Crippled by debt piled upon it by its Wall Street owners, storied Oregon fruit company Harry & David has filed for bankruptcy protection.
The filing Monday in Delaware Bankruptcy Court had been widely expected after the troubled firm — known for its Moose Munch candied popcorn and pricey fruit baskets — missed a $7-million interest payment earlier this month.
Weak sales during the crucial holiday season hurt Harry & David, as consumers still smarting from the economic downturn shunned luxuries such as the company's famed pears, which retail for about $4 each. Increased competition from gourmet food stores and high-end supermarkets further cut into sales.
But some analysts said the mountain of debt put onto the century-old company as part of its 2004 buyout by New York private equity firm Wasserstein & Co. proved the difference, giving Harry & David no room to maneuver during tough times.
"There's no doubt that the debt payments are a huge factor," said Renee Fellman, an Oregon turnaround expert who has been following the company. "On top of that, they have had declining margins, increasing competition and many reports of bad customer service."
Under Chapter 11 protection, Harry & David will continue sending out its fruit boxes and operating its 70 retail stores. The company's bondholders, including Wells Fargo, will convert the $200 million in debt they hold into equity and will become the new owners. As part of the deal, Harry & David will receive $155 million in loans from its current creditors, including UBS and Ally Financial, to fund operations. Those creditors will also provide as much as $100 million to help the company exit bankruptcy.
Chief Executive Kay Hong, appointed by the company's board last month, said Monday that the bankruptcy restructuring would allow Harry & David to "strengthen its operations and create long-term value, while continuing to provide customers with the highest-quality products and service."
The story of Harry & David began in 1910, when an entrepreneur named Samuel Rosenberg traded his Seattle hotel for orchards in southern Oregon that grew the distinctive fleshy red and green Comice pears. After his sons, Harry and David Holmes, took over, they began marketing the pears as high-end gifts and sold them to affluent city folk. Based in Medford, Ore., the company prospered.
The family sold the firm to RJR Nabisco in 1986. It changed hands a few more times before being purchased by Wasserstein & Co. in 2004 for $253.9 million.
The firm, founded by the late New York buyout king Bruce Wasserstein, financed the deal by issuing $250 million in bonds — and used some of the proceeds to pay itself back all of the cash it had put up to buy the company.
"All of the Wasserstein original investors got their money out of it and left Medford with a shell of a company with gigantic debt," said Charles Jaeger, a professor at Medford's Southern Oregon University business school. "They handled it in their typical greedy Wall Street way."
The interest payments on the debt have been staggering. In the first half of its current fiscal year, Harry & David posted $6.2 million in operating profits, but its debt service totaled $10.9 million.
The company's decline has been a blow to Medford, a city of about 77,000 people, where Harry & David was a major contributor to local charities and the biggest private employer. Wasserstein & Co. fired the local management team, slashed the workforce by one-third and cut back on raises and benefits.
The new management team Wasserstein installed proved controversial. The chief executive during the last year, Steve Heyer, had previously been pushed out as CEO of Starwood Hotels after facing allegations that he had sent inappropriate sexual emails. Harry & David's current marketing chief, Ross Klein, had been accused in a lawsuit by Starwood of stealing corporate documents after he left his job at the company.
Neither of the men relocated to Medford. Their offices in Atlanta and Beverly Hills were paid for by Harry & David, and Heyer was given a $9.4-million pay package, nearly seven times what the previous chief executive had earned.
"For people here in Medford to see that guy making that kind of money and telecommuting — they were just outraged," Jaeger said.
Heyer's team revamped Harry & David's website and marketing, but the strategy came up short during the crucial 2010 holiday season, when sales fell 2% from a year earlier.
In January, Harry & David hired the investment bank Rothschild and the New York law firm Jones Day to negotiate a restructuring deal with its creditors. In February, Heyer was replaced by Hong, the former chief executive of Alvarez & Marsal, the restructuring firm that has handled the Lehman Bros. bankruptcy.
Bankruptcy Court filings said no immediate changes to the company's operations were planned, though budget projections call for a 21% cut to expenses by next year.