Harry & David files bankruptcy

Harry & David traded in goodwill and great pears for generations. Now the goodwill has been exchanged for ill feelings and the Royal Riviera pear purveyor is a net debtor.

When Medford-based Harry & David Holdings filed for Chapter 11 bankruptcy protection on Monday, it ushered in a new era.

The company's founder drummed up decades worth of sales in New York City during the Great Depression and spawned a legacy reaching into the 21st century. But the Rogue Valley icon has fallen on hard times, and some say it's because its new owners were too quick to pay themselves following their 2004 acquisition of the gourmet food and gift direct marketer.

The question now before the Delaware bankruptcy court is whether the company can resurrect itself.

Over the weekend, Harry & David Holdings secured support from the holders of about 81 percent of its senior notes on a reorganization plan eliminating most of its debt. With that deal in hand, company officials immediately filed for court protection on Monday morning.

According to court documents, the prearranged agreement guarantees $55 million in newly issued shares will be bought to provide the company the necessary equity financing to emerge from Chapter 11. The Chapter 11 filing, if approved by creditors and a judge, allows a company to restructure its debt and continue operating under the supervision of the bankruptcy court.

"We believe that entering into this agreement provides the best opportunity for Harry & David to restructure its balance sheet on an expedited basis, strengthen its operations and create long-term value, while continuing to provide customers with the highest quality products and service," Kay Hong, chief restructuring officer and interim chief executive officer, said in a statement.

In the bankruptcy filing, Hong said the prearranged Chapter 11 plan will allow Harry & David to operate efficiently while the court oversees the matter, and to avoid adverse consequences.

"Among other things, Harry & David seeks relief aimed at maintaining: loyalty of its customers; confidence of its stakeholders; and morale of employees, Hong said in the filing. "Gaining and retaining the support of these key constituencies is critical to (the company's) efforts to successfully reorganize."

Although several rounds of layoffs in recent years, including at least two since the first of the year, have left the rank and file in limbo, Cassandra Bujarski, a spokeswoman for Sard Verbinnen & Co., a New York public relations firm said: "There are no broad-scale layoffs planned at this time."

Critics of the company's new owners, Wasserstein & Co., have questioned whether the private equity firm should still be calling the shots after giving itself a $100 million dividend on its original $82 million investment while saddling the company with a total of nearly $200 million in debt.

Timothy D. Naegele, former counsel to the Senate Committee on Banking, Housing and Urban Affairs, who practices banking and financial law in Washington, D.C., and Los Angeles is among those who wonder.

"Obviously, when people come in, leverage a buyout, load the company with debt and basically raid the company, everything suffers," Naegele said.

His father began buying Harry & David gifts for his real estate clients following World War II and Naegele continued the practice through 2009. He was pleased with the gifts and service, he said, but moved on to another company as client tastes changed.

"The good people that served the company in your community have been brutalized," Naegele said. "I've dealt with presidents of banks, who for most part are good people. When a leveraged buyout artist comes in, it's another matter. I believe a business is served by building them, not raiding and destroying them, that's what seemed to happen to Harry & David."

The critical question for the community, he said, will surface when Harry & David emerges from reorganization with new management.

"Farmers and growers work their tails off, get hit by weather, international marketing conditions and competition," Naegele said. "It's a very fragile business."

After last spring's late frost cut the Rogue Valley crop nearly in half, the local industry was already staggering. With the industry's biggest name in reorganization mode, it adds to the pressure.

"We're all holding our breath, hoping for the best. A lot of us do a lot of business with them," Mike Naumes, president of Medford-based Naumes Inc., told the Wall Street Journal.

Grant Newton, a Medford resident and executive director for the Association of Insolvency and Restructuring Advisors, said the critical element for Harry & David was securing interim debtor in possession financing.

Circuit City failed in that arena, as did Mervyn's.

"Emerging from Chapter 11 almost debt free and, as long as the economy recovers, Harry & David will make the necessary changes to becoming more efficient in delivering services in what they do best," Newton said.

Harry & David seeks approval to access a $100 million debtor-in-possession credit line to pay for employee wages, benefits and other obligations. The company also has secured a commitment from its current lenders to provide up to $100 million in financing. The company expects no interruptions to customer service, and consumers can continue to purchase Harry & David products online, through catalog orders and at 70 Harry & David stores nationwide. The company finished 2008 with nearly double the number of stores.

In addition to its remaining stores, Harry & David still has leases for 52 other store locations. According to the filing, Harry & David seeks to vacate those leases. The company also leases storage or warehouse space at a dozen locations, costing $19 million annually.

Harry & David said it has approximately 1,950 full-time employees throughout its operation. During calendar year the company generated sales of about $416 million. At the end of its second fiscal quarter, on Dec. 25, 2010, the company had $304 million in assets and approximately $361 million in liabilities.

Reach reporter Greg Stiles at 541-776-4463 or e-mail business@mailtribune.com.

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