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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the quarterly period ended July 31, 2000

Commission file number 1-15101

TD WATERHOUSE GROUP, INC.

(212) 806-3500

     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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]   No      

      Number of shares outstanding of each of the registrant’s classes of Common Stock at September 13, 2000.

TD WATERHOUSE GROUP, INC.

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Forward-Looking Statements:

      In addition to historical information, this interim report contains forward-looking statements that reflect management’s current expectations. These statements relate to, among other things, contingencies, business strategy, sources of liquidity, capital expenditures, and operating results and financial condition. Achievement of the expressed expectations is subject to a number of risks and uncertainties that could cause actual results to differ materially from those expectations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this interim report for a discussion of important factors that may cause such differences.

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PART I.

Item 1.  Financial Statements

TD WATERHOUSE GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial statements.

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TD WATERHOUSE GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

The accompanying notes are an integral part of these consolidated financial statements.

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TD WATERHOUSE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

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TD WATERHOUSE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Description of the Business

      TD Waterhouse Group, Inc. (the “Company”), is a Delaware holding company which, through its operating subsidiaries, is a leading provider of online financial services to investors in the United States, Canada, the United Kingdom, Australia and Hong Kong. The Company is 88.6% owned by The Toronto-Dominion Bank (“TD Bank”) through its wholly-owned subsidiary, TD Waterhouse Holdings, Inc. (“TDW Holdings”).

      The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant transactions and balances between and among the Company and its subsidiaries have been eliminated in consolidation. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements as of October 31, 1999 included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 1999, as filed with the SEC.

2.  Commitments and Contingent Liabilities

      In the normal course of conducting its securities business, the Company has been named as a defendant in certain lawsuits and legal actions. In the opinion of management, after consultation with outside legal counsel, the ultimate outcome of such matters will not have a material adverse effect on the financial condition or results of operations of the Company.

3.  Net Capital Requirements

      As registered broker-dealers and members of the New York Stock Exchange, the Company’s U.S. subsidiaries, TD Waterhouse Investor Services, Inc. (“TDW US”) and National Investor Services Corp. (“NISC”), are subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital. At July 31, 2000, TDW US and NISC were both in compliance with their respective capital requirements and had net capital of $14,816 and $763,668, respectively, which was $10,202 and $617,729, respectively, in excess of their required net capital.

      TD Waterhouse Investor Services (Canada) Inc. (“TDW Canada”) is a member of the Investment Dealers Association of Canada and is required to meet its risk-adjusted capital rules, which require the maintenance of minimum risk-adjusted capital of Cdn. $250 (US $168 at July 31, 2000). As at July 31, 2000, TDW Canada was in compliance with such requirements.

      TD Waterhouse Investor Services (UK) Limited (“TDW UK”), TD Waterhouse Holdings (Australia) Pty. Limited (“TDW Australia”), and TD Waterhouse Investor Services (Hong Kong) Limited (“TDW HK”) are all subject to broker-dealer capital requirements in their respective countries and, as at July 31, 2000, were in compliance with such requirements.

4.  Net Interest Revenue

      The Company reports interest revenue, which primarily arises from margin loans to customers, net of related financing cost (interest expense). Interest expense was $116,106 and $58,922 for the three months ended July 31, 2000 and 1999, respectively, and $336,141 and $134,241 for the nine months ended July 31, 2000 and 1999, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.  Segment Information

      Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating and geographic segments of a company’s business. Currently, the nature and extent of the Company’s operations are such that it operates in only one reportable segment as a provider of discount brokerage services.

      The total revenues, income before income taxes, total accounts, average daily trades, total customer assets and identifiable assets of the Company’s businesses by geographic region are summarized below:

6.  Comprehensive income

      SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income, which includes net income and changes in equity except those resulting from investments by, or distributions to, stockholders. Comprehensive income is as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.  Earnings Per Share

      SFAS No. 128, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. Basic EPS excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential reduction in EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Earnings per share under the basic and diluted computations are as follows (in thousands, except share and per share amounts).

      For the prior periods, securities or other contracts to issue common stock did not have a dilutive impact.

8.  Acquisitions

      Dealwise Limited, one of the UK’s largest discount brokerage firms, was acquired on May 19, 2000, for $123.4 million, and its operations are being merged into the operations of the Company’s subsidiary TDW UK. The $103.0 million excess of the purchase price over fair value of assets acquired was recorded as goodwill. No pro forma information has been provided because the acquisition is not material.

9.  Reconciliation of U.S. and Canadian Generally Accepted Accounting Principles

      The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Material differences for the three and nine months ended July 31, 2000 and 1999 and as at July 31, 2000 and October 31, 1999 between U.S. GAAP financial statements and accounting principles generally accepted in Canada (“Canadian GAAP”) are described below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.  Reconciliation of U.S. and Canadian Generally Accepted Accounting Principles — (Continued)

Statement of Financial Condition

Stock Based Compensation

      The TD Bank employee stock option plan (“Plan”) allows option holders to elect to receive cash for the option’s intrinsic value, being the difference between the option’s exercise price and the current market value of the shares. In accounting for stock options with this feature, SFAS 123, Accounting for Stock Based Compensation, requires expensing the annual change in the intrinsic value of the stock options. For options that have not fully vested, the change in intrinsic value is amortized over the remaining vesting period. For purposes of preparing its Canadian GAAP financial statements, TD Bank does not record compensation expense for stock based compensation, but rather cash payments to option holders are charged to retained earnings. Effective May 1, 2000, certain option holders signed legally binding waivers to forfeit their right to a shareless exercise as provided by the Plan, resulting in no further expense being recorded for the change in the intrinsic value of the stock options. Accordingly, this resulted in no U.S. GAAP to Canadian GAAP reconciling amounts for the quarter ended July 31, 2000.

Customer’s Securities Transactions

      Under U.S. GAAP, customers’ securities transactions are recorded on a settlement date basis. Under Canadian GAAP, customers’ securities transactions are recorded on a trade date basis.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.  Reconciliation of U.S. and Canadian Generally Accepted Accounting Principles — (Continued)

      The following discussion of the financial condition and results of operations of TD Waterhouse Group, Inc. and its subsidiaries (collectively referred to as the “Company”) is based on the unaudited consolidated results of our U.S. and international businesses for the three months and the nine months ended July 31, 2000, and should be read in conjunction with the Company’s audited financial statements as of October 31, 1999. This discussion contains forward-looking statements, including statements regarding our strategy, financial performance and revenue sources, which involve risks and uncertainties. Actual results of operations of the businesses may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth elsewhere in this Form 10-Q and under the caption “Business-Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 1999, as filed with the SEC.

Overview

      We are one of the largest online financial service providers in the world. We offer investors a broad range of brokerage, mutual fund, banking and other consumer financial products on an integrated basis through 227 branches in the United States, Canada, the United Kingdom, Australia and Hong Kong. Our common stock trades on the New York and Toronto Stock Exchanges. Our principal shareholder is TD Bank, one of Canada’s largest financial institutions.

  Revenues

      Commissions and fees, which account for the majority of total revenues, include commissions earned for executing customer trades; payments received by us from market-makers, exchanges and other execution agents for order flow; and fees for providing trade execution and clearance services to financial institutions in the United States and Canada. Commissions and fees are primarily affected by changes in transaction volumes and changes in the commission or fee rates charged per transaction. Commissions, which account for more than 91% of commissions and fees, fluctuate based on the number of active customer accounts, the average number of trades per account, and the average commission per revenue trade. Active customer accounts have grown 45% to approximately 3.0 million as at July 31, 2000, from over 2.0 million as at July 31, 1999. We define active accounts as accounts that had purchase, sale or other activity or a position during the latest fiscal quarter. The significant growth in daily average trading volumes in the U.S. and Canada has permitted average trades per account to largely hold level with the quarter ended July 31, 1999, despite significant addition of accounts in international markets with traditionally lower activity per account than the North American markets. The quarter ended July 31, 2000 reflected a decline in average trades per account of 43.6% from the unusually active quarter ended April 30, 2000. This decline in investor activity resulted from increased market volatility and a seasonal industry trend. The slowdown led to decreases in third quarter revenues and net income of 29% and 55%, respectively, from the second quarter ended April 30, 2000. Average commissions per revenue trade for the third quarter ended July 31, 2000 decreased to approximately $20 per trade, down 10.8% from approximately $22 per trade in the quarter ended July 31, 1999. The third fiscal quarter of 2000 average commission per revenue trade was also down 5.7% from the average commission per revenue trade of approximately $21 in the second fiscal quarter of 2000. This was primarily due to the growth of our online trading products, which provide online customers with discounts from our standard commission schedule. We use other broker-dealers to execute our customers’ orders and receive revenue from these broker-dealers for such order flow. Payments for order flow have not increased commensurate with increases in trading volumes as a result of changes in regulations and market conventions that caused market-makers and execution agents to change their payment policies for order flow by reducing the payment per trade and by limiting the types of trades on which payments are made. Order flow revenue for the third quarter was approximately 3.2% of total revenue, which was down slightly from the third quarter of 1999 level of approximately 3.5%. Growth of transaction fees for execution and clearing services are a function of the addition of new clients and general increases in market volumes.

      Mutual fund and related revenue represents customary trailer fees from third party and affiliated mutual funds in the U.S. and Canada and, in the U.S. only, fees for shareholder services, administration and

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      We also receive fees for providing referral and administrative services to our affiliate, TD Waterhouse Bank, N.A. (“TDWB”), which is based on the daily cash balances our customers choose to sweep into an FDIC insured money market account. In addition, we provide investment advisory services to TDWB with respect to TDWB’s fixed income portfolio and receive a fee based on the market value of the assets under management. Fees related to services provided to TDWB are classified as mutual fund and related revenues.

      Net interest revenue is the difference between interest earned on our interest-earning assets (which primarily consist of margin loans to customers) and the interest expense associated with our interest-bearing liabilities (which include free credit balances in customers’ accounts, deposits received for stock loaned and other borrowings). Net interest revenue is principally affected by changes in customer margin balances, as well as the prevailing net interest spread. Net interest spread represents the difference between the rate we charge customers on margin loans (based on the broker call rate) and the rate we pay our customers (which is our lowest cost source of funds) and the rate we pay our other creditors. In the U.S., securities regulations place limits on the amount of customer funds we can use to finance our business, while no such limitations exist in Canada. Accordingly, the net interest spread from our Canadian brokerage operations has exceeded that of our U.S. operations.

      Other revenue consists primarily of revenues derived from ancillary services such as floor brokerage and retirement account administration.

  Operating Expenses

      Our largest operating expense is employee compensation and benefits, which includes salaries and wages, incentive compensation and related employee benefits and taxes. We employ a limited number of commissioned sales representatives; therefore, compensation and benefits do not vary directly with changes in commission revenue. Most employees do, however, receive annual incentive compensation based on the overall results of our operations in each geographical region, as well as the employee’s individual performance. Therefore, a significant portion of compensation and benefits expense will fluctuate based on our operating results. Prior to the current quarter being reported, compensation expense has also reflected the change in intrinsic value of TD Bank stock options granted to our employees under TD Bank’s stock option plan. Effective May 1, 2000, certain option holders signed legally binding waivers to forfeit their right to a shareless exercise as provided by the Plan. As a result no further expense will be recorded for the change in the intrinsic value of the stock options.

      Execution and clearing costs include fees paid to floor brokers and exchanges for trade execution costs, fees paid to third-party vendors for data processing services, and fees paid to clearing entities for certain clearance and settlement services. Execution and clearing costs, with the exception of data processing expenses, generally fluctuate based on transaction volume. Data processing services are generally provided under longer-term fixed fee arrangements with the providers.

      Occupancy and equipment expense includes the costs of leasing and maintaining our office space and branch network, the leases and rental costs related to computers and other equipment, and depreciation and amortization expense associated with our fixed assets and leasehold improvements. Occupancy and equipment expense is primarily affected by increases in the number of branches and employees.

      Advertising and marketing includes media, print and direct mail advertising expenses and other costs incurred to create brand awareness, promote our product and service offerings and introduce new products and services. Due to the rapid development of new products and services and increased competition, advertising

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      Communications expense includes telephone expenses, which are generally affected by changes in customer transaction volumes and the increased use of electronic communication channels and online service offerings.

      We have been active in acquiring new businesses to rapidly expand our operations including: Marathon Brokerage in 1993, Waterhouse Securities Group in 1996, Pont Securities Limited in 1997 and Rivkin Croll Smith, Kennedy Cabot & Co., Jack White & Company and Gall & Eke in 1998, and YorkSHARE Limited, a U.K. based discount broker operation, in November, 1999. In the quarter ended April 30, 2000, we acquired CT Securities Inc. from CT Financial Services Inc. CT Financial Services Inc. was acquired by TD Bank in February, 2000. The acquisition of Dealwise Limited in the U.K., one of the largest discount brokers in the U.K., was completed early in the third fiscal quarter. Goodwill relating to our major acquisitions is generally being amortized over a period of 20 years from the date of acquisition.

      We also provided the initial funding of two joint ventures in Japan and in India, which were completed in the second quarter, and began activity in the third quarter. Contributions from these joint ventures with The Bank of Tokyo-Mitsubishi, Ltd., which provides access to the Japanese market, and with Tata Finance Limited, which provides us with access to the rapidly developing market in India, are reflected in other income and are accounted for under the equity method of accounting.

      Professional fees include fees paid to consultants engaged to support our product, service and systems development efforts, as well as legal and accounting fees. These expenses generally fluctuate with overall changes in the level of business activities.

      Other expenses consist of administrative expenses related to account maintenance such as statement production, printing and supplies, along with fees to TD Bank’s branch network for their support and other costs including postage. It also includes expenses for errors and provisions against our margin loan portfolio.

      We are subject to income taxes in each country in which we operate. The difference between our effective tax rate and the U.S. statutory rate of 35% differs from period to period, but primarily results from state and local taxes in the United States, provincial taxes in Canada, and the effect of certain non-deductible expenses, most notably the amortization of goodwill.

      *  *  *

      Our revenues are derived primarily from securities brokerage and related services, and we expect this business to continue to account for a significant amount of our revenues. We, like other securities firms, are directly affected by economic and political conditions, broad trends in business and finance and changes in the conditions of the securities markets in which our customers trade. Over the past several years, the securities markets in the U.S. and Canada (which comprise the principal trading markets for most of our customers) have fluctuated considerably, including increased volatility during 2000. A downturn in either of these markets would adversely affect our operating results. Recently the markets for technology and Internet-related stocks have been especially volatile, and a significant downturn would have an even greater effect on us because a substantial portion of our customers invest in these types of stocks. In previous major stock market declines, many firms in the securities industry suffered financial losses, and the level of individual investor trading activity decreased after these events. When trading volume is low, our profitability would likely be adversely affected because a significant portion of our costs do not vary with revenue. In addition, during the past several years, the stock market has experienced a significant increase in market pricing and trading volume, which has contributed to an increase in investor interest in buying and trading securities. A sustained downturn in the stock market could adversely affect investor interest in buying and trading securities and, accordingly, adversely affect our business. For these reasons, severe market fluctuations and decreased investor trading activity could have a material adverse effect on our business, financial condition and operating results.

      We adjust our expenses to the extent possible in anticipation of and in response to changes in financial market conditions and customer trading patterns. Certain of our expenses (including incentive compensation,

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      We have experienced substantial changes in and expansion of our business and operations since we began offering our online Internet investing services in the U.S. in 1997. We expect to continue to experience periods of rapid change in the future. Our past expansion has placed, and any future expansion would place, significant demands on our administrative, operational, financial and other resources.

Results of Operations

      The following table sets forth the combined statement of income data for the periods indicated as a percentage of total revenues:

North America comprises our primary market, with the predominant level of transactions being conducted in the United States and Canada. However, the international component continues to grow, with increased levels of activity expected to be reflected as a result of our rapidly expanding international operations, especially in

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Three Months Ended July 31, 2000 Versus Three Months Ended July 31, 1999

  Financial Overview

      Net income for the three months ended July 31, 2000 was $34.5 million, up 30.7% from $26.4 million for the comparable period in 1999. Revenues for the three months ended July 31, 2000 were $345.6 million, up 42.3% from $243.0 million for the comparable period in 1999. This arose from a 30.5% increase in commissions and transaction fees, a 44.1% increase in mutual fund and related revenue, a 72.0% increase in net interest revenue, and a 65.7% increase in other revenue.

      Total operating expenses of $278.8 million for the three months ended July 31, 2000 were up 43.7% from $193.9 million for the comparable period in 1999. This resulted largely from a $26.2 million increase in compensation and benefits costs, which included the impact of over 2,450 additional associates to handle the increased business volume, of which total, over 1,350 were dedicated to retail service. Increases were also experienced in the volume driven clearing costs ($8.1 million), occupancy and equipment in connection with the expanded staffing and branch expansions ($11.0 million), increased marketing and advertising expenses related to the national advertising and global branding campaigns ($8.8 million), and other expenses for the period ($18.9 million).

  Revenues

     Commissions and Fees

      Commissions and fees were $202.9 million for the three months ended July 31, 2000, up $47.5 million, or 30.5%, from the comparable period in 1999. The total number of trades executed by us has increased 46.7% from the comparable period in 1999 as our customer base has grown. Average commissions per revenue trade decreased 10.8% due to the expanded popularity of our online brokerage services, which are offered at a lower price than traditional agent based trading. For the three months ended July 31, 2000, total daily average online

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      We added approximately 172,000 new customer accounts (excluding those obtained through acquisitions) during the three months ended July 31, 2000, an increase of 2% from the approximately 169,000 new accounts added during the comparable period in 1999. Our advertising and marketing expense per new account was approximately $136 for the three months ended July 31, 2000 versus $87 for the comparable 1999 period, which preceded our re-branding under the TD Waterhouse name.

     Mutual Fund and Related Revenue

      Mutual fund and related revenue was $37.1 million for the three months ended July 31, 2000, up $11.3 million, or 44.1%, from the comparable period in 1999. This increase was primarily due to a significant increase in customer assets held in third party mutual funds and proprietary money market and mutual funds.

     Net Interest Revenue

      Net interest revenue was $88.8 million for the three months ended July 31, 2000, up $37.2 million, or 72.0%, from the comparable period in 1999. This increase was primarily due to a 59.1% increase in average customer margin loans to $8.5 billion during the three months ended July 31, 2000 from $5.35 billion during the comparable period in 1999. Our average net interest spread of 2.49% for the three months ended July 31, 2000 was a slight improvement over the spread of 2.41% for the comparable period in 1999 due to the increased growth in our Canadian operations, which has provides a higher net interest spread than our U.S. operations.

  Operating Expenses

      Compensation and benefits expense was $97.5 million for the three months ended July 31, 2000, up $26.2 million, or 36.7%, from the comparable period in 1999. This increase was primarily due to the addition of new employees to support our rapid growth and to provide incentive compensation in line with our operating results.

      Execution and clearing costs were $40.6 million for the three months ended July 31, 2000, up $8.1 million, or 25.0%, from the comparable period in 1999. This increase was primarily due to increased transaction volume offset in part by productivity gains from our ability to leverage our existing clearing operations.

      Occupancy and equipment expense was $32.4 million for the three months ended July 31, 2000, up $11.0 million, or 51.5%, from the comparable period in 1999. This increase was primarily due to additional lease expenses on our expanded branch and call center space, as well as increased lease and maintenance expenses on data processing equipment. During the third quarter we opened three new branches.

      Advertising and marketing expense was $23.4 million for the three months ended July 31, 2000, up $8.8 million, or 60.0%, from the comparable period in 1999. This increase primarily relates to increased

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      Communications expense was $14.5 million for the three months ended July 31, 2000, up $4.5 million, or 45.1%, from the comparable period in 1999. This increase was primarily due to increased trading volumes and the opening of new branches.

      Amortization of goodwill was $11.6 million for the three months ended July 31, 2000, up $2.3 million, or 24.4%, from the comparable period in 1999. This increase was due to the acquisition of YorkSHARE Limited in the first fiscal quarter, 2000, the acquisition of CT Securities Inc. in the second fiscal quarter, 2000, and the acquisition of Dealwise Limited in the third fiscal quarter, 2000.

      Professional fees were $11.5 million for the three months ended July 31, 2000, up $5.1 million, or 78.7%, from the comparable period in 1999. This increase was primarily due to fees for computer programming and systems consultants (up approximately $1.2 million), state registration fees (up approximately $1.6 million) for the increased dedicated retail associates (up over 1,350) in call centers and new branches, and a $0.75 million increase in costs of management of international operations expansion.

      Other expenses were $47.3 million for the three months ended July 31, 2000, up $18.9 million, or 66.5%, from the comparable period in 1999. The increase in other expenses is a reflection of the overall growth in the business, as it includes costs related to account opening and maintenance, statement production and printing and supplies, along with increased referral commissions in Canada. Also included in other expenses are increased costs incurred for trading errors and an increase in provisions on the margin loan portfolio.

      Our effective income tax rate for the three months ended July 31, 2000 and 1999 was 48.4% and 46.2%, respectively. The increase in the effective tax rate was due to an increase in the Canadian business contribution, which has a higher tax rate and a large increase of non-deductible goodwill. Our effective tax rate, excluding the tax effects of non-deductible goodwill, was 43.3% and 41.5%, respectively, for the three months ended July 31, 2000 and 1999.

Nine Months Ended July 31, 2000 Versus Nine Months Ended July 31, 1999

  Financial Overview

      Net income for the nine months ended July 31, 2000 was $168.1 million, up 120.0% from $76.4 million for the comparable period in 1999. Revenues for the nine months ended July 31, 2000 were $1,215.9 million, up 72.0% from $707.0 million for the comparable period in 1999. This was due to a 65.0% increase in commissions and transaction fees, a 55.8% increase in mutual fund and related revenue, a 107.1% increase in net interest revenue, and a 77.0% increase in other revenue.

      Total operating expenses of $910.5 million for the nine months ended July 31, 2000 were up 61.2% from $565.0 million for the comparable period in 1999, primarily resulting from additional business volume.

  Revenues

     Commissions and Fees

      Commissions and fees were $798.6 million for the nine months ended July 31, 2000, up $314.5 million, or 65.0%, from the comparable period in 1999. The total number of trades executed by us has increased 86.6% from the comparable period in 1999 as our customer base has grown. Average commissions per revenue trade decreased 10.2% due to the expanded popularity of our online brokerage services, which are offered at a lower price than traditional agent based trading. For the nine months ended July 31, 2000, total daily average online

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      We added approximately 851,000 new customer accounts (excluding those obtained through acquisition) during the nine months ended July 31, 2000, an increase of 44.4% from the approximately 589,000 new accounts added during the comparable period in 1999. Our advertising and marketing expense per new account was approximately $104 for the nine months ended July 31, 2000 versus $66 for the comparable 1999 period.

     Mutual Fund and Related Revenue

      Mutual fund and related revenue was $108.0 million for the nine months ended July 31, 2000, up $38.7 million, or 55.8%, from the comparable period in 1999. This increase was primarily due to a significant increase in customer assets held in third party mutual funds and proprietary money market and mutual funds.

     Net Interest Revenue

      Net interest revenue was $258.8 million for the nine months ended July 31, 2000, up $133.8 million, or 107.1%, from the comparable period in 1999. This increase was primarily due to a 110.1% increase in average customer margin loans to $8.6 billion during the nine months ended July 31, 2000 from $4.1 billion during the comparable period in 1999. Our average net interest spread of 2.44% for the nine months ended July 31, 2000 was lower than the spread of 2.57% for the comparable period in 1999 due to the continued growth of our U.S. operation, which has a lower net interest spread than our Canadian operation.

  Operating Expenses

      Compensation and benefits expense was $317.6 million for the nine months ended July 31, 2000, up $115.9 million, or 57.5%, from the comparable period in 1999. This increase was primarily due to the addition of new employees to support our rapid growth and incentive compensation to reflect the improvement in our operating results. Compensation as a percentage of revenues has decreased which reflects the fact that revenue growth has outpaced our employee growth in the short term.

      Execution and clearing costs were $129.9 million for the nine months ended July 31, 2000, up $29.3 million, or 29.1%, from the comparable period in 1999. This increase was primarily due to increased transaction volume offset in part by productivity gains from our ability to leverage our large clearing operations.

      Occupancy and equipment expense was $92.6 million for the nine months ended July 31, 2000, up $34.4 million, or 59.2%, from the comparable period in 1999. This increase was primarily due to additional lease expenses on our expanded office space, as well as increased lease and maintenance expenses on data processing equipment. During the first nine months of fiscal 2000 we opened 15 new branches, including two new call centers.

      Advertising and marketing expense was $88.8 million for the nine months ended July 31, 2000, up $50.1 million, or 129.5%, from the comparable period in 1999. This increase primarily relates to increased

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      Communications expense was $48.1 million for the nine months ended July 31, 2000, up $15.4 million, or 47.0%, from the comparable period in 1999. This increase was primarily due to increased trading volumes and the opening of new branches.

      Amortization of goodwill was $31.8 million for the nine months ended July 31, 2000, up $3.9 million, or 14.0%, from the comparable period in 1999. This increase was due to the acquisition of YorkSHARE Limited in the first fiscal quarter of 2000, and of CT Securities Inc. in the second fiscal quarter of 2000, and Dealwise Limited in the third fiscal quarter of 2000.

      Professional fees were $31.4 million for the nine months ended July 31, 2000, up $14.7 million, or 88.3%, from the comparable period in 1999. This increase was primarily due to fees for computer programming and systems consultants, along with registration fees for the increase in dedicated retail associates and costs for management of the international expansion.

      Other expenses were $170.4 million for the nine months ended July 31, 2000, up $81.8 million, or 92.3%, from the comparable period in 1999. This increase was consistent with the overall growth in the business as reflected in the increased trading volumes and account openings, along with increased referral commissions in Canada. Additionally, other expenses for the nine months ended July 31, 2000 includes the increased costs incurred in trading errors and unsecured losses related to the record volumes and market volatility experienced in the second quarter.

      Our effective income tax rate for the nine months ended July 31, 2000 and 1999 was 45.0% and 46.2%, respectively. The decrease in the fiscal year to date effective tax rate was primarily due to the large contribution in pre-tax income from our U.S. operations, which has the effect of reducing the impact of permanent differences such as the amortization of goodwill, as well as foreign provincial taxes. Our effective tax rate, excluding the tax effects of non-deductible goodwill, was 42.2% and 41.3%, respectively, for the nine months ended July 31, 2000 and 1999.

  Liquidity and Capital Resources

      We finance our customer securities operations primarily through customer credit balances, deposits received for securities loaned, other short-term borrowings and cash generated by our operations. As of July 31, 2000, 90.1% of our assets consisted of cash and cash equivalents or assets readily convertible into cash (principally receivables from customers, receivables from brokers and dealers, deposits paid for stock borrowed, and securities owned). Receivables from customers primarily consist of margin loans to customers, which are secured by customers’ readily marketable securities. Receivables from brokers and dealers consist of amounts receivable for pending securities transactions, which can generally be settled within three business days. Deposits paid for securities borrowed represent cash deposits placed with brokers securing marketable securities borrowed by us. Securities owned consist primarily of U.S. and Canadian government securities and other securities, which trade in highly liquid markets.

      Capital expenditures and investments in new technology, services and advertising are being primarily financed through earnings from operations. Prior to the initial public offering of the Company’s common stock on June 23, 1999 (the “Offering”), acquisitions of new businesses have been funded through capital contributions from TD Bank. New acquisitions are funded by issuances of shares of the Company or its subsidiaries, by proceeds from the Offering and by funds generated by operations.

      Net income plus depreciation and amortization was $55.5 million and $30.2 million for the three months ended and $224.9 million and $105.2 million for the nine months ended July 31, 2000 and 1999, respectively. Depreciation and amortization expense, which relates to fixed assets, leasehold improvements and goodwill, was $21.0 million and $4.2 million for the three months ended and $56.8 million and $28.8 million for the nine months ended July 31, 2000 and 1999, respectively. Capital expenditures were $38.8 million and $17.0 million in the three months ended and $78.1 million and $29.2 million in the nine months ended July 31, 2000 and 1999, respectively, which represented 11.2% and 7.0% and 6.4% and 4.1% of total revenues in each period.

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      Our broker-dealer subsidiaries are subject to regulatory requirements intended to ensure their general soundness and liquidity and require that the broker-dealers comply with certain minimum capital requirements. These regulations, which differ in each country, generally prohibit our broker-dealer subsidiaries from repaying borrowings from TD Bank, paying cash dividends, making loans to us or affiliates, or otherwise entering into transactions which would result in a significant reduction in their regulatory capital position, without prior notification and/or approval of the broker-dealer’s principal regulator. Our capital structure is designed to provide each entity and business with capital and liquidity consistent with their business and regulatory requirements.

      It is currently anticipated that our available cash resources and credit facilities will be sufficient to meet anticipated working capital, capital expenditures and regulatory capital requirements for at least the next twelve months.

  Recently Issued Accounting Standards

      SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in 1998. This standard requires us to recognize all derivatives as either assets or liabilities in our financial statements and to measure such instruments at their fair values. Hedging activities must be redesignated and documented pursuant to the provisions of this standard. This standard becomes effective for all fiscal quarters of fiscal years which begin after June 15, 2000. At this time, we do not believe that adoption of this standard will have a material impact on our financial condition and results of operations.

      In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. At this time, management does not believe that SAB No. 101 will have a material effect on the Company’s financial condition or results of operations.

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 not traded or otherwise transacted in derivatives nor do we expect to in the future. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations.

      As a part of our brokerage business, we hold short-term interest-earning assets (mainly margin loans to customers) totaling $9.6 billion and $6.5 billion at July 31, 2000 and October 31, 1999, respectively, of which $2.6 billion and $1.8 billion, respectively, were denominated in foreign currencies, primarily the Canadian dollar. Our interest earning assets are financed by short-term interest-bearing liabilities in the form of customer balances and deposits received for stock loaned. We earn a net interest spread on the difference between amounts earned on customer margin loans and amounts paid on stock loan and customer credit balances. Since we establish the rate paid on customer cash balances, a substantial portion of our interest rate risk is under our direct management. We generally move rates earned on loans in lockstep with rates paid on credit balances to maintain a consistent net interest spread, and, therefore, do not anticipate that changes in interest rates will have a material adverse effect on our earnings and cash flows. Similarly, since we manage the assets and liabilities related to our brokerage business on a geographic basis and fund assets with liabilities denominated in the same currency as the assets, we do not anticipate that changes in foreign exchange rates will have a material adverse effect on our net interest revenues or cash flows.

      We held marketable securities (securities owned) at July 31, 2000 and October 31, 1999, which were recorded at fair value of $117.0 million and $342.0 million, respectively, and sold securities short (securities sold, not yet purchased) at July 31, 2000 and October 31, 1999 with a fair value of $8.4 million and

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PART II.

OTHER INFORMATION

Item 1.  Legal Proceedings

      Many aspects of our business involve substantial risks 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 in some cases punitive damages. Like other securities brokerage firms, we have been named as a defendant in lawsuits and from time to time we have been threatened with, or named as a defendant in, arbitrations and 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 and inspections.

      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.

Item 2.  Changes in Securities and Use of Proceeds

      None

Item 3.  Defaults Upon Senior Securities

      None

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

      None

Item 5.  Other Information

      None

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Item 6.  Exhibits and Reports on Form 8-K

      (a)  The following exhibits are filed as part of this quarterly report on Form 10-Q.

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      (b)  Reports on Form 8-K

      None

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SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated:  September 14, 2000

	TD WATERHOUSE GROUP, INC.

	By:	/s/ STEPHEN D. MCDONALD _______________________________________ Stephen D. McDonald

	Chief Executive Officer and Deputy Chairman

	By:	/s/ B. KEVIN STERNS _______________________________________ B. Kevin Sterns

	Executive Vice President
	and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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