- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM
---------------- TO
----------------
COMMISSION FILE NO. 1-11278
------------------------
THE DEWOLFE COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2895334
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
80 HAYDEN AVENUE 02421-7962
LEXINGTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (781) 863-5858
------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $.01 PAR VALUE AMERICAN STOCK EXCHANGE
(Title of class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
------------------------
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
l934 during the preceding 12 months 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 l0-K or any amendment to this
Form l0-K. ____
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (assuming for these purposes, but without conceding, that all
executive officers and Directors are "affiliates" of the Registrant) as of March
10, 2001 (based on the closing sale price as reported on AMEX on such date) was
$7,252,034.
The number of shares outstanding of the Registrant's Common Stock as of
March 10, 2000 was 3,428,753.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 2001, are incorporated by reference in Part
III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
The DeWolfe Companies, Inc. (the "Company") is an integrated homeownership
service company, primarily engaged in the business of providing sales and
marketing services to consumers in connection with residential real estate
transactions. In addition, the Company originates and services residential
mortgage loans, markets insurance products, and provides corporate and employee
relocation and related services to a variety of clients. As such, the Company
describes the services that it renders as "homeownership" services. The Company
concentrates primarily in the residential segment of the real estate market.
Accordingly, for financial purposes the Company views itself as having three
reportable operating segments: real estate, including both real estate brokerage
and relocation services, mortgage banking and insurance services. For additional
segment information, see Note 12 of Notes to Consolidated Financial Statements.
The Company is the largest homeownership company in New England where its
services are offered in Massachusetts, New Hampshire, Maine, Connecticut and
Rhode Island.
The Company was incorporated in Massachusetts in 1984 at which time it
acquired The DeWolfe Company, Inc., which had been incorporated in 1975 as the
successor to a real estate brokerage business originally founded in 1949 by the
family of the Company's Chairman and Chief Executive Officer, Richard B.
DeWolfe. The DeWolfe Companies, Inc. is the parent corporation of five principal
subsidiary corporations, which are the Company's operating entities: The DeWolfe
Company, Inc. and its subsidiaries provide residential real estate sales and
marketing services; DeWolfe Mortgage Services, Inc. originates and services
residential real estate mortgage loans; DeWolfe Relocation Services, Inc., and
its subsidiaries provide relocation services; The DeWolfe Insurance Agency, Inc.
provides insurance products to the Company's customer base; and DeWolfe.com
offers integrated homeownership tools and services via the internet. The Company
and its subsidiaries do business under the trade name "DeWolfe". References in
this report to the business and operations of the Company include the business
and operations of the Company and its consolidated subsidiaries.
RESIDENTIAL REAL ESTATE SALES AND MARKETING
The Company acts as a broker or agent in residential real estate
transactions. In performing these services, the Company has historically
represented the seller, either as the listing broker, or as a co-broker in the
sale. In acting as a broker for the seller, the Company's services include
assisting the seller in pricing the property and preparing it for sale,
advertising the property, showing the property to prospective buyers, and
assisting the seller in negotiating the terms of the sale and in closing the
transaction. In exchange for these services, the seller pays to the Company a
commission, which is generally a fixed percentage of the sales price. In a
co-broke arrangement the listing broker typically splits its commission with the
other co-broker involved in the transaction. The Company also offers buyer
brokerage services. When acting as a broker for the buyer, the Company's
services include assisting the buyer in locating properties that meet the
buyer's personal and financial specifications, showing the buyer properties, and
assisting the buyer in negotiating the terms of the purchase and closing the
transaction. In exchange for these services a commission is paid to the Company
which also is generally a fixed percentage of the purchase price and is usually,
with the consent of the listing broker, deducted from, and payable out of, the
commission payable to the listing broker. With the consent of a buyer and
seller, subject to certain conditions, the Company may, in certain
circumstances, act as a selling broker and as a buying broker in the same
transaction. The Company's sales and marketing services are provided by licensed
real estate sales associates who have entered into independent contractor
agreements with the Company.
During the year ended December 31, 2000, the Company changed its method of
revenue recognition for residential real estate brokerage commissions in
accordance with Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. Previously, the Company had recognized revenue when the
buyer and seller of a property entered into a contract of sale and a good faith
deposit was made by the
3
buyer. Under the new accounting method adopted retroactive to January 1, 2000,
the Company now recognizes revenue upon the consumation of the underlying real
estate sale.
RELOCATION SERVICES
Through DeWolfe Relocation Services, Inc. ("DRS"), and its subsidiaries, the
Company offers to employers a variety of specialized services primarily
concerned with facilitating the resettlement of transferred employees. These
services include sales and marketing of transferees' existing homes for their
corporate employer, assistance in finding new homes, moving services,
educational and school placement counseling, customized videos, property
marketing assistance, rental assistance, area tours, international relocation,
group move services, marketing and management of foreclosed properties, career
counseling, spouse/partner employment assistance, and financial services.
Clients can select these programs and services on a fee basis according to their
needs.
Since 1997, the Company has had an agreement with Reliance Relocation
Services, Inc. ("RELO") to provide relocation services to the RELO network. The
RELO organization comprises a network of 900 independent real estate brokerage
firms, which includes 36% of the nation's top 100 real estate firms. The Company
is a founding member and shareholder of RELO. The Company anticipates that
participation in RELO will provide new relocation opportunities with firms on a
national level.
DRS generated approximately 18% of the Company's real estate sales dollar
volume (aggregate sales price) in 2000, 1999, and 1998. The alliance with RELO
accounted for approximately 6% of DRS transactions for the years ended December
31, 2000 and 1999 and 5% in 1998.
REAL ESTATE BROKERAGE REVENUES
The following table summarizes the Company's revenues from residential real
estate transactions, including relocation, for the periods indicated (Number of
Transactions and Aggregate Sales Price are based on transactions accounted for
at the time a sale contract was entered into):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
PERCENT PERCENT PERCENT
2000 INCREASE 1999 INCREASE 1998 INCREASE
---------- -------- ---------- -------- ---------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Number of Transactions.................. 26,326 2.6% 25,654 35.3% 18,966 29.9%
Aggregate Sales Price................... $6,272,411 13.2% $5,541,597 30.7% $4,239,029 34.0%
Real Estate Brokerage Revenues.......... $ 187,059 8.9% $ 171,725 32.4% $ 129,735 30.1%
Net Real Estate Brokerage Revenues...... $ 63,719 10.6% $ 57,616 24.8% $ 46,170 29.7%
Real estate brokerage revenues accounted for 96%, 96% and 96% of total
revenues and net real estate brokerage revenues accounted for 90%, 89% and 89%
of net revenues of the Company for the years ended December 31, 2000, 1999 and
1998, respectively.
MORTGAGE BANKING
The Company, through its wholly owned subsidiary, DeWolfe Mortgage Services,
Inc. ("DMS"), is engaged in the residential mortgage business, which involves
the origination, sale and servicing of mortgage loans for one-to-four family
residences. The Company primarily originates and services loans for purchases of
properties located in Massachusetts, New Hampshire, Connecticut, Rhode Island
and Maine. The majority of these loans are for home sales transactions in which
the Company also acts as a broker. The term "origination" refers generally to
the process of providing mortgage financing for the purchase of property
directly to the purchaser or for refinancing an existing mortgage. The Company
primarily funds mortgage loans under a $40 million line of credit with First
Union National Bank. The majority of its mortgage loans are funded by the line
of credit, and the remainder of the loans are funded by investors at
4
closing. The Company sells the loans that it funds through the line of credit to
investors in the secondary mortgage market. The Company has correspondent
relationships with several financial institutions (investors or wholesale
lenders) to whom it sells some of the mortgage loans that it originates. These
sales are pursuant to a pre-closing commitment from the investor at a specified
price, based upon a specified interest rate and type of mortgage loan. These
relationships are governed by contracts which establish procedures for
registering certain types of loans, including delegated underwriting and
submitting complete loan packages for approval, meeting conditions established
by the investors, funding the loans, delivering the closed loan package, and
assigning the loan to the investor. The Company originates "conventional"
mortgage loans, as well as loans that are guaranteed or insured by agencies of
the federal government, secured by one-to-four family residential properties
(including condominiums), that comply with the requirements for sale to either
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). The Company also originates "jumbo" loans
(conventional loans that exceed the maximum amounts qualifying for sale to FNMA
or FHLMC but that otherwise generally comply with FNMA or FHLMC requirements)
and other loans that do not comply with FNMA or FHLMC requirements but that do
comply with requirements for sale to private investors.
The Company is an approved seller/servicer of FNMA and FHLMC, the largest
national investors in residential mortgage loans and the Company sells some of
its loans directly to these investors, while retaining the rights to service
these loans. Mortgage servicing includes processing loan payments, administering
escrow funds, monitoring delinquencies, managing foreclosures, and answering
borrowers' inquires. Servicing fees are collected by the Company out of mortgage
payments and are normally equal to a fixed percentage of the declining principal
balance of the loan. In addition, income is derived from earnings on escrow
accounts, late fees, and interest on funds received from borrowers prior to
remittance to the purchasers of the loan. The right to service these loans has
been treated as an asset (Originated Mortgage Servicing Rights) of the Company.
This servicing asset is subject to adjustments for impairment of valuation due
to prepayment risk.
The funding of loans by investors at closing or through the line of credit
arrangement subjects the Company to certain risks. For example, if a loan fails
to satisfy the terms required under an investor's pre-closing commitment, the
investor may decide not to fund or purchase the loan. Alternatively, there is a
risk that the Company will fail to obtain a pre-closing commitment from an
investor in the secondary market when the Company makes a loan commitment to a
borrower. In either case, the Company would then be required to find an
alternative investor, which, depending on market conditions, and the nature of
the issue giving rise to the first investor's failure to purchase the loan,
could result in the loan being unsaleable or saleable only at a loss. The
Company believes its exposure to interest rate risk is reasonable, but rapid
changes in interest rates could result in loans being sold at a loss.
Another risk the Company faces under this way of doing business is if an
error is made in confirming coverage of a commitment, or if an investor breaches
its obligation to purchase a loan at the agreed-upon price. The Company manages
these risks by maintaining strict policies and procedures to insure proper
coverage, and by carefully evaluating the financial capabilities and business
practices of its investors.
The Company's mortgage servicing business is also subject to certain risks.
For example, the decision to purchase servicing rights or to sell loans while
retaining servicing rights is based in part on the Company's estimate of the
market value of the servicing rights purchased or retained, which in turn is
based on the estimated present value of the expected future cash flows from such
rights. Various events, such as a higher than anticipated rate of default or
prepayment on loans which the Company has servicing rights, could adversely
affect the value of, and earnings from, these rights. However, it is the
Company's practice to acquire or retain only servicing rights "without
recourse", which means that if a borrower defaults on a loan, then the Company
would not be required to remit funds to the loan investor or owner until
remittance was received from the borrower.
5
The Company's mortgage revenues consist of loan origination fees, which are
generally a percentage of the original principal amount of the loan and are
commonly referred to as "points", application and investor fees paid by the
borrowers, originated mortgage servicing rights capitalized and service release
premiums paid by the investors. Mortgage revenues are offset by direct loan
origination costs, which consist of commissions paid to the Company's mortgage
consultants and appraisal fees and credit report fees paid to third parties. The
Company recognizes mortgage origination revenues and costs when the sale of a
mortgage loan is consummated. DeWolfe Mortgage Services, Inc. is licensed as
both a mortgage lender and as a mortgage broker in Massachusetts, New Hampshire,
Rhode Island, Maine and Connecticut.
The following table summarizes the Company's mortgage origination and
servicing activities for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
PERCENT PERCENT PERCENT
INCREASE INCREASE INCREASE
2000 (DECREASE) 1999 (DECREASE) 1998 (DECREASE)
-------- ---------- -------- ---------- -------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Mortgages Originated and
closed........................ 2,535 (13.7)% 2,939 9.7% 2,678 41.0%
Closed Loan Volume.............. $448,676 (0.7)% $451,894 5.1% $429,899 46.6%
Mortgage Revenues............... $ 4,387 (6.2)% $ 4,679 0.0% $ 4,680 65.8%
Balance at December 31:
Loans Serviced for Others....... $122,260 10.6% $110,534 30.4% $ 84,740 108.1%
Originated Mortgage Servicing
Rights, Net................... $ 1,033 6.6% $ 969 27.8% $ 758 155.2%
INSURANCE SERVICES
In late 1996, the Company commenced its insurance agency business, The
Company acts as an insurance agent, advising customers as to their insurance
needs and the appropriate types and amounts of coverage, placing coverage on
their behalf with insurers directly or through wholesale insurance brokers, and
assisting them with any subsequent claims. In return for these services, the
Company's customers pay premiums based upon the type and amount of coverage
purchased and the insurer remits to the Company a commission for sale of the
coverage. Premium and commission rates vary in amount depending upon the type of
insurance coverage provided, the insurance company underwriting the coverage and
other factors. Gross commission revenues from insurance were $1.7 million in
2000, $1.2 million in 1999 and $585,000 in 1998. In May 1998 DeWolfe Insurance
Agency, Inc. acquired the personal lines business of the Curtin Insurance
Agency, Inc., which included approximately 5,000 policyholders.
MARKETING
The Company's real estate sales and marketing, mortgage banking, insurance,
and relocation services are marketed by a multimedia program conducted
throughout Massachusetts, New Hampshire, Connecticut, Rhode Island and Maine.
This program includes direct mail, newspaper, internet, catalog, radio and
television advertising. In addition, the integrated nature of the Company's
services is designed to produce a flow of customers from its sales and marketing
business to its mortgage and insurance businesses.
COMPETITION
The businesses in which the Company is engaged are highly competitive. Many
of its competitors, through affiliated franchising organizations, have
substantially greater financial resources than the Company. However, the Company
believes that its ability to offer its customers a range of inter-related
6
services and its relative strength in residential real estate sales and
marketing strongly position it to meet the competition and improve its market
share.
In the Company's traditional business of residential real estate sales and
marketing, the Company competes primarily with muti-office independent real
estate organizations and, to some extent with franchise real estate
organizations, such as Century-21, ERA, Realty World, Better Homes and Gardens,
RE/MAX, The Prudential, and Coldwell Banker. The Company believes that its major
competitors in 2001 will be muti-office real estate organizations, such as GMAC
Home Services and NRT. Companies compete for sales and marketing business
primarily on the basis of services offered, reputation, personal contacts, and,
to some degree, price.
The Company's relocation business is fully integrated with its residential
real estate sales and marketing business. Accordingly, the Company's major
competitors are many of the same real estate organizations previously noted.
Competition in the relocation business is based primarily on level of service,
reputation, personal contact and recently to a greater extent, price.
In its mortgage loan origination business, the Company competes with other
mortgage originators, such as mortgage bankers, state and national banks, and
thrift institutions. Many of the Company's competitors for mortgage services
have substantially greater resources than the Company. The Company competes for
loan origination business based on services offered, price and available terms,
and its ability to obtain referrals through its sales and marketing services.
DMS employs full-time mortgage consultants who are assigned to various Company
real estate offices. The mortgage consultants originate mortgage loans almost
exclusively from the Company's real estate customers.
In insurance services, the Company competes primarily with locally-owned
independent insurance brokers. Competition in insurance services is based
primarily on level of service, reputation, personal contact and to a greater
extent, price.
GOVERNMENT REGULATION
Several facets of the Company's business are subject to government
regulation. For example, the Company's real estate sales and marketing
subsidiaries are licensed as real estate brokers in the states in which they
conduct their real estate brokerage businesses. In addition, the Company's real
estate sales associates must be licensed as real estate brokers or salespersons
in the states in which they do business. Future expansion of the Company's
operations into new geographic markets may subject it to similar licensing
requirements in other states.
A number of states and localities have adopted laws and regulations imposing
environmental controls, disclosure rules, zoning, and other land use
restrictions, which can materially impact the marketability of certain real
estate. However, the Company does not believe that compliance with
environmental, zoning, and land use laws and regulations has had, or will have,
a materially adverse effect on its financial condition or operations.
In its mortgage business, mortgage loan origination activities are subject
to the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real
Estate Settlement Procedures Act, and the regulations promulgated thereunder
which prohibit discrimination and require the disclosure of certain information
to borrowers concerning credit and settlement costs. As an approved FNMA and
FHLMC mortgage seller, the Company is required to comply with FNMA and FHLMC
seller guidelines for secondary sale of mortgages.
Additionally, there are various state laws affecting the Company's mortgage
operations, including licensing requirements and substantive limitations on the
interest and fees that may be charged. States also have the right to conduct
financial and regulatory audits of the loans under their jurisdiction.
7
The Company is licensed as a mortgage lender and as a mortgage broker in
Massachusetts, New Hampshire, Maine, Rhode Island, and Connecticut. In
Massachusetts, the Company is required to submit annual audited financial
statements to the Commissioner of Banks and maintain a minimum net worth of
$100,000, $75,000 of which can be in the form of a bond.
There are various state laws affecting the Company's insurance operations,
including licensing requirements.
The Company is not aware of any material licensing or other government
regulatory requirements governing its relocation business, except to the extent
that such business also involves the rendering of real estate brokerage
services, the licensing and regulation of which are described above.
TRADE NAMES
The name "DeWolfe" (registered in Massachusetts, New Hampshire, Connecticut,
Rhode Island and Maine), the DeWolfe logotype, and the tagline "One Stop and
You're Home" are used extensively in the Company's businesses. These service
marks are material to the business of the Company and have been registered in
the applicable states. The tagline "One Stop and You're Home" has also been
registered federally. In addition, the Company continues to use the trade names
of certain companies that it has acquired, and has registered other marks used
in its businesses.
SEASONALITY
The residential real estate sales and marketing business, mortgage loan
origination business, and relocation services business are subject to seasonal
fluctuations. Historically, the Company's revenues from these businesses were
greater in the second and third quarters than in first and fourth quarters. As
shown below, after adoption of SAB 101 revenues are typically higher in the last
three quarters of the year than in the first quarter. The following table
illustrates the percentage of the Company's revenues by quarter for the periods
indicated.
PERCENTAGE OF REVENUES
--------------------------------------
2000 (1) 1999 1998
-------- -------- --------
First Quarter............................................... 14.7% 20.8% 22.3%
Second Quarter.............................................. 26.7% 31.8% 31.6%
Third Quarter............................................... 31.2% 26.0% 24.2%
Fourth Quarter.............................................. 27.4% 21.4% 21.9%
---- ---- ----
100% 100% 100%
==== ==== ====
- ------------------------
(1) 2000 Revenues include the effect of the change in accounting principle due
to SAB 101.
WORK FORCE
At December 31, 2000 the Company's total work force numbered 2,829 people,
including 516 employees (including 71 mortgage banking personnel), 2,300 real
estate sales associates and 13 relocation associates. The Company believes that
its relations with its personnel are satisfactory and none of its employees are
represented by a union. All of its real estate sales associates are independent
contractors. As independent contractors, the real estate sales associates are
paid by commission solely on the basis of closed sales transactions. Mortgage
consultants are paid primarily on the basis of closed mortgage loans.
8
GROWTH STRATEGIES
ACQUISITIONS
Historically, the Company's growth has been achieved primarily through
acquisitions. In some acquisitions, the Company acquired the respective business
under a non-competition, consulting, and cooperation agreement with the acquired
firm's principal which provided for contingent cash payments to such principal
in exchange for the principal's fulfillment of the terms of the agreement and
based upon the net commission income derived from the acquired firm's sales
offices during the term of the agreement. In other cases the purchase price was
paid primarily with cash or the issuance of shares of the Company's common
stock.
The Company expects to fund all or a portion of future acquisitions through
credit facilities negotiated with the principals of the acquired businesses or
with institutional lenders. Additionally, the Company may continue to issue
shares of its common stock to complete acquisitions and in some cases the
Company may grant registration rights to the sellers in such acquisitions. As a
result, resales of shares issued in such acquisitions may affect the market
price of the Company's stock, depending on the number of shares sought to be
sold in any particular period.
During 2000 the Company completed the acquisition of two real estate
brokerage firms, the Yankee Realty Inc. and the Strong Agency.
During 1999 the Company completed the acquisition of ten real estate
brokerage firms, including J.W. Riker Northern Rhode Island, Inc. and Mark
Stimson Associates and Mark Stimson Real Estate Network, Inc.
For further discussion, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
DIVERSIFICATION
The Company has expanded by entering businesses related to homeownership
such as mortgage banking and insurance sales. The Company expects to continue to
investigate other revenue producing services providing a better range of
products and quality of service related to homeownership.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 80 Hayden Avenue,
Lexington, Massachusetts where it leases approximately 39,000 square feet of
space under a lease which requires rent of $1,018,000 per year ($26 per square
foot) and expires in June, 2004. In addition, the Company leases office space
for its 95 locations and 2 storage space locations, which consist of an average
of 3,400 square feet each, under leases which require rent ranging from $9,600
per year ($6 per square foot) to $269,000 per year ($22 per square foot) and
expire at various times through December, 2010. The Company owns the land and
building occupied by its Westford, Massachusetts sales office. The property
includes approximately 4,400 square feet of newly renovated sales office space.
As of December 31, 2000 the property was subject to mortgages in the aggregate
amount of $266,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings, except for litigation and
arbitration claims arising in the ordinary course of business which, if
adversely determined, should not have, in the opinion of the Company, a material
adverse effect either in the aggregate or in any single case on the operations
or financial condition of the Company.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The common stock of the Company is traded on the American Stock Exchange
under the symbol "DWL". The following table sets forth, for the periods
indicated, the high and low selling prices as reported by the American Stock
Exchange. As of March 16, 2001, there were 4,184 record holders of the Company's
Common Stock.
CALENDAR PERIOD 1999 HIGH LOW
- -------------------- -------- --------
First Quarter............................................... $8.50 $6.75
Second Quarter.............................................. 7.75 6.94
Third Quarter............................................... 8.00 6.75
Fourth Quarter.............................................. 7.38 6.31
CALENDAR PERIOD 2000
- ------------------------------------------------------------
First Quarter............................................... $8.00 $6.38
Second Quarter.............................................. 8.50 7.00
Third Quarter............................................... 8.06 7.25
Fourth Quarter.............................................. 8.75 7.06
On November 14, 2000, the Company declared a special cash dividend of $0.18
per common share payable on January 3, 2001 to holders of record on December 5,
2000. On November 9, 1999, the Company declared a special cash dividend of $0.15
per common share payable on January 4, 2000 to holders of record on December 7,
1999. On November 24, 1998, the Company declared a special cash dividend of
$0.12 per common share payable on January 4, 1999 to holders of record on
December 7, 1998. Pursuant to credit agreements with Fleet Bank, N.A., the
Company is restricted from paying dividends without the prior written consent of
the lender, which was obtained in each case. The Company will periodically
evaluate the merits of paying future cash dividends, however, at this time the
Company has no plans to pay any future cash dividends.
10
ITEM 6. SELECTED FINANCIAL DATA -- FIVE YEAR FINANCIAL SUMMARY
FISCAL YEAR
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Total revenue.............................. $194,435 $178,829 $135,420 $103,144 $ 92,274
Commission expense......................... 123,340 114,109 83,565 64,111 56,695
-------- -------- -------- -------- --------
Net revenue................................ 71,095 64,720 51,855 39,033 35,579
Operating Income........................... 9,583(a) 8,656(a) 6,244(a) 2,120(b) 3,783
Income before income taxes................. 9,738 8,580 5,834 1,946 3,425
Income before cumulative effect of change
in accounting principle................... 5,453 4,984 3,233 1,070 1,930
Cumulative effect of change in Accounting
principle................................. (3,715) -- -- -- --
-------- -------- -------- -------- --------
Net income................................. $ 1,738 $ 4,984 $ 3,233 $ 1,070 $ 1,930
======== ======== ======== ======== ========
Per share data:
Basic earnings per share--
Income before cumulative effect of change
in accounting principle................... $ 1.61 $ 1.49 $ 0.99 $ 0.33 $ 0.58
Cumulative effect of change in accounting
principle................................. (1.10) -- -- -- --
-------- -------- -------- -------- --------
Net Income................................. $ 0.51 $ 1.49 $ 0.99 $ 0.33 $ 0.58
======== ======== ======== ======== ========
Diluted earnings per share--
Income before cumulative effect of change
in accounting principle................... $ 1.51 $ 1.41 $ 0.95 $ 0.32 $ 0.57
Cumulative effect of change in accounting
principle................................. (1.03) -- -- -- --
-------- -------- -------- -------- --------
Net Income................................. $ 0.48 $ 1.41 $ 0.95 $ 0.32 $ 0.57
======== ======== ======== ======== ========
- ------------------------
(a) Includes a pre-tax charge of $56,000 or $0.02 per share after taxes,
$660,000 or $0.11 per share after taxes, and $405,000 or $0.07 per share
after taxes, for costs related to acquisitions, in 2000, 1999 and 1998,
respectively.
(b) Includes a pre-tax charge of $250,000 or $0.04 per share after taxes,
primarily related to office closings and consolidations.
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
FINANCIAL POSITION
Cash and cash equivalents...................... $14,537 $ 9,604 $ 6,171 $ 2,542 $ 2,586
Mortgage loans held for sale................... 24,668 9,774 24,289 12,508 6,735
Total assets................................... 67,012 65,281 63,652 39,617 32,597
Long-term debt................................. 14,167 15,396 8,195 4,004 3,215
Total liabilities.............................. 47,948 47,582 50,581 28,819 22,405
Stockholders' equity........................... 19,064 17,699 13,071 10,798 10,192
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS REPORT.
OVERVIEW OF OPERATIONS
Income before the cumulative effect of change in accounting principle for
2000 was $5.5 million compared to $5.0 million in 1999. The increase in 2000 was
primarily attributed to continued growth in the Company's existing real estate
markets and the positive effects of the integration of the prior years'
acquisitions.
As more fully discussed in Note 1 of Notes to Consolidated Financial
Statements, the Company adopted U.S. Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 (SAB 101) on Revenue Recognition in the fourth
quarter of 2000 and recorded a cumulative effect of change in accounting
principle related to real estate revenues recognized in prior periods. As a
result, the Company recorded a one-time, non-cash charge of $3.7 million, which
represents the one-time reversal of net real estate commissions receivable that
will be recorded in revenue as collected in future periods.
The following table summarizes selected operating ratios (shown as a
percentage of net revenue) as of December 31 for each of the years indicated:
2000 1999 1998
-------- -------- --------
Operating income............................................ 13.5% 13.4% 12.0%
Income before taxes......................................... 13.7% 13.3% 11.3%
Income before the cumulative effect of change in accounting
principle................................................. 7.7% 7.7% 6.2%
BUSINESS COMBINATIONS
Historically, the Company's growth has been achieved primarily through
acquisitions. During 2000, the Company completed the acquisition of two real
estate brokerage firms, as compared to the acquisition of ten real estate
brokerage firms in 1999.
The combined purchase price of the acquisitions in 2000 was $900 thousand.
The agreements also require additional payments to be made not to exceed $700
thousand if specific operating goals are reached by the acquired entities. The
combined purchase price of the acquisitions in 1999 was $8.7 million and also
require additional payments to be made not to exceed $2.3 million if specific
operating goals are reached by the acquired entities. The acquisitions were
funded by borrowings from the Company's acquisition line of credit and financing
from the principals of the acquired companies.
All business combinations have been accounted for under the purchase method
of accounting and, accordingly, are included in the Company's financial
statements from the date of acquisition.
See Item 1, "Growth Strategies", and Note 2 of Notes to Consolidated
Financial Statements for further discussion of business combinations.
RESULTS OF OPERATIONS
2000 COMPARED WITH 1999
REAL ESTATE BROKERAGE REVENUES
Real estate brokerage revenues increased 9% in 2000 to $187.1 million, an
increase of $15.3 million over 1999. Real estate brokerage revenue per sales
associate was $83 thousand in 2000 and $89 thousand in 1999. The increase in
real estate brokerage revenues was primarily attributed to the growth in the
12
Company's existing markets and the positive effects of the integratation of the
prior years' acquisitions. The Company's growth in its existing markets is
attributed to the continued strong economy combined with the Company's
integrated homeownership service marketing strategy.
Real estate brokerage revenues in 2000 include $8.5 million of revenues from
relocation services as compared to $7.3 million in 1999, an increase of 16%. The
increase was primarily due to an increase in the number of corporate services
clients as well as the Company's expansion into new markets.
Net revenues from real estate brokerage increased 11% in 2000 to $63.7
million, an increase of $6.1 million over 1999. Net real estate brokerage
revenues as a percentage of real estate brokerage revenues were 34% in 2000 and
1999. Net revenues from real estate brokerage are impacted by many factors,
including those beyond the Company's control, such as the number of co-brokered
home sales and prevailing market rates for sales associates commission
structures.
MORTGAGE REVENUES
Mortgage revenues decreased 6% in 2000 to $4.4 million, a decrease of $292
thousand from 1999. The decrease was primarily due to a decrease in mortgage
loans closed and lower margins on loans, which the Company believes was caused
by a higher interest rate market, and increased competition in the mortgage
industry. During 2000, the Company's closed loan volume totaled $448.7 million
compared to $451.9 million in 1999.
INSURANCE REVENUES
Insurance revenues increased 41% in 2000 to $1.7 million, an increase of
$486 thousand over 1999. The increase was primarily due to a higher percentage
of real estate brokerage customers purchasing their insurance through the
Company as well as growth in the Company's group insurance business, and growth
in the Company's renewal book of business.
OTHER REVENUES
Other revenues, which primarily consist of revenues related to reimbursement
of real estate expenditures and services, increased 6% in 2000 to $1.3 million,
an increase of $78 thousand over 1999. The increase was primarily due to growth
in the Company's real estate markets.
OPERATING EXPENSES
Operating expenses increased 10% in 2000 to $61.5 million, an increase of
$5.4 million over 1999. Operating expenses as a percentage of net revenues was
87% in 2000 and 1999. The increase in operating expenses in 2000 is primarily
due to costs associated with the increase in the Company's overall business,
along with implementation of new marketing strategies, investments in technology
and communications, and costs associated with acquired operations.
OTHER INCOME (EXPENSE)
Interest expense increased by $377 thousand in 2000 as compared to 1999. The
increase in 2000 was primarily due to an increase of $217 thousand in interest
on the mortgage warehouse line of credit, additional interest of $118 thousand
primarily related to the financing of acquisitions and increased interest on
chattel mortgages of $62 thousand. The increase in interest on the mortgage
warehouse line of credit was primarily due to the average balance outstanding on
the line.
The Company realized a gain of $306 thousand in 2000 on the sale of
securities held as investments.
Interest income increased by $302 thousand in 2000 as compared to 1999. The
increase was primarily due to additional interest earned on bank accounts of
$448 thousand and partially offset by a decrease in
13
interest earned on originated mortgage loans held for sale of $146 thousand. The
change in net interest earned on bank accounts was primarily due to higher
average balances kept in bank accounts.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
REAL ESTATE BROKERAGE REVENUES
Real estate brokerage revenues increased 32% in 1999 to $171.7 million, an
increase of $42.0 million over 1998. Real estate brokerage revenue per sales
associate was $89 thousand in 1999 and $84 thousand in 1998. The increase in
real estate brokerage revenues was primarily attributed to the growth in the
Company's existing markets and the effect of business combinations. The
Company's growth in its existing markets was attributed to the continued strong
economy and the generally low interest rate environment combined with the
Company's integrated homeownership service marketing strategy.
Real estate brokerage revenues in 1999 included $7.3 million of revenues
from relocation services as compared to $6.8 million in 1998, an increase of 8%.
The increase was primarily due to an increase in the number of corporate
services clients as well as the Company's expansion into new markets.
Net revenues from real estate brokerage increased 25% in 1999 to $57.6
million, an increase of $11.4 million over 1998. Net real estate brokerage
revenues as a percentage of real estate brokerage revenues decreased to 34% for
1999 as compared to 36% in 1998. Net revenues from real estate brokerage are
impacted by many factors, including those beyond the Company's control, such as
the number of co-brokered home sales and prevailing market rates for sales
associates commission structures.
MORTGAGE REVENUES
Mortgage revenues in 1999 were $4.7 million, the same as 1998. During 1999,
the Company's closed loan volume totaled $451.9 million compared to $429.9
million in 1998.
INSURANCE REVENUES
Insurance revenues increased 104% in 1999 to $1.2 million, an increase of
$608 thousand over 1998. The increase was primarily due to the acquisition of
the personal lines business of the Curtin Insurance Agency, Inc. in May 1998, as
well as a higher percentage of real estate brokerage customers purchasing their
insurance through the Company.
OTHER REVENUES
Other revenues increased 193% in 1999 to $1.2 million, an increase of $812
thousand over 1998. The increase was primarily due to revenues related to
reimbursement of real estate expenditures and services.
OPERATING EXPENSES
Operating expenses increased 23% in 1999 to $56.1 million, an increase of
$10.5 million over 1998. Operating expenses as a percentage of net revenues
decreased to 87% in 1999 as compared to 88% in 1998. The increase in operating
expenses in 1999 was primarily due to costs associated with the increase in the
Company's overall business and non-recurring expenses of $660 thousand in costs
related to acquisitions.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense decreased by $45 thousand in 1999 as compared to 1998. The
decrease in 1999 was primarily due to a decrease of $456 thousand in interest on
the mortgage warehouse line of credit, offset by additional interest of $411
thousand primarily related to the financing of acquisitions. The decrease in
14
interest on the mortgage warehouse line of credit was primarily due to the
average balance outstanding on the line.
Interest income increased by $289 thousand in 1999 as compared to 1998. The
increase was primarily due to additional interest earned on bank accounts of
$319 thousand and partially offset by a decrease in interest earned on
originated mortgage loans held for sale. The change in net interest earned on
bank accounts was primarily due to higher average balances kept in bank accounts
and interest earned on these accounts.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's cash and cash equivalents at December 31, 2000 totaled $14.5
million compared to $9.6 million at December 31, 1999. Cash used in operating
activities was $5.1 million in 2000, as compared to cash provided by operating
activities of $23.1 million in 1999 and cash used in operations of $2.5 million
in 1998. The changes in cash provided by or used in operations in 2000, 1999,
and 1998 were primarily due to the increases and decreases in the Company's
mortgage loans held for sale which were funded by the Company's mortgage
warehouse line of credit with First Union National Bank and by cash generated by
net earnings. Net cash used relating to an increase in mortgage loans held for
sale was $11.0 million in 2000 as compared to net cash provided related to a
decrease in mortgage loans held for sale of $18.6 million in 1999 and net cash
used related to increases in mortgage loans held for sale of $7.9 million in
1998.
Expenditures for property and equipment totaled $935 thousand in 2000, $2.1
million in 1999, and $1.4 million in 1998. Capital spending during this period
was primarily attributed to the Company's investment in improvements to acquired
and existing sales offices and upgrades to systems and technology. The Company
intends to continue to make expenditures for property and equipment in order to
maintain the standards for a quality appearance and processing systems in all of
the Company's locations.
The Company has various credit arrangements with Fleet Bank, N.A., including
a $20 million acquisition line of credit, a revolving line of credit of $5.0
million, a term note of $725,000, and an aggregate equipment lease line of
credit and chattel mortgage financing of $5.0 million. During the fourth quarter
of 2000, the Company entered into a $5.0 million relocation revolving line of
credit with Fleet Bank, N.A. for the purposes of financing home acquisitions and
equity advances provided to relocating corporate clients. The company's
revolving line of credit and relocation revolving line of credit mature on April
30, 2001 and are expected to be renewed.
The current outstanding amount under the Company's acquisition line of
credit is scheduled to convert to a 5 year term note on March 31, 2001. It is
anticipated that the note will be amended to extend the conversion to a 5 year
term note on April 30, 2002.
The outstanding amount of the acquisition line of credit was $12.4 million
at December 31, 2000 and $11.5 million at December 31, 1999. There was no
outstanding amount under the revolving line of credit at December 31, 2000 and
1999. There was no outstanding amount under the term note at December 31, 2000;
the remaining balance of the term note was $225,000 at December 31, 1999. At
December 31, 2000 and 1999, the Company had outstanding balances under lease
lines of credit and chattel mortgage financing of $3.5 million and $2.9 million,
respectively. There was no outstanding amount under the relocation revolving
line of credit at December 31, 2000.
In connection with the mortgage loan activity the Company maintains a $40
million mortgage warehouse line of credit with First Union National Bank that is
used to finance mortgage loans that it originates. The credit line had
outstanding balances of $22.9 million and $9.0 million at December 31, 2000 and
1999, respectively. The maturity date of the line is May 2001. The Company
expects that the line will be renewed.
In May of 1998, the Company authorized an increase in the amount of the
Company's stock that may be repurchased under its stock repurchase plan to a
total of $1.9 million. As of December 31, 2000, the
15
Company had acquired a total of $1.4 million of stock under the plan, $50,000 of
which was acquired during 2000.
The Company considers its cash flows from operations, combined with its
credit arrangements with Fleet Bank, N.A. and First Union National Bank, to be
adequate to fund continuing operations. However, the Company expects to continue
to expand its existing businesses, which may include opening new real estate
sales offices as well as making investments in or acquiring other real estate
and or insurance businesses. As a result, the Company from time-to-time may seek
additional or alternate sources of debt or equity financing which could include
the issuance of shares of the Company's capital stock.
FACTORS AFFECTING FUTURE RESULTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements, which are not historical fact, including but not limited
to, statements concerning future acquisitions, financing of such acquisitions,
new products, financing of the Company's mortgage line of credit, future
alternative revenue sources and relocation opportunities, dividends, cash flows,
and revenues, both generally and with respect to particular fiscal quarters, and
market share, may be deemed to be forward looking statements. There are many
important factors that would cause the Company's actual results to differ
materially from those indicated in the forward-looking statements. Such factors
include, but are not limited to, interest rates and economic conditions
generally, regulatory changes (legislative or otherwise) affecting the
residential real estate and mortgage lending industries, competition, and
prevailing rates for sales associate commission structures.
INFLATION
The Company believes that its revenues per transaction are primarily
affected by the increase or decrease in home sale prices. However, the Company's
expenses are affected by general price changes, which may not necessarily
parallel the changes in home sale prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting the
Company. Interest rate risk is the possibility that changes in interest rates
will cause unfavorable changes in net income or in the value of interest-rate
sensitive assets, liabilities and commitments. As part of the Company's interest
rate risk management programs, the Company purchases financial instruments and
enters into agreements with off-balance sheet risk in the normal course of
business to manage its exposure to interest rate risk. The Company uses
financial instruments for the purpose of managing interest rate risks to protect
the value of its mortgage loans held for sale and mortgage commitment pipeline.
Interest rate swaps are also used to convert floating rates to fixed rates. The
Company has no market risk sensitive instruments held for trading purposes.
Management actively monitors and manages its exposure to interest rate risk.
Analyses are performed for various interest rate scenarios to capture the
expected economic change in market value of rate sensitive assets, liabilities
and commitments.
16
In the normal course of business, the Company also faces risks that are
either nonfinancial and or nonquantifiable. Such risks include credit risk and
legal risk and are not included in the following table.
DECEMBER 31, EXPECTED MATURITY DATE
----------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
----------- --------- --------- --------- --------- ---------- ----------- -----------
Rate sensitive assets:
Cash and cash
equivalents.............. $14,537,000 $14,537,000 $14,537,000
Mortgage loans held for
sale..................... 24,668,000 24,668,000 25,075,000
Average interest rate...... 7.70%
Originated mortgage
servicing rights......... 161,000 161,000 161,000 161,000 161,000 228,000 1,033,000 1,300,000
Average interest rate
(underlying portfolio)... 7.11% 7.11% 7.11% 7.11% 7.11% 7.11%
Rate sensitive liabilities:
Long term debt- fixed
rate..................... 2,641,000 2,199,000 978,000 285,000 43,000 82,000 6,228,000 5,725,000
Average interest rate...... 8.60% 8.40% 8.34% 8.00% 8.00% 8.00%
Long-term debt- variable
rate..................... 1,867,000 2,489,000 2,489,000 2,489,000 2,489,000 624,000 12,447,000 12,420,000
Average interest rate...... 9.50% 10.50% 10.50% 10.50% 10.50% 10.50%
Notes payable, bank........ 22,911,000 22,911,000 22,911,000
Average interest rate...... 8.28%
Rate sensitive derivative
financial instruments:
Pay fixed/receive variable
interest rate swap....... 11,500,000 11,500,000 6,000
Average pay rate........... 7.36%
Average receive rate....... 7.87%
Commitments to extend
credit:
Rate locked................ 11,641,000 11,641,000 173,000
Average interest rate...... 7.70%
Floating rate.............. 73,042,000 73,042,000 --
Forward commitments........ 33,981,000 33,981,000 41,000
Average interest rate...... 7.62%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14 hereof and the
report of independent auditors included in this report on Pages F-1 through F-26
are incorporated herein by reference.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading "Business Experience of Nominees and Executive
Officers" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 15, 2001 is incorporated herein by reference.
17
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The section under the heading "Executive Compensation and Other Information"
in the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held May 15, 2001 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section under the heading "Principal Stockholders and Stockholdings of
Management" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 15, 2001 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section under the heading "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 15, 2001 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
PAGE
----
Consolidated Balance Sheets--December 31, 2000 and 1999..... F-2
Consolidated Statements of Income--Years ended December 31,
2000, 1999 and 1998......................................... F-4
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 2000, 1999 and 1998............................ F-5
Consolidated Statements of Cash Flows--Years ended December
31, 2000, 1999 and 1998..................................... F-6
Notes to Consolidated Financial Statements.................. F-8
2. Financial Statement Schedule:
Schedule II Valuation And Qualifying Accounts............... F-26
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
3. Exhibits (See the Index to Exhibits included elsewhere in this Report).
(b) Reports on Form 8-K.
None
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE DEWOLFE COMPANIES, INC.
By: /s/ RICHARD B. DEWOLFE
-----------------------------------------
Richard B. DeWolfe,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ RICHARD B. DEWOLFE
- -------------------------------------------
Richard B. DeWolfe
CHAIRMAN, BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND
A DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
Date: March 26, 2001
/s/ JAMES A. MARCOTTE
- -------------------------------------------
James A. Marcotte
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: March 26, 2001
/s/ PAUL R. DEL ROSSI
- -------------------------------------------
Paul R. Del Rossi
DIRECTOR
Date: March 26, 2001
/s/ A. CLINTON ALLEN
- -------------------------------------------
A.Clinton Allen, III
DIRECTOR
Date: March 26, 2001
/s/ R. ROBERT POPEO
- -------------------------------------------
R. Robert Popeo
DIRECTOR
Date: March 26, 2001
/s/ ROBERT N. SIBCY
- -------------------------------------------
R. Robert N. Sibcy
DIRECTOR
Date: March 26, 2001
19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The DeWolfe Companies, Inc.
We have audited the accompanying consolidated balance sheets of The DeWolfe
Companies, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The DeWolfe
Companies, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2000 the
Company changed its method of revenue recognition for residential real estate
brokerage commissions.
ERNST & YOUNG LLP
Boston, Massachusetts
February 2, 2001
F-1
THE DEWOLFE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents............................... $14,537,000 $ 9,604,000
Commissions receivable, net of allowance of $933,000 at
December 31, 1999..................................... -- 21,556,000
Mortgage loans held for sale............................ 24,668,000 9,774,000
Advance receivable from stockholder..................... -- 66,000
Prepaid expenses and other current assets............... 2,148,000 1,728,000
----------- -----------
TOTAL CURRENT ASSETS................................ 41,353,000 42,728,000
----------- -----------
PROPERTY AND EQUIPMENT:
Land.................................................... 80,000 80,000
Building and improvements............................... 779,000 779,000
Furniture and equipment................................. 11,713,000 9,518,000
Leasehold improvements.................................. 4,120,000 3,451,000
----------- -----------
16,692,000 13,828,000
Accumulated depreciation and amortization............... (8,866,000) (6,189,000)
----------- -----------
NET PROPERTY AND EQUIPMENT.......................... 7,826,000 7,639,000
----------- -----------
OTHER ASSETS:
Note receivable from affiliate.......................... 28,000 28,000
Excess of cost over value in net assets acquired, net of
accumulated amortization of $2,817,000 at December 31,
2000 and $1,937,000 at
December 31, 1999..................................... 11,792,000 11,559,000
Non-compete and consulting agreements, net of
accumulated amortization of $969,000 at December 31,
2000 and $607,000 at December 31, 1999................ 961,000 1,264,000
Trade name, net of accumulated amortization of $262,000
at
December 31, 1999..................................... -- 108,000
Originated mortgage servicing rights, net............... 1,033,000 969,000
Net deferred tax assets................................. 2,660,000 361,000
Security deposits and other assets...................... 1,359,000 625,000
----------- -----------
TOTAL OTHER ASSETS.................................. 17,833,000 14,914,000
----------- -----------
TOTAL ASSETS........................................ $67,012,000 $65,281,000
=========== ===========
See notes to consolidated financial statements.
F-2
THE DEWOLFE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
CURRENT LIABILITIES:
Note payable--bank...................................... $22,911,000 $ 9,027,000
Commissions payable..................................... -- 15,183,000
Accounts payable........................................ 37,000 1,111,000
Dividend payable........................................ 610,000 506,000
Accrued expenses........................................ 5,295,000 3,563,000
Deferred mortgage fee income............................ 251,000 133,000
Current portion of long-term debt....................... 4,194,000 1,706,000
Current portion of obligations under capital leases..... 314,000 678,000
----------- -----------
TOTAL CURRENT LIABILITIES........................... 33,612,000 31,907,000
Long-term debt, net of current portion...................... 14,046,000 14,962,000
Obligations under capital leases, net of current portion.... 121,000 434,000
Non-compete agreements and consulting agreements payable.... 169,000 279,000
----------- -----------
TOTAL LIABILITIES................................... 47,948,000 47,582,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value; 3,000,000 authorized;
none outstanding...................................... -- --
Common Stock, $.01 par value; 10,000,000 shares
authorized; 3,658,544 shares issued at December 31,
2000 and 3,623,245 shares issued at December 31,
1999.................................................. 37,000 36,000
Additional paid-in capital.............................. 7,832,000 7,623,000
Treasury Stock (263,318 shares at December 31, 2000 and
256,111 shares at December 31, 1999), at cost......... (1,520,000) (1,470,000)
Notes receivable from sale of stock..................... (869,000) (871,000)
Accumulated other comprehensive income.................. 75,000 --
Retained earnings....................................... 13,509,000 12,381,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.......................... 19,064,000 17,699,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $67,012,000 $65,281,000
=========== ===========
See notes to consolidated financial statements.
F-3
THE DEWOLFE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUES:
Real estate brokerage............................ $187,059,000 $171,725,000 $129,735,000
Mortgage......................................... 4,387,000 4,679,000 4,680,000
Insurance........................................ 1,679,000 1,193,000 585,000
Other............................................ 1,310,000 1,232,000 420,000
------------ ------------ ------------
TOTAL REVENUES............................. 194,435,000 178,829,000 135,420,000
Commission expense............................... 123,340,000 114,109,000 83,565,000
------------ ------------ ------------
NET REVENUES............................... 71,095,000 64,720,000 51,855,000
Operating expenses:
Compensation and benefits........................ 27,509,000 24,170,000 19,546,000
Facilities....................................... 8,557,000 7,738,000 6,289,000
General and administrative....................... 14,718,000 13,891,000 10,871,000
Marketing and promotion.......................... 7,648,000 7,158,000 6,610,000
Communications................................... 3,024,000 2,447,000 1,890,000
Acquisition related costs........................ 56,000 660,000 405,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES................... 61,512,000 56,064,000 45,611,000
------------ ------------ ------------
OPERATING INCOME........................... 9,583,000 8,656,000 6,244,000
OTHER INCOME (EXPENSES):
Interest expense................................. (2,384,000) (2,007,000) (2,052,000)
Gain on sale of investments...................... 306,000 -- --
Interest income.................................. 2,233,000 1,931,000 1,642,000
------------ ------------ ------------
INCOME BEFORE INCOME TAXES......................... 9,738,000 8,580,000 5,834,000
Income taxes..................................... 4,285,000 3,596,000 2,601,000
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. 5,453,000 4,984,000 3,233,000
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NET OF TAX BENEFIT OF $2,637,000)............... (3,715,000) -- --
------------ ------------ ------------
NET INCOME................................. $ 1,738,000 $ 4,984,000 $ 3,233,000
============ ============ ============
BASIC EARNINGS PER SHARE:
Income before cumulative effect of change in
accounting principle........................... $1.61 $1.49 $0.99
Cumulative effect of change in accounting
principle...................................... (1.10) -- --
------------ ------------ ------------
NET INCOME................................. $0.51 $1.49 $0.99
============ ============ ============
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of change in
accounting principle........................... $1.51 $1.41 $0.95
Cumulative effect of change in accounting
principle........................................ (1.03) -- --
------------ ------------ ------------
NET INCOME................................. $0.48 $1.41 $0.95
============ ============ ============
Basic weighted average shares outstanding........ 3,381,000 3,350,000 3,251,000
Diluted weighted average shares outstanding...... 3,623,000 3,538,000 3,394,000
See notes to consolidated financial statements.
F-4
THE DEWOLFE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
NOTES ACCUMULATED
ADDITIONAL TREASURY RECEIVABLE OTHER TOTAL
COMMON PAID-IN STOCK AT FROM SALE OF RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL COST STOCK EARNINGS INCOME (LOSS) EQUITY
-------- ---------- ----------- ------------ ----------- -------------- -------------
BALANCE AT DECEMBER 31, 1997.. $34,000 $6,488,000 $ (783,000) $ -- $ 5,059,000 $ -- $10,798,000
Issuance of Common Stock...... 1,000 354,000 -- -- -- -- 355,000
Purchase of Treasury Shares... -- -- (656,000) -- -- -- (656,000)
Notes Receivable from Sale of
Stock....................... -- -- -- (270,000) -- -- (270,000)
Cash Dividends Declared on
Common Stock ($0.12 per
share)...................... -- -- -- -- (389,000) -- (389,000)
Net Income.................... -- -- -- -- 3,233,000 -- 3,233,000
------- ---------- ----------- --------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1998.. 35,000 6,842,000 (1,439,000) (270,000) 7,903,000 -- 13,071,000
------- ---------- ----------- --------- ----------- ---------- -----------
Issuance of Common Stock...... 1,000 710,000 -- -- -- -- 711,000
Purchase of Treasury Shares... -- -- (31,000) -- -- -- (31,000)
Notes Receivable from Sale of
Stock, net.................. -- -- -- (601,000) -- -- (601,000)
Cash Dividends Declared on
Common Stock ($0.15 per
share)...................... -- -- -- -- (506,000) -- (506,000)
Effect of Issuance of Stock
Options..................... -- 71,000 -- -- -- -- 71,000
Net Income.................... -- -- -- -- 4,984,000 -- 4,984,000
------- ---------- ----------- --------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1999.. 36,000 7,623,000 (1,470,000) (871,000) 12,381,000 -- 17,699,000
------- ---------- ----------- --------- ----------- ---------- -----------
Issuance of Common Stock...... 1,000 177,000 -- -- -- -- 178,000
Purchase of Treasury Shares... -- -- (50,000) -- -- -- (50,000)
Notes Receivable from Sale of
Stock, net.................. -- -- -- 2,000 -- -- 2,000
Cash Dividends Declared on
Common Stock ($0.18 per
share)...................... -- -- -- -- (610,000) -- (610,000)
Effect of Issuance of Stock
Options..................... -- 32,000 -- -- -- -- 32,000
Unrealized Appreciation on
Marketable Securities (net
of tax of $50,000).......... -- -- -- -- -- 75,000 75,000
Net Income.................... -- -- -- -- 1,738,000 -- 1,738,000
-----------
Comprehensive Income.......... -- -- -- -- -- -- 1,813,000
------- ---------- ----------- --------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 2000.. $37,000 $7,832,000 $(1,520,000) $(869,000) $13,509,000 $ 75,000 $19,064,000
======= ========== =========== ========= =========== ========== ===========
See notes to consolidated financial statements
F-5
THE DEWOLFE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES:
Net Income................................................ $ 1,738,000 $ 4,984,000 $ 3,233,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Deferred income tax..................................... (2,298,000) (120,000) 338,000
Depreciation............................................ 3,276,000 3,097,000 3,037,000
Amortization............................................ 1,469,000 1,364,000 919,000
Additions to valuation allowance for mortgage servicing
rights................................................ 23,000 38,000 108,000
Gain on sale of mortgage loans, net..................... (4,096,000) (4,429,000) (4,596,000)
Gain on sale of investments............................. (306,000) -- --
Change in Assets and Liabilities:
Decrease (increase) in commissions receivable........... 21,688,000 (945,000) (2,936,000)
(Increase) decrease in prepaid expenses and other
current assets........................................ (440,000) (745,000) 1,715,000
Increase in security deposits and other assets.......... (659,000) (135,000) (188,000)
Mortgage loans held for sale............................ (448,676,000) (352,661,000) (355,931,000)
Proceeds from mortgage loans sales...................... 437,643,000 371,212,000 348,075,000
(Decrease) increase in commissions payable.............. (15,183,000) 1,421,000 2,215,000
Increase (decrease) in accounts payable and accrued
expenses.............................................. 644,000 56,000 1,535,000
Increase (decrease) in deferred mortgage fee income..... 118,000 (83,000) (15,000)
------------ ------------ ------------
Total adjustments................................... (6,797,000) 18,070,000 (5,724,000)
------------ ------------ ------------
Cash (used in) provided by operating activities..... (5,059,000) 23,054,000 (2,491,000)
INVESTING ACTIVITIES:
Proceeds from sale of investments....................... 326,000 -- --
Expenditures for business combinations, net of cash
acquired.............................................. (900,000) (6,356,000) (4,997,000)
Expenditures for property and equipment................. (935,000) (2,077,000) (1,418,000)
------------ ------------ ------------
Cash used in investing activities........................... (1,509,000) (8,433,000) (6,415,000)
FINANCING ACTIVITIES:
Net borrowings under lines of credit.................... -- -- (1,500,000)
Net borrowings (repayments) on notes payable-bank....... 13,884,000 (14,798,000) 11,631,000
Borrowing on acquisition line of credit................. 900,000 6,472,000 5,075,000
Repayment of notes receivable from stockholders......... 66,000 -- 25,000
Repayment (issuance) of notes receivable from sale of
stock................................................. 2,000 (601,000) (270,000)
Repayment of long-term debt............................. (3,005,000) (2,552,000) (2,125,000)
Payment of cash dividends............................... (506,000) (389,000) --
Issuance of common stock................................ 210,000 711,000 355,000
Purchase of treasury stock.............................. (50,000) (31,000) (656,000)
------------ ------------ ------------
Cash provided by (used in) financing activities..... 11,501,000 (11,188,000) 12,535,000
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,933,000 3,433,000 3,629,000
Cash and cash equivalents at beginning of year.......... 9,604,000 6,171,000 2,542,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 14,537,000 $ 9,604,000 $ 6,171,000
============ ============ ============
See notes to consolidated financial statements.
F-6
THE DEWOLFE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Leases capitalized and property and equipment
financed.............................................. $2,514,000 $ 1,597,000 $ 1,775,000
Cash paid for interest.................................. 2,199,000 2,075,000 1,989,000
Expenditures for business combinations, net of cash
acquired:
Commissions receivable.............................. (132,000) (3,524,000) (1,801,000)
Property and equipment, net......................... (13,000) (277,000) (388,000)
Excess of cost over value in net assets acquired.... (1,113,000) (5,721,000) (5,276,000)
Non-compete and consulting agreements............... (30,000) (1,363,000) (30,000)
Other assets........................................ -- (495,000) (241,000)
Commissions payable................................. -- 2,119,000 976,000
Long-term debt...................................... 375,000 1,930,000 959,000
Accounts payable and accrued expenses............... 8,000 904,000 804,000
Additional paid-in capital.......................... 5,000 71,000 --
---------- ----------- -----------
$ (900,000) $(6,356,000) $(4,997,000)
========== =========== ===========
See notes to consolidated financial statements.
F-7
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The DeWolfe Companies, Inc. (together with its subsidiaries, "the Company")
is a provider of integrated homeownership services, and is primarily engaged in
the business of providing sales and marketing services to consumers in
connection with residential real estate transactions in Massachusetts, New
Hampshire, Rhode Island, Maine, and Connecticut. In addition, the Company
originates and services residential mortgage loans, provides corporate and
employee relocation services and other related services to a variety of clients,
and provides insurance products to its homeownership customers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. Significant intercompany accounts and
transactions are eliminated in consolidation.
REVENUE RECOGNITION
The Company's real estate brokerage services principally involve providing a
ready, willing and able buyer of a property to the seller. During the year ended
December 31, 2000, the Company changed its method of revenue recognition for
residential real estate brokerage commissions in accordance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Previously, the Company had recognized revenue when the buyer and
seller of a property entered into a contract of sale and a good faith deposit
was made by the buyer. Under the new accounting method adopted retroactive to
January 1, 2000, the Company now recognizes revenue upon the consummation of the
underlying real estate sale. The cumulative effect of the accounting change
resulted in a charge to income of $3.7 million (net of an income tax benefit of
$2.6 million), which is included in income for the year ended December 31, 2000.
The effect of the change on the year ended 2000 was to decrease income before
cumulative effect of the accounting change by $64,000, ($0.02 and $0.01 per
basic and diluted shares, respectively).
The following table shows the amounts reported and pro forma amounts that
would have been reported if SAB 101 had been applied retroactively.
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA AS REPORTED PRO FORMA AS REPORTED
--------- ----------- --------- -----------
Net Income........................................ $4,266 $4,984 $2,533 $3,233
Basic Earnings Per Share.......................... $ 1.27 $ 1.49 $ 0.78 $ 0.99
Diluted Earnings Per Share........................ $ 1.21 $ 1.41 $ 0.75 $ 0.95
The cumulative effect adjustment as of January 1, 2000 included the reversal
of net real estate brokerage commission revenues of approximately $6.4 million.
Substantially, all of the revenues were subsequently recognized in 2000,
principally in the first quarter.
Mortgage loan origination revenues, offset by direct loan origination costs,
are deferred and the net amount is recognized as a component of gain on sale of
mortgage loans when the sale of the loan has been consummated. Mortgage loan
origination revenues consist primarily of loan origination, application and
investor fees paid by the borrowers, originated mortgage servicing rights
capitalized and service release
F-8
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
premiums paid by the investors. Direct loan origination costs consist of
commissions paid to the Company's mortgage consultants and appraisal fees and
credit report fees paid to third parties. Interest on mortgage loans held for
sale is recognized as income when earned.
Originated mortgage servicing rights are capitalized based on their fair
value and are amortized in proportion to, and over the period of, estimated net
servicing income. Amortization is adjusted prospectively to reflect changes in
prepayment experience. The Company periodically evaluates and measures the value
of the servicing rights to determine impairment. In determining the value, the
Company stratifies the servicing rights based on predominant risk
characteristics of the underlying loans. The characteristics that the Company
uses are interest rate, date of origination and loan term. Impairment is
recognized in a valuation allowance in the period of impairment.
Servicing income represents net fees earned for servicing real estate
mortgage loans owned by outside investors and is recognized as income when
received.
Insurance revenue is generally recognized as of the effective date of the
insurance policy. Contingent insurance revenue is recognized as income when
received.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market
determined on a net aggregate basis. The carrying value of mortgage loans is
adjusted by realized gains and losses generated from corresponding hedging
transactions in the form of forward commitments. Forward commitments are used to
protect the value of mortgage loans held for sale and loan applications with
interest rate commitments from increases in interest rates.
FAIR VALUE DISCLOSURES
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, except for equipment under capital
leases, which is recorded at the net present value of the minimum lease payments
at inception of the lease.
Depreciation and amortization is provided using the straight-line method
over the estimated useful asset lives for owned assets (three to five years),
the related lease term for equipment under capital leases (three to thirty
years), and the shorter of the lease term or estimated useful life of the asset
for leasehold improvements.
ACCOUNTING FOR COMPUTER SOFTWARE COSTS
In accordance with Statement of Position No. 98-1, "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use," the Company
capitalizes qualified software costs and amortizes these costs over three to
five years.
F-9
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EXCESS OF COST OVER VALUE IN NET ASSETS ACQUIRED AND TRADE NAMES
The excess of cost over value in net assets of companies acquired and trade
names are being amortized using the straight-line method over fifteen to
twenty-year periods and are reviewed on an ongoing basis by the Company's
management based on several factors, including the Company's projection of
undiscounted operating cash flows from such acquisitions. If an impairment of
the carrying value was identified by this review, the Company would adjust the
carrying value of the excess of cost over value in net assets acquired and trade
names to its estimated fair value.
NON-COMPETITION AND CONSULTING AGREEMENTS
Costs related to non-competition and consulting agreements entered into as
part of the Company's acquisition of real estate agencies are being amortized
over the period of the respective agreements which range from three to five
years.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, when the exercise price of options granted under
these plans equals the market price of the underlying stock on the date of grant
(as is the case with the Company's options), no compensation expense is
required.
ADVERTISING
Advertising costs are expensed as incurred and are classified as marketing
and promotion on the accompanying Consolidated Statements of Income.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with the requirements of SFAS No. 109, "Accounting For Income Taxes."
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash includes cash and
short-term highly liquid investments with original maturities of three months or
less.
BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the assumed conversion of all
dilutive securities, such as options and warrants.
NEW ACCOUNTING PRONOUNCEMENT
As of January 1, 2001, the Company will adopt Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which was issued in June, 1998 and
F-10
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
its amendments Statements 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No 133" and
138, "Accounting for Derivative Instruments and Certain Hedging Activities"
issued in June 1999 and June 2000, respectively (collectively referred to as
"Statement 133"). The Company has determined that Statement 133 will not have a
material effect on its financial position or results of operations based on the
current uses of derivatives.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates, and such differences may be material.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2--ACQUISITIONS
The Company has expanded its operations through the acquisition of 16
independent real estate agencies in the three year period ended December 31,
2000 (2 in 2000, 10 in 1999 and 4 in 1998). Additionally, in May 1998, The
DeWolfe Insurance Agency, Inc. acquired the personal lines business of the
Curtin Insurance Agency, Inc., which included approximately 5,000 policyholders.
The total purchase price of acquisitions in 2000 was $900,000. The
agreements also require additional payments to be made not to exceed $700,000 if
specific operating goals are achieved by the acquired entities. The total
purchase price of the acquisitions in 1999 was $8.7 million. The agreements also
require additional payments to be made not to exceed $2.3 million if specific
operating goals are achieved by the acquired entities. The total purchase price
of the acquisitions in 1998 was $6.1 million and additional payments not to
exceed $150,000 if specific operating goals are achieved by the acquired
entities. The acquisitions were funded by borrowings from the Company's
acquisition line of credit and by loans from the principals of the acquired
companies. The Company recorded the present value of minimum estimated payments
to be made pursuant to non-competition, consulting and cooperation agreements
related to acquisitions of $30,000 in 2000, $1.3 million in 1999, and $99,000 in
1998. Additionally, as a result of the Company's acquisitions, the Company
recorded the excess of cost over value in net assets acquired of $1.1, $5.7 and
$5.3 million during 2000, 1999, and 1998, respectively. Acquisition related
costs of $56,000, $660,000 and $405,000 were incurred in 2000, 1999 and 1998,
respectively.
In connection with the acquisition of the assets of various real estate
agencies, the Company entered into non-competition, consulting and cooperation
agreements that expire at various dates through August 2004. Future payments, as
called for in the agreements, are contingent upon the fulfillment of the terms
of these agreements by the sellers and provide for certain percentage payments
of the net commission income of various sales office locations. During 2000,
1999 and 1998, payments of $375,000, $744,000, and $519,000, respectively, were
expensed. The annual minimum commitment for these payments, assuming the
contracted commitments are fulfilled, will be approximately $71,000 in 2001, and
$44,000 in 2002, $40,000 in 2003, and $40,000 in 2004.
F-11
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
On January 16, 1998, the Company acquired 100% of the stock of Dollar Dry
Dock Real Estate, Inc. for $4.0 million. The acquisition was funded through a
credit facility provided by Fleet Bank, N.A.
The following table shows the Company's unaudited consolidated results of
operations for the years ended December 31, 1999 and 1998 on a pro forma basis
assuming the 1999 acquisitions had occurred as of January 1, 1998. The effect of
the 2000 acquisitions on Pro Forma results of Operations was not material.
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998
----------------- ----------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues................................................ $188,977 $168,576
Net Income.............................................. $ 5,337 $ 4,386
Basic Earnings Per Share................................ $ 1.59 $ 1.35
Diluted Earnings Per Share.............................. $ 1.51 $ 1.29
NOTE 3--RELATED PARTY TRANSACTIONS
The Company has various advances and notes receivables with related parties
as described below:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Notes receivable from the Company's principal stockholder
and spouse, with interest at prime plus 0.25%. At
December 31, 2000 the rate in effect was 9.75%. The
proceeds were used to purchase the Company's stock. The
notes are secured by a pledge of certain shares of common
stock of the Company. Principal and interest are due at
various dates through April 2002. The notes receivable are
carried as a reduction of stockholders' equity............ $642,000 $625,000
Notes receivable from an executive officer of the Company,
with interest at prime plus 0.25%. At December 31, 2000
the rate in effect was 9.75%. The proceeds were used to
purchase the Company's stock. The notes are secured by a
pledge of certain shares of common stock of the Company.
Principal and interest are due at various dates through
April 2002. The note receivable is carried as a reduction
of stockholders' equity................................... 204,000 204,000
Note receivable from an executive officer of the Company,
with interest at prime plus 0.25%. At December 31, 2000
the rate in effect was 9.75%. The proceeds were used to
purchase the Company's stock. The note is secured by a
pledge of certain shares of common stock of the Company.
Principal and interest is due in February 2002. The note
receivable is carried as a reduction of stockholders'
equity.................................................... 23,000 42,000
-------- --------
Total notes receivable from sale of stock................... 869,000 871,000
Advance receivable from the Company's principal stockholder,
due on demand, with interest at prime plus 0.50%. At
December 31, 1999 the rate in effect was 9.00%............ -- 66,000
F-12
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
DECEMBER 31,
-------------------
2000 1999
-------- --------
Note receivable from an entity controlled by the Company's
principal stockholder. The note is collateralized by a
mortgage lien on the commercial property that was also
leased to the Company until January, 1999. The Company
provided rent payments for this property of $3,000 in 1999
and $38,000 in 1998....................................... 28,000 28,000
-------- --------
Total advances and notes receivable......................... $897,000 $965,000
======== ========
NOTE 4--INDEBTEDNESS
The Company has a $40.0 million mortgage warehouse line of credit with First
Union National Bank to provide financing for mortgage loans that it originates.
The line of credit is collaterized by all mortgage loans held for sale, the
Company's mortgage servicing rights, and certain deposit accounts. The line
requires monthly interest payments at the lesser of the Federal Funds rate plus
1.50% or the prime rate. At December 31, 2000 the rate in effect was 8.28%. The
maturity date of the line is May 2001, at which time the principal repayment is
due, unless the line is renewed. The balances due at December 31, 2000 and at
December 31, 1999 were $22.9 million and $9.0 million, respectively.
The Company has various credit arrangements with Fleet Bank, N.A., which
include a $20.0 million acquisition line of credit, a revolving line of credit
of $5.0 million, a relocation revolving line of credit of $5.0 million, a term
note of $725,000, and an equipment lease line of credit of $5.0 million. The
credit agreements require the Company to obtain the written consent of the
lender prior to paying dividends.
The following table describes the detail of the indebtedness:
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Note payable (acquisition facility note) maturing on
March 31, 2006. The note requires interest only payments
at the Fleet Bank, N.A. prime rate (9.50% at December 31,
2000) for $11,500,000 of the note and 7.87% on the
remainder of the note until March 31, 2001 (see "interest
rate swap" information below). On March 31, 2001, at the
Company's option, the interest rate will be either the
Fleet Bank prime rate plus 1.0% or a fixed rate of
interest specified by Fleet Bank, N.A. The principal
balance of the note on March 31, 2001 will be due in sixty
installments as follows: 59 equal principal installments
each equal in amount to the principal balance on
March 31, 2001 divided by sixty and one final principal
installment in an amount equal to the then unpaid
principal amount of all acquisition facility loans. This
note is secured by all personal and real property of the
Company, except for the assets of DeWolfe Mortgage
Services, Inc............................................. $12,447,000 $11,547,000
Note payable (revolving line of credit) maturing on
April 30, 2001. The note requires monthly interest only
payments, based on the Company's option, of either the
Fleet Bank, N.A. prime rate or the LIBOR rate plus 1.25%.
This note is secured by all personal and real property of
the Company, except for the assets of DeWolfe Mortgage
Services, Inc............................................. -- --
F-13
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INDEBTEDNESS (CONTINUED)
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Note payable (relocation revolving line of credit) maturing
on April 30, 2001. The note requires monthly interest only
payments, based on the Company's option of either the
Fleet Bank, N.A. prime rate or the LIBOR rate plus 1.25%.
This note is secured by all personal and real property of
the company, except for the assets of DeWolfe Mortgage
Services, Inc............................................. -- --
Note payable (term note) matured September 30, 2000 paid in
monthly principal installments of $25,000 plus interest at
the Fleet Bank, N.A. prime rate plus 0.25% (8.75% at
December 31, 1999). The note was secured by all personal
and real property of the Company, except for the assets of
DeWolfe Mortgage Services, Inc............................ -- 225,000
Promissory notes payable (due to principals of companies
acquired in 1998) in monthly principal and interest
payments of $19,468 at interest rates ranging from 7.50%
to 8.50% maturing between April 2001 and May 2003......... 359,000 602,000
Promissory notes payable (due to principals of companies
acquired in 1999) in monthly principal and interest
payments of $35,541 and annual principal and interest
payments of $100,000 at interest rates ranging from 7.75%
to 8.50%, maturing between October, 2002 and
May, 2004................................................. 1,374,000 1,733,000
Promissory notes payable (due to principals of companies
acquired in 2000) in monthly principle and interest
payments of $3,750 and annual principal and interest
payments of $52,500 at interest rates ranging from 9.00%
to 9.50%, maturing at various dates in 2004............... 384,000 --
Chattel promissory notes payable maturing at various dates
through November, 2003. The notes require monthly
principal and interest payments of $142,680 at interest
rates from 7.10% to 9.26%. The notes are secured by the
underlying furniture and equipment........................ 3,095,000 1,749,000
Mortgage note payable in monthly principal and interest
payments of $4,297 to maturity on May 1, 2009 with
interest at 8.00%. The note is secured by land and
building housing the Westford, MA sales office............ 266,000 295,000
Unsecured note payable in monthly principal and interest
payments of approximately $11,000, maturing in February,
2003 with interest at 14.3%. This note is guaranteed by
the president and principal stockholder................... 249,000 338,000
Unsecured payment plan agreement with Oracle Credit
Corporation payable in quarterly principal and interest
payments of $31,864 with interest at 7.50%................ 66,000 179,000
Obligations under capital leases (Note 5)................... 435,000 1,112,000
----------- -----------
18,675,000 17,780,000
Less current portion........................................ 4,508,000 2,384,000
----------- -----------
$14,167,000 $15,396,000
=========== ===========
The Company has entered into an interest rate swap agreement in the notional
amount of $11,500,000 to reduce the impact of increases in the interest rate on
its borrowings under its variable rate acquisition line of credit with Fleet
Bank, N.A. The agreement effectively entitles the Company to convert its
variable rate agreement to a fixed rate of 7.36% on borrowings under the
facility up to $11,500,000 through
F-14
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INDEBTEDNESS (CONTINUED)
March 31, 2001. Payments received or paid as a result of the swap are accrued as
a reduction of, or an increase to, interest expense on the variable rate line of
credit.
Aggregate annual maturities of long-term debt as of December 31, 2000, are
as follows:
2001........................................................ $ 4,508,000
2002........................................................ 4,688,000
2003........................................................ 3,467,000
2004........................................................ 2,776,000
2005........................................................ 2,533,000
Thereafter.................................................. 703,000
-----------
$18,675,000
===========
NOTE 5--COMMITMENTS AND CONTINGENCIES
NON-COMPETITION AND CONSULTING AGREEMENTS
In connection with the acquisition of the assets of various real estate
agencies, the Company entered into non-competition, consulting and cooperation
agreements that expire at various dates through August 2004. Future payments, as
called for in the agreements, are contingent upon the fulfillment of the terms
of these agreements by the sellers and provide for certain percentage payments
of the net commission income of various sales office locations. During 2000,
1999 and 1998, payments of $375,000, $744,000, and $519,000, respectively, were
expensed. The annual minimum commitment for these payments, assuming the
contracted commitments are fulfilled, will be approximately $71,000 in 2001, and
$44,000 in 2002, $40,000 in 2003, and $40,000 in 2004.
FUNDS HELD IN ESCROW
The Company acts as escrow agent in connection with the performance of its
real estate services. Accordingly, the Company held escrow funds totaling $16.5
million and $15.4 million at December 31, 2000 and 1999, respectively. These
funds are not recorded in the Company's financial statements.
LEASE COMMITMENTS
The Company leases office facilities under operating leases that expire at
various dates through 2004. The Company anticipates renewing or replacing leases
that expire in the normal course of business. The terms of the leases provide
for the payment of minimum annual rentals and generally for the payment of
insurance, maintenance, and certain other operating expenses. The Company also
leases various items of equipment used for sales and administrative activities.
The leases expire at various dates through 2003. Leases that meet criteria for
capitalization have been recorded as capital leases.
F-15
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule of the future minimum payments under operating
and capital leases for each of the five years in the period ending December 31,
2005 and thereafter:
CAPITAL OPERATING
LEASES LEASES
-------- -----------
2001................................................. $338,000 $ 5,813,000
2002................................................. 81,000 4,768,000
2003................................................. 48,000 3,200,000
2004................................................. -- 1,594,000
2005................................................. -- 526,000
Thereafter........................................... -- 768,000
-------- -----------
Total minimum lease payments......................... 467,000 $16,669,000
===========
Less amount representing interest at various rates
from 4% to 15%..................................... 32,000
--------
Present value of minimum lease payments.............. $435,000
========
Rent expense under the non-cancelable operating leases was $6.5 million in
2000, $6.1 million in 1999 and $4.8 million in 1998.
Equipment and improvements recorded under capital leases, which are included
with company-owned property and equipment at December 31, 2000 and December 31,
1999, totaled $328 thousand and $1.1 million, respectively, net of accumulated
amortization at that date of $2.5 million and $2.3 million, respectively.
COMMITMENTS AND CONTINGENCIES WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit to customers and
forward commitments to sell mortgage loans to investors. The instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the financial statements. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for making loans. In the opinion of
management, the Company's outstanding commitments do not reflect any unusual
risk.
F-16
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED) (CONTINUED)
The contract or notional amount of commitments outstanding are as follows:
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.............................. $84,683,000 $96,156,000
Financial instruments whose notional or contract amounts
exceed the amount of credit risk:
Forward commitments....................................... $33,981,000 $25,675,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Loan applications must be approved by the
Company's underwriting department, before a commitment is issued, for compliance
with underwriting criteria of FNMA, FHLMC, or other investors.
Forward commitments are contracts for the future delivery of loans or
securities at a specific future date, at a specified price and yield, and are
entered into to reduce market risk associated with originating and holding loans
for sale by protecting the value of the anticipated closing of loan applications
for which the interest rate has been locked by the borrower. These loans usually
close within three months from the time of the application. The risks associated
with forward commitments arise from the possible inability of the counterparties
to meet the contract terms, or the Company's inability to generate loans to
fulfill the contracts.
The Company sells, without recourse, all its mortgage loan production to
investors.
OTHER CONTINGENCIES
The Company is currently a defendant in certain litigation arising in the
ordinary course of business. It is management's opinion that the outcome of
these actions will not have a material effect on operations or the financial
condition of the Company.
F-17
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table represents the carrying amounts and estimated fair
values of the Company's financial instruments:
DECEMBER 31,
-----------------------------------------------------
2000 1999
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents............... $14,537,000 $14,537,000 $ 9,604,000 $ 9,604,000
Mortgage loans held for sale............ 24,668,000 25,075,000 9,774,000 9,914,000
Originated mortgage servicing rights,
net................................... 1,033,000 1,300,000 969,000 1,283,000
----------- ----------- ----------- -----------
Total financial assets................ $40,238,000 $40,912,000 $20,347,000 $20,801,000
=========== =========== =========== ===========
Financial liabilities:
Long-term debt.......................... $18,240,000 $18,145,000 $16,668,000 $16,625,000
Note payable-bank....................... 22,911,000 22,911,000 9,027,000 9,027,000
----------- ----------- ----------- -----------
Total financial liabilities........... $41,151,000 $41,056,000 $25,695,000 $25,652,000
=========== =========== =========== ===========
ESTIMATION OF FAIR VALUES
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments shown above and the
Company's commitment to extend credit and forward commitments.
CASH AND CASH EQUIVALENTS
The fair value of cash and cash equivalents approximates the carrying amount
as a result of the highly liquid and short-term nature of the instruments.
MORTGAGE LOANS HELD FOR SALE
The fair value of mortgage loans held for sale was determined using the
specified prices to be realized based on the Company's forward commitment
contracts.
ORIGINATED MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is determined using a valuation
model that calculates the present value of estimated expected future net
servicing cash flows. The Company utilized assumptions that market participants
would use in their estimates of future servicing income and expense. The
significant assumptions utilized in the valuation were discount rate, prepayment
estimates, and cost to service.
NOTE PAYABLE-BANK AND LONG-TERM DEBT
The fair value of the note payable-bank is stated at carrying amount as a
result of the short-term nature of the instrument and the variable interest
rate. The fair value of long-term debt reflects current
F-18
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
rates for similar debt. The fair value of the interest rate swap agreement was
$6,000 and $45,000 at December 31, 2000 and December 31, 1999, respectively,
based on quoted market prices.
COMMITMENTS TO EXTEND CREDIT
The fair value of the Company's commitments to extend credit is estimated by
comparing the Company's cost to acquire mortgages to the current price for
similar mortgage loans, taking into account the terms of the commitments and
creditworthiness of the counterparties, but not giving effect to forward
commitments. For fixed rate loan commitments, fair value also considers the
difference between the current levels of interest rates and the committed rates.
The fair value of the Company's commitments to extend credit at December 31,
2000 and 1999 was $173,000 and $146,000, respectively.
FORWARD COMMITMENTS
The fair value of forward commitments is estimated to be the amount that the
Company would receive or pay to terminate the forward commitments at the
reporting date based on market prices for similar financial instruments. The
fair value of the Company's forward commitments reflect a gain of $41,000 and
$95,000 at December 31, 2000 and 1999, respectively. The fair value estimates of
the Company's forward commitments are estimated without consideration of the
future earnings attributable to loans that have been or will be originated to
satisfy the forward commitments.
NOTE 7--RETIREMENT PLANS
Effective December 1, 1996, the Company established a qualified 401(k)
retirement plan for the benefit of eligible employees. The Company has made
discretionary contributions to the plan by matching 25% of employee
contributions (up to 6% of individual employee income) in 2000, 1999 and 1998.
The Company contributed $205,000, $181,000 and $162,000 to this plan in 2000,
1999, and 1998, respectively.
NOTE 8--INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2000 and
1999 are as follows:
2000 1999
---------- --------
Deferred tax assets (liabilities):
Allowances for doubtful accounts.......................... $ 11,000 $ 11,000
Book over tax depreciation................................ 828,000 415,000
Deferred acquisition costs................................ (65,000) (65,000)
Net real estate commission revenues....................... 1,886,000 --
---------- --------
Net deferred tax assets................................. $2,660,000 $361,000
========== ========
F-19
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
The provision for income taxes for 2000, 1999 and 1998 consisted of the
following:
2000 1999 1998
---------------------- ---------------------- ---------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
---------- --------- ---------- --------- ---------- --------
Federal.......................... $3,614,000 $(297,000) $2,803,000 $ (90,000) $1,861,000 $101,000
State............................ 1,084,000 (116,000) 913,000 (30,000) 402,000 237,000
---------- --------- ---------- --------- ---------- --------
Total............................ $4,698,000 $(413,000) $3,716,000 $(120,000) $2,263,000 $338,000
========== ========= ========== ========= ========== ========
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate to income before
taxes. The items causing the difference are as follows:
2000 1999 1998
---------- ---------- ----------
Tax expense at statutory rate.................... $3,311,000 $2,917,000 $1,982,000
State income tax................................. 640,000 583,000 422,000
Permanent differences............................ 334,000 96,000 154,000
Other............................................ -- -- 43,000
---------- ---------- ----------
$4,285,000 $3,596,000 $2,601,000
========== ========== ==========
The tax benefit of the cumulative effect of the change in accounting
principle was $2.6 million of which approximately $750,000 resulted in a
reduction in current tax liability not reflected above, and approximately $1.9
million was recorded as a prepaid tax asset.
NOTE 9--CONCENTRATION OF CREDIT RISK
The Company sells its services to homeowners and buyers. The Company is
affected by the cyclical nature of the residential real estate industry and the
availability of financing for the homebuyer.
NOTE 10--STOCKHOLDERS' EQUITY
The Company established a policy in 1993 pursuant to which one share of
common stock is issued as a bonus under the Company's Company Stock Purchase
Plan to each employee, consultant, sales associate, or advisor who joins the
Company, subject to a ninety-day waiting period. During 2000, 1999, and 1998,
624, 1,090 and 709 shares, respectively, were issued pursuant to this policy.
The total value of these shares amounted to $5,000 in 2000, $8,000 in 1999 and
$5,000 in 1998 using as a value the closing sale price of the common stock on
the American Stock Exchange on the day immediately preceding the date of
issuance.
In 1996, the Company approved a stock repurchase plan authorizing the
Company to repurchase shares of its common stock in the open market or in
private transactions. In May of 1998, the Company authorized an increase in the
amount of the Company's stock that may be repurchased under the repurchase plan
to a total of $1.9 million. At December 31, 2000, 238,755 shares at a cost of
$1,369,000 million had been acquired under this plan, of which 7,207 shares at a
cost of $50,000 were acquired in 2000, 4,500 shares at a cost of $31,000 were
acquired in 1999, and 108,400 shares at a cost of $656,000 were acquired in
1998.
In 2000 and 1999, the Company issued notes receivable to the Company's
principal stockholder (including spouse) and to executive officers totaling
$17,000 and $607,000, respectively. The proceeds from
F-20
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
these transactions were used to purchase shares of the Company's stock. The
notes receivable are carried as a reduction of stockholders' equity.
The Company has various stock option plans under which shares of common
stock may be granted to key employees, consultants, sales associates, advisers,
and directors of the Company. Options granted under the plans are non-qualified
or incentive stock options, and are granted at a price that is not less than the
fair market value of the common stock at the date of grant. These options have
lives of five or ten years and vest over periods from zero to four years.
Options available for future grant under these plans totaled 359,900 and 124,300
at December 31, 2000 and December 31, 1999, respectively.
At December 31, 1998 the Company had 500,000 warrants outstanding with
exercise prices ranging from $6.00 to $9.00 per share. During 1999, 5,960
warrants were exercised at $6.00 per share. The remaining 494,040 warrants
expired unexercised.
Pursuant to the requirements of SFAS 123, the following are the pro forma
net income and net income per share amounts for 2000, 1999, and 1998, as if the
compensation cost for the stock option and stock purchase plans had been
determined based upon the fair value at the grant date for grants in 2000, 1999,
and 1998:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ---------- ----------- ----------
Net Income.................... $1,738,000 $1,179,000 $4,984,000 $4,488,000 $3,233,000 $2,829,000
Basic earnings per share...... $0.51 $0.36 $1.49 $1.34 $0.99 $0.87
Diluted earnings per share.... $0.48 $0.33 $1.41 $1.27 $0.95 $0.83
The above pro forma estimates were made using the Black-Scholes option
pricing model. The following assumptions were used to estimate the fair value of
the options issued in 2000: risk free interest rate of 4.98%, expected
volatility of .299, expected dividend yield of 2% and an estimated life of the
options of 5 and 10 years based on the grant. The following assumptions were
used to estimate the fair value of the options issued in 1999: risk free
interest rate of 6.46%, expected volatility of .309, expected dividend yield of
2% and an estimated life of the options of 5 and 10 years based on the grant.
The following assumptions were used to estimate the fair value of the options
issued in 1998: risk free interest rate of 4.45%, expected volatility of .303,
expected dividend yield of 0% and an estimated life of the options of 5 and 10
years based on the grant.
The values estimated related to options are based on management estimates in
conjunction with the Black-Scholes valuation model and may not reflect actual
values of these options.
F-21
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option and warrant transactions is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
--------- ---------- --------- ----------
Options and warrants outstanding at
beginning of year........................... 1,249,850 $6.18 1,496,275 $6.21
Options granted (1)........................... 388,815 $7.04 350,450 $7.21
Options granted (2)........................... 14,285 $7.70 40,850 $8.13
Options granted (3)........................... -- -- 6,000 $7.00
Options exercised............................. (34,675) $4.63 (140,125) $4.91
Cancelled options............................. (11,500) $6.16 (3,600) $5.23
Warrants exercised............................ -- -- (5,960) $6.00
Cancelled warrants............................ -- -- (494,040) $7.52
--------- ----- --------- -----
Options and warrants outstanding at end of
year........................................ 1,606,775 $6.43 1,249,850 $6.18
========= ===== ========= =====
Options and warrants exercisable at December
31.......................................... 867,097 $5.77 645,687 $5.60
PRICE NUMBER PRICE NUMBER
----------- --------- ----------- ---------
Price and number of options and warrants
outstanding at end of year..................... $3.50-$5.00 125,925 $3.50-$5.00 154,350
$5.01-$7.24.. 1,408,715 $5.01-$7.24 1,073,500
$7.25-$9.00.. 72,135 $7.25-$9.00 22,000
- ------------------------
(1) Options granted during the year where the exercise price equaled the market
price on the grant date.
(2) Options granted during the year where the exercise price exceeds the market
price on the grant date.
(3) Options granted during the year where the exercise price was less than the
market price on the grant date.
The weighted average remaining life of stock options outstanding at December
31, 2000 was approximately 4 years.
The weighted average fair value of options granted during 2000 and 1999 for
options where the exercise price equaled the market price on the grant date was
$2.02 and $2.41, respectively. The weighted average fair values of options
granted during 2000 and 1999 where the exercise price exceeds the market price
on the grant date were $1.77 and $1.97, respectively. The weighted average fair
value of options granted during 1999 where the exercise price was less than the
market price on the grant date was $2.50. There were no options granted in 2000
where the exercise price was less than the market price on the grant date. These
fair values were estimated using the Black-Scholes valuation model and the
assumptions noted above.
F-22
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
The following table sets forth the computation of basic earnings per share
and diluted earnings per share:
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Numerator:
Income before cumulative effect of change in accounting
principle............................................ $5,453,000 $4,984,000 $3,233,000
Cumulative effect of change in accounting principle.... (3,715,000) -- --
---------- ---------- ----------
Net income............................................. $1,738,000 $4,984,000 $3,233,000
========== ========== ==========
Denominator:
Basic weighted average shares.......................... 3,381,000 3,350,000 3,251,000
Effect of stock options................................ 242,000 188,000 143,000
---------- ---------- ----------
Diluted weighted average shares........................ 3,623,000 3,538,000 3,394,000
========== ========== ==========
Basic Earnings per share:
Income before cumulative effect of change in accounting
principle............................................ $1.61 $1.49 $0.99
Cumulative effect of change in accounting principle.... (1.10) -- --
---------- ---------- ----------
Net income............................................. $0.51 $1.49 $0.99
========== ========== ==========
Diluted Earnings per share:
Income before cumulative effect of change in accounting
principle............................................ $1.51 $1.41 $0.95
Cumulative effect of change in accounting principle.... (1.03) -- --
---------- ---------- ----------
Net income............................................. $0.48 $1.41 $0.95
========== ========== ==========
NOTE 11--ORIGINATED MORTGAGE SERVICING RIGHTS
The following table represents activity and carrying amounts for originated
mortgage servicing rights,
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999
---------- ----------
Beginning Balance, January 1................................ $1,124,000 $ 875,000
Originated Mortgage Servicing Rights capitalized 235,000 393,000
Amortization................................................ (148,000) (144,000)
---------- ----------
Balance at December 31,..................................... $1,211,000 $1,124,000
========== ==========
F-23
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--ORIGINATED MORTGAGE SERVICING RIGHTS (CONTINUED)
The following table represents activity and carrying amounts for the
valuation allowance for originated mortgage servicing rights,
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999
--------- ---------
Beginning Balance, January 1................................ $155,000 $117,000
Additions to Valuation Allowance............................ 23,000 38,000
-------- --------
Balance at December 31,..................................... $178,000 $155,000
======== ========
NOTE 12--SEGMENT REPORTING
The Company has three reportable operating segments based upon its services:
real estate, including both real estate brokerage and relocation services;
mortgage banking; and insurance services. The Company evaluates its segments
based on pre-tax income. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. Financial
information for the three operating segments is provided in the following table:
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Real Estate.................................... $188,369,000 $172,957,000 $130,155,000
Mortgage Banking............................... 4,387,000 4,679,000 4,680,000
Insurance Services............................. 1,679,000 1,193,000 585,000
------------ ------------ ------------
Total Segment Revenues............................. $194,435,000 $178,829,000 $135,420,000
============ ============ ============
Net Revenues:
Real Estate.................................... $ 65,029,000 $ 58,848,000 $ 46,590,000
Mortgage Banking............................... 4,387,000 4,679,000 4,680,000
Insurance Services............................. 1,679,000 1,193,000 585,000
------------ ------------ ------------
Total Segment Net Revenues......................... $ 71,095,000 $ 64,720,000 $ 51,855,000
============ ============ ============
Pre-tax Income (Loss):
Real Estate.................................... $ 9,360,000 $ 7,971,000 $ 4,784,000
Mortgage Banking............................... 728,000 1,133,000 1,381,000
Insurance Services............................. (350,000) (524,000) (331,000)
------------ ------------ ------------
Total Segment Pre-tax Income (Loss)................ $ 9,738,000 $ 8,580,000 $ 5,834,000
============ ============ ============
Assets:
Real Estate.................................... $ 37,564,000 $ 49,904,000 $ 33,792,000
Mortgage Banking............................... 27,736,000 13,658,000 28,335,000
Insurance Services............................. 1,712,000 1,719,000 1,525,000
------------ ------------ ------------
Total Segment Assets............................... $ 67,012,000 $ 65,281,000 $ 63,652,000
============ ============ ============
F-24
THE DEWOLFE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--SELECTED QUARTERLY DATA (UNAUDITED)
(In thousands except share and per share amounts)
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
FIRST FIRST SECOND SECOND THIRD THIRD FOURTH
CALENDAR YEAR 2000 QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues.................. $ 44,527 $ 28,566 $ 57,490 $ 51,901 $ 50,334 $ 60,639 $ 53,329 $ 194,435
Net Revenues.............. $ 16,328 $ 11,226 $ 20,887 $ 19,107 $ 18,592 $ 22,096 $ 18,666 $ 71,095
Operating income (loss)... $ 1,654 $ (3,448) $ 5,445 $ 3,665 $ 2,469 $ 5,972 $ 3,394 $ 9,583
Income before cumulative
effect of change in
accounting principle.... $ 846 $ (2,011) $ 2,972 $ 1,975 $ 1,426 $ 3,387 $ 2,102 $ 5,453
Cumulative effect of
change
in accounting
principle............... -- (3,715) -- -- -- -- -- (3,715)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)......... $ 846 $ (5,726) $ 2,972 $ 1,975 $ 1,426 $ 3,387 $ 2,102 $ 1,738
Basic Earnings per share
Income before cumulative
effect of change in
accounting principle.... $ 0.25 $ (0.60) $ 0.88 $ 0.58 $ 0.42 $ 1.00 $ 0.62 $ 1.61
Cumulative effect of
change
in accounting
principle............... -- (1.10) -- -- -- -- -- (1.10)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income................ $ 0.25 $ (1.70) $ 0.88 $ 0.58 $ 0.42 $ 1.00 $ 0.62 $ 0.51
Diluted Earnings per
share:
Income before cumulative
effect of change in
accounting principle.... $ 0.24 $ (0.60) $ 0.82 $ 0.55 $ 0.39 $ 0.93 $ 0.57 $ 1.51
Cumulative effect of
change
in accounting
principle............... -- (1.10) -- -- -- -- -- (1.03)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income................ $ 0.24 $ (1.70) $ 0.82 $ 0.55 $ 0.39 $ 0.93 $ 0.57 $ 0.48
Basic Weighted Average
shares outstanding...... 3,362,000 3,362,000 3,379,000 3,379,000 3,389,000 3,389,000 3,394,000 3,381,000
Diluted Weighted Average
shares outstanding...... 3,545,000 3,362,000 3,614,000 3,614,000 3,647,000 3,647,000 3,697,000 3,623,000
FIRST SECOND THIRD FOURTH
CALENDAR YEAR 1999 QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------- ---------- ---------- ---------- ---------- ----------
Revenues.................. $ 37,222 $ 56,901 $ 46,464 $ 38,242 $ 178,829
Net Revenues.............. $ 13,392 $ 20,728 $ 16,886 $ 13,714 $ 64,720
Operating income (loss)... $ 1,119 $ 6,122 $ 1,932 $ (517) $ 8,656
Net income (loss)......... $ 566 $ 3,298 $ 1,102 $ 18 $ 4,984
Basic Earnings per
share................... $ 0.17 $ 0.98 $ 0.33 $ 0.01 $ 1.49
Diluted Earnings per
share................... $ 0.16 $ 0.92 $ 0.30 $ 0.01 $ 1.41
Basic Weighted Average
shares outstanding...... 3,302,000 3,361,000 3,365,000 3,371,000 3,350,000
Diluted Weighted Average
shares outstanding...... 3,544,000 3,575,000 3,618,000 3,505,000 3,538,000
F-25
THE DEWOLFE COMPANIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING CHARGED TO END OF YEAR
DESCRIPTION OF YEAR OPERATIONS DEDUCTIONS BALANCE
- ----------- ---------- ---------- ---------- -----------
Year ended December 31, 2000.................... $933,000 -- $933,000(2) --
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts............. $826,000 $440,000 $333,000(1) $933,000
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts............. $611,000 $472,000 $257,000(1) $826,000
- ------------------------
(1) Represents primarily write-offs of net commissions on real estate sales,
which were not consummated.
(2) Due to the adoption of SAB 101.
F-26
THE DEWOLFE COMPANIES, INC.
EXHIBIT INDEX
FORM 10K
12/31/00
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- ---------
3.1 Restated Articles of Organization of the Registrant......... A-3.1
3.2 Amendment to Articles 3 and 4 of Restated Articles of
Organization.............................................. B-3(i)
3.3 By-laws of the Registrant, as amended....................... C-3(ii)
4.1 Speciman Certificate of shares of Common Stock. $.01 par
value..................................................... C-4.1
10.1 1992 Stock Option Plan, as amended*......................... G-10.4
10.2 1992 Non-Employee Director Stock Option Plan*............... F-10.2
10.3 Employment Agreement dated May 20, 1992 with Richard B.
DeWolfe*.................................................. A-10.16
10.4 Stock Option Agreement dated May 20, 1992 with Richard B.
DeWolfe*.................................................. A-10.17
10.5 Employment Agreement dated May 20, 1992 with Patricia A.
Griffin*.................................................. A-10.20
10.6 Employment Agreement dated May 20, 1992 with Paul J.
Harrington*............................................... A-10.21
10.7 $10,507 Note dated June 1, 1990 from Amherst Realty Trust... A-10.24.1
10.8 Mortgage dated June 23, 1991 from Richard B. DeWolfe and
Marcia A. DeWolfe......................................... A-10.24.2
10.9 Employment Agreement dated April 29, 1996 with James A.
Marcotte*................................................. D-10(i)
10.10 Employment Agreement dated September 2, 1997 with Gail
Hayes*.................................................... E-10.0
10.11 Employment Agreement dated May 14, 1998 with Richard Pucci* G-10.3
10.12 Employment Agreement dated February 20, 1998 with Richard
Loughlin*................................................. H-10.20
10.13 Employment agreement dated July 6, 2000 with John R.
Penrose*.................................................. I-10.21
10.14 1998 Stock Option Plan, as amended*......................... J-B
10.15 Consulting Agreement dated January 1, 1999 with A. Clinton filed
Allen..................................................... herewith
21 Subsidiaries of the Registrant.............................. filed
herewith
23 Consent of Ernst & Young LLP................................ filed
herewith
99 Copy of Section 67 of the Massachusetts Business Corporation
Law....................................................... A-28.1
A - Incorporated by reference from the registrant's Registration
Statement on Form S-18 (File No. 33-48113-B). The page or
reference set forth herein is the exhibit number in said
Registration Statement.
B - Incorporated by reference from the registrant's Quarterly
Report on Form 10-Q for the period ending June 30, 1995. The
page or reference set forth herein is the exhibit number in
said quarterly report.
C - Incorporated by reference from the registrant's Annual
Report on Form 10-K for for the fiscal year ended
December 31, 1995. The number set forth herein is the
exhibit number in said report.
D - Incorporated by reference from the registrant's Quarterly
Report on Form 10-Q for the period ending June 30, 1996. The
page or reference set forth herein is the exhibit number in
said quarterly report.
E - Incorporated by reference from the registrant's Quarterly
Report on Form 10-Q for the period endeding September 30,
1997. The page or reference set forth herein is the exhibit
number in said quarterly report.
F - Incorporated by reference from the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996. The page or reference set forth herein is the exhibit
number in said report.
G - Incorporated by reference from the registrant's Quarterly
Report on Form 10-Q for the period ending June 30, 1998. The
page or reference set forth herein is the exhibit number in
said quarterly Report.
H - Incorporated by reference from the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999. The page or reference set forth herein is the exhibit
number in said report.
I - Incorporated by reference from the registrant's Quarterly
Report on Form 10-Q for the period Ending September 30,
2000. The page or reference set forth herein is the exhibit
number in said quarterly Report.
J - Incorporated by reference from the registrant's 2001 Proxy
Statement. The reference set forth herein is the exhibit
letter in said Proxy Statement.
* Represents a management contract or compensatory plan in which a director or
executive officer of the registrant participates.