Bigbux Financial Ltd. October_2000_Backgrounder_Information CMA

October 2000 Entrance Examination Part 2 Backgrounder

Copyright 2000 by The Society of Management Accountants of Canada. All rights reserved.This material, in whole or in part, may not be reproduced or transmitted without authorization.

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Bigbux Financial Ltd.Backgrounder

The Company

Overview

Bigbux Financial Ltd. (Bigbux or the Company) is a mutual fund dealer with its head officein Calgary and sales representatives located throughout Western Canada. Ray Smith establishedBigbux in 1989. Prior to that time, Mr. Smith had worked as a stockbroker for a nationalinvestment company. With mutual funds in their infancy in the late 1980s, Mr. Smith foresawthat such investments would appeal to ordinary Canadians who did not have an in-depthunderstanding of financial markets or investing.

During the mid-1990s, mutual funds became the investment vehicle of choice for manyCanadians. As a result, Bigbux has grown considerably since its inception and is now one of thelargest independent mutual fund dealers in Western Canada. As of the end of 1999, the Companyhad 25 employees at its Alberta head office and over 200 sales representatives in 28 branchoffices located from Manitoba to British Columbia. Bigbux attributes much of its success to itslong-standing philosophy of building long-term relationships with its clients, and offering themsound and objective investment advice.

Spurred by its success during the mid-1990s, Bigbux became a public company in May 1997.Ray Smith continues to hold a 22% interest in the Company and other Bigbux employees hold anadditional 7%. An investment company named Newcap Ventures Inc. holds a 17% interest. Theremaining shares are quite widely held and relatively thinly traded.

Operations

Bigbuxs business is the sale of mutual funds to individual investors. The Company does notmanage any of the funds that it sells. Rather, Bigbux acts solely as an intermediary between themutual fund companies and the investing public. The sales representatives interact directly withindividual clients on the Companys behalf.

When a sales representative identifies a prospective client, a meeting is arranged to discuss thepossibility of opening a Bigbux investment account and buying mutual funds. Many Bigbuxbranch offices are open during evenings and weekends, and some representatives even offerhome visits to accommodate client schedules.



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At the initial meeting, prospective clients are apprised of the nature of Bigbuxs services and thevarious types of mutual funds that are available. The sales representative gathers information onthe clients background, including his or her investment objectives, investing knowledge, incomelevel, occupation, personal net worth, and various other demographic factors. This information isrecorded on the Companys standard client information sheet. Based on the informationgathered, the sales representative recommends to the client one or more mutual funds that arebelieved to meet the clients objectives. Bigbux sells most mutual funds available on the market,including the very popular ones with names that are familiar to the general public. Bigbuxs salesrepresentatives are at liberty to recommend the funds that they believe are best suited for theirclients. However, it is the investing client and not the sales representative (or Bigbux) thatultimately decides which mutual fund(s) to acquire.

If the client is interested in making an investment, he or she opens an account at the local Bigbuxsales branch and writes a cheque to Bigbux for the purchase of those funds in which the clientwants to invest. Bigbux deposits the clients payment into a trust account and then Bigbux issuesa cheque to the mutual fund company (companies) that the client has selected, normally within afew days.

On a standard account application form, the sales representative records the clients name,address, phone number, social insurance number, date of birth, type of account (RRSP, spousalRRSP or regular investment account), the initial investment amount, the allocation to the mutualfund(s) selected, and the account beneficiary in the event that the client dies. The initiating salesrepresentative is also identified on the form so that commissions generated from the clientsaccount can be properly credited. The minimum investment to open a new account is $500. Theaccount application form is prepared in triplicate: one copy is given to the client, the salesrepresentative retains one copy, and the third copy is forwarded to Bigbuxs head office forprocessing, along with the clients initial investment. Bigbuxs accounting staff enters theinformation recorded on the account application form into a computerized customer database.

After an account is opened, clients can make additional contributions at any time for amounts of$50 or more. Some clients arrange for automatic monthly contributions from their bank accountsto ensure that they invest on a regular basis. Automatic contributions are administered byBigbuxs head office. To expedite processing, clients who make additional contributions by wayof cheque are instructed, where possible, to mail their cheque directly to the head office ratherthan giving it first to the sales representative. Clients can request a withdrawal of funds eitherthrough their sales representative or directly through Bigbux. Withdrawals are processed withinthree business days and a cheque is sent to the client. At any time, clients can alter the funds inwhich they have invested simply by contacting their sales representative or Bigbux directly.These changes are made on the following business day. The sales representatives are encouragedby Bigbux to meet with each of their clients at least annually to review the performance of theirinvestments and to determine if there have been any changes to the clients investment objectivesor other fundamental information.



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Bigbuxs clients do not pay any fees or charges to the Company for its services. Rather, Bigbuxreceives commission revenues from the mutual fund companies in which its clients invest.Bigbux receives two types of commission revenues from mutual fund companies:

1. Service fees on the initial sale of mutual funds to clients, which tend to be in the range of 4%to 5% of the gross amount invested (and lower rates on money market funds). Service feesnormally are paid to Bigbux within 30 days of the mutual fund company receiving theclients investment.

2. Trailer fees based on the amount invested by Bigbux clients with a particular mutual fundcompany (termed assets under administration). Trailer fees normally are calculated as0.5% of assets under administration. Most mutual fund companies pay trailer fees once peryear, on June 30, based on the market value of assets under administration as at May 31 ofthat year.

Bigbux pays branch managers a portion of the gross commissions to cover the costs of operatingtheir branches, including the compensation for their sales representatives and the branchmanagers salary. Payouts to branch managers historically have been in the range of 80% to 85%of gross commissions received by Bigbux and are made within 30 days of receiving thecommissions from the mutual fund companies.

Compensation for sales representatives is determined by the individual branch managers andnormally includes a low base salary with a significant commission component. On average, salesrepresentatives who are not branch managers earn approximately $45,000 per year, although therange of earnings is quite wide. Most newly hired sales representatives receive totalremuneration (including base salary and commissions) in the low to mid $20,000s in their initialyears. However, that figure can grow quickly if the sales representative can attract new clientsand assist those clients in making wise investments such that his or her assets underadministration grow. Some sales representatives earn in excess of $100,000 per year. Manybranch managers fall into this income category as well.

The portion of gross commissions retained by Bigbux (i.e., the remaining 15% to 20%) is usedby the Company to fund its corporate promotional activities, sales representative support, andhead office administration, as well as providing for a profit.

Information Systems

Bigbux uses a standard client account program for mutual fund dealers. The program tracksclient contributions, withdrawals, and the market value of the funds in which the client iscurrently invested. Statements of account are printed and mailed directly to clients on a monthlybasis for those clients with gross investments of $100,000 or more. All other clients receivestatements on a quarterly basis. For RRSP accounts, the program automatically determines whatproportion of investments represent foreign content, for which there are investment limits.



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The client account program automatically tracks the information that clients are required toreport for income tax purposes. Clients with RRSP accounts receive, by March 15 each year, astatement indicating contributions made during the previous year or within the first 60 days ofthe current year. Clients with non-RRSP accounts are provided with a statement of income fromthe account during the year, which identifies the clients capital gains, dividends and interestincome. Some clients have more than one type of account; each account is maintained separatelyfor income tax purposes. Financial statements are drawn up monthly for internal use. Quarterlystatements are prepared for distribution to Bigbux shareholders.

Organizational Structure

Bigbuxs organization consists of 25 full-time staff at its head office, not including the board ofdirectors or the sales representatives. See Exhibit A for Bigbuxs organizational chart.

The following is an overview of the board of directors and the functions and background of theCompanys key staff members.

Board of Directors

A five-person board of directors governs the affairs of Bigbux. The board is comprised of RaySmith, President and Chief Executive Officer, Ronald Park, Chief Operating Officer, and threeoutside directors, i.e., one from Newcap Ventures Inc. (Newcap) and two independentindividuals. Jane Newman and Adam Wright, the independent directors, work for othercompanies in the financial services industry and do not hold a financial interest in Bigbux.Newcap, as a result of its substantial holding of Bigbux shares, is virtually assured of one seat onthe board. The current board representative from Newcap is Paul Nicholson, a young investmentbanker trying to make his mark in the financial world. Paul was appointed to the board at the lastshareholders meeting.

Ray Smith, President and Chief Executive Officer

In his role as President and CEO, Ray oversees the entire organization. He is a salesman bynature and tends to spend most of his time on the sales side of the business. Ray is a verypersonable individual who is liked and respected by all Bigbux head office staff and salesrepresentatives. He has always maintained an open door policy and insists on getting to knoweach of the staff members and sales representatives personally.

Ronald Park, Chief Operating Officer

Ronald Park joined Bigbux in 1991, prior to which he was employed as a senior complianceofficer at a major Canadian bank. As Chief Operating Officer, Ronald oversees the functions ofinformation processing, policy and procedures development, sales representative compliance andfinance. Ronald has a strong work ethic and often spends his evenings and weekends at theoffice.



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Mark Thompson, Vice-President, Sales

As Vice-President, Sales, Mark oversees the entire sales and marketing function and isresponsible for all of the Companys sales representatives. Mark has been with Bigbux since itsinception. Prior to that, he worked in association with Ray Smith at the same national investmentfirm.

Bigbuxs staff and sales representatives view Mark as a significant asset to the Company becauseof his knowledge of the industry and his ability to select many of the top performing mutualfunds. Each quarter, Mark communicates his top mutual fund picks to the Companys salesrepresentatives. Over the years, Marks mutual fund selection ability has contributed to the salesrepresentatives ability to create significant wealth for many of the Companys clients.

Sales Managers

Bigbux employs three sales managers, each of whom oversees the sales representatives within agiven region. Sales managers are primarily responsible for liaising with sales representatives andfor coordinating head office sales programs and promotional materials. The current salesmanagers are as follows:

Brenda Simms Manitoba/Saskatchewan Region. Brenda has no formal education beyondhigh school. However, prior to joining Bigbux in 1995, Brenda was a very successful salesrepresentative for 5 years in the Winnipeg area.

Michael Smith Alberta Region. Michael is the son of Ray Smith. He holds a bachelorsdegree in business administration from a Canadian university. Prior to becoming a salesmanager in 1997, Michael spent three years as a sales representative at a Bigbux sales branchupon the insistence of his father that such experience was essential.

Allison Jackson British Columbia Region. Allison is an MBA graduate from a Canadianuniversity. She joined Bigbux about six months ago, and just prior to that she had worked fora major investment firm as a sales manager.

Gordon Richardson, Marketing Manager

Prior to joining Bigbux in 1997, Gordon worked as a brand manager for a large consumerproducts company where he had developed a reputation for producing costly but innovativetelevision commercials. Gordons responsibilities at Bigbux include the development andexecution of advertising programs and promotional support. Gordon was hired to bring bigcompany thinking to Bigbuxs marketing activities.



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Elaine Freely, Training Manager

Elaine joined Bigbux in 1990 and became its training manager in 1994. Elaines responsibilitiesinclude developing training materials, organizing training programs for new salesrepresentatives, and providing ongoing business development programs for existing salesrepresentatives. Just over a year ago, Elaine reported directly to Ronald Park, Chief OperatingOfficer. However, more recently, her function was reassigned to the sales side under MarkThompson in an effort to balance the span of control within the organization.

Veronica Fisher, Operations Manager

Veronica joined Bigbux in 1996. Previously, she was a technical writer for a major aerospacecompany in the United States. She possesses excellent writing abilities and is able to translatedifficult concepts into a form that is easy to understand. In her current role at Bigbux, Veronicais responsible for establishing sales representative policies and procedures and ensuring that theyare followed.

Julie Johnson, Information Technology Manager

Julie joined Bigbux in 1993. She holds a bachelors degree in computer science. Prior to joiningBigbux, Julie was a computer programmer with a software development firm. Julie is responsiblefor ensuing that the Companys information systems are functioning properly.

Rachel Peterson, Controller

Rachel has been with Bigbux since its inception. Prior to that, she worked in the accountingdepartment of a large insurance company. Rachels responsibilities include overseeing the entireaccounting and office administration function, including the preparation of quarterly reports forshareholders. Rachel is very well organized and meticulous.

Sales Representatives

Bigbux has 28 branch managers in total. Branch operations typically involve from 5 to 15 salesrepresentatives (including the branch manager) and a small administrative staff of one to threepeople. Bigbux produces a set of operating and branch management standards and publishesnational policies by which all branch managers and sales representatives must abide.

The branches receive support from Bigbux in the form advertising, promotional materials, andtraining programs for new sales representatives. However, each branch manager manages his orher own operation and pays for the operating costs of the branch. Branch offices receive noadditional financial support from Bigbux head office other than the commissions earned by thebranch.



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Bigbuxs sales representatives are located throughout Western Canada. The percentage of theCompanys gross commission revenues earned by region for the 1999 fiscal year is as follows:

# of Branches % of Reps* % of Gross RevenuesManitoba 5 16% 19%Saskatchewan 4 11% 10%Alberta 11 38% 38%British Columbia 8 35% 33%Total 28 100% 100%

* includes branch managers

All sales representatives, including branch managers, are required to sign sales representativeagreements. These agreements stipulate that the efforts of the sales representative are dedicatedexclusively to Bigbux and that they will comply with the Companys policies and procedures.Branch managers are required to sign an additional branch management agreement. Uponsigning, the branch is awarded an exclusive territory and is required to use the Bigbux name(which must be prominently displayed on signage, letterhead, and business cards).

Most sales representatives join an existing Bigbux branch office with little or no prior experiencein mutual fund sales. Although sales representatives vary in terms of age and background, newrecruits in recent years have tended to be persons in their 20s and 30s with either a communitycollege diploma or a university degree. Many have enrolled in programs to attain a professionalfinancial planning designation. Few are professional accountants. Further information on thesales representatives is provided in Exhibit B.

Bigbux provides sales tools such as videos, sales kits, promotional items, and brochures to all ofthe sales representatives. There are also ongoing support services such as information bulletins,operations manuals, advertising, and regional sales representative meetings. Overall, the salesrepresentatives generally believe that they are well supported by the Company in terms ofpromotional materials in comparison to most of its competitors.

By their nature, sales representatives tend to be outgoing people. Many of Bigbuxs salesrepresentatives are actively involved in their community and do volunteer work for charitableorganizations. Most sales representatives recognize the importance of building personalrelationships with their major clients. Bigbuxs sales representatives commonly retain theirclients for many years and those clients frequently refer their friends and relatives to a Bigbuxsales representative with whom they have developed a good relationship. Ray Smith has alwayscontended that, in the event of a stock market downturn or poor performance of a particularmutual fund, a personal relationship with a client often helps to prevent a hasty withdrawal offund assets. This was the case in 1994, when the stock market was going through a downturn.Through the personal relationships they had established, many Bigbux sales representativesconvinced their clients to stay invested. Years later, most clients who took that advice found



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themselves with significant financial gains. Many of these clients told their Bigbux salesrepresentatives that because of the advice they had received, they had become a client for life.

Marketing

The Companys marketing program consists mainly of brochures that are geared towardpromoting the Bigbux name and educating clients about the benefits of investing in mutualfunds. Marketing dollars are also used to supply sales representatives with promotional itemssuch as golf balls and T-shirts featuring the Bigbux name.

Most marketing expenditures are made in December through February in the run-up to RRSPseason. These advertisements typically generate a large number of phone calls to Bigbuxs headoffice from prospective clients with questions about various mutual funds and services offeredby the Company. Many callers ask to receive brochures about Bigbux and the funds that it offers.The Companys standard procedure is to refer these callers to the local Bigbux branch offices.

To better understand the marketplace in which Bigbux operates, the Marketing Manager, GordonRichardson, recently commissioned an independent market research firm to survey 500households in Western Canada. Extracts from that survey are reproduced in Exhibit C.

Financial Performance

Historical balance sheets and income statements for Bigbux for recent fiscal years endingDecember 31 are reproduced in Exhibits D and E respectively.

As previously indicated, the Company generates commission revenues from mutual fundcompanies in the form of service fees and trailer fees, from which its branch managers and salesrepresentatives are compensated. An analysis of these fees for 1995 to 1997 is shown inExhibit F.

Bigbuxs assets under administration during this period increased, as shown below (in millions):

1995 $8791996 $1,1781997 $1,532

Bigbuxs excess cash is invested in stock and money market investments. As a result, theCompany generates other income in the form of interest income, dividends and capital gains(losses) on its marketable securities portfolio.



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Industry regulations require that Bigbux maintain a minimum level of net free capital,essentially defined as net working capital excluding non-liquid assets such as prepaid expenses.Current minimum net free capital requirements for Bigbux are set at $500,000. In addition,Bigbux maintains a contingency fund set at 2% of annual commission fee revenues. These fundsare invested in highly liquid and secure marketable securities (such as government treasury bills)and can only be utilized pursuant to a resolution of the board of directors. The objective of thecontingency fund is to provide for cash shortages in the event of a downturn in the stock marketand the resultant withdrawal of client assets.

At present, Bigbux has 5,033,545 common shares outstanding, which is the same number aswhen the Company became public in 1997. The Company has never issued any options orwarrants. Bigbux pays an annual dividend of $0.06 per share, payable quarterly. This dividendrate has been consistent since Bigbux became public.

The Annual Sales Meeting

Each year, Bigbux hosts a 3-day meeting at a resort located in Western Canada for the branchmanagers and selected high-performing sales representatives. Many of the Companys headoffice staff also attend. Ray Smith has always maintained that these meetings, despite beingrather costly, are an important part of the Companys culture. They allow for salesrepresentatives from different regions to interact and share ideas, provide for discussions on newdevelopments, and offer a forum for the recognition of top performing individuals. The structureof the annual sales meeting is fairly informal. While there are some presentations on educationalmatters and new developments, plenty of time is allowed for socializing and extracurricularactivities. Typically, the sales meeting is held in Banff, Alberta.

At a recent meeting, Ray Smith acknowledged two of Bigbuxs sales representatives whoseefforts had won each of them special recognition from two separate mutual fund companiesbased on their annual sales of those particular mutual funds. Overall top performers for each ofthe three regions were also recognized for their performance during the previous twelve months.

During the course of the meeting, several Bigbux staff members, including Mark Thompson andGordon Richardson, made presentations. As usual, Mark Thompson was asked, What funds willbe the top performers next year? He conveyed his picks to the attendees. They all then gaveMark a round of applause for the keen selections he had made in the past, some of which turnedout to be the best performing mutual funds in the industry.

Gordon Richardson talked about marketing and promotional plans for the coming year. Duringhis presentation, he suggested that Bigbux branch managers allocate a portion of theircommission revenues to promote the Company, believing that the payoffs for such expenditureswould be substantial. Gordon added that this would allow the branch managers to tailor theirpromotional efforts to their specific client base.



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At the meeting, Ray Smith did what he had always done best make the effort to talk toeveryone who attended and listen to any concerns they had about the business. Thus, he took theopportunity during his discussions with branch managers to find out more about theirexperiences at the grassroots level.

During his discussion with Rachel Peterson, Bigbuxs controller, Ray Smith thanked her for theadditional time she had spent at the office over the course of the past year to keep the Companysaccounting records in proper order. Ray told Rachel that, The external auditors were reallypleased with how well organized the accounting records were. The partner in charge of the audittold me that there were no significant issues, and that helps to keep audit fees in line.

As usual, the annual sales meeting ended on a high note, with Ray Smith giving an inspirationalclosing address. Many sales representatives and Company staff stayed afterwards to continuetheir discussions and enjoy the pleasant surroundings.

Market Overview

Types of Mutual Funds

A mutual fund simply is a pool of investments such as stocks, bonds and other marketablesecurities. Individuals hold units in these pools of investments. Mutual funds often are viewed asattractive investments because they provide ordinary investors with access to a professionalinvestment manager at a relatively low cost, and allow for greater diversification than mostinvestors could obtain by purchasing individual securities.

A mutual fund normally is structured as a separate holding company. Money is raised from bothinstitutional investors and individuals who are in effect the owners of the fund. The mutual fundis managed by a professional investment manager employed by the mutual fund company, whichreceives a management fee for that service. Investments are selected in accordance with thestated policies and objectives of the fund.

There are two basic types of mutual funds closed-end and open-end. In a closed-end fund, theownership structure is divided into a fixed number of units that trade on organized stockexchanges similar to the trading of common shares for a publicly held company. The price perunit of a closed-end fund is a function of the supply and demand for those ownership units.Conversely, an open-end fund has a floating number of ownership units. Ownership units of anopen-end fund are bought from and sold to the fund itself at a price equal to the net asset value ofthe fund on that day. The net asset value of the fund is the aggregate market value of theinvestments in the fund less its liabilities (which usually are not significant). Therefore, net assetvalue is similar to net book value using a current value concept. Most mutual funds arestructured as open-end funds.



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The basic types of mutual funds available include the following:

Equity funds, where the holdings include common shares of publicly traded companies. Insome cases, equity funds specialize in certain industry segments such as technology or healthcare companies. The objective of most equity funds is capital appreciation.

Bond and income funds, where the holdings include government and corporate bonds,debentures and interest bearing notes of varying risk levels and maturity. Certain incomefunds also hold preferred shares and in some cases even common stock with a high dividendyield. The objective of most bond and income funds is to provide a relatively stable incomestream with some capital appreciation potential.

Money market funds, where the holdings include government treasury bills, high qualitycommercial paper and other low risk, highly liquid securities. The objective of money marketfunds is capital protection.

Diversified or balanced funds, where the holdings include an assortment of equityinvestments, fixed income investments and cash or equivalents (i.e., money market typeinvestments). The objective of most balanced funds is to provide investors with a high degreeof risk diversification by holding different types of financial securities.

Most mutual fund companies have a family of funds that includes at least one fund of eachtype and several specialized funds within each category. In addition, each type of mutual fundnormally is categorized as being either Canadian or foreign (U.S. or other countries). Thisclassification is necessary due to the limitations on foreign content that Canadian residents canhave in their registered retirement savings plan accounts (RRSPs). A breakdown of mutual fundsby type is as follows:

Distribution of Mutual Funds Held by Canadians

Canadian Equity23%

Foreign equity29%

Bond and income

18%

Money market13%

Diversified17%



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Mutual fund companies earn money by charging clients of the mutual fund various types of fees.While the names afforded to these fees may vary, they generally are one of three types:

1. Sales commission (or front-end load fee), which is a charge on new accounts andcontributions to existing accounts. Not all funds charge a sales commission, but for those thatdo, the rate can be as high as 5% of the gross proceeds contributed by the client. This charge,when applicable, is deducted from the amount invested by the client.

2. Management fee, which is charged annually based on assets under management (i.e., themarket value of the assets held in a particular fund). All funds charge an annual managementfee, typically in the range of 0.5% to 3% of assets under management. A low rate is chargedon money market funds where the investment management process is relatively simple. Thehighest fees are charged on equity and balanced funds where the fund management processrequires greater effort on the part of the fund manager. Mutual fund companies arecontinually under pressure to reduce management fees.

3. Redemption fee (or back-end load fee), which is charged upon the withdrawal of funds by anindividual. Such fees normally are not charged where an investor transfers money from onefund to another within the same family of funds. Not all funds have redemption fees, butthose that do often charge as much as 5% of the amount withdrawn. It is not uncommon forthe redemption fee rate to decline over time such that if an individual has left his or hermoney with a particular fund for at least, say, 5 years, no redemption fee is charged. Theobjective of a redemption fee is to prevent clients from readily withdrawing their moneyfrom a family of funds should a mutual fund company experience a bad year. In addition,redemption fees serve to counteract the efforts of any mutual fund dealer or salesrepresentative who may encourage clients to frequently switch funds in order to receive themore lucrative service fee as opposed to the smaller trailer fee.

The Mutual Fund Industry

There are more than 100 mutual fund companies in Canada that collectively manage over 1,100individual mutual funds. The Canadian mutual fund industry has seen explosive growth duringthe 1990s, as indicated in the following chart:



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Canadian Mutual Fund Assets

2423 5067

115 127146

212283

327 355

0

100

200

300

400

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

$ billions

Industry observers are projecting that mutual fund assets in Canada will continue to grow.However, projections for the industry could fall well short of expectations in the event of adownturn in the financial markets, which would scare away many investors and erode the valueof mutual fund assets currently in place. Numerous stock market analysts are predicting asignificant stock market correction in the near future. The member association for the investment funds industry includes 85 fund managementcompanies sponsoring over 1,000 mutual funds in Canada, 146 independent dealer firms sellingmutual funds, and 70 affiliates representing law, accounting and other professional firms. Theassociation represents the industry to governing bodies, and provides research, statistics andother services to its members. Bigbux is a member of the association.

Many individuals involved in the mutual fund industry pursue professional financial planningdesignations. Growth in both the number of members and the number of candidates for suchdesignations has been very strong in recent years. Many professionally accredited candidates goon to work for mutual fund companies or as sales representatives.

Mutual Fund Clients

Roughly 1 in 3 Canadians now owns at least one mutual fund. According to industry research,more than half of Canadians with at least $10,000 in savings or investments has money in mutualfunds. Industry publications state that 93% of mutual fund investors say that, overall, they arehappy with their investments and most are planning to invest more. These tend to be individualsinvesting their savings for retirement or for some other purpose.

Disposable income and savings tend to increase with age and education levels. Most of the babyboomers in Canada (defined as those born between 1946 and 1966) are now entering theirprime saving phase in life. This demographic trend is expected to be the driving force forinvestment and mutual fund sales over the next several years.



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Industry studies have shown that, although mutual funds have increased in popularity andinvestors have generally become more knowledgeable, most ordinary Canadians do not have agood understanding of mutual funds or investment management, including one of the basic tenetsof investing the relationship between risk and return. The general publics knowledgeregarding mutual funds tends to vary by location, age and demographics.

A recent industry report found that the majority of mutual fund assets were purchased throughadvice givers such as stockbrokers, financial planners, and independent mutual fund dealers.Because of the large number of funds available, many investors need advice regarding whichfunds are right for them. The industry report also indicated that the percentage of families in thegreater than $50,000 income bracket relying primarily on themselves to make investmentdecisions has more than doubled in recent years, from 8% to 18%.

Canadian investors tend to be quite risk averse. When the stock market in general is rising, theyare very interested in investing in it. However, when the stock market falls, many investorsscramble to move their investments into less risky alternatives, such as guaranteed investmentcertificates (GICs). A recent survey found that Canadian investors are unprepared for a majormarket downturn because very few (approximately 7%) believe that a downturn of 20% or morewould come in the next 10 years.

Competitive Analysis

The principal competitors in the mutual fund distribution industry include stock brokerage firms,mutual fund dealers, banks and trust companies, financial planners and the mutual fundcompanies themselves. Recent statistics indicate that 48% of mutual fund investments are madethrough stockbrokers and mutual fund dealers while 31% are made through banks and trustcompanies. The remaining 21% of mutual fund assets are invested through other channels suchas mutual fund companies and financial planning firms.

Stockbrokers, financial planners and mutual fund dealers (including Bigbux) sell an array offunds. In recent years, banks have also begun selling their competitors mutual funds in an effortto increase market share. Mutual fund companies themselves sell only their own funds. Mostmutual funds can be purchased through other channels (mutual fund dealers, financial planningfirms, and so on), although some larger funds are available exclusively through the captive salesforce of a particular mutual fund company.

Current estimates have shown that there are more than 200 mutual fund dealer firms withinCanada (including Bigbux) that collectively employ more than 12,000 sales representatives andadminister over $75 billion in mutual fund assets. Bigbux is one of the largest independentmutual fund dealers in Western Canada. However, it faces competition from nationalindependent mutual fund dealers in its market and from numerous smaller local firms. The majorbanks and credit unions have an estimated 30% share of the mutual fund distribution market inWestern Canada. Selected demographic data relating to the population in Western Canada arereproduced in Exhibit G.



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Competition within the mutual fund industry has been intensifying. Canadas major banks inparticular are aggressively pursuing more business in the mutual funds market. Banks areconsidered a major competitive threat due to their high level of public awareness and their largepool of capital.

Direct sale mutual fund dealers, which typically only have a presence on the Internet, haverecently emerged and have caught the attention of industry participants. Such on-line dealersenable investors to invest on-line in a broad range of mutual funds. These dealers offer themutual funds of most companies on a no-load basis and typically appeal to sophisticatedinvestors who do not need investment advice and who are attracted by the ease and flexibility ofthis approach. In addition to value-added services such as monthly purchase plans and nocommissions, some on-line mutual fund dealers offer investors the opportunity to talk withindividual participating fund companies through on-line chat groups. In addition, large mutualfund companies are making use of the Internet by enabling direct communication with investorsand providing commentaries on mutual funds and other related information on their own web-sites. According to a recent survey, more than 50% of Canadian homes have a computer and11% of investors are already using the Internet as a source of investment information.

Competition has also increased from the insurance sector with the advent of segregated funds inthe mutual fund marketplace. These essentially are mutual funds where the principal isguaranteed at death and at maturity, and are commonly used as an estate planning tool. Theiremergence has the double impact of providing a new distribution network for mutual fundsthrough the insurance industry and introducing a new product to the mutual fund industry.



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Exhibit A

Bigbux Financial Ltd.Organization Chart

Board ofDirectors

Presidentand CEORaySmith

ExecutiveAssistant

Chief OperatingOfficer

Ronald Park

Vice-PresidentSales

Mark Thompson

InformationTech. ManagerJulie Johnson

I. T.Assistants

(2)

OperationsManager

Veronica Smith

Sales ManagerBC Region

Allison Jackson

MarketingManager

Gord Richardson

ControllerRachel Peterson

AccountingClerks

(4)

OfficeManager

Receptionist

ComplianceOfficers

(3)

OperationsAnayst

Sales ManagerAlbertaRegion

Michael Smith

TrainingManager

Elaine Freely

Sales ManagerMan./Sask.

RegionBrenda Simms

SalesAssistant

Board ofDirectors

Presidentand CEORaySmith

ExecutiveAssistant


Ronald Park

Vice-PresidentSales

Mark Thompson


I. T.Assistants

(2)

OperationsManager

Veronica Smith


Allison Jackson

MarketingManager

Gord Richardson


AccountingClerks

(4)

OfficeManager

Receptionist

ComplianceOfficers

(3)

OperationsAnayst


Michael Smith

TrainingManager

Elaine Freely


RegionBrenda Simms

SalesAssistant

Board ofDirectors

Presidentand CEORay Smith

ExecutiveAssistant


Ronald Park

Vice-President,Sales

Mark Thompson


I. T.Assistants

(2)

OperationsManager

Veronica Fisher


Allison Jackson

MarketingManagerGordon

Richardson


AccountingClerks

(4)

OfficeManager

Receptionist

ComplianceOfficers

(3)

OperationsAnalyst


Michael Smith

TrainingManager

Elaine Freely


RegionBrenda Simms

SalesAssistant



Page 18 (23 pages)

Exhibit B

Bigbux Financial Ltd.Profile of Sales Representatives

(Percentages Indicate Percentage of Bigbuxs Total Sales Representatives)

1999 1998 1997 1996 1995By Age:

20-29 15% 14% 13% 11% 6%30-39 38% 37% 36% 35% 37%40-49 28% 28% 29% 31% 33%50-59 13% 14% 15% 15% 16%60 and over 6% 7% 7% 8% 8%

100% 100% 100% 100% 100%

By highest level of education obtained:

Less than high school 10% 12% 14% 15% 18%High school 27% 29% 32% 35% 40%Community college 37% 36% 34% 33% 27%Undergraduate degree 22% 20% 18% 15% 14%Graduate degree 4% 3% 2% 2% 1%

100% 100% 100% 100% 100%

Professional designation (enrolled or achieved):

Financial planner 19% 16% 14% 11% 9%Professional accountant 4% 4% 5% 4% 5%

Assets under administration:

Under $2 million 7% 7% 6% 6% 9%$2 million to $4.9 million 28% 28% 28% 29% 34%$5 million to $9.9 million 35% 33% 34% 36% 33%$10 million to $14.9 million 27% 29% 29% 27% 23%$15 million or more 3% 3% 3% 2% 1%

100% 100% 100% 100% 100%

Gross service and trailer fees generated for Bigbux:

Under $50,000 10% 10% 12% 11% 11%$50,000 to $74,999 45% 44% 47% 49% 52%$75,000 to $99,999 32% 32% 29% 28% 27%$100,000 to $149,999 8% 10% 9% 9% 8%$150,000 or more 5% 4% 3% 3% 2%

100% 100% 100% 100% 100%



Page 19 (23 pages)

Exhibit C

Extracts from Market Survey(Percentages Indicate Percentage of Households)

What is the estimated market value of mutual funds held by all members of your household?

No mutual funds held 18%$1 to $9,999 38%$10,000 to $49,999 23%$50,000 to $99,999 16%$100,000 or more 5%

How would you rate your knowledge of mutual fund investing?

Very knowledgeable 24%Somewhat knowledgeable 58%Little or no knowledge 18%

For those owning mutual funds, how do you normally purchase them?

Direct from a mutual fund company 15%From a bank or trust company 30%From a stockbroker 9%From a financial planner 12%From an independent mutual fund dealer 29%Other 5%

Which of the following mutual fund dealers have you heard of and which have you used in thepast two years?

Heard Of Used in Past Two YearsCanbank Financial 38% 14%Strategic Funds 18% 12%Western Mutual Funds 9% 2%Funds Plus 4% 1%



Page 20 (23 pages)

Exhibit D

Bigbux Financial Ltd.Historical Balance Sheets

As at December 31(000s)

1997 1996 1995 Current assets:

Cash and marketable securities $1,783 $1,242 $ 936Trust funds on deposit 1,064 940 723Commissions receivable 944 783 422Contingency funds 402 328 249Prepaid expenses and other 459 62 113

4,652 3,355 2,443Fixed assets (net) 526 520 544

Total assets $5,178 $3,875 $2,987

Liabilities:Accounts payable & accruals $1,480 $ 922 $ 777Commissions payable 786 642 342Client trust obligations 1,059 880 690Taxes & other payables 64 107 111

3,389 2,551 1,920

Shareholders equity:Common shares 44 1 1Retained earnings 1,745 1,323 1,066

1,789 1,324 1,067

Total liabilities & shareholders equity $5,178 $3,875 $2,987



Page 21 (23 pages)

Exhibit E

Bigbux Financial Ltd.Historical Statements of Income and Retained Earnings

Fiscal Years Ended December 31(000s, except the earnings per share figures)

1997 1996 1995 Revenues:

Commission fees $20,082 $16,388 $12,473Other income 119 87 42

20,201 16,475 12,515Commission expense 16,399 13,242 9,962

Net revenues 3,802 3,233 2,553

Expenses:Salaries and benefits 1,433 1,212 921Advertising and sales representative support 604 593 553Other operating expenses 280 254 203Amortization 77 69 64

2,394 2,128 1,741

Income before taxes 1,408 1,105 812Income taxes 635 448 319

Net income $ 773 $ 657 $ 493

Basic earnings per share (rounded) $0.15 N/A N/A

Retained earnings:Opening balance $1,323 $1,066 $ 773 Net income 773 657 493 Dividends paid (351) (400) (200)

Closing balance $1,745 $1,323 $1,066



Page 22 (23 pages)

Exhibit F

Bigbux Financial Ltd.Composition of Commission Revenues

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1995 1996 1997

'000

s

Service Fees Trailer Fees



Page 23 (23 pages)

Exhibit G

Schedule of Demographic Indicators for 1999

Western Provinces

Population by age distribution:

0 19 2,443,66420 29 1,210,15930 39 1,554,86340 49 1,228,27050 59 869,40760 69 677,65870 and over 812,199

Total 8,796,220

Population by gender:

Male 4,354,893Female 4,441,327

Income statistics:

Income per capita $19,370

Average employment income

- Males $46,953- Females $31,311

Average household income $50,475

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Bigbux Financial Ltd. October_2000_Backgrounder_Information CMA

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