateral. The risk associated with this
concentration is limited because of the large number of customers and their
geographic dispersion.
LONG-LIVED ASSETS
Long-lived assets, including goodwill, are evaluated when indicators of
impairment are present and provisions for possible losses are recorded when
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.
F-13
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill reflects the excess of purchase price over the fair value of net
assets purchased. Goodwill is amortized on a straight-line basis over 30 years.
Accumulated amortization of goodwill was $384 and $23 at December 31, 1997 and
1996, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which establishes standards for the way in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services, and
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company is currently evaluating
the impact SFAS 131 will have on its financial statement disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
2. REAL ESTATE HELD FOR SALE
The Company provides build-to-suit services for its customers and also
develops or purchases projects for investment purposes. Therefore, the Company
has ownership of real estate until such projects are sold. Real estate held for
sale is carried at the lower of cost or fair value less selling expenses. At
December 31, real estate held for sale consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land.................................................................... $ 40,269 $ 26,635
Buildings and improvements.............................................. 58,298 44,487
--------- ---------
$ 98,567 $ 71,122
--------- ---------
--------- ---------
</TABLE>
The estimated costs to complete the 17 projects under construction at
December 31, 1997, total $54,837. Projects are expected to be sold within one
year of completion. At December 31, 1997, the Company had commitments for the
sale of ten of the projects. Gains are recognized upon sale of the project.
In 1997, rental revenues, which are included in development and construction
services revenue, and net income relating to real estate held for sale was
$6,086 and $658, respectively. Operations from real estate held for sale were
insignificant in 1996 and 1995.
F-14
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and equipment, at cost...................................... $ 19,875 $ 18,097
Less: Accumulated depreciation........................................ (13,566) (11,774)
---------- ----------
Furniture and equipment, net $ 6,309 $ 6,323
---------- ----------
---------- ----------
</TABLE>
4. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Summarized financial information for unconsolidated subsidiaries in which
the Company has an investment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET:
Real estate held for sale.................................................. $ 179,973
Other assets............................................................... 52,687
--------
Total assets............................................................. $ 232,660
--------
--------
Notes payable on real estate held for sale................................. $ 122,267
Other liabilities.......................................................... 28,573
Equity..................................................................... 81,820
--------
Total liabilities and equity............................................. $ 232,660
--------
--------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
STATEMENT OF OPERATIONS:
Total revenues............................................................. $ 47,277
Total expenses............................................................. (44,154)
--------
Net income............................................................... $ 3,123
--------
--------
</TABLE>
F-15
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Profit sharing distributions............................................ $ 12,752 $ 10,931
Payroll and bonuses..................................................... 14,825 10,191
Commissions............................................................. 11,132 7,808
Stock Appreciation Rights Plan settlement............................... 4,228 --
Deferred income......................................................... 3,288 --
Insurance accrual....................................................... 1,128 901
Interest................................................................ 55 473
Other................................................................... 8,862 5,824
--------- ---------
$ 56,270 $ 36,128
--------- ---------
--------- ---------
</TABLE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Long-term debt consists of the following at December 31:
Borrowings under a $150,000 line of credit with a bank; due December 1999, with
two 1-year extension options; bearing interest at (1) the greater of prime or
the Federal Funds Effective Rate plus 1/2% or (2) the Eurocurrency rate plus a
margin ranging from 1 1/4 to 1 3/4%; interest payable monthly.................. $ -- $ --
Borrowings under a $7,750 line of credit with a bank; bearing interest at 8.75%;
terminated in 1997............................................................. -- 7,750
Borrowings under revolving lines of credit with banks; totaling $3,300 and $2,800
in 1997 and 1996, respectively; expiring in 1998; bearing interest at rates
ranging from prime plus .5% to prime plus 1%; secured by certain assets........ -- 514
Note payable under a loan agreement with the majority stockholders; bearing
interest at 10.5%; paid in full in December 1997............................... -- 1,378
Capital lease obligations primarily for furniture and equipment; with maturity
dates ranging from 1998 to 2002; bearing interest at various rates ranging from
3.3% to 14% per annum in 1997; secured by the underlying assets and certain
accounts receivable............................................................ 1,579 2,719
Notes payable to former stockholders; due in 2000; bearing interest at 6.1%;
principal and interest payable upon maturity................................... 851 --
--------- ---------
Total long-term debt............................................................. 2,430 12,361
Less current portion of long-term debt........................................... 875 3,409
--------- ---------
$ 1,555 $ 8,952
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LONG-TERM DEBT (CONTINUED)
The shares of certain wholly-owned subsidiaries having 5% or more of the
consolidated assets, revenues or earnings of the Company, and subsidiaries which
are engaged primarily in the business of real estate development and ownership,
whose assets are not subject to any financing, having more than 5% of the
consolidated assets, revenues or earnings of the Company, are pledged as
security for the $150,000 line of credit.
The Company is subject to various covenants associated with the $150,000
line of credit such as maintenance of minimum equity and liquidity and certain
key financial data. In addition, the Company may not pay dividends exceeding 50%
of the previous year's net income before depreciation and amortization, and
there are certain restrictions on investments and acquisitions that can be made
by the Company. If certain financial ratios fall below a specified level, the
Company will be required to make payments equal to cash flow until such time as
the ratios reach the pre-established levels. At December 31, 1997, the Company
is in compliance with all debt covenants.
The covenants associated with the $150,000 line of credit and the amount of
the Company's other borrowings and contingent liabilities may have the effect of
limiting the credit available to the Company under the line of credit to an
amount less than the $150,000 commitment. At December 31, 1997, the Company has
$92,461 available under its $150,000 line of credit. Beginning March 1998, the
Company must pay a quarterly fee equal to .25% of the unused commitments under
the line.
The Company also has other revolving lines of credits with banks totaling
$3,300 at December 31, 1997, of which $2,876 is available.
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998................................................................................. $ 875
1999................................................................................. 459
2000................................................................................. 1,006
2001................................................................................. 85
2002................................................................................. 5
---------
$ 2,430
---------
---------
</TABLE>
Based on current rates available to the Company for debt with similar terms,
there is not a significant difference between the carrying amounts of the long-
term debt and their fair values.
7. NOTES PAYABLE ON REAL ESTATE HELD FOR SALE
The Company has loans secured by real estate held for sale (the majority of
which are construction loans) totaling $76,623 and $67,810 as of December 31,
1997 and 1996, respectively. Interest rates range from 8.25% to 12.0%.
Generally, interest only is payable on the real estate loans, with all unpaid
principal and interest due at maturity. The unused commitments on real estate
loans total $33,684 at December 31, 1997. All real estate loans have been
classified as current liabilities on the balance sheet since the loans are
expected to be repaid as the related projects are sold (see Note 2).
Capitalized interest in 1997 and 1996 totaled $1,642 and $539, respectively.
At December 31, 1997, $18,000 of the $76,623 real estate loans are recourse to
the Company.
F-17
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. NOTES PAYABLE ON REAL ESTATE HELD FOR SALE (CONTINUED)
Based on current rates available to the Company for debt with similar terms,
there is not a significant difference between the carrying amounts of the notes
payable on real estate held for sale and their fair values.
8. STOCKHOLDERS' EQUITY
Prior to the reincorporation transactions, the Predecessor Company had five
classes of common stock, all of which held the same voting rights, except for
voting rights with respect to certain specific actions.
In August 1996, the Predecessor Company completed a private offering to
Company employees and directors of 9,634 shares of Class E Common Stock. In
connection with the offering, the Company provided financing of $9,394 to
stockholders, which is reflected as a reduction of stockholders' equity. These
stockholder loans are to be repaid at prime plus .5% interest (9.0% at December
31, 1997). Principal and interest are payable annually and the notes mature in
March 2001. Principal and interest payments of $8,214 and $649, respectively,
were received in 1997.
The Company was capitalized with the issuance of 1,000 common shares to a
Predecessor Company stockholder. As a result of the Reincorporation Merger, the
outstanding shares of common stock of the Predecessor Company were exchanged for
25,502,964 shares of common stock of the Company. The Company also issued
2,295,217 shares of common stock to a Predecessor Company stockholder in
exchange for a trade name license.
On November 24, 1997, the Company's registration statement was declared
effective for its initial public offering of 5,750,000 shares of its common
stock (including exercise of the over-allotment option of 750,000 shares) at a
public offering price of $17.50 per share (the Offering). The proceeds to the
Company from the Offering were $90,205, net of offering expenses.
The holders of shares of the Company's common stock are entitled to one vote
for each share held on all matters submitted to a vote of common stockholders.
Each share of common stock is entitled to participate equally in dividends, when
and if declared, and in the distribution of assets in the event of liquidation,
dissolution or winding up of the Company, subject in all cases to any rights of
outstanding shares of preferred stock.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS No. 123),
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, compensation expense is recognized
to the extent the market price of the underlying stock on the date of grant
exceeds the exercise price of the option.
In connection with the reincorporation transactions, the Company assumed the
Trammell Crow Company 1997 Option Plan (the Assumed Option Plan), which provided
for the issuance of up to 1,626 shares of the Predecessor Company's Class E
common stock. On August 1, 1997, the Predecessor Company granted to certain
employees options to acquire 1,626 shares of Class E common stock. In connection
with the reincorporation transactions, these options were converted into options
to purchase 2,423,769 shares of the Company's common stock at an exercise price
of $3.85 per share. The options
F-18
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
vested at the closing of the Offering and became exercisable 30 days after that
date. The options expire 10 years from the date of grant. The Company recognized
a non-cash, non-recurring charge to compensation of $33,085 for these options.
In connection with the Offering, the Company established the Trammell Crow
Company Long-Term Incentive Plan (the Long-Term Plan). The Long-Term Plan
provides for the issuance of up to 5,334,878 shares of common stock. In
connection with the Offering, the Company granted to certain employees options
to acquire 2,348,455 shares of common stock at an exercise price of $17.50 per
share. The options vest over a three-year period, with one-third vesting on each
of the three anniversaries of the grant date, and expire 10 years from the date
of grant. In December 1997, the Company granted to non-employee directors of the
Company options to acquire 15,822 shares of common stock at an exercise price of
$22.75 per share. The options vested immediately upon granting and expire 10
years from the date of grant.
The Long-Term Plan also provides for the awards of Stock Appreciation
Rights, Restricted Stock and Performance Units. No such awards have been made as
of December 31, 1997.
At December 31, 1997, common shares reserved for future issuance under the
Assumed Option Plan and the Long-Term Plan total 7,758,647 shares.
Pro forma information regarding net income and earnings per share is
required by FAS No. 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions: risk-free interest rates ranging
from 5.76% to 6.40%; a dividend yield of 0%; volatility factors of the expected
market price of the Company's common stock of 0.318; and a weighted-average
expected life of the options of 8 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
differently than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. For the year
ended December 31, 1997, the Company's pro forma net loss is $18,473 and pro
forma loss per share (basic and diluted) is $.55. These pro forma disclosures
are not likely to be representative of the effects on reported net income for
future years since few options have vested at December 31, 1997.
F-19
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information,
for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE OF EXERCISE PRICE OF
$3.85 (BELOW $17.50 TO $22.75 (AT
MARKET PRICE AT MARKET
GRANT DATE) PRICE AT GRANT DATE) TOTAL
------------------ ------------------------- ----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING:
Number of options at January 1, 1997.................. -- -- --
Granted............................................... 2,423,769 2,364,277 4,788,046
Exercised............................................. -- -- --
Forfeited............................................. -- -- --
Expired............................................... -- -- --
------------------ ----------- ----------
Number of options at December 31, 1997................ 2,423,769 2,364,277 4,788,046
------------------ ----------- ----------
------------------ ----------- ----------
Weighted-average exercise price....................... $ 3.85 $ 17.54
Weighted-average fair value of options granted........ $ 15.18 $ 8.79
Weighted-average remaining contractual life........... 9.6 years 9.9 years
OPTIONS EXERCISABLE:
Number of options..................................... 2,423,769 15,822 2,439,591
Weighted-average exercise price....................... $ 3.85 $ 22.75
</TABLE>
9. INCOME TAXES
Components of deferred income taxes are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Assets................................................................... $ 18,946 $ 8,047
Liabilities.............................................................. (679) (163)
--------- ---------
$ 18,267 $ 7,884
--------- ---------
--------- ---------
Current.................................................................. $ 3,870 $ 88
Noncurrent............................................................... 14,397 7,796
--------- ---------
$ 18,267 $ 7,884
--------- ---------
--------- ---------
</TABLE>
F-20
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset are summarized below as of
December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets
Deferred compensation.................................................. $ 4,395 $ 6,856
Bad debts.............................................................. 316 313
Depreciation........................................................... 507 546
Basis difference on real estate held for sale.......................... 2,012 --
Compensation expense relating to stock options......................... 12,559 --
Stock Appreciation Rights Plan Settlement.............................. 1,605 --
Other.................................................................. 64 332
--------- ---------
21,458 8,047
Less: Valuation allowance.............................................. (2,512) --
--------- ---------
Total deferred tax assets.............................................. 18,946 8,047
Deferred tax liabilities
State taxes............................................................ (523) --
Goodwill amortization.................................................. (115) --
Other.................................................................. (41) (163)
--------- ---------
Total deferred tax liabilities......................................... (679) (163)
--------- ---------
Net deferred tax asset................................................... $ 18,267 $ 7,884
--------- ---------
--------- ---------
</TABLE>
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal...................................................... $ 1,646 $ 5,202 $ 4,893
State........................................................ 449 1,022 940
--------- --------- ---------
2,095 6,224 5,833
Deferred
Federal...................................................... (4,862) 1,602 (2,040)
State........................................................ (600) -- --
--------- --------- ---------
(5,462) 1,602 (2,040)
--------- --------- ---------
$ (3,367) $ 7,826 $ 3,793
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. INCOME TAXES (CONTINUED)
The differences between the provisions for income taxes and the amounts
computed by applying the statutory federal income tax rates to income (loss)
before income taxes for the years ended December 31 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate applied to income (loss) before income
taxes......................................................... $ (5,912) $ 6,780 $ 2,766
State income taxes, net of federal tax benefit.................. (611) 674 589
Increase in taxes resulting from non-deductible meals,
entertainment and other....................................... 644 372 438
Valuation allowance............................................. 2,512 -- --
--------- --------- ---------
$ (3,367) $ 7,826 $ 3,793
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. OPERATING LEASES
The Company has commitments under operating leases for office space and
office equipment. During the years ended December 31, 1997, 1996 and 1995, rent
expense was $6,906, $7,814 and $7,255, including $1,770, $3,037 and $2,987,
respectively, paid to affiliates of the Company.
Minimum future rentals under noncancelable operating lease commitments in
effect at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
AFFILIATE NONAFFILIATE TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
1998........................................................ $ 936 $ 4,494 $ 5,430
1999........................................................ 935 2,971 3,906
2000........................................................ 882 1,994 2,876
2001........................................................ 759 1,401 2,160
2002........................................................ 696 1,145 1,841
Thereafter.................................................. -- 236 236
----------- ----------- ---------
$ 4,208 $ 12,241 $ 16,449
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Rental amounts include fixed operating expense payments but do not include
increases for rate escalations.
11. EMPLOYEE BENEFIT PLANS
The Company's employees participate in a defined contribution savings plan,
which provides the opportunity for pretax contributions by employees. The
Company matches 50% of the employee's contributions up to 6% of the employee's
annual earnings or a maximum of $4.5 per annum. The Company's contribution
expense for 1997, 1996, and 1995 was $2,122, $1,741, and $2,154, respectively.
The Company has a profit sharing plan for key employees (the Profit Sharing
Plan). Each participant has a profit sharing account that is adjusted annually
for the participant's percentage of the earnings for a profit sharing unit, cash
distributions, tax rate changes, and other adjustments. Distributions to
participants
F-22
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
are limited to Available Cash, as defined. Any difference between the amount
expensed and the amount paid to the participants is recorded as deferred
compensation. The Company's management board approved the percentage of earnings
available to profit sharing participants. Such percentages were approximately
58%, 58% and 73% of earnings before profit sharing, as defined, in 1997, 1996,
and 1995, respectively. In connection with the Offering, the Company terminated
any future awards under the Profit Sharing Plan.
Effective January 1, 1993, the Company initiated the All Employee Cash
Profit Sharing Program whereby 3% of earnings, as defined, was paid as bonuses
to employees not participating in the key employee profit sharing plan. Expense
related to the program, which is included in salaries, wages and benefits, was
$1,577, $1,205, and $818 in 1997, 1996, and 1995, respectively. In connection
with the Offering, the Company terminated this program.
Effective March 1, 1998, the Company established the Trammell Crow Company
Employee Stock Purchase Plan (the ESPP), subject to stockholder approval.
Employees may elect to have monthly payroll deductions of 1% to 10%, which is
used to purchase, on a semi-annual basis, stock of the Company at a 15% discount
from market value. The ESPP is available to all employees. The Company has
reserved 1,000,000 shares of common stock for issuance under the ESPP. Shares
may also be issued from treasury, if available.
12. GAIN ON DISPOSITION OF REAL ESTATE
During 1997, the Company sold thirteen real estate projects for an aggregate
sale price of $51,542, resulting in a gain on sale of $10,241. During 1996, the
Company sold sixteen real estate projects for an aggregate sale price of
$48,555, resulting in a gain on sale of $6,630. During 1995, the Company sold
nine real estate projects for an aggregate sale price of $43,472, resulting in a
gain on sale of $5,026.
In March 1997, the Company contributed real estate held for sale of $35,400
and the related $35,400 note payable to a partnership and received a 16% limited
partner interest. No gain was recognized.
13. ACQUISITIONS
In August 1997, the Company acquired substantially all of the assets of
Doppelt & Company (Doppelt), a Cleveland, Ohio-based company that specializes in
new store roll out strategies and problem real estate disposition services. The
Company paid $20,658 in cash, issued a promissory note of $6,000, which was
prepaid by the Company in November 1997 with 342,857 shares of common stock, and
granted the seller the right to receive an additional $2,000 of purchase price
if future commissions collected by the Company exceed $7,000, subject to certain
reductions. The Company also paid Mr. Doppelt $2,000 as consideration for an
employment agreement, which includes non-compete provisions. In connection with
the acquisition, which was accounted for using the purchase method of
accounting, the Company recorded goodwill of $27,416. The operations of Doppelt
are included in the Company's operations from the date of acquisition.
F-23
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. RELATED PARTY TRANSACTIONS
In 1997, 1996 and 1995, the Company derived 7%, 9%, and 11%, respectively,
of its total revenues from services provided principally to the stockholders of
the Company. The fees received are comparable to those charged to unaffiliated
customers.
Under certain agreements, two significant stockholders were entitled to
receive royalty and consulting fees totaling approximately 12% of Earnings
Before Profit Sharing, as defined. Accrued royalties and consulting fees at
December 31, 1997 and 1996, are included in payables to affiliates. These
agreements were terminated in connection with the Offering. The Company paid
$1,556 to one of the stockholders in January 1998 and has agreed to pay all
remaining unpaid amounts by April 15, 1998.
In conjunction with the issuance of stock in 1996, the Company issued tax
loans to the stockholders totaling $4,734 in order for the stockholders to pay
the incremental taxes related to the stock purchased. As of December 31, 1997
and 1996, $43 and $1,620, respectively, is outstanding and included in notes and
other receivables. These notes bear interest at 5.9% and are due in August 1999;
however, these loans may be repaid earlier based on cash available for profit
sharing distributions.
In January 1997, the Company formed a joint venture with an affiliate of one
of the stockholders to provide management information services. Both parties
share equally in any distributions from the joint venture (none through December
31, 1997). The Company entered into a 5-year management information system
agreement with the joint venture for related services and, in 1997, paid fees
totaling $4,135 for such services.
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company has guaranteed $37,250 of real estate
notes payable of others. These notes are collateralized by the underlying real
estate. The Company has outstanding letters of credit totaling $13,163 at
December 31, 1997, of which $4,663 was released through February 1998. The
remaining letter of credit expires in July 1999.
In addition, at December 31, 1997, the Company has several completion and
budget guarantees relating to development projects. Management does not expect
to incur any material losses under these guarantees.
On November 2, 1997 the Company settled claims asserted by certain former
employees arising out of the termination of the Company's Stock Appreciation
Rights Plan. In connection with the settlement, the Company paid $127 in 1997
and accrued $4,228 for additional payments which are due by May 1998.
The Company and its subsidiaries are defendants in other lawsuits that arose
in the normal course of business. In management's judgment, the ultimate
liability, if any, from such legal proceedings will not have a material effect
on the Company's financial position.
F-24
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized below for the three years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest paid................................................. $ 7,575 $ 1,520 $ 2,833
Income taxes paid............................................. 10,454 3,288 6,320
Profit sharing distributions paid............................. 21,927 12,021 7,722
Non cash activities for the three years ended December 31:
Assumption of stockholder loan............................ -- -- 327
Write-off of pursuit costs and intangibles................ -- -- 361
Conversion of deferred compensationbalances to stock...... -- 10,670 --
Stockholder loans......................................... -- 9,394 --
Payment of stockholder and tax loans with deferred
compensation balances................................... 12,338 -- --
Conversion of Doppelt note payable to stock............... 6,000 -- --
</TABLE>
17. UNAUDITED INTERIM FINANCIAL INFORMATION
Unaudited summarized financial information by quarter is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1997:
Total revenues............................. $ 62,098 $ 69,344 $ 81,797 $ 100,400
Net income (loss).......................... 1,601 2,685 4,568 (22,874)
1996:
Total revenues............................. $ 56,397 $ 54,299 $ 65,515 $ 79,244
Net income................................. 1,876 2,093 3,673 4,472
</TABLE>
Quarterly net income (loss) per share is not relevant due to the change in
capital structure during the quarter ended December 31, 1997.
In the fourth quarter of 1997, the Company recognized a non-cash,
non-recurring charge to compensation of $33,085 for options granted prior to the
Offering at an exercise price substantially less than the fair value (see Note
8). The Company also expensed $4,355 in the fourth quarter relating to
settlement of litigation with participants under the Stock Appreciation Rights
Plan (see Note 15).
F-25
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 76,471 $ 96,747
Accounts receivable, net of allowance for doubtful accounts of
$586 in 1998 and $955 in 1997................................................... 70,456 40,602
Receivables from affiliates....................................................... 1,394 926
Notes and other receivables....................................................... 6,205 4,007
Income taxes recoverable.......................................................... -- 4,939
Deferred income taxes............................................................. 3,058 3,870
Real estate held for sale......................................................... 128,058 98,567
Other current assets.............................................................. 10,928 9,220
------------- ------------
Total current assets............................................................ 296,570 258,878
Furniture and equipment, net........................................................ 12,783 6,309
Deferred income taxes............................................................... 11,866 14,397
Investments in unconsolidated subsidiaries.......................................... 13,026 11,244
Goodwill, net....................................................................... 103,863 27,111
Other assets........................................................................ 28,530 8,297
------------- ------------
$ 466,638 $ 326,236
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................................. $ 25,100 $ 18,523
Accrued expenses.................................................................. 69,246 56,270
Payables to affiliates............................................................ 4,930 4,466
Income taxes payable.............................................................. 3,555 --
Current portion of long-term debt................................................. 1,799 875
Notes payable on real estate held for sale........................................ 77,297 76,623
Other current liabilities......................................................... 1,493 2,185
------------- ------------
Total current liabilities....................................................... 183,420 158,942
Long-term debt, less current portion................................................ 93,476 1,555
Deferred compensation............................................................... 57 8,391
Other liabilities................................................................... 245 417
------------- ------------
Total liabilities............................................................... 277,198 169,305
Minority interest................................................................... 14,210 19,859
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;
34,173,855 and 33,892,038 shares issued and outstanding
in 1998 and 1997, respectively.................................................. 342 339
Paid-in capital................................................................... 157,663 150,647
Retained earnings (deficit)....................................................... 18,730 (12,734)
Less: Stockholder loans........................................................... (1,028) (1,180)
Unearned compensation, net................................................... (477) --
------------- ------------
Total stockholders' equity................................................... 175,230 137,072
------------- ------------
$ 466,638 $ 326,236
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
REVENUES
Property management services...................................................... $ 81,897 $ 65,055
Brokerage services................................................................ 100,814 61,692
Infrastructure management services................................................ 74,008 47,954
Development and construction services............................................. 42,132 27,462
Retail services................................................................... 11,487 1,912
---------- ----------
310,338 204,075
Income from investments in unconsolidated subsidiaries............................ 7,151 1,467
Gain on disposition of real estate................................................ 23,455 1,566
Other income...................................................................... 6,012 6,131
---------- ----------
346,956 213,239
COSTS AND EXPENSES
Salaries, wages and benefits...................................................... 180,509 114,006
Commissions....................................................................... 43,808 25,379
General and administrative........................................................ 51,371 33,779
Profit sharing.................................................................... -- 15,417
Depreciation...................................................................... 3,385 2,682
Amortization...................................................................... 3,510 592
Interest.......................................................................... 7,782 3,336
Royalty and consulting fees....................................................... -- 3,167
Minority interest................................................................. 3,702 280
---------- ----------
294,067 198,638
---------- ----------
Income before income taxes.......................................................... 52,889 14,601
Income tax expense.................................................................. 21,425 5,747
---------- ----------
Net income.......................................................................... $ 31,464 $ 8,854
---------- ----------
---------- ----------
Earnings per share:
Basic............................................................................. $ .93 *
----------
----------
Diluted........................................................................... $ .87 *
----------
----------
</TABLE>
- ------------------------
* Information is not relevant due to change in capital structure.
See accompanying notes.
F-27
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................................. $ 31,464 $ 8,854
Adjustments to reconcile net income to net cash used in operating activities
Depreciation.......................................................................... 3,385 2,682
Amortization.......................................................................... 3,510 592
Amortization of employment contracts.................................................. 693 --
Minority interest..................................................................... 3,702 280
Deferred income tax provision......................................................... 4,000 159
Income from investments in unconsolidated subsidiaries................................ (7,151) (1,467)
Gain on disposition of real estate.................................................... (23,455) (1,566)
Changes in operating assets and liabilities
Accounts receivable................................................................. (26,557) (4,962)
Receivables from affiliates......................................................... (468) 941
Notes receivable and other assets................................................... (14,255) (6,805)
Expenditures for real estate held for sale.......................................... (140,768) (59,672)
Proceeds from sale of real estate................................................... 136,598 39,272
Proceeds from real estate notes payable............................................. 75,922 56,860
Payments on real estate notes payable............................................... (75,248) (37,386)
Accounts payable and accrued expenses............................................... 15,758 (7,183)
Payables to affiliates.............................................................. 897 (3,660)
Income taxes recoverable/payable.................................................... 8,494 (2,011)
Deferred compensation............................................................... (8,334) 5,843
Other liabilities................................................................... (1,373) (971)
---------- ----------
Net cash used in operating activities..................................................... (13,186) (10,200)
---------- ----------
INVESTING ACTIVITIES
Expenditures for furniture and equipment.................................................. (7,579) (2,470)
Acquisitions of real estate service companies............................................. (92,226) (22,658)
Investments in unconsolidated subsidiaries................................................ (3,907) (4,163)
Distributions from unconsolidated subsidiaries............................................ 9,278 2,382
Contributions from minority interest...................................................... 201 2,009
Distributions to minority interest........................................................ (9,985) (906)
---------- ----------
Net cash used in investing activities..................................................... (104,218) (25,806)
---------- ----------
FINANCING ACTIVITIES
Principal payments on debt................................................................ (12,251) (12,399)
Proceeds from debt........................................................................ 102,721 34,372
Proceeds from exercise of stock options................................................... 553 --
Proceeds from issuance of common stock.................................................... 5,953 --
Purchase of common stock.................................................................. -- (730)
Collections of stockholder loans.......................................................... 152 1,918
Dividends paid............................................................................ -- (8,200)
---------- ----------
Net cash provided by financing activities................................................. 97,128 14,961
---------- ----------
Net decrease in cash and cash equivalents................................................. (20,276) (21,045)
Cash and cash equivalents, beginning of period............................................ 96,747 58,505
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 76,471 $ 37,460
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. GENERAL
The consolidated interim financial statements of Trammell Crow Company (the
Company) included herein have been prepared in accordance with the requirements
for interim financial statements and do not include all disclosures required
under generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1997 included
herein. In the opinion of management, all adjustments and eliminations,
consisting only of recurring adjustments, necessary for a fair presentation of
the financial statements for the interim periods have been made. Interim results
of operations are not necessarily indicative of the results to be expected for
the full year.
The Company has experienced and expects to continue to experience quarterly
variations in revenues and net income as a result of several factors, including
the timing of transactions, the commencement of new contracts, revenue mix and
the timing of additional selling, general and administrative expenses to support
new business activities. The Company's revenues tend to be higher in the last
quarter of the year than in the first three quarters because its clients have
demonstrated a tendency to close transactions toward the end of the year, which
causes the Company to earn more of its revenue under transaction-oriented
service contracts in the last quarter of the year. In addition, an increasing
percentage of the Company's property management and infrastructure management
contracts provide for incentive payments if the Company achieves certain
performance targets. Such incentive payments are generally earned in the fourth
quarter. The timing and introduction of new contracts and other factors may also
cause quarterly fluctuations in the Company's results of operations.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The provision for income taxes has been included in the accompanying
financial statements based on an estimated annual effective tax rate. The
differences between the provisions for income taxes and amounts computed by
applying the statutory federal income tax rates to income are primarily a result
of amortization of goodwill, non-deductible meals and entertainment
expenditures, payment of deferred compensation, and the impact of options
exercised and expected to be exercised prior to December 31, 1998.
EARNINGS PER SHARE
Weighted average shares outstanding used to calculate basic earnings per
share were 33,984,517. Weighted average shares outstanding used to calculate
diluted earnings were 36,208,762. Employee stock options to purchase 2,224,245
shares of common stock were included in the weighted average shares outstanding
used to calculate diluted earnings per share.
F-29
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. GENERAL (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation. Certain revenues and expenses for the period
ended September 30, 1998 have been reclassified to conform to the presentation
for the quarter and year ended December 31, 1998. As a result, certain revenue
and expense items differ from the amounts reported in previously filed
documents. These reclassifications do not impact net income.
2. REAL ESTATE HELD FOR SALE
During the nine months ended September 30, 1998, the Company sold
twenty-nine real estate projects for an aggregate sales price of $136,598,
resulting in a gain on disposition of $23,455. During the nine months ended
September 30, 1997, the Company sold eight real estate projects for an aggregate
sales price of $39,272, resulting in a gain on disposition of $1,566.
In March 1997, the Company contributed real estate held for sale of $35,400
and the related $35,400 note payable to a partnership and received a 16% limited
partner interest. No gain was recognized.
3. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Operating results for unconsolidated subsidiaries in which the Company has
an investment were as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
Total revenues................................................................. $ 46,661
Total expenses................................................................. (28,532)
-------------
Net income................................................................... $ 18,129
-------------
-------------
</TABLE>
F-30
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
4. STOCKHOLDERS' EQUITY
A summary of the Company's stock option activity for the nine months ended
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE OF EXERCISE PRICE OF
$3.85 (BELOW MARKET $17.50 TO $36.00 (AT
PRICE MARKET PRICE
AT GRANT DATE) AT GRANT DATE) TOTAL
--------------------- ----------------------- ----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING:
December 31, 1997............... 2,423,769 2,364,277 4,788,046
Granted......................... -- 253,885 253,885
Exercised....................... (62,700) -- (62,700)
Forfeited....................... -- (104,894) (104,894)
Expired......................... -- -- --
---------- ---------- ----------
September 30, 1998.............. 2,361,069 2,513,268 4,874,337
---------- ---------- ----------
---------- ---------- ----------
OPTIONS EXERCISABLE AT SEPTEMBER
30, 1998...................... 2,361,069 62,769 2,423,838
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
5. ACQUISITIONS OF REAL ESTATE SERVICE COMPANIES
In March 1998, the Company purchased all of the issued and outstanding
capital stock of Tooley & Company, Inc. ("Tooley"), a California real estate
services company primarily engaged in office management and leasing. The Company
paid cash of $23,400 for the capital stock, and paid an additional $1,000 to two
of the principals of Tooley as consideration for non-compete agreements. The
Company also agreed to pay the seller an additional $3,000 of purchase price if
Tooley achieves certain performance standards in the future, as well as certain
payments based upon the future performance of certain of Tooley's projects. In
connection with the acquisition, which was accounted for using the purchase
method of accounting, the Company recorded goodwill of $17,016. The operations
of Tooley are included in the Company's operations from the date of acquisition.
The Company borrowed $23,000 under its credit facility to fund the purchase.
In May 1998, the Company acquired the business of Fallon Hines & O'Connor,
Inc., a Boston, Massachusetts-based commercial real estate brokerage, consulting
and advisory firm ("Fallon"). In exchange for substantially all of the assets of
Fallon, the Company paid approximately $30,595 in cash and agreed to pay up to
an additional $6,000 in cash and/or stock options if the acquired business meets
certain performance thresholds. The Company also paid an aggregate of $2,000 to
the principals of Fallon in exchange for certain covenants not to compete. In
connection with the acquisition, which was accounted for using the purchase
method of accounting, the Company recorded goodwill of $29,654. The operations
of Fallon are included in the Company's operations from the date of acquisition.
The Company borrowed $32,000 under its credit facility to fund the acquisition.
In July 1998, the Company acquired a portion of the businesses of Faison &
Associates ("Faison") and Faison Enterprises, Inc. ("Faison Enterprises"), which
are engaged in the development, leasing and management of office and retail
properties located primarily in the Midatlantic and Southeast regions of the
United States. In exchange for the portion of the businesses acquired, the
Company paid $36,107 in cash and delivered a $2,000 promissory note that bears
interest at an annual rate of 6.0%. The note
F-31
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
5. ACQUISITIONS OF REAL ESTATE SERVICE COMPANIES (CONTINUED)
matures on April 30, 2000 and is payable in eight equal quarterly installments.
In connection with the closing, Mr. Henry Faison and Faison Enterprises
purchased an aggregate of 127,828 shares of common stock for $4,000. In
addition, the Company entered into a program whereby Faison Enterprises will be
given the opportunity to invest in, and provide the financing for, certain
retail projects identified through the Company's operations purchased in the
acquisition. Faison Enterprises also entered into a long-term services contract
with the Company with respect to the properties developed under this program and
certain other properties controlled by Mr. Henry Faison.
In connection with the acquisition, the Company entered into employment
agreements with four key employees, including Mr. Faison, and in connection with
such employment agreements the Company paid an aggregate of $1,000 in exchange
for certain covenants not to compete. The Company authorized the issuance of
options to purchase an aggregate of 71,424 shares of common stock at an exercise
price per share equal to the fair market value of the common stock on the date
of grant to certain employees of the acquired business who were retained after
the closing.
In addition, on August 5, 1998, the Company authorized the grant of an
aggregate of 63,490 restricted shares of its common stock to certain employees
of the acquired business who were retained after the closing. These shares were
issued on October 7, 1998 and will vest on July 2, 2000 if the grantee has been
continuously employed by the Company from the date of closing. At the closing,
Mr. Henry Faison was elected to serve as a Class III Director of the Company's
Board of Directors with a term expiring at the Company's annual meeting of
stockholders in 2000. In connection with the acquisition, which was accounted
for using the purchase method of accounting, the Company recorded goodwill of
$30,670. The Company borrowed $37,105 under its credit facility to fund the
acquisition.
6. LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Borrowings under $150,000 line of credit with a bank................. $ 92,105 $ --
Capital lease obligations............................................ 1,061 1,579
Notes payable........................................................ 2,109 --
Notes payable to former stockholders................................. -- 851
------------- ------
Total long-term debt................................................. 95,275 2,430
Less current portion of long-term debt............................... 1,799 875
------------- ------
$ 93,476 $ 1,555
------------- ------
------------- ------
</TABLE>
At September 30, 1998, the Company has $51,674 available under its $150,000
line of credit.
7. FINANCIAL INSTRUMENTS
In September 1998, as required under the Company's line of credit, the
Company entered into an interest rate swap to manage market risks related to
changes in interest rates. The Company's participation
F-32
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
7. FINANCIAL INSTRUMENTS (CONTINUED)
in derivative transactions has been designated for hedging purposes, and
derivative instruments are not held or issued for trading purposes. At September
30, 1998, the Company has an interest rate swap outstanding with a notional
amount of $135,000. This swap agreement establishes a fixed interest pay rate of
5.29% on a portion of the Company's variable rate debt and terminates on June
24, 1999. The weighted average receive rate for the swap agreement is 5.59% for
the period.
8. CONTINGENCIES
At September 30, 1998, the Company has guaranteed $4,837 in aggregate
principal amount of real estate notes payable of others. These notes are
collateralized by the underlying real estate. The Company has outstanding
letters of credit totaling $14,721 at September 30, 1998, which expire at
varying dates through January 2004.
In addition, at September 30, 1998, the Company has several completion and
budget guarantees relating to development projects. Management does not expect
to incur any material losses under these guarantees.
The Company and its subsidiaries are defendants in lawsuits that arose in
the normal course of business. In management's judgment, the ultimate liability,
if any, from such legal proceedings will not have a material effect on the
Company's financial position.
F-33
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
MARCH 22, 1999
4,500,000 SHARES
TRAMMELL CROW COMPANY
COMMON STOCK
--------------
SELLING STOCKHOLDERS ARE OFFERING ALL OF THE SHARES TO BE SOLD IN THE OFFERING.
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE OFFERING. IN 1991, OUR REAL
ESTATE SERVICES BUSINESS WAS SEPARATED FROM THE COMMERCIAL REAL
ESTATE ASSET BASE OWNED BY OUR PREDECESSOR. WE CONTINUED
TO OPERATE THE REAL ESTATE SERVICES BUSINESS WHILE
OWNERSHIP OF THE COMMERCIAL REAL ESTATE
ASSET BASE WAS SEGREGATED INTO
SEPARATE ENTITIES WITH
INDEPENDENT
MANAGEMENT AND
OPERATIONS.
-------------------
THE COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
"TCC."
ON MARCH 19, 1999, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON
THE NEW YORK STOCK EXCHANGE WAS $15 5/8 PER SHARE.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDERS
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE
UP TO AN ADDITIONAL 675,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN STANLEY &
CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON ,
1999.
-------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
, 1999.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the various expenses payable by the Company and
the Selling Stockholders in connection with the sale and distribution of the
securities offered hereby, other than underwriting discounts and commissions.
All of the amounts shown are estimated except the Commission filing fee:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee..................... $ 28,574
NASD filing fee................................................... 30,500
Printing expenses................................................. 225,000
Legal fees and expenses........................................... 150,000
Accounting fees and expenses...................................... 150,000
Blue Sky fees and expenses........................................ 15,000
Custodian fees and expenses....................................... 12,000
Miscellaneous expenses............................................ 127,235
---------
Total......................................................... $ 738,309
---------
---------
</TABLE>
The Company expects to be reimbursed from the Selling Stockholders other
than Crow Family and its affiliates for a portion of the expenses of issuance
and distribution that will not exceed $525,722.
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL ("Section 145") permits indemnification of
directors, officers, agents and controlling persons of a corporation under
certain conditions and subject to certain limitations. Article Twelfth of the
Certificate of Incorporation of the Company provides that the Company shall
indemnify its officers and directors to the maximum extent allowed by the DGCL.
Pursuant to Section 145, the Company generally has the power to indemnify its
present and former directors and officers against expenses and liabilities
incurred by them in connection with any suit to which they are, or are
threatened to be made, a party by reason of their serving in those positions so
long as they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the registrant, and with respect to
any criminal action, so long as they had no reasonable cause to believe their
conduct was unlawful. With respect to suits by or in the right of the
registrant, however, indemnification is generally limited to attorneys' fees and
other expenses and is not available if the person is adjudged to be liable to
the registrant, unless the court determines that indemnification is appropriate.
The statute expressly provides that the power to indemnify authorized thereby is
not exclusive of any rights granted under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise. The registrant also has
the power to purchase and maintain insurance for its directors and officers. The
Company maintains officers' and directors' liability insurance which insures
against liabilities that officers and directors of the Company may incur in such
capacities. Additionally, Article Twelve of the Certificate of Incorporation
provides that, in the event that an officer or director files suit against the
registrant seeking indemnification of liabilities or expenses incurred, the
burden will be on the registrant to prove that the indemnification would not be
permitted under the DGCL. The preceding discussion of the registrant's
Certificate of Incorporation and Section 145 of the DGCL is not intended to be
exhaustive and is qualified in its entirety by the Certificate of Incorporation
and Section 145 of the DGCL.
The Company has entered into indemnification agreements with the Company's
directors and officers. Pursuant to such agreements, the Company will, to the
extent permitted by applicable law, indemnify such persons against all expenses,
judgments, fines and penalties incurred in connection with the defense or
settlement of any actions brought against them by reason of the fact that they
were directors or officers of the Company or assumed certain responsibilities at
the direction of the Company.
II-1
<PAGE>
At present, there is no pending litigation or proceeding involving a
director or officer of the Company for which indemnification is being sought nor
is the Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers, and by the Company and the Selling Stockholders of
the Underwriters, for certain liabilities arising under the Securities Act or
otherwise.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(A) EXHIBITS
<TABLE>
<C> <S>
1.1(1) Form of Underwriting Agreement
2.1(2) Agreement and Plan of Merger dated August 22, 1997, among the Company, the
Predecessor Company, TCC Merger Sub, Inc. and certain other parties thereto
2.2(2) First Amendment to Agreement and Plan of Merger dated as of November 22, 1997
4.1(2) Form of certificate for shares of Common Stock of the Company
5.1(1) Opinion of Vinson & Elkins L.L.P. relating to the Common Stock
8.1(1) Opinion of Vinson & Elkins L.L.P. relating to Certain U.S. Federal Tax
Considerations for Non-U.S. Holders of Common Stock
10.1(3) Credit Agreement dated as of December 1, 1997, among the Company, NationsBank
of Texas, N.A. and Bankers Trust Company
10.2(4) First Amendment of Credit Agreement dated as of December 1, 1997 among the
Company, NationsBank of Texas, N.A. and Bankers Trust Company--January 29,
1998
10.3(4) Second Amendment of Credit Agreement dated as of December 1, 1997 among the
Company, NationsBank of Texas, N.A. and Bankers Trust Company--April 27,
1998
10.4(2) Form of License Agreement among the Company and CFH Trade-Names, L.P.
10.5(2) Form of Indemnification Agreement, with schedule of signatures
10.6(2) Predecessor Company's 1997 Stock Option Plan
10.7(2) Company's Long-Term Incentive Plan
10.8(2) Company's 1995 Profit Sharing Plan
10.9(5) Company's Employee Stock Purchase Plan
10.10(2) Acquisition Agreement dated August 15, 1997, among the Company, TCRS, Doppelt
and Jeffrey J. Doppelt
10.11(1) Master Loan Agreement dated December 22, 1998 between TCC NNN Trading, Inc.
and KeyBank National Association
10.12(2) Form of Stockholders' Agreement among the Company, Crow Family Partnership
L.P., CFH Trade-Names, L.P., J. McDonald Williams and certain other
signatories thereto
10.13(6) Employment Agreement for Henry J. Faison dated July 2, 1998
10.14(1) Master Construction Loan Agreement dated August 4, 1997 between Trammell Crow
BTS, Inc. and KeyBank National Association
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.15(1) First Modification to Master Construction Loan Agreement dated August 4, 1997
between Trammell Crow BTS, Inc. and KeyBank National Association--
September 15, 1997
10.16(1) Second Modification to Master Construction Loan Agreement dated August 4,
1997 between Trammell Crow BTS, Inc. and KeyBank National Association--May
12, 1998
10.17(1) Third Modification to Master Construction Loan Agreement dated August 4, 1997
between Trammell Crow BTS, Inc. and KeyBank National Association--June 9,
1998
10.18(1) Fourth Modification to Master Construction Loan Agreement dated August 4,
1997 between Trammell Crow BTS, Inc. and KeyBank National Association--
December 30, 1998
23.1* Consent of Ernst & Young LLP
23.2(1) Consent of Vinson & Elkins L.L.P. (included as part of Exhibit 5.1)
24.1(1) Power of Attorney
</TABLE>
- ------------------------
* Filed herewith.
(1) Previously filed.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File Number 333-34859) initially filed with the Securities and
Exchange Commission on September 3, 1997 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997 and incorporated herein
by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998 and incorporated herein
by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (File Number 333-50578) filed with the Securities and Exchange
Commission on April 21, 1998 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File Number 333-59387) initially filed with the Securities and
Exchange Commission on July 17, 1998 and withdrawn on October 9, 1998, and
incorporated herein by reference.
(B) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
Report of Independent Auditors
Schedule III--Real Estate Investments and Accumulated Depreciation--Trammell
Crow Company and Subsidiaries.
All other schedules have been intentionally omitted because they are either
not required or the information has been included in the Notes to the
Consolidated Financial Statements included as part of this Registration
Statement.
17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public
II-3
<PAGE>
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act:
(1) the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) the filing each of the registrant's annual reports that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby further undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas on the 22nd day of March,
1999.
<TABLE>
<S> <C> <C>
TRAMMELL CROW COMPANY
By: /s/ WILLIAM P. LEISER
-----------------------------------
William P. Leiser
EXECUTIVE VICE PRESIDENT AND
TREASURER
</TABLE>
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
------------------------------ ------------------------------ ---------------
<C> <S> <C>
President, Chief Executive
* Officer and Director
------------------------------ (Principal Executive March 22, 1999
George L. Lippe Officer)
Executive Vice President,
* Chief Financial Officer and
------------------------------ Director (Principal March 22, 1999
Robert E. Sulentic Financial Officer)
/s/ WILLIAM P. LEISER Executive Vice President and
------------------------------ Treasurer (Principal March 22, 1999
William P. Leiser Accounting Officer)
*
------------------------------ Director March 22, 1999
Harlan R. Crow
*
------------------------------ Director March 22, 1999
J. McDonald Williams
*
------------------------------ Director March 22, 1999
James D. Carreker
*
------------------------------ Director March 22, 1999
William F. Concannon
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
------------------------------ ------------------------------ ---------------
<C> <S> <C>
*
------------------------------ Director March 22, 1999
James R. Erwin
*
------------------------------ Director March 22, 1999
Jeffrey M. Heller
*
------------------------------ Director March 22, 1999
Rowland T. Moriarty
* Executive Vice President and
------------------------------ Director March 22, 1999
Henry J. Faison
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ WILLIAM P. LEISER
-------------------------
William P. Leiser
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Trammell Crow Company
We have audited the consolidated financial statements of Trammell Crow
Company (a Delaware corporation; formerly a Texas close corporation) and
Subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, and have issued our report thereon dated
March 4, 1998 (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1998
II-7
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST
--------------------------------------- COSTS
BUILDINGS FURNITURE SUBSEQUENT
RELATED AND FIXTURES & TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS EQUIPMENT ACQUISITION
- ------------------------------ ------------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
RETAIL:
Diamond Bar--Diamond Bar,
CA.......................... $ 5,650 $ 1,475 $ 4,290 $-- $ --
Dry-Wadsworth--Arvada, CO..... -- 473 495 -- 76
Petsmart--Edmond, OK.......... 1,434 900 -- -- 587
Fairbanks--Fairbanks, AK...... 2,136 -- (A) -- -- 2,557
Gateway Plaza--Aurora, CO..... 6,574 1,018 5,793 -- 62
Lost Pines--Bastrop, TX....... 1,407 521 40 -- 1,214
Village Green--Yorba Linda,
CA.......................... 2,750 1,890 2,316 -- --
Walgreen's--Houston, TX....... 2,440 2,525 35 -- --
OFFICE:
Bowie--Austin, TX............. 1,785 442 1,767 -- 78
Kelley Clarke--Portland, OR... 1,955 530 -- -- 1,501
INDUSTRIAL:
349 Oyster Point--San
Francisco, CA............... 3,806 1,577 -- -- 2,670
Bolingbrook--Bolingbrook,
IL.......................... 6,239 1,406 -- -- 7,061
Centrepoint--Chino, CA........ 5,313 4,588 -- -- 692
CH-NW Place II--Houston, TX... 5,174 698 176 -- 4,292
Cooper--Reno, NV.............. 4,074 1,513 2,537 -- 23
Dunsirn BTS--Reno, NV......... 451 401 -- -- 38
McCormick--Irving, TX......... -- 496 -- -- 445
OCP II--Orlando, FL........... 2,478 499 1,751 -- 1,444
Peerless--Allen, TX........... 2,424 1,496 102 -- 1,761
TC Longmont--Longmont, CO..... 8,300 1,155 6,708 -- 136
Wooddale--Wooddale, IL........ 11,694 4,034 301 -- 7,804
LAND:
56th & Warner--Phoenix, AZ.... -- 1,578 -- -- 76
AEW #10--Mt. Laurel Township,
MJ.......................... -- 327 -- -- --
Andover--Andover, MA.......... -- 291 -- -- --
Chapel Hills--Colorado
Springs, CO................. 430 770 -- -- 35
Cleveland--Cleveland, OH...... -- 260 -- -- --
Freeport I--Irving, TX........ -- 2,746 -- -- --
Oxnard--Oxnard, CA............ -- 280 -- -- --
Quarry Crossing--San Antonio,
TX.......................... -- 2,557 -- -- --
Sadler--Memphis, TN........... -- 123 -- -- --
Silver Lake Pond--Charlotte,
NC.......................... 109 109 -- -- --
Summit Plaza--Orlando, FL..... -- 572 -- -- --
TC Riverside--Belcamp, MD..... -- 919 -- -- --
Westridge at Gateway-Dallas,
TX.......................... -- 1,535 -- -- --
------------- -------- ------------- ----- ----------
Total....................... $76,623 $ 39,704 $26,311 $-- $ 32,552
------------- -------- ------------- ----- ----------
------------- -------- ------------- ----- ----------
<CAPTION>
12/31/97 BALANCE
----------------------------------------------------
BUILDINGS FURNITURE
AND FIXTURES & DATE OF DATE DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS EQUIPMENT TOTAL(B) CONSTRUCTION ACQUIRED LIVES(C)
- ------------------------------ --------- ------------- ------------ --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RETAIL:
Diamond Bar--Diamond Bar,
CA.......................... $ 1,475 $ 4,290 $-- $ 5,765 1981 1997
Dry-Wadsworth--Arvada, CO..... 473 571 -- 1,044 1995 1995
Petsmart--Edmond, OK.......... 900 587 -- 1,487 1997 1997
Fairbanks--Fairbanks, AK...... -- 2,557 -- 2,557 1997 n/a
Gateway Plaza--Aurora, CO..... 1,018 5,855 -- 6,873 1984 1996
Lost Pines--Bastrop, TX....... 521 1,254 -- 1,775 1997 1997
Village Green--Yorba Linda,
CA.......................... 1,890 2,316 -- 4,206 1986 1997
Walgreen's--Houston, TX....... 2,525 35 -- 2,560 1997 1997
OFFICE:
Bowie--Austin, TX............. 442 1,845 -- 2,287 1986 1997
Kelley Clarke--Portland, OR... 530 1,501 -- 2,031 1997 1997
INDUSTRIAL:
349 Oyster Point--San
Francisco, CA............... 1,754 2,493 -- 4,247 1997 1997
Bolingbrook--Bolingbrook,
IL.......................... 1,406 7,061 -- 8,467 1995 1995
Centrepoint--Chino, CA........ 4,588 692 -- 5,280 1997/1998 1997
CH-NW Place II--Houston, TX... 698 4,468 -- 5,166 1997 1997
Cooper--Reno, NV.............. 1,513 2,560 -- 4,073 1992 1997
Dunsirn BTS--Reno, NV......... 401 38 -- 439 1997 1997
McCormick--Irving, TX......... 761 180 -- 941 1997 1997
OCP II--Orlando, FL........... 499 3,195 -- 3,694 1982 1997
Peerless--Allen, TX........... 1,508 1,851 -- 3,359 1997 1997
TC Longmont--Longmont, CO..... 1,155 6,844 -- 7,999 1979/1988 1997
Wooddale--Wooddale, IL........ 4,034 8,105 -- 12,139 1996/1997 1996
LAND:
56th & Warner--Phoenix, AZ.... 1,654 -- -- 1,654 n/a 1997
AEW #10--Mt. Laurel Township,
MJ.......................... 327 -- -- 327 n/a 1997
Andover--Andover, MA.......... 291 -- -- 291 n/a 1995
Chapel Hills--Colorado
Springs, CO................. 805 -- -- 805 n/a 1997
Cleveland--Cleveland, OH...... 260 -- -- 260 n/a 1996
Freeport I--Irving, TX........ 2,746 -- -- 2,746 n/a 1997
Oxnard--Oxnard, CA............ 280 -- -- 280 n/a 1996
Quarry Crossing--San Antonio,
TX.......................... 2,557 -- -- 2,557 n/a 1997
Sadler--Memphis, TN........... 123 -- -- 123 n/a 1997
Silver Lake Pond--Charlotte,
NC.......................... 109 -- -- 109 n/a 1997
Summit Plaza--Orlando, FL..... 572 -- -- 572 n/a 1997
TC Riverside--Belcamp, MD..... 919 -- -- 919 n/a 1997
Westridge at Gateway-Dallas,
TX.......................... 1,535 -- -- 1,535 n/a 1997
--------- ------------- ----- ---------
Total....................... $ 40,269 $58,298 $-- $ 98,567
--------- ------------- ----- ---------
--------- ------------- ----- ---------
</TABLE>
- ----------------------------------
(A) Property is subject to a ground lease.
(B) The aggregate cost for Federal income tax purposes is approximately $103
million.
(C) All real estate investments have been held for sale since acquisition and
are therefore not depreciated.
II-8
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO SCHEDULE III--REAL ESTATE INVESTMENTS AND
ACCUMULATED DEPRECIATION
Changes in real estate investments and accumulated depreciation for the three
years ended December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year........................................................ $ 71,122 $ 20,274 $ 20,215
Additions and improvements........................................................ 104,147 92,975 38,549
Sales and transfers............................................................... (76,702 (A) (42,127) (38,490)
---------- ---------- ----------
Balance at end of year.............................................................. $ 98,567 $ 71,122 $ 20,274
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(A) Includes $35,400 contributed to a partnership in March 1997.
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S> <C>
1.1(1) Form of Underwriting Agreement
2.1(2) Agreement and Plan of Merger dated August 22, 1997, among the Company, the
Predecessor Company, TCC Merger Sub, Inc. and certain other parties
thereto
2.2(2) First Amendment to Agreement and Plan of Merger dated as of November 22,
1997
4.1(2) Form of certificate for shares of Common Stock of the Company
5.1(1) Opinion of Vinson & Elkins L.L.P. relating to the Common Stock
8.1(1) Opinion of Vinson & Elkins L.L.P. relating to Certain U.S. Federal Tax
Considerations for Non-U.S. Holders of Common Stock
10.1(3) Credit Agreement dated as of December 1, 1997, among the Company,
NationsBank of Texas, N.A. and Bankers Trust Company
10.2(4) First Amendment of Credit Agreement dated as of December 1, 1997 among the
Company, NationsBank of Texas, N.A. and Bankers Trust Company--January
29, 1998
10.3(4) Second Amendment of Credit Agreement dated as of December 1, 1997 among
the Company, NationsBank of Texas, N.A. and Bankers Trust Company--
April 27, 1998
10.4(2) Form of License Agreement among the Company and CFH Trade-Names, L.P.
10.5(2) Form of Indemnification Agreement, with schedule of signatures
10.6(2) Predecessor Company's 1997 Stock Option Plan
10.7(2) Company's Long-Term Incentive Plan
10.8(2) Company's 1995 Profit Sharing Plan
10.9(5) Company's Employee Stock Purchase Plan
10.10(2) Acquisition Agreement dated August 15, 1997, among the Company, TCRS,
Doppelt and Jeffrey J. Doppelt
10.11(1) Master Loan Agreement dated December 22, 1998 between TCC NNN Trading,
Inc. and KeyBank National Association
10.12(2) Form of Stockholders' Agreement among the Company, Crow Family Partnership
L.P., CFH Trade-Names, L.P., J. McDonald Williams and certain other
signatories thereto
10.13(6) Employment Agreement for Henry J. Faison dated July 2, 1998
10.14(1) Master Construction Loan Agreement dated August 4, 1997 between Trammell
Crow BTS, Inc. and KeyBank National Association
10.15(1) First Modification to Master Construction Loan Agreement dated August 4,
1997 between Trammell Crow BTS, Inc. and KeyBank National Association--
September 15, 1997
10.16(1) Second Modification to Master Construction Loan Agreement dated August 4,
1997 between Trammell Crow BTS, Inc. and KeyBank National Association--
May 12, 1998
10.17(1) Third Modification to Master Construction Loan Agreement dated August 4,
1997 between Trammell Crow BTS, Inc. and KeyBank National
Association--June 9, 1998
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.18(1) Fourth Modification to Master Construction Loan Agreement dated August 4,
1997 between Trammell Crow BTS, Inc. and KeyBank National Association--
December 30, 1998
23.1* Consent of Ernst & Young LLP
23.2(1) Consent of Vinson & Elkins L.L.P. (included as part of Exhibit 5.1)
24.1(1) Power of Attorney
</TABLE>
- ------------------------
* Filed herewith.
(1) Previously filed.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File Number 333-34859) initially filed with the Securities and
Exchange Commission on September 3, 1997 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997 and incorporated herein
by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998 and incorporated herein
by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (File Number 333-50578) filed with the Securities and Exchange
Commission on April 21, 1998 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File Number 333-59387) initially filed with the Securities and
Exchange Commission on July 17, 1998 and withdrawn on October 9, 1998, and
incorporated herein by reference.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts,"
"Selected Consolidated Financial Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent Developments,"
and to the use of our reports dated March 4, 1998 included and incorporated by
reference, in Amendment No. 2 to the Registration Statement (Form S-3 No.
333-72925) and related Prospectus of Trammell Crow Company dated March 22, 1999.
ERNST & YOUNG LLP
Dallas, Texas
March 19, 1999
