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 services and asset management 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 reporting purposes the Company
views itself as operating in a single segment. 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 four 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; and The DeWolfe Insurance Agency,
Inc., which was incorporated in 1996, provides insurance products to the
Company's customer base. The Company and its subsidiaries do business under
various trade names, including "DeWolfe New England" and "DeWolfe Westledge".
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 recognizes commission revenue and expense from
brokerage services at the time a purchase and sale agreement is signed by the
buyer and seller. Allowances are recorded for amounts that are estimated to be
ultimately unrealized. 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.
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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, 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 1987, the Company has maintained a Strategic Alliance Agreement with
PHH Homequity ("PHH") the nation's largest relocation organization, which has
provided the Company with membership in PHH's nationwide network of over 400
other suppliers of relocation services. Under the terms of this agreement, PHH
retained the Company to sell the homes PHH purchases from the transferred
employees and to market them under the Company's usual commission arrangement.
PHH has also referred to the Company relocated employees who were in the market
for a new home. In return for these referrals, the Company has remitted to PHH a
fixed percentage of its commission from any sales. In addition, the Company also
has acted as an agent or marketing representative for other relocation services
offered through the PHH network. The Company's agreement with PHH is terminable
by either party on 30 days notice.
Relocation services accounted for approximately 21% and 20% of the
Company's real estate sales dollar volume (aggregate sales price) in 1997 and
1996, respectively. Of these amounts, the alliance with PHH accounted for
approximately 19% and 26% of DRS transactions for the years ended December 31,
1997 and 1996, respectively.
In September, 1997, the Company entered into an agreement with Reliance
Relocation Services, Inc. ("Reliance") to provide relocation services to the
Reliance network. The Reliance organization comprises a network of 500
independent real estate brokerage firms, which includes 42% of the nation's
largest real estate firms. The Company is a founding member and shareholder of
Reliance Relocation Services, Inc. The Company anticipates that participation in
Reliance Relocation will provide new relocation opportunities with firms on a
national level.
It is anticipated that, based upon the Reliance agreement, relocation
revenue generated through the PHH alliance will be greatly reduced or
eliminated. The Company believes that these revenues will be primarily replaced
by revenues generated via the Reliance network and direct corporate marketing
efforts. However, there is no guarantee as to the success that the Company will
have in replacing this income.
REAL ESTATE BROKERAGE REVENUES
The following table summarizes the Company's revenues from residential real
estate transactions, including relocation, for the periods indicated:
(Dollar amounts in thousands)
Year ended Percentage
December 31, increase
1997 1996 1997 vs. 1996
---- ---- -------------
Number of Transactions 14,599 14,168 3.0%
Aggregate Sales Price $3,162,960 $2,797,417 13.1%
Gross Real Estate Brokerage Revenues $100,799 $90,282 11.6%
Net Real Estate Brokerage Revenues $36,057 $32,988 9.3%
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REAL ESTATE BROKERAGE REVENUES (CONTINUED)
Gross real estate brokerage revenues accounted for 95%, 95% and 94% of total
revenues and net real estate brokerage revenues accounted for 87%, 87% and 86%
of net revenues of the Company for the years ended December 31, 1997, 1996 and
1995, 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 eastern Massachusetts, southern New Hampshire
and Connecticut. 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 line of credit with CoreStates Bank, N.A.
that presently has a $25 million limit. The majority of its mortgage loans are
funded by the line of credit, and the remainder of the loans is funded by
investors at closing. The Company sells the loans that it funds through the line
of credit to investors on 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 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 emphasizes the origination of "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.
During the fourth quarter of 1995, the Company was approved as a
seller/servicer by the FNMA and the FHLMC, the largest national investors in
residential mortgage loans and the Company began to sell 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.
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MORTGAGE BANKING (CONTINUED)
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, under the supervision of an experienced "secondary market officer",
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 will be based in part on the Company's estimate of
the market value of the servicing rights purchased or retained, which in turn
are 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 as to which the Company has servicing rights, could
adversely affect the value of, and earnings from, these rights. However, it is
the Company's intention 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.
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," servicing release premiums, which are
generally a percentage of the original principal amount of the loan based on the
financial return expected by the investor from the servicing rights, gains or
losses on the sale of the loan and other miscellaneous fees. The Company
recognizes mortgage origination revenues and expenses 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 Company's net mortgage revenues
accounted for 10% of net revenues in 1997 and 9% of net revenues in 1996.
The following table summarizes the Company's mortgage origination and
servicing activities for the periods indicated:
(Dollar amounts in thousands)
Year ended Percentage
December 31, increase
1997 1996 1997 vs. 1996
-------- --------- -------------
Mortgages Originated
and Closed 1,899 1,843 3.0%
Aggregate Loan Amount $293,178 $274,115 7.0%
Gross Mortgage Revenues $4,915 $4,473 9.9%
Net Mortgage Revenues $3,539 $3,207 10.4%
Loans Serviced for Others $40,715 $11,785 245.5%
Originated Mortgage Servicing
Rights, Net (Booked Value) $297 $84 253.6%
INSURANCE SERVICES
In late 1996, the Company commenced its insurance agency business and 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 in 1997 from insurance were $37,000. There
were no revenues in 1996 from insurance.
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MARKETING
The Company's real estate sales and marketing, mortgage banking, insurance,
relocation, and asset management services are marketed by a multimedia program
conducted throughout eastern Massachusetts, southern New Hampshire, northern
Rhode Island and central and southern Connecticut. This program includes direct
mail, newspaper, catalog, radio and television advertising. The Company
maintains a mobile video studio and produces and broadcasts its own weekly
television program, "DeWolfe Home Vision," which currently airs in Boston,
Massachusetts on WCVB-TV, Channel 5 and in Hartford, Connecticut WSFB-TV,
Channel 3. The Company believes that this program is the only such proprietary
program in the New England market area. 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.
The Company markets relocation services directly to employers and asset
management services directly to property owners. Contracts for asset management
services are typically obtained through a competitive bidding process.
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
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 franchise real estate
organizations, such as Century-21, ERA, Realty World, Better Homes and Gardens,
RE/MAX, The Prudential, and Coldwell Banker; and multi-office independent real
estate organizations, such as Dallamora, and Jack Conway & Company. The Company
believes that its major competitors in 1998 will be franchise organizations,
such as RE/MAX and Coldwell Banker. 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 franchise 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 business, the Company competes with other mortgage
originators, such as mortgage bankers, state and national banks, and thrift
institutions for loan origination. 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 referral customers generated by 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.
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 act as a broker. In every case, all such licenses
may be denied or revoked for various reasons, including the violation of
regulations, conviction of crimes, and the like. Future expansion of the
Company's operations into new geographic markets may subject it to similar
licensing requirements in other states.
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GOVERNMENT REGULATION (CONTINUED)
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.
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.
Licenses may be denied or revoked for various reasons, including the
violation of regulations and the failure to maintain the required minimum net
worth. Future expansion of the Company's operations may subject it to similar
licensing requirements and regulations in other states.
There are various state laws affecting the Company's insurance operations,
including licensing requirements.
No licensing or other government regulatory requirements are material to
the Company's relocation and property management businesses, except to the
extent that such businesses also involve the rendering of real estate brokerage
services, the licensing and regulation of which are described above.
TRADE NAMES
The names "DeWolfe New England" (registered in Massachusetts and New
Hampshire) and "DeWolfe Westledge" (registered in Connecticut) and the DeWolfe
logotype 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, but not federally. In addition, the Company continues to use
the trade names of certain companies that it has acquired.
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SEASONALITY
The residential real estate sales and marketing business, mortgage loan
origination business, and relocation services business are subject to seasonal
fluctuations. Historically, revenues from these businesses are greater in the
spring and summer months than in the fall and winter months. The following table
illustrates the percentage of the Company's revenues by quarter for the periods
indicated.
PERCENTAGE OF REVENUE
1997 1996
First Quarter 22.1% 22.7%
Second Quarter 29.5% 31.6%
Third Quarter 26.4% 24.7%
Fourth Quarter 22.0% 21.0%
100% 100%
WORK FORCE
At December 31, 1997 the Company's total work force numbered 1,712 people,
including 337 employees (including 51 mortgage banking personnel), 1,366 real
estate sales associates and 9 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 sales associates and relocation associates
are independent contractors. As independent contractors, the real estate sales
associates and relocation associates are paid by commission solely on the basis
of closed sales transactions. Mortgage consultants are paid on the basis of
closed mortgage loans.
GROWTH STRATEGIES
ACQUISITIONS
Historically, the Company's growth has been achieved primarily through
acquisitions. In some of these 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 for primarily through cash and the issuance of shares of
the Company's common stock.
The Company expects to fund a portion of future acquisitions through credit
facilities negotiated with the principals of the acquired Companies or with
institutional lenders. Additionally, the Company may continue to use shares of
the Company's 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.
On December 8th, 1997, the Company entered into an agreement with Dollar
Dry Dock Real Estate, Inc. ("DDD") to acquire 100% of the stock of DDD and its
wholly owned subsidiary, The Heritage Group, Inc., for $4,000,000. A deposit of
$1.5 million of the purchase price was placed in escrow and was funded using the
Company's revolving line of credit. On January 16th, 1998, the Company completed
the transaction to acquire DDD. The acquisition was funded through a credit
facility provided by BankBoston, N.A. (formerly The First National Bank of
Boston).
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.
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