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 SEPTEMBER 30, 1999
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
JONES LANG LASALLE 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 November 12, 1999
----- ------------------
Common Stock ($0.01 par value) 30,188,641
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. . . . . . . . . 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. . . . . . . . . . . . . . . . . . . . . 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 32
Item 2. Changes in Securities and Use of Proceeds. . . . . . 32
Item 5. Other Matters. . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 32
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JONES LANG LASALLE INCORPORATED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(in thousands, except share data)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
ASSETS
- ------
Current assets:
Cash and cash equivalents. . . . . . . . . $ 21,593 16,941
Trade receivables, net of allowances
of $11,566 and $3,978 in 1999 and
1998, respectively . . . . . . . . . . . 206,079 116,965
Notes receivable and advances to
real estate ventures . . . . . . . . . . 5,008 17,042
Other receivables. . . . . . . . . . . . . 14,370 3,385
Prepaid expenses . . . . . . . . . . . . . 7,394 2,185
Other assets . . . . . . . . . . . . . . . 6,649 --
Deferred and current tax benefit . . . . . 46,805 9,926
---------- ---------
Total current assets . . . . . . . 307,898 166,444
Property and equipment, at cost,
less accumulated depreciation of
$51,010 and $35,859 in 1999
and 1998, respectively . . . . . . . . . . 68,783 28,773
Intangibles resulting from
business acquisitions, net of
accumulated amortization of $23,323
and $11,961 in 1999 and 1998,
respectively . . . . . . . . . . . . . . . 375,578 229,437
Investments in real estate ventures. . . . . 56,830 52,976
Long-term receivables, net . . . . . . . . . 10,666 10,950
Prepaid pension asset. . . . . . . . . . . . 19,421 --
Other assets, net. . . . . . . . . . . . . . 3,203 2,341
---------- ----------
$ 842,379 490,921
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and
accrued liabilities. . . . . . . . . . . $ 60,644 51,101
Accrued compensation . . . . . . . . . . . 108,840 58,398
Short-term borrowings. . . . . . . . . . . 10,478 --
Other liabilities. . . . . . . . . . . . . 38,824 8,324
---------- ----------
Total current liabilities. . . . . 218,786 117,823
Long-term liabilities:
Credit facilities. . . . . . . . . . . . . 323,994 202,923
Deferred tax liability . . . . . . . . . . 4,584 --
Other. . . . . . . . . . . . . . . . . . . 3,456 603
Commitments and contingencies
---------- ----------
Total liabilities. . . . . . . . . 550,820 321,349
JONES LANG LASALLE INCORPORATED
CONSOLIDATED BALANCE SHEETS - CONTINUED
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(in thousands, except share data)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
Stockholders' equity:
Common stock, $.01 par value per share,
100,000,000 shares authorized;
30,188,641 shares issued and
outstanding. . . . . . . . . . . . . . . 303 163
Additional paid-in capital . . . . . . . . 445,761 123,543
Deferred stock compensation. . . . . . . . (93,293) --
Unallocated ESOT shares. . . . . . . . . . (9) --
Retained earnings (deficit). . . . . . . . (65,264) 44,792
Accumulated other comprehensive
income . . . . . . . . . . . . . . . . . 4,061 1,074
---------- ----------
Total stockholders' equity . . . . 291,559 169,572
---------- ----------
$ 842,379 490,921
========== ==========
See accompanying notes to consolidated financial statements.
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands, except share data)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
Fee-based services . . . . . . . . . . . . . . . . . .$ 190,979 63,611 467,449 186,067
Equity in earnings from unconsolidated
ventures . . . . . . . . . . . . . . . . . . . . . . 2,371 466 4,422 2,340
Other income . . . . . . . . . . . . . . . . . . . . . 822 755 2,866 1,702
---------- ---------- ---------- ----------
Total revenue. . . . . . . . . . . . . . . . . . 194,172 64,832 474,737 190,109
Operating expenses:
Compensation and benefits. . . . . . . . . . . . . . . 135,170 37,739 335,249 116,775
Operating, administrative and other. . . . . . . . . . 36,587 16,265 115,177 50,057
Depreciation and amortization. . . . . . . . . . . . . 9,665 2,599 26,726 8,177
---------- ---------- ---------- ----------
Total operating expenses before merger
related non-recurring charges. . . . . . . . . 181,422 56,603 477,152 175,009
---------- ---------- ---------- ----------
Merger related non-recurring charges:
Stock compensation expense . . . . . . . . . . . . . . 14,942 -- 82,383 --
Integration and transition expenses. . . . . . . . . . 10,800 -- 32,989 --
---------- ---------- ---------- ----------
Total merger related non-recurring
charges. . . . . . . . . . . . . . . . . . . . 25,742 -- 115,372 --
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . 207,164 56,603 592,524 175,009
---------- ---------- ---------- ----------
Operating income (loss). . . . . . . . . . . . . (12,992) 8,229 (117,787) 15,100
Interest expense . . . . . . . . . . . . . . . . . . . . 4,967 413 12,312 992
---------- ---------- ---------- ----------
Earnings (loss) before provision
(benefit) for income taxes . . . . . . . . . . (17,959) 7,816 (130,099) 14,108
Net provision (benefit) for income taxes . . . . . . . . (1,022) 3,010 (20,043) 5,432
---------- ---------- ---------- ----------
Net earnings (loss). . . . . . . . . . . . . . .$ (16,937) 4,806 (110,056) 8,676
========== ========== ========== ==========
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME - CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands, except share data)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments. . . . . . . . . . . . . . . . . . . . .$ 2,881 244 2,987 542
---------- ---------- ---------- ----------
Comprehensive income (loss). . . . . . . . . . . . . . .$ (14,056) 5,050 (107,069) 9,218
========== ========== ========== ==========
Basic earnings (loss) per common share . . . . . . . . .$ (0.70) 0.30 (4.98) 0.54
========== ========== ========== ==========
Weighted average shares outstanding. . . . . . . . . . .24,110,884 16,230,358 22,109,143 16,210,340
========== ========== ========== ==========
Diluted earnings (loss) per common share . . . . . . . .$ (0.70) 0.29 (4.98) 0.53
========== ========== ========== ==========
Diluted weighted average shares
outstanding. . . . . . . . . . . . . . . . . . . . . .24,110,884 16,446,906 22,109,143 16,403,225
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIODS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(in thousands, except share data)
(UNAUDITED)
Deferred Effect of
Common Stock Additional Retained Stock Unallocated Cumulative
------------------- Paid-In Earnings Compen- ESOT Translation
Shares Amount Capital (Deficit) sation Shares Adjustment Total
---------- ------ ---------- --------- ---------- ------------ ----------- ---------
Balances at
December 31,
1997 . . . . . . . . .16,200,000 $ 162 121,778 24,327 -- -- 630 146,897
Net earnings. . . . . -- -- -- 20,465 -- -- -- 20,465
Shares issued
under stock
purchase plan. . . . 64,176 1 1,765 -- -- -- -- 1,766
Other . . . . . . . . -- -- -- -- -- -- 444 444
---------- ----- -------- ------ -------- ------- ------ --------
Balances at
December 31, 1998 . . .16,264,176 163 123,543 44,792 -- -- 1,074 169,572
Net loss. . . . . . . -- -- -- (110,056) -- -- -- (110,056)
Shares issued in
connection with:
Stock option
plan . . . . . . . 21,292 -- 495 -- -- -- -- 495
Stock purchase
programs . . . . . 93,981 1 2,630 -- -- -- -- 2,631
Share activity
related to JLW
merger:
Shares issued
at closing . . . .14,254,116 143 355,233 -- (160,253) (9) -- 195,114
Adjustment
shares sub-
sequently
retained . . . . . (444,924) (4) (8,298) -- -- -- -- (8,302)
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIODS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 - CONTINUED
(in thousands, except share data)
(UNAUDITED)
Deferred Effect of
Common Stock Additional Retained Stock Unallocated Cumulative
------------------- Paid-In Earnings Compen- ESOT Translation
Shares Amount Capital (Deficit) sation Shares Adjustment Total
---------- ------ ---------- --------- ---------- ------------ ----------- ---------
Stock compensa-
tion adjustments. . -- -- (27,842) -- 22,859 -- -- (4,983)
Amortization of
deferred stock
compensation. . . . -- -- -- -- 44,101 -- -- 44,101
Other . . . . . . . . -- -- -- -- -- -- 2,987 2,987
---------- ----- -------- ------- -------- ------- ------ --------
Balances at
September 30, 1999 . .30,188,641 $ 303 445,761 (65,264) (93,293) (9) 4,061 291,559
========== ===== ======== ======= ======== ======= ====== ========
<FN>
See accompanying notes to consolidated financial statements.
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands, unless otherwise noted)
(UNAUDITED)
1999 1998
--------- --------
Cash flows from operating activities:
Net earnings (loss). . . . . . . . . . . . . . . . $(110,056) 8,676
Reconciliation of net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . 26,726 8,177
Equity in earnings from unconsolidated
ventures . . . . . . . . . . . . . . . . . . . (4,422) (2,340)
Provision for loss on receivables and
other assets . . . . . . . . . . . . . . . . . 1,544 1,218
Stock compensation expense . . . . . . . . . . . 81,942 --
Changes in:
Receivables. . . . . . . . . . . . . . . . . . . 33,941 5,683
Prepaid expenses and other assets. . . . . . . . (4,146) (817)
Deferred and current tax benefit . . . . . . . . (24,929) --
Accounts payable, accrued liabilities and
compensation and other liabilities . . . . . . (109,784) (4,841)
--------- --------
Net cash (used in) provided by
operating activities . . . . . . . . . . . (109,184) 15,756
Cash flows provided by (used in) investing
activities:
Net capital additions - property and
equipment. . . . . . . . . . . . . . . . . . . . (23,641) (11,790)
Cash balances assumed in Jones Lang Wootton
merger, net of cash paid and transaction
costs (Note 4) . . . . . . . . . . . . . . . . . 10,094 --
Other acquisitions, net of cash acquired
and transaction costs. . . . . . . . . . . . . . (3,003) (5,465)
Investments in real estate ventures:
Capital contributions and advances to
real estate ventures . . . . . . . . . . . . . (8,963) (45,965)
Distributions, repayments of advances
and sale of investments. . . . . . . . . . . . 25,055 3,411
--------- --------
Net cash used in investing
activities . . . . . . . . . . . . . . . . (458) (59,809)
Cash flows provided by financing activities:
Net borrowings under long-term credit
facilities . . . . . . . . . . . . . . . . . . . 114,381 28,442
Common stock issued under stock option plan. . . . 495 --
--------- --------
Net cash provided by financing activities. . 114,876 28,442
JONES LANG LASALLE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands, unless otherwise noted)
(UNAUDITED)
1999 1998
--------- --------
Effects of foreign currency translation on
cash balances. . . . . . . . . . . . . . . . . . (582) 165
--------- --------
Net increase (decrease) in
cash and cash equivalents. . . . . . . . 4,652 (15,446)
Cash and cash equivalents, beginning of period . . 16,941 30,660
--------- --------
Cash and cash equivalents, end of period . . . . . $ 21,593 15,214
========= ========
Supplemental disclosure of cash flow information:
Combined interest paid was $13,524 and $935 for the periods
ended September 30, 1999 and 1998, respectively.
Taxes paid were $13,077 and $1,930 for the periods
ended September 30, 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
JONES LANG LASALLE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(in millions, except where otherwise noted)
(UNAUDITED)
Readers of this quarterly report should refer to our audited financial
statements for the year ended December 31, 1998, which are included in our
1998 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
Jones Lang LaSalle Incorporated ("Jones Lang LaSalle") formerly
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 4.0 million shares of Jones Lang LaSalle 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 12.2 million shares of common
stock. The contribution occurred immediately prior to the closing of the
Offering. The 4.0 million shares were offered at $23 per share,
aggregating $82.8 million, net of offering costs, of which $63.5 million
was used to retire long-term debt and related interest.
The Predecessor Partnerships were subject to a reorganization as part
of the Company's incorporation. 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.
On March 11, 1999, LaSalle Partners Incorporated and Jones Lang
Wootton ("JLW") completed the merger of their operations. In connection
with the merger, LaSalle Partners Incorporated changed its name to Jones
Lang LaSalle Incorporated.
(2) INTERIM INFORMATION
The consolidated financial statements as of September 30, 1999 and
for the three and nine month periods ended September 30, 1999 and 1998 are
unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial statements for these interim
periods have been included. The results for the periods ended September
30, 1999 and 1998 are not necessarily indicative of the results to be
obtained for the full fiscal year.
Certain amounts have been reclassified to conform with the
September 30, 1999 presentation.
(3) STOCK-BASED COMPENSATION
The Company grants 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. The Company follows the requirements of the Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock-based compensation, and, accordingly,
recognizes no compensation expense for stock option grants, but provides
the annual pro forma disclosures required by the Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".
In connection with the merger with JLW, the Company issued shares to
former employees of JLW which are subject to vesting provisions or are
contingently returnable. Shares issued that are contingently returnable
are accounted for as a variable stock award plan. The remaining shares
issued are accounted for as a fixed stock award plan. Compensation expense
associated with shares subject to vesting is recognized over the vesting
period.
(4) JONES LANG WOOTTON MERGER
In accordance with the purchase and sale agreements, the Company
issued 14.3 million shares of its 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 ownership trust ("ESOT") to be distributed by
December 31, 2000 to selected employees of the former JLW entities.
Issuance of the shares was not registered under the U.S. securities laws,
and the shares are generally subject to a contractual one-year restriction
on sale.
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 and resulted in .5 million shares being
retained by the Company and an additional $.5 million in cash consideration
being due to certain of the former JLW shareholders.
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 the
Company's results as of March 1, 1999, the effective date of the merger for
accounting purposes.
No. of % of Shares
Accounting Method 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, are subject to accounting under APB Opinion No. 16. The
value of those shares totaled $142.1 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 $15.9 million were
allocated to the identifiable assets and liabilities acquired, based on
management's estimate of fair value, which totaled $246.9 million and
$238.5 million, respectively. Included in the assets acquired is $32.0
million in cash. The resulting excess purchase price of $155.8 million was
allocated to goodwill which is being amortized on a straight-line basis
over 40 years based on management's estimate of useful lives.
The remaining 6.6 million shares, or 48% of the shares issued, and
$.4 million in cash paid are subject to accounting under APB Opinion No.
25. Accordingly, shares issued are being accounted for as compensation
expense or deferred compensation expense to the extent
they are subject to forfeiture or vesting provisions. Included in
the 6.6 million shares are 1.3 million shares that are subject to variable
stock award plan accounting. The remaining 5.3 million shares and the $.4
million in cash paid are subject to fixed stock award plan accounting.
Compensation expense incurred for the three and nine months ended September
30, 1999 totaled $14.9 million and $82.4 million, respectively, inclusive
of the compensation expense recognized at closing and the amortization of
deferred compensation for the periods.
(5) SUBSEQUENT EVENT
On October 27, 1999, the Company closed a new $380 million unsecured
credit agreement. The agreement includes a $223.5 million three-year
revolving facility and a $156.5 million term facility due October 15, 2000
(collectively, the "New Facilities"). The Company is authorized under the
agreement to increase the revolving facility up to a total of $250 million
and the term facility up to a total of $175 million through the expansion
of its existing bank group. The New Facilities replace the Company's five
year unsecured $150 million revolving credit facility, $175 million term
credit facility and $30 million short-term facility (the "Existing
Facilities"). The revolving facility is available for working capital, co-
investments and acquisitions.
The New Facilities are guaranteed by certain of the Company's
subsidiaries. The Company must maintain a certain level of consolidated
net work and a ratio of funded debt to earnings before interest expense,
taxes, depreciation and amortization ("EBITDA"). The Company must also
meet a minimum interest coverage ratio, minimum liquidity ratio, and
minimum EBITDA. Additionally, the Company is restricted from, among other
things, incurring certain levels of indebtedness to lenders outside of the
New Facilities, disposing of a significant portion of its assets, and
paying dividends until the term facility is repaid. Lender approval is
required for certain levels of co-investment. The New Facilities bear
variable rates of interest based on market rates. The Company uses
interest rate swaps to convert a portion of the floating rate indebtedness
to a fixed rate. The effective interest rate on the Existing Facilities
was 6.23% and 5.99% for the three and nine months ended September 30, 1999,
respectively, including the effect of interest rate swap agreements.
(6) EARNINGS PER SHARE
The basic and diluted losses per common share were calculated based
on basic weighted average shares outstanding of 24.1 million and 22.1
million for the three and nine months ended September 30, 1999,
respectively. Consideration shares issued as a result of the merger with
JLW, to the extent included, have been weighted as of March 11, 1999. As a
result of the operating loss incurred for the period, diluted weighted
average shares outstanding for the three and nine months ended September
30, 1999 do not give effect to common stock equivalents, consisting
principally of consideration shares issued in connection with the JLW
merger that are subject to vesting provisions or are contingently
returnable, as to do so would be anti-dilutive. Basic earnings per share
was based on weighted average shares outstanding of 16.2 million for both
the three and nine month periods ended September 30, 1998. Diluted
earnings per share was based on weighted average shares outstanding of 16.4
million for the three and nine month periods ended September 30, 1998,
which reflects an increase of .2 million shares primarily 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, and,
to a lesser extent, the dilutive effect of shares to be issued under the
Company's employee stock benefit plans.
(7) BUSINESS SEGMENTS
As a result of the merger with JLW, the Company is managing its
business along a combination of functional and geographic lines.
Accordingly, operations have been classified into six business segments,
two global functional businesses: (i) Investment Management and (ii) Hotel
Services; and four geographic regions consisting of the: (iii) Americas;
(iv) Europe; (v) Asia; and (vi) Australasia. The Investment Management
segment provides real estate investment management services to
institutional investors, corporations, and high net worth individuals. The
Hotels Services segment provides strategic advisory, sales, acquisition and
asset management services related solely to hotel, conference and resort
properties. The geographic regions of the Americas, Europe, Asia and
Australasia each provide Owner and Occupier Services which consist
primarily of tenant representation and agency leasing, investment
disposition and acquisition, and valuation services (collectively,
"implementation services") and property, facility, development and project
management services (collectively, "management fees"). Results for 1998
have been realigned based upon the current business segments.
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. Merger related non-
recurring charges are not allocated to the segments.
Summarized unaudited financial information by business segment for
the three and nine month periods ended September 30, 1999 and 1998 is as
follows ($ in thousands):
SEGMENT OPERATING RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
--------- -------- --------- --------
OWNER AND OCCUPIER SERVICES -
AMERICAS
Revenue:
Implementation services. . . . . . . . . . . . . . .$ 43,010 27,991 81,617 66,070
Management fees. . . . . . . . . . . . . . . . . . . 26,257 17,392 81,606 48,602
Equity earnings. . . . . . . . . . . . . . . . . . . 178 (47) 279 (53)
Other services . . . . . . . . . . . . . . . . . . . 2,901 3,003 7,394 6,121
Intersegment revenue . . . . . . . . . . . . . . . . 1,619 622 1,759 928
---------- ---------- ---------- ----------
73,965 48,961 172,655 121,668
Operating expenses:
Compensation, operating and
administrative expenses. . . . . . . . . . . . . . 61,895 40,879 179,412 117,949
Depreciation and amortization. . . . . . . . . . . . 5,076 1,573 15,152 4,790
---------- ---------- ---------- ----------
Operating income (loss). . . . . . . . . . . .$ 6,994 6,509 (21,909) (1,071)
========== ========== ========== ==========
EUROPE
Revenue:
Implementation services. . . . . . . . . . . . . . .$ 44,998 420 106,867 543
Management fees. . . . . . . . . . . . . . . . . . . 22,216 -- 52,047 --
Equity earnings. . . . . . . . . . . . . . . . . . . (132) -- (225) --
Other services . . . . . . . . . . . . . . . . . . . 713 17 4,900 167
---------- ---------- ---------- ----------
67,795 437 163,589 710
Operating expenses:
Compensation, operating and
administrative expenses. . . . . . . . . . . . . . 65,230 141 146,605 710
Depreciation and amortization. . . . . . . . . . . . 2,399 -- 5,371 --
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . .$ 166 296 11,613 --
========== ========== ========== ==========
SEGMENT OPERATING RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
--------- -------- --------- --------
AUSTRALASIA
Revenue:
Implementation services. . . . . . . . . . . . . . .$ 8,822 -- 23,978 --
Management fees. . . . . . . . . . . . . . . . . . . 4,668 -- 11,483 --
Other services . . . . . . . . . . . . . . . . . . . 1,011 -- 1,917 --
---------- ---------- ---------- ----------
14,501 -- 37,378 --
Operating expenses:
Compensation, operating and
administrative expenses. . . . . . . . . . . . . . 13,095 -- 33,679 --
Depreciation and amortization. . . . . . . . . . . . 336 -- 1,234 --
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . .$ 1,070 -- 2,465 --
========== ========== ========== ==========
ASIA
Revenue:
Implementation services. . . . . . . . . . . . . . .$ 9,772 118 20,472 333
Management fees. . . . . . . . . . . . . . . . . . . 5,861 -- 13,642 --
Other services . . . . . . . . . . . . . . . . . . . 1,543 2 3,346 3
---------- ---------- ---------- ----------
17,176 120 37,460 336
Operating expenses:
Compensation, operating and
administrative expenses. . . . . . . . . . . . . . 13,878 519 34,708 1,322
Depreciation and amortization. . . . . . . . . . . . 864 6 2,020 16
---------- ---------- ---------- ----------
Operating income (loss). . . . . . . . . . . .$ 2,434 (405) 732 (1,002)
========== ========== ========== ==========
HOTEL SERVICES -
Revenue:
Implementation services. . . . . . . . . . . . . . .$ 2,511 -- 5,611 --
Management fees. . . . . . . . . . . . . . . . . . . 470 -- 943 --
Other services . . . . . . . . . . . . . . . . . . . 734 -- 1,196 --
---------- ---------- ---------- ----------
3,715 -- 7,750 --
Operating expenses:
Compensation, operating and
administrative expenses. . . . . . . . . . . . . . 3,182 -- 7,721 --
Depreciation and amortization. . . . . . . . . . . . 45 -- 106 --
---------- ---------- ---------- ----------
Operating income (loss). . . . . . . . . . . .$ 488 -- (77) --
========== ========== ========== ==========
SEGMENT OPERATING RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
--------- -------- --------- --------
INVESTMENT MANAGEMENT -
Revenue:
Implementation services. . . . . . . . . . . . . . .$ 2,078 845 8,115 3,524
Advisory fees. . . . . . . . . . . . . . . . . . . . 14,153 14,192 44,957 61,489
Equity earnings. . . . . . . . . . . . . . . . . . . 2,325 513 4,368 2,393
Other services . . . . . . . . . . . . . . . . . . . 83 386 224 917
---------- ---------- ---------- ----------
18,639 15,936 57,664 68,323
Operating expenses:
Compensation, operating and
administrative expenses. . . . . . . . . . . . . . 16,096 13,087 50,060 47,779
Depreciation and amortization. . . . . . . . . . . . 945 1,020 2,843 3,371
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . .$ 1,598 1,829 4,761 17,173
========== ========== ========== ==========
Total segment revenue. . . . . . . . . . . . . . . . . .$ 195,791 65,454 476,496 191,037
Intersegment revenue eliminations. . . . . . . . . . . . (1,619) (622) (1,759) (928)
---------- ---------- ---------- ----------
Total revenue. . . . . . . . . . . . . . . . .$ 194,172 64,832 474,737 190,109
========== ========== ========== ==========
Total segment operating expenses . . . . . . . . . . . .$ 183,041 57,225 478,911 175,937
Intersegment operating expense
eliminations . . . . . . . . . . . . . . . . . . . . . (1,619) (622) (1,759) (928)
---------- ---------- ---------- ----------
Total operating expenses
before merger related
non-recurring charges. . . . . . . . . . . .$ 181,422 56,603 477,152 175,009
========== ========== ========== ==========
Operating income (loss)
before merger related
non-recurring charges. . . . . . . . . . . .$ 12,750 8,229 (2,415) 15,100
========== ========== ========== ==========
(8) PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma results for the nine months ended
September 30, 1999 give effect to the merger with JLW as if it occurred on
January 1, 1999. Jones Lang LaSalle Actual results reflect the results of
operations of the LaSalle Partners' businesses for the two months ended
February 28, 1999 and the operations of the merged Jones Lang LaSalle
businesses for the period from March 1, 1999 to September 30, 1999. JLW
Results reflect operating results for each of the JLW companies for the two
months ended February 28, 1999, as adjusted for market compensation, taxes
and other costs associated with the integration of the companies.
Acquisition Adjustments represent the impact of the additional amortization
of goodwill resulting from the merger, and income taxes as if the Company
was taxable for the period at an effective tax rate of 38%. Merger-Related
Adjustments reflect the additional non-cash compensation expense associated
with certain shares issued in connection with the JLW merger and the
related income tax effect as if the merger had occurred on January 1, 1999.
Pro Forma weighted average shares outstanding include shares issued in
connection with the merger with JLW, excluding those shares which are
contingently returnable or subject to vesting provisions, as though they
were issued on January 1, 1999.
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The pro forma
consolidated financial statements are not necessarily indicative of what
the actual results of operations would have been for the nine month period
ended September 30, 1999 had the JLW merger been completed as of the date
indicated nor does it purport to represent the future financial position or
results of operations of the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
Jones Lang Merger-
LaSalle JLW Acquisition Adjusted Related
Actual Results Adjustments Pro Forma Adjustments Pro Forma
---------- ---------- ----------- ---------- ----------- ----------
Revenue:
Fee-based services . . . . . $ 467,449 58,039 -- 525,488 -- 525,488
Equity in earnings from uncon-
solidated ventures . . . . 4,422 -- -- 4,422 -- 4,422
Other income . . . . . . . . 2,866 421 -- 3,287 -- 3,287
---------- ---------- ---------- ---------- ---------- ----------
Total revenue. . . . . 474,737 58,460 -- 533,197 -- 533,197
Operating expenses:
Compensation and benefits. . 335,249 43,610 -- 378,859 -- 378,859
Operating, administrative
and other. . . . . . . . . 115,177 18,360 -- 133,537 -- 133,537
Depreciation and
amortization . . . . . . . 26,726 2,197 850 29,773 -- 29,773
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses before
merger related non-
recurring charges. . 477,152 64,167 850 542,169 -- 542,169
---------- ---------- ---------- ---------- ---------- ----------
Operating loss before
merger related non-
recurring charges. . (2,415) (5,707) (850) (8,972) -- (8,972)
Merger related non-recurring
charges:
Stock compensation
expense. . . . . . . . . 82,383 -- -- 82,383 234 82,617
Integration and transition
expense. . . . . . . . . 32,989 12,325 -- 45,314 -- 45,314
---------- ---------- ---------- ---------- ---------- ----------
Total merger related
non-recurring
charges. . . . . . . 115,372 12,325 -- 127,697 234 127,931
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses . . . . . . 592,524 76,492 850 669,866 234 670,100
---------- ---------- ---------- ---------- ---------- ----------
Operating loss . . . . (117,787) (18,032) (850) (136,669) (234) (136,903)
Interest expense, net. . . . 12,312 (93) -- 12,219 -- 12,219
---------- ---------- ---------- ---------- ---------- ----------
Jones Lang Merger-
LaSalle JLW Acquisition Adjusted Related
Actual Results Adjustments Pro Forma Adjustments Pro Forma
---------- ---------- ----------- ---------- ----------- ----------
Loss before benefit
for income taxes . . (130,099) (17,939) (850) (148,888) (234) (149,122)
Net benefit for income
taxes. . . . . . . . . . . (20,043) (2,133) (323) (22,499) (189) (22,688)
---------- ---------- ---------- ---------- ---------- ----------
Net loss . . . . . . . $ (110,056) (15,806) (527) (126,389) (45) (126,434)
========== ========== ========== ========== ========== ==========
Basic loss per common share. $ (4.98) $ (5.26)
========== ==========
Weighted average shares
outstanding. . . . . . . . 22,109,143 24,057,044
========== ==========
Diluted loss per common
share. . . . . . . . . . . $ (4.98) $ (5.26)
========== ==========
Diluted weighted average
shares outstanding . . . . 22,109,143 24,057,044
========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Jones Lang LaSalle Incorporated (the "Company"; formerly LaSalle
Partners Incorporated) is a leading full-service real estate services firm
that provides investment management, hotel acquisition, disposition,
strategic advisory and valuation, property management, corporate property
services, development services, project management, tenant and agency
leasing, investment disposition, acquisition, financing and capital
placement services on a local, regional and global basis. With over 6,000
employees in 98 key markets spanning 34 countries and five continents,
Jones Lang LaSalle is able to satisfy local, regional and international
service needs. The ability to provide this network of services around the
globe was solidified effective March 11, 1999 with the merger of LaSalle
Partners Incorporated and the Jones Lang Wootton ("JLW") companies.
In accordance with the purchase and sale agreements, Jones Lang
LaSalle issued 14.3 million shares of common stock, plus $6.2 million in
cash (collectively, the "Consideration"). Included in the 14.3 million
shares are 1.2 million shares subject to the post-closing net worth
adjustment. The procedures related to the post-closing net worth
calculation were completed during the third quarter and resulted in .5
million shares being retained by the Company and an additional $.5 million
in cash consideration being due to certain of the former JLW shareholders.
Of the original 14.3 million shares issued, approximately 12.5 million of
the shares were issued to former JLW equity owners and 1.8 million shares
were placed in an employee 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 .9 million that were allocated on
March 11, 1999, with the remaining .9 million shares to be allocated by
December 31, 2000. Issuance of the shares was not registered under the
U.S. securities laws, and the shares are generally subject to a contractual
one-year restriction on sale.
The merger, which was principally structured as a share exchange, has
been treated as an acquisition and is being accounted for using both APB
Opinion No. 16, "Business Combinations" and APB Opinion No. 25, "Accounting
for Stock Issued to Employees". In accordance with the purchase and sale
agreements, the merger is effective for accounting purposes as of March 1,
1999. Accordingly, the results of operations for the former JLW entities
have been included in the first quarter results of Jones Lang LaSalle from
that date. Giving effect to the adjustment shares retained, the following
table summarizes the accounting treatment applied to the issued shares:
Net Net
Shares Shares
Issued at to be Total Net
Accounting Method Closing Allocated Shares
- ----------------- ---------- ---------- ----------
APB Opinion No. 16 . . . . . . 7.2 -- 7.2
APB Opinion No. 25 -
Fixed Award. . . . . . . . . 4.4 .9 5.3
Variable Award . . . . . . . 1.3 -- 1.3
----- ----- -----
Net Shares Issued. . . . . . . 12.9 .9 13.8
===== ===== =====
As a general matter, the accounting treatment of the Consideration is
dependent on whether the recipient (i) had a legal ownership interest in
the JLW entities prior to the integration of those entities ("Current JLW
Owners"); (ii) obtained their legal ownership interest in the JLW entities
as part of the JLW integration ("New JLW Owners"); or, (iii) will receive
their shares from the ESOT. The accounting treatment is further dependent
on whether the shares issued are non-restricted ("Non-restricted Shares"),
issued from the ESOT ("ESOT Shares"), or are subject to (i) forfeiture
provisions ("Forfeiture Shares); (ii) indemnification provisions
("Indemnification Shares"); or, (iii) closing net worth requirements
("Adjustment Shares").
All Consideration paid to Current JLW Owners, excluding Forfeiture
Shares, has been accounted for using the purchase method of accounting
under APB Opinion No. 16. Such Consideration consists of 7.2 million
shares and $6.2 million in cash. The shares were valued based on the
average price of Jones Lang LaSalle common stock of $24.66 per share for
the five day period that includes the two trading days immediately
preceding, the trading day of, and the two trading days immediately
following the date of substantial completion of negotiations regarding the
principal financial terms of the merger (October 9, 1998) discounted at a
rate of 20%, to account for transferability restrictions applicable to such
shares. The total value attributed to the issuance of shares, $142.1
million, in addition to the cash payment and capitalizable transaction
costs of approximately $15.9 million have been allocated to the
identifiable assets and liabilities acquired with the excess value being
allocated to goodwill which is being amortized over its estimated useful
life of 40 years.
Accounting under APB Opinion No. 25 is being applied to the remaining
6.6 million shares which represents all shares issued to New JLW Owners,
shares allocated from the ESOT and Forfeiture Shares issued to Current JLW
Owners. Shares issued or allocated from the ESOT at March 11, 1999 were
valued at $35.375, the market price of Jones Lang LaSalle common stock on
March 10, 1999. Shares to be allocated from the ESOT on December 31, 1999
and 2000, totaling .9 million, will be valued based on the prevailing
market price of the common stock on those dates.
Of the 5.7 million shares issued or allocated from the ESOT on
March 11, 1999, after giving effect to the adjustment shares retained, 1.3
million shares, which are deemed to be contingently returnable, are being
accounted for as a variable stock award plan. Such shares include
Forfeiture Shares issued to the JLW Asia Shareholders (which are subject to
indemnification provisions) in addition to Indemnification Shares issued to
New JLW Owners and allocated from the ESOT at March 11, 1999. 1.2 million
shares subject to forfeiture or vesting provisions have been accounted for
as deferred compensation with compensation expense to be recognized over
the forfeiture or vesting period. The value of the remaining .1 million
shares was accounted for as compensation expense during 1999. Under a
variable stock award plan, the amount of compensation expense and value of
deferred compensation will be adjusted at the end of each quarter based on
the change in stock price from the previous quarter until the final number
of shares to be issued is known.
The remaining 4.4 million shares after giving effect to the adjustment
shares retained, issued or allocated from the ESOT on March 11, 1999
subject to accounting under APB Opinion No. 25 are being accounted for as a
fixed stock award plan. Such shares include Forfeiture Shares issued to
Current JLW Owners (excluding Forfeiture Shares issued to JLW Asia
Shareholders which are subject to indemnification provisions) and New JLW
Owners in addition to shares allocated from the ESOT on March 11, 1999
which are not subject to indemnity provisions. 3.4 million of those shares
are subject to forfeiture or vesting provisions and have been accounted for
as deferred compensation with compensation expense to be recognized over
the forfeiture or vesting period. The value of the remaining 1.0 million
shares, in addition to a cash payment of $.4 million, were accounted for as
compensation expense during 1999.
Compensation expense incurred for the three and nine months ended
September 30, 1999 related to the issuance of shares and the amortization
of deferred compensation totaled $14.9 million and $82.4 million,
respectively, net of the quarterly adjustment for the change in stock
price. Deferred compensation at September 30, 1999 totaled $93.3 million,
including the effect of the quarterly adjustment for the change in stock
price, which will be amortized into compensation expense through December
31, 2000. Such compensation expense, in addition to compensation expense
anticipated to be incurred at December 31, 1999 and 2000 associated with
the final allocations of ESOT shares, is expected to result in significant
non-cash net losses for Jones Lang LaSalle for those periods.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1998
Operating results for the three and nine months ended September 30,
1999 include the results of the acquired Compass businesses (the
acquisition was completed in October 1998) and the results of the JLW
entities effective March 1, 1999. Total revenue, after elimination of
intersegment revenue, increased $129.3 million to $194.2 million for the
three months ended September 30, 1999 and increased $284.6 million to
$474.7 million for the nine months ended September 30, 1999 from the prior
year periods, primarily as a result of these two transactions. These
increases were partially offset by lower performance fees generated on the
disposition of assets under management during the nine months ended
September 30, 1999 as compared to the prior year period, which had high
levels of performance fees. Total operating expenses, after elimination of
intersegment expenses and excluding the effect of merger related non-
recurring charges, increased $124.8 million to $181.4 million for the three
months ended September 30, 1999 and increased $302.1 million to $477.2
million for the nine months ended September 30, 1999, as compared with the
prior year periods, also substantially a result of these transactions.
Merger related non-recurring charges totaled $25.7 million and $115.4
million for the three and nine months ended September 30, 1999,
respectively. $14.9 million and $82.4 million of these charges for the
three and nine months ended September 30, 1999, respectively, represent
non-cash compensation expense recorded as a result of shares issued to
certain former employees of JLW in connection with the merger. $10.8
million and $33.0 million of these charges represent non-recurring
transition and integration costs for the three and nine months ended
September 30, 1999, respectively, of which approximately $7.6 million are
attributable to the integration of the acquired Compass businesses for the
nine months ended September 30, 1999. The remaining transition expense
relates to the merger with JLW, and represents non-capitalizable expenses
such as rebranding, office consolidations, and information technology
initiatives.
The resulting operating income for the three months ended
September 30, 1999, excluding the effect of merger related non-recurring
charges, totaled $12.8 million compared to $8.2 million in the prior year
period. The operating loss for the nine months ended September 30, 1999,
excluding the effect of merger related non-recurring charges, totaled $2.5
million compared to operating income of $15.1 million in the prior year
period. The operating results for the three and nine month periods of 1999
have been negatively affected by four primary factors, (i) the seasonal
nature of the operations and the compounding effect of the Compass
acquisition; (ii) distractions caused by the integration of the Compass and
JLW operations; (iii) increased infrastructure costs associated with the
acquisition of Compass and the roll out of the JD Edwards property
accounting system, and a delay in the realization of anticipated cost
savings from these events; and (iv) lower performance fees generated on the
disposition of certain assets under management.
Historically, the leasing & management, corporate property services,
project management and development management businesses in the Americas
Region have incurred an operating loss through the third quarter of each
year. This pattern was intensified with the acquisition of Compass which
had the same seasonal experience and doubled the size of the Jones Lang
LaSalle leasing & management portfolio. In addition, the efforts taken to
fully integrate the employees and business processes of the Compass and JLW
entities, specifically in the United States, resulted in a significant
distraction of senior management of the Americas Region resulting in less
new business generation as compared to the prior year periods. Further,
this distraction resulted in a delay in capturing the anticipated synergies
from the Compass acquisition as well as the benefits anticipated from the
implementation of the JD Edwards property accounting system. Finally,
performance fees generated on the disposition of assets under management by
both the Investment Management segment and Americas Region during the nine
months ended September 30, 1998 were well above those generated during the
same period in 1999, consistent with management's expectation that the
timing of dispositions and related performance fees could result in
significant fluctuations in periodic earnings. These matters are expected
to effect the performance of Jones Lang LaSalle for the full year 1999
reporting period. The integration of the businesses is well underway and
significant progress has been made toward creating the platform with which
to grow the business.
Including the effect of the merger related non-recurring charges, the
operating loss for the three and nine months ended September 30, 1999
totaled $13.0 million and $117.8 million, respectively, compared to
operating income in the prior year periods of $8.2 million and $15.1
million, respectively.
SEGMENT OPERATING RESULTS
INVESTMENT MANAGEMENT. Investment Management revenue increased $2.7
million to $18.6 million for the three months ended September 30, 1999 from
the prior year period and decreased $10.7 million to $57.7 million for the
nine months ended September 30, 1999 from the prior year period. The
decrease for the nine month period is primarily attributable to performance
fees generated in the second quarter of 1998 on the disposition of certain
assets under management, partially offset by increased acquisition fees
generated during the nine month period ended September 30, 1999. Operating
expenses increased $2.9 million to $17.0 million for the three months ended
September 30, 1999 and increased $1.8 million to $52.9 million for the nine
months ended September 30, 1999 as compared with the prior year periods
primarily as a result of the merger with JLW. The increase for the nine
months ended September 30, 1999 was partially offset by lower accruals for
incentive bonuses during 1999 as compared to the prior year period as a
result of lower performance fees generated.
HOTEL SERVICES. Hotel Services, a new reportable segment as a result
of the recent merger, had total revenue of $3.7 million and $7.8 million
for the three and nine months ended September 30, 1999, respectively.
Services provided represented a combination of valuation, disposition and
acquisition services. Operating expenses for the segment totaled $3.2
million and $7.8 million for the three and nine months ended September 30,
1999, respectively.
AMERICAS REGION. Revenue for the Americas Region increased $25.0
million to $74.0 million for the three months ended September 30, 1999 and
increased $51.0 million to $172.7 million for the nine months ended
September 30, 1999 compared to the prior year periods. The increases are
primarily attributable to the acquisition of Compass, and the resulting
increase in leasing, property management and corporate property service
fees, and, to a lesser extent, to the merger with JLW. Operating expenses
for the segment increased $24.5 million to $67.0 million for the three
months ended September 30, 1999 and increased $71.8 million to $194.6
million for the nine months ended September 30, 1999 compared to the prior
year periods. These increases are primarily attributable to the
acquisition of Compass and the related increase in personnel, office
occupancy and goodwill amortization costs, in addition to the merger with
JLW, incremental infrastructure and depreciation expense associated with
the implementation and roll out of the JD Edwards property accounting and
information system, and costs incurred in expanding the operations in South
America.
EUROPE REGION. Revenue for the Europe Region, which is substantially
a new reportable segment as a result of the JLW merger and the acquisition
of Compass, totaled $67.8 million and $163.6 million for the three and nine
months ended September 30, 1999, respectively. The revenue generated by
the Region primarily reflects robust activity within the United Kingdom
primarily in the form of tenant and agency leasing activities and
investment sales and acquisition transactions, and to a lesser extent to
investment and leasing activities for the third quarter of 1999 in Germany.
Operating expenses for the region totaled $67.6 million and $152.0 million
for the three and nine months ended September 30, 1999, respectively.
These expenses increased for the three months ended September 30, 1999, as
compared to previous quarters, primarily as a result of increases in
accruals for compensation expenses, reflective of the overall strong
performance of the segment and increases in pension costs.
ASIA REGION. Revenue for the Asia Region, also substantially a new
reportable segment as a result of the merger, totaled $17.2 million and
$37.5 million for the three and nine months ended September 30, 1999,
respectively, primarily reflecting strong activity within Hong Kong
representing management fees, agency leasing activity, consulting and
valuation services. Operating expenses totaled $14.7 million and $36.7
million for the three and nine months ended September 30, 1999,
respectively. The Region continues to see growing indications that
economic recovery has begun and that global outsourcing continues to
produce new business opportunities. The currency valuation throughout most
of the Asia Region remained stable for the periods, inflation remained low,
and property prices and rents in a number of the Asia markets have begun to
stabilize.
AUSTRALASIA REGION. Revenue for the Australasia Region, a new
reportable segment as a result of the JLW merger and the acquisition of
Compass, totaled $14.5 million and $37.4 million for the three and nine
months ended September 30, 1999, respectively. Leasing activity has
remained strong over the first half of 1999, reflecting improved business
confidence. Operating expenses totaled $13.4 million and $34.9 million for
the three and nine months ended September 30, 1999, respectively. The
Australasia Region operations continue to benefit from several positive
trends, including continued economic growth funded by strong consumer
spending, the outsourcing of property management functions by corporations
and the Australian government, and a strengthening in the Australian dollar
against the U.S. dollar for the nine months ended.
INTEREST EXPENSE
Interest expense increased $4.6 million to $5.0 million for the three
months ended September 30, 1999 and increased $11.3 million to $12.3
million for the nine months ended September 30, 1999 from the prior year
periods, primarily as a result of the acquisition of Compass and the
related borrowings on the acquisition credit facility, and to a lesser
extent, additional borrowings on the revolving credit facilities as a
result of the transition and integration expenses associated with the
acquisition of Compass and merger with JLW.
BENEFIT FOR INCOME TAXES
The benefit for income taxes increased $4.0 million to $1.0 million
for the three months ended September 30, 1999 and increased $25.5 million
to $20.0 million for the nine months ended September 30, 1999 from a
provision of $3.0 million and $5.4 million, respectively, in the prior year
periods, primarily as a result of the increased net loss, exclusive of the
compensation expense associated with the issuance of shares to former JLW
employees in connection with the merger, at an effective tax rate of 38%.
In addition, a benefit has been recognized on a portion of the stock
compensation expense, which is largely non-deductible for tax purposes,
based on the rates prevailing in the applicable countries.
NET LOSS
The net loss for the three months ended September 30, 1999 totaled
$16.9 million compared to net income of $4.8 million in the prior year
period. The net loss for the nine months ended September 30, 1999 totaled
$110.1 million compared to net income of $8.7 million for the prior year
period. The increase in net loss compared to the prior year periods is
predominantly a result of the merger related non-recurring charges, in
addition to the effects on operations previously discussed by segment.
OTHER COMPREHENSIVE INCOME
The financial statements of the Company's subsidiaries that are
located outside of the U.S., except those subsidiaries located in highly
inflationary economies, are generally 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 as a separate component of
stockholders' equity and comprehensive income. Other comprehensive income
for the three and nine month periods ended September 30, 1999 was $2.9
million and $3.0 million as compared to $.2 million and $.5 million for the
corresponding prior year periods. These increases are a direct result of
the merger with JLW and the resulting increase of the Company's oeprations
which do not have the U.S. Dollar as their functional currency. Specific-
ally, these increases are a result of the strengthening of the British
Pound against the U.S. Dollar for the three and nine months ended September
30, 1999 and a strengthening of the Australian Dollar against the U.S.
Dollar for the nine months ended September 30, 1999, partially offset by a
weakening experienced for the three months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, acquisitions
and co-investment activities with internally generated funds, the common
stock of the Company and borrowings under the credit facilities. As of
September 30, 1999, the Company's existing five year unsecured $150 million
revolving credit facility and $175 million term credit facility were fully
drawn, including the impact of outstanding letters of credit. During the
third quarter, the Company extended the maturity of its short term
facility, originally obtained in May, in a reduced amount of $30 million,
to November 30, 1999. There were no outstanding borrowings on the short-
term facility at September 30, 1999. The three facilities described in
this paragraph are collectively referred to as the "Existing Facilities".
On October 27, 1999, the Company closed a new $380 million unsecured
credit agreement. The agreement includes a $223.5 million three-year
revolving facility and a $156.5 million term facility due October 15, 2000
(collectively, the "New Facilities"). The Company is authorized under the
agreement to increase the revolving facility up to a total of $250 million
and the term facility up to a total of $175 million through the expansion
of its existing bank group. The New Facilities replace the Company's
Existing Facilities. The revolving facility is available for working
capital, co-investments and acquisitions.
The New Facilities are guaranteed by certain of the Company's
subsidiaries. The Company 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"). The Company must also
meet a minimum interest coverage ratio, minimum liquidity ratio, and
minimum EBITDA. Additionally, the Company is restricted from, among other
things, incurring certain levels of indebtedness to lenders outside of the
New Facilities, disposing of a significant portion of its assets, and
paying dividends until the term facility is repaid. Lender approval is
required for certain levels of co-investment. The New Facilities bear
variable rates of interest based on market rates. The Company uses
interest rate swaps to convert a portion of the floating rate indebtedness
to a fixed rate. The effective interest rate on the Existing Facilities
was 6.23% and 5.99% for the three and nine months ended September 30, 1999,
respectively, including the effect of interest rate swap agreements. The
interest rate swap agreements had a notional amount as of September 30,
1999 of $55 million.
The Company has additional access to liquidity via various overdraft
facilities and short term credit facilities in Europe, Asia, and Australia.
The aggregate amount available under these facilities approximates $41.9
million, of which $10.5 million was outstanding as of September 30, 1999.
Borrowings on these facilities are currently limited to $50 million under
the terms of the New Facilities.
Management believes that the New Facilities, along with existing local
borrowing facilities and cash flow generated from operations, will provide
adequate liquidity and financial flexibility to meet working capital
requirements, including merger and integration costs yet to be paid.
Permanent financing alternatives will be considered for the refinancing of
the term facility due October 15, 2000.
During the nine months ended September 30, 1999, cash flows used in
operating activities totaled $109.2 million compared to cash flows provided
by operations of $15.8 million in the prior year period. The increased use
is primarily a result of increased operating expenses resulting from the
acquisition of Compass and the merger with JLW, and the related payment of
integration, transition and transaction costs associated with the
transactions. To a lesser extent, the increased use is due to higher bonus
accruals at December 31, 1998 as compared to December 31, 1997, which are
paid in the first quarter of the following year.
Jones Lang LaSalle expects to continue to pursue co-investment
opportunities with investment management clients for which the holding
period typically ranges from three to seven years. While this program
remains very important to the continued growth of the Investment Management
segment, the future commitment to co-investment is completely discretionary
and can be increased or decreased based on the availability of capital and
other factors. The performance of the Investment Management segment would
likely be negatively impacted if a substantial decrease in co-investment
were to occur. Management anticipates that co-investment activity within
the Americas and Europe regions will continue with probable expansion into
Asia and Australasia, as appropriate opportunities arise. This strategy
should serve to grow the assets under management, generate returns on
investment and create potential opportunities to provide other services.
Such co-investments are generally represented by non-controlling general
partner and limited partner interests. In addition to a 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 current earnings and cash flow. However,
increased investment participation could increase fluctuations in net
earnings and cash flow as a result of the timing and magnitude of the gains
or losses and potential performance fees, if any, to be recognized upon the
disposition of these assets. In most of these investments, Jones Lang
LaSalle will not have complete discretion to control the timing of the
disposition of such investments. As of September 30, 1999, there were
total investments of $56.8 million in 39 separate property or fund co-
investments with additional capital commitments of $10.8 million for future
fundings of co-investments.
Capital expenditures are anticipated to be approximately $40.0 to
$50.0 million for 1999 which is significantly higher than prior years or
expected annual expenditures in 2000 and beyond. The increased level of
expenditures in the current year are associated primarily with the
implementation of the JD Edwards property accounting and information
system, the integration of a global accounting system, and office
consolidations related to the recent merger and acquisition.
Net cash used in investing activities was $0.5 million for the nine
months ended September 30, 1999 compared with $59.8 million in the prior
year period. The decreased use of cash of $59.3 million is primarily
attributable to the significant co-investment activity in 1998, including
an $18.8 million investment in LaSalle Hotel Properties, in addition to
increased distributions and repayments in 1999 of advances from
coinvestment ventures, and, to a lesser extent, to cash acquired in the
merger with JLW. These increases were partially offset by increased
capital expenditures during 1999 as a result of the JLW merger and
acquisition of Compass and the resulting consolidation of corporate
offices, and the continued customization and implementation of the JD
Edwards property accounting and information system.
Net cash provided by financing activities was $114.9 million for the
nine months ended September 30, 1999 compared with $28.4 million in the
prior year period. The increase in cash flows is a result of increased
borrowings on the Existing Facilities as a result of the increased uses of
cash described above.
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. Other than Investment Management, this seasonality
is due to a calendar year-end focus, primarily in the United States on the
completion of transactions, which is consistent with the real estate
industry generally. The 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. 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, typically reports a small profit or loss in the second and third
quarters and records a substantial majority of its earnings in the fourth
calendar quarter, barring the recognition of investment generated
performance fees.
INFLATION
Jones Lang LaSalle'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, management does not believe that general inflation
has had a material impact on operations, as revenue, bonuses, and other
variable costs related to revenue are primarily impacted by real estate
supply and demand rather than general inflation.
OTHER MATTERS
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" becomes effective for all
fiscal quarters for fiscal years beginning after June 15, 2000 and is not
expected to have a material impact on the financial statements.
YEAR 2000 ISSUES
The "Year 2000 Issue" is the result of computer programs and systems
having been designed and developed to use two digits, rather than four, to
define the applicable year. As a result, these computer programs and
systems may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruption of operations, including, among other things, a temporary
inability to process transactions, pay invoices or engage in similar normal
business activities. Jones Lang LaSalle has defined five key phases in
addressing the Year 2000 Issue: Awareness, Assessment, Renovation,
Validation and Implementation.
Under the guidance of a Year 2000 program team, whose strategy is
supported by senior management, the Company has in place a firmwide
Awareness Phase and will continue this phase through December 31, 1999 to
maintain a heightened sense of awareness to the Year 2000 Issue. As part
of the Assessment Phase, it has reviewed the year 2000 readiness of its
information technology systems through the creation of critical
applications, systems software and hardware inventories. These inventories
included detailed information relating to the potential impact of the
Year 2000 issue to Jones Lang LaSalle. The global Assessment Phase was
completed in early 1999.
Renovation and Validation Phase efforts are substantially complete.
The Company conducts its business primarily with commercial software
purchased from third-party vendors versus in-house developed software.
Over the last two years, the Company has significantly upgraded its
information systems capabilities, and is currently in the final stages of
rolling out new property and client accounting systems in the United
States. Continued upgrades of critical business systems provide a
historically sound software infrastructure, and positively impact the
degree of effort necessary related to the renovation process of converting,
replacing or eliminating selected platforms, applications, databases and
utilities, as well as the validation process of testing and verifying for
Year 2000 readiness. The schedule for completion of these renovations and
validation efforts remains on schedule with anticipated completion during
the fourth quarter of 1999.
The continuing Implementation Phase, which involves returning the
tested systems to operational status and the development of contingency
plans for critical business systems, is also anticipated to be completed
during the fourth quarter of 1999.
Management expects that the cost of additional modifications to its
software and hardware to meet Year 2000 requirements will not be material.
The total anticipated cost related to the phases previously discussed is
currently projected to be approximately $6.3 million, including
approximately $4.8 million of operating expenses associated with testing
and other matters and $1.5 million of capital expenditures primarily
representing system upgrades which provide operational benefits above and
beyond Year 2000 compliance. Jones Lang LaSalle has incurred approximately
$3.1 million in operating expenses to date.
Properties for which the Company provides management services rely on
a variety of third party suppliers to provide critical operating services.
These suppliers may utilize systems and embedded technologies to control
the operation of building systems such as utilities, lighting, security,
elevators, heating, ventilation and air conditioning systems. Jones Lang
LaSalle is in the process of obtaining assurances from suppliers as to
their Year 2000 readiness and preparing contingency plans, including the
identification of alternative suppliers. The Company does not control
these third party suppliers, and for some suppliers, such as utility
companies, there may be no feasible alternative suppliers available. The
failure to these suppliers' systems could have a material adverse effect on
the operations of the affected property, and widespread failures could have
a material adverse effect on Jones Lang LaSalle. Plans for a complete
millennium period staffing and communication strategy are underway to
address any concerns.
A corporate business resumption strategy has been defined to create
specific response action plans throughout the organization to deal with
situations which arise that could cause interruption to or have serious
impact on the continuation of normal business operations. The strategy
includes specific contingency and communication plans to be instituted at
the time of an emergency, and will allow the Company's resources to
effectively react to critical issues resulting from any Year 2000 related
occurrences.
The ability of third parties with whom the Company transacts business
or companies that may be acquired to adequately address their Year 2000
issues is outside Jones Lang LaSalle's control. At this time, the Company
is in the process of reviewing the Year 2000 readiness of major suppliers
and customers. There can be no assurance that the failure of major
suppliers and customers to adequately address Year 2000 issues will not
have a material adverse effect on the Company's business, financial
condition, and results of operations.
Although the Company is not aware of any threatened claims related to
the Year 2000, it may become subject to litigation arising from such
claims, and, depending on the outcome, such litigation could have a
material adverse affect on Jones Lang LaSalle. It is not clear whether
insurance coverage would be adequate to offset these and other business
risks related to the Year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Jones Lang LaSalle is exposed to interest rate changes primarily as a
result of its lines of credit used to maintain liquidity and to fund
capital expenditures, acquisitions, co-investments and operations. The
Company's interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower overall
borrowing costs. To achieve this objective, the Company borrows primarily
at variable rates and enters into derivative financial instruments such as
interest rate swap agreements when appropriate. The Company does not enter
into derivative or interest rate transactions for speculative purposes.
The Company has entered into interest rate swap agreements with a
notional amount of $55.0 million providing for an average fixed interest
rate of approximately 5.21% as of September 30, 1999. These agreements
have terms which expire through June 15, 2000. Such interest rate swap
agreements had an approximate market value of $.2 million at September 30,
1999. The carrying value of the debt approximates its fair value. As of
September 30, 1999, the outstanding borrowings on the Existing Facilities
were $324.0 million. The Existing Facilities bore and the New Facilities
bear variable rates of interest based on market rates. The effective
interest rate on the Existing Facilities was 6.23% and 5.99% for the three
and nine months ended September 30, 1999, respectively, including the
effect of interest rate swap agreements.
FOREIGN CURRENCY RISK
Jones Lang LaSalle's reporting currency is the U.S. Dollar. Business
is transacted in various foreign currencies throughout Europe, Asia, and
Australasia. The financial statements of subsidiaries outside the U.S.,
except those located in highly inflationary economies, are generally
measured using the local currency as the functional currency. As a result,
fluctuations in the U.S. Dollar relative to the other currencies in which
earnings are generated can impact the Company's business, operating results
and financial condition as reported in U.S. dollars. For the three and
nine months ended September 30, 1999, on a pro forma basis (excluding the
effect of stock compensation expense), 168% and 93% of our net loss was
attributable to operations with U.S. Dollars as their functional currency
and (68%) and 7% was attributable to operations having other functional
currencies, respectively. Revenues and expenses have primarily been earned
and incurred in the currency of the location where the operations
generating the revenues and expenses have occurred, thereby limiting
exposure to exchange rate fluctuations to some extent.
On a limited basis, the Company enters into forward currency exchange
contracts to manage currency risks and reduce exposure resulting from
fluctuations in the designated foreign currency associated with existing
commitments, assets or liabilities. There were no significant forward
exchange contracts in effect at September 30, 1999. The Company does not
use foreign currency exchange contracts for trading purposes.
DISCLOSURE OF LIMITATIONS
As the information presented above includes only those exposures that
exist as of September 30, 1999, it does not consider those exposures or
positions which could arise after that date. Moreover, because firm
commitments are not presented, the information presented 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jones Lang LaSalle 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. Many of these matters are
covered by insurance. In the opinion of management, the ultimate resolution
of such litigation matters is not expected to have a material adverse
effect on the Company's financial position, results of operations and
liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Under the credit agreement with respect to the New Facilities, the
Company is restricted from paying dividends until the term facility is
repaid.
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 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 the Company'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) each of the Quarterly Reports on Form 10-Q for
the quarters ended September 30, 1999, June 30, 1999 and March 31, 1999, in
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations", Item 3. "Quantitative and Qualitative Disclosures
About Market Risk", and elsewhere, (ii) our Annual Report on Form 10-K for
the year ended December 31, 1998, 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, and (iii) our Proxy Statement dated February
4, 1999 under the captions "Risk Factors", "The Transactions", "The
Purchase Agreements", "JLW Management's Discussion and Analysis of
Financial Condition and Results of Operations of the JLW Companies", and
elsewhere, and in other reports filed with the Securities and Exchange
Commission. 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 its 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) Reports on Form 8-K
None.
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.
JONES LANG LASALLE INCORPORATED
Dated: November 12, 1999 BY: /S/ WILLIAM E. SULLIVAN
------------------------------
William E. Sullivan
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Second Amendment to 1997 Stock Award and
Incentive Plan
10.2 Third Amendment to 1997 Stock Award and
Incentive Plan
10.3 Amended and Restated Multicurrency
Credit Agreement, dated as of
October 27, 1999
27.1 Financial Data Schedule.