UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 1-13145
LASALLE PARTNERS INCORPORATED
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 36-4150422
------------------------- ---------------------------------
(State or other jurisdic- (IRS Employer Identification No.)
tion of incorporation or
organization)
200 East Randolph Drive, Chicago, IL 60601
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 312/782-5800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class May 1, 1998
----- --------------
Common Stock ($0.01 par value) 16,200,000
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. . . . . . . . . . . . . . . . . . . 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 18
Item 5. Other Matters. . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA SALLE PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
($ in thousands, except share data)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
--------- -----------
ASSETS
- ------
Current assets:
Cash and cash equivalents . . . . . . . $ 13,474 30,660
Trade receivables, net. . . . . . . . . 76,427 80,565
Notes receivable. . . . . . . . . . . . 10,285 6,995
Other receivables . . . . . . . . . . . 5,937 2,400
Prepaid expenses. . . . . . . . . . . . 1,368 2,055
Deferred tax benefit. . . . . . . . . . 5,104 5,104
---------- ---------
Total current assets. . . . . . 112,595 127,779
Property and equipment, at cost,
less accumulated depreciation of
$29,400 and $28,993 in 1998 and 1997,
respectively. . . . . . . . . . . . . . 17,317 16,098
Intangibles resulting from
business acquisitions, net of
accumulated amortization of $6,798
and $5,698 in 1998 and 1997,
respectively. . . . . . . . . . . . . . 55,111 50,366
Investments in real estate ventures . . . 26,735 18,080
Long-term receivables, net. . . . . . . . 6,140 6,607
Other assets, net . . . . . . . . . . . . 932 957
-------- ----------
$218,830 219,887
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and
accrued liabilities . . . . . . . . . $ 29,087 25,781
Accrued compensation. . . . . . . . . . 9,970 40,163
Other liabilities . . . . . . . . . . . 4,394 6,100
---------- ----------
Total current liabilities . . . 43,451 72,044
Long-term credit facility . . . . . . . . 30,519 --
Other long-term liabilities . . . . . . . 1,108 946
Commitments and contingencies
---------- ----------
Total liabilities . . . . . . . 75,078 72,990
LA SALLE PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS - CONTINUED
MARCH 31, 1998 AND DECEMBER 31, 1997
($ in thousands, except share data)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
---------- -----------
Stockholders' equity:
Common stock, $.01 par value per share,
100,000,000 shares authorized;
16,200,000 shares issued and
outstanding . . . . . . . . . . . . . 162 162
Additional paid-in capital. . . . . . . 121,778 121,778
Retained earnings . . . . . . . . . . . 20,887 24,327
Accumulated other comprehensive
income. . . . . . . . . . . . . . . . 925 630
-------- ----------
Total stockholders' equity. . . 143,752 146,897
-------- ----------
$218,830 219,887
======== ==========
See accompanying notes to consolidated and combined financial statements.
LA SALLE PARTNERS INCORPORATED
CONSOLIDATED AND COMBINED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
($ in thousands, except share data)
(UNAUDITED)
1998 1997
---------- --------
Revenue:
Fee-based services. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,902 30,136
Equity in earnings from unconsolidated ventures . . . . . . . . . . . . . 692 1,394
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 176
---------- --------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,065 31,706
Operating Expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . 37,353 23,581
Operating, administrative and other . . . . . . . . . . . . . . . . . . . 16,445 9,623
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 2,616 1,774
---------- --------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . 56,414 34,978
---------- --------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,349) (3,272)
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 1,695
---------- --------
Loss before benefit for income taxes. . . . . . . . . . . . . . . . (5,593) (4,967)
Net benefit for income taxes. . . . . . . . . . . . . . . . . . . . . . . . (2,153) (248)
---------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,440) (4,719)
========== ========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments. . . . . . . . . . . . . . . . . 295 (483)
---------- --------
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ (3,145) (5,202)
========== ========
Basic earnings (loss) per common share (1). . . . . . . . . . . . . . . . . $ (.21)
==========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . 16,200,000
==========
Diluted earnings (loss) per common Share (1). . . . . . . . . . . . . . . . $ (.21)
==========
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . 16,359,961
==========
<FN>
(1) Earnings per share has not been presented for the three months ended March 31, 1997 as the
Company's conversion to corporate form did not occur until July 22, 1997.
See accompanying notes to consolidated and combined financial statements.
LA SALLE PARTNERS INCORPORATED
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIODS ENDED MARCH 31, 1998 AND DECEMBER 31, 1997
($ in thousands, except share data)
(UNAUDITED)
Partners'
Capital Effect of
Common Stock Additional Retained (Deficit) Cumulative
------------------- Paid-In Earnings Predecessor Translation
Shares Amount Capital (Deficit) Partnerships Adjustment Total
---------- ------ ---------- --------- ------------ ----------- ---------
Balances at January 1,
1997. . . . . . . . . . -- -- -- -- $ 23,148 1,099 24,247
Net earnings (through
July 21, 1997). . . . -- -- -- -- 1,513 -- 1,513
Distributions. . . . . -- -- -- -- (14,835) -- (14,835)
Acquisition of the
Galbreath Company
common stock. . . . . -- -- -- -- 29,292 -- 29,292
Effect of the
reorganization. . . .12,200,000 $ 122 38,996 -- (39,118) -- --
Net proceeds from the
initial Offering. . . 4,000,000 40 82,782 -- -- -- 82,822
Other. . . . . . . . . -- -- -- -- -- (565) (565)
---------- ------ -------- ------ ------- ------ --------
Balances after the
reorganization and
initial Offering. . . .16,200,000 162 121,778 -- -- 534 122,474
Net earnings (July 22,
1997 through
December 31, 1997) . -- -- -- 24,327 -- -- 24,327
Other. . . . . . . . . -- -- -- -- -- 96 96
---------- ------ -------- ------ ------- ------ --------
Balances at December 31,
1997. . . . . . . . . .16,200,000 162 121,778 24,327 -- 630 146,897
Net loss . . . . . . . -- -- -- (3,440) -- -- (3,440)
Other. . . . . . . . . -- -- -- -- -- 295 295
---------- ------ -------- ------ ------- ------ --------
Balances at March 31,
1998. . . . . . . . . .16,200,000 $ 162 121,778 20,887 -- 925 143,752
========== ====== ======== ====== ======= ====== ========
<FN>
See accompanying notes to consolidated and combined financial statements.
LA SALLE PARTNERS INCORPORATED
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
($ in thousands)
(UNAUDITED)
1998 1997
-------- --------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . $ (3,440) (4,719)
Reconciliation of net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . 2,616 1,774
Equity in earnings from unconsolidated
ventures. . . . . . . . . . . . . . . . . (692) (1,394)
Provision for loss on receivables and
other assets. . . . . . . . . . . . . . . 1,043 1,140
Operating distributions from
real estate ventures . . . . . . . . . . 557 386
Changes in:
Receivables . . . . . . . . . . . . . . . . 515 33,123
Prepaid expenses and other assets . . . . . 702 15
Accounts payable, accrued liabilities and
accrued compensation. . . . . . . . . . . (29,518) (35,003)
-------- --------
Net cash used in
operating activities. . . . . . . . . (28,217) (4,678)
Cash flows provided by (used in) investing
activities:
Net capital additions - property and
equipment . . . . . . . . . . . . . . . . . (2,863) (981)
Acquisition of business-Satulah Group Inc.. . (5,465) --
Investments in real estate ventures:
Capital contributions and advances to
real estate ventures. . . . . . . . . . . (11,549) (2,206)
Distributions, repayments of advances
and sale of investments . . . . . . . . . 321 1,149
-------- --------
Net cash used in investing activities . (19,556) (2,038)
Cash flows provided by (used in) financing
activities:
Net borrowings under credit facility. . . . . 30,519 12,100
Distributions to partners . . . . . . . . . . -- (4,395)
-------- --------
Net cash provided by
financing activities. . . . . . . . . 30,519 7,705
Effects of foreign currency translation
on cash balances. . . . . . . . . . . . . . . 68 (102)
-------- --------
Net increase (decrease) in cash
and cash equivalents. . . . . . . . . . . . . (17,186) 887
Cash and cash equivalents, January 1. . . . . . 30,660 7,207
-------- --------
Cash and cash equivalents, March 31 . . . . . . $ 13,474 8,094
======== ========
Supplemental disclosure of cash flow information:
Combined interest paid was $162 and $773 for March 31, 1998 and 1997,
respectively.
See accompanying notes to consolidated and combined financial statements.
LA SALLE PARTNERS INCORPORATED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
($ in thousands, except share data)
(UNAUDITED)
Readers of this quarterly report should refer to the Company's audited
financial statements for the year ended December 31, 1997, which are
included in the Company's 1997 Form 10-K, filed with the Securities and
Exchange Commission, as certain footnote disclosures which would
substantially duplicate those contained in such audited financial
statements have been omitted from this report.
(1) ORGANIZATION
LaSalle Partners Incorporated [successor to LaSalle Partners Limited
Partnership and LaSalle Partners Management Limited Partnership
(collectively, the "Predecessor Partnerships"] was incorporated in Maryland
on April 15, 1997, (collectively referred to as the "Company"). On
July 22, 1997, the Company completed an initial public offering (the
"Offering") of 4,000,000 shares of LaSalle Partners Incorporated common
stock, $.01 par value per share (the "Common Stock"). In addition, all of
the partnership interests held in the Predecessor Partnerships were
contributed to the Company, pursuant to agreements among the general and
limited partners, in exchange for an aggregate of 12,200,000 shares of
common stock. The contribution occurred immediately prior to the closing
of the Offering. The 4,000,000 shares were offered at $23 per share,
aggregating $82,822, net of offering costs, of which $63,490 was used to
retire long-term debt and related interest.
The Predecessor Partnerships were subject to a reorganization as part
of the incorporation of the Company. Due to the existence of a paired
share arrangement between the Predecessor Partnerships and between the
former general partners of the Predecessor Partnerships, as well as the
existence of identical ownership before and after the incorporation of the
Predecessor Partnerships, such transactions were accounted for in a manner
similar to the accounting used for a pooling of interests. Thus, the
Company's financial statements include the financial positions and results
of operations of the Predecessor Partnerships at their historical basis.
(2) INTERIM INFORMATION
The consolidated and combined financial statements as of March 31,
1998 and for the three month periods ended March 31, 1998 and 1997 are
unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the consolidated and combined financial statements for
these interim periods have been included. The results for the periods
ended March 31, 1998 and 1997 are not necessarily indicative of the results
to be obtained for the full fiscal year.
(3) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are determined based on
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates and laws applicable to the years in
which the differences are expected to reverse. Valuation allowances, if
any, are established when necessary to reduce deferred tax assets to the
amount that is more likely than not to be realized. Income tax expense is
comprised of the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
FOOTNOTE 3 - CONTINUED
For the period prior to the incorporation of the Predecessor
Partnerships, the accompanying Consolidated and Combined Statements of
Earnings and Comprehensive Income include a federal and state income tax
provision for wholly-owned corporate subsidiaries and a state tax provision
for certain states which require partnerships to pay income taxes. No
other provision for income taxes was made for those periods as the
liability for such taxes would have been that of the respective partners.
(4) EARNINGS PER SHARE
Basic earnings per share was based on weighted average shares
outstanding of 16,200,000 for the period. Diluted earnings per share was
based on weighted average shares outstanding of 16,359,961 for the period,
which reflects an increase of 159,961 shares representing the dilutive
effect of outstanding stock options whose exercise price was less than the
average market price of the Company's stock for the period.
(5) BUSINESS SEGMENTS
The Company's operations have been classified into three business
segments: Management Services, Corporate and Financial Services and
Investment Management. The Management Services segment provides three
primary service capabilities: (i) property and facility management and
leasing for property owners; (ii) development management for both investors
and real estate users seeking to develop new buildings or renovate existing
facilities; and (iii) project management of tenant improvements in both
owner-occupied and leased space. The Corporate and Financial Services
segment provides transaction and advisory services through three primary
service capabilities, including: (i) tenant representation for corporations
and professional services firms; (ii) investment banking services to
address the financing, acquisition, and disposition needs of real estate
owners; and (iii) land acquisition services for owners and users of land.
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. The Company allocates
all expenses, other than interest and income taxes, as substantially all
expenses incurred benefit one or more of the segments.
Summarized unaudited financial information by business segment for
the three month periods ended March 31, 1998 and 1997 is as follows:
SEGMENT
OPERATING RESULTS
--------------------
1998 1997
-------- --------
MANAGEMENT SERVICES:
Revenue:
Property and facility management fees . . . $ 10,291 7,143
Leasing fees. . . . . . . . . . . . . . . . 1,813 1,173
Development management fees . . . . . . . . 2,218 1,111
Project management fees . . . . . . . . . . 3,856 1,308
Intersegment revenue. . . . . . . . . . . . 71 25
Other income. . . . . . . . . . . . . . . . 190 47
-------- --------
18,439 10,807
FOOTNOTE 5 - CONTINUED
SEGMENT
OPERATING RESULTS
--------------------
1998 1997
-------- --------
Operating expenses:
Compensation, operating and administrative
expenses. . . . . . . . . . . . . . . . . 25,917 12,542
Depreciation and amortization . . . . . . . 1,426 512
-------- --------
Operating loss. . . . . . . . . . . . . $ (8,904) (2,247)
======== ========
CORPORATE & FINANCIAL SERVICES:
Revenue:
Tenant representation . . . . . . . . . . . $ 3,468 2,976
Investment banking. . . . . . . . . . . . . 5,028 612
Land fees . . . . . . . . . . . . . . . . . 541 701
Construction operations . . . . . . . . . . 250 205
Equity in earnings from unconsolidated
ventures. . . . . . . . . . . . . . . . . (5) --
Other income. . . . . . . . . . . . . . . . 76 33
-------- --------
9,358 4,527
Operating expenses:
Compensation, operating and administrative
expenses. . . . . . . . . . . . . . . . . 11,988 7,996
Depreciation and amortization . . . . . . . 290 218
-------- --------
Operating loss. . . . . . . . . . . . . $ (2,920) (3,687)
======== ========
INVESTMENT MANAGEMENT:
Revenue:
Advisory fees . . . . . . . . . . . . . . . $ 21,485 14,402
Acquisition fees. . . . . . . . . . . . . . 952 505
Equity in earnings from unconsolidated
ventures. . . . . . . . . . . . . . . . . 697 1,394
Other income. . . . . . . . . . . . . . . . 205 96
-------- --------
23,339 16,397
Operating expenses:
Compensation, operating and administrative
expenses. . . . . . . . . . . . . . . . . 15,964 12,691
Depreciation and amortization . . . . . . . 900 1,044
-------- --------
Operating income. . . . . . . . . . . . $ 6,475 2,662
======== ========
Total segment revenue . . . . . . . . . . . . . $ 51,136 31,731
Intersegment revenue eliminations . . . . . . . (71) (25)
-------- --------
Total revenue . . . . . . . . . . . . . $ 51,065 31,706
======== ========
Total segment operating expenses. . . . . . . . $ 56,485 35,003
Intersegment operating expense eliminations . . (71) (25)
-------- --------
Total operating expenses. . . . . . . . $ 56,414 34,978
======== ========
Total operating loss. . . . . . . . . . $ (5,349) (3,272)
======== ========
(6) PRO FORMA FINANCIAL INFORMATION
The following pro forma consolidated and combined statements of
earnings give effect to the acquisition of the common stock of Galbreath,
as adjusted for the Tenant Representation and Investment Banking units
which were not acquired, the provision for income taxes as though the
Company and Galbreath were taxable entities at an effective tax rate of
38.5%, the conversion of the Company to corporate form and the initial
public offering, including the receipt and application of the net proceeds
therefrom to repay long-term indebtedness and related interest, as if these
events occurred on January 1, 1997.
The pro forma adjustments are based upon available information and
certain assumptions that management of the Company believes are reasonable.
The pro forma consolidated and combined financial statements are not
necessarily indicative of what the actual results of operations would have
been for the three month period ended March 31, 1997 had the Company
completed the acquisition of the Galbreath common stock and consummated its
conversion to corporate form and the Offering transactions as of the dates
indicated nor does it purport to represent the future financial position or
results of operations of the Company. The three month period ended March
31, 1998 represents the Company's actual results of operations.
ACTUAL PRO FORMA
1998 1997
---------- ----------
Revenue:
Fee-based services. . . . . . $ 49,902 36,509
Equity in earnings from
unconsolidated ventures . . 692 1,467
Other income. . . . . . . . . 471 342
---------- ----------
Total revenue . . . . 51,065 38,318
Operating expenses:
Compensation and benefits . . 37,353 27,396
Operating, administrative
and other . . . . . . . . . 16,445 11,521
Depreciation and amortization 2,616 2,286
---------- ----------
Total operating
expenses. . . . . . 56,414 41,203
---------- ----------
Operating loss. . . . (5,349) (2,885)
Interest expense. . . . . . . . 244 265
---------- ----------
Loss before benefit
for income taxes. . (5,593) (3,150)
Net benefit for income taxes. . (2,153) (1,213)
---------- ----------
Net loss. . . . . . . $ (3,440) (1,937)
========== ==========
Basic earnings (loss) per
common share. . . . . . . . . $ (0.21) (0.12)
========== ==========
Weighted average shares
outstanding . . . . . . . . . 16,200,000 16,200,000
========== ==========
Diluted earnings (loss) per
common share. . . . . . . . . $ (0.21) (0.12)
========== ==========
Diluted weighted average
shares outstanding. . . . . . 16,359,961 16,328,999
========== ==========
FOOTNOTE 6 - CONTINUED
Pro forma total revenue and operating expenses for Galbreath include
activities such as property management and leasing, facility management and
development management. Additional adjustments to operating expenses were
made for estimated incremental general and administrative costs associated
with operations as a public company totaling $188 for 1997. As a result of
the repayment of the Company's long-term notes payable out of the proceeds
of the Offering, the related actual interest expense totaling $1,430 for
1997 has been eliminated in the pro forma results. The pro forma results
further include an additional benefit for income taxes totaling $965 for
1997 giving effect to the conversion of the Company and Galbreath to
taxable entities.
(7) DEBT
CREDIT FACILITY
In November 1997, the Company replaced its $70 million credit
agreement, which consisted of a short-term revolving line of credit and a
long-term facility, with a $150 million, five year unsecured revolving
credit facility. The facility is guaranteed by certain of the Company's
subsidiaries and is available for working capital, co-investment and
acquisitions. The Company must maintain a certain level of consolidated
net worth and ratio of funded debt to earnings before interest expense,
income taxes, depreciation and amortization expense, and must meet a
minimum fixed charge coverage ratio. The Company is restricted from
incurring certain levels of indebtedness to lenders outside of the
facility, disposing of a significant portion of its assets, and is subject
to lender approval on certain levels of co-investment. The facility bears
variable rates of interest based on market rates and requires the Company
to pay a commitment fee of .15% per annum on the unused portion of the
commitment. The Company's effective interest rate was 6.44% and 6.16% for
the three months ended March 31, 1998 and 1997, respectively. The Company
had $30,519 of outstanding debt on the facility at March 31, 1998 compared
with no outstanding debt at December 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
LaSalle Partners Incorporated is a leading full-service real estate
firm that provides management services, corporate and financial services
and investment management services to corporations and other real estate
owners and investors worldwide. The Company has grown by expanding both
its client base and its range of services and products in anticipation of
client needs. The Company completed its initial public offering
("Offering") on July 22, 1997, raising net proceeds of $82.8 million which
were used primarily to repay the Company's long-term debt and related
interest of $63.5 million. A substantial block of the Company's stock,
approximately 43.5%, is owned by employees, of which approximately 20.4% is
owned by senior management.
The Company continues to pursue a growth strategy that capitalizes on
existing client relationships and emerging industry trends. The key
components of the growth strategy include expanding client relationships to
increase the range of services provided to current clients and developing
new client relationships, broadening its international presence and
selectively pursuing strategic acquisitions and co-investment
opportunities.
The Company has completed four strategic acquisitions since late 1994
and continues to consider potential acquisition candidates that have both a
strong strategic and cultural fit. Potential acquisitions will focus
primarily on the Management Services segment to enhance product and
geographic coverage, and on the international markets to complete the
Company's global expansion initiative. To date, completed acquisitions
include Alex. Brown Kleinwort Benson Realty Advisors Corporation, a real
estate investment advisor, in November 1994; CIN Property Management, a
London-based investment advisor, in October 1996; The Galbreath Company, a
property and development management company, in April 1997; and the project
management business of Satulah Group Inc., a project management/facilities
conversion company, in January 1998.
The Company intends to continue to increase its co-investment with its
investment management clients. This strategy should serve to grow the
assets under management, generate returns on investment and create
potential opportunities to provide services related to the acquisition,
financing, property management, leasing and disposition of such
investments. As of March 31 1998, the Company had a total investment of
$26.7 million in 43 separate property or fund co-investments with
additional capital commitments of $31.8 million for future fundings of co-
investments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS
ENDED MARCH 31, 1997
REVENUE
The Company's total revenue grew $19.4 million, or 61.1%, to $51.1
million for the three months ended March 31, 1998 from $31.7 million in the
prior year period. Increased revenues were driven in part, by the
acquisition of Galbreath and Satulah, and also by four additional factors:
the strong U.S. economy; increased inflow of capital to the real estate
market; an ongoing trend toward consolidation in many financial services
businesses; and the Company's ability to cross-market real estate services
to its clients. The strong economy has led to job growth, which has fueled
increased demand for real estate of all types. This increased demand has
produced rising rental rates and higher investment returns for owners,
thereby attracting investment capital to the market. The inflow of capital
has led to a high level of transaction activity, including disposition,
acquisition, and financing of real estate. The consolidation in certain
financial service industries has encouraged demand for national real estate
and strategic planning services, including lease negotiation, space
planning, move management, and tenant construction. The result has been
increased activity in both the Management Services and Corporate and
Financial Services businesses. The Company's ability to cross-market these
services to its clients has augmented the increased revenue generated by
favorable market conditions.
These increases have been partially offset by a decline in property
management, leasing and investment management fees from four multiple
investor funds ("Commingled Funds") formed by the Company in the 1980s. The
decline is a result of the current and continuing disposition of the funds'
assets, in accordance with the strategic plan. These asset dispositions are
expected to be completed by the end of 1998. Revenue generated from these
funds compared with total revenue was 1.6% for the three months ended
March 31, 1998 and 6.9% for the prior year period.
Revenue for the Company's Management Services segment, which
represented 36.0% of the Company's total revenue for the three months ended
March 31, 1998, increased $7.6 million, or 70.6%, to $18.4 million for the
three months ended March 31, 1998 from $10.8 million in the prior year
period. This increase was substantially due to the acquisition of Galbreath
(with approximately 67.5 million square feet under management) and Satulah,
and, to a lesser extent, to both an increase in strategic alliance clients
formed by the Project Management business and a higher level of development
projects being managed by the Development Management business. These
increases were partially offset by a decline in revenue related to the sale
of the Commingled Fund properties discussed previously.
The Company's Corporate and Financial Services segment revenue, which
represented 18.3% of the Company's total revenue for the three months ended
March 31, 1998, more than doubled to $9.4 million from $4.5 million in the
prior year period. This substantial increase in revenue resulted primarily
from a $4.4 million increase in revenue generated by the Company's
Investment Banking business.
The Company's Investment Management segment revenue, which represented
45.7% of the Company's total revenue for the three months ended March 31,
1998, increased $6.9 million, or 42.3%, to $23.3 million for the three
months ended March 31, 1998 from $16.4 million in the prior year period.
The net gain in revenue was substantially attributable to increased
performance fees generated on the disposition of certain assets under
management. These increases were partially offset by a decline in revenue
from four of the Company's Commingled Funds discussed previously.
OPERATING EXPENSE
The Company's operating expenses increased $21.4 million, or 61.3%, to
$56.4 million for the three months ended March 31, 1998 from $35.0 million
in the prior year period. Operating expenses represented 110% of total
revenue for the periods ended March 31, 1998 and 1997, reflecting the
accrual for incentive compensation as a result of increased revenue levels
over the prior year, additional infrastructure costs related to public
reporting and technology enhancements and the impact of goodwill
amortization associated with the recent acquisitions. All three of the
Company's segments experienced higher levels of compensation and benefits
associated with increased staffing and higher incentive compensation
associated with the Company's increased revenue levels.
Operating expenses for the Company's Management Services segment
increased $14.3 million to $27.3 million for the three months ended
March 31, 1998 from $13.1 million in the prior year period. This increase
was primarily a result of the effects of the Galbreath and Satulah
acquisitions, including personnel costs and amortization of intangibles
resulting from the acquisitions, higher compensation and benefit costs
associated with increased staffing to support new business initiatives and
incremental corporate infrastructure costs as a result of higher staffing
levels and technology enhancements.
Operating expenses for the Corporate and Financial Services segment
increased $4.1 million, or 49.5%, to $12.3 million for the three months
ended March 31, 1998 from $8.2 million in the prior year period. The
increase was principally a result of increased incentive compensation
accrued in the Investment Banking unit, consistent with the increased level
of revenue generated, in addition to higher employment levels for both the
Investment Banking and Tenant Representation units as a result of an
increased demand for services. To a lesser extent, costs associated with
new international offices opened in Toronto, New Delhi and Shanghai
subsequent to the first quarter of 1997 were incurred, in addition to
corporate infrastructure costs related to higher staffing levels and
technology enhancements.
Operating expenses for the Investment Management segment increased
$3.1 million, or 22.8%, to $16.9 million for the three months ended
March 31, 1998 from $13.7 million in the prior year period. The increase
was substantially a result of increased incentive compensation, consistent
with the increased level of revenue generated, and, to a lesser extent, to
increased corporate infrastructure costs as a result of higher staffing
levels and technology enhancements.
OPERATING LOSS
As a result of the factors noted above, the Company's operating loss
increased $2.1 million to $5.3 million for the three months ended March 31,
1998 from a loss of $3.3 million in the prior year period. As a percentage
of total revenue, the Company's operating loss remained constant at 10% for
the three months ended March 31, 1998 and 1997.
INTEREST EXPENSE
Interest expense decreased $1.5 million to $.2 million for the three
months ended March 31, 1998 from $1.7 million in the prior year period,
principally as a result of the repayment of the Company's long-term debt
from the net proceeds of the Offering and the substantially lower
borrowings on the Company's credit facility during the first quarter of
1998 as a result of capital raised from the Offering.
BENEFIT FOR INCOME TAXES
The benefit for income taxes increased $1.9 million to $2.2 million
for the three months ended March 31, 1998 from $.2 million in the prior
year period as a result of the Company's conversion from partnership to
corporate form in July 1997 and the resulting benefit for income taxes at
an effective tax rate of 38.5%.
NET LOSS
The Company's net loss decreased $1.3 million to $3.4 million for the
three months ended March 31, 1998 from a loss of $4.7 million in the prior
year period. The decrease in loss is attributable to additional tax
benefits recognized by the Company as a result of its conversion from
partnership to corporate form in July 1997.
PRO FORMA RESULTS
Pro forma results for the three months ended March 31, 1997 give
effect to (i) the acquisition of Galbreath, as adjusted for the Tenant
Representation and Investment Banking units which were not acquired, as if
the acquisition occurred on January 1, 1997; (ii) the provision for income
taxes as though the Company and Galbreath were both taxable entities as of
January 1, 1997 at an effective tax rate of 38.5%; and (iii) estimated
incremental general and administrative costs associated with operations as
a public company and the repayment of the Company's long-term notes payable
out of the proceeds of the Offering as if the Offering occurred on
January 1, 1997.
The Company's revenue for the three months ended March 31, 1998 of
$51.1 million compares to $38.3 million for the prior year period on a pro
forma basis, reflecting an increase of $12.7 million or 33.3%. The
Company's operating expenses for the three months ended March 31, 1998 were
110.5% of revenue compared to 107.5% for the prior year period on a pro
forma basis. The increase over the prior year pro forma results is
primarily a result of incremental corporate infrastructure costs as a
result of higher staffing levels and technology enhancements. As a result
of the factors previously discussed, the Company's net loss increased $1.5
million to $3.4 million for the three months ended March 31, 1998 from $1.9
million in the prior year period on a pro forma basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating cash requirements primarily from
operating activities. No one client accounts for more than 10% of the
Company's total revenue. During the three months ended March 31, 1998,
cash flows used in operating activities totaled $28.2 million, an increase
of $23.5 million over the prior year period. This higher level of use is
primarily attributable to stronger earnings in the second and third
quarters of 1997 which resulted in cash collections being made during 1997.
Comparatively, 1996 results were heavily fourth quarter driven, consistent
with the Company's historical patterns, resulting in a substantial amount
of cash collections during the first quarter of 1997. In addition,
stronger 1997 annual earnings, as compared to 1996, resulted in higher
incentive compensation which is paid each January of the following year.
The Company continues to pursue co-investment opportunities with its
investment management clients, for which the holding period typically
ranges from three to seven years. Such co-investments are represented by
non-controlling general partner and limited partner interests. In addition
to its share of investment returns, the Company typically earns investment
management fees, and in some cases, property management and leasing fees on
these investments. The equity earnings from these co-investments have had a
relatively small impact on the Company's current earnings and cash flow.
However, the Company's increased participation as a principal in real
estate investments could increase fluctuations in the Company's net
earnings and cash flow as a result of the timing and magnitude of the gains
or losses and potential incentive participation fees, if any, to be
recognized on the disposition of the assets. The Company will not have
complete discretion to control the timing of the disposition of such
investments.
Net cash used in investing activities was $19.6 million for the three
months ended March 31, 1998 compared with $2.0 million for the prior year
period. The increased usage is primarily attributable to a higher level of
co-investment during the first quarter of 1998 and an advance made to an
investment fund totaling $7.1 million which is expected to be repaid in the
second quarter of 1998. In addition, the Company acquired the project
management business of the Satulah Group Inc. in January 1998 for $5.5
million in cash. Finally, the Company experienced increased capital
expenditures of $1.9 million primarily as a result of the continued
customization and implementation of a new property accounting and
information system by its Management Services segment in addition to the
on-going replacement of personal computers. The Company anticipates that
future capital expenditures will continue to exceed prior year levels as a
result of technology enhancements that are currently in progress.
Historically, the Company has financed its operations, acquisitions
and co-investments with internally generated funds, ownership equity and
borrowings under revolving credit facilities. In November 1997, the Company
replaced its $70 million credit agreement, which consisted of a short-term
revolving line of credit and a long-term facility, with a $150 million,
five-year unsecured revolving credit facility. The facility is guaranteed
by certain of the Company's subsidiaries and is available for working
capital, co-investment, and acquisitions. The Company must maintain a
certain level of consolidated net worth and ratio of funded debt to EBITDA,
and must meet a minimum fixed charge coverage ratio. The Company is
restricted from incurring certain levels of indebtedness to lenders outside
of the facility and disposing of a significant portion of its assets, and
is subject to lender approval on certain levels of co-investment. The
facility bears variable rates of interest based on market rates. The
Company's effective interest rate was 6.44% and 6.16% for the three months
ended March 31, 1998 and 1997, respectively.
Net cash provided by financing activities was $30.5 million for the
three months ended March 31, 1998 compared with net cash provided of $7.7
million in the prior year period. The increase in financing cash flows are
primarily a result of increased borrowings on the Company's credit facility
as a result of increased bonus compensation paid in 1998 related to higher
1997 operating profits. In addition, increased borrowings were used to
fund increased co-investment activity and capital expenditures as
previously discussed. The Company believes, based on current operating
plans, that cash generated from operations and available borrowings will be
sufficient to meet its capital and liquidity requirements for the
foreseeable future.
SEASONALITY
Historically, the Company's revenue, operating profits and net
earnings in the first three calendar quarters are substantially lower than
in the fourth quarter. This seasonality is due to a calendar year-end focus
on the completion of transactions, which is consistent with the real estate
industry generally. In addition, an increasing percentage of the Company's
management contracts contain clauses providing for performance bonuses to
be received if the Company's Management Services segment achieves certain
performance targets. Such incentive payments are generally earned in the
fourth quarter. In contrast, the Company's Investment Management segment
earns performance fees on client's returns on their real estate
investments. Such performance fees are generally earned when the asset is
disposed of, the timing of which the Company does not have complete
discretion over. The Company's non-variable operating expenses, which are
treated as expenses when incurred during the year, are relatively constant
on a quarterly basis. Therefore, the Company typically sustains a loss in
the first quarter of each calendar year, reports a small profit or loss in
the second and third quarters and records a substantial majority of the
Company's earnings in the fourth calendar quarter, barring the recognition
of investment generated performance fees.
INFLATION
The Company's operations are directly affected by various national and
local economic conditions, including interest rates, the availability of
credit to finance real estate transactions and the impact of tax laws. To
date, the Company does not believe that general inflation has had a
material impact on its operations, as revenue, commissions, and other
variable costs related to revenue are primarily impacted by real estate
supply and demand rather than general inflation.
OTHER MATTERS
ACCOUNTING MATTERS
In an attempt to align its operating results with those presented by
similar companies within the industry, certain amounts have been
reclassified in the Company's 1997 revenue and operating expenses to
reflect direct personnel cost reimbursements received on property or
specific client assignments on a net, rather than a gross, basis. There
was no effect on operating profits or net earnings as historically
reported.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" becomes effective for
fiscal years beginning after December 15, 1997 and will not have a material
impact on the Company's financial statements.
YEAR 2000 ISSUES
The Company conducts its business primarily with commercial software
purchased from third-party vendors. After an analysis of the Company's
exposure to the impact of the year 2000 issues, the Company has determined
that such commercial software is expected to be substantially year 2000
compliant and that completion of the year 2000 compliance is not expected
to have a material impact on its business, operations, or financial
condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is 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. Most of these matters are covered by
insurance. In the opinion of the Company, the ultimate resolution of such
litigation matters will not have a material adverse effect on the financial
position, results of operations and liquidity of the Company.
ITEM 5. OTHER MATTERS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995:
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 the Company 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 the actual results,
performance, achievements, plans and objectives of the Company 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 the Company's Registration
Statement (No. 333-25741), under "Risk Factors" and elsewhere, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
in Item 1. "Business", Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere, and in other
reports filed by the Company with the Securities and Exchange Commission.
These factors include, among other things, the following: (i) the impact
of general economic conditions and the real estate economic climate on the
Company's business and results of operations; (ii) the risk that property
management and investment management agreements will be terminated prior to
expiration or not renewed; (iii) the dependence of the Company's revenue
from property management and leasing services on the performance of the
properties managed by the Company; (iv) the risks inherent in pursuing a
selective acquisition strategy; (v) the concentration of the Company's
business in properties in central business districts; (vi) the risks
associated with the co-investment activities of the Company; (vii) the
seasonal nature of the Company's revenue, operating income and net
earnings; and (viii) the competition faced by the Company in a variety of
business disciplines within the commercial real estate industry. The
Company expressly disclaims any obligation or undertaking to update or
revise any forward-looking statements to reflect any changes in events or
circumstances or in the Company's expectations or results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of exhibits is set forth in the Exhibit Index which
immediately precedes the exhibits and which is incorporated by reference
herein.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LASALLE PARTNERS INCORPORATED
Dated: May 1, 1998 BY:/S/ WILLIAM E. SULLIVAN
------------------------------
William E. Sullivan
Executive Vice President and
Chief Financial Officer
(Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule.