United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2005 

Or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____

Commission File Number 1-13145

Jones Lang LaSalle Incorporated
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of incorporation or organization)

36-4150422
(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


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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x   No o


The number of shares outstanding of the registrant’s common stock (par value $0.01) as of the close of business on October 31, 2005 was 35,039,968 which includes 3,328,551 shares held by a subsidiary of the registrant.
 

Table of Contents

Part I
Financial Information
    
       
Item 1.
3
  
       
 
3
  
       
 
4
  
       
 
5
 
   
 
  
 
6
  
   
 
  
 
7
  
   
 
  
Item 2.
19
  
   
 
  
Item 3.
34
  
   
 
  
Item 4.
35
 
   
 
  
Part II
Other Information
 
  
   
 
  
Item 1.
36
  
   
 
  
Item 2.
36
  
   
 
  
Item 5.
37
  
   
 
  
Item 6.
40
 
 
2

Financial Information
Financial Statements

JONES LANG LASALLE INCORPORATED
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
($ in thousands, except share data)

   
September 30, 2005
  
December 31,
  
Assets
  
(unaudited)
  
2004
  
Current assets:
          
Cash and cash equivalents
  
$
26,029
    
30,143
  
Trade receivables, net of allowances of $6,579 and $6,660 in 2005 and 2004, respectively
    
283,763
    
328,876
  
Notes receivable
    
3,039
    
2,911
  
Other receivables
    
12,507
    
11,432
  
Prepaid expenses
    
23,578
    
22,279
  
Deferred tax assets
    
27,376
    
28,427
  
Other assets
    
9,793
    
12,189
  
Total current assets
    
386,085
    
436,257
  
 
              
Property and equipment, at cost, less accumulated depreciation of $163,108 and $163,667 in 2005 and 2004, respectively
   
72,988
    
75,531
  
Goodwill, with indefinite useful lives, at cost, less accumulated amortization of $37,667 and $38,390 in 2005 and 2004, respectively
    
338,570
    
343,314
  
Identified intangibles, with finite useful lives, at cost, less accumulated amortization of $44,383 and $41,242 in 2005 and 2004, respectively
    
5,840
    
8,350
  
Investments in and loans to real estate ventures
    
83,817
    
73,570
  
Long-term receivables, net
    
19,206
    
16,179
  
Prepaid pension asset
    
1,855
    
2,253
  
Deferred tax assets
    
40,317
    
43,202
  
Debt issuance costs, net
    
1,161
    
1,704
  
Other assets, net
    
19,013
    
12,017
  
 
  
$
968,852
    
1,012,377
  
 
              
Liabilities and Stockholders’ Equity
              
Current liabilities:
              
Accounts payable and accrued liabilities
  
$
99,873
    
130,489
  
Accrued compensation
    
174,648
    
244,659
  
Short-term borrowings
    
16,469
    
18,326
  
Deferred tax liabilities
    
819
    
262
  
Deferred income
    
24,137
    
16,106
  
Other liabilities
    
22,064
    
17,221
  
Total current liabilities
    
338,010
    
427,063
  
 
              
Long-term liabilities:
              
Credit facilities
    
80,213
    
40,585
  
Deferred tax liabilities
    
348
    
671
  
Deferred compensation
    
15,560
    
8,948
  
Minimum pension liability
    
1,703
    
3,040
  
Other
    
30,371
    
24,090
  
Total liabilities
    
466,205
    
504,397
  
 
              
Commitments and contingencies (Note 7)
              
 
              
Stockholders’ equity:
              
Common stock, $.01 par value per share, 100,000,000 shares authorized; 35,012,299 and 33,243,527 shares issued and outstanding as of September 30, 2005 and December 31, 2004, respectively
    
350
    
332
  
Additional paid-in capital
    
613,479
    
575,862
  
Deferred stock compensation
    
(29,576
)
  
(34,064
)
Retained earnings
    
32,423
    
4,896
  
Stock held by subsidiary
    
(101,924
)
  
(58,898
)
Stock held in trust
    
(808
)
  
(530
)
Accumulated other comprehensive (loss) income
    
(11,297
)
  
20,382
  
Total stockholders’ equity
    
502,647
    
507,980
  
 
  
$
968,852
    
1,012,377
  

See accompanying notes to consolidated financial statements.


JONES LANG LASALLE INCORPORATED
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2005 and 2004
($ in thousands, except share data)
(unaudited)
 
   
Three Months Ended September 30, 2005
  
Three Months Ended September 30, 2004
  
Nine Months Ended September 30, 2005
 
Nine Months Ended September 30, 2004
  
                   
Revenue:
                  
                   
Fee based services
  
$
320,607
    
263,949
   
874,554
   
740,545
  
Other income
    
5,777
   
5,968
   
17,094
   
14,031
  
Total revenue
    
326,384
   
269,917
   
891,648
   
754,576
  
                           
Operating expenses:
                          
                           
Compensation and benefits
    
211,035
   
175,018
   
592,800
   
505,544
  
Operating, administrative and other
    
79,702
   
62,782
   
227,184
   
193,466
  
Depreciation and amortization
    
8,322
   
8,435
    
24,967
    
24,678
  
Restructuring charges
    
721
   
2,442
   
471
   
1,083
  
Total operating expenses
    
299,780
    
248,677
    
845,422
    
724,771
  
                           
Operating income
    
26,604
    
21,240
    
46,226
    
29,805
  
                           
Interest expense, net of interest income
    
1,333
    
1,016
    
3,019
    
8,472
  
Loss on extinguishment of Senior Notes
    
—
    
—
    
—
    
11,561
  
Equity in earnings from unconsolidated ventures
    
2,366
    
1,034
    
6,104
    
10,071
  
                           
Income before provision for income taxes
    
27,637
    
21,258
    
49,311
    
19,843
  
Net provision for income taxes
    
7,020
    
5,953
    
12,525
    
5,557
  
                           
Net income
  
$
20,617
    
15,305
    
36,786
    
14,286
  
                           
                           
Net income available to common shareholders (Note 1)
  
$
20,231
    
15,305
    
36,400
    
14,286
  
                           
                           
Basic income per common share
  
$
0.64
    
0.49
    
1.16
    
0.46
  
Basic weighted average shares outstanding
    
31,576,006
    
30,936,792
    
31,296,057
    
30,912,002
  
                           
Diluted income per common share
  
$
0.61
    
0.47
    
1.10
    
0.43
  
                           
Diluted weighted average shares outstanding
    
33,425,883
    
32,894,416
    
32,990,066
    
32,850,218
  

See accompanying notes to consolidated financial statements.
 

JONES LANG LASALLE INCORPORATED
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2005
($ in thousands, except share data)
(unaudited)

   
Common Stock
 
Additional Paid-In
 
Deferred Stock
 
Retained
 
Stock Held by
 
Shares Held in Trust and
 
Accumulated Other Comprehensive
 
 
 
 
 
Shares (1)
 
Amount
 
Capital
 
Compensation
 
Earnings
 
Subsidiary
 
Other
 
Income (Loss)
 
Total
  
Balances at                                      
December 31, 2004
    
33,243,527
  
$
332
    
575,862
    
(34,064
)
  
4,896
    
(58,898
)
  
(530
)
  
20,382
  
$
507,980
  
                                                         
Net income
    
—
    
—
    
—
    
—
    
36,786
    
—
    
—
    
—
    
36,786
  
                                                         
Shares issued in connection with stock option plan
    
916,761
    
9
    
22,086
    
—
    
—
    
—
    
—
    
—
    
22,095
  
Tax benefit of option exercises
    
—
    
—
    
6,611
    
—
    
—
    
—
    
—
    
—
    
6,611
  
                                                         
Restricted stock:
                                                        
Shares granted
    
—
    
—
    
12,556
    
(12,556
)
  
—
    
—
    
—
    
—
    
—
  
Amortization of granted shares
    
—
    
—
    
—
    
5,598
    
—
    
—
    
—
    
—
    
5,598
  
Reduction in grants outstanding
    
—
    
—
    
(1,690
)
  
1,690
    
—
    
—
    
—
    
—
    
—
  
Shares issued
    
380,749
    
4
    
94
    
—
    
—
    
—
    
—
    
—
    
98
  
Shares repurchased for payment of taxes
    
(96,483
)
  
(1
)
  
(2,383
)
  
—
    
—
    
—
    
—
    
—
    
(2,384
)
Tax benefit of vestings
    
—
    
—
    
2,503
    
—
    
—
    
—
    
—
    
—
    
2,503
  
                                                         
Stock compensation programs:
                                                        
Shares granted
    
—
    
—
    
(875
)
  
875
    
—
    
—
    
—
    
—
    
—
  
Amortization of granted shares
    
—
    
—
    
—
    
7,282
    
—
    
—
    
—
    
—
    
7,282
  
Reduction in grants outstanding
    
—
    
—
    
(1,599
)
  
1,599
    
—
    
—
    
—
    
—
    
—
  
Shares issued (vestings)
    
593,776
    
6
    
(20
)
  
—
    
—
    
—
    
—
    
—
    
(14
)
Shares repurchased for payment of taxes
    
(157,871
)
  
(2
)
  
(7,096
)
  
—
    
—
    
—
    
—
    
—
    
(7,098
)
Tax benefit of vestings
    
—
    
—
    
4,149
    
—
    
—
    
—
    
—
    
—
    
4,149
  
                                                         
Stock purchase programs:
                                                        
Shares issued
    
131,840
    
2
    
3,281
    
—
    
—
    
—
    
—
    
—
    
3,283
  
                                                         
Shares held by subsidiary (1)
    
—
    
—
    
—
    
—
    
—
    
(43,026
)
  
(278
)
  
—
    
(43,304
)
Dividends declared
    
—
    
—
    
—
    
—
    
(9,259
)
  
—
    
—
    
—
    
(9,259
)
                                                         
Cumulative effect of foreign currency translation adjustments
   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(31,679
)
  
(31,679
)
                                                         
Balances at September 30, 2005
    
35,012,299
  
$
350
    
613,479
    
(29,576
)
  
32,423
    
(101,924
)
  
(808
)
  
(11,297
)
$
502,647
  

(1) Shares repurchased under our share repurchase programs are not cancelled, but are held by one of our subsidiaries. The 3,328,551 shares we have repurchased through September 30, 2005 are included in the 35,012,299 shares total of our common stock account, but are excluded from our share count for purposes of calculating earnings per share.

See accompanying notes to consolidated financial statements.
 

JONES LANG LASALLE INCORPORATED

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2005 and 2004
($ in thousands)
(unaudited)

   
Nine Months Ended September 30, 2005
  
Nine Months Ended September 30, 2004
  
           
Cash flows from operating activities:
          
           
Cash flows from earnings:
          
Net income
  
$
36,786
    
14,286
  
Reconciliation of net income to net cash provided by earnings:
              
Depreciation and amortization
    
24,967
    
24,678
  
Equity in earnings from unconsolidated ventures
    
(6,104
)
  
(10,071
)
Operating distributions from real estate ventures
    
5,568
    
7,487
  
Provision for loss on receivables and other assets
    
2,194
    
2,378
  
Amortization of deferred compensation
    
15,332
    
10,642
  
Amortization of debt issuance costs
    
543
    
2,244
  
Net cash provided by earnings
    
79,286
    
51,644
  
               
Cash flows from changes in working capital:
              
Receivables
    
38,689
    
15,404
  
Prepaid expenses and other assets
    
(2,025
)
  
(14,010
)
Deferred tax assets
    
4,170
    
(586
)
Accounts payable, accrued liabilities and accrued compensation
    
(108,874
)
  
(15,996
)
Net cash flow uses from changes in working capital
   
(68,040
)
  
(15,188
)
Net cash provided by operating activities
    
11,246
    
36,456
  
               
Cash flows from investing activities:
              
               
Net capital additions—property and equipment
    
(21,908
)
  
(15,582
)
Other acquisitions and investments
    
(4,885
)
  
(509
)
Investments in real estate ventures:
              
Capital contributions and advances to real estate ventures
    
(19,850
)
  
(32,284
)
Distributions, repayments of advances and sale of investments
    
7,572
    
12,984
  
Net cash used in investing activities
    
(39,071
)
  
(35,391
)
               
Cash flows from financing activities:
              
               
Proceeds from borrowings under credit facilities
    
444,957
    
420,013
  
Repayments of borrowings under credit facilities
    
(407,187
)
  
(235,575
)
Redemption of Senior Notes, net of costs
    
—
    
(203,209
)
Shares repurchased for payment of taxes on stock awards
    
(9,481
)
  
(4,210
)
Shares repurchased under share repurchase program
    
(43,304
)
  
(35,837
)
Common stock issued under stock option plan and stock purchase programs
    
38,726
    
16,276
  
Net cash provided by (used in) financing activities
    
23,711
    
(42,542
)
               
Net decrease in cash and cash equivalents
    
(4,114
)
  
(41,477
)
Cash and cash equivalents, January 1
    
30,143
    
63,105
  
Cash and cash equivalents, September 30
  
$
26,029
    
21,628
  
               
               
Supplemental disclosure of cash flow information:
              
               
Cash paid during the period for:
              
Interest
  
$
3,218
    
9,037
  
Income taxes, net of refunds
    
14,447
    
7,977
  
               
Non-cash financing activities:
              
Cash dividends declared but not paid
    
9,259
    
—
  
 
See accompanying notes to consolidated financial statements.
 

JONES LANG LASALLE INCORPORATED

Notes to Consolidated Financial Statements (Unaudited)

Readers of this quarterly report should refer to the audited financial statements of Jones Lang LaSalle Incorporated (“Jones Lang LaSalle”, which may also be referred to as the “Company” or as “the firm,” “we,” “us” or “our”) for the year ended December 31, 2004, which are included in Jones Lang LaSalle’s 2004 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission (“SEC”) and also available on our website (www.joneslanglasalle.com), since we have omitted from this report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to the “Summary of Critical Accounting Policies and Estimates” section within “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for further discussion of our accounting policies and estimates.

(1) Summary of Significant Accounting Policies

Interim Information

Our consolidated financial statements as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements for these interim periods have been included.

Historically, our revenue, operating income and net earnings in each of the first three calendar quarters are substantially lower than in the fourth quarter. Other than for the Investment Management segment, this seasonality is due to a calendar-year-end focus on the completion of real estate transactions, which is consistent with the real estate industry generally. The Investment Management segment earns performance fees on clients’ returns on their real estate investments. Such performance fees are generally earned when assets are sold, the timing of which is geared towards the benefit of our clients, and therefore can be volatile, as more particularly discussed below under “Items Affecting Comparability - LaSalle Investment Management Incentive Fee Revenues” within “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Non-variable operating expenses, which are treated as expenses when they are incurred during the year, are relatively constant on a quarterly basis. As such, the results for the periods ended September 30, 2005 and 2004 are not indicative of the results to be obtained for the full fiscal year.

Reclassifications

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

Beginning in the fourth quarter 2004, we reclassified ”equity in earnings from unconsolidated ventures” from “total revenue” to a separate line on the consolidated statements of operations after ”operating income”. This change has the effect of reducing the amounts of ”total revenue” and ”operating income” originally reported, for the three and nine months ended September 30, 2004, by the amount of equity earnings (losses) in the respective period. However, for segment reporting purposes, we continue to reflect ”equity in earnings from unconsolidated ventures” within ”total revenue”. See Note 2 for ”equity earnings (losses)” reflected within revenues for the Americas, Europe and Investment Management segments, as well as the discussion of how the Chief Operating Decision Maker (as defined in Note 2) measures segment results with “equity earnings (losses)” included in segment revenues.

The following table lists total revenue and operating income as originally reported in the quarterly report for the three and nine months ended September 30, 2004, and lists the reclassification as discussed above, as well as the reclassified amounts ($ in thousands):

   
Three Months Ended September 30, 2004
  
Nine Months Ended September 30, 2004
  
           
Total revenue, as originally reported
  
$
270,951
  
$
764,647
  
Reclassification: Equity in earnings from unconsolidated ventures
    
(1,034
)
  
(10,071
)
Total revenue, as reclassified
    
269,917
    
754,576
  
               
Operating income, as originally reported
    
22,274
    
39,876
  
Operating income, as reclassified
  
$
21,240
  
$
29,805
  

Also, see Note 3 for discussion of reclassifications of restructuring charges (credits).

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 unconsolidated ventures over which we exercise significant influence, but not control, are accounted for by the equity method. Under this method we maintain an investment account, which is increased by contributions made and our share of net income of the unconsolidated ventures, and decreased by distributions received and our share of net losses of the unconsolidated ventures. Our share of each unconsolidated venture’s net income or loss, including gains and losses from capital transactions, is reflected in our statements of operations as "equity in earnings from unconsolidated ventures." Investments in unconsolidated ventures over which we are not able to exercise significant influence are accounted for under the cost method. Under the cost method our investment account is increased by contributions made and decreased by distributions representing return of capital.


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 47.85% of the respective ventures. We apply the provisions of the following guidance when accounting for these interests:

 
·
FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46-R”)
 
·
AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” (“SOP 78-9”)
 
·
Accounting Principles Board (“APB”) 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 FIN 46-R, SOP 78-9, APB 18 and EITF D-46 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.

Additionally, in June 2005, the Financial Accounting Standards Board ratified 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”). We are applying the provisions of EITF 04-5 to limited partnerships or similar entities newly formed or modified after June 29, 2005 in which we hold a general partner or equivalent interest. EITF 04-5 will be effective beginning January 1, 2006 for all other limited partnerships or similar entities in which we hold a general partner or equivalent interest.

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 an indication 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 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.

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 accounting principles generally accepted in the United States of America 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 generally accepted accounting principles to revenue transactions with multiple deliverables.

In “Item 1. Business” of our 2004 Annual Report on Form 10-K, we describe the services that we provide. We recognize revenue from these services as advisory and management fees, transaction commissions and project and development management fees. 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 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. Project and development management fees are recognized applying the “percentage of completion” method of accounting. We use the efforts expended method to determine the extent of progress towards completion.

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.

Reimbursable expenses
We follow the guidance of EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF 01-14”), 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 accounting for 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 that we incur, and not separately scheduled as such, 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 the 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 which 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 offset the reimbursement against expenses. We base this accounting on the following factors which define us as an agent rather than a principal:

 
(i)
The property owner, with ultimate approval rights relating to the employment and compensation of onsite personnel, and bearing all of the economic costs of such personnel, is determined to be the primary obligor in the arrangement;
 
(ii)
Reimbursement to Jones Lang LaSalle is generally completed simultaneously with payment of payroll or soon thereafter;
 
(iii)
Because the property owner is contractually obligated to fund all operating costs of the property from existing cash flow or direct funding to its building operating account, Jones Lang LaSalle bears little or no credit risk under the terms of the management contract; and
 
(iv)
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 are accounted for on a net basis. We have always presented the above reimbursable contract costs on a net basis in accordance with accounting principles generally accepted in the United States of America. Such costs aggregated approximately $128.9 million and $109.4 million for the three months ended September 30, 2005 and 2004, respectively. Such costs aggregated approximately $354.0 million and $316.3 million for the nine months ended September 30, 2005 and 2004, respectively. This treatment has no impact on operating income, net income or cash flows.

Stock-based Compensation

The Jones Lang LaSalle Amended and Restated Stock Award and Incentive Plan (“SAIP”) provides for the granting of options to purchase a specified number of shares of common stock and for other stock awards to eligible employees of Jones Lang LaSalle. Additionally, we award restricted stock units of our common stock to certain employees and members of our Board of Directors under the SAIP, and have plans under which eligible employees have the opportunity to purchase shares of our common stock at a 15% discount.

We account for our stock option and stock compensation plans under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”). These provisions allow 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, had been applied. We have elected to apply the provisions of APB 25 in accounting for stock options and other stock awards, and accordingly, recognize no compensation expense for stock options granted at the market value of our common stock on the date of grant.

We have recognized other stock awards (including various grants of restricted stock units and offerings of discounted stock purchases under employee stock purchase plans), which we granted at prices below the market value of our common stock on the date of grant, as compensation expense over the vesting period of those awards pursuant to APB 25.

The following table provides net income, and pro forma net income per common share as if the fair value-based method had been applied to all awards ($ in thousands, except share data):

   
Three Months Ended September 30, 2005
  
Three Months Ended September 30, 2004
 
Nine Months Ended
September 30, 2005
 
Nine Months Ended September 30, 2004
  
Net income available to common shareholders, as reported
  
$
20,231
    
15,305
   
36,400
    
14,286
  
                           
Add:   Stock-based employee compensation expense included in reported net income, net of related tax benefits
    
6,324
   
3,505
    
15,156
    
9,662
  
                           
Deduct:  Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax benefits
    
(7,149
)
  
(1,914
)
  
(17,274
)
  
(9,124
)
                           
Pro forma net income available to common shareholders
  
$
19,406
    
16,896
   
34,282
    
14,824
  
                           
Net income per share:
                          
Basic - as reported
  
$
0.64
    
0.49
   
1.16
   
0.46
  
Basic - pro forma
  
$
0.61
    
0.55
   
1.10
   
0.48
  
Diluted - as reported
  
$
0.61
    
0.47
   
1.10
   
0.43
  
Diluted - pro forma
  
$
0.58
    
0.51
   
1.04
   
0.45
  
 

Earnings Per Share

Earnings per share is calculated by dividing net income available to common shareholders by weighted average shares outstanding. To calculate net income available to common shareholders, we subtract dividend-equivalents to be paid on outstanding but unvested shares of restricted stock units from net income in the period the dividend is declared. For the three months ended September 30, 2005 and 2004, we calculated basic earnings per common share using basic weighted average shares outstanding of 31.6 million and 30.9 million shares, respectively. For the three months ended September 30, 2005 and 2004, we calculated diluted earnings per common share using diluted weighted average shares outstanding of 33.4 million and 32.9 million shares, respectively. The portion of diluted weighted average shares outstanding which is comprised of common stock equivalents primarily represents 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. We did not include in weighted average shares outstanding the 3,328,551 or 2,005,400 shares that had been repurchased as of September 30, 2005 and 2004, respectively, and which are held by one of our subsidiaries. See “Part II, Item 2. Share Repurchases” for additional information.

Dividends Declared

On August 17, 2005, our Board of Directors declared an initial semi-annual cash dividend of $0.25 per share of common stock. The plan approved by the Board anticipates a total annual dividend of $0.50 per common share. We paid the first dividend on October 14, 2005 to 34,965,135 holders of record at the close of business on September 15, 2005. A dividend-equivalent of $0.25 per share was also paid simultaneously on 2,069,154 outstanding but unvested shares of restricted stock units granted under the SAIP or in lieu of certain cash bonus payments under our Stock Ownership Plan.

Comprehensive Income

For the three and nine months ended September 30, 2005 and 2004, we calculated comprehensive income as follows:

   
Three Months Ended September 30, 2005
  
Three Months Ended September 30, 2004
  
Nine Months Ended
September 30, 2005
  
Nine Months Ended September 30, 2004
  
                   
Net income
  
$
20,617
    
15,305
   
36,786
    
14,286
  
                         
Other comprehensive income (loss):
                          
Foreign currency translation adjustments
    
(2,932
)
  
1,972
   
(31,679
)
  
3,363
  
                         
Comprehensive income
  
$
17,685
    
17,277
    
5,107
   
17,649
  
 
Derivatives and Hedging Activities

We apply FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by FASB Statement No. 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 specific elements of foreign currency risk. At September 30, 2005, we had forward exchange contracts in effect with a gross notional value of $289.5 million ($259.0 million on a net basis) and a market and carrying loss of $5.9 million.

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.

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 transactions 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, during the three and nine months ended September 30, 2005 was not significant.


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 our balance sheet as a separate component of stockholders’ equity (accumulated other comprehensive income (loss)) and in our disclosure of comprehensive income above. Income and expenses are translated at the average monthly rates of exchange. Gains and losses from foreign currency transactions are included in net earnings. 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 balances are reflected in cash flows from operating activities on the consolidated statement of cash flows.

New Accounting Standards

Accounting for “Share-Based” Compensation
SFAS No. 123 (revised 2004), “Share-Based Payment” ("SFAS 123-R"), a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" (“SFAS 123”), was issued in December 2004. SFAS 123-R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and its related implementation guidance. Due to actions by the SEC, SFAS 123-R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005, which will be January 1, 2006 for Jones Lang LaSalle.

SFAS 123-R eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally has resulted in recognition of no compensation cost. However, SFAS 123-R will require us to recognize expense for the grant-date fair value of stock options and other equity-based compensation issued to employees. That cost will be recognized over the employee’s requisite service period.

Employee share purchase plans (“ESPPs”) result in recognition of compensation cost if defined as “compensatory,” which under SFAS 123-R includes (a) plans that contain a “look-back” feature, or (b) plans that contain a purchase price discount larger than five percent, which SFAS 123-R views as the per-share amount of issuance costs that would have been incurred to raise a significant amount of capital by a public offering.

SFAS 123-R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying SFAS 123-R also will be recognized as of the required effective date. Management has not yet determined the impact that the application of SFAS 123-R will have on our financial reporting.

Accounting for General Partner Interests in a Limited Partnership
In June 2005, the FASB ratified EITF 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 presumes that a general partner controls a limited partnership, and therefore should consolidate the limited partnership in its financial statements. To overcome the presumption of control, and thereby account for a general partner investment in a limited partnership on the equity method, EITF 04-5 requires the general partner to grant certain rights to the limited partners. EITF 04-5 applies to limited partnerships created or amended after June 29, 2005, and to all other limited partnerships effective January 1, 2006. EITF 04-5 also applies to entities similar to limited partnerships, such as limited liability companies with governing provisions that are the functional equivalent of a limited partnership.

Consolidation of existing limited partnerships (or similar entities) in which we have a general partner (or similar) interest would result in a material increase in the amount of assets and liabilities reported in our balance sheet. However, management is considering whether it will amend partnership agreements affected by EITF 04-5 to grant limited partner rights sufficient to overcome the EITF 04-5 control presumption, and thereby retain equity method accounting for those interests.


(2) 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 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 "implementation services") and property management, facilities management services, and project and development 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, including certain globally managed stock programs. These corporate global overhead expenses are allocated to the business segments based on the relative revenue of each segment.

Our measure of segment operating results excludes “restructuring charges (credits).” See Note 3 for a detailed discussion of these charges (credits). We have determined that it is not meaningful to investors to allocate these restructuring charges (credits) to our segments. Also, for segment reporting we continue to show “equity in earnings from unconsolidated ventures” within our revenue line, especially since it is an integral part of our Investment Management segment. The Chief Operating Decision Maker of Jones Lang LaSalle measures the segment results without restructuring charges (credits), but with equity in earnings from unconsolidated ventures included in segment revenues. 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.

We have reclassified certain prior year amounts to conform with the current presentation. These reclassifications are discussed in Note 1.

Summarized unaudited financial information by business segment for the three and nine months ended September 30, 2005 and 2004 is detailed in the following table ($ in thousands):

Investor and Occupier Services
  
Three Months Ended September 30, 2005
  
Three Months Ended September 30, 2004
 
Nine Months Ended September 30, 2005
 
Nine Months Ended September 30, 2004
  
                   
Americas
                  
Revenue:
                  
Implementation services
  
$
44,825
    
36,763
   
113,864
    
98,757
  
Management services
   
55,831
   
44,774
    
150,220
    
124,070
  
Equity earnings
    
198
   
—
   
381
   
467
  
Other services
    
2,291
    
1,871
   
6,040
    
4,613
  
Intersegment revenue
   
169
   
234
    
698
    
615
  
     
103,314
    
83,642
   
271,203
    
228,522
  
Operating expenses:
                          
Compensation, operating and administrative services
    
87,065
    
70,386
   
245,477
    
201,426
  
Depreciation and amortization
    
3,797
   
3,494
    
11,080
    
10,519
  
Operating income
  
$
12,452
    
9,762
    
14,646
    
16,577
  
                           
Europe
                          
Revenue:
                          
Implementation services
  
$
84,734
    
72,788
   
236,720
    
214,389
  
Management services
   
22,179
   
23,486
    
70,051
    
70,211
  
Equity losses
    
—
   
—
   
(226
)
  
—
 
Other services
    
3,740
   
3,235
   
9,099
   
7,191
  
     
110,653
    
99,509
   
315,644
    
291,791
  
Operating expenses:
                          
Compensation, operating and administrative services
    
105,164
    
94,044
   
307,621
    
277,701
  
Depreciation and amortization
    
2,435
   
2,544
    
7,439
    
7,998
  
Operating income
  
$
3,054
    
2,921
    
584
    
6,092
  
                           
Asia Pacific
                          
Revenue:
                          
Implementation services
  
$
35,461
    
33,083
   
101,674
    
82,471
  
Management services
   
28,604
   
22,683
    
78,310
    
64,632
  
Other services
    
(756
)
  
468
    
777
    
1,226
  
     
63,309
    
56,234
   
180,761
    
148,329
  
Operating expenses:
                          
Compensation, operating and administrative services
    
60,741
    
48,554
   
167,037
    
141,414
  
Depreciation and amortization
    
1,745
   
2,104
    
5,414
    
5,247
  
Operating income
  
$
823
    
5,576
    
8,310
    
1,668
  
                           
                           
Investment Management
                          
Revenue:
                          
Implementation and other services
  
$
3,722
    
3,092
   
14,613
    
8,011
  
Advisory fees
    
32,601
   
24,616
    
93,369
    
74,636
  
Incentive fees
    
13,154
   
3,058
   
16,911
   
4,369
  
Equity earnings
   
2,166
   
1,034
    
5,949
    
9,604
  
     
51,643
    
31,800
   
130,842
    
96,620
  
Operating expenses:
                          
Compensation, operating and administrative services
    
37,937
    
25,049
   
100,547
    
79,083
  
Depreciation and amortization
    
344
   
294
    
1,034
    
915
  
Operating income
  
$
13,362
    
6,457
    
29,261
    
16,622
  
                           
                           
Segment Reconciling Items:
                          
Total segment revenue
 
$
328,919
    
271,185
    
898,450
    
765,262
  
Intersegment revenue eliminations
   
(169
)
  
(234
)
  
(698
)
  
(615
)
Equity earnings reclassified
    
(2,366
)
  
(1,034
)
  
(6,104
)
  
(10,071
)
Total revenue
    
326,384
    
269,917
   
891,648
    
754,576
  
                           
Total segment operating expenses
    
299,228
   
246,469
    
845,649
    
724,303
  
Intersegment operating expense eliminations
   
(169
)
  
(234
)
  
(698
)
  
(615
)
Total operating expenses before restructuring charges (credits)
    
299,059
   
246,235
    
844,951
    
723,688
  
Operating income before restructuring charges
  
$
27,325
    
23,682
    
46,697
    
30,888
  
 
 
(3) Restructuring Charges (Credits)

Restructuring activity for the three and nine months ended September 30, 2005 and 2004, respectively, is detailed in the following table ($ in millions):

Restructuring Charges (Credits)
  
Three Months Ended September 30, 2005
  
Three Months Ended September 30, 2004
  
Nine Months Ended September 30, 2005
  
Nine Months Ended September 30, 2004
  
                   
Land Investment and Development Group
  
$
(0.4
)
  
1.9
   
(0.4
)
  
0.6
  
                           
2002 Restructuring:
                          
Compensation and benefits
    
—
    
—
   
(0.2
)
  
(0.2
)
Operating, administrative and other
    
—
    
0.5
    
—
    
0.7
  
                           
2005 Restructuring:
                          
Compensation and benefits
    
1.1
    
—
    
1.1
    
—
  
Net Restructuring Charges
  
$
0.7
    
2.4
    
0.5
    
1.1
  


Land Investment and Development Group

We closed the non-strategic residential land business (“Land Investment Group”) in the Americas region of the Investment Management segment in 2001. In the third quarter of 2004, we received updated cash flow projections for one of the investments indicating a decline in expected cash proceeds and an increase in expected expenses associated with the investment. As a result, a $2.0 million impairment charge was recorded in the three months ended September 30, 2004. The impairment charge was offset by approximately $0.1 million in third quarter 2004 cash proceeds related to other assets fully written down in a prior period. Following the charge, the net book value of Land Investment Group investments was $0 at September 30, 2004. In the third quarter of 2005, a $0.4 million net gain was recorded as a result of cash received in the quarter from sales of land of the Land Investment Group.

As part of our broad-based business restructuring in the second half of 2001, we disposed of our Americas Development Group, although we retained an interest in certain investments the group had originated. In the second quarter of 2004, we liquidated the final investment and recorded a gain of $1.3 million to restructuring charges (credits).

Net Land Investment Group charges of $1.9 million in the third quarter of 2004 and the $1.3 million gain on Development Group liquidation in the second quarter of 2004 resulted in total net charges for the Land Investment and Development Group of $0.6 million for the nine months ended September 30, 2004.
 

Business Restructuring

Business restructuring charges include severance, professional fees, and excess leased space associated with the realignment of our business. The “2002 Restructuring Program” in the table above refers to a four percent reduction in workforce in December 2002 to meet expected global economic conditions.

Actual costs incurred from business restructurings have varied from our original estimates for a variety of reasons, including the identification of additional facts and circumstances, the complexity of international labor law, developments in the underlying business resulting in the unforeseen reallocation of resources, and better or worse than expected settlement discussions. Updates to original severance estimates have included net credits of $0.2 million in restructuring compensation and benefits in each of the second quarter of 2005 and the first quarter of 2004. Additionally, updates to the identification and valuation of excess leased space made in prior periods resulted in net charges of $0.5 million in operating, administrative and other expense in the third quarter of 2004.

The $0.2 million of net credits taken in the second quarter of 2005 were not reserves related to the 2002 Restructuring Program.

In the three months ended September 30, 2005, we initiated a restructuring program in Germany. The restructuring is in the form of workforce reductions, resulting in $1.1 million of severance charges being recorded during the quarter. We expect approximately $0.1 million of additional restructuring expenses under this program in the fourth quarter of 2005.

Reclassifications

During the third quarter of 2005, we reclassified certain charges (credits) presented within “non-recurring and restructuring charges (credits)” in prior quarters for inclusion within “compensation and benefits” or “operating, administrative and other” expenses. Such reclassified amounts are legal expenses and collections from a litigation settlement related to the abandonment of a property management software system in Asia Pacific which were presented as non-recurring and restructuring charges (credits) in prior periods. A third-quarter 2005 payment of $0.8 million received from the property management software system litigation settlement was recorded as a credit to “Operating, administrative and other” expenses. Amounts received during the first half of 2005 and for the nine months ended September 30, 2004, $1.6 million and $3.4 million, respectively, were reclassified in the quarter from “non-recurring and restructuring” to conform to the current presentation. Such reclassification had no impact on consolidated total operating expenses or operating income.


Restructuring Charges (Credits) by Segment

The following table displays the net charges incurred by segment for the three and nine months ended September 30, 2005 and 2004 ($ in millions):

Restructuring Charges (Credits)
  
Three Months Ended September 30, 2005
  
Three Months Ended September 30, 2004
  
Nine Months Ended September 30, 2005
  
Nine Months Ended September 30, 2004
  
                   
Investor and Occupier Services:
                  
Americas
  
$
—
    
—
    
—
    
—
  
Europe
    
1.1
    
0.5
    
0.9
    
0.5
  
Asia Pacific
    
—
    
—
    
—
    
—
  
                           
Investment Management
    
(0.4
)
  
1.9
    
(0.4
)
  
0.6
  
Corporate
    
—
    
—
    
—
    
—
  
Net Restructuring Charges
  
$
0.7
    
2.4
    
0.5
    
1.1
  


(4) 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 47.85% of the respective ventures. We typically are entitled to operating distributions in accordance with our respective ownership interests. Our exposure to liabilities and losses of these ventures is limited to our existing capital contributions and remaining capital commitments. In the normal course of business, certain of our wholly-owned subsidiaries may enter into forward purchase commitments on behalf of certain ventures; however, financial exposure to such commitments is fully assigned to the respective real estate venture.

For real estate limited partnerships in which the Company is a general partner, we apply the guidance set forth in FIN 46-R and SOP 78-9, and will apply the guidance in EITF 04-5, 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, the right to dissolve or liquidate the partnership, approve the sale or refinancing of the principal partnership assets, or approve the acquisition of principal partnership assets. Such general partner interests have been accounted for under the equity method through September 30, 2005.


For real estate limited partnerships in which the Company is a limited partner, the Company is a co-investment partner and 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, rather only a 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.

As of September 30, 2005, we have total investments and loans of $83.8 million in approximately 25 separate property or fund co-investments. Within this $83.8 million, loans of $3.8 million to real estate ventures bear interest rates ranging from 7.25% to 8.0% and are to be repaid by 2008. With respect to certain co-investment indebtedness, in the event that the underlying co-investment loans default, we also have repayment guarantees to third-party financial institutions of $0.7 million outstanding at September 30, 2005.

Following is a table summarizing our investments in real estate ventures ($ in millions):

Type of Interest
Percent Ownership of Real Estate Limited Partnership Venture
Accounting Method
Carrying Value
 
 
 
 
General partner
0% to 1%
Equity
$ 0.3
Limited partner with advisory agreements
<1% to 47.85%
Equity
83.0
Equity method
 
 
$ 83.3
Limited partner without advisory agreements
<1% to 5%
Cost
0.5
Total
 
 
$ 83.8

•  LaSalle Investment Company - LaSalle Investment Company ("LIC"), formerly referred to as LaSalle Investment Limited Partnership, is a series of four parallel limited partnerships, which serve as our investment vehicle for substantially all new co-investments. LIC invests in certain real estate ventures that own and operate commercial real estate. LIC generally invests via limited partnerships and intends to own 20% or less of the respective ventures. We have an effective 47.85% ownership interest in LIC; primarily institutional investors hold the remaining 52.15% interest in LIC. In addition, a non-executive Director of Jones Lang LaSalle is an investor in LIC on equivalent terms to other investors. Our investment in LIC is accounted for under the equity method of accounting in the accompanying consolidated financial statements.

At September 30, 2005, LIC has unfunded capital commitments to underlying real estate ventures of $171.2 million, of which our 47.85% share is $81.9 million, for future fundings of co-investments. These commitments are part of our maximum potential unfunded commitment to LIC at September 30, 2005, which is euro 96.1 million ($115.6 million). We also have unfunded capital commitments to other real estate ventures of $12.0 million, exclusive of our LIC commitment structure, at September 30, 2005.

LIC’s exposure to liabilities and losses of the ventures is limited to its existing capital contributions and remaining capital commitments. We expect that LIC will draw down on our commitments over the next three to five years. Additionally, 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 investment funds. 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.

For the nine months ended September 30, 2005, we funded a net $12.3 million related to co-investment activity. We expect to continue to pursue co-investment opportunities with our real estate money management clients in the Americas, Europe and Asia Pacific. Co-investment remains very important to the continued growth of Investment Management. The net co-investment funding for 2005 is anticipated to be between $20 and $25 million (planned co-investment less return of capital from liquidated co-investments).

As of September 30, 2005, LIC maintains a euro 75 million ($90.2 million) revolving credit facility (the "LIC Facility") principally for its working capital needs. The LIC Facility contains a credit rating trigger (related to the credit rating of one of LIC’s investors who is unaffiliated with Jones Lang LaSalle) and a material adverse condition clause. If either the credit rating trigger or the material adverse condition clause becomes triggered, the LIC Facility would be in default and would need to be repaid. This would require us to fund our pro-rata share of the then outstanding balance on the LIC Facility, which is the limit of our liability. The maximum exposure to Jones Lang LaSalle, assuming that the LIC Facility were fully drawn, would be euro 35.9 million ($43.2 million). This exposure is included within and will never be more than our maximum potential unfunded commitment to LIC of euro 96.1 million ($115.6 million) discussed above. As of September 30, 2005, LIC had no outstanding borrowings on the LIC Facility.

•  Impairment - For the nine months ended September 30, 3005, we have recorded net impairment charges in “equity in earnings from unconsolidated ventures” of $1.5 million, representing our equity share of the impairment charge against individual assets held by these ventures. We recorded an insignificant amount of net impairment charges during the three months ended September 30, 2005. For the three and nine months ended September 30, 2004, we recorded such charges to equity earnings of $0.2 million and $0.4 million, respectively.
 

(5) Accounting for Business Combinations, Goodwill and Other Intangible Assets

We have $344.4 million of unamortized intangibles and goodwill as of September 30, 2005 that are subject to the provisions of SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). A significant portion of these unamortized intangibles and goodwill are denominated in currencies other than U.S. dollars, which means that a portion of the movements in the reported book value of these balances are attributable to movements in foreign currency exchange rates. The tables below set forth further details on the foreign exchange impact on intangible and goodwill balances. Of the $344.4 million of unamortized intangibles and goodwill, $338.6 million represents goodwill with indefinite useful lives, which we ceased amortizing beginning January 1, 2002. The remaining $5.8 million of identifiable intangibles (principally representing management contracts acquired) are amortized over their remaining finite useful lives.

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 2005 evaluation performed in the third quarter was that the fair value of each reporting unit exceeded its carrying amount, and therefore we did not recognize an impairment loss.

“Additions” detailed in the table below include the acquisition of ThompsonCalhounFair Hotel Brokerage, a hotel real estate broker and advisory firm, completed June 3, 2005. The acquisition extends the Americas’ service delivery capabilities to clients operating in the select service hotel sector. The purchase price was determined to be $4.5 million, plus or minus adjustments for current assets less current liabilities accrued at the closing date. Additionally, a contingent payment of 24.5 percent of net operating income generated by the hotel real estate broker and advisory business for the year after the close of the acquisition will be paid in 2006. Acquired existing contract relationships valued at $1.1 million and goodwill of $3.4 million were recorded in conjunction with the transaction.

The following table sets forth, by reporting segment, the current year movements in the gross carrying amount and accumulated amortization of our goodwill with indefinite useful lives ($ in thousands):

   
Investor and Occupier Services
          
   
 
 
 
 
Asia
 
Investment
 
 
 
 
 
Americas
 
Europe
 
Pacific
 
Management
 
Consolidated
  
                       
Gross Carrying Amount
                      
                       
Balance as of January 1, 2005
 
$
181,530
    
69,259
   
94,883
   
36,032
   
381,704
  
Additions
    
3,722
    
—
    
—
    
—
    
3,722
  
Reclassifications
    
—
    
5,583
    
—
    
(5,583
)
  
—
  
Impact of exchange rate movements
   
—
   
(6,241
)
  
(933
)
  
(2,015
)
  
(9,189
)
                                 
Balance as of September 30, 2005
   
185,252
   
68,601
   
93,950
   
28,434
   
376,237
  
                                 
Accumulated Amortization
                                
                                 
Balance as of January 1, 2005
 
$
(15,458
)
  
(5,127
)
  
(6,733
)
  
(11,072
)
  
(38,390
)
Reclassifications
    
—
    
(1,270
)
  
—
    
1,270
    
—
  
Impact of exchange rate movements
   
1
    
520
    
(124
)
  
326
   
723
  
                                 
Balance as of September 30, 2005
   
(15,457
)
  
(5,877
)
  
(6,857
)
  
(9,476
)
  
(37,667
)
                                 
Net book value as of September 30, 2005
  
$
169,795
    
62,724
    
87,093
   
18,958
   
338,570
  

The following table sets forth, by reporting segment, the current year movements in the gross carrying amount and accumulated amortization of our intangibles with finite useful lives ($ in thousands):

   
Investor and Occupier Services
  
 
  
 
  
 
  
Americas
 
Europe
 
Asia
Pacific
 
Investment
Management
 
Consolidated
  
                       
Gross Carrying Amount
                      
                       
Balance as of January 1, 2005
 
$
39,925
    
783
   
3,172
   
5,712
   
49,592
  
Additions
    
1,163
    
—
    
—
    
—
    
1,163
  
Impact of exchange rate movements
   
63
   
(63
)
  
(74
)
  
(458
)
  
(532
)
                                 
Balance as of September 30, 2005
   
41,151
   
720
   
3,098
   
5,254
   
50,223
  
                                 
Accumulated Amortization
                                
                                 
Balance as of January 1, 2005
 
$
(32,440
)
  
(612
)
  
(2,478
)
  
(5,712
)
  
(41,242
)
Amortization expense
    
(3,586
)
  
—
   
(293
)
  
—
   
(3,879
)
Impact of exchange rate movements
   
(1
)
  
27
   
254
   
458
   
738
  
                                 
Balance as of September 30, 2005
   
(36,027
)
  
(585
)
  
(2,517
)
  
(5,254
)
  
(44,383
)
                                 
Net book value as of September 30, 2005
  
$
5,124
    
135
   
581
   
—
   
5,840
  

The following table sets forth the estimated future amortization expense of our intangibles with finite useful lives:


Estimated Annual Amortization Expense

Remaining 2005 amortization
$1.4 million
For year ended December 31, 2006
$4.1 million
For year ended December 31, 2007
$0.3 million


(6) Retirement Plans

We maintain contributory defined benefit pension plans in the United Kingdom, Ireland and Holland to provide retirement benefits to eligible employees. It is our policy to fund the minimum annual contributions required by applicable regulations. We use a December 31 measurement date for our plans.

Net periodic pension cost consisted of the following for the nine months ended September 30, 2005 and 2004 ($ in thousands):

   
2005
  
2004
  
           
Employer service cost - benefits earned during the year
  
$
2,371
    
2,097
  
Interest cost on projected benefit obligation
    
5,919
    
5,363
  
Expected return on plan assets
    
(6,891
)
  
(6,587
)
Net amortization/deferrals
    
283
    
26
  
Recognized actual loss
    
129
    
—
  
Net periodic pension cost
  
$
1,811
    
899
  

In the nine months ended September 30, 2005, we have made $2.7 million in payments to our defined benefit pension plans. We expect to contribute a total of $3.9 million to our defined benefit pension plans in 2005. We made $3.9 million of contributions to these plans in the twelve months ended December 31, 2004, $2.7 million of which had been contributed by September 30, 2004.


(7) Commitments and Contingencies

Jones Lang LaSalle and certain of our subsidiaries guarantee our $325 million revolving credit facility more particularly described below in Item 2 under “Liquidity and Capital Resources.” In addition, we guarantee the local overdraft facilities of certain subsidiaries. Third-party lenders request these guarantees to ensure payment by the Company in the event that one of our subsidiaries fails to repay its borrowing on an overdraft facility. The guarantees typically have one-year or two-year maturities. The guarantees of the revolving credit facility and local overdraft facilities do not meet the recognition provisions, but do meet the disclosure requirements of FASB Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We have local overdraft facilities totaling $35.8 million, of which $8.5 million was outstanding as of September 30, 2005. We have provided guarantees of $26.5 million related to the local overdraft facilities, as well as guarantees related to the $325 million revolving credit facility, which in total represent the maximum future payments that Jones Lang LaSalle could be required to make under the guarantees provided for subsidiaries’ third-party debt.

We are a defendant in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Many of these litigation 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.

 
See Note 8 for discussion of the resolution of the lawsuit between Bank One and Jones Lang LaSalle which has been pending since November 2002 and which we previously disclosed as a pending litigation matter.
 
(8) Subsequent Event
 
On November 7, 2005, the Company and JP Morgan Chase, formerly Bank One, amicably resolved the lawsuit between Bank One and Jones Lang LaSalle which has been pending since November 2002 and which we previously disclosed as a pending litigation matter.  The claims filed by each party will be dismissed.  Jones Lang LaSalle and JP Morgan Chase will continue their business relationship.
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements, including the notes thereto, for the three and nine months ended September 30, 2005, included herein, and Jones Lang LaSalle’s audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2004, which have been filed with the SEC as part of our 2004 Annual Report on Form 10-K and are also available on our website (www.joneslanglasalle.com).

The following discussion and analysis contains certain forward-looking statements which are 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 which may cause Jones Lang LaSalle’s actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. See the Cautionary Note Regarding Forward-Looking Statements in “Part II, Item 5. Other Information.”

Our Management’s Discussion and Analysis is presented 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 acknowledge as adding value to their real estate and business operations. We believe that this 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.

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, we are not capital intensive. As a result, our profits also produce strong cash returns. Over the last three years, we have used this cash strategically to:

•
Significantly pay down our debt, resulting in significantly reduced interest expense;
•
Purchase shares under our share repurchase programs;
•
Invest for growth in important markets throughout the world;