UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Act of 1934
For the fiscal year
ended December 31, 2002 Commission File Number 1-13145
JONES LANG LASALLE INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 36-4150422
(State of organization) (I.R.S. Employer Identification No.)
200 East Randolph Drive, Chicago, IL 60601
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 312/782-5800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock ($.01 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ]
As of February 24, 2003, there were outstanding 31,016,506 shares of the
Registrant's Common Stock of which 300,000 are held by a subsidiary of the
Registrant. The aggregate market value of the Registrant's Common Stock
outstanding, and held for non-affiliates, on February 24, 2003 was
$423,375,307 based on the closing price of $13.65 per share.
Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting of
Stockholders to be held on May 22, 2003 are incorporated by reference in
Part III of this report.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . 18
Item 3. Legal Proceedings. . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 19
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . 20
Item 6. Selected Financial Data. . . . . . . . . . . 21
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . 24
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . 49
Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . . . 50
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . 124
PART III
Item 10. Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . 124
Item 11. Executive Compensation . . . . . . . . . . . 124
Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . 124
Item 13. Certain Relationships and
Related Transactions . . . . . . . . . . . . 125
Item 14. Controls and Procedures. . . . . . . . . . . 125
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . 126
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 127
SIGNATURES and CERTIFICATIONS . . . . . . . . . . . . . . 129
i
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Jones Lang LaSalle Incorporated ("Jones Lang LaSalle", which may be
referred to as we, us, our or the Company) was incorporated in 1997, and
its operations presently include the businesses previously known as LaSalle
Partners (founded in 1968) and Jones Lang Wootton (founded in 1873). We
are a leading provider of integrated real estate services and solutions to
real estate owners, occupiers and investors around the world. We serve our
clients' real estate needs locally, regionally and globally from offices in
over 100 markets in 34 countries on five continents, with approximately
16,900 employees, including approximately 9,800 directly reimbursable
property maintenance employees. Our breadth of services include space
acquisition and disposition, facilities and property management, project
and development management services, leasing, buying and selling
properties, consulting and capital markets expertise. We also provide
investment management on a global basis for both public and private assets
through LaSalle Investment Management, our investment management business.
Our services are enhanced by our strong research capabilities, our
technology platforms and our strategic solutions approach with our clients.
We have grown by expanding both our client base and range of services
and products, as well as through a series of strategic acquisitions and a
merger. Our extensive global platform and in depth knowledge of local real
estate markets enable us to serve as a single source provider of solutions
for our clients' full range of real estate needs. This network of services
around the globe was solidified with the merger of the businesses of the
Jones Lang Wootton companies ("JLW") with those of LaSalle Partners
Incorporated effective March 11, 1999 (see Jones Lang LaSalle History and
Recent Activities section below for discussion).
JONES LANG LASALLE HISTORY AND RECENT ACTIVITIES
Prior to our incorporation in Maryland on April 15, 1997 and our
initial public offering (the "Offering") of 4,000,000 shares of common
stock on July 22, 1997, Jones Lang LaSalle conducted business as LaSalle
Partners Limited Partnership and LaSalle Partners Management Limited
Partnership (collectively, the "Predecessor Partnerships"). Immediately
prior to the Offering, the general and limited partners of the Predecessor
Partnerships contributed all of their partnership interests in the
Predecessor Partnerships in exchange for an aggregate of 12,200,000 shares
of common stock.
In October 1998, we acquired all of the common stock of the following
real estate service companies (collectively referred to as "COMPASS")
formerly owned by Lend Lease Corporation Limited ("Lend Lease"): COMPASS
Management and Leasing, Inc. and its wholly owned subsidiaries, The
Yarmouth Group Property Management, Inc., ERE Yarmouth Retail, Inc.
(formerly COMPASS Retail, Inc.), and COMPASS Management and Leasing
(Australia) Pty Limited. The acquisition of COMPASS elevated our position
in the property management and corporate property services industry to that
of the largest property management services company in the United States
and expanded our international presence into Australia and South America.
On March 11, 1999, LaSalle Partners Incorporated merged its business
with those of JLW and changed its name to Jones Lang LaSalle Incorporated.
In accordance with the purchase and sale agreements related to the merger,
we issued 14.3 million shares of common stock and paid cash consideration
of $6.2 million.
CLIENT SERVICE MODEL
[ graphic demonstrating ]
Strategic Solutions - through
Research Global Capabilities
Technology Innovation
CORPORATE SOLUTIONS INVESTOR SERVICES
- Space Acquisition - Buying & Selling
- Space Disposition - Leasing
- Facilities Management - Property Management
- Project & Development - Project & Development
Services Services
- Consulting - Consulting
CAPITAL MARKETS INVESTMENT MANAGEMENT
- Acquisitions & Dispositions - Investment Strategy
- Corporate Finance - Private & Public Markets
- Financial Restructuring - Direct and Indirect
- Sale & Leaseback Investment
- Debt & Equity Raising - Income, Growth &
- Partnering Opportunistic Programs
Articulating our range of services and approach to business, the
Client Service Model sets forth a graphical definition of our mission:
To deliver exceptional strategic, fully integrated services and
solutions for real estate owners, occupiers and investors worldwide.
The model describes how we serve these client segments with four broad
sets of services: Corporate Solutions and Investor Services, which reflect
our practical, on-the-ground real estate expertise and market knowledge,
and Capital Markets and Investment Management, which incorporate the
financial expertise we bring to our service offerings.
We believe that this combination of skills and expertise sets us apart
from our competitors. Consultancy practices competitors do not share our
implementation capability and market awareness. Investment banking and
investment management competitors possess neither our local market
knowledge nor our real estate service capabilities and traditional real
estate firms lack our financial skills.
The center of the Client Service Model represents the intellectual hub
of our operations. We work to distinguish ourselves in the marketplace by
driving all our businesses through the prism of Global Capabilities,
Innovation, Research and Technology, investing in each to secure a position
of thought and market leadership in our industry. (Descriptions of the four
platforms are found in the "Competitive Advantages" section of this
document.)
Strategic Solutions sit at the core of our business model. Based on
our presence in and knowledge of real estate and capital markets, and
supported by our investments in thought leadership, we believe that our
strategic capability enables us to address not only the real estate needs
of our clients but their broader business and financial goals as well. This
approach helps us identify opportunities and couple strategy to our
implementation and market skills to introduce effective solutions for our
clients. We also believe that the ability to develop and deliver sound
strategy drives our own ability to grow our business and improve our
profitability.
BUSINESS SEGMENTS
While we rely on our Client Service Model to define and pursue our
mission, we manage our business along a combination of geographic and
functional lines. Operations are reported as four business segments: the
three geographic regions of Owner and Occupier Services ("OOS"), (i)
Americas, (ii) Europe and (iii) Asia Pacific, which offer our full range of
Corporate Solutions, Investor Services and Capital Markets Services, and
(iv) Investment Management, which offers investment management services on
a global basis. The OOS business consists primarily of tenant
representation and agency leasing, capital markets and valuation services
(collectively, "implementation services") and property management,
corporate property services, project and development management services
(collectively, "management services'). The Investment Management segment
provides real estate investment management services to institutional
investors, corporations, and high-net-worth individuals. FOR FINANCIAL
INFORMATION AND A DISCUSSION OF THE OPERATING PERFORMANCE OF EACH SEGMENT,
REFER TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROVIDED ELSEWHERE HEREIN.
CLIENT SERVICE MODEL DELIVERY - OOS AMERICAS, EUROPE AND ASIA PACIFIC
To address the local, regional and global needs of real estate owners
and occupiers, we provide a full spectrum of integrated transaction,
property and project management and corporate property services in our
regional operating segments of the Americas, Europe and Asia Pacific.
Services are delivered through multiple delivery teams as set forth below:
GLOBAL CLIENT SERVICES acts as a catalyst to assist professionals
across all groups as they market the multiple services of the firm to
existing and prospective clients. Global Client Services also ensures that
our worldwide operations work and interact at the consistently high levels
our clients have grown to expect. Our twin objectives are to expand our
"strategic alliance" relationships and drive consistent service. (The term
"strategic alliance" is used in the real estate services industry to refer
to longer-term relationships with large owners or occupiers of real estate
who, in many cases, require a number of different property services.)
STRATEGIC CONSULTING provides clients with specialized, value-added
real estate consulting services and strategies in such areas as mergers and
acquisitions, privatization, development and asset strategy, occupier
portfolio strategy, organizational strategy and work-process design.
Strategic Consulting professionals focus on translating global best
practices into local real estate solutions for our clients.
TENANT REPRESENTATION SERVICES seeks to develop strategic alliances
with clients whose real estate requirements include ongoing assistance to
meet real estate needs and to help clients evaluate and execute
transactions to meet their occupancy requirements. We assist clients by
defining space requirements, identifying suitable alternatives,
recommending appropriate occupancy solutions and negotiating lease and
ownership terms with third parties. We seek to help our clients lower real
estate costs, minimize real estate occupancy risks, improve occupancy
control and flexibility, and create more productive office environments. We
employ a multi-discipline approach to develop occupancy strategies linked
to our clients' core business objectives. In 2002 we completed over 3,300
tenant representation transactions involving approximately 40 million
square feet.
Compensation for Tenant Representation Services is generally
determined on a negotiated fee basis. Such fees often involve performance
measures related to targets set by us and our clients prior to engagement
or, in the case of strategic alliances, at annual intervals thereafter.
Quantitative and qualitative measurements are used to assess performance
relative to these goals, and we are compensated accordingly, with incentive
fees often awarded for superior performance.
AGENCY LEASING SERVICES executes marketing and leasing programs to
identify tenants and negotiate leases with terms that reflect the best
interests of our clients, who are typically investors, property companies,
developers or public bodies. In 2002 we completed approximately 7,900
agency leasing transactions representing approximately 76 million square
feet of space.
Agency leasing fees are typically based on a percentage of the value
of the lease revenue commitment for leases consummated.
CAPITAL MARKETS SERVICES includes institutional property sales and
acquisitions, real estate financings, private equity placements, portfolio
advisory activities, and corporate finance advice and execution. Combining
local market knowledge with our access to global capital sources, the
Capital Markets Services unit provides clients with superior execution in
raising capital for their real estate assets. By researching, developing
and introducing innovative new financial products and strategies, our
Capital Markets Services units are integral to the business development
efforts of our other businesses. In 2002 we completed institutional
property sales and acquisitions, debt financings and equity placements on
assets and portfolios valued at approximately $18 billion.
Capital Markets Services units are typically compensated on the basis
of the value of transactions completed or securities placed. In certain
circumstances, we receive retainer fees for portfolio advisory services.
VALUATION SERVICES provides clients with professional valuation
services, helping them determine accurate values for office, retail,
industrial and mixed-use properties. Such services may involve valuing a
single property or a worldwide portfolio of multiple property types.
Valuations, which typically involve commercial property, are completed for
a variety of purposes including acquisitions, dispositions, debt and equity
financings, mergers and acquisitions, securities offerings and
privatization initiatives. Clients include occupiers, investors and
financing sources from the public and private sectors. Our valuation
specialists provide valuation services to clients in nearly every developed
country. During 2002 we performed over 25,000 valuations of properties with
an aggregate value of approximately $178 billion.
Compensation for valuation services is generally negotiated for each
assignment based on its scale and complexity, and typically relates in part
to the value of the underlying assets.
PROPERTY MANAGEMENT SERVICES provides on-site management services to
real estate investors for office, industrial, retail and specialty
properties. We seek to leverage our market share and buying power to
deliver superior service for clients. Our goal is to enhance our clients'
property values through aggressive day-to-day management focused on
maintaining high levels of occupancy and tenant satisfaction, while
lowering property operating costs. During 2002 we provided on-site Property
Management Services for office, retail, mixed-use and industrial properties
totaling approximately 530 million square feet.
Property management services are typically provided by an on-site
general manager and staff who are supported by regional supervisory teams
and central resources in such areas as training, technical and
environmental services, accounting, marketing and human resources. Our
property general managers assume full responsibility for property
management activities, client satisfaction and financial results. They are
not compensated by fees or commissions, but through a combination of base
salary and performance bonus that is directly linked to results produced
for clients. Increasingly, management agreements provide for incentive
compensation relating to operating expense reductions, gross revenue or
occupancy objectives, or tenant satisfaction levels. Consistent with
industry custom, management contract terms typically range from one to
three years, but may be canceled at any time following a short notice
period, usually 30 to 60 days.
CORPORATE PROPERTY SERVICES provides comprehensive portfolio and
property management ("facilities management") services to corporations and
institutions that outsource the management of their occupied real estate.
Properties under management range from corporate headquarters to industrial
complexes. During 2002, the Corporate Property Services units provided
facilities management services for approximately 205 million square feet of
real estate. Our target clients typically have large portfolios (usually
over one million square feet) exhibiting significant opportunities to
reduce costs and improve service delivery. Performance measures are
generally developed to quantify progress made toward goals and objectives
set mutually with clients. Depending on client needs, the Corporate
Property Services units, either alone or partnering with other business
units, provide services that include portfolio planning, property
management, leasing, tenant representation, acquisition, finance,
disposition, project management, development management and land advisory
services.
The Corporate Property Services units are compensated on the basis of
negotiated fees that are typically structured to include a base fee and a
performance bonus. Performance bonus compensation is based on a
quantitative evaluation of progress toward performance measures and
regularly scheduled client satisfaction surveys. Corporate Property
Services agreements are typically three to five years in duration but are
cancelable at any time upon a short notice period, usually 30 to 60 days,
as is typical in the industry.
PROJECT AND DEVELOPMENT MANAGEMENT SERVICES units provide a variety of
services, including interior build-out and conversion management, move
management and strategic occupancy planning service to tenants of leased
space, owners in self-occupied buildings and owners of real estate
investments. Project and Development Management Service units frequently
manage relocation and build-out initiatives for clients of our Property
Management Services, Corporate Property Services and Tenant Representation
Services units. Project and Development Management Services will also
manage all aspects of development and renovation of commercial projects for
our clients.
Compensation is typically on the basis of negotiated fees. Client
contracts are typically multi-year in duration and may govern a number of
discrete projects, with individual projects being completed in less than
one year.
INVESTMENT MANAGEMENT
Our global investment management business operates under the name of
LaSalle Investment Management. LaSalle Investment Management's strategy is
shaped by three priorities: (i) developing and executing customized
investment strategies that meet the specific investment objectives of each
of our clients, (ii) providing superior performance for all clients and
(iii) delivering uniformly high levels of service.
We provide real estate investment management services to institutional
investors, corporations and high net-worth individuals. We seek to
establish and maintain relationships with sophisticated investors who value
our global platform and extensive local market knowledge. As of
December 31, 2002, LaSalle Investment Management managed $23 billion of
public and private real estate assets, making us one of the world's largest
managers of institutional capital invested in real estate assets and
securities.
LaSalle Investment Management serves clients with a broad range of
real estate investment products and services in the public and private
capital markets. These products and services are designed to meet the
differing strategic, risk/return and liquidity requirements of individual
clients. LaSalle Investment Management offers its clients a range of
investment alternatives, including private investments in multiple real
estate property types (e.g., office, retail, industrial and residential),
either through investment funds that LaSalle Investment Management manages
or through single client account relationships ("separate accounts"). We
also offer public indirect investments, primarily in publicly traded Real
Estate Investment Trusts ("REITs") and other real estate equities.
We believe the success of our investment management business comes
from our fully integrated research capabilities, innovative investment
strategies, global presence and local market knowledge, and a strong client
focus. We maintain an extensive real estate research department whose
dedicated professionals monitor real estate and capital market conditions
around the world to enhance current investment decisions and identify
future opportunities. In addition to drawing on public sources for
information, our research department utilizes the extensive local presence
of Jones Lang LaSalle professionals throughout the world to gather and
disseminate proprietary insight into local market conditions.
The investment and capital origination activities of our Investment
Management business have grown increasingly global. As of December 31,
2002, 59% of LaSalle Investment Management's assets under management were
invested outside the United States. We expect Investment Management
activities outside the United States, both fund raising and investing, to
increase as a proportion of total capital raised and invested, and we see a
growing trend of cross-border capital movement. In 1999, the Monetary
Authority of Singapore approved LaSalle Investment Management's application
for Approved Fund Manager status. This approval marked the first major step
in our plan to add to our presence in the United States and Europe by
building a full-service investment management operation to serve clients
from around the world with investments in the Asia Pacific region. In 2001
we built on this foundation with the placement of on-the-ground resources
and capabilities in the region, activities that culminated in the closing
of the Asia Recovery Fund in 2002.
PRIVATE INVESTMENTS IN REAL ESTATE PROPERTIES. To serve our investment
management clients, LaSalle Investment Management oversees the acquisition
management, leasing, financing and divestiture of real estate investments
across a broad range of real estate property types. LaSalle Investment
Management introduced its first institutional investment fund in 1979 and
currently has a series of commingled investment funds, including six funds
that invest in assets in the United States, two funds that invest in assets
located in continental Europe and one fund that invests in assets in Asia
Pacific. LaSalle Investment Management also maintains separate account
relationships with investors for whom LaSalle Investment Management manages
private real estate investments. As of December 31, 2002 LaSalle Investment
Management had approximately $19 billion in assets under management in
these funds and separate accounts.
Some investors prefer to partner with investment managers willing to
co-invest their own funds to more closely align the interests of the
investor and the investment manager. We believe that our ability to co-
invest funds alongside the investments of clients' funds will continue to
be an important factor in maintaining and continually improving our
competitive position. We also believe that our co-investment strategy will
greatly strengthen our ability to continue to raise capital for new
investment funds. By creating new investment funds, and thereby increasing
assets under management, we also gain the opportunity to provide additional
services related to the acquisition, financing, property management,
leasing and disposition of such assets. At December 31, 2002, we had a
total of $75 million of investments in, and loans to, co-investments.
LaSalle Investment Management's operations are conducted with teams of
professionals dedicated to achieving specific client objectives. LaSalle
Investment Management establishes investment committees within each region
whose members have specialized knowledge applicable to underlying
investment strategies. These committees must approve all investment
decisions for private market investments. The investment committee approval
process is employed for LaSalle Investment Management's investment funds
and for all separate account relationships.
LaSalle Investment Management is generally compensated for investment
management services for private equity investments based on initial capital
invested, with additional fees tied to investment performance above
benchmark levels. The terms of contracts vary by the form of investment
vehicle involved and the type of service provided. Our investment funds
have various life spans, typically ranging between five and ten years.
Separate account advisory agreements generally have three year terms with
"at will" termination provisions and may include compensation arrangements
that are linked to the market value of the assets under management.
INVESTMENTS IN PUBLIC EQUITY AND DEBT SECURITIES. LaSalle Investment
Management also offers clients the ability to invest in separate accounts
focused on public real estate equity and debt securities. LaSalle
Investment Management principally invests these clients' capital in
publicly traded securities of REITs and property company equities. We are
also active in private placement investments in publicly traded real estate
companies and in selected investments in private real estate companies
seeking capital to ultimately gain access to the public markets. As of
December 31, 2002 LaSalle Investment Management had approximately $4
billion of assets under management in these types of investments. LaSalle
Investment Management is typically compensated by its securities investment
clients on the basis of the market value of assets under management.
COMPETITIVE ADVANTAGES
We believe that the reputation of Jones Lang LaSalle, together with
our global service platform, create several competitive advantages that
have established us as a leader in the real estate services and investment
management industries. We believe that we are one of the few companies in
the real estate industry that possess all of the following competitive
advantages:
TOTAL PERFORMANCE MANAGEMENT. To institutionalize our Relationship
Orientation, we have developed Total Performance Management, a business
philosophy that promotes a standard of excellence in relationships with
clients and colleagues alike. While TPM draws from established practices of
top-performing organizations, it is unique to Jones Lang LaSalle. Superior
client service is furthered through best practices in Client Relationship
Management, the practice of soliciting and acting upon regular client
feedback, and recognizing each clients' definition of excellence. TPM
strengthens our people through programs focused on providing clear
objectives that align with the firm's strategies, as well as supporting and
coaching employees as they assess and build core skills.
RELATIONSHIP ORIENTATION. Our client-driven focus enables us to
develop long-term relationships with owners and users of real estate. By
developing these relationships, we are able to generate repeat business and
create recurring revenue sources. In many cases we establish strategic
alliances with clients whose on-going service needs mesh with our ability
to deliver fully integrated real estate services across multiple business
units and office locations. Our relationship focus is supported by an
employee compensation system that we believe is unique in the real estate
industry. Professionals are compensated through a salary and bonus plan
designed to reward client relationship building, teamwork and quality
performance, rather than on a commission basis, which is typical in the
industry.
FULL RANGE OF SERVICES. By offering a wide range of high quality,
complementary services, we can combine our services to develop and
implement real estate strategies that meet the increasingly complex needs
of our clients. In addition, our cross-selling potential across geographies
and product lines creates revenue sources for multiple business units
within Jones Lang LaSalle.
WORLD-CLASS RESEARCH. We invest in and rely on comprehensive top-down
and bottom-up research to support and guide the development of real estate
and investment strategy. Our Global Research Committee oversees and
coordinates the activities of more than 170 research professionals who
cover market and economic conditions in 36 countries around the world.
Jones Lang LaSalle produces more than 100 research publications annually.
Research also plays a key role in keeping colleagues throughout the
organization attuned to important events and changing conditions in world
markets. Dissemination of this information to colleagues is facilitated
through our company-wide intranet.
GLOBAL REACH AND CAPABILITIES. We believe we have secured an
established business presence in the world's principal real estate markets,
and that we can grow revenues without a substantial increase in
infrastructure costs. With 111 corporate offices on five continents, we
possess in-depth knowledge of local and regional markets and can provide a
full range of real estate services around the globe. This geographic
coverage positions us to serve our multinational clients and manage
investment capital on a global basis.
REPUTATION. Based on our industry knowledge, commissioned marketing
surveys, coverage in top-tier business publications and our number of long-
standing client relationships, we believe that we are widely recognized by
large corporations and institutional owners and users of real estate as a
provider of high quality, professional real estate and investment
management services. We believe that the Jones Lang LaSalle brand and
reputation for quality services represent significant advantages when we
pursue new business opportunities.
TECHNOLOGY. Based on our general industry knowledge and specific
client feedback, we believe we are recognized as an industry leader in
technology. We possess the capability to provide sophisticated information
technology systems on a global basis to serve our clients and support our
employees. For example, the purpose of Delphi+, our client extranet
technology, is to provide clients with a detailed and comprehensive insight
into their portfolios, the markets in which they operate and the services
we provide to them. Delphi, our intranet technology, offers our employees
easy access to the firm's thinking regarding our experience, skills and
best practices. The combination enables us to offer individual clients not
only the expertise of the specific teams that serve them, but also the
collective skills and experience of a global, multi-discipline organization
serving multiple industries in multiple markets.
INNOVATION. We believe that our investments in people, research,
technology and thought leadership position our firm as a leading innovator
in our industry. Major research initiatives like our "World Winning Cities"
program investigate emerging trends to help us anticipate future conditions
and shape new services to benefit our clients. Professionals in our
strategic consulting practice identify and address shifting market and
business trends to address changing client needs and opportunities. Our
Investment Management business relies on our comprehensive investigation of
global real estate and capital markets to develop new investment products
and services tailored to the specific investment goals and risk/return
objectives of our clients. We believe that our commitment to innovation
helps us secure and maintain profitable long-term relationships with the
clients we target: the world's leading real estate owners, occupiers and
investors.
INDUSTRY TRENDS
INCREASING DEMAND FOR GLOBAL SERVICES; GLOBALIZATION OF CAPITAL FLOWS.
Many corporations, both those based in the United States and in other
countries, have pursued growth opportunities in international markets. This
activity has increased the demand for global real estate services,
including corporate property services, tenant representation and leasing
and property management. We believe that this trend will favor real estate
service providers with the capability to provide services -- and
consistently high service levels--in multiple markets around the world.
Additionally, real estate capital flows have become increasingly global, as
more investors seek real estate investment opportunities beyond their
existing borders. This trend has created new markets for investment
managers equipped to facilitate international real estate capital flows and
execute cross-border real estate transactions.
CONSOLIDATION. The real estate services industry has experienced
significant consolidation in recent years. We, as well as other large real
estate service firms engaged in the property management business, believe
that as a result of substantial existing infrastructure investments and the
ability to spread fixed costs over a broader base of business, it is
possible to recognize incrementally higher margins on property management
and corporate property services assignments as the amount of square footage
under management increases.
Large users of commercial real estate services continue to demonstrate
a preference to work with single-source service providers able to operate
across local, regional and global markets. The ability to offer a full
range of services on this scale requires significant corporate
infrastructure investment, including information technology and personnel
training. Smaller regional and local real estate service firms, with
limited resources, are less able to make such investments.
GROWTH OF OUTSOURCING. In recent years, and on a global level,
outsourcing of professional real estate services has increased
substantially as corporations have focused corporate resources, including
capital, on core competencies. In addition, public and other non-corporate
users of real estate, including government agencies and health and
educational institutions, have begun to outsource real estate activities as
a means of reducing costs. As a result, there are significant growth
opportunities for firms that can provide integrated real estate services
across many geographic markets.
ALIGNMENT OF INTERESTS OF INVESTORS AND INVESTMENT MANAGERS.
Institutional investors continue to allocate significant portions of their
investment capital to real estate, and many investors have shown a desire
to commit their capital to investment managers willing to co-invest their
own funds in specific real estate investments or real estate funds. In
addition, investors are increasingly requiring that fees paid to investment
managers be more closely aligned with investment performance. As a result,
we believe that investment managers with co-investment capital, like
LaSalle Investment Management, will have an advantage in attracting real
estate investment capital. Co-investment typically brings with it the
opportunity to provide additional services related to the acquisition,
financing, property management, leasing and disposition of such
investments.
GROWTH STRATEGY
We intend to capitalize on our competitive advantages, the
opportunities created by our global platform and broad product and service
lines, and our solutions approach to the marketplace to pursue the
following growth strategy:
EXPANDING CLIENT RELATIONSHIPS. Based on our ability to deliver high
quality real estate services, we have been able to successfully leverage
discrete client assignments into comprehensive relationships that engage
several or all of our business groups. Current industry trends,
particularly the globalization of corporate clients and the increased
outsourcing of real estate services on a global basis, provide a favorable
environment for us to increase the scope of our current client
relationships and develop new relationships through our broad array of
services. We are successfully expanding the strategic alliance approach we
have applied in our Corporate Solutions unit to the rest of our business
units worldwide.
STRENGTHENING INTERNATIONAL PRESENCE. Supported by our extensive
global platform, we plan to add and expand services that are well developed
in particular regions and business units to our other regions and business
units. In particular, we have identified markets in Asia that offer new
client and product growth. We will leverage our strengths in Tenant
Representation, Project and Development Management Services and Capital
Markets activities to provide talent and clients to fuel that growth.
PROVIDING CONSISTENT, HIGH QUALITY SERVICE. The objective of our
Global Client Services unit is to ensure that worldwide operations work and
interact at the consistently high levels our clients have come to expect.
Through the delivery of consistent high quality service, we aim to expand
current client relationships, grow our business organically and further
strengthen our brand and reputation.
PURSUING CO-INVESTMENT OPPORTUNITIES. We believe that an important
growth driver of our business is our ability to co-invest our funds
alongside those of clients. Some investors continue to favor investment
managers who co-invest their own funds in newly formed investment vehicles
in order to more closely align the interests of the investor and the
investment manager. Also, by creating new investment funds, and thereby
increasing our assets under management, we also gain the opportunity to
provide additional services related to the acquisition, financing, property
management, leasing and disposition of such assets.
CONTINUING TO DEVELOP TECHNOLOGY. Our technology strategy is to
provide truly integrated, high value added information and tools to our
clients and employees worldwide by using proven technology architecture and
advancing innovative technology solutions.
EMPLOYEES
The goal of our TPM program is to instill in all of our people an
unyielding commitment to be the best: the real estate advisor our clients
want to work with and the employer of choice in our industry. Our objective
is to invest in and continue to attract, motivate and retain the best
people. The following table details our headcount at December 31, 2002 and
2001:
2002 2001
------ ------
Professional . . . . . . . . . . . . . . 5,600 5,600
Support. . . . . . . . . . . . . . . . . 1,500 1,600
------ ------
7,100 7,200
Directly reimbursable property
maintenance. . . . . . . . . . . . . . 9,800 9,500
Total Employees. . . . . . . . . . . . . 16,900 16,700
====== ======
Directly reimbursable project
management employees included as
professionals above. . . . . . . . . . 1,100 900
The directly reimbursable project management employees work with clients
which have a contracted fee structure including a fixed management fee as
well as a separate component, which allows for scheduled reimbursable
personnel and other expenses to be billed directly to the client.
Approximately 4,300 and 4,600 of our professional and support staff in 2002
and 2001, respectively, were based in countries other than the United
States. Approximately 6,800 and 6,700 of our directly reimbursable
property maintenance workers in 2002 and 2001, respectively, were based in
countries other than the United States. None of our employees are members
of any labor union with the exception of approximately 560 of our directly
reimbursable property maintenance employees. We have generally had
satisfactory relations with our employees.
COMPANY WEBSITE
Jones Lang LaSalle's website address is www.joneslanglasalle.com and
we make available free of charge through our website our form 10K, 10-Qs,
8-Ks and amendments thereto as soon as reasonably practicable after
electronic filing with the Securities and Exchange Commission. The
Company's Code of Business Ethics applies to all employees of the Company,
including our Chief Executive Officer, Chief Financial Officer and Global
Controller, and can be found in the Company section on the Jones Lang
LaSalle website. In addition, the Company intends to satisfy the amendment
and waiver disclosure requirements under Item 10 of Form 8-K by posting any
such amendment of or waiver to the Code of Business Ethics on the Company
website.
RISKS TO OUR BUSINESS
GENERAL ECONOMIC CONDITIONS AND REAL ESTATE MARKET CONDITIONS CAN HAVE
A NEGATIVE IMPACT ON OUR BUSINESS. We have recently experienced, and can
expect in the future, to be negatively impacted by periods of economic
slowdown or recession and declines in the demand for real estate. This has
been evidenced by our performance over the course of the last couple of
years. The real estate market tends to be cyclical and related to the
condition of the economy as a whole or, at least, to the perceptions of
investors and users as to the economic outlook. For example, corporations
may be hesitant to expand space or enter into long-term commitments if they
are concerned with the economic environment. Negative economic conditions
and declines in the demand for real estate in several markets or in
significant markets could have a material adverse effect on our business,
results of operations and financial condition, including as a result of the
following factors:
.. DECLINE IN LEASING ACTIVITY
A decline in leasing activity can lead to a reduction in fees and
commissions for arranging leases, both on behalf of owners and
tenants. Additionally, a decline in leasing activity can lead to a
reduction in the demand for, and fees earned from, other services,
such as Project Development Services (managing the build-out of
space) and Corporate Property Services (managing space occupied by
clients).
.. DECLINE IN ACQUISITION AND DISPOSITION ACTIVITY
A decline in acquisition and disposition activity can lead to a
reduction in fees and commissions for arranging such transactions as
well as fees and commissions for arranging financing for acquirers.
.. DECLINE IN REAL ESTATE INVESTMENT ACTIVITY
A decline in real estate investment activity can lead to a reduction
in investment management fees on the acquisition of property for
clients, as well as in fees and commissions for arranging
acquisitions, dispositions and financings.
.. DECLINE IN THE VALUE AND PERFORMANCE OF REAL ESTATE AND RENTAL RATES
A decline in the value and performance of real estate and in rental
rates can lead to a reduction in investment management fees (the most
significant portion of which generally are based upon the performance
of investments) and the value of co-investments we make with our
investment management clients. Additionally, such declines can lead
to a reduction of fees and commissions which are based upon the value
of, or revenues produced by, the properties with respect to which
services are provided, including fees and commissions for property
management and valuations and for arranging acquisitions,
dispositions, leasing and financings.
THE INTERNATIONAL SCOPE OF OUR OPERATIONS, AND OUR OPERATIONS IN
PARTICULAR REGIONS AND COUNTRIES, INVOLVE A NUMBER OF RISKS FOR OUR
BUSINESS. The fact that we operate in 33 countries presents risks for our
business in a number of ways. If the risks, including the following,
associated with the international scope of our operations and our
operations in particular regions and countries cannot be or are not
successfully managed, our business, operating results and financial
condition could be materially and adversely affected.
.. DIFFICULTIES AND COSTS OF STAFFING AND MANAGING INTERNATIONAL
OPERATIONS
The coordination and management of international operations poses
additional costs and difficulties. We must manage operations in many
time zones and involving people with language and cultural
differences. Our success depends on finding and retaining people
capable of effectively dealing with these challenges. We have
committed resources to effectively coordinate our business activities
around the world to meet our clients' needs, whether they be local,
regional or global. When addressing staffing in connection with a
restructuring of our organization or a downturn in economic
conditions or activity we must take into account the employment laws
of the countries in which actions are contemplated, which in some
cases can result in significant costs and/or time delay in
implementing headcount reductions. Our ability to manage such
operational fluctuations and to maintain adequate long-term
strategies in the face of such developments will be critical to our
continued growth and profitability.
.. CURRENCY RESTRICTIONS AND EXCHANGE RATE FLUCTUATIONS
We produce positive flows of cash in various countries and currencies
which can be most effectively used to fund operations in other
countries or to repay our indebtedness, which is primarily
denominated in euros and U.S. dollars. We face restrictions in
certain countries which limit or prevent the transfer of funds to
other countries or the exchange of the local currency to other
currencies. We also face risks associated with fluctuations in
currency exchange rates which may lead to a decline in the value of
the funds produced in certain jurisdictions.
Additionally, although we operate globally, we report our results in
U.S. dollars and thus our reported results may be positively or
negatively impacted by the strengthening or weakening of currencies
against the U.S. dollar. As an example, the euro, the pound sterling
and the Australian dollar, each a currency used in a significant
portion of our operations, weakened significantly against the U.S.
dollar in 2000 and 2001 but significantly strengthened in 2002. For
the year ended December 31, 2002, on an adjusted basis excluding non-
recurring charges, 49% of our adjusted operating income was
attributable to operations with U.S. dollars as their functional
currency, and 51% was attributable to operations having other
functional currencies. In addition to the potential negative impact
on reported earnings, fluctuations in currencies relative to the US
dollar may make it more difficult to perform period-to-period
comparisons of the reported results of operations.
We are authorized to use currency-hedging instruments, including
foreign currency forward contracts, purchased currency options and
borrowings in foreign currency. There can be no assurance that such
hedging will be effective, and an ineffective hedging instrument may
expose us to currency losses.
The following table sets forth the revenues derived from our most
significant currencies (based upon 2002 revenues). The euro revenues
include our businesses in France, Germany, Italy, Ireland, Spain, Portugal,
Holland, Belgium and Luxembourg.
MOST SIGNIFICANT CURRENCIES ON A REVENUE BASIS
2002 2001
------ ------
United States Dollar 331.7 378.3
United Kingdom Pound 184.3 189.3
Euro 145.2 164.0
Australian Dollar 48.9 50.8
Other currencies 130.3 123.0
------ ------
Total Revenues 840.4 905.4
====== ======
.. POTENTIALLY ADVERSE TAX CONSEQUENCES
Moving funds between countries can produce adverse tax consequences
in the countries from which and to which funds are transferred as
well as in other countries, such as the United States, in which we
have operations. Additionally, as our operations are global, we face
challenges in effectively gaining a tax benefit for costs incurred in
one country which benefit our operations in other countries.
.. BURDEN OF COMPLYING WITH MULTIPLE AND POTENTIALLY CONFLICTING LAWS
AND REGULATIONS AND DEALING WITH CHANGES IN LEGAL AND REGULATORY
REQUIREMENTS
We face a broad range of legal and regulatory environments in the
countries in which we do business. Coordinating our activities to
deal with these requirements presents challenges. As an example, in
the United Kingdom, the Financial Services Authority (FSA) regulates
the conduct of investment businesses and the Royal Institute of
Chartered Surveyors (RICS) regulates the profession of Chartered
Surveyors, which is the professional qualification required for
certain of the services provided in the United Kingdom, through
upholding standards of competence and conduct. Additionally, changes
in legal and regulatory requirements can impact our ability to engage
in business in certain jurisdictions or increase the cost of doing
so.
.. GREATER DIFFICULTY IN COLLECTING ACCOUNTS RECEIVABLE IN CERTAIN
COUNTRIES AND REGIONS
We face challenges to our ability to efficiently and/or effectively
collect accounts receivable in certain countries and regions. For
example, in Asia, many countries have underdeveloped insolvency laws
and clients often are slow to pay, and in Europe, clients in some
countries, particularly Spain, Italy and France, also tend to delay
payments reflecting a different business culture.
.. POLITICAL AND ECONOMIC INSTABILITY
We operate in 34 countries with varying degrees of political and
economic stability. For example, certain Asian, Eastern European and
South American countries have experienced serious political and
economic instability within the last few years and such instability
will likely continue to arise from time to time in countries in which
we have operations.
REAL ESTATE SERVICES MARKETS ARE HIGHLY COMPETITIVE. We provide a
broad range of commercial real estate services and there is significant
competition, on an international, regional and local level with respect to
many of these services and in commercial real estate services generally.
Depending on the service, we face competition from other real estate
service providers, institutional lenders, insurance companies, investment
banking firms, investment managers, accounting firms and companies bringing
their real estate services in-house (any of which may be a global, regional
or local firm). Many of our competitors are local or regional firms, which
although substantially smaller in overall size may be larger in a specific
local or regional market.
We are substantially dependent on long-term client relationships and
on revenue received for services under various service agreements. Many of
these agreements are cancelable by the client for any reason on as little
as 30 to 60 days' notice, as is typical in the industry. In this
competitive market if we are unable to maintain these relationships or we
are otherwise unable to retain existing clients and develop new clients,
our business, results of operations and financial condition will be
materially adversely affected.
THE SEASONALITY OF OUR BUSINESS EXPOSES US TO RISKS. Our revenues and
profits tend to be significantly higher in the fourth quarter of each year
than the other three quarters. This is a result of a general focus in the
real estate industry on completing transactions by calendar year end and
the fact that certain expenses are constant through the year.
Historically, we have reported a small loss in the first quarter, a small
profit or loss in the second and third quarters and a large profit in the
fourth quarter, excluding the recognition of investment generated
performance fees. The seasonality of our business makes it difficult to
determine during the course of the year whether plan results will be
achieved, and thus, to adjust to changes in expectations. Additionally,
negative economic or other conditions which arise at a time when they
impact performance in the fourth quarter may have a more significant impact
than if they occurred earlier in the year. To the extent we are not able
to identify and adjust for changes in expectations or we are confronted
with negative conditions which impact inordinately on the fourth quarter of
a year, this could have a material adverse effect on our business, results
of operations and financial condition.
WE MAY FACE LIABILITY WITH RESPECT TO ENVIRONMENTAL ISSUES OCCURRING
AT PROPERTIES WHICH WE MANAGE, INVEST IN, OR DEAL WITH. Various 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. We
may face liability under these laws as a result of our role as an on-site
property manager. In addition, we may face liability if such laws are
applied to expand our limited liability with respect to our co-investments
in real estate as discussed below.
CO-INVESTMENT ACTIVITIES SUBJECT US TO REAL ESTATE INVESTMENT RISKS
AND POTENTIAL LIABILITIES. An important part of our investment strategy
includes investing in real estate along with our investment management
clients. Investing in this manner exposes us to a number of risks which
could have a material adverse effect on our business, results of operations
and financial condition, including as a result of the following risks:
.. We may lose some or all of the capital which we invest if the
investments perform poorly.
.. We will have fluctuations in earnings and cash flow as we recognize
gains or losses, and receive cash, upon the disposition of
investments, the timing of which in many cases is not completely in
our control.
.. We generally hold our investments in real estate through subsidiaries
with limited liability; however, in certain circumstances it is
possible that this limited exposure may be expanded in the future
based upon, among other things, changes in applicable laws or the
application of existing or new laws. To the extent this occurs, our
liability could exceed the amount we have invested.
.. We make co-investments in real estate in many countries and this
presents risk as described above in "The international scope of our
operations, and our operations in particular regions and countries,
involve a number of risks for our business".
WE HAVE INDEBTEDNESS THAT COULD IMPEDE OUR OPERATIONS AND FLEXIBILITY.
At December 31, 2002, we had $215.0 million of indebtedness on a
consolidated basis. We have borrowed through a euro 165 million 9.0%
Senior Euro Notes offering and a $275 million revolving credit facility.
Our average outstanding borrowings under the Euro Notes and revolving
credit facility were $230.8 million during 2002, and the effective interest
rate was 7.3%.
We need approximately $17.5 million annually to make required interest
payments on our Euro Notes and the outstanding portion of our revolving
credit facility. The Euro Notes have a fixed rate of interest and the
revolving credit facility has a variable rate based on the market, plus a
margin. The variable rate and margin features of the revolving credit
facility could result in higher borrowing costs if market interest rates or
the margin rise. An increase of 50 basis points in the 2002 average
interest rate on the revolving credit facility would have resulted in a
$370,000 increase in our borrowing cost.
The terms of our debt contain a number of covenants that could
restrict our flexibility to finance future operations or capital needs or
to engage in other business activities that may be in our best interest.
The debt covenants limit us in, among other things:
. encumbering or disposing of assets;
. incurring indebtedness;
. engaging in acquisitions; and
. entering into transactions with affiliates.
In addition, the covenants include the maintenance of maximum debt to
EBITDA and minimum liquidity ratios. There are no covenants or triggers
related to a change in credit rating or a material adverse change.
If we are unable to make required payments on the Euro Notes or under
the revolving credit facility or if we breach any of the debt covenants, we
will be in default under the terms of the indenture or the revolving credit
agreement, as applicable. A default under either agreement could cause
acceleration of repayment of those amounts as well as defaults under other
existing and future debt obligations.
Regardless of our compliance with the terms of the debt, the existence
of the debt could adversely affect our ability to adjust to changing market
conditions or remain competitive with our competitors.
THE STOCKHOLDER AGREEMENTS, THE DEL STOCKHOLDER AGREEMENTS, THE
CHARTER AND THE AMENDED BYLAWS OF JONES LANG LASALLE AND THE MARYLAND
GENERAL CORPORATE LAW COULD DELAY, DEFER OR PREVENT A CHANGE OF CONTROL.
The Stockholder Agreements and the DEL Stockholder Agreements entered into
in connection with the merger and the charter and bylaws of Jones Lang
LaSalle include provisions that may discourage, delay, defer or prevent a
takeover attempt that may be in the best interest of stockholders of Jones
Lang LaSalle and may adversely affect the market price of our common stock.
The Stockholder Agreements and the DEL Stockholder Agreements require each
of the parties thereto to vote all shares of Jones Lang LaSalle common
stock owned or controlled by such stockholder:
. for persons nominated by the our board of directors pursuant to
the amended bylaws; and
. in accordance with the recommendations of a majority of our
directors on all matters (1) submitted to the vote of the
stockholders of Jones Lang LaSalle which have been proposed by
any stockholder as to which the board of directors has
recommended against approving and (2) relating to any merger,
sale of all or substantially all of our assets, or any similar
transactions as to which the board of directors has recommended
against approving.
Additionally, the Stockholder Agreements and DEL Stockholder
Agreements require the persons bound by them to take reasonable actions to
assure that they do not transfer shares to a person, which is, or would as
a result of the transfer become, the owner of 5% or more of the outstanding
Jones Lang LaSalle common stock. This requirement does not apply to the
extent shares are sold in accordance with certain securities regulations.
As a result, during the term of the Stockholder Agreements and the DEL
Stockholder Agreements, as long as persons who hold a significant number of
our issued and outstanding common stock continue to be bound by these
agreements, the board of directors recommendations regarding director
nominees to the board, sale or merger transactions and all stockholder
proposals will have the benefit of these provisions. The Stockholder
Agreements are scheduled to terminate the earlier of (i) the first business
day immediately following the 2003 annual meeting of shareholders, (ii)
June 1, 2003 or (iii) such date as may be agreed between the Company and
the stockholder party to the Stockholder Agreement. The persons bound by
the Stockholder Agreements and DEL Stockholder Agreements hold, as of
February 15, 2003, approximately 20% of the issued and outstanding shares
of Jones Lang LaSalle common stock.
In addition, pursuant to the charter of Jones Lang LaSalle, we have a
classified board of directors, pursuant to which directors are divided into
three classes, with three-year staggered terms. The classified board
provision could increase the likelihood that, in the event an outside party
acquired a controlling block of our capital stock or initiated a proxy
contest, incumbent directors nevertheless would retain their positions for
a substantial period, which may have the effect of discouraging, delaying
or preventing a change in control of Jones Lang LaSalle. In addition, the
charter and bylaws provide for:
.. the ability of the board of directors to establish one or more
classes and series of capital stock including the ability to
issue up to 10,000,000 shares of preferred stock, and to determine
the price, rights, preferences and privileges of such capital stock
without any further stockholder approval;
.. a requirement that any stockholder action taken without a meeting be
pursuant to unanimous written consent; and
.. certain advance notice procedures for Jones Lang LaSalle stockholders
nominating candidates for election to the Jones Lang LaSalle board of
directors.
Under the Maryland General Corporate Law (the "MGCL"), certain
"Business Combinations" (including a merger, consolidation, share exchange
or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and
any person who beneficially owns 10% or more of the voting power of the
corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an
affiliate of the Interested Stockholder are prohibited for five years after
the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such Business Combination must be
recommended by the board of directors of such corporation and approved by
the affirmative vote of at least (1) 80% of the votes entitled to be cast
by holders of outstanding voting shares of the corporation and (2) 66-2/3%
of the votes entitled to be cast by holders of outstanding voting shares of
the corporation other than shares held by the Interested Stockholder with
whom the Business Combination is to be effected, unless, among other
things, the corporation's stockholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or
in the same form as previously paid by the Interested Stockholder for its
shares. Pursuant to the MGCL, these provisions also do not apply to
Business Combinations, which are approved or exempted by the board of
directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.
The provisions of the agreements described above, as well as our
charter and bylaws, and the MGCL, could discourage bids for common stock as
well as adversely affect the market price of our common stock.
CLAIMS AND INVESTIGATIONS. Substantial legal liability or a
significant regulatory action against Jones Lang LaSalle could have a
material adverse financial effect or cause significant reputational harm to
the Company, which in turn could seriously harm our business prospects. We
generally provide our services under contracts and in many cases subject to
regulatory and fiduciary obligations. We face legal and reputational risks
in the event we do not, or are perceived to have not performed under those
contracts or in accordance with those regulations or obligations and the
precautions we take to prevent these types of occurrences may not be
effective in all cases.
INFRASTRUCTURE DISRUPTIONS. Our ability to conduct business may be
adversely impacted by a disruption in the infrastructure that supports our
businesses and the communities in which they are located. This may include
a disruption involving electrical, communications, transportation or other
services used by Jones Lang LaSalle or third parties with which we conduct
business. These disruptions may occur, for example, as a result of events
that affect only the buildings in which we operate or of such third
parties, or as a result of events with a broader impact on the cities where
those buildings are located. Nearly all of our employees in our primary
locations, including Chicago, London, Singapore and Sydney, work in close
proximity to each other, in one or more buildings. If a disruption occurs
in one location and our employees in that location are unable to
communicate with or travel to other locations, our ability to service and
interact with our clients may suffer and we may not be able to successfully
implement contingency plans that depend on communication or travel.
SYSTEMS. Our business is highly dependent on our ability to process
transactions across numerous and diverse markets in many currencies. If any
of our financial, accounting or other data processing systems do not
operate properly or are disabled, we could suffer a disruption of our
businesses, liability to clients, regulatory intervention or reputational
damage. These systems may fail to operate properly or become disabled as a
result of events that are wholly or partially beyond our control, including
a disruption of electrical or communications services or our inability to
occupy one or more of our buildings.
ITEM 2. PROPERTIES
Our principal holding company headquarters are located at 200 East
Randolph Drive, Chicago, Illinois, where we currently occupy over 100,000
square feet of office space pursuant to a lease that expires in February
2006. Our principal operational headquarters are located at 22 Hanover
Square, London, England where approximately 83,000 square feet are leased
under a lease expiring in December 2008. Regional headquarters are located
in Chicago, London and Singapore. We have 111 local offices worldwide
located in most major cities and metropolitan areas as follows: 31 offices
in 5 countries in the Americas (including 23 in the United States), 50
offices in 17 countries in Europe and 30 offices in 12 countries in Asia
Pacific. Our offices are each leased pursuant to agreements with terms
ranging from month-to-month to ten years. In addition, we have on-site
property and other offices located throughout the world. On-site property
management offices are generally located within properties that we manage
and are provided without cost.
ITEM 3. LEGAL PROCEEDINGS
The Company has contingent liabilities from various pending claims and
litigation matters arising in the ordinary course of business, some of
which involve claims for damages that are substantial in amount. Many of
these matters are covered by insurance. Although the ultimate liability for
these matters cannot be determined, based upon information currently
available, we believe the ultimate resolution of such claims and
litigation, will not have a material adverse effect on our financial
position, results of operations or liquidity.
On November 8, 2002, Bank One N.A. ("Bank One") filed suit against the
Company and certain of its subsidiaries in the Circuit Court of Cook
County, Illinois with regard to services provided in 1999 and 2000 pursuant
to three different agreements relating to facility management, project
development and broker services. The suit generally alleges negligence,
breach of contract and breach of fiduciary duty on the part of Jones Lang
LaSalle and seeks to recover a total of $40 million in compensatory damages
and $80 million in punitive damages. The Company is aggressively defending
the suit and on December 16, 2002 filed a counterclaim for breach of
contract seeking payment of approximately $1.2 million for fees due for
services provided under the agreements. While there can be no assurance,
the Company believes that the complaint is without merit and, as such, will
not have a material adverse impact on our financial position, results of
operations, or liquidity. The suits are in their early stages. As of the
date of this report, discovery is just beginning and no trial date has been
set. As such, the outcome of Bank One's suit cannot be predicted with any
certainty and management is unable to estimate an amount or range of
potential loss that could result if an improbable unfavorable outcome did
occur.
In the third quarter of 2001 we established a reserve of $1.6 million
which we believe is adequate to cover our exposures resulting from the
insolvency of HIH Insurance Ltd. ("HIH"), one of our former insurance
providers. HIH provided public liability coverage to the Australian
operations of JLW for the years from 1994 to 1997, which coverage would
typically provide protection against, among other things, personal injury
claims arising out of accidents occurring at properties for which we had
property management responsibilities. As of December 31, 2002, $1.1
million of the reserve established remained to cover claims which would
have been covered by the insurance provided by HIH. Although there can be
no assurance, we believe this reserve is adequate to cover any remaining
claims and expenses resulting from the HIH insolvency. Due to the nature
of the claims covered by this insurance, it is possible that future claims
may be made.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Jones Lang LaSalle's
stockholders during the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our Common Stock is listed for trading on the New York Stock Exchange
under the symbol "JLL."
As of January 31, 2003, there were approximately 2,400 beneficial
holders of our Common Stock.
The following table sets forth the high and low sale prices of our
Common Stock as reported on the New York Stock Exchange.
2002 High Low
------ ------
First Quarter . . . . . . . . . . . . . . . . $22.85 $16.74
Second Quarter. . . . . . . . . . . . . . . . $24.80 $21.75
Third Quarter . . . . . . . . . . . . . . . . $24.70 $18.60
Fourth Quarter. . . . . . . . . . . . . . . . $21.49 $14.04
2001 High Low
------ ------
First Quarter . . . . . . . . . . . . . . . . $16.24 $12.20
Second Quarter. . . . . . . . . . . . . . . . $14.05 $12.25
Third Quarter . . . . . . . . . . . . . . . . $15.65 $12.50
Fourth Quarter. . . . . . . . . . . . . . . . $18.20 $13.25
We have not paid cash dividends on our common stock to date. We
intend to retain our earnings to support the expansion of the business and
continue to pay down debt levels. Any payment of future dividends and the
amounts thereof will be at the discretion of the Board of Directors and
will depend upon our financial condition, earnings and other factors deemed
relevant by the Board of Directors.
TRANSFER AGENT
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park, NJ 07760
<table>
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
The following table sets forth our summary historical consolidated financial data. The information should be
read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere herein.
<caption>
Year Ended December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except share data)
<s> <c> <c> <c> <c> <c>
Statement of Operations Data:
Total revenue (1) . . . . . . . . . . . . . . .$ 840,429 905,449 942,524 755,439 304,464
---------- --------- ---------- --------- ----------
Operating income (loss). . . . . . . . . . . . . 54,695 12,959 6,403 (71,303) 37,842
Interest expense . . . . . . . . . . . . . . . . 17,024 20,156 27,182 18,211 4,153
---------- --------- ---------- --------- ----------
Earnings (loss) before provision for
income taxes and minority interest. . . . . . . 37,671 (7,197) (20,779) (89,514) 33,689
Net provision for income taxes . . . . . . . . . 11,037 7,986 22,053 5,328 13,224
Minority interest in earnings (losses)
of subsidiaries . . . . . . . . . . . . . . . . 711 228 (21) -- --
---------- --------- ---------- --------- ----------
Earnings (loss) before extraordinary item
and cumulative effect of change in
accounting principle. . . . . . . . . . . . . . 25,923 (15,411) (42,811) (94,842) 20,465
Extraordinary gain on the acquisition of
minority interest, net of tax (2) . . . . . . . 341 -- -- -- --
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . . 846 -- (14,249) -- --
---------- --------- ---------- --------- ----------
Net earnings (loss). . . . . . . . . . . . . . .$ 27,110 (15,411) (57,060) (94,842) 20,465
========== ========= ========== ========== ==========
Basic earnings (loss) per common share
before extraordinary item and cumulative
effect of change in accounting principle. . . .$ 0.85 (0.51) (1.72) (4.20) 1.26
Extraordinary gain on the acquisition of
minority interest, net of tax (2) . . . . . . . 0.01 -- -- -- --
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . . 0.03 -- (0.58) -- --
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per common share . . . . .$ 0.89 (0.51) (2.30) (4.20) 1.26
========== ========== ========== ========= ==========
Basic weighted average shares outstanding. . . .30,486,842 30,016,122 24,851,823 22,607,350 16,215,478
========== ========== ========== ========== ==========
Year Ended December 31,
----------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
(in thousands, except share data)
Diluted earnings (loss) per common share
before extraordinary item and cumulative
effect of change in accounting principle. . . .$ 0.81 (0.51) (1.72) (4.20) 1.25
Extraordinary gain on the acquisition of
minority interest, net of tax (2) . . . . . . . 0.01 -- -- -- --
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . . 0.03 -- (0.58) -- --
----------- ---------- ---------- ---------- ----------
Diluted earnings (loss) per common share . . . .$ 0.85 (0.51) (2.30) (4.20) 1.25
=========== ========== ========== ========== ==========
Diluted weighted average shares outstanding. . .31,854,397 30,016,122 24,851,823 22,607,350 16,387,721
=========== ========== ========== ========== ==========
Other Data:
EBITDA (3). . . . . . . . . . . . . . . . . . . .$ 90,722 59,767 49,433 (34,627) 51,297
Ratio of earnings to fixed charges (4). . . . . . 2.06X 0.80X 0.19X -- 5.54X
=========== ========== ========== ========== =========
Cash flows provided by (used in):
Operating activities . . . . . . . . . . . . .$ 68,369 54,103 140,340 (18,227) 23,000
Investing activities . . . . . . . . . . . . .$ (26,340) (32,549) (66,590) (80,867) (239,096)
Financing activities . . . . . . . . . . . . .$ (38,821) (29,951) (78,215) 105,461 202,377
Investments under management (5). . . . . . . . .$23,200,000 22,200,000 22,500,000 21,500,000 14,200,000
Total square feet under management (6). . . . . . 735,000 725,000 700,000 700,000 400,500
=========== ========== ========== ========== =========
Balance Sheet Data:
Cash and cash equivalents. . . . . . . . . . . .$ 13,654 10,446 18,843 23,308 16,941
Total assets . . . . . . . . . . . . . . . . . . 852,516 835,727 914,045 924,800 490,921
Total debt . . . . . . . . . . . . . . . . . . . 215,008 222,886 249,947 322,386 202,923
Total liabilities. . . . . . . . . . . . . . . . 485,558 521,346 581,707 600,864 321,349
Total stockholders' equity . . . . . . . . . . . 366,958 314,381 332,338 323,936 169,572
</table>
(1) Certain prior year amounts were reclassified to conform with current
presentation.
Beginning in January 2002, we began accounting for the revenues of
our Strategic Consulting unit on a gross basis, as opposed to netting
these revenues into expenses. These revenues amounted to $10.4
million and $9.2 million for the years ended December 31, 2001 and
2000, respectively. The Strategic Consulting business unit was
created in 2000, therefore no reclassifications have been made for
the years ended December 31, 1999 and 1998.
Beginning in December 2002, pursuant to the FASB's Emerging Issues
Task Force ("EITF") No. 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred", we
have reclassified reimbursements received for out-of-pocket expenses
to revenues in the income statement, as opposed to being shown as a
reduction of expenses. These out-of-pocket expenses amounted to
$2.9 million, $4.0 million and $3.2 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Out-of-pocket
expenses were not available for the years ended December 31, 1999 and
1998 given that it was necessary to reconfigure our reporting systems
to separate these costs, therefore no reclassification has been made
for these years.
Beginning in December 2002, we have reclassified as revenue our
recovery of indirect costs related to our management services
business, as opposed to being classified as a reduction of expenses
in the income statement. This recovery of indirect costs for the
years ended December 31, 2002, 2001 and 2000 totaled $9.7 million,
$9.3 million and $7.3 million, respectively. The amounts related to
recovery of indirect costs in our management services business were
not available for the years ended December 31, 1999 and 1998 given
that it was necessary to reconfigure our reporting systems to
separate these costs, therefore no reclassification has been made for
these years.
(2) In December 2002, we exercised our option to purchase the remaining
45% interest in the joint venture company Jones Lang LaSalle Asset
Management Services, which exclusively provides asset management
services for all Skandia Life properties in Sweden. The purchase
price was below the fair value of the assets acquired, resulting in
an after-tax extraordinary gain of $341,000.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and excludes Minority Interests in
EBITDA. EBITDA also excludes the cumulative effects of changes in
accounting principles and the extraordinary item. We believe that
EBITDA is useful to investors as a measure of operating performance,
cash generation and ability to service debt. EBITDA is also used in
the calculations of certain covenants related to our revolving credit
facility. However, EBITDA 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.
(4) For purposes of computing the ratio of earnings to fixed charges,
earnings represents net earnings (loss) before income taxes plus
fixed charges, less capitalized interest. Fixed charges consist of
interest expense, including amortization of debt discount and
financing costs, capitalized interest and one-third of rental expense
which we believe is representative of the interest component of
rental expense. Due to the merger related non-recurring charges,
earnings were insufficient to cover fixed charges by $89.5 million
for the year ended December 31, 1999.
(5) Investments under management represent the aggregate fair market
value or cost basis (where an appraisal is not available) of assets
managed by our Investment Management segment as of the end of the
periods reflected.
(6) Represents the total square footage of properties for which we
provided property management and leasing or corporate property
services as of the end of the periods reflected.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Selected Financial Data and Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Form 10-K. The
following discussion and analysis contains certain forward-looking
statements which are generally identified by the words anticipates,
believes, estimates, expects, plans, intends and other similar expressions.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause Jones Lang LaSalle's actual
results, performance, achievements, plans and objectives to be materially
different from any future results, performance, achievements, plans and
objectives expressed or implied by such forward-looking statements. See
Cautionary Note Regarding Forward-Looking Statements below.
Management's Discussion and Analysis is presented in five sections.
The first section is a summary of our critical accounting policies and
estimates. The second section discusses certain items affecting the
comparability of results and certain market and other risks that we face.
The third section analyzes the Results of our Operations, first on a
consolidated basis and then for each of our business segments. The final
two sections address Consolidated Cash Flows and Liquidity and Capital
Resources.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
An understanding of our accounting policies is necessary for a
complete analysis of our results, financial position, liquidity and trends.
The preparation of our financial statements requires management to make
certain critical accounting estimates that impact the stated amount of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues
and expenses during the reporting periods. These accounting estimates are
based on management's judgment and are considered to be critical because of
their significance to the financial statements and the possibility that
future events may differ from current judgments, or that the use of
different assumptions could result in materially different estimates. We
review these estimates on a periodic basis to ensure reasonableness.
However, the amounts we may ultimately realize could differ from such
estimated amounts.
REVENUE RECOGNITION - We recognize advisory and management fees in the
period in which we perform the service. Transaction commissions are
recognized as income when we provide the service unless future
contingencies exist. If future contingencies exist, we defer recognition
of this revenue until the respective contingencies are satisfied.
Development management fees are generally recognized as billed, which we
believe approximates the percentage of completion method of accounting.
Incentive fees are generally tied to some form of contractual milestone and
are recorded in accordance with the specific terms of the underlying
compensation agreement. The Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," provides guidance on the application of generally accepted
accounting principles to selected revenue recognition issues. We believe
that our revenue recognition policy is appropriate and in accordance with
accounting principles generally accepted in the United States of America
and SAB 101. We implemented SAB 101 in 2000 and this is discussed more
fully in Note 17 to Notes to Consolidated Financial Statements.
In certain of our businesses, primarily those involving management
services, we are reimbursed by our clients for expenses that are incurred
on their behalf. The treatment of reimbursable expenses for financial
reporting purposes is based upon the fee structure of the underlying
contracts. A contract that provides a fixed fee/billing, fully inclusive
of all personnel or other recoverable expenses that we incur, and not
separately scheduled as such, is reported on a gross basis. This means that
our reported revenues include the full billing to our client and our
reported expenses include all costs associated with the client. When the
fee structure is comprised of at least two distinct elements: the fixed
management fee and a separate component which allows for scheduled
reimbursable personnel or other expenses to be billed directly to the
client, we will account for the contract on a net basis. This means we
include the fixed management fee in reported revenues and we net the
reimbursement against expenses. This characterization is based on the
following factors: (i) the property owner generally has authority over
hiring practices and the approval of payroll prior to payment by Jones Lang
LaSalle; (ii) Jones Lang LaSalle is the primary obligor with respect to the
property personnel, but bears little or no credit risk under the terms of
the management contract; (iii) reimbursement to Jones Lang LaSalle is
generally completed simultaneously with payment of payroll or soon
thereafter; and (iv) Jones Lang LaSalle generally earns no margin in the
arrangement, obtaining reimbursement only for actual cost incurred. The
majority of our service contracts utilize the latter structure and are
accounted for on a net basis. We have always presented the above
reimbursable contract costs on a net basis in accordance with accounting
principles generally accepted in the United States of America. Such costs
aggregated approximately $360 million in 2002. Prior year comparative
information is not available given that it was necessary to reconfigure our
reporting systems in 2002 as our global systems did not separate these
costs.
ACCOUNTS RECEIVABLE. We estimate the allowance necessary to provide
for uncollectible accounts receivable. This estimate includes specific
accounts for which payment has become unlikely. This estimate is also
based on historical experience, combined with a careful review of current
developments and with a strong focus on credit quality. The process by
which we calculate the allowance begins in the individual business units
where specific problem accounts are identified and reserved as part of an
overall reserve that is formulaic and driven by the age profile of the
receivables. These reserves are then reviewed on a quarterly basis by
regional and global management to ensure that they are appropriate. As part
of this review, a range of potential reserves is developed on a consistent
formulaic basis. Over the last two years we have placed considerable focus
on working capital management and in particular, collecting our receivables
on a more timely basis. As we are successful in doing this, the range of
potential reserves is narrowing. We would normally expect that the
allowance would fall within this range. The table below sets out certain
information regarding our accounts receivable, allowance for uncollectible
accounts receivable, range of possible allowance and the bad debt expense
we incurred by segment for the last three years (in millions).
Accounts Allowance
Receivable for Uncol-
Gross More Than lectible Bad
Accounts 90 Days Accounts Maximum Minimum Debt
Receivable Past Due ReceivableAllowance Allowance Expense
---------- ---------- ------------------- --------- -------
December 31,
2002
- ------------
Americas
OOS . . . 76.9 1.6 1.4 1.5 0.8 1.1
Europe OOS. 78.4 2.9 2.1 2.5 1.3 0.4
Asia
Pacific
OOS . . . 32.8 2.6 1.5 2.4 1.2 1.3
Investment
Manage-
ment. . . 44.4 0.5 -- 0.5 0.2 (0.5)
----- ----- ----- ----- ----- -----
Consoli-
dated . . 232.5 7.6 5.0 6.9 3.5 2.3
===== ===== ===== ===== ===== =====
December 31,
2001
- ------------
Americas
OOS . . . 74.4 1.9 1.2 1.3 0.6 5.7
Europe OOS. 91.4 3.3 2.9 2.9 1.4 1.3
Asia
Pacific
OOS . . . 36.6 3.0 1.2 2.7 1.4 1.3
Investment
Manage-
ment. . . 26.1 0.5 0.6 0.4 0.2 --
----- ----- ----- ----- ----- -----
Consoli-
dated . . 228.5 8.7 5.9 7.3 3.6 8.3
===== ===== ===== ===== ===== =====
December 31,
2000
- ------------
Americas
OOS . . . 96.5 3.4 3.1 3.1 1.8 2.4
Europe OOS. 99.7 7.2 4.3 6.4 3.2 1.7
Asia
Pacific
OOS . . . 32.7 4.1 1.0 3.1 1.5 1.3
Investment
Manage-
ment. . . 24.2 0.2 0.4 0.2 0.1 --
----- ----- ----- ----- ----- -----
Consoli-
dated . . 253.1 14.9 8.8 12.8 6.6 5.4
===== ===== ===== ===== ===== =====
We would note that included in the $5.7 million bad debt expense for
the Americas OOS segment in 2001 is a charge of $3.9 million for
unrecoverable receivables from technology related clients.
PERIODIC ACCOUNTING FOR INCENTIVE COMPENSATION - An important part of
our overall compensation package is incentive compensation, which is
typically paid out to our employees in the first quarter of the year after
it is earned. In our interim financial statements we accrue for incentive
compensation based on the percentage of revenue and compensation costs
recorded to date relative to forecasted revenue and compensation costs for
the full year as substantially all incentive compensation pools are based
upon revenues and profits. The impact of this incentive compensation
accrual methodology is that we accrue very little incentive compensation in
the first six months of the year, with the majority of our incentive
compensation accrued in the second half of the year, particularly in the
fourth quarter. We exclude from the standard accrual methodology incentive
compensation pools that are not subject to the normal performance criteria.
These pools are accrued for on a straight-line basis.
As discussed in Note 13 to Notes to Consolidated Financial Statements,
we have a stock ownership program for certain of our senior employees
pursuant to which they receive a portion of their annual incentive
compensation in the form of restricted stock units of our common stock.
These restricted shares vest 50% at 18 months from the date of grant
(January of the following year to which the restricted stock relates) and
50% vest at 30 months from the date of grant. The related compensation cost
is amortized to expense over the service period. The service period
consists of the 12 months of the year to which payment of the restricted
stock relates, plus the periods over which the shares vest. In 2002, we
expanded the population of employees who qualify for the program as part of
our goal of broadening employee stock ownership. In addition, the program
for 2002 was amended to enable employees, who currently own certain minimum
levels of our stock, to elect not to participate in the 2002 program.
Given that individual incentive compensation awards are not finalized until
after year-end, we must estimate the portion of the overall incentive
compensation pool that will qualify for this program. This estimation
factors in the performance of the Company and individual business units,
together with the target bonuses for qualified individuals. Given that the
majority of our incentive compensation is accrued in the fourth quarter, we
do not estimate and account for the current year impact of this program
until the fourth quarter (i.e. the enhancement, the deferral and the
related amortization).
The table below sets out certain information regarding this stock
ownership program and related incentive compensation deferral and expense
for the last three years (in thousands, except employee data).
December 31,
----------------------------
2002 2001 2000
-------- -------- --------
Number of employees qualified for
the stock ownership program . . . . . 700 200 200
Current year incentive compensation
deferred net of current year
amortization . . . . . . . . . . . . (5,039) (2,910) (4,458)
Compensation expense amortization
recognized with regard to the
current year stock ownership
program . . . . . . . . . . . . . . . 3,832 1,895 3,134
Compensation expense amortization
recognized with regard to the
prior years stock ownership
programs. . . . . . . . . . . . . . . 4,843 4,917 1,987
-------- -------- --------
Total compensation expense
amortization with regard to the
stock ownership programs. . . . . . . 8,675 6,812 5,121
======== ======== ========
ASSET IMPAIRMENT - We apply Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS 144") to recognize and
measure impairment of long-lived assets. SFAS 144 establishes accounting
and reporting standards for the impairment or disposal of long-lived assets
by requiring that those long-lived assets to be held and used be measured
at the lower of carrying costs or their fair value, and by requiring that
those long-lived assets to be held for sale to be measured at the lower of
carrying costs or their fair value less costs to sell, whether reported in
continuing operations or in discontinued operations. We adopted SFAS 144 on
January 1, 2002. The effect of implementing SFAS 144 did not have a
material impact on our consolidated financial statements.
We review long-lived assets, including investments in real estate
ventures, intangibles and property and equipment for impairment on an
annual basis, or whenever events or circumstances indicate the carrying
value of an asset group may not be recoverable. The review of
recoverability is based on an estimate of the future undiscounted cash
flows expected to be generated by the asset group. If impairment exists due
to the inability to recover the carrying value of an asset group, an
impairment loss is recorded to the extent that the carrying value exceeds
the estimated fair value.
We adopted Statement No. 142, "Goodwill and Other Intangible Assets,"
("SFAS 142") effective January 1, 2002. In connection with the
transitional goodwill impairment evaluation, SFAS 142 required us to
perform an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption. To accomplish this evaluation, we
determined the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. For purposes
this exercise we defined reporting units based on how the Chief Operating
Decision Makers for each segment looked at their segment when determining
strategic business decisions. The following reporting units were
determined: Investment Management, Americas OOS, Australia OOS, Asia OOS,
and by country grouping in Europe OOS. We have determined the fair value of
each reporting unit on the basis of a discounted cash flow methodology and
compared it to the reporting unit's carrying amount. In all cases, the fair
value of each reporting unit exceeded its carrying amount, and therefore no
impairment loss has been recognized on our goodwill.
Although the Land Investment Group was closed in 2001, we have
retained certain investments originated by this group. Included in
investments in real estate ventures as of December 31, 2002 is the book
value of the five remaining Land Investment Group investments (of which
three have now been fully written down) of $2.1 million. This book value is
net of $6.3 million of impairment charges, of which $3.5 million was
recorded in 2001 as part of our non-recurring charges. We have also
provided guarantees associated with this investment portfolio of $1.2
million, which we currently do not expect to be required to fund. We
continue to monitor the portfolio very carefully and have taken two
additional impairment charges in 2002 as part of our non-recurring charges.
We recorded $1.9 million to fully provide against an investment that had
previously not been impaired, but which defaulted on certain financial
covenants in 2002. In addition, we took an impairment charge of $0.9
million to fully write down an investment that we had partially impaired in
2001, as our underlying projected performance expectations continued to
decline. Any future impairment charges or gains or losses on disposal
relating to the Land Investment Group will be included in non-recurring
charges. We currently expect to liquidate the Land Investment Group
investments by the end of 2006.
Although the Development Group was sold in the third quarter of 2001,
we have retained certain investments originated by this group. Included in
investments in real estate ventures as of December 31, 2002 is the book
value of the one remaining investment project of $893,000. In 2002 we have
recorded a net gain of $675,000 as a result of the disposal of three of
these investments, an impairment charge of $472,000 relating to two
properties that were subsequently sold and equity losses of $404,000. The
net gain and expenses have been recorded in non-recurring expense in 2002.
Any future impairment charges or gains or losses on disposal relating to
the final Development Group investment will be included in non-recurring
expenses. We continue to evaluate this investment for impairment. We
currently expect to liquidate the final Development Group investment by the
end of 2003.
During 2001, we reviewed our e-commerce investments on an investment
by investment basis, evaluating actual business performance against
original expectations, projected future performance and associated cash
flows, and capital needs and availability. As a result of this evaluation
we determined that our investments in e-commerce were impaired and fully
wrote down these investments by the end of 2001 as part of our non-
recurring charges. It is currently our policy to expense any additional
investments, primarily contractual commitments to fund operating expenses
of existing investments, that are made into these ventures in the period
they are made. These charges are recorded as ordinary recurring charges. In
2002 we expensed a total of $287,000 of such investments.
Also during 2001, the Asia Pacific region underwent a realignment from
a traditional geographic structure to one that is managed according to
business lines. As part of this realignment, we decided to restructure our
operations to exit an arrangement with a third-party in Indonesia. This
decision resulted in the write-down of a net $1.0 million receivable from
this third-party.
INCOME TAXES - We account for income taxes under the asset and
liability method. Because of the global and cross border nature of our
business, our corporate tax position is complex. We generally provide taxes
in each tax jurisdiction in which we operate based on local tax regulations
and rules. Such taxes are provided on net earnings and include the
provision of taxes on substantively all differences between accounting
principles generally accepted in the United States of America and tax
accounting, excluding certain non-deductible items and permanent
differences.
Our global effective tax rate is sensitive to the complexity of our
operations as well as to changes in the mix of our geographic
profitability, as local statutory tax rates range from 10% to 42% in the
countries in which we have significant operations. We evaluate our
estimated effective tax rate on a quarterly basis to reflect forecast
changes in our geographic mix of income, legislative actions on statutory
tax rates, the impact of tax planning to reduce losses in jurisdictions
where we cannot recognize the tax benefit of those losses, as well as tax
planning for jurisdictions affected by double taxation. We continuously
seek to develop and implement potential strategies and/or actions that
would reduce our overall effective tax rate. We reflect the benefit from
tax planning actions when we believe it is probable that they will be
successful, which usually requires that certain actions have been
initiated. We provide for the effects of income taxes on interim financial
statements based on our estimate of the effective tax rate for the full
year. The actual 2002 effective tax rate of 34% excludes a tax benefit of
$1.8 million related to certain costs incurred in restructuring actions
taken in 2001. These costs were not originally expected to be deductible
for tax purposes. However, as a result of actions undertaken this year,
these costs were deemed deductible.
Based on our historical experience and future business plans we do not
expect to repatriate our foreign source earnings to the United States. As a
result, we have not provided deferred taxes on such earnings or the
difference between tax rates in the United States and the various foreign
jurisdictions where such amounts were earned. Further, there are various
limitations on our ability to utilize foreign tax credits on such earnings
when repatriated. As such, we may incur taxes in the United States upon
repatriation without credits for foreign taxes paid on such earnings. Due
to the complex nature of our tax position, it is not practical for us to
determine the amount of taxes that we may incur if repatriation did occur.
We have established valuation allowances against the possible future
tax benefits of current losses where expected future taxable income does
not support the realization of the deferred tax assets. We formally assess
the likelihood of being able to utilize current tax losses in the future on
a country by country basis, with the determination of each quarter's income
tax provision; and we establish or increase valuation reserves upon
specific indications that the carrying value of a tax asset may not be
recoverable, or alternatively we reduce valuation reserves upon specific
indications that the carrying value of the tax asset is more likely than
not recoverable or upon the implementation of tax planning strategies
allowing an asset previously determined not realizable to be viewed as
realizable. The table below summarizes certain information regarding the
gross deferred tax assets and valuation allowance for the last three years
(in millions):
December 31,
-------------------------
2002 2001 2000
----- ---- ----
Gross Deferred Tax Asset. . . . . . . $70.0 62.4 44.4
Valuation Allowance . . . . . . . . . $12.2 12.1 3.3
The increase in the valuation allowance from 2000 to 2001 was
primarily the result of the establishment of valuation reserves on foreign
tax loss carryover benefits, particularly in the Asia Pacific region, and
write downs of certain investments. The increases in gross deferred tax
assets from 2001 to 2002 and from 2000 to 2001 were the result of tax loss
carryovers in all regions, write downs of investments and other differences
in the timing of income recognition on investments. Gross deferred asset
growth in 2002 included a significant loss in a previously profitable
jurisdiction, which is expected to return to profitability in 2003 and for
which a valuation reserve was not provided.
We evaluate our segment operating performance before tax, and do not
consider it meaningful to allocate tax by segment. Estimations and
judgments relevant to the determination of tax expense, assets, and
liabilities require analysis of the tax environment and the future
profitability, for tax purposes, of local statutory legal entities rather
than business segments. Our statutory legal entity structure generally does
not mirror the way that we organize, manage and report our business
operations. For example, the same legal entity may include both Investment
Management and OOS businesses in a particular country.
ACCOUNTING FOR SELF-INSURANCE PROGRAMS - In our Americas business, in
common with many other American companies, we have chosen to retain certain
risks regarding workers' compensation and health insurance rather than
purchase third-party insurance. Estimating our exposure to such risks
involves subjective judgments about future developments. We engage the
services of an independent actuary to assist us in quantifying our
potential exposure.
. HEALTH INSURANCE - We chose to self-insure our health benefits
for all US based employees for the first time in 2002, although
we did purchase stop loss coverage to limit our exposure. We
made this decision because we believed that on the basis of our
historic claims experience, the demographics of our workforce
and trends in the health insurance industry, we would incur
reduced expense in self-insuring our health benefits as opposed
to purchasing health insurance through a third-party. We
engaged an actuary who specializes in health insurance to
estimate our likely full year cost at the beginning of the year
and expensed this cost on a straight-line basis throughout the
year. In the fourth quarter of 2002, we employed the same
actuary to estimate the required reserve for unpaid health
costs we would need at year-end, together with an initial
estimate of costs for 2003, which we will use for periodic
reporting purposes in 2003. With regard to the year-end
reserve, the actuary provides us with a point estimate and we
accrued that estimate, additionally we accrued a provision
of approximately $300,000 for adverse deviation. The amount
accrued at December 31, 2002 was $2.4 million. Total costs
incurred related to this plan in 2002 were $15.0 million which
includes the $2.4 million reserve. As we had previously
purchased health insurance from a third-party, there were no
similar accruals in 2001 or 2000.
. WORKERS' COMPENSATION INSURANCE - Given our belief, based on
historical experience that our workforce has experienced lower
costs than is normal for our industry, we have been self-
insured for worker's compensation insurance for a number of
years. On a periodic basis we accrue using the various state
rates based on job classifications and engage an independent
actuary who specializes in worker's compensation to estimate
our exposure based on actual experience. Given the significant
judgmental issues involved in this evaluation, the actuary
provides us a range of potential exposure and we reserve within
that range. The table below sets out the range and our actual
reserve for the last three years (in millions):
Maximum Minimum Actual
Reserve Reserve Reserve
------- ------- -------
December 31, 2002 . $6.4 4.9 6.1
December 31, 2001 . $7.2 5.1 6.4
December 31, 2000 . $7.2 5.5 5.9
Historically the results of this review have been available by
the end of the third quarter and we have recorded an adjustment
to bring our financial statements in line with the actuary's
estimate of our actual experience.
. CAPTIVE INSURANCE COMPANY - In order to better manage our
global insurance program, the Company, and its predecessor
entities have used a captive insurance company to provide
professional indemnity insurance coverage on a "claims made"
basis to certain of our international operations in addition to
traditional insurance coverage. The maximum risk retained by
this captive insurance company in any one year is pound
sterling 1 million (approximately $1.6 million). Given the
nature of these types of claims, it may take several years for
there to be a resolution of the underlying claims and finalize
the expense. We are required to estimate the ultimate cost
of these claims. This estimate includes specific claim
reserves that are developed on the basis of a review of the
circumstances of the individual claim. Given that the
timeframe for these reviews may be lengthy, we also provide a
reserve against the current year exposures on the basis of our
historic loss ratio. The table below provides details of the
reserves, which can relate to multiple years, that we have
established in the last three years (in millions):
December 31, 2002 . $1.7
December 31, 2001 . $2.0
December 31, 2000 . $1.7
COMMITMENTS AND CONTINGENCIES - We are subject to various claims and
contingencies related to lawsuits, taxes and environmental matters as well
as commitments under contractual obligations. Many of these claims are
covered under our current insurance programs. We recognize the liability
associated with commitments and contingencies when a loss is probable and
estimable. Our contractual obligations relate to the provision of services
by us in the normal course of our business.
ITEMS AFFECTING COMPARABILITY
NON-RECURRING AND RESTRUCTURING CHARGES
In December 2002, our Board of Directors approved a reduction of our
workforce by four percent to meet expected global economic conditions. This
reduction in force has led to a $12.7 million charge to the non-recurring
compensation and benefits expense in 2002. In addition, we incurred non-
recurring expenses of approximately $500,000 for the future lease costs of
excess space and $3.0 million of impairment charges related to investments
made by businesses exited in 2001.
In 2001, we incurred non-recurring and restructuring charges related
to; 1) impairment of e-commerce investments, 2) exit from certain
businesses and business relationships, including related asset impairments,
3) insolvent insurance providers and 4) restructuring actions taken to
bring ongoing operating expenses in line with anticipated future business.
Non-recurring charges in 2001 include the $18.0 million impairment of our
investments in e-commerce and reserves of $1.9 million related to insolvent
insurance providers. Also included in the non-recurring charge in 2001 is
$13.4 million of asset impairment charges related to the realignment of our
business. Restructuring related to the 2001 business realignment totaled
$43.9 million for severance and related costs. Actual costs incurred have
varied from our original estimate for a variety of reasons, including the
identification of additional facts and circumstances, the complexity of
international labor law and developments in the underlying business,
resulting in the unforeseen reallocation of resources and better or worse
than expected settlement discussions. These events have resulted in a
credit of $1.3 million being recorded in the non-recurring compensation and
benefits expense and an additional $98,000 being recorded in the non-
recurring operating, administrative and other expense in 2002.
Additionally, 2002 included non-recurring charges of $3.0 million related
to further impairment and net equity losses of certain investments in the
Land Investment Group and Development Group, businesses which were exited
as part of the broad based restructuring in 2001. See Note 6 to Notes to
Consolidated Financial Statements for a more detailed discussion of these
non-recurring and restructuring items.
NEW YORK EXPANSION
In the third quarter of 2002 we initiated the expansion of our New
York business. To support this expansion, we increased the underlying
headcount and associated costs in this business. Given the nature of our
business, we expect that it will take at least six months for this
headcount to deliver incremental revenues. In addition, there were
significant upfront costs associated with expanding the New York business.
The combination of these factors has meant that we have incurred net pre-
tax expenses of $3.2 million in 2002 associated with this expansion.
ACQUISITIONS AND MERGER
We have grown by expanding our client base and the range of services
and products we offer. In addition, we have made a series of strategic
acquisitions since the Initial Public Offering of LaSalle Partners
Incorporated in 1997 and also entered into the merger with the Jones Lang
Wootton companies ("JLW").
In December 2002, Jones Lang LaSalle acquired the 45% minority
interest in the joint venture company Jones Lang LaSalle Asset Management
Services, which since 2000 has exclusively provided Asset Management
services for all Skandia Life properties in Sweden - currently totaling 25
million square feet. The purchase price of the minority interest was
approximately $1 million, a discount to the fair value of the net assets
acquired. As a result, we have recorded an after-tax gain of $341,000 as
an extraordinary item in 2002.
On March 11, 1999, LaSalle Partners Incorporated and JLW merged their
businesses. JLW was an employee-owned international real-estate services
firm with approximately 4,000 employees with operations in 32 countries.
Approximately 48% of the shares issued to employees of the former JLW
operations as part of the merger were accounted for as compensation expense
or deferred compensation expense to the extent they were subject to
forfeiture or vesting provisions. We incurred non-cash, merger-related
stock compensation expense of $83.3 million in 2000, on an after-tax basis.
As of December 31, 2000, all merger-related stock compensation was expensed
and all forfeiture and vesting provisions were removed.
ADOPTION OF STAFF ACCOUNTING BULLETIN NO. 101, "REVENUE RECOGNITION IN
FINANCIAL STATEMENTS" ("SAB 101")
Effective January 1, 2000, as a result of the implementation of Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), we recorded a one-time, non-cash, after-tax cumulative change
in accounting principle of $14.2 million, net of taxes $8.7 million. This
adjustment represented revenues of $22.9 million that had been recognized
prior to January 1, 2000 that would not have now been recognized if the new
accounting policy had been in effect in the years prior to 2000. These
revenues have now been recognized as the underlying contingencies are
satisfied. We recognized $400,000, $5.8 million and $16.2 million of these
revenues in the twelve months ended December 31, 2002, 2001 and 2000,
respectively. Of the $22.9 million of revenues that were deferred on
January 1, 2000, $500,000 represented revenues related to our land
investment business, a business we exited in 2001. We have determined that
the subsequent impairment of the specific investment that generated these
revenues means that this $500,000 will not be collected, and therefore will
not be recorded as revenue. This will have no impact on our earnings or
cash flow. SAB 101 is discussed in detail in Note 17 of Notes to
Consolidated Financial Statements.
ADOPTION OF STATEMENT NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
("SFAS 142")
We adopted the provisions of SFAS 142 effective January 1, 2002. As a
result of implementing SFAS 142, we recorded an after-tax credit to
earnings representing a cumulative change in accounting principle effective
January 1, 2002 of $846,000. This represented the negative goodwill
balance at January 1, 2002. During 2002, the net impact of SFAS 142 was to
increase operating income by $9.6 million as a result of ceasing the
amortization of goodwill with indefinite lives. SFAS 142 is discussed in
detail in Note 15 of Notes to Consolidated Financial Statements.
LASALLE INVESTMENT MANAGEMENT REVENUES
Our Investment Management business is in part compensated through the
receipt of incentive fees where investment performance exceeds agreed
benchmark levels. Depending upon performance, these fees can be
significant and will generally be recognized when agreed events or
milestones are reached. These fees may also be structured in a variety of
ways. This may mean we record them as equity earnings for financial
reporting purposes. For example, in 2000, we recognized $10.3 million in
fees and equity earnings related to the partial liquidation of a fund
invested in French property. In 2001, we recognized incentive fees of
$14.4 million as the result of the disposition of a hotel investment. In
2002, we recognized advisory fees of $8.7 million related to the
performance of an investment portfolio in which we have a co-investment.
The timing of recognition will impact comparability between quarters, in
any one year, or compared to a prior year. We believe that given the scope
of our co-investment portfolio, we would expect that in any year incentive
fees would be triggered in some funds and that this would facilitate year
on year comparability. However, comparability year on year may be impacted
by these fees.
NEW ACCOUNTING STANDARDS
Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board issued
Statement No. 143, "Accounting for Asset Retirement Obligations," ("SFAS
143") which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal use of the
asset.
SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the
carrying amount of the liability, the Company will recognize a gain or loss
on settlement.
The Company is required, and plans to adopt, the provisions of
SFAS 143 for the quarter ending March 31, 2003. We have not yet fully
assessed the impact of SFAS 143 on our consolidated financial statements,
but do not anticipate it to be material.
Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("SFAS 146") which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS 146 requires that a liability for costs associated with an exit
or disposal activity be recognized when the liability is incurred rather
than when a company commits to such an activity and also establishes fair
value as the objective for initial measurement of the liability.
SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. If SFAS 146 had been effective in 2002,
we would have been unable to recognize approximately $500,000 of excess
lease costs taken as part of the 2002 restructuring charge. The adoption
of SFAS 146 is not expected to have a material impact on our consolidated
financial statements.
Accounting and Disclosure by Guarantors
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
("FIN 45") which addresses the disclosure to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees. FIN 45 also requires the recognition of a liability by a
guarantor at the inception of certain guarantees.
FIN 45 requires the guarantor to recognize a liability for the non-
contingent component of the guarantee; this is the obligation to stand
ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair
value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under
the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple elements.
The Company has adopted FIN 45 and has provided the disclosure
requirements and will apply the recognition and measurement provisions for
all guarantees entered into or modified after December 31, 2002. To date
the Company has not entered into or modified guarantees pursuant to the
recognition provisions of FIN 45. Guarantees covered by the disclosure
provisions of FIN 45 are discussed in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 8, 9 and 16 to Notes to Consolidated
Financial Statements.
Accounting for Stock-Based Compensation Transition and Disclosure
In December 2002, The Financial Accounting Standards Board issued
Statement No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure, an amendment of FASB Statement No. 123" ("SFAS 148"). This
statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-
based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual
and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are
included in Note 13 to Notes to Consolidated Financial Statements.
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" ("FIN 46"). FIN 46 addresses the
consolidation by business enterprises of variable interest entities as
defined. FIN 46 applies immediately to variable interests in variable
interest entities created after January 31, 2003. For public enterprises
with a variable interest entity created before February 1, 2003, FIN 46
applies to that enterprise no later than the beginning of the first interim
or annual reporting period beginning after June 15, 2003. The adoption of
FIN 46 is not expected to have a material impact on our consolidated
financial statements.
MARKET AND OTHER RISK FACTORS
MARKET RISK
The principal market risks (i.e., the risk of loss arising from
adverse changes in market rates and prices) to which we are exposed are:
. Interest rates on the multi-currency credit facility
. Foreign exchange risks
In the normal course of business, Jones Lang LaSalle manages these
risks through a variety of strategies, including the use of hedging
transactions using various derivative financial instruments such as foreign
currency forward contracts. We do not enter into derivative transactions
for trading or speculative purposes.
INTEREST RATES
We centrally manage our debt, considering investment opportunities and
risks, tax consequences and overall financing strategies. We are primarily
exposed to interest rate risk on the $275 million revolving multi-currency
credit facility due in September 2004, that is available for working
capital, investments, capital expenditures and acquisitions. This facility
bears a variable rate of interest based on market rates. The interest rate
risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to lower the overall borrowing costs. To
achieve this objective, in the past we have entered into derivative
financial instruments such as interest rate swap agreements when
appropriate and may do so in the future. We entered into no such
agreements in the years ended December 31, 2001 and 2002 and as of
December 31, 2002, we had no interest rate swap agreements outstanding.
The effective interest rate on our debt was 7.3% compared to 7.48% in
2001. The decrease in the effective interest rate is due to reduced
revolver borrowings at declining market interest rates, partially offset by
the strengthening of the euro against the US dollar.
A 50 basis point increase in the effective interest rate on the
revolving credit facility would have increased our net interest expense by
$370,000 in 2002.
FOREIGN EXCHANGE
Our revenues outside of the United States totaled 61% of our total
revenues in 2002. Operating in international markets means that we are
exposed to movements in these foreign exchange rates, primarily the British
pound (22% of 2002 revenues) and the euro (17% of 2002 revenues). Changes
in these foreign exchange rates would have the largest impact on
translating our international operations results into U.S. dollars.
The British pound expenses incurred as a result of both our worldwide
operational headquarters and our regional headquarters being located in
London act as a partial operational hedge against our translation exposure
to the British pound. A 10% change in the average exchange rate for the
British pound in 2002 would have impacted our pre-tax net operating income
by approximately $1.5 million.
The interest on the euro 165 million of notes we issued during 2000
acts as a partial hedge against the translation exposure on our euro
denominated earnings. The net impact on our earnings before tax of a 10%
change in the average exchange rate for the euro in 2002 would have been
$1.5 million.
We enter into forward foreign currency exchange contracts to manage
currency risks associated with intercompany loan balances. At December 31,
2002, we had forward exchange contracts in effect with a gross notional
value of $143.1 million ($82.1 million on a net basis) with a market and
carrying gain of $3.1 million.
SEASONALITY
Historically, our revenue, operating income and net earnings in the
first three calendar quarters are substantially lower than in the fourth
quarter. Other than for Investment Management, this seasonality is due to
a calendar year end focus on the completion of real estate transactions,
which is consistent with the real estate industry generally. The
Investment Management segment earns performance fees on clients' returns on
their real estate investments. Such performance fees are generally earned
when assets are sold, the timing of which we do not have complete
discretion over. Non-variable operating expenses, which are treated as
expenses when they are incurred during the year, are relatively constant on
a quarterly basis.
EURO CONVERSION ISSUES
On January 1, 1999, certain member countries of the European Union
fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the euro. For a three-and-one-half-
year transition period, non-cash transactions were allowed to be
denominated in either the euro or in the legacy currency. As of July 1,
2002 the euro is the sole legal tender for these countries.
In January 2002, we converted our legacy currency general ledgers to
the euro. There has been no adverse impact resulting from this conversion.
We are continuing to evaluate the potential impact of euro related issues
on information systems, currency exchange rate risk and other business
activities, but we do not expect the impact of euro conversion to be
material to us. However, there can be no assurance that external factors
relating to the euro conversion will not have a material adverse impact on
our operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
CONSOLIDATED REVIEW
REVENUE
Total revenue, after the elimination of intersegment revenue,
decreased $65.0 million, or 7.2%, to $840.4 million in 2002 from $905.4
million in 2001. Excluding the impact of movements in foreign currency
exchange rates, the 2002 revenue decline was $87.1 million, or 9.6%, when
compared to 2001 results. This reflects the general strengthening of the
euro, pound sterling and Australian dollar against the US dollar when
compared to last year. The reduction in our revenues year over year
reflects the weak global economy, but the impact was most significant in
the American and European OOS businesses. The broad based restructuring
initiated in the second half of 2001 was in anticipation of a decline in
revenues as we had not anticipated a turnaround in overall economic
conditions until late 2002. However, the severity and persistence of
revenue pressures was greater than we expected.
OPERATING EXPENSES
Total operating expenses, after the elimination of intersegment
expense and excluding the effects of non-recurring charges, decreased $44.4
million, or 5.4% to $770.9 million in 2002 from $815.3 million in 2001. The
impact of the stronger euro, pound sterling and Australian dollar has meant
that the effectiveness of our cost reduction initiatives have been masked
by an increase in US dollar reported expenses. Excluding the impact of
movement in foreign currency exchange rates, the cost reduction was 7.8%
for 2002. The reduction in expenses is largely the result of 1) the
restructuring actions taken in 2001 to bring ongoing operating expenses in
line with anticipated future business in light of the existing economic
conditions, 2) continued focus on discretionary costs, and 3) the adoption
of SFAS 142 which reduced amortization expense by $9.6 million. Partially
offsetting this was $3.9 million of expenses related to our New York
expansion initiated in late 2002.
Compensation and benefit expense decreased $15.1 million, or 2.8%, to
$530.5 million in 2002 from $545.6 million in 2001. The decrease in
compensation and benefit expense reflects the reduction in headcount as a
result of the restructuring actions taken in 2001. The strengthening of the
euro, pound sterling and Australian dollar, against the US dollar increased
reported US dollar compensation and benefits expense by $13.8 million in
2002. Incentive compensation increased as a result of improved performance
in some business units as well as a rebuilding of incentive compensation
pools from the low levels in 2001.
Operating expenses, excluding compensation and benefits expense and
non-recurring charges, were down $29.3 million, or 10.9%, to $240.3 million
in 2002 from $269.6 million in 2001, largely due to cost containment
initiatives put in place in 2001. Areas which have seen significant cost
savings in 2002 were travel and entertainment, marketing, and information
technology, which benefitted from the renegotiation of our contract with a
third-party support provider. In addition, bad debt expense was
substantially lower, in part due to our ongoing focus on working capital
management, but also because in 2001 we incurred a $3.9 million charge for
unrecoverable receivables from technology related clients. The benefit
resulting from adopting SFAS 142 (discussed in Note 15 to Notes to
Consolidated Financial Statements) was amortization savings of $9.6 million
in 2002. The effectiveness of our cost saving initiatives in 2002 was
offset by the impact of the strengthening of the euro, pound sterling and
Australian dollar, which increased reported US dollar operating expenses,
excluding compensation and benefits expense and non-recurring charges, by
$5.7 million.
The non-recurring charges in 2001 of $77.2 million include the write-
down of investments in e-commerce, reserves against potential liabilities
associated with the bankruptcy of two insurance providers, severance and
asset impairment costs associated with the global restructuring program in
place at 2001, and include costs associated with the exiting of certain
non-strategic business lines and the realignment of our Asia Pacific
business along client and business lines. Actual costs incurred related to
our 2001 broad based realignment varied from our original estimates for a
variety of reasons, including the identification of additional facts and
circumstances, the complexity of international labor law and developments
in the underlying business, resulting in the unforeseen reallocation of
resources and better or worse settlement discussions. These events have
resulted in the recording of a credit to non-recurring compensation and
benefits expense in 2002 of $1.3 million and an additional expense of
$98,000 to non-recurring operating, administrative and other expense. In
addition, in 2002 we have incurred additional impairment expense and equity
losses of $3.0 million related to investments made by businesses exited
during the 2001 restructuring. The non-recurring charges in 2002 of $14.9
million include $12.7 million of severance costs associated with the most
recent global restructuring program and approximately $500,000 for the
lease costs of excess space as a result of this restructuring. See Note 6
to Notes to Consolidated Financial Statements for a more detailed
discussion of these non-recurring and restructuring items.
OPERATING INCOME
We reported operating income, excluding non-recurring charges, of
$69.6 million in 2002, a decrease of $20.6 million, or 22.8%, from $90.2
million in 2001. The change year over year in operating income before non-
recurring and restructuring charges is the result of continued revenue
pressures due to the slowdown in the global economy, partially offset by
reduced expenses as a result of lower compensation costs due to the broad
based restructuring in 2001, a strong focus on discretionary costs and the
impact of the implementation of SFAS 142 on amortization expense.
Including non-recurring and restructuring charges, operating income
increased $41.7 million, to $54.7 million in 2002 from $13.0 million in
2001. See Note 6 to Notes to Consolidated Financial Statements for a more
detailed discussion of these non-recurring and restructuring items.
INTEREST EXPENSE
Interest expense, net of interest income, decreased $3.2 million, or
15.8%, to $17.0 million in 2002 from $20.2 million in 2001. The decrease in
interest expense is the result of lower average revolver borrowings at
declining interest rates partially offset by the impact of the
strengthening euro on the reported US dollar value of the interest expense
on the Euro Notes.
PROVISION FOR INCOME TAXES
The provision for income taxes was $11.0 million in 2002, as compared
to $8.0 million in 2001. The increase in provision is primarily due to
increased earnings before tax in 2002 compared to 2001.
On an operational basis, excluding non-recurring and restructuring
charges, we achieved a 34% effective tax in 2002 compared to 42% in 2001.
The decrease in our effective tax rate was due to the impact of tax
planning undertaken in 2002, particularly planning to reduce the impact of
losses in jurisdictions where we cannot recognize tax benefits and planning
to reduce the incidence of double taxation of earnings and other tax
inefficiencies. The reduction in the effective tax rate also reflects the
benefits of the reduction in non deductible goodwill amortization under
SFAS 142 and a greater proportion of earnings in countries with lower
corporate tax rates in 2002 compared to 2001. The effective tax rate of 34%
excludes a one-time tax benefit of $1.8 million related to certain costs
incurred in restructuring actions taken in 2001. These costs were not
originally thought to be deductible for tax purposes; however, as a result
of actions undertaken in 2002, these costs are now deductible. Including
this one-time item, we achieved a 29% effective tax rate. See Note 11 to
Notes to Consolidated Financial Statements for further discussion of our
effective tax rate.
NET INCOME/(LOSS)
Net income before the extraordinary item and cumulative change in
accounting principle, increased $41.3 million, to $25.9 million in 2002, as
compared to a net loss of $15.4 million in 2001. Including the
extraordinary gain on the acquisition of minority interest (a net benefit
of $341,000 and the cumulative change in accounting principle (a net
benefit of $846,000) related to the adoption of SFAS 142, our net income
for 2002 was $27.1 million as compared to a net loss of $15.4 million in
2001.
SEGMENT OPERATING RESULTS
We manage our business along a combination of geographic and
functional lines. Operations are reported as four business segments: the
three geographic regions of Owner and Occupier Services ("OOS"), (i)
Americas, (ii) Europe and (iii) Asia Pacific, which offer our full range of
Corporate Solutions, Investor Services, and Capital Markets Services, and
(iv) Investment Management, which offers investment management services on
a global basis. The OOS business consists primarily of tenant
representation and agency leasing, capital markets and valuation services
(collectively "implementation services") and property management, corporate
property services, project and development management services
(collectively, "management services"). The Investment Management segment
provides real estate investment management services to institutional
investors, corporations, and high-net-worth individuals.
We have not allocated non-recurring and restructuring charges to the
business segments for segment reporting purposes and therefore these costs
are not included in the discussions below.
OWNER AND OCCUPIER SERVICES
AMERICAS
Revenue for the Americas region decreased $37.0 million, or 11.3%, to
$290.9 million in 2002, from $327.9 million in 2001. The pressure on
revenues continues a trend that began in the middle of 2001. The most
significant revenue declines during 2002, as compared to last year, were
experienced in our transaction business as clients continued to delay or
defer decision making. We also found that our revenue per transaction
reduced as clients maintained operational flexibility by entering into
leases that were either for less space, or shorter time frames, both
factors that impact the quantum of our fees. The Project and Development,
Tenant Representation and the leasing part of our Leasing and Management
units were most severely impacted. We also saw declines in our South
American business as political uncertainty and economic difficulty
adversely impacted revenues.
Operating expenses for the Americas region decreased $42.7 million, or
14.2%, to $258.9 million in 2002 from $301.6 million in 2001. The reduction
in expense year over year is due to lower base compensation expense as a
result of the restructuring actions taken in 2001, partially offset by
increased incentive compensation, reflecting the improved financial and
operating performance. There was also a continued focus on controlling
discretionary costs. Areas which have seen significant cost savings in 2002
were travel and entertainment, information technology, which benefitted
from the renegotiation of our contract with a third-party support provider,
and bad debt expense, where 2001 included a write-off of $3.9 million
related to unrecoverable receivables from technology related clients. The
benefit resulting from adopting SFAS 142 was amortization savings of $4.5
million in 2002.
EUROPE
Revenue for the Europe region decreased $30.4 million, or 8.8%, to
$314.4 million in 2002 from $344.8 million in 2001. Reported US dollar
revenues were positively impacted by approximately $16 million, as compared
to the same periods last year, primarily due to the strengthening of the
euro and pound sterling against the US dollar. Excluding the impact of
movements in foreign currency exchange rates, revenue for the Europe region
decreased 13.5% when compared to the same period last year. The most
significant declines in 2002, as compared to the prior year period,
occurred in the leasing business in England, together with overall declines
in our business in Germany and France, reflecting the difficult economic
conditions they were experiencing.
Operating expenses for the region decreased $5.6 million, or 1.9%, to
$296.7 million in 2002 from $302.3 million in 2001. Reported US dollar
operating expenses were increased approximately $15 million, as compared to
last year, primarily due to the strengthening of the euro and pound
sterling against the US dollar. Excluding the impact of movements in
foreign currency exchange rates, expenses declined 7.0% when compared to
last year. The reduction in expense year over year is due to lower base
compensation expense as a result of the restructuring actions taken in
2001, together with reduced incentive compensation, reflecting the decline
in financial performance. Also contributing to the reduction in expenses
year over year is a continued focus on controlling discretionary costs. The
benefit resulting from adopting SFAS 142 was amortization savings of $1.6
million in 2002.
ASIA PACIFIC
Revenue for the Asia Pacific region decreased $3.0 million, or 2.3%,
to $126.6 million in 2002 from $129.6 million in 2001. Reported US dollar
revenues were positively impacted by approximately $3 million, as compared
to last year, primarily due to the strengthening of the Australian dollar
against the US dollar. Excluding the impact of movements in foreign
currency exchange rates, revenue for the Asia Pacific region declined 4.7%,
when compared to last year. The most significant declines in 2002, as
compared to the prior year, occurred in Singapore, Hong Kong and Australia.
Partially offsetting the decline of revenues in these markets are the
markets of North Asia, which continue to show strong revenue growth year
over year, primarily in the Investment Sales, Property Management and
Tenant Representation units.
Operating expenses for the region decreased $3.1 million, or 2.4%, to
$126.8 million in 2002 from $129.9 million in 2001. Reported US dollar
expenses were adversely impacted by approximately $2 million, as compared
to last year, primarily due to the strengthening of the Australian dollar
against the US dollar. Excluding the impact of movements in foreign
currency exchange rates, operating expenses for the Asia Pacific region
declined 3.9%, when compared to last year. A continued focus on
discretionary costs helped in the expense reduction. Also, contributing to
the reduction in expense was the benefit resulting from adopting SFAS 142,
an amortization savings of $2.0 million in 2002.
INVESTMENT MANAGEMENT
Investment Management revenue increased $4.7 million, or 4.5%, to
$109.0 million in 2002 from $104.3 million in 2001. Reported US dollar
revenues were positively impacted by approximately $3 million, as compared
to last year, primarily due to the strengthening of the euro and pound
sterling against the US dollar. Excluding the impact of movements in
foreign currency exchange rates, revenue for Investment Management
increased 2.0% when compared to last year. The most significant increase in
2002 occurred in Advisory Fees, with an increase of $7.6 million, or 8.1%,
over 2001. The increase in Advisory Fees in 2002 was in part due to the
recognition of $8.7 million related to the performance of an investment
portfolio in which we have a co-investment. Included in revenues in 2001
were incentive fees and equity earnings of $14.4 million generated from the
disposition of a hotel investment. Expansion into the Asia Pacific region
positively impacted revenue with the Asia Recovery Fund in operation for
the full year as compared to seven months in 2001.
Operating expenses increased $6.4 million, or 7.7%, to $89.0 million
in 2002 from $82.6 million in 2001. Reported US dollar expenses were
adversely impacted by approximately $2 million, as compared to last year,
primarily due to the strengthening of the euro and pound sterling against
the US dollar. Excluding the impact of movements in foreign currency
exchange rates, operating expenses for Investment Management increased
5.2%, when compared to last year. Base compensation and benefit expense
increased in 2002 as staffing increased to support new fund activity, and
there was also an increase in incentive compensation reflecting both
improved financial and operating performance. Partially offsetting this
increase was a reduction in other operating expense as result of focusing
on discretionary cost control. Also, a $2.0 million reduction in bad debt
reserves related to the partial reversal of a reserve, originally
established in 1995 for a receivable due from Diverse Real Estate Holdings
Limited Partnership ("Diverse"), favorably impacted operating expenses for
the year as the underlying collateral was significantly enhanced in 2002.
As discussed in Note 14 to Notes to Consolidated Financial Statements, the
Chairman of our Board of Directors holds a 19.8% limited partnership
interest in Diverse. The benefit resulting from adopting SFAS 142 was an
amortization savings of $1.5 million in 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
CONSOLIDATED REVIEW
REVENUE
Total revenue, after elimination of intersegment revenue, was $905.4
million in 2001, a reduction of $37.1 million, or 3.9%, from reported 2000
revenue of $942.5 million. The decrease in revenue in 2001 is the result
of the slowdown in the global economy, which has significantly reduced the
pace of transaction activity. In addition, reported US dollar revenues
have been adversely impacted by $20 million in 2001 as compared to 2000
because of the relative strength of the US dollar against the key
currencies in which we operate, primarily the euro, pound sterling and the
Australian dollar. The negative impact of the global economic slowdown and
the strength of the US dollar has been partially mitigated by growth in our
management services revenue.
OPERATING EXPENSES
Total operating expenses in 2001, after elimination of intersegment
expenses and excluding the effect of non-recurring charges, decreased by
$35.0 million to $815.3 million. This is 4.1% below 2000 operating
expenses of $850.3 million after excluding merger related stock
compensation. The decrease in operating expenses from the prior year is
primarily the result of reduction in incentive compensation of $51.8
million (including a $3.5 million reduction in the allocated departments of
Corporate Overhead, Global Client Services and Strategic Consulting) partly
offset by increases in headcount and associated expenses, primarily in the
first nine months of the year, in the regions of America and Europe to
service new business. The strengthening US dollar against the key
currencies in which we operate (the euro, pound sterling and the Australian
dollar) reduced the US dollar reported operating expenses by $20 million
over last year.
The non-recurring charges in 2001 of $77.2 million include the write-
down of investments in e-commerce, reserves against potential liabilities
associated with the bankruptcy of two insurance providers and severance and
asset impairment costs associated with the global restructuring program,
including the exiting of certain non-strategic business lines and the
realignment of our Asia Pacific business along client and business lines.
These charges are described more detail in Note 6 to the financial
statements. Non-recurring charges for 2000 consist of merger related non-
cash compensation expense of $85.8 million associated with the issuance of
shares to former employees of JLW.
OPERATING INCOME
In 2001, operating income before non-recurring charges was $90.2
million, as compared to $92.2 million in 2000. Operating income, excluding
non-recurring charges, was 10.0% of revenue for 2001, as compared to 9.8%
of revenue in 2000. The small change year over year in operating income
before non-recurring charges is the result of the reduced revenue due to
the slowdown in the global economy, offset by reduced expenses as a result
of lower incentive compensation and a focus on discretionary costs.
The delivery of a constant operating income before non-recurring
charges, despite the 3.9% reduction in revenues was driven by our flexible
business model. Our bonus driven incentive compensation structure aligns
our compensation with the achievement of client objectives and with the
achievement of both non-financial and financial objectives at the operating
unit, segment and firm levels. This alignment with financial objectives
has resulted in the significant decline in incentive compensation expense
for the year.
Including the effects of the non-recurring charges, operating income
in 2001 was $13.0 million, as compared to $6.4 million in 2000.
INTEREST EXPENSE
Interest expense, net of interest income, decreased by $7.0 million,
to $20.2 million in 2001, from $27.2 million in 2000. This decrease in
interest expense is the result of lower average borrowings and lower
overall interest rates on revolver borrowings, partially offset by the
higher 9% fixed interest rate on the euro 165 million notes, issued
July 26, 2000, and the increase in amortization of debt issuance costs.
Our average debt level for 2001 was $269.4 million, with an effective
interest rate of 7.48%, as compared to $325.6 million, with an effective
interest rate of 8.42% for 2000.
PROVISION FOR INCOME TAXES
The provision for income taxes was $8.0 million in 2001, as compared
to a provision of $22.1 million in 2000. The $14.1 million reduction in
provision is due to the combination of: 1) $18.8 million increased tax
benefit in 2001 related to the non-recurring charges in 2001 being largely
tax deductible, compared to the non-recurring charges in 2000 being largely
non-deductible, 2) $1.9 million increase in tax provision related to
increased earnings before tax in 2001 compared to 2000, and 3) $2.8 million
due to the 4% increase in effective tax rates on an operational basis, to
42% in 2001 from 38% in 2000.
On an operational basis (excluding non-recurring charges), we achieved
a 38% effective tax rate in 2000. As a result of a shift in income mix
such that a greater proportion of our income was earned in jurisdictions
with high tax rates, our effective tax rate on operational activities
increased to 42% in 2001. As mentioned above, non-recurring charges were
separately tax-effected based on the projected tax deductibility of these
items.
NET INCOME/LOSS
Our 2001 net earnings, excluding non-recurring charges and the
cumulative effect of change in accounting principle in 2000, were unchanged
from 2000 at $40.5 million.
Including the effect of non-recurring charges of $77.2 million, our
net loss for 2001 was $15.4 million. Including the effects of non-
recurring charges of $85.8 million and a net charge of $14.2 million for
the cumulative effect of a change in accounting principle related to the
adoption of SAB 101, our net loss for 2000 was $57.1 million.
BUSINESS SEGMENTS
OWNER AND OCCUPIER SERVICES
AMERICAS
Revenue for the Americas region decreased $12.7 million, or 3.7%, to
$327.9 million in 2001 from $340.6 million in 2000. The two main sources
of revenue are implementation services and management services.
Implementation services revenue, which is largely transaction based,
declined in 2001 by $28.7 million, or 15.3%, reflecting the overall
slowdown in the economy. The key business units contributing to the
decline were the Capital Markets unit, where the volume of completed
capital transactions dropped significantly in 2001, and the Tenant
Representation unit, where the economic recession and uncertainty post the
tragic events of September 11 caused our corporate clients to postpone or
cancel a number of transactions, particularly in the fourth quarter.
Management services revenue, increased 10.7%, to $165.9 million, largely
driven by the Project and Development Management Services unit.
Operating expenses decreased by $12.6 million, or 4.0%, to $301.6
million in 2001 as a result of cost containment initiatives and reduced
incentive compensation, partially offset by increased headcount and
associated expenses, primarily in the first half of the year, to service
new business. Incentive compensation, was $21.2 million below 2000 levels.
Included in the 2001 operating expenses is a $3.9 million charge for
unrecoverable receivables from technology related clients.
EUROPE
Revenue for our Europe region totaled $344.8 million in 2001, as
compared to $358.3 million in 2000, a decline of 3.8%. The European
revenues were adversely impacted by approximately $14 million due to a
weakening of European currencies, primarily the euro and pound sterling,
against the US dollar during 2001 as compared to 2000. In addition,
included in the 2000 revenue are two large capital transactions that
provided approximately $12 million in revenue. As the year progressed, it
became clear that after a strong start to the year, the economic slowdown
began to impact our Europe business and particularly continental Europe.
Overall, implementation services revenue was down $23.6 million, or 8.5%
from 2000. The largest contributors to this decline were our businesses in
England (as a result of the large capital transactions in 2000 noted
above), France and Germany. Management services revenue increased $8.8
million, or 11.0%, led by the continuing growth of our 55% owned joint
venture with Skandia Fastighet AB.
Operating expenses for the region were $302.3 million for 2001, as
compared to $316.8 million in 2000, a decline of $14.5 million. The
weakening of European currencies, primarily the euro and pound sterling,
against the US dollar in 2001 has reduced US dollar reported expenses by
approximately $14 million, as compared to 2000. Operating expenses in 2001
included reduced incentive compensation (by $14.0 million compared to
2000), offset by increased headcount and associated expenses, to service
new business.
ASIA PACIFIC
The difficult underlying economic conditions persisted in this region,
impacting even the previously resilient Singapore economy. Revenue for the
Asia Pacific region totaled $129.6 million in 2001, as compared to $135.6
million in 2000, a decline of 4.4%. The reported revenues were negatively
impacted in 2001 by $6 million, as compared to 2000, due to the weakness of
the Australian dollar against the US dollar. Therefore, in local currency
terms, revenues were flat year on year. The revenues reflect a lower
volume of transaction activity driven by the economic weakness in the
region, particularly in Hong Kong, Singapore and Australia. Countering the
effects of the decline in transactional based implementation services
revenue, the management services revenue increased $6.0 million, or 14.3%.
In addition, our Taiwan acquisition in early 2001 contributed $2.3 million
in revenues.
Operating expenses for the region declined by $5.5 million, or 4.1%,
to $129.9 million in 2001, as compared to $135.4 million in 2000. The
weakness of the Australian dollar reduced reported operating expenses in
2001 by $6 million, as compared to 2000. Incentive compensation was $5.2
million below 2000 levels.
INVESTMENT MANAGEMENT
Investment Management revenue decreased $5.7 million, or 5.2%, to
$104.3 million in 2001, from $110.0 million in 2000. Revenues in both
years included significant incentive fees. Included in 2000 were incentive
fees of $10.3 million related to the partial liquidation of our French
investment fund (recorded as equity earnings due to the incentive fee
structure) and $7.5 million related to our resignation from a client
relationship. Revenue for 2001 includes incentive fees and equity earnings
of $14.4 million generated from the disposition of a hotel investment early
in the third quarter.
Operating expenses decreased $3.3 million, or 3.8%, to $82.6 million
in 2001, as compared to $85.9 million in 2000. The reduction in expenses
is primarily the result of reduced incentive compensation of $7.9 million.
CONSOLIDATED CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
During 2002, cash flows provided by operating activities totaled $68.4
million compared to $54.1 million in 2001. The cash flows from operating
earnings can be further divided into cash generated from operations of
$83.4 million (compared to $73.9 million in 2001) and cash used in balance
sheet movements, primarily working capital, of $15.0 million (compared to
$19.8 million in 2001). The increase in cash flows generated from
operations reflects the improved business performance in 2002, together
with the fact that 2001 included significant non-recurring and
restructuring charges associated with the realignment of our business. The
reduction in cash flows from changes in working capital of $4.8 million can
be attributed to a slowdown in the improvement in accounts receivable
collection as we 1) approach the optimal level of accounts receivable and
2) see difficult economic conditions resulting in clients seeking to extend
payment periods. Offsetting this was a lower level of incentive
compensation accrued at December 31, 2001 and paid in 2002, as compared to
the amounts accrued at December 31, 2000 and paid in 2001.
During 2001, cash flows provided by operating activities totaled $54.1
million compared to cash provided during 2000 of $140.3 million. The cash
flows provided by operating earnings can be further divided into cash
generated from operations of $73.9 million (compared to $100.9 million in
2000) and cash used in balance sheet movements (primarily working capital)
of $19.8 million (compared to cash generated of $39.4 million in 2000).
The decline in cash provided from operations is largely as a result of a
significant portion of the 2001 non-recurring charges being cash related
expenses, as opposed to the merger-related non-recurring stock compensation
expense and the cumulative effect of change in accounting principle in 2000
being non-cash expenses. The decline in cash flows from changes in working
capital of $59.2 million is because we accrued higher incentive
compensation at December of 2000, which was then paid in 2001, as compared
to the amounts we accrued at December of 1999 and paid in 2000. In
addition, we had significantly lower incentive compensation accruals at
December of 2001 as compared to December of 2000 which also contributes to
the cash used in working capital. Also contributing to the decline in cash
flows year over year from changes in working capital was the U.S. Federal
tax refund of $13.5 million that we collected in 2000. Partially
offsetting the decline in cash flows from changes in working capital is the
increase in cash provided by receivables of $9.7 million, which reflects
our continued focus our working capital management.
CASH FLOWS USED IN INVESTING ACTIVITIES
We used $26.3 million in investing activities in 2002, which was a
reduction in cash used of $6.2 million from the $32.5 million used in 2001.
This reduction is a combination of reduced investment in fixed assets of
$19.0 million, partially offset by increasing co-investments, where we had
an outflow of $9.2 million to our investments in real estate ventures in
2002 versus a net inflow of $8.7 million in 2001.
We used $32.5 million in investing activities in 2001, which was a
reduction in cash used of $34.1 million from the $66.6 million used in
2000. This reduction was the combination of reduced investment in fixed
assets of $10.0 million, and $7.9 million in other investments (primarily
e-commerce). In addition, there was a net inflow of $8.7 million from our
investments in real estate ventures in 2001 versus a net outflow of $7.4
million in 2000.
CASH FLOWS USED IN FINANCING ACTIVITIES
In 2002, $38.8 million was used in financing activities, as debt was
paid-down and we repurchased shares of our common stock, which are now held
by a subsidiary. In 2001, $30.0 million was used in financing activities
as debt was paid-down and we repurchased and cancelled shares of our common
stock.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations, acquisitions and co-
investment activities with internally generated funds, our common stock and
borrowings under our credit facilities. During the first half of 2000, our
unsecured credit agreement totaled $425 million, which consisted of a $250
million revolving facility scheduled to mature in October 2002 and a $175
million term facility that was scheduled to mature on October 15, 2000. On
July 26, 2000, we closed our offering of the Euro Notes, which mature on
June 15, 2007, receiving net proceeds of $148.6 million, which were used to
pay-down the term facility. On August 29, 2000, the remaining borrowings
under the term facility were fully repaid using proceeds from the revolving
credit facility, and the term facility was terminated. Beginning June 15,
2004, the Euro Notes can be redeemed, at our option, at the following
redemption prices: during the twelve-month period commencing June 15, 2004
at 104.50% of principal, during the twelve-month period commencing June 15,
2005 at 102.25% of principal and commencing June 15, 2006 and thereafter at
100.00% of principal.
On September 21, 2001, we increased our unsecured credit agreement
from $250 million to $275 million, reduced the number of participating
banks to eleven from fourteen and extended the maturity date from the
original due date of October 2002 to September 2004.
As of December 31, 2002, we have a $275 million revolving credit
facility for working capital needs, investments and acquisitions. We also
have outstanding the Euro Notes of euro 165 million and, under the terms of
the revolving credit facility, the authorization to borrow up to $50
million under local facilities. As of December 31, 2002, there was $26.1
million outstanding under the revolving credit facility, euro 165 million
($173.1 million) of borrowings under the Euro Notes and short-term
borrowings of $15.9 million. We would expect borrowing to increase over
the first six months as we pay incentive compensation and associated
payroll taxes before reducing over the balance of the year.
Jones Lang LaSalle and certain of our subsidiaries guarantee the
revolving credit facility and the Euro Notes (the "Facilities"). In
addition, we guarantee the local overdraft facilities of certain
subsidiaries. Third-party lenders request these guarantees to ensure
repayment by the Company in the event that one of our subsidiaries fails to
repay its borrowing on an overdraft facility. The guarantees typically
have one-year or two-year maturities. We will apply FIN 45 to recognize
and measure the provisions of future guarantees. FIN 45 addresses the
recognition and disclosure requirements of guarantor obligations under
guarantees. The guarantees of the revolving credit facility, Euro Notes and
local overdraft facilities do not meet the recognition provisions, but do
meet the disclosure requirements of FIN 45. We have local overdraft
facilities totalling $33.8 million, of which $15.4 million was outstanding
as of December 31, 2002. We have provided guarantees of $22.3 million
related to the local overdraft facilities, as well as guarantees related to
the $275 million revolving credit facility and the euro 165 million Euro
Notes, which in total represent the maximum future payments that Jones Lang
LaSalle could be required to make under the guarantees provided for
subsidiaries' third-party debt.
With respect to the revolving credit facility, we must maintain a
certain level of consolidated net worth and a ratio of funded debt to
EBITDA. We must also meet a minimum interest coverage ratio and a minimum
liquidity ratio. As part of the global restructuring initiative in 2001,
we obtained the approval of our bank group to vary certain of these ratios
to reflect the non-recurring and restructuring charges. We were in
compliance with all covenants at December 2002. Additionally, we are
restricted from, among other things, incurring certain levels of
indebtedness to lenders outside of the Facilities and disposing of a
significant portion of our assets. Lender approval is required for certain
levels of co-investment. The revolving credit facility bears variable rates
of interest based on market rates. We are authorized to use interest rate
swaps to convert a portion of the floating rate indebtedness to a fixed
rate, however, none were used during 2002 or 2001 and none were outstanding
as of December 31, 2002. The effective interest rate on the Facilities was
7.3% in 2002 versus 7.48% in 2001.
We believe that the revolving credit facility, together with the Euro
Notes, local borrowing facilities and cash flow generated from operations
will provide adequate liquidity and financial flexibility to meet our needs
to fund working capital, capital expenditures and co-investment activity.
We expect to continue to pursue co-investment opportunities with our
investment management clients in the Americas, Europe and Asia Pacific.
Co-investment remains very important to the continued growth of Investment
Management, which would likely be negatively impacted if a substantial
decrease in co-investment activity were to occur. As of December 31, 2002,
we had total investments and loans of $75.0 million in 19 separate property
or fund co-investments, with additional capital commitments of $130.3
million for future fundings of co-investments. The net co-investment
funding for 2003 is anticipated to be approximately $15 million (planned
co-investment less return of capital from liquidated co-investments). With
respect to certain co-investment indebtedness, we also had repayment
guarantees outstanding at December 31, 2002 of $4.7 million. The $130.3
million capital commitment is a commitment to LaSalle Investment Limited
Partnership, referred to as LaSalle Investment Company ("LIC"). We expect
that LIC will draw down on our commitment over the next five to seven years
as it enters into new commitments. LIC is a series of four parallel
limited partnerships and is intended to be our co-investment vehicle for
substantially all new co-investments. We have an effective 47.85%
ownership interest in two of the four LIC entities. Primarily
institutional investors, including a significant shareholder in Jones Lang
LaSalle, hold the remaining 52.15% interest in LIC. Our investment in LIC
is accounted for under the equity method of accounting in the accompanying
Consolidated Financial Statements. In addition, our Chairman and another
Director of Jones Lang LaSalle are investors in LIC on equivalent terms to
other investors. As discussed more fully in Note 8 to Notes to
Consolidated Financial Statements, at December 31, 2002, LIC has unfunded
capital commitments of $55.2 million for future fundings of co-investments.
LIC currently has no external debt, but may enter into a revolving credit
facility for its working capital purposes.
On October 30, 2002 we announced that our Board of Directors had
approved a share repurchase program. Under the program, we may repurchase
up to one million shares in the open market and in privately negotiated
transactions from time to time, depending upon market prices and other
conditions. In the fourth quarter of 2002 we repurchased 300,000 shares at
an average price of $15.56 per share. These shares are held by a subsidiary
of Jones Lang LaSalle.
The 2002 share repurchase program replaced a program that was in place
in 2001 authorizing purchases of up to $10.0 million. On March 8, 2001, we
repurchased and cancelled 473,962 shares of our own common stock at a price
of $14.65 per share, totaling $6.9 million. There were no further purchases
in 2001.
Capital expenditures for 2002 were $20.4 million, down $22.2 million
from 2001, reflecting our continued focus on limiting discretionary
spending. Capital expenditures are anticipated to be $25 million for 2003,
primarily for ongoing improvements to computer hardware and information
systems.
We have obligations and commitments to make future payments under
contracts in the normal course of business, for example:
.. Future minimum lease payments, as follows, due in each of the next
five years ended December 31 and thereafter ($ in thousands):
Operating Capital
Leases Leases
--------- --------
2003 . . . . . . . . $ 45,620 $ 615
2004 . . . . . . . . 42,027 393
2005 . . . . . . . . 32,080 357
2006 . . . . . . . . 26,858 204
2007 . . . . . . . . 21,724 76
Thereafter . . . . . 19,255 60
-------- --------
$187,564 1,705
======== ========
As of December 31, 2002, we have reserves related to excess lease
space of $3.9 million, which were established as part of our
restructuring in 2001 and 2002. The total of minimum rentals to be
received in the future under non-cancelable operating subleases as of
December 31, 2002 was $9.8 million.
.. Interest and principal payments on outstanding borrowings against
our $275 million revolving credit facility fluctuate based on our
level of borrowing needs. There is no set repayment schedule with
respect to the revolving credit facility, however this facility
expires in September 2004. The fixed 9% Euro Notes have an
outstanding principle balance of euro 165 million ($173.1 million as
of December 31, 2002), and are due in 2007. Interest payments are
due on June 15th and December 15th of each year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding market risk is included in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
under the caption "Market and Other Risk Factors" and is incorporated by
reference herein.
DISCLOSURE OF LIMITATIONS
As the information presented above includes only those exposures that
exist as of December 31, 2002, it does not consider those exposures or
positions which could arise after that date. The information represented
herein has limited predictive value. As a result, the ultimate realized
gain or loss with respect to interest rate and foreign currency
fluctuations will depend on the exposures that arise during the period, the
hedging strategies at the time and interest and foreign currency rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
JONES LANG LASALLE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
Management's Statement of Responsibility for
Financial Information . . . . . . . . . . . . . . . . . . . . 51
Report of KPMG LLP, Independent Auditors' Report. . . . . . . . 52
Consolidated Balance Sheets as of
December 31, 2002 and 2001. . . . . . . . . . . . . . . . . . 53
Consolidated Statements of Earnings
For the Years Ended December 31, 2002, 2001 and 2000. . . . . 55
Consolidated Statements of Stockholders'
Equity For the Years Ended December 31,
2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . 57
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000. . . . . 61
Notes to Consolidated Financial Statements. . . . . . . . . . . 63
Quarterly Results of Operations (Unaudited) . . . . . . . . . . 119
SCHEDULES SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS:
II - Valuation and Qualifying Accounts. . . . . . . . . . . . . 123
All other schedules have been omitted since the required information
is presented in the financial statements and related notes or is not
applicable.
MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL INFORMATION
The management of Jones Lang LaSalle Incorporated and its subsidiaries
(Jones Lang LaSalle) has the responsibility for preparing the accompanying
consolidated financial statements and for their integrity and objectivity.
The statements were prepared in accordance with accounting principles
generally accepted in the United States of America. The financial
statements include amounts that are based on management's best estimates
and judgments. Management also prepared the other information in the
December 31, 2002 Annual Report filed on Form 10-K and is responsible for
its accuracy and consistency with the financial statements.
Jones Lang LaSalle's financial statements have been audited by KPMG
LLP, independent auditors elected by the shareholders. As part of its
audit of Jones Lang LaSalle's financial statements, KPMG LLP considered
Jones Lang LaSalle's internal control structure in determining the nature,
timing and extent of audit tests to be applied. The opinion of the
independent auditors, based upon their audits of the consolidated financial
statements, is contained in this Form 10-K.
Jones Lang LaSalle has established and maintains a system of internal
controls and disclosure controls and procedures to safeguard assets against
loss or unauthorized use, to ensure the proper authorization and accounting
for all transactions and to ensure that the information required in
periodic reports is identified and reported on a timely basis. These
systems include appropriate reviews by Jones Lang LaSalle's Internal Audit
Group and management as well as written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process and updated as necessary. The Internal Audit Group is assisted by
PricewaterhouseCoopers.
The Board of Directors, through its Audit Committee, is responsible
for ensuring that both management and the independent auditors fulfill
their respective responsibilities with regard to the financial statements.
The Audit Committee, composed entirely of independent directors, meets
periodically with both management and the independent auditors to assure
that each is carrying out its responsibilities. The independent auditors
and Jones Lang LaSalle's Internal Audit Group have full and free access to
the Audit Committee and meet with it, with and without management present,
to discuss matters including auditing, financial reporting and internal
controls and disclosure controls and procedures.
Management also recognizes its responsibility for fostering a strong
ethical climate so that Jones Lang LaSalle's affairs are conducted
according to high standards of conduct. This responsibility is
characterized and reflected in Jones Lang LaSalle's Code of Business
Ethics, which is publicized throughout Jones Lang LaSalle and on its public
website. The Code of Business Ethics addresses, among other things,
avoidance of potential conflicts of interest, protecting company assets,
compliance with domestic and foreign laws, including those relating to
financial disclosure and reporting violations or possible violations.
STUART L. SCOTT CHRISTOPHER A. PEACOCK
Chairman of the President and
Board of Directors Chief Executive Officer
LAURALEE E. MARTIN NICHOLAS J. WILLMOTT
Executive Vice President Executive Vice President and
and Chief Financial Officer Global Controller
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
Jones Lang LaSalle Incorporated:
We have audited the accompanying consolidated financial statements of Jones
Lang LaSalle Incorporated and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed
in the accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial position of Jones
Lang LaSalle Incorporated and subsidiaries as of December 31, 2002 and
2001, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 15 and 17 to the financial statements, Jones Lang
LaSalle Incorporated and subsidiaries changed their method of accounting
for goodwill and intangible assets in 2002 and changed their method of
accounting for certain lease commission revenue in 2000.
/s/ KPMG LLP
Chicago, Illinois
January 31, 2003,
except as to note 19
which is as of February 13, 2003
<table>
JONES LANG LASALLE INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
($ in thousands, except share data)
<caption>
2002 2001
-------- --------
<s> <c> <c>
ASSETS
- ------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 13,654 10,446
Trade receivables, net of allowances of $4,992 and $5,887
in 2002 and 2001, respectively. . . . . . . . . . . . . . . . . . 227,579 222,590
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 4,165 3,847
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . 7,623 8,872
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 15,142 11,802
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . 27,382 16,935
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,760 11,340
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . 306,305 285,832
Property and equipment, at cost, less accumulated
depreciation of $116,214 and $102,401 in
2002 and 2001, respectively . . . . . . . . . . . . . . . . . . . . 81,652 92,503
Goodwill, with indefinite useful lives, at cost,
less accumulated amortization of $36,398 and
$35,327 in 2002 and 2001, respectively. . . . . . . . . . . . . . . 315,477 305,688
Negative goodwill, at cost, less accumulated
amortization of ($565) in 2001. . . . . . . . . . . . . . . . . . . -- (846)
Identified intangibles, with definite useful lives,
at cost, less accumulated amortization of $28,928
and $23,195 in 2002 and 2001, respectively. . . . . . . . . . . . . 18,344 23,327
Investments in and loans to real estate ventures. . . . . . . . . . . 74,994 64,528
Long-term receivables, net. . . . . . . . . . . . . . . . . . . . . . 15,248 10,427
Prepaid pension asset . . . . . . . . . . . . . . . . . . . . . . . . 9,646 14,384
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . 18,839 25,770
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . 4,343 5,407
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . 7,668 8,707
-------- --------
$852,516 835,727
======== ========
JONES LANG LASALLE INCORPORATED
CONSOLIDATED BALANCE SHEETS - CONTINUED
2002 2001
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities. . . . . . . . . . . . . . $ 92,389 104,568
Accrued compensation. . . . . . . . . . . . . . . . . . . . . . . . 139,513 144,080
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 15,863 15,497
Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . 20 23
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 21,411 23,467
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . 269,196 287,635
Long-term liabilities:
Credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . 26,077 60,621
9% Senior Euro Notes, due 2007. . . . . . . . . . . . . . . . . . . 173,068 146,768
Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . 146 6,567
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,071 18,966
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 485,558 520,557
Commitments and contingencies
Minority interest in consolidated subsidiaries. . . . . . . . . . . . -- 789
Stockholders' equity:
Common stock, $.01 par value per share, 100,000,000 shares
authorized; 30,896,333 issued and outstanding as
of December 31, 2002; 30,183,450 shares issued and outstanding
as of December 31, 2001 . . . . . . . . . . . . . . . . . . . . . 309 302
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 494,283 463,926
Deferred stock compensation . . . . . . . . . . . . . . . . . . . . (17,321) (6,038)
Retained deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (95,411) (122,521)
Stock held by subsidiary. . . . . . . . . . . . . . . . . . . . . . (4,659) --
Stock held in trust . . . . . . . . . . . . . . . . . . . . . . . . (460) (1,658)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . (9,783) (19,630)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . 366,958 314,381
-------- --------
$852,516 835,727
======== ========
<fn>
See accompanying notes to consolidated financial statements.
</table>
<table>
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ in thousands, except share data)
<caption>
2002 2001 2000
---------- ---------- ----------
<s> <c> <c> <c>
Revenue:
Fee based services. . . . . . . . . . . . . . . . . . $ 831,096 889,633 920,660
Equity in earnings from unconsolidated ventures . . . 2,581 8,560 16,693
Other income. . . . . . . . . . . . . . . . . . . . . 6,752 7,256 5,171
---------- ---------- ----------
Total revenue . . . . . . . . . . . . . . . . . 840,429 905,449 942,524
Operating expenses:
Compensation and benefits, excluding non-recurring
and restructuring charges . . . . . . . . . . . . . 530,527 545,609 581,322
Operating, administrative and other, excluding
non-recurring and restructuring charges . . . . . . 203,211 222,229 225,878
Depreciation and amortization . . . . . . . . . . . . 37,125 47,420 43,126
Non-recurring and restructuring charges:
Compensation and benefits . . . . . . . . . . . . . 11,438 40,120 85,795
Operating, administrative and other . . . . . . . . 3,433 37,112 --
---------- ---------- ----------
Total operating expenses. . . . . . . . . . . . 785,734 892,490 936,121
Operating income. . . . . . . . . . . . . . . . . . . 54,695 12,959 6,403
Interest expense, net of interest income. . . . . . . . 17,024 20,156 27,182
---------- ---------- ----------
Income (loss) before provision for income taxes and
minority interest . . . . . . . . . . . . . . . . . 37,671 (7,197) (20,779)
Net provision for income taxes. . . . . . . . . . . . . 11,037 7,986 22,053
Minority interest in earnings (losses) of subsidiaries. 711 228 (21)
---------- ---------- ----------
Net income (loss) before extraordinary item and
cumulative effect of change in accounting principle. 25,923 (15,411) (42,811)
Extraordinary gain on the acquisition of minority
interest, net of tax. . . . . . . . . . . . . . . . . 341 -- --
Cumulative effect of change in accounting principle . . 846 -- (14,249)
---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 27,110 (15,411) (57,060)
========== ========== ==========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments. . . . . . . $ 9,847 (2,218) (18,509)
---------- ---------- ----------
Comprehensive income (loss) . . . . . . . . . $ 36,957 (17,629) (75,569)
========== ========== ==========
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
2002 2001 2000
------------ ------------ ------------
Basic earnings (loss) per common share
before extraordinary item and cumulative
effect of change in accounting principle. . . . . $ 0.85 (0.51) (1.72)
Extraordinary gain on the acquisition of
minority interest, net of tax . . . . . . . . . . $ 0.01 -- --
Cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . $ 0.03 -- (0.58)
------------ ---------- ----------
Basic earnings (loss) per common share. . . . . . . $ 0.89 (0.51) (2.30)
============ ========== ==========
Basic weighted average shares outstanding . . . . . 30,486,842 30,016,122 24,851,823
============ ========== ==========
Diluted earnings (loss) per common share
before extraordinary item and cumulative effect
of change in accounting principle . . . . . . . . $ 0.81 (0.51) (1.72)
Extraordinary gain on the acquisition of
minority interest, net of tax . . . . . . . . . . $ 0.01 -- --
Cumulative effect of change in accounting principle $ 0.03 -- (0.58)
------------ ---------- ----------
Diluted earnings (loss) per common share. . . . . . $ 0.85 (0.51) (2.30)
============ ========== ==========
Diluted weighted average shares outstanding . . . . 31,854,397 30,016,122 24,851,823
============ ========== ==========
<fn>
See accompanying notes to consolidated financial statements.
</table>
<table>
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ in thousands, except share data)
<caption>
Accumu-
lated
Shares Other
Additi- Deferred Stock Held in Compre-
Common Stock tional Stock Retained Held by Trust hensive
------------------- Paid-In Compen- Earnings Subsi- and Income
Shares Amount Capital sation (Deficit) diary Other (Loss) Total
---------- ------ -------- -------- --------- -------- ------- ------- -------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balances at
December 31,
1999 . . . . . . . . .30,285,472$303 442,699 (70,106) (50,050) -- (7) 1,097 323,936
Net loss. . . . . . . -- -- -- -- (57,060) -- -- -- (57,060)
Shares issued in
connection with:
Stock option
plan . . . . . . .461,250 5 5,674 (5,679) -- -- -- -- --
Amortization of
shares issued
in connection
with stock
option plan. . . . -- -- -- 1,357 -- -- -- -- 1,357
Stock purchase
programs . . . . .255,237 2 4,379 -- -- -- -- -- 4,381
Shares held in
trust . . . . . . . -- -- -- -- -- -- (397) -- (397)
Share activity
related to JLW
merger:
Adjustment shares
subsequently
retained . . . . . (372) -- (141) -- -- -- -- -- (141)
ESOT shares
allocated. . . . . -- -- 9,900 -- -- -- 7 -- 9,907
Shares repur-
chased for
payment of taxes
on ESOT shares
allocated. . . . .(301,437) (3) (4,037) -- -- -- -- -- (4,040)
Stock compensation
adjustments . . . -- -- 2,798 (2,375) -- -- -- -- 423
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
Accumu-
lated
Shares Other
Additi- Deferred Stock Held in Compre-
Common Stock tional Stock Retained Held by Trust hensive
------------------- Paid-In Compen- Earnings Subsi- and Income
Shares Amount Capital sation (Deficit) diary Other (Loss) Total
---------- ------ -------- -------- --------- -------- ------- ------- -------
Amortization of
deferred stock
compensation. . -- -- -- 72,481 -- -- -- -- 72,481
Cumulative effect
of foreign cur-
rency transla-
tion adjustments. -- -- -- -- -- -- -- (18,509) (18,509)
---------- ---- ------- -------- -------- -------- -------- -------- -------
Balances at
December 31, 2000. .30,700,150 307 461,272 (4,322) (107,110) -- (397) (17,412) 332,338
Net loss. . . . . . -- -- -- -- (15,411) -- -- -- (15,411)
Shares issued in
connection with
stock option
plan . . . . . . . 6,001 -- 117 -- -- -- -- -- 117
Restricted stock:
Amortization of
granted shares . -- -- -- 1,178 -- -- -- -- 1,178
Reduction in
restricted
stock compensa-
tion rights
outstanding. . . -- -- (739) 739 -- -- -- -- --
Other adjust-
ments. . . . . . (461,249) (5) 5 -- -- -- -- -- --
Stock purchase
programs:
Shares granted. . 199,244 2 2,423 -- -- -- -- -- 2,425
Stock compensa-
tion programs:
Shares granted. . -- -- 5,529 (5,529) -- -- -- -- --
Amortization of
granted shares . -- -- -- 1,896 -- -- -- (1) 1,895
Shares issued . . 280,991 3 3,150 -- -- -- -- -- 3,153
Shares repur-
shased for
payment of
taxes . . . . . (67,725) (1) (893) -- -- -- -- -- (894)
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
Accumu-
lated
Shares Other
Additi- Deferred Stock Held in Compre-
Common Stock tional Stock Retained Held by Trust hensive
------------------- Paid-In Compen- Earnings Subsi- and Income
Shares Amount Capital sation (Deficit) diary Other (Loss) Total
---------- ------ -------- -------- --------- -------- ------- ------- -------
Shares repurchased
under share re-
purchase program. (473,962) (4) (6,938) -- -- -- -- -- (6,942)
Shares held in
trust . . . . . . -- -- -- -- -- -- (1,460) -- (1,460)
Distribution of
Shares held
in trust. . . . . -- -- -- -- -- -- 199 -- 199
Cumulative effect
of foreign
currency trans-
lation adjust-
ments . . . . . . -- -- -- -- -- -- -- (2,217) (2,217)
---------- ---- ------- -------- -------- -------- -------- -------- -------
Balances at
December 31, 2001. .30,183,450 $302 463,926 (6,038) (122,521) -- (1,658) (19,630) 314,381
Net income. . . . . -- -- -- -- 27,110 -- -- -- 27,110
Shares issued in
connection with
stock option
plan . . . . . . . 150,943 2 2,656 -- -- -- -- -- 2,658
Restricted stock:
Shares granted. . -- -- 9,077 (9,077) -- -- -- -- --
Amortization of
granted shares . -- -- -- 2,516 -- -- -- -- 2,516
Reduction in
restricted
stock grants
outstanding . . -- -- (808) 808 -- -- -- -- --
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
Accumu-
lated
Shares Other
Additi- Deferred Stock Held in Compre-
Common Stock tional Stock Retained Held by Trust hensive
------------------- Paid-In Compen- Earnings Subsi- and Income
Shares Amount Capital sation (Deficit) diary Other (Loss) Total
---------- ------ -------- -------- --------- -------- ------- ------- -------
Stock purchase
programs:
Shares issued . . 166,304 2 2,674 -- -- -- -- -- 2,676
Shares repur-
chased for
payment of
taxes . . . . . (6,718) -- (121) -- -- -- -- -- (121)
Stock compensation
programs:
Shares granted. . -- -- 11,416 (11,416) -- -- -- -- --
Amortization
of granted
shares. . . . . -- -- -- 5,886 -- -- -- (2) 5,884
Shares issued . . 563,443 5 9,392 -- -- -- -- -- 9,397
Shares repur-
chased for
payment of
taxes . . . . . (161,089) (2) (3,929) -- -- -- -- -- (3,931)
Distribution of
shares held in
trust . . . . . . -- -- -- -- -- -- 1,198 -- 1,198
Shares held by
subsidiary. . . . -- -- -- -- -- (4,659) -- -- (4,659)
Cumulative effect
of foreign
currency
translation
adjustments . . . -- -- -- -- -- -- -- 9,849 9,849
---------- ---- ------- -------- -------- -------- -------- -------- -------
Balances at
December 31, 2002. .30,896,333 $309 494,283 (17,321) (95,411) (4,659) (460) (9,783) 366,958
========== ==== ======= ======== ======== ======== ======== ======== =======
<fn>
See accompanying notes to consolidated financial statements.
</table>
<table>
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ in thousands)
<caption>
2002 2001 2000
-------- -------- --------
<s> <c> <c> <c>
Cash flows from operating activities:
Cash flows from earnings:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 27,110 (15,411) (57,060)
Reconciliation of net income (loss) to net cash provided by
earnings:
Cumulative effect of change in accounting principle . . . . (846) -- 14,249
Minority interest . . . . . . . . . . . . . . . . . . . . . 711 228 (21)
Depreciation and amortization . . . . . . . . . . . . . . . 37,125 47,420 43,126
Equity in earnings and gain on sale from uncon-
solidated ventures. . . . . . . . . . . . . . . . . . . . (2,581) (8,560) (16,693)
Operating distributions from real estate ventures . . . . . 4,981 10,654 18,126
Provision for loss on receivables and other assets. . . . . 3,529 30,318 5,464
Stock compensation expense. . . . . . . . . . . . . . . . . 139 36 85,795
Amortization of deferred compensation . . . . . . . . . . . 11,931 7,990 6,474
Amortization of debt issuance costs . . . . . . . . . . . . 1,303 1,224 1,444
-------- -------- --------
Net cash provided by earnings . . . . . . . . . . . . 83,402 73,899 100,904
Cash flows from changes in working capital:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . (9,142) 19,184 9,548
Prepaid expenses and other assets . . . . . . . . . . . . . 4,196 (3,098) (7,305)
Deferred tax assets and income tax refund receivable. . . . (9,467) (8,385) 7,991
Accounts payable, accrued liabilities and accrued
compensation. . . . . . . . . . . . . . . . . . . . . . . (620) (27,497) 29,202
-------- -------- --------
Net cash flows from changes in working capital. . . . (15,033) (19,796) 39,436
-------- -------- --------
Net cash provided by operating activities . . . . . . 68,369 54,103 140,340
Cash flows used in investing activities:
Net capital additions--property and equipment . . . . . . . (16,790) (35,792) (45,804)
Other acquisitions and investments, net of cash acquired
and transaction costs . . . . . . . . . . . . . . . . . . (287) (5,413) (13,333)
Investments in real estate ventures:
Capital contributions and advances to real estate ventures (30,010) (16,367) (15,214)
Distributions, repayments of advances and sale of
investments . . . . . . . . . . . . . . . . . . . . . . 20,747 25,023 7,761
-------- -------- --------
Net cash used in investing activities . . . . . . . . (26,340) (32,549) (66,590)
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
2002 2001 2000
-------- -------- --------
Cash flows used in financing activities:
Proceeds from borrowings under credit facilities. . . . . . 414,223 340,635 262,581
Repayments of borrowings under credit facilities. . . . . . (448,461) (361,723) (490,566)
Proceeds from issuance of bonds, net of financing costs . . -- -- 148,596
Shares repurchased for payment of taxes on stock awards . . (4,052) (4,118) (816)
Shares repurchased under share repurchase program . . . . . (4,659) (6,942) --
Common stock issued under stock option plan and stock
purchase programs . . . . . . . . . . . . . . . . . . . . 4,128 2,197 1,990
-------- -------- --------
Net cash used in financing activities . . . . . . . . (38,821) (29,951) (78,215)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents. . . . . 3,208 (8,397) (4,465)
Cash and cash equivalents, January 1. . . . . . . . . . . . . 10,446 18,843 23,308
-------- -------- --------
Cash and cash equivalents, December 31. . . . . . . . . . . . $ 13,654 10,446 18,843
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,705 21,140 28,548
Taxes, net of refunds . . . . . . . . . . . . . . . . . . . 14,144 23,647 5,620
<fn>
See accompanying notes to consolidated financial statements.
</table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except where otherwise noted)
(1) ORGANIZATION
Jones Lang LaSalle Incorporated ("Jones Lang LaSalle" which may be
referred to as we, us, our or the Company), was incorporated in 1997, and
its operations presently include the businesses previously known as LaSalle
Partners (founded in 1968) and Jones Lang Wootton (founded in 1873). We
are a leading provider of integrated real estate services and solutions to
real estate owners, occupiers and investors around the world. We serve our
client's real estate needs locally, regionally and globally from offices in
over 100 markets in 34 countries on five continents, with approximately
16,900 employees including approximately 9,800 directly reimbursable
property maintenance employees. Our breadth of services include space
acquisition and disposition, facilities and property management, project
and development services, leasing, buying and selling properties,
consulting and capital markets expertise. We also provide investment
management on a global basis for both public and private assets through
LaSalle Investment Management, our investment management business. Our
services are enhanced by our strong research capabilities, our technology
platforms and our strategic solutions approach with our clients. The
ability to provide this network of services around the globe was solidified
effective March 11, 1999 with the merger of the business of the Jones Lang
Wootton companies ("JLW") with those of LaSalle Partners Incorporated
("LaSalle Partners"). In connection with this merger, the name of the
company was changed from LaSalle Partners Incorporated to Jones Lang
LaSalle Incorporated (see Note 3).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Our financial statements include the accounts of Jones Lang LaSalle
and its majority-owned-and-controlled subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. Investments in unconsolidated affiliates over which we
exercise significant influence, but not control, are accounted for by the
equity method. Under this method we maintain an investment account, which
is increased by contributions made and our share of net income of the
unconsolidated affiliates, and decreased by distributions received and our
share of net losses of the unconsolidated affiliates. Our share of each
unconsolidated affiliate's net income or loss, including gains and losses
from capital transactions, is reflected in our statement of earnings as
"equity in earnings from unconsolidated ventures." Investments in
unconsolidated affiliates over which we are not able to exercise
significant influence are accounted for under the cost method. Under the
cost method our investment account is increased by contributions made and
decreased by distributions representing return of capital. Distributions of
income are reflected in our statement of earnings as in "equity in earnings
from unconsolidated ventures."
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
REVENUE RECOGNITION
We recognize advisory and management fees in the period in which we
perform the service. Transaction commissions are recognized as income when
we provide the service unless future contingencies exist. If future
contingencies exist, we defer recognition of this revenue until the
respective contingencies are satisfied. Development management fees are
generally recognized as billed, which we believe approximates the
percentage of completion method of accounting. Incentive fees are
generally tied to some form of contractual milestone and are recorded in
accordance with the specific terms of the underlying compensation
agreement. The Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements,"
provides guidance on the application of generally accepted accounting
principles to selected revenue recognition issues. We believe that our
revenue recognition policy is appropriate and in accordance with accounting
principles generally accepted in the United States of America and SAB No.
101. We implemented SAB No. 101 in 2000 as discussed more fully in Note 17.
Pursuant to contractual arrangements, accounts receivable includes unbilled
amounts of $56.9 million and $50.4 million at December 31, 2002 and 2001,
respectively.
In certain of our businesses, primarily those involving management
services, we are reimbursed by our clients for expenses that are incurred
on their behalf. The treatment of reimbursable expenses for financial
reporting purposes is based upon the fee structure of the underlying
contracts. A contract that provides a fixed fee/billing, fully inclusive
of all personnel or other recoverable expenses that we incur, and not
separately scheduled as such, is reported on a gross basis. This means that
our reported revenues include the full billing to our client and our
reported expenses include all costs associated with the client. When the
fee structure is comprised of at least two distinct elements: the fixed
management fee and a separate component which allows for scheduled
reimbursable personnel or other expenses to be billed directly to the
client, we will account for the contract on a net basis. This means we
include the fixed management fee in reported revenues and we net the
reimbursement against the expenses. This characterization is based on the
following factors: (i) the property owner generally has authority over
hiring practices and the approval of payroll prior to payment by Jones Lang
LaSalle; (ii) Jones Lang LaSalle is the primary obligor with respect to the
property personnel, but bears little or no credit risk under the terms of
the management contract; (iii) reimbursement to Jones Lang LaSalle is
generally completed simultaneously with payment of payroll or soon
thereafter; and (iv) Jones Lang LaSalle generally earns no margin in the
arrangement, obtaining reimbursement only for actual cost incurred. The
majority of our service contracts utilize the latter structure and are
accounted for on a net basis. We have always presented the above
reimbursable contract costs on a net basis in accordance with accounting
principles generally accepted in the United States of America. Such costs
aggregated approximately $360 million in 2002. Prior year comparative
information is not available given that it was necessary to reconfigure our
reporting systems in 2002 as our global systems did not separate these
costs.
ACCOUNTS RECEIVABLE
We estimate the allowance necessary to provide for uncollectible
accounts receivable. The estimate includes specific accounts for which
payment has become unlikely. This estimate is also based on historical
experience combined with a careful review of current developments and with
a strong focus on credit quality. A detailed discussion of the calculation
can be found in the Summary of Critical Accounting Policies and Estimates
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS
We apply Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," ("SFAS 144") to recognize and measure impairment of
long-lived assets. SFAS 144 establishes accounting and reporting standards
for the impairment or disposal of long-lived assets by requiring that those
long-lived assets to be held and used be measured at the lower of carrying
costs or their fair value, and by requiring that those long-lived assets to
be held for sale to be measured at the lower of carrying costs or their
fair value less costs to sell, whether reported in continuing operations or
in discontinued operations. We adopted SFAS 144 on January 1, 2002. The
effect of implementing SFAS 144 did not have a material impact on our
consolidated financial statements.
We review long-lived assets, including investments in real estate
ventures, intangibles and property and equipment for impairment on an
annual basis, or whenever events or circumstances indicate the carrying
value of an asset group may not be recoverable. The review of
recoverability is based on an estimate of the future undiscounted cash
flows expected to be generated by the asset group. If impairment exists
due to the inability to recover the carrying value of an asset group, an
impairment loss is recorded to the extent that the carrying value exceeds
the estimated fair value.
During 2001, we reviewed our e-commerce investments on an investment
by investment basis, evaluating actual business performance against
original expectations, projected future performance and associated cash
flows, and capital needs and availability. As a result of this evaluation
we determined that our investments in e-commerce were impaired and fully
wrote down these investments by the end of 2001 as part of our non-
recurring charges. It is currently our policy to expense any additional
investments, primarily contractual commitments to fund operating expenses
of existing investments, that are made into these ventures in the period
they are made. These charges are recorded as ordinary recurring charges. In
2002 we expensed a total of $287,000 of such investments.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
DERIVATIVES AND HEDGING ACTIVITIES
On January 1, 2001 we adopted Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") as amended by
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS 133, as amended, establishes accounting
and reporting standards for derivative instruments. Specifically, SFAS 133
requires an entity to recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and to measure the
instruments at fair value. Additionally, the fair value adjustments will
affect either stockholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if
so, the nature of the hedging activity.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In the normal course of business, we use derivative financial
instruments to manage foreign currency risk. At December 31, 2002, we had
forward exchange contracts in effect with a gross notional value of $143.1
million ($82.1 million on a net basis) and a market and carrying gain of
$3.1 million. In the past we have used interest rate swap agreements to
limit the impact of changes in interest rates on earnings and cash flows.
We did not enter into any interest rate swap agreements during 2002 or
2001, and there were no such agreements outstanding as of December 31,
2002.
We require that hedging derivative instruments be effective in
reducing the exposure that they are designated to hedge. This effectiveness
is essential to qualify for hedge accounting treatment. Any derivative
instrument used for risk management that does not meet the hedging criteria
is marked-to-market each period with changes in unrealized gains or losses
recognized currently in earnings.
As a firm, we do not enter into derivative financial instruments for
trading or speculative purposes. We hedge any foreign exchange risk
resulting from intercompany loans through the use of foreign currency
forward contracts. SFAS 133 requires that unrealized gains and losses on
these derivatives be recognized currently in earnings. The gain or loss on
the re-measurement of the foreign currency transactions being hedged is
also recognized in earnings. The net impact on our earnings during 2002 and
2001 of the unrealized gain on foreign currency contracts, offset by the
loss resulting from re-measurement of foreign currency transactions, was
not significant.
COMMITMENTS AND CONTINGENCIES
We are subject to various claims and contingencies related to
lawsuits, taxes and environmental matters as well as commitments under
contractual obligations. We recognize the liability associated with
commitments and contingencies when a loss is probable and estimable. Our
contractual obligations relate to the provision of services by us in the
normal course of our business.
ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE
ASSETS
We have historically grown through a series of acquisitions and one
substantial merger. As a result of this activity, and consistent with the
services nature of our businesses we acquired, the largest assets on our
balance sheet are intangibles resulting from business acquisitions and the
JLW merger. Historically we have amortized these intangibles over their
estimated useful lives (generally eight to forty years). Beginning
January 1, 2002, pursuant to the issuance of Statement No. 142, "Goodwill
and Other Intangible Assets," ("SFAS 142"), we have ceased the amortization
of intangibles with indefinite useful lives, which have a net book value of
$315.5 million at December 31, 2002. This has reduced our annual
amortization expense by $9.6 million. We will continue to amortize
intangibles with definite useful lives, which primarily represent the value
placed on management contracts that are acquired as part of our acquisition
of a company.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In connection with the transitional goodwill impairment evaluation,
SFAS 142 required us to perform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption. To
accomplish this evaluation, we determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the
date of adoption. For purposes of this exercise, we defined reporting units
based on how the Chief Operating Decision Makers for each segment looked at
their segments when determining strategic business decisions. The
following reporting units were determined: Investment Management, Americas
OOS, Australia OOS, Asia OOS, and by country in Europe OOS. We have
determined the fair value of each reporting unit on the basis of a
discounted cash flow methodology and compared it to the reporting unit's
carrying amount. In all cases, the fair value of each reporting unit
exceeded its carrying amount, and therefore no impairment loss has been
recognized on our goodwill.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of the
revenues and expenses during the reporting periods. Actual results could
differ from those estimates. For further discussion of accounting
estimates please refer to the Summary of Critical Accounting Policies and
Estimates section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
CASH HELD FOR OTHERS
We control certain cash and cash equivalents as agents for our
investment and property management clients. Such amounts are not included
in our consolidated financial statements.
STATEMENT OF CASH FLOWS
Cash and cash equivalents include demand deposits and investments in
United States Treasury instruments (generally held as available for sale)
with maturities of three months or less. The combined carrying value of
such investments of $5.3 million and $1.5 million at December 31, 2002 and
2001, respectively, approximates their market value.
The effects of foreign currency translation on cash balances are
reflected in cash flows from operating activities on the Consolidated
Statement of Cash Flows.
INVESTMENTS IN REAL ESTATE VENTURES AND OTHER CORPORATIONS
We have non-controlling ownership interests in various real estate
ventures with interests generally ranging from less than 1% to 47.85%,
which are generally accounted for using the equity method of accounting.
These investments are discussed further in Note 8.
We have made investments in certain high technology and e-commerce
related private corporations whose operations are connected to the real
estate industry. These investments are for less than 20% of the voting
stock of the corporations and we are not able to exercise significant
influence over the operating and financial policies of these corporations.
Such investments are accounted for under the cost method. In 2001, we
determined that these investments were impaired and recorded $18.0 million
of non-recurring expense. These impairments are discussed further in
Note 6.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DEBT ISSUANCE COSTS
Costs incurred in connection with the issuance of debt are capitalized
and amortized over the periods to which the underlying debt is outstanding.
Amortization expense related to debt issuance costs, included as interest
expense, was $1.3 million, $1.2 million and $1.4 million in 2002, 2001 and
2000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and cash equivalents,
receivables, accounts payable, notes payable and foreign currency exchange
contracts. The estimated fair value of cash and cash equivalents,
receivables and payables approximates their carrying amounts due to the
short maturity of these instruments. The estimated fair value of our
revolving credit facility and short-term borrowings approximates their
carrying value due to their variable interest rate terms. The fair value of
the Senior Euro Notes was euro 168.3 million, or $176.5 million which was
the mid-market value as of December 31, 2002. The fair value of forward
foreign exchange contracts is estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the
reporting date.
FOREIGN CURRENCY TRANSLATION
The financial statements of our subsidiaries located outside the
United States, except those subsidiaries located in highly inflationary
economies, are measured using the local currency as the functional
currency. The assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date with the resulting
translation adjustments included in the balance sheet as a separate
component of stockholders' equity (accumulated other comprehensive income)
and in the statement of earnings (other comprehensive income - foreign
currency translation adjustments). Income and expenses are translated at
the average monthly rates of exchange. Gains and losses from foreign
currency transactions are included in net earnings. For subsidiaries
operating in highly inflationary economies, the associated gains and losses
from balance sheet translation adjustments are included in net earnings.
EARNINGS PER SHARE
The basic income per common share for the year ended December 31,2002
was calculated based on basic weighted average shares outstanding of
30,486,842. Diluted income per common share for the year ended December 31,
2002 was calculated based on diluted weighted average shares outstanding of
31,854,397. The following table details the calculation of diluted average
shares outstanding:
2002 2001 2000
---------- ---------- ----------
Net income (loss) . . . . . . . . $ 27,110 (15,411) (57,060)
Basic weighted average shares
outstanding . . . . . . . . . . 30,486,842 30,016,122 24,851,823
---------- ---------- ----------
Basic earnings (loss)
per common share. . . . . . . . $ 0.89 (0.51) (2.30)
========== ========== ==========
Diluted net income (loss) . . . . $ 27,110 (15,411) (57,060)
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2002 2001 2000
---------- ---------- ----------
Basic weighted average shares
outstanding . . . . . . . . . . 30,486,842 30,016,122 24,851,823
Dilutive impact of common
stock equivalents:
Outstanding stock options . . . 354,125 -- --
Unvested stock compensa-
tion programs . . . . . . . . 1,013,430 -- --
---------- ---------- ----------
Dilutive weighted average
shares outstanding. . . . . . . 31,854,397 30,016,122 24,851,823
---------- ---------- ----------
Dilutive earnings (loss)
per common share. . . . . . . . $ 0.85 (0.51) (2.30)
========== ========== ==========
The basic and diluted losses per common share for the years ended
December 31, 2001 and 2000 were calculated based on basic weighted average
shares outstanding of 30,016,122 and 24,851,823, respectively. The increase
in shares outstanding from 2000 to 2001 was primarily the result of the
expiration of certain vesting conditions on 5.2 million of the shares
issued in connection with the JLW merger. As a result of the net loss
incurred in these periods, diluted weighted average shares outstanding for
the years ended December 31, 2001 and 2000 do not give effect to common
stock equivalents as to do so would be anti-dilutive. These common stock
equivalents consist primarily of shares to be issued under employee stock
compensation programs and outstanding stock options whose exercise price
was less than the average market price of our stock during these periods.
DEPRECIATION
Depreciation and amortization is calculated for financial reporting
purposes primarily using the straight-line method based on the estimated
useful lives of our assets. The following table shows the gross value of
each asset category at December 31, 2002 and 2001, respectively, as well as
the standard depreciable life for each asset category (in thousands):
December 31, December 31, Depreciable
Category 2002 2001 Life
- -------- ------------ ------------ -----------
Furniture, fixtures
and equipment . . . $ 36.2 $ 40.2 7 years
Computer equipment
and software. . . . 114.9 108.6 2 to 7 years
Leasehold
Improvements. . . . 36.5 33.8 1 to 10 years
Automobiles . . . . . 9.5 11.4 3 to 6 years
STOCK-BASED COMPENSATION
We grant stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of
grant. We follow Accounting Principles Board (APB) Opinion 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation,
and accordingly, recognize no compensation expense for stock option grants,
but provide pro forma disclosures required by Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by
Statement No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure, an amendment of FASB Statement No. 123."
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We have also established stock compensation programs for certain of
our employees pursuant to which they are awarded Jones Lang LaSalle common
stock if they are employed at the end of the vesting period. These stock
compensation programs meet the definition of fixed awards as defined in
SFAS 123, as amended, and therefore, we recognize compensation expense,
based on the market value of awards on the grant date, over the vesting
period.
See Note 13 for additional information on stock-based compensation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation. In 2001 and 2000, Strategic Consulting ("SCON"), a
globally allocated department, recorded its revenue as a reduction to
expense. Beginning in 2002, this revenue is recorded as part of revenue.
The SCON revenue for 2001 and 2000 has been reclassified for comparability.
The impact of the reclassification of 2001 and 2000 revenue related to SCON
was to increase revenues and operating expenses by $10.4 and $9.2 for the
years ending December 31, 2001 and 2000, respectively.
Beginning in December 2002, pursuant to the FASB's Emerging Issues
Task Force ("EITF") No. 01-14, "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket' Expenses Incurred", we have
reclassified reimbursements received for out-of-pocket expenses to revenues
in the income statement, as opposed to being shown as a reduction of
expenses. These out-of-pocket expenses amounted to $2.9 million, $4.0
million and $3.2 million for the years ended December 31, 2002, 2001 and
2000, respectively.
Beginning in December 2002, we have reclassified as revenue our
recovery of indirect costs related to our management services business, as
opposed to being classified as a reduction of expenses in the income
statement. This recovery of indirect costs for the years ended December
31, 2002, 2001 and 2000 totaled $9.7 million, $9.3 million and $7.3
million, respectively.
Beginning in September 2002, we aggregated our loans to co-investments
with our investments in co-investments. The co-investment loans of $7.6
million in the December 31, 2001 balance sheet have been reclassified to
conform with this new presentation.
NEW ACCOUNTING STANDARDS
ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board issued
Statement No. 143, "Accounting for Asset Retirement Obligations,"
("SFAS 143") which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal use of the
asset.
SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company is required, and plans to adopt, the provisions of
SFAS 143 for the quarter ending March 31, 2003. We have not yet fully
assessed the impact of SFAS 143 on our consolidated financial statements,
but do not anticipate it to be material.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the Financial Accounting Standards Board issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("SFAS 146") which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS 146 requires that a liability for costs associated with an exit
or disposal activity be recognized when the liability is incurred rather
than when a company commits to such an activity and also establishes fair
value as the objective for initial measurement of the liability.
SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. If SFAS 146 had been effective in 2002,
we would have been unable to recognize approximately $500,000 of excess
lease costs taken as part of the 2002 restructuring charge. The adoption
of SFAS 146 is not expected to have material impact on our consolidated
financial statements.
ACCOUNTING AND DISCLOSURE BY GUARANTORS
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
("FIN 45") which addresses the disclosure to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees. FIN 45 also requires the recognition of a liability by a
guarantor at the inception of certain guarantees.
FIN 45 requires the guarantor to recognize a liability for the non-
contingent component of the guarantee; this is the obligation to stand
ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair
value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under
the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple elements.
The Company has adopted FIN 45 and has provided the disclosure
requirements and will apply the recognition and measurement provisions for
all guarantees entered into or modified after December 31, 2002. To date
the Company has not entered into or modified guarantees pursuant to the
recognition provisions of FIN 45. Guarantees covered by the disclosure
provisions of FIN 45 are discussed in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 8, 9 and 16 to Notes to Consolidated
Financial Statements.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ACCOUNTING FOR STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE
In December 2002, The FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS 148"). This statement amends FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements.
Certain of the disclosure modifications are required for fiscal years
ending after December 15, 2002 and are included in Note 13 to Notes to
Consolidated Financial Statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46").
FIN 46 addresses the consolidation by business enterprises of variable
interest entities as defined. FIN 46 applies immediately to variable
interests in variable interest entities created after January 31, 2003. For
public enterprises with a variable interest entity created before February
1, 2003, FIN 46 applies to that enterprise no later than the beginning of
the first interim or annual reporting period beginning after June 15, 2003.
The adoption of FIN 46 is not expected to have a material impact on our
consolidated financial statements.
(3) ACQUISITION AND MERGER
JONES LANG LASALLE ASSET MANAGEMENT SERVICES ACQUISITION
In December 2002, Jones Lang LaSalle acquired the 45% minority
interest in the joint venture company Jones Lang LaSalle Asset Management
Services, which, since 2000 has exclusively provided Asset Management
services for all Skandia Life properties in Sweden. The purchase price of
the minority interest was approximately $1 million, a discount to the fair
value of the net assets acquired. As a result, we have recorded an after-
tax gain of $341,000 as an extraordinary item in 2002.
JONES LANG WOOTTON MERGER
On March 11, 1999, LaSalle Partners merged its business with that of
JLW and changed its name to Jones Lang LaSalle Incorporated. In accordance
with the purchase and sale agreements, we issued 14.3 million shares of our
common stock on March 11, 1999, plus $6.2 million in cash (collectively,
the "Consideration") in connection with the acquisition of the property and
asset management, advisory and other real estate businesses operated by a
series of JLW partnerships and corporations in Europe, Asia, Australia,
North America and New Zealand. Approximately 12.5 million of the shares
were issued to former JLW equity owners (having both direct and indirect
ownership) and 1.8 million of the shares were placed in an employee stock
ownership trust ("ESOT") to be distributed by December 31, 2000 to selected
employees of the former JLW entities. Included in the total ESOT shares
are 900,000 shares that were allocated on March 11, 1999 and 200,000 that
were allocated on December 31, 1999, with the remaining 700,000 shares
allocated by December 31, 2000. Issuance of the shares was not registered
under the U.S. securities laws, and the shares were generally subject to a
contractual one-year restriction on sale.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Included in the 14.3 million shares originally issued were 1.2 million
shares which were subject to a post-closing net worth adjustment. The
procedures related to the post-closing net worth calculation were completed
during the third quarter of 1999 and resulted in 500,000 shares being
retained by us and an additional $500,000 in cash consideration being due
to certain of the former JLW owners.
The transaction, which was principally structured as a share exchange,
has been treated as a purchase and is being accounted for using both APB
Opinion No. 16, "Business Combinations" and APB Opinion No. 25, "Accounting
for Stock Issued to Employees" as reflected in the following table.
Accordingly, JLW's operating results have been included in our results as
of March 1, 1999, the effective date of the merger for accounting purposes.
Accounting Method No. of % of Shares
(shares in millions) Shares Issued
-------------------- -------- -----------
APB Opinion No. 16 7.2 52%
APB Opinion No. 25 -
Fixed Award 5.3 38%
Variable Award 1.3 10%
---- ----
Net Shares Issued 13.8 100%
==== ====
As noted in the previous table, 7.2 million shares, or 52% of the
shares issued, were subject to accounting under APB Opinion No. 16. The
value of those shares totaled $141.8 million for accounting purposes based
on the five-day average closing stock price surrounding the date the
financial terms of the merger with JLW were substantially complete,
discounted at a rate of 20% for transferability restrictions. The value of
the shares, in addition to a cash payment of approximately $6.2 million and
capitalizable transaction costs of approximately $15.8 million were
allocated to the identifiable assets acquired and liabilities assumed,
based on our estimate of fair value, which totaled $247.5 million and
$245.9 million, respectively. Included in the assets acquired was $32.2
million in cash. Included in the liabilities assumed was $47.4 million of
obligations to former partners for undistributed earnings, all of which was
paid by December 31, 2000. The resulting excess purchase price of $162.2
million was allocated to goodwill which was being amortized on a straight-
line basis over 40 years based on our estimate of useful lives. As
discussed in Note 2, as a result of the adoption of SFAS 142, effective
January 1, 2002, we have ceased amortization of the net carrying value of
this goodwill.
The remaining 6.6 million shares, or 48% of the shares issued, and
$500,000 in cash paid are subject to accounting under APB Opinion No. 25.
Accordingly, shares issued were accounted for as compensation expense or
deferred compensation expense to the extent they were subject to forfeiture
or vesting provisions. Included in the 6.6 million shares were 1.3 million
shares that were subject to variable stock award plan accounting. The
remaining 5.3 million shares and the $500,000 in cash paid were subject to
fixed stock award plan accounting. As of December 31, 2000, all
compensation expense related to these shares has been recognized,
therefore, there is no such expense after December 31, 2000. Compensation
expense related to these shares for the year ended December 31, 2000
totaled $85.8 million.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4) DISPOSITION
Effective December 31, 1996, we sold our Construction Management
business and certain related assets to a former member of management for a
$9.1 million note. The note, which is secured by the current and future
assets of the business, is due December 31, 2006 and bears interest at
rates of 6.8% to 10.0%, with interest payments due annually. Annual
principal repayments began in January 1998. The outstanding balance of
this loan as of December 31, 2002 is $5.3 million. The payments due under
the terms of this note are current.
As of December 31, 1999, we had received substantial principal
payments on the note receivable and were no longer obligated to provide
financial assistance to the Construction Management business under the
Asset Purchase Agreement. Accordingly, we recognized the disposition as a
divestiture at December 31, 1999 with a resulting gain of $7.5 million in
the 1999 Consolidated Statement of Earnings.
Under the terms of the Asset Purchase Agreement, Jones Lang LaSalle
has the option to repurchase up to 49.9% of the ownership in the
Construction Management business on the earlier of the December 31, 2006 or
the prepayment of the note receivable. The choice to exercise the
repurchase option belongs solely to Jones Lang LaSalle.
(5) SHARE REPURCHASE
On October 30, 2002 we announced that our Board of Directors had
approved a share repurchase program. Under the program, we may repurchase
up to one million shares in the open market and in privately negotiated
transactions from time to time, depending upon market prices and other
conditions. In the fourth quarter of 2002 we repurchased 300,000 shares at
an average price of $15.56 per share. These shares are held by a subsidiary
of Jones Lang LaSalle.
The 2002 share repurchase program replaces a program that was in place
in 2001 authorizing purchases of up to $10.0 million. On March 8, 2001, we
repurchased and cancelled 473,962 shares of our own common stock at a price
of $14.65 per share, totaling $6.9 million. There were no further
purchases in 2001.
(6) NON-RECURRING AND RESTRUCTURING CHARGES
For the years ended December 31, 2002 and 2001, non-recurring and
restructuring charges totaled $14.9 million and $77.2 million,
respectively. These charges and associated tax benefits are made up of the
following:
2002 2001
------ ------
Non-Recurring & Restructuring Charges
- -------------------------------------
Impairment of E-commerce Investments. . . . . . $ (0.3) 18.0
Insolvent Insurance Providers . . . . . . . . . -- 1.9
Land Investment & Development Group
Impairment Charges. . . . . . . . . . . . . . 3.0 3.5
2001 Global Restructuring Program:
Compensation & Benefits . . . . . . . . . . . (1.3) 40.1
Operating, Administrative & Other . . . . . . 0.1 13.7
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2002 2001
------ ------
2002 Global Restructuring Program:
Compensation & Benefits . . . . . . . . . . . 12.7 --
Operating, Administrative & Other . . . . . . 0.7 --
----- -----
Total Non-Recurring & Restructuring Charges . . $14.9 77.2
===== =====
Net tax benefit for current year charges. . . . $ 5.0 21.3
Net tax benefit for prior year charges. . . . . 1.8 --
----- -----
$ 6.8 21.3
===== =====
E-COMMERCE INVESTMENT IMPAIRMENT
Non-recurring charges in 2001 include the write-down of our
investments in e-commerce ventures. In 2001, we reviewed our e-commerce
investments on an investment-by-investment basis, evaluating actual
business performance against original expectations, projected future cash
flows, and capital needs and availability. By the end of 2001, we had
written down all of our investments in e-commerce ventures. It is currently
our policy to expense any additional investments, primarily contractual
commitments to fund operating expenses of existing investments, which are
made into these ventures in the period they are funded. These charges are
recorded as ordinary recurring charges. In 2002, we expensed $287,000 of
such investments. Also in 2002, $276,000 related to an e-commerce venture
written-off in 2001 was recovered and recorded as a credit to non-recurring
expense.
INSOLVENT INSURANCE PROVIDERS
The non-recurring charges for the full year of 2001 included $1.9
million against our exposure to insolvent insurance providers, of which
$1.6 million related to approximately 30 claims that were covered by an
Australian insurance provider, HIH Insurance Limited ("HIH"). At
December 31, 2002 $1.1 million remained to pay claims related to HIH. We
believe this reserve is adequate to cover the remaining claims and expenses
to be paid as a result of the HIH insolvency although there remains a risk
given the nature of the underlying claims that this reserve may not be
adequate. In addition there was one large, complex claim, with multiple
defendants and plaintiffs, which we believed was covered by another class
of insurance, and therefore, no reserve was established for this claim. We
settled this claim at no cost to us in the third quarter of 2002.
LAND INVESTMENT AND DEVELOPMENT GROUP IMPAIRMENT
As part of the broad based business restructuring in the second half
of 2001, we closed the non-strategic residential land investment business
in the Americas region of the Investment Management segment. Included in
non-recurring expense in 2001 was an impairment provision of $3.5 million
against the carrying value of certain residential land co-investments. We
had determined that we would not fund these investments beyond our
contractual commitments and would seek to manage an exit from this
portfolio. In 2002 we took additional impairment charges of $2.8 million
to fully write-down an additional two of these co-investments as a result
of adverse performance expectation developments in 2002. This charge is
included in non-recurring expense. Any future impairment charges or gains
or losses on disposal relating to the Land Investment Group will be
included in non-recurring charges. Included in investments in real estate
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ventures as of December 31, 2002 is the book value of the five remaining
Land Investment Group investments of $2.1 million. Three of these
investments have been fully written down. We have provided guarantees
associated with this investment portfolio of $1.2 million, which we
currently do not expect to be required to fund. We currently expect to
have liquidated the Land Investment Group investments by the end of 2006.
Additionally, as part of the 2001 restructuring program, we disposed
of our Americas Development Group, retaining an interest in certain
investments originated by this group with the intention of liquidating them
by the end of 2003. In 2002 we have recorded a net gain of $675,000 as a
result of the disposal of three of these investments, an impairment charge
of $472,000 relating to two properties that were subsequently sold and
equity losses of $404,000. The net gain and expenses have been recorded in
non-recurring expense in 2002. Any future impairment charges or gains or
losses on disposal relating to the Development Group will be included in
non-recurring expenses. Included in investment in real estate ventures as
of December 31, 2002 is the book value of the one remaining investment
project of $893,000. We currently expect to have liquidated this
investment by the end of 2003.
BUSINESS RESTRUCTURING
Business restructuring charges include severance and professional fees
associated with the realignment of our business. In 2001, the Asia Pacific
business underwent a realignment from a traditional geographic structure to
one that is managed according to business lines. In addition, in the second
half of 2001 we implemented a broad based restructuring of our business
that reduced headcount by approximately 9%. The total charge for the full
year of 2001 for estimated severance and related costs was $43.9 million.
Included in the $43.9 million was $40.0 million of severance costs and
approximately $3.0 million of professional fees. The balance of $900,000
included relocation and other severance related expenses. Of these
estimated costs, $40.0 million had been paid at December 31, 2002, with a
further $2.6 million to be paid over the balance of 2003. The actual cost
incurred by individual have varied from our original estimates for a
variety of reasons, including the identification of additional facts and
circumstances, the complexity of international labor law, developments in
the underlying business, resulting in the unforeseen reallocation of
resources and better or worse than expected settlement discussions. This
has meant that we have taken a credit in 2002 of $1.3 million to the non-
recurring compensation and benefits expense and additional expense of
$98,000 to the non-recurring operating, administrative and other expense.
In December 2002, our Board of Directors approved a reduction of our
workforce by four percent to meet expected global economic conditions. As
such, we have recorded $12.7 million in non-recurring compensation and
benefits expense and $632,000 in non-recurring operating, administrative
and other expense in 2002, primarily related to the lease cost of excess
space. We expect that the $12.7 million will be paid out by December 31,
2003.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table displays the net charges incurred by segment for
the years ended December 31, 2002 and 2001:
2002 2001
------ ------
Non-Recurring & Restructuring Charges
- -------------------------------------
Owner and Occupier Services:
Americas. . . . . . . . . . . . . . . . . . . $ 4.8 34.9
Europe. . . . . . . . . . . . . . . . . . . . 6.7 22.6
Asia Pacific. . . . . . . . . . . . . . . . . 0.3 12.6
Investment Management (1) . . . . . . . . . . . 2.6 5.0
Corporate . . . . . . . . . . . . . . . . . . . 0.5 2.1
----- -----
Total Non-Recurring and Restructuring Charges . $14.9 77.2
===== =====
(1) Non-recurring charges for Investment Management in 2002 were
primarily asset write-downs.
There were no similar charges in 2000. The non-recurring charges incurred
in 2000 consisted of merger-related stock compensation expense resulting
from the JLW merger. See Note 3 for additional information.
(7) BUSINESS SEGMENTS
We manage our business along a combination of geographic and
functional lines. Operations are reported as four business segments: the
three geographic regions of Owner and Occupier Services ("OOS"), (i)
Americas, (ii) Europe and (iii) Asia Pacific, which offer our full range of
Corporate Solutions, Investor Services, and Capital Markets Services, and
(iv) Investment Management which offers investment management services on a
global basis. The OOS business consists primarily of tenant representation
and agency leasing, capital markets and valuation services (collectively,
"implementation services") and property management, corporate property
services, project and development management services (collectively,
"management services"). The Investment Management segment provides real
estate investment management services to institutional investors,
corporations, and high-net-worth individuals.
Total revenue by industry segment includes revenue derived from
services provided to other segments. Operating income represents total
revenue less direct and indirect allocable expenses. We allocate all
expenses, other than interest and income taxes, as nearly all expenses
incurred benefit one or more of the segments. Allocated expenses primarily
consist of corporate global overhead, including certain globally managed
stock programs. These corporate global overhead expenses are allocated to
the business segments based on the relative revenue of each segment.
During the third quarter of 2001, we changed our measure of segment
operating results to exclude non-recurring and restructuring charges.
Prior year results were not materially impacted by this change. See Note 6
for a detailed discussion of these non-recurring and restructuring charges.
We have determined that it is not meaningful to investors to allocate these
non-recurring and restructuring charges to our segments. In addition, the
Chief Operating Decision Maker of Jones Lang LaSalle measures the segment
results without these charges allocated.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information by business segment for 2002, 2001
and 2000 are as follows ($ in thousands):
2002 2001 2000
-------- -------- --------
OWNER AND OCCUPIER SERVICES -
AMERICAS
Revenue:
Implementation services . . . $135,013 158,775 187,450
Management services . . . . . 154,255 165,940 149,880
Equity earnings (losses). . . (10) 366 478
Other services. . . . . . . . 1,170 1,665 847
Intersegment revenue. . . . . 476 1,191 1,898
-------- -------- --------
290,904 327,937 340,553
Operating expenses:
Compensation, operating and
administrative expenses . . 240,141 277,473 292,696
Depreciation and
amortization. . . . . . . . 18,761 24,138 21,505
-------- -------- --------
Operating income. . . . $ 32,002 26,326 26,352
======== ======== ========
EUROPE
Revenue:
Implementation services . . . $228,155 252,608 276,168
Management services . . . . . 82,492 88,700 79,873
Other services. . . . . . . . 3,767 3,532 2,227
-------- -------- --------
314,414 344,840 358,268
Operating expenses:
Compensation, operating and
administrative expenses . . 286,238 289,664 305,075
Depreciation and
amortization. . . . . . . . 10,421 12,652 11,713
-------- -------- --------
Operating income. . . . $ 17,755 42,524 41,480
======== ======== ========
ASIA PACIFIC
Revenue:
Implementation services . . . $ 77,329 79,731 91,676
Management services . . . . . 47,625 47,945 41,853
Other services. . . . . . . . 1,624 1,878 2,069
-------- -------- --------
126,578 129,554 135,598
Operating expenses:
Compensation, operating and
administrative expenses . . 120,136 122,959 129,269
Depreciation and
amortization. . . . . . . . 6,673 6,951 6,102
-------- -------- --------
Operating income
(loss). . . . . . . . $ (231) (356) 227
======== ======== ========
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2002 2001 2000
-------- -------- --------
INVESTMENT MANAGEMENT
Revenue:
Implementation services . . . $ 5,058 2,387 7,228
Advisory fees . . . . . . . . 101,169 93,558 86,475
Equity earnings . . . . . . . 2,591 8,194 16,215
Other services. . . . . . . . 191 170 85
-------- -------- --------
109,009 104,309 110,003
Operating expenses:
Compensation, operating and
administrative expenses . . 87,699 78,933 82,058
Depreciation and
amortization. . . . . . . . 1,270 3,679 3,806
-------- -------- --------
Operating income. . . . $ 20,040 21,697 24,139
======== ======== ========
Total segment revenue . . . . . . $840,905 906,640 944,422
Intersegment revenue
eliminations. . . . . . . . . . (476) (1,191) (1,898)
-------- -------- --------
Total revenue . . . . . 840,429 905,449 942,524
-------- -------- --------
Total segment operating
expenses. . . . . . . . . . . . 771,339 816,449 852,224
Intersegment operating
expense eliminations. . . . . . (476) (1,191) (1,898)
-------- -------- --------
Total operating expenses
before non-recurring and
restructuring charges. 770,863 815,258 850,326
-------- -------- --------
Non-recurring and
restructuring charges. 14,871 77,232 85,795
-------- -------- --------
Operating income. . . . $ 54,695 12,959 6,403
======== ======== ========
Identifiable assets by segment are those assets that are used by or
are a result of each segment's business. Corporate assets are principally
cash and cash equivalents, office furniture and computer hardware and
software.
The following table reconciles segment identifiable assets to
consolidated assets, investments in real estate ventures to consolidated
investments in real estate ventures and fixed asset expenditures to
consolidated fixed asset expenditures. Certain 2001 and 2000 amounts have
been reclassified to conform with the 2002 presentation.
<table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<caption>
2002 2001 2000
-------------------------------- ------------------------------- -------
Invest- Invest-
ments Fixed ments Fixed Fixed
Identi- in Real Asset Identi- in Real Asset Asset
fiable Estate Expen- fiable Estate Expen- Expen-
Assets Ventures ditures Assets Ventures ditures ditures
($ in thousands) -------- -------- -------- -------- -------- -------- -------
<s> <c> <c> <c> <c> <c> <c> <c>
Owner and Occupier
Services:
Americas . . . . . $328,878 899 4,822 331,130 3,127 10,525 14,819
Europe . . . . . . 203,244 -- 9,434 213,165 -- 15,625 16,964
Asia Pacific . . . 146,125 -- 3,751 149,004 -- 13,535 9,590
Investment Management 141,535 74,095 426 111,019 61,401 647 1,976
Corporate . . . . . . 32,734 -- 1,923 31,409 -- 2,221 2,757
-------- -------- -------- -------- -------- -------- -------
Consolidated. . . . . $852,516 74,994 20,356 835,727 64,528 42,553 46,106
======== ======== ======== ======== ======== ======== =======
</table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth the revenues and assets from our most
significant currencies. The euro revenues and assets include our
businesses in France, Germany, Italy, Ireland, Spain, Portugal, Holland,
Belgium and Luxemburg.
Total Total
Revenue Assets
-------- --------
United States Dollar. . . . . 331,689 433,344
United Kingdom Pound. . . . . 184,309 177,993
Euro. . . . . . . . . . . . . 145,180 68,810
Australian Dollar . . . . . . 48,883 65,995
Other currencies. . . . . . . 130,368 106,374
-------- --------
840,429 852,516
======== ========
We face restrictions in certain countries which limit or prevent the
transfer of funds to other countries or the exchange of the local currency
to other currencies.
(8) INVESTMENTS IN REAL ESTATE VENTURES
We invest in certain real estate ventures that own and operate
commercial real estate. These investments include non-controlling ownership
interests generally ranging from less than 1% to 47.85% of the respective
ventures. We generally account for these interests under the equity method
of accounting in the accompanying Consolidated Financial Statements. As
such, we recognize our share of the underlying profits and losses of the
ventures as revenue in the accompanying Consolidated Statements of
Earnings. We are generally entitled to operating distributions in
accordance with our respective ownership interests. Substantially all
venture interests are held by corporate subsidiaries of Jones Lang LaSalle.
Accordingly, our exposure to liabilities and losses of these ventures is
limited to our existing capital contributions and remaining capital
commitments. To the extent that our investment basis may differ from our
share of the equity of an unconsolidated investment, such difference would
be amortized over the depreciable lives of the investee's investment
assets.
Effective January 1, 2001, we established LaSalle Investment Company
("LIC"), formerly referred to as LaSalle Investment Limited Partnership, a
series of four parallel limited partnerships, as our investment vehicle for
substantially all new co-investments. At December 31, 2002 we had unfunded
committed capital of euro 121.2 million ($130.3 million), which is
equivalent to 47.85% of total capital committed to LIC. We anticipate that
LIC will require this capital over the next five to seven years. Actual
cash funded to LIC through December 31, 2002 was $26.9 million. The
balance of LIC is held primarily by institutional investors, including a
significant shareholder in Jones Lang LaSalle. In addition, our Chairman
and another Director of Jones Lang LaSalle are investors in LIC on
equivalent terms to other investors. The investment in LIC is accounted
for under the equity method of accounting in the accompanying Consolidated
Financial Statements.
LIC has, and will continue to, invest in certain real estate ventures
that own and operate commercial real estate. LIC generally invests via
limited partnerships and intends to own 10% or less of the respective
ventures. As of December 31, 2002, LIC had no external debt, but may enter
into a revolving credit facility for its working capital purposes. LIC has
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
capital commitments to ventures of $109.2 million as of December 31, 2002,
of which $55.2 million remained unfunded at December 31, 2002. LIC's
exposure to liabilities and losses of the ventures is limited to its
existing capital contributions and remaining capital commitments.
The following table summarizes the financial statements of LIC ($ in
thousands):
2002 2001
---------- ----------
Balance Sheet
Investments in real estate. . . $ 54,050 6,721
---------- ----------
Total Assets. . . . . . . . . . . $ 64,542 9,368
========== ==========
Other borrowings. . . . . . . . . $ -- --
Mortgage indebtedness . . . . . . -- --
---------- ----------
Total Liabilities . . . . . . . . $ 2,909 2,570
========== ==========
Total Equity. . . . . . . . . . . $ 61,633 6,798
========== ==========
Statement of Operations
Revenues. . . . . . . . . . . . $ 721 131
Net Loss. . . . . . . . . . . . $ (168) (129)
========== ==========
The following table summarizes the combined financial information for
the unconsolidated ventures (including those that are held via LIC),
accounted for under the equity method of accounting ($ in thousands):
2002 2001 2000
---------- --------- ---------
Balance Sheet:
Investments in real estate. .$3,180,682 2,432,609 2,661,699
Total assets. . . . . . . . .$3,413,917 2,628,599 3,010,544
========== ========= =========
Other borrowings. . . . . . .$ 273,130 163,582 115,239
Mortgage indebtedness . . . .$1,546,680 837,243 1,019,752
Total liabilities . . . . . .$1,977,677 1,166,436 1,509,112
========== ========= =========
Total equity. . . . . . . . .$1,436,240 1,462,163 1,501,432
========== ========= =========
Loans to real estate ventures$ 9,175 7,629 5,662
Equity investments in real
estate ventures . . . . . .$ 65,819 56,899 74,565
Total investments in real
estate ventures . . . . . . . .$ 74,994 64,528 80,227
========== ========= =========
Statements of Operations:
Revenues. . . . . . . . . . .$ 336,047 370,395 671,713
Net earnings. . . . . . . . .$ 67,955 109,201 225,529
========== ========= =========
Equity in earnings from
real estate ventures
recorded by Jones Lang
LaSalle . . . . . . . . . . . .$ 2,581 8,560 16,693
========== ========= =========
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The loans to real estate ventures bear interest rates of 7.25% to 8.0%
and are to be repaid by 2008. The Company makes guarantees to third-party
financial institutions would require us to fund monies in the event that
the underlying co-investment loans default. We apply FIN 45 with respect to
these guarantees. FIN 45 addresses the recognition and disclosure
requirements of guarantor obligations under guarantees. The initial
recognition and measurement provisions of FIN 45 apply to guarantees issued
or modified after December 31, 2002. As such, no recognition is required at
this time, however, any new guarantees or modifications to existing
guarantees would need to be measured on the Company's books in the
respective period. As of December 31, 2002 we have repayment guarantees
outstanding of $4.7 million.
Included in our investment in real estate ventures at December 31,
2000 was an investment in LaSalle Hotel Properties ("LHO"), a real estate
investment trust, which completed its initial public offering in April
1998. We provided advisory, acquisition and administrative services to LHO
for which we received a base advisory fee calculated as a percentage of net
operating income, as well as performance fees based on growth in funds from
operations on a per share basis. Such performance fees were paid in the
form of LHO common stock or units, at our option. LHO was formed with 10
hotels, we had a nominal co-investment in, and investment advisory
agreement with, nine of these hotels. We contributed our ownership
interests in the hotels as well as the related performance fees to LHO for
an effective ownership interest of approximately 6.4%. Effective
January 1, 2001, the service agreement with LHO was terminated and LHO
became a self-managed real estate investment trust. As a result of the
terminated service agreement, we changed our method of accounting for LHO
to the cost method. On February 1, 2001, we sold our investment in LHO and
recognized a gain of $2.7 million.
(9) DEBT
CREDIT FACILITIES
During the first half of 2000, we increased our unsecured credit
agreement from $380 million to $425 million through the addition of five
banks to the credit group. This total was comprised of a $250 million
revolving facility maturing in October 2002 and a $175 million term
facility, which was scheduled to mature on October 15, 2000.
On July 26, 2000, we closed our offering of euro 165 million aggregate
principal amount of 9.0% Senior Notes, due 2007 (the "Euro Notes"). The
net proceeds of $148.6 million were used to pay-down borrowings under the
$175 million term facility that matured on October 15, 2000. The Euro
Notes were issued by Jones Lang LaSalle Finance B.V. ("JLL Finance"), a
wholly owned subsidiary of Jones Lang LaSalle. On August 29, 2000, the
remaining borrowings under the term facility were fully repaid using
proceeds from the revolving credit facility and the term facility was
terminated.
On September 21, 2001, we increased our unsecured credit agreement
from $250 million to $275 million, reduced the number of participating
banks to eleven from fourteen and extended the maturity date to September
2004 from the original due date of October 2002.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of December 31, 2002, we had $275 million available under the
revolving credit facility for working capital, investments, capital
expenditures and acquisitions. We also had the Euro Notes of euro 165
million and, under the terms of the revolving credit facility, the
authorization to borrow up to $50 million under local credit facilities.
As of December 31, 2002, there was $26.1 million outstanding under the
revolving credit facility, euro 165 million ($173.1 million), of borrowings
under the Euro Notes, and short-term borrowings of $15.9 million.
The revolving credit facility and the Euro Notes (the "Facilities")
are guaranteed by certain of our subsidiaries. We apply FIN 45 to
recognize and measure the provisions of these guarantees. FIN 45 addresses
the recognition and disclosure requirements of guarantor obligations under
guarantees. The guarantees of the revolving credit facility, Euro Notes and
local overdraft facilities do not meet the recognition provisions, but do
meet the disclosure requirements of FIN 45. With respect to the revolving
credit facility, we must maintain a certain level of consolidated net worth
and a ratio of funded debt to earnings before interest expense, taxes,
depreciation and amortization ("EBITDA"). We must also meet a minimum
interest coverage ratio and minimum liquidity ratio. As part of the global
restructuring initiative in 2001, we obtained the approval of our bank
group to vary certain of these ratios to reflect the non-recurring and
restructuring charges. We were in compliance with all covenants at
December 31, 2002. Additionally, we are restricted from, among other
things, incurring certain levels of indebtedness to lenders outside of the
Facilities and disposing of a significant portion of our assets. Lender
approval is also required for certain levels of co-investment. There are
no covenants or triggers related to a change in credit rating or a material
adverse change. The revolving credit facility bears variable rates of
interest based on market rates. Prior to 2001, we had used interest rate
swaps to convert a portion of the floating rate indebtedness to a fixed
rate. The effective interest rate on the Facilities was 7.3% for the year
ended December 31, 2002.
We have various interest-bearing overdraft facilities in Europe and
Asia Pacific. As of December 31, 2002, we have overdraft facilities
totaling $33.8 million, of which $15.4 million was outstanding. We have
provided guarantees of $22.3 million related to the local overdraft
facilities, as well as guarantees related to the $275 million revolving
credit facility and the euro 165 million Euro Notes, which in total
represent the maximum future payments that Jones Lang LaSalle could be
required to make under these guarantees.
(10) LEASES
We lease office space in various buildings for our own use. The terms
of these non-cancelable operating leases provide for us to pay base rent
and a share of increases in operating expenses and real estate taxes in
excess of defined amounts. We also lease equipment under both operating
and capital lease arrangements.
Minimum future lease payments (e.g., base rent for leases of office
space) due in each of the next five years ending December 31 and thereafter
are as follows ($ in thousands):
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Operating Capital
Leases Leases
--------- -------
2003 . . . . . . . . . $ 45,620 $ 615
2004 . . . . . . . . . 42,027 393
2005 . . . . . . . . . 32,080 357
2006 . . . . . . . . . 26,858 204
2007 . . . . . . . . . 21,724 76
Thereafter . . . . . . 19,255 60
-------- -------
$187,564 1,705
========
Less: Amount repre-
senting interest . . (213)
-------
Present value of
minimum lease
payments . . . . . . $ 1,492
=======
As of December 31, 2002, we have reserves related to excess lease
space of $3.9 million, which were established as part of our restructuring
in 2001 and 2002. The total of minimum rentals to be received in the
future under noncancelable operating subleases as of December 31, 2002 was
$9.8 million.
Assets recorded under capital leases in our Consolidated Balance Sheet
at December 31, 2002 and 2001 are as follows ($ in thousands):
2002 2001
-------- --------
Furniture, fixtures and equipment $ 1,421 2,170
Computer equipment and software 1,172 2,708
Automobiles 1,289 1,845
Leasehold improvements -- 3,179
-------- --------
3,882 9,902
Less accumulated depreciation
and amortization (2,083) (7,321)
-------- --------
Net assets under capital leases $ 1,799 2,581
======== =========
Rent expense was $50.4 million, $45.5 million and $44.0 million during
2002, 2001 and 2000, respectively.
(11) INCOME TAXES
For the years ended December 31, 2002, 2001 and 2000, our provision
for income taxes consisted of the following ($ in thousands):
Year Ended December 31,
----------------------------------------
2002 2001 2000
-------- -------- --------
U.S. Federal:
Current . . . . . . . $ 8 $ -- $ --
Deferred tax. . . . . 1,981 (2,216) 498
-------- -------- --------
1,989 (2,216) 498
-------- -------- --------
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31,
----------------------------------------
2002 2001 2000
-------- -------- --------
State and Local:
Current . . . . . . . -- 1,063 --
Deferred tax. . . . . 378 (1,921) 32
-------- -------- --------
378 (858) 32
-------- -------- --------
Foreign:
Current . . . . . . . 17,220 13,920 25,220
Deferred tax. . . . . (8,550) (2,860) (3,697)
-------- -------- --------
8,670 11,060 21,523
-------- -------- --------
Total . . . . . . . . . $ 11,037 $ 7,986 $ 22,053
======== ======== ========
In 2002 our current tax liabilities were reduced by $4.5 million due
to the utilization of prior years' net operating loss carryovers.
Income tax expense for 2002, 2001 and 2000 differed from the amounts
computed by applying the U.S. federal income tax rate of 35% to earnings
before provision for income taxes (income of $37.7 million for the year
ended December 31, 2002, a loss of $7.2 million for the year ended December
31, 2001 and a loss of $20.8 million for the year ended December 31, 2000)
as a result of the following ($ in thousands):
2002 2001 2000
---------------- ---------------- ----------------
Computed "expected"
tax expense
(benefit). . . . . .$13,185 35.0% $(2,519) 35.0% $(7,273) 35.0%
Increase (reduction)
in income taxes
resulting from:
Nondeductible
stock compensa-
tion expense . . . -- -- -- -- 27,433(132.0%)
State and local
income taxes,
net of federal
income tax benefit 246 0.7% (588) 8.2% 20 (0.1%)
Amortization of
goodwill and
other intangibles. (1,417) (3.8%) 1,195 (16.6%) 1,020 (4.9%)
Nondeductible
expenses . . . . . 1,999 5.3% 3,041 (42.3%) 1,606 (7.7%)
Foreign earnings
taxed at varying
rates. . . . . . . (3,534) (9.4%) (901) 12.5% (3,655) 17.6%
Valuation
allowances . . . . 411 1.1% 6,943 (96.5%) 1,296 (6.2%)
Other, net. . . . . . 1,947 5.2% 815 (11.2%) 1,606 (7.7%)
Additional tax
benefit on 2001
restructuring
reserve actions . . (1,800) (4.8%) -- -- -- --
------- ------ ------- ------- --------------
$11,037 29.3% $ 7,986 (110.9%) $22,053(106.0%)
======= ====== ======= ======= ==============
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the years ended December 31, 2002, 2001 and 2000, our income
(loss) before taxes from domestic and international sources are as follows
($ in thousands):
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Domestic. . . . . . . . . . . $ 5,311 (17,635) 3,316
International . . . . . . . . 32,360 10,438 (24,095)
-------- -------- --------
Total . . . . . . . . . $ 37,671 (7,197) (20,779)
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below ($ in thousands):
December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Deferred tax assets:
Accrued expenses. . . . . . . . $ 18,754 $ 16,447 $ 12,154
Revenue deferred per SAB 101. . -- 7,740 10,505
U.S. Federal and state loss
carryforwards. . . . . . . . . 13,917 10,426 5,311
Allowances for uncollectible
accounts . . . . . . . . . . . 747 1,683 2,864
Foreign tax credit carryforwards 761 4,410 4,410
Foreign loss carryforwards. . . 17,053 8,762 6,156
Property and equipment. . . . . 4,383 3,172 2,437
Investments in real estate
ventures and other
investments . . . . . . . . . 12,596 9,542 --
Other . . . . . . . . . . . . . 1,835 249 529
-------- -------- --------
70,046 62,431 44,366
Less valuation allowances . . . (12,223) (12,065) (3,255)
-------- -------- --------
$ 57,823 $ 50,366 $ 41,111
======== ======== ========
Deferred tax liabilities:
Prepaid pension asset . . . . . $ 2,311 $ 4,061 $ 5,360
Intangible assets . . . . . . . 7,137 6,660 4,242
Income deferred for tax purposes 2,117 2,400 2,850
Investments in real estate
ventures and other
investments . . . . . . . . . -- -- 1,161
Other . . . . . . . . . . . . . 203 1,130 995
-------- -------- --------
$ 11,768 $ 14,251 $ 14,608
======== ======== ========
A deferred U.S. tax liability has not been provided on the unremitted
earnings of foreign subsidiaries because it is our intent to permanently
reinvest such earnings outside of the United States. Due to the complex
nature of our tax position it is not practical to determine the amount of
taxes that we may incur if repatriation did occur.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of December 31, 2002, we had available U.S. Federal net operating
loss carryforwards of $28 million which begin to expire in 2019, U.S. state
net operating loss carryforwards of $75 million which expire in 2003
through 2020, foreign net operating loss carryforwards of $49 million which
begin to expire in 2003, and foreign tax credit carryforwards for U.S.
federal income tax purposes of $0.8 million which expire in 2003. We do
not believe that we will be able to utilize the $0.8 million of foreign tax
credit carryforwards, and therefore we have taken a full valuation reserve
against this tax credit.
As of December 31, 2002, we believe that the net deferred tax asset of
$46.1 million will be realized based upon our estimates of future income
and the consideration of net operating losses, earnings trends and tax
planning strategies. Valuation allowances have been provided with regard
to the tax benefit of certain foreign net operating loss carryforwards,
write-downs related to investments in e-commerce ventures and foreign tax
credits, for which utilization is not probable. In 2002, we reduced
valuation reserves by $2.4 million on net operating losses in two
jurisdictions due to changes in circumstances which caused us to change our
judgement on the current and future utilization of those losses, and we
increased valuation reserves by $1.1 million for other jurisdictions based
upon circumstances which caused us to continue to provide valuation
reserves on current year losses in addition to those provided in prior
years.
As of December 31, 2002, our current payable for income tax was $3.0
million.
(12) RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
We have a qualified profit sharing plan that incorporates IRC Section
401(k) for our eligible U.S. employees. Contributions under the qualified
profit sharing plan are made via a combination of employer match and an
annual contribution on behalf of eligible employees. Included in the
accompanying Consolidated Statements of Earnings for the years ended
December 31, 2002, 2001 and 2000 are employer contributions of $1.5
million, $1.7 million and $1.6 million, respectively. Related trust assets
of the Plan are managed by trustees and are excluded from the accompanying
Consolidated Financial Statements.
We maintain several defined contribution retirement plans for our
eligible non-U.S. employees. Contributions to these plans were approxi-
mately $1.9 million, $2.4 million and $2.5 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
DEFINED BENEFIT PLANS
We maintain contributory defined benefit pension plans in the UK,
Ireland and Holland to provide retirement benefits to eligible employees.
It is our policy to fund the minimum annual contributions required by
applicable regulations.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net periodic pension cost consisted of the following ($ in thousands):
2002 2001 2000
-------- -------- --------
Employer service cost
- benefits earned
during the year. . . . . . . . $ 8,533 $ 7,300 $ 6,716
Interest cost on projected
benefit obligation . . . . . . 5,649 5,575 5,130
Expected (return) loss on
plan assets. . . . . . . . . . (7,309) (8,572) (7,924)
Net amortization/deferrals . . . 50 -- --
-------- -------- --------
Net periodic pension cost. . . . $ 6,923 $ 4,303 $ 3,922
======== ======== ========
The change in benefit obligation and plan assets and reconciliation of
funded status as of December 31, 2002, 2001 and 2000 are as follows ($ in
thousands):
2002 2001 2000
-------- -------- --------
Change in benefit obligation:
Projected benefit obligation
at beginning of year . . . . $ 88,598 $ 93,854 $ 89,163
Service cost . . . . . . . . . 8,533 7,300 6,716
Interest cost. . . . . . . . . 5,649 5,575 5,130
Plan participants' contribu-
tions. . . . . . . . . . . . 232 167 136
Plan amendments. . . . . . . . -- 379 --
Benefits paid. . . . . . . . . (3,589) (3,711) (2,482)
Actuarial loss (gain). . . . . 4,569 (12,293) 2,144
Changes in foreign exchange
rates. . . . . . . . . . . . 10,843 (2,673) (6,953)
-------- -------- --------
Projected benefit obliga-
tion at end of year. . . . $114,835 $ 88,598 $ 93,854
======== ======== ========
Change in plan assets:
Fair value of plan assets
at beginning of year . . . . $ 95,522 $119,763 $114,724
Actual return on plan assets . (8,939) (17,726) 15,998
Plan contributions . . . . . . 1,284 714 470
Benefits paid. . . . . . . . . (3,589) (3,711) (2,482)
Changes in foreign exchange
rates. . . . . . . . . . . . 9,648 (3,518) (8,947)
Other. . . . . . . . . . . . . (149) -- --
-------- -------- --------
Fair value of plan assets
at end of year . . . . . . $ 93,777 $ 95,522 $119,763
======== ======== ========
Reconciliation of funded status:
Funded status. . . . . . . . . $(21,058) $ 6,924 $ 25,909
Unrecognized actuarial loss
(gain) . . . . . . . . . . . 29,454 6,483 (7,582)
Unrecognized prior service
cost (credit). . . . . . . . 414 377 --
-------- -------- --------
Net amount recognized. . . . $ 8,810 $ 13,784 $ 18,327
======== ======== ========
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The amounts recognized in the accompanying Consolidated Balance Sheet
as of December 31, 2002, 2001 and 2000 are as follows ($ in thousands):
2002 2001 2000
-------- -------- --------
Prepaid pension asset. . . . . . $ 9,646 $ 14,384 $ 18,730
Accrued pension liability. . . . (836) (600) (403)
-------- -------- --------
Net amount recognized. . . . . . $ 8,810 $ 13,784 $ 18,327
======== ======== ========
In January 2003, we curtailed the UK defined benefit plan and
implemented a defined contribution plan. The table below shows how the
curtailment impacts the accumulated benefit obligation and the projected
benefit obligation of the defined benefit plan (amounts in millions).
At December 31, At January 1,
2002 2003
--------------- -------------
Accumulated benefit obligation
-UK plan. . . . . . . . . . . . . . $ 82.2 $ 90.1
Projected benefit obligation
-UK plan. . . . . . . . . . . . . . $ 104.2 $ 92.7
As a result of the curtailment of the UK plan, the accumulated benefit
obligation will exceed the fair value of the plan assets by $4.8 million.
The range of assumptions used in developing the projected benefit
obligation as of December 31 were as follows:
2002 2001 2000
-------------- -------------- --------------
Discount rate used
in determining
present values. . . 5.50% to 6.00% 5.80% to 6.25% 5.50% to 6.25%
Annual increase in
future compensation
levels. . . . . . . 2.00% to 3.80% 2.00% to 4.00% 2.00% to 4.00%
Expected long-term
rate of return on
assets. . . . . . . 5.50% to 7.50% 5.80% to 7.50% 5.80% to 7.50%
Plan assets consist of a diversified portfolio of fixed-income
investments and equity securities.
(13) STOCK OPTION AND STOCK COMPENSATION PLANS
STOCK AWARD AND INCENTIVE PLAN
In 1997, we adopted the 1997 Stock Award and Incentive Plan ("SAIP")
that provides for the granting of options to purchase a specified number of
shares of common stock and other stock awards to eligible participants of
Jones Lang LaSalle. In 2002, the SAIP was amended and restated and merged
with the Stock Compensation Program ("SCP"). Under the plan, the total
number of shares of common stock available to be issued is 9,110,000. The
options are generally granted at the market value of common stock at the
date of grant. The options vest at such times and conditions as the
Compensation Committee of our Board of Directors determines and sets forth
in the award agreement. Such options granted in 2002, 2001 and 2000 vest
over a period of zero to five years. At December 31, 2002, 2001 and 2000,
there were 2.4 million, 3.9 million and 0.3 million shares, respectively,
available for grant under the SAIP.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The per share weighted-average fair value of options granted during
2002, 2001 and 2000 was $11.61, $7.54 and $7.42 on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
-------------- ------------- -------------
Expected dividend yield . 0.00% 0.00% 0.00%
Risk-free interest rate . 3.51% 5.61% 5.20%
Expected life . . . . . . 6 to 9 years 6 to 9 years 6 to 9 years
Expected volatility . . . 45.31% 46.72% 49.17%
Contractual terms . . . . 7 to 10 years 7 to 10 years 7 to 10 years
We account for our stock option and compensation plans under the
provisions of SFAS 123, as amended by SFAS 148, which allows entities to
continue to apply the provisions of APB 25 and provide pro forma net income
and net income per share disclosures for employee option grants as if the
fair-value-based method defined in SFAS 123, as amended, had been applied.
We have elected to apply the provisions of APB 25 in accounting for stock
options granted at the market value of our common stock on the date of
grant, and, accordingly, no compensation cost has been recognized for these
grants in our Consolidated Financial Statements. Had we determined
compensation cost based upon the fair value at the date of grant for our
options as set forth under SFAS 123, as amended, our net earnings (loss),
basic earnings (loss) per common share and diluted earnings (loss) per
common share would have been as follows ($ in thousands, except share
data):
2002 2001 2000
-------- -------- --------
Net income (loss) . . . . . . . . $ 27,110 $(15,411) $(57,060)
Impact of SFAS 123. . . . . . . . (1,446) (3,942) (4,871)
Adjusted net income (loss). . . . 25,664 (19,353) (61,931)
Basic income (loss) per common
share . . . . . . . . . . . . . 0.89 (0.51) (2.30)
Impact of SFAS 123. . . . . . . . (0.05) (0.13) (0.19)
Adjusted basic income (loss)
per common share. . . . . . . . 0.84 (0.64) (2.49)
Diluted income (loss) per
common share. . . . . . . . . . 0.85 (0.51) (2.30)
Impact of SFAS 123. . . . . . . . (0.05) (0.13) (0.19)
Adjusted diluted income (loss)
per common share. . . . . . . . 0.80 (0.64) (2.49)
Stock option activity is as follows (shares in thousands):
2002 2001 2000
------------------ ----------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
Outstanding at
beginning of
year . . . . . 3,327.9 $20.68 2,961.7 $22.46 2,011.0 $ 28.67
Granted . . . . 593.2 22.16 603.9 13.12 1,188.7 12.77
Exercised . . . (151.0) 13.23 (6.0) 12.25 (4.9) --
Forfeited . . . (487.6) 22.75 (231.7) 23.97 (233.1) 27.07
------- ------- -------
Outstanding at
end of year. . 3,282.5 $20.98 3,327.9 $20.68 2,961.7 $22.46
======= ======= =======
<table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<caption>
The following tables summarize information about fixed stock options outstanding at December 31, 2002, 2001
and 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------
Weighted-Average
Range of Remaining
Exercise Number Contractual Weighted-Average Number Weighted-Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------------------------- ---------------- ----------------- ------------ ----------------
<s> <c> <c> <c> <c> <c>
December 31,
2002
- ------------
$ 9.31-14.75 1,320,134 4.78 years $12.66 755,099 $12.64
$15.00-21.95 164,530 5.26 years $16.79 93,456 $16.90
$23.00-35.06 1,794,877 4.29 years $27.46 1,279,077 $29.17
$38.00-43.88 3,000 5.39 years $39.00 2,400 $39.00
---------- ----------
$ 9.31-43.88 3,282,541 4.54 years $20.98 2,130,032 $22.78
============ ========== ==========
December 31,
2001
- ------------
$ 9.31-$14.75 1,544,068 5.70 years $12.59 316,659 $12.27
$15.00-$21.95 148,032 5.93 years $16.24 64,688 $17.69
$23.00-$35.06 1,627,792 4.49 years $28.67 1,227,964 $28.67
$38.00-$43.88 8,000 4.67 years $38.38 6,800 $38.26
---------- ----------
$ 9.31-$43.88 3,327,892 5.12 years $20.68 1,616,111 $25.06
========== ==========
December 31,
2000
- ------------
$ 9.31-$14.75 1,019,666 6.17 years $12.26 3,166 $12.83
$15.00-$21.95 157,548 6.90 years $16.17 24,298 $21.95
$23.00-$35.06 1,771,487 5.46 years $28.78 945,196 $27.64
$38.00-$43.88 13,000 5.27 years $38.23 7,866 $38.15
---------- ----------
$ 9.13-$43.88 2,961,701 5.78 years $22.46 980,526 $27.54
========== ==========
</table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OTHER STOCK COMPENSATION PROGRAMS
In November of 2001, we established the Jones Lang LaSalle Savings
Related Share Option (UK) Plan ("SAYE") for employees of our UK based
operations. Our Compensation Committee approved the reservation of 500,000
shares for the SAYE on May 14, 2001. Under the SAYE plan, employees have a
one time opportunity to enter into a tax efficient savings program linked
to the option to purchase our stock. The employees' contributions for
stock purchases will be enhanced by Jones Lang LaSalle through an
additional contribution of 15%. Both employee and employer contributions
vest over a period of three to five years. The SAYE plan resulted in the
issuance of 219,954 options in 2002 at an exercise price of $13.63. Our
contribution of $528,000 will be recorded as compensation expense over the
vesting period which began January 1, 2002.
We award restricted stock units of our common stock to certain of our
employees. These shares are drawn from the SAIP. The related compensation
cost is amortized to expense over the vesting period. The following table
sets forth the details of our restricted stock grants (amortization in
millions).
Grant
Number Date Amortization
of Market Vesting -----------------
Grant Date Shares Value Period 2002 2001 2000
- -------------- ------- ------- ------------- ---- ---- ----
March 2000 472,500 $12.31 50% 34 months $0.7 1.2 1.4
50% 58 months
February 2002 280,000 $17.21 50% 40 months $1.0 -- --
50% 64 months
May 2002 80,000 $23.08 50% 40 months $0.3 -- --
50% 64 months
September 2002 111,200 $20.69 33% 12 months $0.5 -- --
33% 24 months
33% 36 months
---- ---- ----
$2.5 1.2 1.4
==== ==== ====
In 1999, we established a stock ownership program for certain of our
employees pursuant to which they were paid a portion of their annual bonus
in the form of restricted stock units of our common stock. We enhanced the
number of shares by 20% with respect to the 1999 plan year, and by 25% with
respect to the 2000, 2001 and 2002 plan years. In 2002, we expanded the
population of employees who qualified for this program as part of our goal
of broadening employee stock ownership. The related compensation cost is
amortized over the service period. The service period consists of the
twelve months of the year to which the payment of restricted stock relates,
plus the periods over which the shares vest. The following table sets forth
the details of our stock ownership program (amortization in millions).
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Number Amortization
Plan of Market -----------------
Year Shares Value Vesting Period 2002 2001 2000
- ---- ------- ------ -------------- ---- ---- ----
1999 500,000 $11.31 50% 18 months $0.4 1.7 2.0
50% 30 months
2000 700,000 $13.50 50% 18 months 2.4 3.3 3.1
50% 30 months
2001 300,000 $17.80 50% 18 months 2.1 1.8 --
50% 30 months
2002 700,000 $15.89 50% 18 months 3.8 -- --
50% 30 months
---- ---- ----
Total amortization $8.7 6.8 5.1
==== ==== ====
In 1997 and 1998, we maintained the SCP for eligible employees. Under
this program, employee contributions for bonuses for stock purchases were
enhanced by us through an additional contribution of 15%. Employee
contributions vested immediately while our contributions were subject to
various vesting periods. The related compensation cost is amortized to
expense over the vesting period. 207,022 total shares were paid into this
program. Total compensation expense recognized under the program during
2001 and 2000 was $172,802 and $179,600, respectively. As of December 31,
2001, all compensation expense related to these shares has been recognized,
therefore, there is no such expense after December 31, 2001. As of
December 31, 2002, 196,536 shares have been distributed under this program
with the remaining to be distributed in the future. This program was
suspended in 1999, therefore no further contributions will be made. As
referenced above under the Stock Award and Incentive Plan, the SCP was
merged into the SAIP in 2002.
In 1998, we adopted an Employee Stock Purchase Plan ("ESPP") for
eligible US based employees. Under this plan, employee contributions for
stock purchases will be enhanced by us through an additional contribution
of 15%. Employee contributions and our contributions vest immediately. As
of December 31, 2002, 756,690 shares have been purchased under this plan.
During 2002 and 2001, 147,351 shares and 191,715 shares, respectively,
having weighted-average grant-date market values of $14.12 and $11.08,
respectively, were purchased under the program. No compensation expense is
recorded with respect to this program.
(14) TRANSACTIONS WITH AFFILIATES
We have equity interests in real estate ventures, some of which
certain of our officers are trustees, from which we earn advisory and
management fees. Included in the accompanying Consolidated Financial
Statements are revenues of $53.9 million, $44.9 million and $27.7 million
for 2002, 2001 and 2000, respectively, as well as receivables of $12.3
million, $5.5 million and $8.2 million at December 31, 2002, 2001 and 2000,
respectively, related to these equity interests.
We also earn fees and commissions for services rendered to affiliates
of Dai-ichi Life Property Holdings, Inc. and Gothaer Lebensversicherung
A.G., two significant stockholders. Included in the accompanying
Consolidated Financial Statements are revenues from such affiliates of $4.9
million, $9.0 million and $7.6 million for 2002, 2001 and 2000,
respectively, as well as receivables for reimbursable expenses and revenues
as of December 31, 2002, 2001 and 2000 of $0.2 million, $0.5 million and
$2.3 million, respectively.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Some members of our Board of Directors are also on the Board of
Directors of some of our clients. Included in the accompanying Consoli-
dated Financial Statements are revenues of $2.8 million and $1.8 million
for 2002 and 2001, respectively, as well as receivables of $1.0 million and
$0.2 million at December 31, 2002 and 2001, respectively, related to these
clients.
Mr. Stuart L. Scott, as well as an entity affiliated with Mr. Scott,
are limited partners of Diverse Real Estate Holdings Limited Partnership
("Diverse"). Diverse has an ownership interest in and operates investment
assets, primarily as the managing general partner of real estate
development ventures. Prior to January 1, 1992, Jones Lang LaSalle earned
fees for providing development advisory services to Diverse as well as fees
for the provision of administrative services. Effective January 1, 1992,
Jones Lang LaSalle discontinued charging fees to Diverse for these
services. In 1992, Diverse began the process of discontinuing its
operations and disposing of its assets. At the end of 2002, the net
receivable due from Diverse in connection with such fees and interest
thereon was $2.7 million. The underlying collateral security for this
receivable was significantly enhanced in 2002. As such, $2.0 million of
bad debt reserves were reversed in 2002. Mr. Scott directly holds an
approximately 13.4% partnership interest in Diverse. In addition, the
Stuart Scott Trust, a trust affiliated with Mr. Scott, has a 6.4%
partnership interest in Diverse.
The outstanding balance of loans to employees at December 31, 2002 is
shown in the following table. (1)
2002
----
Loans related to Co-Investments (2)(3) . . . . . . . 1.3
Travel, relocation and other miscellaneous advances. 2.6
----
3.9
====
(1) The Company has not extended or maintained credit, arranged for
the extension of credit, or renewed the extension of credit, in
the form of a personal loan to or for any Director or Executive
Officer of the Company since the enactment of the Sarbanes-Oxley
Act of 2002 on July 30, 2002.
(2) These loans have been made to allow employees the ability to
participate in investment fund opportunities. With the exception
of approximately $474,000 of these co-investment related loans,
all loans are nonrecourse loans.
(3) Included in loans related to co-investments is an advance of
$87,300 to an employee who is an executive officer of the Company
that was entered into prior to, and has not been materially
modified since, the date of enactment of the Sarbanes-Oxley Act
of 2002.
(15) ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND
OTHER INTANGIBLE ASSETS
Effective July 2001, we adopted Statement No. 141, "Business
Combinations," ("SFAS 141"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations completed after June 30,
2001. SFAS 141 also specifies that intangible assets acquired in a purchase
method business combination must meet certain criteria to be recognized and
reported apart from goodwill.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Effective January 1, 2002, we adopted Statement No. 142, "Goodwill and
Other Intangible Assets," ("SFAS 142"). SFAS 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized,
but instead they must be tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment.
In connection with the transitional goodwill impairment evaluation,
SFAS 142 required us to perform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption. To
accomplish this evaluation, we determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the
date of adoption. For purposes of this exercise, we defined reporting units
based on how the Chief Operating Decision Makers for each segment looked at
their segment when determining strategic business decisions. The following
reporting units were determined: Investment Management, Americas OOS,
Australia OOS, Asia OOS, and by country in Europe OOS. We have determined
the fair value of each reporting unit on the basis of a discounted cash
flow methodology and compared it to the reporting unit's carrying amount.
In all cases, the fair value of each reporting unit exceeded its carrying
amount, and therefore no impairment loss has been recognized on our
goodwill. Also, unamortized negative goodwill of $846,000, which existed at
the date we adopted SFAS 142, has been credited to the income statement as
a cumulative effect of a change in accounting principle.
We have $333.8 million of unamortized intangibles and goodwill as of
December 31, 2002, that are subject to the provisions of SFAS 142. A
significant portion of these unamortized intangibles and goodwill are
denominated in currencies other than US dollars, which means that a portion
of the movements in the reported book value of these balances are
attributable to movements in currency exchange rates. See the tables below
for further details on the foreign exchange impact on intangible and
goodwill balances. Goodwill with an indefinite useful life in the amount of
$315.5 million represents intangibles which have ceased to be amortized
beginning January 1, 2002. The amortization savings for 2002 totaled $9.6
million. As a result of adopting SFAS 142, on January 1, 2002 we credited
$846,000 to the income statement, as the cumulative effect of a change in
accounting principle, which represented our negative goodwill balance at
January 1, 2002. The gross carrying amount of this negative goodwill (which
related to the Americas OOS reporting segment) at January 1, 2002 was $1.4
million with accumulated amortization of $565,000. The remaining $18.3
million of identifiable intangibles (principally representing management
contracts acquired) will be amortized over their remaining definite useful
lives. Other than the prospective non-amortization of goodwill, which
results in a non-cash improvement in our operating results, the adoption of
SFAS 142 did not have a material effect on our revenue, operating results
or liquidity.
In accordance with SFAS 142, the effect of this accounting change is
applied prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the prior periods is as follows (in
thousands, except share data):
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2002 2001 2000
-------- -------- --------
Reported net income (loss). . . . . $ 27,110 (15,411) (57,060)
Add back: Cumulative effect
of change in accounting
principal . . . . . . . . . . . . (846) -- --
Add back: Amortization of
Goodwill with indefinite
useful lives, net of tax. . . . . -- 5,574 6,173
-------- -------- --------
Adjusted net income (loss). . . . . $ 26,264 (9,837) (50,887)
======== ======== ========
Basic earnings (loss)
per common share. . . . . . . . . $ 0.89 (0.51) (2.30)
Cumulative effect of change in
accounting principle. . . . . . . (0.03) -- --
Amortization of Goodwill with
indefinite useful lives,
net of tax. . . . . . . . . . . . -- 0.19 0.25
-------- -------- --------
Adjusted basic earnings (loss)
per common share. . . . . . . . . $ 0.86 (0.32) (2.05)
======== ======== ========
Diluted earnings (loss)
per common share. . . . . . . . . $ 0.85 (0.51) (2.30)
Cumulative effect of change in
accounting principle. . . . . . . (0.03) -- --
Amortization of Goodwill with
indefinite useful lives,
net of tax. . . . . . . . . . . . -- 0.19 0.25
-------- -------- --------
Adjusted diluted earnings (loss)
per common share. . . . . . . . . $ 0.82 (0.32) (2.05)
======== ======== ========
<table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth, by reporting segment, the current year movements in the gross carrying amount
and accumulated amortization of our goodwill with indefinite useful lives (amounts in thousands):
<caption>
Owner and Occupier Services
--------------------------------------
Asia Investment
Americas Europe Pacific Management Consolidated
---------- ---------- ---------- ---------- ------------
<s> <c> <c> <c> <c> <c>
Gross Carrying Amount
- ---------------------
Balance as of
January 1, 2002 . . . . . . . . $ 179,263 53,259 79,603 28,890 341,015
Impact of exchange
rate movements. . . . . . . . . 72 5,643 3,152 1,993 10,860
---------- ---------- ---------- ---------- ----------
Balance as of
December 31, 2002 . . . . . . . $ 179,335 58,902 82,755 30,883 351,875
Owner and Occupier Services
--------------------------------------
Asia Investment
Americas Europe Pacific Management Consolidated
---------- ---------- ---------- ---------- ------------
Accumulated Amortization
- ------------------------
Balance as of
January 1, 2002 . . . . . . . . $ (15,516) (4,901) (5,607) (9,303) (35,327)
Impact of exchange
rate movements. . . . . . . . . (15) (560) (228) (268) (1,071)
---------- ---------- ---------- ---------- ----------
Balance as of
December 31, 2002 . . . . . . . (15,531) (5,461) (5,835) (9,571) (36,398)
Net book value. . . . . . . . . . $ 163,804 53,441 76,920 21,312 315,477
========== ========== ========== ========== ==========
</table>
<table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth, by reporting segment, the current year movements in the gross carrying amount
and accumulated amortization of our intangibles with definite useful lives (amounts in thousands, unless otherwise
noted):
<caption>
Owner and Occupier Services
--------------------------------------
Asia Investment
Americas Europe Pacific Management Consolidated
---------- ---------- ---------- ---------- ------------
<s> <c> <c> <c> <c> <c>
Gross Carrying Amount
- ---------------------
Balance as of
January 1, 2002 . . . . . . . . $ 39,377 742 2,071 4,332 46,522
Impact of exchange
rate movements. . . . . . . . . -- 77 225 448 750
---------- ---------- ---------- ---------- ----------
Balance as of
December 31, 2002 . . . . . . . $ 39,377 819 2,296 4,780 47,272
Owner and Occupier Services
--------------------------------------
Asia Investment
Americas Europe Pacific Management Consolidated
---------- ---------- ---------- ---------- ------------
Accumulated Amortization
- ------------------------
Balance as of
January 1, 2002 . . . . . . . . $ (17,720) (302) (841) (4,332) (23,195)
Amortization expense. . . . . . . (4,785) (96) (276) -- (5,157)
Impact of exchange
rate movements. . . . . . . . . 11 (37) (102) (448) (576)
---------- ---------- ---------- ---------- ----------
Balance as of
December 31, 2002 . . . . . . . $ (22,494) (435) (1,219) (4,780) (28,928)
Net book value. . . . . . . . . . $ 16,883 384 1,077 -- 18,344
========== ========== ========== ========== ==========
</table>
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth the estimated future amortization
expense of our intangibles with definite useful lives:
ESTIMATED ANNUAL AMORTIZATION EXPENSE
-------------------------------------
For year ended December 31, 2003 $5.2 million
For year ended December 31, 2004 $5.2 million
For year ended December 31, 2005 $4.7 million
For year ended December 31, 2006 $3.2 million
For year ended December 31, 2007 None
(16) COMMITMENTS AND CONTINGENCIES
As of December 31, 2002, Jones Lang LaSalle and certain of our
subsidiaries had $4.7 million of co-investment indebtedness guarantees
outstanding to third-party lenders. As discussed in Note 8, we apply
Interpretation No. 45 to recognize and measure the provisions of these
guarantees. The $4.7 million of guarantees represents the maximum future
payments that Jones Lang LaSalle could be required to make under such
guarantees. These guarantees relate to collateralized borrowings by
project-level entities, and certain of the guarantees have terms extending
out until 2011. Repayment could be requested by the third-party lenders in
the event that one of the project level entities fail to repay its
borrowing. We do not expect to incur any material losses under these
guarantees.
We are a defendant in various litigation matters arising in the
ordinary course of business, some of which involve claims for damages that
are substantial in amount. Many of these litigation matters are covered by
insurance. We do not expect the ultimate resolution of such litigation
matters to have a material adverse effect on our financial position,
results of operations or liquidity.
On November 8, 2002, Bank One N.A. ("Bank One") filed suit against the
Company and certain of its subsidiaries in the Circuit Court of Cook
County, Illinois with regard to services provided in 1999 and 2000 pursuant
to three different agreements relating to facility management, project
development and broker services. The suit generally alleges negligence,
breach of contract and breach of fiduciary duty on the part of Jones Lang
LaSalle and seeks to recover a total of $40 million in compensatory damages
and $80 million in punitive damages. The Company is aggressively defending
the suit and on December 16, 2002 filed a counterclaim for breach of
contract seeking payment of approximately $1.2 million for fees due for
services provided under the agreements. While there can be no assurance,
the Company believes that the complaint is without merit and, as such, will
not have a material adverse impact on our financial position, results of
operations, or liquidity. The suits are in their early stages. As of the
date of this report, discovery is just beginning and no trial date has been
set. As such, the outcome of Bank One's suit cannot be predicted with any
certainty and management is unable to estimate an amount or range of
potential loss that could result if an improbable unfavorable outcome did
occur.
In the third quarter of 2001 we established a reserve, which we
believe is adequate to cover our exposures resulting from the insolvency of
HIH Insurance Ltd. ("HIH"), one of our former insurance providers. HIH
provided public liability coverage to the Australian operations of JLW for
the years from 1994 to 1997, which coverage would typically provide
protection against, among other things, personal injury claims arising out
of accidents occurring at properties for which we had property management
responsibilities. As of December 31, 2002, $1.1 million remained to cover
claims which would have been covered by the insurance provided by HIH.
Although there can be no assurance, we believe this reserve is adequate to
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
cover any remaining claims and expenses resulting from the HIH insolvency.
Due to the nature of the claims covered by this insurance, it is possible
that future claims may be made.
(17) IMPLEMENTATION OF SAB 101
During December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101"), which provides guidance on various revenue
recognition matters. Historically, we and certain other real estate
service companies had recorded the full amount of lease commissions as
revenue upon the completion of leasing services and the closing of the
transaction, when invoicing for a portion of the commission was to be
delayed until actual tenant occupancy. This policy was based upon the fact
that we had fulfilled all of our contractual obligations and the likelihood
of the tenant defaulting under the lease was extremely remote. Under
SAB 101, such lease commission revenue should be deferred until the parties
to the lease contract have fulfilled their respective obligations. In 2000
we adopted the provisions of SAB 101, retroactively applying them as of
January 1, 2000.
As a result, revenue recognition is now deferred until all parties to
the lease contract have fulfilled their respective lease obligations if the
fee income is dependent upon those contingencies being removed. This
change in accounting policy does not impact the timing or amount of cash
flow, or the amount of earnings that we will ultimately recognize.
Effective January 1, 2000, we recorded a one-time, non-cash, after-tax
cumulative effect of a change in accounting principle of $14.2 million, net
of taxes of $8.7 million. This adjustment represents revenues of $22.9
million that had been recognized prior to January 1, 2000 that would not
have been recognized if the new accounting policy had been in effect in
prior years. These revenues will be recognized as the underlying
contingencies are satisfied. We recognized $400,000, $5.8 million and
$16.2 million of these revenues in the twelve months ended December 31,
2002, 2001 and 2000, respectively. Of the $22.9 million of revenues that
were deferred on January 1, 2000, $500,000 represented revenues related to
our land investment business, a business we exited in 2001. We have
determined that the subsequent impairment of the specific investment that
generated these revenues means that this $500,000 will not be collected,
and therefore will not be recorded as revenue. This will have no impact on
our earnings or cash flow.
The new revenue recognition policy meant that revenue associated with
transactions in the year 2000 was deferred until 2001 or later. In 2000,
we deferred $20.9 million of such revenue. SAB 101 was fully implemented
into our accounting systems in 2001.
The net impact of the implementation of SAB 101 on our 2000 operating
income was to reduce the reported operating income by $4.7 million.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(18) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On July 26, 2000, Jones Lang LaSalle Finance B.V. ("JLL Finance"), a
wholly-owned subsidiary of Jones Lang LaSalle, issued 9% Senior Euro Notes
with an aggregate principal amount of euro 165 million, due 2007 (the "Euro
Notes"). The payment obligations under the Euro Notes are fully and
unconditionally guaranteed by Jones Lang LaSalle Incorporated and certain
of its wholly-owned subsidiaries: Jones Lang LaSalle America's Inc.;
LaSalle Investment Management, Inc.; Jones Lang LaSalle International,
Inc.; Jones Lang LaSalle Co-Investment, Inc.; and Jones Lang LaSalle Ltd.
(the "Guarantor Subsidiaries"). All of Jones Lang LaSalle Incorporated's
remaining subsidiaries (the "Non-Guarantor Subsidiaries") are owned by the
Guarantor Subsidiaries. The following supplemental Condensed Consolidating
Balance Sheets as of December 31, 2002 and December 31, 2001, Condensed
Consolidating Statement of Earnings and Condensed Consolidating Statement
of Cash Flows for the years ended December 31, 2002, 2001 and 2000 present
financial information for (i) Jones Lang LaSalle Incorporated (carrying any
investment in subsidiaries under the equity method), (ii) Jones Lang
LaSalle Finance B.V. (the issuer of the Euro Notes), (iii) on a combined
basis the Guarantor Subsidiaries (carrying any investment in Non-Guarantor
Subsidiaries under the equity method) and (iv) on a combined basis the Non-
Guarantor Subsidiaries (carrying its investments in JLL Finance under the
equity method). Separate financial statements of the Guarantor
Subsidiaries are not presented because the guarantors are jointly,
severally, and unconditionally liable under the guarantees, and Jones Lang
LaSalle Incorporated believes that separate financial statements and other
disclosures regarding the Guarantor Subsidiaries are not material to
investors. In general, historically, Jones Lang LaSalle Incorporated has
entered into third-party borrowings, financing its subsidiaries via
intercompany accounts that are then converted into equity on a periodic
basis. Certain Guarantor and Non-Guarantor Subsidiaries also enter into
third-party borrowings on a limited basis. All intercompany activity has
been included as subsidiary activity in investing activities in the
Condensed Consolidating Statements of Cash Flows. Cash is managed on a
consolidated basis and there is a right of offset between bank accounts in
the different groupings of legal entities in the condensed consolidating
financial information. Therefore, in certain cases, negative cash balances
have not been reallocated to payables as they legally offset positive cash
balances elsewhere in Jones Lang LaSalle Incorporated. In certain cases,
taxes have been calculated on the basis of a group position that includes
both Guarantor and Non-Guarantor Subsidiaries. In such cases, the taxes
have been allocated to individual legal entities on the basis of that legal
entity's pre-tax income.
<table>
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2002
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c>
ASSETS
- ------
Cash and cash
equivalents . . . . $ 8,657 65 (3,849) 8,781 -- 13,654
Trade receivables,
net of allowances . -- -- 84,033 143,546 -- 227,579
Other current assets. 21,303 -- 29,006 14,763 -- 65,072
---------- ---------- ---------- ---------- ---------- ----------
Total current
assets. . . . . 29,960 65 109,190 167,090 -- 306,305
Property and equipment,
at cost, less accumu-
lated depreciation. 5,088 -- 38,913 37,651 -- 81,652
Intangibles resulting
from business acquisi-
tions and JLW merger,
net of accumulated
amortization. . . . -- -- 231,538 102,283 -- 333,821
Other assets, net . . 16,399 -- 77,047 37,292 -- 130,738
Investment in
subsidiaries. . . . 280,330 -- 266,571 774 (547,675) --
---------- ---------- ---------- ---------- ---------- ----------
$ 331,777 65 723,259 345,090 (547,675) 852,516
========== ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
As of December 31, 2002
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
Accounts payable and
accrued liabilities $ 22,622 1,215 24,184 44,368 -- 92,389
Short-term borrowings -- 205 4,210 11,448 -- 15,863
Other current
liabilities . . . . (64,630) (201,274) 404,201 22,647 -- 160,944
---------- ---------- ---------- ---------- ---------- ----------
Total current
liabilities . . (42,008) (199,854) 432,595 78,463 -- 269,196
Long-term liabilities:
Credit facilities . -- 26,077 -- -- -- 26,077
9% Senior Notes,
due 2007. . . . . -- 173,068 -- -- -- 173,068
Other . . . . . . . 2,168 -- 10,334 4,715 -- 17,217
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities (39,840) (709) 442,929 83,178 -- 485,558
Stockholders' equity. 371,617 774 280,330 261,912 (547,675) 366,958
---------- ---------- ---------- ---------- ---------- ----------
$ 331,777 65 723,259 345,090 (547,675) 852,516
========== ========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2001
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c>
ASSETS
- ------
Cash and cash
equivalents . . . . $ 3,142 52 (2,843) 10,095 -- 10,446
Trade receivables,
net of allowances . 132 -- 84,492 137,966 -- 222,590
Other current assets. (4,575) -- 30,708 26,663 -- 52,796
---------- ---------- ---------- ---------- ---------- ----------
Total current
assets. . . . . (1,301) 52 112,357 174,724 -- 285,832
Property and equipment,
at cost, less accumu-
lated depreciation. 4,388 -- 48,817 39,298 -- 92,503
Intangibles resulting
from business acquisi-
tions and JLW merger,
net of accumulated
amortization. . . . -- -- 230,940 97,229 -- 328,169
Other assets, net . . 26,154 -- 69,426 33,643 -- 129,223
Investment in
subsidiaries. . . . 216,825 -- 212,452 367 (429,644) --
---------- ---------- ---------- ---------- ---------- ----------
$ 246,066 52 673,992 345,261 (429,644) 835,727
========== ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
As of December 31, 2001
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
Accounts payable and
accrued liabilities $ 10,572 836 42,568 50,592 -- 104,568
Short-term borrowings -- -- 9,147 6,350 -- 15,497
Other current
liabilities . . . . (81,592) (207,773) 391,432 65,503 -- 167,570
---------- ---------- ---------- ---------- ---------- ----------
Total current
liabilities . . (71,020) (206,937) 443,147 122,445 -- 287,635
Long-term liabilities:
Credit facilities . -- 59,854 -- 767 -- 60,621
9% Senior Notes,
due 2007. . . . . -- 146,768 -- -- -- 146,768
Other . . . . . . . 2,705 -- 14,020 8,808 -- 25,533
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities (68,315) (315) 457,167 132,020 -- 520,557
Commitments and
contingencies
Minority interest in
consolidated
subsidiaries. . . . -- -- -- 789 -- 789
Stockholders' equity. 314,381 367 216,825 212,452 (429,644) 314,381
---------- ---------- ---------- ---------- ---------- ----------
$ 246,066 52 673,992 345,261 (429,644) 835,727
========== ========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
For the year ended December 31, 2002
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c>
Revenue . . . . . . . $ -- -- 404,785 435,644 -- 840,429
Equity earnings (loss)
from subsidiaries . 29,061 -- 21,359 189 (50,609) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenue . . 29,061 -- 426,144 435,833 (50,609) 840,429
Operating expenses
before non-recurring
and restructuring
charges . . . . . . 5,145 34 374,737 390,947 -- 770,863
Non-recurring and
restructuring
charges . . . . . . 5,086 -- 8,595 1,190 -- 14,871
---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss). . . . . 18,830 (34) 42,812 43,696 (50,609) 54,695
Interest expense, net
of interest income. (6,623) (748) 14,084 10,311 -- 17,024
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss)
before provision
(benefit) for
income taxes
and minority
interest. . . . 25,453 714 28,728 33,385 (50,609) 37,671
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED
For the year ended December 31, 2002
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
Net provision (benefit)
for income taxes. . (1,657) 525 (333) 12,502 -- 11,037
Minority interests in
earnings of
subsidiaries. . . . -- -- -- 711 -- 711
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)
before extraordinary
item and cumulative
change in accounting
principle . . . . . 27,110 189 29,061 20,172 (50,609) 25,923
Extraordinary gain on
the acquisition of
minority interest,
net of tax. . . . . -- -- -- 341 -- 341
Cumulative effect of
a change in account-
ing principle . . . -- -- -- 846 -- 846
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) . $ 27,110 189 29,061 21,359 (50,609) 27,110
========== ========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
For the year ended December 31, 2001
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c>
Revenue . . . . . . . $ -- -- 449,379 456,070 -- 905,449
Equity earnings (loss)
from subsidiaries . (3,045) -- 9,768 263 (6,986) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenue . . (3,045) -- 459,147 456,333 (6,986) 905,449
Operating expenses
before non-recurring
and restructuring
charges . . . . . . 17,884 32 393,425 403,917 -- 815,258
Non-recurring and
restructuring
charges . . . . . . 569 -- 46,664 29,999 -- 77,232
---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss). . . . . (21,498) (32) 19,058 22,417 (6,986) 12,959
Interest expense, net
of interest income. (4,344) (756) 15,369 9,887 -- 20,156
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss)
before provision
(benefit) for
income taxes
and minority
interest. . . . (17,154) 724 3,689 12,530 (6,986) (7,197)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED
For the year ended December 31, 2001
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
Net provision (benefit)
for income taxes. . (1,743) 461 6,734 2,534 -- 7,986
Minority interests in
earnings of
subsidiaries. . . . -- -- -- 228 -- 228
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) . $ (15,411) 263 (3,045) 9,768 (6,986) (15,411)
========== ========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
For the year ended December 31, 2000
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c>
Revenue . . . . . . . $ -- -- 453,226 489,298 -- 942,524
Equity earnings (loss)
from subsidiaries . 49,064 -- 55,832 110 (105,006) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenue . . 49,064 -- 509,058 489,408 (105,006) 942,524
Operating expenses
before merger re-
lated non-recurring
charges . . . . . . 17,565 2 428,026 404,733 -- 850,326
Merger related non-
recurring charges . 79,908 -- 3,433 2,454 -- 85,795
---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss). . . . . (48,409) (2) 77,599 82,221 (105,006) 6,403
Interest expense, net
of interest income. 7,931 (209) 16,245 3,215 -- 27,182
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss)
before provision
for income taxes
and minority
interest. . . . (56,340) 207 61,354 79,006 (105,006) (20,779)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED
For the year ended December 31, 2000
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Eliminations Incorporated
------------ ---------- ------------ ------------- ------------ ------------
Net provision for
income taxes. . . . 720 97 2,479 18,757 -- 22,053
Minority interests in
earnings of
subsidiaries. . . . -- -- -- (21) -- (21)
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)
before cumulative
effect of change in
accounting principle (57,060) 110 58,875 60,270 (105,006) (42,811)
Cumulative effect of
change in accounting
principle, net
of tax. . . . . . . -- -- (9,811) (4,438) -- (14,249)
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) . $ (57,060) 110 49,064 55,832 (105,006) (57,060)
========== ========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve Months Ended December 31, 2002
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Incorporated
------------ ---------- ------------ ------------- ------------
<s> <c> <c> <c> <c> <c>
Cash flows provided by
operating activities $ 6,913 26,867 23,478 11,111 68,369
Cash flows provided by
(used in) investing
activities:
Net capital additions-
property and equip-
ment . . . . . . . (1,923) -- (6,891) (7,976) (16,790)
Other acquisitions and
investments, net of
cash acquired and
transaction costs. -- -- (287) -- (287)
Subsidiary activity 509 6,718 (3,627) (3,600) --
Investments in real
estate ventures. . -- -- (8,742) (521) (9,263)
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) investing
activities . . . (1,414) 6,718 (19,547) (12,097) (26,340)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED
For the Twelve Months Ended December 31, 2002
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Incorporated
------------ ---------- ------------ ------------- ------------
Cash flows provided by
(used in) financing
activities:
Net borrowings under
credit facility. . (60) (33,572) (4,937) 4,331 (34,238)
Shares repurchased. (4,052) -- -- (4,659) (8,711)
Common stock issued
under stock option
plan and stock
purchase programs. 4,128 -- -- -- 4,128
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities . . . 16 (33,572) (4,937) (328) (38,821)
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents . . . . 5,515 13 (1,006) (1,314) 3,208
Cash and cash equiva-
lents, beginning
of period . . . . . 3,142 52 (2,843) 10,095 10,446
---------- ---------- ---------- ---------- ----------
Cash and cash equiva-
lents, end of period $ 8,657 65 (3,849) 8,781 13,654
========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve Months Ended December 31, 2001
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Incorporated
------------ ---------- ------------ ------------- ------------
<s> <c> <c> <c> <c> <c>
Cash flows provided by
operating activities $ (10,653) 34 37,061 27,661 54,103
Cash flows provided by
(used in) investing
activities:
Net capital additions-
property and equip-
ment . . . . . . . (2,346) -- (16,309) (17,137) (35,792)
Other acquisitions and
investments, net of
cash acquired and
transaction costs. -- -- (5,129) (284) (5,413)
Subsidiary activity 23,139 25,576 (7,039) (41,676) --
Investments in real
estate ventures. . -- -- (11,723) 20,379 8,656
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) investing
activities . . . 20,793 25,576 (40,200) (38,718) (32,549)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED
For the Twelve Months Ended December 31, 2001
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Incorporated
------------ ---------- ------------ ------------- ------------
Cash flows provided by
(used in) financing
activities:
Net borrowings under
credit facility. . (1,824) (25,710) 3,961 2,485 (21,088)
Shares repurchased. (11,060) -- -- -- (11,060)
Common stock issued
under stock option
plan and stock
purchase programs. 2,197 -- -- -- 2,197
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities . . . (10,687) (25,710) 3,961 2,485 (29,951)
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents . . . . (547) (100) 822 (8,572) (8,397)
Cash and cash equiva-
lents, beginning
of period . . . . . 3,689 152 (3,665) 18,667 18,843
---------- ---------- ---------- ---------- ----------
Cash and cash equiva-
lents, end of period $ 3,142 52 (2,843) 10,095 10,446
========== ========== ========== ========== ==========
</table>
<table>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve Months Ended December 31, 2000
($ in thousands)
<caption>
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Incorporated
------------ ---------- ------------ ------------- ------------
<s> <c> <c> <c> <c> <c>
Cash flows provided by
operating activities $ 11,070 1,064 45,913 82,293 140,340
Cash flows provided by
(used in) investing
activities:
Net capital additions-
property and equip-
ment . . . . . . . (2,433) -- (19,695) (23,676) (45,804)
Other acquisitions and
investments, net of
cash acquired and
transaction costs. -- -- (12,418) (915) (13,333)
Subsidiary activity 311,876 (238,787) (17,018) (56,071) --
Investments in real
estate ventures. . -- -- (3,144) (4,309) (7,453)
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) investing
activities . . . 309,443 (238,787) (52,275) (84,971) (66,590)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED
For the Twelve Months Ended December 31, 2000
($ in thousands)
Jones Lang Consoli-
LaSalle Jones Lang dated
Incorporated LaSalle Jones Lang
(Parent and Finance Guarantor Non-Guarantor LaSalle
Guarantor) B.V. Subsidiaries Subsidiaries Incorporated
------------ ---------- ------------ ------------- ------------
Cash flows provided by
(used in) financing
activities:
Net borrowings under
credit facility. . (316,214) 85,565 4,215 (1,551) (227,985)
Net proceeds from
issuance of the
Euro Notes . . . . (1,169) 152,310 (2,545) -- 148,596
Shares repurchased. (816) -- -- -- (816)
Common stock issued
under stock option
plan and stock
purchase programs. 1,990 -- -- -- 1,990
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities . . . (316,209) 237,875 1,670 (1,551) (78,215)
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents . . . . 4,304 152 (4,692) (4,229) (4,465)
Cash and cash equiva-
lents, beginning
of period . . . . . (615) -- 1,027 22,896 23,308
---------- ---------- ---------- ---------- ----------
Cash and cash equiva-
lents, end of period $ 3,689 152 (3,665) 18,667 18,843
========== ========== ========== ========== ==========
</table>
(19) SUBSEQUENT EVENTS
On February 13, 2003 the Compensation Committee of the Board of
Directors approved the grant of 330,000 restricted stock units to certain
employees. These restricted stock units, which were granted under the 1997
Jones Lang LaSalle Stock Award and Incentive Plan, have a zero strike price
and 50% will vest July 1, 2006 (over 40 months) and 50% will vest July 1,
2008 (over 64 months). The total related compensation expense of $4.3
million (330,000 shares at $13.00 per share) will be expensed over the
vesting periods.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited consolidated
statements of earnings data for each of our last eight quarters. In our
opinion, this information has been presented on the same basis as the
audited consolidated financial statements appearing elsewhere in this
report, and includes all adjustments, consisting only of normal recurring
adjustments and accruals, that we consider necessary for a fair
presentation. The unaudited consolidated quarterly information should be
read in conjunction with our Consolidated Financial Statements and the
notes thereto as well as the "Summary of Critical Accounting Policies and
Estimates" section within "Management's Discussion and Analysis of
Financial Condition and Results of Operations.". The operating results for
any quarter are not necessarily indicative of the results for any future
period.
We would note the following points regarding how we prepare and
present our financial statements on a periodic basis.
PERIODIC ACCOUNTING FOR INCENTIVE COMPENSATION - An important part of
our overall compensation package is incentive compensation, which is
typically paid out to employees in the first quarter of the year after it
is earned. In our interim financial statements we accrue for incentive
compensation based on the percentage of revenue and compensation costs
recorded to date relative to forecasted revenue and compensation costs for
the full year as substantially all incentive compensation pools are based
upon revenues and profits. The impact of this incentive compensation
accrual methodology is that we accrue very little incentive compensation in
the first six months of the year, with the majority of our incentive
compensation accrued in the second half of the year, particularly in the
fourth quarter. We adjust the incentive compensation accrual in those
unusual cases where earned incentive compensation has been paid to
employees. In addition, we exclude from the standard accrual methodology
incentive compensation pools that are not subject to the normal performance
criteria. These pools are accrued for on a straight-line basis. As
discussed in Note 13 to Notes to Consolidated Financial Statements, certain
senior employees receive a portion of their incentive compensation in the
form of restricted stock units of our common stock. We recognize this
compensation over the vesting period of these restricted stock units, which
has the effect of deferring a portion of current year incentive
compensation to later years. Given that the majority of our incentive
compensation is accrued in the fourth quarter, we do not estimate and
account for the current year impact of this program until the fourth
quarter.
INCOME TAXES - We provide for the effects of income taxes on interim
financial statements based on our estimate of the effective tax rate for
the full year. We assess our effective tax rate on a quarterly basis and
reflect the benefit from tax planning actions when we believe it is
probable they will be successful, which usually requires that certain
actions have been initiated. We account for the cumulative catch-up impact
of any change in estimated effective tax rate in the quarter that a change
is made.
<table>
JONES LANG LASALLE INCORPORATED
QUARTERLY INFORMATION
(UNAUDITED)
<caption>
2002
-------------------------------------------------------
($ in thousands, except share data) March 31 June 30 Sept. 30 Dec. 31 Year
-------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c>
Revenue:
Owner & Occupier Services:
Americas. . . . . . . . . . . . . . . . . . . . $ 55,828 61,439 71,299 102,338 290,904
Europe. . . . . . . . . . . . . . . . . . . . . 64,337 78,843 73,890 97,344 314,414
Asia Pacific. . . . . . . . . . . . . . . . . . 26,224 31,968 30,484 37,902 126,578
Investment Management . . . . . . . . . . . . . . 19,158 22,013 35,005 32,833 109,009
Less: intersegment revenue . . . . . . . . . . . . (117) (85) (173) (101) (476)
-------- -------- -------- -------- --------
Total revenue . . . . . . . . . . . . . . . 165,430 194,178 210,505 270,316 840,429
Operating expenses:
Owner & Occupier Services:
Americas. . . . . . . . . . . . . . . . . . . . 57,944 57,885 65,005 78,068 258,902
Europe. . . . . . . . . . . . . . . . . . . . . 64,059 73,138 73,027 86,435 296,659
Asia Pacific. . . . . . . . . . . . . . . . . . 29,250 30,675 30,426 36,458 126,809
Investment Management . . . . . . . . . . . . . . 18,306 19,363 23,940 27,360 88,969
Less: intersegment expenses. . . . . . . . . . . . (117) (85) (173) (101) (476)
Non-recurring and restructuring charges . . . . . . 100 951 472 13,348 14,871
-------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . . . . . . 169,542 181,927 192,697 241,568 785,734
Operating income (loss) . . . . . . . . . . . . . . $ (4,112) 12,251 17,808 28,748 54,695
Net earnings (loss) . . . . . . . . . . . . . . . . $ (4,035) 3,506 10,169 17,470 27,110
Basic earnings (loss) per common share before
extraordinary item and cumulative effect
of change in accounting principle . . . . . . . $ (0.16) 0.12 0.33 0.56 0.85
Extraordinary gain on the acquisition of
minority interest, net of tax . . . . . . . . . $ -- -- -- 0.01 0.01
Cumulative effect of change in accounting
principal . . . . . . . . . . . . . . . . . . . $ 0.03 -- -- -- 0.03
2002
-------------------------------------------------------
($ in thousands, except share data) March 31 June 30 Sept. 30 Dec. 31 Year
-------- -------- -------- -------- --------
Basic earnings (loss) per common share. . . . . . . $ (0.13) 0.12 0.33 0.57 0.89
Diluted earnings (loss) per common share before
extraordinary item and cumulative effect
of change in accounting principle . . . . . . . $ (0.16) 0.11 0.32 0.54 0.81
Extraordinary gain on the acquisition of
minority interest, net of tax . . . . . . . . . $ -- -- -- 0.01 0.01
Cumulative effect of change in accounting
principal . . . . . . . . . . . . . . . . . . . $ 0.03 -- -- -- 0.03
Diluted earnings (loss) per common share. . . . . . $ (0.13) 0.11 0.32 0.55 0.85
2001
-------------------------------------------------------
($ in thousands, except share data) March 31 June 30 Sept. 30 Dec. 31 Year
-------- -------- -------- -------- --------
Revenue:
Owner & Occupier Services:
Americas. . . . . . . . . . . . . . . . . . . . $ 64,606 78,484 78,997 105,850 327,937
Europe. . . . . . . . . . . . . . . . . . . . . 85,688 77,599 74,331 107,222 344,840
Asia Pacific. . . . . . . . . . . . . . . . . . 27,886 28,659 32,748 40,261 129,554
Investment Management . . . . . . . . . . . . . . 24,476 19,732 35,882 24,219 104,309
Less: intersegment revenue . . . . . . . . . . . . (160) (550) (189) (292) (1,191)
-------- -------- -------- -------- --------
Total revenue . . . . . . . . . . . . . . . 202,496 203,924 221,769 277,260 905,449
Operating expenses:
Owner & Occupier Services:
Americas. . . . . . . . . . . . . . . . . . . . 75,322 74,926 70,951 80,412 301,611
Europe. . . . . . . . . . . . . . . . . . . . . 77,072 71,899 70,001 83,344 302,316
Asia Pacific. . . . . . . . . . . . . . . . . . 30,433 31,046 32,144 36,287 129,910
Investment Management . . . . . . . . . . . . . . 19,703 20,215 22,981 19,713 82,612
Less: intersegment expenses. . . . . . . . . . . . (160) (550) (189) (292) (1,191)
Non-recurring and restructuring charges . . . . . . 1,055 2,595 24,490 49,092 77,232
-------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . . . . . . 203,425 200,131 220,378 268,556 892,490
Operating income (loss) . . . . . . . . . . . . . . $ (929) 3,793 1,391 8,704 12,959
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (3,546) (1,922) (6,181) (3,762) (15,411)
Basic loss per common share . . . . . . . . . . . . $ (0.12) (0.06) (0.21) (0.13) (0.51)
Diluted loss per common share . . . . . . . . . . . $ (0.12) (0.06) (0.21) (0.13) (0.51)
</table>
JONES LANG LASALLE INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
Balance at Balance
Beginning Costs and Deductions at End
Description of Period Expenses (A) of Period
- ----------- ---------- ---------- ---------- ---------
2002
Accounts Receivable
Reserves (B). . . . . $ 5,887 262 1,157 $ 4,992
2001
Accounts Receivable
Reserves. . . . . . . $ 8,843 8,257 11,213 $ 5,887
2000
Accounts Receivable
Reserves. . . . . . . $ 9,871 5,464 6,492 $ 8,843
(A) Includes primarily write-offs of uncollectible accounts.
(B) Costs and expenses for 2002 are net of the $2.0 million reversal of
bad debt reserves relating to Diverse.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the material in Jones Lang LaSalle's Proxy Statement for the 2003 Annual
Meeting of Stockholders (the "Proxy Statement") under the captions
"Election of Directors," "Management" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the material in the Proxy Statement under the caption "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the material in the Proxy Statement under the caption "Security Ownership."
The following table provides information as of December 31, 2002 with
respect to Jones Lang LaSalle's common shares issuable under our equity
compensation plans (in thousands, except exercise price):
Number of
Securities
Remaining
Available for
Number of Weighted- Future Issuance
Securities Average Under Equity
to be Issued Exercise Compensation
Upon Exercise Price of Plans
of Outstanding Outstanding (Excluding
Options, Options, Securities
Warrants and Warrants and Reflected in
Plan Category Rights Rights Column (A))
- ------------- -------------- ------------- ---------------
(A) (B) (C)
Equity compensa-
tion plans
approved by
security holders
SAIP (1) 5,436 $ 19.00 2,395
ESPP (2) -- -- 243
------- ------
Subtotal 5,436 2,638
------- ------
Equity compensa-
tion plans not
approved by
security holders
SAYE (3) 220 $13.63 280
------- ------
Subtotal 220 280
------- ------
Total 5,656 2,918
======= ======
Notes:
(1) In 1997, we adopted the 1997 Stock Award and Incentive Plan ("SAIP")
that provides for the granting of options to purchase a specified
number shares of common stock and other stock awards to eligible
participants of Jones Lang LaSalle.
(2) In 1998, we adopted an Employee Stock Purchase Plan ("ESPP") for
eligible US based employees. Under this plan, employee contributions
for stock purchases will be enhanced through an additional
contribution of 15%.
(3) In November of 2001, we established the Jones Lang LaSalle Savings
Related Share Option (UK) Plan ("SAYE") for employees of our UK based
operations. Under the SAYE plan, employees have a one-time
opportunity to enter into a tax efficient savings plan linked to the
option to purchase stock. The Company enhances employee contributions
by 15%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the material appearing in the Proxy Statement under the caption "Certain
Relationships and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, Jones Lang
LaSalle carried out an evaluation, under the supervision and with the
participation of the Company's management, including Christopher A.
Peacock, the Company's Chief Executive Officer and Lauralee E. Martin, the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, Mr. Peacock and Ms.
Martin concluded that Jones Lang LaSalle's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in Jones Lang LaSalle's periodic SEC filings.
There were no significant changes made in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements
See Index to Consolidated Financial Statements in Item 8
of this report.
2. Financial Statement Schedule:
See Index to Consolidated Financial Statements in Item 8
of this report.
3. Exhibits
A list of exhibits is set forth in the Exhibit Index
which immediately precedes the exhibits and is
incorporated by reference herein.
(b) Reports on Form 8-K:
On October 30, 2002, Jones Lang LaSalle filed a Report
on Form 8-K incorporating a press release announcing earnings
for the quarterly period ended September 30, 2002 and a share
repurchase program.
On November 15, 2002, Jones Lang LaSalle filed a Report
on Form 8-K incorporating its November Investor Relations
presentation.
On December 23, 2002, Jones Lang LaSalle filed a Report
on Form 8-K incorporating a press release announcing the
acquisition of the minority interest in a Swedish joint
venture.
On January 3, 2003, Jones Lang LaSalle filed a Report
on Form 8-K incorporating a press release announcing a
reduction in workforce.
On February 4, 2003, Jones Lang LaSalle filed a Report
on Form 8-K incorporating a press release announcing earnings
for the quarterly period ended December 31, 2002.
On February 19, 2002, Jones Lang LaSalle filed a report
on Form 8-K incorporating its February Investor Relations
presentation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this filing and elsewhere (such as in reports,
other filings with the Securities and Exchange Commission, press releases,
presentations and communications by Jones Lang LaSalle or its management
and written and oral statements) may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause Jones Lang LaSalle's
actual results, performance, achievements, plans and objectives to be
materially different from any future results, performance, achievements,
plans and objectives expressed or implied by such forward-looking
statements. Such factors are discussed in (i) this Report in Item 1.
"Business," Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk," and elsewhere, (ii) Jones Lang
LaSalle's Proxy Statement dated April 3, 2002, and (iii) in other reports
filed with the Securities and Exchange Commission. Jones Lang LaSalle
expressly disclaims any obligation or undertaking to update or revise any
forward-looking statements to reflect any changes in events or
circumstances or in its expectations or results.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Jones Lang LaSalle
Incorporated, a Maryland corporation, and the undersigned Directors and
officers of Jones Lang LaSalle Incorporated, hereby constitutes and
appoints Christopher A. Peacock, Lauralee E. Martin and Nicholas J.
Willmott its, his or her true and lawful attorneys-in-fact and agents, for
it, him or her and in its, his or her name, place and stead, in any and all
capacities, with full power to act alone, to sign any and all amendments to
this report, and to file each such amendment to this report, with all
exhibits thereto, and any and all documents in connection therewith, with
the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as it,
he or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on the 27th day of February, 2003.
JONES LANG LASALLE INCORPORATED
/s/ Lauralee E. Martin
----------------------------------
By: Lauralee E. Martin
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of February,
2003.
SIGNATURE TITLE
- --------- -----
/s/ Stuart L. Scott
- ------------------------------ Chairman of the Board of Directors
Stuart L. Scott and Director
/s/ Christopher A. Peacock
- ------------------------------ President, Chief Executive Officer
Christopher A. Peacock and Director
(Principal Executive Officer)
/s/ Peter C. Roberts
- ------------------------------ Executive Vice President,
Peter C. Roberts Chief Operating Officer
and Director
/s/ Lauralee E. Martin
- ------------------------------ Executive Vice President,
Lauralee E. Martin Chief Financial Officer
(Principal Financial Officer)
/s/ Henri-Claude de Bettignies
- ------------------------------ Director
Henri-Claude de Bettignies
SIGNATURE TITLE
- --------- -----
/s/ Darryl Hartley-Leonard
- ------------------------------ Director
Darryl Hartley-Leonard
/s/ Derek A. Higgs
- ------------------------------ Director
Derek A. Higgs
/s/ Thomas C. Theobald
- ------------------------------ Director
Thomas C. Theobald
/s/ Sheila A. Penrose
- ------------------------------ Director
Sheila A. Penrose
/s/ Jackson P. Tai
- ------------------------------ Director
Jackson P. Tai
/s/ Nicholas J. Willmott
- ------------------------------ Executive Vice President and
Nicholas J. Willmott Global Controller
(Principal Accounting Officer)
CERTIFICATIONS
--------------
I, Christopher A. Peacock, certify that:
1. I have reviewed this annual report on Form 10-K of Jones Lang LaSalle
incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:February 27, 2003 /s/ Christopher A. Peacock
-------------------------------------
Christopher A. Peacock
President and Chief Executive Officer
CERTIFICATIONS
--------------
I, Lauralee E. Martin, certify that:
1. I have reviewed this annual report on Form 10-K of Jones Lang LaSalle
incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:February 27, 2003 /s/ Lauralee E. Martin
------------------------------
Lauralee E. Martin
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Subscription Agreement (Incorporated by reference to
Exhibit 2.01 to the Registrant's Registration Statement
No. 333-25741).
2.2 Purchase and Sale Agreement, dated as of October 21, 1998,
as amended, with respect to the acquisition by the Registrant
of the JLW Parent Companies operating in Europe and the U.S.A.
(the "Europe/USA Agreement") (Incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K dated
October 22, 1998 (filed December 9, 1998)).
2.3 Purchase and Sale Agreement, dated as of October 21, 1998,
as amended, with respect to the acquisition by the Registrant
of the JLW Parent Companies operating in Australia and New
Zealand (the "Australasia Agreement") (Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K
dated October 22, 1998 (filed December 9, 1998)).
2.4 Purchase and Sale Agreement, dated as of October 21, 1998,
as amended, with respect to the acquisition by the Registrant
of the JLW Parent Companies operating in Asia (the "Asia
Agreement") (Incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K dated October 22, 1998 (filed
December 9, 1998)).
2.5 Form of Purchase and Sale Joinder Agreement, dated as of
October 21, 1998, by and among the Registrant and each of the
shareholders selling equity interests in the JLW Parent
Companies under the Europe/USA Agreement (Incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K
dated October 22, 1998 (filed December 9, 1998)).
2.6 Form of Purchase and Sale Joinder Agreement, dated as of
October 21, 1998, by and among the Registrant and each of the
shareholders selling equity interests in the JLW Parent
Companies under the Australasia Agreement (Incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K
dated October 22, 1998 (filed December 9, 1998)).
2.7 Form of Purchase and Sale Joinder Agreement, dated as of
October 21, 1998, by and among the Registrant and each of the
shareholders selling equity interests in the JLW Parent
Companies under the Asia Agreement (Incorporated by reference
to Exhibit 10.6 to the Current Report on Form 8-K dated
October 22, 1998 (filed December 9, 1998)).
2.8 Form of Indemnity and Escrow Agreement, dated as of October 21,
1998, by and among the Registrant, certain subsidiaries of the
Registrant and each of the shareholders selling equity
interests in the JLW Parent Companies under the Europe/USA
Agreement, the Australasia Agreement and the Asia Agreement
(Incorporated by reference to Exhibit 10.7 to the Current
Report on Form 8-K dated October 22, 1998 (filed December 9,
1998)).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.9 Form of Stockholder Agreement, dated as of October 21, 1998,
by and among the Registrant and each of the persons receiving
shares of common stock under the Europe/USA Agreement, the
Australasia Agreement and the Asia Agreement (Incorporated by
reference to Exhibit 10.8 to the Current Report on Form 8-K
dated October 22, 1998 (filed December 9, 1998)).
2.10 Form of Stockholder Agreement, dated as of October 21, 1998,
by and among the Registrant and each of the partners of DEL-LPL
Limited Partnership and DEL-LPAML Limited Partnership who was
an employee of the Registrant in October 1998 and who received
shares of Common Stock in connection with the dissolution of
DEL-LPL Limited Partnership and DEL-LPAML Limited Partnership
(Incorporated by reference to Exhibit 10.9 to the Current
Report on From 8-K dated October 22, 1998 (filed December 9,
1998)).
3.1 Charter of Jones Lang LaSalle Incorporated (Incorporated by
reference to Exhibit 3.1 to Jones Lang LaSalle Incorporated's
Registration Statement on Form S-4 (File No. 333-48074-01)).
3.2 Amended and Restated Bylaws of the Registrant (Incorporated by
reference to Exhibit 3(ii) to Jones Lang LaSalle Incorporated's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002).
3.3 Articles of Association of Jones Lang LaSalle Finance B.V.
(English Translation of Dutch Original) (Incorporated by
reference to Jones Lang LaSalle Incorporated's Registration
Statement on Form S-4 (File No. 333-48074-01)).
3.4 Charter of Jones Lang LaSalle Americas, Inc. (Incorporated by
reference to Exhibit 3.4 to Jones Lang LaSalle Incorporated's
Registration Statement on Form S-4 (File No. 333-48074-01)).
3.5 Bylaws of Jones Lang LaSalle Americas, Inc. (Incorporated by
reference to Exhibit 3.5 to Jones Lang LaSalle Incorporated's
Registration Statement on Form S-4 (File No. 333-48074-01)).
3.6 Charter of LaSalle Investment Management, Inc. (Incorporated by
reference to Exhibit 3.6 to Jones Lang LaSalle Incorporated's
Registration Statement on Form S-4 (File No. 333-48074-01)).
3.7 Bylaws of LaSalle Investment Management, Inc. (Incorporated by
reference to Exhibit 3.7 to Jones Lang LaSalle Incorporated's
Registration Statement on Form S-4 (File No. 333-48074-01)).
3.8 Certificate of Incorporation of Jones Lang LaSalle
International, Inc. (Incorporated by reference to Exhibit 3.8
to Jones Lang LaSalle Incorporated's Registration Statement on
Form S-4 (File No. 333-48074-01)).
3.9 Bylaws of Jones Lang LaSalle International, Inc. (Incorporated
by reference to Exhibit 3.9 to Jones Lang LaSalle
Incorporated's Registration Statement on Form S-4 (File
No. 333-48074-01)).
3.10 Charter of Jones Lang LaSalle Co-Investment, Inc. (Incorporated
by reference to Exhibit 3.10 to Jones Lang LaSalle
Incorporated's Registration Statement on Form S-4 (File No.
333-48074-01)).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.11 Bylaws of Jones Lang LaSalle Co-Investment, Inc. (Incorporated
by reference to Exhibit 3.11 to Jones Lang LaSalle
Incorporated's Registration Statement on Form S-4 (File
No. 333-48074-01)).
3.12 Articles of Incorporation of LaSalle Hotel Advisors, Inc.
(Incorporated by reference to Exhibit 3.12 to Jones Lang
LaSalle Incorporated's Registration Statement on Form S-4
(File No. 333-48074-01)).
3.13 Bylaws of LaSalle Hotel Advisors, Inc. (Incorporated by
reference to Exhibit 3.13 to Jones Lang LaSalle Incorporated's
Registration Statement on Form S-4 (File No. 333-48074-01)).
3.14 Memorandum of Association of Jones Lang LaSalle Limited
(Incorporated by reference to Exhibit 3.14 to Jones Lang
LaSalle Incorporated's Registration Statement on Form S-4
(File No. 333-48074-01)).
3.15 Articles of Association of Jones Lang LaSalle Limited
(Incorporated by reference to Exhibit 3.15 to Jones Lang
LaSalle Incorporated's Registration Statement on Form S-4
(File No. 333-48074-01)).
4.1 Form of certificate representing shares of Jones Lang LaSalle
Incorporated common stock (Incorporated by reference to
Exhibit 4.1 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001).
4.2 Indenture, dated July 26, 2000, among Jones Lang LaSalle
Finance B.V., Jones Lang LaSalle Incorporated, as parent
Guarantor, Jones Lang LaSalle Americas, Inc., LaSalle
Investment Management, Inc., Jones Lang LaSalle International,
Inc., Jones Lang LaSalle Co-Investment, Inc., LaSalle Hotel
Advisors, Inc. and Jones Lang LaSalle Limited, as Guarantors,
and The Bank of New York, as trustee (Incorporated by reference
to Exhibit 4.1 to Jones Lang LaSalle Incorporated's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2000).
4.3 Form of Note (included in Exhibit 4.2).
4.4 Registration Rights Agreement, dated July 19, 2000, among
Jones Lang LaSalle Finance B.V., Jones Lang LaSalle
Incorporated, Jones Lang LaSalle Americas, Inc., LaSalle
Investment Management, Inc., Jones Lang LaSalle International,
Inc., Jones Lang LaSalle Co-Investment, Inc., LaSalle Hotel
Advisors, Inc., Jones Lang LaSalle Limited, Morgan Stanley &
Co. International Limited, Bank of America International
Limited, BMO Nesbitt Burns Corp., and Chase Manhattan
International Limited (Incorporated by reference to Exhibit 4.1
to Jones Lang LaSalle Incorporated's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000).
10.1 Multicurrency Credit Agreement, dated as of September 21, 2001
(Incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
10.2 First Amendment to Credit Agreement dated as of December 31,
2001 (Incorporated by reference to Exhibit 10.2 to the Annual
Report on Form 10-K for the year ended December 31, 2001).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.3 Asset Purchase Agreement, dated as of December 31, 1996, by
and among LaSalle Construction Limited Partnership, LaSalle
Partners Limited Partnership, Clune Construction Company, L.P.
and Michael T. Clune (Incorporated by reference to
Exhibit 10.10 to the Registrant's Registration Statement
No. 333-25741).
10.4 Amended and Restated Stock Award and Incentive Plan, attached
hereto and incorporated herein as Exhibit 10.4.
10.5 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 99.1 to the Registrant's Registration Statement
No. 333-42193).
10.6 First Amendment to the Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.7 Second Amendment to the Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.8 Third Amendment to the Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.2 to Jones Lang
LaSalle Incorporated's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000).
10.9 Description of Management Incentive Plan (Incorporated by
reference to Exhibit 10.8 to the Annual Report on Form 10-K for
the year ended December 31, 1997).
10.10 Registration Rights Agreement, dated as of April 22, 1997,
by and among the Registrant, DEL-LPL Limited Partnership,
DEL-LPAML Limited Partnership, DSA-LSPL, Inc., DSA-LSAM, Inc.
and Galbreath Holdings, LLC (Incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement
No. 333-25741.)
10.11 Form of Indemnification Agreement with Executive Officers and
Directors (Incorporated by Reference to Exhibit 10.14 to the
Annual Report on Form 10-K for the year ended December 31,
1998).
10.12 Severance Pay Plan (Incorporated by reference to Exhibit 10.20
to the Annual Report on Form 10-K for the year ended
December 31, 2001).
10.13 Senior Executive Services Agreement with Christopher A. Peacock
(Incorporated by reference to Exhibit 10.16 to Jones Lang
LaSalle Incorporated's Annual report on Form 10-K for the
fiscal year ended December 31, 1999).
10.14 Senior Executive Service Agreement with Robert Orr
(Incorporated by reference to Exhibit 10.17 to Jones Lang
LaSalle Incorporated's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.15 Jones Lang LaSalle Savings Related Share Option (UK) Plan
adopted October 24, 2001 (Incorporated by reference to
Exhibit 10.25 to the Annual Report on Form 10-K for the year
ended December 31, 2001).
10.16 Jones Lang LaSalle Incorporated Co-Investment Long Term
Incentive Plan, attached hereto and incorporated herein as
Exhibit 10.16.
10.17 LaSalle Investment Management Long Term Incentive Plan
(Incorporated by reference to Exhibit 10.2 to Jones Lang
LaSalle Incorporated's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002).
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent
24.1 Power of Attorney (Set forth on page preceding signature page
of this report.)
99.1 Certification of Chief Executive Officer dated February 27,
2003, attached hereto and incorporated herein as Exhibit 99.1.
99.2 Certification of Chief Financial Officer dated February 27,
2003, attached hereto and incorporated herein as Exhibit 99.2.