10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

   

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Act of 1934

 

For the fiscal year ended December 31, 2007   Commission File Number 1-13145

Jones Lang LaSalle Incorporated

(Exact name of registrant as specified in its charter)

 

Maryland   36-4150422
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
200 East Randolph Drive, Chicago, IL   60601
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 312/782-5800

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Name of each exchange on

which registered

Common Stock ($.01 par value)   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [   ] No [ X ]

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer [ X ] Accelerated filer [   ] Non-accelerated filer [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [ X ]

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of the close of business on June 30, 2007 was $3,583,722,208.

The number of shares outstanding of the registrant’s common stock (par value $0.01) as of the close of business on February 22, 2008 was 31,777,650.

Portions of the Registrant’s Proxy Statement for its 2008 Annual Meeting of Shareholders to be held on May 29, 2008 are incorporated by reference in Part III of this report.

 

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TABLE OF CONTENTS

 

PART I   
Item 1.   Business    3
Item 1A.   Risk Factors    10
Item 1B.   Unresolved Staff Comments    20
Item 2.   Properties    21
Item 3.   Legal Proceedings    21
Item 4.   Submission of Matters to a Vote of Security Holders    21
PART II   
Item 5.   Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities    21
Item 6.   Selected Financial Data    24
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    26
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk    43
Item 8.   Financial Statements and Supplementary Data    43
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    75
Item 9A.   Controls and Procedures    75
Item 9B.   Other Information    75
PART III   
Item 10.   Directors and Executive Officers of the Registrant    76
Item 11.   Executive Compensation    76
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters    76
Item 13.   Certain Relationships and Related Transactions    76
Item 14.   Principal Accountant Fees and Services    76
PART IV   
Item 15.   Exhibits and Financial Statement Schedules    77
Cautionary Note Regarding Forward-Looking Statements    77
Power of Attorney    77
Signatures    78
Exhibit Index    79

 

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PART I

 

ITEM 1. BUSINESS

Company Overview

Jones Lang LaSalle Incorporated (“Jones Lang LaSalle,” which may be referred to as we, us, our, the Company or the Firm) was incorporated in 1997. We now have approximately 170 corporate offices worldwide and operations in more than 700 cities in approximately 60 countries on five continents. We have approximately 32,700 employees, including approximately 13,700 property maintenance employees whose costs are directly reimbursed by our clients. We provide comprehensive integrated real estate and investment management expertise on a local, regional and global level to owner, occupier and investor clients. We are an industry leader in property and corporate facility management services, with a portfolio of approximately 1.2 billion square feet worldwide. In 2007, the Firm had revenues of $2.7 billion and assisted in the completion of capital markets sales and acquisitions, debt financings, and equity placements on assets and portfolios valued at over $82 billion. LaSalle Investment Management is one of the world’s largest and most diversified real estate money management firms, with nearly $50 billion of assets under management.

We are the only real estate services and money management firm to have been named:

 

 

To Forbes magazine’s Platinum 400 list in 2006, 2007 and 2008;

 

 

To Fortune magazine’s 100 Best Companies To Work For list in 2007;

 

 

To CRO (Corporate Responsibility Officer) magazine’s 100 Best Corporate Citizens list in 2007; and

 

 

By the U.S. Environmental Protection Agency as a 2007 Energy Star Partner of the Year.

In addition, in 2008 our ethics program received Ethics Inside™ certification from the Ethisphere Institute, a leading think-tank dedicated to the research, creation and promotion of best practices in ethics, compliance, corporate governance and citizenship.

Our full range of real estate services includes:

 

 

Agency leasing;

 

 

Property management;

 

 

Project and development;

 

 

Construction management;

 

 

Valuations;

 

 

Capital markets;

 

 

Real estate investment banking and merchant banking;

 

 

Brokerage of properties;

 

 

Corporate finance;

 

 

Hotel advisory;

 

 

Space acquisition and disposition (tenant representation);

 

 

Facilities management;

 

 

Strategic consulting;

 

 

Energy management and sustainability;

 

 

Outsourcing; and

 

 

Money management

We offer these services on a global basis to real estate investors and occupiers for a variety of property types, including offices, hotels, industrial, retail, residential, hospitals, critical environments and data centers, sports facilities, cultural institutions and transportation centers. Individual regions and markets focus on different property types, depending upon local requirements and market conditions.

We act for a broad range of clients that represent a wide variety of industries and are based in markets throughout the world. Our clients vary greatly in size and include for-profit and not-for-profit entities of all kinds, public-private partnerships and governmental (public sector) entities.

We provide real estate money management services on a global basis for both public and private assets through LaSalle Investment Management. We enhance our services by our integrated global business model, industry-leading research capabilities, client relationship management focus, consistent worldwide service delivery and strong brand.

We have grown by expanding both our client base and the range of our services and products, as well as through a series of strategic acquisitions and mergers. Our extensive global platform and in-depth knowledge of local real estate markets enable us to serve as a single-source provider of solutions for our clients’ full range of real estate needs. We solidified this network of services around the globe through the 1999 merger of the Jones Lang Wootton companies (“JLW”) (founded in 1783) with those of LaSalle Partners Incorporated (“LaSalle Partners”) (founded in 1968).

Jones Lang LaSalle History

Prior to our incorporation in Maryland in April 1997 and our initial public offering (the “Offering”) of 4,000,000 shares of common stock in July 1997, Jones Lang LaSalle conducted business as LaSalle Partners Limited Partnership and LaSalle Partners Management Limited Partnership (collectively, the “Predecessor Partnerships”). Immediately prior to the Offering, the general and limited partners of the Predecessor Partnerships contributed all of their partnership interests in the Predecessor Partnerships in exchange for an aggregate of 12,200,000 shares of common stock.

In October 1998, we acquired all of the common stock of the COMPASS group of real estate service companies (collectively referred to as “COMPASS”) from Lend Lease Corporation Limited. The acquisition of COMPASS made us the largest property management services company in the United States and expanded our international presence into Australia and South America.

In March 1999, LaSalle Partners merged its business with that of JLW and changed its name to Jones Lang LaSalle Incorporated. In connection with the merger, we issued 14,300,000 shares of common stock and paid cash consideration of $6.2 million.

 

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In January 2006, we merged operations with Spaulding & Slye, a privately held real estate services and investment company with offices in Boston and Washington, D.C. Substantially all of Spaulding & Slye’s 500 employees were integrated into the Jones Lang LaSalle organization, significantly increasing the Firm’s market presence in New England and Washington D.C. In September 2006, we opened an office in Dubai, UAE, and acquired RSP Group, a privately held real estate investment services business with a local market-leading position and assignments across more than 20 Middle Eastern and North African countries.

In April 2007, we acquired Troostwijk Makelaars, a significant property advisor in the Netherlands that specializes in leasing, capital markets, and advisory and research services. In July 2007, we acquired a 44.8% interest in the former Trammell Crow Meghraj (“TCM”), one of the largest privately held real estate services companies in India, and agreed to acquire the remaining shareholder interests in 2010 and 2012. We now operate as Jones Lang LaSalle Meghraj in a number of cities throughout India, where we have more than 3,300 employees. Each of these acquisitions provides us with market leadership positions in their respective countries.

In addition to the 2006 and 2007 acquisitions noted above in the United States, UAE, Netherlands and India, we have completed 19 other strategic acquisitions from January 2006 through February 2008 in order to gain further share in key markets, expand our capabilities in certain service areas and further broaden the global platform we make available to our clients. These acquisitions of businesses, providing an array of real estate and money management services, have been completed in Australia, England, Finland, France, Germany, Hong Kong, Japan, Scotland, Spain, Sweden and the United States. These acquisitions indicate our strategy of being a consolidator within a consolidating industry, which we expect will continue consolidating in 2008.

Performing Consistently and Maximizing Growth

Our stated mission is to deliver exceptional strategic, fully integrated services and solutions for real estate owners, occupiers and investors worldwide. We deliver a combination of services, skills and expertise on an integrated global platform that we own (and do not franchise), which we believe sets us apart from our competitors. Consultancy practices typically do not share our implementation expertise, local market awareness or merchant banking capabilities. Investment banking and investment management competitors generally possess neither our local market knowledge nor our real estate service capabilities. Traditional real estate firms lack our financial expertise and operating consistency. Other global competitors, which we believe often franchise their offices through separate owners, do not have the same level of business coordination or consistency of delivery that we can provide through our network of wholly owned offices and directly employed personnel. That network also permits us to promote a high level of integrity through the organization and to use our diverse and welcoming culture as a competitive advantage in developing clients, recruiting employees and acquiring businesses.

 

 

Six key value drivers distinguish our business activities (see “Competitive Advantages” below):

 

 

Our integrated global services platform;

 

 

The quality and worldwide reach of our research function;

 

 

Our focus on client relationship management as a means to provide superior client service;

 

 

Our reputation for consistent worldwide service delivery, as measured by our creation of best practices and the skills and experience of our people;

 

 

Our ability to deliver innovative solutions to assist our clients in maximizing the value of their real estate portfolios; and

 

 

The strength of our brand.

We have designed our business model to create value for our clients, our shareholders and our employees. Based on our established presence in, and intimate knowledge of, real estate and capital markets worldwide, and supported by our investments in thought leadership and technology, we believe that we create value for clients by addressing not only their local, regional and global real estate needs, but also their broader business, strategic, operating and financial goals. We believe that the ability to create and deliver value drives our own ability to grow our business and improve profitability and shareholder value. In doing so, we enable our people to demonstrate their technical competence and advance their careers by taking on new and increased responsibilities within a dynamic environment as our business expands geographically and develops in sophistication.

Growth Strategy

To continue to create new value for our clients, shareholders and employees, in early 2005 we identified five strategic priorities for continued growth. We refer to them as the Global Five Priorities, or the “G5.” At that time, we initiated a five-year program designed to invest capital and resources that will maintain and extend our global leadership positions in the G5, which we have defined as follows:

G1: LOCAL AND REGIONAL SERVICE OPERATIONS. Our strength in local and regional markets determines the strength of our global service capabilities. Our financial performance also depends, in great part, on the business we source and execute locally from approximately 170 wholly owned offices around the world. We believe that we can leverage our established business presence in the world’s principal real estate markets to provide expanded local and regional services without a proportionate increase in infrastructure costs.

G2: GLOBAL CORPORATE SOLUTIONS. The accelerating trends of globalization and the outsourcing of real estate services by corporate occupiers support our decision to emphasize a truly global Corporate Solutions business to serve their needs comprehensively. This service delivery capability helps us create new client relationships. In addition, current corporate clients are demanding multi-regional capabilities.

 

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G3: GLOBAL CAPITAL MARKETS AND REAL ESTATE INVESTMENT BANKING. Our focus on the further development of our global Capital Markets service delivery capability reflects increasing international cross-border money flows to real estate and the accelerated global marketing of assets that has resulted. Our real estate investment banking capability helps provide capital and other financial solutions by which our clients can maximize the value of their real estate.

G4: LASALLE INVESTMENT MANAGEMENT. With a truly integrated global platform, our LaSalle Investment Management business is already well positioned to serve institutional real estate investors looking for attractive opportunities around the world. We intend to continue investment in LaSalle Investment Management’s ability to develop and offer new products quickly, and to extend its portfolio capabilities into promising new markets, to enhance that position.

G5: WORLD-STANDARD BUSINESS OPERATIONS. To gain maximum benefit from our other priorities, we must have superior operating procedures and processes to serve our clients and support our people. Our goal is to equip our people with the knowledge and risk management tools and other globally integrated infrastructure resources they need to create sustainable value for our clients. As we fully leverage the investments we have made in our infrastructure, we will continue to develop a global platform that will allow us to perform our services in an increasingly efficient, integrated and consistent manner.

We committed resources to each of the G5 priorities during the past three years. By continuing to invest in the future based on our view of how our strengths can support the needs of our clients, we intend to further grow our business and to maintain and expand our position as an industry leader in the process. We expect our growth to come from a combination of organic growth and additional strategic acquisitions.

Business Segments

We report our operations as four business segments. We manage our Investor and Occupier Services (“IOS”) product offerings geographically as (i) the Americas, (ii) Europe, Middle East and Africa (“EMEA”), and (iii) Asia Pacific, and our money management business globally as (iv) LaSalle Investment Management. See “Results of Operations” within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as Note 3 of the Notes to Consolidated Financial Statements, for financial information discussed by segment.

VALUE DELIVERY: IOS AMERICAS, EMEA AND ASIA PACIFIC

To address the needs of real estate owners and occupiers, we provide a full range of integrated property, project management and transaction services locally, regionally and globally through our Americas, EMEA and Asia Pacific operating segments. We deliver those services through the following teams:

AGENCY LEASING SERVICES executes marketing and leasing programs on behalf of investors, developers, property companies and public entities to secure tenants and negotiate leases with terms that reflect our clients’ best interests. In 2007, we completed approximately 11,400 agency leasing transactions representing approximately 138 million square feet of space.

We typically base our agency leasing fees on a percentage of the value of the lease revenue commitment for consummated leases.

PROPERTY MANAGEMENT SERVICES provides on-site management services to real estate owners for office, industrial, retail and specialty properties. We seek to leverage our market share and buying power to deliver superior service to clients. Our goal is to enhance our clients’ property values through aggressive day-to-day management. We may provide services through our own employees or through contracts with third-party providers (for which we may act in a principal capacity or which we may hire as an agent for our clients). We focus on maintaining high levels of occupancy and tenant satisfaction while lowering property operating costs. During 2007, we provided on-site property management services for office, retail, mixed-use and industrial properties totaling approximately 803 million square feet.

Property Management Services typically are provided by an on-site general manager and staff whom we support with regional supervisory teams and central resources in such areas as training, technical and environmental services, accounting, marketing and human resources. Our general managers are responsible for property management activities, client satisfaction and financial results. We do not compensate them with commissions, but rather with a combination of base salary and a performance bonus that is directly linked to results they produce for their clients. Increasingly, management agreements provide for incentive compensation relating to operating expense reductions, gross revenue or occupancy objectives or tenant satisfaction levels. Consistent with industry custom, management contract terms typically range from one to three years, but may be canceled at any time following a short notice period, usually 30 to 60 days.

PROJECT AND DEVELOPMENT SERVICES provides a variety of services—including conversion management, move management and strategic occupancy planning services—to tenants of leased space, owners in self-occupied buildings and owners of real estate investments. Project and Development Services frequently manages relocation and build-out initiatives for clients of our Property Management Services, Integrated Facilities Management and Tenant Representation Services units. Project and Development Services also manages all aspects of development and renovation of commercial projects for our clients. We have expanded this service to the public sector, particularly to military and government entities in the United States and to educational institutions.

Our Project and Development Services business is typically compensated on the basis of negotiated fees. Client contracts are typically multi-year in duration and may govern a number of discrete projects, with individual projects being completed in less than one year.

Construction Services is the Firm’s full-service construction business in the United States that provides general contracting, “at risk” construction management and construction-related consulting services. Projects

 

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consist primarily of commercial-related construction, including interior build-outs, new ground-up construction and renovation of existing buildings. Construction Services is fully integrated into the Company’s platform and operates out of Boston, Washington, D.C. and Chicago to cover the New England, Mid-Atlantic and Midwest regions.

We generate our construction work through properties that Jones Lang LaSalle manages or leases, tenants that we represent and other clients. We complete the majority of our Construction Services business on a negotiated fee basis.

VALUATION SERVICES provides clients with professional valuation services, helping them determine market values for office, retail, industrial and mixed-use properties. Such services may involve valuing a single property or a global portfolio of multiple property types. Valuations, which typically involve commercial property, are completed for a variety of purposes, including acquisitions, dispositions, debt and equity financings, mergers and acquisitions, securities offerings (including initial public offerings) and privatization initiatives. Clients include occupiers, investors and financing sources from the public and private sectors. Our valuation specialists provide services to clients in nearly every developed country outside the Americas, where we do not currently provide such services. During 2007, we performed nearly 32,500 valuations of commercial properties with an aggregate value of approximately $759 billion.

We generally negotiate compensation for valuation services for each assignment based on its scale and complexity, and our fees typically relate in part to the value of the underlying assets.

CAPITAL MARKETS SERVICES includes institutional property sales and acquisitions, real estate financings, private equity placements, portfolio advisory activities, and corporate finance advice and execution. Real Estate Investment Banking Services includes sourcing capital, both in the form of equity and debt, derivatives structuring and other traditional investment banking services designed to assist corporate clients in maximizing the value of their real estate. As more and more real estate assets are marketed internationally, and as a growing number of clients are investing outside their home markets, our Capital Markets Services teams combine local market knowledge with our access to global capital sources to provide clients with superior execution in raising capital for their real estate assets. By researching, developing and introducing innovative new financial products and strategies, Capital Markets Services is integral to the business development efforts of our other businesses. In 2007, we advised clients on institutional property sales and acquisitions, debt financings and equity placements on assets and portfolios valued at approximately $81.8 billion.

Clients typically compensate Capital Markets Services units on the basis of the value of transactions completed or securities placed. In certain circumstances, we receive retainer fees for portfolio advisory services. Real Estate Investment Banking fees are generally transaction-specific and conditioned upon the successful completion of the transaction.

TENANT REPRESENTATION SERVICES establishes strategic alliances with clients to deliver ongoing assistance to meet their real estate needs, and to help them evaluate and execute transactions to meet their occupancy requirements. Tenant Representation Services also are an important component of our local market services. We assist clients by defining space requirements, identifying suitable alternatives, recommending appropriate occupancy solutions and negotiating lease and ownership terms with third parties. We help our clients lower real estate costs, minimize real estate occupancy risks, improve occupancy control and flexibility, and create more productive office environments. We employ a multidisciplinary approach to develop occupancy strategies linked to our clients’ core business objectives.

We generally determine compensation for Tenant Representation Services on a negotiated fee basis. Fees often reflect performance measures related to targets that we and our clients establish prior to engagement or, in the case of strategic alliances, at annual intervals thereafter. We use quantitative and qualitative measurements to assess performance relative to these goals, and we are compensated accordingly, with incentive fees awarded for superior performance.

INTEGRATED FACILITIES MANAGEMENT SERVICES provides comprehensive portfolio and property management services to corporations and institutions that outsource the management of their occupied real estate. Properties under management range from corporate headquarters to industrial complexes. During 2007, Integrated Facilities Management Services managed approximately 432 million square feet of real estate for its clients. Our target clients typically have large portfolios (usually over 1 million square feet) that offer significant opportunities to reduce costs and improve service delivery. The competitive trends of globalization, outsourcing and offshoring are prompting many of these clients to demand consistent service delivery worldwide and a single point of contact from their real estate service providers. We generally develop performance measures to quantify the progress we make toward mutually determined goals and objectives. Depending on client needs, Integrated Facilities Management Services units, either alone or partnering with other business units, provide services that include portfolio planning, property management, agency leasing, tenant representation, acquisition, finance, disposition, project management, development management and land advisory services. We may provide services through our own employees or through contracts with third-party providers (with which we may act in a principal capacity or which we may hire as an agent for our clients).

Integrated Facilities Management Services units are compensated on the basis of negotiated fees that we typically structure to include a base fee and performance bonus. We base performance bonus compensation on a quantitative evaluation of progress toward performance measures and regularly scheduled client satisfaction surveys. Integrated Facilities Management Services agreements are typically three to five years in duration, but also are cancelable at any time upon a short notice period, usually 30 to 60 days, as is typical in the industry.

STRATEGIC CONSULTING SERVICES delivers innovative, results-driven real estate solutions that both strategically and tactically align with clients’ business objectives. We provide clients with specialized, value-added

 

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real estate consulting services in such areas as mergers and acquisitions, development and asset strategy, occupier portfolio strategy, workplace solutions, location advisory, financial optimization strategies, organizational strategy and Six Sigma real estate solutions. Our professionals focus on translating global best practices into local real estate solutions, creating optimal financial results for our clients.

We typically negotiate compensation for Strategic Consulting Services based on work plans developed for advisory services that vary based on scope and complexity of projects. For transaction services, we base compensation on the value of transactions completed.

ENERGY AND SUSTAINABILITY SERVICES provides occupiers and investors assistance in developing their corporate sustainability strategies, greening their portfolios by managing Leadership in Energy and Environmental Design (LEED) construction or retrofits and providing sustainable building operations management. With 75 LEED accredited professionals, our experience includes 40 LEED projects representing nearly 25 million square feet. In 2007, we oversaw $573 million in client energy expense representing a portfolio of 11,177 facilities with specialized energy services. We documented $38 million in energy savings and reduced greenhouse gas emissions by 132,848 tons.

We generally negotiate compensation for our energy and sustainability services for each assignment based on the scale and complexity of the project or shared savings.

VALUE DELIVERY: MONEY MANAGEMENT

Our global real estate money management business, a member of the Jones Lang LaSalle group that we operate under the name of LaSalle Investment Management, has three priorities:

 

 

Develop and execute customized investment strategies that meet the specific investment objectives of each of our clients;

 

 

Provide superior investment performance; and

 

 

Deliver uniformly high levels of services on a global basis.

We provide money management services to institutional investors and high-net-worth individuals. We seek to establish and maintain relationships with sophisticated investors who value our global platform and extensive local market knowledge. As of December 31, 2007, LaSalle Investment Management managed approximately $49.7 billion of public and private real estate assets, making us one of the world’s largest managers of institutional capital invested in real estate assets and securities.

LaSalle Investment Management provides clients with a broad range of real estate investment products and services in the public and private capital markets. We design these products and services to meet the differing strategic, risk/return and liquidity requirements of individual clients. The range of investment alternatives includes private investments in multiple real estate property types (including office, retail, industrial, health care and residential) either through investment funds that LaSalle Investment Management manages or through single client account relationships (“separate accounts”). We also offer indirect public investments, primarily in publicly traded real estate investment trusts (“REITs”) and other real estate equities.

We believe the success of our money management business comes from our industry-leading research capabilities, innovative investment strategies, global presence, local market knowledge, and strong client focus. We maintain an extensive real estate research department whose dedicated professionals monitor real estate and capital market conditions around the world to enhance current investment decisions and identify future opportunities. In addition to drawing on public sources for information, our research department utilizes the extensive local presence of Jones Lang LaSalle professionals throughout the world to gather and share proprietary insight into local market conditions.

The investment and capital origination activities of our money management business have grown increasingly global. We have invested in direct real estate in 20 countries across the globe, as well as in public real estate companies traded on all major stock exchanges. We expect money management activities, both fund raising and investing, to continue this trend as cross-border capital flows increase.

PRIVATE INVESTMENTS IN REAL ESTATE PROPERTIES. In serving our money management clients, LaSalle Investment Management is responsible for the acquisition, management, leasing, financing and divestiture of real estate investments across a broad range of real estate property types. LaSalle Investment Management launched its first institutional investment fund in 1979 and currently has a series of commingled investment funds, including nine funds that invest in assets in the Americas, ten funds that invest in assets located in Europe and six funds that invest in assets in Asia Pacific. LaSalle Investment Management also maintains separate account relationships with investors for whom LaSalle Investment Management manages private real estate investments. As of December 31, 2007, LaSalle Investment Management had approximately $39.1 billion in assets under management in these funds and separate accounts.

Some investors prefer to partner with money managers willing to co-invest their own funds to more closely align the interests of the investor and the investment manager. We believe that our ability to co-invest funds alongside the investments of clients’ funds will continue to be an important factor in maintaining and continually improving our competitive position. Our co-investment strategy will strengthen our ability to continue to raise capital for new investment funds. At December 31, 2007, we had a total of $151.8 million of investments in, and loans to, co-investments.

We are expanding our “merchant banking” activities in appropriate circumstances. This involves making investments of Firm capital to acquire properties in order to seed investment management funds (typically within the LaSalle Investment Company structures described in Note 5 of the Notes to Consolidated Financial Statements) before they have been offered to clients.

LaSalle Investment Management conducts its operations with teams of professionals dedicated to achieving specific client objectives. We

 

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establish investment committees within each region whose members have specialized knowledge applicable to underlying investment strategies. These committees must approve all investment decisions for private market investments. We utilize the investment committee approval process for LaSalle Investment Management’s investment funds and for all separate account relationships.

LaSalle Investment Management is generally compensated for money management services for private equity investments based on initial capital invested and managed, with additional fees tied to investment performance above benchmark levels. The terms of contracts vary by the form of investment vehicle involved and the type of service we provide. Our investment funds have various life spans, typically ranging between five and 10 years. Separate account advisory agreements generally have three-year terms with “at will” termination provisions, and they may include compensation arrangements that are linked to the market value of the assets under management.

INVESTMENTS IN PUBLIC EQUITY. LaSalle Investment Management also offers clients the ability to invest in separate accounts focused on public real estate equity. We invest the capital of these clients principally in publicly traded securities of REITs and property company equities. As of December 31, 2007, LaSalle Investment Management had approximately $10.6 billion of assets under management in these types of investments. LaSalle Investment Management is typically compensated by securities investment clients on the basis of the market value of assets under management.

Competition

We provide a broad range of commercial real estate and investment management services, and there is significant competition on an international, regional and local level with respect to many of these services and in commercial real estate services generally. Depending on the service, we face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers, accounting firms, technology firms, firms providing outsourcing services of various types (including technology or building products) and companies bringing their real estate services in-house (any of which may be a global, regional or local firms). Many of our competitors are local or regional firms, which, although substantially smaller in overall size, may be larger in a specific local or regional market. We are also subject to competition from large national and multi-national firms that have similar service competencies to ours.

Competitive Advantages

We believe that the six key value drivers we list above and more specially describe below create several competitive advantages that have made us the leading integrated global real estate services and money management firm.

INTEGRATED GLOBAL SERVICES. By combining a wide range of high-quality, complementary services—and delivering them at consistently high service levels globally through wholly owned Company offices with directly employed personnel—we can develop and implement real estate strategies that meet the increasingly complex and far-reaching needs of our clients. We also believe that we have secured an established business presence in the world’s principal real estate markets, with the result that we can grow revenues without a proportionate increase in infrastructure costs. With operations in more than 700 cities in 60 countries on five continents, we have in-depth knowledge of local and regional markets and can provide a full range of real estate services around the globe. This geographic coverage positions us to serve our multinational clients and manage investment capital on a global basis. In addition, we anticipate that our additional cross-selling potential across geographies and product lines will continue to develop new revenue sources for multiple business units within Jones Lang LaSalle.

INDUSTRY-LEADING RESEARCH AND KNOWLEDGE BUILDING. We invest in and rely on comprehensive top-down and bottom-up research to support and guide the development of real estate and investment strategy for our clients. Our Global Research Executive Board oversees and coordinates the activities of approximately 300 research professionals, who cover market and economic conditions around the world. Research also plays a key role in keeping colleagues throughout the organization attuned to important events and changing conditions in world markets. We facilitate the dissemination of this information to colleagues through our company-wide intranet.

CLIENT RELATIONSHIP MANAGEMENT. We support our ability to deliver superior service to our clients through our ongoing investments in client relationship management and account management. Our goal is to provide each client with a single point of contact at our firm, an individual who is answerable to, and accountable for, all the activities we undertake for the client. We believe that we enhance superior client service through best practices in client relationship management, the practice of seeking and acting on regular client feedback, and recognizing each client’s definition of excellence.

Our client-driven focus enables us to develop long-term relationships with real estate investors and occupiers. By developing these relationships, we are able to generate repeat business and create recurring revenue sources. In many cases, we establish strategic alliances with clients whose ongoing service needs mesh with our ability to deliver fully integrated real estate services across multiple business units and office locations. We support our relationship focus with an employee compensation system designed to reward client relationship building, teamwork and quality performance, in addition to revenue development.

CONSISTENT SERVICE DELIVERY. We believe that our globally coordinated investments in research, technology, people and innovation, combined with the fact that our offices are wholly owned (rather than franchised) and our people are directly employed, enable us to develop, share and continually evaluate best practices across our global organization. As a result, we are able to deliver the same consistently high levels of client service and operational excellence substantially wherever our clients’ real estate investment and services needs exist.

 

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Based on our general industry knowledge and specific client feedback, we believe we are recognized as an industry leader in technology. We possess the capability to provide sophisticated information technology systems on a global basis to serve our clients and support our employees. For example, the purpose of OneView by Jones Lang LaSalleSM , our client extranet technology, is to provide clients with detailed and comprehensive insight into their portfolios, the markets in which they operate and the services we provide to them. DelphiSM, our intranet technology, offers our employees easy access to the Firm’s policies and its collective thinking regarding our experience, skills and best practices.

We believe that our investments in research, technology, people and thought leadership position our firm as a leading innovator in our industry. Major research initiatives, such as our “World Winning Cities” program, our offshoring index and our “Global Real Estate Transparency Index,” investigate emerging trends and therefore help us anticipate future conditions and shape new services to benefit our clients. Professionals in our Strategic Consulting practice identify and respond to shifting market and business trends to address changing client needs and opportunities. LaSalle Investment Management relies on our comprehensive investigation of global real estate and capital markets to develop new investment products and services tailored to the specific investment goals and risk/return objectives of our clients. We believe that our commitment to innovation helps us secure and maintain profitable long-term relationships with the clients we target: the world’s leading real estate owners, occupiers and investors.

We anticipate that we will soon receive notice that our patent for a “System and Method for Evaluating Real Estate Financing Structures” has been issued by the United States Patent and Trademark Office. The technology behind the patent is designed to assist clients with determining the optimal financing structure for controlling its real estate assets, including, for example, whether the client should own the asset, lease the asset, or control the asset by means of some other financing structure.

MAXIMIZING VALUES OF REAL ESTATE PORTFOLIOS. To maximize the values of our real estate investments, LaSalle Investment Management capitalizes on its strategic research insights and local market knowledge to develop an integrated approach that leads to innovative solutions and value enhancement. Our global strategic perspective allows us to assess pricing trends for real estate, and know which investors worldwide are actively investing. This enables us to have an advantageous perspective about when buying and selling strategies should be implemented. During hold periods, our local market research allows us to assess the potential for cash flow enhancement in our assets based on an informed opinion of rental rate trends. When combined, these two perspectives provide us with an optimal view that leads to timely execution and translates into superior investment performance.

POWERFUL BRAND. Based on the evidence provided by commissioned marketing surveys, the extensive coverage we receive in top-tier business publications, the major awards and accolades we receive in many categories of real estate, together with our significant, long- standing client relationships, we believe that large corporations and institutional investors and occupiers of real estate recognize Jones Lang LaSalle’s ability to create value in changing market conditions. Our reputation is based on our deep industry knowledge, excellence in service delivery, integrity and our global provision of high-quality, professional real estate and money management services. We believe that the combined strength of the Jones Lang LaSalle and LaSalle Investment Management brands represents a significant advantage when we pursue new business opportunities and is also a major motivation for talented people to join us around the world.

We believe we hold the necessary trademarks worldwide with respect to the “Jones Lang LaSalle” and “LaSalle Investment Management” names and the related logo, which we would expect to continue to renew as necessary.

Industry Trends

INCREASING DEMAND FOR GLOBAL SERVICES AND GLOBALIZATION OF CAPITAL FLOWS. Many corporations based in countries around the world have pursued growth opportunities in international markets. Many are striving to control costs by outsourcing or offshoring non-core business activities. Both trends have increased the demand for global real estate services, including facilities management, tenant representation and leasing, and property management services. We believe that this trend will favor real estate service providers with the capability to provide services—and consistently high service levels—in multiple markets around the world. Additionally, real estate capital flows have become increasingly global, as more assets are marketed internationally and as more investors seek real estate investment opportunities beyond their own borders. This trend has created new markets for investment managers equipped to facilitate international real estate capital flows and execute cross-border real estate transactions.

CONSOLIDATION. The real estate services industry has experienced significant consolidation in recent years. We believe that as a result of substantial existing infrastructure investments and the ability to spread fixed costs over a broader base of business, it is possible to recognize incrementally higher margins on property management and facilities management assignments as the amount of square footage under management increases.

Large users of commercial real estate services continue to demonstrate a preference for working with single-source service providers able to operate across local, regional and global markets. The ability to offer a full range of services on this scale requires significant corporate infrastructure investment, including information technology and personnel training. Smaller regional and local real estate service firms, with limited resources, are less able to make such investments.

GROWTH OF OUTSOURCING. In recent years, on a global level, outsourcing of professional real estate services has increased substantially, as corporations have focused corporate resources, including capital, on core competencies. In addition, public and other non-corporate users of real estate, including government agencies and health and educational

 

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institutions, have begun to outsource real estate activities as a means of reducing costs. As a result, we believe there are significant growth opportunities for firms like ours that can provide integrated real estate services across many geographic markets.

ALIGNMENT OF INTERESTS OF INVESTORS AND INVESTMENT MANAGERS. Institutional investors continue to allocate significant portions of their investment capital to real estate, and many investors have shown a desire to commit their capital to investment managers willing to co-invest their own funds in specific real estate investments or real estate funds. In addition, investors are increasingly requiring that fees paid to investment managers be more closely aligned with investment performance. As a result, we believe that investment managers with co-investment capital, such as LaSalle Investment Management, will have an advantage in attracting real estate investment capital. In addition, co-investment may bring the opportunity to provide additional services related to the acquisition, financing, property management, leasing and disposition of such investments.

Employees

With the help of aggressive goal and performance measurements, we attempt to instill in all of our people the commitment to be the best. Our goal is to be the real estate advisor of choice for clients and the employer of choice in our industry. To achieve that, we intend to continue to promote those human resources techniques that will attract, motivate and retain high quality employees. The following table details our respective headcounts at December 31, 2007 and 2006:

 

     2007   2006

Professional

  16,500   11,800

Support

  2,500   1,800
  19,000   13,600

Directly reimbursable property maintenance

  13,700   11,900

Total employees

  32,700   25,500

Directly reimbursable project management employees included as professionals above

  7,100   4,200

Directly reimbursable project management employees work with clients that have a contracted fee structure comprised of a fixed management fee and a separate component that allows for scheduled reimbursable personnel and other expenses to be billed directly to the client.

Approximately 13,600 and 9,300 of our professional and support staff in 2007 and 2006, respectively, were based in countries other than the United States. Additionally, approximately 9,300 and 8,100 of our directly reimbursable property maintenance workers in 2007 and 2006, respectively, were based in countries other than the United States. Our employees are not members of any labor unions with the exception of approximately 800 of our directly reimbursable property maintenance employees in the United States. We have generally had satisfactory relations with our employees.

 

Company Web Site, Corporate Governance and Other Available Information

Jones Lang LaSalle’s Web site address is www.joneslanglasalle.com. We make available, free of charge, our Form 10-K, 10-Q and 8-K reports, and our proxy statements, as soon as reasonably practicable after we file them electronically with the U.S. Securities and Exchange Commission (“SEC”). You also may read and copy any document we file with the SEC at its public reference room at 100 F Street, NE, Washington, D.C. 20549. You may call the SEC at 1.800.SEC.0330 for information about its public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy statements and other information that we file electronically with the SEC. The SEC’s Web site address is www.sec.gov.

The Company’s Code of Business Ethics, which applies to all employees of the Company, including our Chief Executive Officer, Chief Operating and Financial Officer, Global Controller and the members of our Board of Directors, can also be found on our Web site under Investor Relations/Board of Directors and Corporate Governance. In addition, the Company intends to post any amendment or waiver of the Code of Business Ethics with respect to a member of our Board of Directors or any of the executive officers named in our proxy statement.

Our Web site also includes information about our corporate governance. You may access, in addition to other information, the following materials, which we will make available in print to any shareholder who requests them:

 

 

Bylaws

 

 

Corporate Governance Guidelines

 

 

Charters for our Audit, Compensation, and Nominating and Governance Committees

 

 

Statement of Qualifications for Members of the Board of Directors

 

 

Complaint Procedures for Accounting and Auditing Matters

 

 

Statements of Beneficial Ownership of our Equity Securities by our Directors and Officers

I TEM 1A. RISK FACTORS

The complex, dynamic and international scope of our operations overall, and of our operations in particular regions and countries, involve a number of significant risks for our business. The fact that we operate in numerous countries likely magnifies those risks relative to other companies whose operations are not as geographically dispersed. If the risks associated with the services we provide, our operations in particular regions and countries or the international scope of our operations cannot be or are not successfully managed, our business, operating results and/or financial condition could be materially and adversely affected.

One of the challenges of a global business such as ours is to be able to determine in a sophisticated manner the enterprise risks that in fact exist and to monitor continuously those that develop over time as a result of

 

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changes in the business, laws to which we are subject and the other factors we discuss below. We must then determine how best to employ available resources to prevent, mitigate and/or minimize those risks that have the greatest potential (1) to occur and (2) to cause significant damage from an operational, financial or reputational standpoint. An important dynamic that we must also consider and appropriately manage is how much and what types of commercial insurance to obtain and how much potential liability may remain uninsured consistent with the infrastructure that is in place within the organization to identify and properly manage it. While we attempt to approach these issues in an increasingly sophisticated and coordinated manner across the globe, our failure to identify or effectively manage the enterprise risks inherent within our business could result in a material adverse effect on our business, results of operations and/or financial condition.

We govern our enterprise risk program primarily through our Global Operating Committee, which is chaired by our Global Chief Operating Officer and includes the Chief Operating Officers of our four reported business segments and the leaders from certain corporate staff groups such as Finance, Legal and Insurance. The Global Operating Committee coordinates its enterprise risk activities with our Internal Audit function, which performs an annual risk assessment of our business in order to determine where to focus its auditing efforts.

This section reflects our views concerning the most significant risks we believe our business faces, although they do not purport to include every possible risk from which we might sustain a loss. For purposes of the following analysis and discussion, we generally group the risks we face according to four principal categories:

 

 

External Market Risk Factors;

 

 

Internal Operational Risk Factors;

 

 

Financial Risk Factors; and

 

 

Human Resources Risk Factors.

Some of the risks we identify could appropriately be discussed in more than one category, but we have chosen the one we view as primary.

External Market Risk Factors

GENERAL ECONOMIC CONDITIONS AND REAL ESTATE MARKET CONDITIONS CAN HAVE A NEGATIVE IMPACT ON OUR BUSINESS. We have experienced in past years, and expect in the future to be negatively impacted by, periods of economic slowdown or recession, and corresponding declines in the demand for real estate and related services, within one or more of the markets in which we operate. Each real estate market tends to be cyclical and related to the condition of its corresponding economy as a whole or, at least, to the perceptions of investors and users as to the relevant economic outlook. For example, corporations may be hesitant to expand space or enter into long-term commitments if they are concerned with the economic environment. Corporations that are under financial pressure for any reason, or are attempting to more aggressively manage their expenses, may reduce the size of their workforces and/or seek corresponding reductions in office space and related management services. Negative economic conditions and declines in the demand for real estate and related services in several markets or in significant markets could have a material adverse effect on our business, results of operations and/or financial condition, including as a result of the following factors:

 

 

Decline in Acquisition and Disposition Activity

  A general decline in acquisition and disposition activity can lead to a reduction in fees and commissions for arranging such transactions, as well as in fees and commissions for arranging financing for acquirers.

 

  During the second half of 2007, the well-publicized and severe restriction in the availability of credit in the United States and certain European countries significantly reduced the volume and pace of commercial real estate transactions compared with 2006, and also negatively impacted real estate pricing as a general matter within those countries. This in turn decreased the performance of our Capital Markets businesses, particularly in the United States, the United Kingdom and Germany as compared with the prior year when markets were much more robust. While we believe we have continued to gain market share in those markets, the additional transaction volumes from an increase in market share did not fully offset the overall declines in these markets in 2007. We expect this situation to continue for some time into 2008 before it begins to improve, although it is inherently difficult to make accurate predictions in this regard particularly because macro movements of the real estate markets are beyond our control.

 

 

Decline in Leasing Activity

  A general decline in leasing activity can lead to a reduction in fees and commissions for arranging leases, on behalf of both owners and tenants. Additionally, a decline in leasing activity can lead to a reduction in the demand for, and fees earned from, other real estate services, such as Project and Development Services (managing the build-out of space).

 

 

Decline in the Value and Performance of Real Estate and Rental Rates

  A general decline in the value and performance of real estate and in rental rates can lead to a reduction in investment management fees (a significant portion of which is generally based upon the performance of investments) and the value of the co-investments we make with our investment management clients or merchant banking investments we have made for our own account. Additionally, such declines can lead to a reduction in fees and commissions that are based upon the value of, or revenues produced by, the properties with respect to which services are provided, including fees and commissions for property management and valuations, and for arranging acquisitions, dispositions, leasing and financings. Historically, a significant decline in real estate values in a given market has also tended to result in increases in litigation regarding advisory and valuation work done prior to the decline.

 

 

Decline in Real Estate Investment Activity

 

A general decline in real estate investment activity can lead to a reduction in the fees generated from the acquisition of property for

 

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clients, as well as in the fees and commissions generated by our Capital Markets, Hotels and other businesses for arranging acquisitions, dispositions and financings, and in our investment management fees.

 

 

Decline in Value of Real Estate Securities

  A general decline in the value of real estate securities (for example, real estate investment trusts, or “REITS”), will have a negative effect on the value of the portfolios that our LaSalle Investment Management Securities business manages, and any securities held in accounts that LaSalle Investment Management manages, and therefore the fees we earn on assets under management. In addition, a general decline in the value of real estate securities could negatively impact the amount of money that investors are willing to allocate to real estate securities and the pace of engaging new investor clients.

Changes in non-real estate markets can also affect our business. For example, strength in the equity markets can mean that there are generally lower levels of capital allocated to real estate, which in turn can mean that our ability to generate fees from the operation of our investment management business will be negatively impacted. Strength in the equity markets can also negatively impact the performance of real estate as an asset class, which in turn means that the incentive fees relating to the performance of our investment funds will be negatively impacted.

Cyclicality in the real estate markets may lead to cyclicality in our earnings and significant volatility in our stock price, which in recent years has been highly sensitive to market perception of the global economy generally and our industry specifically.

REAL ESTATE SERVICES AND INVESTMENT MANAGEMENT MARKETS ARE HIGHLY COMPETITIVE. We provide a broad range of commercial real estate and investment management services, and there is significant competition on an international, regional and local level with respect to many of these services and in commercial real estate services generally. Depending on the service, we face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers, accounting firms, technology firms, firms providing outsourcing services of various types (including technology or building products) and companies bringing their real estate services in-house (any of which may be a global, regional or local firm). Many of our competitors are local or regional firms, which, although substantially smaller in overall size, may be larger in a specific local or regional market. Some of our competitors are expanding the services they offer in an attempt to gain additional business. Some of our competitors may have greater financial, technical and marketing resources, larger customer bases, and more established relationships with their customers and suppliers than we have. Larger or better-capitalized competitors may be able to respond faster to the need for technological changes, price their services more aggressively, compete more effectively for skilled professionals, finance acquisitions more easily and generally compete more aggressively for market share.

New competitors or alliances among competitors that increase their ability to service clients could emerge and gain market share, develop a lower cost structure, adopt more aggressive pricing policies or provide services that gain greater market acceptance than the services we offer. In order to respond to increased competition and pricing pressure, we may have to lower our prices, which would have an adverse effect on our revenues and profit margins. As we are in a consolidating industry, there exists the inherent risk that competitive firms may be more successful than we are at growing through merger and acquisition activity. While we were successful during 2007 in continuing to grow organically and through a series of acquisitions, sourcing and completing acquisitions are complex and sensitive activities and there is no assurance that we will be able to continue our acquisition activity in the future at the same pace as we have in the past.

We are substantially dependent on long-term client relationships and on revenue received for services under various service agreements. Many of these agreements may be canceled by the client for any reason with as little as 30 to 60 days’ notice, as is typical in the industry. In this competitive market, if we are unable to maintain these relationships or are otherwise unable to retain existing clients and develop new clients, our business, results of operations and/or financial condition will be materially adversely affected.

We also must continue to successfully differentiate the scope and quality of our service and product offerings from those of our competitors in order to maintain the value and premium status of our brand, which is one of our most important assets. Additionally, given the rigors of the competitive marketplace in which we operate, we must continue to find ways to operate more cost-effectively, including by realizing on economies of scale, so that we are optimizing the costs required to operate on a globally coordinated platform.

THE SEASONALITY OF OUR IOS BUSINESS EXPOSES US TO RISKS. Within our Investor and Occupier Services business, our revenues and profits tend to be significantly higher in the third and fourth quarters of each year than in the first two quarters. This is a result of a general focus in the real estate industry on completing or documenting transactions by calendar-year-end and the fact that certain expenses are constant through the year. Historically, we have reported an operating loss or a relatively small profit in the first quarter and then increasingly larger profits during each of the following three quarters, excluding the recognition of investment-generated performance fees and co-investment equity gains (both of which can be particularly unpredictable). The seasonality of our business makes it difficult to determine during the course of the year whether plan results will be achieved, and thus to adjust to changes in expectations. Additionally, negative economic or other conditions that arise at a time when they impact performance in the fourth quarter, such as the particular timing of when larger transactions close or changes in the value of the U.S. dollar against other currencies, may have a more significant impact than if they occurred earlier in the year. To the extent we are not able to identify and adjust for changes in expectations or we are confronted with negative conditions that impact inordinately on the fourth quarter of a year, this could have a material adverse effect on our business, results of operations and/or financial condition.

 

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We have taken various measures internally to more equally spread our IOS revenue throughout the year and have been successful to a degree. As a result, there has been somewhat less seasonality in our revenues and profits during the past few years than there was historically, but we believe that some level of seasonality will always be inherent in our industry and outside of our control.

POLITICAL AND ECONOMIC INSTABILITY AND TRANSPARENCY; TERRORIST ACTIVITIES; HEALTH EPIDEMICS. We operate in 60 countries with varying degrees of political and economic stability and transparency. For example, certain Asian, Eastern European and South American countries have experienced serious political and economic instability within the past few years, and such instability will likely continue to arise from time to time in countries in which we have operations. It is difficult for us to predict where or when a significant change in the political leadership or regime within a given country may occur, or what the implications of such a change will be on our operations given that legislative, tax and business environments can be altered quickly and dramatically. As a result, our ability to operate our business in the ordinary course may be disrupted in one way or another, with corresponding reductions in revenues, increases in expenses or other material adverse effects.

In addition, terrorist activities have escalated in recent years and at times have affected cities in which we operate. To the extent that similar terrorist activities continue to occur, they may adversely affect our business because they tend to target the same type of high-profile urban areas in which we do business.

Health epidemics that affect the general conduct of business in one or more urban areas (including as the result of travel restrictions and the inability to conduct face-to-face meetings), such as occurred in the past from SARS or may occur in the future from an avian flu or other type of outbreak, can also adversely affect the volume of business transactions, real estate markets and the cost of operating real estate or providing real estate services, and may therefore adversely affect our results.

INFRASTRUCTURE DISRUPTIONS. Our ability to conduct a global business may be adversely impacted by disruptions to the infrastructure that supports our businesses and the communities in which they are located. This may include disruptions involving electrical, communications, transportation or other services used by Jones Lang LaSalle or third parties with which we conduct business, or disruptions as the result of natural disasters (such as earthquakes and floods), political instability, general labor strikes or turmoil or terrorist attacks. These disruptions may occur, for example, as a result of events affecting only the buildings in which we operate (such as fires), or as a result of events with a broader impact on the cities where those buildings are located (including, potentially, the longer-term effects of global climate change). Nearly all of our employees in our primary locations, including Chicago, London, Singapore and Sydney, work in close proximity to each other in one or more buildings. If a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, our ability to service and interact with our clients may suffer, and we may not be able to successfully implement contingency plans that depend on communication or travel.

The infrastructure disruptions described above may also disrupt our ability to manage real estate for clients or may adversely affect the value of real estate investments we make on behalf of clients. The buildings we manage for clients, which include some of the world’s largest office properties and retail centers, are used by numerous people daily. As a result, fires, earthquakes, floods, other natural disasters, defects and terrorist attacks can result in significant loss of life, and, to the extent we are held to have been negligent in connection with our management of the affected properties, we could incur significant financial liabilities and reputational harm.

The occurrence of natural disasters and terrorist attacks can also significantly increase the availability and/or cost of commercial insurance policies covering real estate, both for our own business and for those clients whose properties we manage and who may purchase their insurance through the insurance buying programs we make available to them.

While we have disaster recovery and crisis management procedures in place, there can be no assurance that they will suffice in any particular situation to avoid a significant loss.

CIVIL AND REGULATORY CLAIMS; LITIGATING DISPUTES IN DIFFERENT JURISDICTIONS. Substantial civil legal liability or a significant regulatory action against the Firm could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our business prospects. While we do maintain commercial insurance in an amount we believe is appropriate, we also maintain a significant level of self-insurance for the liabilities we may incur. While we place our commercial insurance with only highly-rated companies, the value of otherwise valued claims we hold under insurance policies may become uncollectible due to the insolvency of the applicable insurance company. Additionally the claims we have can be complex and insurance companies can prove difficult or bureaucratic in resolving claims, which may result in payments to us being delayed or reduced or that we must litigate in order to enforce an insurance policy claim.

Because any disputes we have with third parties, or any government regulatory matters, must generally be adjudicated within the jurisdiction in which the dispute arose, our ability to resolve our disputes successfully depends on the local laws that apply and the operation of the local judicial system, the timeliness, quality, transparency, integrity and sophistication of which varies widely from one jurisdiction to the next. Our geographic diversity therefore may expose us to disputes in certain jurisdictions which could be challenging to resolve efficiently and/or effectively, particularly as there appears to be a tendency toward more litigation in emerging markets, where the rule of law is less reliable and legal systems are less mature and transparent. It may also be more difficult to collect receivables from clients who do not pay their bills in certain jurisdictions, since resorting to the judicial system in certain countries may not be an effective alternative given the delays and costs involved.

 

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Internal Operational Risk Factors

CONCENTRATIONS OF BUSINESS WITH CORPORATE CLIENTS INCREASE CREDIT RISK AND THE IMPACT FROM THE LOSS OF CERTAIN CLIENTS. While our client base remains diversified across industries and geographies, we do value the expansion of business relationships with individual corporate clients and the increased efficiency and economics (both to our clients and our Firm) that can result from developing repeat business from the same client and from performing an increasingly broad range of services for the same client. At the same time, having increasingly large and concentrated clients also can lead to greater or more concentrated risks of loss if, among other possibilities, such a client (1) experiences its own financial problems, which can lead to larger individual credit risks, (2) becomes bankrupt or insolvent, which can lead to our failure to be paid for services we have previously provided or funds we have previously advanced, (3) decides to reduce its operations or its real estate facilities, (4) makes a change in its real estate strategy, such as no longer outsourcing its real estate operations, (5) decides to change its providers of real estate services or (6) merges with another corporation or otherwise undergoes a change of control, which may result in new management taking over with a different real estate philosophy or in different relationships with other real estate providers. Additionally, increasingly large clients may, and sometimes do, attempt to leverage the extent of their relationships with us during the course of contract negotiations or in connection with disputes or potential litigation.

CONTRACTUAL LIABILITIES AS PRINCIPAL AND FOR WARRANTED PRICING. We may, on behalf of our clients, hire and supervise third-party contractors to provide construction, engineering and various other services for our managed properties or the properties we are developing. Depending upon the terms of our contracts with clients (which, for example, may place us in the position of a principal rather than an agent) or responsibilities we assume or are legally deemed to have assumed in the course of a client engagement (whether or not memorialized in a contract), we may be subjected to, or become liable for, claims for construction defects, negligent performance of work or other similar actions by third parties whom we do not control. Adverse outcomes of property management disputes or litigation could negatively impact our business, operating results and/or financial condition, particularly if we have not limited in our contracts the extent of damages to which we may be liable for the consequences of our actions or if our liabilities exceed the amounts of the commercial third-party insurance that we carry. Moreover, our clients may seek to hold us accountable for the actions of contractors because of our role as property manager even if we have technically disclaimed liability as a legal matter, in which case we may be pressured to participate in a financial settlement for purposes of preserving the client relationship.

As part of our project management business, we may enter into agreements with clients that provide for a warranted or guaranteed cost for a project that we manage. In these situations, we are responsible for managing the various other contractors required for a project, including general contractors, in order to ensure that the cost of a project does not exceed the contract price and that the project is completed on time. In the event that one of the other contractors on the project does not or cannot perform as a result of bankruptcy or for some other reason, we may be responsible for any cost overruns as well as the consequences for late delivery.

PERFORMANCE UNDER CLIENT CONTRACTS; REVENUE RECOGNITION; SCOPE CREEP. We generally provide our services to our clients under contracts, and in certain cases we are subject to regulatory and/or fiduciary obligations (which may relate to, among other matters, the decisions we may make on behalf of a client with respect to managing assets on its behalf or purchasing products or services from third parties or other divisions within our Firm). Our services may involve handling substantial amounts of client funds in connection with managing their properties. We face legal and reputational risks in the event we do not perform, or are perceived to have not performed, under those contracts or in accordance with those regulations or obligations, or in the event we are negligent in the handling of client funds. The precautions we take to prevent these types of occurrences, which represent a significant commitment of corporate resources, may nevertheless not be effective in all cases. Unexpected costs or delays could make our client contracts or engagements less profitable than anticipated. Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, could have an adverse effect on profit margins.

In the event that we perform services for clients without executing appropriate contractual documentation, we may be unable to realize our full compensation potential or recognize revenue for accounting purposes, and we may not be able to effectively limit our liability in the event of client disputes. In the event we perform services for clients that are beyond, or different from, what were contemplated in contracts (known as “scope creep”), we may not be fully reimbursed for the services provided, or our potential liability in the case of a negligence claim may not have been as limited as it normally would have been or may be unclear.

CO-INVESTMENT, INVESTMENT, MERCHANT BANKING AND REAL ESTATE INVESTMENT BANKING ACTIVITIES SUBJECT US TO REAL ESTATE INVESTMENT RISKS AND POTENTIAL LIABILITIES. An important part of our investment strategy includes investing in real estate, both individually and along with our money management clients. In order to remain competitive with well-capitalized financial services firms, we also make merchant banking investments, as the result of which we may use Firm capital to acquire properties before the related investment management funds have been established or investment commitments received from third-party clients. An emerging but potentially significant strategy is to further engage in certain real estate investment banking activities in which we, either solely or with one or more joint venture partners, would employ capital to assist our clients in maximizing the value of their real estate (for example, we might acquire a property from a client that wishes to dispose of it within a certain time frame, after which we would market it for sale as the principal and therefore assume any related market risk). We also have business lines that have as part of their strategy the acquisition, development, management and sale of real estate. Investing

 

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in any of these types of situations exposes us to a number of risks that could have a material adverse effect on our business, results of operations and/or financial condition, including as a result of the following risks:

 

 

We may lose some or all of the capital that we invest if the investments perform poorly. Real estate investments can perform poorly as the result of many factors outside of our control, including the general reduction in asset values within a particular geography or asset class. In 2007, for example, real estate prices in certain markets within the United States and Europe declined generally as the result of the significant tightening of the credit markets.

 

 

We will have fluctuations in earnings and cash flow as we recognize gains or losses, and receive cash, upon the disposition of investments, the timing of which is geared toward the benefit of our clients.

 

 

We generally hold our investments in real estate through subsidiaries with limited liability; however, in certain circumstances, it is possible that this limited exposure may be expanded in the future based upon, among other things, changes in applicable laws or the application of existing or new laws. To the extent this occurs, our liability could exceed the amount we have invested.

 

 

We make co-investments in real estate in many countries, and this presents risks as described above in “External Market Risk Factors.” Without limitation, this may include changes to tax treaties, tax policy, foreign investment policy or other local legislative changes that may adversely affect the performance of our co-investments.

 

 

We generally make co-investments in the local currency of the country in which the investment asset exists and we will therefore be subject to the risks described below under “Currency Restrictions and Exchange Rate Fluctuations.”

CORPORATE CONFLICTS OF INTEREST. All providers of professional services to clients, including our Firm, must manage potential conflicts of interest that may arise, principally where the primary duty of loyalty owed to one client is somehow potentially weakened or compromised by a relationship also maintained with another client or third party. While the Firm has policies and procedures in place to identify, disclose and resolve potential conflicts of interest, the failure or inability to do so in a significant situation could have a material adverse effect on our business, operating results and/or financial condition. Corporate conflicts of interest arise in the context of the services we provide as a firm to our different clients. Personal conflicts of interest on the part of our employees are separately considered as issues within the context of our Code of Business Ethics.

An example of a potential conflict of interest situation is that in the ordinary course of its business, LaSalle Investment Management hires property managers for its investment properties held on behalf of clients, in which case it may hire Jones Lang LaSalle to provide such services or it may hire a firm that is a competitor of Jones Lang LaSalle. In the event it retains Jones Lang LaSalle, it may appear to have a conflict of interest with respect to the selection. As a fiduciary with respect to its client funds, LaSalle Investment Management acts independently of Jones Lang LaSalle in these situations and follows certain internal procedures so that in each situation it selects the service provider that can best represent the interests of the investment management client or fund.

Another example is that in certain countries, based upon applicable regulations and local market dynamics, we have established joint ventures or other arrangements with insurance brokers through which insurance coverage is offered to clients, tenants in buildings we manage and vendors to those buildings. In any case, Jones Lang LaSalle has a financial interest in the placement of insurance with such third parties and therefore we may be deemed to have certain conflicts of interest in those situations. However, we fully disclose our arrangements and we never require any client, tenant or vendor to use the insurance services. We make it clear that they are free to compare the services with the separate insurance arrangements they may make on their own behalf, as we believe we often can use our industry expertise and high-volume insurance relationships to obtain better terms for such clients, tenants and vendors than they could receive on their own.

CLIENT DUE DILIGENCE. There are circumstances where the conduct or identity of our clients could cause us reputational damage or financial harm or could lead to our non-compliance with certain laws, as the result of which there could be a material adverse effect on our business, operating results and/or financial condition. An example would be the attempt by a client to “launder” funds through its relationship with us, namely to disguise the illegal source of funds that are put into otherwise legitimate real estate investments. Another example is doing business with a client that has been listed on one of the “prohibited persons” lists now published by many countries around the world. While we continue to attempt to enhance the procedures we use to evaluate our clients before doing business with them in order not to do business with a prohibited party and to avoid attempts to launder money or otherwise to exploit their relationship with us, our efforts may not be successful in all situations since compliance for a business such as ours is very complex and also since we take a risk-based approach to the procedures we have employed.

BURDEN OF COMPLYING WITH MULTIPLE AND POTENTIALLY CONFLICTING LAWS AND REGULATIONS AND DEALING WITH CHANGES IN LEGAL AND REGULATORY REQUIREMENTS. We face a broad range of legal and regulatory environments in the countries in which we do business. Coordinating our activities to deal with these requirements presents significant challenges. As an example, in the United Kingdom, the Financial Services Authority (FSA) regulates the conduct of investment businesses and the Royal Institute of Chartered Surveyors (RICS) regulates the profession of Chartered Surveyors, which is the professional qualification required for certain of the services we provide in the United Kingdom, through upholding standards of competence and conduct. As another example, various activities of LaSalle Investment Management associated with raising capital and offering investment funds are regulated in the United States by the Securities and Exchange Commission (SEC) and in other countries by similar securities regulatory authorities. As a publicly traded company, we are subject to various corporate governance and

 

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other requirements established by statute, pursuant to SEC regulations and under the rules of the New York Stock Exchange. Additionally, changes in legal and regulatory requirements can impact our ability to engage in business in certain jurisdictions or increase the cost of doing so. The legal requirements of U.S. statutes may also conflict with local legal requirements in a particular country, as, for example, when anonymous hotlines required under U.S. law were construed to conflict in part with French privacy laws.

We make concerted efforts to identify the regulations with which we must comply and then to continue to comply with them, but doing so is complicated in our circumstances and may not be successful in all situations, as the result of which we could be subject to regulatory actions and fines for non-compliance.

LICENSING REQUIREMENTS. The brokerage of real estate sales and leasing transactions, property management, conducting valuations and the operation of the investment advisory business, among other business lines, require us to maintain licenses in various jurisdictions in which we operate. If we fail to maintain our licenses or conduct brokerage, management, valuations, investment advisory or other regulated activities without a license, we may be required to pay fines or return commissions received or have licenses suspended. Licensing requirements may also preclude us from engaging in certain types of transactions or change the way in which we conduct business or the cost of doing so. In addition, because the size and scope of real estate sales transactions and the number of countries in which we operate or invest have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous licensing regimes and the possible loss resulting from noncompliance have increased. Furthermore, the laws and regulations applicable to our business, both in the United States and in foreign countries, also may change in ways that materially increase the costs of compliance. Particularly in emerging markets, there can be relatively less transparency around the standards and conditions under which licenses are granted, maintained or renewed, and it may be difficult to defend against the arbitrary revocation of a license in a jurisdiction where the rule of law is less well developed.

As a licensed real estate service provider and advisor in various jurisdictions, we and our licensed employees may be subject to various due diligence, disclosure, standard-of-care, anti-money laundering and other obligations in the jurisdictions in which we operate. Failure to fulfill these obligations could subject us to litigation from parties who purchased, sold or leased properties we brokered or managed or who invested in our funds. We could become subject to claims by participants in real estate sales or other services claiming that we did not fulfill our obligations as a service provider or broker (including, for example, with respect to conflicts of interests where we are acting, or are perceived to be acting, for two or more clients with potentially contrary interests).

COMPUTER AND INFORMATION SYSTEMS. Our business is highly dependent on our ability to process transactions across numerous and diverse markets in many currencies. If any of our financial, accounting, human resources or other data processing, e-mail, client accounting, funds processing or electronic information management systems do not operate properly or are disabled (including as the result of computer viruses, problems with the internet or sabotage), we could suffer a disruption of our businesses, liability to clients, loss of client data, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including disruptions of electrical or communications services, disruptions caused by natural disasters, political instability or terrorist attacks, or our inability to occupy one or more of our buildings.

The development of new software systems used to operate one or more aspects of our business, particularly on a customized basis or in order to coordinate or consolidate financial, human resources or other types of infrastructure data reporting, client accounting or funds processing is complicated and may result in costs that cannot be recouped in the event of the failure to complete a planned software development. A new software system that has defects may cause reputational issues and client or employee dissatisfaction, with business lost as a result. The acquisition or development of software systems is often dependent to one degree or another on the quality, ability and/or financial stability of one or more third-party vendors, over which we may not have control beyond the rights we negotiate in our contracts. Different privacy policies from one country to the next (or across a region such as the European Union) may restrict our ability to share or collect data on a global basis, and this may limit the utility of otherwise available technology.

The Firm has been implementing significant new financial, human resources and client relationship management software systems on a world-wide basis, and is in the process of transitioning various significant processes to these new systems. This implementation is complex and will continue throughout 2008 and into 2009. If the Firm does not effectively implement these new systems, or if any of the new systems do not operate as intended, the effectiveness of the Firm’s financial reporting or internal controls could be materially and adversely affected.

Our business is also dependent, in part, on our ability to deliver to our clients the efficiencies and convenience afforded by technology. The effort to gain technological expertise and develop or acquire new technologies requires us to incur significant expenses. If we cannot offer new technologies as quickly as our competitors do, we could lose market share. We are increasingly dependent on the internet and intranet technology to disseminate critical business information publicly and also to our employees internally. In the event of technology failure, or our inability to maintain robust platforms, we risk competitive disadvantage.

RISKS INHERENT IN MAKING ACQUISITIONS. We have made in the past, and anticipate that we may make in the future, acquisitions of businesses or business lines. In 2006, for example, we closed the acquisition of Spaulding & Slye, a significant U.S. business with approximately 500 employees. In 2007, we announced the merger of our operations in India with those of a third party, as the result of which we are now operating in

 

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India under the name Jones Lang LaSalle Meghraj, which is a market leader with over 3,300 employees. Also in 2006 and 2007, we completed a number of other smaller but still strategically important acquisitions in various countries, and we have announced additional acquisitions in 2008. Any such acquisitions may subject us to a number of significant risks, including, among others:

 

 

Diversion of management attention;

 

 

Inability to retain the management, key personnel and other employees of the acquired business;

 

 

Inability to retain clients of the acquired business;

 

 

Exposure to legal, environmental, employment and other types of claims for activities of the acquired business prior to acquisition, including those that may not have been adequately identified during the pre-acquisition due diligence investigation;

 

 

Addition of business lines in which we have not previously engaged (for example, general contractor services for “ground up” construction development projects);

 

 

Inability to effectively integrate the acquired business and its employees; and

 

 

Potential impairment of intangible assets, which could adversely affect our reported results.

ENVIRONMENTAL LIABILITIES AND REGULATIONS; CLIMATE CHANGE RISKS. The Firm’s operations are affected by federal, state and/or local environmental laws in the countries in which we maintain office space for our own operations and where we manage properties for clients. We may face liability with respect to environmental issues occurring at properties that we manage or occupy, or in which we invest. Various laws and regulations restrict the levels of certain substances that may be discharged into the environment by properties or they may impose liability on current or previous real estate owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at the property. We may face costs or liabilities under these laws as a result of our role as an on-site property manager or a manager of construction projects. Our risks for such liabilities may increase as we expand our services to include more industrial and/or manufacturing facilities than has been the case in the past. In addition, we may face liability if such laws are applied to expand our limited liability with respect to our co-investments in real estate as discussed above.

Given that the Firm’s own operations are generally conducted within leased office building space, we do not currently anticipate that regulations restricting the emissions of “greenhouse gases,” or taxes that may be imposed on their release, would result in material costs or capital expenditures, although we cannot be certain about the extent to which such regulations will develop as there are higher levels of understanding and commitments by different governments around the world regarding the risks of climate change and how they should be mitigated. We have accelerated our efforts to be a more sustainable business in terms of our own environmental impact as a firm, and we also provide sustainability services to clients, who are increasingly seeking to manage their properties in more environmentally sustainable ways.

ABILITY TO PROTECT INTELLECTUAL PROPERTY; INFRINGEMENT OF THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. Our business depends, in part, on our ability to identify and protect proprietary information and other intellectual property (such as our service marks, client lists and information, and business methods). Existing laws of some countries in which we provide or intend to provide services (or the extent to which their laws are enforced) may offer only limited protections of our intellectual property rights. We rely on a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements, and on patent, copyright and trademark laws to protect our intellectual property rights. Our inability to detect unauthorized use (for example, by former employees) or take appropriate or timely steps to enforce our intellectual property rights may have an adverse effect on our business.

We cannot be sure that the services we offer to clients do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us or against our clients. These claims may harm our reputation, cost us money and prevent us from offering some services.

ABILITY TO CONTINUE TO MAINTAIN SATISFACTORY INTERNAL FINANCIAL REPORTING CONTROLS AND PROCEDURES. If we are not able to continue to successfully implement the requirements of Section 404 of the United States Sarbanes-Oxley Act of 2002, our reputation, financial results and the market price of our stock could suffer. While we believe that we have adequate internal financial reporting control procedures in place, we may be exposed to potential risks from this legislation, which requires companies to evaluate their internal controls and have their controls attested to by their independent auditors on an annual basis. We have evaluated our internal control systems in order to allow our management to report on, and our independent auditors to attest to, our internal controls over financial reporting as required for purposes of this Annual Report on Form 10-K for the year ended December 31, 2007. However, there can be no assurance that we will continue to receive a positive attestation in future years, particularly since standards continue to evolve and are not necessarily being applied consistently from one auditing firm to another. If we identify one or more material weaknesses in our internal controls in the future that we cannot remediate in a timely fashion, we may be unable to receive a positive attestation at some time in the future from our independent auditors with respect to our internal controls over financial reporting.

Financial Risk Factors

WE MAY HAVE INDEBTEDNESS WITH FIXED OR VARIABLE INTEREST RATES AND CERTAIN COVENANTS WITH WHICH WE MUST COMPLY. At December 31, 2007, we had $43.6 million of unsecured indebtedness on a consolidated basis, principally under a revolving credit facility from a syndicate of lenders. Our average outstanding borrowings under the revolving credit facility were $153.9 million during 2007, and the effective interest rate on that facility was 5.5%.

 

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Our outstanding borrowings fluctuate during the year primarily due to varying working capital requirements. For example, payment of annual incentive compensation represents a significant working capital requirement commanding increased borrowings in the first half of the year, while the Firm’s seasonal earnings pattern provides more for working capital requirements in the second half of the year. To the extent we continue our acquisition activities in the future, the level of our indebtedness could increase materially if that is the source of cash we use.

The terms of our debt contain a number of covenants that could restrict our flexibility to finance future operations or capital needs, or to engage in other business activities that may be in our best interest. The debt covenants limit our ability, among other things, to:

 

 

Encumber or dispose of assets;

 

 

Incur indebtedness; and

 

 

Engage in acquisitions.

In addition, with respect to the revolving credit facility, we must maintain a consolidated net worth of at least $729 million and a leverage ratio not exceeding 3.5 to 1. We must also maintain a minimum interest coverage ratio of 2.5 to 1.

If we are unable to make required payments under the revolving credit facility or if we breach any of the debt covenants, we will be in default under the terms of the revolving credit facility. A default under the facility could cause acceleration of repayment of outstanding amounts as well as defaults under other existing and future debt obligations.

VOLATILITY IN LASALLE INVESTMENT MANAGEMENT INCENTIVE FEE REVENUES. With the growth in assets under management at LaSalle Investment Management, our portfolio is of sufficient size to periodically generate large incentive fees and, in some cases, equity gains that significantly contribute to our earnings and to the changes in earnings from one year to the next. Volatility in this component of our earnings is inevitable due to the nature of this aspect of our business, and the amount of the fees or equity gains we may recognize in future quarters is inherently unpredictable and relates to market dynamics in effect at the time). In the case of our commingled funds, underlying market conditions, particular decisions regarding the acquisition and disposition of fund assets, and the specifics of the client mandate will determine the timing and size of incentive fees from one fund to another. For separate accounts, where asset management is ongoing, we also may earn incentive fees at periodic agreed-upon measurement dates, and that may be related to performance relative to specified real-estate indices (such as that published by the National Council of Real Estate Investment Fiduciaries (NCREIF)).

While LaSalle Investment Management has focused over the past several years on developing more predictable annuity-type revenues, incentive fees have been, and will continue to be, an important part of our revenues and earnings. As a result, the volatility described above should be expected to continue. For example, in 2006 we recognized one very significant incentive fee from the long-term performance of a separate account where we have ongoing portfolio management. This incentive fee was payable only once every four years and was calculated based on the account’s performance above a real rate of return so long as the account’s performance has exceeded a NCREIF-based index. The incentive fee will next be measured after a five-year performance period.

Where incentive fees on a given transaction are particularly large, certain clients in the past have attempted to take advantage of their relationship with us to renegotiate fees even though contractually obligated to pay them, and we expect this to occur from time to time in the future. Our efforts to collect our fees in these situations may lead to significant legal fees and/or significant delays in collection due to extended judicial proceedings or negotiations, or may result in negotiated reductions in fees that take into account the future value of the relationship.

VOLATILITY IN HOTELS AND CAPITAL MARKETS FEES. We have business lines other than LaSalle Investment Management that also generate fees based on the timing, size and pricing of closed transactions and these fees may significantly contribute to our earnings and to changes in earnings from one quarter or year to the next. For example, in 2007 our Hotels business generated one very substantial fee from the sale of a large portfolio of hotels on behalf of a particular client. Volatility in this component of our earnings is inevitable due to the nature of these businesses and the amount of the fees we will recognize in future quarters is inherently unpredictable.

CURRENCY RESTRICTIONS AND EXCHANGE RATE FLUCTUATIONS. We produce positive flows of cash in various countries and currencies that can be most effectively used to fund operations in other countries or to repay our indebtedness, which is currently primarily denominated in U.S. dollars. We face restrictions in certain countries that limit or prevent the transfer of funds to other countries or the exchange of the local currency to other currencies. We also face risks associated with fluctuations in currency exchange rates that may lead to a decline in the value of the funds produced in certain jurisdictions.

Additionally, although we operate globally, we report our results in U.S. dollars, and thus our reported results may be positively or negatively impacted by the strengthening or weakening of currencies against the U.S. dollar. As an example, the euro and the pound sterling, each a currency used in a significant portion of our operations, strengthened against the U.S. dollar over the course of 2006 and 2007. For the year ended December 31, 2007, 36% of our revenue was attributable to operations with U.S. dollars as their functional currency, and 64% was attributable to operations having other functional currencies. In addition to the potential negative impact on reported earnings, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of the reported results of operations.

We are authorized to use currency-hedging instruments, including foreign currency forward contracts, purchased currency options and borrowings in foreign currency. There can be no assurance that such hedging will be economically effective. We do not use hedging instruments for speculative purposes.

 

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As currency forward and option contracts are generally conducted off-exchange or over-the-counter (“OTC”), many of the safeguards accorded to participants on organized exchanges, such as the performance guarantee of an exchange clearing house, are generally unavailable in connection with OTC transactions. In addition, there can be no guarantee that the counterparty will fulfill its obligations under the contractual agreement especially in the event of a bankruptcy or insolvency of the counterparty, which would effectively leave us unhedged.

The following table sets forth the revenues derived from our most significant currencies (based upon 2007 revenues, $ in millions). The euro revenues include our businesses in France, Germany, Italy, Ireland, Spain, Portugal, Holland, Belgium and Luxembourg.

Most Significant Currencies on a Revenue Basis

 

      2007    2006

United States Dollar

   $ 959.5    898.6

United Kingdom Pound

     460.7    352.1

Euro

     453.0    342.0

Australian Dollar

     182.6    126.8

Other currencies

     596.3    294.1

Total revenues

   $   2,652.1    2,013.6

GREATER DIFFICULTY IN COLLECTING ACCOUNTS RECEIVABLE IN CERTAIN COUNTRIES AND REGIONS. We face challenges to our ability to efficiently and/or effectively collect accounts receivable in certain countries and regions. For example, in Asia, many countries have underdeveloped insolvency laws, and clients often are slow to pay. In Europe, clients in some countries, particularly Spain, Italy and France, also tend to delay payments, reflecting a different business culture over which we do not necessarily have any control.

POTENTIALLY ADVERSE TAX CONSEQUENCES; CHANGES IN TAX LEGISLATION AND TAX RATES. Moving funds between countries can produce adverse tax consequences in the countries from which and to which funds are transferred, as well as in other countries, such as the United States, in which we have operations. Additionally, as our operations are global, we face challenges in effectively gaining a tax benefit for costs incurred in one country that benefit our operations in other countries.

Changes in tax legislation or tax rates may occur in one or more jurisdictions in which we operate that may materially increase the cost of operating our business.

THE CHARTER AND THE BYLAWS OF JONES LANG LASALLE, OR THE MARYLAND GENERAL CORPORATION LAW, COULD DELAY, DEFER OR PREVENT A CHANGE OF CONTROL. The charter and bylaws of Jones Lang LaSalle include provisions that may discourage, delay, defer or prevent a takeover attempt that may be in the best interest of Jones Lang LaSalle shareholders and may adversely affect the market price of our common stock.

 

The charter and bylaws provide for:

 

 

The ability of the board of directors to establish one or more classes and series of capital stock including the ability to issue up to 10,000,000 shares of preferred stock, and to determine the price, rights, preferences and privileges of such capital stock without any further shareholder approval;

 

 

A requirement that any shareholder action taken without a meeting be pursuant to unanimous written consent; and

 

 

Certain advance notice procedures for Jones Lang LaSalle shareholders nominating candidates for election to the Jones Lang LaSalle board of directors.

Under the Maryland General Corporate Law (the “MGCL”), certain “Business Combinations” (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation’s shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an “Interested Shareholder”) or an affiliate of the Interested Shareholder are prohibited for five years after the most recent date on which the Interested Shareholder became an Interested Shareholder. Thereafter, any such Business Combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding voting shares of the corporation and (2) 66 2/3% of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Shareholder with whom the Business Combination is to be effected, unless, among other things, the corporation’s shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its shares. Pursuant to the MGCL, these provisions also do not apply to Business Combinations approved or exempted by the board of directors of the corporation prior to the time that the Interested Shareholder becomes an Interested Shareholder.

Human Resources Risk Factors

DIFFICULTIES AND COSTS OF STAFFING AND MANAGING INTERNATIONAL OPERATIONS. The coordination and management of international operations pose additional costs and difficulties. We must manage operations in many time zones and that involve people with language and cultural differences. Our success depends on finding and retaining people capable of dealing with these challenges effectively and who will represent the Firm with the highest levels of integrity. If we are unable to attract and retain qualified personnel, or to successfully plan for succession of employees holding key management positions, our growth may be limited, and our business and operating results could suffer. Among the challenges we face in retaining our people is maintaining a compensation system that rewards them consistent with local markets

 

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and with our profitability, which can be especially difficult where competitors may be attempting to gain market share by hiring our best people at rates of compensation that are well above the current market level.

We have committed resources to effectively coordinate our business activities around the world to meet our clients’ needs, whether they are local, regional or global. We also consistently attempt to enhance the establishment, organization and communication of corporate policies, particularly where we determine that the nature of our business poses the greatest risk of noncompliance. The failure of our people to carry out their responsibilities in accordance with our client contracts, our corporate and operating policies, or our standard operating procedures, or their negligence in doing so, could result in liability to clients or other third parties, which could have a material adverse effect on our business, operating results and/or financial condition.

When addressing staffing in connection with a restructuring of our organization or a downturn in economic conditions or activity, we must take into account the employment laws of the countries in which actions are contemplated, which, in some cases, can result in significant costs and/or time delays in implementing headcount reductions.

NONCOMPLIANCE WITH POLICIES; COMMUNICATIONS AND ENFORCEMENT OF OUR POLICIES AND OUR CODE OF BUSINESS ETHICS. The geographic and cultural diversity in our organization makes it more challenging to communicate the importance of adherence to our Code of Business Ethics and our Vendor Code of Conduct, to monitor and enforce compliance with its provisions on a worldwide basis, and to ensure local compliance with U.S. laws that apply globally, such as the Foreign Corrupt Practices Act, the Patriot Act and the Sarbanes-Oxley Act of 2002.

We have introduced an Ethics Everywhere program to address these challenges and to attempt to maintain a high level of awareness about, and compliance with, our Code of Business Ethics. In 2008, we received Ethics Inside™ certification of our ethics program from the Ethisphere Institute, a leading think-tank dedicated to the research, creation and promotion of best practices in ethics, compliance, corporate governance and citizenship. The Ethics Inside™ certification is the only independent verification of a company’s ethics of which we are aware. The Ethisphere Institute uses over fifty separate criteria in order to conduct its evaluations, including organizational heath and culture, ethics and compliance programs and initiatives, corporate governance systems, corporate citizenship and social responsibility efforts, legal and regulatory track record, and third-party perception of a company’s ethics.

 

Breaches of our Code of Business Ethics, particularly by our executive management, could have a material adverse effect on our business, reputation, operating results and/or financial condition. Breaches of our Vendor Code of Conduct by vendors whom we retain as a principal for client engagements can also lead to significant losses to clients from financial liabilities that might result.

EMPLOYEE AND VENDOR MISCONDUCT. Like any business, we run the risk that employee fraud or other misconduct could occur. In a company such as ours with more than 30,000 employees, it is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee misconduct, including fraud, can cause significant financial or reputational harm to any business, from which full recovery cannot be assured. We also may not have insurance that covers any losses in full or that covers losses from particular criminal acts. We do have a strong ethics policy, which is articulated in our Code of Business Ethics, and an overall Ethics Everywhere program that employs a number of different but complementary methods to reinforce the importance of integrity as our employees carry out their employment duties. In particular, we attempt to reinforce our commitment to sound ethics through regular employee communication, and we are continuously increasing our training efforts in this area, an example of which is a new interactive on-line ethics training program we instituted in the United States in 2007 and hope to expand internationally in the future.

Because we often hire third-party vendors to perform services for our own account or for clients, we are also subject to the consequences of fraud or misconduct by employees of our vendors, which also can result in significant financial or reputational harm (even if we have been adequately protected from a legal standpoint). We have instituted a Vendor Code of Conduct, which is published in multiple languages on our public Web site, and which is intended to communicate to our vendors the standards of conduct we expect them to uphold.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

Our principal corporate holding company headquarters are located at 200 East Randolph Drive, Chicago, Illinois, where we currently occupy over 130,000 square feet of office space pursuant to a lease that expires in February 2016. Our regional headquarters for our Americas, EMEA and Asia Pacific businesses are located in Chicago, London and Singapore, respectively. We have 167 local offices worldwide located in most major cities and metropolitan areas as follows: 54 offices in 6 countries in the Americas (including 44 in the United States), 55 offices in 23 countries in EMEA and 58 offices in 13 countries in Asia Pacific. Our offices are each leased pursuant to agreements with terms ranging from month-to-month to 10 years. In addition, we have on-site property and other offices located throughout the world. On-site property management offices are generally located within properties that we manage and are provided to us without cost.

ITEM 3. LEGAL PROCEEDINGS

The Company has contingent liabilities from various pending claims and 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 (including insurance provided through a captive insurance company), although they may nevertheless be subject to large deductibles or retentions, and the amounts being claimed may exceed the available insurance. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial position, results of operations or liquidity.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of Jones Lang LaSalle’s shareholders during the fourth quarter of 2007.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is listed for trading on the New York Stock Exchange under the symbol “JLL.”

As of February 19, 2008, there were 18,771 beneficial holders of our Common Stock.

The following table sets forth the high and low daily closing prices of our Common Stock as reported on the New York Stock Exchange.

 

      HIGH    LOW

2007

     

Fourth Quarter

   $ 108.45    $ 70.48

Third Quarter

   $ 123.17    $ 95.92

Second Quarter

   $ 120.10    $ 102.76

First Quarter

   $ 109.33    $ 90.60

2006

     

Fourth Quarter

   $ 93.21    $ 84.00

Third Quarter

   $ 88.54    $ 75.92

Second Quarter

   $ 90.70    $ 71.05

First Quarter

   $ 76.54    $ 52.75

Dividends

In October 2007, the Company announced that its Board of Directors declared a semi-annual dividend of $0.50 per share of its common stock. The dividend payment was made on December 14, 2007 to holders of record at the close of business on November 15, 2007. This amount represents an increase of $0.15 per share over the amount of the semi-annual dividend that was paid in June 2007. The current dividend plan for 2008 approved by the Board anticipates a total annual dividend of $1.00 per common share; however there can be no assurance that future dividends will be declared since the actual declaration of future dividends, and the establishment of record and payment dates, remains subject to final determination by the Company’s Board of Directors. A dividend-equivalent in the same amount has also been paid simultaneously on outstanding but unvested restricted stock units granted under the Company’s Stock Award and Incentive Plan at the time of each previous semi-annual dividend paid on common stock.

Transfer Agent

Mellon Investor Services LLC

480 Washington Boulevard

Jersey City, New Jersey 07310

Equity Compensation Plan Information

For information regarding our equity compensation plans, including both shareholder approved plans and plans not approved by shareholders, see Item 12. Security Ownership of Certain Beneficial Owners and Management.

 

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Comparison of Cumulative Total Return

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG JONES LANG LASALLE INCORPORATED, THE S&P 500 INDEX AND A PEER GROUP

The following graph compares the cumulative shareholder return of the Common Stock of Jones Lang LaSalle to the cumulative return of the Standard & Poor’s 500 Stock Index and an industry peer group for the five-year period ending December 31, 2007. The peer group consists of Grubb & Ellis Company and, from the time it first issued public equity in 2004, CB Richard Ellis Group, Inc., both of which are publicly-traded real estate services companies. The graph assumes the investment on December 31, 2002 of $100 in Jones Lang LaSalle Common Stock and in each of the other indices shown, and assumes that all dividends were reinvested.

LOGO

 

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Share Repurchases

The following table provides information with respect to approved share repurchase programs for Jones Lang LaSalle in 2007:

 

      TOTAL NUMBER
OF SHARES
PURCHASED
     AVERAGE PRICE
PAID PER
SHARE (1)
     CUMULATIVE
NUMBER
OF SHARES
PURCHASED
AS PART
OF PUBLICLY
ANNOUNCED
PLAN
     SHARES
REMAINING
TO BE
PURCHASED
UNDER
PLAN (2)

January 1, 2007–January 31, 2007

               1,421,100      578,900

February 1, 2007–February 28, 2007

               1,421,100      578,900

March 1, 2007–March 31, 2007

   220,581      $ 98.90      1,641,681      358,319

April 1, 2007–April 30, 2007

               1,641,681      358,319

May 1, 2007–May 31, 2007

               1,641,681      358,319

June 1, 2007–June 30, 2007

               1,641,681      358,319

July 1, 2007–July 31, 2007

   20,000      $ 114.32      1,661,681      338,319

August 1, 2007–August 31, 2007

   258,200      $ 104.20      1,919,881      80,119

September 1, 2007–September 12, 2007 (2)

   80,119      $ 100.83      2,000,000     

September 13, 2007–September 30, 2007

   70,000      $ 101.20      70,000      1,930,000

October 1, 2007–October 31, 2007

               70,000      1,930,000

November 1, 2007–November 30, 2007

   246,900      $ 81.55      316,900      1,683,100

December 1, 2007–December 1, 2007

   120,000      $ 79.16      436,900      1,563,100

Total

   1,015,800      $ 94.31              

 

(1) The average price paid per share is a weighted monthly average and the total average price per share of $94.31 is the weighted average for the twelve months ending December 31, 2007.

 

(2) Since October 2002, our Board of Directors has approved five share repurchase programs. At December 31, 2007 the Company is authorized to purchase 1,563,100 shares under the repurchase program approved on August 15, 2007. Share repurchases through September 12, 2007 were made under the share repurchase program approved on September 15, 2005; the program approved September 15, 2005 was allowed to be fully utilized before the program approved August 15, 2007 came into use on September 13, 2007. These share repurchase programs allow the Company to purchase our common stock in the open market and in privately negotiated transactions. The repurchase of shares is primarily intended to offset dilution resulting from both restricted stock and stock option grants made under our existing employee compensation plans. The following table details the activities for each of our approved share repurchase programs:

 

REPURCHASE PLAN APPROVAL DATE    SHARES
APPROVED FOR
REPURCHASE
   SHARES
REPURCHASED
THROUGH
DECEMBER 31, 2007

October 30, 2002

   1,000,000    700,000

February 27, 2004

   1,500,000    1,500,000

November 29, 2004

   1,500,000    1,128,551

September 15, 2005

   2,000,000    2,000,000

August 15, 2007

   2,000,000    436,900
          5,765,451

 

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ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)

The following table sets forth our summary historical consolidated financial data. The information should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

 

     YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)    2007     2006     2005     2004   2003

Statement of Operations Data:

          

Revenue

   $ 2,652,075     2,013,578     1,390,610     1,166,958   941,894

Operating income

     342,320     244,079     131,751     89,521   54,235

Interest expense, net of interest income

     13,064     14,254     3,999     9,292   17,861

Loss on extinguishment of Senior Notes

                 11,561  

Gain on sale of investments

     6,129              

Equity in earnings from real estate ventures

     12,216     9,221     12,156     17,447   7,951

Income before provision for income taxes and minority interest

     347,601     239,046     139,908     86,115   44,325

Provision for income taxes

     87,595     63,825     36,236     21,873   8,260

Minority interest in earnings of subsidiaries, net of taxes

     2,174              

Net income before cumulative effect of change in accounting principle

     257,832     175,221     103,672     64,242   36,065

Cumulative effect of change in accounting principle, net of tax (1)

         1,180          

Net income

   $ 257,832     176,401     103,672     64,242   36,065

Dividends on unvested common stock, net of tax

     1,342     1,057     385      

Net income available to common shareholders

   $ 256,490     175,344     103,287     64,242   36,065

Basic earnings per common share before cumulative effect of change in accounting principle and dividends on unvested common stock

   $ 8.05     5.50     3.30     2.08   1.17

Cumulative effect of change in accounting principle, net of tax (1)

         0.03          

Dividends on unvested common stock, net of tax

     (0.04 )   (0.03 )   (0.01 )    

Basic earnings per common share

   $ 8.01     5.50     3.29     2.08   1.17

Basic weighted average shares outstanding

     32,021,380     31,872,112     31,383,828     30,887,868   30,951,563

Diluted earnings per common share before cumulative effect of change in accounting principle and dividends on unvested common stock

   $ 7.68     5.24     3.13     1.96   1.12

Cumulative effect of change in accounting principle, net of tax (1)

         0.03          

Dividends on unvested common stock, net of tax

     (0.04 )   (0.03 )   (0.01 )    

Diluted earnings per common share

   $ 7.64     5.24     3.12     1.96   1.12

Diluted weighted average shares outstanding

     33,577,927     33,447,939     33,109,261     32,845,281   32,226,306

 

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     YEAR ENDED DECEMBER 31,  
(IN THOUSANDS, EXCEPT SHARE DATA)    2007     2006     2005     2004     2003  

Other Data:

          

EBITDA (2)

   $ 412,729     302,387     177,358     128,788     99,130  

Ratio of earnings to fixed charges (3)

     8.33X     6.99X     6.75X     3.90X     2.15X  

Cash flows provided by (used in):

          

Operating activities

   $ 409,418     377,703     120,636     161,478     110,045  

Investing activities

     (258,502 )   (306,360 )   (61,034 )   (27,565 )   (15,282 )

Financing activities

     (122,948 )   (49,389 )   (61,087 )   (166,875 )   (45,312 )

Investments under management (4)

   $ 49,700,000     40,600,000     29,800,000     24,100,000     23,000,000  

Total square feet under management

     1,235,000     1,024,000     903,000     835,000     725,000  

Balance Sheet Data:

          

Cash and cash equivalents

   $ 78,580     50,612     28,658     30,143     63,105  

Total assets

     2,291,874     1,729,948     1,144,769     1,012,377     942,940  

Total debt

     43,590     50,136     44,708     58,911     211,408  

Total liabilities

     1,273,069     979,568     608,766     504,397     511,949  

Total shareholders’ equity

     1,010,533     750,380     536,003     507,980     430,991  

 

(1) The cumulative effect of change in accounting principle in 2006 is the result of our adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”). As a result of adopting SFAS 123R on January 1, 2006, we credited $1.2 million to the income statement, as the cumulative effect of a change in accounting principle, which represented the expense recognized in prior years on shares we expect to be forfeited prior to their vesting date.

 

(2) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Although EBITDA is a non-GAAP financial measure, our management believes that EBITDA is a useful analytical tool, that it is useful to investors as one of the primary metrics for evaluating operating performance and liquidity, and that an increase in EBITDA is an indicator of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. EBITDA also is used in the calculation of certain covenants related to our revolving credit facility. However, EBITDA should not be considered as an alternative either to net income or net cash provided by operating activities, both of which are determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Because EBITDA is not calculated under U.S. GAAP, our EBITDA may not be comparable to similarly titled measures used by other companies.

Below is a reconciliation of our EBITDA to net income ($ in thousands):

 

     YEAR ENDED DECEMBER 31,
      2007   2006   2005   2004   2003

Net income

   $ 256,490   175,344   103,287   64,242   36,065

Interest expense, net of interest income

     13,064   14,254   3,999   9,292   17,861

Provision for income taxes

     87,595   63,825   36,236   21,873   8,260

Depreciation and amortization

     55,580   48,964   33,836   33,381   36,944

EBITDA

   $ 412,729   302,387   177,358   128,788   99,130

Below is a reconciliation of our EBITDA to net cash provided by operating activities, the most comparable cash flow measure on the statements of cash flows ($ in thousands):

 

     YEAR ENDED DECEMBER 31,  
      2007     2006     2005   2004     2003  

Net cash provided by operating activities

   $ 409,418     377,703     120,636   161,478     110,045  

Interest expense, net of interest income

     13,064     14,254     3,999   9,292     17,861  

Provision for income taxes

     87,595     63,825     36,236   21,873     8,260  

Change in working capital and non-cash expenses

     (97,348 )   (153,395 )   16,487   (63,855 )   (37,036 )

EBITDA

   $ 412,729     302,387     177,358   128,788     99,130  

 

(3) For purposes of computing the ratio of earnings to fixed charges, “earnings” represents net earnings before income taxes plus fixed charges, less capitalized interest. Fixed charges consist of interest expense, including amortization of debt discount and financing costs, capitalized interest and one-third of rental expense, which we believe is representative of the interest component of rental expense.

 

(4) Investments under management represent the aggregate fair market value or cost basis (where an appraisal is not available) of assets managed by our Investment Management segment as of the end of the periods reflected.

 

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Selected Financial Data and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Form 10-K. The following discussion and analysis contains certain forward-looking statements generally identified by the words anticipates, believes, estimates, expects, plans, intends and other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Jones Lang LaSalle’s actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. See the Cautionary Note Regarding Forward-Looking Statements after Part IV, Item 15. Exhibits and Financial Statement Schedules.

We present our Management’s Discussion and Analysis in six sections, as follows:

 

(1) An executive summary, including how we create value for our stakeholders,

 

(2) A summary of our critical accounting policies and estimates,

 

(3) Certain items affecting the comparability of results and certain market and other risks that we face,

 

(4) The results of our operations, first on a consolidated basis and then for each of our business segments,

 

(5) Consolidated cash flows, and

 

(6) Liquidity and capital resources.

Executive Summary

BUSINESS OBJECTIVES AND STRATEGIES

We define our stakeholders as:

 

 

The clients we serve,

 

 

The people we employ, and

 

 

The shareholders who invest in our Company.

We create value for these stakeholders by enabling and motivating our employees to apply their expertise to deliver services that our clients want in order to add value to their real estate and business operations. We believe that our ability to add value is demonstrated by our clients’ repeat or expanded service requests and by the strategic alliances we have formed with them.

The services we provide require “on the ground” expertise in local real estate markets. Such expertise is the product of research into market conditions and trends, expertise in buildings and locations, and expertise in competitive conditions. This real estate expertise is at the heart of the history and strength of the Jones Lang LaSalle brand. One of our key differentiating factors, as a result, is our global reach and service imprint in local markets around the world, all provided by offices we own (rather than franchise, as many of our competitors do) and personnel we employ directly.

We enhance our local market expertise with a global team of research professionals, with the best practice processes we have developed and delivered repeatedly for our clients, and with the technology investments that support these best practices.

Our principal asset is the talent and the expertise of our people. We seek to support our service-based culture through a compensation system that rewards superior client service performance, not just transaction activity, and that includes a meaningful long-term compensation component. We invest in training and believe in optimizing our talent base through internal advancement. We believe that our people deliver our services with the experience and expertise to maintain a balance of strong profit margins for the Firm and competitive value-added pricing for our clients, while achieving competitive compensation levels.

Because we are a services business, our profits produce strong cash returns. Over the past five years, we have used this cash strategically to:

 

 

Invest for growth in important markets throughout the world;

 

 

Make business acquisitions to strategically grow the Company;

 

 

Co-invest in LaSalle Investment Management sponsored and managed funds;

 

 

Purchase shares under our share repurchase programs and initiate a dividend program; and

 

 

Pay down our debt and maintain our desired leverage ratio.

In 2007, our Board declared and paid a total annual dividend of $0.85 per common share, a 42% increase over the $0.60 annual dividend paid in 2006, and anticipates paying a total annual dividend in 2008 of $1.00 per share. We do not believe that the payment of dividends will preclude us from continuing the above other uses of cash.

We believe value is enhanced by investing appropriately in growth opportunities, growing our market position in developed markets and keeping our balance sheet strong.

The services we deliver are managed as business strategies to enhance the synergies and expertise of our people. The principal businesses in which we are involved are:

 

 

Money Management;

 

 

Local Market Services;

 

 

Capital Markets and Real Estate Investment Banking; and

 

 

Occupier Services.

The market knowledge we develop in our services and capital markets businesses helps us identify investment opportunities and capital sources for our money management clients. Consistent with our fiduciary responsibilities, the investments we make or structure on behalf of our money management clients help us identify new business opportunities for our services and capital markets businesses.

 

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To continue to create new value for our clients, shareholders and employees, in early 2005 we identified five strategic priorities for continued growth. We refer to them as the Global Five Priorities, or the “G5.” We have initiated a five-year program designed to invest capital and resources that will maintain and extend our global leadership positions. We define the G5 as follows:

G1: LOCAL AND REGIONAL SERVICE OPERATIONS. Our strength in local and regional markets determines the strength of our global service capabilities. Our financial performance also depends, in great part, on the business we source and execute locally from approximately 170 offices around the world. We believe that we can leverage our established business presence in the world’s principal real estate markets to provide expanded local and regional services without a proportionate increase in infrastructure costs.

G2: GLOBAL CORPORATE SOLUTIONS. The accelerating trends of globalization and the outsourcing of real estate services by corporate occupiers support our decision to emphasize a truly global Corporate Solutions business to serve their needs comprehensively. This service delivery capability helps us create new client relationships. In addition, current corporate clients are demanding multi-regional capabilities.

G3: GLOBAL CAPITAL MARKETS AND REAL ESTATE INVESTMENT BANKING. Our focus on the further development of our global Capital Markets service delivery capability reflects increasing international cross-border money flows to real estate and the accelerated global marketing of assets that has resulted. Our real estate investment banking capability helps provide capital and other financial solutions by which our clients can maximize the value of their real estate.

G4: LASALLE INVESTMENT MANAGEMENT. With a truly integrated global platform, our LaSalle Investment Management business is already well positioned to serve institutional real estate investors looking for attractive opportunities around the world. Our continued investment in LaSalle Investment Management’s ability to develop and offer new products quickly, and to extend its portfolio capabilities into promising new markets, is intended to enhance that position.

G5: WORLD-STANDARD BUSINESS OPERATIONS. To gain maximum benefit from our other priorities, we must have superior operating and support procedures and processes to serve our clients and support our people. Our goal is to equip our people with the knowledge and risk management tools and other globally integrated infrastructure resources they need to create sustainable value for our clients. As we fully leverage the investments we have made in our infrastructure, we will continue to develop a global platform that will allow us to perform our services in an increasingly efficient, integrated and consistent manner.

We committed resources to all G5 priorities during the last three years. By continuing to invest in the future based on our view of how our strengths can support the needs of our clients, we intend to further grow our business and to maintain and expand our position as an industry leader in the process.

 

 

We have demonstrated our commitment of resources to support these priorities and drive growth through a combination of organic growth, which includes hiring individuals and teams to expand service offerings, and the completion of strategic business acquisitions. Beginning with the acquisition of Spaulding & Slye in January 2006, we have completed 23 business acquisitions of varying sizes. Through both organic growth and strategic acquisitions, we have grown significantly over the past five years both in terms of expanding our core service offerings, such as the launch and expansion of energy and sustainability services, and moving into new but related areas, such as providing services for industrial, retail and healthcare properties.

Businesses

MONEY MANAGEMENT

LaSalle Investment Management provides money management services for large institutions, both in specialized funds and separate account vehicles, as well as for managers of institutional and, increasingly, retail real estate funds. Investing money on behalf of clients requires not just asset selection, but also asset value activities that enhance the asset’s performance. The skill set required to succeed in this environment includes knowledge of real estate values—opportunity identification (research), individual asset selection (acquisitions), asset value creation (portfolio management) and investor relations. Our competitors in this area tend to be investment banks, fund managers and other financial services firms. They commonly lack the “on-the-ground” real estate expertise that our global market presence provides.

We are compensated for our services through a combination of recurring advisory fees that are asset-based, together with incentive fees based on underlying investment return to our clients. We generally recognize incentive fees when agreed upon events or milestones are reached and equity earnings at the time of the exit of individual investments within funds. We have been successful in transitioning the mix of our fees for this business to the more annuity revenue category of advisory fees. We also have increasingly been seeking to form alliances with distributors of real estate investment funds to retail clients where we provide the real estate investment expertise. In 2007, these funds, which exist in all three global regions, attracted approximately $400 million in investments, bringing the total we have allocated to these funds to approximately $3.0 billion. Additionally, our strengthened balance sheet and continued cash generation position us for expansion in co-investment activity, which we believe will accelerate our growth in assets under management.

LOCAL MARKET SERVICES

The services we offer to real estate investors in local markets around the world range from client-critical best practice process services (such as property management) to sophisticated and complex transactional services (such as leasing) that maximize real estate values. The skill set required to succeed in this environment includes financial knowledge coupled with the delivery of market and property operating organizations, ongoing technology investment and strong cash controls as the business is a fiduciary for client funds. The revenue streams

 

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associated with process services have annuity characteristics and tend to be less impacted by underlying economic conditions. The revenue stream associated with the sophisticated and complex transactional services is generally transaction-specific and conditioned upon the successful completion of the transaction. We compete in this area with traditional real estate and property firms. We differentiate ourselves on the basis of qualities such as our local presence aligned with our global platform, our research capability, our technology platform and our ability to innovate by way of new products and services.

CAPITAL MARKETS AND REAL ESTATE INVESTMENT BANKING

Our capital markets product offerings include institutional property sales and acquisitions, real estate financings, private equity placements, portfolio advisory activities, and corporate finance advice and execution. As more and more real estate assets are marketed internationally, and as a growing number of clients are investing outside their home markets, our Capital Markets Services teams combine local market knowledge with our access to global capital sources to provide clients with superior execution in raising capital for their real estate assets. Capital Markets Services units are typically compensated on the basis of the value of transactions completed or securities placed. In certain circumstances, we receive retainer fees for portfolio advisory services. By researching, developing and introducing innovative new financial products and strategies, Capital Markets Services is integral to the business development efforts of our other businesses.

Real Estate Investment Banking Services includes sourcing capital, both in the form of equity and debt, derivatives structuring and other traditional investment banking services designed to assist corporate clients in maximizing the value of their real estate. Our investment banking services require client relationship skills and consulting capabilities as we act as our client’s trusted advisor. The level of demand for these services is impacted by general economic conditions. Our fee structure is generally transaction-specific and conditioned upon the successful completion of the transaction. We compete with consulting and investment banking firms for corporate finance and capital markets transactions. We differentiate ourselves on the basis of qualities such as our global platform, our research capability, our technology platform and our ability to innovate as demonstrated through the creation of new products and services.

Because of the success we have had with our capital markets business, particularly in Europe and also with our global Hotels business, and because we expect the trans-border flow of real estate investments to remain strong, we are focused on enhancing our ability to provide capital markets services in an increasingly global fashion. This success leverages our regional market knowledge for clients who seek to benefit from a truly global capital markets platform.

OCCUPIER SERVICES

Our occupier services product offerings have leveraged our local market real estate services into best practice operations and process capabilities that we offer to corporate clients. The value added for these clients is the transformation of their real estate assets into an integral part of their core business strategies, delivered at more effective cost. The Firm’s client relationship focus drives our business success, as delivery of one product successfully sells the next and subsequent services. The skill set required to succeed in this environment includes financial and project management, and for some products, more technical skills such as engineering and energy management. We compete in this area with traditional real estate and property firms.

We differentiate ourselves on the basis of qualities that include our integrated global platform, our research capability, our technology platform and our ability to innovate through best practice products and services. Our strong strategic focus also provides a highly effective point of differentiation from our competitors. We have seen the demand for coordinated multi-national occupier services by global corporations increase, and we expect this trend to continue as these businesses refocus on core competencies. Consequently, we focus on continuing to enhance our ability to deliver our services across all geographies globally in a seamless and coordinated fashion that best leverages our expertise for our clients’ benefit.

Summary of Critical Accounting Policies and Estimates

An understanding of our accounting policies is necessary for a complete analysis of our results, financial position, liquidity and trends. The preparation of our financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. These accounting estimates are based on management’s judgment and we consider them to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to ensure reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material.

REVENUE RECOGNITION

The SEC’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended by SAB 104, provides guidance on the application of U.S. generally accepted accounting principles (“U.S. GAAP”) to selected revenue recognition issues. Additionally, EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), provides guidance on the application of U.S. GAAP to revenue transactions with multiple deliverables.

We earn revenue from the following principal sources:

 

 

Transaction commissions;

 

 

Advisory and management fees;

 

 

Incentive fees;

 

 

Project and development management fees; and

 

 

Construction management fees.

 

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We recognize transaction commissions related to agency leasing services, capital markets services and tenant representation services as income when we provide the related service unless future contingencies exist. If future contingencies exist, we defer recognition of revenue until the respective contingencies have been satisfied.

We recognize advisory and management fees related to property management services, valuation services, corporate property services, strategic consulting and money management as income in the period in which we perform the related services.

We recognize incentive fees based on the performance of underlying funds’ investments and the contractual benchmarks, formulas and timing of the measurement period with clients.

We recognize project and development management fees and construction management fees by applying the “percentage of completion” method of accounting. We use the efforts expended method to determine the extent of progress toward completion for project and development management fees and costs incurred to total estimated costs for construction management fees.

Certain contractual arrangements for services provide for the delivery of multiple services. We evaluate revenue recognition for each service to be rendered under these arrangements using criteria set forth in EITF 00-21. For services that meet the separability criteria, revenue is recognized separately. For services that do not meet those criteria, revenue is recognized on a combined basis.

We follow the guidance of EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF 01-14”). Accordingly, we have recorded these reimbursements as revenues in the income statement, as opposed to showing them as a reduction of expenses.

In certain of our businesses, primarily those involving management services, we are reimbursed by our clients for expenses incurred on their behalf. The treatment of reimbursable expenses for financial reporting purposes is based upon the fee structure of the underlying contracts. We follow the guidance of EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”), when accounting for reimbursable personnel and other costs. A contract that provides a fixed fee billing, fully inclusive of all personnel or other recoverable expenses incurred but not separately scheduled, is reported on a gross basis. When accounting on a gross basis, our reported revenues include the full billing to our client and our reported expenses include all costs associated with the client.

We account for a contract on a net basis when the fee structure is comprised of at least two distinct elements, namely a fixed management fee and a separate component that allows for scheduled reimbursable personnel or other expenses to be billed directly to the client. When accounting on a net basis, we include the fixed management fee in reported revenues and net the reimbursement against expenses.

 

We base this characterization on the following factors, which define us as an agent rather than a principal:

 

 

The property owner, with ultimate approval rights relating to the employment and compensation of on-site personnel, and bearing all of the economic costs of such personnel, is determined to be the primary obligor in the arrangement;

 

 

Reimbursement to Jones Lang LaSalle is generally completed simultaneously with payment of payroll or soon thereafter;

 

 

Because the property owner is contractually obligated to fund all operating costs of the property from existing cash flow or direct funding from its building operating account, Jones Lang LaSalle bears little or no credit risk; and

 

 

Jones Lang LaSalle generally earns no margin in the reimbursement aspect of the arrangement, obtaining reimbursement only for actual costs incurred.

Most of our service contracts utilize the latter structure and are accounted for on a net basis. We have always presented the above reimbursable contract costs on a net basis in accordance with U.S. GAAP. Such costs aggregated approximately $931 million, $746 million and $549 million in 2007, 2006 and 2005, respectively. This treatment has no impact on operating income, net income or cash flows.

ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE

We estimate the allowance necessary to provide for uncollectible accounts receivable. This estimate includes specific accounts for which payment has become unlikely. We also base this estimate on historical experience, combined with a careful review of current developments and with a strong focus on credit quality. The process by which we calculate the allowance begins in the individual business units where specific problem accounts are identified and reserved as part of an overall reserve that is formulaic and driven by the age profile of the receivables. These allowances are then reviewed on a quarterly basis by regional and global management to ensure they are appropriate. As part of this review, we develop a range of potential allowances on a consistent formulaic basis. We would normally expect that the allowance would fall within this range. Our allowance for uncollectible accounts receivable as determined under this methodology was $13.3 million and $7.8 million at December 31, 2007 and 2006, respectively.

Over the past several years we have placed considerable focus on working capital management and, in particular, collecting our receivables in a more timely manner. Our bad debt expense as a percentage of revenues has been reduced as we have been successful in working capital management and collecting receivables more timely. Bad debt expense was $4.2 million, $3.6 million and $2.2 million for the years ended December 31, 2007, 2006 and 2005, respectively. Bad debt expense was less than two-tenths of one percent of total revenues in each of the last three years. Considering our growth in revenues and receivables over the last several years, we believe this level of bad debt expense reflects effective efforts in working capital management.

 

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INVESTMENTS IN REAL ESTATE VENTURES

We invest in certain real estate ventures that own and operate commercial real estate. Typically, these are co-investments in funds that our Investment Management business establishes in the ordinary course of business for its clients. These investments include non-controlling ownership interests generally ranging from less than 1% to 48.78% of the respective ventures. We apply the provisions of the following guidance when accounting for these interests:

 

 

 

FASB Interpretation No. 46 (revised), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”)

 

 

EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”)

 

 

AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” as amended by FASB Staff Position No. SOP 78-9-a (“SOP 78-9-a”)

 

 

Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”)

 

 

EITF Topic No. D-46, “Accounting for Limited Partnership Investments” (“EITF D-46”)

The application of such guidance generally results in accounting for these interests under the equity method in the accompanying consolidated financial statements due to the nature of our non-controlling ownership in the ventures.

For real estate limited partnerships in which the Company is a general partner, we apply the guidance set forth in FIN 46R, EITF 04-5 and SOP 78-9-a in evaluating the control the Company has over the limited partnership. These entities are generally well-capitalized and grant the limited partners important rights, such as the right to replace the general partner without cause, to dissolve or liquidate the partnership, to approve the sale or refinancing of the principal partnership assets, or to approve the acquisition of principal partnership assets. We account for such general partner interests under the equity method.

For real estate limited partnerships in which the Company is a limited partner, the Company is a co-investment partner, and based on applying the guidance set forth in FIN 46R and SOP 78-9-a, has concluded that it does not have a controlling interest in the limited partnership. When we have an asset advisory contract with the real estate limited partnership, the combination of our limited partner interest and the advisory agreement provides us with significant influence over the real estate limited partnership venture. Accordingly, we account for such investments under the equity method. When the Company does not have an asset advisory contract with the limited partnership, but only has a limited partner interest without significant influence, and our interest in the partnership is considered “minor” under EITF D-46 (namely, not more than 3 to 5 percent), we account for such investments under the cost method.

For investments in real estate ventures accounted for under the equity method, we maintain an investment account, which is increased by contributions made and by our share of net income of the real estate ventures, and decreased by distributions received and by our share of net losses of the real estate ventures. Our share of each real estate venture’s net income or loss, including gains and losses from capital transactions, is reflected in our consolidated statement of earnings as “Equity in earnings (losses) from real estate ventures.” For investments in real estate ventures accounted for under the cost method, our investment account is increased by contributions made and decreased by distributions representing return of capital.

ASSET IMPAIRMENTS

Within the balances of property and equipment used in our business, we have computer equipment and software; leasehold improvements; furniture, fixtures and equipment; and automobiles. Goodwill and other identified intangibles have been recorded from a series of acquisitions and one substantial merger. We also invest in certain real estate ventures that own and operate commercial real estate. Typically, these are co-investments in funds that our Investment Management business establishes in the ordinary course of business for its clients. These investments include non-controlling ownership interests generally ranging from less than 1% to 48.78% of the respective ventures. We generally account for these interests under the equity method of accounting in the accompanying Consolidated Financial Statements due to the nature of our non-controlling ownership.

 

 

Property and Equipment—We apply Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), to recognize and measure impairment of property and equipment owned or under capital lease. We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. If impairment exists due to the inability to recover the carrying value of an asset group, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value. We did not recognize an impairment loss related to property and equipment in 2007, 2006 or 2005.

 

 

Goodwill and Other Intangible Assets—We apply SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), when accounting for goodwill and other intangible assets. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead evaluated for impairment at least annually. To accomplish this annual evaluation, we determine the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of evaluation. Under SFAS 142, we define reporting units as Investment Management, Americas IOS, Australia IOS, Asia IOS, and by country groupings in Europe IOS. We then determine the fair value of each reporting unit on the basis of a discounted cash flow methodology and compare it to the reporting unit’s carrying value. The result of the 2007, 2006 and 2005 evaluations was that the fair value of each reporting unit exceeded its carrying amount, and therefore we did not recognize an impairment loss in any of those years.

 

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Investments in Real Estate Ventures—We apply the provisions of APB 18, SEC Staff Accounting Bulletin Topic 5-M, “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities” (“SAB 59”), and SFAS 144 when evaluating investments in real estate ventures for impairment, including impairment evaluations of the individual assets underlying our investments. We review investments in real estate ventures on a quarterly basis for indications of whether the carrying value of the real estate assets underlying our investments in real estate ventures may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows expected to be generated by the underlying assets. When an “other than temporary” impairment has been identified related to a real estate asset underlying one of our investments in ventures, we use a discounted cash flow approach to determine the fair value of the asset in computing the amount of the impairment. We then record the portion of the impairment loss related to our investment in the reporting period.

There were no impairment charges in equity earnings in 2007 or 2006. There were $1.8 million of such impairment charges to equity earnings in 2005, representing our equity share of the impairment charges against individual assets held by these ventures.

Additionally, since the 2001 closing of our Land Investment Group and sale of our Development Group, we have recorded net impairment charges related to investments originated by these groups to restructuring expense. There were $0.4 million, $0.7 million and $0.4 million of net credits to restructuring credits in 2007, 2006 and 2005, respectively, related to cash received from sales of land previously written down to a net book value of $0 in the Land Investment Group.

INCOME TAXES

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Because of the global and cross border nature of our business, our corporate tax position is complex. We generally provide for taxes in each tax jurisdiction in which we operate based on local tax regulations and rules. Such taxes are provided on net earnings and include the provision of taxes on substantively all differences between financial statement amounts and amounts used in tax returns, excluding certain non-deductible items and permanent differences.

Our global effective tax rate is sensitive to the complexity of our operations as well as to changes in the mix of our geographic profitability. Local statutory tax rates range from 10% to 42% in the countries in which we have significant operations. We evaluate our estimated effective tax rate on a quarterly basis to reflect forecast changes in:

 

  (i) Our geographic mix of income;

 

  (ii) Legislative actions on statutory tax rates;

 

  (iii) The impact of tax planning to reduce losses in jurisdictions where we cannot recognize the tax benefit of those losses; and

 

  (iv) Tax planning for jurisdictions affected by double taxation.

We continuously seek to develop and implement potential strategies and/or actions that would reduce our overall effective tax rate. We reflect the benefit from tax planning actions when we believe it is probable that they will be successful, which usually requires that certain actions have been initiated. We provide for the effects of income taxes on interim financial statements based on our estimate of the effective tax rate for the full year.

We achieved an effective tax rate of 25.2%, 26.7% and 25.9% in 2007, 2006 and 2005, respectively, which reflected our continued disciplined management of our global tax position.

Based on our historical experience and future business plans, we do not expect to repatriate our foreign source earnings to the United States. As a result, we have not provided deferred taxes on such earnings or the difference between tax rates in the United States and the various international jurisdictions where such amounts were earned. Further, there are various limitations on our ability to utilize foreign tax credits on such earnings when repatriated. As such, we may incur taxes in the United States upon repatriation without credits for foreign taxes paid on such earnings.

We have established valuation allowances against deferred tax assets where expected future taxable income does not support their probable realization. We formally assess the likelihood of being able to utilize current tax losses in the future on a country-by-country basis, with the determination of each quarter’s income tax provision; and we establish or increase valuation allowances upon specific indications that the carrying value of a tax asset may not be recoverable, or alternatively we reduce valuation allowances upon specific indications that the carrying value of the tax asset is more likely than not recoverable or upon the implementation of tax planning strategies allowing an asset previously determined not realizable to be viewed as realizable. The table below summarizes certain information regarding the gross deferred tax assets and valuation allowance for the past three years ($ in millions):

 

    DECEMBER 31,
     2007   2006   2005

Gross deferred tax assets

  $ 147.6   108.9   115.1

Valuation allowance

    2.5   2.4   5.3

The increase in gross deferred tax assets from 2006 to 2007 was the result of an increase in the amount of expense accruals not yet deductible. The decrease in gross deferred tax assets from 2005 to 2006

 

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was the result of the usage of net operating loss carryforwards in 2006, with much of that decrease being offset by the growth in expense accruals not yet deductible.

We evaluate our segment operating performance before tax, and do not consider it meaningful to allocate tax by segment. Estimations and judgments relevant to the determination of tax expense, assets and liabilities require analysis of the tax environment and the future profitability, for tax purposes, of local statutory legal entities rather than business segments. Our statutory legal entity structure generally does not mirror the way that we organize, manage and report our business operations. For example, the same legal entity may include both Investment Management and IOS businesses in a particular country.

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN 48, the Company did not recognize any adjustment to its retained earnings or any change to its liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows ($ in millions):

 

Balance at January 1, 2007

   $ 19.9  

Additions based on tax positions related to the current year

     2.4  

Additions for tax positions of prior years

      

Reductions for tax positions of prior years

      

Reductions for lapse of the statute of limitations

     (0.3 )

Settlements

      

Balance at December 31, 2007

   $ 22.0  

All of the unrecognized benefits, if recognized, would affect the effective tax rate. The Company does not believe there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months after December 31, 2007. The Company does not believe that it has material tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

INCENTIVE COMPENSATION

An important part of our overall compensation package is incentive compensation, which we typically pay to our employees in the first quarter of the year after it is earned. Certain employees receive a portion of their annual incentive compensation in the form of restricted stock units of our common stock under programs in which the restricted units vest over periods of up to 64 months from the date of grant. Under each program, we amortize related compensation cost to expense over the service period.

The most significant of these programs under which restricted stock units are granted is our stock ownership program. We increase incentive compensation deferred under the stock ownership program by 20% when determining the value of restricted stock units we grant. These restricted units vest in two parts: 50% at 18 months and 50% at 30 months, in each case from the date of grant (namely, vesting periods start in January of the year following that for which the bonus was earned). The service period over which the related compensation cost is amortized to expense consists of the 12 months of the year to which payment of the restricted stock relates, plus the periods over which the stock vests. Given that we do not finalize individual incentive compensation awards until after year-end, we must estimate the portions of the overall incentive compensation pools that will qualify for these programs. Estimations factor in the performance of the Company and individual business units, together with the target bonuses for qualified individuals.

We determine, announce and pay incentive compensation in the first quarter of the year following that to which the incentive compensation relates, at which point we true-up the estimated stock ownership program deferral and related amortization. The table below sets forth certain information regarding the stock ownership program ($ in millions, except employee data):

 

    YEAR ENDED DECEMBER 31,  
     2007     2006     2005  

Number of employees qualified
for the restricted stock programs

    1,500     1,200     1,000  

Deferral of compensation under
the stock ownership program

  $ (39.9 )   (28.8 )   (23.1 )

Enhancement of deferred compensation

    (8.0 )   (7.2 )   (5.8 )

(Increase)/decrease to deferred compensation in the first quarter of the following year

    N/A     (1.6 )   0.3  

Total deferred compensation

  $ (47.9 )   (37.6 )   (28.6 )

Compensation expense recognized with regard to the current year stock ownership program

  $ 15.4     11.3     10.1  

Compensation expense recognized with regard to prior year stock ownership programs

    25.0     15.8     9.6  

Total stock ownership program compensation expense

  $ 40.4     27.1     19.7  

SELF-INSURANCE PROGRAMS

In our Americas business, and in common with many other American companies, we have chosen to retain certain risks regarding health insurance and workers’ compensation rather than purchase third-party insurance. Estimating our exposure to such risks involves subjective judgments about future developments. We supplement our traditional global insurance program by the use of a captive insurance company to provide professional indemnity and employment practices insurance on a “claims made” basis. As professional indemnity claims can be complex and take a number of years to resolve, we are required to estimate the ultimate cost of claims.

 

 

Health Insurance—We self-insure our health benefits for all U.S.-based employees, although we purchase stop loss coverage on an annual basis to limit our exposure. We self-insure because we believe that on

 

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the basis of our historic claims experience, the demographics of our workforce and trends in the health insurance industry, we incur reduced expense by self-insuring our health benefits as opposed to purchasing health insurance through a third party. We estimate our likely full-year health costs at the beginning of the year and expense this cost on a straight-line basis throughout the year. In the fourth quarter, we estimate the required reserve for unpaid health costs required at year-end.

 

  Given the nature of medical claims, it may take up to 24 months for claims to be processed and recorded. The reserve balance for the 2007 program is $5.8 million at December 31, 2007.

 

  The table below sets out certain information related to the cost of the health insurance program for the years ended December 31, 2007, 2006 and 2005 ($ in millions):

 

     2007     2006     2005  

Expense to Company

  $ 14.8     11.6     7.9  

Employee contributions

    3.8     3.7     2.6  

Adjustment to prior year reserve

    (1.5 )   (0.3 )   (0.5 )

Total program cost

  $ 17.1     15.0     10.0  

 

 

Workers’ Compensation Insurance—Given our belief, based on historical experience, that our workforce has experienced lower costs than is normal for our industry, we have been self-insured for workers’ compensation insurance for a number of years. We purchase stop loss coverage to limit our exposure to large, individual claims. On a periodic basis we accrue using various state rates based on job classifications. On an annual basis in the third quarter, we engage in a comprehensive analysis to develop a range of potential exposure, and considering actual experience, we reserve within that range. We accrue the estimated adjustment to income for the differences between this estimate and our reserve. The credits taken to revenue for the years ended December 31, 2007, 2006 and 2005 were $5.2 million, $3.0 million and $3.7 million, respectively.

 

  The table below sets out the range and our actual reserve for the past three years ($ in millions):

 

     MAXIMUM
RESERVE
 

MINIMUM

RESERVE

 

ACTUAL

RESERVE

December 31, 2007

  $ 9.8   9.2   9.8

December 31, 2006

    8.4   7.8   8.4

December 31, 2005

    7.6   7.0   7.6

 

  Given the uncertain nature of claim reporting and settlement patterns associated with workers’ compensation insurance, we have accrued at the higher end of the range.

 

 

Captive Insurance Company—In order to better manage our global insurance program and support our risk management efforts, we supplement our traditional insurance program by the use of a wholly-owned captive insurance company to provide professional indemnity and employment practices liability insurance coverage on a “claims made” basis. The level of risk retained by our captive is up to $2.5 million per claim (dependent upon location) and up to $12.5 million in the aggregate. The reserves estimated and accrued in accordance with SFAS 5 for self-insurance facilitated through our captive insurance company, which relate to multiple years, were $7.1 million and $9.3 million, net of receivables from third party insurers, as of December 31, 2007 and 2006, respectively.

 

  Professional indemnity insurance claims can be complex and take a number of years to resolve. Within our captive insurance company, we estimate the ultimate cost of these claims by way of specific claim reserves developed through periodic reviews of the circumstances of individual claims, as well as reserves against current year exposures on the basis of our historic loss ratio. The increase in the level of risk retained by the captive means we would expect that the amount and the volatility of our estimate of reserves will be increased over time. With respect to the consolidated financial statements, when a potential loss event occurs, management estimates the ultimate cost of the claims and accrues the related cost in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”).

 

  The table below provides details of the year-end reserves, which can relate to multiple years, that we have established as of ($ in millions):

 

      RESERVE AT YEAR-END

December 31, 2007

   $             7.1

December 31, 2006

     7.9

December 31, 2005

     10.9

New Accounting Standards

FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS 123R. The provisions of SFAS 157 are effective for financial assets beginning January 1, 2008. In November 2007, the FASB deferred the implementation of SFAS 157 for non-financial assets and liabilities for one year. Management does not believe that the adoption of SFAS 157 will have a material impact on our consolidated financial statements.

FAIR VALUE OPTION

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company has the option of adopting fair value accounting for financial assets and liabilities in accordance with the guidance of SFAS 159 beginning January 1, 2008. Management does not believe that the adoption of SFAS 159 will have a material impact on our consolidated financial statements.

 

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BUSINESS COMBINATIONS

In December 2007, the FASB issued SFAS 141(revised), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will change how identifiable assets acquired and the liabilities assumed in a business combination will be recorded in the financial statements. SFAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires expensing of most transaction and restructuring costs. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is after December 31, 2008. Management has not yet determined what impact the application of SFAS 141(R) will have on our consolidated financial statements.

NONCONTROLLING INTERESTS

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. SFAS 160 applies prospectively as of January 1, 2009. Management has not yet determined what impact the application of SFAS 160 will have on our consolidated financial statements.

Items Affecting Comparability

LASALLE INVESTMENT MANAGEMENT REVENUES

Our money management business is in part compensated through the receipt of incentive fees where performance of underlying funds’ investments exceeds agreed-to benchmark levels. Depending upon performance and the contractual timing of measurement periods with clients, these fees can be significant and vary substantially from period to period. In 2006, the Firm recognized a gross incentive fee of $112.5 million from a single client. The fee, determined from an independent third-party valuation of the related portfolio, was larger than usual due to the eight-year contractual measurement period, as well as outstanding performance execution by the Firm.

“Equity in earnings from real estate ventures” may also vary substantially from period to period for a variety of reasons, including as a result of: (i) impairment charges, (ii) realized gains on asset dispositions, or (iii) incentive fees recorded as equity earnings. The timing of recognition of these items may impact comparability between quarters, in any one year, or compared to a prior year.

The comparability of these items can be seen in Note 3 of the Notes to Consolidated Financial Statements and is discussed further in Segment Operating Results included herein.

 

IOS REVENUES

Expansion of our real estate investment banking, capital markets activities and other transaction based services within our Investor and Occupier Services businesses will tend to increase the revenues we receive that relate to the size and timing of our clients’ transactions. As we attempt to continue to expand these services, we would also expect the timing of recognition of these items to increasingly impact comparability between quarters, in any one year, or compared to a prior year. Fees from these services can be significant and may vary substantially from period to period. For example, in the second quarter of 2007, we recognized a significant transaction fee in our Asia Pacific segment for the sale of a portfolio of 13 Japanese hotels.

FOREIGN CURRENCY

We conduct business using a variety of currencies, but report our results in U.S. dollars, as a result of which our reported results may be positively or negatively impacted by the volatility of currencies against the U.S. dollar. This volatility can make it more difficult to perform period-to-period comparisons of the reported U.S. dollar results of operations, as such results demonstrate a growth rate that might not have been consistent with the real underlying growth rate in the local operations. As a result, we provide information about the impact of foreign currencies in the period-to-period comparisons of the reported results of operations in our discussion and analysis of financial condition in the Results of Operations section below.

Market and Other Risk Factors

MARKET RISK

The principal market risks (namely, the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are:

 

 

Interest rates on our multi-currency credit facility; and

 

 

Foreign exchange risks

In the normal course of business, we manage these risks through a variety of strategies, including the use of hedging transactions using various derivative financial instruments such as foreign currency forward contracts. We enter into derivative instruments with high credit quality counterparties and diversify our positions across such counterparties in order to reduce our exposure to credit losses. We do not enter into derivative transactions for trading or speculative purposes.

INTEREST RATES

We centrally manage our debt, considering investment opportunities and risks, tax consequences and overall financing strategies. We are primarily exposed to interest rate risk on our revolving multi-currency credit facility that is available for working capital, investments, capital expenditures and acquisitions. Our average outstanding borrowings under the revolving credit facility were $153.9 million during 2007, and the effective interest rate on that facility was 5.5%. As of December 31, 2007, we had $29.2 million outstanding under the revolving credit facility. This facility bears a variable rate of interest based on market

 

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rates. The interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs. To achieve this objective, in the past we have entered into derivative financial instruments such as interest rate swap agreements when appropriate and may do so in the future. We entered into no such agreements in the last three years and we had no such agreements outstanding at December 31, 2007.

The effective interest rate on our debt was 5.5% in 2007, compared to 5.1% in 2006. A 50 basis point increase in the effective interest rate on the revolving credit facility would have increased our net interest expense by $0.8 million during 2007 and $1.0 million during 2006.

FOREIGN EXCHANGE

Foreign exchange risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. Currently, our revenues outside of the United States totaled 64% of total revenues in 2007 and 55% of our total revenues in 2006. Operating in international markets means that we are exposed to movements in foreign exchange rates, primarily related to the British pound (17% of 2007 and 2006 revenues) and the euro (17% of 2007 and 2006 revenues).

We mitigate our foreign currency exchange rate risk principally by establishing local operations in the markets we serve and invoicing customers in the same currency as the source of the costs. The British pound expenses incurred as a result of our European region headquarters being located in London act as a partial operational hedge against our revenue exposure to British pounds.

We enter into forward foreign currency exchange contracts to manage currency risks associated with intercompany loan balances. At December 31, 2007, we had forward exchange contracts in effect with a gross notional value of $744.2 million ($718.4 million on a net basis) with a market and carrying loss of $5.5 million. This carrying loss is offset by a carrying gain in associated intercompany loans such that the net impact to earnings is not significant.

SEASONALITY

Our revenues and profits tend to be significantly higher in the third and fourth quarters of each year than in the first two quarters. This is a result of a general focus in the real estate industry on completing or documenting transactions by calendar-year-end and the fact that certain expenses are constant through the year. Historically, we have reported an operating loss or a relatively small profit in the first quarter and then increasingly larger profits during each of the following three quarters, excluding the recognition of investment-generated performance fees and co-investment equity gains (both of which can be particularly unpredictable). Such performance fees and co-investment equity gains are generally earned when assets are sold, the timing of which is geared toward the benefit of our clients. Non-variable operating expenses, which are treated as expenses when they are incurred during the year, are relatively constant on a quarterly basis.

 

Results of Operations

We operate in a variety of currencies, but report our results in U.S. dollars, which means that our reported results may be positively or negatively impacted by the volatility of those currencies against the U.S. dollar. This volatility means that the reported U.S. dollar revenues and expenses demonstrate apparent growth rates between years that may not be consistent with the real underlying growth rates in the local operations. In order to provide more meaningful year-to-year comparisons of the reported results, we have included detail of the movements in certain reported lines of the Consolidated Statement of Earnings ($ in millions) in both U.S. dollars and in local currencies in the tables throughout this section.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current presentation.

During the third quarter of 2005, we reclassified certain charges (credits) presented within “restructuring charges (credits)” in prior quarters for inclusion within “compensation and benefits” or “operating, administrative and other” expenses. Such reclassifications had no impact on consolidated total operating expenses or operating income.

We report ‘equity in earnings from real estate ventures’ in the consolidated statement of earnings after ‘operating income.’ However, for segment reporting we reflect ‘equity in earnings from real estate ventures’ within ‘total revenue.’ See Note 3 of the Notes to Consolidated Financial Statements for ‘equity earnings (losses)’ reflected within segment revenues, as well as discussion of how the chief operating decision maker (as defined in Note 3) measures segment results with ‘equity earnings (losses)’ included in segment revenues.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

     2007     2006     INCREASE   CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 2,652.1     $ 2,013.6     $ 638.5   32%   26%

Compensation & benefits

    1,724.2       1,313.3       410.9   31%   26%

Operating, administrative & other

    530.4       408.0       122.4   30%   24%

Depreciation & amortization

    55.6       48.9       6.7   14%   9%

Restructuring

    (0.4 )     (0.7 )     0.3   n.m.   n.m.

Operating expenses

    2,309.8       1,769.5       540.3   31%   25%

Operating income

  $ 342.3     $ 244.1     $ 98.2   40%   38%

(n.m. not meaningful)

REVENUE

Revenues for the year ended 2007 were $2.65 billion, an increase of 32% from the prior year that resulted from strong performance in all operating segments. Revenue in 2007 includes a significant advisory transaction

 

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fee earned by the Asia Pacific Hotels business. Included in the 2006 revenue was an incentive fee from a single client of $113 million, earned by LaSalle Investment Management.

See Segment Operating Results below for additional discussion of revenues.

OPERATING EXPENSES

Operating expenses were $2.31 billion in 2007 and $1.77 billion in 2006, an increase of approximately 31% in U.S. dollars and 25% in local currencies from the prior year. The increase in operating expenses in 2007 was largely driven by additions to revenue-generating and client-service staff, both through hiring and strategic acquisitions, and the expansion of offices to support the continued growth of the global business platform. Higher incentive compensation costs related to the strong revenue and profit performance also contributed to the increase in operating expenses.

OPERATING INCOME

Operating income for the year ended 2007 was $342.3 million, compared to $244.1 million in the prior year, an increase of 40%. From 2006 to 2007, revenue increased $638.5 million, or 32%, while operating expenses increased $540.3 million, or 31%.

INTEREST EXPENSE

Interest expense was $13.1 million in 2007 and $14.3 million in 2006, a decrease of 8%, primarily due to a decrease in average debt balances compared to 2006, which included the debt used to finance the Spaulding & Slye acquisition in January 2006.

PROVISION FOR INCOME TAXES

The provision for income taxes was $87.6 million in 2007 as compared to $63.8 million in 2006. The increase in the tax provision is primarily due to improved business performance. The effective tax rate was 25.2% in 2007 as compared to 26.7% in 2006. See Note 8 of the Notes to Consolidated Financial Statements for a further discussion of our effective tax rate.

NET INCOME

Net income was $257.8 million for 2007, an increase of 46% over the prior year’s net income of $176.4 million, driven by strong performance in all operating segments.

SEGMENT OPERATING RESULTS

We manage and report our operations as four business segments:

 

  (i) Investment Management, which offers money management services on a global basis, and

The three geographic regions of Investor and Occupier Services (“IOS”):

 

  (ii) Americas,

 

  (iii) Europe, Middle East and Africa (“EMEA”) and

 

  (iv) Asia Pacific.

 

The Investment Management segment provides money management services to institutional investors and high-net-worth individuals. Each geographic region offers our full range of Investor Services, Capital Markets and Occupier Services. The IOS business consists primarily of tenant representation and agency leasing, capital markets, and valuation services (collectively “transaction services”); and property management, facilities management, project and development management, energy management and sustainability, and construction management services (collectively “management services”).

For segment reporting we show equity in earnings from real estate ventures within our revenue line, especially since it is an integral part of our Investment Management segment. We have not allocated restructuring charges to the business segments for segment reporting purposes and therefore these costs are not included in the discussion below.

AMERICASINVESTOR AND OCCUPIER SERVICES

 

     2007   2006   INCREASE   CHANGE

Revenue

  $ 765.2   $ 622.1   $ 143.1   23%

Operating expense

    684.8     556.6     128.2   23%

Operating income

  $ 80.4   $ 65.5   $ 14.9   23%

Revenue in the Americas region increased 23% over the prior year, and in the fourth quarter of 2007 revenue was $250 million, an increase of 11%. Compared with 2006, Management Services grew 23% for both 2007 and the fourth quarter, while Transaction Services revenue increased 20% for 2007 and was flat for the fourth quarter of 2007. New and expanded relationships with corporate clients produced strong full-year performance, increasing account management revenue by 32% over the prior year. Public Institutions and Project and Development Services grew 35% and 23%, respectively, for 2007. Due to lack of liquidity in the credit markets, transaction volumes for investment sales within the U.S. slowed during the fourth quarter of 2007. As a result, revenue from Capital Markets decreased 20% in the Americas in the fourth quarter of 2007, while remaining up 22% for the full year.

Total operating expenses increased 23% for 2007 and 18% for the fourth quarter of 2007. The increase in operating expenses resulted from the addition of revenue generators in key markets and higher incentive compensation expenses as a result of the growth in both revenue and profit performance. Operating income for the full year increased 23% to $80.4 million and decreased for the fourth quarter of 2007 to $34.7 million from $42.4 million in 2006.

EMEAINVESTOR AND OCCUPIER SERVICES

 

     2007   2006   INCREASE   CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 926.1   $ 679.3   $ 246.8   36%   26%

Operating expense

    834.6     635.3     199.3   31%   22%

Operating income

  $ 91.5   $ 44.0   $ 47.5   108%   89%

EMEA’s revenue grew 36% due to a 35% increase in Transaction Services and a 39% increase in Management Services. Year-over-year

 

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revenue growth in the region was driven by strong performance in all transaction service lines. Agency Leasing continued its momentum, growing approximately 40% for both the full year and fourth quarter of 2007. Advisory Services revenue, which increased 47% for the fourth quarter of 2007 and 65% percent for all of 2007, contributed to the growth in Management Services. Capital Markets was up 20% for 2007 driven by increased market share, despite a decrease of 12% in the fourth quarter of 2007. We completed seven strategic acquisitions in the region in 2007 and opened seven new offices. Both the euro and pound sterling were stronger than the previous year, which contributed to the U.S. dollar revenue growth.

Geographically, the region’s robust growth was led by England, Germany and Russia. Revenue in England, the firm’s largest European market, grew 21% in 2007. Germany had an increase of 53%, while Russia continued its strong growth in 2007 with revenue doubling compared with 2006.

For the fourth quarter of 2007, revenue growth in England and Germany was flat year-over-year, with both countries negatively impacted by lower volumes in Capital Markets transactions. However, the geographical diversity of the EMEA business provided continued growth in the fourth quarter of 2007 as Russia, the Netherlands and Central and Eastern Europe (“CEE”) reported healthy increases in revenue year-over-year. Revenue in Russia increased 78% in the fourth quarter of 2007, while the Netherlands and CEE grew 90% and 61%, respectively over the prior year. The firm has started to benefit from the significant strategic investments and acquisitions in these markets over the past several years.

Operating expenses increased by 31% on a full-year basis and by 17% for the fourth quarter. The increase was primarily due to acquisitions, staff additions to service clients and grow market share, and increased revenue and profit-driven incentive compensation. Operating income for the full year increased 108% to $91.5 million from $44.0 million in 2006, while increasing 58% percent to $47.3 million in the fourth quarter of 2007.

ASIA PACIFICINVESTOR AND OCCUPIER SERVICES

 

     2007   2006   INCREASE   CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 602.1   $ 336.9   $ 265.2   79%   67%

Operating expense

    531.9     318.3     213.6   67%   57%

Operating income

  $ 70.2   $ 18.6   $ 51.6   n.m.   n.m.
(n.m. – not meaningful; change greater than 100%)

Revenue for Asia Pacific increased 79% for the full-year of 2007 and 37% to $170 million for the fourth quarter of 2007. Transaction Services revenue nearly doubled for the year and increased 40% for the fourth quarter of 2007 and Management Services revenue increased 58% for the year and 34% for the fourth quarter of 2007. The region’s 2007 performance was driven by returns from investments made in growing markets, the third-quarter acquisition in India, and a significant Asia Pacific Hotels transaction that involved selling a portfolio of 13 Japanese hotels on behalf of a client in the second quarter. The weakening of the U.S. dollar against most major Asian currencies also contributed to the revenues growth in U.S. dollars in 2007.

Geographically, the strongest revenue contributions were from the region’s largest market, Australia, and from the growth markets of India and Japan, as well as the core market in Singapore. Revenue in Australia grew 43% in 2007 and 51% for the fourth quarter of 2007, compared to 2006. Japan and Singapore also made significant revenue growth contributions, with revenue nearly doubling in each market for 2007.

Results generated by the business we acquired in India, are included in the region’s revenue and operating expenses from the July acquisition date. However, because the acquisition was for an ownership share of less than 100 percent, the portion of operating results not belonging to the firm is classified as a minority interest, net of tax, constituting an offset to net income in the consolidated results.

Operating expenses on a full-year basis for the Asia Pacific region increased 67%, and for the fourth quarter of 2007 increased 40%, over the prior year. The increase was the result of further expansion of the geographic platform, service capabilities and infrastructure throughout the region, and higher incentive compensation associated with revenue-generating activities. Operating income for 2007 increased to $70.2 million from $18.6 million in 2006, and for the fourth quarter increased to $22.0 million from $18.3 million in 2006.

INVESTMENT MANAGEMENT

 

     2007   2006   INCREASE
(DECREASE)
  CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $   361.1   $ 377.2   $ (16.1)   (4)%   (7)%

Equity in earnings from real estate ventures

    9.7     7.1     2.6   37%   35%

Total revenue

    370.8     384.3     (13.5)   (4)%   (6)%

Operating expense

    258.8     260.0     (1.2)   0%   (3)%

Operating income

  $ 112.0   $ 124.3   $ (12.3)   (10)%   (12)%

LaSalle Investment Management’s revenue decreased 4% in 2007 and increased 35% to $115 million for the fourth quarter of 2007. Excluding the $113 million incentive fee earned from a single client in 2006, 2007 revenue increased 36% over 2006. The increase in current-year revenue was driven primarily by the continued growth of the annuity-based business, as well as from incentive fees that were generated from strong performance of assets managed on behalf of clients.

The continued focus on the growth in annuity revenue led to a 38% increase in 2007 in Advisory fees and a 43% increase in the fourth quarter of 2007. The growth in the annuity business was due to the healthy increase in assets under management and advisory fees generated from newly committed capital. Supporting this growth, the firm’s co-investment capital totaled $151.8 million at the end of 2007, compared with $131.8 million at the end of 2006.

 

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Incentive fees vary significantly from period to period due to both the performance of the underlying investments and the contractual timing of the measurement periods for different clients. In 2007, incentive fees were up 52%, excluding the $113 million fee earned in 2006.

LaSalle Investment Management raised over $10.1 billion of equity during 2007, as it launched five new private equity funds and secured 16 global securities mandates. Investments made on behalf of clients during 2007 were $8.4 billion worldwide. Assets under management grew to $49.7 billion from $40.6 billion, a 22% increase over the prior year.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

 

     2006     2005   INCREASE
(DECREASE)
    CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 2,013.6     $ 1,390.6   $ 623.0     45%   43%

Compensation & benefits

    1,313.3       902.7     410.6     45%   44%

Operating, administrative & other

    408.0       320.9     87.1     27%   26%

Depreciation & amortization

    48.9       33.8     15.1     45%   44%

Restructuring

    (0.7 )     1.4     (2.1 )   n.m.   n.m.

Total operating expenses

    1,769.5       1,258.8     510.7     41%   39%

Operating income

  $ 244.1     $ 131.8   $ 112.3     85%   78%
(n.m. – not meaningful)

REVENUE

Revenues for the year ended 2006 were $2.01 billion, an increase of 45% from 2005 that resulted from growth in all operating segments. Included in the Firm’s 2006 full-year results was an incentive fee from a single client of $113 million at a 41% operating income margin.

See Segment Operating Results below for additional discussion of revenues.

OPERATING EXPENSES

Operating expenses were $1.77 billion in 2006 and $1.26 billion in 2005, an increase of approximately 41% in U.S. dollars and 39% in local currencies from the prior year. The increase in operating expenses was driven by significant additions in global Capital Markets and Leasing broker teams, additional client-service staff, and by the expansion of offices to support the global business platform. Also contributing to the increase were the operations added through five strategic acquisitions, including Spaulding & Slye in the Americas, which closed in January 2006. Higher incentive compensation costs related to the strong revenue and profit performance contributed to the increase, as well.

OPERATING INCOME

Operating income for the year ended 2006 was $244.1 million, compared to $131.8 million in the prior year, an increase of 85%. From 2005 to 2006, revenue increased $623.0 million while operating expenses increased $510.7 million. The increase in operating margin resulted from operating, administrative and other costs increasing at a lower rate than revenues when compared to the prior year (27% compared to 45%), a significant portion of which was achieved as a result of the $112.5 million incentive fee noted above.

INTEREST EXPENSE

Interest expense of $14.3 million for the 2006 full year was higher than the $4.0 million for 2005 due to higher debt balances throughout the year compared with 2005. The higher debt balances during the year resulted from acquisition spending totaling $191.7 million, share repurchases of $64.8 million, including $35.1 million in the fourth quarter, and net co-investment funding of $44.3 million in connection with growth in the Firm’s investment management business. Despite these significant cash uses, the Firm had no net debt (i.e., cash and cash equivalents exceeded short-term borrowings and borrowings under credit facilities) at year end.

PROVISION FOR INCOME TAXES

The provision for income taxes was $63.8 million in 2006 as compared to $36.2 million in 2005. The increase in the tax provision is primarily due to improved business performance. The effective tax rate was 26.7% in 2006 as compared to 25.9% in 2005.

NET INCOME

Net income of $176.4 million for 2006 represented an increase of 70% over the prior year’s net income of $103.7 million. The increase was driven by growth in all operating segments, part of which was due to the $112.5 million incentive fee at a 41% operating income margin described above.

SEGMENT OPERATING RESULTS

AMERICASINVESTOR AND OCCUPIER SERVICES

 

     2006   2005   INCREASE   CHANGE

Revenue

  $ 622.1   $ 434.3   $ 187.8   43%

Operating expense

    556.6     384.0     172.6   45%

Operating income

  $ 65.5   $ 50.3   $ 15.2   30%

Americas revenue for the full year 2006 was $622.1 million, an increase of 43% over the prior year, and fourth-quarter revenue was $227 million, an increase of 38%. Compared with 2005, Transaction Services revenue increased 57% for the full year and 45% for the quarter while Management Services grew 31% for the year and 27% for the quarter.

The strong 2006 performance benefited from growth in both the Markets group, whose focus is to maximize the Firm’s competitive position in key local markets, and the Accounts organization, whose focus is on delivering services and strategic advice to corporate clients. Revenue in the Markets and Accounts groups increased by a combined 47% for the full year compared with the prior year. The Spaulding & Slye acquisition had a significant impact on year-over-year revenue growth in both Markets and Accounts. Strong performance in Capital Markets also

 

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contributed to the annual year-over-year revenue growth with a 74% increase over the previous year. Revenue in the Firm’s Americas Hotels business was up 46% in 2006 compared with the prior year as a result of the business’ strong position in a healthy industry environment.

Total operating expenses increased 45% for the full year 2006 and 43% for the quarter compared with 2005. The increase in operating expenses resulted from significant additions to the local market teams and from operations added through the Spaulding & Slye acquisition. In addition, incentive compensation expenses increased as a result of the growth in both revenue-generating activities and profit performance.

EMEAINVESTOR AND OCCUPIER SERVICES

 

     2006   2005   INCREASE   CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 679.3   $ 492.8   $ 186.5   38%   34%

Operating expense

    635.3     468.3     167.0   36%   32%

Operating income

  $ 44.0   $ 24.5   $ 19.5   80%   54%

EMEA’s full-year 2006 revenue grew 38% and 34% in U.S. dollars and local currencies, respectively, to $679.3 million, and fourth-quarter 2006 revenue increased 53% in U.S. dollars and 39% in local currencies to $270 million. Transaction Services revenue grew 44% for the full year to $557 million, and 54% for the quarter, while Management Services revenue grew 19% for the year to $114 million, and 67% for the quarter. Year-over-year annual revenue growth in the region was driven by strong performance in Capital Markets, which was up 70% for the year driven by increased market share and strong underlying market conditions, and by Agency Leasing, which grew 26%. We completed four strategic acquisitions in the region in 2006 (in the United Kingdom, Spain, and United Arab Emirates) and opened six new offices which, together with hiring, resulted in the addition of approximately 350 revenue-generators in the year.

Geographically, the region’s robust full-year 2006 growth was driven primarily by France and Germany. Revenue in France grew 83% in U.S. dollars for the full year and 60% for the fourth quarter compared with the prior year, while Germany had an increase of 58% for the full year and 45% for the quarter. Russia continued its strong growth with full year revenue doubling compared with the prior year, while very favorable trends continued in Central and Eastern Europe and Spain. The EMEA Hotels business also had solid growth with annual revenues up almost 30% compared with the prior year.

Operating expenses increased by 36% in U.S. dollars and 32% in local currencies on a full-year 2006 basis and by 56% in U.S. dollars and 43% in local currencies for the quarter. The increase was primarily due to acquisitions, staff additions to service clients and grow market share, and increased incentive compensation driven by improved revenue and profit performance.

 

ASIA PACIFICINVESTOR AND OCCUPIER SERVICES

 

     2006   2005   INCREASE
(DECREASE)
    CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 336.9   $ 272.9   $ 64.0     23%   23%

Operating expense

    318.3     252.9     65.4     26%   27%

Operating income

  $ 18.6   $ 20.0   $ (1.4 )   (7)%   (7)%

Revenue for the Asia Pacific region on a full-year 2006 basis was $336.9 million, an increase of 23% in both U.S. dollars and local currencies, and $124 million for the fourth quarter, an increase of 35% in U.S. dollars and 31% in local currencies from the prior year. Growth for the full year and fourth quarter in U.S. dollars resulted from both Transaction Services revenue, which increased 22% and 32%, respectively, and Management Services revenue, which increased 20% and 38%, respectively.

Geographically, the strongest profit contributions were from the region’s largest market, Australia, and from the growth markets of China and Korea. Revenue in Australia grew 22% for the year and 26% for the quarter, while revenue in China increased 60% for the year and 64% for the quarter, compared with the prior year. Korea’s revenue for the year was up 69%, and finished the year strongly with fourth-quarter 2006 revenue more than double compared with the prior year. India and Singapore also made significant revenue growth contributions. The leading Asian Hotels business recorded a very strong finish in 2006 with revenue almost tripling in the last quarter compared with the prior year and with revenue for the full year up 33% as a result of higher transaction volume and increased market share. Offsetting the region’s growth was a decline in Japan, where Capital Markets activity was lower in 2006 compared with 2005, which included several significant transactions.

Operating expenses on a full-year 2006 basis for the Asia Pacific region increased 26% in both U.S. dollars and local currencies, and for the fourth quarter increased 34% in U.S. dollars and 30% in local currencies, over the prior year. The increase was the result of expansion of the geographic platform, service capabilities and infrastructure throughout the region.

Operating income decreased from $20.0 million in 2005 to $18.6 million in 2006. Included in 2006’s full year results were expenses of approximately $1.7 million for net transition costs incurred to outsource the management of the region’s IT infrastructure, call centers and application development, positioning the region for future growth. The 2005 full-year results included a benefit of $2.4 million received from a litigation settlement. Excluding the impact of these items, operating income for the region would have increased from $17.6 million in 2005 to $20.3 million in 2006, with operating income margins flat at approximately 6%. The firm is now well-positioned with a leading market share in the region to capitalize on the anticipated growth.

 

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INVESTMENT MANAGEMENT

 

     2006   2005   INCREASE
(DECREASE)
    CHANGE
IN U.S.
DOLLARS
  % CHANGE
IN LOCAL
CURRENCIES

Revenue

  $ 377.2   $ 190.8   $ 186.4     98%   94%

Equity in earnings from real estate ventures

    7.1     11.9     (4.8 )   (40)%   (41)%

Total revenue

    384.3     202.7     181.6     90%   86%

Operating expense

    260.0     152.3     107.7     71%   69%

Operating income

  $ 124.3   $ 50.4   $ 73.9     n.m.   n.m.
(n.m. – not meaningful; change greater than 100%)

LaSalle Investment Management’s full-year 2006 revenue grew to $384.3 million, up 90% in U.S. dollars and 86% in local currencies over the prior year, and fourth-quarter 2006 revenue increased to $85 million, up 18% in U.S. dollars and 13% in local currencies. The increase in revenue was driven by the continued growth of the annuity-based business as well as from incentive fees that were generated from strong performance of clients’ investments managed by the Firm.

The continued focus on the growth in annuity-like revenue led to a full-year increase in Advisory fees of 39% and a fourth quarter increase of 48% over 2005. The growth in the annuity-based business was principally due to the healthy increase in assets under management. Supporting this growth, the Firm’s co-investment capital totaled $129.5 million at the end of 2006, compared with $88.7 million in the prior year.

Incentive fees vary significantly from period to period due to both the performance of the underlying investments and the contractual benchmarks, formulas and timing of the measurement periods for different clients. In 2006, incentive fees were up significantly for the full year due to the single incentive fee earned in the second quarter of the year, and were slightly down for the fourth quarter compared with last year. The amount of the specific incentive fee was originally disclosed as $109.5 million, but increased during the second half of the year to $112.5 million as a result of final third-party valuations and audit.

LaSalle Investment Management raised over $7.1 billion of equity during 2006, as it launched three new private equity funds and secured 16 global securities mandates. Investments made on behalf of clients in 2006 were $9.6 billion, including the CenterPoint acquisition, compared with approximately $5.4 billion in 2005. Assets under management grew to $40.6 billion from $30.0 billion, a 35% increase over the prior year.

Consolidated Cash Flows

CASH FLOWS FROM OPERATING ACTIVITIES

During 2007, cash flows provided by operating activities totaled $409.4 million, an increase of $31.7 million, or 8%, over the $377.7 million of cash flows provided by operating activities in 2006. The most significant items driving the $31.7 million increase in cash flow from operations were an increase in net income of $81.4 million, or 46%, from 2006 to 2007, partially offset by net increases in working capital and deferred tax assets compared to 2006. Current assets less current liabilities increased by $30.0 million in 2007, and long-term deferred tax assets, net, increased by $15.2 million over the same period. Increases in accounts payable and accrued liabilities ($303.0 million compared to $221.4 million at December 31, 2007 and 2006, respectively) and accrued compensation ($655.9 million compared to $514.6 million at December 31, 2007 and 2006, respectively), offset in part by increases in trade receivables ($834.9 million compared to $630.1 million at December 31, 2007 and 2006, respectively), were the most significant components of the net change in working capital, and also are reflective of continued growth.

During 2006, cash flows provided by operating activities totaled $377.7 million compared to $120.6 million in 2005, due to improved and expanded business performance in 2006. The 2006 increase in cash flow from operations was driven by a 70% increase in net income and a net decrease in working capital. Increases in accounts payable and accrued liabilities ($221.4 million compared to $155.7 million at December 31, 2006 and 2005, respectively) and accrued compensation ($514.6 million compared to $300.8 million at December 31, 2006 and 2005, respectively), offset in part by increases in trade receivables ($630.1 million compared to $415.1 million at December 31, 2006 and 2005, respectively), were most responsible for the increase in cash flows from changes in working capital, and also are reflective of improved and expanded business performance.

CASH FLOWS USED IN INVESTING ACTIVITIES

We used $258.5 million in investing activities in 2007, which was a decrease of $47.9 million from the $306.4 million used for investing activities in 2006. The decrease was due to a $57.5 million decrease in cash used for acquisitions, as well as a $33.8 million decrease in net fundings of co-investment activity, primarily as a result of more significant distributions from and sales of investments in 2007 when compared with 2006, partially off-set by a $43.4 million increase in net property and equipment additions.

We used $306.4 million in investing activities in 2006, which was an increase in cash used of $245.4 million from the $61.0 million used in 2005. This increase was primarily due to $186.8 million more of business acquisitions activity in 2006 than in 2005, but also was due to increases of $30.5 million in net property and equipment additions and of $28.0 million in net fundings of co-investment activity over the prior year.

CASH FLOWS USED IN FINANCING ACTIVITIES

We used $122.9 million in financing activities in 2007 compared with $49.4 million used in 2006. The $73.5 million increase in cash used for financing activities was the result of changes in levels of activity in several programs, including a $43.4 million increase in shares repurchased under our share repurchase program and for taxes on stock awards, a $14.1 million decrease in cash received from employee stock option and stock purchase programs, an $8.0 million decrease in net borrowings, and an $8.3 million increase in dividends paid.

 

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We used $49.4 million in financing activities in 2006 compared with $61.1 million used in 2005. The moderate decrease in cash used in financing activities in 2006 as compared to 2005 was largely a result of effective management of the Firm’s debt structure and comparable levels of share repurchase activity between 2006 and 2005 in dollar terms.

Liquidity and Capital Resources

Historically, we have financed our operations, co-investment activity, share repurchases and dividend payments, capital expenditures and business acquisitions with internally generated funds, issuances of our common stock and borrowings under our credit facilities.

CREDIT FACILITY

On June 6, 2007, we amended our unsecured revolving credit facility to increase the facility to $575 million, improve the pricing, extend the term to June 2012 and modify other terms of the agreement. Pricing on the $575 million facility now ranges from LIBOR plus 47.5 basis points to LIBOR plus 80 basis points. As of December 31, 2007, our pricing on the revolving credit facility was LIBOR plus 47.5 basis points. This facility will continue to be utilized for working capital needs (including payment of accrued bonus compensation during the first quarter of each year), co-investment activity, share repurchases and dividend payments, capital expenditures and acquisitions. Interest and principal payments on outstanding borrowings against the facility will fluctuate based on our level of borrowing needs. We also have capacity to borrow up to an additional $46.8 million under local overdraft facilities.

As of December 31, 2007, we had $29.2 million outstanding under the revolving credit facility. The average borrowing rate on the revolving credit agreement was 5.5% as compared with an average borrowing rate of 5.1% in 2006. We also had short-term borrowings (including capital lease obligations) of $14.4 million outstanding at December 31, 2007, with $14.3 million of those borrowings attributable to local overdraft facilities.

With respect to the revolving credit facility, we must maintain a consolidated net worth of at least $729 million, a leverage ratio not exceeding 3.5 to 1, and a minimum interest coverage ratio of 2.5 to 1. Additionally, we are restricted from, among other things, incurring certain levels of indebtedness to lenders outside of the facility and disposing of a significant portion of our assets. Lender approval or waiver is required for certain levels of co-investment and acquisitions. We are in compliance with all covenants as of December 31, 2007.

The revolving credit facility bears variable rates of interest based on market rates. We are authorized to use interest rate swaps to convert a portion of the floating rate indebtedness to a fixed rate; however, none were used during the last three years, and none were outstanding as of December 31, 2007.

We believe that the revolving credit facility, together with local borrowing facilities and cash flow generated from operations will provide adequate liquidity and financial flexibility to meet our needs to fund working capital, co-investment activity, share repurchases and dividend payments, capital expenditures and acquisitions.

 

CO-INVESTMENT ACTIVITY

As of December 31, 2007, we had total investments and loans of $151.8 million in approximately 40 separate property or fund co-investments. Within this $151.8 million are loans of $3.3 million to real estate ventures which bear an 8.0% interest rate and are to be repaid by 2008.

In the past, we have had repayment guarantees outstanding to third-party financial institutions in the event that underlying co-investment loans defaulted; however, we had no such guarantees at December 31, 2007.

We utilize two investment vehicles to facilitate the majority of our co-investment activity. LaSalle Investment Company I (“LIC I”) is a series of four parallel limited partnerships which serve as our investment vehicle for substantially all co-investment commitments made through December 31, 2005. LIC I is fully committed to underlying real estate ventures. At December 31, 2007, our maximum potential unfunded commitment to LIC I is euro 32.9 million ($48.0 million). LaSalle Investment Company II (“LIC II”), formed in January 2006, is comprised of two parallel limited partnerships which serve as our investment vehicle for most new co-investments. At December 31, 2007, LIC II has unfunded capital commitments for future fundings of co-investments of $323.9 million, of which our 48.78% share is $158.0 million. The $158.0 million commitment is part of our maximum potential unfunded commitment to LIC II at December 31, 2007 of $434.2 million.

LIC I and LIC II invest in certain real estate ventures that own and operate commercial real estate. We have an effective 47.85% ownership interest in LIC I, and an effective 48.78% ownership interest in LIC II; primarily institutional investors hold the remaining 52.15% and 51.22% interests in LIC I and LIC II, respectively. We account for our investments in LIC I and LIC II under the equity method of accounting in the accompanying consolidated financial statements. Additionally, a non-executive Director of Jones Lang LaSalle is an investor in LIC I on equivalent terms to other investors.

LIC I’s and LIC II’s exposures to liabilities and losses of the ventures are limited to their existing capital contributions and remaining capital commitments. We expect that LIC I will draw down on our commitment over the next three to five years to satisfy its existing commitments to underlying funds, and we expect that LIC II will draw down on our commitment over the next four to eight years as it enters into new commitments. Our Board of Directors has endorsed the use of our co-investment capital in particular situations to control or bridge finance existing real estate assets or portfolios to seed future investments within LIC II. The purpose is to accelerate capital raising and growth in assets under management. Approvals for such activity are handled consistently with those of the Firm’s co-investment capital. At December 31, 2007 no bridge financing arrangements were outstanding.

As of December 31, 2007, LIC I maintains a euro 10.0 million ($14.6 million) revolving credit facility (the “LIC I Facility”), and LIC II maintains a $200.0 million revolving credit facility (the “LIC II Facility”), principally for their working capital needs. The capacity in the LIC II Facility contemplates potential bridge financing opportunities.

 

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Each facility contains a credit rating trigger and a material adverse condition clause. If either of the credit rating trigger or the material adverse condition clauses becomes triggered, the facility to which that condition relates would be in default and outstanding borrowings would need to be repaid. Such a condition would require us to fund our pro-rata share of the then outstanding balance on the related facility, which is the limit of our liability. The maximum exposure to Jones Lang LaSalle, assuming that the LIC I Facility were fully drawn, would be euro 4.8 million ($7.0 million); assuming that the LIC II Facility were fully drawn, the maximum exposure to Jones Lang LaSalle would be $97.6 million. Each exposure is included within and cannot exceed our maximum potential unfunded commitments to LIC I of euro 32.9 million ($48.0 million) and to LIC II of $434.2 million. As of December 31, 2007, LIC I had euro 2.3 million ($3.4 million) of outstanding borrowings on the LIC I Facility, and LIC II had $26.2 million of outstanding borrowings on the LIC II Facility.

The following table summarizes the discussion above relative to LIC I and LIC II at December 31, 2007 ($ in millions):

 

      LIC I    LIC II

Our effective ownership interest in co-investment vehicle

     47.85%      48.78%

Our maximum potential unfunded commitments

   $ 48.0    $ 434.2

Our share of unfunded capital commitments to underlying funds

     34.8      158.0

Our maximum exposure assuming facilities are fully drawn

     7.0      97.6

Our share of exposure on outstanding borrowings

     1.6      12.8

Exclusive of our LIC I and LIC II commitment structures, we have potential obligations related to unfunded commitments to other real estate ventures, the maximum of which is $10.7 million at December 31, 2007.

For the year ended December 31, 2007, funding of co-investments exceeded return of capital by $19.8 million. We expect to continue to pursue co-investment opportunities with our real estate money management clients in the Americas, EMEA and Asia Pacific. Co-investment remains very important to the continued growth of Investment Management. The net co-investment funding for 2008 is anticipated to be between $50 and $60 million (planned co-investment less return of capital from liquidated co-investments).

SHARE REPURCHASE AND DIVIDEND PROGRAMS

Since October 2002, our Board of Directors has approved five share repurchase programs. On August 15, 2007, our board of directors approved a new share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock; this was in addition to the 208,000 shares that remained authorized to be repurchased as of August 15, 2007 under a program that was established in September 2005. These share repurchase programs allow the Company to purchase our common stock in the open market and in privately negotiated transactions. The repurchase of shares is primarily intended to offset dilution resulting from both restricted stock and stock option grants made under our existing employee compensation plans. Through December 31, 2007, we have repurchased a total of 5,765,451 shares since the first repurchase program approved by our Board of Directors on October 30, 2002. In 2007, we repurchased 1,015,800 shares and at December 31, 2007 we have 1,563,100 shares that we are authorized to repurchase under this program. See Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities,” for additional details regarding our share repurchase activity throughout 2007.

In 2006, our Board declared and paid total annual dividends and dividend-equivalents of $0.60 per common share. In 2007, our Board declared and paid total annual dividends and dividend-equivalents of $0.85 per common share, and anticipated paying total annual dividends and dividend-equivalents of $1.00 per share in 2008. See Item 5 for additional discussion of our current dividend practice.

CAPITAL EXPENDITURES

Capital expenditures for 2007 were $113.7 million, up from $70.3 million in 2006, primarily for ongoing improvements to computer hardware and information systems and improvements to leased space. Included in the $113.7 million of capital expenditures were $5.3 million of allowances from landlords for leasehold improvements. Capital expenditures, net of leasehold improvement allowances, are anticipated to be approximately $105 million for 2008, primarily for ongoing improvements to computer hardware and information systems and improvements to leased space.

CONTRACTUAL OBLIGATIONS

We have obligations and commitments to make future payments under contracts in the normal course of business, including future minimum lease payments, interest and principal payments on outstanding borrowings.

Following is a table summarizing our minimum contractual obligations as of December 31, 2007 ($ in millions):

 

    PAYMENTS DUE BY PERIOD

CONTRACTUAL

OBLIGATIONS

  TOTAL   LESS THAN 1
YEAR
  1-3 YEARS   3-5 YEARS   MORE THAN
5 YEARS

Long-term debt obligations

  $ 29.2       29.2  

Business acquisition obligations

    91.2   45.6   11.5   23.4   10.7

Operating lease obligations

    421.0   87.3   125.1   88.9   119.7

Capital lease obligations

    0.3   0.1   0.2    

Defined benefit plan obligations

    82.0   4.9   11.4   14.3   51.4

Vendor and other purchase obligations

    57.8   19.6   21.5   14.0   2.7

Total

  $ 681.5   157.5   169.7   169.8   184.5

 

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As of December 31, 2007, we had $29.2 million outstanding under our revolving credit facility. Interest and principal payments on outstanding borrowings against our $575 million revolving credit facility fluctuate based on our level of borrowing needs. There is no set repayment schedule with respect to the revolving credit facility; however, this facility expires in June 2012.

Our business acquisition obligations represent payments to sellers of businesses for which our acquisition has closed as of December 31, 2007, and the only condition on those payments is the passage of time. The $91.2 million total represents $82.0 million of current fair value as reported in Deferred business acquisition obligations in our Consolidated Balance Sheet, and $9.2 million of imputed interest reducing the obligations to their present value.

Our lease obligations include operating leases of office space in various buildings for our own use, as well as the use of equipment under both operating and capital lease arrangements. As of December 31, 2007, we have accrued liabilities related to excess lease space of $0.9 million, which were identified as part of our restructurings in 2001 and 2002. The total of minimum rentals to be received in the future under noncancelable operating subleases as of December 31, 2007 was $3.0 million.

Our defined benefit plan obligations represent estimates of what we expect to pay as retirement benefits for prior and expected future employee service in the countries where we have such plans in place.

Our other purchase obligations are related to various information technology servicing agreements, telephone communications and other administrative support functions.

The minimum contractual obligation table includes no provision for the $22.0 million of unrecognized tax benefits at December 31, 2007 because the amount and timing of certain payment can not be reliably estimated at this time.

In the Notes to Consolidated Financial Statements, see Note 9 for additional information on long-term debt obligations, see Note 10 for additional information on lease obligations, see Note 7 for additional information on defined benefit plan obligations, and see Note 8 for additional information on unrecognized tax benefits.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding market risk is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Market and Other Risk Factors” and is incorporated by reference herein.

Disclosure of Limitations

As the information presented above includes only those exposures that exist as of December 31, 2007, it does not consider those exposures or positions that could arise after that date. The information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate and foreign currency fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time and interest and foreign currency rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements    Page
JONES LANG LASALLE INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS   

Report of Independent Registered Public Accounting Firm, KPMG LLP, on Consolidated Financial Statements

   44

Report of Independent Registered Public Accounting Firm, KPMG LLP, on Internal Control Over Financial Reporting

   45

Consolidated Balance Sheets as of December 31, 2007 and 2006

   46

Consolidated Statements of Earnings For the Years Ended December 31, 2007, 2006 and 2005

   47

Consolidated Statements of Shareholders’ Equity For the Years Ended December 31, 2007, 2006 and 2005

   48

Consolidated Statements of Cash Flows For the Years Ended December 31, 2007, 2006 and 2005

   49

Notes to Consolidated Financial Statements

   50

Quarterly Results of Operations (Unaudited)

   71

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Jones Lang LaSalle Incorporated:

We have audited the consolidated financial statements of Jones Lang LaSalle Incorporated and subsidiaries (the Company) as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” and changed its method of accounting for defined benefit pension plans pursuant to Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG

Chicago, Illinois

February 29, 2008

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Jones Lang LaSalle Incorporated:

We have audited Jones Lang LaSalle Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company, as listed in the accompanying index, and our report dated February 29, 2008 expressed an unqualified opinion on those consolidated financial statement.

/s/ KPMG

Chicago, Illinois

February 29, 2008

 

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JONES LANG LASALLE INCORPORATED

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2007 AND 2006

 

($ IN THOUSANDS, EXCEPT SHARE DATA)   2007     2006  

Assets

   

Current assets:

   

Cash and cash equivalents

  $ 78,580     50,612  

Trade receivables, net of allowances of $13,300 and $7,845

    834,865     630,121  

Notes and other receivables

    52,695     30,079  

Prepaid expenses

    26,148     28,040  

Deferred tax assets

    64,872     49,230  

Other

    13,816     19,363  

Total current assets

    1,070,976     807,445  

Property and equipment, net of accumulated depreciation of $198,169 and $181,959

    193,329     120,376  

Goodwill, with indefinite useful lives

    694,004     520,478  

Identified intangibles, with finite useful lives, net of accumulated amortization of $68,537 and $58,594

    41,670     37,583  

Investments in real estate ventures

    151,800     131,789  

Long-term receivables, net

    33,219     29,781  

Deferred tax assets

    58,584     37,465  

Other, net

    48,292     45,031  

Total assets

  $ 2,291,874     1,729,948  

Liabilities and Shareholders’ Equity

   

Current liabilities:

   

Accounts payable and accrued liabilities

  $ 302,976     221,356  

Accrued compensation

    655,895     514,586  

Short-term borrowings

    14,385     17,738  

Deferred tax liabilities

    727     1,426  

Deferred income

    29,756     31,896  

Other

    60,193     43,444  

Total current liabilities

    1,063,932     830,446  

Noncurrent liabilities:

   

Credit facilities

    29,205     32,398  

Deferred tax liabilities

    6,577     648  

Deferred compensation

    46,423     30,668  

Pension liabilities

    1,096     19,252  

Deferred business acquisition obligations

    82,042     34,178  

Other

    43,794     31,978  

Total liabilities

    1,273,069     979,568  

Commitments and contingencies

   

Minority interest

    8,272      

Shareholders’ equity:

   

Common stock, $.01 par value per share, 100,000,000 shares authorized; 31,722,587 and 36,592,864 shares issued and outstanding

    317     366  

Additional paid-in capital

    441,951     676,270  

Retained earnings

    484,840     255,914  

Shares held by subsidiary

        (197,543 )

Shares held in trust

    (1,930 )   (1,427 )

Accumulated other comprehensive income

    85,355     16,800  

Total shareholders’ equity

    1,010,533     750,380  

Total liabilities and shareholders’ equity

  $ 2,291,874     1,729,948  

See accompanying notes to consolidated financial statements.

 

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JONES LANG LASALLE INCORPORATED

CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

 

 

($ IN THOUSANDS, EXCEPT SHARE DATA)    2007     2006     2005  

Revenue

   $ 2,652,075     2,013,578     1,390,610  

Operating expenses:

      

Compensation and benefits

     1,724,174     1,313,294     902,712  

Operating, administrative and other

     530,412     407,985     320,934  

Depreciation and amortization

     55,580     48,964     33,836  

Restructuring charges (credits), net

     (411 )   (744 )   1,377  

Total operating expenses

     2,309,755     1,769,499     1,258,859  

Operating income

     342,320     244,079     131,751  

Interest expense, net of interest income

     13,064     14,254     3,999  

Gain on sale of investments

     6,129          

Equity in earnings from real estate ventures

     12,216     9,221     12,156  

Income before provision for income taxes and minority interest

     347,601     239,046     139,908  

Provision for income taxes

     87,595     63,825     36,236  

Minority interest, net of tax

     2,174          

Net income before cumulative effect of change in accounting principle

     257,832     175,221     103,672  

Cumulative effect of change in accounting principle, net of tax

         1,180      

Net income

   $ 257,832     176,401     103,672  

Net income available to common shareholders

   $ 256,490     175,344     103,287  

Other comprehensive income:

      

Change in pension liabilities, net of tax

     17,158     (1,345 )   (16,168 )

Foreign currency translation adjustments

     53,653     52,781     (41,106 )

Unrealized holding gain on investments

     (2,256 )   2,256      

Comprehensive income

   $ 326,387     230,093     46,398  

Basic earnings per common share

   $ 8.01     5.50     3.29  

Basic weighted average shares outstanding

     32,021,380     31,872,112     31,383,828  

Diluted earnings per common share

   $ 7.64     5.24     3.12  

Diluted weighted average shares outstanding

     33,577,927     33,447,939     33,109,261  

See accompanying notes to consolidated financial statements.

 

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JO NES LANG LASALLE INCORPORATED

CONSOLIDATED STATEMENT OF SHAREHOLDERSEQUITY FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

 

($ IN THOUSANDS, EXCEPT SHARE DATA)

  COMMON STOCK    

ADDITIONAL PAID-
IN CAPITAL

   

RETAINED
EARNINGS

   

SHARES HELD BY
SUBSIDIARY

   

SHARES HELD IN
TRUST

    ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
   

TOTAL

 
  SHARES     AMOUNT              

Balances at December 31, 2004

  33,243,527     $ 332     541,798     4,896     (58,898 )   (530 )   20,382     $ 507,980  

Net income

                103,672                   103,672  

Shares issued under stock
compensation programs

  1,956,217       20     19,515                       19,535  

Tax benefits of vestings and exercises

            16,493                       16,493  

Amortization of stock compensation

            28,194                       28,194  

Shares repurchased

                    (73,893 )             (73,893 )

Shares held in trust

                        (278 )         (278 )

Dividends declared, $0.25 per share

                (8,426 )                 (8,426 )

Change in minimum pension liability

                            (16,168 )     (16,168 )

Foreign currency translation adjustments

                            (41,106 )     (41,106 )

Balances at December 31, 2005

  35,199,744     $ 352     606,000     100,142     (132,791 )   (808 )   (36,892 )   $ 536,003  

Net income

                176,401                   176,401  

Shares issued under stock
compensation programs

  1,393,120       14     3,577                       3,591  

Tax benefits of vestings and exercises

            29,104                       29,104  

Amortization of stock compensation

            37,589                       37,589  

Shares repurchased

                    (64,752 )             (64,752 )

Shares held in trust

                        (619 )         (619 )

Dividends declared, $0.60 per share

                (20,629 )                 (20,629 )

Change in pension liabilities

                            (1,345 )     (1,345 )

Foreign currency translation adjustments

                            52,781       52,781  

Unrealized holding gain on investments

                            2,256       2,256  

Balances at December 31, 2006

  36,592,864     $ 366     676,270     255,914     (197,543 )   (1,427 )   16,800     $ 750,380  

Net income

                257,832                   257,832  

Shares issued under stock
compensation programs

  895,174       9     (20,142 )                     (20,133 )

Tax benefits of vestings and exercises

            26,215                       26,215  

Amortization of stock compensation

            52,895                       52,895  

Shares repurchased (1)

  (5,765,451 )     (58 )   (293,287 )       197,543               (95,802 )

Shares held in trust

                        (503 )         (503 )

Dividends declared, $0.85 per share

                (28,906 )                 (28,906 )

Change in pension liabilities

                            17,158       17,158  

Unrealized holding gain on investments

                            (2,256 )     (2,256 )

Foreign currency translation adjustments

                            53,653       53,653  

Balances at December 31, 2007

  31,722,587     $ 317     441,951     484,840         (1,930 )   85,355     $ 1,010,533  

 

(1) Included in the 5,765,451 shares repurchased under our share repurchase programs through December 31, 2007 are 4,970,232 shares repurchased and held by one of our subsidiaries through June 30, 2007, 428,319 shares repurchased and canceled in the third quarter of 2007, and 366,900 shares repurchased in the fourth quarter of 2007 by Jones Lang LaSalle Incorporated. Shares held by one of our subsidiaries in previous reporting periods were included in total shares outstanding, but were deducted from shares outstanding for purposes of calculating earnings per share.

See accompanying notes to consolidated financial statements.

 

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JONES LANG LASALLE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

 

($ IN THOUSANDS)    2007     2006     2005  

Cash flows from operating activities:

      

Net income

   $ 257,832     176,401     103,672  

Reconciliation of net income to net cash provided by earnings:

      

Cumulative effect of change in accounting principle, net of tax

         (1,180 )    

Depreciation and amortization

     55,580     48,964     33,836  

Equity in earnings from real estate ventures

     (12,216 )   (9,221 )   (12,156 )

Gain on sale of investments

     (6,129 )        

Operating distributions from real estate ventures

     11,560     17,501     10,427  

Provision for loss on receivables and other assets

     4,209     3,645     2,243  

Minority interest, net of tax

     2,174          

Amortization of deferred compensation

     57,932     44,556     31,593  

Amortization of debt issuance costs

     579     668     847  

Change in:

      

Receivables

     (224,083 )   (242,377 )   (94,094 )

Prepaid expenses and other assets

     3,662     (24,008 )   (5,464 )

Deferred tax assets, net

     (32,279 )   6,978     (20,903 )

Excess tax benefits from share-based payment arrangements

     (26,215 )   (25,981 )    

Accounts payable, accrued liabilities and accrued compensation

     316,812     381,757     70,635  

Net cash provided by operating activities

     409,418     377,703     120,636  

Cash flows from investing activities:

      

Net capital additions—property and equipment

     (113,743 )   (70,307 )   (39,785 )

Business acquisitions, net of cash acquired

     (134,259 )   (191,706 )   (4,885 )

Investing activities—real estate ventures:

      

Capital contributions and advances to real estate ventures

     (45,517 )   (62,122 )   (29,777 )

Distributions, repayments of advances and sale of investments

     35,017     17,775     13,413  

Net cash used in investing activities

     (258,502 )   (306,360 )   (61,034 )

Cash flows from financing activities:

      

Proceeds from borrowings under credit facilities

     1,448,413     891,231     569,649  

Repayments of borrowings under credit facilities

     (1,452,749 )   (887,528 )   (584,167 )

Shares repurchased for payment of taxes on stock awards

     (29,665 )   (17,288 )   (11,057 )

Shares repurchased under share repurchase program

     (95,778 )   (64,752 )   (74,171 )

Excess tax benefits from share-based payment arrangements

     26,215     25,981      

Common stock issued under stock option plan and stock purchase programs

     9,522     23,596     47,085  

Payments of dividends

     (28,906 )   (20,629 )   (8,426 )

Net cash used in financing activities

     (122,948 )   (49,389 )   (61,087 )

Net increase (decrease) in cash and cash equivalents

     27,968     21,954     (1,485 )

Cash and cash equivalents, January 1

     50,612     28,658     30,143  

Cash and cash equivalents, December 31

   $ 78,580     50,612     28,658  

Supplemental disclosure of cash flow information:

      

Cash paid during the period for:

      

Interest

   $ 13,705     13,644     4,299  

Income taxes, net of refunds

     47,578     34,006     20,120  

Non-cash financing activities:

      

Deferred business acquisition obligations

     47,864     34,178      

See accompanying notes to consolidated financial statements.

 

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JONES LANG LASALLE INCORPORATED

Notes to Consolidated Financial Statements

(1) Organization

Jones Lang LaSalle Incorporated (“Jones Lang LaSalle,” which may be referred to as we, us, our, the Company or the Firm), the leading integrated global real estate services and money management firm, was incorporated in 1997. We serve our clients’ real estate needs locally, regionally and globally from approximately 170 corporate offices in more than 700 cities in approximately 60 countries on five continents, with approximately 32,700 employees, including approximately 13,700 directly reimbursable property maintenance employees. We believe that our combination of local market presence and global reach differentiates our firm from other real estate service providers.

Our full range of services includes:

 

 

Agency leasing;

 

 

Property management;

 

 

Construction management;

 

 

Project and development;

 

 

Valuations;

 

 

Capital markets;

 

 

Real estate investment banking and merchant banking;

 

 

Brokerage of properties;

 

 

Corporate finance;

 

 

Hotel advisory;

 

 

Space acquisition and disposition (tenant representation);

 

 

Facilities management;

 

 

Strategic consulting;

 

 

Energy management and sustainability;

 

 

Outsourcing; and

 

 

Money management

We provide money management services on a global basis for both public and private assets through LaSalle Investment Management. Our services are enhanced by our integrated global business model, industry-leading research capabilities, client relationship management focus, consistent worldwide service delivery and strong brand.

We have grown by expanding both our client base and the range of our services and products, as well as through a series of strategic acquisitions and mergers. Our extensive global platform and in-depth knowledge of local real estate markets enable us to serve as a single source provider of solutions for our clients’ full range of real estate needs. We solidified this network of services around the globe through the 1999 merger of the Jones Lang Wootton companies (“JLW”) (founded in 1783) with those of LaSalle Partners Incorporated (“LaSalle Partners”) (founded in 1968).

 

(2) Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

Our financial statements include the accounts of Jones Lang LaSalle and its majority-owned-and-controlled subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Investments in real estate ventures over which we exercise significant influence, but not control, are accounted for under the equity method. Investments in real estate ventures over which we are not able to exercise significant influence are accounted for under the cost method.

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of the revenues and expenses during the reporting periods. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material. For further discussion of accounting estimates, please refer to the Summary of Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current presentation.

REVENUE RECOGNITION

The SEC’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended by SAB 104, provides guidance on the application of U.S. GAAP to selected revenue recognition issues. Additionally, EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), provides guidance on the application of U.S. GAAP to revenue transactions with multiple deliverables.

We earn revenue from the following principal sources:

 

 

Transaction commissions;

 

 

Advisory and management fees;

 

 

Incentive fees;

 

 

Project and development management fees; and

 

 

Construction management fees.

We recognize transaction commissions related to agency leasing services, capital markets services and tenant representation services as income when we provide the related service unless future contingencies exist. If future contingencies exist, we defer recognition of this revenue until the respective contingencies have been satisfied.

We recognize advisory and management fees related to property management services, valuation services, corporate property services,

 

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strategic consulting and money management as income in the period in which we perform the related services.

We recognize incentive fees based on the performance of underlying funds’ investments and the contractual benchmarks, formulas and timing of the measurement period with clients.

We recognize project and development management and construction management fees by applying the “percentage of completion” method of accounting. We use the efforts expended method to determine the extent of progress towards completion for project and development management fees and costs incurred to total estimated costs for construction management fees.

Construction management fees, which are gross construction services revenues net of subcontract costs, were $12.9 million and $11.8 million for the years ended December 31, 2007 and 2006, respectively. Gross construction services revenues totaled $187.3 million and $147.6 million and subcontract costs totaled $174.4 million and $135.8 million for the years end December 31, 2007 and 2006, respectively. We did not provide construction services in 2005.

We include costs in excess of billings on uncompleted construction contracts of $4.8 million and $3.2 million in “Trade receivables,” and billings in excess of costs on uncompleted construction contracts of $12.9 million and $6.6 million in “Deferred income,” respectively, in our December 31, 2007 and 2006 consolidated balance sheets.

Certain contractual arrangements for services provide for the delivery of multiple services. We evaluate revenue recognition for each service to be rendered under these arrangements using criteria set forth in EITF 00-21. For services that meet the separability criteria, revenue is recognized separately. For services that do not meet those criteria, revenue is recognized on a combined basis.

We follow the guidance of EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” when accounting for reimbursements received. Accordingly, we have recorded these reimbursements as revenues in the income statement, as opposed to being shown as a reduction of expenses.

In certain of our businesses, primarily those involving management services, we are reimbursed by our clients for expenses incurred on their behalf. The treatment of reimbursable expenses for financial reporting purposes is based upon the fee structure of the underlying contracts. We follow the guidance of EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” when accounting for reimbursable personnel and other costs. A contract that provides a fixed fee billing, fully inclusive of all personnel or other recoverable expenses incurred but not separately scheduled, is reported on a gross basis. When accounting on a gross basis, our reported revenues include the full billing to our client and our reported expenses include all costs associated with the client.

We account for a contract on a net basis when the fee structure is comprised of at least two distinct elements, namely (i) a fixed management fee and (ii) a separate component that allows for scheduled reimbursable personnel costs or other expenses to be billed directly to the client. When accounting on a net basis, we include the fixed management fee in reported revenues and net the reimbursement against expenses. We base this accounting on the following factors, which define us as an agent rather than a principal:

 

 

The property owner, with ultimate approval rights relating to the employment and compensation of on-site personnel, and bearing all of the economic costs of such personnel, is determined to be the primary obligor in the arrangement;

 

 

Reimbursement to Jones Lang LaSalle is generally completed simultaneously with payment of payroll or soon thereafter;

 

 

Because the property owner is contractually obligated to fund all operating costs of the property from existing cash flow or direct funding from its building operating account, Jones Lang LaSalle bears little or no credit risk; and

 

 

Jones Lang LaSalle generally earns no margin in the reimbursement aspect of the arrangement, obtaining reimbursement only for actual costs incurred.

Most of our service contracts utilize the latter structure and are accounted for on a net basis. We have always presented the above reimbursable contract costs on a net basis in accordance with U.S. GAAP. Such costs aggregated approximately $931 million, $746 million and $549 million in 2007, 2006 and 2005, respectively. This treatment has no impact on operating income, net income or cash flows.

CASH AND CASH EQUIVALENTS

We consider all highly-liquid investments purchased with maturities of less then one year to be cash equivalents. The carrying amount of cash equivalents approximates fair value due to the short-term maturity of these investments.

ACCOUNTS RECEIVABLE

Pursuant to contractual arrangements, accounts receivable includes unbilled amounts of $244.0 million and $172.3 million at December 31, 2007 and 2006, respectively.

We estimate the allowance necessary to provide for uncollectible accounts receivable. The estimate includes specific accounts for which payment has become unlikely. We also base this estimate on historical experience combined with a careful review of current developments and a strong focus on credit quality. The process by which we calculate the allowance begins in the individual business units where specific problem accounts are identified and reserved as part of an overall reserve that is formulaic and driven by the age profile of the receivables. These allowances are then reviewed on a quarterly basis by regional and global management to ensure they are appropriate. As part of this review, we develop a range of potential allowances on a consistent formulaic basis. We would normally expect that the allowance would fall within this range. See the Summary of Critical Accounting Policies and Estimates

 

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section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information on our Allowance for Uncollectible Accounts Receivable.

PROPERTY AND EQUIPMENT

We apply Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), to recognize and measure impairment of property and equipment owned or under capital leases. We review property and equipment for impairment whenever events or circumstances indicate that the carrying value of an asset group may not be recoverable. We record an impairment loss to the extent that the carrying value exceeds the estimated fair value. We did not recognize an impairment loss related to property and equipment in 2007, 2006 or 2005.

We calculate depreciation and amortization on property and equipment for financial reporting purposes primarily by using the straight-line method based on the estimated useful lives of our assets. The following table shows the gross value of each asset category at December 31, 2007 and 2006, respectively, as well as the standard depreciable life for each asset category ($ in millions):

 

CATEGORY    2007    2006   DEPRECIABLE
LIFE

Furniture, fixtures and equipment

   $ 72.7    $ 54.2   5 to 10 years

Computer equipment and software

     215.9      174.5   2 to 7 years

Leasehold improvements

     89.6      62.3   1 to 10 years

Automobiles

     10.6      8.7   4 to 5 years

BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS

We apply SFAS No. 141, “Business Combinations” (“SFAS 141”), when accounting for business combinations. We have historically grown through a series of acquisitions and one substantial merger. As a result of this activity, and consistent with the services nature of the businesses we acquired, among the largest assets on our balance sheet are intangibles resulting from business acquisitions and the JLW merger. We amortize intangibles with finite useful lives, which primarily represent the value placed on management contracts that are acquired as part of our acquisition of another business.

SFAS 142 requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead evaluated for impairment at least annually. To accomplish this annual evaluation, we determine the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of evaluation. Under SFAS 142, we define reporting units as Investment Management, Americas IOS, Australia IOS, Asia IOS and by country groupings in Europe IOS. We then determine the fair value of each reporting unit on the basis of a discounted cash flow methodology and compare it to the reporting unit’s carrying value. The result of the 2007, 2006 and 2005 evaluations was that the fair value of each reporting unit exceeded its carrying amount, and therefore we did not recognize an impairment loss in any of those years.

See Note 4 for additional information on goodwill and other intangible assets.

INVESTMENTS IN REAL ESTATE VENTURES

We invest in certain real estate ventures that own and operate commercial real estate. Typically, these are co-investments in funds that our Investment Management business establishes in the ordinary course of business for its clients. These investments include non-controlling ownership interests generally ranging from less than 1% to 48.78% of the respective ventures. We apply the provisions of the following guidance when accounting for these interests:

 

 

FASB Interpretation No. 46 (revised), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”)

 

 

EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”)

 

 

AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” as amended by FASB Staff Position No. SOP 78-9-a (“SOP 78-9-a”)

 

 

Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”)

 

 

EITF Topic No. D-46, “Accounting for Limited Partnership Investments” (“EITF D-46”)

The application of such guidance generally results in accounting for these interests under the equity method in the accompanying consolidated financial statements due to the nature of our non-controlling ownership in the ventures.

For real estate limited partnerships in which the Company is a general partner, we apply the guidance set forth in FIN 46R, EITF 04-5 and SOP 78-9-a in evaluating the control the Company has over the limited partnership. These entities are generally well-capitalized and grant the limited partners important rights, such as the right to replace the general partner without cause, to dissolve or liquidate the partnership, to approve the sale or refinancing of the principal partnership assets, or to approve the acquisition of principal partnership assets. We account for such general partner interests under the equity method.

For real estate limited partnerships in which the Company is a limited partner, the Company is a co-investment partner, and based on applying the guidance set forth in FIN 46R and SOP 78-9-a, has concluded that it does not have a controlling interest in the limited partnership. When we have an asset advisory contract with the real estate limited partnership, the combination of our limited partner interest and the advisory agreement provides us with significant influence over the real estate limited partnership venture. Accordingly, we account for such investments under the equity method. When the Company does not have an asset advisory contract with the limited partnership, but only has a

 

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limited partner interest without significant influence, and our interest in the partnership is considered “minor” under EITF D-46 (i.e., not more than 3 to 5 percent), we account for such investments under the cost method.

For investments in real estate ventures accounted for under the equity method, we maintain an investment account, which is increased by contributions made and by our share of net income of the real estate ventures, and decreased by distributions received and by our share of net losses of the real estate ventures. Our share of each real estate venture’s net income or loss, including gains and losses from capital transactions, is reflected in our consolidated statement of earnings as “Equity in earnings from real estate ventures.” For investments in real estate ventures accounted for under the cost method, our investment account is increased by contributions made and decreased by distributions representing return of capital.

We apply the provisions of APB 18, SEC Staff Accounting Bulletin Topic 5-M, “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities” (“SAB 59”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) when evaluating investments in real estate ventures for impairment, including impairment evaluations of the individual assets underlying our investments. We review investments in real estate ventures on a quarterly basis for indications of whether the carrying value of the real estate assets underlying our investments in ventures may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows expected to be generated by the underlying assets. When an “other than temporary” impairment has been identified related to a real estate asset underlying one of our investments in real estate ventures, we use a discounted cash flow approach to determine the fair value of the asset in computing the amount of the impairment. We then record the portion of the impairment loss related to our investment in the reporting period.

We report “Equity in earnings from real estate ventures” in the consolidated statement of earnings after “Operating income.” However, for segment reporting we reflect “Equity earnings (losses)” within “Revenue.” See Note 3 for “Equity earnings (losses)” reflected within segment revenues, as well as discussion of how the Chief Operating Decision Maker (as defined in Note 3) measures segment results with “Equity earnings (losses)” included in segment revenues.

See Note 5 for additional information on investments in real estate ventures.

STOCK-BASED COMPENSATION

Prior to January 1, 2006, we accounted for our stock-based compensation plans under the provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” These provisions allowed entities to continue to apply the intrinsic value-based method under the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and provide disclosure of pro forma net income and net income per share as if the fair value-based method, defined in SFAS 123 as amended by SFAS 148, had been applied. We elected to apply the provisions of APB 25 in accounting for stock options and other stock awards, and accordingly, recognized no compensation expense for stock options granted at the market value of our common stock on the date of grant, or for 15% discounts on stock purchases under our U.S. Employee Stock Purchase Plan (“ESPP”). We did recognize compensation expense over the vesting period of other stock awards (including various grants of restricted stock units and offerings of discounted stock purchases under our Jones Lang LaSalle Savings Related Share Option (UK) Plan) pursuant to APB 25.

Effective January 1, 2006, we account for stock-based compensation in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. SFAS 123R requires us to recognize expense for the grant-date fair value of stock options and other equity-based compensation issued to employees over the employee’s requisite service period. Per the provisions of SFAS 123R we have elected to amortize the fair value of share-based compensation on a straight-line basis over the associated vesting period for each separately vesting portion of an award. Effective January 1, 2006, we amended our ESPP to provide for a 5% discount on stock purchases and eliminate the “look-back” feature in the plan, which along with the other provisions of the plan allows the ESPP to remain “noncompensatory” under the standard. The adoption of SFAS 123R primarily impacts “Compensation and benefits” expense in our consolidated statement of earnings by changing prospectively our method of measuring and recognizing compensation expense on share-based awards from recognizing forfeitures as incurred to estimating forfeitures. The effect of this change as it relates to prior periods is reflected in “Cumulative effect of change in accounting principle, net of tax” in the consolidated statement of earnings. In the year ended 2006, we recorded an increase in income of $1.2 million, net of tax, for the cumulative effect of this accounting change.

See Note 6 for additional information on stock-based compensation.

INCOME TAXES

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between (1) the financial statement carrying amounts of existing assets and liabilities and (2) their respective tax bases, and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize in income the effect on deferred tax assets and liabilities of a change in tax rates in the period that includes the enactment date.

See Note 8 for additional information on income taxes.

 

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SELF-INSURANCE PROGRAMS

In our Americas business, and in common with many other American companies, we have chosen to retain certain risks regarding health insurance and workers’ compensation rather than purchase third-party insurance. Estimating our exposure to such risks involves subjective judgments about future developments. We supplement our traditional global insurance program by the use of a captive insurance company to provide professional indemnity and employment practices insurance on a “claims made” basis. As professional indemnity claims can be complex and take a number of years to resolve, we are required to estimate the ultimate cost of claims.

 

 

Health Insurance—We self-insure our health benefits for all U.S.-based employees, although we purchase stop loss coverage on an annual basis to limit our exposure. We self-insure because we believe that on the basis of our historic claims experience, the demographics of our workforce and trends in the health insurance industry, we incur reduced expense by self-insuring our health benefits as opposed to purchasing health insurance through a third party. We estimate our likely full-year cost at the beginning of the year and expense this cost on a straight-line basis throughout the year. In the fourth quarter, we estimate the required reserve for unpaid health costs we would need at year-end.

 

 

Workers’ Compensation Insurance—Given our belief, based on historical experience, that our workforce has experienced lower costs than is normal for our industry, we have been self-insured for worker’s compensation insurance for a number of years. We purchase stop loss coverage to limit our exposure to large, individual claims. On a periodic basis we accrue using various state rates based on job classifications. On an annual basis in the third quarter, we engage in a comprehensive analysis to develop a range of potential exposure, and considering actual experience, we reserve within that range. We accrue the estimated adjustment to income for the differences between this estimate and our reserve. The credits taken to revenue for the years ended December 31, 2007, 2006 and 2005 were $5.2 million, $3.0 million and $3.7 million, respectively.

 

 

Captive Insurance Company—In order to better manage our global insurance program and support our risk management efforts, we supplement our traditional insurance program by the use of a wholly-owned captive insurance company to provide professional indemnity and employment practices liability insurance coverage on a “claims made” basis. The level of risk retained by our captive is up to $2.5 million per claim (dependent upon location) and up to $12.5 million in the aggregate. The reserves estimated and accrued in accordance with SFAS 5 for self-insurance facilitated through our captive insurance company, which relate to multiple years, were $7.1 million and $9.3 million, net of receivables from third party insurers, as of December 31, 2007 and 2006, respectively.

Professional indemnity insurance claims can be complex and take a number of years to resolve. Within our captive insurance company, we estimate the ultimate cost of these claims by way of specific claim reserves developed through periodic reviews of the circumstances of individual claims, as well as reserves against current year exposures on the basis of our historic loss ratio. The increase in the level of risk retained by the captive means we would expect that the amount and the volatility of our estimate of reserves will be increased over time. With respect to the consolidated financial statements, when a potential loss event occurs, management estimates the ultimate cost of the claims and accrues the related cost in accordance with SFAS 5, “Accounting for Contingencies.”

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments include cash and cash equivalents, receivables, accounts payable, notes payable and foreign currency exchange contracts. The estimated fair value of cash and cash equivalents, receivables and payables approximates their carrying amounts due to the short maturity of these instruments. The estimated fair value of our revolving credit facility and short-term borrowings approximates their carrying value due to their variable interest rate terms. The fair values of forward foreign exchange contracts are estimated to be a loss of $5.5 million as of December 31, 2007, determined by valuing the net position of the contracts using the applicable spot rates and forward rates as of the reporting date; see further discussion in “Derivatives and Hedging Activities” immediately below.

DERIVATIVES AND HEDGING ACTIVITIES

We apply SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 138, “Accounting For Certain Derivative Instruments and Certain Hedging Activities,” when accounting for derivatives and hedging activities.

As a firm, we do not enter into derivative financial instruments for trading or speculative purposes. However, in the normal course of business we do use derivative financial instruments in the form of forward foreign currency exchange contracts to manage selected foreign currency risks. At December 31, 2007, we had forward exchange contracts in effect with a gross notional value of $744.2 million ($718.4 million on a net basis) with a market value and carrying loss of $5.5 million. This carrying loss is offset by a carrying gain in associated intercompany loans such that the net impact to earnings is not significant. These gains and losses are included in net earnings as a component of Operating, administrative and other expense.

We hedge any foreign currency exchange risk resulting from intercompany loans through the use of foreign currency forward contracts. SFAS 133 requires that unrealized gains and losses on these derivatives be recognized currently in earnings. The gain or loss on the re-measurement of the foreign currency loan accounts being hedged is also recognized in earnings. The net impact on our earnings of the unrealized gain on foreign currency contracts, offset by the loss resulting from remeasurement of foreign currency transactions, for 2007, 2006 and 2005 was not significant.

 

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In the past we have used interest rate swap agreements to limit the impact of changes in interest rates on earnings and cash flows. We have not used interest rate swap agreements in the last three years, and there were no such agreements outstanding as of December 31, 2007.

We require that hedging derivative instruments be effective in reducing the exposure that they are designated to hedge. This effectiveness is essential to qualify for hedge accounting treatment. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period with changes in unrealized gains or losses recognized currently in earnings.

FOREIGN CURRENCY TRANSLATION

The financial statements of our subsidiaries located outside the United States, except those subsidiaries located in highly inflationary economies, are measured using the local currency as the functional currency. The assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date with the resulting translation adjustments included in the balance sheet as a separate component of shareholders’ equity (accumulated other comprehensive income (loss)) and in the statement of earnings (other comprehensive income—foreign currency translation adjustments). Income and expenses are translated at the average monthly rates of exchange. Gains and losses from foreign currency transactions are included in net earnings as a component of Operating, administrative and other expense and resulted in a net gain of $2.9 million in 2007 and net expense of $1.3 million and $0.7 million in 2006 and 2005, respectively. For subsidiaries operating in highly inflationary economies, the associated gains and losses from balance sheet translation adjustments are included in net earnings.

The effects of foreign currency translation on cash and cash equivalents are reflected in cash flows from operating activities on the Consolidated Statement of Cash Flows.

CASH HELD FOR OTHERS

We manage significant amounts of cash and cash equivalents in our role as agent for our investment and property management clients. We do not include such amounts in our Consolidated Financial Statements.

COMMITMENTS AND CONTINGENCIES

We are subject to various claims and contingencies related to lawsuits, taxes and environmental matters as well as commitments under contractual obligations. Many of these claims are covered under our current insurance programs, subject to deductibles. We recognize the liability associated with a loss contingency when a loss is probable and estimable in accordance with SFAS 5. Our contractual obligations generally relate to the provision of services by us in the normal course of our business.

See Note 12 for additional information on commitments and contingencies.

 

EARNINGS PER SHARE; NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

The difference between basic weighted average shares outstanding and diluted weighted average shares outstanding represents the dilutive impact of common stock equivalents. Common stock equivalents consist primarily of shares to be issued under employee stock compensation programs and outstanding stock options whose exercise price was less than the average market price of our stock during these periods.

For the years ended December 31, 2007, 2006 and 2005, respectively, we did not include in the weighted average shares outstanding the shares that had been repurchased and which were held by one of our subsidiaries. We calculate net income available to common shareholders by subtracting dividend-equivalents paid on outstanding but unvested shares of restricted stock units, net of tax, from net income. See “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities” in Item 5 for additional information regarding our share repurchase activity and current dividend practice.

 

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The following table details the calculations of basic and diluted earnings per common share ($ in thousands, except share data) for each of the three years ended December 31, 2007.

 

      2007     2006     2005  

Net income before cumulative effect of change in accounting principle

   $ 257,832     175,221     103,672  

Cumulative effect of change in accounting principle, net of tax

         1,180      

Net income

     257,832     176,401     103,672  

Dividends on unvested common stock, net of tax

     1,342     1,057     385  

Net income available to common shareholders

     256,490     175,344     103,287  

Basic income per common share before cumulative effect of change in accounting principle

   $ 8.05     5.50     3.30  

Cumulative effect of change in accounting principle, net of tax

         0.03      

Dividends on unvested common stock, net of tax

     (0.04 )   (0.03 )   (0.01 )

Basic earnings per common share

   $ 8.01     5.50     3.29  

Basic weighted average shares outstanding

     32,021,380     31,872,112     31,383,828  

Dilutive impact of common stock equivalents:

      

Outstanding stock options

     126,313     316,914     590,571  

Unvested stock compensation programs

     1,430,234     1,258,913     1,134,862  

Diluted weighted average shares outstanding

     33,577,927     33,447,939     33,109,261  

Diluted income per common share before cumulative effect of change in accounting principle

   $ 7.68     5.24     3.13  

Cumulative effect of change in accounting principle, net of tax

         0.03      

Dividends on unvested common stock, net of tax

     (0.04 )   (0.03 )   (0.01 )

Diluted earnings per common share

   $ 7.64     5.24     3.12  

 

New Accounting Standards

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

Effective January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies and sets forth consistent rules for accounting for uncertain income tax positions in accordance with SFAS 109, “Accounting for Income Taxes.” The Company did not recognize any change to its liability for unrecognized tax benefits as a result of the adoption. Therefore, we have not adjusted our retained earnings as of January 1, 2007. As of the adoption date, the amount of unrecognized tax benefits was $19.9 million, all of which would impact the effective tax rate of the Company if recognized. However, we do not believe that there will be significant changes in the amount of unrecognized tax benefits within the next 12 months. See Note 8, Income Taxes, for additional information on adoption of FIN 48.

FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS 123R. The provisions of SFAS 157 are effective for financial assets beginning January 1, 2008. In November 2007, the FASB deferred the implementation of SFAS 157 for non-financial assets and liabilities for one year. Management does not believe that the adoption of SFAS 157 will have a material impact on our consolidated financial statements.

FAIR VALUE OPTION

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company has the option of adopting fair value accounting for financial assets and liabilities in accordance with the guidance of SFAS 159 beginning January 1, 2008. Management does not believe that the adoption of SFAS 159 will have a material impact on our consolidated financial statements.

INVESTMENT COMPANY ACCOUNTING

In June 2007, the AICPA issued Statement of Position (“SOP”) 07–1, “Clarification of the Scope of the Audit and Accounting Guide, Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies.” In October 2007, the FASB delayed the effective date of SOP 07-1 indefinitely. Management has not yet determined the applicability of SOP 07-1 to the Company’s investments in real estate ventures and what impact, if any, the application of SOP 07-1 would have on our consolidated financial statements.

 

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PART II

 

BUSINESS COMBINATIONS

In December 2007, the FASB issued SFAS 141(revised), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will change how identifiable assets acquired and the liabilities assumed in a business combination will be recorded in the financial statements. SFAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires expensing of most transaction and restructuring costs. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is after December 31, 2008. Management has not yet determined what impact the application of SFAS 141(R) will have on our consolidated financial statements.

NONCONTROLLING INTERESTS

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. SFAS 160 applies prospectively as of January 1, 2009. Management has not yet determined what impact the application of SFAS 160 will have on our consolidated financial statements.

(3) Business Segments

We manage and report our operations as four business segments:

 

  (i) Investment Management, which offers money management services on a global basis, and

The three geographic regions of Investor and Occupier Services (“IOS”):

 

  (ii) Americas,
  (iii) Europe, Middle East and Africa (“EMEA”) and
  (iv) Asia Pacific.

The Investment Management segment provides money management services to institutional investors and high-net-worth individuals. Each geographic region offers our full range of Investor Services, Capital Markets and Occupier Services. The IOS business consists primarily of tenant representation and agency leasing, capital markets and valuation services (collectively “transaction services”) and property management, facilities management, project and development management, energy management and sustainability and construction management services (collectively “management services”).

Total revenue by industry segment includes revenue derived from services provided to other segments. Operating income represents total revenue less direct and indirect allocable expenses. We allocate all expenses, other than interest and income taxes, as nearly all expenses incurred benefit one or more of the segments. Allocated expenses primarily consist of corporate global overhead. We allocate these corporate global overhead expenses to the business segments based on the relative operating income of each segment.

For segment reporting we show equity earnings from unconsolidated ventures within our revenue line, especially since it is a very integral part of our Investment Management segment. Our measure of segment operating results also excludes restructuring charges. The Chief Operating Decision Maker of Jones Lang LaSalle measures the segment results with equity in earnings from real estate ventures, and without restructuring charges. We define the Chief Operating Decision Maker collectively as our Global Executive Committee, which is comprised of our Global Chief Executive Officer, Global Chief Operating and Financial Officer and the Chief Executive Officers of each of our reporting segments.

As stated in Note 2, we have reclassified certain prior year amounts to conform to the current presentation.

 

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PART II

 

Summarized financial information by business segment for 2007, 2006 and 2005 are as follows ($ in thousands):

 

INVESTOR AND OCCUPIER SERVICES   2007   2006     2005  

Americas

     

Revenue:

     

Transaction services

  $ 378,815   316,752     201,460  

Management services

    359,731   292,270     223,604  

Equity earnings

    1,626   700     565  

Other services

    25,057   12,420     8,657  
    765,229   622,142     434,286  

Operating expenses:

     

Compensation, operating and administrative expenses

    659,392   534,549     369,158  

Depreciation and amortization

    25,387   22,040     14,788  

Operating income

  $ 80,450   65,553     50,340  

EMEA

     

Revenue:

     

Transaction services

  $ 754,428   556,792     385,869  

Management services

    157,783   113,515     95,179  

Equity earnings (losses)

    373   (362 )   (221 )

Other services

    13,497   9,394     12,006  
    926,081   679,339     492,833  

Operating expenses:

     

Compensation, operating and administrative expenses

    814,936   616,824     458,180  

Depreciation and amortization

    19,703   18,511     10,124  

Operating income

  $ 91,442   44,004     24,529  

Asia Pacific

     

Revenue:

     

Transaction services

  $ 388,129   199,037     162,574  

Management services

    206,329   130,514     108,689  

Equity earnings (losses)

    502   1,802     (66 )

Other services

    7,181   5,624     1,716  
    602,141   336,977     272,913  

Operating expenses:

     

Compensation, operating and administrative expenses

    523,179   311,290     245,356  

Depreciation and amortization

    8,774   7,042     7,545  

Operating income

  $ 70,188   18,645     20,012  

 

Investment Management

     

Revenue:

     

Transaction and other services

  $ 27,768     28,573     19,593  

Advisory fees

    245,138     178,087     127,880  

Incentive fees

    88,219     170,600     43,383  

Equity earnings

    9,715     7,081     11,878  
    370,840     384,341     202,734  

Operating expenses:

     

Compensation, operating and administrative expenses

    257,079     258,616     150,953  

Depreciation and amortization

    1,716     1,371     1,378  

Operating income

  $ 112,045     124,354     50,403  

Segment Reconciling Items:

     

Total segment revenue

  $ 2,664,291     2,022,799     1,402,766  

Reclassification of equity earnings

    (12,216 )   (9,221 )   (12,156 )

Total revenue

    2,652,075     2,013,578     1,390,610  

Total operating expenses before restructuring charges (credits)

    2,310,166     1,770,243     1,257,482  

Restructuring charges (credits)

    (411 )   (744 )   1,377  

Operating income

  $ 342,320     244,079     131,751  

Identifiable assets by segment are those assets that are used by or are a result of each segment’s business. Corporate assets are principally cash and cash equivalents, office furniture and computer hardware and software.

 

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PART II

 

The following table reconciles segment identifiable assets to consolidated assets, investments in real estate ventures to consolidated investments in real estate ventures and property and equipment expenditures to consolidated property and equipment expenditures.

 

    2007    2006    2005
($ IN THOUSANDS)   IDENTIFIABLE
ASSETS
   INVESTMENTS
IN REAL ESTATE
VENTURES
  

PROPERTY AND
EQUIPMENT

EXPENDITURES

   IDENTIFIABLE
ASSETS
  INVESTMENTS
IN REAL ESTATE
VENTURES
  PROPERTY AND
EQUIPMENT
EXPENDITURES
   PROPERTY AND
EQUIPMENT
EXPENDITURES

Investor and Occupier Services:

                 

Americas

  $ 873,652    2,293    35,729    697,128   7,436   34,310    7,354

EMEA

    629,299    4,587    53,616    455,650   12,795   19,697    13,146

Asia Pacific

    353,006       13,086    256,325     8,495    8,086

Investment Management

    389,912    144,920    2,323    259,456   111,558   1,539    907

Corporate

    46,005       11,622    61,389     9,936    12,004

Consolidated

  $ 2,291,874    151,800    116,376    1,729,948   131,789   73,977    41,497

 

The following table sets forth the 2007 revenues and assets from our most significant currencies ($ in thousands). The euro revenues and assets include our businesses in France, Germany, Italy, Ireland, Spain, Portugal, Holland, Belgium and Luxembourg.

 

     TOTAL
REVENUE
  

TOTAL

ASSETS

United States Dollar

  $ 959,491    1,121,731

United Kingdom Pound

    460,738    376,182

Euro

    452,957    352,897

Australian Dollar

    182,648    114,772

Other currencies

    596,241    326,292
    $ 2,652,075    2,291,874

We face restrictions in certain countries that limit or prevent the transfer of funds to other countries or the exchange of the local currency to other currencies.

(4) Business Combinations, Goodwill and Other Intangible Assets

We completed 13 business combinations in 2007 and five in 2006.

2007 BUSINESS COMBINATIONS

In 2007, the Americas business segment made three acquisitions, acquiring: 1) Zietsman Realty Partners, a California-based real estate services firm, 2) Corporate Realty Advisors, one of