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 JUNE 30, 2000 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 August 10, 2000 ----- ---------------- Common Stock ($0.01 par value) 30,859,772
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. . . . . . . . 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . 39 PART II OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 40 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 40 Item 5. Other Matters. . . . . . . . . . . . . . . . . . . 41 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 41
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JONES LANG LASALLE INCORPORATED CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 (in thousands, except share data) (UNAUDITED) JUNE 30, DECEMBER 31, 2000 1999 ------------- ----------- ASSETS - ------ Current assets: Cash and cash equivalents . . . . . . . $ 13,167 23,308 Trade receivables, net of allowances of $11,777 and $9,871 in 2000 and 1999, respectively. . . . . . . . 236,548 270,593 Notes receivable and advances to real estate ventures. . . . . . . . . 3,591 4,519 Other receivables . . . . . . . . . . . 2,775 7,045 Income tax refund receivable. . . . . . 14,500 14,500 Prepaid expenses. . . . . . . . . . . . 9,894 9,598 Deferred tax assets . . . . . . . . . . 18,021 13,673 Other assets. . . . . . . . . . . . . . 13,505 5,446 ---------- --------- Total current assets. . . . . . 312,001 348,682 Property and equipment, at cost, less accumulated depreciation of $66,655 and $55,943 in 2000 and 1999, respectively. . . . . . . . . 79,637 76,470 Intangibles resulting from business acquisitions and JLW merger, net of accumulated amortization of $35,812 and $27,515 in 2000 and 1999, respectively. . . . . . . . . . . . . . 356,648 367,215 Investments in real estate ventures . . . 69,126 67,305 Long-term receivables, net. . . . . . . . 23,311 27,962 Prepaid pension asset . . . . . . . . . . 20,914 23,956 Deferred tax assets . . . . . . . . . . . 5,566 5,270 Other assets, net . . . . . . . . . . . . 8,418 7,940 ---------- ---------- $ 875,621 924,800 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable and accrued liabilities . . . . . . . . . $ 85,944 88,257 Accrued compensation. . . . . . . . . . 87,165 142,960 Short-term borrowings . . . . . . . . . 190,612 162,643 Deferred tax liabilities. . . . . . . . 36 -- Other liabilities . . . . . . . . . . . 19,429 26,259 ---------- ---------- Total current liabilities . . . 383,186 420,119 Long-term liabilities: Credit facilities . . . . . . . . . . . 154,483 159,743 Deferred tax liabilities. . . . . . . . 6,808 7,535 Other . . . . . . . . . . . . . . . . . 14,009 12,878 ---------- ---------- Total liabilities . . . . . . . 558,486 600,275 Commitments and contingencies
JONES LANG LASALLE INCORPORATED CONSOLIDATED BALANCE SHEETS - CONTINUED JUNE 30, 2000 AND DECEMBER 31, 1999 (in thousands, except share data) (UNAUDITED) JUNE 30, DECEMBER 31, 2000 1999 ------------- ----------- Minority interest in consolidated subsidiaries. . . . . . . . . . . . . . 590 589 Stockholders' equity: Common stock, $.01 par value per share, 100,000,000 shares authorized; 30,859,772 and 30,285,472 shares issued and outstanding as of 2000 and 1999, respectively. . . . . . . . 309 303 Additional paid-in capital. . . . . . . 453,209 442,699 Unallocated ESOT shares . . . . . . . . (7) (7) Deferred stock compensation . . . . . . (40,395) (70,106) Retained deficit. . . . . . . . . . . . (86,515) (50,050) Accumulated other comprehensive income (loss) . . . . . . . . . . . . (10,056) 1,097 ---------- ---------- Total stockholders' equity. . . 316,545 323,936 ---------- ---------- $ 875,621 924,800 ========== ========== See accompanying notes to consolidated financial statements.
<TABLE> JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (in thousands, except share data) (UNAUDITED) <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue: Fee-based services. . . . . . . . $ 216,238 175,766 396,661 276,470 Equity in earnings from unconsolidated ventures . . . . 8,747 1,870 14,687 2,051 Other income. . . . . . . . . . . 698 1,508 1,315 2,044 ---------- ---------- ---------- ---------- Total revenue . . . . . . . 225,683 179,144 412,663 280,565 Operating expenses: Compensation and benefits . . . . 142,536 124,640 272,773 200,079 Operating, administrative and other 53,482 47,273 104,967 78,590 Depreciation and amortization . . 10,797 10,106 21,491 17,061 ---------- ---------- ---------- ---------- Total operating expenses before merger related non-recurring charges . . 206,815 182,019 399,231 295,730 ---------- ---------- ---------- ---------- Operating income (loss) before merger related non-recurring charges . . 18,868 (2,875) 13,432 (15,165) Merger related non-recurring charges: Stock compensation expense. . . . 18,865 21,242 37,191 67,441 Integration and transition expenses -- 14,345 -- 22,189 ---------- ---------- ---------- ---------- Total merger related non-recurring charges . . 18,865 35,587 37,191 89,630 ---------- ---------- ---------- ---------- Total operating expenses. . 225,680 217,606 436,422 385,360 ---------- ---------- ---------- ---------- Operating income (loss) . . 3 (38,462) (23,759) (104,795) Interest expense, net of interest income. . . . . . . . . . . . . . 6,664 4,703 13,339 7,345 ---------- ---------- ---------- ----------
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME - CONTINUED THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (in thousands, except share data) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Loss before provision (benefit) for income taxes (6,661) (43,165) (37,098) (112,140) Net provision (benefit) for income taxes. . . . . . . . . . . 4,832 (5,461) (633) (19,021) ---------- ---------- ---------- ---------- Net loss. . . . . . . . . . $ (11,493) (37,704) (36,465) (93,119) ========== ========== ========== ========== Other comprehensive income (loss), net of tax: Foreign currency translation adjustments . . . . . . . . . . $ (6,043) 483 (11,153) 106 ---------- ---------- ---------- ---------- Comprehensive loss. . . . . . . . . $ (17,536) (37,221) (47,618) (93,013) ========== ========== ========== ========== Basic loss per common share . . . . $ (0.47) (1.62) (1.49) (4.52) ========== ========== ========== ========== Basic weighted average shares outstanding . . . . . . . . . . . 24,559,305 23,297,467 24,472,122 20,620,715 ========== ========== ========== ========== Diluted loss per common share . . . $ (0.47) (1.62) (1.49) (4.52) ========== ========== ========== ========== Diluted weighted average shares outstanding . . . . . . . . . . . 24,559,305 23,297,467 24,472,122 20,620,715 ========== ========== ========== ========== <FN> See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY PERIODS ENDED JUNE 30, 2000 AND DECEMBER 31, 1999 (in thousands, except share data) (UNAUDITED) <CAPTION> Accumu- lated Other Additi- Unallo- Deferred Compre- Common Stock tional cated Stock Retained hensive ------------------- Paid-In ESOT Compen- Earnings Income Shares Amount Capital Shares sation (Deficit) (Loss) Total ---------- ------ -------- ------- -------- --------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1998 . . . . . . . 16,264,176 163 123,543 -- -- 44,792 1,074 169,572 Net loss . . . . -- -- -- -- -- (94,842) -- (94,842) Shares issued in connection with: Stock option plan. . . . . 21,292 -- 495 -- -- -- -- 495 Stock purchase programs. . . 199,587 2 3,695 -- -- -- -- 3,697 Share activity related to JLW merger: Shares issued at closing. . 14,254,116 143 355,233 (9) (160,253) -- -- 195,114 Adjustment shares sub- sequently retained. . . (453,699) (5) (8,462) -- -- -- -- (8,467) ESOT shares allocated . . -- -- 1,597 2 -- -- -- 1,599 Stock compensa- tion adjust- ments. . . . . -- -- (33,402) -- 27,906 -- -- (5,496) Amortization of deferred stock compensation . -- -- -- -- 62,241 -- -- 62,241 Cumulative effect of foreign currency translation adjustments. . -- -- -- -- -- -- 23 23 ---------- ----- ------- -------- -------- -------- -------- --------
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED Accumu- lated Other Additi- Unallo- Deferred Compre- Common Stock tional cated Stock Retained hensive ------------------- Paid-In ESOT Compen- Earnings Income Shares Amount Capital Shares sation (Deficit) (Loss) Total ---------- ------ -------- ------- -------- --------- ------- ------- Balances at December 31, 1999 . . . . . . . 30,285,472 303 442,699 (7) (70,106) (50,050) 1,097 323,936 Net loss. . . . . . -- -- -- -- -- (36,465) -- (36,465) Shares issued in connection with: Stock option plan 472,500 5 5,813 -- (5,818) -- -- -- Amortization of shares issued in connection with stock option plan. . . -- -- -- -- 542 -- -- 542 Stock purchase programs. . . . 169,335 2 3,308 -- -- -- -- 3,310 Share activity re- lated to JLW merger: Shares repurchased for payment of taxes on ESOT Shares allocated at December 31, 1999. . . . . . (67,534) (1) (815) -- -- -- -- (816) Stock compensa- tion adjustments. -- -- 2,204 -- (1,781) -- -- 423 Amortization of deferred stock compensation. . . -- -- -- -- 36,768 -- -- 36,768 Other . . . . . . . -- -- -- -- -- -- (11,153) (11,153) ---------- ----- ------- ------- -------- -------- -------- -------- Balances at June 30, 2000 . . 30,859,773 $ 309 453,209 (7) (40,395) (86,515) (10,056) 316,545 ========== ===== ======= ======= ======== ======== ======== ======== <FN> See accompanying notes to consolidated financial statements. </TABLE>
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (in thousands, unless otherwise noted) (UNAUDITED) 2000 1999 ---------- ---------- Cash flows used in operating activities: Net loss. . . . . . . . . . . . . . . . . $ (36,465) (93,119) Reconciliation of net loss to net cash used in operating activities: Depreciation and amortization . . . . . 21,491 17,061 Equity in earnings from unconsolidated ventures. . . . . . . . . . . . . . . (14,687) (2,051) Provision for loss on receivables and other assets. . . . . . . . . . . . . 3,990 4,537 Stock compensation expense. . . . . . . 37,191 67,000 Amortization of deferred compensation . 1,912 -- Changes in: Receivables . . . . . . . . . . . . . . 36,164 34,152 Prepaid expenses and other assets . . . 949 (6,046) Deferred tax assets and income tax refund receivable . . . . . . . . . . (5,279) (22,486) Accounts payable, accrued liabilities and accrued compensation. . . . . . . (75,102) (53,130) ---------- ---------- Net cash used in operating activities. . . . . . . (29,836) (54,082) Cash flows used in investing activities: Net capital additions - property and equipment . . . . . . . . . . . . . . . (19,298) (12,715) Cash paid in connection with Jones Lang Wootton merger, net of cash balances assumed. . . . . . . . . . . . -- (36,373) Other acquisitions and investments, net of cash balances assumed. . . . . . (1,946) (3,195) Investments in real estate ventures: Capital contributions and advances to real estate ventures. . . . . . . . . (2,959) (3,528) Distributions, repayments of advances and sale of investments . . . . . . . 17,680 6,611 ---------- ---------- Net cash used in investing activities. . . . . . . (6,523) (49,200) Cash flows provided by financing activities: Proceeds from borrowings under credit facilities. . . . . . . . . . . . . . . 169,188 185,031 Repayments of borrowings under credit facilities. . . . . . . . . . . . . . . (146,479) (63,152) Common stock issued under stock option plan and stock purchase programs. . . . 3,509 3,126 ---------- ---------- Net cash provided by financing activities. . . . . . . 26,218 125,005 ---------- ----------
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (in thousands, unless otherwise noted) (UNAUDITED) 2000 1999 ---------- ---------- Net increase (decrease) in cash and cash equivalents . . . . (10,141) 21,723 Cash and cash equivalents, beginning of period . . . . . . . . . . . 23,308 16,941 ---------- ---------- Cash and cash equivalents, end of period. . $ 13,167 38,664 ========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest. . . . . . . . . . . . . . . . $ 12,739 7,537 Taxes, net of refunds . . . . . . . . . 2,115 11,892 Non-cash investing and financing activities: Acquisitions and merger: Shares issued in connection with merger. . . . . . . . . . . . . . . $ -- 149,521 Fair value of assets acquired . . . . (2) (214,499) Fair value of liabilities assumed . . 4,199 190,334 Goodwill. . . . . . . . . . . . . . . (4,893) (164,924) Other investments . . . . . . . . . . (1,250) -- --------- -------- Cash paid, net of cash balances assumed. . . . . . . . $ (1,946) (39,568) ========= ======== See accompanying notes to consolidated financial statements.
JONES LANG LASALLE INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1999, which are included in our 1999 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. Readers of this quarterly report should also refer to any Forms 8- K filed with the Securities and Exchange Commission during the year 2000. (1) ACCOUNTING POLICIES INTERIM INFORMATION The consolidated financial statements as of June 30, 2000 and for the three and six month periods ended June 30, 2000 and 1999 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 June 30, 2000 and 1999 are not necessarily indicative of the results to be obtained for the full fiscal year. Certain prior year amounts have been reclassified to conform with the current presentation. BONUS INCENTIVE COMPENSATION In the first quarter of 2000, Jones Lang LaSalle changed its method of estimating and allocating bonus incentive compensation to interim periods. The impact of this change for the three and six months ended June 30, 2000 was to reduce compensation expense by approximately $500,000 and $8.7 million, respectively. This change does not impact the overall compensation cost that will be incurred during the year ended December 31, 2000, but rather the periods in which it is recognized. EARNINGS PER SHARE The basic and diluted losses per common share were calculated based on basic weighted average shares outstanding of 24.6 million and 24.5 million for the three and six month periods ended June 30, 2000, respectively. For the three and six months ended June 30, 1999, basic and diluted losses per common share were calculated based on basic weighted average shares outstanding of 23.3 million and 20.6 million, respectively. As a result of the net losses incurred for these periods, diluted weighted average shares outstanding do not give effect to common stock equivalents, as to do so would be anti-dilutive. These common stock equivalents consist principally of consideration shares issued in connection with the JLW merger that are subject to vesting provisions or are contingently returnable. To a lesser extent, common stock equivalents also include outstanding stock options whose exercise price was less than the average market price of Jones Lang LaSalle's stock for the period and shares to be issued under employee stock compensation programs. STATEMENT OF CASH FLOWS The effects of foreign currency translation on cash balances are reflected in cash flows from operating activities on the Consolidated Statements of Cash Flows.
(2) JONES LANG WOOTTON MERGER On March 11, 1999, LaSalle Partners Incorporated merged its businesses with those of the Jones Lang Wootton companies ("JLW") and changed its name to Jones Lang LaSalle Incorporated. In accordance with the purchase and sale agreements, Jones Lang LaSalle issued 14.3 million shares of common stock and paid cash consideration of $6.2 million. This transaction, 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." See our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 for a full discussion of this transaction and the related accounting treatment. The total value attributed to the issuance of the 7.2 million shares accounted for under APB No. 16 of $141.9 million, in addition to the cash payment of $6.2 million and capitalizable transaction costs of approximately $15.8 million, have been allocated to the identifiable assets acquired and liabilities assumed, based on management's estimates of fair value, which totaled $251.4 million and $244.8 million, respectively. The resulting excess purchase price of $157.3 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. Included in the assets acquired was $32.2 million in cash and included in the liabilities assumed was $47.4 million of obligations to former partners of undistributed earnings. The liabilities assumed also included employee termination costs of $9.3 million, as well as office rental payments in excess of sublease rental income of $.3 million and telecommunication lease termination costs of $.8 million related to the closing of offices with geographic overlap in the United States. As of June 30, 2000, $0.1 million of employee termination costs remain unpaid and will be paid in the remainder of 2000. Approximately $0.9 million of office closure costs remain unpaid as of June 30, 2000. These amounts will be paid through 2002. In relation to the transaction, 4.6 million of the shares issued are subject to forfeiture or vesting provisions and therefore, pursuant to APB Opinion No. 25, have been accounted for as deferred compensation with compensation expense to be recognized over the forfeiture or vesting period. In addition, 1.3 million shares are deemed to be contingently returnable and therefore, are being accounted for as a variable stock award plan. 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. Compensation expense incurred for the three and six months ended June 30, 2000 related to the amortization of deferred compensation totaled $18.9 million and $37.2 million, respectively, net of the quarterly adjustment for the change in stock price. Compensation expense incurred for the three and six months ended June 30, 1999 related to the issuance of shares and amortization of deferred compensation totaled $21.2 million and $67.4 million, respectively, net of the quarterly adjustment for the change in stock price. Deferred compensation, related to the issuance of shares to JLW, not yet amortized at June 30, 2000 totaled $35.1 million, including the effect of the quarterly adjustment for the change in stock price, which will be amortized into compensation expense during the remainder of 2000. Such compensation expense, in addition to compensation expense anticipated to be incurred at December 31, 2000 associated with the final allocation of the shares in the employee stock ownership trust ("ESOT"), is expected to result in a significant non-cash net loss for Jones Lang LaSalle for the year.
(3) BUSINESS SEGMENTS Operations are classified into five business segments: two global businesses, (i) Investment Management and (ii) Hotel Services; and Owner and Occupier Services which is divided into three geographic regions, (iii) the Americas, (iv) Europe and (v) Asia Pacific. 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, valuation and asset management services related solely to hotel, conference and resort properties. Owner and Occupier Services consist primarily of tenant representation and agency leasing, investment disposition, acquisition, and valuation services (collectively, "implementation services") and property management, corporate property services and development and project management services (collectively, "management services"). 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. Jones Lang LaSalle allocates all expenses, other than interest and income taxes, as nearly all expenses incurred benefit one or more of the segments. Merger related non- recurring charges are not allocated to the segments. Operating results in 1999 include the results of JLW effective March 1, 1999, therefore, segment results for the six months ended June 30, 1999 include only four months of results of the former JLW operations. Summarized unaudited financial information by business segment for the three and six month periods ended June 30, 2000 and 1999 is as follows ($ in thousands):
<TABLE> <CAPTION> SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> OWNER AND OCCUPIER SERVICES - AMERICAS Revenue: Implementation services . . . . $ 34,507 25,049 55,211 42,208 Management services . . . . . . 30,728 28,739 59,957 55,349 Equity earnings (losses). . . . 294 281 (66) 101 Other services. . . . . . . . . 187 370 375 892 Intersegment revenue. . . . . . (17) 78 378 140 ---------- ---------- ---------- ---------- 65,699 54,517 115,855 98,690 Operating expenses: Compensation, operating and administrative expenses . . . 56,815 60,431 116,409 117,517 Depreciation and amortization . 5,484 5,033 10,866 10,076 ---------- ---------- ---------- ---------- Operating income (loss) . $ 3,400 (10,947) (11,420) (28,903) ========== ========== ========== ========== EUROPE Revenue: Implementation services . . . . $ 70,264 53,457 129,850 74,925 Management services . . . . . . 21,169 14,227 41,345 20,558 Equity losses . . . . . . . . . -- (72) -- (93) Other services. . . . . . . . . 311 399 547 404 ---------- ---------- ---------- ---------- 91,744 68,011 171,742 95,794 Operating expenses: Compensation, operating and administrative expenses . . . 81,902 60,186 154,030 81,375 Depreciation and amortization . 2,839 2,357 5,588 2,972 ---------- ---------- ---------- ---------- Operating income. . . . . $ 7,003 5,468 12,124 11,447 ========== ========== ========== ==========
SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- ASIA PACIFIC Revenue: Implementation services . . . . $ 21,605 22,158 40,293 28,368 Management services . . . . . . 11,671 11,128 23,085 14,554 Equity earnings . . . . . . . . -- 24 -- -- Other services. . . . . . . . . 193 124 360 239 ---------- ---------- ---------- ---------- 33,469 33,434 63,738 43,161 Operating expenses: Compensation, operating and administrative expenses . . . 33,501 30,043 61,694 41,414 Depreciation and amortization . 1,465 1,648 3,015 2,054 ---------- ---------- ---------- ---------- Operating income (loss) . $ (1,497) 1,743 (971) (307) ========== ========== ========== ========== HOTEL SERVICES - Revenue: Implementation services . . . . $ 3,592 2,923 6,972 3,777 Management services . . . . . . 402 (29) 746 (29) Other services. . . . . . . . . 1 287 2 287 ---------- ---------- ---------- ---------- 3,995 3,181 7,720 4,035 Operating expenses: Compensation, operating and administrative expenses . . . 3,893 3,619 7,246 4,539 Depreciation and amortization . 28 50 56 61 ---------- ---------- ---------- ---------- Operating income (loss) . $ 74 (488) 418 (565) ========== ========== ========== ==========
SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- INVESTMENT MANAGEMENT - Revenue: Implementation services . . . . $ 1,029 4,247 3,998 6,108 Advisory fees . . . . . . . . . 21,271 14,190 35,204 30,804 Equity earnings . . . . . . . . 8,453 1,637 14,753 2,043 Other services. . . . . . . . . 6 5 31 70 Intersegment revenue. . . . . . -- (35) -- -- ---------- ---------- ---------- ---------- 30,759 20,044 53,986 39,025 Operating expenses: Compensation, operating and administrative expenses . . . 19,890 17,678 38,739 33,964 Depreciation and amortization . 981 1,017 1,966 1,898 ---------- ---------- ---------- ---------- Operating income. . . . . $ 9,888 1,349 13,281 3,163 ========== ========== ========== ========== Total segment revenue . . . . . . . $ 225,666 179,187 413,041 280,705 Intersegment revenue eliminations . 17 (43) (378) (140) ---------- ---------- ---------- ---------- Total revenue . . . . . . $ 225,683 179,144 412,663 280,565 ========== ========== ========== ========== Total segment operating expenses. . $ 206,798 182,062 399,609 295,870 Intersegment operating expense eliminations. . . . . . . . . . . 17 (43) (378) (140) ---------- ---------- ---------- ---------- Total operating expenses before merger related non-recurring charges . $ 206,815 182,019 399,231 295,730 ========== ========== ========== ========== Operating income (loss) before merger related non-recurring charges . $ 18,868 (2,875) 13,432 (15,165) ========== ========== ========== ========== </TABLE>
(4) SUBSEQUENT EVENTS On July 26, 2000, Jones Lang LaSalle closed its offering of Euro 165 million aggregate principal amount of 9% Senior Notes, due 2007 (the "Notes"). The net proceeds of $149.5 million were used to repay borrowings under the $175 million term facility that matures on October 15, 2000. The Notes were issued by Jones Lang LaSalle Finance B.V. ("JLL Finance"), a wholly owned subsidiary of Jones Lang LaSalle. Jones Lang LaSalle also has a $250 million revolving facility maturing in October 2002. In July 2000, Jones Lang LaSalle exercised its option to repurchase LPI Service Corporation for a nominal amount. LPI Service Corporation provides the services of approximately 2,800 janitorial, engineering and property maintenance employees for certain properties managed by Jones Lang LaSalle in the United States. The costs of these employees are directly reimbursed by the properties. On July 31, 2000, Jones Lang LaSalle received a Federal tax refund of $13.5 million. The remaining balance of the income tax refund receivable represents state income tax refunds that are expected to be collected over the balance of the year. On July 12, 2000, it was announced that Jones Lang LaSalle together with two other leading U.S. real estate services firms had participated in a $30 million preferred stock financing for SiteStuff.com, Inc., an e- marketplace for owners and operators of commercial and multi-family real estate properties. On July 19, 2000, Jones Lang LaSalle funded its $10.0 million participation. (5) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS As discussed in Note 4, JLL Finance issued the Notes on July 26, 2000. The payment obligations under the Notes are fully and unconditionally guaranteed by Jones Lang LaSalle and certain of its wholly- owned subsidiaries; Jones Lang LaSalle America's Inc., LaSalle Investment Management, Inc., Jones Lang LaSalle International, Inc., Jones Lang LaSalle Co-Investment, Inc., LaSalle Hotel Advisors, Inc., and Jones Lang LaSalle Ltd. (the "Guarantor Subsidiaries"). All of Jones Lang LaSalle's remaining subsidiaries (the "Non-Guarantor Subsidiaries") are owned by the Guarantor Subsidiaries. The following supplemental Condensed Consolidating Balance Sheets as of June 30, 2000 and December 31, 1999, Condensed Consolidating Statement of Earnings for the three and six months ended June 30, 2000 and June 30, 1999, and Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2000 and June 30, 1999 present financial information for (i) Jones Lang LaSalle (carrying any investment in subsidiaries under the equity method), (ii) Jones Lang LaSalle Finance B.V. (the issuer of the Notes), (iii) on a combined basis the Guarantor Subsidiaries (carrying any investment in
Non-Guarantor subsidiaries under the equity method) and (iv) on a combined basis the Non-Guarantor Subsidiaries. Separate financial statements of the Guarantor Subsidiaries are not presented because the guarantors are jointly, severally, and unconditionally liable under the guarantees, and Jones Lang LaSalle believes that separate financial statements and other disclosures regarding the Guarantor Subsidiaries are not material to investors. In general, historically, Jones Lang LaSalle has entered into third party borrowings, financing its subsidiaries via intercompany accounts that are then converted into equity on a periodic basis. All intercompany activity has been included as subsidiary activity in investing activities in the Condensed Consolidating Statements of Cash Flows. Cash is managed on a consolidated basis and there is a right of offset between bank accounts in the different groupings of legal entities in the condensed consolidating financial information. Therefore, in certain cases, negative cash balances have not been reallocated to payables as they legally offset positive cash balances elsewhere in Jones Lang LaSalle. In certain cases, taxes have been calculated on the basis of a group position that includes both Guarantor and Non-Guarantor Subsidiaries. In such cases, the taxes have been allocated to individual legal entities on the basis of that legal entity's pre tax income.
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING BALANCE SHEET As of June 30, 2000 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> ASSETS - ------ Cash and cash equivalents. . $ 2,786 -- (2,365) 12,746 -- 13,167 Trade receivables, net of allowances . 127 -- 102,196 134,225 -- 236,548 Other current assets. 25,557 -- 23,677 13,052 -- 62,286 ---------- ---------- ---------- ---------- ---------- ---------- Total current assets. . . . . 28,470 -- 123,508 160,023 -- 312,001 Property and equipment, at cost, less accumu- lated depreciation . 1,183 -- 49,525 28,929 -- 79,637 Intangibles resulting from business acquisi- tions and JLW merger, net of accumulated amortization . . . . -- -- 279,236 77,412 -- 356,648 Other assets, net . . 4,831 -- 37,544 84,960 -- 127,335 Investments in subsidiaries . . . . 372,075 -- 369,462 -- (741,537) -- ---------- ---------- ---------- ---------- ---------- ---------- $ 406,559 -- 859,275 351,324 (741,537) 875,621 ========== ========== ========== ========== ========== ==========
JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED As of June 30, 2000 ($ in thousands) Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------- Accounts payable and accrued liabilities $ 10,624 -- 29,475 45,845 -- 85,944 Short-term borrowings 175,000 -- 4,145 11,467 -- 190,612 Other current liabilities . . . . (250,742) -- 450,607 (93,235) -- 106,630 ---------- ---------- ---------- ---------- ---------- ---------- Total current liabilities . . (65,118) -- 484,227 (35,923) -- 383,186 Long-term liabilities: Credit facilities . 154,483 -- -- -- -- 154,483 Other long-term liabilities . . . 649 -- 2,973 17,785 -- 21,407 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities 90,014 -- 487,200 (18,138) -- 559,076 Commitments and contingencies Stockholders' equity. 316,545 -- 372,075 369,462 (741,537) 316,545 ---------- ---------- ---------- ---------- ---------- ---------- $ 406,559 -- 859,275 351,324 (741,537) 875,621 ========== ========== ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING BALANCE SHEET As of December 31, 1999 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> ASSETS - ------ Cash and cash equivalents. . $ (615) -- 1,027 22,896 -- 23,308 Trade receivables, net of allowances . 2,070 -- 128,599 139,924 -- 270,593 Other current assets. 23,379 -- 15,223 16,179 -- 54,781 ---------- ---------- ---------- ---------- ---------- ---------- Total current assets. . . . . 24,834 -- 144,849 178,999 -- 348,682 Property and equipment, at cost, less accumu- lated depreciation . 749 -- 48,491 27,230 -- 76,470 Intangibles resulting from business acquisi- tions and JLW merger, net of accumulated amortization . . . . -- -- 287,848 79,367 -- 367,215 Other assets, net . . 3,010 -- 38,147 91,276 -- 132,433 Investments in subsidiaries . . . . 357,593 -- 348,702 -- (706,295) -- ---------- ---------- ---------- ---------- ---------- ---------- $ 386,186 -- 868,037 376,872 (706,295) 924,800 ========== ========== ========== ========== ========== ==========
JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED As of December 31, 1999 ($ in thousands) Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------- Accounts payable and accrued liabilities $ (4,847) -- 30,516 62,588 -- 88,257 Short-term borrowings 156,471 -- 959 5,213 -- 162,643 Other current liabilities . . . . (250,272) -- 485,978 (66,487) -- 169,219 ---------- ---------- ---------- ---------- ---------- ---------- Total current liabilities . . (98,648) -- 517,453 1,314 -- 420,119 Long-term liabilities: Credit facilities . 159,743 -- -- -- -- 159,743 Other long-term liabilities . . . 1,155 -- (7,009) 26,856 -- 21,002 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities 62,250 -- 510,444 28,170 -- 600,864 Commitments and contingencies Stockholders' equity. 323,936 -- 357,593 348,702 (706,295) 323,936 ---------- ---------- ---------- ---------- ---------- ---------- $ 386,186 -- 868,037 376,872 (706,295) 924,800 ========== ========== ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING STATEMENT OF EARNINGS For the Three Months Ended June 30, 2000 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Revenue . . . . . . . $ -- -- 105,993 119,690 -- 225,683 Equity earnings (loss) from subsidiaries. . 13,812 -- 6,584 -- (20,396) -- ---------- ---------- ---------- ---------- ---------- ---------- Total revenue . . 13,812 -- 112,577 119,690 (20,396) 225,683 Operating expenses before merger related non-recurring charges 3,117 -- 94,389 109,309 -- 206,815 Merger related non- recurring charges. . 18,522 -- 245 98 -- 18,865 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss). . . . . (7,827) -- 17,943 10,283 (20,396) 3 Interest expense, net of interest income . . . . . . . 2,820 -- 3,957 (113) -- 6,664 ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before provision for income taxes . . . . . (10,647) -- 13,986 10,396 (20,396) (6,661) Net provision for income taxes . . . . 846 -- 174 3,812 -- 4,832 ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) . $ (11,493) -- 13,812 6,584 (20,396) (11,493) ========== ========== ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING STATEMENT OF EARNINGS For the Six Months Ended June 30, 2000 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Revenue . . . . . . . $ -- -- 185,711 226,952 -- 412,663 Equity earnings (loss) from subsidiaries. . 6,230 -- 12,520 -- (18,750) -- ---------- ---------- ---------- ---------- ---------- ---------- Total revenue . . 6,230 -- 198,231 226,952 (18,750) 412,663 Operating expenses before merger related non-recurring charges 6,232 -- 185,879 207,120 -- 399,231 Merger related non- recurring charges. . 36,848 -- 245 98 -- 37,191 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss). . . . . (36,850) -- 12,107 19,734 (18,750) (23,759) Interest expense, net of interest income . . . . . . . 5,193 -- 8,156 (10) -- 13,339 ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before provision (benefit) for income taxes. . (42,043) -- 3,951 19,744 (18,750) (37,098) Net provision (benefit) for income taxes . . (5,578) -- (2,279) 7,224 -- (633) ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) . $ (36,465) -- 6,230 12,520 (18,750) (36,465) ========== ========== ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING STATEMENT OF EARNINGS For the Three Months Ended June 30, 1999 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Revenue . . . . . . . $ -- -- 77,294 101,850 -- 179,144 Equity earnings (loss) from subsidiaries. . 5,677 -- 6,706 -- (12,383) -- ---------- ---------- ---------- ---------- ---------- ---------- Total revenue . . 5,677 -- 84,000 101,850 (12,383) 179,144 Operating expenses before merger related non-recurring charges 4,217 -- 89,348 88,454 -- 182,019 Merger related non- recurring charges. . 32,464 -- 1,059 2,064 -- 35,587 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss). . . . . (31,004) -- (6,407) 11,332 (12,383) (38,462) Interest expense, net of interest income . . . . . . . 1,224 -- 3,351 128 -- 4,703 ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before provision (benefit) for income taxes. . (32,228) -- (9,758) 11,204 (12,383) (43,165) Net provision (benefit) for income taxes . . 5,476 -- (15,435) 4,498 -- (5,461) ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) . $ (37,704) -- 5,677 6,706 (12,383) (37,704) ========== ========== ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING STATEMENT OF EARNINGS For the Six Months Ended June 30, 1999 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang Jones Lang (Parent and LaSalle Guarantor Non-Guarantor LaSalle Guarantor) Finance B.V. Subsidiaries Subsidiaries Eliminations Incorporated ------------ ----------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Revenue . . . . . . . $ -- -- 131,783 148,782 -- 280,565 Equity earnings (loss) from subsidiaries. . (10,364) -- 8,407 -- 1,957 -- ---------- ---------- ---------- ---------- ---------- ---------- Total revenue . . (10,364) -- 140,190 148,782 1,957 280,565 Operating expenses before merger related non-recurring charges 6,478 -- 156,172 133,080 -- 295,730 Merger related non- recurring charges. . 80,598 -- 6,617 2,415 -- 89,630 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss). . . . . (97,440) -- (22,599) 13,287 1,957 (104,795) Interest expense, net of interest income . . . . . . . 179 -- 7,319 (153) -- 7,345 ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before provision (benefit) for income taxes. . (97,619) -- (29,918) 13,440 1,957 (112,140) Net provision (benefit) for income taxes . . (4,500) -- (19,554) 5,033 -- (19,021) ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) . $ (93,119) -- (10,364) 8,407 1,957 (93,119) ========== ========== ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Six Months Ended June 30, 2000 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang (Parent and Guarantor Non-Guarantor LaSalle Guarantor) Subsidiaries Subsidiaries Incorporated ------------ ------------ ------------- ------------ <S> <C> <C> <C> <C> Cash flows provided by (used in) operating activities . . . . . . . . . . . . . . . . . . $ 5,054 (14,146) (20,744) (29,836) Cash flows provided by (used in) investing activities: Net capital additions - property and equipment . . . . . . . . . . . . . . . . . (455) (10,086) (8,757) (19,298) Cash balances assumed in Jones Lang Wootton merger, net of cash paid and transaction cost. . . . . . . . . . . . . . . . . . . . -- -- -- -- Other acquisitions and investments, net of cash acquired and transaction costs . . . . -- (1,250) (696) (1,946) Subsidiary activity . . . . . . . . . . . . . (17,976) 13,479 4,497 -- Investments in real estate ventures . . . . . -- 5,425 9,296 14,721 ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities. . . . . . . . . . (18,431) 7,568 4,340 (6,523) Cash flows provided by financing activities: Net borrowings under credit facility. . . . . 159,748 3,186 6,254 169,188 Proceeds from borrowings under credit facility (146,479) -- -- (146,479) Common stock issued under stock option plan and stock purchase programs . . . . . . . . 3,509 -- -- 3,509 ---------- ---------- ---------- ---------- Net cash provided by financing activities. . . . . . . . . . . . . . . 16,778 3,186 6,254 26,218 ---------- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . 3,401 (3,392) (10,150) (10,141) Cash and cash equivalents, January 1. . . . . . (615) 1,027 22,896 23,308 ---------- ---------- ---------- ---------- Cash and cash equivalents, June 30. . . . . . . $ 2,786 (2,365) 12,746 13,167 ========== ========== ========== ========== </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Six Months Ended June 30, 1999 ($ in thousands) <CAPTION> Jones Lang LaSalle Consolidated Incorporated Jones Lang (Parent and Guarantor Non-Guarantor LaSalle Guarantor) Subsidiaries Subsidiaries Incorporated ------------ ------------ ------------- ------------ <S> <C> <C> <C> <C> Cash flows provided by (used in) operating activities . . . . . . . . . . . . . . . . . . $ (12,697) (89,677) 48,292 (54,082) Cash flows provided by (used in) investing activities: Net capital additions - property and equipment . . . . . . . . . . . . . . . . . (289) (6,110) (6,316) (12,715) Cash balances assumed in Jones Lang Wootton merger, net of cash paid and transaction cost. . . . . . . . . . . . . . . . . . . . -- (3,187) (33,186) (36,373) Other acquisitions and investments, net of cash acquired and transaction costs . . . . -- (3,195) -- (3,195) Subsidiary activity . . . . . . . . . . . . . (116,608) 104,703 11,905 -- Investments in real estate ventures . . . . . -- 738 2,345 3,083 ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities. . . . . . . . . . (116,897) 92,949 (25,252) (49,200) Cash flows provided by (used in) financing activities: Net borrowings under credit facility. . . . . 185,031 -- -- 185,031 Proceeds from borrowings under credit facility (60,109) (902) (2,141) (63,152) Common stock issued under stock option plan and stock purchase programs . . . . . . . . 3,126 -- -- 3,126 ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities. . . . . . . . . . 128,048 (902) (2,141) 125,005 ---------- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . (1,546) 2,370 20,899 21,723 Cash and cash equivalents, January 1. . . . . . 1,703 2,160 13,078 16,941 ---------- ---------- ---------- ---------- Cash and cash equivalents, June 30. . . . . . . $ 157 4,530 33,977 38,664 ========== ========== ========== ========== </TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto for the three and six months ended June 30, 2000, included herein, and our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 1999 which have been filed with the Securities and Exchange Commission as part of our Annual Report on Form 10-K. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 1999 Operating results in 1999 include the results of JLW effective March 1, 1999, therefore results for the six months ended June 30, 1999 include only four months of results for the former JLW operations. REVENUE Total revenue, after elimination of intersegment revenue, increased $46.6 million, or 26.0%, to $225.7 million for the three months ended June 30, 2000 from $179.1 million for the three months ended June 30, 1999. For the six months ended June 30, 2000 revenues increased $132.1 million, or 47.1%, to $412.7 million from $280.6 million for the six months ended June 30, 1999. A primary driver in the increase in the six months ended June 30, 2000 was the inclusion of an additional two months of revenue for the former JLW operations compared to the six months ended June 30, 1999 due to the timing of the JLW merger. For both the three months and six months ended June 30, 2000, the Europe region of Owner and Occupier Services benefitted from the strong European economy with significant increased transaction activity in the United Kingdom, Germany and France. Additionally, current year revenues in that region were increased by the Scandinavian JV that was established in December 1999. The increase in the equity earnings component of total revenues of $6.8 million and $12.6 million for the three months and six months ended June 30, 2000 when compared to prior year periods, respectively, is primarily related to our share of the gain on sale and the performance-related fee from the partial liquidation of a French investment fund managed by the Investment Management segment. OPERATING EXPENSES Total operating expenses, after elimination of intersegment expenses and excluding the effect of merger related non-recurring charges, increased $24.8 million, or 13.6%, to $206.8 million for the three months ended June 30, 2000 as compared with $182.0 million for the three months ended June 30, 1999. For the six months ended June 30, 2000 operating expenses increased $103.5 million, or 35.0%, to $399.2 million from $295.7 million for the six months ended June 30, 1999. The increase for the six month period was primarily due to the timing of the JLW merger, resulting in there being only four months of the former JLW operations in the prior year. This transaction also resulted in increases in personnel and office occupancy costs related to the global infrastructure added to support the larger size of the combined company, as well as an increase in amortization expense due to the amortization of the resulting goodwill. These increases were partially offset by decreases in operating expenses resulting from the continued success in the implementation of cost savings initiatives in the Americas region of the Owner and Occupier services segment. A change in Jones Lang LaSalle's method of estimating and allocating bonus incentive compensation to interim periods has caused a decrease of $500,000 and $8.7 million in operating expenses for the three and six months ended June 30, 2000, respectively. This change does not impact the overall compensation cost that will be incurred during the year ended December 31, 2000, but rather the periods in which it is recognized. This change is weighted towards the Americas region of the Owner and Occupier Services segment, which is the most seasonal of the segments.
Merger related non-recurring charges totaled $18.9 million and $37.2 million for the three and six months ended June 30, 2000, respectively, compared to $35.6 million and $89.6 million for the three and six months ended June 30, 1999, respectively. For both 2000 and 1999, these charges include non-cash compensation expense recorded as a result of shares issued to certain former employees of JLW in connection with the merger. In 1999, merger related non-recurring charges also included $14.3 million and $22.2 million of non-recurring transition and integration costs for the three and six months ended June 30, 1999, respectively. There were no transition and integration costs in the current year. OPERATING INCOME Due to the seasonal nature of our business, Jones Lang LaSalle typically reports a loss in the first quarter, followed by rising profitability throughout the remainder of the year (see Seasonality section for further discussion). The size and timing of the equity earnings related to the French investment fund, and the impact of the change in method of estimating and allocating bonus incentive compensation to interim periods have somewhat mitigated this seasonality in the second quarter. The current year results have also benefited from the earlier than expected closing of several large transactions. However, we still believe we will have significantly higher profitability in the fourth quarter than the other quarters. Consistent with this, our operating income for the three and six months ended June 30, 2000, excluding the effect of merger related non-recurring charges, totaled $18.9 million and $13.4 million, respectively, as compared to operating losses of $2.9 and $15.2 million for the three and six months ended June 30, 1999, respectively. This improvement over the prior year period is primarily due to the gain on sale and performance-related fee from the liquidation of the French investment fund, the positive effects of cost-saving initiatives implemented by the Americas region of Owner and Occupier Services and the change in the method of estimating and allocating bonus incentive compensation to interim periods as discussed above. Including the effect of the merger related non-recurring charges, the operating income for the three months ended June 30, 2000 totaled $0 million compared to a loss of $38.5 million for the three months ended June 30, 1999. The operating loss for the six months ended June 30, 2000 totaled $23.8 million compared to a loss of $104.8 million for the six months ended June 30, 1999. SEGMENT OPERATING RESULTS See Note 3 in Notes to Consolidated Financial Statements, included herein, for a discussion of Jones Lang LaSalle's segment reporting. INVESTMENT MANAGEMENT Investment Management revenue increased $10.8 million, or 54.0%, to $30.8 million for the three months ended June 30, 2000 from $20.0 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, Investment Management revenue increased $15.0 million, or 38.5%, to $54.0 million from $39.0 million for the six months ended June 30, 1999. The increase for both periods is primarily attributable to the equity earnings recognized in relation to our share of the gain on sale and the performance-related fee from the partial liquidation of the segment's French investment fund. This fund was structured in such a manner that the performance incentive fee is received as a preferred distribution of earnings. Consequently, for financial reporting purposes, the fee is classified as equity earnings rather than advisory fees. There have also been increased advisory fees and equity earnings from growth in funds launched during the fourth quarter of 1999. Additionally, two dispositions with total performance fees of $4 million closed in the three months ended June 30, 2000 that were originally expected to close later in the year.
Operating expenses increased $2.2 million, or 11.8%, to $20.9 million for the three months ended June 30, 2000, as compared with $18.7 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, operating expenses increased $4.8 million, or 13.4%, to $40.7 million from $35.9 million for the six months ended June 30, 2000. The increases are primarily attributable to an increase in personnel and office occupancy costs related to new hires for various new product launches together with increased incentive compensation consistent with performance. HOTEL SERVICES Hotel Services had total revenue of $4.0 million for the three months ended June 30, 2000, as compared to $3.2 million for the three months ended June 30, 1999 an increase of 25%, reflecting strong activity in the Americas hotel market. Revenues increased from $4.0 million for the six months ended June 30, 1999 to $7.7 million for the six months ended June 30, 2000. This increase was a result of the timing of the JLW merger which resulted in an additional two months of revenue in the current year, as well as strong activity in both the Europe and Americas hotel markets. This activity was partially the result of transactions which closed in the first six months of 2000, that were delayed from closing in the fourth quarter of 1999 as originally expected. Operating expenses for the segment were $3.9 million for the three months ended June 30, 2000, as compared to $3.7 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, operating expenses were $7.3 million which was a $2.7 million increase on the prior year period when expenses were $4.6 million. These expenses mainly represent personnel costs and office occupancy costs. The increase is primarily related to the timing of the merger with JLW. OWNER AND OCCUPIER SERVICES AMERICAS Revenue for the Americas region increased $11.2 million, or 20.6%, to $65.7 million for the three months ended June 30, 2000, as compared to $54.5 million for the three months ended June 30, 1999. The revenue growth was 17.4% to $115.9 million for the six months ending June 30, 2000, compared to $98.7 million for the same period in 1999. The increased revenues are in part attributable to increased focus by the senior management group on growing the business in the current year as compared to the early part of 1999 when they expended significant efforts on merger and integration issues. The region has benefitted from an increased volume of leasing transactions completed by the Leasing and Management and Tenant Representation units, and an increased number of projects in process by the Project Development unit. These revenue gains were partially offset by reduced performance fees generated by the Capital Markets unit as compared to the prior year period, as well as a reduction in the number of investment dispositions performed. Operating expenses for the Americas region decreased by $3.2 million to $62.3 million for the three months ended June 30, 2000 from $65.5 million for the three months ended June 30, 1999. The current year operating expenses at $127.3 million for the six months ending June 30, 2000 were essentially flat with the same period in the prior year. The Americas region has experienced increased compensation levels resulting from annual performance evaluations, increased headcount generally as a result of higher transaction volumes and new client engagements, as well as higher office occupancy costs associated with the increased capacity needs resulting from the merger with JLW and increased personnel levels. However, these increased costs were offset by the change in the method of estimating and allocating bonus incentive compensation to interim periods, as well as the cost reduction program initiated during the second half of 1999, and further expanded during February of 2000.
EUROPE Revenue for the Europe region totaled $91.7 million for the three months ended June 30, 2000, as compared to $68.0 million for the three months ended June 30, 1999, an increase of 34.9%. This increase is due primarily to continued strong activity in the UK, Germany and France in the current period. The region also benefitted from several exceptionally large transactions in the quarter including advising on the UK's largest property investment portfolio sale for Aegon UK and Belgium's largest single real estate company transaction for the AXA Group. In addition, contributing to the increase was our property management venture with Skandia Fastighet AB, the real estate subsidiary of Sweden's leading insurance company which became operational January 1, 2000. This 55% owned venture, which is consolidated in these financial statements, established Jones Lang LaSalle as one of the leading real estate services firms in the Nordic region. The revenue of the Europe region for the six months ended June 30, 2000 was $171.7 million, as compared to $95.8 million for the six months ended June 30, 1999. This increase was a result of the strong broad based business activity described above, together with the timing of the JLW merger. The effect of a strong transaction flow was partially offset by a weakening of the euro, and to a lesser extent the British pound, against the U.S. dollar in the six month period ended June 30, 2000, as compared to the prior year period. Operating expenses for the region were $84.7 million for the three months ended June 30, 2000, as compared to $62.5 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, operating expenses increased $75.3 million to $159.6 million from $84.3 million. The increase in the six month period is in part due to the timing of the JLW merger. In addition, the increase for both the current quarter and the year-to-date resulted from higher personnel and office occupancy costs related to infrastructure and personnel added in the latter half of 1999 in anticipation of strong business prospects throughout Europe together with increased bonus costs as a result of the change in the method of estimating and allocating bonus incentive compensation to interim periods. Incentive compensation was also increased by the strong performance of the region. The increase in operating expenses was also contributed to by the amortization of goodwill associated with the JLW merger. ASIA PACIFIC Revenue for the Asia Pacific region totaled $33.5 million and $63.7 million for the three and six months ended June 30, 2000, respectively. This compares to $33.4 million and $43.2 million for the three and six months ended June 30, 1999. The increase year-to-date was due primarily to the timing of the JLW merger as this was substantially a new segment post merger. This region continues to benefit from several positive trends in the Australian real estate market, including continued economic growth fueled by strong consumer spending and the outsourcing of property management functions by corporations and the Australian government. Additionally, the introduction in Australia of a Goods and Services Tax ("GST") effective July 1, 2000, increased transaction activity in the Residential area as efforts were made to close transactions ahead of the imposition of GST. For the three months ended June 30, 2000, Australasia experienced strong activity in its Agency Leasing, Property Management and Residential units. Asia's real estate activity continues to be boosted by a gradual economic recovery within the Asian markets. However, conditions vary from country to country, and the benefits from the recovery in Hong Kong, Singapore and Shanghai were partially offset by the stagnant market conditions in other areas of Asia, particularly Thailand and Indonesia. The region also saw revenue growth from the newer operations in Japan and India.
Operating expenses for Asia Pacific totaled $35.0 million for the three months ended June 30, 2000, as compared to $31.7 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, operating expenses were $64.7 million as compared to $43.5 million for the comparable period in 1999. The increase in the six month period is primarily a result of the timing of the JLW merger. These expenses mainly represent personnel costs and office occupancy costs, and the increases are in part due to added infrastructure to support the needs of public company reporting and enhanced technology support. The Australasia business also incurred costs in the second quarter associated with preparing the business for the introduction of GST. Amortization of goodwill associated with the JLW merger also contributed to this increase. These increases were partially offset by the change in the method of estimating and allocating bonus incentive compensation to interim periods discussed above. INTEREST EXPENSE Interest expense, net of interest income, increased $2.0 million to $6.7 million for the three months ended June 30, 2000, and $6.0 million to $13.3 million for the six months ended June 30, 2000 from the prior year periods. This increase is a result of the higher average level of borrowings outstanding on the credit facilities for both periods as compared to the prior year together with an increase in the effective interest rate. The increase in the average level of borrowings was due to higher working capital needs, primarily for the payment of higher bonus accruals in early 2000, as compared to early 1999, as well as borrowings made during 1999 to fund the payment of integration and transition expenses related to the JLW merger. The effective interest rate was 8.3% and 8.2% for the three and six months ended June 30, 2000, respectively, as compared to 5.8% for the three and six months ended June 30, 1999. Interest expense is expected to be significantly higher in 2000 than in 1999 as a result of an increase in the average level of borrowings outstanding and generally increasing interest rates. The refinancing of a portion of the Facilities with the Notes is expected to slightly increase the effective interest rate for the balance of the year. PROVISION FOR INCOME TAXES The provision for income taxes was $4.8 million for the three months ended June 30, 2000 as compared to a benefit of $5.5 million for the three months ended June 30, 1999. The benefit for income taxes was $0.6 million for the six months ended June 30, 2000 as compared to a benefit of $19.0 million for the six months ended June 30, 1999. This is primarily attributable to the move to profitability of our operations before income taxes, exclusive of the compensation expense associated with the issuance of shares to former JLW employees in connection with the merger. This compensation expense is largely nondeductible for tax purposes. Excluding the impact of merger related non-recurring charges, the effective tax rate on recurring operations was 38% for the three and six months ended June 30, 2000 and 1999. NET INCOME/LOSS Net income, excluding the effect of merger related non-recurring charges, was $7.6 million for the three months ended June 30, 2000 as compared to a net loss of $4.7 million for the three months ended June 30, 1999, an increase of $12.3 million. For the six months ending June 30, 2000, net income excluding the effect of merger related non-recurring charges was $0.1 million as compared to a net loss of $14.0 million in the prior year. Including the effect of the merger related non-recurring charges, the net loss for the three and six months ended June 30, 2000 was $11.5 million and $36.5 million, respectively. This compares to $37.7 million and $93.1 million for the three and six months ended June 30, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES Historically, Jones Lang LaSalle has financed its operations, acquisitions and co-investment activities with internally generated funds, the common stock of Jones Lang LaSalle and borrowings under its credit facilities. Jones Lang LaSalle had increased its unsecured credit agreement from $380.0 million to $425.0 million, through the addition of five banks to its credit group. The credit agreement at June 30, 2000 was comprised of a $250.0 million revolving facility maturing in October 2002 and a $175.0 million term facility, which matures on October 15, 2000 (collectively, the "Facilities"). Jones Lang LaSalle was also authorized under the terms of the Facilities to borrow up to an additional $50 million through local facilities in its international operations. On July 26, 2000, Jones Lang LaSalle closed its offering of the Notes, the net proceeds of $149.5 million were used to paydown borrowings under the term facility. The balance of the term facility will be repaid via a combination of internally generated funds and borrowings under the revolving facility. The revolving facility is available for working capital, co-investments and acquisitions. As of June 30, 2000 there was $329.5 million outstanding on the Facilities, of which $175.0 million was under the term facility and classified as current. The balance of current borrowings of $15.6 million at June 30, 2000, related to local borrowings by the international operations and the current portion of capital lease obligations. The Facilities are guaranteed by certain of Jones Lang LaSalle's subsidiaries. Jones Lang LaSalle 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"). Jones Lang LaSalle must also meet a minimum interest coverage ratio and minimum liquidity ratio. Additionally, Jones Lang LaSalle is restricted from, among other things, incurring certain levels of indebtedness to lenders outside of the 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 Facilities bear variable rates of interest based on market rates. Jones Lang LaSalle sometimes uses interest rate swaps to convert a portion of the floating rate indebtedness to a fixed rate. The effective interest rate on the Facilities was 8.2% for the six months ended June 30, 2000, including the effect of interest rate swap agreements. As of June 30, 2000, Jones Lang LaSalle had no interest rate swap agreements outstanding. Jones Lang LaSalle has additional access to liquidity via various interest-bearing overdraft facilities and short-term credit facilities in Europe and Asia Pacific. The aggregate amount available under these facilities is approximately $41.0 million, of which $15.2 million was outstanding as of June 30, 2000. Borrowings on these facilities are currently limited to $50.0 million under the terms of the Facilities. Management believes that the Facilities, together with the Notes, local borrowing facilities and cash flow generated from operations, will provide adequate liquidity and financial flexibility to meet working capital requirements. During the six months ended June 30, 2000, cash flows used in operating activities totaled $29.8 million compared to $54.1 million for the six months ended June 30, 1999. The reduced use of cash is primarily the result of the significant reduction in the cash losses of the business. 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 (other than with respect to the $26.9 million of commitments discussed below) 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 activity were to occur. Management anticipates that co- investment activity within the Americas and Europe regions will continue, with probable expansion into Asia Pacific, 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, limited partner and limited liability company interests. In addition to a share of investment returns, Jones Lang LaSalle typically earns investment management fees, and in some cases, property management, leasing, financing and disposition fees, on these investments. The equity earnings from these co-investments have historically had a relatively small impact on current earnings and cash flow. However, increased investment participation and changes in the structure of underlying performance fees 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. Jones Lang LaSalle generally does not have complete discretion to control the timing of the disposition of such investments. Jones Lang LaSalle anticipates that significant equity earnings will be recorded in 2000 relating to the disposition of the French investment fund of which $9.7 million was recognized for the six months ended June 30, 2000 with $5.7 million of this being recognized in the second quarter. As of June 30, 2000, there were total investments of $69.1 million in 31 separate property or fund co-investments with additional capital commitments of $26.9 million for future fundings of co-investments. Capital expenditures are anticipated to be approximately $40.0 million for 2000, of which $19.3 million was spent in the six months ended June 30, 2000. These 2000 expenditures are associated primarily with the ongoing improvements to Jones Lang LaSalle's computer hardware and information systems, including the implementation of global reporting and communication systems, office renewals and expansions and the scheduled replacement of fleet cars primarily within the European countries. Net cash used in investing activities was $6.5 million for the six months ended June 30, 2000 compared with $49.2 million for the six months ended June 30, 1999. The decreased use of cash is primarily attributable to the net cash paid in connection with the JLW merger in the first six months of 1999 of $36.4 million and the distributions from the French property co-investment in the first six months of the current year. This decrease is partially offset by the increased capital needs since the merger with JLW for upgrades and improvements to information systems and computer hardware. Net cash provided by financing activities of $26.2 million for the six months ended June 30, 2000 was comprised primarily of proceeds from borrowings under credit facilities, net of repayments, of $22.7 million to fund working capital requirements. Cash flows provided by financing activities of $125.0 million for the six months ended June 30, 1999 were primarily composed of borrowings under credit facilities, net of repayments, of $121.9 million to fund the payment of transaction costs and integration and transition expenses related to the JLW merger and the acquisition of COMPASS. SEASONALITY Historically, Jones Lang LaSalle's revenue, operating profits and net earnings in the first three calendar quarters are substantially lower than in the fourth quarter. Other than in 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 clients' returns on their real estate investments. Such performance fees are generally earned when the asset is disposed of, the timing of which Jones Lang LaSalle 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, Jones Lang LaSalle 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 its earnings in the fourth calendar quarter, barring the recognition of investment generated gains and performance fees in earlier quarters. As discussed earlier, Jones Lang LaSalle changed its method of estimating and allocating bonus incentive compensation to interim periods to more meaningfully reflect the seasonal nature of the underlying business. Also, as discussed earlier, the timing of recognition of the equity earnings from the French investment fund have reduced the seasonality of the overall results in the second quarter. 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 NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, becomes effective for all fiscal quarters for fiscal years beginning after December 15, 2000 and is not expected to have a material impact on our consolidated financial statements. During December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"), which provides guidance on various revenue recognition matters. Jones Lang LaSalle had intended to adopt the provisions of SAB 101 related to how we understood the SEC staff believed it applied to revenue recognition on second half lease commissions. Historically, Jones Lang LaSalle and certain other real estate service companies have recorded the full amount of lease commissions as revenue upon the completion of leasing services and the closing of the transaction, when invoicing for a portion of the commission was to be delayed until actual tenant occupancy. This policy was based upon the fact that Jones Lang LaSalle had fulfilled all of its contractual obligations and the likelihood of the tenant defaulting under the lease was extremely remote. Jones Lang LaSalle understood that the SEC staff believed that under SAB 101, such lease commission revenue should be deferred until the parties to the lease contract have fulfilled their respective obligations. However, in late June, the SEC issued an amendment to SAB 101 that permitted companies to delay implementation until the fourth quarter of 2000 while the SEC seeks to provide increased interpretive guidance. As a result, Jones Lang LaSalle believes that it is prudent to delay implementation until the SEC has clarified whether SAB 101 is applicable and, if so, how it should be applied. Therefore, while it is likely that SAB 101 will be adopted by Jones Lang LaSalle, it will not be adopted until at least the fourth quarter of 2000. Jones Lang LaSalle has reviewed the impact of modifying its revenue recognition policy in accordance with its current understanding of the SEC's interpretation of SAB 101. If SAB 101 had been adopted in this manner in the second quarter, a cumulative catch up adjustment for a change in accounting principle effective as of January 1, 2000 would have been recorded. This would have been reflected by a one-time, after-tax non-cash charge of $13.9 million (net of taxes of $8.4 million) to defer commission revenue where the contractual right to invoice was contingent on the occupancy of the leased space by the tenant. Thereafter, Jones Lang LaSalle would recognize the revenue associated with those remaining commissions generally at the time the tenant occupies the leased space.
This change in accounting policy will not affect cash flows or the amount of earnings the company will ultimately recognize. The one-time after-tax charge will be recognized as earnings in future periods when the revenue is recognized. The impact of the revised revenue recognition policy on the first quarter of 2000 would have been to reduce the net loss before cumulative change in accounting principle by $2.1 million. This includes an after-tax benefit of $3.6 million (net of tax of $2.2 million) of revenue that had been included in the cumulative catch up adjustment. The impact on the second quarter would have been to increase the net loss before cumulative change in accounting principle by $1.0 million. This includes an after-tax benefit of $3.2 million (net of tax of $2.0 million) of revenue that had been included in the cumulative catch up adjustment. Therefore, the impact for the six months ending June 30, 2000 would have been to reduce the net loss before cumulative change in accounting principle by $1.1 million. This would include an after-tax benefit of $6.8 million (net of taxes of $4.2 million) of revenue that had been deferred through the cumulative catch up adjustment. It is not possible at this time to estimate the potential impact on the full year 2000 net loss before cumulative change in accounting principle, but management believes that it may increase the net loss by up to $5 million. This will be dependent upon the mix and timing of revenues together with the underlying contractual terms of our customer contracts. Management believes that this change in accounting policy will help to reduce the seasonality in the financial performance reported by Jones Lang LaSalle by shifting some lease commission revenue out of the fourth quarter and into other quarters. E-COMMERCE INITIATIVES Through the first six months of 2000, Jones Lang LaSalle has evaluated a number of e-business opportunities. On April 26, 2000, Jones Lang LaSalle announced the formation of Octane, an e-commerce alliance with two other leading U.S. real estate services firms. This alliance will develop e-business solutions for the real estate services industry and will focus on procurement, transactions, support services and other business-to- business activities. On May 5, 2000, Jones Lang LaSalle announced its intent to join eleven other leading North American real estate firms to form Constellation, a real estate e-business company. This company will form, incubate and sponsor real estate-related Internet, e-commerce and broadband enterprises; acquire interests in existing leading companies on a synergistic basis; and act as an opportunistic consolidator across property sectors in the emerging real estate technology area. On June 29, 2000, Jones Lang LaSalle announced that together with two other leading international property services firms and an international business to business publisher, it would be developing a pan-European commercial property listings, information and data research portal. The venture will be an unaffiliated, independently managed company with its own brand and may ultimately include other content and technology partners. The final terms and conditions of the agreements related to these ventures are currently being negotiated. On July 12, 2000, it was announced that Jones Lang LaSalle together with two other leading U.S. real estate services firms had participated in a $30 million preferred stock financing for SiteStuff.com, Inc., an e- marketplace for owners and operators of commercial and multi-family real estate properties. On July 19, 2000, Jones Lang LaSalle funded its $10.0 million participation. Through SiteStuff, Jones Lang LaSalle has the ability to aggregate the purchase of property management maintenance, repair and operations products and services for the benefit of clients in the U.S. We will continue to seek additional e-commerce opportunities which enhance our product and service offerings. We expect to commit up to $20 million over the next eighteen months for our e-commerce initiatives, including commitments already made in connection with the four ventures described above.
EURO CONVERSION ISSUES On January 1, 1999, certain countries of the European Monetary Union ("EMU") adopted a common currency, the euro. For a three-and-one-half-year transition period, non-cash transactions may be denominated in either the euro or in the old national currencies. After July 1, 2002, the euro will be the sole legal tender for the EMU countries. The adoption of the euro affected a multitude of financial systems and business applications as the commerce of these nations is now transacted in the euro and the existing national currency. Although the impact of the January 1, 1999 euro conversion was minimal, Jones Lang LaSalle continues to evaluate the potential impact relating to the EMU countries yet to convert. Management does not expect the impact of euro conversion issues to be material to Jones Lang LaSalle, however there can be no assurance that external factors will not have a material adverse effect on operations. YEAR 2000 ISSUES The "Year 2000 Issue" was 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 had the potential to recognize a date using "00" as the year 1900 rather than the year 2000. This could have resulted 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 successfully modified its software and hardware to meet Year 2000 requirements and experienced no significant disruption of its operations. The total cost of such modifications was $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. Although Jones Lang LaSalle 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. Jones Lang LaSalle'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, Jones Lang LaSalle historically has borrowed at variable rates and has entered into derivative financial instruments such as interest rate swap agreements when appropriate. Jones Lang LaSalle does not enter into derivative or interest rate transactions for trading or speculative purposes. As of June 30, 2000, Jones Lang LaSalle had no interest rate swap agreements outstanding. Given that the Notes will be a substantial portion of the outstanding debt and charges a fixed rate of interest, Jones Lang LaSalle's exposure to interest rate changes will be reduced from its historical exposure. The carrying value of the debt approximates its fair value. As of June 30, 2000, the outstanding borrowings on the Facilities were $329.5 million. The Facilities bear variable rates of interest based on market rates. The effective interest rate on the Facilities was 8.3% and 8.2% for the three and six months ended June 30, 2000, 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 other currencies. The financial statements of subsidiaries outside the United States, 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 Jones Lang LaSalle's business, operating results and financial condition as reported in U.S. dollars. For the three and six months ended June 30, 2000 (excluding the effect of stock compensation expense) Jones Lang LaSalle reported net income of $7.6 and $0.1 million, respectively, of which $1.5 million of net income and $12.4 million of net losses were attributable to operations having U.S. dollars as their functional currency and $6.1 million and $12.5 million of net income for the three and six months ended June 30, 2000, respectively, was attributable to operations having other functional currencies. Revenues and expenses are primarily 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, Jones Lang LaSalle enters into forward foreign 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. At June 30, 2000, Jones Lang LaSalle had forward exchange contracts in effect with a notional value of approximately $37.8 million with no market value and no carrying value. Jones Lang LaSalle does not enter into forward foreign currency exchange contracts for trading or speculative purposes. DISCLOSURE OF LIMITATIONS As the information presented above includes only those exposures that exist as of June 30, 2000, it does not consider those exposures or positions, which could arise after that date. Moreover, because firm commitments are not presented, the information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate and foreign currency fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time and interest and foreign currency rates.
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 is not expected to have a material adverse effect on the financial condition, results of operations and liquidity of Jones Lang LaSalle. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the annual meeting of stockholders held on May 15, 2000, the following business was conducted: A. Stockholders elected six directors as follows: (i) The following two Class I Directors were elected for terms expiring at the 2001 annual meeting of stockholders and until their successors are elected and qualify: M.G. Rose: 26,412,818 votes for and 92,954 votes withheld. Michael J. Smith: 26,412,978 votes for and 92,974 votes withheld. (ii) The following four Class III Directors were elected for terms expiring at the 2003 annual meeting of stockholders and until their successors are elected and qualify: Christopher M. G. Brown: 26,412,978 votes for and 92,794 votes withheld. Derek A. Higgs: 26,411,878 votes for and 93,894 votes withheld. Thomas C. Theobald: 26,412,878 votes for and 92,894 votes withheld. Lynn C. Thurber: 26,412,389 votes for and 93,383 votes withheld. B. Stockholders approved an amendment to the Jones Lang LaSalle Employee Stock Purchase Plan to increase the number of shares available thereunder to 1,000,000 from 250,000 as follows: Votes for: 21,881,524 Votes against: 423,128 Votes abstained: 4,201,120 C. Stockholders ratified the appointment of KPMG LLP as the Company's independent auditors for the fiscal year ending December 31, 2000 as follows: Votes for: 22,282,059 Votes against: 73,664 Votes abstained: 4,150,049
ITEM 5. OTHER MATTERS INFORMATION REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this filing and elsewhere (such as in reports, other filings with the Securities and Exchange Commission, press releases, presentations and communications by Jones Lang LaSalle or its management and written and oral statements) may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause Jones Lang LaSalle's actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. Such factors are discussed in our Annual Report on Form 10-K for the year ended December 31, 1999 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, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", Item 3 "Quantitative and Qualitative Disclosure about Market Risk" and elsewhere, and in other reports filed with the Securities and Exchange Commission. Jones Lang LaSalle expressly disclaims any obligation or undertaking to update or revise any forward-looking statements to reflect any changes in events or circumstances or in its expectations or results. 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: August 14, 2000 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 - ------- ----------- 4.1 Indenture, dated as of July 26, 2000, governing 9% Senior Notes due 2007. 4.2 Registration Rights Agreement, dated as of July 19, 2000, with respect to 9% Senior Notes due 2007. 10.1 Second Amendment and Restated Multicurrency Credit Agreement, dated as of July 26, 2000. 10.2 Third Amendment to the Jones Lang LaSalle Incorporated Employee Stock Purchase Plan. 27.1 Financial Data Schedule.