By Joel Millman and Mike Spector
Harry & David Holdings Inc., the specialty gourmet fruit retailer known for its gift baskets, is preparing to file for Chapter 11 bankruptcy protection as soon as Monday morning, people familiar with the matter said.
The company has reached a so-called "prearranged" deal with creditors under which Harry & David would convert its bond debt to equity, one of these people said. Harry & David would also seek to raise additional capital through a new stock sale that creditors would likely have special rights to participate in, this person said.
UBS AG and Ally Bank plan to provide Harry & David with roughly $100 million in so-called debtor-in-possession financing that would keep the company operating while it's under bankruptcy protection, this person said. Another $50 million to $55 million in bankruptcy financing would come from bondholders, the person said.
Harry & David declined to comment.
It has been assumed here for some time that the 77-year-old company, this region's largest private employer, would seek to restructure under Chapter 11 protection. Burdened by nearly $200 million in short- and long-term obligations, Harry & David has been battered in the recession, with customers cutting back on luxury items like gift baskets of fruits and snacks.
The retailer, which recently breached terms on a revolving credit line and skipped an interest payment due bondholders, has been working with creditors to develop the plan it hopes to execute starting Monday to restructure its balance sheet and operations.
On March 1, the company skipped a $7 million interest payment owed to bondholders, but it remains technically in a "grace period" until Thursday. As of the end of last year, Harry & David had roughly $198 million in bond debt, along with its $105 million revolving-credit facility. That credit line will remain in place under the company's current restructuring plan, the person familiar with the matter said.
Harry & David posted weak holiday results that left it unable to borrow money under the terms of its revolving credit line, prompting the company to explore a recapitalization or other restructuring of its obligations. The inability to borrow under the credit line meant Harry & David couldn't continue to adequately fund operations or make looming debt payments. In a regulatory filing, the company raised doubt about its ability to continue as a going concern.
For the past few months, Harry & David has huddled with law firm Jones Day, investment bank Rothschild Inc. and turnaround firm Alvarez & Marsal in an attempt to restructure and remain viable.
Harry & David's survival has been the main topic of concern in this community of 75,000 for much of the past decade. In 2004 New York private-equity firm Wasserstein & Co. paid $252.9 million to buy the vendor from the Japanese conglomerate Yamanouchi Pharmaceutical Co. in a highly leveraged transaction.
Since then, several controversial decisions—including replacing long-time Harry & David executives and paying the Wasserstein group millions of dollars in annual management fees—have left bitter feelings among many here, especially after the economy soured and layoffs of hourly employees began.
Last April, Harry & David gave pink slips to 80 local employees and then began closing retail stores across the U.S. An additional 100 workers were laid off last month.
With unemployment in surrounding Jackson County close to 12% over the past year, citizens of this city in Southern Oregon have been watching events at Harry & David with increasing trepidation. Rounds of layoffs, and deep cutbacks in benefits, have rippled through the area.
"Everyone's a little bit worried. How can you not be?" remarked Mike Baker, co-owner here of Reter Fruits, a storage facility that does much of its business with Harry & David.
Besides the layoffs, "there's been a total cutback on charitable giving," added Mike Naumes, whose own fruit company was both a collaborator and a competitor of Harry & David. Mr. Naumes was co-chair of a capital campaign to raise $4.2 million for Saint Mary's School of Medford, one of the town's leading private schools. Harry & David had pledged more than $100,000 to the campaign but last year withdrew the offer.
"Things started going south for them, and we felt the impact," said Jim Fredericks, development director for Medford's annual Britt Music Festival. Harry & David was the festival's chief corporate sponsor.
