SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the Quarterly Period Ended March 31, 2011
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OR
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the transition period from
to
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Commission file number: 001-32419
optionsXpress Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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20-1444525
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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311 W. Monroe, Suite 1000, Chicago, Illinois
60606
(Address of principal executive offices)
(Zip Code)
(312) 630-3300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months,
and (2) has been subject to such filing requirements for the past ninety days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuit to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve
months (or for such shorter period that the registrant was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
As of May 2, 2011, there were 57,476,090 outstanding shares of the registrants Common Stock.
Part I FINANCIAL INFORMATION
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Item 1.
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Condensed Consolidated Financial Statements
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optionsXpress Holdings, Inc.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except per share data)
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March 31,
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December 31,
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2011
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2010
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ASSETS
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Cash and cash equivalents
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$
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106,441
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$
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100,875
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Cash and investments segregated in compliance with federal regulations
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1,097,941
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945,870
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Receivables from brokerage customers, net
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241,862
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235,589
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Receivables from brokers, dealers and clearing organizations
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21,609
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25,686
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Investments in securities
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11,344
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11,442
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Deposits with clearing organizations
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21,780
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20,480
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Fixed assets, (net of accumulated depreciation and amortization of
$28,623 and $26,904 at March 31, 2011 and December 31, 2010,
respectively)
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10,966
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11,345
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Goodwill
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85,360
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85,360
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Other intangible assets, net
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4,470
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4,837
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Other assets
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33,913
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31,434
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Total assets
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$
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1,635,686
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$
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1,472,918
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LIABILITIES AND STOCKHOLDERS EQUITY
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Payables to brokerage customers
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$
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1,338,638
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$
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1,193,479
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Payables to brokers, dealers and clearing organizations
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3,123
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1,711
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Accrued liabilities and accounts payable
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21,690
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19,471
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Current and deferred income taxes
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7,534
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651
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Other liabilities
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29,992
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32,521
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Long-term debt
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115,200
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120,000
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Total liabilities
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1,516,177
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1,367,833
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Stockholders equity
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Common stock, $0.0001 par value (250,000 shares authorized; 57,466 and
57,475 shares issued and outstanding at March 31, 2011 and December 31,
2010, respectively)
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6
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6
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Preferred stock, $0.0001 par value (75,000 shares authorized; none issued)
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Additional paid-in capital
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15,583
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15,642
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Accumulated other comprehensive loss
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(628
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)
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(859
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Non-controlling interests
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209
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185
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Retained earnings
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104,339
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90,111
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Total stockholders equity
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119,509
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105,085
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Total liabilities and stockholders equity
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$
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1,635,686
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$
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1,472,918
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See accompanying notes.
3
optionsXpress Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
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Three Months Ended
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March 31,
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2011
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2010
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Revenues:
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Commissions
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$
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45,396
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$
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39,598
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Other brokerage-related revenue
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5,851
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4,498
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Interest revenue and fees
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4,283
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4,767
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Interest expense
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(70
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)
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(51
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Net interest revenue and fees
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4,213
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4,716
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Education revenue
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5,383
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7,530
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Other income
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5,054
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689
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Net revenues
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65,897
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57,031
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Expenses:
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Compensation and benefits
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12,321
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11,648
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Brokerage, clearing and other related expenses
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9,744
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9,018
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Brokerage advertising
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5,383
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4,369
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Education marketing and fulfillment
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3,043
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5,295
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Depreciation and amortization
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2,166
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2,291
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Loan interest and fees
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1,013
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Other general and administrative
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9,982
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5,559
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Total expenses
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43,652
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38,180
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Income before income taxes of consolidated companies
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22,245
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18,851
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Income taxes
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7,993
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6,946
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Net income of consolidated companies
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14,252
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11,905
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Net income attributable to non-controlling interests
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24
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17
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Net income
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$
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14,228
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$
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11,888
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Earnings per common share:
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Basic
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$
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0.25
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$
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0.21
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Diluted
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$
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0.25
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$
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0.21
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Weighted-average number of common shares:
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Basic
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57,465
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57,465
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Diluted
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57,793
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57,655
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Dividends declared per share
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$
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$
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See accompanying notes.
4
optionsXpress Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands, except per share data)
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Three Months Ended
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March 31,
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March 31,
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2011
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2010
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Operating activities
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Net income
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$
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14,228
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$
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11,888
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Adjustments to reconcile net income to cash provided by (used in) operating activities:
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Depreciation and amortization
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2,166
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2,291
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Stock-based compensation
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1,391
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1,341
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Reduction of tax benefit for stock-based compensation
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(174
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)
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(4
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Deferred income taxes
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(68
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)
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110
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(Decrease) Increase in contingent liability
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(4,064
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)
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203
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Unrealized (gain) loss, deferred rent and other
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(96
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739
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Changes in operating assets and liabilities:
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(Increase) decrease in:
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Cash and investments segregated in compliance with federal regulations
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(152,071
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28,469
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Receivables from brokerage customers, net
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(6,273
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(55,697
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Receivables from brokers, dealers and clearing organizations
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4,077
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76,963
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Investments in securities
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7,000
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Deposits with clearing organizations
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(1,300
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)
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9,807
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Other assets
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(2,325
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(22,195
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Increase (decrease) in:
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Payables to brokerage customers
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145,159
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(95,102
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Payables to brokers, dealers and clearing organizations
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1,412
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1,830
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Accrued liabilities and accounts payable
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1,924
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(1,732
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)
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Current income taxes
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7,205
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5,879
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Other liabilities
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1,472
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17,139
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Net cash provided by (used in) operating activities
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12,663
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(11,071
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Investing activities
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Purchases and development of computer software
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(1,063
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(1,006
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Purchases of fixed assets
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(287
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)
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(374
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)
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Net cash used in investing activities
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(1,350
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(1,380
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Financing activities
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Payment of long-term debt
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(4,800
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)
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Exercise of stock options
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329
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65
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Excess tax benefit for stock-based compensation
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174
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4
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Stock repurchases
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(1,560
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)
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(2,874
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Net cash used in financing activities
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(5,857
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(2,805
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Effect of exchange rates on cash and cash equivalents
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110
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(27
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)
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Net increase (decrease) in cash and cash equivalents
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5,566
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(15,283
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)
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Cash and cash equivalents, beginning of period
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100,875
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178,989
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Cash and cash equivalents, end of period
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$
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106,441
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$
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163,706
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Supplemental disclosure of cash flow information:
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Income taxes paid
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$
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821
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$
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726
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Interest paid
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927
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51
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Supplemental disclosure of non-cash activity:
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Non-cash foreign currency translation gain
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46
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142
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Non-cash change in unrealized gain on available for sale investments in securities
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366
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112
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See accompanying notes.
5
optionsXpress Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data)
1. Basis of Presentation and Nature of Operations
Basis of Presentation
The condensed consolidated financial statements include the accounts of optionsXpress Holdings,
Inc. and its subsidiaries (collectively, the Company). All significant intercompany balances
and transactions have been eliminated in consolidation.
The Company follows United States generally accepted accounting principles (GAAP) including
certain accounting guidance used by the brokerage industry. Certain notes and other information
normally included in financial statements prepared in accordance with United States GAAP have
been condensed or omitted. The accompanying condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes to the consolidated
financial statements included in the Annual Report on Form 10-K of the Company for the year
ended December 31, 2010.
In the opinion of management, all adjustments necessary to present fairly the Companys
consolidated financial position at March 31, 2011 and the consolidated results of operations
and cash flows for each of the periods presented have been recorded. The
results of operations and cash flows for an interim period are not necessarily indicative of
the results of operations or cash flows that may be reported for the year or any subsequent
period.
Nature of Operations
The Companys principal business segments include broker services and education services.
The Companys brokerage services segment provides internet-based options, stock, bond, mutual
fund and futures brokerage services to retail customers located throughout the United States
and certain foreign countries. Except for trades placed by its Canadian customers, all
securities trades are cleared through the Companys internal self-clearing operations. The
Company clears its futures accounts transactions as a non-clearing futures commission merchant
through an omnibus account arrangement with several futures commission merchants.
optionsXpress, Inc. is a broker-dealer registered with the Securities and Exchange Commission
(SEC) and is a member of the Financial Industry Regulatory Authority Inc. (FINRA), the
Securities Investor Protection Corporation (SIPC), the National Securities Clearing
Corporation and the Depository Trust Company (together, the Depository Trust & Clearing
Corporation or DTCC), and the Options Clearing Corporation (OCC). optionsXpress, Inc. is
also a member of various exchanges, including the Chicago Board Options Exchange (CBOE), the
International Securities Exchange, the BATS Exchange, the NYSE Amex Options Exchange, the
NASDAQ Options Market, the NYSE Arca Exchange, and the NASDAQ OMX PHLX Exchange. brokersXpress
LLC is a broker-dealer registered with the SEC and a member of FINRA and SIPC. In addition,
optionsXpress, Inc., brokersXpress LLC and Open E Cry, LLC (OEC, formerly known as Open E
Cry) are registered with the Commodity Futures Trading Commission (CFTC) and are members of
the National Futures Association (NFA). optionsXpress Canada Corp. is provincially registered
and registered with the Investment Industry Regulatory Organization of Canada. optionsXpress
Singapore Pte. Ltd. is registered with and licensed by the Monetary Authority of Singapore.
optionsXpress Europe, B.V. is registered with and licensed by the Netherlands Authority for the
Financial Markets and has obtained passport licensure in various European Union countries.
optionsXpress Australia Pty Limited is registered with and licensed by the Australian
Securities & Investments Commission. In March 2011, optionsXpress, Inc. applied to the NFA to
become registered as a Retail Foreign Exchange Dealer (RFED).
The Companys education services segment offers a full range of education products and services
which cover a broad range of financial products including stock, market analysis, options,
foreign exchange and financial planning. The education services business is conducted through
the Companys Optionetics, Inc., a subsidiary of the Company and its affiliates (collectively,
Optionetics).
2. Summary of Significant Accounting Policies
Except as described in the following paragraph, there have been no changes in the significant
accounting policies from those included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2010.
6
Fair Value of Financial Instruments
In January 2010, the FASB issued Accounting Standards
Update (ASU) 2010-06,
Improving Disclosures about Fair Value Measurements
(ASU 2010-06).
ASU 2010-06 amends ASC 820,
Fair Value Measurements and Disclosures
(ASC 820)
,
by requiring
additional disclosures regarding fair value measurements. As a supplement to the additional
required fair value measurement disclosures regarding assets and liabilities that were
effective for the Companys fiscal year beginning January 1, 2010, FASB requires further
disclosures effective for fiscal periods beginning after December 15, 2010. Specifically, the
additional amendment requires the purchases, sales, issuances and settlements of Level 3 assets
and liabilities to be shown on a gross basis in a roll forward table. This amendment to ASU
2010-06 is effective for the Companys fiscal year beginning January 1, 2011. The adoption of
ASU 2010-06 did not have a material impact on the Companys condensed consolidated financial
statements.
3. The Charles Schwab Corporation Merger
On March 18, 2011, optionsXpress Holdings, Inc. (optionsXpress) entered into an Agreement and
Plan of Merger (the Merger Agreement) by and among optionsXpress, The Charles Schwab Corporation,
a Delaware corporation (Schwab), and Neon Acquisition Corp., a Delaware corporation and
wholly-owned direct subsidiary of Schwab (Merger Sub). Pursuant to the Merger Agreement, Merger
Sub will be merged with and into optionsXpress, and as a result, optionsXpress will continue as the
surviving corporation and as a wholly-owned subsidiary of Schwab (the Schwab Merger).
Pursuant to the Merger Agreement, at the effective time of the Schwab Merger, each issued and
outstanding share of common stock of optionsXpress, other than shares owned by optionsXpress,
Schwab, or any subsidiary of optionsXpress or Schwab, will be cancelled and retired and
automatically converted into the right to receive 1.02 fully paid and nonassessable shares of
common stock of Schwab.
As part of the Schwab Merger, Schwab has entered into retention agreements with certain members of
optionsXpress management. Consummation of the Schwab Merger is subject to certain conditions,
including, among others, the approval of the Merger Agreement by optionsXpress stockholders and
the receipt of required regulatory and antitrust approvals. The Merger Agreement contains customary
representations, warranties and covenants of optionsXpress, Schwab and Merger Sub, including, among
others things, optionsXpress covenants (i) to have its board of directors (the Board) recommend
approval of the Merger Agreement by
optionsXpress stockholders, subject to a fiduciary-out provision that allows optionsXpress under
certain circumstances to provide information and participate in discussions with respect to
unsolicited alternative acquisition proposals, (ii) not to solicit alternate transactions and (iii)
to conduct its business in the ordinary course during the period between the date of the Merger
Agreement and the effectiveness of the Merger and refrain from taking various non-ordinary course
actions during that period.
The Merger Agreement contains certain termination rights for both optionsXpress and Schwab and,
further provides that, upon the termination of the Merger Agreement under specified circumstances,
generally including an alternative business combination transaction, optionsXpress will owe Schwab
a cash termination fee of $41,900.
Transaction costs of approximately $4.0 million were incurred related to the pending merger for the
three months ended
March 31, 2011.
4. Capitalization
Common Stock
At March 31, 2011, the Company had 250,000 shares of $0.0001 par value common stock authorized.
Of the authorized common stock, 57,466 shares were issued and outstanding.
On February 24, 2009, the Companys Board of Directors approved a stock repurchase program that
authorized the Company to repurchase up to $20,000 of the Companys outstanding common stock
(the 2009 Repurchase Program). On February 12, 2008, the Companys Board of Directors
approved a stock repurchase program that authorized the Company to repurchase up to $100,000 of
the Companys outstanding common stock (the 2008 Repurchase Program).
In addition, on February 14, 2008, the Company entered into an agreement with Ned W. Bennett,
Executive Vice Chairman and founder of optionsXpress, pursuant to which, the Company may
repurchase up to an additional 200 shares annually from Mr. Bennett (the Bennett Stock
Purchase Agreement). The Bennett Stock Purchase Agreement does not create an obligation for
the Company to buy, or Mr. Bennett to sell to the Company, any of his shares of our common
stock. The number of shares the Company may purchase under the Bennett Stock Purchase Agreement
is limited to 200 shares per year, but the total number of shares is limited only by the number
of shares of our common stock that Mr. Bennett may hold from time to time.
The repurchase programs have no expiration date and the Companys Board of Directors may
terminate any or all of the stock repurchase programs at any time.
For the three months ended March 31, 2011, the Company has repurchased 100 shares of its common
stock in aggregate under these programs at a total cost of $1,560, or an average cost of $15.60
per share. Since inception, the Company has repurchased 6,350 shares of its common stock in
aggregate under these programs at a total cost of $111,350, or an average cost of $17.53 per
share. The repurchased shares were retired to authorized, but unissued shares. The Company
does not plan on repurchasing any additional shares pending the consummation of the Schwab
Merger.
7
5. Fair Value Measurements
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction. ASC 820 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three
levels of the fair value hierarchy under which assets and liabilities measured at fair value
will be classified are as follows:
Level 1:
Quoted market prices in active markets for identical assets or liabilities.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by market
data.
Level 3:
Unobservable inputs that are not corroborated by market data.
As required by ASC 820, assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
Financial Assets and Liabilities
The following table sets forth by level within the fair value hierarchy the Companys assets
and liabilities owned, at fair value, including $5,211 of money market funds included in cash
and cash and equivalents that are pledged as collateral for a letter of credit, and financial
instruments sold but not yet purchased at fair value as of March 31, 2011 and December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
Level 1(1)
|
|
|
Level 2(2)
|
|
|
Level 3(3)
|
|
|
Total
|
|
Financial assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds included in cash and cash equivalents
|
|
$
|
9,676
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,676
|
|
U.S. treasury securities included in deposits with clearing
organizations
|
|
|
12,100
|
|
|
|
|
|
|
|
|
|
|
|
12,100
|
|
Corporate equities and derivatives included in other assets
|
|
|
23,486
|
|
|
|
1,043
|
|
|
|
|
|
|
|
24,529
|
|
Investments in securities
|
|
|
|
|
|
|
|
|
|
|
11,344
|
|
|
|
11,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,262
|
|
|
$
|
1,043
|
|
|
$
|
11,344
|
|
|
$
|
57,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equities and derivatives included in other liabilities
|
|
$
|
19,084
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,084
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Level 1(1)
|
|
|
Level 2(2)
|
|
|
Level 3(3)
|
|
|
Total
|
|
Financial assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds included in cash and cash equivalents
|
|
$
|
9,674
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,674
|
|
U.S. treasury securities included in deposits with clearing
organizations
|
|
|
11,960
|
|
|
|
|
|
|
|
|
|
|
|
11,960
|
|
Corporate equities and derivatives included in other assets
|
|
|
20,143
|
|
|
|
823
|
|
|
|
|
|
|
|
20,966
|
|
Investments in securities
|
|
|
|
|
|
|
|
|
|
|
11,442
|
|
|
|
11,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,777
|
|
|
$
|
823
|
|
|
$
|
11,442
|
|
|
$
|
54,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equities and derivatives included in other liabilities
|
|
$
|
17,661
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,661
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
(1)
|
|
All of the Companys assets and liabilities included in Level 1 of the fair value hierarchy are exchange traded securities or have quoted market prices in
active markets for identical assets or liabilities.
|
|
(2)
|
|
Level 2 assets represent publicly traded shares that are restricted as part of an initial public offering and are valued based on the quoted market price
less any discount for that restriction.
|
|
(3)
|
|
Level 3 assets represent 19.7% and 21.2% of all financial assets measured at fair value at March 31, 2011 and December 31, 2010, respectively (see below for
further information).
|
The following table provides a reconciliation of the beginning and ending balances for the
major classes of financial assets and liabilities measured at fair value using significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
Investments
|
|
|
|
in
|
|
|
|
Securities
|
|
|
|
Assets
|
|
Balance, January 1, 2011
|
|
$
|
11,442
|
|
Total gains/(losses), realized and unrealized
|
|
|
(98
|
)
|
Redemptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2011
|
|
$
|
11,344
|
|
|
|
|
|
The Companys Level 3 financial assets are comprised of auction rate securities (ARS).
The Companys ARS are backed by United States Department of Education-guaranteed student loans
issued under the Federal Family Education Loan Program (FFELP). The Companys ARS are
marketable securities with long-term stated maturities (during years 2034-2040) for which the
interest rates are reset through periodic short-term auctions every 35 days, depending on the
issue. As a result of the liquidity issues in the global credit and capital markets,
all of the auctions for all of the Companys ARS have failed since February 2008. A failed
auction is not a default of the debt instrument and the ARS holder continues to receive
interest payments when the auctions fail. All of the Companys ARS are current with respect to
the receipt of interest payments according to the stated terms of each ARS indenture. The
Company believes that it has the ability and intent, if necessary, to hold its ARS investments
until such time as the auctions are successful, the issuer redeems the securities, or another
market for ARS develops. Since the ARS markets began failing on February 14, 2008, $95,575 of
the Companys ARS securities have been redeemed by issuers or the Companys brokers at par.
At March 31, 2011, there was insufficient observable ARS market information available to
determine the market value of the Companys investments in ARS. Therefore, the Company has
continued to designate the ARS as Level 3 financial assets under ASC 820 and estimated the
Level 3 fair values for these securities by using the income method, incorporating assumptions
that market participants would use in their estimates of fair value. The Company calculated
income by developing a discounted cash flow model based on the expected cash flows from the ARS
compared to a market rate. Based on the Companys analysis, the weighted average economic life
was estimated to be approximately four years. For the fair market interest rates used in its
discounted cash flow, the Company used a current market rate for liquid debt instruments of
similar underlying assets and credit quality, with spreads of approximately 150bps-250bps over
the London Interbank Offered Rate.
The Company has classified the remaining $12,000 in par value ARS as available-for-sale
securities. At March 31, 2011, the Companys calculation of fair value of the ARS implied an
impairment of fair value of approximately $656, which has been recorded through accumulated
other comprehensive loss on the condensed consolidated statement of financial condition, and
the carrying fair value of the ARS was approximately $11,344.
Non-Financial Assets and Liabilities
Non-financial assets and liabilities subject to fair value measurements include customer
relationships included in other intangible assets and a contingent liability included in other
liabilities. At March 31, 2011 and December 31, 2010, there was significant unobservable
information used to determine the market value for these non-financial assets and liabilities.
Therefore, the Company has continued to designate the customer relationships intangible asset
and the contingent liability as Level 3 non-financial assets and liabilities, respectively,
under ASC 820.
9
The Company reviews other intangible assets for impairment on an annual basis and whenever
events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of the Companys finite-lived intangible assets is evaluated by
comparing the current and forecasted cash flows associated with the assets to the assets
carrying values. The fair value of the Companys customer relationships intangible assets were
$3,569 at December 31, 2010 and $3,254 at March 31, 2011. For the three months ended March 31,
2011 and 2010, no impairment was recorded against the Companys customer relationships
intangible assets.
The Companys non-financial liabilities include a contingent liability for accrued contingent
consideration related to the acquisition of Optionetics. The accrued contingent consideration
is payable for a period of five years following the acquisition and is based on the
profitability of the business acquired and the number of funded brokerage accounts referred to
the Companys brokerage services segment in the year the contingent consideration is paid.
Depending on the level of performance, the contingent consideration can range from zero to
$7,000 for each of the first five years following the acquisition date of May 4, 2009. The fair
value is based on the estimated projected future performance of Optionetics, the time remaining
on the liability and the estimated market debt rate for the Company. The fair value of the
contingent liability was $8,876 at December 31, 2010 and $4,812 at March 31, 2011.
6. Derivative Instruments
To help provide customers with improved trade execution, the Company at times enters into
proprietary short-term positions in equity option and equity securities. The Company attempts
to hedge these positions so that changes in market prices do not materially change the value of
its securities. Any gains/losses from this trading activity are recognized as part of other
brokerage-related revenue in the condensed consolidated statement of operations. For the three
months ended March 31, 2011 and 2010, the total gains from the Companys proprietary trading
activities were $1,257 and $496, respectively.
7. Contingencies and Guarantees
General Contingencies
The Company extends margin credit and leverage to its customers, which are subject to various
regulatory and clearing firm margin requirements. Cash and securities in customers accounts
collateralize margin credit balances. Leverage involves securing a large potential future
obligation with a lesser amount of cash or securities. The risks associated with margin credit
and leverage increase during periods of fast market movements, or in cases where leverage or
collateral is concentrated and market movements occur. During such times, customers who utilize
margin credit or leverage and who have collateralized their obligations with securities may
find that the securities have a rapidly depreciating value and may not be sufficient to cover
their obligations in the event of liquidation. The Company is exposed to credit risk when its
customers execute transactions, such as short sales of options, equities or futures
transactions that can expose them to risk beyond their invested capital. As of March 31, 2011
and December 31, 2010, the Company had $234,823 and $231,170, respectively, in credit extended
to its customers. In addition, the Company may be obligated for margin extended to the
Companys customers by its third-party clearing agents on collateralized securities and futures
positions.
The margin and leverage requirements that the Company imposes on its customer accounts meet or
exceed those required by various regulatory requirements and Regulation T of the Board of
Governors of the Federal Reserve. The amount of this risk is not quantifiable since the risk is
dependent upon analysis of a potential significant and undeterminable rise or fall in stock
prices. As a result, the Company is exposed to significant off-balance sheet credit risk in the
event customer collateral is not sufficient to fully cover losses that customers may incur. In
the event customers fail to satisfy their obligations, the Company may be required to purchase
or sell financial instruments at prevailing market prices to fulfill customers obligations.
The Company believes that it is unlikely that it will have to make any material payments under
these arrangements, and no liabilities related to these guarantees and indemnifications have
been recognized in the accompanying condensed consolidated financial statements.
The Company borrows securities temporarily from other broker-dealers in connection with its
broker-dealer business. The Company deposits cash as collateral for the securities borrowed.
Decreases in securities prices may cause the market value of the securities borrowed to fall
below the amount of cash deposited as collateral. In the event the counterparty to these
transactions does not return the cash deposited, the Company may be exposed to the risk of
selling the securities at prevailing market prices. The Company seeks to manage this risk by
requiring credit approvals for counterparties, by monitoring the securities value on a daily
basis and by requiring additional collateral as needed.
Other assets and other liabilities on the condensed consolidated statement of financial
condition include premiums on unrealized gains and losses for written and purchased options
contracts. These contracts are subject to varying degrees of market risk. In addition, the
Company has sold securities that it does not currently own (see Note 6), and therefore will be
obligated to purchase such securities at a future date. The Company has recorded these
obligations in the condensed consolidated financial statements as of March 31, 2011, at the
fair values of the related securities, and will incur losses if the fair values of these
securities increase subsequent to March 31, 2011.
10
Legal Contingencies
In the ordinary course of business, the Company is subject to lawsuits, arbitrations, claims,
administrative or regulatory examinations and other legal or regulatory proceedings. Management
cannot predict with certainty the outcome of pending legal proceedings. A substantial adverse
judgment or other resolution regarding the proceedings could have a material adverse effect on
the Companys financial condition, results of operations and cash flows. However, in the
opinion of management, after consultation with legal counsel, the outcome of any pending
proceedings is not likely to have a material adverse effect on the financial condition, results
of operations or cash flows of the Company.
In March and April 2010, ten purported class actions lawsuits were filed on behalf of
optionsXpress stockholders related to the Schwab Merger (See Note 3). The Company believes the
lawsuits to be without merit, and intends to contest the plaintiffs claims. There can be no
assurance, however, with regard to the outcome of the lawsuits and it is not possible to
estimate a range for potential losses related to these lawsuits.
Guarantees
The Company introduces its Canadian securities customers accounts to a clearing broker who
clears and carries all customer securities account activity. The Company clears its futures
transactions on an omnibus account basis through several futures commission merchants. The
Company has agreed to indemnify its third-party clearing broker and all of its clearing futures
commission merchants for any losses that they may sustain for the customer accounts introduced
to them by the Company.
The Company provides guarantees to its clearing organizations and exchanges under their
standard membership agreements, which require members to guarantee the performance of other
members. Under the agreements, if another member becomes unable to satisfy its obligations to
the clearing organization or exchange, the other members would be required to meet any
shortfalls. The Companys liability under these arrangements is not quantifiable and may exceed
the cash and securities it has posted as collateral. However, the Company believes that it is
unlikely that it will have to make any material payments under these arrangements, and no
liabilities related to these guarantees have been recognized in the accompanying condensed
consolidated financial statements.
8. Earnings Per Share
The computations of basic and diluted EPS were as follows for the following periods:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net income
|
|
$
|
14,228
|
|
|
$
|
11,888
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding basic
|
|
|
57,465
|
|
|
|
57,465
|
|
Effect of dilutive securities
|
|
|
328
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding diluted
|
|
|
57,793
|
|
|
|
57,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
Diluted EPS
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
9. Stock-Based Compensation
The Company maintains three stock compensation plans: the 2001 Equity Incentive Plan, the 2005
Equity Incentive Plan, and the 2008 Equity Incentive Plan, or collectively, the equity
incentive plans. All of the options outstanding pursuant to the stock compensation plans at
March 31, 2011 are options to buy common stock of the Company granted to employees or directors
of the Company.
Stock-based compensation for the three months ended March 31, 2011 and March 31, 2010 was
$1,446 and $1,341, respectively. As of March 31, 2011, the total compensation cost related to
stock options and deferred shares not yet vested and recognized was estimated to be $6,472.
This compensation cost related to stock options and deferred shares is expected to be
recognized over a weighted average period of 2.92 years and 3.69 years, respectively. As of
March 31, 2011, the aggregate intrinsic value of the total outstanding stock options and
deferred shares was $7,959 and $9,797, respectively, and the aggregate intrinsic value of the
total exercisable stock options was $4,432. During the three months ended March 31, 2011, 91
shares were issued pursuant to the Companys equity incentive plans.
11
10. Regulatory Requirements
optionsXpress, Inc. is subject to the Securities and Exchange Commission Uniform Net Capital
Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, administered by the SEC and
FINRA, which requires the maintenance of minimum net capital. Under Rule 15c3-1, optionsXpress,
Inc. is required to maintain net capital of 2% of aggregate debits or $250, whichever is
greater, as these terms are defined.
optionsXpress, Inc. is also subject to the CFTC Regulation 1.17 (Reg. 1.17) under the
Commodity Exchange Act, administered by the CFTC and the NFA, which also requires the
maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is
required to maintain minimum net capital equal to the greater of its net capital requirement
under Reg. 1.17 ($20,000), or the sum of 8% of the total risk margin requirements for all
positions carried in customer accounts, as defined in Reg. 1.17 and 8% of the total risk margin
requirements for all positions carried in non-customer accounts.
As of March 31, 2011, optionsXpress, Inc. had net capital requirements of $20,000 and net
capital of $88,393. As of March 31, 2010, optionsXpress, Inc. had net capital requirements of
$13,758 and net capital of $105,232. All of the Companys other broker-dealers also exceeded
the net capital requirements for their respective jurisdictions. The net capital rules may
effectively restrict the payment of cash distributions or other equity withdrawals.
11. Segment Reporting
The Company operates in the following two principal business segments:
Brokerage services segment- Brokerage services offers a comprehensive suite of services for
option, futures, stock, mutual fund, and fixed-income investors.
Education services segment- Education services provides a full range of investor education
products and services that educate customers on stock market analysis, options, foreign
exchange and financial planning.
Information concerning the Companys operations by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
Brokerage services
|
|
$
|
60,691
|
|
|
$
|
49,491
|
|
Education services
|
|
|
5,864
|
|
|
|
8,014
|
|
Eliminations
|
|
|
(658
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,897
|
|
|
$
|
57,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
|
|
|
|
|
|
Brokerage services
|
|
$
|
23,576
|
|
|
$
|
20,336
|
|
Education services
|
|
|
(1,355
|
)
|
|
|
(1,502
|
)
|
Non-controlling interests
|
|
|
24
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,245
|
|
|
$
|
18,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March
|
|
|
December
|
|
|
|
31,
|
|
|
31,
|
|
|
|
2011
|
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
Brokerage services
|
|
$
|
1,629,097
|
|
|
$
|
1,465,944
|
|
Education services
|
|
|
9,434
|
|
|
|
10,008
|
|
Eliminations
|
|
|
(2,845
|
)
|
|
|
(3,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,635,686
|
|
|
$
|
1,472,918
|
|
|
|
|
|
|
|
|
12
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of operations of the Company
should be read in conjunction with the Selected Financial Data and the Consolidated Financial
Statements and Notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2010, and the Condensed Consolidated Financial Statements and
Notes thereto contained in this Quarterly Report on Form 10-Q. This discussion contains
forward-looking statements that relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements. You are urged to carefully consider these risks and factors
included in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expects, intends, plans,
anticipates, believes, estimates, predicts, potential, continue or the negative of
these terms or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. The forward-looking statements made in this Quarterly
Report on Form 10-Q relate only to events as of the date on which the statements are made, and
we undertake no ongoing obligation, other
than any imposed by law, to update these statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
Important factors that may cause such differences include, but are not limited to: risks
related to general economic conditions, regulatory developments, the competitive landscape, the
volume of securities trading generally or by our customers specifically, competition, systems
failures and capacity constraints and the other risks and uncertainties set forth under the
heading Risk Factors in Item 1A of the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2010.
Forward-looking statements include, but are not limited to, the following:
|
|
the statements about our intention to pay dividends;
|
|
|
|
the statements about future growth in online brokerage accounts, options trading,
futures trading, online options trading, and online futures trading;
|
|
|
|
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 about continuing to expand our product offering and our customer base
and the costs associated with such expansion;
|
|
|
|
the statements concerning future growth of our futures business, international
operations, brokersXpress and our institutional business;
|
|
|
|
the statements about the impact of changes in interest rates on our earnings;
|
|
|
|
the statements concerning continued financing options;
|
|
|
|
the statements regarding scalability of our systems and the cost of capacity increases;
|
|
|
|
the statements concerning uncertainties and deteriorations in the credit and capital
markets and the credit quality of our auction rate securities (ARS);
|
|
|
|
the statements concerning the number of students receiving education services and our
ability to convert those students into brokerage customers; and,
|
|
|
|
the statements about the pending Schwab Merger.
|
13
Results of Operations
The following table sets forth our total net revenues and condensed consolidated statements of
operations data for the periods presented as a percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
Net revenues (in thousands)
|
|
$
|
65,897
|
|
|
$
|
57,031
|
|
Compensation and benefits
|
|
|
18.7
|
%
|
|
|
20.4
|
%
|
Brokerage, clearing, and other related expenses
|
|
|
14.8
|
|
|
|
15.8
|
|
Brokerage advertising
|
|
|
8.2
|
|
|
|
7.7
|
|
Education marketing and fulfillment
|
|
|
4.6
|
|
|
|
9.3
|
|
Depreciation and amortization
|
|
|
3.3
|
|
|
|
4.0
|
|
Loan interest and fees
|
|
|
1.5
|
|
|
|
|
|
Other general and administrative
|
|
|
15.2
|
|
|
|
9.8
|
|
Income before income taxes
|
|
|
33.7
|
|
|
|
33.0
|
|
Income taxes
|
|
|
12.1
|
|
|
|
12.2
|
|
Net income
|
|
|
21.6
|
|
|
|
20.8
|
|
Statistical Data
The following table sets forth our statistical data for the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Statistical Data
|
|
|
|
|
|
|
|
|
Number of customer accounts (at period end) (1)
|
|
|
389,300
|
|
|
|
357,700
|
|
Daily average revenue trades (DARTs) (2)
|
|
|
|
|
|
|
|
|
Retail DARTs
|
|
|
36,500
|
|
|
|
30,300
|
|
Institutional DARTs
|
|
|
14,000
|
|
|
|
14,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total DARTs
|
|
|
50,500
|
|
|
|
44,600
|
|
Customer trades per account (3)
|
|
|
33
|
|
|
|
31
|
|
Average commission per trade
|
|
$
|
14.50
|
|
|
$
|
14.55
|
|
Option trades as a % of total trades
|
|
|
45
|
%
|
|
|
42
|
%
|
Brokerage advertising expense per net new
customer account (4)
|
|
$
|
544
|
|
|
$
|
672
|
|
Total client assets (000s)
|
|
$
|
8,399,624
|
|
|
$
|
7,504,799
|
|
Client margin balances (000s)
|
|
$
|
218,858
|
|
|
$
|
195,520
|
|
|
|
|
(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 net new customer accounts opened during the period.
|
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010
Overview
Our results for the period reflect the following principal factors:
|
|
total customer accounts increased by 31,600 to 389,300, or 8.8%;
|
|
|
|
total trades increased by 410,400 to 3,131,600, or 15.1% and
|
|
|
|
average commission per trade decreased by $0.05 to $14.50, or 0.3%.
|
Commissions
Commissions increased $5.8 million, or 14.6%, for the three months ended March 31, 2011 to
$45.4 million compared to $39.6 million for the three months ended March 31, 2010. The increase
in commissions was primarily the result of the 15.1% increase in the total number of trades,
which was slightly offset by the 0.3% decrease in the average commission per trade.
14
Other brokerage-related revenue
Other brokerage-related revenue increased $1.4 million, or 30.1%, for the three months ended
March 31, 2011 to $5.9 million compared to $4.5 million for the three months ended March 31,
2010. The increase in other brokerage-related revenue was due to an increase in the payment for
order flow rate per contract captured for our option order flow and an increase in the number
of option contracts traded.
Net interest revenue and fees
Net interest revenue and fees decreased $0.5 million, or 10.7%, to $4.2 million for the three
months ended March 31, 2011 compared to $4.7 million for the three months ended March 31, 2010.
The decrease in net interest revenue and fees was primarily the result of a decline in
short-term interest rates.
Education revenue
Education revenue decreased $2.1 million, or 28.5%, to $5.4 million for the three months ended
March 31, 2011 compared to $7.5 million for the three months ended March 31, 2010. The decrease
in education revenue was primarily due to lower revenue from seminar sales.
Other income
Other income increased $4.4 million, or 633.5%, to $5.1 million for the three months ended
March 31, 2011 compared to $0.7 million for the three months ended March 31, 2010. The increase
in other income is due primarily to the reduction in fair value of the contingent liability
from the Optionetics acquisition.
Compensation and benefits
Compensation and benefits expenses increased $0.7 million, or 5.8%, to $12.3 million for the
three months ended March 31, 2011 from $11.6 million for the three months ended March 31, 2010.
The increase in compensation and benefits expenses was largely due to severance expenses incurred
during the three months ended March 31, 2011.
Brokerage, clearing, and other related expenses
Brokerage, clearing and other related expenses increased $0.7 million, or 8.1%, to $9.7 million
for the three months ended March 31, 2011 from $9.0 million for the three months ended March
31, 2010. Brokerage, clearing and other related expenses increased primarily due to higher
payouts to the independent registered representatives and advisors of our brokersXpress
subsidiary.
Brokerage advertising
Brokerage advertising expenses increased $1.0 million, or 23.2%, to $5.4 million for the three
months ended March 31, 2011 from $4.4 million for the three months ended March 31, 2010.
Brokerage advertising expenses increased due to increased spending across all marketing
channels. Brokerage advertising expenses per net new customer account decreased to $544 for the
three months ended March 31, 2011 from $672 for the three months ended March 31, 2010.
Education marketing and fulfillment
Education marketing and fulfillment expenses decreased $2.3 million, or 42.5%, to $3.0 million
for the three months ended March 31, 2011 compared to $5.3 million for the three months ended
March 31, 2010. Education marketing and fulfillment expenses decreased primarily due to lower
marketing expenses incurred for preview events.
Depreciation and amortization
Depreciation and amortization expenses decreased $0.1 million, or 5.5%, to $2.2 million for the
three months ended March 31, 2011 from $2.3 million for the three months ended March 31, 2010.
Lower depreciation and amortization expenses were due to a reduced level of fixed assets being
depreciated and amortized.
Loan interest and fees
Loan interest and fees was $1.0 million for the three months ended March 31, 2011. Prior to
the long-term debt we acquired on November 22, 2010, we did not have any expenses related to
loan interest and fees.
Other general and administrative
Other
general and administrative expenses increased $4.4 million, or 79.6%, to $10.0 million
for the three months ended March 31, 2011 from $5.6 million for the three months ended
March 31, 2010 primarily due
to the transaction costs pertaining to the pending merger with The Charles Schwab Corporation.
Income taxes
Income taxes increased $1.1 million, or 15.1%, to $8.0 million for the three months ended March
31, 2011 from $6.9 million for the three months ended March 31, 2010. Higher income taxes were
primarily due to the 18.0% increase of taxable income before income taxes.
15
Net income
As a result of the foregoing, we reported $14.2 million in net income for the three months
ended March 31, 2011, compared to $11.9 million in net income for the three months ended March
31, 2010, an increase of $2.3 million, or 19.7%.
Segment information
Brokerage Services
Brokerage services net revenues increased $11.2 million, or 22.6% to $60.7 million for the
three months ended March 31, 2011 compared to the $49.5 million for the three months ended
March 31, 2010 due to the increase in commissions and other income. Income before income taxes
increased $3.3 million, or 15.9%, to $23.6 million for the three months ended March 31, 2011
compared to the $20.3 million for the three months ended March 31, 2010 primarily due to the
overall increase in net revenues from trading activity, which was partially offset by the
increase in other general and administrative expenses.
Education Services
Education services net revenues decreased $2.1 million, or 26.8% to $5.9 million for the three
months ended March 31, 2011 compared to the $8.0 million for the three months ended March 31,
2010 primarily due to lower seminar sales. The loss before income taxes decreased $0.1 million,
or 9.8%, to $1.4 million for the three months ended March 31, 2011 compared to the $1.5 million
for the three months ended March 31, 2010 due to declines in marketing expenses for preview
events, which were partially offset by lower revenues from seminar sales.
Liquidity and Capital Resources
As a holding company, almost all of our funds generated from operations are earned by our
operating subsidiaries. We access these funds through receipt of dividends from these
subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory
bodies, including the SEC, FINRA, the CBOE, the CFTC and the NFA, relating to liquidity and
capital standards, which limit the funds available for the payment of dividends to us.
We invest company cash in a variety of high credit quality investment vehicles including U.S.
Government Treasury Bills, bank-issued commercial paper, AAA-rated institutional money market
funds and tax-free ARS backed by United States Department of Education-guaranteed student loans
issued under the FFELP. As a result of the liquidity issues in the global credit and capital
markets, all of the auctions for all our ARS have failed since February 2008. Failed auctions
limit liquidity for ARS holders until there is a successful auction, the issuer redeems the
security, or another market for ARS develops. All of our ARS are AAA-rated and current with
respect to receipt of interest payments according to the stated terms of each ARS indenture. As
of the date of this report, we have no reason to believe that any of the underlying issuers of
our ARS will be unable to satisfy the terms of the indentures or that the underlying credit
quality of the assets backing our ARS investments has deteriorated. Since the ARS markets began
failing on February 14, 2008, $95.6 million of our ARS securities have been redeemed by issuers
or our brokers at par. We believe we have the ability and intent, if necessary, to hold our
remaining ARS investments until such time as the auctions are successful, the issuer redeems
the securities, or another market for ARS develops.
optionsXpress, Inc. is subject to the Securities and Exchange Commission Uniform Net Capital
Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, administered by the SEC and
FINRA, which requires the maintenance of minimum net capital. Under Rule 15c3-1, optionsXpress,
Inc. is required to maintain net capital of 2% of aggregate debits or $0.25 million,
whichever is greater, as these terms are defined.
optionsXpress, Inc. is also subject to the CFTC Regulation 1.17 (Reg. 1.17) under the
Commodity Exchange Act, administered by the CFTC and the NFA, which also requires the
maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is
required to maintain minimum net capital equal to the greater of its net capital requirement
under Reg. 1.17 ($20.0 million), or the sum of 8% of the total risk margin requirements for all
positions carried in customer accounts and 8% of the total risk margin requirements for all
positions carried in non-customer accounts, as defined in Reg. 1.17.
As of March 31, 2011, optionsXpress, Inc. had net capital requirements of $20.0 million and net
capital of $88.4 million. As of March 31, 2010, optionsXpress, Inc. had net capital
requirements of $13.8 million and net capital of $105.2 million. All of our other
broker-dealers also exceeded the net capital requirements for their respective jurisdictions.
We believe that we currently have sufficient capital to satisfy these ongoing requirements.
In addition to net capital requirements, as a self-clearing broker-dealer, optionsXpress, Inc.
is subject to Depository Trust & Clearing Corporation (DTCC), Options Clearing Corporation
(OCC), and other cash deposit requirements, which may fluctuate significantly from time to
time based upon the nature and size of our customers trading activity. At March 31, 2011, we
had interest-bearing security deposits and short-term treasury bills totaling $21.8 million
deposited with clearing organizations for the self-clearing of equities and option trades.
16
At March 31, 2011, we had $1,097.9 million of cash segregated in compliance with federal
regulations in special reserve bank accounts for the exclusive benefit of customers under Rule
15c3-3 of the Securities Exchange Act of 1934 and other regulations. Liquidity needs relating
to client trading and margin borrowing activities are met primarily through cash balances in
customer brokerage accounts, which were $1,338.6 million as of March 31, 2011.
We generally finance our operating liquidity and capital needs through the use of funds
generated from operations and the issuance of common stock.
Although we have no current plans to do so, we may issue equity or debt securities or enter
into secured or additional unsecured lines of credit from time to time.
Cash Flow
Cash provided by operating activities was $12.7 million for the three months ended March 31,
2011, compared to cash used in operating activities of $11.1 million for the three months ended
March 31, 2010. The primary reason for the increase in cash provided by operating activities
was due to the increase of payables to brokerage customers, which was largely offset by the
increase of cash segregated in compliance with federal regulations.
Cash used in investing activities remained constant at $1.4 million for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010.
Cash used in financing activities was $5.9 million for the three months ended March 31, 2011,
compared to cash used in financing activities of $2.8 million for the three months ended March
31, 2010. Cash used in financing activities increased primarily with the first principal payment on
our long-term debt, which we acquired on November 22, 2010, which was partially offset by the
reduction of cash used to repurchase our outstanding common stock during the current period.
Capital Expenditures
Capital expenditures remained constant at $1.4 million for the three months ended March 31,
2011 and the three months ended March 31, 2010. Capital expenditures for the periods ended
March 31, 2011 and 2010 included capitalized software development costs, which we capitalized
in accordance with Financial Accounting Standards Board Accounting Standards Codification
TM
Topic 350-50,
Website Development Costs
, primarily related to the
development of our technology.
The Charles Schwab Corporation Merger
On March 18, 2011, optionsXpress Holdings, Inc. entered into an Agreement and Plan of Merger by and
among optionsXpress, The Charles Schwab Corporation, a Delaware corporation, and Neon Acquisition
Corp., a Delaware corporation and wholly-owned direct subsidiary of Schwab. Pursuant to the Merger
Agreement, Merger Sub will be merged with and into optionsXpress, and as a result, optionsXpress
will continue as the surviving corporation and as a wholly-owned subsidiary of Schwab.
Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding
share of common stock of optionsXpress, other than shares owned by optionsXpress, Schwab, or any
subsidiary of optionsXpress or Schwab, will be cancelled and retired and automatically converted
into the right to receive 1.02 fully paid and nonassessable shares of common stock of Schwab.
As part of the Merger, Schwab has entered into retention agreements with certain members of
optionsXpress management.
Consummation of the Merger is subject to certain conditions, including, among others, the approval
of the Merger Agreement by optionsXpress stockholders and the receipt of required regulatory and
antitrust approvals. The Merger Agreement contains customary representations, warranties and
covenants of optionsXpress, Schwab and Merger Sub, including, among others things, optionsXpress
covenants (i) to have its board of directors recommend approval of the Merger Agreement by
optionsXpress stockholders, subject to a fiduciary-out provision that allows optionsXpress under
certain circumstances to provide information and participate in discussions with respect to
unsolicited alternative acquisition proposals, (ii) not to solicit alternate transactions and (iii)
to conduct its business in the ordinary course during the period between the date of the Merger
Agreement and the effectiveness of the Merger and refrain from taking various non-ordinary course
actions during that period.
The Merger Agreement contains certain termination rights for both optionsXpress and Schwab and,
further provides that, upon the termination of the Merger Agreement under specified circumstances,
generally including an alternative business combination transaction, optionsXpress will owe Schwab
a cash termination fee of $41.9 million.
17
|
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures about Market Risk
|
Market risk generally represents the risk of loss that may result from the potential change in
the value of a financial instrument as a result of fluctuations in interest rates and market
prices. We have established policies, procedures and internal processes governing our
management of market risks in the normal course of our business operations. We do not have
material exposure to commodity price changes, foreign currency fluctuations or similar market
risks other than the effect they may have on trading volumes. Accordingly, we have not entered
into any derivative contracts to mitigate such risks.
We extend margin credit and leverage to our customers, which are subject to various regulatory
and clearing firm margin requirements. Margin credit balances are collateralized by cash and
securities in our customers accounts. Leverage involves securing a large potential future
obligation with a lesser amount of cash or securities. The risks associated with margin credit
and leverage increase during periods of fast market movements or in cases where leverage or
collateral is concentrated and market movements occur. During such times, customers who utilize
margin credit or leverage and who have collateralized their obligations with securities may
find that the securities have a rapidly depreciating value and may not be sufficient to cover
their
obligations in the event of liquidation. We are exposed to credit risk when our customers
execute transactions, such as short sales of options and equities or futures transactions that
can expose them to risk beyond their invested capital.
We expect this kind of exposure to increase with the growth in our overall business. The use of
margin credit, leverage and short sales may expose us to significant off-balance-sheet risk in
the event that collateral requirements are not sufficient to fully cover losses that customers
may incur and those customers fail to satisfy their obligations. As of March 31, 2011, we had
$234.8 million in credit extended to our customers either directly or through our clearing
firms. The amount of risk to which we are exposed from the leverage we extend to our customers
and from short sale transactions by our customers is unlimited and not quantifiable as the risk
is dependent upon analysis of a potential significant and undeterminable rise or fall in stock
or futures prices. Our account level margin credit and leverage requirements meet or exceed
those required by Regulation T of the Board of Governors of the Federal Reserve. We have a
comprehensive policy implemented in accordance with SRO standards to assess and monitor the
suitability of investors to engage in various trading activities. To mitigate our risk, we also
continuously monitor customer accounts to detect excessive concentration, large orders or
positions, patterns of day trading and other activities that indicate increased risk to us.
Please see Item 2. Liquidity and Capital Resources for additional information.
|
|
|
Item 4.
|
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time periods specified
in the SECs rules and forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. Our management, including our Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of the end of the
period covered by this report. Based on the evaluation of these disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months
ended March 31, 2011 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Part II OTHER INFORMATION
|
|
|
Item 1.
|
|
Legal Proceedings
|
We are not, nor are our subsidiaries, currently a party to any litigation that we believe could
have a material adverse effect on our business, financial condition or operating results.
However, many aspects of our business involve substantial risk of liability. In recent years,
there has been an increasing incidence of litigation involving the securities brokerage
industry, including class action suits that generally seek substantial damages, including
punitive damages in some cases. Like other securities and futures brokerage firms, we have been
named as a respondent in arbitrations, and from time to time we have been threatened with
litigation, or named as a defendant in administrative proceedings. Compliance and trading
problems that are reported to federal, state and provincial securities regulators, securities
exchanges or other self-regulatory organizations by dissatisfied customers are investigated by
such regulatory bodies, and, if pursued by such regulatory body or such customers, may rise to
the level of arbitration or disciplinary action. We are also subject to periodic regulatory
audits, inquiries and inspections, or other regulatory actions.
18
Schwab Merger Litigation
In March and April 2011, ten purported class action lawsuits were filed on behalf of optionsXpress
shareholders related to the Schwab Merger (See Note 3). These suits name optionsXpress, members of
optionsXpress board of directors, Schwab and Neon Acquisition Corp. as defendants.
Seven complaints have been filed in the Circuit Court of Cook County, Illinois. Seven lawsuits
have been filed in the Circuit Court of Cook County, Illinois: Kolton v. Gray, et al. (Civ. Action
No. 11CH10657) was filed on March 21, 2011;
Page v. optionsXpress Holdings, Inc., et al.
(Case No.
11CH10845) was filed on March 22, 2011;
Thomas v. optionsXpress Holdings, Inc., et al.
(Case No.
11CH10898) was filed on March 22, 2011;
Shotter v. optionsXpress Holdings, Inc., et al.
(Case No.
11CH11957) was filed on March 29, 2011;
Dworkin v. optionsXpress Holdings, Inc., et al.
(Case No.
11CH12445) was filed on March 31, 2011;
Raymon v. optionsXpress Holdings, Inc., et al.
(Case No.
11CH12710) was filed on April 4, 2011; and
Marks v. optionsXpress Holdings, Inc. et al.
(Case No.
11CH12764) was filed on April 5, 2011. By orders dated April 6 and April 27, 2011 the Illinois
Court consolidated these lawsuits under the caption
Kolton v. Gray, et al.
(Civ. Action No.
11CH10657). Three additional lawsuits were filed in the Court of Chancery in the State of
Delaware:
Oakes v. Bennett, et al.
(C.A. No. 6314-VCL) was filed March 25, 2011;
Collipi v.
optionsXpress Holdings, Inc., et al.
(C.A. No. 6337-VCL) was filed April 1, 2011; and
Kokolis v.
optionsXpress Holdings, Inc., et al
.
(C.A. No. 6353-VCL) was filed on April 6, 2011. The Delaware Chancery Court ordered these three
lawsuits consolidated under the caption
In re optionsXpress Holdings, Inc. Shareholder Litigation
(Consolidated C.A. No. 6314-VCL) on April 25, 2011 and stayed the action in favor of the Illinois
consolidated action on April 28, 2011. The complaints generally allege that (i) members of
optionsXpress board of directors breached their fiduciary duties owed to optionsXpress
stockholders by approving the merger agreement at an unfair price and through an unfair process and
by agreeing to certain deal protection devices; and (ii) the transaction unfairly benefits certain
members of optionsXpress board of directors, including the Chief Executive Officer, to the
disadvantage of other optionsXpress stockholders. The complaints also allege that Schwab and Neon
Acquisition Corp. aided and abetted the alleged fiduciary breaches by the individual defendants.
Additionally, the consolidated Delaware complaint alleges optionsXpress board of directors
breached their fiduciary duties owed to optionsXpress stockholders by failing to disclose material
information related to the Schwab Merger. The complaints seek, among other relief, to enjoin the
transaction, rescission in the event the transaction is completed, an order directing defendants to
account to plaintiff and other members of the putative class for all damages caused by their
breaches, and an award of costs and disbursements, including reasonable attorneys and expert fees.
We believe these lawsuits to be without merit, and intend to contest the plaintiffs claims. There
can be no assurance, however, with regard to the outcome of the lawsuits.
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 lists in more detail
various important risk factors facing our business in Part I, Item 1A under the heading
Risk
Factors.
Except as set forth below, there have been no material changes from the risk factors
disclosed in that section of our Annual Report on Form 10-K. We encourage you to review that
information and to review our other reports filed periodically with the Securities and Exchange
Commission for any further information regarding risks facing our business.
Uncertainty about the Schwab Merger and diversions of management could harm us, whether or not
the Schwab Merger is completed.
In response to the announcement of the Schwab Merger, existing or prospective customers
and counterparties of ours may delay or defer decisions concerning us or they may seek to
change their existing business relationships with us. In addition, as a result of the Schwab
Merger, current and prospective employees could experience uncertainty about their future with
us or the combined company. These uncertainties may impair our ability to retain, recruit or
motivate key personnel. Completion of the Schwab Merger will also require a significant amount
of time and attention from management. The diversion of management attention away from ongoing
operations could adversely affect our business relationships. If the Schwab Merger is not
completed as anticipated, the adverse effects of these uncertainties and the diversion of
management could be exacerbated by the delay.
Failure to complete the Schwab Merger for regulatory or other reasons could adversely affect
our stock price and our future business and financial results.
Completion of the Schwab Merger is conditioned upon, among other things, the receipt of
certain regulatory approvals, including from FINRA, and approval of our stockholders. There is
no assurance that we will receive the necessary approvals or satisfy the other conditions
necessary for completion of the Schwab Merger. If we fail to complete the Schwab Merger, we
will remain liable for significant transaction costs, including legal and accounting fees, and
may be required, in certain circumstances, to pay a termination fee of $41.9 million. In
addition, the current market price of our common stock may reflect a market assumption that the
Schwab Merger will occur, and a failure to complete the Schwab Merger could result in a
negative perception by the market of us generally and a resulting decline in the market price
of our common stock.
19
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|
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Item 2.
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|
Unregistered Sales of Equity Securities and Use of Proceeds
|
(c) Purchases of Equity Securities by the Issuer
The following table provides information about our repurchases of our common stock during the
three months ended March 31, 2011:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
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Dollar Value
|
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|
|
|
|
|
|
|
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Purchased
|
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|
of Shares that
|
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|
|
|
|
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|
as Part of
|
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|
May Yet Be
|
|
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Total
|
|
|
|
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Number of
|
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|
Average
|
|
|
Plans or
|
|
|
Plans or
|
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|
|
Shares
|
|
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Price Paid
|
|
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Programs
|
|
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Programs
|
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Period
|
|
Purchased
|
|
|
per Share
|
|
|
(3)
|
|
|
(4)(5)(6)
|
|
January 1, 2011 through January 31, 2011
|
|
|
|
|
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$
|
|
|
|
|
|
|
|
$
|
20,999,540
|
|
February 1, 2011 through February 28, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,999,540
|
|
March 1, 2011 through March 31, 2011
|
|
|
100,000
|
(1)
|
|
|
15.60
|
|
|
|
100,000
|
|
|
|
20,999,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
(2)
|
|
$
|
15.60
|
|
|
|
100,000
|
|
|
$
|
20,999,540
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
(1)
|
|
Shares were repurchased from Ned. W. Bennett, our Executive Vice Chairman pursuant to the Bennett Stock Purchase Agreement.
|
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(2)
|
|
Represents repurchased shares which were retired to authorized, but unissued.
|
|
(3)
|
|
Please see Part I Item 1. Notes to Condensed Consolidated Financial Statements 4. Capitalization for additional information regarding our
repurchase programs.
|
|
(4)
|
|
Does not include shares that may be repurchased from Ned. W. Bennett, our Executive Vice Chairman and founder pursuant to the Bennett Stock Purchase
Agreement.
|
|
(5)
|
|
Includes shares that may yet be repurchased by us pursuant to the 2008 Repurchase Program.
|
|
(6)
|
|
Includes shares that may yet be repurchased by us pursuant to the 2009 Repurchase Program.
|
20
Item 6. Exhibits
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
31.1
|
|
|
Certification of David A. Fisher, Principal Executive
Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Adam J. DeWitt, Principal Financial
Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
32.1
|
|
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
21
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Dated: May 10, 2011
|
optionsXpress Holdings, Inc.
(Registrant)
|
|
|
By:
|
/s/ DAVID A. FISHER
|
|
|
|
David A. Fisher
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
By:
|
/s/ ADAM J. DEWITT
|
|
|
|
Adam J. DeWitt
|
|
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
22
Exhibit Index
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
31.1
|
|
|
Certification of David A. Fisher, Principal Executive
Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Adam J. DeWitt, Principal Financial
Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
32.1
|
|
|
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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