STONE CREEK VINEYARDS
“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 $3.7 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. 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...
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