10-K 1 a2042203z10-k.txt 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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):

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:

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.

------------------------ (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.

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

------------------------ (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.

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:

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.

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

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

See notes to consolidated financial statements. F-2 THE DEWOLFE COMPANIES, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY

See notes to consolidated financial statements. F-3 THE DEWOLFE COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME

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

See notes to consolidated financial statements F-5 THE DEWOLFE COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements. F-6 THE DEWOLFE COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

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.

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.

NOTE 3--RELATED PARTY TRANSACTIONS The Company has various advances and notes receivables with related parties as described below:

F-12 THE DEWOLFE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)

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:

F-13 THE DEWOLFE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--INDEBTEDNESS (CONTINUED)

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:

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:

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:

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:

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:

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:

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:

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:

------------------------ (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:

NOTE 11--ORIGINATED MORTGAGE SERVICING RIGHTS The following table represents activity and carrying amounts for originated mortgage servicing rights,

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,

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:

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)

F-25 THE DEWOLFE COMPANIES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

------------------------ (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

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.

DEWOLFE COMPANIES INC 10-K