Harry & David Holdings' days in its present form are numbered.

Harry & David Holdings' days in its present form are numbered.

The Medford-based gourmet food and gift company reaffirmed its tenuous financial situation Tuesday when it released its official second fiscal quarter 2011 results, largely mirroring a preliminary report on Jan. 18, stating its Christmas sales had declined and it had lost $57.6 million during calendar year 2010.

"Based on (Harry & David's) current working capital and anticipated working capital requirements, the company will not be able to finance continuing operations, including servicing its payment obligations under its senior notes, without securing new capital and restructuring its obligations," the Rogue Valley's largest agriculture-related business said in its release.

"The company intends to conduct discussions with its revolving credit lenders, bondholders, other creditors and owners in an effort to recapitalize. There can be no assurance that our efforts to obtain new capital and restructure our obligations will be successful, and therefore, there is substantial doubt as to our ability to continue as a going concern."

In January, the company said it has hired Rothschild Inc. as a financial adviser and Jones Day as legal adviser in its efforts to reorganize.

Interest payments of $7 million on the company's bonds are due March 1.

That looming obligation and a growing inability to pay vendors for components used in its operation have painted the venerable company into a corner.

In recent weeks, credit ratings agencies Standard & Poor's and Moody's both dropped Harry & David bonds into a range that anticipated default, likely triggering Chapter 11 reorganization.

"The outlook is negative," Standard & Poor's credit analyst Mariola Borysiak said in a report posted on the agency's website on Jan. 21. "We believe that Harry & David's current capital structure is unsustainable and that the company will seek to restructure its balance sheet. In our opinion, this could lead to a selective default or a filing for protection under Chapter 11."

Stephanie Pillersdorf of Sard Verbinnen & Co., a New York public relations firm by Harry & David, summed up the company's position by saying, "They continue to operate and explore all recapitalization alternatives and ultimately expect to be even stronger."

In a separate Securities and Exchange filing on Tuesday, the company glumly reported it had fallen behind on payment to vendors and was negotiating for new terms with other creditors.

"Difficulties arising from our stressed financial position may further exacerbate our problems," the company said in the filing. "In an effort to manage our liquidity relative to our anticipated needs, we are seeking to adjust prices and payment terms with our third party providers. In some cases, payment obligations to third party providers have became delinquent. In the event that we are unable to negotiate an acceptable resolution with these providers, we expect that legal proceedings may be commenced against us, and the outcome of these proceedings could have a material and adverse effect on the company."

It concluded: "There can be no assurance that our third party providers will otherwise continue to do business with us as they previously have in the ordinary course. In the event that we need to find replacement third party providers, we may not be able to find suitable replacements providing services to us on comparable terms which may further adversely impact our operations."

Jackson County Commissioner Don Skundrick said he believes the recent events mean Harry & David will wind up in court protection.

"We can figure it out that Chapter 11 is pretty much a done deal," Skundrick said. "Given their previous comments, that doesn't come as a surprise."

While companies come and go, one with a workforce reaching into the thousands during peak seasons carries clout at every level.

"Figuratively speaking, it's going to create a big hole in this community's heart," Skundrick said. "It's probably an exaggeration, but it's like Detroit losing General Motors or Chrysler. I don't think Harry & David is going away, but reorganization will have an impact on employment.

"Psychologically, Jackson County and Harry & David have been linked at the hip for the last 100 years, so it's going to have a huge impact on the psyche, whether you are connected to the company or buy there."

Beyond that, Skundrick noted, Harry & David has been a major contributor to charitable causes and encouraged employees to do the same.

Skundrick said the Board of Commissioners plans to issue a proclamation in support of the company and its employees.

"We want to let them know we're willing to help in whatever way we can, recognizing our constraints," Skundrick said. "... Those folks are darn important to us and the fabric of the community."

Harry & David's net sales for the 13-week period ending Dec. 25 declined 1.8 percent to $262.1 million, compared to $267 million for the same period a year earlier.

"While we were able to attract new customers, reactivate old ones, significantly grow internet traffic and build awareness with world-class PR by means of many new initiatives last year, sales and operatings fell well below expectations due to market and competitive conditions," Steven Heyer, chairman of the board and chief executive officer, said in a statement.

"Our focus from here will be on continuing to build our customer base, revamping our products to offer substantially more value to our customers in order to grow profitably, as well as pursuing options to recapitalize our business as we announced earlier."

Harry & David's gross profit for the company's traditional make-or-break quarter fell 20.6 percent from $104.2 million a year earlier. The decreases were attributed to higher discounts and markdowns, lower average selling prices and higher product costs.

Harry & David reported earlier that it had a cash balance of $66.9 million and accounts payable of $57.9 million on Dec. 25, compared to a cash balance of $108.5 million and accounts payable of $32.5 million on Dec. 26, 2009.

The company failed to satisfy financial covenants of its credit line. As a result, it will not be able to borrow from its lenders unless terms are amended or the covenant non-compliance is waived.

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