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Solution toOctober 2000 Entrance Examination

Part 2Question 1 (240 minutes)The following sample solution presents one approach to the case. Candidates should note thatother valid approaches and conclusions are possible.

Date: October 18, 2000To: Board of Directors, Bigbux Financial Ltd.From: Max Jones, CMA, ConsultantSubject: Strategic Direction of Bigbux Financial Ltd.

Attached is the requested report containing my analysis and recommendations regarding thestrategic direction of Bigbux Financial Ltd. (hereafter referred to as Bigbux or the Company).The report also provides an implementation plan and highlights some operational issues thatrequire immediate attention.

Thank you for the opportunity to work on this project. Please contact me if you require furtherassistance in your planning and/or implementation process.

Max Jones

Solution to October 2000 Entrance Examination – Part 2

Page 2 The Society of Management Accountants of Canada

A Report to the Board of Directorsof Bigbux Financial Ltd.

TABLE OF CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

SITUATION ANALYSISStrategic MissionExternal environmentInternal EnvironmentFinancial Analysis

GENERATION AND CONSEQUENCES OF ALTERNATIVESMerger with a U.S. Mutual Fund DealerExpand Into Other Geographic MarketsExpand the Product LineStatus Quo

RECOMMENDATIONS

IMPLEMENTATION PLANMission StatementTime Horizon for Expansion StrategyMarketingCustomer Service and Information ManagementQuality Control and ComplianceSales Representative TurnoverPersonnel and Organization StructurePerformance MeasurementBranch Manager CompensationFinancial Accounting and Internal ControlDividends, Share Repurchase and Financing

APPENDICESAppendix A – SWOT Analysis for Bigbux Financial Ltd.Appendix B – Analysis of Investco Merger ProposalAppendix C – Analysis of Expansion CandidatesAppendix D – Analysis of Other Financial Services Option



EXECUTIVE SUMMARYBigbux Financial Ltd. has performed well since being formed in 1989 due to its aggressivegrowth of branches and good personal service to its clients, as well as the explosive growth ofthe mutual fund industry in Canada. It is now one of the largest independent mutual fund dealersin Western Canada.

However, competition has been growing , particularly from banks and credit unions as well asnational independent mutual fund dealers. This has caused the growth of Bigbux’s profits to slowover the past few years, and its share price to stay low causing dissatisfaction among investors.

With the introduction of new industry regulations and a recent wave of consolidation amongmutual fund dealers, Bigbux needs to review its strategic options to determine the best directionto take to maximize future shareholder wealth.

Bigbux should re-focus its mission on expansion and growth. To accomplish this, it isrecommended that Bigbux expand into the Central and Eastern Canada markets through theacquisition of smaller mutual fund dealers. As well, to improve the profitability of the existingbranches, Bigbux should expand the products and services it offers to clients to include lifeinsurance, personal financial planning and income tax preparation. Changes will also be requiredin customer service, compliance, information systems and other aspects of the Company’sbusiness.

In particular, upgrading the information systems to include a centralized database that isaccessible to sales representatives, branch managers and even clients will provide manyimprovement in administration and customer service. As well, the establishment of a BigbuxWeb site should stengthen the relationship between clients and Bigbux, and enhance theCompany’s ability to attract and service clients.

It is anticipated that implementation of the recommended changes will lead to an exciting andprosperous future for Bigbux and a substantial increase in the value of the Company’s shares.

INTRODUCTION

Bigbux has enjoyed being a leader in Western Canada in the independent mutual fund dealerindustry over the past several years. However, changing regulations and increasing competitionhave placed pressure on Bigbux. Furthermore, internal problems are slowing the growth rate ofthe Company’s earnings and weakening its position in the Western Canada market.

These problems call for a re-evaluation of the Company’s strategic position, managementphilosophy and business processes. This report presents an analysis of Bigbux’s current situation,and provides recommendations and an implementation plan to address the strategic and businessissues facing Bigbux.



SITUATION ANALYSIS

In light of the changing market conditions, Bigbux is currently considering a number ofalternatives. To help assess these alternatives and determine an appropriate strategic direction, asituation analysis of the Company’s external and internal environments is required. Appendix Abriefly lists the Company’s strengths, weaknesses, opportunities and threats. The most importantof these are discussed in the various remaining sections of this report.

Strategic MissionBefore a selection can be made from among the various possible options, Bigbux must look atitself. It must decide what are its values, why is it in business and what are its weaknesses. Thenit must look at its external environment and determine what the market is looking for, whatregulations are being imposed, and what things are happening that could threaten the business.Being proactive and visiting the Company’s mission from time to time are necessary steps inensuring that Bigbux remains relevant.

Bigbux is in danger of becoming unprofitable, which is a symptom of failing to take advantageof its opportunities, effectively combat its threats, capitalize on and improve its strengths, andeffectively deal with its weaknesses.

Bigbux does not appear to have made its corporate mission explicit, but given its track record,the current mission could be stated as follows:

“We are committed to providing ordinary citizens with the opportunity toaccumulate wealth through mutual fund investments by offering them sound andobjective investment advice based on the concept of a long-term relationship. Webelieve that if we focus on our customers’ objectives, our shareholders will earn afair return and our human resources will enjoy rewarding careers.”

Should Bigbux amalgamate, its individual existence would cease, as would the need for amission statement. Otherwise, its mission should be made explicit and should reflect the strategicoption(s) chosen.

External EnvironmentThe mutual fund industry has experienced explosive growth during the past decade. Assets underadministration in Canada have grown from $23 billion in 1989 to $255 billion in 1999, and in theU.S. assets under administration are almost $6 trillion. All indications show that there is stillroom for significant growth, particularly in Canada as only 1 in 3 Canadians owns mutual fundsand only half of Canadians with $10,000 in savings actually own mutual funds. As well, studieshave shown that most investors who currently own mutual funds are planning to invest more,particularly the large group of baby boomers who are now entering their prime saving phase inlife in preparation for retirement.

With the explosive growth of the mutual fund market, there has also been a growth in the numberof mutual fund distributors. Currently, there are more than 200 mutual fund dealer firms withinCanada that collectively employ more than 12,000 sales representatives, who administer an



average of $6,250,000 in mutual fund assets per sales representative. In 1999, Bigbux’s salesrepresentatives administered an average of over $8.6 million in mutual fund assets each, which issignificantly higher than the industry average.

While Bigbux enjoys a large share of the mutual fund dealer market in Western Canada, theshare of the overall mutual fund market held by mutual fund dealers has been challenged.Competition has come in many forms. In recent years, banks, trust companies and credit unionshave entered the market and have already captured 31% of the market. The emergence ofsegregated funds being offered by insurance companies may result in mutual fund dealers losingmore of the market share.

Other competitive threats faced by Bigbux include the entry of U.S. mutual fund dealers in theCanadian market, the consolidation of smaller mutual fund dealers and the emergence of on-linedealers who sell mutual funds over the Internet. Many of Bigbux’s competitors now have cost,infrastructure, customer base and capital advantages. Increasing compliance and advertisingcosts resulting from the introduction of new government regulations has made economies ofscale one of the most important criteria for the survival of mutual fund dealers.

To remain competitive, Bigbux will need to change the way it does business or achieveeconomies of scale though growth in the form of expansion, mergers or acquisitions. Onepossible opportunity is to tap into the growing niche of high income investors who are lookingfor a single source for all their financial services needs, such as life insurance, personal financialplanning and personal income tax return preparation in addition to mutual funds. Entering thelarger markets in Central Canada or the Western U.S. are possible approaches to achieving thecritical mass necessary to achieve economies of scale.

The Internet presents another opportunity for Bigbux. With more than 50% of Canadian homeshaving a computer, Bigbux could use the Internet to reach current and potential clients anywherein Canada or even anywhere in the world.

Internal EnvironmentThe strength of Bigbux resides in its people. The Company is led by an outgoing and confidentCEO whose style of leadership has brought a family atmosphere to the corporate culture. RaySmith has stressed the importance of personal interaction between sales representatives andclients, and has supported this philosophy by providing advertising, promotional materials,training programs and ongoing services to branches and sales representatives. Mark Thompson isanother main strength of the Company, particularly his knowledge of the industry and talent forpredicting the top mutual fund performers. He has contributed greatly to the Company’s abilityto offer superior products to clients. This, together with the personal relationships that salesrepresentatives have developed with clients, has been the Company’s competitive advantage,resulting in strong customer loyalty and growth.

Recently, however, there has been a decline in customer service, particularly by new salesrepresentatives in British Columbia. Also, weaknesses in the information system have causedcustomer complaints. These issues must be addressed if the Company does not wish to loseclients.



The pending retirement of Ray Smith and Mark Thompson could have a serious negative impacton the Company’s future, considering that they are the two individuals most responsible for theCompany’s past success. The loss of Ray’s leadership and Mark’s experience (particularly histalent to pick top mutual fund performers) may make it necessary to find new competitiveadvantages. It is crucial that a succession plan be drawn to prevent possible future disasters.

Another serious problem is the increase in turnover of sales representatives, especially the loss oftop performing sales representatives along with their clients. The lack of a non-competitionagreement with the sales representatives and the high level of promotional support provided byBigbux may have been an effective tool in the past to recruit sales representatives, but thepromise of higher commission payouts by competitors has been luring some of them away.

Financial AnalysisIn general, Bigbux’s financial situation is strong and healthy, but is declining in some respects.

Prior to 1997, commission fees and net income had substantially increased each year and a largeproportion of the commission fees came from service fees. Since going public, service fees havenot noticeably increased despite an increase in the number of sales representatives, and netincome has somewhat stabilized. This indicates that the average new business generated per salesrepresentative has declined over the past few years. Also, the Company’s profit margin oncommission fees has decreased over the past five years from 4% to 3.5%; however, this is stillconsidered fairly healthy in the industry.

Bigbux has a very good cash position and has had no trouble maintaining the required net freecapital. However, since going public, the market price of the Company’s shares had initiallydeclined and has not yet fully recovered, despite its healthy financial position. Newcap’sobjective of realizing a 25% annual return has certainly not been met and must be addressed.

GENERATION AND CONSEQUENCES OF ALTERNATIVESFrom the previous analysis, it is evident that shareholder objectives are not being met and thatthe future growth of Bigbux is threatened. Four alternative actions to address these issues areidentified as follows:

1. Merge with a U.S. mutual fund dealer.

2. Expand into other geographic markets.

3. Expand the product line to include other financial services.

4. Status quo.

Merge with a U.S. Mutual Fund DealerColorado-based Investco has extended a share-for-share exchange proposal to Bigbux based onthe relative market valuation of the companies. A quantitative analysis of this proposal isprovided in Appendix B and is discussed below.



It appears that Bigbux is much more profitable than Investco, as Investco’s profit margin in 1999was only 0.13% while Bigbux netted a profit margin of 3.5% of commission fees. This may be aresult of the relative youth of Investco, having been made up of six companies acquired withinthe past three years. Investco may need to acquire a few more firms like Bigbux before itachieves the critical mass it needs to realize better profit margins.

Appendix B also shows that the current market capitalization of Bigbux is approximately$10.1 million and Investco’s market capitalization is in excess of $45 million. Therefore, usingmarket capitalization to determine the share exchange ratio as suggested by Nick Chance ofInvestco, Bigbux’s shareholders would receive 1 1/3 shares of Investco for each share of Bigbuxwhich would result in their owning approximately 18% of the combined Bigbux-Investco entity.

At issue is the ‘fairness’ of the proposed merger stipulations to Bigbux’s existing shareholders.Fairness can be gauged through an assessment of the relative revenues and relative assets underadministration of the two entities. Bigbux’s commission revenues for its latest fiscal yearamounted to approximately $22.5 million, whereas Investco’s revenues were approximately$50.7 million. Assuming the same revenues for next year, Bigbux would generate approximately31% of the total revenues of the combined firm. Similarly, Bigbux’s assets under administrationat $2.254 billion compares to $4.532 billion for Investco – or approximately 33% of thecombined total.

As a result, a share exchange based on market capitalization may understate the relative value ofBigbux in a combined Bigbux-Investco entity. It is possible that the market capitalization ofInvestco is high due to the more aggressive nature of the U.S. stock markets. Alternatively,Bigbux may be experiencing a low market valuation due to the fact that its shares are thinlytraded. In any case, Investco’s proposal in its current form does not appear to be ‘fair’ in aquantitative sense from the standpoint of the Bigbux’s shareholders, who as a group would haveto approve the amalgamation. If this option is to be pursued, the Company’s shareholders shouldnegotiate for a better exchange ratio.

There are several qualitative issues to be addressed in assessing this proposal as well. On thepositive side are the following:

• The market penetration of mutual funds in the U.S. is much greater than in Canada. A mergerwith Investco would allow Bigbux shareholders to benefit by accessing the large U.S. mutualfund market and in particular the growth prospects of Investco.

• A successful expansion through Bigbux may open the door for Investco to make otherCanadian mergers, thereby effectively increasing Bigbux’s market presence in Canada.

• New sales representatives may be attracted to the prestige of an ‘international firm.’

• If Bigbux does not strike a deal with Investco, then Investco may form an alliance withanother mutual fund dealer in Western Canada. This would further harm Bigbux’scompetitive position.

• Bigbux shareholders may experience an increase in their shares’ value as a result of greaterliquidity and generally more favourable financial market conditions in the U.S. This may beparticularly attractive to Newcap Ventures.



• Bigbux would be exposed to a much greater base of financial and human resources thatmight enable the Company to adopt certain ‘best practices’ in its operations.

• Bigbux would enjoy improved information management since Investco would handle theinformation systems function. Consequently, the current shareholders of Bigbux would nothave to finance the upgrade of the Company’s information systems (as discussed later in thisreport).

• There would be no need for a succession plan, as management functions would be performedby Investco.

On the other hand, some of the negative implications and potential risks associated with thismerger that should be considered include the following:

• Significant Bigbux shareholders (Ray Smith and Newcap Ventures) would have a muchsmaller interest in the combined entity and would not have the same degree of influence overthe business they now enjoy.

• Most of the Canadian head office operations would be eliminated. Thus, many employees(likely including Veronica Fisher) would be laid off.

• Having control and compliance functions exercised outside of Canada may proveproblematic if there is a significant difference in regulatory requirements.

• Marketing and promotional programs that are established in the U.S. may not reflect certainuniquely important Canadian considerations, such as the generally more risk-averse nature ofCanadian investors. Other important differences also exist, such as the Canadian RRSPseason, differences in mutual funds available, cultural influences, and so on.

• Investco’s low profit margin may be the result of ineffective management, which wouldeventually be reflected in the value of its shares.

• Because Investco is a U.S. company, the share exchange likely would not qualify as a tax-free rollover and would be a taxable transaction to Bigbux’s shareholders. Consequently,Bigbux’s shareholders could incur a tax liability but would receive no cash. Therefore,current shareholders may have to dispose of a portion of their Investco shares to finance theirtax liability.

Following from the foregoing, it may be worthwhile to pursue further discussions with Investco.In particular, Bigbux should address the concerns identified above and whether an arrangementthat is more reflective of Bigbux’s relative contribution can be struck.

Expand Into Other Geographic MarketsA quantitative analysis of this opportunity is set out in Appendix C.



Canada

Bigbux has the immediate opportunity to acquire up to four independent mutual fund dealersoperating in Central and Eastern Canada. Collectively, these companies comprise over $5 millionin revenues and over $500 million in assets under administration.

Based on Bigbux’s expectation that revenues from these acquisitions could increase by 20% peryear, gross commission revenues would exceed $13 million by 2005. The cost to acquire all fourof these operations would range from $2.5 million to $5.0 million, the payback period wouldrange from 4.8 to 7.7 years, and the net present value would range from $1.4 million to$-1.1 million. The feasibility of this option will depend greatly on the price that can benegotiated with the target companies.

If the Company cannot negotiate a price that reflects close to 0.5% of assets underadministration, the payback period would be too long and the net present value too low, evengiven the optimistic growth projections.

A national expansion program would provide Bigbux with the following benefits:

• It may help in attracting good sales representatives who want to be part of a national firm.Existing and prospective clients may also be attracted to the prestige of a national firm.

• It would provide Bigbux with geographic diversification and less exposure to the economicconditions of Western Canada.

• A base in Central and Eastern Canada would be established and could be used as a launchingpoint for further expansion. As Bigbux grows, it may generate additional economies of scaleand become a much greater market force.

• Bigbux would have a presence in the large Ontario market, which has favourabledemographics, as evidenced by the relatively high level of household income and highproportion of baby boomers.

• An expansion program may send a positive signal to the financial markets resulting in anincrease in Bigbux’s share price.

However, the following negative factors and potential risks must also be considered:

• There may be significant cultural differences between various regions, particularly theQuebec market place. Furthermore, Bigbux would need to translate its materials into Frenchif it acquires the Quebec City company.

• Effective integration, monitoring and control of the newly acquired operations may provedifficult in light of the geographic situation, different time zones, and so on.

• The markets in Quebec and the Atlantic Provinces are less attractive than in Ontario in termsof certain key demographic indicators dealing with income levels.

• Given the current phase of industry consolidation, other prospective acquirers may also beinterested in these mutual fund dealers, thereby increasing the price Bigbux would have topay.



• Even if all four firms were acquired, Bigbux would not be well represented in most regions.

• According to the marketing survey, only 9% of clients place a high degree of importance ona mutual fund dealer being a national firm.

If Bigbux decides to acquire all of these firms, the issue of financing must be addressed. TheCompany’s cash position is insufficient to finance all four acquisitions from internal sources.Therefore, Bigbux would have to raise debt or issue additional equity. The issuance of additionalequity would erode earnings per share and may place further downward pressure on theCompany’s share price. Bigbux may also want to consider a share-for-share exchange with theseother operations. Since both the acquirer (Bigbux) and the target company are Canadian, a shareexchange would qualify as a tax free rollover pursuant to section 85.1 of the Income Tax Act.This may be a very attractive alternative to the shareholders of the target companies. However,an increase in the number of shares outstanding would also decrease earnings per share, resultingin a negative impact on the price per share.

Bigbux could also consider acquiring only one or two of the companies for sale. This would easethe financial burden and facilitate integration. Of the four companies, Investment ServicesLimited of Toronto has the highest AUA and gross commissions per sales representativeindicating that it is the most efficient (see Appendix C). This, together with the generallyfavourable demographic indicators of the Ontario market, make it the most attractive of the fourcompanies. Although Newfunds Inc. of Hamilton is the least efficient, its AUA per salesrepresentative of $7,313,000 is still greater than the $6,250,000 average for all Canadian mutualfund dealers. Because of its proximity to Toronto, there should be some economies of scaleresulting from the acquisition of both the Toronto and Hamilton companies.

If Bigbux does acquire one or more of the prospective target companies, it will be important toensure that key sales representatives at those businesses do not depart shortly after a transactionhas occurred, thereby depleting the acquired client base and assets under administration. Theconditions of a purchase agreement should therefore include a holdback of a portion of thepurchase price, non-competition agreements, and so on. The issue of sales representativeturnover in general is addressed in a subsequent section of this report.

An alternative to acquiring the target companies is to form a strategic alliance with one or moreof these companies. This could involve a sharing of best practices, certain administrative andadvertising expenses, compliance, and so on. A strategic alliance approach would allow Bigbuxto obtain some form of national presence without having to make a significant capitalcommitment.

United States

Bigbux has also been approached with the opportunity to acquire U.S.-based JP Investments Inc.(JP). This presents an opportunity to expand into the U.S. market and reap many of thepreviously listed benefits associated with the option to merger with Investco. However, as theacquirer, Bigbux would have to contend with practical issues such as regulatory and culturaldifferences between Canada and the U.S., as well as foreign currency exchange risks. Accordingto Appendix C, JP has relatively strong gross commissions per sales representative, but its AUAper sales representative is relatively weak, suggesting that a larger portion on its revenue base isearned through commission fees rather than trailer fees.



If the guidelines for pricing are consistent between Canada and the U.S., the cost of JPInvestments Inc. would be $735,000 to $1,470,000 (in Canadian dollars). The high end of thisrange is more likely given that the owner (Jake Price) is making it widely known that he isselling. In addition, Bigbux would likely have to pay cash given Jake Price’s objectives.

Expand the Product LineThe board of directors has suggested that additional revenues could be generated by offeringBigbux’s clients an extensive set of financial services including life insurance, personal financialplanning and personal income tax return preparation in addition to mutual fund sales.Appendix D provides an analysis of the potential profitability of this alternative.

Total incremental net revenues to Bigbux are estimated to range from $443,000 to $850,000 peryear, with incremental costs amounting to $600,000 per year. Therefore, based on the board’sestimates, incremental annual pretax profits would range from $250,000 on the high end to a lossof $157,000 on the low end if this option is adopted.

Based on this analysis, the viability of this option is tentative. It entails significant risk, and itshould be noted that any economic analysis of this option is fettered by the lack of informationthat Bigbux has regarding its client base. This issue is addressed subsequently in this report.

Before a final decision is made, various other factors should be considered. Among the benefitsof going the full financial services route are the following:

• Bigbux could differentiate itself from other mutual fund dealers and be better able to competeagainst banks, trust companies and insurance companies.

• Wealthy clients often seek a full line of financial services from one source. Because theseclients tend to invest more funds while requiring the same amount of service time fromBigbux and the sales representatives, the overall payoff from these clients is higher than fromless wealthy clients. The loss of these clients to banks and other competitors that offer a fullline of services could have a significant negative impact on Bigbux’s profits.

• New high quality sales representatives may be attracted to the Company because of the rangeof services they can offer.

• An increasing proportion of Bigbux sales representatives have post-secondary educationand/or are pursuing or have achieved a financial planning designation.

• A large capital investment would not be required.

On the other hand, negative factors and possible risks associated with this option include thefollowing:

• While the proportions have been decreasing, Bigbux still employs a large number of salesrepresentatives who likely do not have the educational background to offer such services andmay find the learning curve difficult.

• Sales representatives may reject spending the time required to keep up to date on newdevelopments, given that such efforts take away from ‘selling time’.



• The marketing survey indicates that only 12% of respondents feel that the most importantcharacteristic of a mutual fund supplier is that the firm offers a full line of financial services.

• According to the marketing survey, Bigbux has had minimal success in creating awareness ofits name in general. Therefore, making the public aware that additional services are offeredmay prove difficult and/or costly, particularly in light of the recent pressure on marketingfunds with the loss of co-op advertising money.

If the full financial services option were pursued, the Company could endeavour to make thenumbers work. For example, the payout percentages to the sales representatives could belowered a little, say to 75% or 80%. If the incremental time the sales representative has to spendwith the client on these additional services is relatively low, a lower percentage payout may stillgenerate a higher overall payoff to the sales representatives. Another possibility is to reduce theincremental costs by hiring fewer in-house experts and train only a portion of the salesrepresentatives at each branch who would focus on the wealthier clients. The other salesrepresentatives would continue to sell only mutual funds and would refer clients who areinterested in the other services to the full-service sales representatives.

However, it would be necessary to establish a mechanism of internal control to ensure that allpersonal financial planning and income tax preparation revenues were fully accounted for.

Status QuoBigbux has the alternative of not pursuing any of the aforementioned strategic options, andcontinuing to operate as in the past, albeit with certain improvements to its operations, assuggested in subsequent sections of this report. This may be a plausible alternative for thefollowing reasons:

• Based on the analysis contained herein, none of the alternatives appears overwhelminglyattractive, and most entail a significant change to the Company. These changes may bedifficult to manage, particularly in light of the pending departure of key personnel (RaySmith and Mark Thompson).

• The status quo would allow Bigbux to focus on its existing operations and to properlyimplement those changes that should, in and of themselves, improve operating performanceand eventually increase shareholder value.

On the other hand, electing the status quo may prove detrimental to the Company in the long runfor the following reasons:

• Given the recent industry consolidation, Bigbux’s competitive position is likely to erode.

• Bigbux will incur additional costs in respect of compliance requirements and advertising,without those increased expenditures translating into incremental revenues. Without asignificant increase in revenues or decrease in other costs, profits will decrease and,consequently, so will the value of the Company’s shares.

• The opportunities that are present at this time (specifically the merger option and theexpansion option) may not be available at a later date. If Bigbux does not pursue one of these



other options, it can expect that a competitor likely will, which may further impair thecompetitive position of the Company.

RECOMMENDATIONSThe main decision criteria is to choose the strategic direction for Bigbux that has the greatestchances of maximizing the value of the Company’s shares, thereby providing a good return oninvestment to the shareholders. Given the current trends in the competitive market, it isrecommended that the status quo should not be furthered considered.

It is difficult to assess the future success of Investco without further investigation into itsstrategies, policies, objectives, and management. There are no guarantees that Investco’sprofitability will improve in the near future. Also, as 29% of Bigbux’s shares are owned by RaySmith and other Bigbux employees and a merger would result in Ray’s daughter and some ofthese employees losing their jobs, it is unlikely that they would be willing to support a mergerwith Investco unless they can be convinced that their returns will be substantially greater bymerging than by expanding. Therefore, it is recommended that the Investco merger offer not beaccepted at this time.

The opportunities in the mutual fund industry in Canada are still substantial and Bigbux is in areasonably good position to capitalize on these opportunities if it is willing to adapt to new trendsin the market and take a few risks. It is recommended that Bigbux pursue an expansion strategy,both geographically and in its product line.

Geographical expansion is necessary to achieve the economies of scale necessary to offset theincreased costs resulting from the new government regulations and to attract the high qualitysales representatives that will be required to support the product line expansion and increaseoverall revenues. Expansion of the products and services that Bigbux offers is necessary toattract both wealthy investors and top performing sales representatives.

By pursuing both forms of expansion, Bigbux will differentiate itself from other mutual funddealers and will be in a better position to compete with banks, trust companies and insurancecompanies. Expansion should result in greater public awareness of the Bigbux name, increasedprofits and, consequently, increased value of its shares.

For the time being, it is recommended that Bigbux first pursue geographical expansion intoCentral and Eastern Canada rather than expanding into the United States. Bigbux is more likelyto find small mutual fund companies at a better price in Central and Eastern Canada than in theUnited States, and there would be fewer cultural and regulatory differences to contend with.

Regarding the expansion of products and services, Bigbux should initially seek external trainingalternatives that are less costly than hiring in-house experts and should at first train only a fewspecialists per branch, who would offer the new services initially to the Company’s exisitingclients. Eventually, once marketing efforts are expanded and demand for the new servicesincrease, more of the sales representatives could be trained.



IMPLEMENTATION PLAN

Mission StatementIn view of the recommendations regarding the Company’s strategic direction, Bigbux shouldestablish a clear mission that reflects these recommendations, thus providing employees, salesrepresentatives and clients with a clear vision of the Company’s future. The following is arecommended mission statement:

“We are committed to assisting Canadians in accumulating and managing wealthby offering an extensive line of financial services, including sound and objectiveinvestment and insurance advice, personal financial planning and income taxmanagement, based on the concept of long-term relationships with clients. Webelieve that if we focus on our clients’ objectives, our shareholders will earn a fairreturn, and our employees and associates will enjoy rewarding careers.”

Time Horizon for Expansion StrategyThe expansion into Central and Eastern Canada should be a top priority, as the pace ofconsolidation in the industry appears to be very rapid. Expansion of products and services shouldnot be rushed since it will take some time to train the necessary staff and to develop relationshipswith insurance companies whose policies Bigbux will be selling. In general, the expansion intoCentral Canada should be targeted for next year and expansion into Eastern Canada thefollowing year.

Bigbux should immediately engage in preliminary discussions with Investment Services Ltd andNewfunds Inc. to ascertain whether their purchase prices would be sufficiently low to make themfeasible acquisition candidates. If their prices are too high, Bigbux should search for other smallmutual fund dealers in Central Canada that would be good acquisition candidates

Bigbux must also give immediate attention to a number of key business issues, which will bediscussed in the following sections.

Expansion of products and services should be phased in over the next two to three years onceimprovements have been made to the current operations of the Company. Improvements to theinformation systems will be especially critical to the introduction of the new services. Anadministrative infrastructure for the new services would have to be established, and an efficienttraining program would have to be found or designed. Then, a few specialists per branch shouldbe trained or hired to offer the expanded line of services. Once head office is able to compile andanalyse background data on the Company’s clients (e.g., proportion of clients who can becategorized as higher wealth clients), the new services could first be offered to Bigbux’swealthiest clients. As demand for these services increase, more qualified sales representativesshould be hired or trained.

MarketingBigbux suffers from a low level of awareness of its name outside of its client base. Aggravatingthis factor is the pending loss of co-op advertising money from mutual fund companies.



Therefore, Bigbux will have to increase advertising spending just to maintain its current level ofpublic exposure. As a result, Bigbux should consider more innovative and efficient ways ofcreating awareness.

Bigbux Web Site

A higher level of awareness might be gained through the use of a well designed company Website. While many of its competitors have already established Web sites, Bigbux may be able todifferentiate itself in this respect. For example, Bigbux might post articles and other informationregarding mutual funds on its Web site so as to help investors better understand these financialtools and to make informed decisions as to the right funds for them. It should not be too difficultto connect with some services permitting the online viewing of the price performance of mutualfunds and their current contents. This might also help Bigbux to establish itself as ‘independentmutual fund experts’.

It may be beneficial to offer special services to existing clients through a Bigbux Web site so thatthese clients can see the benefit of remaining with Bigbux in the event that their salesrepresentative leaves the Company. For example, Bigbux might be able to offer clients thecapability to view their mutual fund balances, contribution histories, rates of return, and so on,online.

With the Internet becoming increasingly more common, the Company may be at a disadvantagein not having a Web site. Many clients may come to expect it. In addition, a properly designedWeb site could help alleviate some issues. Many prospective clients call into Bigbux to requestbrochures and documentation regarding the Company and the funds it offers. The Web site couldanswer most of these standard questions quickly and on a more cost-efficient basis. One of themarketing or sales staff at head office could be assigned the responsibility of answeringquestions from potential clients who wish to speak with a person rather than accessing aWeb site. The time that sales representatives had previously spent providing this informationcould be more productively spent on other income generating or compliance activities. It mayalso alleviate some of the complaints from clients regarding their sales representative failing toreturn phone calls.

The implementation of a Bigbux Web site would have to be done carefully so as to garner thesupport of the sales representatives. Ideally, the sales representatives should see the BigbuxWeb site as a valuable tool that helps them in attracting and retaining clients. Therefore, salesrepresentatives should be involved in its design. Perhaps some of the sales representatives couldbe encouraged to use the Web site and e-mail to provide services to clients as an alternative toface-to-face meetings or telephone communications. This could be an efficient method ofattracting and servicing clients from parts of the country that Bigbux does not currently service.

Television Advertising

With the expansion into Central and Eastern Canada, Bigbux should consider national televisionadvertising for the long term. Gordon Richardson has the experience and talent to produceinnovative advertisements that could substantially influence demand for the company’s productsand services. It will be important, however, to keep costs under control. An affordable budget forthe development of the advertising campaign will have to be set and Gordon will have to begiven sufficient motivation to keeps costs within the budget. Because such an initiative is very



expensive, it should not be implemented for several years. Bigbux must first establish branchesin Central and Eastern Canada, and set up an infrastructure for handling the increased demandthat the television advertising will generate. Ultimately, the increased net revenues generatedfrom the campaign will finance its costs.

Customer Service and Information ManagementCurrently, client information sheets are maintained by the sales representatives. The informationon these sheets is not stored electronically or forwarded to the head office; therefore, Bigbuxdoes not have certain information regarding the composition of its client base, such as incomelevels, net worth, and other client data. This has impaired the Company’s ability to makeinformed decisions on matters such as expansion plans, advertising focus, training, and so on.Conversely, sales representatives do not have access to their clients’ contribution history andaccount performance, which is maintained at head office. This has caused the salesrepresentative to be caught off guard when confronted by clients regarding the performance oftheir investments.

To overcome these concerns, it is recommended that Bigbux establish and maintain a centralizeddatabase, whereby the sales representatives would input client profiles and the head office wouldprovide account balances and contribution histories for those clients. This would enable Bigbuxto better understand the composition of its client base and sales representatives could be ofgreater service to their clients. The centralized database would be managed by Bigbux’s headoffice and sales representatives could link up to it online at any time.

An automated system could help in managing oversights, such as the recommendation of aninappropriate fund based on a clients’ risk profile, or send out an alert when the foreign contentportions in a client’s RRSP account exceed the prescribed limits. Also, sales representativescould be made aware of large fluctuations in their clients’ portfolios, either due to largecontributions, withdrawals, or significant changes in asset values. This exceptions list wouldallow sales representatives to be proactive in contacting their clients to discuss the issues andhelp to curtail confrontations with angry clients.

Customer service could be further improved by allowing clients to access their accounts at anytime through a Bixbux Web site, so that they could monitor the performance of their mutualfunds. The growing number of investors who make their own investment decisions mayappreciate this service, thereby attracting them as customers.

The success of an expansion strategy will rely on the Company’s ability to provide superiorcustomer service. Therefore, the establishment of a centralized database, as well as a Web site,should be implemented as soon as possible.

Security and training issues will be important implementation considerations. Because client datawill be accessible online, a proper access authorization system will be essential. It is important tocontrol not only who is authorized to view the data, but also who is authorized to change it. Salesrepresentatives should be permitted to view and change profile data only for their own clients aswell as view the details of their clients’ accounts and investments. Branch managers should beable to view but not change the information on any client serviced by their branch. Bigbux headoffice should be permitted to view any client data, but should only be authorized to update the



clients’ accounting data and information regarding the clients’ investments. Clients should onlybe permitted to view their own accounts.

The implementation of a new database system will also have to take into account training in itsuse. Some sales representatives may not be familiar with online computer systems and might notfully appreciate their benefits. Above all, the system must be secure and easy to use. BothBigbux managers and sales representatives should be involved in the system’s design andimplementation.

Finally, the client account system and the financial accounting system should be integratedwhere possible. In particular, information such as assets under administration, contributions, andso on, should feed directly into the accounting system so that monthly accruals are madeautomatically. This would help in alleviating the workload of the accounting department.

Quality Control and ComplianceBigbux is experiencing a quality control problem with some of its sales representatives, mainlynew sales representatives in the British Columbia region. These sales representatives are ill-advising clients and are not meeting service expectations. The warnings received from regulatoryauthorities may be of particular concern. While the required addition of compliance officers byBigbux should help to stem this issue somewhat, more needs to be done to ensure customersatisfaction and not just legal compliance. Improved service is a function of training (both initialand ongoing), monitoring, and support.

Initial training of sales representatives is now being done by way of self-study and theassignment of a mentor. The self-study methodology does not guarantee that new recruits havecompleted the program and learned the material. It may be necessary to reconsider whether amore formal initial training program is necessary, such as periodic training camps for newrecruits. Direct interaction with new sales representatives and perhaps some form of testing at theend of the program may be appropriate. This would also take some pressure off the branchmanagers and would ensure that sales representatives from newly acquired/established branchesin Central and Eastern Canada are made aware of the Company’s policies and procedures. Perhasinitial training sessions could be conducted in conjunction with the annual sales meeting, wherenew sales staff could gain an appreciation for the corporate culture.

With respect to ongoing training, sales representatives are resistant to such efforts because theyperceive it as non-productive time. Bigbux must try to find ways to minimize the timerequirements of its sales representatives where possible, while still conveying important points.Ideally, sales representatives should see the training function as a helpful tool or as an investmentthat will help generate increased revenues. One possibility is to arrange for on-line training,whereby sales representatives could search a database of frequently asked questions and obtainonline support for issues they were uncertain about.

The quality monitoring function could be done in a number of ways. Client surveys are apossibility, although sales representatives may protest on the basis that they do not want theCompany interacting directly with their clients. Alternatively, the role of compliance officerscould be broadened to that of quality assurance officers. This might entail hiring even morecompliance officers and giving them a designated number of branches where they would become



familiar with the sales representatives and clients. Their function would encompass not onlyregulatory compliance, but customer satisfaction as well.

Sales representatives should be given the tools necessary to help them in satisfying clients. Whileit appears that Bigbux is already ahead of most of its competitors in terms of sales representativesupport, there could be areas for improvement. A Bigbux Web site might be one way ofachieving this objective. As previously mentioned, the Web site could be used by potentialclients to obtain general information on mutual fund investing and by current clients to monitortheir accounts.

Several clients have complained that they never hear from their sales representative. In thesecases, it is possible that client information (including investment objectives) is not being kept upto date. This non-compliance can be a serious issue. By computerizing the client informationforms and maintaining the information in a common database, Bigbux could ensure that clientinformation is updated at least annually, in accordance with company policy. For example,Bigbux could print out an exceptions list of client profiles that had not been updated in the past12 months and remind the sales representatives that compliance procedures dictate that regularupdates be completed.

The fact that clients have been confronting the sales representatives upon realizing that theirinvestments have declined in value is a symptom of another problem, i.e., that salesrepresentatives may not be adequately communicating the risks involved in mutual fundinvesting. It might be beneficial for Bigbux to prepare a standard brochure that would explain toclients the potential downside normally associated with various types of funds. This informationcould be made available in printed form and on a Bigbux Web site.

Sales Representative TurnoverBigbux has been experiencing an increase in the turnover rate of its sales representatives,including the loss of some of its top performers to competitors in return for higher commissionpayout rates. Because Bigbux does not require sales representatives to sign a non-competitionagreement and as a result of the emphasis placed on developing strong relations between clientsand sales representative, Bigbux has also lost some clients who have opted to keep their businesswith former Bigbux sales representatives who are now employed by other mutual fund dealers.Of further concern is the fact that Bigbux has incurred the expense of training these salesrepresentatives and competitors are now reaping the benefits of this training.

Under the current organization structure, sales representatives are employees of the branchmanager, not Bigbux; therefore, Bigbux does not have any control over setting the commissionpayout rates to individual sales representatives. However, Bigbux does have the option ofrequiring that each sales representative sign a non-competition agreement. While this would nothelp with the recruitment of sales representatives, such an agreement could influence some salesrepresentatives to stay with Bigbux rather than switch to a competitor. Other options to considerare as follows:

• Offer stock options to top performers. Ideally, these stock options would vest over time (e.g.,five years) which could induce top performing sales representatives to remain with Bigbux.The advantage of stock options is that the goals of the sales representatives will be more inline with the goals of shareholders.



• Hold contests and award prizes to sales representatives who attain a certain goal with respectto new sales.

• Rather than imposing non-competition agreements, use the lack of such agreements as afeature to lure sales representatives from competitors. This might be particularly effective ifit were implemented in conjunction with a deferred profit sharing plan.

• As previously suggested, free-up some of the time that a sales representative or other branchemployee needs to spend informing new and prospective clients about the basics of mutualfund investing. If this information were made available to the public from the head office andover a Web site, sales representative would have more time to spend on training, complianceand revenue generating activities, thereby increasing their total earnings. Salesrepresentatives would be less likely to leave Bigbux if they could increase their total earningssufficiently to make up for the lower commission payout rate.

The offering of new financial services, requiring specialized training of sales representatives,will increase the risk of some of them leaving the Bigbux family. One way to minimize this riskis to give the sales representatives a choice of which services they wish to offer. This could alsobe useful for recruiting sales representatives who may already to trained to provide some of thenew services, but who are not trained to sell mutual funds. This strategy, however, will requireBigbux and the branch managers to devise an efficient system to match up clients with the salesrepresentatives who are qualified to fulfil the clients’ service needs.

The issue of compensation for sales representatives will become even more important if Bigbuxwishes to recruit better educated sales representatives who are qualified to offer a full line offinancial services to clients.

Rather than changing the structure of Bigbux such that they have better control over commissionpayout rates to individual sales representatives, it is recommended that improvements be made inclient and sales representative support by head office. The objective would be to free up asubstantial amount of time that the sales representatives could instead use to keep abreast ofcompliance issues and generate additional commission revenues.

For now, do not impose non-competition agreements on the sales representatives. Instead, usethe lack of such an agreement as a recruitment tool and use stock options or some other deferredprofit sharing program to encourage sales representative to stay with Bigbux.

Personnel and Organizational StructureSuccession Planning

Bigbux is facing the pending departure of its president and its vice-president, sales within thenext two years. Due to the importance of these individuals within the company, this might resultin some transitional issues if not managed properly. In particular, both Ray Smith and MarkThompson have established a good rapport with the sales representatives, and some salesrepresentatives may leave if they believe that the replacements for Ray Smith and MarkThompson are unacceptable.

With respect to the replacement of Ray Smith, a successor president should be knowledgeableabout the industry. Given the nature of the Company’s operations, that person should have a



strong sales background, but be sufficiently astute on matters regarding operations and finance.Since it does not appear that such an individual is currently employed at Bigbux, it will benecessary to hire externally. Given the level of industry consolidation that has occurred, it ispossible that senior executives of recently amalgamated mutual fund dealers may have becomeavailable, some of who could be ideal candidates for Bigbux. Not only would they beknowledgeable about the industry in general, but they also might be able to bring some of thecompetitors’ best practices to Bigbux.

The loss of Mark Thompson will be an issue because of the respect he has earned from the salesrepresentatives and the concern that some may have regarding Bigbux losing his insights intomutual fund selection. Overall, a successor for the vice-president, sales position should be wellfamiliar with mutual fund sales and be a person who can properly strategize the sales functionand marketing efforts. Brenda Simms might make a good candidate, but will likely require somespecial training with Mark Thompson over the next two years.

The new vice-president, sales does not necessarily have to possess good mutual fund selectionabilities. It may be possible to retain the services of Mark Thompson on a consulting basis afterhis retirement to fill this void. He might receive some form of consulting fee plus contingencyfor selecting the best performing funds. Eventually, however, Bigbux will need to find anotherexpert in mutual fund selection.

Appropriate candidates for the two executive positions may be more attracted to Bigbux if theCompany offered stock options as part of its incentive package. This would also help align theobjectives of top management with those of the shareholders.

Accounting and Finance

It appears that the current personnel in the finance function are not sufficient to handle theforthcoming volume of transactions, although improvements to the information systems (aspreviously discussed) should help alleviate some of the pressure. Although Rachel Peterson hasmanaged the record-keeping function well, her background does not include that of financialmanagement. Ideally, a chief financial officer (CFO) should be hired to fill that role. This personshould be a professional accountant who is familiar with the financial services industry and whois a good analyst and strategic thinker. The CFO should report directly to the president given theimportance of that role. He or she would oversee the finance function, including budgeting,analysis and financial reporting. This would also help alleviate the workload of Ronald Park(Chief Operating Officer). Although there would be a cost to hiring a CFO, it may be offset tosome degree if the accounting department could forego hiring an additional clerk since a portionof Rachel Peterson’s time would be freed up.

Information Technology

The creation and maintenance of a Bigbux Web site will necessitate the hiring of a Webmaster.The initial implementation of a centralized database could be contracted out, but its ongoingmaintenance should become Julie Johnson’s responsibility.

Operations and Training

To conform to the new industry regulations, additional compliance officers will be required. Aspreviously noted, consideration should be given to transforming the compliance function into



one of quality assurance. A quality assurance department could be established and, givenVeronica Fisher’s current struggles in her current position, it may be best for the new departmentto report directly to Ronald Park (COO).

The training function was recently moved from operations (under Ronald Park) to sales (underMark Thompson). Since that change, there has been an increase in compliance related issues.While training has both a sales and operations aspect to it, that function may be better positionedunder operations in the near term to stem compliance-related issues. It would also facilitate thetransition of a new vice-president, sales, who could focus on the sales and marketing functions.

With the realignment of the compliance/quality control function, training might be appropriatelyassigned to Veronica Fisher in her role as operations manager. In addition to her dutiespertaining to sales representative policies and procedures, Veronica’s talents in writtencommunications could be utilized by making her responsible for the development of trainingmaterials so that they are better understood and followed by sales representatives. In addition,due to the limitations of Elaine Freely’s background, it may be appropriate to train her (orpossibly replace her) so that the critical training function is properly conducted.

Sales and Marketing

The performance of Allison Jackson (the sales manager of the British Columbia region) needs tobe addressed. Her lack of practical experience may be causing a shortfall in her performance andis the source of a lack of respect from the sales representatives in her region. To overcome thisissue, it might be beneficial for Allison to spend some time in the field (say an extended periodof 3 to 6 months), working closely with branch managers and sales representatives and learningthe business. Getting to know these individuals on a personal basis may also help in obtainingtheir support. Failing that, it may be necessary to consider finding a replacement for Allison andreassigning her within the organization, if a suitable position can be found.

Performance MeasurementPerformance measurement and compensation should be consistent with the quality controlfunction. At present, sales managers are evaluated strictly based on growth in assets underadministration in their region, and the sales managers in turn evaluate the sales representativeson that basis. Basing performance evaluation strictly on growth in assets under administrationdoes not directly consider many of the elements that are important to Bigbux, including customersatisfaction and growth in client base. Growth in assets under administration is affected by theperformance of the underlying mutual funds and the financial markets in general, which isbeyond the control of Bigbux and its sales representatives. Using the current performancemeasure may discriminate against sales representatives and branch managers working interritories with lower general income levels.

Fortunately, the branch managers normally incorporate other quantitative and qualitative criteriain evaluating and compensating sales representatives. However, the performance measurementsystem should be redesigned to focus on factors that can be controlled by the person beingevaluated and that are important to the long-term economic prosperity of Bigbux. Such factorsinclude customer satisfaction, market share, number of clients, etc. Information on some of thesemeasures is readily available, while others (such as customer satisfaction) may require the use of



surveys. Offering a client survey or the opportunity for feedback on a Bigbux Web site mayfacilitate collecting such information.

The measure of growth in assets under administration should be kept as one of the performancemeasurements since it is also important to Bigbux. However, the way in which it is measuredshould be modified. For example, a measure of growth due to net contributions in any particularyear would help alleviate distortions caused by the favourable or poor performance of thefinancial markets.

Finally, from a macro perspective, Bigbux should determine and strive to match the industrybenchmarks in terms of profitability, return on investment, and other relevant performanceindicators. Striving to become an ‘industry outperformer’ would help increase the Company’sshare price.

Branch Manager CompensationSeveral branch managers have complained that their compensation is stymied due to branchoperating costs. Specifically, the smaller branches are not enjoying the same economies of scaleas the larger branches, forcing branch managers to cover operating costs with their own earnedcommissions. Therefore, there has been an increasing risk that these branch managers, whotypically generate above-average commissions, may leave Bigbux.

On the other hand, the proposed increases in support services provided to the branches by thehead office (i.e., training, information systems, compliance, etc.) will free up some of the salesrepresentatives’ and branch managers’ time, which can be more efficiently spent on revenue-generating activities. The costs of providing these support services may have to be partiallyfinanced through a decrease in the commission payout to the branch managers. Therefore, it willbecome increasingly important to achieve economies of scale in the branches to ensure thatbranch managers can earn sufficient profits.

Because the small branches may not have sufficient critical mass to provide its branch managerwith a sufficient level of compensation, Bigbux should consider expanding the territory of thesebranches, providing them with assistance in recruiting more sales representatives, and increasingthe marketing effort in their territories. Alternatively, where two or more branches in a particulararea are relatively small, Bigbux should encourage the branch managers to amalgamate theirbusinesses in order to generate economies of scale. This alternative must consider the impact onboth sales representatives and existing clients prior to undertaking such an arrangement.

Financial Accounting and Internal ControlDeferrals

The board of directors has raised the possibility of deferring certain costs (such as advertisingand training) in an effort to increase short-term profitability and earnings per share, therebyenhancing the price of Bigbux’s stock. Deferring such costs suggests that they represent an asset,i.e., that the benefits associated with those expenditures can be directly associated with futureperiods.

Since a large portion of advertising costs are incurred in December and the benefits associatedtherewith are realized during RRSP season (the following January and February), there may be



an argument for deferral. Similarly, the benefits of sales representative training costs likelyextend beyond the year in which they were incurred.

However, the deferral of these ‘soft costs’ typically is not done in financial accounting given thatthe benefits are difficult to measure. Any deferral would come under close scrutiny of theauditors who may not accept the arguments put forth. For example, they many challenge thedeferral of training costs in light of the increasing rate of turnover in Bigbux’s salesrepresentatives. In addition, if these costs were deferred for accounting purposes, they would stillbe written off for income tax purposes, thereby creating a deferred income tax expense andcorresponding liability. This would serve to mitigate against the benefits of increased income inthe amount of 45%.

Finally, it generally is accepted that the stock market is not fooled by changes in accountingpolicies. As a result, even if a deferral were permitted, it would likely not increase the marketprice of Bigbux’s stock. Based on the foregoing, it is concluded that deferring advertising andtraining costs would not be particularly beneficial.

Other Income

Other income is included on the income statement as a subset of revenues. However, given thatthis is not part of Bigbux’s principal operating activities, it may be better to show other incomeas a reduction to operating expenses. Even if not done for external reporting, from an internalmanagement standpoint this reclassification makes sense. Net revenues in both absolute dollarsand as a percentage of gross revenues are distorted pursuant to the inclusion of other income withrevenues. For example, while it appears that net revenues increased by $182,000 in fiscal 1999vs. 1998, when other income is removed, it is evident that net revenues actually decreased by$22,000 for the year.

Contingency Funds

Contingency funds in essence represent restricted cash since its use requires the approval of theboard of directors. In accordance with generally accepted accounting principles, restricted fundsshould be properly disclosed as such. It may be more appropriate to reclassify this asset as longterm (rather than current), since its use is not intended for the current operations of the Company.

Internal Control

With the introduction of personal financial planning and income tax preparation services, theboard of directors expressed concern that there would be no way of ensuring that all revenueswere accounted for. Because clients would be charged an hourly rate for this service, salesrepresentatives would be responsible for keeping track of their time for billing purposes. Ratherthan the sales representatives themselves billing the clients and collecting the fees, Bigbuxshould introduce a policy that sales representatives submit their billable time to head office,where invoices would be prepared and sent out to the clients. Clients would be instructed toremit payment payable to Bigbux. Alternatively, the branch managers could take on theresponsibility of billing the clients, but clients should be required to make all payments toBigbux, as they do now for mutual fund investments. Bigbux would then pay the branchmanagers their commissions for this billable service in the same manner as with the sales ofmutual funds.



Dividends, Share Repurchase and FinancingThe board of directors has raised the possibility of increasing the dividend rate (presently at$0.06 per share) or repurchasing shares in order to enhance shareholder value. An increase in thedividend rate often is accompanied by an increase in the stock price pursuant to the fact that theshares offer a more attractive yield to investors. In addition, dividend increases often areregarded as a positive signal to the financial markets by management that a company’s prospectsare expected to improve. However, dividends are ‘sticky’. That is, once increased, they aredifficult to lower because of the negative signal such action sends to stock market participants.While current cash reserves appear adequate to sustain a higher dividend, that may not be thecase immediately after financing an expansion into Central and Eastern Canada, or in the eventof a general downturn in the financial markets. If Bigbux decides to amalgamate with Investco, aone time special dividend could be declared. This would be a means of increasing value to thecurrent shareholders.

A share repurchase is another means of increasing shareholder value. The repurchase of sharesreduces the number of shares outstanding and increases the reported earnings per share figure –an important indicator for stock market participants. In addition, share repurchases are aneffective way for management to send a positive signal to the public markets that it believes itsstock to be undervalued. Finally, unlike dividend payments, share repurchases are not ‘sticky’,and are generally not expected to occur every year, which may lower the level of perceived riskin the event of a downturn in the financial markets.

In the end, an increase in the dividend rate or repurchase of shares is a financing decision, whichshould be made after operating decisions have been made. Stated differently, until such time asBigbux decides on which strategic option to pursue and calculates the financing requirementsassociated with that option, it is premature to address the issue of dividend payments and sharerepurchase decisions.

If Bigbux adopts the recommendations for geographic and product line expansion, the Companywill need the current surplus funds to finance the expansion, to make up for the loss in co-opadvertising funds and to cover the cost of additional compliance officers, as well as financiangthe recommended improvements in information technology and head office operations. It mayalso be necessary to arrange for some debt financing to cover the costs of some of theseinitiatives. Therefore, there will not be any excess funds available to finance a share repurchaseor increase dividends, at least not in the short-run. Once the expansion plans are implemented,the market value of the shares should increase as a result of the increased growth and profits, andit may be possible to repurchase shares and/or increase dividend payouts, which would increasethe value of the shares even further.



Appendix ASWOT Analysis for Bigbux Financial Ltd.

Strengths1. Excess cash on hand, which can be used to buy back shares or to fund expansion.

2. Strong leadership.

3. Effective sales representatives.

4. Good track record in providing sound investment advice, mainly as a result of MarkThompson’s knowledge of the industry.

5. Customer loyalty.

6. Good promotional support materials.

7. Strong financial position.

Weaknesses1. Bigbux’s share price and profitability are not meeting expectations.

2. Bigbux shares are not traded actively.

3. No succession planning. No one internally is deemed fit to replace Ray Smith. Areplacement for Mark Thompson also needs to be found and/or groomed.

4. Sales representatives are not keeping current with regulatory requirements.

5. No advertising at branch level.

6. Information system is not sufficiently automated or integrated, e.g., requires manualinputting of totals from client account program into accounting program.

7. Some employees have limited education and business experience.

8. Low market awareness (i.e., only 7% of those surveyed had heard of Bigbux).

9. No on-line access by sales representatives or clients.

10. No information at head office regarding client background (i.e., a copy of the clientinformation sheets are not forwarded to head office).

11. No Web site.

12. Seasonality of cash flows (i.e., trailer fees are received only once per year).

13. Small board or directors, which limits the flow of new ideas.

14. Nepotism.

15. Unclear responsibilities and relationships among sales managers, training manager, salesrepresentatives, operations manager and branch managers.

16. Inconsistent performance evaluation criteria for sales managers, sales representatives andbranch managers.

17. Dividend policy unchanged since going public in 1997.



18. No growth in service fees since 1997.

19. Phone calls from the public are redirected to branches instead of being handledy by headoffice.

20. High turnover of sales representatives and loss of high performance sales representatives.

21. New sales representatives are providing poor service, particularly in British Columbia.

22. Training of new sales representatives is weak, particularly in British Columbia.

23. Difficult to recruit high quality sales representatives.

24. Non-compliance incidents.

25. Loss of clients as a result of the lack of non-competition agreements with the salesrepresentatives.

Opportunities1. Continued growth in the mutual fund industry in both Canada and the U.S., particularly

within the “baby boomer” segment of the market which is entering its prime saving phasein life.

2. 93% of current investors plan to increase their investing in the future.

3. Small firms in Central and Eastern Canada, as well as in the U.S., are available to bepurchased.

4. U.S. firm is interested in merging with Canadian mutual fund dealer.

5. Internet provides a new method of reaching current and potential clients 24 hours perday.

6. Increasing proportion of sales representatives with university degrees, college diplomasand/or professional designations who are qualified to provide additional financial servicesto current and potential clients with a high net worth who prefer “one-stop shopping” fortheir financial services needs.

Threats1. Pending retirement of Ray Smith and Mark Thompson.

2. New government regulations, resulting in a loss of advertising support from mutual fundcompanies and the requirement of more compliance officers.

3. Growing competition from banks and insurance companies.

4. U.S. companies are looking to expand into Canada.

5. Regional and national mutual fund dealers are acquiring or merging with smaller firms,enabling them to realize economies of scale and greater negotiating strength with mutualfund companies, giving them an advantage over Bigbux.

6. On-line “direct sales” mutual fund dealers are entering the market.

7. Increased use of the Internet by mutual fund companies to directly communicate withinvestors, which reduces the need for individuals to seek the services of mutual funddealers.



8. Pending stock market correction.

9. Aggressive shareholder expectations (e.g., Newcap’s objective of a 25% return oninvestment per year).

Appendix BAnalysis of Investco Merger Proposal

Investco

in U.S. $ in Can. $ Bigbux CombinedTotal

Bigbux %of

CombinedTotal

Commission fees $34,480,000 $50,685,600 $22,505,000 $73,190,600 30.8%

Net income $44,000 $64,680 $785,000 $849,680 92.4%

Profit margin 0.13% 0.13% 3.5%

Assets under administration(in millions)

$3,083 $4,532 $2,254 $6,786 33.2%

Earnings per share $0.0025 $0.0022 $0.16

Average share price in 1999 $1.02 $1.50 $2.00 1.33 to 1

Number of shares 30,018,000 5,033,545

Value of shares (marketcapitalization)

$45,008,989 $10,067,090 $55,076,079 18.3%



Appendix CAnalysis of Expansion Candidates

PurchasePrice

(‘000s)

Numberof SalesReps.

AUA*(in

millions)

GrossCommissions

(‘000)

AUA* perSales Rep.

(‘000)

GrossCommissions

per SalesRep.

Newfunds Inc.(Hamilton) $585-$1,170 16 $117 $1,067 $7,313 $66,688

Investment ServicesLtd. (Toronto) $1,090-$2,180 26 $218 $2,802 $8,385 $107,769

Investissements PlusLtée. (Québec City) $595-$1,190 15 $119 $1,076 $7,933 $71,733

Miritime InvestmentsInc. (Halifax) $235-$470 6 $47 $490 $7,833 $81,667

Total $2,505-$5,010 63 $501 $5,435 $7,952 $86,270

JP Investments Inc.(Seattle) – inCanadian $ at 1.47

20 $147 $1,764 $7,350 $88,200

Bigbux 261 $2,254 $22,505 $8,637 $86,226

All Canadian mutualfund dealers 12,000 $75,000 $6,250

* Assets Under Administration



Appendix DAnalysis of Other Financial Services Option

(‘000s)

Low HighIncremental income from insurance sales:

Insurance premiums (gross) $5,000 $10,000Gross commissions (@ 5% of gross premiums) $250 $500Net revenues (@ 15% of gross commissions) $38 $75

Incremental income from financial planning and income taxpreparation:

Gross amount $2,000 $4,000Amount remitted to Bigbux (@ 15%) $300 $600

Incremental commission revenues from new clients:Base revenues (1999 net, excluding other income) $3,502 $3,502Percentage increase 3% 5%Incremental net revenues $105 $175

Incremental revenues from above three sources $ 443 $850Incremental costs:

Advertising and promotional support 250 250Personnel additions 300 300Incremental fixed costs 50 50

600 600Incremental profits (before tax) $(157)) $250