##### 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, 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: 001-32419
 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
  Large accelerated filer  o
    
    Accelerated filer  o
    
    Non-accelerated filer  þ
 o þ




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##### 



Part I  FINANCIAL INFORMATION
    
    
    3Item 1.  Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Statements of Financial Condition
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.  Controls and Procedures
    
    
    16Part II  OTHER INFORMATION
    
    
    16Item 1.  Legal Proceedings
    
    
    16Item 6.  Exhibits
    
    
    17EX-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 CFOSignaturesCertificationCertificationCertification
  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 31,2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    14,685
    
    
    $
    10,258Short-term investments
    
    
    117,250
    
    
    
    95,275Cash segregated in compliance with federal regulations
    
    
    239,717
    
    
    
    585Receivables from brokerage customers, net of allowance for doubtful accounts
    
    
    126,351
    
    
    
    Receivables from brokers, dealers and clearing organizations
    
    
    32,690
    
    
    
    11,765Deposits with clearing organizations
    
    
    26,915
    
    
    
    Fixed assets, net
    
    
    6,648
    
    
    
    4,088Other assets
    
    
    6,636
    
    
    
    4,598Total assets
    
    $
    570,892
    
    
    $
    126,569Liabilities and stockholders equityLiabilities:Payables to brokerage customers
    
    $
    381,791
    
    
    $
    369Payables to brokers, dealers and clearing organizations
    
    
    11,516
    
    
    
    Accounts payable and accrued liabilities
    
    
    10,803
    
    
    
    6,570Current and deferred income taxes
    
    
    2,869
    
    
    
    1,111Total liabilities
    
    
    406,979
    
    
    
    8,050Stockholders equity:Common stock, $0.0001 par value, 250,000 shares authorized; September 30,
2006  62,375 shares issued and outstanding, December 31, 2005  62,101
shares issued and outstanding
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    92,593
    
    
    
    90,176Accumulated other comprehensive income (loss)
    
    
    8
    
    
    
    (13
    )Retained earnings
    
    
    71,306
    
    
    
    28,350Total stockholders equity
    
    
    163,913
    
    
    
    118,519Total liabilities and stockholders equity
    
    $
    570,892
    
    
    $
    126,569
 See accompanying notes
 3




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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Commissions
    
    $
    28,363
    
    
    $
    23,669
    
    
    $
    92,815
    
    
    $
    63,751Other brokerage-related revenue
    
    
    7,909
    
    
    
    6,177
    
    
    
    25,303
    
    
    
    16,706Net interest income
    
    
    7,513
    
    
    
    3,696
    
    
    
    19,161
    
    
    
    8,415Other income
    
    
    52
    
    
    
    69
    
    
    
    307
    
    
    
    186Total revenues
    
    
    43,837
    
    
    
    33,611
    
    
    
    137,586
    
    
    
    89,058Expenses:Brokerage, clearing and other related expenses
    
    
    5,292
    
    
    
    3,931
    
    
    
    16,919
    
    
    
    10,809Compensation and benefits
    
    
    5,566
    
    
    
    3,821
    
    
    
    15,456
    
    
    
    9,906Advertising
    
    
    1,751
    
    
    
    1,312
    
    
    
    5,303
    
    
    
    4,083Quotation services
    
    
    1,475
    
    
    
    1,063
    
    
    
    4,235
    
    
    
    3,076Depreciation and amortization
    
    
    915
    
    
    
    590
    
    
    
    2,440
    
    
    
    1,677Technology and telecommunications
    
    
    713
    
    
    
    600
    
    
    
    2,139
    
    
    
    1,629Other
    
    
    1,724
    
    
    
    1,392
    
    
    
    5,616
    
    
    
    3,233Total expenses
    
    
    17,436
    
    
    
    12,709
    
    
    
    52,108
    
    
    
    34,413Income before income taxes
    
    
    26,401
    
    
    
    20,902
    
    
    
    85,478
    
    
    
    54,645Income taxes
    
    
    10,139
    
    
    
    8,251
    
    
    
    33,173
    
    
    
    21,534Net income
    
    $
    16,262
    
    
    $
    12,651
    
    
    $
    52,305
    
    
    $
    33,111Earnings per common share:Basic
    
    $
    0.26
    
    
    $
    0.20
    
    
    $
    0.84
    
    
    $
    0.54Diluted
    
    $
    0.26
    
    
    $
    0.20
    
    
    $
    0.84
    
    
    $
    0.54Weighted-average number of common shares:Basic
    
    
    62,360
    
    
    
    61,960
    
    
    
    62,298
    
    
    
    59,487Diluted
    
    
    62,600
    
    
    
    62,473
    
    
    
    62,605
    
    
    
    61,881
 See accompanying notes.
 4




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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Operating activitiesNet income
    
    $
    52,305
    
    
    $
    33,111Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    2,440
    
    
    
    1,677Stock-based compensation
    
    
    1,023
    
    
    
    24Net deferred income taxes
    
    
    (400
    )
    
    
    120Gain on investment in optionsXpress Australia Pty. Limited
    
    
    (37
    )
    
    
    (141
    )Changes in operating assets and liabilities:(Increase) decrease in:Cash segregated in compliance with federal regulations
    
    
    (239,132
    )
    
    
    Receivables from brokerage customers, net of allowance for
doubtful accounts
    
    
    (126,351
    )
    
    
    Receivables from brokers, dealers and clearing organizations
    
    
    (20,925
    )
    
    
    (1,344
    )Deposits with clearing organizations
    
    
    (26,915
    )
    
    
    Other assets
    
    
    (893
    )
    
    
    443Increase (decrease) in:Payables to brokerage customers
    
    
    381,422
    
    
    
    Payables to brokers, dealers and clearing organizations
    
    
    11,516
    
    
    
    Accounts payable and accrued liabilities
    
    
    4,233
    
    
    
    1,044Current income taxes payable
    
    
    2,158
    
    
    
    (889
    )Net cash provided by operating activities
    
    
    40,444
    
    
    
    34,045Investing activitiesLoans to affiliates and non-affiliates
    
    
    (972
    )
    
    
    (2,098
    )Cash used in business acquisition
    
    
    (79
    )
    
    
    Purchases of short-term investments
    
    
    (62,600
    )
    
    
    (200,372
    )Proceeds from sales and maturities of short-term investments
    
    
    40,649
    
    
    
    118,812Purchases and development of computer software
    
    
    (1,710
    )
    
    
    (928
    )Purchases of fixed assets
    
    
    (3,290
    )
    
    
    (889
    )Net cash used in investing activities
    
    
    (28,002
    )
    
    
    (85,475
    )Financing activitiesExercise of stock options
    
    
    701
    
    
    
    765Purchases through employee stock purchase plan
    
    
    11
    
    
    
    Excess tax benefit for stock-based compensation
    
    
    623
    
    
    
    Dividends paid
    
    
    (9,350
    )
    
    
    (38,455
    )Proceeds from initial public offering
    
    
    
    
    
    
    76,725Direct costs of capital raised
    
    
    
    
    
    
    (1,885
    )Net cash provided by (used in) financing activities
    
    
    (8,015
    )
    
    
    37,150Net increase (decrease) in cash and cash equivalents
    
    
    4,427
    
    
    
    (14,280
    )Cash and cash equivalents, beginning of period
    
    
    10,258
    
    
    
    24,759Cash and cash equivalents, end of period
    
    $
    14,685
    
    
    $
    10,479Supplemental cash flow information:Income taxes paid
    
    $
    30,778
    
    
    $
    22,267Interest paid
    
    
    8
    
    
    
    13Supplemental disclosure of non-cash activity:Non-cash unrealized gain (loss) on short-term investments
    
    $
    24
    
    
    $
    (14
    )Non-cash foreign currency translation
    
    
    (3
    )
    
    
    1
 See accompanying notes.
 5




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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
  Commencement of Self-Clearing Operations
 2. Summary of Significant Accounting Policies
   6




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##### Table of Contents



Net Interest Income
 Stock-Based Employee Compensation
 Short-Term Investments
 Cash Segregated in Compliance with Federal Regulations
 Securities Borrowed
 Fixed Assets
 Customer Transactions
 3. Stock-Based Compensation
    7




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Dividend yield
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Expected volatility
    
    
    45
    %
    
    
    30
    %
    
    
    45
    %
    
    
    30
    %Risk-free interest rate
    
    
    4.50
    %
    
    
    4.18
    %
    
    
    4.50
    %
    
    
    4.18
    %Expected life of option (in months)
    
    
    90
    
    
    
    60
    
    
    
    90
    
    
    
    60
   Three months
    
    
    Nine monthsended
    
    
    endedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    12,651
    
    
    $
    33,111Deduct  Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax
    
    
    86
    
    
    
    247Pro forma net income
    
    
    12,565
    
    
    
    32,864Less income allocable to preferred stock
    
    
    
    
    
    
    930Pro forma net income applicable to common stockholders
    
    $
    12,565
    
    
    $
    31,934Income per share:Basic, as reported
    
    $
    0.20
    
    
    $
    0.54Basic, pro forma
    
    
    0.20
    
    
    
    0.54Diluted, as reported
    
    
    0.20
    
    
    
    0.54Diluted, pro forma
    
    
    0.20
    
    
    
    0.54
 4. Guarantees
     8




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5. Capitalization
 Common Stock
   Preferred Stock
  Dividends
      6. Cash Segregated in Compliance with Federal Regulations
  7. Receivables from Brokerage Customers, Net of Allowance for Doubtful Accounts
  9




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8. Receivables from and Payables to Brokers, Dealers, and Clearing Organizations
   September 30,
    
    
    December 31,2006
    
    
    2005Receivables from unsettled securities transactions
    
    $
    3,396
    
    
    $
    Securities borrowed from other broker-dealers
    
    
    19,378
    
    
    
    Fees and commissions receivable from clearing agents and other broker-dealers
    
    
    9,916
    
    
    
    $
    32,690
    
    
    $
    
  9. Payables to Brokerage Customers
  10. Regulatory Requirements
    11. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Reported net income
    
    $
    16,262
    
    
    $
    12,651
    
    
    $
    52,305
    
    
    $
    33,111Less income allocable to preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    937Adjusted net income applicable to
common stockholders
    
    $
    16,262
    
    
    $
    12,651
    
    
    $
    52,305
    
    
    $
    32,174Weighted-average number of common
shares outstanding  basic
    
    
    62,360
    
    
    
    61,960
    
    
    
    62,298
    
    
    
    59,487Effect of dilutive securities
    
    
    240
    
    
    
    513
    
    
    
    307
    
    
    
    2,394Weighted-average number of common
shares outstanding  diluted
    
    
    62,600
    
    
    
    62,473
    
    
    
    62,605
    
    
    
    61,881Basic EPS
    
    $
    0.26
    
    
    $
    0.20
    
    
    $
    0.84
    
    
    $
    0.54Diluted EPS
    
    $
    0.26
    
    
    $
    0.20
    
    
    $
    0.84
    
    
    $
    0.54
 10




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12. Recent Accounting Pronouncements
  
 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 move to self-clearing;
    
    the statements concerning continued financing options; and
    
    the statements regarding scalability of our systems and the cost of increases.
 Recent Developments
  11




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Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Results of OperationsTotal revenues (in thousands)
    
    $
    43,837
    
    
    $
    33,611
    
    
    $
    137,586
    
    
    $
    89,058Brokerage, clearing, and other related expenses
    
    
    12.1
    %
    
    
    11.7
    %
    
    
    12.3
    %
    
    
    12.1
    %Compensation and benefits
    
    
    12.7
    
    
    
    11.4
    
    
    
    11.2
    
    
    
    11.1Advertising
    
    
    4.0
    
    
    
    3.9
    
    
    
    3.9
    
    
    
    4.6Quotation services
    
    
    3.4
    
    
    
    3.2
    
    
    
    3.1
    
    
    
    3.5Depreciation and amortization
    
    
    2.1
    
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.9Technology and telecommunication
    
    
    1.6
    
    
    
    1.8
    
    
    
    1.5
    
    
    
    1.8Other
    
    
    3.9
    
    
    
    4.1
    
    
    
    4.1
    
    
    
    3.6Income before income taxes
    
    
    60.2
    
    
    
    62.2
    
    
    
    62.1
    
    
    
    61.4Income taxes
    
    
    23.1
    
    
    
    24.6
    
    
    
    24.1
    
    
    
    24.2Net income
    
    
    37.1
    
    
    
    37.6
    
    
    
    38.0
    
    
    
    37.2
 Statistical Data
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Statistical DataNumber of customer accounts (1)
    
    
    196,400
    
    
    
    147,900
    
    
    
    196,400
    
    
    
    147,900Daily average revenue trades (DARTs) (2)
    
    
    24,100
    
    
    
    20,600
    
    
    
    27,300
    
    
    
    18,100Customer trades per account (3)
    
    
    32
    
    
    
    38
    
    
    
    39
    
    
    
    37Average commission per trade
    
    $
    18.84
    
    
    $
    17.94
    
    
    $
    18.12
    
    
    $
    18.67Option trades as a % of total trades
    
    
    75
    %
    
    
    75
    %
    
    
    74
    %
    
    
    75
    %Advertising expense per net new customer
account (4)
    
    $
    130
    
    
    $
    89
    
    
    $
    115
    
    
    $
    87Total client assets (000s)
    
    $
    4,263,623
    
    
    $
    3,077,485
    
    
    $
    4,263,623
    
    
    $
    3,077,485Client margin balances (000s)
    
    $
    120,261
    
    
    $
    108,008
    
    
    $
    120,261
    
    
    $
    108,008
 
 (1)
    
    Customer accounts are open, numbered accounts. In connection with our conversion to self-clearing, based on
additional information we have identified approximately 11,400 accounts that fit our criteria for
inactivity. These accounts were previously included in the Open Account total, most of which were opened
in 2004 or earlier. All such accounts have been removed from Open
Accounts for the three month period ending September 30,
2006. Prior periods have not been restated.(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 customer accounts during the
period. Customer trades are annualized.(4)
    
    Calculated based on net new customer accounts opened during the period. Three Months Ended September 30, 2006 versus September 30, 2005  Overview
  
    
    total customer accounts increased by 48,500 to 196,400, or 33%;
    
    total trades increased by 186,500 to 1,505,500, or 14%; and
    
    average commission per trade increased by $0.90 to $18.84, or 5%.
 12




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Total revenues
 Brokerage, clearing, and other related expenses
 Compensation and benefits
 Advertising
 Quotation services
 Depreciation and amortization
 Technology and telecommunication
 Other
 Income taxes
 Net income
 Nine Months Ended September 30, 2006 versus September 30, 2005  Overview
  13




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
    
    total customer accounts increased by 48,500 to 196,400, or 33%;
    
    total trades increased by 1,709,400 to 5,123,300, or 50%; and
    
    average commission per trade decreased by $0.55 to $18.12, or 3%.
 Total revenues
 Brokerage, clearing, and other related expenses
 Compensation and benefits
 Advertising
 Quotation services
 Depreciation and amortization
 Technology and telecommunication
 Other
 14




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Income taxes
 Net income
 Liquidity and Capital Resources
     Cash Flow
   Capital Expenditures
 
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
  15




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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
  16




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Item 6.  Exhibits
 
  
  
  17




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##### Table of Contents



Signatures
  Dated: November 14, 2006
    optionsXpress Holdings, Inc.
(Registrant)By:
    /s/ David S. KaltDavid S. KaltChief Executive Officer (Principal Executive Officer)By:
    /s/ David A. FisherDavid A. FisherChief Financial Officer (Principal Financial and Accounting
Officer) 18