The specter of possible Chapter 11 bankruptcy hangs over Harry & David Holdings after a woeful Christmas holiday season, in which sales dropped 2 percent off a less-than-stellar performance a year earlier.
With sales in the pivotal Christmas quarter off $5 million and facing a cash-flow crunch, the company announced Tuesday that it has hired two firms frequently involved in corporate restructuring: Rothschild Inc., as a financial adviser, and Jones Day, a legal adviser.
The Medford-based gourmet food and gift company announced preliminary quarterly financial performance along with 12-month results Tuesday, indicating a $57.6 million loss over the previous 12 months, following a $24.7 million loss for the same period the year before. In addition, Harry & David said it is out of compliance with its lender's terms and likely won't be able to tap into a $105 million credit line that was established in July.
The company had a cash flow of $21 million last year, but on the heels of the company's traditional make-or-break quarter, it had a negative cash flow of $17 million as of Dec. 25. That left Harry & David with a $66.9 million cash balance and $57.9 million in accounts payable, a slim cushion. Just around the corner, on March 1, approximately $7 million in interest payments will be due to bondholders.
The company's release listed Neil Augustine, a managing director with Rothschild, as a contact for investors. Augustine has worked on such notable reorganizations as Blockbuster and Dubai World and Borders booksellers.
A major New York bondholder, who asked not to be identified, said the news that Harry & David had retained the two companies made it "pretty much a foregone conclusion the company has to go bankrupt."
Chapter 11 is a form of bankruptcy that involves a reorganization of a company's operations and assets. Named after a chapter of the United States Bankruptcy Code, it is generally used by corporations to provide them time to restructure their debts. Reorganization plans under Chapter 11 must be approved by a bankruptcy court and creditors must approve of the plan.
Calls seeking comment on the announcement were referred to Sard Verbinnen & Co., a public relations agency based in New York.
"The company will be having discussions with its revolving credit lenders, bondholders, other creditors and its owners as it explores all recapitalization alternatives," said spokeswoman Stephanie Pillersdorf of Sard Verbinnen. "At the same time, we will continue to operate and take steps to improve the business and increase profitability."
Chief Executive and Chairman Steve Heyer broke the news of the disappointing financial results to the employees in an e-mail, which was obtained by the Mail Tribune.
In the e-mail, Heyer said Harry & David expanded its customer base during the quarter, but sales fell short of expectations and the company was forced to offer significant discounts.
"As a result, we expect to fall short of the cash level required in our loan agreement and have commenced discussions with our lenders," Heyer wrote. "In an effort to address the Company's financial issues, we have retained advisors to help us evaluate alternatives to fund ongoing operations and support the future growth of the business.
"While I understand this news is disappointing, it is important that we maintain focus on our business ... . Your management team is working closely with the company's advisors to make sure that this process is as smooth as possible and provides us with the best path forward."
In its public announcement, the company said it believes cash on hand is sufficient to fund short-term operations, but it won't be able to finance continuing operations without securing new capital and restructuring its debt.
It has fully repaid revolving-credit loans. However, other financial requirements for borrowing are unmet. Harry & David said it won't be able to extend its borrowing unless loan conditions are amended or restrictions on the line of credit are waived.
The company said it intends to hold discussions with its lenders, bondholders and other creditors in an effort to recapitalize.
Harry & David has long been a key cog in the local economy as well as an iconic face often associated with Southern Oregon by people across the country.
The company had nearly 4,600 salaried and hourly permanent employees nationally at Labor Day and anticipated doubling that number during the holidays.
Pillersdorf said the company is not expecting broad-scale layoffs in the near term.
"Employees will continue to be paid in the ordinary course and will not see any changes to their benefits program at this time," she said.