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UNITED STATES

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the quarterly period ended April 30, 2000

Commission file number 1-15101

TD WATERHOUSE GROUP, INC.

(212) 806-3500

(Registrant’s 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 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 June 13, 2000.

TD WATERHOUSE GROUP, INC.

Form 10-Q QUARTERLY REPORT

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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 April 30, 2000, TDW US and NISC were both in compliance with their respective capital requirements and had net capital of $7,524 and $741,283, respectively, which was $3,418 and $582,228, 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 $169 at April 30, 2000). As at April 30, 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 April 30, 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 $134,207 and $44,698 for the three months ended April 30, 2000 and 1999, respectively, and $217,354 and $75,594 for the six months ended April 30, 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 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 per share amounts):

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

8.  Acquisitions

      CT Securities Inc., a subsidiary of CT Financial Services Inc., which in turn is a subsidiary of TD Bank, was acquired on April 13, 2000, for $96.8 million, and subsequently its operations were merged into the Company’s subsidiary TDW Canada. In accordance with the transaction and for purposes of preparing the consolidated financial statements of the Company, this acquisition became effective as of February 1, 2000. The $87 million excess of the purchase price over fair value of assets acquired was recorded as goodwill.

9.  Stockholders’ Equity

      In connection with the acquisition of CT Securities Inc. (Note 8), the Company’s subsidiary, TDW Canada, issued 3,370,150 exchangeable shares and 17,100 Class B preferred shares. The exchangeable shares are exchangeable at any time for an equivalent number of shares of the Company’s common stock, and have dividend and voting rights equal to the number of shares of the Company’s common stock. Common stock in the consolidated financial statements includes the 3,370,150 shares.

10.  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 six months ended April 30, 2000 and 1999 and as at April 30, 2000 and October 31, 1999 between

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

U.S. GAAP financial statements and accounting principles generally accepted in Canada (“Canadian GAAP”) are described below.

Statement of Financial Condition

Stock Based Compensation

      The TD Bank employee stock option 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.

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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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

      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 six months ended April 30, 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, and the second largest discount brokerage operation, in the world. We offer investors a broad range of brokerage, mutual fund, banking and other consumer financial products on an integrated basis through 224 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 92% 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 49% to approximately 2.81 million as at April 30, 2000, from 1.88 million as at April 30, 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 major global equities markets and account growth has resulted in a 48.8% increase in the average number of trades per active account for the quarter ended April 30, 2000 over the quarter ended April 30, 1999. Average number of trades per active account increased 15.1% during the three months ended April 30, 2000, over the first quarter ended January 31, 2000 and 96.7% over the quarter ended October 31, 1999. The effect of such increases has been partially offset by a decrease in the average commission per revenue trade, to approximately $21 per trade in the second fiscal quarter of 2000, down 9.7% from approximately $23 per trade in the quarter ended April 30, 1999. The second fiscal quarter of 2000 average commission per revenue trade was also down 2.3% from the average commission per revenue trade of slightly over $21 in the first 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 second quarter was less than 4% of total revenue, which remained at approximately the same proportion of total revenue as for the second quarter of 1999. Transaction fees for execution and clearing services continue to grow due to 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 investment management services provided to our proprietary money market and mutual funds. Such fees are primarily based upon the daily amount of customer assets invested in third party mutual funds and upon the

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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 operating 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. Compensation expense also reflects the change in intrinsic value of TD Bank stock options granted to our employees under TD Bank’s stock option plan.

      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 and marketing expense has increased significantly from period to period and management expects this trend to continue in step with revenue growth in the future.

      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.

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      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 was acquired by TD Bank in February, 2000. We also provided the initial funding of two joint ventures in Japan and in India in the second quarter. Contributions from these joint ventures with The Bank of Tokyo-Mitsubishi, Ltd., which will provide access to the Japanese market, and with Tata Finance Limited, which provides us with access to the rapidly developing market in India, will begin to be reflected in the third fiscal quarter. An agreement to acquire Dealwise Limited in the U.K. was also reached, and was subsequently concluded 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.

      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.

      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, portions of communications, and execution and clearing costs) vary directly with changes in financial performance or customer trading activity. Expenses relating to the level of temporary employees, contractors, overtime hours, professional services, and advertising and marketing are adjustable over the short-term to help us achieve our financial objectives. Additionally, developmental spending (including branch openings, product and service rollouts, and certain information technology systems improvements) is generally discretionary and can be altered in response to market conditions. However, a significant portion of our expenses such as salaries and wages, occupancy and equipment, depreciation and amortization of goodwill do not vary directly, at least in the short term, with fluctuations in revenues or securities trading volumes. Also, we view our developmental spending as essential to our future growth, and therefore attempt to avoid major adjustments in such spending unless faced with a sustained slowdown in customer trading activity. Given the nature of our revenues and expenses, and the economic and competitive factors discussed above, our earnings may be subject to significant volatility from period to period. Our results for any interim period are not necessarily indicative of results for a full year.

      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.

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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 the United Kingdom. The tables below provide a breakdown as to the geographic source of transaction, account and customer asset volumes.

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Three Months Ended April 30, 2000 Versus Three Months Ended April 30, 1999

Financial Overview

      Net income for the three months ended April 30, 2000 was a record $76.6 million, up 155.7% from $30.0 million for the comparable period in 1999. Revenues for the three months ended April 30, 2000 were also a record $488.7 million, up 96.3% from $249.0 million for the comparable period in 1999. This was primarily due to a 90.7% increase in commissions and transaction fees, a 65.3% increase in mutual fund and related revenue and a 139.2% increase in net interest revenue.

      Total operating expenses of $351.4 million for the three months ended April 30, 2000 were up 81.0% from $194.1 million for the comparable period in 1999. This resulted largely from a $46.0 million increase in compensation and benefits costs, which included the impact of over 2,800 additional associates to handle the increased business volume, of which over 1,900 were dedicated to retail service. Increases were also experienced in the volume driven clearing costs ($14.7 million), occupancy and equipment in connection with the expanded staffing and branch expansions ($14.3 million), increased marketing and advertising expenses related to the national advertising and global branding campaigns ($16.8 million), and other expenses which were also impacted by the record volumes processed and market volatility experienced during the period ($51.0 million).

Revenues

  Commissions and Fees

      Commissions and fees were $336.9 million for the three months ended April 30, 2000, up $160.2 million, or 90.7%, from the comparable period in 1999. The total number of trades executed by us has increased 112.7% from the comparable period in 1999 as our customer base has grown. Average commissions per revenue trade decreased 9.7% 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 April 30, 2000, total daily average online and total daily average electronic trades represented 74.4% and 77.7% of total trades, respectively, as compared to 58.9% and 62.9%, respectively, in the comparable 1999 period.

      We added approximately 418,000 new customer accounts (excluding those obtained through acquisitions) during the three months ended April 30, 2000, an increase of 65.2% from the approximately 253,000 new accounts added during the comparable period in 1999. Our advertising and marketing expense per new

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  Mutual Fund and Related Revenue

      Mutual fund and related revenue was $37.7 million for the three months ended April 30, 2000, up $14.9 million, or 65.3%, 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 $94.0 million for the three months ended April 30, 2000, up $54.7 million, or 139.2%, from the comparable period in 1999. This increase was primarily due to a 139.0% increase in average customer margin loans to $10.11 billion during the three months ended April 30, 2000 from $4.23 billion during the comparable period in 1999. Our average net interest spread of 2.36% for the three months ended April 30, 2000 was lower than the spread of 2.45% 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 $116.5 million for the three months ended April 30, 2000, up $46.0 million, or 65.3%, from the comparable period in 1999. This increase was primarily due to the addition of new employees to support our rapid growth and an increase in incentive compensation to reflect the improvement in our operating results.

      Execution and clearing costs were $48.2 million for the three months ended April 30, 2000, up $14.7 million, or 44.1%, 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 existing clearing operations.

      Occupancy and equipment expense was $33.3 million for the three months ended April 30, 2000, up $14.3 million, or 75.1%, 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 this latest three months we opened five branches, including two new call centers.

      Advertising and marketing expense was $29.2 million for the three months ended April 30, 2000, up $16.8 million, or 134.2%, from the comparable period in 1999. This increase primarily relates to increased national advertising in the United States, but also includes costs arising from foreign national advertising and branding campaigns.

      Communications expense was $20.0 million for the three months ended April 30, 2000, up $8.0 million, or 66.5%, 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 $10.6 million for the three months ended April 30, 2000, up $1.3 million, or 13.9%, from the comparable period in 1999. This increase was due to the acquisition of the UK discount brokerage operation, YorkSHARE Limited in the first fiscal quarter, 2000, and the acquisition of CT Securities Inc. in the second fiscal quarter, 2000.

      Professional fees were $11.3 million for the three months ended April 30, 2000, up $5.2 million, or 83.6%, from the comparable period in 1999. This increase was primarily due to fees for computer programming and systems consultants (up approximately $1.3 million), state registration fees (up approximately $0.9 million) for the increased dedicated retail associates (up over 1,900) in call centers and new branches, and a $1.0 million increase in costs of management of international operations expansion.

      Other expenses were $82.3 million for the three months ended April 30, 2000, up $51.0 million, or 163.5%, from the comparable period in 1999. The increase in other expenses is a reflection of the overall

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      Our effective income tax rate for the three months ended April 30, 2000 and 1999 was 44.2% and 45.4%, respectively. The decrease in the effective tax rate was primarily due to the significant increase 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. Our effective tax rate, excluding the tax effects of non-deductible goodwill, was 42.2% and 41.3%, respectively, for the three months ended April 30, 2000 and 1999.

Six Months Ended April 30, 2000 Versus Six Months Ended April 30, 1999

Financial Overview

      Net income for the six months ended April 30, 2000 was a record $133.6 million, up 167.1% from $50.0 million for the comparable period in 1999. Revenues for the six months ended April 30, 2000 were a record $870.3 million, up 87.6% from $464.0 million for the comparable period in 1999. This was primarily due to an 81.2% increase in commissions and transaction fees, a 62.6% increase in mutual fund and related revenue and a 131.8% increase in net interest revenue.

      Total operating expenses of $631.7 million for the six months ended April 30, 2000 were up 70.3% from $371.0 million for the comparable period in 1999, primarily resulting from additional business volume.

Revenues

  Commissions and Fees

      Commissions and fees were $595.7 million for the six months ended April 30, 2000, up $267.0 million, or 81.2%, from the comparable period in 1999. The total number of trades executed by us has increased 106.9% from the comparable period in 1999 as our customer base has grown. Average commissions per revenue trade decreased 10.5% due to the expanded popularity of our online brokerage services, which are offered at a lower price than traditional agent based trading. For the six months ended April 30, 2000, total daily average online and total daily average electronic trades represented 73.4% and 76.6% of total trades, respectively, as compared to 58.5% and 62.9%, respectively, in the comparable 1999 period.

      We added approximately 679,000 new customer accounts (excluding those obtained through acquisition) during the six months ended April 30, 2000, an increase of 61.7% from the approximately 420,000 new accounts added during the comparable period in 1999. Our advertising and marketing expense per new account was approximately $96 for the six months ended April 30, 2000 versus $57 for the comparable 1999 period.

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  Mutual Fund and Related Revenue

      Mutual fund and related revenue was $70.9 million for the six months ended April 30, 2000, up $27.3 million, or 62.6%, 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 $170.0 million for the six months ended April 30, 2000, up $96.6 million, or 131.8%, from the comparable period in 1999. This increase was primarily due to a 148.6% increase in average customer margin loans to $8.7 billion during the six months ended April 30, 2000 from $3.5 billion during the comparable period in 1999. Our average net interest spread of 2.42% for the six months ended April 30, 2000 was lower than the spread of 2.67% 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 $220.0 million for the six months ended April 30, 2000, up $89.7 million, or 68.8%, from the comparable period in 1999. This increase was primarily due to the addition of new employees to support our rapid growth and an increase in 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 $89.3 million for the six months ended April 30, 2000, up $21.2 million, or 31.1%, 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 $60.2 million for the six months ended April 30, 2000, up $23.4 million, or 63.6%, 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 first six months of fiscal 2000 we opened 12 new branches, including two new call centers.

      Advertising and marketing expense was $65.4 million for the six months ended April 30, 2000, up $41.3 million, or 171.8%, from the comparable period in 1999. This increase primarily relates to increased national advertising in the U.S., but also includes costs arising from foreign national advertising and branding campaigns.

      Communications expense was $33.6 million for the six months ended April 30, 2000, up $10.9 million, or 47.9%, 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 $20.2 million for the six months ended April 30, 2000, up $1.6 million, or 8.8%, from the comparable period in 1999. This increase was primarily 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.

      Professional fees were $19.9 million for the six months ended April 30, 2000, up $9.7 million, or 94.4%, 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 $123.1 million for the six months ended April 30, 2000, up $62.9 million, or 104.5%, 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 six months ended April 30, 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.

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      Our effective income tax rate for the six months ended April 30, 2000 and 1999 was 44.0% and 46.2%, respectively. The decrease in the effective tax rate was primarily due to the significant increase 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 41.8% and 41.3%, respectively, for the six months ended April 30, 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 April 30, 2000, 91.7% 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 issuance of shares of the Company or its subsidiaries and by proceeds from the Offering.

      Net income plus depreciation and amortization was $95.6 million and $42.3 million for the three months ended and $169.3 million and $74.7 million for the six months ended April 30, 2000 and 1999, respectively. Depreciation and amortization expense, which relates to fixed assets, leasehold improvements and goodwill, was $19.1 million and $12.4 million for the three months ended and $35.7 million and $24.6 million for the six months ended April 30, 2000 and 1999, respectively. Capital expenditures were $20.6 million and $6.8 million in the three months ended and $39.3 million and $12.2 million in the six months ended April 30, 2000 and 1999, respectively, which represented 4.2% and 2.7% and 4.5% and 2.6% of total revenues in each period. Capital expenditures, excluding acquisitions of new businesses, during the three months and six months ended April 30, 2000 and 1999, primarily related to the purchase of communications and data processing equipment and leasehold improvements related to new branches and office facilities.

      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

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      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 $10.4 billion and $6.8 billion at April 30, 2000 and October 31, 1999, respectively, of which $2.6 billion and $1.9 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 April 30, 2000 and October 31, 1999, which were recorded at fair value of $149.6 million and $342.0 million, respectively, and sold securities short (securities sold, not yet purchased) at April 30, 2000 and October 31, 1999 with a fair value of $10.6 million and $3.6 million, respectively, which exposes us to market price risk. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in quoted market prices and amounts to approximately $16.0 million and $34.6 million at April 30, 2000 and October 31, 1999, respectively. Of these positions, approximately $75.9 million and $10.2 million of securities owned at April 30, 2000 and October 31, 1999, respectively, and $7.1 million and $3.4 million of securities sold short at April 30, 2000 and October 31, 1999, respectively, were denominated in foreign currencies, primarily the Canadian dollar. Therefore, we are also exposed to foreign currency risk. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates and amounts to approximately $8.3 million and $1.4 million at April 30, 2000 and October 31, 1999, respectively. Actual results may differ.

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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.

      On April 13, 2000, our subsidiary, TDW Canada, acquired CT Securities Inc. from CT Financial Services Inc. (“CTFSI”), a subsidiary of TD Bank. In connection with this acquisition, 3,370,150 exchangeable shares of TDW Canada (the “Exchangeable Shares”) were issued to CTFSI. In addition to the Exchangeable Shares, CTFSI also received cash and certain Class B preferred shares of TDW Canada. Pursuant to the terms of the Exchangeable Shares and an Amended and Restated Support and Exchange Agreement, dated as of April 13, 2000, by and among us, TDW Canada, TD Waterhouse Holdings, Inc. (“TDWH”), TD Securities Inc., CTFSI and TD Bank, TDWH has the right to acquire all of the Exchangeable Shares and the right to convert such securities, at any time, into an equivalent number of shares of our Common Stock. Such issuance was made in reliance upon an exemption from the registration provisions of the Securities Act set forth in section 4(2) thereof relating to sales by an issuer not involving a public offering. The foregoing securities are deemed restricted for purposes of the Securities Act.

      None

      None

      None

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

      (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.

	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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