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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission file number 1-13145 LASALLE PARTNERS INCORPORATED ----------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 36-4150422 ------------------------- --------------------------------- (State or other jurisdic- (IRS Employer Identification No.) tion of incorporation or organization) 200 East Randolph Drive, Chicago, IL 60601 - --------------------------------------- ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code 312/782-5800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class August 4, 1998 ----- -------------- Common Stock ($0.01 par value) 16,230,358
TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements. . . . . . . . . . . . . . . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . 22 PART II OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 23 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 23 Item 5. Other Matters . . . . . . . . . . . . . . . . . . . 23 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 24
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 ($ in thousands, except share data) (UNAUDITED) JUNE 30, DECEMBER 31, 1998 1997 --------- ----------- ASSETS - ------ Current assets: Cash and cash equivalents . . . . . . . . $ 11,684 30,660 Trade receivables, net. . . . . . . . . . 72,516 80,565 Other receivables . . . . . . . . . . . . 7,732 9,395 Prepaid expenses. . . . . . . . . . . . . 1,422 2,055 Deferred tax benefit. . . . . . . . . . . 5,104 5,104 ---------- --------- Total current assets. . . . . . . 98,458 127,779 Property and equipment, at cost, less accumulated depreciation of $32,068 and $28,993 in 1998 and 1997, respectively. . . . . . . . . . 19,631 16,098 Intangibles resulting from business acquisitions, net of accumulated amortization of $7,896 and $5,698 in 1998 and 1997, respectively. . . . . . . . . . . . . . . 53,959 50,366 Investments in real estate ventures . . . . 41,578 18,080 Long-term receivables, net. . . . . . . . . 6,826 6,607 Other assets, net . . . . . . . . . . . . . 2,059 957 -------- ---------- $222,511 219,887 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable and accrued liabilities . . . . . . . . . . $ 27,659 25,781 Accrued compensation. . . . . . . . . . . 23,638 40,163 Other liabilities . . . . . . . . . . . . 8,383 6,100 -------- ---------- Total current liabilities . . . . 59,680 72,044 Long-term credit facility . . . . . . . . . 9,776 -- Other long-term liabilities . . . . . . . . 1,088 946 Commitments and contingencies -------- ---------- Total liabilities . . . . . . . . 70,544 72,990
LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED BALANCE SHEETS - CONTINUED JUNE 30, 1998 AND DECEMBER 31, 1997 ($ in thousands, except share data) (UNAUDITED) JUNE 30, DECEMBER 31, 1998 1997 ---------- ----------- Stockholders' equity: Common stock, $.01 par value per share, 100,000,000 shares authorized; 16,229,815 shares issued and outstanding . . . . . . . . . . . . . . 162 162 Additional paid-in capital. . . . . . . . 122,680 121,778 Retained earnings . . . . . . . . . . . . 28,197 24,327 Accumulated other comprehensive income. . . . . . . . . . . . . . . . . 928 630 -------- ---------- Total stockholders' equity. . . . 151,967 146,897 -------- ---------- $222,511 219,887 ======== ========== See accompanying notes to consolidated and combined financial statements.
<TABLE> LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 ($ in thousands, except share data) (UNAUDITED) <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1998 1997 1998 1997 --------- -------- --------- -------- <S> <C> <C> <C> <C> Revenue: Fee-based services. . . . . . . . . . . . . . . . . $ 72,554 57,251 122,456 87,387 Equity in earnings from unconsolidated ventures . . . . . . . . . . . . . 1,182 345 1,874 1,739 Other income. . . . . . . . . . . . . . . . . . . . 476 322 947 498 ---------- -------- -------- -------- Total revenue . . . . . . . . . . . . . . . . 74,212 57,918 125,277 89,624 Operating expenses: Compensation and benefits . . . . . . . . . . . . . 41,683 33,016 79,036 56,597 Operating, administrative and other . . . . . . . . 17,347 13,519 33,792 23,142 Depreciation and amortization . . . . . . . . . . . 2,962 2,180 5,578 3,954 ---------- -------- -------- -------- Total operating expenses. . . . . . . . . . . 61,992 48,715 118,406 83,693 ---------- -------- -------- -------- Operating income. . . . . . . . . . . . . . . 12,220 9,203 6,871 5,931 Interest expense. . . . . . . . . . . . . . . . . . . 335 1,881 579 3,576 ---------- -------- -------- -------- Earnings before provision for income taxes. . . . . . . . . . . . . . 11,885 7,322 6,292 2,355 Net provision for income taxes. . . . . . . . . . . . 4,575 382 2,422 134 ---------- -------- -------- -------- Net earnings. . . . . . . . . . . . . . . . . $ 7,310 6,940 3,870 2,221 ========== ======== ======== ========
LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME - CONTINUED THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1998 1997 1998 1997 --------- -------- --------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments. . . . . . $ 3 (82) 298 (565) ---------- -------- ---------- -------- Comprehensive income. . . . . . . . . . . . . . . . . $ 7,313 6,858 4,168 1,656 ========== ======== ========== ======== Basic earnings per common share (1) . . . . . . . . . $ 0.45 $0.24 ========== ========== Weighted average shares outstanding . . . . . . . . . 16,200,000 16,200,000 ========== ========== Diluted earnings per common share (1) . . . . . . . . $ 0.45 $ 0.24 ========== ========== Diluted weighted average shares outstanding . . . . . 16,392,626 16,374,883 ========== ========== <FN> (1) Earnings per share has not been presented for the three and six months ended June 30, 1997 as the Company's conversion to corporate form did not occur until July 22, 1997. See accompanying notes to consolidated and combined financial statements. </TABLE>
<TABLE> LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY PERIODS ENDED JUNE 30, 1998 AND DECEMBER 31, 1997 ($ in thousands, except share data) (UNAUDITED) <CAPTION> Partners' Capital Effect of Common Stock Additional Retained (Deficit) Cumulative ------------------- Paid-In Earnings Predecessor Translation Shares Amount Capital (Deficit) Partnerships Adjustment Total ---------- ------ ---------- --------- ------------ ----------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Balances at January 1, 1997. . . . . . . . . . . -- -- -- -- $ 23,148 1,099 24,247 Net earnings (through July 21, 1997). . . . . -- -- -- -- 1,513 -- 1,513 Distributions. . . . . . -- -- -- -- (14,835) -- (14,835) Acquisition of the Galbreath Company common stock. . . . . . -- -- -- -- 29,292 -- 29,292 Effect of the reorganization. . . . .12,200,000 $ 122 38,996 -- (39,118) -- -- Net proceeds from the initial Offering. . . . 4,000,000 40 82,782 -- -- -- 82,822 Other. . . . . . . . . . -- -- -- -- -- (565) (565) ---------- ------ -------- ------ ------- ------ -------- Balances after the reorganization and initial Offering. . . . .16,200,000 162 121,778 -- -- 534 122,474 Net earnings (July 22, 1997 through December 31, 1997) . . -- -- -- 24,327 -- -- 24,327 Other. . . . . . . . . . -- -- -- -- -- 96 96 ---------- ------ -------- ------ ------- ------ -------- Balances at December 31, 1997. . . . . . . . . . .16,200,000 162 121,778 24,327 -- 630 146,897 Net earnings . . . . . . -- -- -- 3,870 -- -- 3,870 Shares issued under stock purchase plan. . 29,815 -- 902 -- -- -- 902 Other. . . . . . . . . . -- -- -- -- -- 298 298 ---------- ------ -------- ------ ------- ------ -------- Balances at June 30, 1998. . . . . . . . . . .16,229,815 $ 162 122,680 28,197 -- 928 151,967 ========== ====== ======== ====== ======= ====== ======== <FN> See accompanying notes to consolidated and combined financial statements. </TABLE>
LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 ($ in thousands) (UNAUDITED) 1998 1997 -------- -------- Cash flows from operating activities: Net earnings. . . . . . . . . . . . . . . . . . $ 3,870 2,221 Reconciliation of net earnings to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . 5,578 3,954 Equity in earnings from unconsolidated ventures. . . . . . . . . . . . . . . . . . (1,874) (1,739) Provision for loss on receivables and other assets. . . . . . . . . . . . . . . . 2,103 1,497 Operating distributions from real estate ventures . . . . . . . . . . . . . . 1,744 1,569 Foreign exchange loss . . . . . . . . . . . . 106 -- Gain on disposition of property and equipment . . . . . . . . . . . . . . . (79) (14) Changes in: Receivables . . . . . . . . . . . . . . . . . 3,333 39,744 Prepaid expenses and other assets . . . . . . 461 (934) Accounts payable, accrued liabilities and accrued compensation. . . . . . . . . . . . (11,381) (36,311) -------- -------- Net cash provided by operating activities. . . . . . . . . . 3,861 9,987 Cash flows provided by (used in) investing activities: Net capital additions - property and equipment . . . . . . . . . . . . . . . . . . (6,667) (2,004) Acquisition of business-Satulah Group, Inc. . . (5,465) -- Proceeds from disposition of property and equipment . . . . . . . . . . . . . . . . 170 33 Cash balances assumed in Galbreath acquisition . . . . . . . . . . . . . . . . . -- 3,209 Investments in real estate ventures: Capital contributions and advances to real estate ventures. . . . . . . . . . . . (21,286) (2,305) Distributions, repayments of advances and sale of investments . . . . . . . . . . 619 2,777 -------- -------- Net cash provided by (used in) investing activities. . . . . . . . . . (32,629) 1,710 Cash flows provided by (used in) financing activities: Net borrowings under credit facility. . . . . . 9,776 6,301 Distributions to partners . . . . . . . . . . . -- (12,336) -------- -------- Net cash provided by (used in) financing activities. . . . . . . . . . 9,776 (6,035) Effects of foreign currency translation on cash balances. . . . . . . . . . . . . . . . 16 6 -------- -------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . (18,976) 5,668 Cash and cash equivalents, January 1. . . . . . . 30,660 7,207 -------- -------- Cash and cash equivalents, June 30. . . . . . . . $ 11,684 12,875 ======== ========
LA SALLE PARTNERS INCORPORATED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - CONTINUED Supplemental disclosure of cash flow information: Combined interest paid was $530 and $1,325 for the periods ended June 30, 1998 and 1997, respectively. See accompanying notes to consolidated and combined financial statements.
LA SALLE PARTNERS INCORPORATED NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 ($ in thousands, except share data) (UNAUDITED) Readers of this quarterly report should refer to the Company's audited financial statements for the year ended December 31, 1997, which are included in the Company's 1997 Form 10-K, filed with the Securities and Exchange Commission, as certain footnote disclosures which would substan- tially duplicate those contained in such audited financial statements have been omitted from this report. (1) ORGANIZATION LaSalle Partners Incorporated [successor to LaSalle Partners Limited Partnership and LaSalle Partners Management Limited Partnership (collectively, the "Predecessor Partnerships"] was incorporated in Maryland on April 15, 1997, (collectively referred to as the "Company"). On July 22, 1997, the Company completed an initial public offering (the "Offering") of 4,000,000 shares of LaSalle Partners Incorporated common stock, $.01 par value per share (the "Common Stock"). In addition, all of the partnership interests held in the Predecessor Partnerships were contributed to the Company, pursuant to agreements among the general and limited partners, in exchange for an aggregate of 12,200,000 shares of common stock. The contribution occurred immediately prior to the closing of the Offering. The 4,000,000 shares were offered at $23 per share, aggregating $82,822, net of offering costs, of which $63,490 was used to retire long-term debt and related interest. The Predecessor Partnerships were subject to a reorganization as part of the incorporation of the Company. Due to the existence of a paired share arrangement between the Predecessor Partnerships and between the former general partners of the Predecessor Partnerships, as well as the existence of identical ownership before and after the incorporation of the Predecessor Partnerships, such transactions were accounted for in a manner similar to the accounting used for a pooling of interests. Thus, the Company's financial statements include the financial positions and results of operations of the Predecessor Partnerships at their historical basis. (2) INTERIM INFORMATION The consolidated and combined financial statements as of June 30, 1998 and for the three and six month periods ended June 30, 1998 and 1997 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the consolidated and combined financial statements for these interim periods have been included. The results for the periods ended June 30, 1998 and 1997 are not necessarily indicative of the results to be obtained for the full fiscal year. (3) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. Income tax expense is comprised of the tax payable for the period and the change during the period in deferred tax assets and liabilities.
FOOTNOTE 3 - CONTINUED For the period prior to the incorporation of the Predecessor Partnerships, the accompanying Consolidated and Combined Statements of Earnings and Comprehensive Income include a federal and state income tax provision for wholly-owned corporate subsidiaries and a state tax provision for certain states which require partnerships to pay income taxes. No other provision for income taxes was made for those periods as the liability for such taxes would have been that of the respective partners. (4) EARNINGS PER SHARE Basic earnings per share was based on weighted average shares outstanding of 16,200,000 for both the three and six month periods ended June 30, 1998. Diluted earnings per share was based on weighted average shares outstanding of 16,392,626 and 16,374,883 for the three and six month periods ended June 30, 1998, respectively, which reflects an increase of 192,626 and 174,883 shares representing the dilutive effect of outstanding stock options whose exercise price was less than the average market price of the Company's stock for the period. (5) BUSINESS SEGMENTS The Company's operations have been classified into three business segments: Management Services, Corporate and Financial Services and Investment Management. The Management Services segment provides three primary service capabilities: (i) property and facility management and leasing for property owners; (ii) development management for both investors and real estate users seeking to develop new buildings or renovate existing facilities; and (iii) project management of tenant improvements in both owner-occupied and leased space. The Corporate and Financial Services segment provides transaction and advisory services through three primary service capabilities, including: (i) tenant representation for corporations and professional services firms; (ii) investment banking services to address the financing, acquisition, and disposition needs of real estate owners; and (iii) land acquisition services for owners and users of land. The Investment Management segment provides real estate investment management services to institutional investors, corporations and high net worth individuals. Total revenue by industry segment includes revenue derived from services provided to other segments. Operating income represents total revenue less direct and indirect allocable expenses. The Company allocates all expenses, other than interest and income taxes, as substantially all expenses incurred benefit one or more of the segments. Summarized unaudited financial information by business segment for the three and six month periods ended June 30, 1998 and 1997 is as follows:
<TABLE> <CAPTION> SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1998 1997 1998 1997 --------- -------- --------- -------- <S> <C> <C> <C> <C> Management Services: Revenue: Property and facility management fees . . . . . . $ 11,061 10,510 21,352 17,653 Leasing fees. . . . . . . . . . . . . . . . . . . 9,126 4,826 10,939 5,999 Development management. . . . . . . . . . . . . . 1,977 1,633 4,195 2,744 Project management. . . . . . . . . . . . . . . . 4,144 1,788 8,000 3,096 Intersegment revenue. . . . . . . . . . . . . . . 135 25 206 50 Other income. . . . . . . . . . . . . . . . . . . 162 82 352 129 --------- ------- ------- ------- 26,605 18,864 45,044 29,671 Operating expenses: Compensation, operating and administrative expenses . . . . . . . . . . . . . . . . . . . . 25,456 18,970 51,373 31,512 Depreciation and amortization . . . . . . . . . . 1,191 929 2,617 1,441 --------- ------- ------- ------- Operating loss. . . . . . . . . . . . . . . . . $ (42) (1,035) (8,946) (3,282) ========= ======= ======= ======= Corporate and Financial Services: Revenue: Tenant representation . . . . . . . . . . . . . . $ 6,713 7,508 10,181 10,484 Investment banking. . . . . . . . . . . . . . . . 9,526 5,300 14,554 5,912 Land fees . . . . . . . . . . . . . . . . . . . . 2,067 1,091 2,608 1,792 Construction operations . . . . . . . . . . . . . 307 205 557 410 Equity in earnings from unconsolidated ventures . (1) 182 (6) 182 Intersegment revenue. . . . . . . . . . . . . . . 100 392 100 392 Other income. . . . . . . . . . . . . . . . . . . 82 53 158 86 --------- ------- ------- ------- 18,794 14,731 28,152 19,258 Operating expenses: Compensation, operating and administrative expenses . . . . . . . . . . . . . . . . . . . . 15,081 9,745 27,069 17,741 Depreciation and amortization . . . . . . . . . . 320 329 610 547 --------- ------- ------- ------- Operating income. . . . . . . . . . . . . . . . $ 3,393 4,657 473 970 ========= ======= ======= =======
SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1998 1997 1998 1997 --------- -------- --------- -------- Investment Management: Revenue: Advisory fees . . . . . . . . . . . . . . . . . . $ 25,907 24,231 47,392 38,633 Acquisition fees. . . . . . . . . . . . . . . . . 1,727 159 2,679 664 Equity in earnings from unconsolidated ventures . 1,183 163 1,880 1,557 Other income. . . . . . . . . . . . . . . . . . . 231 187 436 283 --------- ------- ------- ------- 29,048 24,740 52,387 41,137 Operating expenses: Compensation, operating and administrative expenses 18,728 18,237 34,692 30,928 Depreciation and amortization . . . . . . . . . . . 1,451 922 2,351 1,966 --------- ------- ------- ------- Operating income. . . . . . . . . . . . . . . . $ 8,869 5,581 15,344 8,243 ========= ======= ======= ======= Total segment revenue . . . . . . . . . . . . . . . . $ 74,447 58,335 125,583 90,066 Intersegment revenue eliminations . . . . . . . . . . (235) (417) (306) (442) --------- ------- ------- ------- Total revenue . . . . . . . . . . . . . . . . . $ 74,212 57,918 125,277 89,624 ========= ======= ======= ======= Total segment operating expenses. . . . . . . . . . . $ 62,227 49,132 118,712 84,135 Intersegment operating expense eliminations . . . . . (235) (417) (306) (442) --------- ------- ------- ------- Total operating expenses. . . . . . . . . . . . $ 61,992 48,715 118,406 83,693 ========= ======= ======= ======= Total operating income. . . . . . . . . . . . . $ 12,220 9,203 6,871 5,931 ========= ======= ======= ======= </TABLE>
(6) PRO FORMA FINANCIAL INFORMATION The following pro forma consolidated and combined statements of earnings give effect to the acquisition of the common stock of Galbreath, as adjusted for the Tenant Representation and Investment Banking units which were not acquired, the provision for income taxes as though the Company and Galbreath were taxable entities at an effective tax rate of 38.5%, the conversion of the Company to corporate form and the initial public offering, including the receipt and application of the net proceeds therefrom to repay long-term indebtedness and related interest, as if these events occurred on January 1, 1997. The pro forma adjustments are based upon available information and certain assumptions that management of the Company believes are reasonable. The pro forma consolidated and combined financial statements are not necessarily indicative of what the actual results of operations would have been for the three and six month periods ended June 30, 1997 had the Company completed the acquisition of the Galbreath common stock and consummated its conversion to corporate form and the Offering transactions as of the dates indicated nor does it purport to represent the future financial position or results of operations of the Company. The three and six month periods ended June 30, 1998 represent the Company's actual results of operations.
<TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ ACTUAL PRO FORMA ACTUAL PRO FORMA 1998 1997 1998 1997 --------- -------- --------- -------- <S> <C> <C> <C> <C> Revenue: Fee-based services. . . . . . . . . . . . . . . . . $ 72,554 58,729 122,456 95,238 Equity in earnings from unconsolidated ventures . . 1,182 345 1,874 1,812 Other income. . . . . . . . . . . . . . . . . . . . 476 443 947 785 ---------- ---------- ---------- ---------- Total revenue . . . . . . . . . . . . . . . . . . 74,212 59,517 125,277 97,835 Operating expenses: Compensation and benefits . . . . . . . . . . . . . 41,683 34,285 79,036 61,681 Operating, administrative and other . . . . . . . . 17,347 14,360 33,792 25,881 Depreciation and amortization . . . . . . . . . . . 2,962 2,331 5,578 4,617 ---------- ---------- ---------- ---------- Total operating expenses. . . . . . . . . . . . . 61,992 50,976 118,406 92,179 ---------- ---------- ---------- ---------- Operating income. . . . . . . . . . . . . . . . . 12,220 8,541 6,871 5,656 Interest expense. . . . . . . . . . . . . . . . . . . 335 464 579 729 ---------- ---------- ---------- ---------- Earnings before provision for income taxes. . . . 11,885 8,077 6,292 4,927 Net provision for income taxes. . . . . . . . . . . . 4,575 3,109 2,422 1,896 ---------- ---------- ---------- ---------- Net income. . . . . . . . . . . . . . . . . . . . $ 7,310 4,968 3,870 3,031 ========== ========== ========== ========== Basic earnings per common share . . . . . . . . . . . $ 0.45 0.31 0.24 0.19 ========== ========== ========== ========== Weighted average shares outstanding . . . . . . . . . 16,200,000 16,200,000 16,200,000 16,200,000 ========== ========== ========== ========== Diluted earnings per common share . . . . . . . . . . $ 0.45 0.30 0.24 0.19 ========== ========== ========== ========== Diluted weighted average shares outstanding . . . . . 16,392,626 16,328,999 16,374,883 16,328,999 ========== ========== ========== ========== </TABLE>
FOOTNOTE 6 - CONTINUED Pro forma total revenue and operating expenses for Galbreath include activities such as property management and leasing, facility management and development management. Additional adjustments to operating expenses were made for estimated incremental general and administrative costs associated with operations as a public company totaling $188 and $376 for the three and six month periods ended June 30, 1997, respectively. As a result of the repayment of the Company's long-term notes payable out of the proceeds of the Offering, the related actual interest expense totaling $1,417 and $2,847 for the three and six month periods ended June 30, 1997, respectively, has been eliminated in the pro forma results. The pro forma results further include an additional provision for income taxes totaling $2,727 and $1,762 for the three and six month periods ended June 30, 1997, respectively, giving effect to the conversion of the Company and Galbreath to taxable entities. (7) DEBT CREDIT FACILITY In November 1997, the Company replaced its $70 million credit agreement, which consisted of a short-term revolving line of credit and a long-term facility, with a $150 million, five year unsecured revolving credit facility. The facility is guaranteed by certain of the Company's subsidiaries and is available for working capital, co-investment and acquisitions. The Company must maintain a certain level of consolidated net worth and ratio of funded debt to earnings before interest expense, income taxes, depreciation and amortization expense, and must meet a minimum fixed charge coverage ratio. The Company is restricted from incurring certain levels of indebtedness to lenders outside of the facility, disposing of a significant portion of its assets, and is subject to lender approval on certain levels of co-investment. The facility bears variable rates of interest based on market rates and requires the Company to pay a commitment fee of .15% per annum on the unused portion of the commitment. The Company's effective interest rate was 6.09% and 6.67% for the six months ended June 30, 1998 and 1997, respectively. The Company had $9,776 of outstanding debt on the facility at June 30, 1998 compared with no outstanding debt at December 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW LaSalle Partners Incorporated is a leading full-service real estate firm that provides management services, corporate and financial services and investment management services to corporations and other real estate owners and investors worldwide. The Company has grown by expanding both its client base and its range of services and products in anticipation of client needs. The Company completed its initial public offering ("Offering") on July 22, 1997, raising net proceeds of $82.8 million which were used primarily to repay the Company's long-term debt and related interest of $63.5 million. A substantial block of the Company's stock, approximately 43.0%, is owned by employees, of which approximately 20.0% is owned by senior management. The Company continues to pursue a growth strategy that capitalizes on existing client relationships and emerging industry trends. The key components of the growth strategy include expanding client relationships to increase the range of services provided to current clients and developing new client relationships, broadening its international presence and selectively pursuing strategic acquisitions and co-investment opportunities. The Company has completed the following four strategic acquisitions since late 1994: Alex. Brown Kleinwort Benson Realty Advisors Corporation, a real estate investment advisor, in November 1994; CIN Property Management, a London-based investment advisor, in October 1996; The Galbreath Company, a property and development management company, in April 1997; and the project management business of Satulah Group Inc., a project management/facilities conversion company, in January 1998. The Company intends to continue to increase its co-investment with its investment management clients. This strategy should serve to grow the assets under management, generate returns on investment and create potential opportunities to provide services related to the acquisition, financing, property management, leasing and disposition of such investments. As of June 30, 1998, the Company had a total investment of $41.6 million in 37 separate property or fund co-investments with additional capital commitments of $7.1 million for future fundings of co- investments. Included in the investments noted above, is an $18.8 million investment in LaSalle Hotel Properties (LHO), a real estate investment trust, which completed its initial public offering in April 1998. LHO was formed to own hotel properties and to continue and expand the hotel investment activities of the Company by investing particularly in upscale and luxury full service hotels located primarily in major business and urban, resort and convention markets. The Company provides advisory, acquisition and administrative services to LHO for which it receives a base advisory fee calculated as a percentage of net operating income, as well as performance fees based on growth in funds from operations on a per share basis. Such performance fees, if any, will be paid in the form of LHO common stock or units, at the option of the Company. LHO was formed with 10 hotels, nine of which the Company had a nominal co-investment in and acted as the investment advisor for. In accordance with the individual investment advisory agreements, the Company earned and received performance fees totaling $15.2 million on the disposition of certain of the assets which were shared between the Company's Investment Management and Investment Banking units. The Company contributed its ownership interests in the hotels as well as the related performance fees to LHO for an effective ownership interest of 6.0%.
RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE AND SIX MONTHS ENDED JUNE 30, 1997 REVENUE The Company's total revenue, after elimination of intersegment revenue, grew $16.3 million, or 28.1%, to $74.2 million for the three months ended June 30, 1998 and grew $35.7 million, or 39.8%, to $125.3 million for the six months ended June 30, 1998 from the prior year periods. Increased revenues were driven in part, by the acquisition of Galbreath and Satulah, the completion of the LHO initial public offering and also by four additional factors: the strong U.S. economy; increased inflow of capital to the real estate market; an ongoing trend toward consolidation in many financial services businesses; and the Company's ability to cross-market real estate services to its clients. The strong economy has led to job growth, which has fueled increased demand for real estate of all types. This increased demand has produced rising rental rates and higher investment returns for owners, thereby attracting investment capital to the market. The inflow of capital has led to a high level of transaction activity, including disposition, acquisition, and financing of real estate. The consolidation among the financial service industries has encouraged demand for national real estate and strategic planning services, including lease negotiation, space planning, move management, and tenant construction. The result has been increased activity in all of the Company's major businesses. The Company's ability to cross-market all of these services to its clients has augmented the increased revenue generated by favorable market conditions. These increases have been partially offset by a decline in property management, disposition, leasing and investment management fees from four multiple investor funds ("Commingled Funds") formed by the Company in the 1980s. The decline is a result of the current and continuing disposition of the funds' assets, in accordance with the strategic plan. These asset dispositions are expected to be completed by the end of 1998. Revenue generated from these funds compared with total revenue was approximately 1% for the three and six months ended June 30, 1998 and approximately 6% for the prior year periods. Revenue for the Company's Management Services segment, which represented 36.0% of the Company's total revenue for the three and six months ended June 30, 1998, increased $7.7 million, or 41.0%, to $26.6 million for the three months ended June 30, 1998 and increased $15.4 million, or 51.8%, to $45.0 million for the six months ended June 30, 1998 from the prior year periods. Increases in revenue were primarily a result of higher volumes of leasing activity and the acquisition of Galbreath and Satulah and, to a lesser extent, to both an increase in strategic alliance clients formed by the Project Management business and a higher level of development projects being managed by the Development Management business. These increases were partially offset by a decline in revenue related to the sale of the Commingled Fund properties discussed previously. The Company's Corporate and Financial Services segment revenue, which represented 25% and 22%, respectively, of the Company's total revenue for the three and six months ended June 30, 1998, increased $4.1 million, or 27.6%, to $18.8 million for the three months ended June 30, 1998 and increased $8.9 million, or 46.2%, to $28.2 million for the six months ended June 30, 1998 over the prior year periods. The increase in revenue for the three months ended June 30, 1998 was primarily attributable to performance fees generated on the disposition of hotel properties previously discussed and, to a lesser extent, to a higher volume of transactions completed by the land unit. In addition to the disposition related fees, June year-to- date revenue growth is a result of increased transaction volume experienced by the Company's Investment Banking and Land units. These increases were partially offset by a decline in revenue related to the sale of the Commingled Fund properties discussed previously.
The Company's Investment Management segment revenue, which represented 39% and 42%, respectively, of the Company's total revenue for the three and six months ended June 30, 1998, increased $4.3 million, or 17.4%, to $29.0 million for the three months ended June 30, 1998 and increased $11.3 million, or 27.3%, to $52.4 million for the six months ended June 30, 1998 from the prior year periods. The gain in revenue was primarily attributable to performance fees generated on the disposition of certain assets under management including the hotels discussed previously, and, to a lesser extent, to acquisition fees generated on international fund activity and the continued volume of activity performed by the securities unit. These increases were partially offset by a decline in revenue from four of the Company's Commingled Funds discussed previously. During the third quarter of 1998, the Company will be transitioning approximately $1 billion in office assets under management out of its portfolio as a result of a change in investment advisors by one of its clients. Revenue on this portfolio represented 4% of the segment's revenue for the six months ended June 30, 1998. OPERATING EXPENSE The Company's operating expenses, after elimination of intersegment expense, increased $13.3 million, or 27.3%, to $62.0 million for the three months ended June 30, 1998 and increased $34.7 million, or 41.5%, to $118.4 million for the six months ended June 30, 1998 from the prior year periods. Operating expenses represented 83% and 95% of total revenue, respectively, for the three and six month periods ended June 30, 1998 which is consistent with the prior year periods. Operating expense levels reflect the accrual for incentive compensation as a result of increased operating profits from the prior year, additional infrastructure costs related to public reporting and technology enhancements and the impact of goodwill amortization associated with the recent acquisitions. All three of the Company's segments experienced higher levels of compensation and benefits associated with increased staffing and higher incentive compensation associated with the Company's increased operating income as well as increased levels of marketing and travel costs associated with new business initiatives. Operating expenses for the Company's Management Services segment increased $6.7 million to $26.6 million and increased $21.0 million to $54.0 million for the three and six months ended June 30, 1998 over the prior year periods. These increases were primarily a result of the effects of the Galbreath and Satulah acquisitions, including personnel costs and amortization of intangibles resulting from the acquisitions, higher compensation and benefit costs associated with increased staffing to support new business initiatives and incremental corporate infrastructure costs as a result of higher staffing levels and technology enhancements. Operating expenses for the Corporate and Financial Services segment increased $5.3 million, or 52.9%, to $15.4 million and increased $9.4 million, or 51.4%, to $27.7 million for the three and six months ended June 30, 1998 over the prior year periods. The increases were principally a result of increased incentive compensation earned by the Investment Banking unit, consistent with the increased level of operating profits generated, in addition to higher employment levels for both the Investment Banking and Tenant Representation units as a result of an increased demand for services. To a lesser extent, costs associated with new international offices in Toronto, New Delhi and Shanghai opened subsequent to the second quarter of 1997 were incurred, in addition to corporate infrastructure costs related to higher staffing levels and technology enhancements. Operating expenses for the Investment Management segment increased $1.0 million, or 5.3%, to $20.2 million and increased $4.1 million, or 12.6%, to $37.0 million for the three and six months ended June 30, 1998 over the prior year periods. The increases for the six months ended June 30, 1998 were substantially a result of increased incentive compensation, consistent with the increased level of operating profits generated to date.
OPERATING INCOME As a result of the factors noted above, the Company's operating income increased $3.0 million to $12.2 million and increased $.9 million to $6.9 million for the three and six months ended June 30, 1998 over the prior year periods. As a percentage of total revenue, the Company's operating income remained relatively constant at 17% and 6% for the three and six months ended June 30, 1998 compared to the prior year periods. INTEREST EXPENSE Interest expense decreased $1.5 million to $.3 million and decreased $3.0 million to $.6 million for the three and six months ended June 30, 1998 from the prior year periods, principally as a result of the repayment of the Company's long-term debt from the net proceeds of the Offering and the substantially lower borrowings on the Company's credit facility during 1998 as a result of capital raised from the Offering. PROVISION FOR INCOME TAXES The provision for income taxes increased $4.2 million to $4.6 million and increased $2.3 million to $2.4 million for the three and six months ended June 30, 1998 from the prior year periods as a result of the Company's conversion from partnership to corporate form in July 1997 and the resulting provision for income taxes at an effective tax rate of 38.5%. NET EARNINGS The Company's net earnings increased $.4 million to $7.3 million and increased $1.6 million to $3.9 million for the three and six months ended June 30, 1998 from the prior year periods. PRO FORMA RESULTS Pro forma results for the three and six months ended June 30, 1997 give effect to (i) the acquisition of Galbreath, as adjusted for the Tenant Representation and Investment Banking units which were not acquired, as if the acquisition occurred on January 1, 1997; (ii) the provision for income taxes as though the Company and Galbreath were both taxable entities as of January 1, 1997 at an effective tax rate of 38.5%; and (iii) estimated incremental general and administrative costs associated with operations as a public company and the repayment of the Company's long-term notes payable out of the proceeds of the Offering as if the Offering occurred on January 1, 1997. The Company's revenue for the three and six months ended June 30, 1998 of $74.2 million and $125.3 million, respectively, compares to $59.5 million and $97.8 million for the prior year periods on a pro forma basis, reflecting increases of $14.7 million, or 24.7%, and $27.4 million, or 28.0%, respectively. The Company's operating expenses for the three and six months ended June 30, 1998 were 83.5% and 94.5% of revenue, respectively, compared to 85.6% and 94.2%, respectively, for the prior year periods on a pro forma basis. As a result of the factors previously discussed, the Company's net income increased $2.3 million to $7.3 million and increased $.8 million to $3.9 million for the three and six months ended June 30, 1998 from the prior year periods on a pro forma basis. LIQUIDITY AND CAPITAL RESOURCES The Company meets its cash requirements primarily from operating activities. No one client accounts for more than 10% of the Company's total revenue. During the six months ended June 30, 1998, cash flows provided by operating activities totaled $3.9 million, a decrease of $6.1 million over the prior year period. The decrease in operating cash flows is primarily attributable to stronger earnings in the second and third quarters of 1997 which resulted in cash collections being made during 1997. Comparatively, 1996 results were heavily fourth quarter driven, consistent
with the Company's historical patterns, resulting in a substantial amount of cash collections during the first quarter of 1997. In addition, stronger 1997 annual earnings, as compared to 1996, resulted in higher incentive compensation which is paid each January of the following year. The Company continues to pursue co-investment opportunities with its investment management clients, for which the holding period typically ranges from three to seven years. Such co-investments are represented by non-controlling general partner and limited partner interests. In addition to its share of investment returns, the Company typically earns investment management fees, and in some cases, property management and leasing fees on these investments. The equity earnings from these co-investments have had a relatively small impact on the Company's current earnings and cash flow. However, the Company's increased participation as a principal in real estate investments could increase fluctuations in the Company's net earnings and cash flow as a result of the timing and magnitude of the gains or losses and potential incentive participation fees, if any, to be recognized on the disposition of the assets. In certain of these investments, the Company will not have complete discretion to control the timing of the disposition of such investments. Net cash used in investing activities was $32.6 million for the six months ended June 30, 1998 compared with cash provided by investing activities of $1.7 million for the prior year period. The increased usage of $34.3 million is primarily attributable to a higher level of co- investment during 1998, including an $18.8 million investment in LHO (net additional co-investment of $15.2 million) in April 1998. In addition, the Company acquired the project management business of the Satulah Group Inc. in January 1998 for $5.5 million in cash. Finally, the Company experienced increased capital expenditures of $4.7 million primarily as a result of the continued customization and implementation of a new property accounting and information system by its Management Services segment and a new corporate accounting system in addition to the on-going replacement of personal computers. The Company anticipates that future capital expenditures will continue to exceed prior year levels as a result of technology enhancements that are currently in progress. Historically, the Company has financed its operations, acquisitions and co-investments with internally generated funds, ownership equity and borrowings under revolving credit facilities. In November 1997, the Company replaced its $70 million credit agreement, which consisted of a short-term revolving line of credit and a long-term facility, with a $150 million, five-year unsecured revolving credit facility. The facility is guaranteed by certain of the Company's subsidiaries and is available for working capital, co-investment, and acquisitions. The Company must maintain a certain level of consolidated net worth and ratio of funded debt to EBITDA, and must meet a minimum fixed charge coverage ratio. The Company is restricted from incurring certain levels of indebtedness to lenders outside of the facility and disposing of a significant portion of its assets, and is subject to lender approval on certain levels of co-investment. The facility bears variable rates of interest based on market rates. The Company's effective interest rate was 6.09% and 6.67% for the six months ended June 30, 1998 and 1997, respectively. Net cash provided by financing activities was $9.8 million for the six months ended June 30, 1998 compared with net cash used of $6.0 million in the prior year period. The increase in financing cash flows is primarily a result of the Company's conversion to corporate form and the elimination of distributions which were historically made to its partners in accordance with partnership agreements, and to a lesser extent due to increased borrowings on the Company's credit facility to fund increased co-investment activity and capital expenditures as previously discussed. The Company believes, based on current operating plans, that cash generated from operations and available borrowings will be sufficient to meet its capital and liquidity requirements for the foreseeable future. To the extent that the Company makes any significant acquisitions, the Company may be required to increase its available borrowings, and incur additional indebtedness, which could be substantial.
SEASONALITY Historically, the Company's revenue, operating profits and net earnings in the first three calendar quarters are substantially lower than in the fourth quarter. This seasonality is due to a calendar year-end focus on the completion of transactions, which is consistent with the real estate industry generally. In contrast, the Company's Investment Management segment earns performance fees on client's returns on their real estate investments. Such performance fees are generally earned when the asset is disposed of, the timing of which the Company does not have complete discretion over. The Company's non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant on a quarterly basis. Therefore, the Company typically sustains a loss in the first quarter of each calendar year, typically reports a small profit or loss in the second and third quarters and records a substantial majority of the Company's earnings in the fourth calendar quarter, barring the recognition of investment generated performance fees. INFLATION The Company's operations are directly affected by various national and local economic conditions, including interest rates, the availability of credit to finance real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact on its operations, as revenue, commissions, and other variable costs related to revenue are primarily impacted by real estate supply and demand rather than general inflation. OTHER MATTERS ACCOUNTING MATTERS In an attempt to align its operating results with those presented by similar companies within the industry, certain amounts have been reclassified in the Company's 1997 revenue and operating expenses to reflect direct personnel cost reimbursements received on property or specific client assignments on a net, rather than a gross, basis. There was no effect on operating profits or net earnings as historically reported. Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" becomes effective for fiscal years beginning after December 15, 1997 and is not expected to have a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" becomes effective for all fiscal quarters for fiscal years beginning after June 15, 1999 and is not expected to have a material impact on the Company's financial statements. YEAR 2000 ISSUES The Company conducts its business primarily with commercial software purchased from third-party vendors. After an analysis of the Company's exposure to the impact of the year 2000 issues, the Company has determined that such commercial software is expected to be substantially year 2000 compliant and that completion of the year 2000 compliance is not expected to have a material impact on its business, operations, or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Most of these matters are covered by insurance. In the opinion of the Company, the ultimate resolution of such litigation matters will not have a material adverse effect on the financial position, results of operations and liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of stockholders held on May 21, 1998, the following business was conducted: A. Stockholders elected the following persons to office as Class I and Class II Directors (as indicated): Robert C. Spoerri (Class I): Votes for: 13,469,985 Votes withheld: 47,550 Daniel W. Cummings (Class I): Votes for: 13,469,585 Votes withheld: 47,950 Charles K. Esler, Jr. (Class I): Votes for: 13,469,985 Votes withheld: 47,550 Darryl Hartley-Leonard (Class I): Votes for: 13,469,985 Votes withheld: 47,550 John R. Walter (Class II): Votes for: 13,469,985 Votes withheld: 47,550 B. Stockholders ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the year ended December 31, 1998 as follows: Votes for: 13,513,535 Votes against: 1,150 Votes abstained: 2,850 ITEM 5. OTHER MATTERS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain statements in this filing and elsewhere (such as in reports, other filings with the Securities and Exchange Commission, press releases, presentations and communications by the Company or its management and written and oral statements) may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, achievements, plans and objectives of the Company to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. Such factors are discussed in the Company's Registration Statement (No. 333-25741), under "Risk Factors" and elsewhere, in the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
in Item 1. "Business", Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, and in other reports filed by the Company with the Securities and Exchange Commission. These factors include, among other things, the following: (i) the impact of general economic conditions and the real estate economic climate on the Company's business and results of operations; (ii) the risk that property management and investment management agreements will be terminated prior to expiration or not renewed; (iii) the dependence of the Company's revenue from property management and leasing services on the performance of the properties managed by the Company; (iv) the risks inherent in pursuing a selective acquisition strategy; (v) the concentration of the Company's business in properties in central business districts; (vi) the risks associated with the co-investment activities of the Company; (vii) the seasonal nature of the Company's revenue, operating income and net earnings; and (viii) the competition faced by the Company in a variety of business disciplines within the commercial real estate industry. The Company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements to reflect any changes in events or circumstances or in the Company's expectations or results. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) A list of exhibits is set forth in the Exhibit Index which immediately precedes the exhibits and which is incorporated by reference herein. (b) No reports on Form 8-K were filed during the quarter ended June 30, 1998.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LASALLE PARTNERS INCORPORATED Dated: August 4, 1998 BY:/S/ WILLIAM E. SULLIVAN ------------------------------ William E. Sullivan Executive Vice President and Chief Financial Officer (Authorized Officer, Principal Financial Officer and Principal Accounting Officer)
EXHIBIT INDEX Exhibit Number Description - ------- ----------- 10.1 Amendment to the LaSalle Partners Incor- porated 1997 Stock Award and Incentive Plan. 10.2 First Amendment to the LaSalle Partners Incorporated Employee Stock Purchase Plan. 27.1 Financial Data Schedule.