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Harry & David files for Ch. 11 protection

Fruit basket and gift seller Harry & David filed for Chapter 11 bankruptcy protection Monday, brought down by a weak economy and a proliferation of competitors.

The 75-year-old Medford, Ore., company agreed with a majority of its senior creditors on a reorganization plan that will eliminate “substantial” debt and provide financing to restructure its balance sheet, according to court documents.

Harry & David Holdings Inc. has been struggling as businesses slashed corporate gift budgets and consumers cut spending in the weak economy. It relies on discretionary spending that’s often the first to get cut from household and business budgets.

In addition, online competitors have grown significantly. Harry & David grows or makes about 85 percent of its products, but online competitors were able to source products from cheaper places, lowering costs. Also stores like Walmart and Target have begun offering more edible gifts, increasing competition.

The retailer expects to continue operating during the reorganization process.

Its biggest creditor is Wells Fargo Bank, which it owes about $198 million. It also owes $27.4 million to its pension plan. Other top creditors include Convergys CMG, FedEx and Google.

As of December, the company had $304 million in assets and $361 million in liabilities.

The company ships fruit, nuts, baked goods and other snacks to customers around the world under brands including Wolferman’s, Cushman’s and Harry & David. It operates stores in 38 states and a website. It closed 52 unprofitable stores before filing for bankruptcy protections and now operates 70 stores.

It reported in January that revenue during the key holiday quarter fell nearly 2 percent to $262 million.

In January, Harry & David hired Rothschild Inc. as a financial adviser and Jones Day as legal adviser to explore recapitalization options, but by February it said it might have trouble remaining a “going concern,” implying a bankruptcy filing might imminent.

Last month the company cut about 100 jobs and named Kay Hong as its interim CEO. She replaced Steven Heyer, who remains as chairman. Hong is a managing director at Alvarez & Marsal, which is helping Harry & David with its restructuring.

Private equity firm Wasserstein & Co. owns 63 percent of Harry & David and investment firm Highfields Capital Management owns 34 percent. The remaining stake is owned by employees or former employees.

Harry & David said holders of about 81 percent of its senior notes have agreed to vote for the reorganization plan and exchange their notes for common stock. They have also agreed to backstop a $55 million rights offering that gives the company enough equity financing to exit Ch. 11 bankruptcy protection.

“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,” Hong said in a statement.

Harry & David said it is also seeking approval to enter into a $100 million first-lien debtor-in-possession revolving credit agreement that would be provided by its existing secured lenders and a $55 million second-lien debtor-in-possession term loan that would be provided by senior noteholders.

The company has also received a commitment from its noteholders for up to $100 million in exit financing.

Harry & David sprang from a pear-by-mail business started by two brothers, Harry and David Rosenberg, who were seeking to expand the reach of their orchard business during the Great Depression.

Harry & David joins several other retailers who have filed for bankruptcy protection recently, including bookseller Borders Group and movie-rental chain Blockbuster Inc.