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Business Plan

Copy 1 of8

Jason Glidden David L. Jurenka Joseph J. Adams

5617 Gharrett Ave. 4119 fox Hollow Dr. PO Box 4014
Missoula. MT 59803 Helena. MT 59602 Missoula, MT 59806
jasongliddenrshotmail.com [email protected] [email protected]
406.546.8381 406.240.4577 801.403.6197

Written by:

Joseph 1. Adams, Jason Glidden, David Jurenka

The components of this business plan have been submitted on a confidential basis. It cannot be
reproduced, stored, or copied in any form. By accepting delivery of this plan, the recipient agrees
to return this copy of the plan. Do not copy, fax, reproduce, or distribute without permission.
 TABLE OF CONTENTS

1.0 EXECUTIVE SUMMARY 4

1.1 Team 4

1.2 Business 4

1.3 Business Opportunity (from market research) 4

1.4 Strategy 5

1.5 Competitors 5

1.6 Competitive advantage/Core competencies 5

I. 7 Economics ofthe business & Exit Strategy 5

1.8 Proposed offering 5

2.0 THE BUSiNESS 6

2.I Opportunity 6

2.1.1 A Generation Getting Older 6

2.1.2 Independent Pharmacists Getting Older 6

2.2 Strategy 7

2.2.1 Acquisition Targets 7

2.3 Industry Overview 8

2.3.1 Independent Pharmacies 9

2.3.2 Chain Pharmacies 9

2.3.3 Mail Order Pharmacies 9

3.0 MARKETING STRATEGY 9

3.1 Product Mix 9

3.2 Service Mix : 10

3.3 Distribution of Products 10

3.4 Advertising and Promotion I I

3.5 Recruitment of Pharmacy School Graduate (Jr. Pharmacist) I I

4.0 OPERATIONS 11

4.I Production I I

4.2 Operations Strategy 12

5.0 STRUCTURE & COMPENSATION 12

5.1 Legal Structure 12

5.2 Organizational Structure 12

5.3 HomeTown Company Valuation 13

5.4 Founders' Stock 13

5.5 Salaries 13

5.6 Management Team 13

5.7 Competitive Advantage 14
Independent Pharmacist (Seller) 15
Future Potential for Stakeholders 15
6.0 TARGET PHARMACY FINANCE & VALUATION MODELS 15
6.1 Finance 15
6.1.1 Assumption of PayabIes 16
6.1.2 Initial Equity 16
6.1.3 Bank / Debt financing 16
6.1.4 Seller f inancing 16
6.1.5 Valuation & Targets 16
7.0 HOMETOWN REVENUE & EXPENSES 17
7. J Bottom Line 17
8.0 GROWTH STRATEGY 17
8.1 Phase One (2 'I, years) 17
8.2 Phase Two (2 years) 17
8.3 Phase Three (4-10 years) 18
8.4 Proposed Exit Strategy 18
9.0 FUNDING REQUEST 18

LIST OF APPENDICES
APPENDIX 1: STRATEGY 19
APPENDIX 2: ALTERNATIVE VALUATION METHODS 20
APPENDIX 3: INCOME STATEMENT 21
APPENDIX 4: BALANCE SHEET 22
APPENDIX 5: BREAKEVEN ANALYSIS 23
APPENDIX 6: PER STORE CASH FLOW 24
APPENDIX 7: FINANCIAL RATIOS 25
APPENDIX 8: OPERATING CAPITAL ANALYSIS 26
APPENDIX 9: STRATEGIC PROFIT MODEL 27
APPENDIX 10: STRATEGIC PROFIT MODEL. 278
APPENDIX 11: STRATEGIC PROFIT MODEL 279
APPENDIX 12: DEFINING THE BUSINESS 30
APPENDIX 13: DEFINING THE BUSINESS 301
APPENDIX 14: COMPETITIVE ADVANTAGE COMPONENTS 32

1
)
1.0 EXECUTIVE SUMMARY

1.1 Team
• Jason Glidden: Mr. Glidden experience is in developing corporate marketing and
management plans for multi-regional chain restaurants. He has organized, trained. and
managed new restaurant locations. Jason also has an MBA from The University of
Montana and access to a network of social and financial capital.

• David Jurenka: Mr. Jurenka is a licensed pharmacist with experience operating an

independent pharmacy. David also has relationships with pharmacists, University of
Montana Pharmacy school faculty and access to capital.

• Joseph J. Adams: Mr. Adams is a founding member of 5 different start-ups, with

experience managing employees. contractors, and the growth and development of
business structure and systems. 1.1. also has an MRA from The University of Montana
which he will complete in August 2007, and access to a network of social and financial
capital.

• Board of Advisors
While the Board of Advisor selection process has just begun, we have developed a matrix
that will evaluate each advisors experience, level of commitment to the project,
knowledge, network, and access to capital. ThIS matrix will be used to select the best
from a promising pool of candidates.

As a unit, this team will meet the goals of stage one and serve as the core unit as the
company accomplishes the goals of phases two and three. J.J. will spearhead finance and
business development, Jason will oversee human resources, marketing, and information
technology. David will contribute technical and operational knowledge specific to the
industry. As the company grows, managers will be added.

1.2 Business
Hometown Pharmacy will execute a geographic rollup of Independent Pharmacies. The
company will be organized as a "C" corporation to facilitate transfer of uwnership and the
eventual Initial Public Offering exit strategy. HorneTown's strengths include education.
experience, social and financial capital, determination, and youthful enthusiasm. The company's
weaknesses are limited industry and geographic roll-up experience.

1.3 Business Opportunity

The wave of aging baby boomers will strain our current healthcare and pharmacy industries and
create many opportunities for profitable pharmacies to thrive. This opportunity is so large that
Walgreens is opening 425 new stores each year, and still failing to meet the growing need of
pharmacies. Furthermore, traditional chains and supermarket pharmacies have yet to enter the
rural market that HomeTown is targeting. This opportunity will peak through the next 17 year
time period as the baby boomers age. This opportunity is paired with the increasing number of
independent pharmacies that are currently for sale at or below market value. The majority of
 owners are looking to retire with no exit strategy from the business in place. The external threats
present to HomeTown come in the form of chain pharmacies as they expand their geographic
reach and the emergence of the online pharmacies.

1.4 Strategy
HomeTown will compete in the pharmacy industry by differentiating itself with a unique mix of
community involvement, products and clinical services. The company will attract skilled talent
by collaborating with pharmacy schools, providing an above average compensation package,
focusing on customer service and providing new pharmacy graduates an opportunity to utilize
their clinical skills in a community pharmacy setting.

1.5 Competitors
The main competitors in the industry that are those which are geographically located within one
hour drive of each of our store locations, and mail order distribution alternatives. These
competitors wi II likely include Corporate owned chain stores; franchise stores and some
alternatives that offer mail delivery. Appendix II reflects the current industry forces. The
demand of pharmacies and pharmacists currently exceeds supply due to a shortage of licensed
pharmacists, and as the number of baby boomers with higher prescription medication needs
grows, this gap is expected to widen. HomeTown will attract pharmacists through university
recruitment and with compensation packages that exceed industry averages.

1.6 Competitive advantage/Core competencies

HomeTown pharmacy will gain advantage through its acquisition model, pharmacist recruitment,
above average compensation, small town branding, and mix of clinical services and durable
medical products. Our pharmacists will be exposed to a level of business training that is not
available with other employers. The company will succeed by utilizing an established customer
base to build brand loyalty within markets that can support a limited amount of competition.

1.7 Economics of the business & Exit Strategy

Although prescription medications are generally low margin products, the high volume in which
they are sold generates a large profit, accounting for the majority of a pharmacy's profits.
HomeTown Pharmacy will provide over-the-counter medications, durable medical supplies and
clinical services which have higher profit margins. HomeTown is using 25 percent as its
estimated gross profit margin, which is the average gross profit margin of the top 25 percent of
independent pharmacies in 2005, and is relatively conservative for a pharmacy that will provide
these goods and services. 1 Home'Town Pharmacy stores can expect a gross profit margin
exceeding 25 percent. Breakeven will be reached in 5 years for each store and positive cash flow
will be reached in two years, and profits will be re-invested to fund growth. Once a company
valuation of $200 million is reached, the company will have an Initial Public Offering of
common shares that will allow stakeholders to negotiate their ownership on the open market.

1.8 Proposed offering

We are looking for a partner(s) who understand the model, share the vision, have industry
knowledge, and can meet the social and financial capital needs of the company. Investors

I West DS 2006 NCPA-Pfizer Digest. National Community Pharmacist Association. October 06.

5
interested in putting up part of the $91Ok of cash necessary to fund Phase One have been
identified. Social and human capital accounts for an additional $91Ok of initial equity ownership
reserved in the company (see section 5.1) such that the company is valued at $1.82k. Initial
equity investors (i.e., 5>91 Ok) will receive stock immediately in HomeTown pharmacy. All other
equity ownership must be vested and will not be distributed until the goals of Phase one are
complete. The time line illustrated in the "Growth Strategy" section of this document will begin
in 6 months, which means that by the end on years we will have to raise an additional $1.5
million necessary to accomplish the goals of Phase Two. This will constitute a second round of
outside financing.

2.0 THE BUSINESS

HomeTown Pharmacy will utilize a geographic rollup strategy to acquire independent

pharmacies, and in doing so capture economies of scale and scope otherwise only afforded to
large chains. HomeTown Pharmacy stores will provide a variety of medical services including
prescription filling, durable medical supplies sales, and clinical services to rural customers.

In order to "roll up" independent pharmacies and make them more profitable, HomeTown
Pharmacy will provide an "exit strategy" for existing independent pharmacy owners that will
allow for a comfortable retirement and piece of mind that the pharmacy will remain in the
community. HorneTown will offer new pharmacists a competitive salary and offer business and
clinical training to attract and retain their services.

2, I Opportunity
2.1.1 A Generation Getting Older
The great generation of "Baby Boomers" is reaching the age of retirement. In the United States,
over 7,900 people reach the age of60 each day. The U.S. population age 65 and over is going to
double by the year 2030. This will mean that I in 5 Americans will be over the age of 65 in 25
years or less. As this generation, which is estimated to be over 78.2 million2 continues to age, its
need for prescription drugs increases. Although the health of this new generation of retirees is
improving, a large number still suffer from chronic conditions such as heart disease or diabetes.
Patients with chronic diseases such as these may take upwards of five daily medications. and as
this population grows, the burden on the healthcare system will grow as well. This will lead to
an increase in not only the size of the potential pharmaceutical market but also increase revenues
through out the industry.

2.1.2 Independent Pharmacists Getting Older

Sixty percent of independent pharmacists are over the age of 50.3 Many of these pharmacists
have spent their entire life creating a business that they had hoped would financially support
them in retirement. Some of these businesses never find a buyer and simply close their doors
when the time comes for the owners to retire. The closing of these independent pharmacies is

~ US Census Bureau, "Oldest Baby Boomers Turn 60". January 3, 2006

, Tony DeNicola. Owning an Independent Pharmacy Can Be a Fulfilling Experience. National Community
Pharmacist Association. Available at: NCPA.org. Accessed April 24, 2007.

6
creating a shortage of medical services in rural areas across the United States. Many people are
forced to travel over 50 miles to fill prescriptions and receive simple medical services.
HomeTown Pharmacies will be able to acquire rural pharmacies from the retiring owners for a
price at or below market value. At the same time by being located in rural areas, HomeTown
Pharmacies will be less likely to have to compete with larger chain pharmacies found in larger
metropolitan areas.

2.2 Strategy
The strategy of Hometown Pharmacy is to create a chain of pharmacies that will add value to an
existing customer base. In doing so. HomeTown will provide existing pharmacy owners looking
towards retirement with a sound exit strategy from their business. As the number of store
locations increase, so will the operational effectiveness and efficiencies associated from
operating multiple units in a geographic cluster. Hometown Pharmacy will differentiate its brand
from the competitors based on a unique, profitable mix of goods and services in convenient
locations closer to customers than major market locations.

2.2.1 Acquisition Targets

HomeTown Pharmacies will establish target stores to acquire based on financial performance
and geographical location.

2.2.1.1 Financial Performance

Hometown Pharmacy will target the top 25% of all independent pharmacies based on
profitability from the 2006 National Community Pharmacy Association (NePA) Pfizer Digest,
which is an annual statistic reporting digest for independent pharmacies. This equates to 8,000
stores nationwide in our pool of targets. The average pharmacy in this group has annual sales of
$2.6 million, net profit of$195k and a market value of$590k. The average owner of these
pharmacies has owned the store for over 15 years old and has few prospects for a sound exit
strategy.

2.2.1.2 Geographical Locations

We plan to target pharmacies that are
geographically clustered to improve
efficiency of management oversight.
geo-specific information and
operational activities. This will
increase opportunities for
HomeTown to gain economies of
scale. In addition, each geographical
cluster will correlate with a reputable
pharmacy school, which wi II be one
of HomeTown Pharmacy's key
recruiting components. Another
advantage of the geographical clusters is that HomeTown Pharmacy will be able to provide relief
support to pharmacists at each store location by employing relief pharmacists that will travel
between several store locations. The purpose is to allow local pharmacists to enjoy time off, and
prevent occupational "bum out".

7
2.3 Industry Overview
The retail pharmacy industry is a $230 billion industry. In 2005 over 3.3 billion prescriptions
were filled by pharmacies. This number rises each year as the general population continues to
age. This industry is a highly fragmented industry made up of chains stores, supermarkets, mass
merchandisers, mail order pharmacies, and independent pharmacies. This industry is expected to
grow by 5% each year. This can be attributed to the increase of the population age, increases in
marketing by pharmaceutical companies, and the introduction of new drugs to the market. (See
Appendix 11 - Retail Pharmacy Industry Forces)

• Power ofSuppliers: Pharmacies purchase products from a limited number of suppliers.

Because the ability for pharmacists to backwards integrate is limited, supplier's powers
are increased. Discounts can be achieved when products are purchased in large quantities.
Large chains are able to lower supplier power by purchasing in large quantities to satisfy
the numerous store location needs. However, independent pharmacies join buying
groups in order to achieve the same results.

• Power ofBuyers: The end consumers of pharmaceuticals have little buyer power. They
have limited product knowledge and rely on the pharmacists to educate them on the
prescriptions being purchased. End users do not have the knowledge or capability to
create the products themselves and therefore must rely on the expertise of the pharmacies.
In large metropolitan areas switching costs are low due to the high number of competitors
in a small geographical location. In rural settings the opposite is found due to the small
number of competing pharmacies. Brand loyalty can be created through the development
of relationships between the pharmacists and the end user.

• Threat ofNew Entrants: The introduction of online pharmacies has increased the
number of competitors within the pharmacy industry. The U.S. government has begun to
regulate and restrict the sale of pharmaceuticals via the Internet forcing end consumers to
again rely on local pharmacies for their drug needs. The threat of new entrants in rural
areas is decreased because the market can support only a small number of competitors.

• Threat ofSubstitutes: There is very low threat of substitutes in the pharmacy industry.
Although there has been a small increase in all-natural remedies, the majority of end
users still rely on medications sold through pharmacies.

• Industry Rivalry: There is low rivalry between competing pharmacies due to the growth
of the industry each year. Concentration levels are still moderate in densely populated
areas and are low in rural areas. Barriers to exit are low due to industry growth and the
ability to sell inventory back to the suppliers.

8
 2.3.1 Independent Pharmacies
Independent pharmacies make up 41 % of all U.S. Pharmacy locations and dispense 42% of the
nation's retail prescription drugs. The nation's independent pharmacies, independent pharmacy
franchises, and independent chains represent a $92 billion marketplace. There are approximately
24,500 independent pharmacies in contrast to all traditional U.S. retail drug store chains
(including Walgreen's, CVS, Rite Aide, r- Total V.S. Pharmacies
ete.) have only 18.000 stores combined. .
Independent pharmacies are qualified as
being any that are privately held and not
a part of the other designated groups.'

2.3.2 Chain Pharmacies

Chain Pharmacies represent roughly one 6,776 (12%) 24.S00 (41%)
third of the total retail pharmacies in the
United States. This segment of the
industry is controlled by three top players:
CVS, Walgreen's, and Rite Aide. These
three competitors continue to expand
through new store development in large
metropolitan areas and through the
acquisitions of smaller chain pharmacies.
I_ Independents. Traditional Chains I!!iI M{\~s Merchum.hsers 0 Snpcm1arkets '
2.3.3 Mail Order Pharmacies
Through the increased use of the Internet, the Mail Order Pharmacy industry has expanded.
They allow customers to place prescription orders and have them ship directly to the home.
These pharmacies have gained popularity and market share recently due to their ability to
compete within the industry by offering inexpensive, convenient prescription alternatives. Mail
Order Pharmacies have taken criticism for their inability to provide adequate pharmaceutical care
and medication counseling that is provided by the pharmacists that are available with the
traditional brick and mortar stores. For example, 83 percent of consumers prefer traditional
pharmacies over mail order pharmacies and almost half (46%) disagree that mail order
pharmacies are more convenient.' In addition, the U.S. government is reviewing the health risks
involved with Mail Order Pharmacies and legislation to regulate these online pharmacies is being
developed."

3.0 MARKETING STRATEGY

3.1 Product Mix
Independent pharmacies rarely utilize the most profitable combination of goods. Customer
demands and preferences change over time and new medications are being introduced on a dai Iy
basis. In the past, Independent stores did not have access to the same market research as chain

4 West DS. 2006 NCPA-Pfizer Digest. National Community Pharmacist Association. October 06.
j fact Sheet: PBMs and Mail Order. National Community Pharmacist Association. July 06
o States respond to mail order pharmacies delivering and dispensing prescription drugs into their states. National
Alliance for Model State Drug Laws. Jan 4,2005.

9
stores. and could not afford to carry high-margin products with low turnover. Through affiliation
with HomeTown Pharmacy, product mix will be increased to allow for customers to have the
ability to receive any medication or durable medical supply through the local retailer.

3.2 Service Mix

In addition to the filling of prescriptions. recent legislation has allowed pharmacists to receive
financial reimbursement for several clinical services that new Pharml) graduates are trained to
provide. Examples of these services include:

• Chronic Disease Screening

HomeTown Pharmacy will purchase the required equipment for each geographical cluster
to provide screening tests for common chronic diseases such as high cholesterol, high
blood pressure, diabetes and osteoporosis. Diabetes, high cholesterol and high blood
pressure are three preventable risk factors for the development of heart disease, the
number one killer in America. While the equipment will have an upfront expense to
HorneTown, cost sharing between cluster pharmacies will reduce costs. In addition. once
the equipment is paid for, each test costs less than $10 to run.

• Diabetes Education and Management

There is an estimated 20.8 million people in the United States with Diabetes and over 6.4
million yet to be diagnosis. Our trained pharmacists will educate these patients not only
on medications, but managing their condition to prevent long term complications.
Pharmacist-run diabetes education programs optimize patient care while reducing the
burden on primary care physicians that have little time to manage these complicated
patients.

• Immunization Services
New Doctorate of Pharmacy graduates are entering the profession with full immunization
certification. This service is valuable to consumers because pharmacies are the frontline
of healthcare, and pharmacy immunizations provide a convenient alternative to scheduled
immunization appointments. Furthermore, it is an excellent opportunity for the patient
and pharmacist to develop a personal and professional relationship.

• Other Services Provided

o Asthma Education and Management
o HII' Wellness consultation
o Community Health Information Seminars
o Anticoagulation Management
o Smoking Cessation

3.3 Distribution of Products

The products of HomeTown Pharmacy will be disturbed in two ways. The first will be directly
through the store locations. Customers will be able to come to the store locations and purchase
prescriptions, over the counter medication, and durable medical supplies on site. In addition.
delivery services will also be made available to customers that are only looking to have a
prescription refilled.

10
3.4 Advertising and Promotion
The advantage oftaking over an existing business is that there is a customer base already
established. HomeTown Pharmacy will look to further develop these relationships by providing
a high level of customer service while adding additional services to create a more complete
health care facility. It will be critical that we maintain a small town feel for our customers and
become a positive member of the local community. In an effort to promote our HomeTown
image, we will design our marketing efforts accordingly. We will provide equipment and
advertising for events such as periodic summer barbeques and breakfasts. HomeTown will also
do what it can to participate and contribute to the community through events such as:

• Health fairs: these fairs will be set up to provide health screenings and educational
seminars to promote a healthier life style.

• Local athletics: sponsorship of local athletics that will encourage an active lifestyle for
kids and develop strong community ties.

• Senior community entertainment and activities: sponsorship of these events will

provide exposure of the company and allow local pharmacists to build stronger
relationships with community members.

HomeTown Pharmacy intends to make community involvement a competitive advantage to

distinguish its stores from large chains by becoming part of the community rather than just
operating within it. By building a strong relationship with the local community, HomeTown
Pharmacy will gain the support of the local customer base while gaining loyal customers.

3.5 Recruitment of Pharmacy School Graduates

The typical Pharmacy School Graduate is young, has marginal credit worthiness and has more
than $50,000 in student loans. HomeTown will offer new pharmacists a competitive salary and a
degree of autonomy not available at traditional chain stores. We will recruit pharmacy school
graduates from regional schools near geographic target areas. David has strong relationships
with many of the faculty members and students at the University of Montana pharmacy school
and will recruit students by presenting HomeTown's business model to them during class. In
addition, the fourth year of the Doctorate of Pharmacy program consists of eight, four-week
educational experiences in which students rotate through hospital and community pharmacy
settings. Hometown pharmacy will provide one of its stores as a site for students to choose as
one of their four-week rotations, which will act as a key component of the recruitment process.
The University of Montana, Washington State University, and Northern Arizona University all
have reputable programs and good pools of talent, and will act as the initial target universities.

4.0 OPERATIONS
4.1 Production
HomeTown Pharmacy will follow the industry's traditional model for the dispensing of
prescription medicine. Each store will be staffed with one full-time pharmacist, one part-time
cluster relief pharmacist and a variable number of pharmacy technicians. This staffing strategy
correlates perfectly with a top 25% independent pharmacy practice (i.e .. one with $2.6 million in

II
annual sales). As sales increase, an additional full-time pharmacist will be hired to help with the
increasing prescription load and to begin implementation of clinical programs. All prescription
medicine will be purchased in bulk from supply companies. The filling of prescriptions will be
preformed by a pharmacy technician or an automated dispensing machine. Each prescription
must be checked by the pharmacist to ensure that the prescription is correct, and the pharmacist
will provide counseling on all new prescriptions, if additional information must be relayed to the
patient. or if the patient has questions. The use of the technicians and automated dispensing
machines will reduce labor costs to the pharmacy and allow for an increase in the number of
prescriptions filled.

4.2 Operations Strategy

In order to create value for our customers, HomeTown Pharmacy will utilize economies of scale
and scope to create a knowledgeable team of pharmacists and technicians to provide a
convenient, cost effective buying experience.

5.0 STRUCTURE & COMPENSATION

5.1 Legal Structure
HomeTown Pharmacy, Inc. will organize as a C corporation. Initial equity will be credited on a
theory that the funded value of the company is 81.82 million and that all shares must be vested
through performance. That is to say, investors only get credit for funds spent / committed and
founders only gain shares after a period of commitment.

Stock will be issued and vested based upon pre-determined goals. Selling pharmacists will have
the option to take stock in lieu of cash payment established in the purchasing model and
negotiated on a case-by-case basis. Shares will be issued to founders and original investors in
proportion to their contribution. Undistributed shares have no voting rights.

5.2 Organizational Structure

As the company grows. a management team will eventually be assembled and led by three
people with a variety of important skills, One of these managers will be a specialist in Sales,
Marketing, and Recruitment. The second manager will have deep financial expertise and
understanding. The third member of the team will have retail and operations experience. The
president and figurehead of the company will be decided by the board and will be one of these
three individuals.

Important decisions will receive heavy inf1uence from the company's Board of Advisors (at first)
and later from the Board of Directors. The difference between the aforementioned boards is
simply a matter of Iiability, resource and compensation. For all practical purposes. they are the
same body at different times during development. Shareholders will vote half the members of
this body each year. The non-management majority stockholder will always have a seat on the
board.

12
5.3 HomeTown Company Valuation
Until a majority shareholder vote determines otherwise, the company will be valued based on the
higher of two methods I) a standard Net Present Value formula of5 years' projected cash flows
with a required Internal Rate of Return of 15% and then adding back Owner's Equity calculated
from a typical balance sheet or 2) by sealed bid auction with one week notice and including the
participation of all interested stakeholders; including all stockholders, all employees, and all
debtors that have claims of more than $25,000.

5.4 Founders' Stock

Upon formal organization of the company, none of the founders are to receive "free" stock for
past efforts. All distributed shares to founders must be agreed to with a 2/3 majority and must be
vested with two years of service.

5.5 Salaries
Company funds will only be used for expenses and no salaries will be paid until the company
generates a positive cash flow. No more than half of the company's positive cash flow will ever
be spent on salaries.

5.6 Management Team

• Joseph J. Adams
Mr. Adams is a founding member of 5 different start-ups. His experience is in managing
employees, contractors, and growing and developing business structure and systems. J.J,
will receive an MBA from the University of Montana in August 2007, and brings access
to a network of social and financial capital.

• Jason Glidden
Mr. Glidden will handle the marketing of Hometown Pharmacy. His experience comes
from developing corporate marketing and management plans for multi-regional chain
restaurants for large corporations. Jason has organized, trained, and managed the
openings and daily operations of new restaurant locations. Jason will be responsible for
the marketing of HomeTown Pharmacy. Maintaining a consistent brand image through
out the company will provide the marketing tools necessary for the company to reach
revenue goals. Jason also will be receiving an MBA from the University of Montana and
brings access to a network of social and financial capital.

• David Jurenka
Dr. J urenka is a licensed pharmacist with experience in the daily operations of an
independent pharmacy and large corporate pharmacy chains. This has allowed David to
build relationships with numerous professionals in the pharmacy industry and to develop
strategies to run a more efficient, profitable, and customer service oriented pharmacy. He
will oversee the research and development of advancements in pharmacy procedures and
practices. In addition, David will work with fellow pharmacists, pharmacy school faculty,
government officials, and insurance companies to create further value for both the
company and its customers.

13
 • Board ofAdvisors
While the Board of Advisor selection process has just begun, we have developed a matrix
that will evaluate each advisors experience, level of commitment to the project,
knowledge, network, and access to capital. This matrix will be used to select the best
from a promising pool of candidates.

As a unit, this team will meet the goals of stage one and serve as the core unit as the
company accomplishes the goals of phases two and three. J.J. will spearhead finance and
business development. Jason will oversee human resources, marketing, and information
technology. David will contribute technical and operational knowledge specific to the
industry. As the company grows, managers will be added.

5.7 Competitive Advantage

Our competitive advantage will be gained by combining the economic advantages of a chain
while preserving the character and reputation of friendly service of an Independent comer drug
store.

Through the acquisitions of existing pharmacies, HomeTown Pharmacy will gain economic
advantages that did not exist within the pharmacy before the acquisition. HomeTown Pharmacy
will be able to increase operational efficiencies within the day-to-day operations of each store.

HomeTown Pharmacy will add value to each store by utilizing various economies of scale. Each
store wil] retain a degree of individualism but benefit greatly from the information sharing and
negotiating power of being a part of a larger organization. Each store will benefit from
improvements in information technology, accounting, finance, billing, purchasing, marketing,
advertising, store layout and atmosphere improvements, brand association (eventually), product
mix, product differentiation, new services, etc. HomeTown will also have relationships with
several Pharmacists in a given geographical area that can help each other cover shifts in the event
of illness, vacation or fatigue.

• Marketing: A general marketing plan can be implemented across multiple stores located
in the same regional district. This will lower marketing cost to individual store locations
and help to build a consistent brand image.

• Purchasing: Although many I["mcT",,,, Plurm;aT

independent pharmacies are Product TIodates
members of a buying group,
,'>
increases in purchasing power will ,~.II.,"lf:i..&:"'A:.oL'JI':" ,. 1r:a;,dii:W

be attained with multiple store

locations. Lower product cost will
~ ..., ., . , , ' ,. }, ;'''-·,-'1''''
allow for increased profit margins.
Dl~l: .. unt f.h"d..;.1
$Iep"_

• Research & Development: R&D D"""'.lUr'( ~1",.1o<£l1

Dd"'LT....d h' V!l"'.lf' "h><WI
"'...,pli.,..
expenses will be distributed across
all store locations. HomeTown
Pharmacy will be able to stay ',',~:,k
_N"., "
< '''~ ,

14
 ahead of industry standards by researching new drug introductions, medical products, and
provide detailed summaries to local store locations. This will cut R&D cost at a local
level, and save local managers and pharmacists time spend to research these areas
individually.

Independent Pharmacist (Seller)

We offer selling Pharmacists an opportunity to extract fair market value for their business and
the opportunity to continue working for a competitive wage. Selling pharmacists will be given
the option to work part time in the pharmacy that they previously owned, and phase themselves
out over an extended period of time. This will keep the former owner, who has strong
community ties, in HomeTown pharmacy helping our pharmacists develop their relationships
with the community. In addition, this may initially reduce the need for a relief pharrnacisr in
each geographical cluster.

By law, a licensed pharmacist must provide counseling on every new prescription that is
dispensed to a patient. Pharmacy Technicians enter and fill each prescription, but a pharmacist
must be present in the store at all times. The justification for this legal requirement is that there
needs to be a qualified expert on hand to answer any questions the customer may have about
their prescription. Because of this requirement, Independent Pharmacy owners that are unable to
find relief pharmacists for one store typically work 50 to 60 hours per week, every week.
HomeTown's phase out plan will allow each seller to sell his/her pharmacy and continue to work
part time.

Future Potential for Stakeholders

Conservatively assuming several factors (such as; 6% sales growth and a 15% required internal
rate of return) the net present value of each of these transactions to the Home Town Company
will be 5267,451. There are an estimated 8,000 independent pharmacies nationwide that meet
the target criteria. As summarized in section 8.4. if HomeTown can "roll-up" more than 1%01'
these stores (85), the company would have a market value of approximately $200 million.

6.0 TARGET PHARMACY FINANCE & VALllAnON MODELS 7

6.1 Finance
Purchasing agreements, business valuation and financial modeling will be fundamental elements
of our business model. The average target pharmacy will have financials reflected in
Appendices 3 - 9. This pharmacy will have $2.6 million in sales, gross profit of $650k,
operating profit of$370k and purchased for $525k. The table below shows how an average
business would be financed.

7 Jackson RA, Coffey CWo Finding the Right Price. America's Pharmacist. October 2004.

15
6.1.1 Assumption of Payables
Since the businesses we will purchase are going concerns, the will undoubtedly have some
current (due in less than one year) liabilities or "Accounts Payable." On average, we will assume
$75,000 of Accounts Payable with each Independent Pharmacy store.

6.1.2 Initial Eq uity PURCHASE SCENARIO OF AVERAGE

TARGET PHARMACY
This number describes the initial cash injection to
acquire each independent pharmacy of this size. This Assume Payables 75.000
number reflects approximately 23% of the value of Initial Equity 120.000
the business. Bank Tenn Loan 232.500
Seller Financing 97,500
6.1.3 Bank I Debt Financing 525,000
The typical pharmacy in our pool of targets carries 30
Total Debt 405.000 77%
% of its market value in prescription medication
Total Equity 120.000 23%
inventory. By law, Pharmacies can sell back any and
all prescription medications to the drug companies for the same price it was purchased. This
legal guarantee of assets makes them very attractive to traditional debt financing. In addition,
the typical pharmacy in our target pool owns the building and land where it is located. making up
another 20%. The net result of this situation (given a series of assumptions) is that nearly 45%
of the value of the business will meet the requirements of traditional debt financing. In the
example shown here, a bank loan of $232,500 would be used to help finance the purchase of this
business.

6.1.4 Seller Financing

The typical seller has very little debt and relatively few selling options; creating a situation
where some seller financing is not only probable, but also many times expected. In this example,
$98k (or 18.5%) is financed by the seller. This amount is roughly equivalent to the estimated
Goodwill portion of the purchase price.

6.1.5 Valuation & Targets

The valuation of each independent pharmacy is an important component of the HomeTown
Pharmacy business model. Like most businesses, there are numerous ways to value an
independent pharmacy. We have built a valuation tool in excel that will help us evaluate each
proposed acquisition quickly and thoroughly. (See Appendices 2-9)

The focus for HomeTown should always be on the sustained and heallhy growth of Net Profit.
This does not mean that independent Pharmacies should be valued solely on that basis. Small
businesses have a reputation for unpredictable operational effectiveness as well as creative and
inconsistent bookkeeping that can make this number less than reliable. We will use a variety of
formulas and assign floors and ceilings to each. For example, businesses where the Net Profit is
less than 5% of Sales will not be considered. For all financial measures, the top 25% of
independent pharmacies (in terms of profitability) will be used as a barometer to measure any
target asset under consideration.

16
7.0 HOMETOWN REVENUE AND EXPENSES

The target independent pharmacies will have a gross margin of 25% and an operating profit of
approximately 8.5%. (See Appendix 3: Income Statement) Initial equity will be returned in
year three for each business acquired. The third year represents the Breakeven Point (see
Appendix 5) and the positive cash flow for each average pharmacy unit.

HomeTown will have negative cash flow ofS360k in the first year to purchase the first three
independent pharmacies plus S175k in salaries and expenses. These expenditures will be
financed with the sale of HomeTown equity. In the second year, salaries and expenses will be
S175k and cash flow will be SI80k for a net income ofS5k. In year three, the business will have
S200k in salaries and expenses and S300k in cash flow - resulting in a net income of 51 OOk.
By the end of year three, Phase One (Startup Period) goals will be reached and Phase Two
(Transition Period) goals will be targeted, including the acquisition of five more units during
years four and five.

7.1 Bottom Line

The power of compounding gives this model tremendous potential. The bottom line is, as long
as HomeTown increases value (by increasing profitability) for each of the businesses acquired
that exceeds the money taken out of the businesses, HomeTown will have a sustainable growth
rate in excess of 34%. Positive cash flow is reached in the third year for each individual business
unit and allows the model to be scaled in a compounded format. For example, once Hometown
owns 9 stores it can grow by one third each year, reaching the goal of 85 stores in eight years
without additional equity financing.

8.0 GROWTH STRATEGY

Managing growth will be a key component of our strategy. We see the future of HomeTown
Pharmacy as being divided into three phases. Each of these phases will require the development
of business systems and equity funding to reach a set of goals.

8.1 Phase One (2 '/1 years)

In the first phase, HomeTown will raise money, buy the first three pharmacies, and develop

corporate competencies. This phase will last approximately 2.5 years and will terminate once the

business model is developed. This business model will establish consistency in daily operations

from one store to the next, and be used to open new locations in the future. The first phase will

allow management to establish and build business relationships and strategies for cutting costs

and improving sales. The systems that will be put in place include policies and procedures to

guide all stores in one common direction working together to reach the pre-established goals of

the company. The estimated total costs of this phase will be S91O,000.

8.2 Phase Two (2 years)

The second phase will focus on business development of HomeTown Pharmacy. With the

completion of phase one, Hometown Pharmacy will expand the number oflocations by

purchasing five additional independent pharmacies. HomeTown Pharmacy will possess a

17
business model that can be applied to new store locations. The business model will allow
HomeTuwn to fine tune uperatiuns tu becume more efficient and take advantage uf increased
economies of scale, strategic alliances, and acquisition target parameters. Improvements in
communication and information systems will be necessary to foster this growth stage. During
phase two, HomeTown Pharmacy will look to increase administrative support by hiring a CEO
and creating department heads in the areas of accounting, marketing, finance, and human
resources. This support will be necessary to develop the detailed plans for phase three and to
reach the company goal of $1 million in annual corporate net revenue: The estimated total costs
of this phase will be $1.5 million.

8,3 Phase Three (4-10 years)

The third phase in the growth strategy of HomeTown Pharmacy will be to increase the number of
acquisitions to a total of 85 pharmacies. At this phase, all business systems will be refined to
meet the need of rapid growth. The addition of an Acquisitions Team will be needed to meet the
goal of 85 new store locations in 4-10 years. Once acquisition goals are met plans will be
developed for an Initial Public Offering of stock. At this time corporate net revenue will
increase to a level of $11 million annually. The estimated total cost of this phase is $12 million.

8.4 Proposed Exit Strategy

The exit strategy for HomeTown Pharmacy will be to hold an Initial Public Offering (lPO) once
this alternative is deemed timely. In the current market, an estimated market value of $200
million would likely meet this criterion. The Drug Store Industry is currently enjoying a 19.8
PIE ratio. Today, HomeTown Pharmacy would have retained earnings of approximately
$120,000 per store. The earnings from 85 stores would equate to retained earnings of $10.2
million and a theoretical market capitalization in excess of the $200 million.

9.0 Funding Request

Once the first three stores are purchased, the entire model becomes something of a Time Value
of Money equation with the rate being set at 34% annually (the sustainable growth rate). At this
time, the HomeTown Pharmacy business plan requires $9 10k to achieve its first set of goals by
December 2009. Our team has tentative commitments for the first $640k and is seeking
sophisticated investors that can offer experience and capital in exchange for equity. The Phase
One value of HomeTown Pharmacy has been set at $1.82 million and we will raise $270k in
exchange for 14.8% ownership. Additional shares of ownership will be available on a "value
added" basis, subject to a vesting agreement as compensation for commitment of resources in
addition to capital.

As a group, Investors will possess the following attributes:

Liquidity - Committable assets in excess of $2.5 million to see us through Phase 2

Resources ~ Investors who can add value in addition to capital may be given priority
Vision - Investors should share our corporate vision and goals

18
 Appendix I: Strategy

Products For One Group Products For Many Kinds

Of Customers Of Customers

Focused Cost Leadership Cost Leadership Strategy

Strategy

Low-Priced

-Mail order prescriptions

-On-line Pharmacies
·Wal-Mart
S

Products For

Customers

T
R
A
Differentiation Strategy
T
Differentiated

Or Unique

• Target

-Suoerrnarket
E

Products For

-Fred Meyer
G

-Shopko
Customers

Appendix 2: Alternative Valuation Methods 8

We have developed our own valuation model, but this is a list of valuation methods used in the

independent retail pharmaceutical products industry. Understanding all of these methods will

assist us in negotiating the purchase of existing pharmacies.

Return (Net Profit) On Investment (Selling Price)

The return on investment formula for determination of an equitable selJing / purchase price uses

20 percent of the selling price.

Percentage of Sales Plus Inventory Formula

The percentage of sales rule of thumb formula used in valuation for Net Profit % of Sales
an average pharmacy is IS percent of sales plus inventory. Breaking <3% 7.4%
down pharmacies by net profit as a percent of sales reveals that the 3 - 4.9% 13.8%
percent of sales used in the formula increases as the net profit as a 5 - 10% 15.1%
percent of sales increases (see Table I, Right). > 10% 22.8%

l'iet Income (Owner's Salary Plus Net Profit) Formula

The rule of thumb formula for determining the value of the average independent pharmacy using

the net income approach is a multiple of 1.5 times net income (owner's salary plus net profit)

plus inventory.

Net Profit formula

The traditional formula used for valuation purposes using net profit is to use a multiple of five

times net profit.

Itemization

Itemization involves simply adding the value of the inventory, fixtures and equipment and

goodwill to determine a selling price. Traditionally, the value of goodwill was estimated at 1-2

times the net profit.

Per Annual Prescriptions ($3-$7) Plus I nventory Formula

The generally accepted rule of thumb valuation formula is $5 per prescription filled annually

plus inventory.

Ten Dollars Per Annual Prescriptions

The annual prescriptions rule of thumb formula uses $10 per prescription filled annually.

Percentage of Sales formula

The selling price rule of thumb formula for percentage of sales is 25 percent of annual sales and

those sold to independents versus chains show little variability. This formula applies to

Pharmacies with Net Profit that is 4% of annual sales, which is the industry average. Our target

pharmacies will have a Net Profit nearly double the average and we will assume Net Profit of

7.50.0 and a corresponding market value 01'22.7%. These assumptions are based on an average
calculated using actual numbers from 6 pharmacies that are currently advertised for sale.

H Jackson RA, Coffey CWo Finding the Right Price. Americas Pharmacist. October 2004.
20
Appendix 3: Income Statement

SINGLE STORE INCOME STATEMENT

2008 2009 2010 Wi 2012
REVENUES/COST OF REVENUES:
Gross Sales/Revenues 2,600,000 2,860,000 3,146,000 3,460,600 3,806,660
Less: Cost of Sales 1,950,000 2,145,000 2,359,500 2,595,450 2,854,995
GROSS PROFIT 650,000 715,000 786,500 865,150 951,665

OPERATING EXPENSES:
Advertising & Promotion 13,000 14,300 15,700 17,200 18,900
Amortization 20,000 20,000 20,000 20,000 20,000
Bad Debts 3,000 3,300 3,600 3,900 4,200
Bank Service Charges 500 600 700, 800 900
Delivery Expenses 5,200 5,720 6,200 6,820 7,500
Depreciation 7,000 10,000 14,000 14,000 14,000
Dues & Publications 3,000 3,200 3,500 3,800 4,100
Employee Benefits 19,258 20,961 22,647 24,253 26,100
Freight & Postage 500 550 600 650 700
Insurance & Licensing 7,800 8,000 8,800 9,600 10,400
Legal & Accounting 5,000 5,300 5,800 6,200 6,600
Office Expenses 5,000 5,400 6,000 6,600 7,200
Outside Labor 10,000 11,000 12.000 13,000 14,000
Payroll Taxes 28,887 31,441 33,971 36,380 39,150
Rent 26.000 28,000 3(),000 32,000 34,000
Repairs & Maintenance 1,000 1,100 1,200 1,300 1,400
Supplies - Operating 15,600 17.000 18,500 18,500 18,500
Taxes & Licenses 2,000 2,100 2,250 2.500 2,650
Travel & Entertainment 2.000 2,100 2,250 2,500 2,650
Utilities & Telephone 13,000 14,300 15,700 17,200 18,900
Wages & Salaries 85,800 94,000 102,000 109,000 119,000
Pharmacist Salary 100,000 110.000 120,000 130,000 140,000
Delivery From Wholesaler 4,000 4.200 4,400 4,600 4,800
Staff/Relief Pharmacist's Salary 44,928 47.008 49,088 51,168 53,248
Pharmacy Computer Expenses 7,800 8,600 9,500 10,400 11,800
TOTAL OPERATING EXPENSES 430,274 468,180 508,406 542,372 580,698

OPERATING PROFIT: 219,726 246,820 278,094 322,778 370,967

OTHER INCOME (EXPENSE): (22,000) (20,000) (18,000) (18,000) (18,000)

PROFIT (LOSS) BEFORE TAXES: 197,726 226,820 260,094 304,778 352.967
Provision for Income Taxes 75,136 86,192 98,836 115,816 134,128
NET PROFIT AFTER TAXES: 122,590 140,629 161,259 188,963 218,840

DIVIDEND / DISTRIBUTION 0 60,000 100,000 120,000 140,000

RETAINED EARNINGS 122,590 80,629 61,259 68,963 78,840

Payroll & Other Expenses

Pharmacist Compensation 100,000 110,000 120,000 130,000 140,000
Non-Owner Salaries & Wages 185,656 199,016 212,176 224,336 239,496
Payroll Expenses & Benefits 48,146 52,402 56,618 60,634 65,250
Total Payroll Including Owner 333,802 361,418 388,794 414,970 444,746

Other Operating Expenses 96,472 106,762 119,612 127,402 135,952

other Income (Expense) (22000) (20,000) (18,000) (18,000) (18000)
Total Expenses 408.274 448,180 490,406 524,372 562,698

21
Appendix 4: Balance Sheet
SINGLE STORE BALANCE SHEET

2008 2009 2010 2011 2012

ASSETS:
Cash & Cash Equivalents 124,790 148,119 156,078 174,078 190,078
Accounts Receivable 90,000 100,000 110,000 120,000 130,000
Inventory 230,000 255,000 280,000 305,000 330,000
Prepaid Expenses 1,000 1,000 1,000 1,000 1,000
Other Current Assets 15,000 15,000 15,000 15,000 15,000
TOTAL CURRENT ASSETS 460,790 519,119 562,078 615,078 666,078

Fixtures 20,000 30,000 30,000 30,000 30,000

Vehicles 15,000 15,000 25,000 25,000 25,000
Equipment 25,000 25,000 30,000 30,000 30,000
Leasehold Improvements 4,000 4,000 4,000 4,000 4,000
Accumulated Depreciation (7,000) (17,000) (31,000) (31,000) (31,000)
TOTAL FIXED ASSETS 57,000 57,000 58,000 58,000 58,000

INTANGIBLE ASSETS 80,000 60,000 40,000 40,000 40,000

TOTAL ASSETS 597,790 636,119 660,078 713,078 764,078

LIABILITIES & OWNERS EQUITY

Accounts Payable - Trade 80,000 92,500 105,000 117,500 130,000
Current Portion - Long Term Debt 35,300 35,300 35,300 35,300 35,300
Notes Payable (Short Term) 0 0 0 0 0
Accrued Expenses 0 0 0 0 0
Income Taxes Payable 0 0 0 0 0
Other Current Liabilities 0 0 0 0 0
TOTAL CURRENT LIABILITIES 115,300 127,800 140,300 152,800 165,300

Notes Payable (Long Term) 161,900 126,600 91,300 56,000 20,700

Bank Loans Payable 0 0 0 0 0
Deferred Taxes 0 0 0 0 0
Other Loans Payable 78,000 58,500 39,000 19,500 0
TOTAL LONG TERM LIABILITIES 239,900 185,100 130,300 75,500 20,700

TOTAL LIABILITIES 355,200 312,900 270,600 228,300 186,000

Stakeholder Equity
Capital Stock & Paid In Capital 120,000 120,000 120,000 120,000 120,000
Retained Earnings 122,590 80,629 61,259 68,963 78,840
Distribution to corporate 0 60,000 100,000 120,000 140,000
Other Store Equity 0 62,590 108,219 175,815 239,238
TOTAL NET WORTH 242,590 323,219 389,478 484,778 578,078

TOTAL LIABILITIES & NET WORTH 597,790 636,119 660,078 713,078 764,078

22
Appendix 5: Breakeven Analysis

BREAKEVEN ANALYSIS

2009 2010
($) (%) ($) (%)

NET SALES / REVENUE 2,600,000 100.00% 2,860,000 100.00%

VARIABLE DISBURSEMENTS
Cost of Sales 1,950.000 75.00% 2.145.000 75.00%
Advertising & Promotion 13.000 0.50% 14.300 0.50%
Bad Debts 3.000 0.12% 3.300 0.12%
Car/Delivery Expenses 5.200 0.20% 5,720 0.20%
Commissions 0 0.00% 0 0.00%
Freight & Postage 500 0.02% 550 0.02%
Travel & Entertainment 2.000 0.08% 2.100 0.07%
Staff/Relief Pharmacist's Salary 44,928 1.73% 47.008 1.64%

Pharmacy Computer Expenses 7.800 0.30% 8,600 0.30%

TOTAL VARIABLE
DISBURSEMENTS 2,026,428 77.94% 2,226,578 77.85%

CONTRIBUTION MARGIN 573,572 22.06% 633,422 22.15%

FIXED DISBURSEMENTS
Amortization 20.000 0.77% 20.000 0.70%

Bank Service Charges 500 0.02% 600 0.02%

Depreciation 7.000 0.27% 10.000 0.35%

Dues & Publications 3.000 0.12% 3.200 0.11%

Employee Benefits 19.258 0.74% 20,961 0.73%

Insurance 7,800 0.30% 8.000 0.28%

Leased Equipment 0 0.00% 0 0.00%
Legal & Accounting 5.000 0.19% 5.300 0.19%
Office Expenses 5.000 0.19% 5,400 0.19%

Outside Labor 10.000 0.38% 11,000 0.38%

Payroll Taxes 28.887 1.11% 31,441 1.10%

Rent 26,000 1.00% 28.000 0.98%

Repairs & Maintenance 1.000 . 0.04% 1.100 0.04%
Supplies - Operating 15.600 0.60% 17.000 0.59%
Taxes & Licenses 2.000 0.08% 2.100 0.07%

Utilities & Telephone 13,000 0.50% 14,300 0.50%

Wages & Salaries

Salaries - Officers 65,000 2.50% 72,000 2.52%
Payroll - Others
20.800 0.80% 22.000 0.77%
Other Fixed Expenses - 1
100,000 3.85% 110.000 3.85%

Other Fixed Expenses - 2

4.000 0.15% 4,200 0.15%

Other Expense (Income)

22.000 0.85% 20.000 0.70%

TOTAL FIXED DISBURSEMENTS 375,846 14.46% 406,602 14.22%

PRETAX PROFIT 197,726 7.60% 226,820 7.93%

DOLLAR SALES BREAKEVEN 1,703,707 1,835,870

MARGIN OF SAFETY 34.5% 35.8%

23
Appendix 6: Per Store Cash Flow

PER STORE CASH FLOW ANALYSIS (DIRECT)

2009 2010
CASH FLOW FROM OPERATIONS: 1 1
HISTORICAL CASH FLOW'
Net Sales 2,860,000 3,146,000 3,460,600 3,806,660
Change in Receivables -10,000 -10,000 -10,000 -10,000
CASH FROM SALES 2,850,000 3,136,000 3,450,600 3,796,660

Cost of Sales -2,145,000 -2,359,500 -2,595,450 -2,854,995

Decrease I (Increase) in Inventory -25,000 -25,000 -25,000 -25,000
Increase I (Decrease) in Payables -12,500 -12,500 -12,500 -12,500
CASH PRODUCTION COSTS -2,182,500 -2,397,000 -2,632,950 -2,892,495

------------------------------------------------------------------------­
GROSS CASH INCOME 667,500 739,000 817,650 904,165

------------------------------------.-.---------------------------------­
NET CASH OPERATING EXPENSE -498,180 -542,406 -576,372 -614,698

Other Income I (Expense) -20,000 -18,000 -18,000 -18,000

Decrease I (Increase) in Other Current Assets -58,329 -42,959 -53,000 -51,000
Increase I (Decrease) in Other Current Liabilities -12,500 -12,500 -12,500 -12,500
Interest Expense Paid -18,000 -16,000 -14000 -12,000
Income Taxes Paid -86,192 -98,836 -115,816 -134,128
OTHER CASH ADJUSTMENTS -195,021 -188,295 -213,316 -227,628

--------------------~---------------------------------
------- -- ----- -----

NET CASH FLOW FROM OPERATIONS -25,700 8,300 27,963 61,840

============================================ ========= ========= ========= =========

NET CASH FLOW FROM INVESTING ACTIVITIES: -5,940 6,142 -3,225 -27,058

============================================ --
- --
----
----
---­
­ ========= ========= =========
CASH FLOW FROM FINANCING ACTIVITIES:
INCREASE (DECREASE) VS PREV PERIOD IN ­
Short Term Debt -12,500 -12,500 -12,500 -12,500
Long Term Debt 54,800 54,800 54,800 54,800
Retained Earnings Adj. 80,629 61,259 68,963 78,840
LESS: Dividends Paid -60,000 -100,000 -120,000 -140,000

------------------------------------------------------------------------­
NET CASH FLOW FROM FINANCING ACTIVITIES: 62,929 3,559 -8,737 -18,860

============================================ ========= ========= ========= ==========

TOTAL CASH FLOWS 31,288 18,000 16,000 15,922

Beginning Cash 124,790 156,078 174,078 190,078

Ending Cash 156,078 174,078 190,078 206,000
CHANGE IN CASH 31,288 18,000 16,000 15,922

• Positive numbers denote sources of cash; negative numbers denote uses,

24
25

Appendix 8: Operating Capital Analysis

OPERATING CAPITAL ANALYSIS

2009 2010 2011

Indus.
($) Avg. ($) Indus. Avg. ($) Indus. Avg.

NET SALES I REVENUE 2,600,000 2,600,000 2,860,000 2,860,000 3,146,000 3,146,000

CASH 124,790 144,665 148,119 153,941 156,078 159,739

ACCOUNTS RECEIVABLE 90,000 104,015 100,000 110,685 110,000 114,854

INVENTORY 230,000 263,625 255,000 280,528 280,000 291,094

ACCOUNTS PAYABLE - TRADE 80,000 84,886 92,500 90,329 110,000 93,731

AVERAGE SALES PER DAY 7,123 7,123 7,836 7,836 8,619 8,619
(Based on 365 days per year)

CASH ON HAND I AVE. DAY'S SALES 17.52 20.31 18.90 1965 18.11 1853

RECEIVABLES I AVE. DAY'S SALES 12.63 14.60 12.76 14.13 12.76 13.33

INVENTORIES I AVE. DAY'S SALES 3229 37.01 32.54 35.80 32.49 33.77

TOTAL TRADING CYCLE 62.44 71.92 64.21 69.57 63.36 65.63

PAYABLES I AVERAGE DAY'S SALES 11.23 11.92 11.81 1153 12.76 1087

NET CASH CYCLE 51.21 60.00 52.40 58.05 50.59 54.76

NET OPERATING CAPITAL 364,790 427,420 410,619 454,825 436,078 471,956

Appendix 9: Strategic Profit Model

HomeTown Pharmacy

Percent • MUltiplication

N.SALES Division
100.0% Percent + Addition

100.0% GR. MAR. Subtraction

•••••> 25.0%
-CGS I 27.1%) INDUSTRY DATA ( Indented)
75.0% BEFORE TAX
72.9% OPR PROFIT
-----> 8.3% 4
OTH. VAR. 6.0% BFTAX
EXPENSE NET PRF MRG
2.8% , • 100 8.3% 2
- TOT EXP ...._> 6.0% BFTAX
16.7% I N SALES RORASS

+ FIX EXP
14.0%
I 205% 100.0%
100.0%
> 139.4%
32.9%

N.SALES 1
INVENTORY FXD ASSETS 476.6% 5 I I BFTAX
ROR
42.4% 14.8% 548.0% • RT ASS TIO NW
------­
44.1% 10.4% 4.77 > 67.6%
-----> I TOT ASS 5.48 49.2%
+ A I REC + CUR ASS 100.0%
16.7% I _•••• > 85.2% 100.0%
17.4% 89.6% 3

+ OTH CIA
•••••••_----•••••••••••_----••••••••.> ,..
LEV RATIO I
I NET WRT I 1.72
26.1% 58.2% 1.50
28.1% 668%

27
Appendix 10: Example Pharmacies

Pharmacy Comparison Sheet

For Sale as of 2/15/2007
Non-Rx
Sates" Year Est. Buying Price (i Profit % (j Prollt s Rx / Yr Rx / IIr %of
Sales
Avg community
I pharmacy $3,167,705 $719,069 22.\% $700,063 71,212 228 8.5%

25% $2,600,000 $590,200 ~$670,800 61.980 199 8.6%

=-
TOD

Michigan-2 s1,900,000 $431,300 10.0%

Wyoming-I $3,800,000 $862,600 $950,000 60,000 192
Louisiana-I $2.300,000 $522,100 23.0% $529,000 5.0%
Colorado-I $2,000,000 $454,000
Califomia-3 $1,750,000 $397,250 24.0% $420,000 28.000 90 8.0".",
Califomia-8 $2,440,000 $553,880 23.0% $561,200 36,344 116 15.0 r/,0
Utah-I $2,000.000 $454,000 ~$500,000 37,000 119 20.0%
Orezon-I
Oregon-Z
Georgia-I
$2.600,000
$4,160.000
$1,930,000
$590,200
$944.320
$438,110
.$95(,,800
21.0% $546,000 40,000 128
67,000 215
$482,500 43,000 138
10.0%
23.0%
5.0%
Nebraska-3 $1,940,000 $440,380 $523,800 38,000 122
Pennsvlvania-Z st.ozo.ooo $435,840 21.0% $403,200 38,000 122 10.0%

28
 I- -------
d F
- ----­
Low Threat of New Entrants
Economy of Scale: High - Discounts on product when purchased in high volumes. The
economies or scales will qrow with the increase In additional stores.

Capital Requirements: High - Large start-up cost to purchase exettnq pharmacies,

property, Inventory, goodwill. and hiring staff.
Costs advanta~es: Moderate - Profit margins, high volume
Switching Costs: High - Limited number of local competitors
Access to Distribution: High - Established customer base
Gov~rnmenl and Legal Barriers: Moderate - Some slates limiting the number of chain
pharmacies. New laws regulating the distribution of prescriptions

J.

Low Industry Rivalry

High Supplier Power

- Industry Growth: High - Industry growing at 77% each
year.
Concentration: Moderate - High In large markets. ION
Substitutes: LON - Small number or suppliers
in rural markets.
Supplier Concentration Low - $m;;lll number
Product Differences. High - Variety of prescnonons
Low Threat of Substitutes
of suppliers and services that can be performed. Price Performance of Substitutes: Lower
prices from other sources (Chain Stores.
Cost of Product: 7??? Brand Identity: Moderate - 4 companies conlrol Online sites) with limited service and client
Competition Between Buyers: Moderate ­ roughly '30% of large markets, High brand identity within consultation
a small market.
~tching Costs: High - Most pharmacies are Switching Costs. High - Patients develop
members Ina buyers group Informational Complexity:_ High - Experienced relationship WIth local pharrnamst
otiermacrsts and pharmaceutical software needed Pharmacists knowledgably to patients
Buyer's Information: High - Pharmacists are
Exit Barriers: Low - Easy to franchise or setlmdrvtdual background.
highly trained and educated in pharmaceutical

field.
stores.

Buyers Ability to Backward Integrate: Low ­

Difficult to research, develop, and manufacture

T
- Low Buyer Power
Cost of Product Relative to Total Cost: Low - Material costs are small

percenfaqe of overall costs.

Product Differentiation: High - Many types of prescription medication.

Competition Between Buyers: Low ­

Concentration of Buyers: Moderate - High in large markets, low tn rural markets

Buyer's Switching Costs: High - Buyers are typically member of buyers group.

Buyer's Information: High - Pharmacists are highly tremed and educated.

Buyer's Ability to Backward Integrate: Low - Difficult to research. develop, and

manufacture medications.

29
Appendix 12: Defining the Business

Defining the Business

BUSINESS DEFINITION
Hometown Pharmacies is a medical service provider that partners local pharmacists in rural communities with
businesses professionals, working to increase company value and customer loyalty.

! J.

STAKEHOLDERS STAKEHOLDER NEEDS

Product Market Stakeholders Product Market Stakeholders Needs
'Sick Individuals requiring medication -Stck/Haalthy Individuals
RESOURCES

·Health conscious individuals -Eas y access to products

-Srnau cornmunlnes in rural areas 'Great customer service Tangible Resources
-T'echrucal
·Pharmaceulical Suppliers -Retiab!e Information
-Highly trained lind educated
'Medical Suppliers 'Cost savings obarmacists and techmc.ans
'Walkers 'Small cornrnuruues -Financtel
'Crutches 'Healthier life styles 'Inveslment Capital

'Wound Care -Hiqh paymq jobs 'Inventory

-Dtabetes Supplies -Pharrcaceuncar/Medroet Suppliers -Pharmacy/store equipment & supplies

-Draqnostrc Products -tocreased sales

'Skin Care 'Increase Product Awareness lntangib!e Resources
-Aids \0 Daily Living -Pharrnaceuncal Scaware

-Estabhshed Customer Base

Capital MarketStakeholders Needs
Capital Market Stakeholders -websne
'Return on Investment
-rnvestors 'Product / Industry knowledge
-Increaseo Profit Margins
'Banks -Busmess Model
-Satisty Loans
-Pharmacrsts 'Buyers Alliances
-rranchtsee -Contracts

Organizational Stakeholders Organizational Stakeholders Needs

·Job Security -Contrecto-s (Janitorial,
'Executives Maintenance, Quality
·PleasantWork
Control, tnsnnanon. etc)
·Employees Environment CAPABILITIES
'Franchisees 'Benefits Providers
-Consuttants I Advisors
(Insurance, retirement,
etc.) 'See Value Chain
IAppendix 13: The Value Chain

The Value Chain

Company Infrastructure
A group of pharmacies that are located in rural areas. The ownership of the pharmacies are split between local
pharmacists and company.
(j)
VALUE: Market is only large enough to support one pharmaceutical retailer. Partnerships creates relationship with local
c: community while taking advantages of economies of scale associated with pharmaceutical chain.
"'0
"'0
o Human Resources
~
Team of highly motivated entrepreneur pharmacists supported by highly trained business team working in a fun,

profitable team oriented work environment.

<" VALUE: Diverse management group that works well as a team to solve issues from all angles.
~
CD Materials Management
en -Suppller selection
-Order taking -Data Mainlenance ( Updates
·Packaging -Materials (Consumables) Maintenance - paper,
-Shippinq I delivery
-Pricinq receipts, stickers, etc.
-Assernbly
-Data Entry (general) -Pharmacy/Store maintenance
-lnventory
-Data Entry (location Specific) -Printed informational brochures, advertising, etc.
Research & Production Marketing & Sales Service

Development Product fulfillment and Parent company would be Local pharmacists will

distribution of prescription responsible for the gather feedback from

Continuous industry would occur on a local purchase and production of customers, advertisers,
development relying on level. Company would content for local advertising and suppliers to
research in customer negotiate contracts with and promotion. determine service

trends, and technological suppliers.

issues.

advancements.
ALUE: Strong local
VALUE: As company grows relationships with local VALUE: This will not only
VALUE: Allows pharmacies larger gains would occur community developing strengthen relationships
to stay up to date to meet from economies of scale. loyalty while decreasing with all three groups but
the needs of primary and marketing costs through will allow for quick

secondary stakeholders. economies of scales across response times to

all retail locations. service issues.

I Primary Activities I
31
Appendix 14: Competitive Advantage Components

Competitive Advantage Components

Customer Response
'Phase in and seller retention
program to preserve customer loyalty
·Valued feedback from users to
enhance usefulness and satisfaction

Exit Strategy
A purchasing and legacy
1 Geographic Location
'Service oriented business where
Competitive Advantage:
package that is far superior to geographic location is
anything else available. 'Differentiation - create value for fundamentally important
selling pharmacist, Jr. pharmacist,
'Tax advantages and shareholders.
'Rural markets often enjoy a
captive element
·"Pass the Torch"
'Partnerships that create barriers of
entry. lot I 'We will also offer strategic urban
'Opportunity to come

locations such as ones near

back and work 2 or 3
-Ouality product the creates value for elderly populations and infirmed
days a week to users, advertisers, and hosts. traffic, such as senior
subsidize retirement

communities and health service

and visit with old

friends. T professionals
Operational Effectiveness
'Economies of scale for accounting,
legal, purchasing, marketing, training,
information technology, product mix,
store layout and design, service
offerings, billing, etc.
'Purchasing existing and already
successful businesses

32