##### 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 June 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: 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
  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)
  June 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    15,709
    
    
    $
    10,258Cash segregated in compliance with federal regulations
    
    
    2,421
    
    
    
    585Short-term investments
    
    
    116,664
    
    
    
    95,275Receivables from brokers
    
    
    12,327
    
    
    
    11,765Security deposits
    
    
    570
    
    
    
    547Fixed assets, net of accumulated depreciation and amortization
    
    
    6,017
    
    
    
    4,088Other assets
    
    
    6,091
    
    
    
    3,655Investment in optionsXpress Australia Pty Limited
    
    
    549
    
    
    
    396Total assets
    
    $
    160,348
    
    
    $
    126,569Liabilities and stockholders equityLiabilities:Accounts payable and accrued liabilities
    
    $
    7,641
    
    
    $
    6,570Payables to customers
    
    
    1,803
    
    
    
    369Current income taxes payable
    
    
    
    
    
    
    2Net deferred income tax liabilities
    
    
    922
    
    
    
    1,109Total liabilities
    
    
    10,366
    
    
    
    8,050Stockholders equity:Common stock, $0.0001 par value, 250,000 shares authorized;
June 30, 2006  62,342 shares issued and outstanding,
December 31, 2005  62,101 shares issued and outstanding
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    91,834
    
    
    
    90,176Accumulated other comprehensive loss
    
    
    (21
    )
    
    
    (13
    )Retained earnings
    
    
    58,163
    
    
    
    28,350Total stockholders equity
    
    
    149,982
    
    
    
    118,519Total liabilities and stockholders equity
    
    $
    160,348
    
    
    $
    126,569
 See accompanying notes
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Commissions
    
    $
    32,365
    
    
    $
    20,573
    
    
    $
    64,452
    
    
    $
    40,082Other brokerage-related revenue
    
    
    8,430
    
    
    
    5,368
    
    
    
    17,394
    
    
    
    10,529Interest income
    
    
    6,420
    
    
    
    2,582
    
    
    
    11,648
    
    
    
    4,719Other income
    
    
    96
    
    
    
    58
    
    
    
    255
    
    
    
    117Total revenues
    
    
    47,311
    
    
    
    28,581
    
    
    
    93,749
    
    
    
    55,447Expenses:Brokerage, clearing and other related expenses
    
    
    5,900
    
    
    
    3,232
    
    
    
    11,627
    
    
    
    6,878Compensation and benefits
    
    
    5,083
    
    
    
    3,260
    
    
    
    9,890
    
    
    
    6,085Advertising
    
    
    1,676
    
    
    
    1,424
    
    
    
    3,552
    
    
    
    2,771Quotation services
    
    
    1,461
    
    
    
    939
    
    
    
    2,760
    
    
    
    2,013Depreciation and amortization
    
    
    805
    
    
    
    565
    
    
    
    1,525
    
    
    
    1,087Technology and telecommunication
    
    
    713
    
    
    
    539
    
    
    
    1,426
    
    
    
    1,029Other
    
    
    2,199
    
    
    
    1,121
    
    
    
    3,892
    
    
    
    1,841Total expenses
    
    
    17,837
    
    
    
    11,080
    
    
    
    34,672
    
    
    
    21,704Income before income taxes
    
    
    29,474
    
    
    
    17,501
    
    
    
    59,077
    
    
    
    33,743Income taxes
    
    
    11,476
    
    
    
    6,845
    
    
    
    23,034
    
    
    
    13,283Net income
    
    $
    17,998
    
    
    $
    10,656
    
    
    $
    36,043
    
    
    $
    20,460Earnings per common share:Basic
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.58
    
    
    $
    0.34Diluted
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.58
    
    
    $
    0.33Weighted-average number of common shares:Basic
    
    
    62,319
    
    
    
    61,845
    
    
    
    62,266
    
    
    
    58,269Diluted
    
    
    62,611
    
    
    
    62,474
    
    
    
    62,606
    
    
    
    61,623
 See accompanying notes.
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
  Six Months EndedJune 30, 2006
    
    
    June 30, 2005Operating activitiesNet income
    
    $
    36,043
    
    
    $
    20,460Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    1,525
    
    
    
    1,087Stock-based compensation
    
    
    567
    
    
    
    1Net deferred income taxes
    
    
    (187
    )
    
    
    (163
    )Gain on investment in optionsXpress Australia Pty Limited
    
    
    (208
    )
    
    
    (95
    )Changes in operating assets and liabilities:(Increase) decrease in:Cash segregated in compliance with federal regulations
    
    
    (1,836
    )
    
    
    Receivable from brokers
    
    
    (562
    )
    
    
    (1,079
    )Security deposits
    
    
    (23
    )
    
    
    Other assets
    
    
    (346
    )
    
    
    834Increase (decrease) in:Accounts payable and accrued liabilities
    
    
    1,071
    
    
    
    36Payables to customers
    
    
    1,434
    
    
    
    Current income taxes payable
    
    
    (1,086
    )
    
    
    (1,356
    )Net cash provided by operating activities
    
    
    36,392
    
    
    
    19,725Investing activitiesLoans to affiliates and non-affiliates
    
    
    (972
    )
    
    
    (98
    )Purchases of short-term investments
    
    
    (34,950
    )
    
    
    (124,828
    )Proceeds from sales and maturities of short-term investments
    
    
    13,573
    
    
    
    114,195Purchases and development of computer software
    
    
    (1,244
    )
    
    
    (689
    )Purchases of fixed assets
    
    
    (2,210
    )
    
    
    (662
    )Net cash used in investing activities
    
    
    (25,803
    )
    
    
    (12,082
    )Financing activitiesExercise of stock options
    
    
    568
    
    
    
    471Purchases through employee stock purchase plan
    
    
    14
    
    
    
    Excess tax benefit for stock-based compensation
    
    
    511
    
    
    
    Dividends paid
    
    
    (6,231
    )
    
    
    (33,500
    )Proceeds from initial public offering
    
    
    
    
    
    
    76,725Direct costs of capital raised
    
    
    
    
    
    
    (1,885
    )Net cash (used in) provided by financing activities
    
    
    (5,138
    )
    
    
    41,811Net increase in cash and cash equivalents
    
    
    5,451
    
    
    
    49,454Cash and cash equivalents, beginning of period
    
    
    10,258
    
    
    
    24,759Cash and cash equivalents, end of period
    
    $
    15,709
    
    
    $
    74,213Supplemental cash flow information:Income taxes paid
    
    $
    23,784
    
    
    $
    14,767Interest paid
    
    
    6
    
    
    
    9Supplemental disclosure of non-cash activity:Non-cash unrealized gain (loss) on short-term investments
    
    $
    12
    
    
    $
    (7
    )Non-cash foreign currency translation
    
    
    (21
    )
    
    
    (5
    )
 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 Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Dividend yield
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Expected volatility
    
    
    48
    %
    
    
    41
    %
    
    
    48
    %
    
    
    41
    %Risk-free interest rate
    
    
    5.00
    %
    
    
    3.98
    %
    
    
    5.00
    %
    
    
    3.98
    %Expected life of option (in months)
    
    
    90
    
    
    
    60
    
    
    
    90
    
    
    
    60
   Three months
    
    
    Six monthsended
    
    
    endedJune 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    10,656
    
    
    $
    20,460Deduct  Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax
    
    
    83
    
    
    
    162Pro forma net income
    
    
    10,573
    
    
    
    20,298Less income allocable to preferred stock
    
    
    
    
    
    
    871Pro forma net income applicable to common stockholders
    
    $
    10,573
    
    
    $
    19,427Income per share:Basic, as reported
    
    $
    0.17
    
    
    $
    0.34Basic, pro forma
    
    
    0.17
    
    
    
    0.33Diluted, as reported
    
    
    0.17
    
    
    
    0.33Diluted, pro forma
    
    
    0.17
    
    
    
    0.33
 4. Guarantees
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5. Capitalization
 Common Stock
    Preferred Stock
   Dividends
     6. Regulatory Requirements
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June 30, 2006Excess
    
    Ratio of AggregateRequired
    
    Net
    
    Net
    
    IndebtednessNet Capital
    
    Capital
    
    Capital
    
    to Net CapitaloptionsXpress, Inc.
    
    $
    472
    
    
    $
    8,204
    
    
    $
    7,732
    
    
    
    0.86 to 1brokersXpress LLC
    
    
    76
    
    
    
    1,140
    
    
    
    1,064
    
    
    
    1.00 to 1
 June 30, 2005Excess
    
    Ratio of AggregateRequired
    
    Net
    
    Net
    
    IndebtednessNet Capital
    
    Capital
    
    Capital
    
    to Net CapitaloptionsXpress, Inc.
    
    $
    467
    
    
    $
    4,451
    
    
    $
    3,984
    
    
    
    1.65 to 1brokersXpress LLC
    
    
    50
    
    
    
    534
    
    
    
    484
    
    
    
    0.41 to 1
  7. Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Reported net income
    
    $
    17,998
    
    
    $
    10,656
    
    
    $
    36,043
    
    
    $
    20,460Less income allocable to preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    878Adjusted net income applicable to
common stockholders
    
    $
    17,998
    
    
    $
    10,656
    
    
    $
    36,043
    
    
    $
    19,582Weighted-average number of common shares
outstanding  basic
    
    
    62,319
    
    
    
    61,845
    
    
    
    62,266
    
    
    
    58,269Effect of dilutive securities
    
    
    292
    
    
    
    629
    
    
    
    340
    
    
    
    3,354Weighted-average number of common
shares outstanding  diluted
    
    
    62,611
    
    
    
    62,474
    
    
    
    62,606
    
    
    
    61,623Basic EPS
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.58
    
    
    $
    0.34Diluted EPS
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.58
    
    
    $
    0.33
 
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of
Operations
 FORWARD-LOOKING STATEMENTS
  9




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
    
    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;
    
    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
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Results of OperationsTotal revenues (in thousands)
    
    $
    47,311
    
    
    $
    28,581
    
    
    $
    93,749
    
    
    $
    55,447Brokerage, clearing, and other related expenses
    
    
    12.5
    %
    
    
    11.3
    %
    
    
    12.4
    %
    
    
    12.4
    %Compensation and benefits
    
    
    10.7
    
    
    
    11.4
    
    
    
    10.5
    
    
    
    11.0Advertising
    
    
    3.6
    
    
    
    5.0
    
    
    
    3.8
    
    
    
    5.0Quotation services
    
    
    3.1
    
    
    
    3.3
    
    
    
    3.0
    
    
    
    3.6Depreciation and amortization
    
    
    1.7
    
    
    
    2.0
    
    
    
    1.6
    
    
    
    2.0Technology and telecommunication
    
    
    1.5
    
    
    
    1.9
    
    
    
    1.5
    
    
    
    1.9Other
    
    
    4.6
    
    
    
    3.9
    
    
    
    4.2
    
    
    
    3.3Income before income taxes
    
    
    62.3
    
    
    
    61.2
    
    
    
    63.0
    
    
    
    60.8Income taxes
    
    
    24.3
    
    
    
    23.9
    
    
    
    24.6
    
    
    
    23.9Net income
    
    
    38.0
    
    
    
    37.3
    
    
    
    38.4
    
    
    
    36.9
 Statistical Data
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2006Statistical DataNumber of customer accounts (1)
    
    
    194,300
    
    
    
    133,200
    
    
    
    194,300
    
    
    
    133,200Daily average revenue trades (DARTs) (2)
    
    
    28,500
    
    
    
    17,000
    
    
    
    28,900
    
    
    
    16,800Customer trades per account (3)
    
    
    38
    
    
    
    35
    
    
    
    41
    
    
    
    36Average commission per trade
    
    $
    18.05
    
    
    $
    18.90
    
    
    $
    17.82
    
    
    $
    19.13Option trades as a % of total trades
    
    
    74
    %
    
    
    76
    %
    
    
    74
    %
    
    
    76
    %Advertising expense per net new customer account (4)
    
    $
    107
    
    
    $
    86
    
    
    $
    109
    
    
    $
    86Total client assets (000s)
    
    $
    4,127,338
    
    
    $
    2,551,852
    
    
    $
    4,127,338
    
    
    $
    2,551,852Client margin balances (000s)
    
    $
    141,315
    
    
    $
    97,514
    
    
    $
    141,315
    
    
    $
    97,514
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(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 customer
accounts during the period. Customer trades are annualized.(4)
    
    Calculated based on net new customer accounts opened during the period. Three Months Ended June 30, 2006 versus June 30, 2005
 Overview
  
    
    total customer accounts increased by 61,100 to 194,300, or 46%;
    
    total trades increased by 704,700 to 1,793,400, or 65%; and
    
    average commission per trade decreased by $0.85 to $18.05, or 4%.
 Total revenues
  Brokerage, clearing, and other related expenses
  Compensation and benefits
  Advertising
  Quotation services
  11




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Depreciation and amortization
  Technology and telecommunication
  Other
  Income taxes
  Net income
  Six Months Ended June 30, 2006 versus June 30, 2005
 Overview
  
    
    total customer accounts increased by 61,100 to 194,300, or 46%;
    
    total trades increased by 1,522,900 to 3,617,800, or 73%; and
    
    average commission per trade decreased by $1.31 to $17.82, or 7%.
 Total revenues
  Brokerage, clearing, and other related expenses
  12




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Compensation and benefits
  Advertising
  Quotation services
  Depreciation and amortization
  Technology and telecommunication
  Other
  Income taxes
  Net income
  Liquidity and Capital Resources
   13




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Cash Flow
    Capital Expenditures
  
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    14




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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
  Item 4.  Submission of Matters to a Vote of Security Holders
  15




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Name of Nominee
    
    FOR
    
    
    WITHHELDBruce Evans
    
    
    58,135,391
    
    
    
    821,257
  ABSTENTIONSAND BROKERFOR
    
    AGAINST
    
    
    NON-VOTES58,883,002
    
    
    94,990
    
    
    
    8,656
 
 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: August 14, 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)
 17