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Red Bluff Construction
Valuation Analysis
As of June 30, 2005
Six Frigates Capital Advisory
NACVA # 31812
Report Date
March 1, 2008
The analysis and conclusions contained herein are based upon information supplied by sources deemed reliable. Six
Frigates Capital Advisors ("SFCA") has relied upon this information and assumed its accuracy and completeness. All
recipients of this document hereby agree that all of the information contained herein is confidential and will be
treated by all recipients as such, and will not, without prior written consent from SFCA, disclose nor distribute such
information in any manner, neither directly nor indirectly.
September 30, 2005
Mr. Michael Jones
Red Bluff Construction
3 East 28th Street
Saugus, CA 78005
Dear Mr. Jones:
You have asked us to provide you with this fair market valuation of Red Bluff Construction, Inc. (the “Company” or
“Red Bluff”) as of June 30, 2005. We understand that the conclusions stated herein will be used in connection
with a possible sale of a 100% controlling interest in the company.
Our analysis of Red Bluff’s fundamental position with respect to historical financial performance, market
opportunities and risks, and the general economic climate in conjunction with the application of generally
accepted valuation methods and principles, as further described within the accompanying report, indicate an
equity value of $7,200,000. Detailed descriptions of the methodologies and assumptions are included in the
accompanying report.
Sincerely,
Six Frigates Capital Advisory
NACVA # 31812
Table of Contents
Executive Summary ..................................................................................................................................................................................... 4
Engagement Overview ....................................................................................................................................................................................... 4
Red Bluff Construction ....................................................................................................................................................................................... 4
Scope of Analysis ............................................................................................................................................................................................... 4
Factors Considered ............................................................................................................................................................................................ 4
Information Utilized in the Preparation of this Report ...................................................................................................................................... 5
Statement of Limiting Conditions ...................................................................................................................................................................... 6
Standard of Value .............................................................................................................................................................................................. 7
Valuation Methodologies .................................................................................................................................................................................. 7
Overview of the Analysis ................................................................................................................................................................................... 8
Normalizing Financial Statements.................................................................................................................................................................... 10
Discounts and Premiums ................................................................................................................................................................................. 11
Conclusion of Value ......................................................................................................................................................................................... 13
Overview ...................................................................................................................................................................................................14
Industry Overview............................................................................................................................................................................................ 14
U.S. Economic Outlook .................................................................................................................................................................................... 15
Markets............................................................................................................................................................................................................ 15
Products and Services ...................................................................................................................................................................................... 16
Competition ..................................................................................................................................................................................................... 16
Customers........................................................................................................................................................................................................ 17
Vendors, Suppliers and Contractors ................................................................................................................................................................ 18
Facilities and Operations ................................................................................................................................................................................. 18
Key Management............................................................................................................................................................................................. 19
Red Bluff Financial Summary ........................................................................................................................................................................... 22
Financial Forecasts ........................................................................................................................................................................................... 23
Red Bluff Key Considerations ........................................................................................................................................................................... 24
Financial Statements and Forecasts ............................................................................................................................................................25
Historical Income Statement ........................................................................................................................................................................... 26
Historical Balance Sheet Summary .................................................................................................................................................................. 27
Historical Cash Flow Summary ......................................................................................................................................................................... 28
Normalized Income Statement Summary ........................................................................................................................................................ 29
Summary of Income Statement Adjustments .................................................................................................................................................. 30
Adjusted Market Value Balance Sheet ............................................................................................................................................................. 31
Key Ratio Analysis ............................................................................................................................................................................................ 32
Ratio Analysis - Definition of Terms ................................................................................................................................................................. 33
Income Statement Projections ........................................................................................................................................................................ 34
Balance Sheet Projections................................................................................................................................................................................ 35
Cash Flow Projections ...................................................................................................................................................................................... 36
Projection Assumptions ................................................................................................................................................................................... 37
Valuation ...................................................................................................................................................................................................38
Income Approach - Discounted Net Cash Flow ................................................................................................................................................ 39
Cost of Capital - Net Cash Flow ........................................................................................................................................................................ 40
Income Approach - Capitalized Net Debt Free Earnings .................................................................................................................................. 41
Weighted Cost of Capital - Net Debt Free Earnings ......................................................................................................................................... 42
Weighted Cost of Capital - Net Debt Free Earnings ......................................................................................................................................... 43
Market Approach – Conclusion ........................................................................................................................................................................ 44
Market Approach - Public Company Comparables .......................................................................................................................................... 45
Market Approach - Public Company Comparables .......................................................................................................................................... 46
Market Approach - Public Company Comparables .......................................................................................................................................... 47
Appendices ................................................................................................................................................................................................48
Control Premiums - Mergerstat Review........................................................................................................................................................... 49
Marketability Discounts - Summary of Restricted Stock Studies ...................................................................................................................... 50
Compensation Review ..................................................................................................................................................................................... 51
Equipment Appraisal........................................................................................................................................................................................ 52
Facility Lease - Survey of Rents ........................................................................................................................................................................ 53
Biography......................................................................................................................................................................................................... 54
Six Frigates Capital Advisory Page 3
Executive Summary
Engagement Overview
Six Frigates Capital Advisory (“SFCA”) was retained to provide an estimate of value for a 100% controlling equity
interest of Red Bluff Construction (the “subject company” or “the company”), beneficially owned by Michael and
Shirley Jones and their children. The company is capitalized with 55,000 shares outstanding of common stock. The
date of the valuation is June 30, 2005 (the “valuation date”). It is our understanding that the purpose of this
valuation is to provide the basis for a potential sale of the company.
Red Bluff Construction
Red Bluff Construction is an electrical contracting company founded in 1989 in Saugus, California. The company
serves the general construction markets of California and Nevada. For the most recent year ended, the company
had revenues of $7.3 million and employed 51 people. The company is a C Corporation incorporated in the State
of California and all shares of common stock are owned by Michael and Shirley Jones and their children.
Scope of Analysis
This value and report were completed in accordance with the National Association of Certified Valuation Analyst
Professional Standards for conducting and reporting business valuations. And Estimate of Value is not an Opinion
of Value and such difference may be material. Using Fair Market Value as our standard of value in this report the
analysis herein was conducted in consideration of the guidelines set forth in Revenue Ruling 59-60. The scope of
this analysis included, but was not limited to, the following: (i) discussions with Company management regarding
the Company’s history, organizational structure, products and services, markets, historical and projected financial
results, competitive positioning, economic and industry outlook, (ii) examination of available documentation
relating to the Company, its assets, operations, and financial results, (iii) an analysis of the information described
above; and (iv) preparation of valuation analysis of the Company and associated report.
Factors Considered
RR 59-60 outlines the fundamental elements analyzed in the valuation of closely held stock. This valuation
includes all such factors outlined in that ruling, including:
The nature of the business and the history of the enterprise
The U.S. economic outlook in general and the outlook of the specific industry, in particular
The book value of the Company's stock and the financial condition of the business
The Company’s earnings capacity
The Company’s dividend-paying capacity
Whether the business has goodwill or other intangible value
Sales of stock and the amount of stock to be valued
The market prices of corporations engaged in the same or similar lines of business, whose stock is
freely traded in the open market either on an exchange or over the counter
Restrictions or agreements that might limit the use or disposition of the property
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Information Utilized in the Preparation of this Report
In determining the fair market value of Red Bluff Construction, we reviewed various financial schedules and
operating data available at the Valuation Date and interviewed management in order to assess the Company’s
historical performance, as well as to gauge its probable future performance. In addition, we reviewed various
industry and economic reports to further assess the Company’s fundamental position in the marketplace and to
measure the risks associated with its fundamental position.
Data considered and relied upon came from various sources, including but not limited to the following:
Unaudited, internal statements for the years ending June 30, 2001 through 2005
Schedule of shareholder compensation and perquisites
Business Plan
Facility Lease
Appraisal letter for equipment and leased real estate
Private company transaction data
Various industry reports and articles
Various U.S. economic reports and articles
Site visit to facility and discussions with management regarding the company’s fundamental
position
Six Frigates Capital Advisory Page 5
Statement of Limiting Conditions
This report was prepared subject to the following conditions and stipulations:
SFCA and its associates have no financial interest or contemplated financial interest in the property that
is the subject of this report.
Information, estimates and opinions contained in this report are obtained from sources considered
reliable; however SFCA assumes no liability for such sources.
The subject company warranted to SFCA that the information supplied was complete and accurate to
the best of the subject company’s knowledge. The information supplied has been accepted without
further verification as correctly reflecting the Company’s past operating results and current condition in
accordance with generally accepted accounting principles unless otherwise noted.
Possession of this report, or a copy thereof, does not carry with it the right of publication of all or part
of it, nor may it be used for any purpose by anyone but Red Bluff Construction without the written
consent of SFCA or Red Bluff and, in any event, only with proper attribution.
SFCA is not required to give testimony in court, or be in attendance during hearings or dispositions, with
reference to the property or assets being analyzed, unless previous arrangements have been made.
The various estimates of financial information presented in this report apply to this analysis only and
may not be used out of the context presented herein. This analysis is valid only for the date or dates
specified herein and only for the purpose or purposes specified herein.
The opinions rendered within this report fundamentally assume ongoing competent management of
the subject company in future years.
Six Frigates Capital Advisory Page 6
Standard of Value
Most everyone has a varying opinion of the value of a particular item, as the term value means different things
to different people. Indeed, it cannot be viewed in isolation, for who is buying what, where, when, why and how
has an impact on value. Therefore, there are three primary standards of value. They are:
Fair Market Value, the price at which a property would change hands between a willing buyer and a willing
seller, when the former is not under compulsion to buy and the latter is not under compulsion to sell, both
parties having reasonable knowledge of the facts. This definition assumes there are willing buyers and sellers
(the hypothetical buyer) and it should be noted that no actual purchase or sale need take place. Fair market
value is what “the market” will bear.
Fair Value, broader than a purely financial concept, fair value is a term within judicial context, and most
concerned with the concept of “equity” of a specific transaction, that is, a fair deal at a fair price.
Investment Value is the value of something to a particular buyer, taking into account revenue enhancement,
cost savings, management expertise and other investment considerations specific to that particular buyer.
For purposes of the Red Bluff valuation, that standard of value most relevant is that of fair market value. The
owners of Red Bluff are considering selling the business and seek an estimate of what the business might be
worth. While the owners are in contact with a potential buyer, no transaction is imminent.
Valuation Methodologies
There are three primary valuation methodologies, the income approach, the market approach and the cost
approach.
The Income Approach is based upon the premise that value is based upon expectations of future earnings while
accounting for the probability (risk) of realizing those expectations and the time value of money.
The Market Approach determines value by observing the value of publicly traded stocks or actual transactions
of similar companies, making allowances for differences among transactions and individual company
characteristics.
The Cost Approach considers the value of the underlying assets and liabilities, often using replacement or
liquidation values for the business’ assets and liabilities. For the purposes of this valuation, we consider the
results of this methodology to be a minimum or “floor” value.
Because Red Bluff is an ongoing business concern with established operations and consistently positive earnings,
the income approach and the market approach are most relevant in determining Red Bluff’s fair market value.
Six Frigates Capital Advisory Page 7
Overview of the Analysis
Income Approach – We have employed several variations of the discounted cash flow (“DCF”) method in our
analysis and also the capitalized earnings method. The DCF approach estimates future cash flows and then
discounts those cash flows back at a discount rate that commensurately provides for the risk inherent in
realizing those cash flows and the time value of money.
Net free cash flow is determined by projecting both the income statement and balance sheet, in this case for a
period of five years. All earnings not needed to be retained to fund the projected balance sheet are withdrawn
from the business, thus creating dividends or cash flows.
Since forecast cash flows are projected only through a fixed period of time, it is necessary to estimate a terminal
value of the company. The terminal value is an estimation of the value of the company at a point in the future, in
this case after five years. This value is then discounted back to the present. Our analysis utilizes the Gordon
Growth Model for determining the terminal value and assumes that at that point in time the company has
reached a state of steady earnings growth. When using a terminal value, it is implied that some type of liquidity
event has taken place such as the sale of the company.
Our projections were developed based upon conversations with Red Bluff ownership and are described in the
Company Overview section of this report, with a full listing of assumptions detailed on page XX of this report.
Normalized Cash Flows and Earnings
$1,000s
2005 Adj. 2006F 2007F 2008F 2009F 2010F
Net Cash Flow $1,054.8 $1,148.5 $1,359.6 $1,407.9 $1,456.3
Net Debt Free Earnings $1,112.0
Discount rates for equity are developed using the Capital Asset Pricing Model (“CAPM”) and Ibbotson discount
rate data. For net cash flow, a pure equity discount rate is used since the net cash flow figure already accounts
for interest payments made to debt holders and therefore, only equity holders lay claim to the forecast dividend.
Our equity discount rate reflects upward adjustments to reflect the subject company’s small size relative to the
companies from which Ibbotson discount rate data is derived and also to reflect key management dependency
(the owners) and the company’s limited geographic presence. We rewarded the company for achieving
consistent earnings and growth.
For capitalized earnings, a single earnings stream is normalized which reflects the earnings capacity of the
company and assumes a period of stabilized growth. It is necessary to convert Ibbotson equity discount rate data
(which reflects the equity return requirements for net cash flow) to meaningful rates which reflect the specific
risk of the earnings stream to which discount data is applied. Then a weighted cost of capital is developed that
reflects the cost of both debt and equity return requirements of the hypothetical buyer and the specific
company risks of Red Bluff. This rate is applied to net cash flow before principal debt and interest payments.
We have selected the following discount and capitalization rates:
Red Bluff Costs of Capital
Cost of Capital - Net Cash Flow 21.0%
Weighted Cost of Capital - Net Debt Free Earnings 17.6%
“Mid-year convention” is a common technique in discounting cash flows back and makes allowance for the fact
that cash flows are often received not at one point in time but throughout the year. We have not, however, used
this convention, as the owners stated to us that they commonly retain earnings during the year to fund growth.
Most often the owners provide themselves with a year-end dividend.
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Market Approach – The market approach to valuation employs observable evidence of actual company
transactions or share prices to derive an indication of value. The theory of the market approach is that of
substitution. One would not pay more or less than one would have to pay for an equally desirable alternative.
Most commonly, the market approach uses multiples of sales or earnings to derive either an equity value or
market value of all invested capital (“MVIC”). Since the premise of value in this report is that of fair market value,
we view data for select comparable companies on the whole (“the market”), and then apply this data to the
subject company to arrive at our conclusion. Adjustments can be made to reflect the specific risks or benefits
inherent on the subject company.
Since the valuation is for a 100% controlling interest, we have used debt free earnings numbers to arrive at our
results for a market value of invested capital and then deducted the value of the debt to arrive at an equity
value. This approach is common practice and consistent with theory, since a controlling party would have the
ability to impact the overall capital structure (debt versus equity) of the company.
We chose to use MVIC / EBITDA (earnings before interest, taxes, depreciation and amortization) for an earnings
multiple. An EBITDA multiple removes potential distortions arising from differing depreciation and amortization
policies, tax treatments and varying capital structures and may serve, loosely, as a proxy for cash flow. To arrive
at our equity value conclusion, we assumed a debt to equity ratio consistent with that of the comparable
companies chosen.
From comparable publicly traded companies we looked at residential construction companies and were pleased
with results. Red Bluff’s electrical contracting is closely tied to residential construction; margins are similar as are
debt to equity ratios to that of the residential construction industry. Our residential construction comparables
are not ideal, however, as major developers now commonly offer financial services to homebuyers. Despite this,
their profitability, capital structure and sensitivity to new housing starts parallel that of the subject company.
The electrical construction public company comparables which we reviewed had far fewer characteristics in
common with Red Bluff than residential construction, including low gross margins and net earnings margins, and
were heavily involved in power line and transformer service and power generation as opposed to Red Bluff’s
focus on residential and commercial development.
We have selected the following multiple to apply to Red Bluff’s last twelve months EBITDA:
Red Bluff Earnings MVIC / EBITDA Multiple 6.24x
Our comparable analysis yielded an EBITDA multiple (in aggregate) of 8.9x. We have revised this multiple
downward to 6.24x to reflect the subject company’s small capitalization relative to the comparable companies,
key person dependence, geographic concentration, mindful of the company’s consistent historical earnings and
growth.
There has been consolidation within the electrical contracting industry (Emcor, Quanta and Integrated Electrical
Services), we have reviewed transaction data and believe our multiple conclusion is valid.
Asset Approach - The asset approach determines a replacement or market value of the tangible assets of the
business but excludes the intangible value of the business as an on-going earnings generating business concern.
The asset approach, while considered, does not factor into our valuation conclusion.
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Normalizing Financial Statements
Valuation is concerned with market values. The purpose of normalizing financial statements is “to adjust the
financial statements of a business to more closely reflect its true economic financial position and results of
1
operation on a historical and current basis” . In most cases, closely held businesses have actual asset values
which differ from those that are recorded on their financial statements.
Common normalizing adjustments include balance sheet adjustments to bring asset values to current market
values, and income statement adjustments to reflect costs and expenses a potential buyer might expect to incur.
In addition, non-operating assets, that is, assets not employed to generate earnings, are removed from forecast
statements and valued separately.
The company’s balance sheet includes several assets which are considered to be non-operating or excess assets
not used in the course of ordinary business. These are short-term investments of $779,000, and land of
$900,000. The short-term investment amount as stated on the company’s 2005 statements is significantly higher
than was actually required as a result of timing. The owner’s drew down the short-term investment balance
shortly after June 30, 2005 through a dividend. The land is an empty lot adjacent to the facility and is not needed
for the operations of the business.
Property, plant and equipment have been restated to their appraised market value of $1.36 million.
Summary of Non-Operating / Excess Assets
$1,000s
2004 2005
Short Term Investments $0.0 $778.5
Land 900.0 900.0
Total $900.0 $1,678.5
We have made two adjustments to normalize the 2006 income statement. We have reduced the owner’s
salaries to market rates and also reduced Director’s fees to a level that we believe a hypothetical buyer would
incur.
Summary of Income Statement Adjustments
$1,000s
2005
Officer's Compensation
Income Statement Expense $240.0
Normalized Expense (158.0)
Adjustment Amount $82.0
Director's Fees
Income Statement Expense $18.0
Normalized Expense (10.5)
Adjustment Amount $7.5
1
Business Valuations; Fundamentals, Theory and Techniques, NACVA
Six Frigates Capital Advisory Page 10
Discounts and Premiums
Discounts and premiums applied in business valuation are the result of using “less than perfect” market data to
derive a subject company’s value. The two most often addressed investment characteristics in valuation are
those of control, or lack thereof, and those related to a lack of marketability. If the valuation approach and the
methodology utilized in a business valuation produce an estimate of value that is based on inherent ownership
and marketability attributes not characteristic in the attendant ownership interest, then the valuator must
consider adjustments necessary to produce a credible estimate of value.
Levels of Value ,
Controlling Interest Value
Discount
Control
For Lack
Premium
of Control
Marketable Minority Interest Value
Discount For
Lack of
Marketability
Non-marketable Minority Interest Value
Methodologies that use data from publicly traded securities inherently reflect the value of a security based upon
a non-controlling minority interest, since the individual shareholder of a publicly traded stock has little way of
affecting operational and financial/investment decision making to his benefit. Therefore, when valuing a
controlling interest, the application of a control premium is common, though not without debate. There is some
level of control embedded into a publicly traded share price, through both the possibility of legal recourse and
competitive pressures which protect a shareholder’s economic and voting rights, for example. Control benefits
include:
Sell or liquidate the Company or its assets
Implement strategies and negotiate a merger or acquisition
Make distributions and determine management compensation/perquisites
Appoint key decision makers and Board members
Select suppliers, vendors, and subcontractors
Studies attempting to measure control premiums and marketability discounts are limited by chosen
methodologies employed in each study. For example, control premium studies which observe actual
transactions may inadvertently also be measuring strategic premiums embedded in a transaction value in
addition to a control premium. Therefore, such premiums should be applied with care and the individual
characteristics of the subject company and market data should be weighed accordingly. We have observed
Mergerstat Review control premium data (see Appendices) which, while a comprehensive ongoing study over
time, is somewhat problematic for several reasons. For example, the study includes only transactions which have
positive premiums, may include pricing in of strategic benefit to acquirers, and the control premiums are
restricted in the time horizon for which they are observed. Nonetheless, Mergerstat results are consistent with
intuition, that is, investors will pay for control and its accompanying ability to influence operating and
financial/investment considerations. Of the companies used in this analysis for determining Red Bluff’s value
through the income and market approaches, all companies are publicly traded, share price data observed
reflects predominantly small block transactions, and thus, are traded on a non-controlling basis.
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The historical median of annual Mergerstat Review control premiums is approximately 25%. However, when
premiums exceeding 100% (most probably strategic acquisitions) are excluded, there is a significant reduction in
the median discount.
Concluded Control Premium For Red Bluff 15%
Investors value liquidity as there are numerous attendant risks associated with holding an interest without a
ready available market. Therefore, it is widely accepted that marketability discounts are applicable when
comparing privately-held interests to those that are publicly traded.
Holding Risks
Uncertainty of the time horizon to complete a sale
Costs to prepare and execute a sale
Risk as to eventual share price
Uncertainty as to the manner in which sale proceeds will be realized
2
Inability to “hypothecate”, that is, borrow against future sale proceeds.
There have been a significant number of studies attempting to understand the impact of marketability discounts
(see Appendices), and these studies are varied and complex, each with limitations. Therefore, it is not acceptable
to blindly apply some marketability discount to all privately-held firms to the same degree. Consideration must
be given to the specifics at hand for the subject company relative to public company data employed.
Of the comparable companies used in this analysis for determining Red Bluff’s value through the income and
market approaches, all companies are publicly traded, all have revenues and earnings substantially greater than
Red Bluff, a potential sale of Red Bluff will undoubtedly incur expenses associated with the transaction, and the
potential pool of competitive buyers for Red Bluff is limited. Therefore we conclude a marketability discount of
25% to be appropriate.
Marketability Discounts - Summary of Restricted Stock Studies
Mean 25.8%
Std Dev 8.1%
Concluded Marketability Discount For Red Bluff 25.0%
2
Valuing a Business, Fourth Edition, Shannon P. Pratt, Robert F. Reilly and Robert P. Schweihs, pg. 393.
Six Frigates Capital Advisory Page 12
Conclusion of Value
Application of the valuation methodologies yielded the following results:
Correlation of Methods Before Discounts and Premiums
Income Approaches MV Equity
Capitalized Debt Free Earnings $7,575.5
Discounted Net Cash Flow $8,064.7
Market Approach
Public Company Comparables $8,490.1
Asset Approach
Market Value Balance Sheet $4,953.4
Concluded Value Before Discounts and Premiums $8,100.0
Based upon our understanding of the objective and scope of this valuation, we have determined the fair market
value for a 100% controlling interest of Red Bluff Construction to be $7,200,000 as follows:
Conclusion
Fair Market Value of Red Bluff Construction $8,100.0
Less: Value of Non-Operating / Excess Assets ($1,680.0)
Value of Operating Interest $6,420.0
x % Ownership 100.0%
Fair Market Value of Interest 6,420.0
Add: Premium for Controlling Interest 15.0% 963.0
Controlling, Marketable Value 7,383.0
Less: Discount for Lack of Marketability 25.0% (1,845.8)
Controlling, Non-Marketable Value of Operating Interest 5,537.3
Add: Value of Non-Operating / Excess Assets 1,680.0
Total Fair Market Value, Controlling - All Assets (Rounded) $7,200.0
Our conclusion gives particular weighting to the discounted cash flow approach. We believe the capitalized
earnings and market approaches support our DCF conclusion.
Six Frigates Capital Advisory Page 13
Overview
Red Bluff Construction is an electrical contracting company founded in 1989 in Saugus, California. The company
serves the general construction markets of California and Nevada, principally Southern California and Western
Nevada. For the most recent year ended, the company had revenues of $7.3 million and employed 51 people.
The company was originally founded by Michael Jones’ father and remained fairly small until Michael and his
family inherited the company. Since that time, the company has established a solid reputation for excellence in
the installation of high end lighting systems and video and data systems. There has been rapidly growing
demand for such installation services coupled with strong new housing starts in the region over the past few
years.
The company is a C Corporation incorporated in the State of California and all shares of common stock are
owned by Michael and Shirley Jones and their children. In the event of a proposed sale of the company, any
family member has the right of first refusal.
Industry Overview
The electrical contracting industry (SIC 17) is highly fragmented with more than 70,000 companies. The industry
is competitive. Most competitors are small, owner-operated companies that typically serve a limited geographic
area. Though there has been active industry consolidation, there are few public companies focused on providing
electrical contracting services and only 14 U.S. electrical contractors with revenues in excess of
$200 million. McGraw Hill Construction Analytics estimates that the electrical contracting industry will generate
annual revenues in excess of $100 billion in 2005. Entry into the market is moderately difficult as it requires
state licenses, capital and equipment. Exit is relatively easy.
McGraw Hill data indicates total construction industry revenues have grown at an average compound rate of
approximately seven percent from 1998 through 2004. McGraw Hill forecasts total construction revenues for
2005 through 2010 to continue to grow at approximately four percent annually, noting several trends: moderate
job growth, looser lending standards offsetting higher interest rates, an improved economy and improved
building, bridge and highway construction segments.
U.S. Private Residential Construction – Value Put In Place
June YTD 2001 2002 2003 2004 2005
$ Millions $ 389,756 $ 420,982 $ 465,925 $ 561,449 $ 634,220
Year Over Year % Change 8.0% 10.7% 20.5% 13.0%
Source: US Census Bureau
Pacific Region Private Non-Residential Construction - Value Put In Place
($ Millions) 2001 2002 2003 2004 2005
Total Non Residential $35,042 $27,725 $24,623 $25,368 $28,055
Year Over Year % Change -20.9% -11.2% 3.0% 10.6%
Source: US Census Bureau
During the last decade, electrical contractors have experienced a growing demand for their services as a result of
more stringent electrical codes, increased use of electrical power, increased demand for bandwidth, demand for
bundled services, and construction of smart houses with integrated audio, video, computer, temperature control
and security systems.
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U.S. Economic Outlook
According to the Congressional Budget Office’s 2004 Budget and Economic Outlook, the economy should
continue to grow at a healthy rate over the next two years, for a recovery appears to have taken hold. Stronger
investment by businesses will lead the way, as spending on equipment and structures continues to bounce back
from the depressed levels of the past few years and firms shift from drawing down their inventories to
restocking their shelves. The rapid productivity growth of the past three years has contributed to the economy's
capacity to expand without generating significant upward pressure on inflation. Indeed, in light of the
unexpected strength of productivity during 2003, the Congressional Budget Office has increased both its two-
year forecast and its medium-term projection of the level of potential output (the level of gross domestic
product consistent with a high rate of resource use). That increase, in turn, has boosted the forecast and
projected levels of real (inflation-adjusted) GDP, which CBO now expects will expand by 4.8 percent in calendar
year 2004 and 4.2 percent in 2005 before growing at an average annual rate of 2.7 percent over the medium
term, from 2006 to 2014.
A variety of factors could produce growth over the next 10 years that is stronger or weaker than CBO's best
estimate. Cyclical factors--those deriving from the ups and downs of the business cycle--are one potential source
of risk. The confidence of businesses and investors, the growth of foreign economies, the level of stock prices,
the rate of personal saving, and the level of housing activity could each be weaker or stronger than CBO has
estimated. Beyond those risks, the accuracy of the forecast is vulnerable as well to the uncertainty that
surrounds the economy's response to the war on terrorism, developments in Iraq, and events elsewhere in the
world. Looking to the medium term, productivity gains could remain unusually large, buoying income and profits
and thus boosting output substantially. Alternatively, productivity could grow at a below-average rate over the
(3)
next few years, reversing its extraordinary recent gains and resulting in a lower level of GDP than CBO expects.
Markets
Southern California’s population is centered on the cities of Los Angeles, San Diego, San Bernardino and
Riverside. It is home to nearly 24 million people and is the second most populated region in the U.S, behind only
the Eastern Corridor. Red Bluff’s immediate market, Los Angeles County, has a total population exceeding 10
million. Red Bluff’s Western Nevada coverage includes Las Vegas. Between 1990 and 2000, Nevada's population
increased 66.3% compared to the USA's population increase of 13.1%. Over two thirds of the Nevada population
lives in the Las Vegas area. According to Woods and Poole Economics, Inc., the California population is expected
to increase annually at 1.5% from 2005-2010, with the total number of households averaging 1.4% growth
during this time. Nevada is expected to average 2.6% population growth during this time, with the total number
of households increasing at an average of 2.6% per annum.
Private New Housing Starts: Western Region
2000 2001 2002 2003 2004
Thousands of Units 383.1 391.1 415.5 472.3 516.2
Source: U.S. Census Bureau
(3) The Budget and Economic Outlook: Fiscal Years 2005 to 2014, January 2004; Congressional Budget Office
Six Frigates Capital Advisory Page 15
New housing starts in the Western region outpaced the national total for each of the past two years.
Annual New Housing Starts: % Increase
U.S. Census Bureau
15.0%
10.0%
Total U.S.
Western Region
5.0%
0.0%
2001 2002 2003 2004
Products and Services
Much of Red Bluff’s electrical work is driven by residential and some nonresidential construction (office and
commercial development). The company provides the following electrical services:
1. Installation (70% of Revenue) - installing and maintaining electrical power systems, conduits, cables,
control panels, generators, lighting systems, video and data systems, and fire alarms.
2. MRR (18% of Revenue) - maintenance and repair work.
3. Retrofitting (12% of Revenue) - electrical systems replacement in existing buildings.
The company has established a solid reputation for excellence in the installation of high end lighting systems and
video and data systems. The company positions its services emphasizing quality of work, and timeliness of
completion. Often the company will assist the developer and/or architect in the design of a system, start-up
support and customer training for both installation and retrofitting.
Revenue By Product/Service
Retrofitting, 12%
MRR, 18%
Installation, 70%
Competition
The company competes against numerous local and several regional companies for installation, MRR and
retrofitting contracts. Primary competitors for high end lighting and video/data systems are Ace Electric of Las
Vegas, NV, Res Lighting of Palm Springs, CA and Retro Electrical in Los Angeles, CA. These companies are all
similar in size to Red Bluff and serve roughly the same geographic market as Red Bluff. The company also
competes against large developers who posses in-house electrical service capabilities. The company competes
on the basis of cost, quality and time to completion. To gain competitive advantage, the company often offers
highly competitive payment terms to developers and contractors.
Six Frigates Capital Advisory Page 16
Top Three Competitors
Company Location Est. 2004 Revenue Number of Employees
Ace Electric Las Vegas, NV $9,500 65
Res Lighting Palm Springs, CA $7,800 55
Retro Electrical Los Angeles, CA $6,500 50
Source: Pacific Electrical Trade Almanac, March, 2005
Current ownership solicits business primarily through trade magazine advertising, word of mouth and trade
associations. Ownership believes new ownership would be able to retain a majority of existing accounts and
solicit new business capitalizing on channels similar to those currently used, though Mike and Shirley the current
owners now handle the bulk of that responsibility. The company has recently developed a website where
developers and contractors can review pictures and descriptions of previous projects completed by Red Bluff.
Customers
The company’s customers are primarily developers and independent contractors serving the single and multi-
family housing development, commercial development and property management industries. The company also
provides some services through retail stores serving small contractor / home owner market. Red Bluff often acts
as a subcontractor to larger developers. The company has established a solid reputation for excellence in the
installation of high end lighting systems and video data systems. No one customer accounts for over 12% of Red
Bluff’s revenues.
Revenue by Customer Segment
Retail, 16%
Large
Development
Firms, 49%
Independent
Contractors, 34%
For installation and retrofitting, customer billing is negotiated upfront when a proposal is submitted to the
independent contractor or developer. MRR work is billed once a job is complete at net 30. For the year end
2005, the company averaged just over 40 day’s sales outstanding due primarily to receivables outstanding from
larger developers on substantial contracts.
Customer Concentration
$1,000s 2005 %
Ace Building $900.0 12.3%
Lennar 875.0 12.0%
SoCal Properties 830.0 11.4%
Nevada Homes 500.0 6.9%
Centex 500.0 6.9%
Desert Images 450.0 6.2%
City Properties 350.0 4.8%
United Construction 348.0 4.8%
Lighting Master 310.0 4.2%
Construction Depot 305.0 4.2%
All Others 1,927.0 26.4%
Total Revenue $7,295.0 100.0%
Six Frigates Capital Advisory Page 17
Top Three Customers:
Ace Building – A commercial and residential developer serving California, Red Bluff provided lighting installation
services for the company’s 100,000 square foot Santa Clara office development.
Lennar - A nationwide developer of single family homes, Red Bluff provided all outdoor lighting installation for
the company’s most recent development in Summerlin, a rapidly growing Las Vegas community at the foot of
the Red Rock Mountains.
SoCal Properties – One of Los Angeles’ premier developers, Red Bluff was contracted by the developer to
provide full electrical installation for the company’s new 200 unit Venice Beach development.
Vendors, Suppliers and Contractors
The company has several long-standing relationships with National suppliers and wholesalers for electrical parts
and components. Key accounts include Shealy Electrical Wholesalers of Greenville, SC; National Electric of
Racine, WI and Key Electrical Supply of Houston, TX. Terms with suppliers are generally “net 30”.
At times, Red Bluff will subcontract with another electrician for certain work due to staffing constraints or when
a highly specialized job is required. The company and its management maintain strong relationships with other
regional electrical contractors.
Facilities and Operations
The company occupies 5,400 square feet of space in a building owned by Mike and Shirley Jones and leased to
the company. The lease is believed to be consistent with market prices and terms (see appraisal included in
Appendices). The facility is considered adequate as it contains parking, storage, work areas, an electrical shop
and inventory space. In the event of the sale of the company the owner’s are willing to offer the same terms of
the facility lease to new ownership.
The company employs 51 total employees, including the owner and his wife. The company is a union shop.
There are no employment contracts for non-union employees. Employee turnover is low by industry standards.
Management has stated the desire to hire additional foreman in the future, as supervision of the construction
staff is somewhat over-extended.
Six Frigates Capital Advisory Page 18
Key Management
Red Bluff has established a strong management team which is well regarded in the region. Key management is
believed to be willing to stay on in the event of ownership change. Mike is aware that the sale of the company
may impact future sales and is willing, to a degree, to make arrangements to stay on board through transition
after a sale of the company.
Michael Jones – Owner and CEO, Mike is a master electrician. He inherited the company after the death of his
father in 2000. Mike attended San Jose State University and received a degree in Mechanical Engineering in
1982. Mike is responsible for soliciting new business and bidding contracts, marketing the company and
managing the overall business. He possesses state contractor’s licenses in both California and Nevada.
Shirley Jones – Owner and Vice President, Shirley manages an office staff of four, is responsible for accounts
payable and receivables and assists her husband in soliciting new business through her activities at trade shows
and conventions and entertaining clients.
Jack Schwartz – Estimator, received a degree from City College in 1979 in production control and electrical
estimating. His skills are critical to maintaining profitability.
Don Smith – Construction Manager, supervises four foremen and is responsible for all quality control. Don is a
master electrician. Don has recently taken on some responsibilities in generating new business.
Steve Gonzalez – Maintenance Foreman, Steve supervises two mechanics and is responsible for all maintenance.
His skills are widely regarded in the region.
David Black – David is office manager and is responsible for book and record keeping activities. He holds a
degree in accounting from Montana State University in 1995.
Six Frigates Capital Advisory Page 19
Red Bluff Construction Facility, Saugus, CA
Six Frigates Capital Advisory Page 20
Recently Installed Residential Lighting System, San Bernardino, CA
Six Frigates Capital Advisory Page 21
Red Bluff Financial Summary
Red Bluff has experienced outstanding revenue and earnings growth over the period 2001-2005. For the 2005 year
ended, revenues were $7.3 million and net income was $984,000, or $1.04 million on a normalized basis. The four year
compounded annual growth rate (“CAGR”) for revenue was 26.7%. Net margins are strong, 13.5% for the year ending
205 and averaging 13.0% for the five year period 2001-2005, far outpacing the industry average (SIC 17 2.2% in 2004).
Return on equity has been strong; 24.6% for the year ended 2005 and averaging 30.6% over the period 2002-2005.
Return on assets has averaged 20.4% for the four year period 2002-2005 and on an adjusted basis, was 21.2% in 2005. In
comparison, the industry average was 6.3% for the year end 2004.
Historical Income Statement Summary
year end June 30 $1,000s
(1)
2001 2002 2003 2004 2005 2005 Adj.
Revenue $3,529.0 $4,156.0 $5,755.0 $6,489.0 $7,295.0 $7,295.0
Growth 17.8% 38.5% 12.8% 12.4% 12.4%
EBITDA $778.0 $891.0 $1,436.0 $1,613.0 $1,719.0 $1,808.5
EBIT $743.0 $854.0 $1,403.0 $1,596.0 $1,730.0 $1,819.5
EBIT Margin 21.1% 20.5% 24.4% 24.6% 23.7% 24.9%
(1) Reflects normalized adjustments to income statement
Net assets at June 300, 2005 were $6.3 million. The balance sheet consists primarily of cash and short-term investments
retained to fund general working capital needs and also to attract and fund new contracts, receivables, property, plant
and equipment consisting primarily of electrical equipment and machinery, and land.
The company’s balance sheet includes several assets which are considered to be non-operating, e.g. excess assets, not
used in the course of ordinary business. These are short-term investments of $779,000, and land of $900,000. The short-
term investment amount as stated on the company’s 2005 statements is significantly higher than was actually required
as a result of timing. The owner’s drew down the short-term investment balance shortly after June 30, 2005 through a
dividend. However, management estimates that going forward higher short-term investment balances (consistent with
that of 2004 18.8% of revenue) will be needed to fund new contracts.
Historical Balance Sheet Summary
year end June 30 $1,000s
(1)
2001 2002 2003 2004 2005 2005 Adj.
Total Assets $2,086.0 $2,735.0 $3,860.0 $5,157.0 $6,468.0 $5,252.4
Total Equity $1,294.0 $1,799.0 $2,574.0 $3,505.0 $4,489.0 $3,273.4
Return on Equity 29.9% 37.4% 30.6% 24.6%
(1)
Reflects normalized adjustments to balance sheet
Six Frigates Capital Advisory Page 22
Financial Forecasts
Based upon discussions with management and review of their current business plan for the forthcoming year, we have
developed financial forecasts for the company for the periods 2006-2010. Key projection assumptions are:
Revenue is forecast to grow approximately 10% per year for each of the next two years and will then likely
stabilize to 5%. 10% revenue growth is consistent with revenue growth for the years 2004 and 2005.
EBIT margins should increase each of the next two years but stabilize thereafter. Management does not foresee
substantial margin improvement under current management practices and existing capital structure.
The balance sheet is primarily a function of revenue and therefore should grow with revenue.
While short term investments at year end in 2005 were higher than actually needed, it appears the company
will have higher short-term investment requirements going forward than the company has had historically, as a
result of the need to purchase materials up front for many new installation contracts.
Debt to equity replicates that of our public company comparables, and is consistent with Red Bluff’s 2005 Debt
/ Total Assets.
Detailed projections and assumptions are listed in Page 35. We believe the assumptions developed through discussions
with management and used in our financial forecasts are reasonable.
Financial Forecast Summary
$1,000s
2005 Adj. 2006F 2007F 2008F 2009F 2010F
Revenue $7,295.0 $8,024.5 $8,827.0 $9,268.3 $9,731.7 $10,218.3
Growth 10.0% 10.0% 5.0% 5.0% 5.0%
EBIT $1,819.5 $2,185.1 $2,596.0 $2,697.0 $2,799.7 $2,903.9
Margin 24.9% 27.2% 29.4% 29.1% 28.8% 28.4%
Growth 20.1% 18.8% 3.9% 3.8% 3.7%
Net Assets $5,239.4 $5,758.7 $6,334.5 $6,651.3 $6,983.8 $7,333.0
Growth 9.9% 10.0% 5.0% 5.0% 5.0%
Six Frigates Capital Advisory Page 23
Red Bluff Key Considerations
Strengths
The company has developed an outstanding reputation in the industry as evidenced by consistent revenue
growth over the company’s 16 year history. It is considered a regional expert in the installation of high end
lighting and voice / data systems, a unique niche.
Employee turnover is considered low by industry standards and the company’s middle management is well
skilled in their roles. Employee morale is excellent.
Profit margins are excellent.
Weaknesses
The Company’s sales efforts are to a large extent dependent upon the efforts of owners Mike and Shirley
Jones. While the construction manager has played an increasing sales role over time, the loss of Mike and
Shirley could hurt revenues.
Going forward, the company anticipates the need to maintain short-term investment balances on the
balance sheet higher than in previous years. This is the result of new business where the owners are
required to purchase materials up front. Higher balance sheet needs reduce cash flows.
Opportunities
The company should be able to continue to capitalize on its expert reputation in high end lighting and voice
data system installation. Increased demand for such products within homes is a continuing trend as
consumers increasingly value in-home entertainment and technological capabilities.
The company operates in an area of the country experiencing rapid growth in residential construction as
evidenced by new housing starts in 2003 and 2004. In addition to regional population growth, such as Las
Vegas, the advent of new mortgage products available to those who might otherwise not meet mortgage
approval has dramatically increased the demand for housing in Southern California and Western Nevada.
Threats
The construction industry is both cyclical and somewhat seasonal. Future decreases in housing starts could
significantly impact earnings.
Six Frigates Capital Advisory Page 24
Financial Statements and Forecasts
Six Frigates Capital Advisory Page 25
Historical Income Statement
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Actual Common Sized
2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
Revenue $3,529.0 $4,156.0 $5,755.0 $6,489.0 $7,295.0 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses
Officer's Compensation 120.0 144.0 168.0 192.0 240.0 3.4% 3.5% 2.9% 3.0% 3.3%
Other Salaries and Wages 1,691.0 1,991.0 2,757.0 3,109.0 3,495.0 47.9% 47.9% 47.9% 47.9% 47.9%
Rent 36.0 42.0 48.0 54.0 66.0 1.0% 1.0% 0.8% 0.8% 0.9%
Payroll Taxes 196.0 231.0 320.0 360.0 405.0 5.6% 5.6% 5.6% 5.5% 5.6%
Truck / Equipment / Auto Expense 325.0 411.0 463.0 520.0 633.0 9.2% 9.9% 8.0% 8.0% 8.7%
Insurance 29.0 36.0 49.0 61.0 78.0 0.8% 0.9% 0.9% 0.9% 1.1%
Legal and Professional Fees 26.0 27.0 29.0 31.0 41.0 0.7% 0.6% 0.5% 0.5% 0.6%
Travel and Entertainment 4.0 4.0 5.0 5.0 5.0 0.1% 0.1% 0.1% 0.1% 0.1%
Director Fees 3.0 5.0 6.0 10.0 18.0 0.1% 0.1% 0.1% 0.2% 0.2%
Pension and Profit Sharing 35.0 42.0 58.0 65.0 73.0 1.0% 1.0% 1.0% 1.0% 1.0%
Other Operating Expense 286.0 332.0 416.0 469.0 522.0 8.1% 8.0% 7.2% 7.2% 7.2%
Total Operating Expenses 2,751.0 3,265.0 4,319.0 4,876.0 5,576.0 78.0% 78.6% 75.0% 75.1% 76.4%
EBITDA 778.0 891.0 1,436.0 1,613.0 1,719.0 22.0% 21.4% 25.0% 24.9% 23.6%
Other Income / (Expense) 22.0 31.0 53.0 67.0 84.0 0.6% 0.7% 0.9% 1.0% 1.2%
Depreciation and Amortization 57.0 68.0 86.0 84.0 73.0 1.6% 1.6% 1.5% 1.3% 1.0%
EBIT 743.0 854.0 1,403.0 1,596.0 1,730.0 21.1% 20.5% 24.4% 24.6% 23.7%
Interest Expense 58.0 68.0 94.0 107.0 120.0 1.6% 1.6% 1.6% 1.6% 1.6%
Earnings Before Taxes 685.0 786.0 1,309.0 1,489.0 1,610.0 19.4% 18.9% 22.7% 22.9% 22.1%
Income Tax Expense 270.0 324.0 491.0 558.0 626.0 7.7% 7.8% 8.5% 8.6% 8.6%
Net Income $415.0 $462.0 $818.0 $931.0 $984.0 11.8% 11.1% 14.2% 14.3% 13.5%
Memo:
Net Margin 11.8% 11.1% 14.2% 14.3% 13.5%
Earnings Growth 11.3% 77.1% 13.8% 5.7%
Four Year Average Growth 27.0%
Tax Rate 39.4% 41.2% 37.5% 37.5% 38.9%
Six Frigates Capital Advisory Page 26
Historical Balance Sheet Summary
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Actual Common Sized
Assets 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 5 Yr. Avg.
Current Assets
Cash $209.0 $350.0 $1,005.0 $1,435.0 $1,403.0 10.0% 12.8% 26.0% 27.8% 21.7% 19.7%
Accounts Receivable (WIP) 290.0 750.0 689.0 714.0 891.0 13.9% 27.4% 17.8% 13.8% 13.8% 17.4%
Inventory 25.0 30.0 39.0 45.0 49.0 1.2% 1.1% 1.0% 0.9% 0.8% 1.0%
Short Term Investments 50.0 65.0 514.0 1,220.0 2,150.0 2.4% 2.4% 13.3% 23.7% 33.2% 15.0%
Total Current Assets 574.0 1,195.0 2,247.0 3,414.0 4,493.0 27.5% 43.7% 58.2% 66.2% 69.5% 53.0%
Property, Plant and Equipment, Net 450.0 475.0 550.0 675.0 900.0 21.6% 17.4% 14.2% 13.1% 13.9% 16.0%
Land 900.0 900.0 900.0 900.0 900.0 43.1% 32.9% 23.3% 17.5% 13.9% 26.1%
Others Fixed Assets 12.0 15.0 13.0 18.0 25.0 0.6% 0.5% 0.3% 0.3% 0.4% 0.4%
Total Fixed Assets 1,362.0 1,390.0 1,463.0 1,593.0 1,825.0 65.3% 50.8% 37.9% 30.9% 28.2% 42.6%
Deposits 150.0 150.0 150.0 150.0 150.0 7.2% 5.5% 3.9% 2.9% 2.3% 4.4%
Total Assets $2,086.0 $2,735.0 $3,860.0 $5,157.0 $6,468.0 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Liabilities
Current Liabilities
Notes Payable (Short-Term) $73.0 $88.0 $111.0 $119.0 $135.0 3.5% 3.2% 2.9% 2.3% 2.1% 2.8%
Accounts Payable 11.0 13.0 15.0 12.0 10.0 0.5% 0.5% 0.4% 0.2% 0.2% 0.4%
Other Current Liabilities 3.0 5.0 2.0 4.0 3.0 0.1% 0.2% 0.1% 0.1% 0.0% 0.1%
Total Current Liabilities 87.0 106.0 128.0 135.0 148.0 4.2% 3.9% 3.3% 2.6% 2.3% 3.3%
Notes Payable 705.0 830.0 1,158.0 1,517.0 1,831.0 33.8% 30.3% 30.0% 29.4% 28.3% 30.4%
Total Liabilities 792.0 936.0 1,286.0 1,652.0 1,979.0 38.0% 34.2% 33.3% 32.0% 30.6% 33.6%
Equity
Common Stock 55.0 55.0 55.0 55.0 55.0 2.6% 2.0% 1.4% 1.1% 0.9% 1.6%
Paid In Capital 465.0 465.0 465.0 465.0 465.0 22.3% 17.0% 12.0% 9.0% 7.2% 13.5%
Retained Earnings 774.0 1,322.0 2,054.0 2,985.0 3,969.0 37.1% 48.3% 53.2% 57.9% 61.4% 51.6%
(Dividends) 0.0 (43.0) 0.0 0.0 0.0 0.0% -1.6% 0.0% 0.0% 0.0% -0.3%
Total Shareholder's Equity 1,294.0 1,799.0 2,574.0 3,505.0 4,489.0 62.0% 65.8% 66.7% 68.0% 69.4% 66.4%
Total Liabilities and Equity $2,086.0 $2,735.0 $3,860.0 $5,157.0 $6,468.0 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Six Frigates Capital Advisory Page 27
Historical Cash Flow Summary
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
2002 2003 2004 2005
Cash Flow From Operations
Net Income $462.0 $818.0 $931.0 $984.0
Addback:
Depreciation and Amortization 68.0 86.0 84.0 73.0
Earnings Before Depreciation and Amortization 530.0 904.0 1,015.0 1,057.0
Less Changes in Working Capital:
Change in Accounts Receivable (WIP) (460.0) 61.0 (25.0) (177.0)
Change in Inventory (5.0) (9.0) (6.0) (4.0)
Change in Short Term Investments (15.0) (449.0) (706.0) (930.0)
Change in Accounts Payable 2.0 2.0 (3.0) (2.0)
Change in Other Current Liabilities 2.0 (3.0) 2.0 (1.0)
Total Changes In Working Capital (476.0) (398.0) (738.0) (1,114.0)
Cash Flow From Operations 54.0 506.0 277.0 (57.0)
Investment Activities
Change in Property, Plant and Equipment, Net (93.0) (161.0) (209.0) (298.0)
Change in Land 0.0 0.0 0.0 0.0
Change in Others Fixed Assets (3.0) 2.0 (5.0) (7.0)
Change in Deposits 0.0 0.0 0.0 0.0
Cash Flow From Investment Activities (96.0) (159.0) (214.0) (305.0)
Cash Flow From Financing Activities
Change in Notes Payable (Short-Term) 15.0 23.0 8.0 16.0
Change in Notes Payable 125.0 328.0 359.0 314.0
Change in Common Stock 0.0 0.0 0.0 0.0
Change in Paid In Capital 0.0 0.0 0.0 0.0
(Dividends) / Contributions 43.0 (43.0) 0.0 0.0
Cash Flow From Financing Activities 183.0 308.0 367.0 330.0
Net Cash Flow $141.0 $655.0 $430.0 ($32.0)
Memo:
Change in Cash and Short Term Investments 126.0 206.0 (276.0) (962.0)
Memo:
Change in Property, Plant and Equipment (NBV) (25.0) (75.0) (125.0) (225.0)
Depreciation and Amortization (68.0) (86.0) (84.0) (73.0)
Total Change in Property, Plant and Equipment (93.0) (161.0) (209.0) (298.0)
Memo:
Net Cash Flow % of Revenue 3.4% 11.4% 6.6% -0.4%
Four Year Average 5.0%
Net Cash Flow % of Net Income 30.5% 80.1% 46.2% -3.3%
Four Year Average 37.4%
Six Frigates Capital Advisory Page 28
Normalized Income Statement Summary
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
2005 Adj. %
Revenue $7,295.0 100.0%
Operating Expenses
1. Officer's Compensation 158.0 2.2%
Other Salaries and Wages 3,495.0 47.9%
Rent 66.0 0.9%
Payroll Taxes 405.0 5.6%
Truck / Equipment / Auto Expense 633.0 8.7%
Insurance 78.0 1.1%
Legal and Professional Fees 41.0 0.6%
Travel and Entertainment 5.0 0.1%
2. Director Fees 10.5 0.1%
Pension and Profit Sharing 73.0 1.0%
Other Operating Expense 522.0 7.2%
Total Operating Expenses 5,486.5 75.2%
Normalized EBITDA 1,808.5 24.8%
Other Income / (Expense) 84.0 1.2%
Depreciation and Amortization 73.0 1.0%
Normalized EBIT 1,819.5 24.9%
Interest Expense 120.0 1.6%
Normalized Earnings Before Taxes 1,699.5 23.3%
3. Income Tax Expense 655.9 9.0%
Normalized Net Income $1,043.6 14.3%
Six Frigates Capital Advisory Page 29
Summary of Income Statement Adjustments
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
1. Officer's Compensation 2001 2002 2003 2004 2005
Income Statement Expense $120.0 $144.0 $168.0 $192.0 $240.0
Normalized Expense (158.0)
Adjustment Amount $82.0
(1) Refer To Appendix
2. Director's Fees 2001 2002 2003 2004 2005
Income Statement Expense $3.0 $5.0 $6.0 $10.0 $18.0
Annual Growth 66.7% 20.0% 66.7% 80.0%
Expense assuming 5% annual growth 3.15 5.25 6.3 10.5
Income Statement Expense $3.0 $5.0 $6.0 $10.0 $18.0
Normalized Expense (5% annual growth) (10.5)
Adjustment Amount $7.5
Total Adjustments $89.5
Total Adjustments After-Tax $55.0
3. Income Taxes Income tax expense assumed to be five year actual average % of EBT (38.6%)
Six Frigates Capital Advisory Page 30
Adjusted Market Value Balance Sheet
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
2004 2005
2004 Adj. Adj. 2005 Adj. Adj. Explanation
Assets
Current Assets
Cash $1,435.0 $0.0 1,435.0 $1,403.0 $0.0 1,403.0
Accounts Receivable (WIP) 714.0 0.0 714.0 891.0 0.0 891.0 All A/R expected to be collected.
Inventory 45.0 0.0 45.0 49.0 4.7 53.7 Adjusted to reflect actual inventory market value per management discussions
Short Term Investments 1,220.0 0.0 1,220.0 2,150.0 (778.5) 1,371.5 Adjusted to reflect 2004 % of revenue
Total Current Assets 3,414.0 0.0 3,414.0 4,493.0 (773.8) 3,719.2
Property, Plant and Equipment, Net 675.0 343.7 1,018.7 900.0 458.3 1,358.3 Adjusted to reflect market value of electrical installation equipment per management
Land 900.0 (900.0) 0.0 900.0 (900.0) 0.0 Non-Operating Asset, no underlying debt
Others Fixed Assets 18.0 0.0 18.0 25.0 0.0 25.0
Total Fixed Assets 1,593.0 (556.3) 1,036.7 1,825.0 (441.8) 1,383.3
Deposits 150.0 0.0 150.0 150.0 0.0 150.0
Total Assets $5,157.0 ($556.3) $4,600.7 $6,468.0 ($1,215.6) $5,252.4
Liabilities
Current Liabilities
Notes Payable (Short-Term) 119.0 (119.0) 0.0 135.0 (135.0) 0.0 Current Portion of Long-Term Debt
Accounts Payable 12.0 0.0 12.0 10.0 0.0 10.0
Other Current Liabilities 4.0 0.0 4.0 3.0 0.0 3.0
Total Current Liabilities 135.0 (119.0) 16.0 148.0 (135.0) 13.0
Notes Payable 1,517.0 119.0 1,636.0 1,831.0 135.0 1,966.0
Total Liabilities 1,652.0 0.0 1,652.0 1,979.0 0.0 1,979.0
Equity
Common Stock 55.0 0.0 55.0 55.0 0.0 55.0
Paid In Capital 465.0 0.0 465.0 465.0 0.0 465.0
Retained Earnings 2,985.0 (556.3) 2,428.7 3,969.0 (1,215.6) 2,753.4
(Dividends) 0.0 0.0 0.0 0.0 0.0 0.0
Total Shareholder's Equity 3,505.0 (556.3) 2,948.7 4,489.0 (1,215.6) 3,273.4
Total Liabilities and Equity $5,157.0 ($556.3) $4,600.7 $6,468.0 ($1,215.6) $5,252.4
Six Frigates Capital Advisory Page 31
Key Ratio Analysis
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
SIC 17 Median Industry Results
Average 4 Yr. CAGR 2001 2002 2003 2004 2005 2005 Adj. 2002 2003 2004
Profitability Ratios
EBIT Margin 22.9% 21.1% 20.5% 24.4% 24.6% 23.7% 24.9%
Net Margin 13.0% 11.8% 11.1% 14.2% 14.3% 13.5% 14.3% 1.9% 1.9% 2.2%
NCF % Revenue 5.2% 3.4% 11.4% 6.6% -0.4%
NCF % of Net Income 38.4% 30.5% 80.1% 46.2% -3.3%
Return on Assets 20.4% 19.2% 24.8% 20.6% 16.9% 21.2% 5.5% 5.3% 6.3%
Return on Equity 30.6% 29.9% 37.4% 30.6% 24.6% 33.5% 12.6% 12.0% 13.9%
Growth Ratios
Revenue Growth 20.4% 26.7% 17.8% 38.5% 12.8% 12.4%
Earnings Growth (EBIT) 25.3% 33.2% 14.9% 64.3% 13.8% 8.4%
Earnings Growth (Net Income) 27.0% 34.3% 11.3% 77.1% 13.8% 5.7%
Expense Ratios
Operating Expense % of Revenue 76.7% 78.0% 78.6% 75.0% 75.1% 75.2%
Turnover Ratios
Receivables Turnover 8.6 x 8.0 x 8.0 x 9.3 x 9.1 x 9.1 x
Fixed Asset Turnover 3.9 x 3.0 x 4.0 x 4.2 x 4.3 x 6.0 x
Total Asset Turnover 1.5 x 1.7 x 1.7 x 1.4 x 1.3 x 1.5 x 3.0 x 3.0 x 2.9 x
Days Sales Outstanding 42.7 x 45.7 x 45.6 x 39.5 x 40.2 x 40.2 x
Risk / Leverage Ratios
Current Ratio 18.2 x 6.6 x 11.3 x 17.6 x 25.3 x 30.4 x NMF 1.9 x 1.9 x 1.9 x
Debt / Equity 50.2% 60.1% 51.0% 49.3% 46.7% 43.8% 60.1% 99.3% 96.8% 101.0%
Interest Coverage 13.9 x 12.8 x 12.6 x 14.9 x 14.9 x 14.4 x 15.2 x
Cash Flow Ratios
Operating Cash Flow 1.5 x 0.5 x 4.0 x 2.1 x -0.4 x
Cash Interest Coverage 8.2 x 6.6 x 11.6 x 8.8 x 5.7 x
Except for "2005 Adj.", based upon unadjusted balance sheet, cash flow and income statement.
Average equals simple average for relevant time period, unadjusted.
4 Yr. CAGR represents compounded annual growth, unadjusted, for the period 2002-2005.
Industry Sources: Hoovers, Dunn and Bradstreet
Six Frigates Capital Advisory Page 32
Ratio Analysis - Definition of Terms
Red Bluff Construction
Fiscal Year Ended June 30, 2005
Profitability Ratios
EBIT Margin EBIT / Revenue
Net Margin Net Income / Revenue
NCF % Revenue Net Cash Flow / Revenue
NCF % of Net Income Net Cash Flow / Net Income
Return on Assets Net Income / [[Total Assets Beg. Balance + Total Assets Ending Bal.]/2]
Return on Equity Net Income / [[Equity Beg. Balance + Equity Ending Bal.]/2]
Growth Ratios
Revenue Growth [[Revenue2 / Revenue1] -1]
Earnings Growth (EBIT) [[EBIT2 / EBIT1] -1]
Earnings Growth (Net Income) [[Net Income2 / Net Income1] -1]
Expense Ratios
Operating Expense % of Revenue Operating Expenses / Revenue
Turnover Ratios
Receivables Turnover Revenue / [[A/R Beg. Balance + A/R Ending Bal.]/2]
Fixed Asset Turnover Revenue /[ [Fixed Asset Beg. Balance + Fixed Asset Ending Bal.]/2]
Total Asset Turnover Revenue / [[Total Assets Beg. Balance + Total Assets Ending Bal.]/2]
Risk / Leverage Ratios
Current Ratio Current Assets / Current Liabilities
Debt / Equity Total Interest Bearing Debt / Total Equity
Interest Coverage EBIT / Interest Expense
Cash Flow Ratios
Operating Cash Flow Cash Flow From Operations / Current Liabilities
Cash Interest Coverage [Cash Flow From Operations + Interest Expense = Taxes] Interest Expense
Six Frigates Capital Advisory Page 33
Income Statement Projections
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
2005 Adj. 2006F 2007F 2008F 2009F 2010F
Revenue $7,295.0 $8,024.5 $8,827.0 $9,268.3 $9,731.7 $10,218.3
Operating Expenses
Officer's Compensation 158.0 165.9 174.2 182.9 192.0 201.7
Other Salaries and Wages 3,495.0 3,669.8 3,853.2 4,045.9 4,248.2 4,460.6
Rent 66.0 68.0 70.0 72.1 74.3 76.5
Payroll Taxes 405.0 449.9 499.8 555.2 616.7 685.1
Truck / Equipment / Auto Expense 633.0 696.3 765.9 804.2 844.4 886.7
Insurance 78.0 85.8 94.4 99.1 104.1 109.3
Legal and Professional Fees 41.0 45.1 49.6 52.1 54.7 57.4
Travel and Entertainment 5.0 5.5 6.1 6.4 6.7 7.0
Director Fees 10.5 10.8 11.1 11.5 11.8 12.2
Pension and Profit Sharing 73.0 80.3 88.3 92.7 97.4 102.3
Other Operating Expense 522.0 574.2 631.6 663.2 696.4 731.2
Total Operating Expenses 5,486.5 5,851.5 6,244.3 6,585.3 6,946.7 7,329.8
Normalized EBITDA 1,808.5 2,173.0 2,582.7 2,683.0 2,785.0 2,888.5
Other Income / (Expense) 84.0 92.4 101.6 106.7 112.1 117.7
Depreciation and Amortization 73.0 80.3 88.3 92.7 97.4 102.3
Normalized EBIT 1,819.5 2,185.1 2,596.0 2,697.0 2,799.7 2,903.9
Margin 24.9% 27.2% 29.4% 29.1% 28.8% 28.4%
Interest Expense 120.0 141.6 159.9 171.7 180.3 189.3
Normalized Earnings Before Taxes 1,699.5 2,043.4 2,436.1 2,525.3 2,619.4 2,714.6
Income Tax Expense 655.9 788.7 940.2 974.6 1,011.0 1,047.7
Normalized Net Income $1,043.6 $1,254.8 $1,495.9 $1,550.7 $1,608.5 $1,666.9
Margin 14.3% 15.6% 16.9% 16.7% 16.5% 16.3%
Six Frigates Capital Advisory Page 34
Balance Sheet Projections
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
2005 Adj. 2006F 2007F 2008F 2009F 2010F
Assets
Current Assets
Cash $1,403.0 $1,543.3 $1,697.6 $1,782.5 $1,871.6 $1,965.2
Accounts Receivable (WIP) 891.0 980.1 1,078.1 1,132.0 1,188.6 1,248.0
Inventory 53.7 59.0 64.9 68.2 71.6 75.1
Short Term Investments 1,371.5 1,508.7 1,659.6 1,742.5 1,829.7 1,921.1
Total Current Assets 3,719.2 4,091.1 4,500.2 4,725.2 4,961.5 5,209.6
Total Fixed Assets 1,383.3 1,521.6 1,673.7 1,757.4 1,845.3 1,937.6
Deposits 150.0 165.0 181.5 190.6 200.1 210.1
Total Assets $5,252.4 $5,777.7 $6,355.4 $6,673.2 $7,006.9 $7,357.2
Liabilities
Current Liabilities
Notes Payable (Short-Term) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Accounts Payable 10.0 14.6 16.1 16.9 17.7 18.6
Other Current Liabilities 3.0 4.4 4.8 5.1 5.3 5.6
Total Current Liabilities 13.0 19.0 20.9 22.0 23.1 24.2
Notes Payable 1,966.0 2,285.3 2,513.8 2,639.5 2,771.5 2,910.1
Total Liabilities 1,979.0 2,304.3 2,534.7 2,661.5 2,794.6 2,934.3
Equity
Equity Beginning Balance 3,273.4 3,473.4 3,820.7 4,011.7 4,212.3
Current Period Net Income 1,254.8 1,495.9 1,550.7 1,608.5 1,666.9
Current Period Contributions / (Distributions) (1,054.8) (1,148.5) (1,359.6) (1,407.9) (1,456.3)
Total Shareholder's Equity $3,273.4 $3,473.4 $3,820.7 $4,011.7 $4,212.3 $4,422.9
Total Liabilities and Equity $5,252.4 $5,777.7 $6,355.4 $6,673.2 $7,006.9 $7,357.2
Memo:
Balance Check 0.0 0.0 0.0 0.0 0.0 0.0
Debt To Net Assets 37.5% 39.7% 39.7% 39.7% 39.7% 39.7%
Net Assets 5,239.4 5,758.7 6,334.5 6,651.3 6,983.8 7,333.0
Net Asset Growth 9.9% 10.0% 5.0% 5.0% 5.0%
Six Frigates Capital Advisory Page 35
Cash Flow Projections
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
2006F 2007F 2008F 2009F 2010F
Cash Flow From Operations
Net Income $1,254.8 $1,495.9 $1,550.7 $1,608.5 $1,666.9
Addback:
Depreciation and Amortization 80.3 88.3 92.7 97.4 102.3
Earnings Before Depreciation and Amortization 1,335.1 1,584.2 1,643.4 1,705.8 1,769.1
Less Changes in Working Capital:
Change in Cash (140.3) (154.3) (84.9) (89.1) (93.6)
Change in Accounts Receivable (WIP) (89.1) (98.0) (53.9) (56.6) (59.4)
Change in Inventory (5.4) (5.9) (3.2) (3.4) (3.6)
Change in Short Term Investments (137.2) (150.9) (83.0) (87.1) (91.5)
Change in Accounts Payable 4.6 1.5 0.8 0.8 0.9
Change in Other Current Liabilities 1.4 0.4 0.2 0.3 0.3
Total Changes In Working Capital (365.9) (407.2) (224.0) (235.2) (246.9)
Cash Flow From Operations 969.2 1,177.0 1,419.4 1,470.7 1,522.2
Investment Activities
Change in Total Fixed Assets (218.6) (240.5) (176.4) (185.3) (194.5)
Change in Deposits (15.0) (16.5) (9.1) (9.5) (10.0)
Cash Flow From Investment Activities (233.6) (257.0) (185.5) (194.8) (204.5)
Cash Flow From Financing Activities
Change in Notes Payable (Short-Term) 0.0 0.0 0.0 0.0 0.0
Change in Notes Payable 319.3 228.5 125.7 132.0 138.6
Cash Flow From Financing Activities 319.3 228.5 125.7 132.0 138.6
Net Cash Flow $1,054.8 $1,148.5 $1,359.6 $1,407.9 $1,456.3
Memo:
Change in Fixed Assets (NBV) (138.3) (152.2) (83.7) (87.9) (92.3)
Depreciation and Amortization (80.3) (88.3) (92.7) (97.4) (102.3)
Total Change in Fixed Assets (218.6) (240.5) (176.4) (185.3) (194.5)
Variance To Balance Sheet Dividend $0.0 $0.0 $0.0 $0.0 $0.0
Cash Flow Growth 8.9% 18.4% 3.5% 3.4%
NCF % of Net Income 84.1% 76.8% 87.7% 87.5% 87.4%
Six Frigates Capital Advisory Page 36
Projection Assumptions
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Income Statement Driver 2005 Adj. 2006F 2007F 2008F 2009F 2010F
Revenue Revenue Growth 12.4% 10.0% 10.0% 5.0% 5.0% 5.0%
Officer's Compensation Inflation +2% 5.0% 5.0% 5.0% 5.0% 5.0%
Other Salaries and Wages Inflation +2% 5.0% 5.0% 5.0% 5.0% 5.0%
Rent Inflation 3.0% 3.0% 3.0% 3.0% 3.0%
Payroll Taxes % of Compensation, Salaries and Wages 11.1% 11.1% 11.1% 11.1% 11.1% 11.1%
Truck / Equipment / Auto Expense Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Insurance Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Legal and Professional Fees Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Travel and Entertainment Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Director Fees Inflation 3.0% 3.0% 3.0% 3.0% 3.0%
Pension and Profit Sharing Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Other Operating Expense Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Other Income / (Expense) Revenue Growth 10.0% 10.0% 5.0% 5.0% 5.0%
Depreciation and Amortization % of NBV Adj. Fixed Assets 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
Interest Expense % of Avg. Debt Balance 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
Income Tax Expense At 5 Year Average 38.6% 38.6% 38.6% 38.6% 38.6%
Inflation Assumption 3.0% 3.0% 3.0% 3.0% 3.0%
Balance Sheet Driver 2005 Adj. 2006F 2007F 2008F 2009F 2010F
Cash 2005 % of Revenue 19.2% 19.2% 19.2% 19.2% 19.2% 19.2%
Accounts Receivable (WIP) 2005 % of Revenue 12.2% 12.2% 12.2% 12.2% 12.2% 12.2%
Inventory 2005 % of Revenue 0.7% 0.7% 0.7% 0.7% 0.7% 0.7%
Short Term Investments 2005 % of Revenue 18.8% 18.8% 18.8% 18.8% 18.8% 18.8%
Total Fixed Assets 2005 % of Revenue 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%
Deposits 2005 % of Revenue 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Accounts Payable % of Operating Expenses 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Other Current Liabilities % of Operating Expenses 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Notes Payable Note Payable To Total Assets (From Comps) 37.4% 39.7% 39.7% 39.7% 39.7% 39.7%
Six Frigates Capital Advisory Page 37
Valuation
Six Frigates Capital Advisory Page 38
Income Approach - Discounted Net Cash Flow
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s 2005 2006 2007 2008 2009 2010 2011
Net Cash Flow $1,054.8 $1,148.5 $1,359.6 $1,407.9 $1,456.3 $1,456.3
Terminal Value Multiple 5.91 x
Total 1,054.8 1,148.5 1,359.6 1,407.9 1,456.3 8,612.8
Mid-Year Convention? || Period No 1 2 3 4 5 6
Discount Rate 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%
Present Value Factor 0.82645 0.68301 0.56447 0.46651 0.38554 0.31863
Present Value $871.8 $784.5 $767.5 $656.8 $561.5 $2,744.3
Sum of Present Values $6,386.24
Add: Value of Non-Operating / Excess Assets 1,678.46
Concluded Equity Value $8,064.71
Multiple of 2006F Earnings (x Non-Operating Assets) 5.09 x
Multiple of 2005 Adj. Earnings (x Non-Operating Assets) 6.12 x
Six Frigates Capital Advisory Page 39
Cost of Capital - Net Cash Flow
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Cost of Equity: CAPM Ibbotson Discount Rate Build-Up % Explanation
Where Rsc = Rf + B(Rm-Rf) + SCP1 + SCP2
Risk-Free Long Term U.S. Government Bond Rate Rf + 4.8% SBBI Valuation Edition 2005 Yearbook
Market Equity Risk Premium Above Risk Free Rate 7.2% SBBI Valuation Edition 2005 Yearbook
Industry Beta 1.48 Weighted aggregate of comparable companies
Industry Equity Risk Premium Rm + 10.6%
Add:
Micro Cap Risk Premium SCP1 + 5.0% SBBI Valuation Edition 2005 Yearbook, 10th Decile - 10a (rounded)
Specific Subject Company Factors SCP2 + 1.0% +1 for limited geographic foot print, +1 for key person dependence
-1 for consistent earnings and growth
Concluded Equity Discount Rate (Rounded) Rsc = 21.0%
Less:
Long Term Projected Earnings Growth Rate G - 3.5%
Concluded Equity Capitalization Rate (Rounded) X = 17.5%
Equivalent Earnings Multiple 5.71 x
Equity Terminal Value: Gordon Growth Formula
Where Terminal Value Multiple = (1+G)/(Rsc - G)
Long Term Projected Earnings Growth Rate G + 3.5%
+ 1.0
103.50%
./.
Concluded Equity Discount Rate Rsc + 21.0%
Long Term Projected Earnings Growth Rate G - 3.5%
Concluded Capitalization Rate 17.5%
Concluded Terminal Value Multiple X = 5.91 x
Six Frigates Capital Advisory Page 40
Income Approach - Capitalized Net Debt Free Earnings
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
MV Equity WACC 2005
Adjusted Net Debt Free Earnings $1,112.0
Multiple 7.07 x
Total Capitalization 7,863.1
Add: Value of Non-Operating / Excess Assets 1,678.46
Less: Total Debt June 30, 2005 (1,966.0)
Concluded Equity Value $7,575.5
Six Frigates Capital Advisory Page 41
Weighted Cost of Capital - Net Debt Free Earnings
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Cost of Equity Conversion Calculation: NCF To Net Debt Free Earnings
Actual Projected
Debt Free Earnings 2001 2002 2003 2004 2005 2005 Adj 2006 2007 2008 2009 2010
Pre-Tax Income 685.0 786.0 1,309.0 1,489.0 1,610.0 1,699.5 2,043.4 2,436.1 2,525.3 2,619.4 2,714.6
Addback: Interest Expense 58.0 68.0 94.0 107.0 120.0 120.0 141.6 159.9 171.7 180.3 189.3
Pre-Tax Earnings (Debt-Free) 743.0 854.0 1,403.0 1,596.0 1,730.0 1,819.5 2,185.1 2,596.0 2,697.0 2,799.7 2,903.9
Tax Rate 39.4% 41.2% 37.5% 37.5% 38.9% 38.9% 38.6% 38.6% 38.6% 38.6% 38.6%
Income Tax Expense 292.9 352.0 526.3 598.1 672.7 707.5 843.3 1,001.9 1,040.9 1,080.5 1,120.7
Debt Free Earnings 450.1 502.0 876.7 997.9 1,057.3 1,112.0 1,341.7 1,594.1 1,656.1 1,719.2 1,783.1
Net Cash Flow 141.0 655.0 430.0 (32.0) 1,054.8 1,148.5 1,359.6 1,407.9 1,456.3
Factor DFE / NCF 3.56007 1.33854 2.3207 -33.0419 1.27199 1.38789 1.21804 1.2211 1.22444
Concluded Conversion Factor (2006-2010 Five Year Average) 126.5%
Six Frigates Capital Advisory Page 42
Weighted Cost of Capital - Net Debt Free Earnings
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Debt Weighting (Aggregate Industry Average From Comps) Wd 39.7%
Cost of Debt (Subject Company) Rd x 6.7%
2.6%
1 - Tax Rate (Subject Company) (1-T) x 61.4%
Weighted Cost of Debt WRd = 1.6%
Equity Weighting We 60.3%
Cost of Equity (Subject Company Discount Rate) Re x 21.0%
Discount Rate Conversion Factor x 126.5%
Weighted Cost of Equity WRe 16.0%
Weighted Cost of Debt WRd 1.6%
Weighted Cost of Equity WRe + 16.0%
Weighted Average Cost of Capital WACC = 17.6%
Long Term Projected Earnings Growth Rate G - 3.5%
Concluded Capitalization Rate 14.1%
Concluded Capitalization Multiple 1/X = 7.07 x
Six Frigates Capital Advisory Page 43
Market Approach – Conclusion
Red Bluff Construction
At Fiscal Year Ended June 30, 2005
$1,000,000s
LTM At June 30, 2005 MVIC Multiples
Weighted
Comparable Company Revenue EBITDA EBIT MV Equity L-T Debt MVIC Revenue EBITDA EBIT Beta Beta
Centex $13,314.2 $2,262.7 $2,199.9 $9,511.1 $13,871.5 $23,382.5 1.76 x 10.33 x 10.63 x 1.44 0.61248
Lennar $11,639.4 $2,018.5 $1,959.0 $10,550.7 $3,207.2 $13,757.9 1.18 x 6.82 x 7.02 x 1.50 0.56814
Toll Brothers $4,704.3 $1,029.9 $1,013.3 $8,515.9 $1,723.9 $10,239.8 2.18 x 9.94 x 10.11 x 1.52 0.29777
Aggregate $29,657.9 $5,311.2 $5,172.2 $28,577.7 $18,802.6 $47,380.3 1.60 x 8.92 x 9.16 x 1.48
Aggregate % of MVIC 60.3% 39.7% 100.0%
Mean 1.70 x 9.03 x 9.25 x 1.49
Median 1.76 x 9.94 x 10.11 x 1.50
Std % of Mean 29.3% 21.4% 21.1% 2.8%
Conclusions 6.24 x 1.48
Red Bluff Construction $7,295.0 $1,808.5 $1,819.5 $6,811.6 $4,481.7 $11,293.3
Add: Value of Non-Operating / Excess Assets 1,678.5
Concluded Market Value of Equity $8,490.11
Multiple of EBITDA (x Non-Operating Assets) 6.24 x
Multiple of EBIT (x Non-Operating Assets) 6.21 x
Red Bluff capitalized at aggregate debt to MVIC
Aggregate beta is derived by weighting subject company earnings
Six Frigates Capital Advisory Page 44
Market Approach - Public Company Comparables
Red Bluff Construction
At Fiscal Year Ended June 30, 2005
$1,000,000s
Toll Brothers
Toll Brothers, Inc. engages in designing, building, marketing, and arranging finance for single-family detached and
attached homes in luxury residential communities in the United States. It also involves in building, or converting
existing rental apartment buildings into high-, mid-, and low-rise luxury homes. The company serves move-up,
empty-nester, active-adult, age-qualified, and second-home buyers in 22 states. In addition, Toll Brothers engages in
the land development, architectural, engineering, mortgage, title, landscaping, lumber distribution, house
(1)
component assembly, and manufacturing operations.
+ + -
Year End Q2 YTD Q2 YTD LTM
Financials Oct-04 Apr-05 Apr-04 Q2 2005
Revenue $3,893.1 $2,215.1 $1,403.9 $4,704.3
Operating Expenses 3,137.3 1,704.4 1,167.3 3,674.4
EBITDA 755.8 510.7 236.6 1,029.9
Depreciation and Amortization 15.0 9.0 7.3 16.7
EBIT 740.7 501.8 229.2 1,013.3
Interest Expense 93.3 49.9 35.8 107.5
Pre-Tax Income $647.4 $451.8 $193.5 $905.8
EBITDA Margin 19.4% 23.1% 16.9% 21.9%
EBIT Margin 19.0% 22.7% 16.3% 21.5%
Pre-Tax Margin 16.6% 20.4% 13.8% 19.3%
Total Assets $4,905.6 $5,351.5 $5,351.5
Revenue / Total Assets 79.4% 87.9%
Shares Outstanding Q2, 2005 (Diluted) 83.859
Share Price 101.6
MV Equity $8,515.88
Loans Payable $358.9
Senior Notes 845.9
Senior Subordinated 450.0
Warehouse Loan 69.1
Long-Term Debt Q2 Month End $1,723.9
MVIC $10,239.8
Six Frigates Capital Advisory Page 45
Market Approach - Public Company Comparables
Red Bluff Construction
At Fiscal Year Ended June 30, 2005
$1,000,000s
Lennar
Lennar Corporation operates as a homebuilder in the United States. It engages in the construction and sale of single-
family attached and detached homes, and to a lesser extent multi-level residential buildings. The company also
involves in the purchase, development, and sale of residential land. In addition, Lennar Corporation offers various
financial services, including mortgage financing; title insurance; closing services; and ancillary services, such as high-
(1)
speed Internet and cable television.
+ + -
Year End Q2 YTD Q2 YTD LTM
Financials Nov-04 May-05 May-04 Q2 2005
Revenue $10,504.9 $5,338.7 $4,204.2 $11,639.4
Operating Expenses 8,658.2 4,522.0 3,559.3 9,620.9
EBITDA 1,846.7 816.7 644.9 2,018.5
Depreciation and Amortization 55.6 37.5 33.6 59.5
EBIT 1,791.2 779.2 611.4 1,959.0
Interest Expense 272.1 77.6 64.1 285.6
Pre-Tax Income $1,519.1 $701.6 $547.3 $1,673.4
EBITDA Margin 17.6% 15.3% 15.3% 17.3%
EBIT Margin 17.1% 14.6% 14.5% 16.8%
Pre-Tax Margin 14.5% 13.1% 13.0% 14.4%
Total Assets $9,165.3 $9,605.6 $9,605.6
Revenue / Total Assets 114.6% 121.2%
Shares Outstanding Q2, 2005 (Diluted) 166.284
Share Price 63.5
MV Equity $10,550.72
Senior Notes / Long-Term Debt / Financial Services Q2 Month End $3,207.2
MVIC $13,757.9
Six Frigates Capital Advisory Page 46
Market Approach - Public Company Comparables
Red Bluff Construction
At Fiscal Year Ended June 30, 2005
$1,000,000s
Centex
Centex Corporation, a home building company, engages in purchasing and developing land or lots, and constructing
and selling detached and attached single-family homes and land or lots in the United States. The company markets
its homes to first-time buyers under the Fox & Jacobs brand, as well as to first-time and move-up buyers under the
Centex Homes brand; sells multi-family homes in urban areas under the City Homes brand; and markets homes to
rural lot owners under the Wayne Homes brand, and to second home/resort homebuyers under the Centex
(1)
Destination Properties brand.
+ + -
Year End Q1 YTD Q1 YTD LTM
Financials Mar-05 Jun-05 Jun-04 Q2 2005
Revenue $12,859.7 $3,220.6 $2,766.1 $13,314.2
Operating Expenses 10,741.5 2,680.6 2,370.5 11,051.5
EBITDA 2,118.2 540.1 395.6 2,262.7
Depreciation and Amortization 58.3 16.5 11.9 62.8
EBIT 2,060.0 523.6 383.6 2,199.9
Interest Expense 486.2 149.1 107.8 527.6
Pre-Tax Income $1,573.8 $374.4 $275.9 $1,672.3
EBITDA Margin 16.5% 16.8% 14.3% 17.0%
EBIT Margin 16.0% 16.3% 13.9% 16.5%
Pre-Tax Margin 12.2% 11.6% 10.0% 12.6%
Total Assets $20,011.1 $21,149.4 $21,149.4
Revenue / Total Assets 64.3% 63.0%
Shares Outstanding Q2, 2005 (Diluted) 134.584
Share Price 70.7
MV Equity $9,511.08
Debt - Centex $3,586.4
Debt - Financial Services 10,285.0
Long-Term Debt Q2 Month End $13,871.5
MVIC $23,382.5
(1) Yahoo Finance
Six Frigates Capital Advisory Page 47
Appendices
Six Frigates Capital Advisory Page 48
Control Premiums - Mergerstat Review
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Avg. Premium Median Premium Implied Minority
Year of Buyout Transactions Paid Paid Discount
1980 169 49.9% 46.6% 31.8%
1981 166 48.0% 41.9% 29.5%
1982 176 47.4% 43.5% 30.3%
1983 168 37.7% 34.0% 25.4%
1984 199 37.9% 34.4% 25.6%
1985 331 37.1% 27.7% 21.7%
1986 333 38.2% 29.9% 23.0%
1987 237 38.3% 30.8% 23.5%
1988 410 41.9% 30.9% 23.6%
1989 303 41.0% 29.0% 22.5%
1990 175 42.0% 32.0% 24.2%
1991 137 35.1% 29.4% 22.7%
1992 142 41.0% 34.7% 25.8%
1993 173 38.7% 33.0% 24.8%
1994 260 41.9% 35.0% 25.9%
1995 324 44.7% 29.2% 22.6%
1996 381 36.6% 27.3% 21.4%
1997 487 35.7% 27.5% 21.6%
1998 512 40.7% 30.1% 23.1%
1999 723 43.3% 34.6% 25.7%
2000 574 49.2% 41.1% 29.1%
2001 439 57.2% 40.5% 28.8%
2002 326 59.7% 34.4% 25.6%
Median 41.0% 33.0% 24.8%
Std Dev 6.5% 5.5% 3.0%
% of Mean 15.9% 16.6% 12.0%
Source: NACVA; Business Valuations: Fundamentals, Techniques and Theory
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Marketability Discounts - Summary of Restricted Stock Studies
Red Bluff Construction
Fiscal Year Ended June 30, 2005
$1,000s
Transactions
Study Observed Median Mean
SEC inst. Investors 398 24.0% 26.0%
Gelman 89 33.0% 33.0%
Moroney 146 34.0% 35.0%
Maher 34 33.0% 35.0%
Trout 60 NA 34.0%
Willamette Mgt. 33 31.0% NA
Stryker / Pittock 28 45.0% NA
Silber 69 NA 34.0%
Hall and Polacek 100+ NA 23.0%
Johnson 72 NA 20.0%
CFIA (1) 23 14.0% 21.0%
CFIA (2) 15 9.0% 13.0%
Mgt. Planning (1) 53 25.0% 27.0%
Mgt. Planning (2) 27 9.0% 12.0%
FMV Opinions 243 20.0% 22.0%
Mean 25.2% 25.8%
Std Dev 8.1%
% of Mean 31.5%
Source: NACVA; Business Valuations: Fundamentals, Techniques and Theory
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Compensation Review
Six Frigates Capital Advisory Page 51
Equipment Appraisal
Six Frigates Capital Advisory Page 52
Facility Lease - Survey of Rents
Six Frigates Capital Advisory Page 53
Biography
Six Frigates Capital Advisory is a investment consultancy firm advising clients on issues relating to mergers,
acquisitions and valuation. The company was founded by Dillon Walters who possesses over ten years experience
as investment buyer, seller and intermediary. Mr. Walters is a member of various professional organizations
including the National Association of Certified Valuation Analysts. He hopes to receive certification as an
Accredited Valuation Analyst in the very near future.
Six Frigates Capital Advisory Page 54
