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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Quarterly Period Ended March 31, 2006
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 for the transition period from       to
 Commission file number: 0-49992
 optionsXpress Holdings, Inc.
  Delaware
    
    20-1444525(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 39 S. LaSalle, Suite 220, Chicago, Illinois
60603
 (312) 630-3300
 þ o
  o o þ
 o þ




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TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1.  Condensed Consolidated Financial StatementsCondensed Consolidated Statements of Financial ConditionCondensed Consolidated Statements of OperationsCondensed Consolidated Statements of Cash FlowsNotes to Condensed Consolidated Financial StatementsItem 2.  Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.  Quantitative and Qualitative Disclosures about Market RiskItem 4.  Controls and ProceduresPart II  OTHER INFORMATIONItem 1.  Legal ProceedingsItem 6.  ExhibitsEX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32.1 Section 906 Certification of the CEO and the CFOSignaturesSection 302 Certification of the CEOSection 302 Certification of CFOSection 906 Certification of CEO and CFOSection 302 CertificationSection 302 CertificationSection 906 Certification
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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1.  Condensed Consolidated Financial Statements
 optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Financial Condition
 (Unaudited)
  March 31,
    
    
    December 31,2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    27,800
    
    
    $
    10,258Cash segregated in compliance with federal regulations
    
    
    1,270
    
    
    
    585Short-term investments
    
    
    95,744
    
    
    
    95,275Receivable from brokers
    
    
    14,601
    
    
    
    11,765Security deposits
    
    
    550
    
    
    
    547Fixed assets, net of accumulated depreciation and amortization
    
    
    5,078
    
    
    
    4,088Other assets
    
    
    6,056
    
    
    
    3,655Investment in optionsXpress Australia Pty Limited
    
    
    497
    
    
    
    396Total assets
    
    $
    151,596
    
    
    $
    126,569Liabilities and stockholders equityLiabilities:Accounts payable and accrued liabilities
    
    $
    5,917
    
    
    $
    6,570Payables to customers
    
    
    963
    
    
    
    369Current income taxes payable
    
    
    8,749
    
    
    
    2Net deferred income tax liabilities
    
    
    1,459
    
    
    
    1,109Total liabilities
    
    
    17,088
    
    
    
    8,050Stockholders equity:Common stock, $0.0001 par value, 250,000 shares authorized;
March 31, 2006  62,287 shares issued and outstanding,
December 31, 2005  62,101 shares issued and outstanding
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    91,232
    
    
    
    90,176Accumulated other comprehensive loss
    
    
    (12
    )
    
    
    (13
    )Retained earnings
    
    
    43,282
    
    
    
    28,350Total stockholders equity
    
    
    134,508
    
    
    
    118,519Total liabilities and stockholders equity
    
    $
    151,596
    
    
    $
    126,569
 See accompanying notes
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
  Three months EndedMarch 31,2006
    
    
    2005Revenues:Commissions
    
    $
    32,087
    
    
    $
    19,509Other brokerage-related revenue
    
    
    8,964
    
    
    
    5,161Interest income
    
    
    5,228
    
    
    
    2,137Other income
    
    
    159
    
    
    
    59Total revenues
    
    
    46,438
    
    
    
    26,866Expenses:Brokerage, clearing and other related expenses
    
    
    5,727
    
    
    
    3,646Compensation and benefits
    
    
    4,807
    
    
    
    2,825Advertising
    
    
    1,876
    
    
    
    1,347Quotation services
    
    
    1,299
    
    
    
    1,074Depreciation and amortization
    
    
    720
    
    
    
    522Technology and telecommunication
    
    
    713
    
    
    
    490Other
    
    
    1,693
    
    
    
    720Total expenses
    
    
    16,835
    
    
    
    10,624Income before income taxes
    
    
    29,603
    
    
    
    16,242Income taxes
    
    
    11,558
    
    
    
    6,438Net income
    
    $
    18,045
    
    
    $
    9,804Earnings per common share:Basic
    
    $
    0.29
    
    
    $
    0.16Diluted
    
    $
    0.29
    
    
    $
    0.16Weighted-average number of common shares:Basic
    
    
    62,213
    
    
    
    54,614Diluted
    
    
    62,600
    
    
    
    60,736
 See accompanying notes.
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
  Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Operating activitiesNet income
    
    $
    18,045
    
    
    $
    9,804Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    720
    
    
    
    522Stock based compensation
    
    
    210
    
    
    
    Net deferred income taxes
    
    
    350
    
    
    
    (50
    )Gain on investment in optionsXpress Australia Pty Limited
    
    
    (101
    )
    
    
    (51
    )Changes in operating assets and liabilities:(Increase) decrease in:Cash segregated in compliance with federal regulations
    
    
    (685
    )
    
    
    Receivable from brokers
    
    
    (2,836
    )
    
    
    (739
    )Security deposits
    
    
    (3
    )
    
    
    (1
    )Other assets
    
    
    (1,397
    )
    
    
    809Increase (decrease) in:Accounts payable and accrued liabilities
    
    
    (653
    )
    
    
    (95
    )Payables to customers
    
    
    594
    
    
    
    Current income taxes payable
    
    
    8,747
    
    
    
    4,482Net cash provided by operating activities
    
    
    22,991
    
    
    
    14,681Investing activitiesLoans to affiliates and non-affiliates
    
    
    (1,000
    )
    
    
    (98
    )Purchases of short-term investments
    
    
    (12,579
    )
    
    
    (50,119
    )Proceeds
from sale and maturities of short-term investments
    
    
    12,107
    
    
    
    Purchases and development of computer software
    
    
    (572
    )
    
    
    (304
    )Purchases of fixed assets
    
    
    (1,138
    )
    
    
    (334
    )Net cash used in investing activities
    
    
    (3,182
    )
    
    
    (50,855
    )Financing activitiesExercise of stock options
    
    
    426
    
    
    
    282Excess tax benefit for stock based compensation
    
    
    421
    
    
    
    Dividends paid
    
    
    (3,114
    )
    
    
    (33,500
    )Proceeds from initial public offering
    
    
    
    
    
    
    76,725Direct costs of capital raised
    
    
    
    
    
    
    (1,718
    )Net cash (used in) provided by financing activities
    
    
    (2,267
    )
    
    
    41,789Net increase in cash and cash equivalents
    
    
    17,542
    
    
    
    5,615Cash and cash equivalents, beginning of period
    
    
    10,258
    
    
    
    24,759Cash and cash equivalents, end of period
    
    $
    27,800
    
    
    $
    30,374Supplemental cash flow information:Income taxes paid
    
    $
    2,041
    
    
    $
    1,900Interest paid
    
    
    3
    
    
    
    5Supplemental disclosure of non-cash activity:Non-cash unrealized loss on short-term investments
    
    $
    5
    
    
    $
    Non-cash foreign currency translation
    
    
    (3
    )
    
    
    (1
    )
 See accompanying notes.
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optionsXpress Holdings, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
  Basis of Presentation and Nature of Operations
 Basis of Presentation
   Nature of Operations
  2. Summary of Significant Accounting Policies
  Stock-based employee compensation
  Fixed Assets
  3. Stock-Based Compensation
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Three Months EndedMarch 31,2006
    
    2005Dividend yield
    
    
    1
    %
    
    
    3
    %Expected volatility
    
    
    44
    %
    
    
    30
    %Risk-free interest rate
    
    
    4.69
    %
    
    
    4.18
    %Expected life of option (in months)
    
    
    90
    
    
    
    60
   Three months endedMarch 31, 2005Net income, as reported
    
    $
    9,804Deduct  Total stock-based employee compensation
expense determined under fair value-based method for all
awards, net of tax
    
    
    78Pro forma net income
    
    
    9,726Less income allocable to preferred stock
    
    
    854Pro forma net income applicable to common stockholders
    
    $
    8,872Income per share:Basic, as reported
    
    $
    0.16Basic, pro forma
    
    
    0.16Diluted, as reported
    
    
    0.16Diluted, pro forma
    
    
    0.16
 4. Guarantees
    5. Capitalization
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Common Stock
    Preferred Stock
   Dividends
   6. Regulatory Requirements
    March 31, 2006Excess
    
    Ratio of AggregateRequired
    
    Net
    
    Net
    
    IndebtednessNet Capital
    
    Capital
    
    Capital
    
    to Net CapitaloptionsXpress, Inc.
    
    $
    666
    
    
    $
    10,825
    
    
    $
    10,159
    
    
    
    0.92 to 1brokersXpress LLC
    
    
    50
    
    
    
    1,479
    
    
    
    1,429
    
    
    
    0.48 to 1
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March 31, 2005Excess
    
    Ratio of AggregateRequired
    
    Net
    
    Net
    
    IndebtednessNet Capital
    
    Capital
    
    Capital
    
    to Net CapitaloptionsXpress, Inc.
    
    $
    270
    
    
    $
    4,730
    
    
    $
    4,460
    
    
    
    0.85 to 1brokersXpress LLC
    
    
    50
    
    
    
    393
    
    
    
    343
    
    
    
    0.63 to 1
  7. Earnings Per Share
  Three Months EndedMarch 31,2006
    
    
    2005Reported net income
    
    $
    18,045
    
    
    $
    9,804Less net income allocable to preferred stock
    
    
    
    
    
    
    861Adjusted net income applicable to common
stockholders
    
    $
    18,045
    
    
    $
    8,943Weighted-average number of common shares
outstanding  basic
    
    
    62,213
    
    
    
    54,614Effect of dilutive securities
    
    
    387
    
    
    
    6,122Weighted-average number of common shares
outstanding  diluted
    
    
    62,600
    
    
    
    60,736Basic EPS
    
    $
    0.29
    
    
    $
    0.16Diluted EPS
    
    $
    0.29
    
    
    $
    0.16
 
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
    
    
    the statements about our intention to pay dividends;
    
    the statements about future growth in online brokerage accounts, options trading and online options trading;
    
    the statements about our anticipated move to self-clearing;
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
    
    the statements concerning continued financing options; and
    
    the statements regarding scalability of our systems and the cost of increases.
 Results of Operations
  Three Months EndedMarch 31,2006
    
    2005Results of OperationsTotal revenues (in thousands)
    
    $
    46,438
    
    
    $
    26,866Brokerage, clearing, and other related expenses
    
    
    12.3
    %
    
    
    13.6
    %Compensation and benefits
    
    
    10.4
    
    
    
    10.5Advertising
    
    
    4.0
    
    
    
    5.0Quotation services
    
    
    2.8
    
    
    
    4.0Depreciation and amortization
    
    
    1.6
    
    
    
    1.9Technology and telecommunication
    
    
    1.5
    
    
    
    1.8Other
    
    
    3.6
    
    
    
    2.7Income before income taxes
    
    
    63.8
    
    
    
    60.5Income taxes
    
    
    24.9
    
    
    
    24.0Net income
    
    
    38.9
    
    
    
    36.5
 Statistical Data
  Three Months EndedMarch 31,2006
    
    2005Statistical DataNumber of customer accounts (1)
    
    
    178,700
    
    
    
    116,600Daily average revenue trades (DARTs) (2)
    
    
    29,400
    
    
    
    16,500Customer trades per account (3)
    
    
    43
    
    
    
    37Average commission per trade
    
    $
    17.59
    
    
    $
    19.38Option trades as a % of total trades
    
    
    74
    %
    
    
    75
    %Advertising expense per new customer account (4)
    
    $
    111
    
    
    $
    86Total client assets (000s)
    
    $
    3,994,714
    
    
    $
    2,172,413Client margin balances (000s)
    
    $
    121,758
    
    
    $
    90,170
 
 (1)
    
    Customer accounts are open, numbered accounts.(2)
    
    DARTs are total revenue-generating trades for a period divided by the number of trading days in
that period.(3)
    
    Customer trades per account are total trades divided by the average number of total customer
accounts during the period. Customer trades are annualized.(4)
    
    Calculated based on net new customer accounts opened during the period. Three Months Ended March 31, 2006 versus March 31, 2005
 Overview
  
    
    total customer accounts increased by 62,100 to 178,700, or 53%;
    
    total trades increased by 818,400 to 1,824,400, or 81%; and
    
    average commission per trade decreased by $1.79 to $17.59, or 9%.
 Total revenues
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Brokerage, clearing, and other related expenses
  Compensation and benefits
  Advertising
  Quotation services
  Depreciation and amortization
  Technology and telecommunication
  Other
  Income taxes
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Net income
  Liquidity and Capital Resources
     Cash Flow
    Capital Expenditures
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Item 3.  Quantitative and Qualitative Disclosures about Market Risk
      
 Item 4.  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 Part II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
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Item 6.  Exhibits
 31.1
    
    Certification of David S. Kalt, Principal Executive Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of David A. Fisher, Principal Financial Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Signatures
  Dated: May 15, 2006
    
    optionsXpress Holdings, Inc.(Registrant)By:
    
    /s/ David S. KaltDavid S. KaltChief Executive Officer (Principal Executive Officer)By:
    
    /s/ David A. FisherChief Financial Officer (Principal Financial and Accounting Officer)
 15