Stone Creek Vineyards Analysis

March, 2002 STONE CREEK VINEYARDS 2000 “If you accept my offer of $11 million dollars, the employment agreement will allow you and your sister to remain as managers for the next ten years. You will be able to continue to define the styles and tastes of Stone Creek’s red and white table wines, just as you have been doing for the last 9 years and you will be able to implement plans for developing and expanding these brands throughout the United States. Yet, you will be relieved of ownership and financing responsibilities.Together we will continue to build our brands, expand our production and distribution, and move towards producing fine wines for the higher end of the premium market segment. ” This was the essence of the proposal made by Mr. Arthur Malone and a small group of investors to Sally and Nancy Stone, majority owners of Stone Creek Vineyards. He had contacted the Stones after hearing from a mutual acquaintance that they were interested in exploring financial options due to the tremendous success of their recent vintages.Selling these wine operations was an option that had been discussed over the dinner table in Sally Stone’s house for the last few years, but it was always eliminated when final decisions were made, especially after talking to Sally’s sister, Nancy, minority owner of the remainder of the firm.

The timing of Mr. Malone’s proposal came just after everyone at Stone Creek had participated in the harvest of 1999. From mid-September throughout the month of October, every available employee worked long hours to ensure that the grapes were picked at just the right time, carefully transported to the winery, and crushed at their peak of flavor.The result was a record harvest, in terms of volume, and the Stone sisters had every reason to be pleased after another excellent growing season. Although they were physically exhausted, they were also quite optimistic about the quality of this year’s products and continued acceptance of their wines in the marketplace.

Stone Creek Vineyards had experienced strong growth in its business in the second half of the 1990’s. Revenues had been expanding by approximately 20 percent per year since fiscal 1995 and 2000 was expected to continue this trend.Of all the relatively small vineyards in the Napa Valley of California, its performance was exceptional. Sally and Nancy had attended numerous industry trade events over the years.

While private winery owners were quite secretive about their operating characteristics and results, the sisters had recently concluded that Stone Creek was quite competitive with its peers. Profit margins for most firms were in the single digit range while most wineries had experienced revenue growth of 5 to 10 percent per year in the 1990’s.Stone Creek’s success could be traced to careful and skillful choices of grapes planted in different areas with different soil characteristics. The Stone sisters had compiled an enviable record of premium product development as well as increased market acceptance, primarily in California and other western markets. Despite being profitable for the last 14 years the company constantly seemed to be facing a strained cash position and continuously found it necessary to increase its borrowings from the First National Bank of Napa, up to the current level of just over $3. million in January of 2000. Since $3. 8 million was the limit for the bank to lend to any one borrower, individual, or business, with or without guarantees, the Stones would either have to rely on expanded trade credit or move their account to a larger regional bank.

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In the last year, First National of Napa had also required the Stones to guarantee the current loan personally. At the time of the proposal from Mr. Malone, Sally Stone had been actively seeking another banking relationship in which she would be able to negotiate a higher loan limit that did not include a personal guarantee.

COMPETITIVE CHARACTERISTICS OF THE WINE INDUSTRY There were hundreds of wine producers operating in the U. S. in the 1980’s. Most were relatively small and located primarily in California. By the late 1990’s, more than 1500 wineries were in business, yet the top 20 produced approximately 90 percent of all American wine, by volume, and 85 percent, by value, at wholesale. Of these larger firms, a few were publicly held, with readily recognizable names: Robert Mondavi, Beringer, and Canadaigua. Probably the most well-known large firm was the privately owned and operated E & J Gallo Wine Company.

Best known for its large production of less expensive wine labels, the firm had been expanding into the premium varietial market segment with it’s widely acclaimed winery, Gallo of Sonoma. Consolidation among wineries began to accelerate in the early 1990’s, as larger producers decided to buy smaller ones in order to achieve greater economies of scale in marketing and economies of scope in gaining access to more varied distribution channels. Larger wineries could then become more effective in negotiating favorable selling terms with the small number of large, regional distributors.

The “consolidators” were generally public firms that were able to offer predominantly family-run wine businesses a means to greater liquidity of their investment in larger, more diversified operations. Concurrently, the attractiveness of California’s wine industry to entrepreneurs continued un abated as new, small operations were started each year. The wine industry was capital intensive. In addition to land and vineyards, a firm needed investments in crushing facilities, fermentation tanks, and barrels for aging their product. Business risks were also substantial.

Weather conditions could affect the quantity and quality of grape production. Insect damage and disease could affect the grape vines. New vines take 4 to 5 years before commercial production of grapes can be expected. When the grapes are ready, they are picked and carefully brought from the fields to the crushing facility. There is only one crop per year and crushing takes from one to two months. Therefore the investment in this facility is idle at least 10 months of the year. Since all the grapes in a region mature at approximately the same time, there is no way to rent out crushing capacity to other wineries at other times of the year.

Fermentation takes place in stainless steel tanks that are temperature controlled. This process takes only weeks after the crush, so this investment also is idle more than 85 percent of the time. From the fermentation tanks, the wine is put into oak barrels for aging. These barrels are quite costly, at $600 to $700 each and, due to quality concerns, are used for only 4 to 5 years, at which time their value is negligible. A barrel aging facility is a large open space that also must be climate controlled. During the aging process, some wine is lost due to evaporation through the oak.

Over a two year period, about 5% of wine value is lost. WINE PRODUCTION IN THE UNITED STATES The internal structure of the wine industry in America had been undergoing fundamental changes in the 1980’s and 1990’s. In terms of product, the most significant developments were observed in the table wine category. As the largest segment of production and value of shipments at more than 80 percent in the late 1990’s, these products had been responding to changes in the tastes and preferences of consumers for higher quality, premium wines. (Exhibit 1) The grapes used to produce table wines are of varying quality.Varietals are delicate, thin-skinned grapes whose vines usually take approximately four years to begin bearing fruit.

As defined by the Bureau of Alcohol, Tobacco, and Firearms, truth in labeling standards, one variety – the name of a single grape – may be used if not less than 75 percent of the wine was derived from grapes of that variety, the entire 75 percent of which was grown in the labeled appellation of origin. Appellation denoted that “at least 75 percent of a wine’s volume was derived from fruit or agricultural products and grown in place or region indicated. ”?To develop the typical varietal characteristics that result in enhanced flavor, taste, and finish could take another 2-3 years after the four years it takes for newly planted vines to bear fruit. These additional growing periods increased both investment levels, operating expenses, and product quality. “Table” wines are those with 7 to 14 percent alcohol content by volume and are traditionally consumed with food. This is in contrast to other wine products such as sparkling wines (champagnes), wine coolers, pop wines, and fortified wines, which are typically consumed as stand-alone beverages.

Table wines that retail for less than $3. 00 per 750 ml. bottle are generally considered to be generic or “jug” wines, while those selling for more than $3. 00 per bottle are considered premium wines.

Premium wines generally have a vintage date on their labels. This means that the product was made with at least 95 percent of grapes harvested, crushed, and fermented in the calendar year shown on the label and used grapes from an appellation of origin (i. e. Napa Valley, Sonoma Valley, Central Coast, etc. ).

Within the premium wine category, a number of market segments have emerged, based on retail price points.Popular premium wines generally sell for $3. 00 to $7.

00 per bottle, while super premium wines retail for $7. 00 $14. 00. The ultra premium category sells for $14.

00 to $20. 00 per bottle while any retail price above $20. 00 per bottle is considered to be luxury premium. (Exhibit 2) Table wine production in the United States has generally followed the tastes and preferences of the American consumer. Per capita consumption peaked in 1986, at just over two gallons, and then trended downward to just under 1. 5 gallons in 1992.Since that year, growth has continued, to an estimated 1. 9 gallons in 1999.

The real story behind these trends is the changing mix of consumption away from the lower priced product and toward the higher premium categories. COMPANY HISTORY Stone Creek Vineyards was purchased by Sally Stone’s parents in the early 1950’s. They ran the operations with little growth or expansion in mind – it was more of a hobby and labor of love for Sally’s father, Andrew, who left his position as Vice President of a prestigious investment banking firm in the East, in 1953.Andrew and his wife, Shirley, moved west with their two daughters, Sally and Nancy, settled in the Napa Valley and started Stone Creek Vineyards on 45 acres of prime land on the Rutherford bench. They succeeded in producing increasing quantities of highly acclaimed Cabernet Sauvignon and were very content with their life styles. In order to address estate tax concerns, Andrew and Shirley decided to slowly sell partial ownership in the company to Sally and Nancy.

By the time their estates probated in 1991, the sisters owned over 90 percent of the common stock of Stone Creek.Both women graduated from the University of California at Davis. Sally majored in chemistry and then went on for her MBA at Stanford, graduating cum laude in 1987. Nancy majored in marketing, receiving her BBA in 1989. Both were married with young families and husbands whose careers were in other fields of endeavor. They lived in separate homes on the original land purchased by their father.

BUSINESS DEVELOPMENT – THE EARLY 1990S When the Stone sisters took over effective control and management of winemaking operations in 1991, they were faced with some significant challenges.Although their parents truly loved the wine making business they had not been keeping up with many important aspects of its operation. While wine quality remained high, control of grape supply was slipping, as well as grape yields in their owned vineyards. For example, in 1980, an average of 4 ? tons of grapes per acre were being produced, while in 1989 the comparable figure was just under 3 tons. Total production rose in the period only because additional acreage was purchased and developed. The net effects were reduced margins and a business that was on the verge of losing money on an annual basis.

A major decision had to be addressed, and quickly. If the sisters decided against continuing the business, it would have to be sold and its value was declining due to operating expenses rising more rapidly than revenues. If they decided to keep the business, a major commitment of talent, energy, and personal funding would be required, perhaps even more quickly! They decided to arrange a weekend at a Bed and Breakfast in Mendocino with their husbands and without their children.

At the end of that weekend, a decision would have to be made.The Stone sisters had grown up in the Napa Valley. Many of their friends and associates were involved in the wine business. They were aware of the declining competitiveness of their parents winery and were quite confident that they could turn it into a model of modern, progressive wine production, marketing and distribution. Since its current value was quite low, except for the land, selling out now would not generate any substantial funds for their families. Turning the business around and enhancing its position in the industry would create benefits for all concerned.They were also aware of the risks they would be accepting if they took over management and ownership of Stone Creek.

Wine making and grape growing were subject to a variety of agricultural risks. Various diseases and pests as well as extreme weather conditions could materially and adversely affect the quality and quantity of grapes available to the winery. Competition in the premium table wine business was significant, not only from domestic producers but also from growing product imports. Demand was also seasonal, being affected by holiday periods and the date that price changes went into effect.Currently, approximately 70 percent of Stone Creek sales went to commercial accounts, direct to hotels, restaurants, resorts, etc.

The remaining 30 percent went into the wholesale distribution channel. If the firm were to expand production significantly, wholesalers would be the most efficient way to distribute product both locally and throughout the U. S. Their buying power could adversely affect margins as sales continued to grow. These and other aspects of the business as well as the sisters personal lives and ambitions, were discussed during long walks on the beach, as well as a cycling trip up the coast.As they sat down to their last meal in Mendocino, they arrived at their decision. They would stay in the business and develop it into an operation that would make everyone associated with Stone Creek proud to be a part of that organization! All the employees were informed of their decision at a June 1991 afternoon meeting two days after their return.

A hearty round of applause was heard from everyone: winemakers, field hands, administrative personnel, and their husbands! During the next few years, major improvements were made to the vineyards and the winery.Over fifty acres of vineyards were purchased bringing their total acreage under production to 87 by 1993. Another 165 acres were leased from their owners, with control over planting, maintenance, and harvesting in the hands of Stone Creek employees. The results were significant increases in output, requiring a substantial expansion of crushing and processing capacity at the winery. By 1994, almost $2 million had been invested in these aspects of operations, financed with a combination of mortgages and internally generated funds.Grape supply came from three main sources, vineyards owned by Stone Creek or leased to Stone Creek and vineyards owned by other growers, who would plant and maintain grape vines in accordance with guidelines set by Stone Creek managers. If additional wine was needed to meet sales contracts, it would be purchased in bulk from other wineries. In contrast, if more wine was produced than needed, or its quality was not up to Stone Creek standards, it would be sold in the bulk market.

Within the winery, new stainless steel holding tanks were purchased and installed.Barrel aging and warehouse space were acquired and expanded in 1994, just down the road from the winery. With this space in place, capital expenditures for new oak barrels (at $625 each) could be timed to coincide with product demand and growing production. Although they still contracted for the bottling of their wines, an in-house capability was on the drawing boards.

Both of these initiatives would contribute to enhancing operating efficiencies and expanding profit and cash flow margins. Although the in-house bottling operation was planned for 2003, it did not affect revenue or marketing expectations.In 1996, a wine tasting room, small retail shop, and expanded parking lot were built along the Silverado Trail within site of travelers and tourists driving though the valley. To their amazement, people seemed to stream into the facility almost from the day it first opened. Summer weekends were especially busy, with all employees working in a number of areas. Although sales through the tasting room and retail shop were only 3 percent of revenues in 1999, with slightly higher profit margins, their major strategic benefit to the firm was word-of-mouth marketing of their products.

Even Ellen Kruger, Stone Creek’s ccountant and comptroller, expanded her activities by conducting the Tuesday and Saturday 2 PM wine tour and tasting. “It’s good to get out of the office and be involved with other aspects of the business. Winemaking is an exciting operation and a better understanding of the activities and individuals behind the numbers allows me to make more informed and intelligent decisions for Stone Creek. ” ACCEPTANCE IN THE MARKETPLACE Major product categories of Stone Creek were Chardonnay and Sauvignon Blanc for white wine lovers, and Merlot and Cabernet Sauvignon for those choosing a hearty red wine.During the period through 1985, most sales were made locally, to restaurants, retailers, and friends. Some expansion on a geographic basis took place over the next few years, but growth really started to accelerate in the 1990’s, under the direction of Nancy Stone.

Marketing of Stone Creek wines took on a strategically planned approach in 1992. Specific market segments were identified and promotions were designed to maximize the response of each area. Sales reps had been used and they were supplemented with a small, in-house, sales team.Promotions were held periodically, dinners sponsored, and organizations contacted to include Stone Creek products at their functions.

Wine tasting sessions were entered regularly and slowly the quality of Stone Creek wines was being recognized by wholesalers, retailers, and the press. When one of the firm’s Cabernet Sauvignon’s was ranked first at a San Francisco tasting contest in the Fall of 1994, and an article in a leading, national newspaper extolled its virtues, growth accelerated in a manner that no one anticipated or was quite ready to accept.From literally no growth in production or sales volumes in the late 1980’s, a 5 percent per year expansion was realized through 1994. However, after that year growth accelerated to the high teens in terms of volume and the 20 percent level, as measured by revenues (Exhibit 3). All of the efforts of Sally, Nancy, and the employees of Stone Creek blossomed in the strong and expanding market for premium wines in the late 1990’s.

A large distribution firm in the southwest was signed on in 1997 and almost $500,000 worth of sales were made in the first full year of that relationship.By late 1999, negotiations were being finalized with a southeastern distributor to expand sales from Texas east to Florida and as far north as the Carolinas. It seemed that national distribution potential was little more than two years away. Nancy had recently been exploring the marketing potential of a Stone Creek website. Her research efforts through surveys of current customers, especially vacationers to the valley, convinced her that on-line sales could easily reach the $1 million level in less than three years.

Their products were well received wherever they could be tasted and repeat business was exceptionally high. Accessibility of supply in large population centers of the northeast and midwest regions of the U. S.

could result in substantial incremental sales. Internal projections of on-line sales activities suggested to Nancy that they could achieve profit margins of at least 10 percent, compared with current levels of 6 percent in 1999. Distributor profits would be eliminated while shipping and transportation costs would increase along with modest growth in personnel to process orders.One variable that could influence these projections was the proposed taxation of Internet sales. However, there was no way to effectively factor in this possibility, as to either size or timing.

A CHALLENGE TO THE SUCCESS OF STONE CREEK The growing demand for Stone Creek wines was a mixed blessing for Sally and Nancy. Not only had the business become more than a full-time job for both of them, but financing pressures seemed to be growing, even though the firm was profitable.Financial data in Exhibits 4 and 5 show quite clearly how assets and debt levels have grown in the last five years.

The growth of Stone Creek assets had taken advantage of market opportunities in all phases of the business. Property, plant and equipment expanded by 23. 4 percent over the last five years (Exhibit 6). A growing percentage of grape supplies were grown on company owned acreage (Exhibit 7). The fastest growing asset category has been inventory; wine in bulk as well as final, bottled product in warehouses or at retail (Exhibit 8).At a recent wine tasting dinner party sponsored by the company at an up-scale restaurant, Sally was getting reacquainted with a high school classmate, Jeannie Foster-Serrano, who she had not seen in more than 20 years. Jeannie was there accompanied by her husband Jose Serrano. While reminiscing about their fond memories of growing up in the valley, Jeannie mentioned that her family had only recently moved back to San Francisco, after being in San Antonio, Texas.

Mr. Serrano had taken a position as Vice-President and Corporate Loan Officer at Wells Fargo.He became quite interested in the business of Stone Creek and, after hearing of Sally’s current challenges, concluded that his bank clearly had the capacity to meet her firm’s financing needs.

As a devoted consumer of red wines, Mr. Serrano appreciated the 1994 Cabernet Sauvignon served at the party that night. As the party ended and the guests were leaving, Sally reflected on the future of the family business. Continuing on its current business path was exciting and challenging, as well as personally and professionally rewarding. All of the initiatives made by Sally and Nancy were bearing fruit.Products were being accepted in new market areas. The Stone Creek label was gaining status and prestige in wine tasting competitions around the state. Orders were flowing in from distributors, as well as restaurants, and their newly formed wine club.

All these activities pointed to the strong probability of continued revenue growth in the 20 percent neighborhood. Translating these top line projections into a viable and efficient financial strategy was at the top of her agenda as she drove home with her husband after the party. Yet in the back of her mind was the offer from Mr. Malone.MR. SERRANO’S PROPOSAL Since the prime use of funds from a bank loan would be to finance current assets, Mr.

Serrano suggested a revolving secured line of credit for up to $4. 3 million, including standard commitments applying to such a loan. He explained that general bank guidelines at that time were that a revolving credit agreement would be structured based on loan levels of up to 85 percent of accounts receivable, 75 percent of finished goods inventory (cased wine) and 50 percent of other inventory (bulk wine), subject to an annual review of operations by bank representatives.In addition, there would be the requirement that restrictions on additional borrowing would be imposed, net working capital would have to be maintained at an agreed upon level, additional investments in fixed assets could be made only with prior approval of the bank, and withdrawal of funds from the business by either Sally or Nancy would be limited to their current salaries.

Interest would be set on a floating rate basis at 1 ? percentage points over the prime rate, which would be approximately 10. percent in early 2000. Finally, all other financial relations with any other banks would be terminated if the agreement with Wells Fargo took place.

THE FINAL CHALLENGE Sally and Nancy now faced perhaps the biggest decision in their lives. Mr. Malone’s offer was quite tempting. It would allow them to “cash out” of the business while still being “involved. ” Their new salaries would be comparable to those of professional managers in a similar sized winery, approximately $135,000 each in calendar year 1999.They could also expect increases of 5 to 10 percent for each of the next three years. In contrast, if they went with a loan from Wells Fargo, it would allow them to continue operating as they had been for almost the last decade.

Success in the marketplace was very satisfying, but there were also risks. Weather conditions were always critical to grape quality and grape supply. Consumer demand could prove to be fleeting or at least cyclical and they knew all too well that the wine business was capital intensive.A slower growth rate, perhaps well under 10 percent per year, could take pressure off their financing needs, but their recent success in every aspect of the business after so many years and memories of mediocre performance, was intoxicating. Was there any way to balance their business expectations with the financial realities of winemaking operations? It was time for another critical meeting between the sisters.

Sally was quite sure of what position Nancy would take. She had been strongly in favor of continuing on a growth path that seemed to be accelerating.Nancy’s marketing initiatives were being accepted in the marketplace and she was eager to see “just how far we can go with this business. ” Sally was more concerned about the financial pressures and requirements created by Stone Creek’s recent, current, and continued operating characteristics.

The business had responded to changing market conditions for premium wine production and consumption. Yet, even with a solid profit margin on sales and return on equity, she was constantly arranging for additional funds to support operations. How long would it be before these financial pressures subside? We are finally going to repay the loan from our uncle, Bob Wagner, but it seems as if we are just replacing it with more funds from our bank. Are there any other alternative ways to run this business? I’d also like to spend more time with my family and Mr.

Malone’s offer would allow that to take place very soon. ” In early March 2000, Sally and Nancy left the valley for a weekend at Yosemite, this time without their husbands. As they drove down Route 29 towards San Francisco, heir husbands and their children left for the beach wondering what plans and decisions the sisters might bring back to their families in the next two days.

Five hours later the sisters arrived at the park. Instead of staying at the Ahwahnee Hotel in Yosemite Valley and strolling to the base of El Capitan, Half Dome, and Yosemite Falls, they continued south another 30 miles to the town of Wawona. Located on the southern edge of the park, the Wawona Hotel was their final destination. Their momentous decision would be made strolling through the Mariposa Grove of Giant Sequoias.Exhibit 1 Stone Creek Vineyards California Table Wine Shipments In the United States (in millions of cases) 1985-1999 Note: A case contains 9 liters of product.

Source: The Wine Institute; http://www. wineinstitute. org Gomberg, Fredrikson, and Associates, San Francisco, California Exhibit 2 Stone Creek Vineyards California Table Wine Revenues (in billions of dollars) 1985-1999 Note: The following price ranges apply to the above categories, as defined by Gomberg, Fredrikson, and Associates, a well known consulting firm to the wine industry: Jug – Under $3 per bottle (750 ml)Popular Premium – $3 – $7 per bottle (750 ml) Super Premium – $7 – $14 per bottle (750 ml) Ultra Premium – $14 – $20 per bottle (750 ml) Luxury Premium – $ above $20 per bottle (750 ml) Source: The Wine Institute; http://www.

wineinstitute. org Gomberg, Fredrikson, and Associates, San Francisco, California Exhibit 3 Stone Creek Vineyards Consolidated Statement of Earnings (in thousands) Exhibit 4 Stone Creek Vineyards Balance Sheets at Year End (in thousands) Exhibit 5 Stone Creek Vineyards Statement of Cash Flows (in thousands) Exhibit 6 Stone Creek Vineyards Property, Plant, and EquipmentYear End Balances Exhibit 7 Stone Creek Vineyards Grape Supply (in percents) Exhibit 8 Stone Creek Vineyards Inventory Positions at Year End (in thousands) Appendix A The Serrano Report Part I Executive Summary of an Analysis of Financing Alternatives Available to the Owners of Stone Creek Vineyards December, 1999 Pursuant to our recent discussion concerning financing the operations of Stone Creek Vineyards, I have prepared the following report for your evaluation. I believe it will prove helpful in making a decision of utmost importance to both of you personally, as well as members of your families. 1.The operating and financial performance of Stone Creek Vineyards over the last five years has been outstanding. You seem to have met challenges and taken advantage of opportunities in an efficient and effective manner.

However, your revenue growth rate of 20 percent per year has clearly strained your finances. Continuing to grow at this rate for the next few years will require additional external financing and Wells Fargo has the capability to meet those needs. 2. In order to reduce external financing needs you may want to consider postponing some of your new market initiatives and development plans.

It is quite conceivable that reducing expected revenue growth to an average of approximately 10 percent annually could achieve this goal. Expansion would still take place, but it would be more focused on those aspects of operations that are most important to the owners of Stone Creek. 3.

We have estimated that, based on projections using constant profit margins and commensurate internally generated cash flows, Stone Creek could grow its revenues at approximately five percent per year for at least the next three years.Geographic expansion would need to be contained, the web initiative postponed, and company operations focused on current market segments. External financing would be more manageable than it has been over the last few years. Part II Evaluation of the offer of Mr. Arthur Malone to purchase Stone Creek Vineyards for $11 million, with employment agreements for Sally and Nancy Stone. In collaboration with the staff of the Wells Fargo corporate valuation department, the following information is presented for your review and consideration. 1. Mr.

Malone’s offer of $11 million represents a price-earnings multiple of 31 times the latest (1999) earnings of Stone Creek Vineyards. In the public equity markets, average equity multiples have been in the 24 to 27 range, using average stock prices and trailing 12 month earnings per share (EPS). In the packaged food and beverage industry, price-earnings ratios have been under 20 times (excluding Coca Cola, a unique, global enterprise. ) There are only a handful of public companies devoted solely or primarily to the wine industry (Beringer, Mondavi, Canandaigua, Chalone) and their valuations generally fall in the range of 14 to 18. . Using a price/book value of equity, the offer amounts to 3.

77 times. One reason for this relatively high valuation on a historical basis for this industry is that the current value of company assets is probably higher than their historical book value. The price is also based on expected operations rather than historical costs. 3. Land values in the Napa Valley have increased significantly in the last decade, reaching levels of $80,000 to $105,000 per acre in the last year.

Currently, Stone Creek has 99 acres in production, which would equate to a market value of between $7. 92 million and $10. 395 million. Inventories of wine of approximately $6. 4 million are assumed to have a comparable market value.

Other assets, after adjustments to current market values, are estimated at $2. 2 million. Therefore, total assets amount to between $16. 520 million and $18. 995 million.

After eliminating liabilities of $8. 459 million as of year end 1999, Stone Creek equity amounts to between $8. 061 and $10. 536 million.