MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
For the Nine Months Ended September 30, 2007 and 2006
OVERVIEW
The following discussion should be read in conjunction with the
Financial Statements of the Company and the Notes thereto appearing
elsewhere herein.
FORWARD-LOOKING STATEMENTS
The following is our discussion and analysis of certain significant
factors that have affected our financial position and operating
results during the periods included in the accompanying financial
statements. This commentary should be read in conjunction with the
financial statements and the related notes and the other statistical
information included in this report.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of
management for future operations, and projections of revenues and
other financial items that are based on the beliefs of management, as
well as assumptions made by and information currently available to
management. The words "may," "will," "anticipate," "should," "would,"
"believe," "contemplate," "expect," "estimate," "continue," and
"intend," as well as other similar words and expressions of the
future, are intended to identify forward-looking statements. Our
actual results may differ materially from the results discussed in the
forward-looking statements, and our operating performance each quarter
is subject to various risks and uncertainties that are discussed in
detail in our filings with the Securities and Exchange Commission,
including, without limitation:
* significant increases in competitive pressure in the financial
services industries;
* changes in political conditions or the legislative or regulatory
environment;
* general economic conditions, either nationally or regionally and
especially in our primary service area, becoming less favorable
than expected;
* changes occurring in business conditions and inflation;
* changes in technology;
* changes in monetary and tax policies;
* changes in the securities markets; and
* other risks and uncertainties detailed from time to time in our
filings with the Securities and Exchange Commission.
OVERVIEW AND GENERAL INDUSTRY CONDITIONS
Our primary sources of revenue are commissions earned from brokerage
services. Our principal business activities are, by their nature,
affected by many factors, including general economic and financial
conditions, movement of interest rates, security valuations in the
marketplace, regulatory changes, competitive conditions, transaction
volume and market liquidity. Consequently, brokerage commission
revenue and investment banking fees can be volatile. While we seek to
maintain cost controls, a significant portion of our expenses is fixed
and does not vary with market activity. As a result, substantial
fluctuations can occur in our revenue and net income from period to
period.
The Company is a licensed insurance broker and we receive commission
revenue as a result of our insurance operations. The Company
continues to grow this business; however does not regard insurance
revenue as material at this time.
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Item 2.
WOODSTOCK FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, continued
For the Quarters and Nine Months Ended September 30, 2007 and 2006
RESULTS OF OPERATIONS - QUARTERS ENDED SEPTEMBER 30, 2007 AND 2006
Total revenue for the quarter ended September 30, 2007 decreased by
$187,025 or by 9% to $1,921,207 from $2,108,232 for the comparable
period in 2006.
Commission revenue decreased by $137,338 or 8% to $1,653,636 from
$1,790,974 for the comparable period in 2006. This decrease was
principally due to a decrease in transactional business in the third
quarter of 2007.
Interest income decreased by $30,984 or 26% during the quarter ended
September 30, 2007 compared to the same period in 2006. This decrease
is due to the decrease in interest from margin accounts and customer
accounts held by our clearing agent, due primarily to a decrease in
the Company's marginal rate received on these accounts.
Fees from clearing transaction charges and other income decreased by
$18,703 or 9% for the quarter ended September 30, 2007 compared to the
same period in 2006. This decrease is also due to the decrease in
transactional business.
Total operating expenses for the quarter ended September 30, 2007
increased by $216,192 or 11% to $2,252,341 from $2,036,149 for the
same period in 2006. Total expenses increased due primarily to the
stock options granted in the third quarter, which were vested
immediately. The Company recognized expense related to these options
of $338,550. This increased expense was offset by a decrease in
commissions paid to brokers, which is due to a decrease in
transactional business.
Commissions to brokers decreased by $172,014 or 11% to $1,376,441 for
the quarter ended September 30, 2007 from $1,548,455 in the prior
year. This decrease coincides with the decrease in commission revenue
during the quarter.
Clearing costs increased by $2,984 or 8% for the quarter ended
September 30, 2007 from $39,207 in the prior year. This increase was
due to an increase in option transactions while the Company's overall
transactional business decreased. As a percentage of commission
income clearing costs were 2.6% in 2007 compared to 2.2% in 2006. The
Company received a one time credit of $57,871 during the second
quarter of 2007 as a result of certain transactions that were
inadvertently charged twice due to a system programming error at the
clearing house; this issue has since been rectified.
Selling, general and administrative expense increased $360,639 or 81%
to $807,651 for the quarter ended September 30, 2007 from $447,012 in
the prior year. This increase was due primarily to the granting of
stock options in July 2007, which resulted in additional expense of
$338,500. The remaining increase in expense relates to condo
association fees, mortgage interest and depreciation associated with
the purchase of the commercial real estate, which closed during the
second quarter of 2006. There is also an increase in service and
equipment contracts due to the new commercial space.
Net loss was $331,134 for the quarter ended September 30, 2007
compared to net earnings of $72,083 for the comparable period in prior
year.
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Item 2.
WOODSTOCK FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, continued
For the Quarters and Nine Months Ended September 30, 2007 and 2006
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006,
continued
Total revenue for the nine months ended September 30, 2007 decreased
by $1,323,017 or by 18% to $5,862,997 from $7,186,014 for the
comparable period in 2006.
Commission revenue decreased by $1,164,731 or 19% to $5,063,885 from
$6,228,616 for the comparable period in 2006. This decrease was
principally due to a decrease in transactional business in the nine
months of 2007.
Interest income decreased by $70,851 or 20% during the nine months
ended Septmeber 30, 2007 compared to the same period in 2006. This
decrease is due to the decrease in interest from margin accounts and
customer accounts held by our clearing agent due primarily to a
decrease in the Company's marginal rate received on these accounts.
Fees from clearing transaction charges and other income decreased by
$87,435 or 14% for the nine months ended September 30, 2007 compared
to the same period in 2006. This decrease is due to the decrease in
transactional business.
Total operating expenses for the nine months ended September 30, 2007
decreased by $646,690 or 9% to $6,261,179 from $6,907,869 for the same
period in 2006. Total expenses decreased due primarily to a decrease
in commissions paid to brokers which is due to a decrease in
transactional business.
Commissions to brokers decreased by $1,131,422 or 21% to $4,345,324
for the nine months ended September 30, 2007 from $5,476,746 in the
prior year. This decrease coincides with the decrease in commission
revenue during the nine months.
Clearing costs decreased by $32,758 or 24% to $103,539 for the nine
months ended September 30, 2007 from $136,297 in the prior year. As a
percentage of commission income clearing costs were 2.0% in 2007
compared to 2.2% in 2006. The Company received a one time credit of
$57,871 during the second quarter of 2007 as a result of certain
transactions that were inadvertently charged twice due to a system
programming error at the clearing house, this issue has since been
rectified.
Selling, general and administrative expense increased $489,577 or 38%
to $1,781,078 for the nine months ended September 30, 2007 from
$1,291,501 in the prior year. This increase was due primarily to the
expense of $338,550 related to the granting of stock options in July
2007. The remaining increase in expense relates to condo association
fees, mortgage interest and depreciation associated with the purchase
of the commercial real estate, which closed during the second quarter
of 2006. There is also an increase in service and equipment contracts
due to the new commercial space.
Net loss was $398,182 for the nine months ended September 30, 2007
compared to net earnings of $278,145.
LIQUIDITY AND CAPITAL RESOURCES
Our assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, and receivables from other
broker-dealers and our clearing agent, all of which fluctuate
depending upon the levels of customer business and trading activity.
Receivables from broker-dealers and our clearing agent turn over
rapidly. Both our total assets as well as the individual components
as a percentage of total assets may vary significantly from period to
period because of changes relating to customer demand, economic,
market conditions and proprietary trading strategies. Our total net
assets at September 30, 2007 were $1,504,367 of which $1,007,055 is
cash.
As a broker-dealer, we are subject to the Securities and Exchange
Commission Uniform Net Capital Rule (Rule15c3-1). The Rule requires
maintenance of minimum net capital and that we maintain a ratio of
aggregate indebtedness (as defined) to net capital (as defined) not to
exceed 15 to 1. Our minimum net capital requirement is $100,000.
Under the Rule we are subject to certain restrictions on the use of
capital and its related liquidity. Our net capital position at
September 30, 2007 was $1,200,557 and our ratio of aggregate
indebtedness to net capital was .38 to 1.
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Historically, we have financed our operations through cash flow from
operations and the private placement of equity securities. We have not
employed any significant leverage or debt.
We believe that our capital structure is adequate for our current
operations. We continually review our overall capital and funding
needs to ensure that our capital base can support the estimated needs
of the business. These reviews take into account business needs as
well as the Company's regulatory capital requirements. Based upon
these reviews, to take advantage of strong market conditions and to
fully implement our expansion strategy, we will continue to pursue
avenues to decrease costs and increase our capital position.
The Company's cash and cash equivalents decreased by $41,897 to
$1,007,055 as of September 30, 2007, from $1,048,952 as of December
31, 2006. This overall decrease was due to cash provided by operating
activities of $31,665, net cash used in investing activities of
$3,748, and cash used by financing activities of $69,814.
On July 5, 2005, the Company entered into a commercial purchase and
sale agreement for the purchase of a portion of an office building.
The total commitment amount for this purchase was approximately
$1,252,000 of which approximately $150,000 had been paid as a deposit
as of December 31, 2005. The Company occupied this new office space
in January 2006. The Company closed on this purchase on May 25, 2006
for a total cost of $1,273,455 financing it with a $1,000.000 loan
with a 5-year balloon amortized on a 25-year basis, at a fixed
interest rate of 8.610%. The Company pays a monthly condo association
fee of $4,200 in addition to the mortgage payment.
EFFECTS OF INFLATION AND OTHER ECONOMIC FACTORS
Market prices of securities are generally influenced by changes in
rates of inflation, changes in interest rates and economic activity
generally. Our revenues and net income are, in turn, principally
affected by changes in market prices and levels of market activity.
Moreover, the rate of inflation affects our expenses, such as employee
compensation, occupancy expenses and communications costs, which may
not be readily recoverable in the prices of services offered to our
customers. To the extent inflation, interest rates or levels of
economic activity adversely affect market prices of securities, our
financial condition and results of operations will also be adversely
affected.