##### Table of Contents



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 September 30, 2005
 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
(State or other jurisdiction of
incorporation or organization)
    
    20-1444525
(I.R.S. Employer
Identification Number)
 39 S. LaSalle, Suite 220, Chicago, Illinois
60603
 (312) 630-3300
 þ o
 o þ
 o þ




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##### Table of Contents



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 CFO
 2




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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)
  September 30,
    
    
    December 31,2005
    
    
    2004AssetsCash and cash equivalents
    
    $
    10,479
    
    
    $
    24,759Short-term investments
    
    
    81,546
    
    
    
    Receivable from brokers
    
    
    10,643
    
    
    
    9,299Security deposits
    
    
    309
    
    
    
    313Fixed assets, net of accumulated depreciation and amortization
    
    
    3,872
    
    
    
    3,732Other assets
    
    
    3,453
    
    
    
    1,892Investment in optionsXpress Australia Pty Limited
    
    
    339
    
    
    
    100Total assets
    
    $
    110,641
    
    
    $
    40,095Liabilities and stockholders equityLiabilities:Accounts payable and accrued liabilities
    
    $
    6,067
    
    
    $
    5,023Current income taxes payable
    
    
    263
    
    
    
    1,152Net deferred income tax liabilities
    
    
    1,034
    
    
    
    914Total liabilities
    
    
    7,364
    
    
    
    7,089Stockholders equity:Common stock, $0.0001 par value, 187,500 shares authorized;
September 30, 2005  62,029 shares issued and outstanding,
December 31, 2004  38,296 shares issued and outstanding
    
    
    6
    
    
    
    4Convertible preferred stock, $0.0001 par value, 75,000 shares
authorized; September 30, 2005  0 shares issued and outstanding,
December 31, 2004  18,196 shares issued and outstanding
    
    
    
    
    
    
    2Additional paid-in capital
    
    
    88,077
    
    
    
    12,450Accumulated other comprehensive (loss)/income
    
    
    (11
    )
    
    
    2Retained earnings
    
    
    15,205
    
    
    
    20,548Total stockholders equity
    
    
    103,277
    
    
    
    33,006Total liabilities and stockholders equity
    
    $
    110,641
    
    
    $
    40,095
 See accompanying notes
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Commissions
    
    $
    23,669
    
    
    $
    14,960
    
    
    $
    63,751
    
    
    $
    52,473Other brokerage-related revenue
    
    
    6,177
    
    
    
    3,881
    
    
    
    16,706
    
    
    
    12,932Interest income
    
    
    3,696
    
    
    
    863
    
    
    
    8,415
    
    
    
    2,068Other income
    
    
    69
    
    
    
    13
    
    
    
    186
    
    
    
    33Total revenues
    
    
    33,611
    
    
    
    19,717
    
    
    
    89,058
    
    
    
    67,506Expenses:Brokerage, clearing and other related expenses
    
    
    3,931
    
    
    
    3,612
    
    
    
    10,809
    
    
    
    10,528Compensation and benefits
    
    
    3,821
    
    
    
    3,117
    
    
    
    9,906
    
    
    
    7,039Advertising
    
    
    1,312
    
    
    
    1,387
    
    
    
    4,083
    
    
    
    5,132Quotation services
    
    
    1,063
    
    
    
    845
    
    
    
    3,076
    
    
    
    2,555Depreciation and amortization
    
    
    590
    
    
    
    418
    
    
    
    1,677
    
    
    
    1,160Technology and telecommunication
    
    
    600
    
    
    
    411
    
    
    
    1,629
    
    
    
    909Other
    
    
    1,392
    
    
    
    1,476
    
    
    
    3,233
    
    
    
    2,454Total expenses
    
    
    12,709
    
    
    
    11,266
    
    
    
    34,413
    
    
    
    29,777Income before income taxes
    
    
    20,902
    
    
    
    8,451
    
    
    
    54,645
    
    
    
    37,729Income taxes
    
    
    8,251
    
    
    
    3,530
    
    
    
    21,534
    
    
    
    15,173Net income
    
    $
    12,651
    
    
    $
    4,921
    
    
    $
    33,111
    
    
    $
    22,556Earnings per common share:Basic
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.40Diluted
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.39Weighted-average number of common shares:Basic
    
    
    61,960
    
    
    
    38,021
    
    
    
    59,487
    
    
    
    38,304Diluted
    
    
    62,473
    
    
    
    57,382
    
    
    
    61,881
    
    
    
    57,822
 See accompanying notes.
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
  Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    33,111
    
    
    $
    22,556Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    1,677
    
    
    
    1,160Stock options expensed
    
    
    24
    
    
    
    Tax Benefit
    
    
    
    
    
    
    646Deferred income taxes
    
    
    120
    
    
    
    402Restricted stock issued
    
    
    
    
    
    
    654Gain on investment in optionsXpress Australia Pty Limited
    
    
    (141
    )
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Receivable from brokers
    
    
    (1,344
    )
    
    
    (702
    )Loan deposit
    
    
    
    
    
    
    (10,131
    )Security deposits
    
    
    4
    
    
    
    (20
    )Other assets
    
    
    439
    
    
    
    (989
    )Increase (decrease) in:Accounts payable and accrued liabilities
    
    
    1,044
    
    
    
    4,223Current income taxes payable
    
    
    (889
    )
    
    
    65Net cash provided by operating activities
    
    
    34,045
    
    
    
    17,864Investing activitiesLoans to affiliates and non-affiliates
    
    
    (2,098
    )
    
    
    Purchases of short-term investments
    
    
    (200,372
    )
    
    
    Proceeds from sale of short-term investments
    
    
    118,812
    
    
    
    Purchases and development of computer software
    
    
    (928
    )
    
    
    (766
    )Purchases of fixed assets
    
    
    (889
    )
    
    
    (1,829
    )Net cash used in investing activities
    
    
    (85,475
    )
    
    
    (2,595
    )Financing activitiesExercise of stock options
    
    
    765
    
    
    
    266Dividends paid
    
    
    (38,455
    )
    
    
    (7,014
    )Proceeds from initial public offering
    
    
    76,725
    
    
    
    Redemption of common stock
    
    
    
    
    
    
    (88,708
    )Issuance of convertible preferred stock
    
    
    
    
    
    
    88,390Issuance of common stock
    
    
    
    
    
    
    2,000Direct costs of capital raised
    
    
    (1,885
    )
    
    
    (2,491
    )Net cash provided by (used in) financing activities
    
    
    37,150
    
    
    
    (7,557
    )Net (decrease) increase in cash and cash equivalents
    
    
    (14,280
    )
    
    
    7,712Cash and cash equivalents, beginning of period
    
    
    24,759
    
    
    
    2,777Cash and cash equivalents, end of period
    
    $
    10,479
    
    
    $
    10,489Supplemental cash flow information:Income taxes paid
    
    $
    22,267
    
    
    $
    14,060Interest paid
    
    
    13
    
    
    
    2Supplemental disclosure of non-cash activity:Noncash exercise of options
    
    
    
    
    
    
    38
 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
  Corporate Reorganization
  2. Summary of Significant Accounting Policies
  Cash and Cash Equivalents
  Short-Term Investments
  6




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3. Stock-Based Compensation
  Accounting for Stock-Based Compensation  Transition and
Disclosure Accounting for Stock-Based Compensation
 Accounting for Stock Issued to Employees
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    12,651
    
    
    $
    4,921
    
    
    $
    33,111
    
    
    $
    22,556Deduct  Total stock-based employee
compensation expense determined under fair
value-based method for all awards, net of
tax
    
    
    86
    
    
    
    56
    
    
    
    247
    
    
    
    118Pro forma net income
    
    
    12,565
    
    
    
    4,865
    
    
    
    32,864
    
    
    
    22,438Less income allocable to preferred stock
    
    
    
    
    
    
    1,575
    
    
    
    930
    
    
    
    7,219Pro forma net income applicable to
common stockholders
    
    $
    12,565
    
    
    $
    3,290
    
    
    $
    31,934
    
    
    $
    15,219Income per share:Basic, as reported
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.40Basic, pro forma
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.40Diluted, as reported
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.39Diluted, pro forma
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.39
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    1
    %
    
    
    3
    %
    
    
    1
    %
    
    
    3
    %Expected volatility
    
    
    30
    %
    
    
    30
    %
    
    
    30
    %
    
    
    30
    %Risk-free interest rate
    
    
    4.18
    %
    
    
    3.35
    %
    
    
    4.18
    %
    
    
    3.35
    %Expected life of option following vesting (in months)
    
    
    60
    
    
    
    60
    
    
    
    60
    
    
    
    60
  4. Recent Accounting Pronouncements
 Share-Based Payment
 7




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5. Guarantees
   6. Capitalization
 Common Stock
    Preferred Stock
  Dividends
     7. Regulatory Requirements
 8




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September 30, 2005Excess
    
    
    Ratio of AggregateRequired
    
    
    Net
    
    
    Net
    
    
    IndebtednessNet Capital
    
    
    Capital
    
    
    Capital
    
    
    to Net CapitaloptionsXpress, Inc.
    
    $
    532
    
    
    $
    6,775
    
    
    $
    6,243
    
    
    
    1.18 to 1brokersXpress LLC
    
    
    50
    
    
    
    824
    
    
    
    774
    
    
    
    0.42 to 1
 September 30, 2004Excess
    
    
    Ratio of AggregateRequired
    
    
    Net
    
    
    Net
    
    
    IndebtednessNet Capital
    
    
    Capital
    
    
    Capital
    
    
    to Net CapitaloptionsXpress, Inc.
    
    $
    371
    
    
    $
    6,889
    
    
    $
    6,518
    
    
    
    0.81 to 1brokersXpress LLC
    
    
    50
    
    
    
    308
    
    
    
    258
    
    
    
    0.29 to 1
  8. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reported net income
    
    $
    12,651
    
    
    $
    4,921
    
    
    $
    33,111
    
    
    $
    22,556Less income allocable to preferred stock
    
    
    
    
    
    
    1,593
    
    
    
    937
    
    
    
    7,257Adjusted net income applicable to
common stockholders
    
    $
    12,651
    
    
    $
    3,328
    
    
    $
    32,174
    
    
    $
    15,299Weighted-average number of common
shares outstanding  basic
    
    
    61,960
    
    
    
    38,021
    
    
    
    59,487
    
    
    
    38,304Effect of dilutive securities
    
    
    513
    
    
    
    19,361
    
    
    
    2,394
    
    
    
    19,517Weighted-average number of common
shares outstanding  diluted
    
    
    62,473
    
    
    
    57,382
    
    
    
    61,881
    
    
    
    57,821Basic EPS
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.40Diluted EPS
    
    $
    0.20
    
    
    $
    0.09
    
    
    $
    0.54
    
    
    $
    0.39
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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 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 relating to the registration of, and transfers of
accounts to, optionsXpress Canada;
    
    the statement that on a per trade basis, brokerage, clearing and other
related expenses generally decrease as the number of customer trades increase;
    
    the statements concerning continued financing options; and
    
    the statements regarding scalability of our systems and the cost of
increases.
 Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Results of OperationsTotal revenues (in thousands)
    
    $
    33,611
    
    
    $
    19,717
    
    
    $
    89,058
    
    
    $
    67,506Brokerage, clearing, and other related expenses
    
    
    11.7
    %
    
    
    18.3
    %
    
    
    12.1
    %
    
    
    15.6
    %Compensation and benefits
    
    
    11.4
    
    
    
    15.8
    
    
    
    11.1
    
    
    
    10.4Advertising
    
    
    3.9
    
    
    
    7.0
    
    
    
    4.6
    
    
    
    7.6Quotation services
    
    
    3.2
    
    
    
    4.3
    
    
    
    3.5
    
    
    
    3.8Depreciation and amortization
    
    
    1.7
    
    
    
    2.1
    
    
    
    1.9
    
    
    
    1.7Technology and telecommunication
    
    
    1.8
    
    
    
    2.1
    
    
    
    1.8
    
    
    
    1.3Other
    
    
    4.1
    
    
    
    7.5
    
    
    
    3.6
    
    
    
    3.7Income before income taxes
    
    
    62.2
    
    
    
    42.9
    
    
    
    61.4
    
    
    
    55.9Income taxes
    
    
    24.6
    
    
    
    17.9
    
    
    
    24.2
    
    
    
    22.5Net income
    
    
    37.6
    
    
    
    25.0
    
    
    
    37.2
    
    
    
    33.4
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Statistical Data
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Statistical DataNumber of customer accounts (1)
    
    
    147,900
    
    
    
    88,700
    
    
    
    147,900
    
    
    
    88,700Daily average revenue trades (DARTs) (2)
    
    
    20,600
    
    
    
    11,400
    
    
    
    18,100
    
    
    
    13,100Customer trades per account (3)
    
    
    38
    
    
    
    35
    
    
    
    37
    
    
    
    45Average commission per trade
    
    $
    17.94
    
    
    $
    20.55
    
    
    $
    18.67
    
    
    $
    21.33Option trades as a % of total trades
    
    
    75
    %
    
    
    80
    %
    
    
    75
    %
    
    
    79
    %Advertising expense per new customer account (4)
    
    $
    89
    
    
    $
    161
    
    
    $
    87
    
    
    $
    166Total client assets (000s)
    
    $
    3,077,485
    
    
    $
    1,626,296
    
    
    $
    3,077,485
    
    
    $
    1,626,296Client margin balances (000s)
    
    $
    108,008
    
    
    $
    62,496
    
    
    $
    108,008
    
    
    $
    62,496
 
 (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 total new customer accounts opened during the period. Quarter Ended September 30, 2005 versus September 30, 2004
 Overview
  
    
    total customer accounts increased by 59,200 to 147,900, or 66.7% from
September 30, 2004 to September 30, 2005;
    
    total trades increased by 591,000 to 1,319,000, or 81.2% for the quarter
ended September 30, 2005, from the comparable period in 2004; and
    
    average commissions per trade decreased by $2.61 to $17.94, or 12.7% for
the quarter ended September 30, 2005, from the comparable period in 2004.
 Total revenues
  Brokerage, clearing, and other related expenses
  11




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Compensation and benefits
  Advertising
  Quotation services
  Depreciation and amortization
  Technology and telecommunication
  Other
  Income taxes
  Net income
  Nine Months Ended September 30, 2005 versus September 30, 2004
 Overview
  
    
    total customer accounts increased by 59,200 to 147,900, or 66.7% from
September 30, 2004 to September 30, 2005;
 
    
    total trades increased by 953,700 to 3,413,900, or 38.8% for the nine
months ended September 30, 2005 from the comparable period in 2004; and
 12




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
    
    average commissions per trade decreased by $2.66 to $18.67, or 12.5%
for the nine months ended September 30, 2005 from the comparable period in 2004.
 Total revenues
  Brokerage, clearing, and other related expenses
  Compensation and benefits
  Advertising
  Quotation services
  Depreciation and amortization
  Technology and telecommunication
  Other
  13




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Income taxes
  Net income
  Liquidity and Capital Resources
  2 3
 2 3
 Cash Flow
    Capital Expenditures
 14




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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
 16




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Signatures
  Dated: November 10, 2005
    
    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)
 17