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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission file number 1-13145 JONES LANG LASALLE INCORPORATED ----------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 36-4150422 ------------------------- --------------------------------- (State or other jurisdic- (IRS Employer Identification No.) tion of incorporation or organization) 200 East Randolph Drive, Chicago, IL 60601 - --------------------------------------- ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code 312/782-5800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class August 13, 1999 ----- ---------------- Common Stock ($0.01 par value) 30,633,565
TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements . . . . . . . . . . . . . . . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . 30 PART II OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 32 Item 4. Submission of Matters to a Vote of Securities Holders . . . . . . . . . . . . . . . . . 32 Item 5. Other Matters. . . . . . . . . . . . . . . . . . . . 33 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 33
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JONES LANG LASALLE INCORPORATED CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND DECEMBER 31, 1998 (in thousands, except share data) (UNAUDITED) JUNE 30, DECEMBER 31, 1999 1998 ---------- ----------- ASSETS - ------ Current assets: Cash and cash equivalents. . . . . . . . . $ 38,664 16,941 Trade receivables, net of allowances of $12,964 and $3,978 in 1999 and 1998, respectively . . . . . . . . . . . 189,622 116,965 Notes receivable and advances to real estate ventures . . . . . . . . . . 15,417 17,042 Other receivables. . . . . . . . . . . . . 17,023 3,385 Prepaid expenses . . . . . . . . . . . . . 8,396 2,185 Other assets . . . . . . . . . . . . . . . 6,590 -- Deferred and current tax benefit . . . . . 39,672 9,926 ---------- --------- Total current assets . . . . . . . 315,384 166,444 Property and equipment, at cost, less accumulated depreciation of $45,365 and $35,859 in 1999 and 1998, respectively . . . . . . . . . . 63,127 28,773 Intangibles resulting from business acquisitions, net of accumulated amortization of $19,404 and $11,961 in 1999 and 1998, respectively . . . . . . . . . . . . . . . 381,704 229,437 Investments in real estate ventures. . . . . 53,066 52,976 Long-term receivables, net . . . . . . . . . 10,926 10,950 Deferred tax assets. . . . . . . . . . . . . -- 660 Prepaid pension asset. . . . . . . . . . . . 20,533 -- Other assets, net. . . . . . . . . . . . . . 3,548 1,681 ---------- ---------- $ 848,288 490,921 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable and accrued liabilities. . . . . . . . . . . $ 82,022 51,101 Accrued compensation . . . . . . . . . . . 81,952 58,398 Short-term borrowings. . . . . . . . . . . 14,618 -- Other liabilities. . . . . . . . . . . . . 40,019 8,324 ---------- ---------- Total current liabilities. . . . . 218,611 117,823 Long-term liabilities: Credit facilities. . . . . . . . . . . . . 327,343 202,923 Deferred tax liability . . . . . . . . . . 1,391 -- Other. . . . . . . . . . . . . . . . . . . 2,800 603 Commitments and contingencies ---------- ---------- Total liabilities. . . . . . . . . 550,145 321,349
JONES LANG LASALLE INCORPORATED CONSOLIDATED BALANCE SHEETS - CONTINUED JUNE 30, 1999 AND DECEMBER 31, 1998 (in thousands, except share data) (UNAUDITED) JUNE 30, DECEMBER 31, 1999 1998 ---------- ----------- Stockholders' equity: Common stock, $.01 par value per share, 100,000,000 shares authorized; 30,633,565 shares issued and outstanding. . . . . . . . . . . . . . . 307 163 Additional paid-in capital . . . . . . . . 473,856 123,543 Deferred stock compensation. . . . . . . . (128,864) -- Unallocated ESOT shares. . . . . . . . . . (9) -- Retained earnings (deficit). . . . . . . . (48,327) 44,792 Accumulated other comprehensive income . . . . . . . . . . . . . . . . . 1,180 1,074 ---------- ---------- Total stockholders' equity . . . . 298,143 169,572 ---------- ---------- $ 848,288 490,921 ========== ========== 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, 1999 AND 1998 (in thousands, except share data) (UNAUDITED) <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue: Fee-based services . . . . . . . . . . . . . . . . . .$ 172,018 72,554 272,722 122,456 Equity in earnings from unconsolidated ventures . . . . . . . . . . . . . . . . . . . . . . 1,870 1,182 2,051 1,874 Other income . . . . . . . . . . . . . . . . . . . . . 5,256 476 5,792 947 ---------- ---------- ---------- ---------- Total revenue. . . . . . . . . . . . . . . . . . 179,144 74,212 280,565 125,277 Operating expenses: Compensation and benefits. . . . . . . . . . . . . . . 124,640 41,683 200,079 79,036 Operating, administrative and other. . . . . . . . . . 47,273 17,347 78,590 33,792 Depreciation and amortization. . . . . . . . . . . . . 10,106 2,962 17,061 5,578 ---------- ---------- ---------- ---------- Total operating expenses before merger related non-recurring charges. . . . . . . . . 182,019 61,992 295,730 118,406 ---------- ---------- ---------- ---------- Merger related non-recurring charges: Stock compensation expense . . . . . . . . . . . . . . 21,242 -- 67,441 -- Integration and transition expenses. . . . . . . . . . 14,345 -- 22,189 -- ---------- ---------- ---------- ---------- Total merger related non-recurring charges. . . . . . . . . . . . . . . . . . . . 35,587 -- 89,630 -- ---------- ---------- ---------- ---------- Total operating expenses . . . . . . . . . . . . 217,606 61,992 385,360 118,406 ---------- ---------- ---------- ---------- Operating income (loss). . . . . . . . . . . . . (38,462) 12,220 (104,795) 6,871 Interest expense . . . . . . . . . . . . . . . . . . . . 4,703 335 7,345 579 ---------- ---------- ---------- ---------- Earnings (loss) before provision for income taxes . . . . . . . . . . . . . . . (43,165) 11,885 (112,140) 6,292 Net provision (benefit) for income taxes . . . . . . . . (5,461) 4,575 (19,021) 2,422 ---------- ---------- ---------- ---------- Net earnings (loss). . . . . . . . . . . . . . .$ (37,704) 7,310 (93,119) 3,870 ========== ========== ========== ==========
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME - CONTINUED THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (in thousands, except share data) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Other comprehensive income, net of tax: Foreign currency translation adjustments. . . . . . . . . . . . . . . . . . . . .$ 483 3 106 298 ---------- ---------- ---------- ---------- Comprehensive income (loss). . . . . . . . . . . . . . .$ (37,221) 7,313 (93,013) 4,168 ========== ========== ========== ========== Basic earnings (loss) per common share . . . . . . . . .$ (1.62) 0.45 (4.52) 0.24 ========== ========== ========== ========== Weighted average shares outstanding. . . . . . . . . . .23,297,467 16,200,000 20,620,715 16,200,000 ========== ========== ========== ========== Diluted earnings (loss) per common share . . . . . . . .$ (1.62) 0.45 (4.52) 0.24 ========== ========== ========== ========== Diluted weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . .23,297,467 16,392,626 20,620,715 16,374,883 ========== ========== ========== ========== <FN> See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY PERIODS ENDED JUNE 30, 1999 AND DECEMBER 31, 1998 (in thousands, except share data) (UNAUDITED) <CAPTION> Deferred Effect of Common Stock Additional Retained Stock Unallocated Cumulative ------------------- Paid-In Earnings Compen- ESOT Translation Shares Amount Capital (Deficit) sation Shares Adjustment Total ---------- ------ ---------- --------- ---------- ------------ ----------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1997 . . . . . . . . .16,200,000 162 121,778 24,327 -- -- 630 146,897 Net earnings. . . . . -- -- -- 20,465 -- -- -- 20,465 Shares issued under stock purchase plan. . . . 64,176 1 1,765 -- -- -- -- 1,766 Other . . . . . . . . -- -- -- -- -- -- 444 444 ---------- ----- -------- ------ -------- ------- ------ -------- Balances at December 31, 1998 . . .16,264,176 163 123,543 44,792 -- -- 1,074 169,572 Net loss. . . . . . . -- -- -- (93,119) -- -- -- (93,119) Shares issued in connection with: Stock option plan . . . . . . . 21,292 -- 495 -- -- -- -- 495 Stock compensa- tion program . . . 93,981 1 2,630 -- -- -- -- 2,631 Merger with JLW. . .14,254,116 143 355,233 -- (160,253) (9) -- 195,114 Stock compensa- tion adjustments. . -- -- (8,045) -- 6,606 -- -- (1,439) Amortization of deferred stock compensation. . . . -- -- -- -- 24,783 -- -- 24,783 Other . . . . . . . . -- -- -- -- -- -- 106 106 ---------- ----- -------- ------- -------- ------- ------ -------- Balances at June 30, 1999. . . . .30,633,565 $ 307 473,856 (48,327) (128,864) (9) 1,180 298,143 ========== ===== ======== ======= ======== ======= ====== ======== <FN> See accompanying notes to consolidated financial statements. </TABLE>
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (in thousands, unless otherwise noted) (UNAUDITED) 1999 1998 -------- -------- Cash flows from operating activities: Net earnings (loss). . . . . . . . . . . . . . . $(93,119) 3,870 Reconciliation of net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization. . . . . . . . . 17,061 5,578 Equity in earnings from unconsolidated ventures . . . . . . . . . . . . . . . . . . (2,051) (1,874) Provision for loss on receivables and other assets . . . . . . . . . . . . . . . . 4,537 2,103 Foreign exchange loss. . . . . . . . . . . . . -- 106 Stock compensation expense . . . . . . . . . . 67,000 -- Changes in: Receivables. . . . . . . . . . . . . . . . . . 49,152 3,333 Prepaid expenses and other assets. . . . . . . (6,046) 461 Deferred and current tax benefit . . . . . . . (22,486) -- Accounts payable, accrued liabilities and compensation and other liabilities . . . . . (112,863) (11,381) -------- -------- Net cash provided by operating activities . . . . . . . . . . (98,815) 2,196 Cash flows provided by (used in) investing activities: Net capital additions - property and equipment. . . . . . . . . . . . . . . . . . . (12,715) (6,667) Net proceeds from disposition of property and equipment. . . . . . . . . . . . . . . . . -- 91 Cash balances assumed in Jones Lang Wootton merger, net of cash paid and transaction costs (Note 4) . . . . . . . . . . . . . . . . 11,170 -- Other acquisition, net of cash acquired and transaction costs. . . . . . . . . . . . . (3,195) (5,465) Investments in real estate ventures: Capital contributions and advances to real estate ventures . . . . . . . . . . . . (3,528) (21,286) Distributions, repayments of advances and sale of investments. . . . . . . . . . . 6,611 2,363 -------- -------- Net cash provided by (used in) investing activities . . . . . . . . . . (1,657) (30,964) Cash flows provided by (used in) financing activities: Net borrowings under long-term credit facilities . . . . . . . . . . . . . . . . . . 121,879 9,776 Common stock issued under stock option plan. . . 495 -- -------- -------- Net cash provided by financing activities. 122,374 9,776
JONES LANG LASALLE INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED SIX MONTHS ENDED JUNE 30, 1999 AND 1998 ($ in thousands, unless otherwise noted) (UNAUDITED) 1999 1998 -------- -------- Effects of foreign currency translation on cash balances. . . . . . . . . . . . . . . . . . (179) 16 -------- -------- Net increase (decrease) in cash and cash equivalents. . . . . . . . 21,723 (18,976) Cash and cash equivalents, beginning of period . . 16,941 30,660 -------- -------- Cash and cash equivalents, end of period . . . . . $ 38,664 11,684 ======== ======== Supplemental disclosure of cash flow information: Combined interest paid was $7,537 and $530 for the periods ended June 30, 1999 and 1998, respectively. Taxes paid were $11,892 and $1,622 for the periods ended June 30, 1999 and 1998, respectively. See accompanying notes to consolidated financial statements.
JONES LANG LASALLE INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 (in millions, except where otherwise noted) (UNAUDITED) Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 1998, which are included in our 1998 Form 10-K, filed with the Securities and Exchange Commission, as certain footnote disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. (1) ORGANIZATION Jones Lang LaSalle Incorporated ("Jones Lang LaSalle") formerly LaSalle Partners Incorporated [successor to LaSalle Partners Limited Partnership and LaSalle Partners Management Limited Partnership (collectively, the "Predecessor Partnerships")], was incorporated in Maryland on April 15, 1997 (collectively referred to as the "Company"). On July 22, 1997, the Company completed an initial public offering (the "Offering") of 4.0 million shares of Jones Lang LaSalle common stock, $.01 par value per share (the "Common Stock"). In addition, all of the partnership interests held in the Predecessor Partnerships were contributed to the Company, pursuant to agreements among the general and limited partners, in exchange for an aggregate of 12.2 million shares of common stock. The contribution occurred immediately prior to the closing of the Offering. The 4.0 million shares were offered at $23 per share, aggregating $82.8 million, net of offering costs, of which $63.5 million was used to retire long-term debt and related interest. The Predecessor Partnerships were subject to a reorganization as part of the Company's incorporation. Due to the existence of a paired share arrangement between the Predecessor Partnerships and between the former general partners of the Predecessor Partnerships, as well as the existence of identical ownership before and after the incorporation of the Predecessor Partnerships, such transactions were accounted for in a manner similar to the accounting used for a pooling of interests. Thus, the Company's financial statements include the financial positions and results of operations of the Predecessor Partnerships at their historical basis. On March 11, 1999, LaSalle Partners Incorporated and Jones Lang Wootton ("JLW") completed the merger of their operations. In connection with the merger, LaSalle Partners Incorporated changed its name to Jones Lang LaSalle Incorporated. (2) INTERIM INFORMATION The consolidated financial statements as of June 30, 1999 and for the three and six month periods ended June 30, 1999 and 1998 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements for these interim periods have been included. The results for the periods ended June 30, 1999 and 1998 are not necessarily indicative of the results to be obtained for the full fiscal year. Certain amounts have been reclassified to conform with the June 30, 1999 presentation.
(3) STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company follows the requirements of the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based compensation, and, accordingly, recognizes no compensation expense for stock option grants, but provides the annual pro forma disclosures required by the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". In connection with the merger with JLW, the Company issued shares to former employees of JLW which are subject to vesting provisions or are contingently returnable. Shares issued that are contingently returnable are accounted for as a variable stock award plan. The remaining shares issued are accounted for as a fixed stock award plan. Compensation expense associated with shares subject to vesting is recognized over the vesting period. (4) JONES LANG WOOTTON MERGER In accordance with the purchase and sale agreements, the Company issued 14.3 million shares of its common stock, which is subject to a post- closing net worth adjustment, plus $6.1 million in cash (collectively, the "Consideration") in connection with the acquisition of the property and asset management, advisory and other real estate businesses operated by a series of JLW partnerships and corporations in Europe, Asia, Australia, North America and New Zealand. Approximately 12.5 million of the shares were issued to former JLW equity owners (having both direct and indirect ownership) and 1.8 million of the shares were placed in an employee ownership trust ("ESOT") to be distributed by December 31, 2000 to selected employees of the former JLW entities. Issuance of the shares was not registered under the U.S. securities laws, and the shares are generally subject to a contractual one-year restriction on sale. The transaction, which was principally structured as a share exchange, has been treated as a purchase and is being accounted for using both APB Opinion No. 16, "Business Combinations" and APB Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, JLW's operating results have been included in the Company's results as of March 1, 1999, the effective date of the merger for accounting purposes. Assuming that the closing net worth requirements are met, 7.6 million shares, or 53% of the shares issued, are subject to accounting under APB Opinion No. 16. The value of those shares totaled $149.5 million for accounting purposes based on the five-day average closing stock price surrounding the date the financial terms of the merger with JLW were substantially complete, discounted at a rate of 20% for transferability restrictions. The value of the shares, in addition to a cash payment of $5.7 million and capitalizable transaction costs of approximately $15.6 million were allocated to the identifiable assets and liabilities acquired, based on management's estimate of fair value, which totaled $243.5 million and $233.3 million, respectively. Included in the assets acquired is $32.0 million in cash. The resulting excess purchase price of $160.5 million was allocated to goodwill which is being amortized on a straight-line basis over 40 years based on management's estimate of useful lives. The remaining 6.7 million shares, or 47% of the shares issued, and $.4 million in cash paid are subject to accounting under APB Opinion No. 25. Accordingly, shares issued are being accounted for as compensation expense or deferred compensation expense to the extent
they are subject to forfeiture or vesting provisions. Included in the 6.7 million shares are 1.6 million shares that are subject to variable stock award plan accounting. The remaining 5.1 million shares and the $.4 million in cash paid are subject to fixed stock award plan accounting. Compensation expense incurred for the three and six months ended June 30, 1999 totaled $21.2 million and $67.4 million, respectively, inclusive of the compensation expense recognized at closing and the amortization of deferred compensation for the periods. (5) EARNINGS PER SHARE The basic and diluted losses per common share were calculated based on basic weighted average shares outstanding of 23.3 million and 20.6 million for the three and six months ended June 30, 1999, respectively. Consideration shares issued as a result of the merger with JLW, to the extent included, have been weighted as of March 11, 1999. As a result of the operating loss incurred for the period, diluted weighted average shares outstanding for the three and six months ended June 30, 1999 do not give effect to common stock equivalents, consisting principally of consideration shares issued in connection with the JLW merger that are subject to vesting provisions or are contingently returnable, as to do so would be anti- dilutive. Basic earnings per share was based on weighted average shares outstanding of 16.2 million for both the three and six month periods ended June 30, 1998. Diluted earnings per share was based on weighted average shares outstanding of 16.4 million for the three and six month periods ended June 30, 1998, which reflects an increase of .2 million shares primarily representing the dilutive effect of outstanding stock options whose exercise price was less than the average market price of the Company's stock for the period, and, to a lesser extent, the dilutive effect of shares to be issued under the Company's employee stock benefit plans. (6) BUSINESS SEGMENTS As a result of the merger with JLW, Jones Lang LaSalle is managing its business along a combination of functional and geographic lines. Accordingly, operations have been classified into six business segments, two global functional businesses: (i) Investment Management and (ii) Hotel Services; and four geographic regions consisting of the: (iii) Americas; (iv) Europe; (v) Asia; and (vi) Australasia. The Investment Management segment provides real estate investment management services to institutional investors, corporations, and high net worth individuals. The Hotels Services segment provides strategic advisory, sales, acquisition and asset management services related solely to hotel, conference and resort properties. The geographic regions of the Americas, Europe, Asia and Australasia each provide Owner and Occupier Services which consist primarily of tenant representation and agency leasing, investment disposition and acquisition, and valuation services (collectively, "implementation services") and property, facility, development and project management services (collectively, "management fees"). Results for 1998 have been realigned based upon the current business segments. Total revenue by industry segment includes revenue derived from services provided to other segments. Operating income represents total revenue less direct and indirect allocable expenses. The Company allocates all expenses, other than interest and income taxes, as substantially all expenses incurred benefit one or more of the segments. Merger related non- recurring charges are not allocated to the segments. Summarized unaudited financial information by business segment for the three and six month periods ended June 30, 1999 and 1998 is as follows ($ in thousands):
<TABLE> <CAPTION> SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1999 1998 1999 1998 --------- -------- --------- -------- <S> <C> <C> <C> <C> OWNER AND OCCUPIER SERVICES - AMERICAS Revenue: Implementation services. . . . . . . . . . . . . . .$ 23,173 27,278 38,607 38,079 Management fees. . . . . . . . . . . . . . . . . . . 28,739 15,544 55,349 31,210 Equity earnings. . . . . . . . . . . . . . . . . . . 281 (1) 101 (6) Other services . . . . . . . . . . . . . . . . . . . 2,246 1,828 4,493 3,118 Intersegment revenue . . . . . . . . . . . . . . . . 78 235 140 306 ---------- ---------- ---------- ---------- 54,517 44,884 98,690 72,707 Operating expenses: Compensation, operating and administrative expenses. . . . . . . . . . . . . . 60,431 39,889 117,517 77,070 Depreciation and amortization. . . . . . . . . . . . 5,033 1,367 10,076 3,217 ---------- ---------- ---------- ---------- Operating income (loss). . . . . . . . . . . .$ (10,947) 3,628 (28,903) (7,580) ========== ========== ========== ========== EUROPE Revenue: Implementation services. . . . . . . . . . . . . . .$ 43,435 123 61,869 123 Management fees. . . . . . . . . . . . . . . . . . . 23,500 (3) 29,831 -- Equity earnings. . . . . . . . . . . . . . . . . . . (72) -- (93) -- Other services . . . . . . . . . . . . . . . . . . . 1,148 150 4,187 150 ---------- ---------- ---------- ---------- 68,011 270 95,794 273 Operating expenses: Compensation, operating and administrative expenses. . . . . . . . . . . . . . 60,186 284 81,375 569 Depreciation and amortization. . . . . . . . . . . . 2,357 -- 2,972 -- ---------- ---------- ---------- ---------- Operating income (loss). . . . . . . . . . . .$ 5,468 (14) 11,447 (296) ========== ========== ========== ==========
SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1999 1998 1999 1998 --------- -------- --------- -------- AUSTRALASIA Revenue: Implementation services. . . . . . . . . . . . . . .$ 11,924 -- 15,156 -- Management fees. . . . . . . . . . . . . . . . . . . 5,240 -- 6,815 -- Equity earnings. . . . . . . . . . . . . . . . . . . 24 -- -- -- Other services . . . . . . . . . . . . . . . . . . . 443 -- 906 -- ---------- ---------- ---------- ---------- 17,631 -- 22,877 -- Operating expenses: Compensation, operating and administrative expenses. . . . . . . . . . . . . . 14,214 -- 20,584 -- Depreciation and amortization. . . . . . . . . . . . 700 -- 898 -- ---------- ---------- ---------- ---------- Operating loss . . . . . . . . . . . . . . . .$ 2,717 -- 1,395 -- ========== ========== ========== ========== ASIA Revenue: Implementation services. . . . . . . . . . . . . . .$ 8,400 170 10,700 215 Management fees. . . . . . . . . . . . . . . . . . . 5,888 -- 7,781 -- Other services . . . . . . . . . . . . . . . . . . . 1,515 -- 1,803 1 ---------- ---------- ---------- ---------- 15,803 170 20,284 216 Operating expenses: Compensation, operating and administrative expenses. . . . . . . . . . . . . . 15,829 422 20,830 803 Depreciation and amortization. . . . . . . . . . . . 948 8 1,156 10 ---------- ---------- ---------- ---------- Operating loss . . . . . . . . . . . . . . . .$ (974) (260) (1,702) (597) ========== ========== ========== ========== HOTEL SERVICES - Revenue: Implementation services. . . . . . . . . . . . . . .$ 2,246 -- 3,100 -- Management fees. . . . . . . . . . . . . . . . . . . 473 -- 473 -- Other services . . . . . . . . . . . . . . . . . . . 462 -- 462 -- ---------- ---------- ---------- ---------- 3,181 -- 4,035 -- Operating expenses: Compensation, operating and administrative expenses. . . . . . . . . . . . . . 3,619 -- 4,539 -- Depreciation and amortization. . . . . . . . . . . . 50 -- 61 -- ---------- ---------- ---------- ---------- Operating loss . . . . . . . . . . . . . . . .$ (488) -- (565) -- ========== ========== ========== ==========
SEGMENT OPERATING RESULTS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1999 1998 1999 1998 --------- -------- --------- -------- INVESTMENT MANAGEMENT - Revenue: Implementation services. . . . . . . . . . . . . . .$ 4,431 1,727 6,037 2,679 Advisory fees. . . . . . . . . . . . . . . . . . . . 14,190 25,881 30,804 47,297 Equity earnings. . . . . . . . . . . . . . . . . . . 1,637 1,183 2,043 1,880 Other services . . . . . . . . . . . . . . . . . . . (179) 332 141 531 Intersegment revenue . . . . . . . . . . . . . . . . (35) -- -- -- ---------- ---------- ---------- ---------- 20,044 29,123 39,025 52,387 Operating expenses: Compensation, operating and administrative expenses. . . . . . . . . . . . . . 17,678 18,670 33,964 34,692 Depreciation and amortization. . . . . . . . . . . . 1,017 1,587 1,898 2,351 ---------- ---------- ---------- ---------- Operating income . . . . . . . . . . . . . . .$ 1,349 8,866 3,163 15,344 ========== ========== ========== ========== Total segment revenue. . . . . . . . . . . . . . . . . .$ 179,187 74,447 280,705 125,583 Intersegment revenue eliminations. . . . . . . . . . . . (43) (235) (140) (306) ---------- ---------- ---------- ---------- Total revenue. . . . . . . . . . . . . . . . .$ 179,144 74,212 280,565 125,277 ========== ========== ========== ========== Total segment operating expenses . . . . . . . . . . . .$ 182,062 62,227 295,870 118,712 Intersegment operating expense eliminations . . . . . . . . . . . . . . . . . . . . . (43) (235) (140) (306) ---------- ---------- ---------- ---------- Total operating expenses before merger related non-recurring charges. . . . . . . . . . . .$ 182,019 61,992 295,730 118,406 ========== ========== ========== ========== Operating income (loss) before merger related non-recurring charges. . . . . . . . . . . .$ (2,875) 12,220 (15,165) 6,871 ========== ========== ========== ========== </TABLE>
(7) PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Pro Forma results for the three and six months ended June 30, 1999 give effect to the merger with JLW as if it occurred on January 1, 1999. Jones Lang LaSalle Actual results reflect the results of operations of the LaSalle Partners' businesses for the two months ended February 28, 1999 and the operations of the merged Jones Lang LaSalle businesses for the period from March 1, 1999 to June 30, 1999. JLW Results reflect operating results for each of the JLW companies for the two months ended February 28, 1999, as adjusted for market compensation, taxes and other costs associated with the integration of the companies. Acquisition Adjustments represent the impact of the additional amortization of goodwill resulting from the merger, and income taxes as if the Company was taxable for the period at an effective tax rate of 38%. Merger-Related Adjustments reflect the additional non-cash compensation expense associated with certain shares issued in connection with the JLW merger and the related income tax effect as if the merger had occurred on January 1, 1999. Pro Forma weighted average shares outstanding include shares issued in connection with the merger with JLW, excluding those shares which are contingently returnable or subject to vesting provisions, as though they were issued on January 1, 1999. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The pro forma consolidated financial statements are not necessarily indicative of what the actual results of operations would have been for the three and six month periods ended June 30, 1999 had the JLW merger been completed as of the dates indicated nor does it purport to represent the future financial position or results of operations of the Company.
<TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------------------ Jones Lang Merger- LaSalle JLW Acquisition Adjusted Related Actual Results Adjustments Pro Forma Adjustments Pro Forma ---------- ---------- ----------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenue: Fee-based services . . . . . $ 172,018 -- -- 172,018 -- 172,018 Equity in earnings from uncon- solidated ventures . . . . 1,870 -- -- 1,870 -- 1,870 Other income . . . . . . . . 5,256 -- -- 5,256 -- 5,256 ---------- ---------- ---------- ---------- ---------- ---------- Total revenue. . . . . 179,144 -- -- 179,144 -- 179,144 Operating expenses: Compensation and benefits. . 124,640 -- -- 124,640 -- 124,640 Operating, administrative and other. . . . . . . . . 47,273 -- -- 47,273 -- 47,273 Depreciation and amortization . . . . . . . 10,106 -- -- 10,106 -- 10,106 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses before merger related non- recurring charges. . 182,019 -- -- 182,019 -- 182,019 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss) before merger related non- recurring charges. . (2,875) -- -- (2,875) -- (2,875) Merger related non-recurring charges: Stock compensation expense. . . . . . . . . 21,242 -- -- 21,242 (5,934) 15,308 Integration and transition expense. . . . . . . . . 14,345 -- -- 14,345 -- 14,345 ---------- ---------- ---------- ---------- ---------- ---------- Total merger related non-recurring charges. . . . . . . 35,587 -- -- 35,587 (5,934) 29,653 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses . . . . . . 217,606 -- -- 217,606 (5,934) 211,672 ---------- ---------- ---------- ---------- ---------- ----------
Jones Lang Merger- LaSalle JLW Acquisition Adjusted Related Actual Results Adjustments Pro Forma Adjustments Pro Forma ---------- ---------- ----------- ---------- ----------- ---------- Operating income (loss) . . . . . . . (38,462) -- -- (38,462) 5,934 (32,528) Interest expense, net. . . . 4,703 -- -- 4,703 -- 4,703 ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before provision (benefit) for income taxes . . (43,165) -- -- (43,165) 5,934 (37,231) Net benefit for income taxes . . . . . . . (5,461) -- -- (5,461) (1,628) (7,089) ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss). . $ (37,704) -- -- (37,704) 7,562 (30,142) ========== ========== ========== ========== ========== ========== Other comprehensive income (loss), net of tax: Foreign currency trans- lation adjustments . . . $ 483 -- -- 483 -- 483 ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive loss . . $ (37,221) -- -- (37,221) 7,562 (29,659) ========== ========== ========== ========== ========== ========== Basic loss per common share . . . . . . . $ (1.62) $ (1.29) ========== ========== Basic weighted average shares outstanding . . . . 23,297,467 23,297,467 ========== ========== Diluted loss per common share . . . . . . . $ (1.62) $ (1.29) ========== ========== Diluted weighted average shares outstanding . . . . 23,297,467 23,297,467 ========== ==========
SIX MONTHS ENDED JUNE 30, 1999 -------------------------------------------------------------------------------- Jones Lang Merger- LaSalle JLW Acquisition Adjusted Related Actual Results Adjustments Pro Forma Adjustments Pro Forma ---------- ---------- ----------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenue: Fee-based services . . . . . $ 272,722 58,039 -- 330,761 -- 330,761 Equity in earnings from uncon- solidated ventures . . . . 2,051 -- -- 2,051 -- 2,051 Other income . . . . . . . . 5,792 421 -- 6,213 -- 6,213 ---------- ---------- ---------- ---------- ---------- ---------- Total revenue. . . . . 280,565 58,460 -- 339,025 -- 339,025 Operating expenses: Compensation and benefits. . 200,079 43,610 -- 243,689 -- 243,689 Operating, administrative and other. . . . . . . . . 78,590 18,360 -- 96,950 -- 96,950 Depreciation and amortization . . . . . . . 17,061 2,197 850 20,108 -- 20,108 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses before merger related non- recurring charges. . 295,730 64,167 850 360,747 -- 360,747 ---------- ---------- ---------- ---------- ---------- ---------- Operating loss before merger related non- recurring charges. . (15,165) (5,707) (850) (21,722) -- (21,722) Merger related non-recurring charges: Stock compensation expense. . . . . . . . . 67,441 -- -- 67,441 2,729 70,170 Integration and transition expense. . . . . . . . . 22,189 12,325 -- 34,514 -- 34,514 ---------- ---------- ---------- ---------- ---------- ---------- Total merger related non-recurring charges. . . . . . . 89,630 12,325 -- 101,955 2,729 104,684 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses . . . . . . 385,360 76,492 850 462,702 2,729 465,431 ---------- ---------- ---------- ---------- ---------- ---------- Operating loss . . . . (104,795) (18,032) (850) (123,677) (2,729) (126,406) Interest expense, net. . . . 7,345 (93) -- 7,252 -- 7,252 ---------- ---------- ---------- ---------- ---------- ----------
Jones Lang Merger- LaSalle JLW Acquisition Adjusted Related Actual Results Adjustments Pro Forma Adjustments Pro Forma ---------- ---------- ----------- ---------- ----------- ---------- Loss before benefit for income taxes . . (112,140) (17,939) (850) (130,929) (2,729) (133,658) Net benefit for income taxes. . . . . . . . . . . (19,021) (2,133) (323) (21,477) (1,300) (22,777) ---------- ---------- ---------- ---------- ---------- ---------- Net loss . . . . . . . $ (93,119) (15,806) (527) (109,452) (1,429) (110,881) ========== ========== ========== ========== ========== ========== Basic loss per common share. $ (4.52) $ (4.76) ========== ========== Weighted average shares outstanding. . . . . . . . 20,620,715 23,283,666 ========== ========== Diluted loss per common share. . . . . . . . . . . $ (4.52) $ (4.76) ========== ========== Diluted weighted average shares outstanding . . . . 20,620,715 23,283,666 ========== ========== </TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Jones Lang LaSalle Incorporated (formerly LaSalle Partners Incorporated) is a leading full-service real estate services firm that provides investment management, hotel acquisition, disposition, strategic advisory and valuation, property management, facility management, development management, project management, tenant and agency leasing, investment disposition, acquisition, financing and capital placement services on a local, regional and global basis. With over 6,000 employees in 98 key markets spanning 34 countries and five continents, Jones Lang LaSalle is able to satisfy local service needs on a regional and international basis. The ability to provide this network of services around the globe was solidified effective March 11, 1999 with the merger of LaSalle Partners Incorporated and the Jones Lang Wootton ("JLW") companies. In accordance with the purchase and sale agreements, Jones Lang LaSalle issued 14.3 million shares of common stock, which is subject to a post closing net worth adjustment, in addition to $6.2 million in cash (collectively, the "Consideration"). Included in the 14.3 million shares are 1.2 million shares subject to the closing net worth adjustment. Management anticipates that the calculations with respect to the closing net worth adjustment will be completed in the third quarter of 1999 with the resulting impact on shares issued resolved shortly thereafter. Approximately 12.5 million of the shares were issued to former JLW equity owners and 1.8 million shares were placed in an employee ownership trust ("ESOT") to be distributed by December 31, 2000 to selected employees of the former JLW entities. Included in the total ESOT shares are .9 million that were allocated on March 11, 1999, with the remaining .9 million shares to be allocated by December 31, 2000. Issuance of the shares was not registered under the U.S. securities laws, and the shares are generally subject to a contractual one-year restriction on sale. The merger, which was principally structured as a share exchange, has been treated as an acquisition and is being accounted for using both APB Opinion No. 16, "Business Combinations" and APB Opinion No. 25, "Accounting for Stock Issued to Employees". In accordance with the purchase and sale agreements, the merger is effective for accounting purposes as of March 1, 1999. Accordingly, the results of operations for the former JLW entities have been included in the first quarter results of Jones Lang LaSalle from that date. As a general matter, the accounting treatment of the Consideration is dependent on whether the recipient (i) had a legal ownership interest in the JLW entities prior to the integration of those entities ("Current JLW Owners"); (ii) obtained their legal ownership interest in the JLW entities as part of the JLW integration ("New JLW Owners"); or, (iii) will receive their shares from the ESOT. The accounting treatment is further dependent on whether the shares issued are non-restricted ("Non-restricted Shares"), issued from the ESOT ("ESOT Shares"), or are subject to (i) forfeiture provisions ("Forfeiture Shares); (ii) indemnification provisions ("Indemnification Shares"); or, (iii) closing net worth requirements ("Adjustment Shares"). All Consideration paid to Current JLW Owners, excluding Forfeiture Shares, has been accounted for using the purchase method of accounting under APB Opinion No. 16. Such Consideration, assuming the net worth requirements are met, consists of 7.6 million shares and $5.7 million in cash. The shares were valued based on the average price of Jones Lang LaSalle common stock of $24.66 per share for the five day period that includes the two trading days immediately preceding, the trading day of, and the two trading days immediately following the date of substantial completion of negotiations regarding the principal financial terms of the
merger (October 9, 1998) discounted at a rate of 20%, to account for transferability restrictions applicable to such shares. The total value attributed to the issuance of shares, $149.5 million, in addition to the cash payment and capitalizable transaction costs of approximately $15.6 million have been allocated to the identifiable assets and liabilities acquired with the excess value being allocated to goodwill which is being amortized over its estimated useful life of 40 years. Accounting under APB Opinion No. 25 is being applied to the remaining 6.7 million shares which represents all shares issued to New JLW Owners, shares allocated from the ESOT and Forfeiture Shares issued to Current JLW Owners. Shares issued or allocated from the ESOT at March 11, 1999 were valued at $35.375, the market price of Jones Lang LaSalle common stock on March 10, 1999. Shares to be allocated from the ESOT on December 31, 1999 and 2000, totaling .9 million, will be valued based on the prevailing market price of the common stock on those dates. Of the 5.8 million shares issued or allocated from the ESOT on March 11, 1999, 1.4 million shares, which are deemed to be contingently returnable, are being accounted for as a variable stock award plan. Such shares include Forfeiture Shares issued to the JLW Asia Shareholders (which are subject to indemnification provisions) in addition to Adjustment and Indemnification Shares issued to New JLW Owners and allocated from the ESOT at March 11, 1999. 1.2 million shares subject to forfeiture or vesting provisions have been accounted for as deferred compensation with compensation expense to be recognized over the forfeiture or vesting period. The value of the remaining .2 million shares was accounted for as compensation expense on March 11, 1999. Under a variable stock award plan, the amount of compensation expense and value of deferred compensation will be adjusted at the end of each quarter based on the change in stock price from the previous quarter until the final number of shares to be issued is known. The remaining 4.4 million shares issued or allocated from the ESOT on March 11, 1999 subject to accounting under APB Opinion No. 25 are being accounted for as a fixed stock award plan. Such shares include Forfeiture Shares issued to Current JLW Owners (excluding Forfeiture Shares issued to JLW Asia Shareholders which are subject to indemnification provisions) and New JLW Owners in addition to shares allocated from the ESOT on March 11, 1999 which are not subject to indemnity and adjustment provisions. 3.4 million of those shares are subject to forfeiture or vesting provisions and have been accounted for as deferred compensation with compensation expense to be recognized over the forfeiture or vesting period. The value of the remaining 1.0 million shares, in addition to a cash payment of $.4 million, were accounted for as compensation expense on March 11, 1999. Compensation expense incurred for the three and six months ended June 30, 1999 related to the issuance of shares and the 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 at June 30, 1999 totaled $128.9 million, including the effect of the quarterly adjustment for the change in stock price, which will be amortized into compensation expense through December 31, 2000. Such compensation expense, in addition to compensation expense anticipated to be incurred at December 31, 1999 and 2000 associated with the final allocations of ESOT shares, is expected to result in significant non-cash net losses for Jones Lang LaSalle for those periods.
RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 1998 Operating results for the three and six months ended June 30, 1999 include the results of the acquired Compass businesses (the acquisition was completed in October 1998) and the results of the JLW entities effective March 1, 1999. Total revenue, after elimination of intersegment revenue, increased $104.9 million to $179.1 million for the three months ended June 30, 1999 and increased $155.3 million to $280.6 million for the six months ended June 30, 1999 from the prior year periods, primarily as a result of these two transactions. These increases were partially offset by lower performance fees generated on the disposition of assets under management during the three and six months ended June 30, 1999 as compared to the prior year periods, which had high levels of performance fees. Total operating expenses, after elimination of intersegment expenses and excluding the effect of merger related non-recurring charges, increased $120.0 million to $182.0 million for the three months ended June 30, 1999 and increased $177.3 million to $295.7 million for the six months ended June 30, 1999, as compared with the prior year periods, also substantially a result of these transactions. Merger related non-recurring charges totaled $35.6 million and $89.6 million for the three and six months ended June 30, 1999, respectively. $21.2 million and $67.4 million of these charges for the three and six months ended June 30, 1999, respectively, represent non-cash compensation expense recorded as a result of shares issued to certain former employees of JLW in connection with the merger. $14.3 million and $22.2 million of these charges represent non-recurring transition and integration costs for the three and six months ended June 30, 1999, respectively, of which approximately $4.3 million are attributable to the integration of the acquired Compass businesses for the six months ended June 30, 1999. The remaining transition expense relates to the merger with JLW, and represents non-capitalizable expenses such as rebranding, office consolidations, and information technology initiatives. The resulting operating loss for the three months ended June 30, 1999, excluding the effect of merger related non-recurring charges, totaled $2.9 million compared to operating income of $12.2 million in the prior year period, and the operating loss for the six months ended June 30, 1999, excluding the effect of merger related non-recurring charges, totaled $15.2 million compared to operating income of $6.9 million in the prior year period. The operating losses for the periods are primarily attributable to a few key factors, (i) the seasonal nature of the operations and the compounding effect of the Compass acquisition; (ii) distractions caused by the integration of the Compass and JLW operations; (iii) increased infrastructure costs associated with the implementation and roll out of the JD Edwards property accounting and information system and a delay in the capture of anticipated cost savings; and (iv) lower performance fees generated on the disposition of certain assets under management. Historically, the leasing & management, facility services, project management and development management businesses in the Americas Region have incurred an operating loss through the third quarter of each year. This pattern was intensified with the acquisition of Compass which had the same seasonal experience and doubled the size of the Jones Lang LaSalle leasing & management portfolio. In addition, the efforts taken to fully integrate the employees and business processes of the Compass and JLW entities, specifically in the United States, resulted in a significant distraction to the senior management of the Americas Region resulting in less new business generation as compared to the prior year periods. Further, this distraction resulted in a delay in capturing the anticipated synergies from the Compass acquisition as well as the benefits anticipated
from the implementation of the JD Edwards system. Finally, performance fees generated on the disposition of assets under management by both the Investment Management segment and Americas Region in both the three and six months ended June 1998 were well above those generated during the same periods in 1999, consistent with management's expectation that the timing of dispositions and related performance fees could result in significant fluctuations in periodic earnings. These matters are expected to effect the performance of Jones Lang LaSalle for the full year 1999 reporting period as discussed in the Jones Lang LaSalle press release dated July 30, 1999 (filed as an exhibit to this Form 10-Q). The integration of the businesses is well underway and significant progress has been made toward creating the platform with which to grow the business. Including the effect of the merger related non-recurring charges, the operating loss for the three and six months ended June 30, 1999 totaled $38.5 million and $104.8 million, respectively, compared to operating income in the prior year periods of $12.2 million and $6.9 million, respectively. SEGMENT OPERATING RESULTS INVESTMENT MANAGEMENT. Investment Management revenue decreased $9.1 million to $20.4 million for the three months ended June 30, 1999 from the prior year period and decreased $13.4 million to $39.0 million for the six months ended June 30, 1999 from the prior year period. These decreases are primarily attributable to performance fees generated in the second quarter of 1998 on the disposition of certain assets under management, partially offset by increased advisory and acquisition fees earned as a result of the merger with JLW during the second quarter of 1999. Operating expenses decreased $1.6 million to $18.7 million for the three months ended June 30, 1999 and decreased $1.2 million to $35.9 million for the six months ended June 30, 1999 as compared with the prior year periods. This decrease was primarily a result of lower accruals for bonus compensation consistent with the lower levels of revenue generated for the three and six months ended June 30, 1999, partially offset by increased operating expenses incurred as a result of the merger with JLW. HOTEL SERVICES. Hotel Services, a new reportable segment as a result of the recent merger, had total revenue of $3.2 million and $4.0 million for the three and six months ended June 30, 1999, respectively. Services provided represented a combination of valuation, disposition and acquisition services. Operating expenses for the segment totaled $3.7 million and $4.6 million for the three and six months ended June 30, 1999, respectively. AMERICAS REGION. Revenue for the Americas Region increased $9.6 million to $54.5 million for the three months ended June 30, 1999 and increased $26.0 million to $98.7 million for the six months ended June 30, 1999 compared to the prior year periods. The increases are primarily attributable to the acquisition of Compass, and the resulting increase in leasing, property management and facility services fees, and, to a lesser extent, to the merger with JLW. This increase for the three months ended June 30, 1999 was partially offset by lower performance fees generated on the disposition of assets during the second quarter of 1998. Operating expenses for the segment increased $24.2 million to $65.5 million for the three months ended June 30, 1999 and increased $47.3 million to $127.6 million for the six months ended June 30, 1999 compared to the prior year periods. These increases are primarily a result of the acquisition of Compass, the merger with JLW, and incremental infrastructure costs associated with the implementation and roll out of the JD Edwards property accounting and information system, for which anticipated cost synergies have not yet been realized.
EUROPE REGION. Revenue for the Europe Region, which is substantially a new reportable segment as a result of the JLW merger and the acquisition of Compass, totaled $68.0 million and $95.8 million for the three and six months ended June 30, 1999, respectively. The revenue generated by the Region primarily reflects robust activity within the United Kingdom primarily in the form of tenant and agency leasing activities and investment sales and acquisition transactions, and to a lesser extent to investment and leasing activities for the second quarter of 1999 in France. This positive performance was slightly offset by a weakening of the pound sterling and the Euro against the US dollar for the period beginning March 1, 1999. Operating expenses for the region totaled $62.5 million and $84.3 million for the three and six months ended June 30, 1999, respectively. ASIA REGION. Revenue for the Asia Region, also substantially a new reportable segment as a result of the merger, totaled $15.8 million and $20.3 million for the three and six months ended June 30, 1999, respectively, primarily reflecting strong activity within Hong Kong representing management fees, agency leasing activity, consulting and valuation services. Operating expenses totaled $16.8 million and $22.0 million for the three and six months ended June 30, 1999, respectively. The currency valuation throughout most of the Asia Region remained stable for the periods and although recovery of the Asian markets is expected to be more protracted than originally anticipated, property prices and rents in a number of the Asia markets have begun to stabilize. AUSTRALASIA REGION. Revenue for the Australasia Region, a new reportable segment as a result of the JLW merger and the acquisition of Compass, totaled $17.6 million and $22.9 million for the three and six months ended June 30, 1999, respectively. Operating expenses totaled $14.9 million and $21.5 million for the three and six months ended June 30, 1999, respectively. The Australasia Region operations continue to benefit from several positive trends, including the outsourcing of property management functions by corporations and a strengthening in the Australian dollar against the U.S. dollar. INTEREST EXPENSE Interest expense increased $4.4 million to $4.7 million for the three months ended June 30, 1999 and increased $6.8 million to $7.3 million for the six months ended June 30, 1999 from the prior year periods, primarily as a result of the acquisition of Compass and the related borrowings on the acquisition facility, and to a lesser extent, to additional borrowings on the revolving credit facilities as a result of the transition and integration charges associated with the acquisition of Compass and merger with JLW. BENEFIT FOR INCOME TAXES The benefit for income taxes increased $10.0 million to $5.5 million for the three months ended June 30, 1999 and increased $21.4 million to $19.0 million for the six months ended June 30, 1999 from a provision of $4.6 million and $2.4 million, respectively, in the prior year periods, primarily as a result of the increased net loss, exclusive of the compensation expense associated with the issuance of shares to former JLW employees in connection with the merger, at an effective tax rate of 38%. In addition, a benefit has been recognized on a portion of the stock compensation expense, which is largely non-deductible for tax purposes, based on the rates prevailing in applicable countries. NET LOSS The net loss for the three months ended June 30, 1999 totaled $37.7 million compared to net income of $7.3 million in the prior year period. The net loss for the six months ended June 30, 1999 totaled $93.1 million compared to net income of $3.9 million for the prior year period. The increase in net loss compared to the prior year periods is predominantly a result of the merger related non-recurring charges, in addition to the effects on operations previously discussed by segment.
LIQUIDITY AND CAPITAL RESOURCES Historically, Jones Lang LaSalle has financed its operations and acquisition and co-investment activities with internally generated funds, the common stock of the company and borrowings under credit facilities. As of June 30, 1999 our existing five year unsecured $150 million revolving credit facility and our $175 million credit facility, used exclusively to finance the acquisition of Compass, were fully drawn, including the impact of letters of credit. In May 1999 we obtained a short-term facility of $45 million (collectively, the "Facilities") with an original maturity of July 31, 1999 which had an outstanding balance of $2.8 million at June 30, 1999. We are currently holding discussions with our lenders regarding appropriate forms of long-term capitalization, including increasing and extending the maturity on our revolving credit facility. As we continue discussions with our lenders to increase our existing revolving facility, the maturity on the short-term facility was extended to September 30, 1999. There can be no assurances as to the terms and conditions with regard to any modification to the revolving credit facility. The revolving credit facility and the short-term credit facility are available for working capital, co-investment, and acquisitions. Jones Lang LaSalle has the right to extend the $175 million credit facility to September 21, 2000. Management had anticipated repaying a portion of this facility with the proceeds from an equity offering. With the significant decrease in our stock price, Jones Lang LaSalle no longer expects to be able to access capital from the equity markets at a price acceptable to management in the immediate future. As such, we are currently discussing alternatives with our lenders to renegotiate the terms of this debt, however, there can be no assurances as to the terms and conditions. The Facilities are guaranteed by certain of our subsidiaries. We must maintain a certain level of consolidated net worth and ratio of funded debt to earnings before interest expense, taxes, depreciation and amortization ("EBITDA"), and must meet a minimum fixed charge coverage ratio. Additionally, we are restricted from, among other things, incurring certain levels of indebtedness to lenders outside of the Facilities or disposing of a significant portion of our assets, and are subject to lender approval on certain levels of co-investment. For the twelve month period ended June 30, 1999, we exceeded the required ratio of funded debt to EBITDA, and the lenders under the Facilities provided waivers. In our discussion with our lenders regarding the renegotiations of our Facilities, management is addressing the adequacy of current covenants contained in the existing credit agreements. The Facilities bear variable rates of interest based on market rates. Jones Lang LaSalle uses interest rate swaps to convert a portion of the floating rate indebtedness to a fixed rate. Our effective interest rate on the Facilities was 5.82% and 5.83% for the three and six months ended June 30, 1999, respectively. Jones Lang LaSalle has additional access to liquidity via various overdraft facilities and short-term credit facilities in Europe, Asia, and Australia. The aggregate amount available under these facilities approximates $37.6 million, of which $12.5 million was outstanding at June 30, 1999. Borrowings on these facilities are currently limited to $25 million under the terms of the credit agreements governing the Facilities. Management believes that in order to meet our future capital and liquidity requirements, it will be necessary to renegotiate our existing credit facilities. Based on current operating plans, cash generated from operations is anticipated to be very strong for the remainder of 1999. However, permanent financing needs to be obtained for the significant disbursements related to opportunities generated from the merger with JLW and acquisition of Compass. These disbursements include merger and integration costs, one-time capital expenditures to establish a global platform, and the funding of a world wide co-investment program.
During the six months ended June 30, 1999, cash flows used in operating activities totaled $98.8 million compared to cash flows provided by operations of $2.2 million in the prior year period. The increased use is primarily a result of increased operating expenses resulting from the acquisition of Compass and the merger with JLW, and the related payment of integration, transition and transaction costs associated with the transactions, and, in addition to the significantly higher operating loss at June 30, 1999 as compared to the prior year period. To a lesser extent, the increased use is due to higher bonus accruals at December 31, 1998 as compared to December 31, 1997, which are paid in the first quarter of the following year. Jones Lang LaSalle expects to continue to pursue co-investment opportunities with investment management clients, for which the holding period typically ranges from three to seven years. While this program remains very important to the continued growth of the Investment Management segment, the future commitment to co-investment is completely discretionary and can be increased or decreased based on the availability of capital and other factors. The performance of the Investment Management segment would likely be negatively impacted if a substantial decrease in co-investing were to occur. Management anticipates that co-investment activity within the Americas and Europe regions will increase with potential expansion into Asia and Australasia, as appropriate opportunities arise. This strategy should serve to grow the assets under management, generate returns on investment and create potential opportunities to provide other services. Such co-investments are represented by non-controlling general partner and limited partner interests. In addition to a share of investment returns, we typically earn 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 our current earnings and cash flow. However, our increased participation could increase fluctuations in our net earnings and cash flow as a result of the timing and magnitude of the gains or losses and potential performance fees, if any, to be recognized upon the disposition of these assets. In certain of these investments, we will not have complete discretion to control the timing of the disposition of such investments. As of June 30, 1999, we had a total investment of $53.1 million in 31 separate property or fund co- investments with additional capital commitments of $10.2 million for future fundings of co-investments. We anticipate that 1999 total capital expenditures will be approximately $48 to $55 million which is significantly higher than prior years or expected annual expenditures in 2000 and beyond. The increased level of expenditures in the current year are associated primarily with the implementation of the JD Edwards property accounting and information system, the integration of a global accounting system, and office consolidations related to the recent merger and acquisition. Net cash used in investing activities was $1.7 million for the six months ended June 30, 1999 compared with net cash used in investing activities of $31.0 million in the prior year period. The decreased use of cash of $24.8 million is primarily attributable to the significant co- investment activity in 1998, including our $18.8 million investment in LaSalle Hotel Properties, partially offset by increased expenditures on capital during 1999 as a result of the JLW merger and acquisition of Compass, and the related consolidation of corporate offices, and the continued customization and implementation of the JD Edwards property accounting and information system. Net cash provided by financing activities was $122.4 million for the six months ended June 30, 1999 compared with $9.8 million in the prior year period. The increase in cash flows is primarily a result of increased borrowings on our long-term credit facilities as a result of the increased use of operating cash flows, and expenditures made on office consolidations and technology enhancements.
SEASONALITY Historically, our 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, primarily in the United States on the completion of transactions, which is consistent with the real estate industry generally. In contrast, our 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 we do not have complete discretion over. Our non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant on a quarterly basis. Therefore, we typically sustain a loss in the first quarter of each calendar year, typically report a small profit or loss in the second and third quarters and record a substantial majority of our earnings in the fourth calendar quarter, barring the recognition of investment generated performance fees. INFLATION Jones Lang LaSalle's operations are directly affected by various national and local economic conditions, including interest rates, the availability of credit to finance real estate transactions and the impact of tax laws. To date, we do not believe that general inflation has had a material impact on operations, as revenue, bonuses, and other variable costs related to revenue are primarily impacted by real estate supply and demand rather than general inflation. OTHER MATTERS ACCOUNTING MATTERS Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" becomes effective for all fiscal quarters for fiscal years beginning after June 15, 2000 and is not expected to have a material impact on our financial statements. YEAR 2000 ISSUES The "Year 2000 Issue" is the result of computer programs and systems having been designed and developed to use two digits, rather than four, to define the applicable year. As a result, these computer programs and systems may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, pay invoices or engage in similar normal business activities. Jones Lang LaSalle has defined five key phases in addressing the Year 2000 Issue: Awareness, Assessment, Renovation, Validation and Implementation.
Under the guidance of a Year 2000 program team, whose strategy is supported by senior management, we have in place a firmwide Awareness Phase and will continue this phase through December 31, 1999 to maintain a heightened sense of awareness to the Year 2000 Issue. As part of the Assessment Phase, we have reviewed the year 2000 readiness of our information technology systems through the creation of critical applications, systems software and hardware inventories. These inventories included detailed information relating to the potential impact of the Year 2000 issue to Jones Lang LaSalle. The global Assessment Phase was completed in early 1999. Renovation and Validation Phase efforts have commenced. We conduct our business primarily with commercial software purchased from third-party vendors versus in house developed software. Over the last two years, we have significantly upgraded our information systems capabilities, and are currently in the final stages of rolling out new property and client accounting systems. Continued upgrades of critical business systems provide a historically sound software infrastructure, and positively impact the degree of effort necessary related to the renovation process of converting, replacing or eliminating selected platforms, applications, databases and utilities, as well as the validation process of testing and verifying for Year 2000 readiness. The schedule for completion of these renovations and validation efforts remains on schedule with anticipated completion by the third quarter of 1999. The continuing Implementation Phase, which involves returning the tested systems to operational status and the development of contingency plans for critical business systems, is also anticipated to be completed by the third quarter of 1999. Management expects that the cost of additional modifications to our software to meet Year 2000 requirements will not be material. The total anticipated costs related to the phases previously discussed is currently projected to be approximately $6.0 million, including approximately $4.3 million of operating expenses associated with testing and other matters and $1.7 million of capital expenditures primarily representing system upgrades which provide operational benefits above and beyond Year 2000 compliance. Jones Lang LaSalle has incurred $2.1 million in operating expenses to date. Factors that could impact our ability to make the necessary modifications or replacement of our software include, but are not limited to, the availability and cost of trained personnel and the ability of such personnel to locate and correct all relevant computer codes. If such modifications are not completed on a timely basis or are more costly to implement than anticipated, our financial condition or results of operations could be materially adversely affected. Properties for which we provide management services rely on a variety of third party suppliers to provide critical operating services. These suppliers may utilize systems and embedded technologies to control the operation of building systems such as utilities, lighting, security, elevators, heating, ventilation and air conditioning systems. Jones Lang LaSalle is in the process of obtaining assurances from suppliers as to their Year 2000 readiness and preparing contingency plans, including the identification of alternative suppliers. We do not control these third party suppliers, and for some suppliers, such as utility companies, there may be no feasible alternative suppliers available. The failure to these suppliers' systems could have a material adverse effect on the operations of the affected property, and widespread failures could have a material adverse effect on Jones Lang LaSalle. Plans for a complete millennium period staffing and communication strategy are underway to address any concerns.
A corporate business resumption strategy has been defined to create specific response action plans throughout our organization to deal with situations which arise that could cause interruption to or have serious impact on the continuation of normal business operations. The strategy includes specific remedies and implementation plans to be instituted at the time of an emergency, and will allow our resources to effectively react to critical issues resulting from any Year 2000 related occurrences. The ability of third parties with whom we transact business or companies that we may acquire to adequately address their Year 2000 issues is outside Jones Lang LaSalle's control. At this time we are in the process of reviewing the Year 2000 readiness of our major suppliers and customers. There can be no assurance that the failure of major suppliers and customers to adequately address Year 2000 issues will not have a material adverse effect on our business, financial condition, and results of operations. Although we are not aware of any threatened claims related to the Year 2000, we 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 our 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 our lines of credit used to maintain liquidity and to fund capital expenditures, acquisitions, co-investments and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we borrow primarily at variable rates and enter into derivative financial instruments such as interest rate swap agreements when appropriate. We do not enter into derivative or interest rate transactions for speculative purposes. We have entered into interest rate swap agreements with a notional amount of $85 million providing for an average fixed interest rate of approximately 5.02% through September 21, 1999. Such interest rate swap agreements had an approximate market value of $.2 million at June 30, 1999. The carrying value of the debt approximates its fair value. As of June 30, 1999, the outstanding borrowings on our long-term credit facilities were $327.3 million. The Facilities bear variable rates of interest based on market rates which approximated 5.82% and 5.83% for the three and six months ended June 30, 1999, including the effect of the interest rate swap agreements. FOREIGN CURRENCY RISK Jones Lang LaSalle's reporting currency is the U.S. Dollar. We transact business in various foreign currencies throughout Europe, Asia, and Australasia. The financial statements of subsidiaries outside the U.S., except those located in highly inflationary economies, are generally measured using the local currency as the functional currency. As a result, fluctuations in the U.S. Dollar relative to the other currencies in which we generate earnings can impact our business, operating results and financial condition as reported in U.S. dollars. For the three and six months ended June 30, 1999, on a pro forma basis (excluding the effect of stock compensation expense), 128% and 89% of our net loss was denominated in U.S. Dollars and (28%) and 11% was denominated in other currencies, respectively. Our revenues and expenses have primarily been earned and incurred in the currency of the location where the operations generating the revenues and expenses have occurred, thereby limiting. Our exposure to exchange rate fluctuations to some extent.
On a limited basis, we enter into forward currency exchange contracts to manage currency risks and reduce our exposure resulting from fluctuations in the designated foreign currency associated with existing commitments, assets or liabilities. There were no forward exchange contracts in effect at June 30, 1999. We do not use foreign currency exchange contracts for trading purposes. DISCLOSURE OF LIMITATIONS As the information presented above includes only those exposures that exist as of June 30, 1999, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented, the information presented has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate and foreign currency fluctuations will depend on the exposures that arise during the period, our hedging strategies at the time and interest and foreign currency rates.
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Jones Lang LaSalle is a defendant in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Many of these matters are covered by insurance. In the opinion of management, the ultimate resolution of such litigation matters is not expected to have a material adverse effect on our financial position, results of operations and liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the annual meeting of stockholders held on May 3, 1999, the following business was conducted: A. Stockholders elected ten 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: Henri-Claude de Bettignies: 26,270,943 votes for and 335,513 votes withheld. Earl E. Webb: 26,270,943 votes for and 335,513 votes withheld. (ii) The following five Class II Directors were elected for terms expiring at the 2002 annual meeting of stockholders and until their successors are elected and qualify: David K.P. Li: 26,270,943 votes for and 335,513 votes withheld. Christopher A. Peacock: 26,270,943 votes for and 335,513 votes withheld. Clive J. Pickford: 26,270,943 votes for and 335,513 votes withheld. Stuart L. Scott: 26,270,838 votes for and 335,618 votes withheld. John R. Walter: 26,270,643 votes for and 335,813 votes withheld. (iii) The following three Class III Directors were elected for terms expiring at the 2000 annual meeting of stockholders and until their successors are elected and qualify: Derek A. Higgs: 26,270,943 votes for and 335,513 votes withheld. Peter H.T. Lee: 26,270,943 votes for and 335,513 votes withheld. Michael J. Smith: 26,270,943 votes for and 335,513 votes withheld. B. Stockholders ratified the appointment of KPMG LLP as the Company's independent auditors for the fiscal year ending December 31, 1999 as follows: Votes for: 16,758,943 Votes against: 2,814 Votes abstained: 9,844,699
ITEM 5. OTHER MATTERS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain statements in this filing and elsewhere (such as in reports, other filings with the Securities and Exchange Commission, press releases, presentations and communications by Jones Lang LaSalle or its management and written and oral statements) may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. Such factors are discussed in (i) each of the Quarterly Reports on Form 10-Q for the quarter ended June 30, 1999 and March 31, 1999, in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations", Item 3. "Quantitative and Qualitative Disclosures About Market Risk", and elsewhere, (ii) our Annual Report on Form 10-K for the year ended December 31, 1998, in Item 1. "Business", Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", Item 7A. "Quantitative and Qualitative Disclosures About Market Risk", and elsewhere, and (iii) our Proxy Statement dated February 4, 1999 under the captions "Risk Factors", "The Transactions", "The Purchase Agreements", "JLW Management's Discussion and Analysis of Financial Condition and Results of Operations of the JLW Companies", and elsewhere, and in other reports filed with the Securities and Exchange Commission. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statements to reflect any changes in events or circumstances or in our 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 The following Form 8-Ks were filed during the 1999 second quarter. 1. Form 8-K, dated July 8, 1999, to announce that Jones Lang LaSalle Incorporated expects to report adjusted pro forma results for the 1999 second quarter and full year that will be substantially below analyst estimates.
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 13, 1999 BY:/S/ WILLIAM E. SULLIVAN ------------------------------ William E. Sullivan Executive Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer)
EXHIBIT INDEX Exhibit Number Description - ------- ----------- 10.1 $45,000,000 Credit Agreement dated as of May 4, 1999. 27.1 Financial Data Schedule. 99.1 Jones Lang LaSalle press release announcing second quarter and year to date 1999 earnings.