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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 26, 2009
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 333-127173
HARRY & DAVID HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-0884389 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
2500 South Pacific Highway, Medford, OR |
97501 | |
(Address of Principal Executive Offices) | (Zip Code) |
(541) 864-2362
(Registrants telephone number including area code)
None
(Former name, former address, and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or if such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (check one):
Large accelerated ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
Class |
Outstanding as of November 2, 2009 | |
Common stock $0.01 par value | 1,033,295 |
Table of Contents
HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page | ||||
Part I. Financial Information | ||||
Item 1. | 3 | |||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | ||
Item 3. | 29 | |||
Item 4. | 29 | |||
Part II. Other Information | ||||
Item 1. | 29 | |||
Item 1A. | 29 | |||
Item 2. | 29 | |||
Item 3. | 29 | |||
Item 4. | 29 | |||
Item 5. | 29 | |||
Item 6. | 30 |
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Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in Thousands, Except Share and Per Share Data)
September 26, 2009 |
June 27, 2009 |
September 27, 2008 |
||||||||||
Unaudited | Unaudited | |||||||||||
Assets |
||||||||||||
Current assets |
||||||||||||
Cash and cash equivalents |
$ | 1,986 | $ | 15,395 | $ | 27,950 | ||||||
Trade accounts receivable, net |
4,659 | 1,466 | 6,482 | |||||||||
Other receivables |
1,460 | 2,062 | 3,029 | |||||||||
Inventories |
82,859 | 44,738 | 100,704 | |||||||||
Deferred catalog expenses |
4,087 | 2,657 | 18,214 | |||||||||
Deferred income taxes |
| 5,230 | 3,861 | |||||||||
Other current assets |
4,462 | 4,862 | 10,642 | |||||||||
Total current assets |
99,513 | 76,410 | 170,882 | |||||||||
Fixed assets, net |
141,300 | 145,477 | 159,404 | |||||||||
Goodwill |
12,236 | 12,236 | 9,006 | |||||||||
Intangibles, net |
33,011 | 33,057 | 47,984 | |||||||||
Deferred financing costs, net |
5,382 | 5,975 | 8,372 | |||||||||
Deferred income taxes |
| 1,423 | | |||||||||
Other assets |
2,133 | 2,114 | 3,271 | |||||||||
Total assets |
$ | 293,575 | $ | 276,692 | $ | 398,919 | ||||||
Liabilities and stockholders deficit |
||||||||||||
Current liabilities |
||||||||||||
Accounts payable |
$ | 19,065 | $ | 11,171 | $ | 33,267 | ||||||
Accrued payroll and benefits |
13,672 | 14,105 | 14,211 | |||||||||
Income taxes payable |
6,076 | 13,643 | 8,627 | |||||||||
Deferred revenue |
9,651 | 16,317 | 11,209 | |||||||||
Deferred income taxes |
617 | | | |||||||||
Accrued interest |
1,324 | 4,485 | 1,814 | |||||||||
Other accrued liabilities |
3,253 | 2,980 | 4,653 | |||||||||
Current portion of capital lease obligations |
299 | 147 | 633 | |||||||||
Revolving credit facility |
47,000 | | 73,000 | |||||||||
Total current liabilities |
100,957 | 62,848 | 147,414 | |||||||||
Long-term debt and capital lease obligations |
198,519 | 198,671 | 225,256 | |||||||||
Accrued pension liabilities |
27,598 | 27,364 | 16,182 | |||||||||
Deferred income taxes |
168 | | 10,485 | |||||||||
Other long-term liabilities |
9,591 | 9,591 | 10,507 | |||||||||
Total liabilities |
336,833 | 298,474 | 409,844 | |||||||||
Commitments and contingencies (Note 10) |
||||||||||||
Stockholders deficit |
||||||||||||
Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,033,295 shares at September 26, 2009, June 27, 2009 and September 27, 2008 |
10 | 10 | 10 | |||||||||
Additional paid-in capital |
6,732 | 6,673 | 6,310 | |||||||||
Accumulated other comprehensive loss, net of taxes |
(9,606 | ) | (9,795 | ) | (3,529 | ) | ||||||
Accumulated deficit |
(40,394 | ) | (18,670 | ) | (13,716 | ) | ||||||
Total stockholders deficit |
(43,258 | ) | (21,782 | ) | (10,925 | ) | ||||||
Total liabilities and stockholders deficit |
$ | 293,575 | $ | 276,692 | $ | 398,919 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in Thousands, Except Share and per Share Data)
(UNAUDITED)
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 |
|||||||
Net sales |
$ | 46,264 | $ | 52,607 | ||||
Cost of goods sold |
30,041 | 36,399 | ||||||
Gross profit |
16,223 | 16,208 | ||||||
Operating expenses: |
||||||||
Selling, general and administrative |
33,344 | 37,664 | ||||||
Selling, general and administrative related party |
250 | 250 | ||||||
33,594 | 37,914 | |||||||
Operating loss |
(17,371 | ) | (21,706 | ) | ||||
Other (income) expense: |
||||||||
Interest income |
(3 | ) | (184 | ) | ||||
Interest expense |
4,699 | 5,921 | ||||||
Gain on debt repayment |
| (2,843 | ) | |||||
Other (income) expense, net |
(23 | ) | 14 | |||||
4,673 | 2,908 | |||||||
Loss from continuing operations before income taxes |
(22,044 | ) | (24,614 | ) | ||||
Benefit for income taxes |
(320 | ) | (9,264 | ) | ||||
Net loss from continuing operations |
(21,724 | ) | (15,350 | ) | ||||
Discontinued operations: |
||||||||
Gain on sale of Jackson & Perkins |
| 21 | ||||||
Operating income from discontinued operations |
| 180 | ||||||
Provision for income taxes on discontinued operations |
| 76 | ||||||
Net income from discontinued operations |
| 125 | ||||||
Net loss |
$ | (21,724 | ) | $ | (15,225 | ) | ||
Net income (loss) per share basic and diluted (Note 8): |
||||||||
Continuing operations |
(21.02 | ) | (14.86 | ) | ||||
Discontinued operations |
| 0.12 | ||||||
Total |
$ | (21.02 | ) | $ | (14.73 | ) | ||
Weighted-average shares used in per share calculations: |
||||||||
Basic and diluted |
1,033,295 | 1,033,295 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
(UNAUDITED)
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 |
|||||||
Operating activities |
||||||||
Net loss |
$ | (21,724 | ) | $ | (15,225 | ) | ||
Less: Net income from discontinued operations |
| 125 | ||||||
Net loss from continuing operations |
(21,724 | ) | (15,350 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations: |
||||||||
Depreciation and amortization of fixed assets |
4,610 | 4,790 | ||||||
Amortization of intangible assets |
46 | 293 | ||||||
Amortization of deferred financing costs |
593 | 644 | ||||||
Stock option compensation expense |
59 | 119 | ||||||
Loss (gain) on disposal and impairment of fixed assets |
16 | (5 | ) | |||||
Gain on sale of short-term investments |
| (64 | ) | |||||
Deferred income taxes |
7,315 | 5,704 | ||||||
Amortization of deferred pension loss |
312 | 29 | ||||||
Gain on debt repayment |
| (2,843 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts receivable and other receivables |
(2,591 | ) | (4,301 | ) | ||||
Inventories |
(38,121 | ) | (45,537 | ) | ||||
Deferred catalog expenses and other assets |
(1,049 | ) | (14,634 | ) | ||||
Accounts payable |
7,894 | 14,130 | ||||||
Accrued liabilities |
(3,321 | ) | (4,245 | ) | ||||
Income taxes |
(7,567 | ) | (14,983 | ) | ||||
Accrued pension liabilities |
234 | (1,312 | ) | |||||
Deferred revenue |
(6,666 | ) | (5,863 | ) | ||||
Net cash used in operating activities from continuing operations |
(59,960 | ) | (83,428 | ) | ||||
Net cash provided by operating activities from discontinued operations |
| 490 | ||||||
Net cash used in operating activities |
(59,960 | ) | (82,938 | ) | ||||
Investing activities |
||||||||
Acquisition of fixed assets |
(493 | ) | (1,744 | ) | ||||
Acquisition of business |
| (9,003 | ) | |||||
Proceeds from the sale of fixed assets |
44 | 10 | ||||||
Proceeds from the sale of held-to-maturity securities |
| 5,000 | ||||||
Proceeds from the sale of available-for-sale securities |
| 10,097 | ||||||
Net cash provided by (used in) investing activities from continuing operations |
(449 | ) | 4,360 | |||||
Financing activities |
||||||||
Borrowings on revolving debt |
47,000 | 73,000 | ||||||
Repayments of long-term debt |
| (7,107 | ) | |||||
Repayments of capital lease obligations |
| (157 | ) | |||||
Net cash provided by financing activities from continuing operations |
47,000 | 65,736 | ||||||
Decrease in cash and cash equivalents |
(13,409 | ) | (12,842 | ) | ||||
Cash and cash equivalents, beginning of period |
15,395 | 40,792 | ||||||
Cash and cash equivalents, end of period |
$ | 1,986 | $ | 27,950 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(UNAUDITED)
NOTE 1BUSINESS
Harry & David Holdings, Inc. and subsidiaries (the Company) is a vertically integrated multichannel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and gifts marketed under the Harry and David®, Wolfermans® and Cushmans® brands. The Company markets and sells its products through the Internet, catalogs distributed through the mail, business-to-business and consumer telemarketing, company-owned stores and wholesale distribution to other retailers.
NOTE 2BASIS OF PRESENTATION
These financial statements include the consolidated results of the Company and its wholly-owned subsidiaries. The Condensed Consolidated Balance Sheets as of September 26, 2009 and September 27, 2008, the Condensed Consolidated Statements of Operations for the thirteen-week periods ended September 26, 2009 and September 27, 2008, and the Condensed Consolidated Statements of Cash Flows for the thirteen-week periods ended September 26, 2009 and September 27, 2008, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. The Company has evaluated subsequent events through November 5, 2009, which is the filing date of this Quarterly Report on Form 10-Q.
In managements opinion, the Condensed Consolidated Financial Statements include all adjustments, which include those typically recurring adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen week periods then ended. Intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at June 27, 2009 presented in this Form 10-Q has been derived from the Companys audited balance sheet not included in this report.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles accepted in the United States for comparable annual financial statements. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2009, previously filed with the Securities and Exchange Commission.
During the fourth quarter of fiscal 2007, the Company completed the sale of its Jackson & Perkins businesses to J&P Acquisition Inc. In a separate transaction, the Company sold its land and the associated buildings of its Wasco facility, which was primarily utilized to support rose growing operations of Jackson & Perkins. The financial results of the divested Jackson & Perkins businesses and activities related to the sale are included in discontinued operations in the Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Cash Flows for the thirteen weeks ended September 27, 2008.
The results of operations for the interim periods presented are not necessarily indicative of results to be expected for other interim periods in the fiscal year. In the second quarter of each fiscal year, the Company realizes its highest sales for the fiscal year as such quarter includes the most significant holidays that drive the largest portion of the gift-giving component of the Companys sales. It is also the period where the Company recognizes significant cost of goods sold and advertising expenses in connection with the increased sales.
The Company has reclassified amounts related to its outstanding gift cards to Deferred Revenue from Accrued Liabilities in the condensed consolidated balance sheets with corresponding reclassifications on its condensed consolidated statements of cash flows to conform to the current year presentation.
The Companys total comprehensive loss for the thirteen weeks ended September 26, 2009 of $21,535 includes a $189 adjustment (net of tax) to comprehensive income (loss) related to its deferred pension amortization. The Companys total comprehensive loss for the thirteen weeks ended September 27, 2008 of $15,196 includes a $29 adjustment (net of tax) to comprehensive income (loss) related to its deferred pension amortization.
NOTE 3NEW ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In October 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)Multiple-Deliverable Revenue Arrangements. FASB Accounting Standards Update 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendors multiple-deliverable revenue arrangements. FASB Accounting Standards Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of Accounting Standards Update 2009-13 is not expected to have a material impact on the Companys condensed consolidated financial statements.
In August 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update 2009-05, Fair Value Measurements and Disclosures (Topic 820)Measuring Liabilities at Fair Value includes amendments to Subtopic 820-10, Fair Value Measurements and DisclosuresOverall, for the fair value measurement of liabilities and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. This guidance is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of Accounting Standards Update 2009-05 did not have a material impact on the condensed consolidated financial statements.
During June 2009, the Financial Accounting Standards Board (FASB) issued FAS No. 168, FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168) and is incorporated in Accounting Standards Codification (ASC) Topic 105, which establishes the FASB Accounting Standards Codification as the single official source of authoritative US GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. SFAS 168 became effective as of the beginning of the first annual reporting period that begins after September 15, 2009 and for interim periods within that period. The adoption of SFAS 168 did not have an impact on the Companys results of operations or financial position.
In April 2009, the FASB issued FASB Staff Position (FSP) No. 107-1 (FSP FAS 107-1) and APB 28-1 (APB 28-1) and is incorporated in Accounting Standards Codification (ASC) Topic 825, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 were effective for interim reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material impact on the Companys financial position or results of operations.
In April 2009, the FASB issued FASB Staff Position No. 115-2 (FSP FAS 115-2), and FASB Staff Position No. 124-2 (FSP FAS 124-2) and is incorporated in Accounting Standards Codification (ASC) Topic 320, which amends the other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 were effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material effect on the Companys condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends and clarifies SFAS No. 141 (Revised) and is incorporated in Accounting Standards Codification (ASC) Topic 805, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during or after fiscal 2010. The Company will apply the requirements of SFAS No. 141R-1 to any future business combinations.
In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets, and is incorporated in Accounting Standards Codification (ASC) Topic 715, which provides additional guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation is effective for financial statements issued for fiscal years ending after December 15, 2009. The Company will adopt this interpretation for the fiscal year ending June 26, 2010. The Company is currently evaluating the impact of adopting FSP 132(R)-1 on its condensed consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) and is incorporated in Accounting Standards Codification (ASC) Topics 275 and 350, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance for determining the useful life of a recognized intangible asset in FSP 142-3 is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements in FSP 142-3 are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The Company adopted FSP 142-3 in fiscal year 2010. The adoption of FSP 142-3 did not have a material impact on the Companys condensed consolidated financial statements.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, (FAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years, and is incorporated in Accounting Standards Codification (ASC) Topic 820. FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels which distinguish between assumptions based on market data (observable inputs) and the Companys assumptions (unobservable inputs). The level in the fair value hierarchy within which the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of inputs used to measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The adoption of FAS 157 did not have a material impact on the condensed consolidated financial statements. The Company adopted the provisions of FAS 157 on June 29, 2008 for assets and liabilities measured at fair value on a recurring basis, which consist of cash and cash equivalents measured using Level 1 inputs. The Company adopted the provisions of FAS 157-2 on June 28, 2009 for assets and liabilities measured at fair value on a non-recurring basis, which include goodwill, intangible assets and certain other long-lived assets. The fair values for these assets are measured for impairment on a non-recurring basis using Level 3 inputs.
NOTE 4BALANCE SHEET INFORMATION
Financial instruments
The Companys financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, certain accrued liabilities, capital lease obligations and the Senior Floating Rate Notes due March 1, 2012 and Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The estimated carrying value of these instruments (other than the Senior Notes) approximates fair value due to their short-term maturities. The fair values below are based on quoted market prices.
The following table provides the carrying value and fair value of the Companys Senior Notes:
September 26, 2009 | ||||||
Book value | Fair value | |||||
Senior floating rate notes |
$ | 58,170 | $ | 26,467 | ||
Senior fixed rate notes |
140,192 | 93,228 |
Inventories
Inventories consist of the following:
September 26, 2009 |
June 27, 2009 |
September 27, 2008 | |||||||
Finished goods |
$ | 42,634 | $ | 18,056 | $ | 47,289 | |||
Materials, packaging supplies, and work-in-process |
40,225 | 20,734 | 53,381 | ||||||
Growing crops |
| 5,948 | 34 | ||||||
Total |
$ | 82,859 | $ | 44,738 | $ | 100,704 | |||
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
Fixed assets
Fixed assets consist of the following:
September 26, 2009 |
June 27, 2009 |
September 27, 2008 |
||||||||||
Land |
$ | 19,607 | $ | 19,607 | $ | 19,607 | ||||||
Land improvements and orchard development costs |
30,701 | 30,692 | 30,548 | |||||||||
Buildings and improvements |
58,457 | 58,517 | 55,873 | |||||||||
Machinery and equipment |
68,511 | 68,176 | 66,072 | |||||||||
Leasehold improvements |
10,681 | 10,611 | 13,280 | |||||||||
Purchased and internally developed software |
36,853 | 36,693 | 35,215 | |||||||||
Capital projects-in-process |
1,417 | 1,521 | 5,234 | |||||||||
226,227 | 225,817 | 225,829 | ||||||||||
Accumulated depreciation and amortization |
(84,927 | ) | (80,340 | ) | (66,425 | ) | ||||||
Total |
$ | 141,300 | $ | 145,477 | $ | 159,404 | ||||||
As of September 26, 2009, purchased and internally developed software includes software licenses acquired for $895 financed through an outstanding capital lease agreement. See Note 6 Borrowing Arrangements for details on the terms and conditions of these capital lease obligations. Accumulated amortization of purchased and internally developed software costs was $20,245, $18,972 and $14,906 as of September 26, 2009, June 27, 2009 and September 27, 2008, respectively. Amortization of software costs, which include software assets financed through capital leases, were $1,273 and $1,299 for the thirteen weeks ended September 26, 2009 and September 27, 2008, respectively.
Goodwill and Intangibles
Goodwill and intangible assets with indefinite lives are tested for impairment annually. The impairment testing compares carrying values to fair values, and generally, if the carrying value of these assets is in excess of fair value, an impairment loss would be recognized. The Company does not consider there to be any indication of impairment of its goodwill, trade names, trademarks, recipe, and customer lists as of September 26, 2009.
Amortization expense was $46 and $293 for the thirteen weeks ended September 26, 2009 and September 27, 2008, respectively, and is included within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
The following is a summary of intangible assets:
September 26, 2009 | June 27, 2009 | |||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount | |||||||||||||||
Trade names, trademarks and recipe |
$ | 32,139 | $ | | $ | 32,139 | $ | 32,139 | $ | | $ | 32,139 | ||||||||
Goodwill |
12,236 | | 12,236 | 12,236 | | 12,236 | ||||||||||||||
Direct marketing customer and rental lists |
9,249 | (8,490 | ) | 759 | 9,249 | (8,467 | ) | 782 | ||||||||||||
Favorable lease agreements |
1,676 | (1,563 | ) | 113 | 1,676 | (1,540 | ) | 136 | ||||||||||||
$ | 55,300 | $ | (10,053 | ) | $ | 45,247 | $ | 55,300 | $ | (10,007 | ) | $ | 45,293 | |||||||
The estimated remaining amortization expense is as follows:
Fiscal Period: |
Direct Marketing Customer and Rental Lists |
Favorable Lease Agreements |
Total Amortization Expense | ||||||
Remaining 2010 |
578 | 53 | 631 | ||||||
2011 |
142 | 39 | 181 | ||||||
2012 |
39 | 21 | 60 | ||||||
Total |
$ | 759 | $ | 113 | $ | 872 | |||
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
NOTE 5INCOME TAXES
For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated annual effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates from continuing operations for the first quarter of fiscal 2010 and fiscal 2009 were 1.5% and 37.6%, respectively. For the first quarter of fiscal 2010, the difference in the effective rate and the federal statutory rate is primarily due to charitable contributions, tax credits, and state tax obligations.
NOTE 6BORROWING ARRANGEMENTS
Revolving Credit Facilities
The Companys current revolving credit agreement (the Credit Agreement) has a maximum borrowing capacity of $125,000, secured by substantially all of the assets of the Company. The Credit Agreement has a maturity date of March 20, 2011. Borrowings under the Credit Agreement may be used for the Companys general corporate purposes, including capital expenditures, subject to certain limitations. Interest on the borrowings is payable at a base rate or a Eurocurrency rate, plus an applicable margin and fees, which as of September 26, 2009 resulted in a rate of 1.75%.
In connection with this facility and related amendments, the Company has remaining deferred financing costs of $1,861 and $2,172 as of September 26, 2009 and June 27, 2009, respectively.
As of September 26, 2009, unused borrowings under the revolving credit facility were $77,239, with borrowings amounting to $47,000 and $761 in outstanding letters of credit. The maximum available borrowing under the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at September 26, 2009 was $41,558. The Company is required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitment fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the condensed consolidated statement of operations.
The terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events of default. The Credit Agreement requires the Company to comply with certain covenants, which primarily include a minimum cash balance and limits to capital expenditures. At September 26, 2009, the Company was in compliance with all Credit Agreement covenants.
Long-Term Debt
As of September 26, 2009, the Companys wholly-owned subsidiary, Harry and David, had outstanding $58,170 in Senior Floating Rate Notes due March 1, 2012 and $140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes) These amounts are net of Senior Notes repurchased by the Company on the open-market in fiscal 2008 and fiscal 2009. For further details on the repurchases during the thirteen weeks ended September 27, 2008, see Long-Term Debt Repurchases below.
The floating rate senior notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 5.35% and 5.67% at September 26, 2009 and June 27, 2009, respectively. The fixed rate senior notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December.
The deferred financing fees incurred in connection with the note offering and related exchange have been recorded as deferred financing costs within long-term assets. The remaining costs are amortized over the remaining life of the associated Senior Notes and as of September 26, 2009 and June 27, 2009, $3,521 and $3,803, respectively, remained on the balance sheet for all associated fees related to the Senior Notes. As noted below under Long-Term Debt Repurchases, the Senior Notes deferred financing costs are subject to write-off on a pro-rata basis due to early repurchase or repayment of the Senior Notes.
These Senior Notes represent the senior unsecured obligations of Harry and David, a wholly-owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of the Companys subsidiaries. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. The Company was in compliance with all of the covenants under the indenture at September 26, 2009.
Long-Term Debt Repurchases
During the thirteen weeks ended September 27, 2008, the Company purchased $10,200 of its fixed rate senior notes in open market purchases for $7,107. This debt prepayment resulted in a net gain of $2,843, comprised of a $3,093 discount on the repayment of outstanding principal, partially offset by the write-off of $250 of unamortized deferred financing costs.
During the thirteen weeks ended December 27, 2008, the Company purchased $26,438 aggregate principal amount of our Senior Notes in open-market purchases for $13,259. This debt prepayment resulted in a net gain of $12,573, comprised of a $13,179 discount on the repayment of outstanding principal, partially offset by the write-off of $606 of unamortized deferred financing costs.
Amortization of Deferred Financing Costs
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
Total amortization expense on deferred financing costs was $593 and $644 for the thirteen weeks ended September 26, 2009 and September 27, 2008 and is included within interest expense in the accompanying Condensed Consolidated Statements of Operations.
Capital lease obligations
As of September 26, 2009, the Company had a $456 capital lease obligation representing amounts outstanding to acquire certain software licenses. The current and non-current portion of the Companys capital lease obligation is $299 and $157, respectively. The interest rate on the agreement is 5.99%, with principal and interest payments due biannually.
NOTE 7STOCK OPTION PLAN
The Company accounts for stock-based compensation using the fair-value method. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses certain assumptions for use in the model. The expected volatility assumption is based on an average historical volatility of the publicly traded stock of a representative set of comparable companies. The expected term of options granted utilized is either the final vesting date or a period derived from the time between the date of final vesting and the expiration of the option, depending on the vesting provisions of the underlying grant. As the Companys shares are not registered, nor publicly traded on a national securities exchange, the liquidity of the option award is limited. As such, the Company has assumed for purposes of estimating the expected term of the stock option that the vested awards would likely forfeit post-termination. The risk-free rate for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant. The Company granted 8,000 shares of stock options during the thirteen weeks ended September 26, 2009. No grants were made during the thirteen weeks ended September 27, 2008. The assumptions used for the options granted during the thirteen weeks ended September 26, 2009, are as follows:
2009 | ||
Expected volatility |
54.0% | |
Expected dividends |
$0 | |
Expected term |
2.9 years | |
Risk-free rate |
1.79% |
A summary of option activity under the Plan for the thirteen weeks ended September 26, 2009 is presented below:
Options |
Option Shares |
Weighted-Average Exercise Price |
Weighted-Average Remaining Contractual Term | |||||
Outstanding at June 27, 2009 |
59,568 | $ | 113.92 | 6.2 years | ||||
Granted |
8,000 | 150.00 | 9.9 years | |||||
Exercised |
| | | |||||
Forfeited |
(1,708 | ) | 138.35 | | ||||
Outstanding at September 26, 2009 |
65,860 | $ | 117.67 | 6.4 years | ||||
Of the 65,860 options outstanding at September 26, 2009, 52,729 were fully vested and exercisable. The weighted average remaining contractual term of vested options was 5.8 years. The total grant date fair value of all options outstanding at September 26, 2009 was $2,562.
A summary of the status of the Companys nonvested option shares as of September 26, 2009, and activity during the thirteen weeks ended September 26, 2009, is presented below:
Nonvested Option Shares |
Option Shares |
Weighted-Average Grant-Date Fair Value of Options | ||||
Outstanding at June 27, 2009 |
6,239 | $ | 13.42 | |||
Granted options |
8,000 | 47.36 | ||||
Vested |
(733 | ) | 11.45 | |||
Forfeited |
(375 | ) | 44.36 | |||
Outstanding at September 26, 2009 |
13,131 | $ | 33.33 | |||
For the thirteen weeks ended September 26, 2009 and September 27, 2008, the Company recognized stock compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $59 and $119, respectively. The total tax benefit recognized for these periods was $23 and $47, respectively. As of September 26, 2009, there remained a total of $415 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
That cost is recognized over a remaining weighted-average period of 6.9 years. While the Company generally utilizes an assumption of a ten percent forfeiture rate when arriving at the amount of stock compensation expense to be recognized, the grant for the current quarter utilized a zero percent forfeiture rate, given the vesting period and that the grant was to one individual.
NOTE 8EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated using the weighted-average common shares outstanding for the period. Diluted earnings per share is calculated using the weighted-average common shares outstanding for the period, including the dilutive effect of stock options as determined under the treasury stock method. For the thirteen weeks ended September 26, 2009 and September 27, 2008, common shares relating to the stock options are excluded from the diluted earnings per share calculation as the related impact would have been anti-dilutive because the Company generated a net loss in those periods. The excluded options for the thirteen weeks ended September 26, 2009 and September 27, 2008 were 65,860 and 61,098, respectively. The basic and diluted net loss per share is as follows (in thousands except share and per share data):
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 |
|||||||
Net loss from continuing operations |
$ | (21,724 | ) | $ | (15,350 | ) | ||
Net income from discontinued operations |
| 125 | ||||||
Net loss |
$ | (21,724 | ) | $ | (15,225 | ) | ||
Income (loss) per share basic and diluted: |
||||||||
Continuing operations |
(21.02 | ) | (14.86 | ) | ||||
Discontinued operations |
| 0.12 | ||||||
Total net loss per share |
$ | (21.02 | ) | $ | (14.73 | ) | ||
Weighted-average shares used in per share calculations: |
||||||||
Basic and diluted |
1,033,295 | 1,033,295 | ||||||
Per share amounts are calculated separately for net loss from continuing operations and discontinued operations and total net loss. As such, the per share amounts for continuing operations and discontinued operations may not sum to the total net loss per share.
NOTE 9BENEFIT PROGRAMS
The components of net periodic pension expense for the Companys qualified and excess defined benefit pension plans are as follows:
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 |
|||||||
Interest cost |
$ | 661 | $ | 754 | ||||
Expected return on plan assets |
(235 | ) | (590 | ) | ||||
Amortization of deferred actuarial losses |
312 | 48 | ||||||
Net periodic pension expense |
$ | 738 | $ | 212 | ||||
During the thirteen weeks ended September 26, 2009 and September 27, 2008, the Company contributed $192 and $1,476 to its defined benefit pension plans, respectively.
The Companys qualified and unqualified defined benefit plans were frozen effective June 30, 2007. The Company has a continuing obligation to fund these plans and will continue to recognize net periodic pension expense.
NOTE 10COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings in the ordinary course of, and which are incidental to, the Companys business. The Companys management believes that the ultimate liability, if any, resulting from such proceedings would not have a material effect on the Companys results of operations, financial position or cash flows.
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify another party from losses arising in connection with the Companys products or services. The Company also enters into indemnification provisions under its agreements with other companies in the ordinary course of business, such as with its contractors, customers and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Companys activities or, in some cases, as a result of the indemnified partys activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. In addition, the Company has
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
entered into indemnification agreements with certain officers and directors that indemnify such persons for certain liabilities they may incur in connection with their services as an officer or director, and the Company has agreed to indemnify certain investors for certain liabilities they may incur in connection with the sale of the senior notes to the initial purchasers and the 2005 exchange offer relating to the senior notes. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally unlimited. As the Company believes that the occurrence of any events that would trigger payments under these contracts is remote, no liabilities have been recorded in the condensed consolidated financial statements for these indemnifications.
The Companys food and horticultural products are subject to regulation and inspection by various governmental agencies, and involve the risk of injury to consumers. As such, the Company may be required to recall some of its products. The Company maintains product liability insurance in an amount that it believes is adequate to cover the costs associated with these recalls.
The Company leases certain properties consisting primarily of retail stores, distribution centers, and equipment with original terms ranging from three to twenty-two years. Certain leases contain purchase options and renewal options. In addition to minimum rental payments, certain of the Companys retail store leases require the Company to make contingent rental payments, which are based upon certain factors, such as sales volume and property taxes. Such contingent rental expense is accrued in each reporting period if achievement of any factor is considered probable.
Total rental expense for all operating leases was as follows:
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 | |||||
Minimum rent expense |
$ | 5,291 | $ | 5,578 | ||
Contingent rent expense |
27 | 52 | ||||
Total rent expense |
$ | 5,318 | $ | 5,630 | ||
On February 18, 2005, the Company established a Liquidity Event Award Program for each member of its senior management team who had received stock options under the 2004 Stock Option Plan as of that date. The aggregate amount of all potential awards to senior management is equal to $6,372 or 7.5% of the portion of the proceeds from the sale of notes which were distributed on February 25, 2005 to the Companys equity sponsors as a return of capital. The amount of each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded as of February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20% of the award vested on June 17, 2006, and 5% vested in the next twelve quarters.
The award is 100% vested, representing $6,034 which also reflects forfeitures. In each case, vesting occurred as long as the award recipient was an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined) occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level; (iii) the Company has available cash, or if applicable, non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash consideration received in the change of control either at the time of the change of control or, in some circumstances, at a later specified date. As of September 26, 2009, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the Liquidity Event Award Program for the fiscal year then ended.
NOTE 11RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such period. During the thirteen weeks ended September 26, 2009 and September 27, 2008 the Company paid $250 in each period in such management fees to Wasserstein and Highfields in connection with this agreement. These amounts were charged to selling, general and administrative expenses related party.
NOTE 12SEGMENT REPORTING
Performance of business units is evaluated considering revenue growth achieved and potential profitability, contribution to other units and capital investment requirements. Reportable segments are strategic business units that offer similar products and are managed separately because the business units utilize distinct marketing strategies. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting polices.
The Direct Marketing segment generates net sales of premium gift-quality fruit, gourmet food products and gifts under the Harry and David®, Wolfermans® and Cushmans® brands by marketing through catalogs, the Internet, business-to-business and consumer telemarketing operations. The Companys catalogs reach customers throughout the United States and, to a lesser extent, in Canada.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
The Stores segment generates net sales of Harry and David®, Wolfermans®, and Cushmans® brand merchandise at various retail locations (outlet stores, specialty stores, and a Country Village Store). As of September 26, 2009, the Company operated 136 Harry and David stores and two Cushmans seasonal stores as well as selling selected store products on the Internet. The Wholesale segment generates net sales by selling Harry and David® brand, Wolfermans® brand and Cushmans® brand wholesale products to national retailers as well as commercial sales of surplus non-gift quality fruit grown in the Companys orchards surrounding Medford, Oregon. Business units that support the Companys operations, including orchards, product supply, distribution, customer operations, facilities, information technology services, and administrative and marketing support functions are grouped in the Other segment.
In order to conform to current year segment presentation, certain reclassifications have been made to the prior year. The Company reclassified revenue from commercial fruit sales from the Other segment to the Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. The Company also reclassified certain activities related to Cushmans from the Direct Marketing segment to the Wholesale segment.
Net intersegment sales were $14,340 and $16,065 for the thirteen weeks ended September 26, 2009 and September 27, 2008, respectively. Total assets in the Other segment include corporate cash and cash equivalents, short-term investments, the net book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived assets, including the Companys manufacturing and distribution facilities.
Dollars in thousands |
Direct Marketing |
Stores | Wholesale | Other | Total Continuing Operations |
||||||||||||||
Thirteen weeks ended September 26, 2009 |
|||||||||||||||||||
Net external sales |
$ | 19,672 | $ | 20,917 | $ | 5,675 | $ | | $ | 46,264 | |||||||||
Depreciation and amortization expense |
34 | 798 | | 3,824 | 4,656 | ||||||||||||||
Operating income (loss) from continuing operations |
(12,232 | ) | (5,470 | ) | 331 | | (17,371 | ) | |||||||||||
Net interest expense from continuing operations |
| | | 4,696 | 4,696 | ||||||||||||||
Income (loss) from continuing operations, before income taxes |
(12,231 | ) | (5,472 | ) | 330 | (4,671 | ) | (22,044 | ) | ||||||||||
Capital expenditures |
| 222 | | 271 | 493 | ||||||||||||||
Total assets |
58,101 | 30,083 | 10,115 | 195,276 | 293,575 | ||||||||||||||
Thirteen weeks ended September 27, 2008 |
|||||||||||||||||||
Net external sales |
$ | 23,107 | $ | 23,050 | $ | 6,450 | $ | | $ | 52,607 | |||||||||
Depreciation and amortization expense |
266 | 922 | | 3,895 | 5,083 | ||||||||||||||
Operating income (loss) from continuing operations |
(16,087 | ) | (6,287 | ) | 668 | | (21,706 | ) | |||||||||||
Net interest expense from continuing operations |
| | | 5,737 | 5,737 | ||||||||||||||
Income (loss) from continuing operations, before income taxes |
(13,660 | ) | (5,970 | ) | 768 | (5,752 | ) | (24,614 | ) | ||||||||||
Capital expenditures |
2 | 452 | | 1,290 | 1,744 | ||||||||||||||
Total assets |
88,201 | 40,275 | 12,827 | 257,616 | 398,919 |
NOTE 13CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Companys wholly-owned subsidiary, Harry and David, has outstanding $58,170 of Senior Floating Rate Notes due 2012 and $140,192 of Senior Fixed Rate Notes due 2013 (collectively, the Senior Notes). The following consolidating financial information presents, in separate columns, financial information for (i) the Company (on a parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry and David under the equity method, (iii) Harry & David Holdings, Inc.s (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of September 26, 2009, and June 27, 2009, and for the thirteen weeks ended September 26, 2009 and September 27, 2008, respectively. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and each of its existing and future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Senior Notes place certain restrictions on the payment of dividends, and on other payments or distributions by the Company and between the subsidiary guarantors.
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 26, 2009
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 51 | $ | 1,935 | $ | | $ | | $ | 1,986 | ||||||||||
Trade accounts receivable, net |
| 4,570 | 89 | | 4,659 | |||||||||||||||
Other receivables |
| 411 | 1,049 | | 1,460 | |||||||||||||||
Inventories |
| 32,351 | 50,508 | | 82,859 | |||||||||||||||
Deferred catalog expenses |
| 4,087 | | | 4,087 | |||||||||||||||
Other current assets |
236 | 1,676 | 2,550 | | 4,462 | |||||||||||||||
Total current assets |
287 | 45,030 | 54,196 | | 99,513 | |||||||||||||||
Fixed assets, net |
| 8,592 | 132,708 | | 141,300 | |||||||||||||||
Goodwill |
| 12,236 | | | 12,236 | |||||||||||||||
Intangibles, net |
| 33,011 | | | 33,011 | |||||||||||||||
Investment in subsidiaries |
128,613 | (83,334 | ) | | (45,279 | ) | | |||||||||||||
Deferred financing costs, net |
| 5,382 | | | 5,382 | |||||||||||||||
Other assets |
1,911 | 34 | 188 | | 2,133 | |||||||||||||||
Total assets |
$ | 130,811 | $ | 20,951 | $ | 187,092 | $ | (45,279 | ) | $ | 293,575 | |||||||||
Liabilities and stockholders equity (deficit) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 8,662 | $ | 10,403 | $ | | $ | 19,065 | ||||||||||
Accrued payroll and benefits |
| 6,923 | 6,749 | | 13,672 | |||||||||||||||
Income taxes payable |
6,149 | (78 | ) | 5 | | 6,076 | ||||||||||||||
Deferred revenue |
| 9,651 | | | 9,651 | |||||||||||||||
Deferred income taxes |
617 | | | | 617 | |||||||||||||||
Accrued interest |
| 1,324 | | | 1,324 | |||||||||||||||
Other accrued liabilities |
186 | 2,053 | 1,014 | | 3,253 | |||||||||||||||
Current portion of capital lease obligations |
| 299 | | | 299 | |||||||||||||||
Revolving credit facility |
| 47,000 | | | 47,000 | |||||||||||||||
Total current liabilities |
6,952 | 75,834 | 18,171 | | 100,957 | |||||||||||||||
Long-term debt and capital lease obligations |
| 198,519 | | | 198,519 | |||||||||||||||
Deferred income taxes |
168 | | | | 168 | |||||||||||||||
Accrued pension liability |
| | 27,598 | | 27,598 | |||||||||||||||
Other long-term liabilities |
3,851 | 3,982 | 1,758 | | 9,591 | |||||||||||||||
Intercompany debt |
163,098 | (385,997 | ) | 222,899 | | | ||||||||||||||
Total liabilities |
174,069 | (107,662 | ) | 270,426 | | 336,833 | ||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
10 | 1 | | (1 | ) | 10 | ||||||||||||||
Additional paid-in capital |
6,732 | 232,518 | 53,784 | (286,302 | ) | 6,732 | ||||||||||||||
Accumulated other comprehensive loss, net of taxes |
(9,606 | ) | | (13,209 | ) | 13,209 | (9,606 | ) | ||||||||||||
Accumulated deficit |
(40,394 | ) | (103,906 | ) | (123,909 | ) | 227,815 | (40,394 | ) | |||||||||||
Total stockholders equity (deficit) |
(43,258 | ) | 128,613 | (83,334 | ) | (45,279 | ) | (43,258 | ) | |||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 130,811 | $ | 20,951 | $ | 187,092 | $ | (45,279 | ) | $ | 293,575 | |||||||||
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 27, 2009
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 51 | $ | 15,344 | $ | | $ | | $ | 15,395 | ||||||||||
Trade accounts receivable, net |
| 1,350 | 116 | | 1,466 | |||||||||||||||
Other receivables |
| 398 | 1,664 | | 2,062 | |||||||||||||||
Inventories |
| 17,936 | 26,802 | | 44,738 | |||||||||||||||
Deferred catalog expenses |
| 2,657 | | | 2,657 | |||||||||||||||
Deferred income taxes |
5,230 | | | | 5,230 | |||||||||||||||
Other current assets |
262 | 1,572 | 3,028 | | 4,862 | |||||||||||||||
Total current assets |
5,543 | 39,257 | 31,610 | | 76,410 | |||||||||||||||
Fixed assets, net |
| 9,208 | 136,269 | | 145,477 | |||||||||||||||
Goodwill |
| 12,236 | | | 12,236 | |||||||||||||||
Intangibles, net |
| 33,057 | | | 33,057 | |||||||||||||||
Investment in subsidiaries |
150,370 | (83,606 | ) | | (66,764 | ) | | |||||||||||||
Deferred financing costs, net |
| 5,975 | | | 5,975 | |||||||||||||||
Deferred income taxes |
1,423 | | | | 1,423 | |||||||||||||||
Other assets |
1,886 | 32 | 196 | | 2,114 | |||||||||||||||
Total assets |
$ | 159,222 | $ | 16,159 | $ | 168,075 | $ | (66,764 | ) | $ | 276,692 | |||||||||
Liabilities and stockholders equity (deficit) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 4,322 | $ | 6,849 | $ | | $ | 11,171 | ||||||||||
Accrued payroll and benefits |
| 7,694 | 6,411 | | 14,105 | |||||||||||||||
Income taxes payable |
13,717 | (78 | ) | 4 | | 13,643 | ||||||||||||||
Deferred revenue |
| 16,317 | | | 16,317 | |||||||||||||||
Accrued interest |
| 4,485 | | | 4,485 | |||||||||||||||
Other accrued liabilities |
176 | 1,813 | 991 | | 2,980 | |||||||||||||||
Current portion of capital lease obligations |
| 147 | | | 147 | |||||||||||||||
Total current liabilities |
13,893 | 34,700 | 14,255 | | 62,848 | |||||||||||||||
Long-term debt and capital lease obligations |
| 198,671 | | | 198,671 | |||||||||||||||
Accrued pension liability |
| | 27,364 | | 27,364 | |||||||||||||||
Other long-term liabilities |
3,861 | 4,121 | 1,609 | | 9,591 | |||||||||||||||
Intercompany debt |
163,250 | (371,703 | ) | 208,453 | | | ||||||||||||||
Total liabilities |
181,004 | (134,211 | ) | 251,681 | | 298,474 | ||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
10 | 1 | | (1 | ) | 10 | ||||||||||||||
Additional paid-in capital |
6,673 | 232,518 | 53,784 | (286,302 | ) | 6,673 | ||||||||||||||
Accumulated other comprehensive loss, net of tax |
(9,795 | ) | | (13,521 | ) | 13,521 | (9,795 | ) | ||||||||||||
Accumulated deficit |
(18,670 | ) | (82,149 | ) | (123,869 | ) | 206,018 | (18,670 | ) | |||||||||||
Total stockholders equity (deficit) |
(21,782 | ) | 150,370 | (83,606 | ) | (66,764 | ) | (21,782 | ) | |||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 159,222 | $ | 16,159 | $ | 168,075 | $ | (66,764 | ) | $ | 276,692 | |||||||||
16
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirteen Weeks Ended September 26, 2009
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 46,532 | $ | 14,072 | $ | (14,340 | ) | $ | 46,264 | |||||||||
Cost of goods sold |
| 30,295 | 14,086 | (14,340 | ) | 30,041 | ||||||||||||||
Gross profit |
| 16,237 | (14 | ) | | 16,223 | ||||||||||||||
Selling, general and administrative |
| 33,608 | (14 | ) | | 33,594 | ||||||||||||||
Operating loss |
| (17,371 | ) | | | (17,371 | ) | |||||||||||||
Other (income) expense: |
||||||||||||||||||||
Interest income |
| | (3 | ) | | (3 | ) | |||||||||||||
Interest expense |
| 4,704 | (5 | ) | | 4,699 | ||||||||||||||
Other (income) expense, net |
(25 | ) | 2 | | | (23 | ) | |||||||||||||
Equity in earnings of consolidated subsidiaries |
22,069 | (8 | ) | | (22,061 | ) | | |||||||||||||
Total other (income) expense |
22,044 | 4,698 | (8 | ) | (22,061 | ) | 4,673 | |||||||||||||
Income (loss) from continuing operations before income taxes |
(22,044 | ) | (22,069 | ) | 8 | 22,061 | (22,044 | ) | ||||||||||||
Benefit for income taxes |
(320 | ) | | | | (320 | ) | |||||||||||||
Net income (loss) |
$ | (21,724 | ) | $ | (22,069 | ) | $ | 8 | $ | 22,061 | $ | (21,724 | ) | |||||||
17
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirteen Weeks Ended September 27, 2008
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 52,326 | $ | 16,346 | $ | (16,065 | ) | $ | 52,607 | |||||||||
Cost of goods sold |
| 36,113 | 16,351 | (16,065 | ) | 36,399 | ||||||||||||||
Gross profit |
| 16,213 | (5 | ) | | 16,208 | ||||||||||||||
Selling, general and administrative |
| 37,919 | (5 | ) | | 37,914 | ||||||||||||||
Operating loss |
| (21,706 | ) | | | (21,706 | ) | |||||||||||||
Other (income) expense: |
||||||||||||||||||||
Interest income |
| | (184 | ) | | (184 | ) | |||||||||||||
Interest expense |
| 5,861 | 60 | | 5,921 | |||||||||||||||
Other (income) expense, net |
15 | (1 | ) | | | 14 | ||||||||||||||
Gain on debt repayment |
| (2,843 | ) | | | (2,843 | ) | |||||||||||||
Equity in earnings of consolidated subsidiaries |
24,398 | (271 | ) | | (24,127 | ) | | |||||||||||||
Total other (income) expense |
24,413 | 2,746 | (124 | ) | (24,127 | ) | 2,908 | |||||||||||||
Income (loss) from continuing operations before income taxes |
(24,413 | ) | (24,452 | ) | 124 | 24,127 | (24,614 | ) | ||||||||||||
Benefit for income taxes |
(9,264 | ) | | | | (9,264 | ) | |||||||||||||
Net income (loss) from continuing operations |
(15,149 | ) | (24,452 | ) | 124 | 24,127 | (15,350 | ) | ||||||||||||
Discontinued operations: |
||||||||||||||||||||
Gain on sale of Jackson & Perkins |
| | 21 | | 21 | |||||||||||||||
Operating income from discontinued operations |
| 54 | 126 | | 180 | |||||||||||||||
Provision for income taxes on discontinued operations |
76 | | | | 76 | |||||||||||||||
Net income (loss) from discontinued operations |
(76 | ) | 54 | 147 | | 125 | ||||||||||||||
Net income (loss) |
$ | (15,225 | ) | $ | (24,398 | ) | $ | 271 | $ | 24,127 | $ | (15,225 | ) | |||||||
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirteen Weeks Ended September 26, 2009
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | |||||||||||||||
Operating activities |
|||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 152 | $ | (45,926 | ) | $ | (14,186 | ) | $ | | $ | (59,960 | ) | ||||||
Investing activities |
|||||||||||||||||||
Acquisition of fixed assets |
| (222 | ) | (271 | ) | | (493 | ) | |||||||||||
Proceeds from the sale of fixed assets |
| | 44 | | 44 | ||||||||||||||
Net cash used in investing activities |
$ | | $ | (222 | ) | $ | (227 | ) | $ | | $ | (449 | ) | ||||||
Financing activities |
|||||||||||||||||||
Borrowings of revolving debt |
| 47,000 | | | 47,000 | ||||||||||||||
Net (payments) receipts on intercompany debt |
(152 | ) | (14,261 | ) | 14,413 | | | ||||||||||||
Net cash provided by (used in) financing activities |
$ | (152 | ) | $ | 32,739 | $ | 14,413 | $ | | $ | 47,000 | ||||||||
Decrease in cash and cash equivalents |
| (13,409 | ) | | | (13,409 | ) | ||||||||||||
Cash and cash equivalents, beginning of period |
51 | 15,344 | | | 15,395 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 51 | $ | 1,935 | $ | | $ | | $ | 1,986 | |||||||||
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HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in Thousands)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirteen Weeks Ended September 27, 2008
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | |||||||||||||||
Operating activities |
|||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 155 | $ | (64,750 | ) | $ | (18,343 | ) | $ | | $ | (82,938 | ) | ||||||
Investing activities |
|||||||||||||||||||
Acquisition of fixed assets |
| (451 | ) | (1,293 | ) | | (1,744 | ) | |||||||||||
Acquisition of business |
| (9,003 | ) | | | (9,003 | ) | ||||||||||||
Proceeds from the sale of fixed assets |
| | 10 | | 10 | ||||||||||||||
Proceeds from the sale of available-for-sale securities |
| | 10,097 | | 10,097 | ||||||||||||||
Proceeds from the sale of held-to-maturity securities |
| | 5,000 | | 5,000 | ||||||||||||||
Net cash provided by (used in) investing activities |
$ | | $ | (9,454 | ) | $ | 13,814 | $ | | $ | 4,360 | ||||||||
Financing activities |
|||||||||||||||||||
Borrowings of revolving debt |
| 73,000 | | | 73,000 | ||||||||||||||
Repayments of long-term debt |
| (7,107 | ) | | | (7,107 | ) | ||||||||||||
Repayments of capital lease obligations |
| (157 | ) | | | (157 | ) | ||||||||||||
Net (payments) receipts on intercompany debt |
(168 | ) | 11,000 | (10,832 | ) | | | ||||||||||||
Net cash provided by (used in) financing activities |
$ | (168 | ) | $ | 76,736 | $ | (10,832 | ) | $ | | $ | 65,736 | |||||||
Increase (decrease) in cash and cash equivalents |
(13 | ) | 2,532 | (15,361 | ) | | (12,842 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
1,570 | 9,723 | 29,499 | | 40,792 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 1,557 | $ | 12,255 | $ | 14,138 | $ | | $ | 27,950 | |||||||||
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, without limitation, projections of earnings, revenues or financial items, statements of the plans, strategies and objectives of management for future operations, statements related to the future performance and growth potential of our brands, statements related to litigation matters, statements related to introducing new core and seasonal merchandise assortments, statements related to reducing returns, replacements and damages, statements related to new marketing initiatives and expanding electronic direct marketing initiatives, statements related to transportation costs, statements related to costs and availability of raw materials, statements related to macroeconomic and retail trends, statements related to our plans to open new retail stores, statements related to implementing new e-commerce functionality, statements related to future comparable store sales, statements related to our income tax provision and effective tax rate, statements related to government regulation, statements related to the use of our available cash, statements related to our projected capital expenditures, statements related to the impact of new accounting pronouncements, statements related to the impact of acquisitions, statements related to indemnifications under our agreements, and statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as will, may, should, expects, plans, anticipates, believes, estimates, predicts, intends, potential, continue, or the negative of such terms, or other comparable terminology.
Risk factors that may affect our results include the Risk Factors set forth in Harry and Davids Annual Report on Form 10-K for the fiscal year ended June 27, 2009, Part II Item 1A of the Quarterly Report on Form 10-Q, and those risks which may be described from time to time in Harry and Davids other filings with the Securities and Exchange Commission.
You should keep in mind that any forward-looking statement made by us in this Form 10-Q speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Quarterly Report after the date of this Quarterly Report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.
As used in this Item 2 and all of Part II, except as the context requires otherwise, reference to us, we, our and our company refer to Harry & David Holdings, Inc. and its subsidiaries on a consolidated basis. Dollars presented in this Item 2. are in thousands.
OVERVIEW
General
We are a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit and gourmet food products and other gifts, which are marketed under the Harry and David®, Wolfermans® and Cushmans® brands. We market our products through multiple channels, including direct marketing (primarily catalogs and Internet), business-to-business, our stores, and wholesale distribution through select retailers.
MATTERS AFFECTING COMPARABILITY
A portion of our Direct Marketing sales are derived from Fruit-of-the-Month Club® product shipments. As such, results in this segment may vary between periods due to variations in fruit availability year-to-year, as well as other factors.
RESULTS OF OPERATIONS
Net Sales
In order to conform to the current year presentation, in the thirteen weeks ended September 27, 2008, we have reclassified revenue from commercial fruit sales from the Other segment to the Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. We have also reclassified certain activities related to Cushmans from the Direct Marketing segment to the Wholesale segment.
The following table summarizes our net sales from continuing operations and net sales by reportable business segment for the periods indicated (dollars are in thousands).
Thirteen weeks ended |
Thirteen weeks ended |
|||||||||||
September 26, 2009 |
Percent of Total |
September 27, 2008 |
Percent of Total |
|||||||||
Direct Marketing |
$ | 19,672 | 42.5 | % | $ | 23,107 | 43.9 | % | ||||
Stores |
20,917 | 45.2 | % | 23,050 | 43.8 | % | ||||||
Wholesale |
5,675 | 12.3 | % | 6,450 | 12.3 | % | ||||||
Total net sales |
$ | 46,264 | 100.0 | % | $ | 52,607 | 100.0 | % | ||||
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Net sales from continuing operations of $46,264 for the thirteen weeks ended September 26, 2009, decreased $6,343, or 12.1%, from the thirteen weeks ended September 27, 2008. The decline in net sales was driven by lower volumes in all three of our operating segments.
Direct Marketing
Net sales in our Direct Marketing segment decreased $3,435 or 14.9% from the first quarter of fiscal 2009 to the first quarter of fiscal 2010. The decrease was attributable to lower sales volumes in our Harry & David® products, offset slightly by higher volumes in Wolfermans® and Cushmans® products.
Stores
Our Stores segment net sales decreased $2,133, representing a 9.3% decline in sales as comparable store sales declined 7.3% or approximately $1,599. The decrease was driven by lower traffic compared to last year.
As of September 26, 2009, we had 136 stores in operation compared to 144 stores in operation during the same quarter last fiscal year. Not included in the store counts above are two seasonal Cushmans stores. A store becomes comparable in the first fiscal month after it has been open for a full twelve fiscal months, at which point its results are included in comparable sales comparisons. When a stores square footage has been changed as a result of reconfiguration or relocation in the same mall or retail complex, the store continues to be treated as a comparable store. However, when a store is closed for an extended period of time, it is no longer treated as a comparable store and is excluded from comparable sales comparisons for that period.
Wholesale
Our Wholesale segment net sales declined $775, or 12.0%, from the first quarter of fiscal 2009 to the first quarter of fiscal 2010. The decline was attributable to lower sales volume with certain wholesale customers.
Gross Profit
The following table summarizes our gross profit from continuing operations, gross profit by reportable business segment, and gross profit as a percentage of consolidated and segment net sales for the periods indicated (dollars are in thousands).
Thirteen weeks ended |
Thirteen weeks ended |
|||||||||||
September 26, 2009 |
Percent of Net Sales |
September 27, 2008 |
Percent of Net Sales |
|||||||||
Direct Marketing |
$ | 4,822 | 24.5 | % | $ | 3,775 | 16.3 | % | ||||
Stores |
10,040 | 48.0 | % | 10,755 | 46.7 | % | ||||||
Wholesale |
1,361 | 24.0 | % | 1,678 | 26.0 | % | ||||||
Total gross profit |
$ | 16,223 | 35.1 | % | $ | 16,208 | 30.8 | % | ||||
Gross profit from continuing operations increased $15, or 0.1%, to $16,223 in the first quarter of fiscal 2010, from $16,208 in the first quarter of fiscal 2009. Consolidated gross profit as a percentage of consolidated net sales was 35.1% in the thirteen-week period ended September 26, 2009, and 30.8% in the thirteen-week period ended September 27, 2008.
Direct Marketing
Our Direct Marketing segment gross profit increased $1,047, or 27.7%, with gross margin increasing to 24.5% in the first quarter of fiscal 2010 from 16.3% in the first quarter of fiscal 2009. The increase in gross profit and 820 basis point improvement in gross margin were primarily driven by lower production costs, offset by higher markdowns and discounts.
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Table of Contents
Stores
Our Stores segment gross profit decreased $715, or 6.6%, with gross margin improving to 48.0% in the first quarter of fiscal 2010 from 46.7% in the first quarter of fiscal 2009. The gross profit decrease was driven by sales volumes, while the 130 basis point improvement in gross margin was driven by freight savings and higher average selling prices.
Wholesale
Our Wholesale segment gross profit decreased $317 or 18.9%, while gross margin declined to 24.0% in the first quarter of fiscal 2010 from 26.0% for the first quarter of fiscal 2009. The gross margin decline was driven by lower sales volumes and higher inventory reserves.
Selling, General and Administrative Expenses
The following table summarizes our selling, general and administrative expenses from continuing operations and by reportable business segment including these expenses as a percentage of net sales for the periods indicated (dollars are in thousands).
Thirteen weeks ended |
Thirteen weeks ended |
|||||||||||
September 26, 2009 |
Percent of Net Sales |
September 27, 2008 |
Percent of Net Sales |
|||||||||
Direct Marketing |
$ | 17,054 | 86.7 | % | $ | 19,862 | 86.0 | % | ||||
Stores |
15,510 | 74.2 | % | 17,042 | 73.9 | % | ||||||
Wholesale |
1,030 | 18.1 | % | 1,010 | 15.7 | % | ||||||
Total selling, general and administrative expenses |
$ | 33,594 | 72.6 | % | $ | 37,914 | 72.1 | % | ||||
Selling, general and administrative expenses from continuing operations decreased $4,320, or 11.4% from September 27, 2008 to September 26, 2009. The decrease in selling, general and administrative expenses was driven primarily by reductions in payroll and other personnel related expenses and advertising.
Consolidated selling, general and administrative expenses as a percentage of consolidated net sales were 72.6% in the thirteen-week period ended September 26, 2009, compared to 72.1% in the thirteen-week period ended September 27, 2008.
Other (Income) Expense, Net
Other (income) expense consists of interest and other non-operating expense (income). The following table summarizes other (income) expense for the periods indicated (dollars in thousands).
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 |
|||||||
Net interest expense |
$ | 4,696 | $ | 5,737 | ||||
Gain on debt prepayment |
| (2,843 | ) | |||||
Other (income) expense, net |
(23 | ) | 14 | |||||
Total other (income) expense |
$ | 4,673 | $ | 2,908 | ||||
Income Taxes
For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated annual effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates from continuing operations for the first quarter of fiscal 2010 and fiscal 2009 were 1.5% and 37.6%, respectively. For fiscal 2009, the difference in the effective rate and the federal statutory rate is primarily due to charitable contributions, tax credits, and state tax obligations.
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EBITDA
EBITDA is defined as earnings before net interest expense, income taxes, depreciation, and amortization. Our EBITDA from continuing operations for the thirteen-week period ended September 26, 2009, increased $1,102 primarily due to improved operating performance.
For an explanation of why management believes EBITDA is a useful measure for understanding our results of operations and a reconciliation of EBITDA to the most comparable GAAP measure, see Non-GAAP Financial Measure: EBITDA. The following table reconciles EBITDA from continuing operations to net cash used in operating activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net income or loss, which we believe to be the closest GAAP performance measure to EBITDA (dollars are in thousands).
Thirteen weeks ended September 26, 2009 |
Thirteen weeks ended September 27, 2008 |
|||||||
Net loss from continuing operations |
$ | (21,724 | ) | $ | (15,350 | ) | ||
Interest expense, net from continuing operations |
4,696 | 5,737 | ||||||
Benefit for income taxes from continuing operations |
(320 | ) | (9,264 | ) | ||||
Depreciation and amortization from continuing operations |
4,656 | 5,083 | ||||||
EBITDA from continuing operations |
$ | (12,692 | ) | $ | (13,794 | ) | ||
Interest expense, net from continuing operations |
(4,696 | ) | (5,737 | ) | ||||
Benefit for income taxes from continuing operations |
320 | 9,264 | ||||||
Amortization of deferred financing costs |
593 | 644 | ||||||
Stock option compensation expense |
59 | 119 | ||||||
Loss (gain) on disposal and impairment of fixed assets |
16 | (5 | ) | |||||
Gain on sale of short-term investments |
| (64 | ) | |||||
Deferred income taxes |
7,315 | 5,704 | ||||||
Amortization of deferred pension loss |
312 | 29 | ||||||
Gain on debt repayment |
| (2,843 | ) | |||||
Changes in operating assets and liabilities from continuing operations |
(51,187 | ) | (76,745 | ) | ||||
Net cash used in operating activities from continuing operations |
(59,960 | ) | (83,428 | ) | ||||
Net cash provided by operating activities from discontinued operations |
| 490 | ||||||
Net cash used in operating activities |
$ | (59,960 | ) | $ | (82,938 | ) | ||
In the thirteen-week period ended September 26, 2009, net loss and EBITDA from continuing operations included:
| $196 of consulting fees associated with certain corporate initiatives and information technology projects; |
| $16 loss on disposal and impairment of fixed assets; |
| $250 of fees paid to Wasserstein and Highfields under the management agreement; |
| $114 benefit from severance and re-organization payroll and benefits; |
| $25 gain related to FIN 48 liabilities; and |
| $89 in approved recruiting and relocation expenses. |
In the thirteen-week period ended September 27, 2008, net loss and EBITDA from continuing operations included:
| $526 of consulting fees associated with certain corporate initiatives and information technology projects; |
| $300 of income associated with a vendor settlement; |
| $87 of expense related to inventory step-up amortization related to our acquisition; |
| $5 gain on disposal of fixed assets; |
| $2,843 net gain on repayment of long-term debt; |
| $82 of expense associated with a leased facility identified for closure; |
| $250 of fees paid to Wasserstein and Highfields under the management agreement; and |
| $316 of severance and re-organization payroll and benefits. |
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity and capital resource needs are to service our debt, finance working capital and make capital expenditures. Due to the highly seasonal nature of our business, we rely heavily on our revolving credit facility to finance operations leading up to the December holiday selling season. Our available cash and borrowings are used to fund inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday selling season. Generally, cash provided by operations peaks during our second fiscal quarter because of the holiday selling season (see Seasonality below).
Based upon our current operations and historical results, we believe that our cash flow from operations, together with available cash and borrowings under our revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, lease payments and scheduled interest payments and to fund our future growth for the next twelve months. Certain loan covenants in the revolving credit facility and in the indenture governing the Senior Notes restrict the transfer of funds from the direct and indirect subsidiaries to the parent in the form of cash dividends, loans or advances. To the extent additional funding is required beyond the twelve-month horizon, we expect to seek additional financing in the public or private debt or equity capital markets; however, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us or at all. Our equity sponsors, Wasserstein & Co. and Highfields Capital Management, are not obligated to provide financing to us. If we are unable to obtain the capital we require to implement our business strategy on acceptable terms or in a timely manner, we would attempt to take appropriate actions to tailor our activities to match our available financing, including revising our business strategy and future growth plans to accommodate the amount of available financing.
Cash Flows Used in Operating Activities from Continuing Operations
Cash used in operating activities from continuing operations totaled $59,960 in the thirteen-week period ended September 26, 2009, compared to $83,428 in the thirteen-week period ended September 27, 2008. The decrease in cash usage was primarily due to reductions in catalog expenses and inventories which is consistent with our operational plan to shift a significant portion of the seasonal inventory build and advertising expenses into our second fiscal quarter.
Cash Flows Provided by (Used in) Investing Activities from Continuing Operations
Cash used in investing activities from continuing operations totaled $449 in the thirteen-week period ended September 26, 2009, compared to cash provided of $4,360 in the thirteen week period ended September 27, 2008. Investing activities in the first thirteen weeks of fiscal 2010 consisted primarily of capital expenditures. Investing activities in the first quarter of fiscal 2009 consisted primarily of proceeds on short-term investments, partially offset by cash used for the Cushmans acquisition and other capital expenditures.
Cash Flows Provided by Financing Activities from Continuing Operations
Cash provided by financing activities from continuing operations totaled $47,000 for the thirteen weeks ended September 26, 2009, compared to $65,736 in cash provided in the thirteen weeks ended September 27, 2008. Financing activities were primarily comprised of borrowings on our revolving credit facility for both periods presented. We had increased borrowings in the first quarter of fiscal 2009 as a result of cash utilized to fund our acquisitions and working capital which was offset by funds used to repurchase our Senior Notes.
Cash Flows from Discontinued Operations
Cash flows provided by operating activities from discontinued operations totaled $490 for the thirteen weeks ended September 27, 2008. Cash from discontinued operations was primarily due to cash payments made to us for transitional services we provided to the buyers of Jackson & Perkins.
The divested Jackson & Perkins business did not impact our cash flows in the first quarter of fiscal 2010.
Borrowing Arrangements
Revolving Credit Facility
Our principal sources of liquidity are available cash, cash flows from operations and borrowings under our revolving credit facility entered into by our subsidiary, Harry and David. The revolving credit facility has a maturity date of March 20, 2011. Our ability to borrow under the revolving credit facility is subject to compliance with the borrowing base and with financial covenants and other customary conditions, including that no default under the facility shall have occurred and be continuing. Borrowings under the revolving credit facility bear interest, at our option, at either a base rate, based on the higher of the federal funds rate plus 0.5% or the corporate base lending rate of UBS AG, or a Eurodollar rate, based on the rate offered in the London interbank market (LIBOR), plus in each case a borrowing margin determined based on our consolidated leverage ratio. Due to the seasonal nature of our business,
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we draw on our revolving credit facility to provide seasonal working capital to support inventory buildup and catalog production in advance of the holiday selling season and for other general corporate purposes. We have typically generated substantial amounts of cash each holiday selling season. We are required by our banks to pay down the revolving credit facility to zero by the next business day following December 25th of each year. Cash generated during the holiday selling season is also typically used to fund our operations for several months during the post-holiday selling season, until we begin to build inventories and other working capital components to support our next holiday selling season.
As of September 26, 2009, we had approximately $47,000 in borrowings and $761 in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the credit agreement are determined in accordance with our asset-based debt limitation formula. Total additional available borrowings at September 26, 2009, were approximately $41,558. We are required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitment fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the consolidated statement of operations.
Harry and Davids obligations under the revolving credit facility are guaranteed by us and by all of Harry and Davids existing and future direct and indirect domestic subsidiaries and are secured by first-priority pledges of the stock of Harry and Davids and each of the subsidiary guarantors equity interests and 65% of the equity interests of any future first-tier foreign subsidiaries, as well as first-priority security interests in and mortgages on all of our, Harry and Davids and each of the subsidiary guarantors respective tangible and intangible property.
The revolving credit facility requires mandatory prepayments upon the receipt of proceeds from certain assets sales, casualty events and debt offerings. The revolving credit facility contains customary affirmative and negative covenants for senior secured credit facilities of this type, including, but not limited to, limitations on the incurrence of indebtedness, capital expenditures, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates.
In addition, the revolving credit facility requires that, on a consolidated basis, we maintain as of December 31 st an available cash balance (defined as all cash, cash equivalents and short-term investments, minus all accounts payable) of $50,000, failing which we are required to meet and maintain a minimum fixed charge coverage ratio, subject to certain definitions and conditions. We also are limited to the amount of capital expenditures in each fiscal year, subject to certain adjustments, through the term of the revolving credit facility.
Our ability to comply with these covenants and to meet and maintain such financial ratios and tests may be affected by events beyond our control, such as those described under Item 1A Risk Factors in our Annual Report on Form 10-K. If we do not meet and maintain these financial ratios, we may not be able to borrow and the lenders could accelerate all amounts outstanding to be immediately due and payable which could also trigger a similar right under other agreements, including our indenture.
At September 26, 2009, we were in compliance with all of our covenants under the Credit Agreement.
Senior Notes
As of September 26, 2009, Harry and David, our wholly owned subsidiary, has outstanding $58,170 in Senior Floating Rate Notes due March 1, 2012, and $140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The $58,170 in Senior Floating Rate Notes accrues interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 5.35% at September 26, 2009. The $140,192 in Senior Fixed Rate Notes accrues interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first of March and December.
The Senior Notes are the senior unsecured obligations of Harry and David are guaranteed on a senior unsecured basis by us and all of Harry and Davids subsidiaries.
The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, engaging in asset dispositions or acquisitions, making investments, and our and our subsidiaries ability to pay dividends and other restricted payments, our ability to incur liens and transactions with affiliates. Our ability to comply with these covenants may be affected by events beyond our control, such as those described under Item 1A. -Risk Factors in our Annual Report on Form 10-K. If we do not remain in compliance with these covenants, we may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes and lenders under the credit facility could accelerate all amounts outstanding to be immediately due and payable.
At September 26, 2009, we were in compliance with all of our covenants under the indenture. Our debt service requirements consist primarily of interest expense on the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash requirements are expected to consist mainly of cash to fund our operations, capital expenditures, cash payments under various operating leases and repayment of any borrowings under our revolving credit facility.
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We expect to finance any future acquisitions using cash, capital stock, debt securities or the assumption of indebtedness. However, the restrictions imposed on us by the agreements governing our debt outstanding at the time may affect this strategy. In addition, to fully implement our growth strategy and meet the resulting capital requirements, we may be required to request increases in amounts available under our revolving credit facility, enter into new credit facilities, issue new debt securities or raise additional capital through equity financings. We may not be able to obtain an increase in the amounts available under our revolving credit facility on satisfactory terms, if at all, and we may not be able to successfully complete any future bank financing or other debt or equity financing on satisfactory terms, if at all. As a result, our ability to make future acquisitions is uncertain. We may also incur expenses in pursuing acquisitions that are never consummated.
Certain funds sponsored by Wasserstein Partners, LP, and its affiliates (Wasserstein) and certain funds sponsored by Highfields Capital Management LP (Highfields) currently own approximately 63% and 34%, respectively, of our common stock. Wasserstein and/or Highfields have purchased, and may continue to purchase, our outstanding Senior Notes in open market purchases, privately negotiated transactions or otherwise. Such purchases will depend on prevailing market conditions and other factors, and there can be no assurance as to when or whether any such purchases may occur. The amounts involved may be material.
Seasonality
Historically, our business has been subject to substantial seasonal variations in demand. A significant portion of our net sales and net earnings are realized during the holiday selling season from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January to September. We believe this is a general pattern for the direct-to-customer and retail industries, but it is more pronounced for our company than for others due to the gift-giving nature of our products.
Accordingly, changing economic conditions or deviations from projected demand for products during the fourth calendar quarter can have a materially favorable or adverse impact on our financial position and results for the full year. Because we commit to certain fixed costs in anticipation of expected sales during the holiday selling season in the fourth calendar quarter, if our actual sales during that calendar quarter are lower than anticipated, our results of operations and profitability will be negatively impacted. In addition, our primary growing season occurs during the second and third calendar quarters. Because we must commit to certain fixed costs before we know the results of a particular harvest, inclement weather conditions and agricultural pests leading to lower harvest yields can also negatively impact our sales and profitability.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experiences and various other factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.
NON-GAAP FINANCIAL MEASURE: EBITDA
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the 1934 Act, define and prescribe the conditions of use of certain non-GAAP financial information. Our measure of EBITDA meets the definition of a non-GAAP financial measure.
EBITDA is defined as earnings before net interest expense, income taxes, depreciation and amortization and is computed on a consistent method from quarter to quarter and year to year.
We use EBITDA, in conjunction with GAAP measures such as cash flows from operating activities, cash flows from investing activities and cash flows from financing activities, to assess our liquidity, financial leverage and ability to service our outstanding debt. For example, certain covenant and compliance ratios under our revolving credit facility and the indenture governing the outstanding Senior Notes use EBITDA, as further adjusted for certain items as defined in each agreement. If we are not able to comply with these covenants, we may not be able to borrow additional amounts, incur more debt to finance our ongoing operations and working
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capital or take other actions. In addition, the lenders could accelerate the outstanding amounts, which could materially and adversely affect our liquidity and financial position.
We use EBITDA, in conjunction with the other GAAP measures discussed above, to assess our debt to cash flow leverage, to plan and forecast overall expectations and to evaluate actual results against such expectations; to assess our ability to service existing debt and incur new debt; and to measure the rate of capital expenditure and cash outlays from year to year and to assess our ability to fund future capital and non-capital projects. We believe that, like management, debt and equity investors frequently use (and expect to be able to continue to use) EBITDA to compare debt to cash flow leverage among companies.
EBITDA, when used as a liquidity measure, has limitations as an analytical tool. These limitations include:
| EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
| EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| EBITDA is not a measure of discretionary cash available to us to pay down debt; |
| EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and |
| Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure. |
To compensate for these limitations, we analyze EBITDA in conjunction with other GAAP financial measures impacting liquidity and cash flow, including depreciation and amortization, capital spending and net income in terms of the impact on depreciation and amortization, changes in net working capital, other non-operating income and losses that affect cash flow and liquidity, interest expense and taxes. Similarly, you should not consider EBITDA in isolation or as a substitute for these GAAP liquidity measures.
We also use EBITDA, in conjunction with GAAP measures such as operating income and net income, to assess our operating performance and that of each of our businesses and segments. Specifically, we use EBITDA, alongside the GAAP measures mentioned above, to measure profitability and profit margins and to make budgeting decisions relating to historical performance and future expectations of our operating segments and business as a whole, and to make performance comparisons of our company compared to other peer companies. We believe that, like management, debt and equity investors frequently use (and expect to be able to continue to use) EBITDA to assess our operating performance and compare it to that of other peer companies.
Furthermore, we use EBITDA (in conjunction with other GAAP and non-GAAP measures such as operating income, capital expenditures, taxes and changes in working capital) to measure return on capital employed. EBITDA allows us to determine the cash return before taxes, capital spending and changes in working capital generated by the total equity employed in our company. We believe return on capital employed is a useful measure because it indicates the total returns generated by our business, which, when viewed together with profit margin information, allows us to better evaluate profitability and profit margin trends.
As a performance measure, we also use return on capital employed to assist us in making budgeting decisions related to how debt and equity capital is being employed and how it will be employed in the future. Historical measures of return on capital employed, which include the use of EBITDA, are used in estimating and predicting future return on capital trends. Combined with other GAAP financial measures, historical return on capital information helps us make decisions about how to employ capital effectively going forward. However, because EBITDA does not take into account certain of these non-cash items, which do affect our operations and performance, EBITDA has inherent limitations as an operating measure. These limitations include:
| EBITDA does not reflect the cash cost of acquiring assets or the non-cash depreciation and amortization of those assets over time, or the replacement of those assets in the future; |
| EBITDA does not reflect cash capital expenditures on an historical basis or in the current period, or address future requirements for capital expenditures or contractual commitments; |
| EBITDA is not a measure of discretionary cash available to us to invest in the growth of our business; |
| EBITDA does not reflect changes in working capital or cash needed to fund our business; |
| EBITDA does not reflect our tax expenses or the cash payments we are required to make to fulfill our tax liabilities; and |
| Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure. |
To compensate for these limitations we analyze EBITDA alongside other GAAP financial measures of operating performance, including, operating income, net income and changes in working capital, in terms of the impact on other non-operating income and losses that affect profitability and return on capital. You should not consider EBITDA in isolation or as a substitute for these GAAP measures of operating performance.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK |
We are exposed to certain market risks as part of our normal business operations, including risks from changes in interest rates and commodity prices, which could impact our financial condition, results of operations and cash flows. We plan to manage our exposure to these and other market risks through regular operating and financing activities and on a limited basis, the use of derivative financial instruments. We intend to use such derivative financial instruments as risk management tools and not for speculative investment purposes.
Interest Rate Risk
Interest on our floating rate notes and on our borrowings under the revolving credit facility accrues at variable rates based on factors such as LIBOR and the federal funds overnight rate. Assuming we were to borrow the entire amount available under our revolving credit facility, together with the principal amount due for our floating rate notes as of September 26, 2009, a 1.0% change in the interest rate on our variable rate debt would result in a $1,832 corresponding effect on our interest expense on an annual basis.
Commodity Risk
We have commodity risk as a result of some of the raw materials we utilize in our business, including paper for our catalog operations, corrugated packaging for our shipping needs, chocolate, butter fat, sugar and cheese used to produce some of our products, and fruit that we do not grow ourselves. Although we do not enter into formal hedging arrangements to manage our commodity risk, we typically have multiple sources for these commodities.
ITEM 4. | CONTROLS AND PROCEDURES |
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of September 26, 2009. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of September 26, 2009, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
For details regarding our legal proceedings, see Note 10 Commitments and Contingencies within Part I of this Form 10-Q.
ITEM 1A. | RISK FACTORS |
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 27, 2009.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM 5. | OTHER INFORMATION |
None.
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ITEM 6. | EXHIBITS |
31.1 | Certification of Principal Executive Officer | |
31.2 | Certification of Principal Financial Officer | |
32.1 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
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SIGNATURES
The Company has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereto duly authorized.
HARRY & DAVID HOLDINGS, INC. | ||
By: | /S/ WILLIAM H. WILLIAMS | |
William H. Williams | ||
President and Chief Executive Officer | ||
By: | /S/ EDWARD F. DUNLAP | |
Edward F. Dunlap | ||
Chief Financial Officer |
November 5, 2009
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