Version 2.1

This case was prepared by Robert F. Bruner. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Information about the company has been disguised. Some information on peer firms is fictional and has been added for the sake of deepening student analysis. Copyright 1995 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to dardencases@virginia.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 6/98.

Calaveras Vineyards

In March 1994, Anne Clemens, a senior vice president at Goldengate Capital, received a loan

proposal from Tom Howell, a managing director with NationsBank=s investment-banking group. The brochure described the prospective management acquisition of Calaveras Vineyards and solicited Goldengate=s participation in the $4.5-million senior financing facility. The facility would consist of a $2-million term loan and a revolving credit of up to $2.5 million. Clemens would need to decide quickly whether the proposed terms were attractive, where to position Goldengate in this credit, and whether to offer a counterproposal on terms.

Goldengate Capital was a large West Coast financial institution with main activities in commercial lending, asset-based financing, leasing, mezzanine lending, and equity investing. Clemens had worked with Howell on a previous deal, and had participated in two other business deals structured by him. These had proved to be very profitable deals for Goldengate, so Clemens planned to give this new proposal careful study. NationsBank N.A. was the third-largest financial institution in the United States. Calaveras Vineyards

Calaveras Vineyards was situated on 220 acres in Alameda Valley, California. The vineyards occupied 175 acres. The remaining acres consisted of various equipment sheds (to house the farming equipment), the winery building (containing storage tanks, aging barrels, and a small bottling operation), and a small farmhouse with guestrooms, offices, and the requisite tasting and sales room. Exhibit 1 summarizes the major assets of the vineyard.1

1Clemens had heard that choice vineyard land might sell for between $5,000 and $10,000 an acre, but that acreage was usually sold in units sufficient in size to constitute a winery business. She suspected that, in a forced liquidation, receivables could be sold for 85 percent of face value, and inventory (virtually all of which was finished goods) could be sold for 75 percent of book value, while plant and equipment would fetch 40 percent of book value.

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Calaveras Vineyards was founded by Esteban Calaveras in 1883 to make wine for the Catholic Church. By the 1950s, the winery and vineyard had expanded into the production of table wines for sale to retailers and restaurants. Through the 1960s and 1970s, the Calaveras family, which continued to own the vineyards, made few changes despite dramatic growth in demand for California wines and the entry of large corporations in the production of California wines. Ownership of the vineyard changed hands in 1986, 1990, and 1992, as the vineyard was caught up in a frenzy of deal-doing among large corporate wine producers. With each change, the vineyard changed marketing organizations (i.e., independent firms that managed the sales and marketing of the vineyard=s products). Thus, over the preceding nine years, there had been no fewer than three changes in ownership, and three changes in the marketing organization.

Most recently, Stout PLC, a British conglomerate with interests in alcoholic beverages and branded consumer products, had acquired Calaveras Vineyards in a purchase of a portfolio of vineyards from another conglomerate. Stout had decided to sell Calaveras as part of a drive to focus on large, well-known wine and spirits brands.

Products, marketing, and competition

Despite the many changes in ownership and marketing, Calaveras managed to improve its brand image and market position through a strategy of careful quality control, market segmentation, and capital improvements (such as converting from redwood to oak cooperage, upgrading the winery with a bladder press, and installing a sprinkler system). As a result of these improvements, Calaveras was able to increase its average wholesale prices from $29.52 in 1989 to $44.26 in 1993.

Calaveras=s products could be broken down into five main categories:

1. Estate wines were made and bottled at the winery from a few selected varieties. The Sauvignon Blanc and Cabernet Sauvignon had been highly praised by numerous influential wine writers, while the Petite Sirah was one of Calaveras=s oldest and best-known varieties. All of Calaveras=s estate wines were sold in the superpremium category.

2. Selected-vineyards wines were made from grapes purchased from selected vineyards (under long-term contracts) and aged and bottled separately to preserve their special characteristics. The Chardonnay was highly praised by numerous influential wine writers and had brought prestige to the Calaveras brand. All selected-vineyards wines were sold in the superpremium category.

3. California wines were made from medium-quality Calaveras produce. This category was declining in importance as Calaveras was able to elevate its wines to a higher status and pricing category under either the estate or selected-vineyards programs.

4. Generic wines were made from lesser-quality produce of the estates, selected-vineyards, and California categories.

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5. Special-accounts wines were made from surplus, lesser-quality wine, and from nonvarietal grapes. This wine was sold under special programs to airlines, hotels, and church parishes.

Exhibit 2 summarizes the breakdown of 1993 revenues among these categories.

In recent years, Calaveras=s corporate owners had aimed to lift it out of the bulk-wine category and into the premium-brand segment of the market. Dr. Lynna Martinez was hired in 1987 to develop and implement a strategy to reach this goal. Martinez=s strategy called for developing estate wines that would put the Calaveras brand in the premium category and focusing the product line on a few premium varieties of grapes. Accordingly, Calaveras introduced the Sauvignon Blanc, Cabernet Sauvignon, and Petite Sirah wines and reduced the number of varietal grapes grown at the vineyard from 22 in 1987 to 7 in 1994. In 1990, Martinez introduced the Chardonnay to broaden Calaveras=s position in the premium category. Having attained the goal of moving Calaveras to the premium segment of the wine market, management=s strategy now called for cautious price increases and the development of the special-accounts segment in order to use more fully Calaveras=s wines of lesser quality.

Calaveras management planned to adopt a new marketing company upon consummation of the acquisition. The new company, Winston-Fendall, was well established as a wine marketer on the West Coast, where Calaveras had its strongest sales. Also, Winston-Fendall had just lost its flagship account and promised to position Calaveras in that capacity. The contract with the marketing company called for Winston-Fendall to collect all receivables on behalf of Calaveras and remit them to Calaveras. In addition, Winston-Fendall would pay Calaveras on a nonrecourse basis any receivables that were left unpaid after 90 days. Management believed these requirements would relieve Calaveras of credit risk.

About two-thirds of Calaveras=s case sales were made through its wholesale-distribution network, with most of the remainder sold directly to special commercial accounts, including airlines and hotels. Roughly 60 percent of Calaveras=s wholesale-case sales were sold by its distributors to restaurants. The other 40 percent was sold primarily to high-end retail outlets. Calaveras management planned to make no significant changes in its current wholesale-distribution network. All major distributorships had expressed keen interest in a continuing or increasing relationship with Calaveras. Nine distributors handled 80 percent of total volume, with two distributors in California handling 50 percent of total volume.

Calaveras had developed special commercial accounts with airline and hotel companies, which represented sales volume of approximately 15,000�25,000 cases a year. These accounts permitted Calaveras to sell wine that would ordinarily be sold in bulk. Because these were direct sales, margins to Calaveras were higher than if the cases had been sold through intermediaries. Gigantic Airlines, a major national air-transportation company, purchased 4,000 cases of this wine in 1987 and had raised the volume to 12,715 cases in 1993. At the same time, free-on-board (FOB) prices increased from $21 per case in 1987 to $39.70 per case in 1993. Gigantic had committed to a

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minimum of 16,500 cases in 1994 and had told management that future purchases should be no less than 16,500 cases per year.

A common practice in the industry was to segment demand by price, ranging from �Low Price� (under $2.75 per 750-milliliter equivalent bottle at retail), �Economy� ($2.76�$4.25), �Popular� ($4.26�$5.75), �Premium� ($5.76�$7.50), �Super Premium� ($7.51�$10.00), and �Ultra Premium� ($10.01 and over). Competition in the superpremium and premium wine segments was fragmented. Nevertheless, management identified several brands with characteristics similar to Calaveras, namely, high visibility, a reputation based on a well-respected brand and/or personality of the owners/winemakers, and a competitive position in the superpremium/premium segment. These competitors included Clos du Val, Cakebread, Acacia, Sonoma-Cutrer, and Jordan, all of which were privately owned and typically secretive about their finances and operations.

Nationwide, demand for alcoholic beverages was stagnating. Unit sales of spirits were declining. Dollar sales of beer had grown only 2.2 percent in 1992, less than the rate of inflation. Wine sales in supermarkets, however, had grown 7.4 percent, in part because �. . . supermarket operators are becoming increasingly sophisticated in their selections of quality wines with higher price points, and because they are doing a better job of merchandising.�2 Another source noted:

Domestic table wine, in particular, outshone the overall wine market. . . . In recent years, this category has been fueled by premium California varietals. American consumers have increasingly been moving away from the generic wines popular in the 1970s to the more upscale, higher-quality varietal wines. Several commercial wine manufacturers, most notably Gallo, Heublein, and The Wine Group, have moved into the premium varietal market to reap its profits. And that is what they did in 1991. Both Gallo=s Reserve Cellars and Heublein=s Blossom Hill posted double-digit gains in 1991. . . .3

Offering one unusual explanation for these sales improvements, Standard & Poor=s noted:

Much of the gains can be traced to the continued effects of the publicity surrounding the so-called French Paradox�scientific studies indicating that while the French consume 30 percent more fat per year than do Americans, they have a 40 percent lower incidence of coronary disease. The report gained widespread attention following a program on the subject that first aired on CBS=s 60 Minutes in November 1991. The show aired again in the summer of 1992. In the report, both American and French doctors suggested that the �paradox� could be related to the fact that the French drink more wine than Americans do. The researchers concluded that moderate consumption of alcoholic beverages�particularly red wine�could reduce

2Progressive Grocer (July 1993): 74. 3Jobson’s Wine Marketing Handbook 1992 (New York: Jobson Publishing Corporation, 1992), 6.

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the risk of heart disease by as much as half. There has been a significant upturn in wine sales, especially red wine, since the 60 Minutes report aired.4

Operations

The vineyard supplied about half the grape requirements of the Calaveras winery. Exhibit 3

details the acreage under production and the yield by variety of grape. To fulfill its grape requirements, the new company would assume two long-term supply contracts from Stout PLC. Exhibit 4 outlines the purchase terms under these contracts for 1993. Clemens learned that the price under these long-term contracts was variable with the market; she assumed that this year=s price per ton would be a fair predictor of next year=s price, although the uncertainty about the cost of goods meant that gross margins for each of the product lines could vary by as much as 4 percent up or down from target. She assumed that gross margins had a standard deviation of 2 percent.

The production of wine from grapes entailed four main steps: crushing, fermenting, aging, and bottling. The winery was located on the vineyard property, with total capacity of approximately 65,000 cases per year for estate and selected-vineyards production. Although the winery had adequate production capacity in most areas, a moderate amount of fermentation, storage, and aging capacity was leased from Seraphim Winery, a neighbor. Also, all finished bottled goods were warehoused at Seraphim.

Management

Management of the new company would be headed by Dr. Lynna Martinez, who was vice president and general manager of the property for Stout PLC. The operations manager, Peter Newsome, would remain in that capacity. Martinez would purchase 85 percent of the equity of the new company; Newsome would purchase the remaining 15 percent. Exhibit 5 presents abbreviated résumés for these individuals.

Historical financial performance

Stout PLC had provided pro forma historical profit-and-loss statements and balance sheets for Calaveras=s fiscal years ended March 1990, 1991, 1992, and 1993. These statements are presented in Exhibit 6. Management believed that sales and operating profit were approximately as follows:

1991 1992 1993 Sales $2,848 $2,836 $2,534 Operating cash flow $ (54) $ 13 $ 260 (all values in thousands) 4Standard & Poor�s Industry Surveys (August 26, 1993): F31.

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Sales increased from $2.4 million in 1990 to $2.8 million in 1991 and 1992 as Calaveras=s strategy of introducing premium wines began to show tangible results with increasing average prices. Sales dropped to $2.5 million in 1993 as Stout=s dismantling of its vineyard operations began to have an impact on Calaveras=s volumes; in particular, Calaveras had no effective sales organization representing it. Operating cash flow improved dramatically because of increased average prices for Calaveras wines. Financial projections

Management had developed a financial forecast with the assistance of the prominent accounting firm Ernst and Anderson. Forecast balance sheets, income statement, and assumptions are given in Exhibits 7, 8, and 9, respectively. Because many factors varied predictably with the planned production level, the primary variable was case revenues. Management had developed what it believed was a conservative projection of case sales, which took into account three main factors: case-sales trends and demand, inflation, and real price increases reflecting Calaveras=s strengthening brand recognition.

Historical and projected case sales are given in Exhibits 10 and 11. Sales in Calaveras Vineyards= first year were expected to rebound to the levels of 1992, as the company=s marketing effort was revitalized. Case-sales forecasts for the second year and beyond represented a continuation of the increasing demand for Calaveras=s estate Sauvignon Blanc, Cabernet Sauvignon, and selected-vineyard=s Chardonnay, while recognizing the constraints of vineyard and production capacity for these and other varieties�overall, this displayed a shift in product mix toward white wines. Clemens learned that the theoretical maximum capacity of the winery was 110,000 cases per year. Without further information, she assumed that, to sustain unit growth shown in the forecasts, it would be necessary to invest $350,000 per year starting in 1996, rather than the $250,000 per year shown in the loan-proposal forecast. The forecast also showed an ambitious real growth rate in unit prices of 2 percent. Anne Clemens wondered how long real price growth could continue, and generally believed that it was an especially uncertain number.5 In defense of this assumption, the proposal document pointed to the strong past success of Lynna Martinez in elevating the winery=s brand recognition and shifting the product mix into the higher-price categories.

For the sake of comparison, Anne Clemens=s assistant had gathered information on manufacturers of wine and brandy (Exhibit 12). Unfortunately, there were very few publicly listed �pure-play� firms comparable to Calaveras. Clemens=s assistant had identified three possible comparables, all traded over-the-counter:

! Canandaigua Wine Company was the second-largest producer of wines in the United States, with sales in 1993 of $471 million. Once derisively called �Chateau Screwcap� and �a

5Indeed, Clemens believed that real price growth could vary between +3 percent and −1 percent with equal probability.

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wino=s winemaker�6 for its focus on low-price product segments, the firm was building a record of solid growth and profit improvement through the acquisition and consolidation of small wineries. The firm was located in upstate New York.

! Finn & Sawyer Wine Company had sales of $25 million and was headquartered in Mendocino, California. It operated four California vineyards and produced only ultrapremium and superpremium wines.

! Frogg=s Jump Winery, Inc., had sales of $67 million and was located in Livermore Valley, California. This firm specialized in the production of private-label wines for hotels, resorts, and airlines, and in servicing the higher-volume wine needs of wine-cooler manufacturers and of large religious organizations.

Valuation information about these firms included the following:

Canandaigua

Finn & Sawyer

Frogg====s Jump

Beta (levered)7

0.59

1.35

0.95

Beta (unlevered)

0.54

1.312

0.867

Book value debt/equity ratio

0.86

0.12

0.35

Market value debt/equity ratio

0.277

0.048

0.156

Market/book ratio

3.11

2.50

2.25

Price/earnings ratio (on expected EPS)

14

13

15

Tax rate

38%

40%

39%

Expected EPS growth rate, next 5 years

25%

11%

14%

Clemens was conscious of the fact that Calaveras was a considerably smaller company than any of these comparables and that, with the performance turnaround and change in management, some conservative equity investors might demand a venture-capital type of return from Calaveras. Target venture-capital equity returns were at least 30 percent. As for future financing, Clemens believed that Calaveras would gravitate toward the industry-average capital structure.

6Jay Palmer, �Sampling Chateau Screwcap,� Barron’s (July 20, 1992): 36. 7These betas are taken from Value Line and casewriter analysis. Such betas are estimated by regressing the difference between return on the company and the risk-free rates of return against the equity-market premium (calculated as the return on a large portfolio of stocks including both large and small capitalization companies less the risk-free rate of return).

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In the first quarter of 1994, long-term corporate interest rates had risen 150 basis points on fears of rising inflation. Similarly, the stock-market indexes had receded 4 percent. Exhibit 13 gives a summary of historical rates of inflation in recent years. Clemens learned that between 1926 and 1992 inflation averaged 3.1 percent per year and had a standard deviation of 4.7 percent. Exhibit 14 presents information on current capital-market conditions. Conclusion

The specific terms of financing would need to be determined through negotiations between the buyers and their creditors. The NationsBank proposal, however, contemplated the following structure at closing:

Uses of Funds Sources of Funds (in millions of dollars) (in millions of dollars)

Net working capital8 $2,116 Revolving loan $1,122 Land 1,124 Term loan 2,000 Plant and equipment 582 Equity investment 1,000 Organization expenses 300 Total uses $4,122 Total sources $4,122

NationsBank had proposed that the revolving loan be secured by accounts receivable and inventory. The maximum commitment under the revolver would be $2.5 million, though the borrowing base (the amount actually permitted to be outstanding under the loan) would be equal to 85 percent of receivables and 75 percent of inventories.9 The interest rate on the revolving loan would be prime plus 2.0 percent. The term loan would amortize equally over five years, and would be secured by land, plant, and equipment. The interest rate on the term loan would be prime plus 3.0 percent. The prime rate was currently 6.75 percent.10 As a rough initial assumption, Anne Clemens decided to assume a total interest rate of 9.5 percent on both the revolver and term loan. Also, Clemens assumed that, over the long term, Martinez would lever Calaveras=s balance sheet at levels typical for other wine-producing companies, and proposed to use a discount rate consistent with this assumption.

The proposal from Tom Howell noted that Calaveras was currently carried on Stout=s books for approximately $7 million and that the fair market value of the assets of Calaveras was estimated 8Net working capital at closing was projected to be the sum of cash ($50,000) and inventory ($2,196,000) less payables and accruals ($130,000). 9Privately, Anne Clemens estimated that, in liquidation, a sale of the plant and equipment would fetch a value equal to only 40 percent of their gross book value. 10Anne Clemens believed that changes in the prime rate of interest were normally distributed with a mean of zero and a standard deviation of about 1.75 percent.

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to be $5�$7 million. Therefore, the purchase price for the assets of the firm of $4.122 million represented a significant discount.

Anne Clemens had to decide quickly whether to participate in this deal, and how. Could the new company service the debt? What was the value of the assets on both an asset and a cash-flow basis? What were the �key drivers� of these values, and how sensitive were the values to variations in those assumptions? How attractive was this deal from the standpoint of the equity investors? Should she propose alternative terms, and if so, what should they be?

As the sun set over the Pacific Ocean, Clemens decided to tackle these questions with the help of her assistant. After telephoning for supper from a nearby deli, she booted up her computer and accessed the spreadsheet model of the financial forecast that her assistant had prepared.

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Exhibit 1 CALAVERAS VINEYARDS Summary of Major Assets Acreage: 220 gross acres

175 planted acres Buildings: 8 structures (2 of wood frame and batten siding; 6 of metal sides and roof, and

concrete floor). Grape-crushing equipment Bottling equipment (@ 70 bottles per minute) Cooperage: 40 stainless-steel tanks; 254,774 gallons capacity.

33 wooden tanks; 61,298 gallons capacity. 1,161 French oak barrels; 69,760 gallons capacity. 1,197 barrels used for generic wines; 63,667 gallons capacity.

Source: NationsBank offering document.

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Exhibit 2 CALAVERAS VINEYARDS Breakdown of 1993 Revenues by Product Category

Products Percentage of 1993 Revenues

Estates Sauvignon Blanc (w) 13.8% Cabernet Sauvignon (r) 8.6 Petite Sirah (r) 4.5

Selected vineyards

Chardonnay (w) 30.0 Sauvignon/Fume Blanc (w) 4.9 White Zinfandel (w) 2.5

California

Petite Sirah (r) 8.1 Chenin Blanc (w) 1.6 Other (r) 0.4

Generic

White table wine 6.9 Red table wine 2.1

Special accounts (r,w) 16.6

Total 100.0%

Note: �r� indicates a red wine; �w� indicates a white wine. Source: NationsBank proposal document.

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Exhibit 3 CALAVERAS VINEYARDS Summary of Acres under Production and Tons per Acre by Variety of Grape

Variety and Acres Growing in 1993

1991 Tons/Acre

1992 Tons/Acre

1993 Tons/Acre

Sauvignon Blanc (71 acres)

3.4

3.1

2.9

Semillon (20.1 acres)

4.4

4.7

3.4

Chenin Blanc (5.7 acres)

7.5

11.9

7.3

White Riesling (7.8 acres)

3.0

2.4

1.4

Muscat Blanc (0 acres)

2.7

0.8

0

White total (107.15 acres)

3.7

3.7

3.0

Cabernet Sauvignon (40.5 acres)

2.8

2.9

2.8

Petite Sirah (26.7 acres)

2.9

2.7

2.2

Red total (67.2 acres)

2.8

2.8

2.5

Grand total (174.35 acres)

3.4

3.4

2.8

Notes: 1. Tonnage figures have been rounded from the actual. In 1989, 50 acres of the 175 were replanted.

This acreage has not yet reached full production.

2. The grand total tons/acre is a weighted average (by acres) of the yield for red and white wine grapes. Source: NationsBank proposal document.

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Exhibit 4 CALAVERAS VINEYARDS Summary of Purchases in 1993 of Grapes under Long-Term Contract

Acres

Price/Ton

Tons

Years Remaining

Pricing Changes

Contract with Helsingor Vineyards Chardonnay Sauvignon Blanc Pinot Blanc

96.0 35.0 27.0

$750.76 469.90 $583.58

320 140 100

9 years

Variable at market

Contract with Cleaver Winery Zinfandel

15.0

$412.90

50

3 years

Variable at market

Source: NationsBank proposal document.

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Exhibit 5 CALAVERAS VINEYARDS Résumés for Martinez and Newsome Lynna Martinez Position Vice president/general manager and winemaker, Calaveras Vineyard, Alameda

California (1987 - present). Education University of Burgundy, Dijon, France. Degrees, Diplôme des Hautes Honneurs,

Microbiology.

University of California at Davis. Degrees: M.S. Food Science/Ph.D. Microbiology. Experience: 1980-81 Technical director - Casa Blanca Winery, Trujillo, Mexico 1981-84 Technical director/winemaker - Domaine Millar, Fresno, California 1984-87 Winemaker - Bullion Vineyards, La Plata, California Other Training in family-owned winery and distillery. Teaching and research assistant at

Department of Viticulture and Enology, University of California at Davis. Numerous training trips to Europe to gain experience in champagne and white-wine technology at the Moet et Chandon installation in Epernay.

Peter Newsome Position Operations manager. Education Macquarrie University, Australia. Degree in business administration. Experience 1984-86 Tasting-room manager. 1986-93 Manager of purchasing and warehousing. 1993 to present Operations manager. Source: NationsBank proposal document.

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Exhibit 6 CALAVERAS VINEYARDS Pro Forma Historical Financial Statements

1990 1991 1992 1993 Profit-and-Loss Statement Net sales $2,378,041 $2,847,763 $2,836,062 $2,534,255 Cost of sales 1,992,461 1,782,811 2,197,367 1,779,809 Winery (under)/over absorbed costs 0 (612,000) (96,998) (53,303) Gross profit 385,580 482,952 541,697 701,143 Mktg. and advt. 62,354 109,647 103,047 61,333 Sell. and admin. 356,706 427,164 425,409 380,138 Total expenses 419,060 536,811 528,456 441,471 Opng. profit (33,480) (53,859) 13,241 259,672 Balance Sheets Cash 331,856 52,385 7,379 24,769 Receivables 337,492 397,864 354,508 316,782 Inventories 2,570,861 2,461,174 1,806,339 2,332,241 Prepaid exp. 1,083 1,179 8,191 0 Total current assets 3,241,292 2,912,602 2,176,417 2,673,792 Fixed assets Cost 3,984,287 4,303,372 4,429,552 4,487,193 Accum. depr. 178,484 377,253 771,765 1,067,086 Net fixed assets 3,805,803 3,926,119 3,657,787 3,420,107 Intangibles 486,822 340,421 493,656 62,233 Total assets 7,533,917 7,197,142 6,327,860 6,156,132 Trade liabs. 166,254 217,290 95,410 78,853 Parent equity and advances 7,367,663 6,961,852 6,232,450 6,077,279 Total liabilities and equity $7,533,917 $7,179,142 $6,327,860 $6,156,132 Source: NationsBank proposal document. Figures have been disguised.

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Exhibit 7 CALAVERAS VINEYARDS Forecast Income Statement (all values in thousands)

1994

1995

1996

1997

1998 Sales revenue

$3,704

$4,193

$4,681

$4,967

$5,348 Cost of goods sold

Estates

422

560

638

664

781 Selected

259

310

365

380

395 Chardonnay

412

509

613

696

724 California

177

120

124

129

135 Generic

215

224

233

242

252 Special accts.

625

650

677

704

732 Winery

85

88

92

96

100 Total

(2,196)

(2,461)

(2,742)

(2,911)

(3,119) Gross profit

1,508

1,731

1,939

2,056

2,229 Selling, general and admin.

(519)

(587)

(655)

(695)

(749) Amortization of organizational costs

(60)

(60)

(60)

(60)

(60) EBIT

930

1,085

1,224

1,301

1,420 Interest expense (avg. balance)

(306)

(308)

(280)

(235)

(173) Profit before taxes

624

777

944

1,066

1,247 Tax expense

231

287

349

394

461 Net income

$393

$489

$594

$671

$786

Dividends to common shareholders

0

0

0

0

0 Retentions to equity

$393

$489

$594

$671

$786

_____________________________ Source: Casewriter�s analysis, drawing on NationsBank proposal document. Figures have been disguised.

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Exhibit 8 CALAVERAS VINEYARDS Forecast Balance Sheets (all values in thousands)

(At Closing)

1994

1995

1996

1997

1998 Cash

$50

$50

$50

$50

$50

$50 Accounts receivable

0

370

419

468

497

535 Inventory

2,196

2,461

2,742

2,911

3,119

3,245 Organization costs, current

60

60

60

60

60

0 Total current assets

2,306

2,942

3,272

3,489

3,726

3,830 Land

1,124

1,124

1,124

1,124

1,124

1,124 Plant and equipment

582

832

1,082

1,332

1,582

1,832 Gross PP&E

1,706

1,956

2,206

2,456

2,706

2,956 Accum. depreciation

0

116

283

499

766

1,082 Net PP&E

1,706

1,840

1,923

1,957

1,940

1,874 Organization costs, noncurrent

240

180

120

60

0

0 Total assets

$4,252

$4,961

$5,315

$5,506

$5,666

$5,704

Payables and accruals

$130

$246

$274

$291

$312

$324 Debt, current portion LTD

400

400

400

400

400

0 Revolving line of credit

1,122

1,722

1,958

1,938

1,806

1,446 Total current liabs.

1,652

2,368

2,633

2,630

2,518

1,770 Debt, noncurrent

1,600

1,200

800

400

0

0 Total liabilities

3,252

3,568

3,433

3,030

2,518

1,770 Common stock

1,000

1,000

1,000

1,000

1,000

1,000 Retained earnings

0

393

882

1,477

2,148

2,934 Total equity

1,000

1,393

1,882

2,477

3,148

3,934 Total liabilities and equity

$4,252

$4,961

$5,315

$5,506

$5,666

$5,704 Memorandum:

Borrowing base (85% AR, 75% Inv.)

$1,647

$2,161

$2,413

$2,581

$2,761

$2,888 Revolver

$1,122

$1,722

$1,958

$1,938

$1,806

$1,446 _____________________________ Source: Casewriter�s analysis, drawing on NationsBank proposal document. Figures have been disguised.

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Exhibit 9 CALAVERAS VINEYARDS Forecast Assumptions Summary of Key Assumptions Case sales

Exh. 11

Cash minimum (m)

$50 $/Case

Exh. 11

AR/sales

0.10 Gross margins

INV(T)/COGS(T+1)

1.00 Estates

0.50

CL(T)/COGS(T+1)

0.10 Select, other

0.38

SGA/sales

0.14 Chardonnay

0.40

Depreciation

5-yr, S-L California

0.36

Cap. exp.

250 Generic

0.29

Interest rate

9.50% Special accts.

0.38

Tax rate

37.00% Winery

0.49

Inflation rate

2.00% Dividend payout:

Real price growth

2.00% Now-1996

0%

Amort. organization costs

5 years 1997 and after

0%

Discussion of Certain Assumptions 1. Production and inventory. Grapes are processed into wine in the year of harvest and all wine processed is sold

approximately one year after processing, with the exception of Estate Reds (about 10 percent of production), which are sold two years after processing. The forecast assumes overall average processing time of one year. Thus, cost of sales and current liabilities are based on costs capitalized the previous year.

2. Beyond the forecast period, prices are expected to increase 2 percent per year, before inflation. This is consistent

with management=s strategy of lifting the brand recognition of Calaveras Vineyards wines, and of improving the quality of all wines.

3. Depreciation is based on a five-year average life of allocated asset (purchased) values. Assets are depreciated

using the straight-line method. 4. The tax rate is a blended Federal and California State blended rate of 37 percent. There are no significant

differences between book and tax income. 5. Organization costs of $300,000 will be amortized over five years. These cash costs were to be paid at closing and

would consist mainly of legal, accounting, and financial advisory fees incurred to consummate the transaction. 6. The vineyard yield per acre and production rate per ton of grapes are expected to remain constant. 7. The term loan is assumed to be amortized over five years. The interest rate of the term loan and revolver is

assumed constant at 9.5 percent, 25 basis points lower than currently to reflect the expected moderation of inflation over the longer term.

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Exhibit 10 CALAVERAS VINEYARDS Historical Case Sales and Prices

1991 1991 1992 1992 1993 1993 Cases $/Case Cases $/Case Cases $/Case

Estates Sauvignon Blanc (w) 4,436 $46.85 2,924 $48.25 6,133 $49.70 Cabernet Sauvignon (r) 3,258 45.56 2,887 46.92 2,993 48.33 Petite Sirah (r) 2,547 46.42 1,574 47.82 1,599 49.25

Select vineyards

Chardonnay (w) 8,633 38.88 16,537 40.05 11,569 41.25 Sauvignon/Fume Blanc (w) 11,794 37.85 9,750 38.98 3,444 40.15 White/Rose Zinfandel (w) 5,835 38.03 4,482 39.17 2,112 40.35

California

Petite Sirah (r) 9,472 32.52 7,666 33.50 5,864 34.50 Chenin Blanc (w) 5,393 33.13 5,210 34.13 1,353 35.15 Other (r) 7,299 30.73 1,350 31.65 322 32.60

Generic

White table wine 17,685 22.42 13,301 23.10 7,716 23.79 Red table wine 4,657 20.09 2,976 20.69 2,337 21.31

Total wholesale 81,009 68,657 45,442

Special accounts

Hotels (w,r) 0 37.61 0 38.74 2,090 39.90 Gigantic Airlines (w,r) 11,320 37.42 23,465 38.54 12,715 39.70 Altar wines (w,r) 2,388 41.59 2,157 42.83 3,155 44.12

Winery (w,r) 3,633 $54.15 2,957 $55.78 2,188 $57.45

Total nonwholesale 17,341 28,579 20,148 Total case sales 98,350 97,236 65,590

Note: �r� indicates a red wine; �w� indicates a white wine. Source: NationsBank proposal document and casewriter�s analysis.

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1994 1994 1995 1995 1996 1996 1997 1997 1998 1998Cases $/Case Cases $/Case Cases $/Case Cases $/Case Cases $/Case

Estates Sauvignon Blanc 9,000 51.71$ 12,000 53.80$ 14,000 55.97$ 14,000 58.23$ 16,000 60.58$ Cabernet Sauvignon 5,000 50.28$ 6,000 52.31$ 6,000 54.43$ 6,000 56.63$ 7,000 58.91$ Petite Sirah 2,500 51.24$ 3,000 53.31$ 3,000 55.46$ 3,000 57.70$ 3,000 60.04$

Select vineyards Chardonnay 16,000 42.92$ 19,000 44.65$ 22,000 46.45$ 24,000 48.33$ 24,000 50.28$ Savignon/Fume Blanc 8,000 41.77$ 8,000 43.46$ 8,000 45.22$ 8,000 47.04$ 8,000 48.94$ White/Rosé Zinfandel 2,000 41.98$ 3,500 43.68$ 5,000 45.44$ 5,000 47.28$ 5,000 49.19$

California Petite Sirah 5,000 35.89$ 5,000 37.34$ 5,000 38.85$ 5,000 40.42$ 5,000 42.06$ Chenin Blanc 1,728 36.57$ 0 38.05$ 0 39.58$ 0 41.18$ 0 42.85$ Other 1,000 33.92$ 0 35.29$ 0 36.71$ 0 38.20$ 0 39.74$

Generic White table wine 10,000 24.75$ 10,000 25.75$ 10,000 26.79$ 10,000 27.87$ 10,000 29.00$ Red table wine 2,500 22.17$ 2,500 23.07$ 2,500 24.00$ 2,500 24.97$ 2,500 25.98$

Total wholesale 62,728 69,000 75,500 77,500 80,500

Special accounts Hotels 4,000 41.51$ 4,000 43.19$ 4,000 44.93$ 4,000 46.75$ 4,000 48.64$ Gigantic Airlines 16,500 41.30$ 16,500 42.97$ 16,500 44.71$ 16,500 46.51$ 16,500 48.39$ Altar wines 3,500 45.90$ 3,500 47.76$ 3,500 49.69$ 3,500 51.69$ 3,500 53.78$

Winery 2,790 59.77$ 2,790 62.19$ 2,790 64.70$ 2,790 67.31$ 2,790 70.03$

Total nonwholesale 26,790 26,790 26,790 26,790 26,790

Total case sales 89,518 95,790 102,290 104,290 107,290

Exhibit 11 CALAVERAS VINEYARDS Forecast Case Sales and Prices

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Exhibit 12 CALAVERAS VINEYARDS Comparative Information on Manufacturers of Wine and Brandy (81 establishments for 1993)

Percentage Average of Assets

Financial Statement Dollar Amount or Sales Cash $ 59,256 4.6% Accounts receivable 99,189 7.7 Notes receivable 6,441 0.5 Inventory 560,356 43.5 Other current 25,763 2.0 Total current 751,005 58.3 Fixed assets 376,147 29.2 Other noncurrent 161,022 12.5 Total assets 1,288,174 100.0 Accounts payable 95,325 7.4 Bank loans 0 0.0 Notes payable 76,002 5.9 Other current 204,820 15.9 Total current 376,147 29.2 Other long-term liabilities 235,736 18.3 Deferred credits 2,576 0.2 Net worth 673,715 52.3 Total liabs. and net worth 1,288,174 100.0 Net sales 752,554 100.0 Gross profit 298,011 39.6 Net profit $ 14,299 1.9% Ratios Upper Quartile Median Lower Quartile Solvency Quick ratio (×) 1.2× 0.4× 0.2× Current ratio (×) 5.5 2.5 1.5 Curr. liab. to net worth (%) 8.0 44.0 102.7 Total liab. to net worth (%) 28.8 103.4 186.4 Efficiency Collection period (days) 29.2 51.3 69.2 Sales to inventory (×) 2.6 1.4 0.8 Assets to sales (%) 95.8 136.7 287.9 Acct. payable to sales (%) 4.9 11.3 17.7 Profitability Return on sales (%) 7.3 2.8 (0.2) Return on assets (%) 8.1 2.3 (0.1) Return on net worth (%) 16.6 7.7 1.1 Source: Industry Norms and Key Business Ratios (Dun & Bradstreet Business Services, 1994).

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Exhibit 13 CALAVERAS VINEYARDS A Summary of Industry Rates of Inflation in 1991

Percentage Change in 1991

Producer Price Index Wine, brandy, and brandy spirits Grape table wine White wine Red wine Rosé wine All farm products

3.4% 4.2 3.3 4.4 6.6

B6.3% Consumer Price Index Wine Total beverage alcohol Food All items

13.6% 10.5 2.9

4.2% Source: Jobson’s Wine Marketing Handbook 1992 (New York: Jobson Publishing Corporation, 1992).

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Exhibit 14 CALAVERAS VINEYARDS Current Capital-Market Conditions (February 28, 1994) Interest Rates

Fed. funds 3.75% Prime rate 6.75% 90-day T-bills 3.25% 30-year T-bonds 5.85% Corporate bonds (10+ years)

High quality 7.0% Medium quality 7.3% High yield 9.35%

Stock Market P/E multiples

Dow 14.5× S&P500 15.5× NASDAQ 16.8×

Average Equity Market Premiums (1926�92)

Geometric Arithmetic Mean Premium Mean Premium

Returns on all common stock less returns on:

Long-term government bonds 5.5% 7.2% U.S. Treasury bills 6.6% 8.6%

Returns on small-company stocks less returns on:

Long-term government bonds 7.4% 12.4% U.S. Treasury bills 8.5% 13.8%

Sources: Federal Reserve Board Bulletin; 1993 Yearbook, Stocks, Bonds, Bills, and Inflation (Ibbotson Associates).