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EXCEL - IDEA: XBRL DOCUMENT - optionsXpress Holdings, Inc. | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - optionsXpress Holdings, Inc. | c02920exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - optionsXpress Holdings, Inc. | c02920exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - optionsXpress Holdings, Inc. | c02920exv31w2.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the Quarterly Period Ended June 30, 2010
OR
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission file number: 001-32419
optionsXpress Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-1444525 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
311 W. Monroe, Suite 1000, Chicago, Illinois
60606
(Address of principal executive offices)
(Zip Code)
60606
(Address of principal executive offices)
(Zip Code)
(312) 630-3300
(Registrants telephone number, including area code)
(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):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 August 2, 2010, there were 57,429,141 outstanding shares of the registrants Common
Stock.
TABLE OF CONTENTS
2
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
optionsXpress Holdings, Inc.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except per share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 174,699 | $ | 178,989 | ||||
Cash and investments segregated in compliance with federal regulations |
891,244 | 881,210 | ||||||
Receivables from brokerage customers, net |
195,406 | 149,871 | ||||||
Receivables from brokers, dealers and clearing organizations |
44,348 | 110,779 | ||||||
Investments in securities |
19,290 | 70,850 | ||||||
Deposits with clearing organizations |
20,037 | 30,245 | ||||||
Fixed assets, (net of accumulated depreciation and amortization of
$23,402 and $19,758 at June 30, 2010 and December 31, 2009, respectively) |
12,539 | 13,263 | ||||||
Goodwill |
85,474 | 81,590 | ||||||
Other intangible assets, net |
5,594 | 6,525 | ||||||
Other assets |
29,249 | 22,999 | ||||||
Total assets |
$ | 1,477,880 | $ | 1,546,321 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Payables to brokerage customers |
$ | 1,074,949 | $ | 1,179,204 | ||||
Payables to brokers, dealers and clearing organizations |
4,964 | 144 | ||||||
Accrued liabilities and accounts payable |
23,729 | 19,027 | ||||||
Current and deferred income taxes |
28 | 193 | ||||||
Other liabilities |
36,370 | 36,878 | ||||||
Total liabilities |
1,140,040 | 1,235,446 | ||||||
Stockholders equity |
||||||||
Common stock, $0.0001 par value (250,000 shares authorized; 57,428 and
57,525 shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively) |
6 | 6 | ||||||
Preferred stock, $0.0001 par value (75,000 shares authorized; none issued) |
| | ||||||
Additional paid-in capital |
14,446 | 15,131 | ||||||
Accumulated other comprehensive loss |
(1,043 | ) | (1,179 | ) | ||||
Non-controlling interests |
159 | 120 | ||||||
Retained earnings |
324,272 | 296,797 | ||||||
Total stockholders equity |
337,840 | 310,875 | ||||||
Total liabilities and stockholders equity |
$ | 1,477,880 | $ | 1,546,321 | ||||
See accompanying notes.
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Table of Contents
optionsXpress Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Commissions |
$ | 44,713 | $ | 42,008 | $ | 84,311 | $ | 80,097 | ||||||||
Other brokerage-related revenue |
5,243 | 7,108 | 9,741 | 13,405 | ||||||||||||
Interest revenue and fees |
4,826 | 4,489 | 9,593 | 8,869 | ||||||||||||
Interest expense |
(56 | ) | (61 | ) | (107 | ) | (123 | ) | ||||||||
Net interest revenue and fees |
4,770 | 4,428 | 9,486 | 8,746 | ||||||||||||
Education revenue |
7,707 | 7,234 | 15,237 | 7,234 | ||||||||||||
Other income |
3,067 | 937 | 3,756 | 1,527 | ||||||||||||
Net revenues |
65,500 | 61,715 | 122,531 | 111,009 | ||||||||||||
Expenses: |
||||||||||||||||
Compensation and benefits |
11,854 | 10,434 | 23,502 | 18,808 | ||||||||||||
Brokerage, clearing and other related expenses |
10,250 | 8,047 | 19,268 | 15,237 | ||||||||||||
Brokerage advertising |
5,747 | 5,005 | 10,116 | 10,794 | ||||||||||||
Education marketing and fulfillment |
4,986 | 4,792 | 10,281 | 4,792 | ||||||||||||
Depreciation and amortization |
2,277 | 2,298 | 4,568 | 4,290 | ||||||||||||
Other general and administrative |
5,772 | 5,883 | 11,331 | 10,625 | ||||||||||||
Total expenses |
40,886 | 36,459 | 79,066 | 64,546 | ||||||||||||
Income before income taxes of consolidated companies |
24,614 | 25,256 | 43,465 | 46,463 | ||||||||||||
Income taxes |
9,005 | 9,165 | 15,951 | 16,804 | ||||||||||||
Net income of consolidated companies |
15,609 | 16,091 | 27,514 | 29,659 | ||||||||||||
Net income attributable to non-controlling interests |
22 | 18 | 39 | 30 | ||||||||||||
Net income |
$ | 15,587 | $ | 16,073 | $ | 27,475 | $ | 29,629 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.27 | $ | 0.28 | $ | 0.48 | $ | 0.51 | ||||||||
Diluted |
$ | 0.27 | $ | 0.28 | $ | 0.48 | $ | 0.51 | ||||||||
Weighted-average number of common shares: |
||||||||||||||||
Basic |
57,403 | 57,832 | 57,434 | 58,146 | ||||||||||||
Diluted |
57,611 | 57,988 | 57,643 | 58,266 | ||||||||||||
Dividends declared per share |
$ | | $ | | $ | | $ | 0.0800 |
See accompanying notes.
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Table of Contents
optionsXpress Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands, except per share data)
Six Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ | 27,475 | $ | 29,629 | ||||
Adjustments to reconcile net income to cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
4,568 | 4,290 | ||||||
Stock-based compensation |
2,352 | 1,811 | ||||||
Excess tax benefit for stock-based compensation |
18 | 290 | ||||||
Deferred income taxes |
1,078 | 311 | ||||||
Increase in contingent liability |
112 | | ||||||
Unrealized loss, deferred rent and other |
(231 | ) | 40 | |||||
Changes in operating assets and liabilities: |
||||||||
(Increase) decrease in: |
||||||||
Cash and investments segregated in compliance with federal regulations |
(10,034 | ) | (214,807 | ) | ||||
Receivables from brokerage customers, net |
(45,535 | ) | 10,917 | |||||
Receivables from brokers, dealers and clearing organizations |
87,381 | (8,490 | ) | |||||
Investments in securities |
27,750 | 1,500 | ||||||
Deposits with clearing organizations |
10,208 | 36,220 | ||||||
Other assets |
(6,765 | ) | (1,035 | ) | ||||
Increase (decrease) in: |
||||||||
Payables to brokerage customers |
(104,255 | ) | 179,360 | |||||
Payables to brokers, dealers and clearing organizations |
4,820 | (125 | ) | |||||
Accrued liabilities and accounts payable |
761 | (10,426 | ) | |||||
Current income taxes |
(914 | ) | (304 | ) | ||||
Other liabilities |
(478 | ) | 8,939 | |||||
Net cash (used in) provided by operating activities |
(1,689 | ) | 38,120 | |||||
Investing activities |
||||||||
Proceeds from sales and maturities of investments in securities |
3,200 | 1,200 | ||||||
Purchases and development of computer software |
(2,103 | ) | (1,464 | ) | ||||
Purchases of fixed assets |
(817 | ) | (343 | ) | ||||
Cash used in acquisition (net of cash received of $3,761) |
| (14,697 | ) | |||||
Net cash provided by (used in) investing activities |
280 | (15,304 | ) | |||||
Financing activities |
||||||||
Exercise of stock options |
81 | 28 | ||||||
Excess tax benefit for stock-based compensation |
(18 | ) | (290 | ) | ||||
Purchases through employee stock purchase plan |
24 | 19 | ||||||
Purchase of non-controlling equity interest |
| (1,021 | ) | |||||
Stock repurchases |
(2,874 | ) | (12,664 | ) | ||||
Dividends paid |
| (4,638 | ) | |||||
Net cash used in financing activities |
(2,787 | ) | (18,566 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
(94 | ) | (266 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(4,290 | ) | 3,984 | |||||
Cash and cash equivalents, beginning of period |
178,989 | 114,450 | ||||||
Cash and cash equivalents, end of period |
$ | 174,699 | $ | 118,434 | ||||
Supplemental cash flow information: |
||||||||
Income taxes paid |
$ | 15,830 | $ | 16,866 | ||||
Interest paid |
107 | 123 | ||||||
Supplemental disclosure of non-cash activity: |
||||||||
Non-cash foreign currency translation gain (loss) |
88 | (94 | ) | |||||
Intangible assets acquired in lieu of debt repayment |
| 2,500 | ||||||
Non-cash change in unrealized gain on available for sale investments in securities |
340 | 901 | ||||||
Non-cash gain from CBOE seat exchanged for initial public offering stock |
2,053 | |
See accompanying notes.
5
Table of Contents
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, 2009.
In the opinion of management, all adjustments necessary to present fairly the Companys
consolidated financial position at June 30, 2010 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 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 American
Stock Exchange, the NYSE Arca Exchange, and the Philadelphia Stock Exchange.
brokersXpress LLC (brokersXpress) is a broker-dealer registered with the SEC and a
member of FINRA and SIPC. In addition, optionsXpress, Inc., brokersXpress 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 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. optionsXpress Australia
Pty Limited is registered with and licensed by the Australian Securities & Investments
Commission.
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 Company entered the
education business on May 4, 2009 through the acquisition of Optionetics, Inc. and its
affiliates (collectively, Optionetics).
2. Summary of Significant Accounting Policies
Except as described in the following paragraphs, 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, 2009.
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.
Specifically, the amendment requires additional disclosures of i) the input and valuation
techniques used to measure fair value for both recurring and nonrecurring fair value
measurements of Level 2 and Level 3 positions, ii) the transfers between all levels
(including Level 1 and Level 2) will be required to be disclosed on a gross basis as well
as the reasons for the transfers and iii) separate disclosures are required for each
class of assets and liabilities rather than each major category of assets and
liabilities. ASU 2010-06 is effective for fiscal years beginning after December 15, 2009.
Therefore, ASU 2010-06 was effective for the Companys fiscal year beginning January 1,
2010. The adoption of ASU 2010-06 did not have a material impact on the Companys
condensed consolidated financial statements.
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Table of Contents
Subsequent Events Effective February 24, 2010, the FASB issued ASU 2010-09, Subsequent
Events (ASU 2010-09). ASU 2010-09 amends ASC 855, Subsequent Events, by requiring less
disclosure regarding subsequent events. As a result of the amendment, the Company is not
required to disclose the date through which management evaluated subsequent events in the
financial statements. ASU 2010-09 also changes the criteria for determining whether an
entity would evaluate subsequent events through the date that financial statements are
issued or when they are available to be issued. The Company is still required to evaluate
subsequent events through the date that the financial statements are issued. ASU 2010-09
was effective for the Companys interim period ended March 31, 2010. The adoption of ASU
2010-09 did not have a material impact on the Companys condensed consolidated financial
statements.
Other Liabilities Other liabilities include deferred revenue, corporate securities
sold, at fair value, accrued contingent consideration and other miscellaneous liabilities
that were previously reported in accrued liabilities and accounts payable. Prior year
balances have been reclassified to conform to the current year presentation.
3. Recently Issued Accounting Pronouncements
Fair Value of Financial Instruments In January 2010, the FASB issued ASU 2010-06,
amending ASC 820. As a supplement to the additional required fair value measurement
disclosures regarding assets and liabilities that are 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 is not expected to have a material impact on the Companys
consolidated financial statements.
Revenue Recognition Multiple-element Arrangements - In October 2009, the FASB issued
ASC 605-25. ASC 605-25 requires enhanced disclosures regarding the products that the
Company sells either separately or in various bundles that contain multiple deliverables.
These enhanced disclosure requirements affect the Companys disclosures regarding the
timing and amount of revenue recognition from these products for fiscal periods on or
after June 15, 2010. Therefore, the adoption of ASC 605-25 will be effective for the
interim period beginning July 1, 2010. The adoption of ASC 605-25 is not expected to have
a material impact on the Companys consolidated financial statements.
4. Goodwill
The Company has recorded goodwill for purchase business combinations to the extent the
purchase price of each completed acquisition exceeded the fair value of the net
identifiable tangible and intangible assets of the acquired company. The following table
summarizes changes in the carrying amount of goodwill:
Balance, January 1, 2010 |
$ | 81,590 | ||
Contingent consideration payment for OEC acquisition |
3,884 | |||
Balance, June 30, 2010 |
$ | 85,474 | ||
In performing the annual impairment test, the Company utilized quoted market prices of
the Companys common stock to estimate the fair value of the Company as a whole. The
estimated fair value was then allocated to the Companys reporting units based on
operating revenues, and was compared to the carrying value of the respective reporting
unit. No impairment of goodwill was determined for the six months ended June 30, 2010.
All of the goodwill has been allocated to the Brokerage Services segment. The Company
amortizes goodwill for income tax purposes on a straight-line basis over a period of
fifteen years with the exception of the goodwill recognized from the Optionetics
acquisition, which is non-deductible for income tax purposes.
5. Capitalization
Common Stock
At June 30, 2010, the Company had 250,000 shares of $0.0001 par value common stock
authorized. Of the authorized common stock, 57,428 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).
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Table of Contents
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 six months ended June 30, 2010, the Company has repurchased 195 shares of its
common stock in aggregate under these programs at a total cost of $2,874, or an average
cost of $14.77 per share. Since inception, the Company has repurchased 6,150 shares of
its common stock in aggregate under these programs at a total cost of $108,217, or an
average cost of $17.60 per share. The repurchased shares were retired to authorized, but
unissued shares.
6. 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 $5,034 of available-for-sale
investments in securities that are pledged as collateral for a letter of credit, and
financial instruments sold but not yet purchased at fair value as of June 30, 2010 and
December 31, 2009:
June 30, 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 |
$ | 103,298 | $ | | $ | | $ | 103,298 | ||||||||
U.S. treasury securities included in
deposits with clearing organizations |
13,197 | | | 13,197 | ||||||||||||
Corporate equities and derivatives
included in other assets |
17,325 | 2,213 | | 19,538 | ||||||||||||
Investments in securities |
| | 19,290 | 19,290 | ||||||||||||
$ | 133,820 | $ | 2,213 | $ | 19,290 | $ | 155,323 | |||||||||
Financial liabilities, at fair value: |
||||||||||||||||
Corporate equities and derivatives
included in other liabilities |
$ | 18,263 | $ | | $ | | $ | 18,263 | ||||||||
$ | 18,263 | $ | | $ | | $ | 18,263 | |||||||||
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December 31, 2009 | Level 1(1) | Level 2(2) | Level 3(3) | Total | ||||||||||||
Financial assets, at fair value: |
||||||||||||||||
Money market funds included in cash
and cash equivalents |
$ | 72,094 | $ | | $ | | $ | 72,094 | ||||||||
U.S. treasury securities included in
deposits with clearing organizations |
12,997 | | | 12,997 | ||||||||||||
Corporate equities and derivatives
included in other assets |
12,162 | | | 12,162 | ||||||||||||
Investments in securities |
| | 70,850 | 70,850 | ||||||||||||
$ | 97,253 | $ | | $ | 70,850 | $ | 168,103 | |||||||||
Financial liabilities, at fair value: |
||||||||||||||||
Corporate equities and derivatives
included in other liabilities |
$ | 17,520 | $ | | $ | | $ | 17,520 | ||||||||
$ | 17,520 | $ | | $ | | $ | 17,520 | |||||||||
(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 12.4% and 42.1% of all financial assets measured at fair value (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, 2010 |
$ | 70,850 | ||
Total gains/(losses), realized and unrealized |
340 | |||
Redemptions |
(51,900 | ) | ||
Balance, June 30, 2010 |
$ | 19,290 | ||
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 2033-2040) for
which the interest rates are reset through periodic short-term auctions every 7 or
35 days, depending on the issue. As a result of the current 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 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, $86,775 of the Companys ARS
securities have been redeemed by issuers or their brokers at par. Issuers or their
brokers have redeemed $51,900 of par value ARS at par during the six months ended
June 30, 2010.
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Table of Contents
At June 30, 2010, 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 200bps-300bps over the London Interbank
Offered Rate.
In November 2008, the Company accepted an offer from UBS, entitling it to sell at par
value ARS originally purchased from UBS at anytime during a two-year period from June 30,
2010 through July 2, 2012 (the UBS Put Right). The Company has adopted the fair value
option under ASC 825, Financial Instruments, to classify the UBS Put Right and the ARS
sold by UBS as trading securities. On June 30, 2010, the Company exercised the UBS Put
Right and sold the remaining $20,950 par value of ARS originally purchased from UBS at
par value according to the provisions of the UBS Put Right. The exercise settled on July
1, 2010. The redemption proceeds have been included in receivables from brokers, dealers
and clearing organizations in the condensed consolidated statement of financial condition
at June 30, 2010.
The remaining $20,800 in par value ARS were sold by another investment advisor, who has
not made an offer similar to UBS, and therefore, the Company has continued to classify
them as available-for-sale securities. The Companys calculation of fair value of the ARS
not held at UBS at June 30, 2010 implied an impairment of fair value of approximately
$1,510, which has been recorded through accumulated other comprehensive loss on the
condensed consolidated statement of financial condition, and the carrying fair value of
those ARS was approximately $19,290.
Non-Financial Assets and Liabilities
Non-financial assets and liabilities subject to fair value measurements include customer
relationships included in other intangible assets and contingent consideration included
in other liabilities. The fair value of the Companys customer relationships intangible
assets were $5,122 at December 31, 2009 and $4,331 at June 30, 2010. For the six months
ended June 30, 2010 and 2009, no impairment was recorded against the Companys customer
relationships intangible assets. The fair value of the Companys contingent consideration
liability was $11,925 at December 31, 2009 and $12,037 at June 30, 2010.
At June 30, 2010 and December 31, 2009, 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 and contingent consideration as Level 3
non-financial assets and liabilities, respectively, under ASC 820.
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 Companys non-financial liabilities include contingent consideration related to the
acquisition of Optionetics. The 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.
7. Derivative Instruments
As part of the UBS settlement agreement accepted by the Company in November 2008 (See
Note 6), the Company received a UBS Put Right to sell certain ARS to UBS at par value beginning on
June 30, 2010. The Company adopted the fair value option election under ASC 825 for this
instrument in 2008, and accounts for any respective gain/loss as a component of other
income in the condensed consolidated statement of operations. Typically, any gain/loss in
the UBS Put Right is offset by an opposite, but equal gain/loss in the value of the ARS
eligible for the UBS Put Right. After the exercise of the UBS Put Right on June 30, 2010,
the Company recognized a gain of $2,517, offset by a corresponding loss, on the UBS Put
Right for the six months ended June 30, 2010. The Company recognized a gain of $2,146,
offset by a corresponding loss, on the UBS Put Right for the six months ended June 30,
2009. The gains were included as a component of other income in the condensed
consolidated statement of operations. 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 six months ended
June 30, 2010 and 2009, the total gains from the Companys proprietary trading activities
were $1,603 and $420, respectively.
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8. 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 June 30, 2010, the Company had
$191,553 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 7),
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 June 30, 2010, at the fair values of the related securities, and will incur losses
if the fair values of these securities increase subsequent to June 30, 2010.
Legal Contingencies
In the ordinary course of business, the Company is subject to lawsuits, arbitrations,
claims and other legal 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.
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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.
9. Earnings Per Share
The computations of basic and diluted EPS were as follows for the following periods:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 15,587 | $ | 16,073 | $ | 27,475 | $ | 29,629 | ||||||||
Weighted-average number of common shares outstanding basic |
57,403 | 57,832 | 57,434 | 58,146 | ||||||||||||
Effect of dilutive securities |
208 | 156 | 209 | 120 | ||||||||||||
Weighted-average number of common shares outstanding diluted |
57,611 | 57,988 | 57,643 | 58,266 | ||||||||||||
Basic EPS |
$ | 0.27 | $ | 0.28 | $ | 0.48 | $ | 0.51 | ||||||||
Diluted EPS |
$ | 0.27 | $ | 0.28 | $ | 0.48 | $ | 0.51 |
10. 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. All of the options
outstanding pursuant to the stock compensation plans at June 30, 2010 are options to buy
common stock of the Company granted to employees or directors of the Company.
Stock-based compensation for the six months ended June 30, 2010 and June 30, 2009 was
$2,352 and $1,811, respectively. As of June 30, 2010, the total compensation cost related
to stock options and deferred shares not yet vested and recognized was estimated to be
$6,484. This compensation cost related to stock options and deferred shares is expected
to be recognized over a weighted average period of 3.13 years and 3.67 years,
respectively. As of June 30, 2010, the aggregate intrinsic value of the total outstanding
stock options and deferred shares was $2,770 and $7,148, respectively, and the aggregate
intrinsic value of the total exercisable stock options was $1,674. During the six months
ended June 30, 2010, 112 shares were issued pursuant to the Companys equity incentive
plans.
11. 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 Rule 15c3-1 ($1,000), 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 June 30, 2010, optionsXpress, Inc. had net capital requirements of $14,392 and net
capital of $103,993. As of June 30, 2009, optionsXpress, Inc. had net capital
requirements of $6,544 and net capital of $77,970. 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.
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12. Segment Reporting
The operations of Optionetics have been included in the condensed consolidated financial
statements since the date of the acquisition, May 4, 2009. As a result of the
acquisition, 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. This business
segment includes almost all of the Companys operations prior to the acquisition of
Optionetics.
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Net Revenues | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Brokerage Services |
$ | 57,797 | $ | 54,477 | $ | 107,288 | $ | 103,771 | ||||||||
Education Services |
8,186 | 7,304 | 16,200 | 7,304 | ||||||||||||
Eliminations |
(483 | ) | (66 | ) | (957 | ) | (66 | ) | ||||||||
Total |
$ | 65,500 | $ | 61,715 | $ | 122,531 | $ | 111,009 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Income (Loss) before Income Taxes | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Brokerage Services |
$ | 25,637 | $ | 25,514 | $ | 45,973 | $ | 46,709 | ||||||||
Education Services |
(1,045 | ) | (276 | ) | (2,547 | ) | (276 | ) | ||||||||
Non-controlling interests |
22 | 18 | 39 | 30 | ||||||||||||
Total |
$ | 24,614 | $ | 25,256 | $ | 43,465 | $ | 46,463 | ||||||||
As of | As of | |||||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Brokerage Services |
$ | 1,473,049 | $ | 1,538,379 | ||||
Education Services |
12,562 | 12,112 | ||||||
Eliminations |
(7,731 | ) | (4,170 | ) | ||||
Total |
$ | 1,477,880 | $ | 1,546,321 | ||||
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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, 2009, 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, 2009.
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); and, | |
| the statements concerning the number of students receiving education services and our ability to convert those students into brokerage customers. |
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Results of Operations |
||||||||||||||||
Net revenues (in thousands) |
$ | 65,500 | $ | 61,715 | $ | 122,531 | $ | 111,009 | ||||||||
Compensation and benefits |
18.1 | % | 16.9 | % | 19.2 | % | 16.9 | % | ||||||||
Brokerage, clearing, and other related expenses |
15.6 | 13.0 | 15.7 | 13.8 | ||||||||||||
Brokerage advertising |
8.8 | 8.1 | 8.3 | 9.7 | ||||||||||||
Education marketing and fulfillment |
7.6 | 7.8 | 8.4 | 4.3 | ||||||||||||
Depreciation and amortization |
3.5 | 3.7 | 3.7 | 3.9 | ||||||||||||
Other general and administrative |
8.8 | 9.6 | 9.3 | 9.6 | ||||||||||||
Income before income taxes |
37.6 | 40.9 | 35.4 | 41.8 | ||||||||||||
Income taxes |
13.8 | 14.9 | 13.0 | 15.1 | ||||||||||||
Net income |
23.8 | 26.0 | 22.4 | 26.7 |
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Statistical Data
The following table sets forth our statistical data for the periods presented below:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Statistical Data |
||||||||||||||||
Number of customer accounts (at period end) (1) |
365,500 | 337,300 | 365,500 | 337,300 | ||||||||||||
Daily average revenue trades (DARTs) (2) |
||||||||||||||||
Retail DARTs |
32,700 | 33,200 | 31,500 | 32,500 | ||||||||||||
Institutional DARTs |
17,100 | 11,900 | 15,700 | 13,500 | ||||||||||||
Total DARTs |
49,800 | 45,100 | 47,200 | 46,000 | ||||||||||||
Customer trades per account (3) |
35 | 34 | 33 | 34 | ||||||||||||
Average commission per trade |
$ | 14.26 | $ | 14.78 | $ | 14.40 | $ | 14.06 | ||||||||
Option trades as a % of total trades |
40 | % | 42 | % | 41 | % | 40 | % | ||||||||
Brokerage advertising expense per net new customer account (4) |
$ | 737 | $ | 556 | $ | 707 | $ | 577 | ||||||||
Total client assets (000s) |
$ | 7,030,199 | $ | 5,749,031 | $ | 7,030,199 | $ | 5,749,031 | ||||||||
Client margin balances (000s) |
$ | 204,194 | $ | 122,770 | $ | 204,194 | $ | 122,770 |
(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 June 30, 2010 versus Three Months Ended June 30, 2009
Overview
Our results for the period reflect the following principal factors:
| total customer accounts increased by 28,200 to 365,500, or 8.4%; | |
| total trades increased by 293,800 to 3,135,400, or 10.3% and | |
| average commission per trade decreased by $0.52 to $14.26, or 3.5%. |
Commissions
Commissions increased $2.7 million, or 6.4%, for the three months ended June 30, 2010 to
$44.7 million compared to $42.0 million for the three months ended June 30, 2009. The
increase in commissions was primarily the result of the 10.3% increase in the total
number of trades, which was partially offset by the 3.5% decrease in the average
commission per trade.
Other brokerage-related revenue
Other brokerage-related revenue decreased $1.9 million, or 26.2%, for the three months
ended June 30, 2010 to $5.2 million compared to $7.1 million for the three months ended
June 30, 2009. The decrease in other brokerage-related revenue was due to a reduction in
the payment for order flow rate per contract paid by exchanges and liquidity providers
for our option order flow.
Net interest revenue and fees
Net interest revenue and fees increased $0.4 million, or 7.7%, to $4.8 million for the
three months ended June 30, 2010 compared to $4.4 million for the three months ended
June 30, 2009. The increase in net interest revenue and fees was primarily the result of
an increase in our customer cash and margin balances.
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Education revenues
Education revenue increased $0.5 million, or 6.5%, to $7.7 million for the three months
ended June 30, 2010 compared to $7.2 million for the three months ended June 30, 2009.
The increase in education revenue was primarily due to the inclusion of operations from
Optionetics for the full three month period ended June 30, 2010, versus the
post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was
partially offset by lower sales volumes. Prior to the acquisition of Optionetics on
May 4, 2009, we did not have any material education revenue.
Other income
Other income increased $2.2 million, or 227.3%, to $3.1 million for the three months
ended June 30, 2010 compared to $0.9 million for the three months ended June 30, 2009.
The increase in other income is due to a gain recognized from shares we received as a
result of the CBOE initial public offering.
Compensation and benefits
Compensation and benefits expenses increased $1.5 million, or 13.6%, to $11.9 million for
the three months ended June 30, 2010 from $10.4 million for the three months ended
June 30, 2009. The increase in compensation and benefits expenses was primarily due to
the incorporation of operations from the acquisition of Optionetics on May 4, 2009, for
the full three month period ended June 30, 2010, versus the post-acquisition period
beginning May 4, 2009 and ending June 30, 2009. The increase in compensation and benefits
expenses was partially offset by a decrease in the number of employees from 442 at
June 30, 2009 to 435 at June 30, 2010.
Brokerage, clearing, and other related expenses
Brokerage, clearing and other related expenses increased $2.3 million, or 27.4%, to $10.3
million for the three months ended June 30, 2010 from $8.0 million for the three months
ended June 30, 2009. Brokerage, clearing and other related expenses increased primarily
due to higher payouts to the independent registered representatives of our brokersXpress
subsidiary and introducing brokers in our OEC subsidiary.
Brokerage advertising
Brokerage advertising expenses increased $0.7 million, or 14.8%, to $5.7 million for the
three months ended June 30, 2010 from $5.0 million for the three months ended June 30,
2009. The increase in advertising expense was primarily due to marketing expenses related
to the launch of our Xtend trading platform. Brokerage advertising expenses per net new
customer account increased to $737 for the three months ended June 30, 2010 from $556 for
the three months ended June 30, 2009. Excluding approximately $1 million in expenses
related to the launch of our Xtend trading platform, brokerage advertising per net new
customer account would have been $609 for the three months ended June 30, 2010.
Education marketing and fulfillment
Education marketing and fulfillment expenses increased $0.2 million, or 4.0%, to
$5.0 million for the three months ended June 30, 2010 compared to $4.8 million for the
three months ended June 30, 2009. Education marketing and fulfillment expenses increased
primarily due to the inclusion of operations from Optionetics for the full three month
period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and
ending June 30, 2009, which was partially offset by lower sales volumes. Prior to the
acquisition of Optionetics on May 4, 2009, we did not have any material education
marketing and fulfillment expenses.
Depreciation and amortization
Depreciation and amortization expenses effectively remained constant at $2.3 million for
the three months ended June 30, 2010 and the three months ended June 30, 2009.
Other general and administrative
Other general and administrative expenses decreased $0.1 million, or 1.9%, to $5.8
million for the three months ended June 30, 2010 from $5.9 million for the three months
ended June 30, 2009.
Income taxes
Income taxes decreased $0.2 million, or 1.7%, to $9.0 million for the three months ended
June 30, 2010 from $9.2 million for the three months ended June 30, 2009. Lower income
taxes were primarily due to the 2.5% reduction of income before income taxes.
Net income
As a result of the foregoing, we reported $15.6 million in net income for the three
months ended June 30, 2010, compared to $16.1 million in net income for the three months
ended June 30, 2009, a decrease of $0.5 million, or 3.0%.
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Segment information
Brokerage Services
Brokerage Services net revenues increased $3.3 million, or 6.1% for the three months
ended June 30, 2010 compared to the three months ended June 30, 2009 due to the increase
in commissions and other income, which was partially offset by the decrease in other
broker-related revenue. Income before income taxes increased $0.1 million, or 0.5% for
the three months ended June 30, 2010 compared to the three months ended June 30, 2009.
Education Services
Education Services net revenues increased $0.9 million, or 12.1% for the three months
ended June 30, 2010 compared to the three months ended June 30, 2009 due to the inclusion
of operations from the acquisition of Optionetics on May 4, 2009, for the full three
month period ended June 30, 2010, versus the post-acquisition period beginning May 4,
2009 and ending June 30, 2009, which was partially offset by lower sales volumes. The
loss before income taxes increased $0.8 million, or 278.6% for the three months ended
June 30, 2010 compared to the three months ended June 30, 2009 due to the inclusion of
operations for the full three month
period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and
ending June 30, 2009 and lower sales volumes.
Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009
Overview
Our results for the period reflect the following principal factors:
| total customer accounts increased by 28,200 to 365,500, or 8.4%; | |
| total trades increased by 159,200 to 5,856,600, or 2.8%; and | |
| average commission per trade increased by $0.34 to $14.40, or 2.4%. |
Commissions
Commissions increased $4.2 million, or 5.3%, for the six months ended June 30, 2010 to
$84.3 million compared to $80.1 million for the six months ended June 30, 2009. The increase in
commissions was primarily the result of the 2.8% increase in the total trades and the 2.4%
increase in the average commission per trade.
Other brokerage-related revenue
Other brokerage-related revenue decreased $3.7 million, or 27.3%, for the six months ended
June 30, 2010 to $9.7 million compared to $13.4 million for the six months ended June 30, 2009.
The decrease in other brokerage-related revenue was due to a reduction in the payment for order
flow rate per contract paid by exchanges and liquidity providers for our option order flow.
Net interest revenue and fees
Net interest revenue and fees increased $0.8 million, or 8.5%, to $9.5 million for the
six months ended June 30, 2010 compared to $8.7 million for the six months ended June 30,
2009. The increase in net interest revenue and fees was primarily the result of an
increase in our customer cash and margin balances.
Education revenue
Education revenue increased $8.0 million, or 110.6%, to $15.2 million for the six months
ended June 30, 2010 compared to $7.2 million for the six months ended June 30, 2009. The
increase in education revenue was primarily due to the inclusion of operations from
Optionetics for the full six month period ended June 30, 2010, versus the
post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was
partially offset by lower sales volumes. Prior to the acquisition of Optionetics on
May 4, 2009, we did not have any material education revenue.
Other income
Other income increased $2.3 million, or 146.0%, to $3.8 million for the six months ended
June 30, 2010 from $1.5 million for the six months ended June 30, 2009. The increase in
other income is due to a gain recognized from shares we received as a result of the CBOE
initial public offering.
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Compensation and benefits
Compensation and benefits expenses increased $4.7 million, or 25.0%, to $23.5 million for the
six months ended June 30, 2010 from $18.8 million for the six months ended June 30, 2009. The
increase in compensation and benefits expenses was primarily due to the incorporation of
operations from the acquisition of Optionetics on May 4, 2009, for the full six month period
ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June
30, 2009. The increase in compensation and benefits expenses was partially offset by a decrease
in the number of employees from 442 at June 30, 2009 to 435 at June 30, 2010.
Brokerage, clearing, and other related expenses
Brokerage, clearing, and other related expenses increased $4.1 million, or 26.5%, to
$19.3 million for the six months ended June 30, 2010 from $15.2 million for the six months ended
June 30, 2009. Brokerage, clearing and other related expenses increased primarily due to higher
payouts to the independent registered representatives of our brokersXpress subsidiary, higher
payouts to introducing brokers in our OEC subsidiary and higher execution costs on certain
option trades executed on behalf of our customers.
Brokerage advertising
Brokerage advertising expenses decreased $0.7 million, or 6.3%, to $10.1 million for the six
months ended June 30, 2010 from $10.8 million for the six months ended June 30, 2009. Brokerage
advertising expenses per net new customer account increased to $707 for the six months ended
June 30, 2010 from $577 for the six months ended June 30, 2009. Excluding approximately $1
million in expenses related to the launch of our Xtend trading platform, brokerage advertising
per net new customer account would have been $637 for the six months ended June 30, 2010.
Education marketing and fulfillment
Education marketing and fulfillment expenses increased $5.5 million, or 114.5%, to $10.3 million
for the six months ended June 30, 2010 compared to $4.8 million for the six months ended
June 30, 2009. Education marketing and fulfillment expenses increased primarily due to the
inclusion of operations from Optionetics for the full six month period ended June 30, 2010,
versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was
partially offset by lower sales volumes. Prior to the acquisition of Optionetics on May 4, 2009,
we did not have any material education marketing and fulfillment expenses.
Depreciation and amortization
Depreciation and amortization expenses increased $0.3 million, or 6.5%, to $4.6 million for the
six months ended June 30, 2010 from $4.3 million for the six months ended June 30, 2009.
Increased depreciation and amortization expenses were primarily due to the intangible and fixed
assets additions from our acquisition of Optionetics on May 4, 2009.
Other general and administrative
Other general and administrative expenses increased $0.7 million, or 6.6%, to $11.3 million for
the six months ended June 30, 2010 from $10.6 million for the six months ended June 30, 2009.
Increased other general and administrative expenses were primarily due to the incorporation of
other general and administrative expenses from our acquisition of Optionetics on May 4, 2009.
Income taxes
Income taxes decreased $0.8 million, or 5.1%, to $16.0 million for the six months ended June 30,
2010 from $16.8 million for the six months ended June 30, 2009. Lower income taxes were
primarily due to the 6.5% reduction of income before taxes.
Net income
As a result of the foregoing, we reported $27.5 million in net income for the six months ended
June 30, 2010, compared to $29.6 million in net income for the six months ended June 30, 2009, a
decrease of $2.1 million, or 7.3%.
Segment information
Brokerage services
Brokerage Services net revenues increased $3.5 million, or 3.4% for the six months ended June
30, 2010 compared to the six months ended June 30, 2009 due to the increase in commissions and
other income, which was partially offset by the decrease in other broker-related revenue. Income
before taxes decreased $0.7 million or 1.6% for the six months ended June 30, 2010 compared to
the six months ended June 30, 2009 due primarily to lower other brokerage related revenue.
Education Services
Education Services net revenues increased $8.9 million, or 121.8% for the six months
ended June 30, 2010 compared to the six months ended June 30, 2009 due to the inclusion
of operations from the acquisition of Optionetics on May 4, 2009, for the full six month
period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and
ending June 30, 2009, which was partially offset by lower sales volumes. The loss before
income taxes increased $2.3 million, or 822.8% for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due to the inclusion of operations for
the full six month period ended June
30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30,
2009 and lower sales volumes.
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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. Our ARS are securities with long-term stated maturities (during years 2033-2040) for which the
interest rates are reset through periodic short-term auctions every 7 or 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 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. Our ARS portfolio
consists entirely of securities backed by student loans issued under the FFELP program,
which are individually guaranteed by the United States Department of Education. All of
our ARS are AAA-rated with the exception of two issues totaling $6.0 million in par
value, and all of our ARS are 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, $86.8 million of our ARS securities have been redeemed by issuers or
their 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 Rule 15c3-1 ($1.0 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 June 30, 2010, optionsXpress, Inc. had net capital requirements of $14.4 million
and net capital of $104.0 million. As of June 30 2009, optionsXpress, Inc. had net
capital requirements of $6.5 million and net capital of $78.0 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 June 30, 2010, we had interest-bearing security deposits and short-term
treasury bills totaling $20.0 million deposited with clearing organizations for the
self-clearing of equities and option trades.
At June 30, 2010, we had $891.2 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 $1,074.9 million as of June 30, 2010.
Credit Facility
We generally finance our operating liquidity and capital needs through the use of funds
generated from operations and the issuance of common stock.
To support our self-clearing activities, we have an unsecured, uncommitted credit
facility with JPMorgan Chase Bank, NA that is callable on demand. We anticipate that the
credit facility will only be used occasionally, addressing potential timing issues with
the flow of customer funds, and will only be used to facilitate transactions for which
customers already have sufficient funds in brokerage accounts. As of June 30, 2010, there
was no balance outstanding on this credit facility.
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.
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Cash Flow
Cash used in operating activities was $1.7 million for the six months ended June 30,
2010, compared to cash provided by operating activities of $38.1 million for the six
months ended June 30, 2009. The primary reasons for the decrease in cash provided by
operating activities was due to the decrease of payables to brokerage customers which was
partially offset by the decrease of the receivables from brokers, dealers and clearing
organizations.
Cash provided by investing activities was $0.3 million for the six months ended June 30,
2010, compared to cash used in investing activities of $15.3 million for the six months
ended June 30, 2009. The primary reason for the decrease in cash used in investing
activities was the absence of the net proceeds used to acquire Optionetics on May 4,
2009.
Cash used in financing activities was $2.8 million for the six months ended June 30,
2010, compared to cash used in financing activities of $18.6 million for the six months
ended June 30, 2009. Cash used in financing activities decreased primarily due to the
reduction of cash used to repurchase our outstanding common stock.
Capital Expenditures
Capital expenditures were $1.5 million for the three months ended June 30, 2010, compared
to $0.8 million for the three months ended June 30, 2009. The increase in capital
expenditures was related to an increased level of fixed asset additions. Capital
expenditures for the periods ended June 30, 2010 and 2009 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.
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 June 30, 2010, we had $191.6 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.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the six
months ended June 30, 2010 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.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 lists in more
detail various important risk factors facing our business in Part I, Item 1A under the
heading Risk Factors. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer
We did not repurchase any of our common stock during the three months ended June 30,
2010.
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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 |
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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: August 9, 2010 | optionsXpress Holdings, Inc. | |||||
(Registrant) | ||||||
By: | /s/ DAVID A. FISHER | |||||
Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
By: | /s/ ADAM J. DEWITT | |||||
Chief Financial Officer | ||||||
(Principal Financial and Accounting Officer) |
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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 |
24