Attached files
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 March 27, 2010
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, or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | ¨ | 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 May 1, 2010 | |
Common stock $0.01 par value | 1,033,295 |
Table of Contents
HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES
INDEX
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Harry & David Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in Thousands, Except Share and Per Share Data)
March 27, 2010 |
June 27, 2009 |
March
28, 2009 (Restated) |
||||||||||
Unaudited | Unaudited | |||||||||||
Assets |
||||||||||||
Current assets |
||||||||||||
Cash and cash equivalents |
$ | 41,602 | $ | 15,395 | $ | 33,581 | ||||||
Short-term investments |
4,995 | | | |||||||||
Trade accounts receivable, net |
2,045 | 1,466 | 4,184 | |||||||||
Other receivables |
1,514 | 2,062 | 3,459 | |||||||||
Inventories |
30,918 | 44,738 | 41,366 | |||||||||
Deferred catalog expenses |
2,690 | 2,657 | 4,265 | |||||||||
Deferred income taxes |
| 5,230 | 529 | |||||||||
Other current assets |
6,514 | 4,862 | 8,866 | |||||||||
Total current assets |
90,278 | 76,410 | 96,250 | |||||||||
Fixed assets, net |
131,953 | 145,477 | 150,528 | |||||||||
Goodwill |
12,236 | 12,236 | 12,211 | |||||||||
Intangibles, net |
32,405 | 33,057 | 33,418 | |||||||||
Deferred financing costs, net |
4,196 | 5,975 | 6,568 | |||||||||
Deferred income taxes |
| 1,423 | 324 | |||||||||
Other assets |
2,058 | 2,114 | 3,403 | |||||||||
Total assets |
$ | 273,126 | $ | 276,692 | $ | 302,702 | ||||||
Liabilities and stockholders deficit |
||||||||||||
Current liabilities |
||||||||||||
Accounts payable |
$ | 8,212 | $ | 11,171 | $ | 10,299 | ||||||
Accrued payroll and benefits |
17,749 | 14,105 | 14,437 | |||||||||
Deferred revenue |
21,183 | 16,317 | 22,497 | |||||||||
Deferred income taxes |
2,488 | | | |||||||||
Income taxes payable |
15,239 | 13,643 | 19,360 | |||||||||
Accrued interest |
1,297 | 4,485 | 1,470 | |||||||||
Other accrued liabilities |
2,337 | 2,980 | 3,879 | |||||||||
Current portion of capital lease obligation |
309 | 147 | 642 | |||||||||
Total current liabilities |
68,814 | 62,848 | 72,584 | |||||||||
Long-term debt and capital lease obligation |
198,362 | 198,671 | 198,671 | |||||||||
Accrued pension liabilities |
24,498 | 27,364 | 24,088 | |||||||||
Deferred income taxes |
1,000 | | | |||||||||
Other long-term liabilities |
9,617 | 9,591 | 10,162 | |||||||||
Total liabilities |
302,291 | 298,474 | 305,505 | |||||||||
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 March 27, 2010, June 27, 2009 and March 28, 2009, respectively |
10 | 10 | 10 | |||||||||
Additional paid-in capital |
16,576 | 6,673 | 6,547 | |||||||||
Accumulated other comprehensive loss, net of taxes |
(9,084 | ) | (9,795 | ) | (7,992 | ) | ||||||
Accumulated deficit |
(36,667 | ) | (18,670 | ) | (1,368 | ) | ||||||
Total stockholders deficit |
(29,165 | ) | (21,782 | ) | (2,803 | ) | ||||||
Total liabilities and stockholders deficit |
$ | 273,126 | $ | 276,692 | $ | 302,702 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in Thousands)
(Unaudited)
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
March 27, 2010 |
March 28, 2009 |
March 27, 2010 |
March
28, 2009 (Restated) |
|||||||||||||
Net sales |
$ | 66,192 | $ | 74,912 | $ | 379,488 | $ | 435,245 | ||||||||
Cost of goods sold |
49,138 | 52,194 | 214,996 | 249,702 | ||||||||||||
Gross profit |
17,054 | 22,718 | 164,492 | 185,543 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
52,747 | 48,548 | 157,463 | 189,706 | ||||||||||||
Selling, general and administrative related party |
250 | 250 | 750 | 750 | ||||||||||||
52,997 | 48,798 | 158,213 | 190,456 | |||||||||||||
Operating income (loss) |
(35,943 | ) | (26,080 | ) | 6,279 | (4,913 | ) | |||||||||
Other (income) expense: |
||||||||||||||||
Interest income |
(37 | ) | (22 | ) | (54 | ) | (246 | ) | ||||||||
Interest expense |
4,689 | 4,870 | 14,293 | 16,694 | ||||||||||||
Gain on debt repurchases |
| | | (15,416 | ) | |||||||||||
Other (income) expense, net |
(47 | ) | (27 | ) | (416 | ) | (50 | ) | ||||||||
4,605 | 4,821 | 13,823 | 982 | |||||||||||||
Loss from continuing operations before income taxes |
(40,548 | ) | (30,901 | ) | (7,544 | ) | (5,895 | ) | ||||||||
Provision (benefit) for income taxes |
(12,556 | ) | (12,702 | ) | 10,453 | (2,684 | ) | |||||||||
Net loss from continuing operations |
(27,992 | ) | (18,199 | ) | (17,997 | ) | (3,211 | ) | ||||||||
Discontinued operations: |
||||||||||||||||
Gain on sale of Jackson & Perkins |
| 22 | | 64 | ||||||||||||
Operating income from discontinued operations |
| 146 | | 485 | ||||||||||||
Provision for income taxes on discontinued operations |
| 69 | | 215 | ||||||||||||
Net income from discontinued operations |
| 99 | | 334 | ||||||||||||
Net loss |
$ | (27,992 | ) | $ | (18,100 | ) | $ | (17,997 | ) | $ | (2,877 | ) | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in Thousands)
(Unaudited)
Thirty-nine Weeks Ended | ||||||||
March 27, 2010 |
March
28, 2009 (Restated) |
|||||||
Operating activities |
||||||||
Net loss |
$ | (17,997 | ) | $ | (2,877 | ) | ||
Less: Net income from discontinued operations |
| 334 | ||||||
Net loss from continuing operations |
(17,997 | ) | (3,211 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities from continuing operations: |
||||||||
Depreciation and amortization of fixed assets |
13,565 | 14,388 | ||||||
Amortization of intangible assets |
652 | 1,397 | ||||||
Amortization of deferred financing costs |
1,779 | 1,842 | ||||||
Stock option compensation expense |
9,903 | 356 | ||||||
Loss on impairment and disposal of fixed assets and other long-lived assets, net |
915 | 13,859 | ||||||
Gain on sale of short-term investments |
| (64 | ) | |||||
Deferred income taxes |
9,818 | 952 | ||||||
Amortization of deferred pension loss |
1,034 | 1,418 | ||||||
Gain on debt repayment |
| (15,416 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts receivable and other receivables |
(31 | ) | (2,997 | ) | ||||
Inventories |
13,820 | 13,741 | ||||||
Deferred catalog expenses and other assets |
(1,629 | ) | 969 | |||||
Accounts payable |
(2,959 | ) | (8,838 | ) | ||||
Accrued liabilities |
364 | (5,482 | ) | |||||
Income taxes |
1,596 | (4,250 | ) | |||||
Accrued pension liabilities |
(2,866 | ) | (2,122 | ) | ||||
Deferred revenue |
4,866 | 5,425 | ||||||
Net cash provided by operating activities from continuing operations |
32,830 | 11,967 | ||||||
Net cash provided by operating activities from discontinued operations |
| 881 | ||||||
Net cash provided by operating activities |
32,830 | 12,848 | ||||||
Investing activities |
||||||||
Acquisition of fixed assets |
(1,541 | ) | (6,005 | ) | ||||
Acquisition of business |
| (8,509 | ) | |||||
Acquisition of held-to-maturity securities |
(4,995 | ) | | |||||
Proceeds from the sale of fixed assets |
60 | 19 | ||||||
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 |
(6,476 | ) | 602 | |||||
Financing activities |
||||||||
Borrowings on revolving debt |
85,000 | 113,000 | ||||||
Repayments of revolving debt |
(85,000 | ) | (113,000 | ) | ||||
Repayments of capital lease obligation |
(147 | ) | (295 | ) | ||||
Repurchases of long-term debt |
| (20,366 | ) | |||||
Net cash used in financing activities from continuing operations |
(147 | ) | (20,661 | ) | ||||
Increase/(decrease) in cash and cash equivalents |
26,207 | (7,211 | ) | |||||
Cash and cash equivalents, beginning of period |
15,395 | 40,792 | ||||||
Cash and cash equivalents, end of period |
$ | 41,602 | $ | 33,581 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
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 catalogs distributed through the mail, the Internet, 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 March 27, 2010 and March 28, 2009, the Condensed Consolidated Statements of Operations for the thirteen-week and the thirty-nine week periods ended March 27, 2010 and March 28, 2009, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended March 27, 2010 and March 28, 2009 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.
For further information, refer to the consolidated financial statements and the notes thereto for the year ended June 27, 2009, which are not included in this report.
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 and thirty-nine week periods then ended. Intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet as of June 27, 2009 presented in this Form 10-Q has been derived from the Companys audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
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.
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.
Certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment. For further information see Note 3-Restatement.
The Companys total comprehensive loss for the thirteen and thirty-nine weeks ended March 27, 2010 of $27,674 and $17,286 respectively, includes adjustments (net of tax) related to unrealized net losses associated with its pension plans of $318 and $711, respectively. The Companys total comprehensive income for the thirteen and thirty-nine weeks ended March 28, 2009 of $22,592 and $8,041, respectively, includes a $4,492 and $4,434 of adjustments (net of tax) related to unrealized net losses associated with its pension plans.
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
NOTE 3RESTATEMENT
Restatement and correction
During the fourth quarter of fiscal 2009, the Company concluded that the Wolfermans impairment charge recorded in the second fiscal quarter was calculated incorrectly. The correction impacted the financial statements in the previously filed form 10-Qs for the second and third fiscal quarters of 2009. In this form 10-Q, the adjustments are reflected in goodwill as of March 28, 2009 in the Condensed Consolidated Balance Sheet, selling, general and administrative expenses and the provision for income taxes in the year-to-date period ended March 28, 2009 in the Condensed Consolidated Statement of Operations. While certain captions comprised in cash provided by operating activities were impacted by the correction, total net operating cash flows did not change from what was previously reported. The financial statement line items on the balance sheet and statement of operations have been restated as follows:
Balance sheet restatement
As
of March 28, 2009 |
||||
Unaudited | ||||
Goodwill |
||||
As previously reported |
$ | 11,000 | ||
As restated |
12,211 | |||
Accumulated deficit |
||||
As previously reported |
$ | (2,098 | ) | |
As restated |
(1,368 | ) |
Statement of operations restatement
Thirty-nine Weeks Ended March 28, 2009 |
||||
Unaudited | ||||
Selling, general and administrative expense |
||||
As previously reported |
$ | 190,917 | ||
As restated |
189,706 | |||
Provision for income taxes from continuing operations |
||||
As previously reported |
$ | (3,165 | ) | |
As restated |
(2,684 | ) | ||
Net loss from continuing operations |
||||
As previously reported |
$ | (3,941 | ) | |
As restated |
(3,211 | ) | ||
Net loss |
||||
As previously reported |
$ | (3,607 | ) | |
As restated |
(2,877 | ) |
NOTE 4NEW ACCOUNTING PRONOUNCEMENTS AND ADOPTIONS
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 Accounting Standards Codification (ASC) Subtopic 605-25, Revenue Recognition-Multiple-Element 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 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,
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
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. 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 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 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 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 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 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 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 ended June 26, 2010. The Company is currently evaluating the impact of adopting FSP 132(R)-1 on 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 ASCTopics 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 Company adopted FSP 142-3 in fiscal year 2010. Early adoption is prohibited. 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 adoption of FSP 142-3 did not have a material impact on the condensed consolidated financial statements.
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 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.
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
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. Refer to Note 5-Balance Sheet Information for further discussion of impairment valuation.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which amends the disclosure guidance with respect to fair value measurements. Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new guidance around the Level 3 activity reconciliations, which is effective for fiscal years beginning after December 15, 2010. The adoption of the guidance required for the interim reporting period ending March 27, 2010 did not impact the Companys condensed consolidated financial statements and adoption of the guidance required for interim and annual reporting periods after December 15, 2010 is not expected to have an impact on the Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09), which eliminates the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in order to remove potential conflicts with current SEC guidance. The relevant provisions of ASU 2010-09 were effective upon the date of issuance of February 24, 2010, and the Company adopted the amendments accordingly. As the update only pertained to disclosures, ASU 2010-09 had no impact on the Companys Condensed Consolidated Financial Statements upon adoption.
NOTE 5BALANCE SHEET INFORMATION
Financial Instruments
The Companys financial instruments consist principally of cash and cash equivalents, short-term investments 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:
March 27, 2010 | ||||||
Book value | Fair value | |||||
Senior floating rate notes |
$ | 58,170 | $ | 42,464 | ||
Senior fixed rate notes |
140,192 | 103,742 | ||||
Total senior notes |
$ | 198,362 | $ | 146,206 | ||
Inventories
Inventories consist of the following:
March 27, 2010 |
June 27, 2009 |
March 28, 2009 | |||||||
Finished goods |
$ | 18,332 | $ | 18,056 | $ | 22,719 | |||
Materials, packaging supplies, and work-in-process |
8,954 | 20,734 | 14,982 | ||||||
Growing crops |
3,632 | 5,948 | 3,665 | ||||||
Total |
$ | 30,918 | $ | 44,738 | $ | 41,366 | |||
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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:
March 27, 2010 |
June 27, 2009 |
March 28, 2009 |
||||||||||
Land |
$ | 19,607 | $ | 19,607 | $ | 19,607 | ||||||
Land improvements and orchard development costs |
30,697 | 30,692 | 30,674 | |||||||||
Buildings and improvements |
58,622 | 58,517 | 58,073 | |||||||||
Machinery and equipment |
67,937 | 68,176 | 66,774 | |||||||||
Leasehold improvements |
9,872 | 10,611 | 10,511 | |||||||||
Purchased and internally developed software |
37,238 | 36,693 | 36,216 | |||||||||
Capital projects-in-process |
567 | 1,521 | 4,324 | |||||||||
224,540 | 225,817 | 226,179 | ||||||||||
Accumulated depreciation and amortization |
(92,587 | ) | (80,340 | ) | (75,651 | ) | ||||||
Total |
$ | 131,953 | $ | 145,477 | $ | 150,528 | ||||||
As of March 27, 2010, purchased and internally developed software includes software licenses acquired for $895 financed through an outstanding capital lease agreement. See Note 7 Borrowing Arrangements. Accumulated amortization of purchased and internally developed software costs was $22,723, $18,972 and $17,604 as of March 27, 2010, June 27, 2009 and March 28, 2009, respectively. Amortization of software costs, which include software assets financed through capital leases, were $1,241 and $1,333 for the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively, and $3,757 and $3,997 for the thirty-nine weeks ended March 27, 2010 and March 28, 2009, respectively.
The Company completed an evaluation of certain underperforming stores and related fixed assets and certain other long-lived assets. At December 26, 2009, as a result of that evaluation, the Company recorded a non-cash impairment charge of $699, all of which was related to fixed assets. A similar evaluation was completed at December 27, 2008, which resulted in an impairment charge of $3,600. The impairment charges were recorded within selling, general and administrative expenses within the condensed consolidated statement of operations. The impairment amounts were calculated by comparing the applicable stores net assets to fair value, which was based on a discounted cash flow model.
In the thirty-nine week period ended March 27,2010, the Company negotiated lease buy-outs for two of its stores and recognized $220 of termination costs, of which $120 remained unpaid as of March 27, 2010. In December 2009, the Company exercised its termination option related to its Eugene, Oregon call center lease and accrued the contractual amounts due of $78, all of which was paid as of March 27, 2010. As a result of the lease termination, fixed assets were reviewed for impairment and a charge of $231 was recorded in the thirteen weeks ended December 26, 2009.
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 Companys goodwill is related to both its Wolfermans reporting unit (included in the Companys Direct Marketing segment,) and its Cushmans reporting units (included in both the Companys Direct Marketing and Wholesale segments). The Company tests goodwill and other intangible assets for impairment on an interim basis should factors or indicators become apparent that would require an impairment test. Historically, the annual impairment testing has occurred during the fourth quarter of each fiscal year for the reporting units and indefinite-lived intangibles.
In the third fiscal quarter of 2010, due to unfavorable revenue and operating income results compared to expectations attributable to the Cushmans® brand, an interim impairment test was performed specific to the Cushmans goodwill and trade name. The interim test did not result in an impairment charge related to either the Cushmans goodwill or its trade name. There was no indication of impairment to warrant interim testing for the Harry and David trade name, nor for the goodwill and intangibles related to its Wolfermans® brand.
In the second quarter of fiscal 2009, the retail industry had declined at a rate that exceeded the Companys forecasted expectations and negatively impacted the Companys operating results for the third quarter of fiscal 2009 and the future outlook on the industry. Management believed the decline in the overall industry, the resulting decline in the Companys operating results from plan, and downward revisions to financial forecasts to be factors that required the Company to perform an interim impairment test. As a result, in connection with the preparation of its second quarter of fiscal 2009 financial statements, the Company performed an interim impairment test on its goodwill, indefinite-lived and other intangible balances.
The estimated fair value of each of the reporting units included consideration of the impact of the previously noted trends in the business and industry in fiscal 2009, primarily the decline in sales caused by the adverse economic climate. Using a discounted cash flows model, the Harry and David trade name, Wolfermans customer list and the goodwill and related intangibles associated with the Cushmans acquisition were tested and no impairment was indicated as of December 27, 2008. Based on the testing the Company
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Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
concluded that the fair values of the Wolfermans goodwill, recipe and trade name were less than their related book values, using a discounted cash flows model. As a result, the Company has recorded an impairment charge of $10,205 ($686 related to goodwill and $9,519 related to the recipe and trade name) in the second quarter within selling, general and administrative expenses within the fiscal 2009 condensed consolidated statement of operations.
Amortization expense was $211 and $465 for the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively, and $652 and $1,397 for the thirty-nine weeks ended March 27, 2010 and March 28, 2009, 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:
March 27, 2010 | 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 | (9,060 | ) | 189 | 9,249 | (8,467 | ) | 782 | ||||||||||||
Favorable lease agreements |
1,676 | (1,599 | ) | 77 | 1,676 | (1,540 | ) | 136 | ||||||||||||
$ | 55,300 | $ | (10,659 | ) | $ | 44,641 | $ | 55,300 | $ | (10,007 | ) | $ | 45,293 | |||||||
The estimated amortization expense for each of the next three fiscal years is as follows:
Fiscal Period: |
Direct Marketing Customer and Rental Lists |
Favorable Lease Agreements |
Total Amortization Expense | ||||||
Remaining 2010 |
9 | 17 | 26 | ||||||
2011 |
142 | 39 | 181 | ||||||
2012 |
38 | 21 | 59 | ||||||
Total |
$ | 189 | $ | 77 | $ | 266 | |||
Impairment Testing and Assumptions
The impairment testing results related to our indefinite-lived intangible assets, our goodwill and long-lived assets were calculated using managements estimates of future forecasted cash flows to be generated from the respective assets and a discount rate inherent within the Companys cost of capital. The nature of these analyses requires significant judgment by management about future operating results, including revenues, margins, operating expenses and applicable discount rate. If the Company had used different assumptions and estimates regarding the future operating results or discount rate, the impairment charges might have been materially different. However, management believes that the assumptions and estimates are reasonable and represent the most likely future operating results based upon the current information available. The Company classifies the inputs used in these measurements as Level 3 within the fair value hierarchy prescribed by ASC Topic 820.
NOTE 6INCOME TAXES
For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates from continuing operations for the third quarter of fiscal 2010 and fiscal 2009 were 31.0% and 41.1%, respectively. For the third quarter of fiscal 2010, the difference in the effective rate and the federal statutory rate is primarily due to a valuation allowance adjustment expense of $4,113, relating to certain deferred tax assets, and state tax benefits of $1,541.
The Company routinely reviews the future realization of deferred tax assets based on projected future reversals of taxable temporary differences, available tax planning strategies and projected future taxable income. As of March 27, 2010, the Company believes that a valuation allowance of $13,155 is required to reduce deferred tax assets to an amount that is more likely than not to be realized. The nature of these analyses requires significant judgment by management about future operating results, including revenues, margins and operating expenses.
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
NOTE 7BORROWING 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.
In connection with this facility and related amendments, the Company had remaining deferred financing costs of $1,240 and $2,172 as of March 27, 2010 and June 27, 2009, respectively.
As of March 27, 2010, unused borrowings under the revolving credit facility were $123,989, reflecting no borrowings, and $1,011 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 March 27, 2010 was $174. 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.
Long-Term Debt
As of March 27, 2010, 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 reflect amounts repurchased by the Company on the open-market in fiscal 2008 and fiscal 2009. For further details on the repurchases during the thirteen weeks and thirty-nine weeks ended March 28, 2009, 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 5.25% and 5.67% at March 27, 2010 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 March 27, 2010 and June 27, 2009, $2,956 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.
Long-Term Debt Repurchases
During the thirty-nine weeks ended March 28, 2009, the Company purchased $36,638 in aggregate principal amounts of fixed and floating rate Senior Notes in open-market purchases for $20,366. This debt prepayment resulted in a net gain of $15,416, comprised of a $16,272 discount on the repayment of outstanding principal, partially offset by the write-off of $856 of unamortized deferred financing costs.
Amortization of Deferred Financing Costs
Total amortization expense on deferred financing costs was $593 and $594 for the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively, and $1,779 and $1,842 for the thirty-nine weeks ended March 27, 2010 and March 28, 2009, respectively, and is included within interest expense in the accompanying Condensed Consolidated Statements of Operations.
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
Capital lease obligation
As of March 27, 2010, the Company had a $309 capital lease obligation representing amounts outstanding to acquire certain software licenses. The current portion of the Companys capital lease obligation is $309. The interest rate on the obligation is 5.99%, with principal and interest payments due biannually.
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Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
NOTE 8STOCK 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 assumption 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. 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 assumptions used for the award granted during the thirteen and thirty-nine weeks ended March 27, 2010 are as follows:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||
Expected volatility |
73.1 | % | 72.3 | % | ||||
Expected dividends |
$ | | $ | | ||||
Expected term |
3.0 | 3.0 | ||||||
Risk-free rate |
1.3 | % | 1.3 | % |
A summary of option activity for the thirty-nine weeks ended March 27, 2010 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 |
222,136 | 231.52 | | |||||
Exercised |
| | | |||||
Forfeited |
(19,103 | ) | 104.06 | | ||||
Outstanding at March 27, 2010 |
262,601 | $ | 214.12 | 9.2 years | ||||
Exercisable at March 27, 2010 |
223,043 | $ | 224.94 | 9.1 years | ||||
The total grant date fair value of all options outstanding at March 27, 2010 was $12,594.
A summary of the status of the Companys nonvested option shares as of March 27, 2010, and activity during the thirty-nine weeks ended March 27, 2010, is presented below:
Nonvested Option Shares |
Option Shares |
Weighted-Average Grant-Date Fair Value of Options | ||||
Nonvested at June 27, 2009 |
6,239 | $ | 13.42 | |||
Granted options |
222,136 | $ | 52.26 | |||
Vested |
(187,593 | ) | $ | 50.47 | ||
Forfeited |
(1,224 | ) | $ | 21.38 | ||
Outstanding at March 27, 2010 |
39,558 | $ | 55.62 | |||
For the thirteen and thirty-nine week periods ended March 27, 2010, the Company recognized stock compensation expense of $9,732 and $9,903, respectively. The total tax benefit recognized for these periods was $3,785 and $3,851, respectively. For the thirteen and thirty-nine week periods ended March 28, 2009, the Company recognized stock compensation expense of $118 and $356, respectively. The Company amortizes the estimated fair value over the vesting period. In February 2010 the Company granted 185,636 fully vested stock options to its new Chief Executive Officer. As of March 27, 2010, there remained a total of $1,863 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan which will be recognized over a remaining weighted-average period of 2.2 years. In prior years, generally, the Company utilized an assumption of a ten percent forfeiture rate when arriving at the amount of stock compensation expense recognized. However, in the current year, the Company has utilized a rate of 0%, as the options have been granted to few individuals with relatively short or immediate vesting.
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
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 | Thirty-nine Weeks Ended | |||||||||||||||
March 27, 2010 |
March 28, 2009 |
March 27, 2010 |
March 28, 2009 |
|||||||||||||
Interest cost |
$ | 657 | $ | 693 | $ | 1,979 | $ | 2,200 | ||||||||
Expected return on plan assets |
(235 | ) | (467 | ) | (704 | ) | (1,646 | ) | ||||||||
Amortization of deferred actuarial losses |
313 | 125 | 938 | 221 | ||||||||||||
Net periodic pension expense |
735 | 351 | 2,213 | 775 | ||||||||||||
Settlement Expenses |
414 | 1,196 | 414 | 1,196 | ||||||||||||
Net periodic pension expense with settlement expenses |
$ | 1,149 | $ | 1,547 | $ | 2,627 | $ | 1,971 | ||||||||
The Company contributed $2,791 and $688 during the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively, and $3,808 and $2,677 during the thirty-nine weeks ended March 27, 2010 and March 28, 2009, respectively, to its defined benefit pension plans.
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.
During the thirteen weeks ended March 27, 2010, the Company accrued total charges of $4,789 related to estimated severance related benefits associated with elimination of certain full-time positions across the company as well as the termination of certain other employees and executives. No cash payments were made relating to this accrual during the thirteen weeks ended March 27, 2010.
The following table shows the Companys severance related activities in fiscal 2010:
Beginning balance as of June 27, 2009 |
$ | 1,819 | ||
Accruals for severance related benefits |
6,156 | |||
Payments of benefits |
(2,055 | ) | ||
Adjustments/reversals |
(350 | ) | ||
Ending balance as of March 27, 2010 |
$ | 5,570 | ||
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 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.
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Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
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 | Thirty-nine weeks ended | |||||||||||
March 27, 2010 |
March 28, 2009 |
March 27, 2010 |
March 28, 2009 | |||||||||
Minimum rent expense |
$ | 4,762 | $ | 5,400 | $ | 17,797 | $ | 19,416 | ||||
Contingent rent expense |
102 | 47 | 187 | 160 | ||||||||
Total rent expense |
$ | 4,864 | $ | 5,447 | $ | 17,984 | $ | 19,576 | ||||
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 by June 17, 2011: (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 March 27, 2010, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the Liquidity Event Award Program.
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 both the thirteen weeks ended March 27, 2010 and March 28, 2009 the Company paid $250 and during both the thirty-nine weeks ended March 27, 2010 and March 28, 2009, the Company paid $750 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 by 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 policies.
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. 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 March 27, 2010, the Company operated 126 Harry and David stores and two Cushmans seasonal stores and sold selected store products through its direct marketing channel. 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
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
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 and adjustments have been made to the prior year. The Company reclassified certain activities related to Cushmans from the Stores segment to the Wholesale segment. In the thirteen and thirty-nine week periods ended March 28, 2009, the revenue reclassification resulted in Wholesale revenue increasing by $949 and $1,421, respectively, and Stores revenue decreasing by $949 and $1,421, respectively. In addition to these reclassifications, certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment in the Direct Marketing segment. The restatement impacted goodwill as of March 28, 2009 and selling, general and administrative expenses and the provision for income taxes in the year-to-date period ended March 28, 2009 (see Note 3-Restatement for further information).
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Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
Net intersegment sales were $11,687 and $13,137 for the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively and $45,144 and $52,083 for the thirty-nine weeks ended March 27, 2010 and March 28, 2009, 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 March 27, 2010 |
||||||||||||||||||||
Net external sales |
$ | 41,585 | $ | 18,452 | $ | 6,155 | $ | | $ | 66,192 | ||||||||||
Depreciation and amortization expense |
205 | 668 | 6 | 3,784 | 4,663 | |||||||||||||||
Operating loss from continuing operations |
(27,058 | ) | (7,974 | ) | (906 | ) | (5 | ) | (35,943 | ) | ||||||||||
Net interest expense (income) from continuing operations |
2 | | | 4,650 | 4,652 | |||||||||||||||
Loss from continuing operations, before income taxes |
(27,040 | ) | (7,971 | ) | (905 | ) | (4,632 | ) | (40,548 | ) | ||||||||||
Capital expenditures |
4 | 55 | | 30 | 89 | |||||||||||||||
Total assets |
52,795 | 23,128 | 3,562 | 193,641 | 273,126 | |||||||||||||||
Thirteen weeks ended March 28, 2009 |
||||||||||||||||||||
Net external sales |
$ | 47,770 | $ | 19,935 | $ | 7,207 | $ | | $ | 74,912 | ||||||||||
Depreciation and amortization expense |
460 | 685 | | 4,033 | 5,178 | |||||||||||||||
Operating loss from continuing operations |
(17,611 | ) | (8,204 | ) | (265 | ) | | (26,080 | ) | |||||||||||
Net interest expense (income) from continuing operations |
| | | 4,848 | 4,848 | |||||||||||||||
Loss from continuing operations, before income taxes |
(17,657 | ) | (8,204 | ) | (266 | ) | (4,774 | ) | (30,901 | ) | ||||||||||
Capital expenditures |
| 31 | | 1,557 | 1,588 | |||||||||||||||
Total assets |
51,272 | 28,810 | 11,976 | 210,644 | 302,702 | |||||||||||||||
Thirty-nine weeks ended March 27, 2010 |
||||||||||||||||||||
Net external sales |
$ | 255,723 | $ | 96,149 | $ | 27,616 | $ | | $ | 379,488 | ||||||||||
Depreciation and amortization expense |
625 | 2,178 | 6 | 11,408 | 14,217 | |||||||||||||||
Operating income (loss) from continuing operations |
9,068 | (3,370 | ) | 586 | (5 | ) | 6,279 | |||||||||||||
Net interest expense (income) from continuing operations |
2 | | | 14,237 | 14,239 | |||||||||||||||
Income (loss) from continuing operations, before income taxes |
9,367 | (3,338 | ) | 595 | (14,168 | ) | (7,544 | ) | ||||||||||||
Capital expenditures |
18 | 351 | | 1,172 | 1,541 | |||||||||||||||
Total assets |
52,795 | 23,128 | 3,562 | 193,641 | 273,126 | |||||||||||||||
Thirty-nine weeks ended March 28, 2009 (As Restated) |
||||||||||||||||||||
Net external sales |
$ | 295,090 | $ | 103,627 | $ | 36,528 | $ | | $ | 435,245 | ||||||||||
Depreciation and amortization expense |
1,370 | 2,504 | | 11,911 | 15,785 | |||||||||||||||
Operating income (loss) from continuing operations |
735 | (8,467 | ) | 2,819 | | (4,913 | ) | |||||||||||||
Net interest expense (income) from continuing operations |
| (7 | ) | | 16,455 | 16,448 | ||||||||||||||
Income (loss) from continuing operations, before income taxes |
13,845 | (6,742 | ) | 3,357 | (16,355 | ) | (5,895 | ) | ||||||||||||
Capital expenditures |
239 | 563 | | 5,203 | 6,005 | |||||||||||||||
Total assets |
51,272 | 28,810 | 11,976 | 210,644 | 302,702 |
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. 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 March 27, 2010, and June 27, 2009, and for the thirteen and thirty-nine weeks ended March 27, 2010 and March 28, 2009, 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, other payments or distributions by Harry and David and between the guarantors. Certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment. The restatement impacted goodwill as of March 28, 2009 and selling, general and administrative expenses and the provision for income taxes in the year-to-date period ended March 28, 2009. For further information see Note 3-Restatement.
18
Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
NOTE 13CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Balance Sheet
As of March 27, 2010
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David | Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 51 | $ | 41,551 | $ | | $ | | $ | 41,602 | ||||||||||
Short-term investment |
| | 4,995 | | 4,995 | |||||||||||||||
Trade accounts receivable, net |
| 1,946 | 99 | | 2,045 | |||||||||||||||
Other receivables |
| 519 | 995 | | 1,514 | |||||||||||||||
Inventories |
| 17,708 | 13,210 | | 30,918 | |||||||||||||||
Deferred catalog expenses |
| 2,690 | | | 2,690 | |||||||||||||||
Other current assets |
17 | 3,207 | 3,290 | 6,514 | ||||||||||||||||
Total current assets |
68 | 67,621 | 22,589 | | 90,278 | |||||||||||||||
Fixed assets, net |
| 6,632 | 125,321 | | 131,953 | |||||||||||||||
Goodwill |
| 12,236 | | | 12,236 | |||||||||||||||
Intangibles, net |
| 32,405 | | | 32,405 | |||||||||||||||
Investment in subsidiaries |
143,782 | (82,594 | ) | | (61,188 | ) | | |||||||||||||
Deferred financing costs, net |
| 4,196 | | | 4,196 | |||||||||||||||
Other assets |
1,960 | 34 | 64 | | 2,058 | |||||||||||||||
Total assets |
$ | 145,810 | $ | 40,530 | $ | 147,974 | $ | (61,188 | ) | $ | 273,126 | |||||||||
Liabilities and stockholders equity (deficit) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 5,088 | $ | 3,124 | $ | | $ | 8,212 | ||||||||||
Accrued payroll and benefits |
| 8,952 | 8,797 | | 17,749 | |||||||||||||||
Income taxes payable |
15,342 | (94 | ) | (9 | ) | | 15,239 | |||||||||||||
Deferred revenue |
| 21,183 | | | 21,183 | |||||||||||||||
Deferred income taxes |
2,488 | | | | 2,488 | |||||||||||||||
Accrued interest |
| 1,297 | | | 1,297 | |||||||||||||||
Other accrued liabilities |
10 | 1,432 | 895 | | 2,337 | |||||||||||||||
Current portion of capital lease obligations |
| 309 | | | 309 | |||||||||||||||
Total current liabilities |
17,840 | 38,167 | 12,807 | | 68,814 | |||||||||||||||
Long-term debt |
| 198,362 | | | 198,362 | |||||||||||||||
Accrued pension liability |
| | 24,498 | | 24,498 | |||||||||||||||
Deferred income taxes |
1,000 | | | | 1,000 | |||||||||||||||
Other long-term liabilities |
3,880 | 3,757 | 1,980 | | 9,617 | |||||||||||||||
Intercompany debt |
152,255 | (343,538 | ) | 191,283 | | | ||||||||||||||
Total liabilities |
174,975 | (103,252 | ) | 230,568 | | 302,291 | ||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
10 | 1 | | (1 | ) | 10 | ||||||||||||||
Additional paid-in capital |
16,576 | 232,518 | 53,785 | (286,303 | ) | 16,576 | ||||||||||||||
Accumulated other comprehensive loss, net of tax |
(9,084 | ) | | (12,488 | ) | 12,488 | (9,084 | ) | ||||||||||||
Accumulated deficit |
(36,667 | ) | (88,737 | ) | (123,891 | ) | 212,628 | (36,667 | ) | |||||||||||
Total stockholders equity (deficit) |
(29,165 | ) | 143,782 | (82,594 | ) | (61,188 | ) | (29,165 | ) | |||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 145,810 | $ | 40,530 | $ | 147,974 | $ | (61,188 | ) | $ | 273,126 | |||||||||
19
Table of Contents
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 | |||||||||
20
Table of Contents
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 March 27, 2010
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David |
Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 66,252 | $ | 11,627 | $ | (11,687 | ) | $ | 66,192 | |||||||||
Cost of goods sold |
| 49,200 | 11,625 | (11,687 | ) | 49,138 | ||||||||||||||
Gross profit |
| 17,052 | 2 | | 17,054 | |||||||||||||||
Selling, general and administrative |
5 | 52,990 | 2 | | 52,997 | |||||||||||||||
Operating loss |
(5 | ) | (35,938 | ) | | | (35,943 | ) | ||||||||||||
Other (income) expense: |
||||||||||||||||||||
Interest income |
(1 | ) | | (36 | ) | | (37 | ) | ||||||||||||
Interest expense |
2 | 4,679 | 8 | | 4,689 | |||||||||||||||
Other (income) expense, net |
(23 | ) | (23 | ) | (1 | ) | | (47 | ) | |||||||||||
Equity in earnings of consolidated subsidiaries |
40,565 | (29 | ) | | (40,536 | ) | | |||||||||||||
Total other (income) expense |
40,543 | 4,627 | (29 | ) | (40,536 | ) | 4,605 | |||||||||||||
Income (loss) from continuing operations before income taxes |
(40,548 | ) | (40,565 | ) | 29 | 40,536 | (40,548 | ) | ||||||||||||
Benefit for income taxes |
(12,556 | ) | | | | (12,556 | ) | |||||||||||||
Net income (loss) |
$ | (27,992 | ) | $ | (40,565 | ) | $ | 29 | $ | 40,536 | $ | (27,992 | ) | |||||||
21
Table of Contents
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 March 28, 2009
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David |
Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 76,577 | $ | 11,472 | $ | (13,137 | ) | $ | 74,912 | |||||||||
Cost of goods sold |
| 53,903 | 11,428 | (13,137 | ) | 52,194 | ||||||||||||||
Gross profit |
| 22,674 | 44 | | 22,718 | |||||||||||||||
Selling, general and administrative |
| 48,802 | (4 | ) | | 48,798 | ||||||||||||||
Operating income (loss) |
| (26,128 | ) | 48 | | (26,080 | ) | |||||||||||||
Other (income) expense: |
||||||||||||||||||||
Interest income |
| | (22 | ) | | (22 | ) | |||||||||||||
Interest expense |
| 4,846 | 24 | | 4,870 | |||||||||||||||
Other (income) expense, net |
(26 | ) | (1 | ) | | | (27 | ) | ||||||||||||
Equity in earnings of consolidated subsidiaries |
30,759 | (210 | ) | | (30,549 | ) | | |||||||||||||
Total other (income) expense |
30,733 | 4,635 | 2 | (30,549 | ) | 4,821 | ||||||||||||||
Income (loss) from continuing operations before income taxes |
(30,733 | ) | (30,763 | ) | 46 | 30,549 | (30,901 | ) | ||||||||||||
Benefit for income taxes |
(12,702 | ) | | | | (12,702 | ) | |||||||||||||
Net income (loss) from continuing operations |
(18,031 | ) | (30,763 | ) | 46 | 30,549 | (18,199 | ) | ||||||||||||
Discontinued operations: |
||||||||||||||||||||
Gain on sale of Jackson & Perkins |
| | 22 | | 22 | |||||||||||||||
Operating income from discontinued operations |
| 4 | 142 | | 146 | |||||||||||||||
Provision for income taxes on discontinued operations |
69 | | | | 69 | |||||||||||||||
Net income (loss) from discontinued operations |
(69 | ) | 4 | 164 | | 99 | ||||||||||||||
Net income (loss) |
$ | (18,100 | ) | $ | (30,759 | ) | $ | 210 | $ | 30,549 | $ | (18,100 | ) | |||||||
22
Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
Condensed Consolidating Statement of Operations
For the Thirty-nine Weeks Ended March 27, 2010
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David |
Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 380,211 | $ | 44,421 | $ | (45,144 | ) | $ | 379,488 | |||||||||
Cost of goods sold |
| 215,711 | 44,429 | (45,144 | ) | 214,996 | ||||||||||||||
Gross profit |
| 164,500 | (8 | ) | | 164,492 | ||||||||||||||
Selling, general and administrative |
5 | 158,216 | (8 | ) | | 158,213 | ||||||||||||||
Operating income (loss) |
(5 | ) | 6,284 | | | 6,279 | ||||||||||||||
Other (income) expense: |
||||||||||||||||||||
Interest income |
(12 | ) | | (42 | ) | | (54 | ) | ||||||||||||
Interest expense |
2 | 14,275 | 16 | | 14,293 | |||||||||||||||
Other (income) expense, net |
(73 | ) | (342 | ) | (1 | ) | | (416 | ) | |||||||||||
Equity in earnings of consolidated subsidiaries |
7,622 | (27 | ) | | (7,595 | ) | | |||||||||||||
Total other (income) expense |
7,539 | 13,906 | (27 | ) | (7,595 | ) | 13,823 | |||||||||||||
Income (loss) from continuing operations before income taxes |
(7,544 | ) | (7,622 | ) | 27 | 7,595 | (7,544 | ) | ||||||||||||
Provision for income taxes |
10,453 | | | | 10,453 | |||||||||||||||
Net income (loss) |
$ | (17,997 | ) | $ | (7,622 | ) | $ | 27 | $ | 7,595 | $ | (17,997 | ) | |||||||
23
Table of Contents
Harry & David Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in Thousands)
(Unaudited)
Condensed Consolidating Statement of Operations
For the Thirty-nine Weeks Ended March 28, 2009 (Restated)
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David |
Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 436,275 | $ | 51,053 | $ | (52,083 | ) | $ | 435,245 | |||||||||
Cost of goods sold |
| 250,768 | 51,017 | (52,083 | ) | 249,702 | ||||||||||||||
Gross profit |
| 185,507 | 36 | | 185,543 | |||||||||||||||
Selling, general and administrative |
| 190,468 | (12 | ) | | 190,456 | ||||||||||||||
Operating income (loss) |
| (4,961 | ) | 48 | | (4,913 | ) | |||||||||||||
Other (income) expense: |
||||||||||||||||||||
Interest income |
| | (246 | ) | | (246 | ) | |||||||||||||
Interest expense |
| 16,584 | 110 | | 16,694 | |||||||||||||||
Other (income) expense, net |
(48 | ) | (2 | ) | | | (50 | ) | ||||||||||||
Gain on debt repurchases |
| (15,416 | ) | | | (15,416 | ) | |||||||||||||
Equity in earnings of consolidated subsidiaries |
5,394 | (619 | ) | | (4,775 | ) | | |||||||||||||
Total other (income) expense |
5,346 | 547 | (136 | ) | (4,775 | ) | 982 | |||||||||||||
Income (loss) from continuing operations before income taxes |
(5,346 | ) | (5,508 | ) | 184 | 4,775 | (5,895 | ) | ||||||||||||
Benefit for income taxes |
(2,684 | ) | | | | (2,684 | ) | |||||||||||||
Net income (loss) from continuing operations |
(2,662 | ) | (5,508 | ) | 184 | 4,775 | (3,211 | ) | ||||||||||||
Discontinued operations: |
||||||||||||||||||||
Gain on sale of Jackson & Perkins |
| | 64 | | 64 | |||||||||||||||
Operating income from discontinued operations |
| 114 | 371 | | 485 | |||||||||||||||
Provision for income taxes on discontinued operations |
215 | | | | 215 | |||||||||||||||
Net income (loss) from discontinued operations |
(215 | ) | 114 | 435 | | 334 | ||||||||||||||
Net income (loss) |
$ | (2,877 | ) | $ | (5,394 | ) | $ | 619 | $ | 4,775 | $ | (2,877 | ) | |||||||
24
Table of Contents
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 Thirty-nine Weeks Ended March 27, 2010
Harry & David Holdings, Inc. (Parent-Only) |
Harry and David |
Guarantor Subsidiaries |
Eliminations and Reclassifications |
Consolidated | |||||||||||||||
Operating activities |
|||||||||||||||||||
Net cash provided (used in) by operating activities |
$ | 10,995 | $ | (1,478 | ) | $ | 23,313 | $ | | $ | 32,830 | ||||||||
Investing activities |
|||||||||||||||||||
Acquisition of fixed assets |
| (369 | ) | (1,172 | ) | | (1,541 | ) | |||||||||||
Acquisition of held-to-maturity securities |
| | (4,995 | ) | | (4,995 | ) | ||||||||||||
Proceeds from the sale of fixed assets |
| | 60 | | 60 | ||||||||||||||
Net cash used in investing activities |
(369 | ) | (6,107 | ) | (6,476 | ) | |||||||||||||
Financing activities |
|||||||||||||||||||
Borrowings of revolving debt |
| 85,000 | | | 85,000 | ||||||||||||||
Repayments of revolving debt |
| (85,000 | ) | | | (85,000 | ) | ||||||||||||
Repayment of capital lease |
| (147 | ) | | | (147 | ) | ||||||||||||
Net (payments) receipts on intercompany debt |
(10,995 | ) | 28,201 | (17,206 | ) | | | ||||||||||||
Net cash provided by (used in) financing activities |
(10,995 | ) | 28,054 | (17,206 | ) | | (147 | ) | |||||||||||
Increase in cash and cash equivalents |
| 26,207 | | | 26,207 | ||||||||||||||
Cash and cash equivalents, beginning of period |
51 | 15,344 | | | 15,395 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 51 | $ | 41,551 | $ | | $ | | $ | 41,602 | |||||||||
25
Table of Contents
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 Thirty-nine Weeks Ended March 28, 2009 (Restated)
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 |
$ | (810 | ) | $ | (10,911 | ) | $ | 24,569 | $ | | $ | 12,848 | |||||||
Investing activities |
|||||||||||||||||||
Acquisition of fixed assets |
| (579 | ) | (5,426 | ) | | (6,005 | ) | |||||||||||
Acquisition of business |
| (8,509 | ) | | | (8,509 | ) | ||||||||||||
Proceeds from the sale of fixed assets |
| | 19 | | 19 | ||||||||||||||
Proceeds from the sale of held-to-maturity securities |
| | 5,000 | | 5,000 | ||||||||||||||
Proceeds from the sale of available-for-sale securities |
| | 10,097 | | 10,097 | ||||||||||||||
Net cash provided by (used in) investing activities |
| (9,088 | ) | 9,690 | | 602 | |||||||||||||
Financing activities |
|||||||||||||||||||
Borrowings of revolving debt |
| 113,000 | | | 113,000 | ||||||||||||||
Repayments of revolving debt |
| (113,000 | ) | | | (113,000 | ) | ||||||||||||
Repayments of capital lease obligations |
| (295 | ) | | | (295 | ) | ||||||||||||
Repurchases of long-term debt |
| (20,366 | ) | | | (20,366 | ) | ||||||||||||
Net (payments) receipts on intercompany debt |
(709 | ) | 44,787 | (44,078 | ) | | | ||||||||||||
Net cash provided by (used in) financing activities |
(709 | ) | 24,126 | (44,078 | ) | | (20,661 | ) | |||||||||||
Increase (decrease) in cash and cash equivalents |
(1,519 | ) | 4,127 | (9,819 | ) | | (7,211 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
1,570 | 9,723 | 29,499 | | 40,792 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 51 | $ | 13,850 | $ | 19,680 | $ | | $ | 33,581 | |||||||||
26
Table of Contents
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 risks relating to market demand for the our products, the seasonality of our business, production capabilities, relationships with customers and suppliers, implementation of the our business and marketing strategies, competition, fluctuations in energy and other commodity costs, financial leverage, postal rate increases, loss of key management, disruptions in IT, increase in labor costs and the availability of a seasonal workforce and changes in federal and state tax laws, potential effect of extreme weather and pests on crops, government regulation by the FDA and USDA, protection of intellectual property, compliance with environmental regulations and natural disasters, terrorism and acts of war, as well as the other risks included in the Risk Factors set forth in Item 1A of Harry and Davids Annual Report on Form 10-K for the fiscal year ended June 27, 2009, 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 Form 10-Q after the date of this Form 10-Q, 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.
In order to conform to the current year presentation, certain reclassifications and adjustments have been made to the prior year. We also reclassified certain activities related to Cushmans from the Direct Marketing and Stores segments to the Wholesale segment. In addition, certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment in the Direct Marketing segment. The restatement impacted goodwill as of March 28, 2009 and selling, general and administrative expenses and the provision for income taxes in the year-to-date period ended March 28, 2009 (see Note 3-Restatement within Item 1 of Part I of this Form 10-Q for further information).
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RESULTS OF OPERATIONS
NET SALES
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 | Thirty-nine Weeks Ended | |||||||||||||||||||||||
March 27, 2010 |
Percent of Total |
March 28, 2009 |
Percent of Total |
March 27, 2010 |
Percent of Total |
March 28, 2009 |
Percent of Total |
|||||||||||||||||
Direct Marketing |
$ | 41,585 | 62.8 | % | $ | 47,770 | 63.8 | % | $ | 255,723 | 67.4 | % | $ | 295,090 | 67.8 | % | ||||||||
Stores |
18,452 | 27.9 | % | 19,935 | 26.6 | % | 96,149 | 25.3 | % | 103,627 | 23.8 | % | ||||||||||||
Wholesale |
6,155 | 9.3 | % | 7,207 | 9.6 | % | 27,616 | 7.3 | % | 36,528 | 8.4 | % | ||||||||||||
Total net sales |
$ | 66,192 | 100.0 | % | $ | 74,912 | 100.0 | % | $ | 379,488 | 100.0 | % | $ | 435,245 | 100.0 | % | ||||||||
Net sales from continuing operations of $66,192 for the thirteen weeks ended March 27, 2010, decreased $8,720, or 11.6%, from the thirteen weeks ended March 28, 2009. The decline in net sales was driven by lower sales volumes in the Harry & David and Cushmans Direct Marketing divisions, Stores, and the Wholesale segments, partially offset by an increase in Wolfermans Direct Marketing brand sales.
Net sales from continuing operations of $379,488 for the thirty-nine weeks ended March 27, 2010, decreased $55,757, or 12.8%, from the thirty-nine weeks ended March 28, 2009. The decline was attributable to the lower average order size due to higher markdowns and discounts in our second quarter of fiscal 2010.
Direct Marketing
Net sales in our Direct Marketing segment decreased $6,185, or 12.9%, from the thirteen weeks ended March 28, 2009 to the thirteen weeks ended March 27, 2010. The decline was primarily driven by lower sales volumes.
Net sales in our Direct Marketing segment decreased $39,367, or 13.3%, from the thirty-nine weeks ended March 28, 2009 to the thirty-nine weeks ended March 27, 2010. The decline was driven by lower average order size resulting from lower advertised retails and increased delivery discounts on higher unit volume.
Stores
Our Stores segment net sales decreased $1,483, representing a 7.4% decline in total sales and a comparable stores sales decline of 0.3%, or approximately $55, from the thirteen weeks ended March 28, 2009 to the thirteen weeks ended March 27, 2010. The decrease was driven by a combination of lower traffic in existing stores, fewer stores, and lower conversion, partially offset by higher retail prices.
Our Stores segment net sales decreased $7,478, representing a 7.2% decline in total sales and a decline of 3.8% or approximately $3,744, on a comparable store basis, from the thirty-nine weeks ended March 28, 2009 to the thirty-nine weeks ended March 27, 2010. The decrease was attributable to the same factors above for the thirteen-week period.
As of March 27, 2010, we had 126 stores in operation compared to 141 stores in operation during the same quarter last fiscal year. Not included in the store counts above are two seasonal Cushmans stores, and three temporary stores that were tested in the same period last season.
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 $1,052, or 14.6%, from the thirteen weeks ended March 28, 2009 to the thirteen weeks ended March 27, 2010. The decline was primarily due to lower sales volumes in all three of our brands.
Our Wholesale segment net sales declined $8,912, or 24.4%, from the thirty-nine weeks ended March 28, 2009 to the thirty-nine weeks ended March 27, 2010. The decline was primarily due to a decision not to renew holiday sales to a major wholesale customer.
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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 | Thirty-nine Weeks Ended | |||||||||||||||||||||||
March 27, 2010 |
Percent of Net Sales |
March 28, 2009 |
Percent of Net Sales |
March 27, 2010 |
Percent of Net Sales |
March 28, 2009 |
Percent of Net Sales |
|||||||||||||||||
Direct Marketing |
$ | 8,137 | 19.6 | % | $ | 13,416 | 28.1 | % | $ | 112,429 | 44.0 | % | $ | 130,520 | 44.2 | % | ||||||||
Stores |
7,885 | 42.7 | % | 8,045 | 40.4 | % | 46,837 | 48.7 | % | 47,697 | 46.0 | % | ||||||||||||
Wholesale |
1,032 | 16.8 | % | 1,257 | 17.4 | % | 5,226 | 18.9 | % | 7,326 | 20.1 | % | ||||||||||||
Total gross profit |
$ | 17,054 | 25.8 | % | $ | 22,718 | 30.3 | % | $ | 164,492 | 43.3 | % | $ | 185,543 | 42.6 | % | ||||||||
Gross profit from continuing operations decreased $5,664, or 24.9%, to $17,054 in the thirteen weeks ended March 27, 2010, from $22,718 in the thirteen weeks ended March 28, 2009. Consolidated gross profit as a percentage of consolidated net sales was 25.8% in the thirteen-week period ended March 27, 2010, and 30.3% in the thirteen-week period ended March 28, 2009.
Gross profit from continuing operations decreased $21,051, or 11.3%, to $164,492 in the thirty-nine weeks ended March 27, 2010, from $185,543 in the thirty-nine weeks ended March 28, 2009. Consolidated gross profit as a percentage of consolidated net sales was 43.3% in the thirty-nine week period ended March 27, 2010, and 42.6% in the thirty-nine week period ended March 28, 2009.
Direct Marketing
Our Direct Marketing segment gross profit decreased $5,279, or 39.3%, with gross margin declining to 19.6% in the thirteen weeks ended March 27, 2010 from 28.1% in the thirteen weeks ended March 28, 2009. The gross profit and gross margin decreases were primarily due to lower sales volumes, higher delivery unit costs, and higher inventory write-offs, partially offset by the effect of lower overhead costs.
Our Direct Marketing segment gross profit decreased $18,091, or 13.9%, with gross margin slightly declining to 44.0% in the thirty-nine weeks ended March 27, 2010 from 44.2% in the thirty-nine weeks ended March 28, 2009. The gross profit and gross margin decreases were primarily due to lower sales volumes, and higher delivery discounts, partially offset by lower inventory reserves last fiscal year and the effect of lower overhead costs.
Stores
Our Stores segment gross profit decreased $160, or 2.0%, with gross margin improving to 42.7% in the thirteen weeks ended March 27, 2010 from 40.4% in the thirteen weeks ended March 28, 2009. The gross profit decline was primarily due to having fewer stores as compared to the same period last year. The improvement in gross margin was attributable to lower product costs and lower markdowns as well as lower overhead costs.
Our Stores segment gross profit decreased $860, or 1.8%, with gross margin improving to 48.7% in the thirty-nine weeks ended March 27, 2010 from 46.0% in the thirty-nine weeks ended March 28, 2009. The gross profit decline was primarily due to fewer stores. The improvement in gross margin was attributable to the same factors as discussed above.
Wholesale
Our Wholesale segment gross profit decreased $225 or 17.9%, while gross margin declined to 16.8% in the thirteen weeks ended March 27, 2010 from 17.4% in the thirteen weeks ended March 27, 2010. The gross profit decrease was primarily attributable to lower sales volume. The decline in gross margin was primarily due to product mix and lower sales volume, partially offset by lower overhead costs.
Our Wholesale segment gross profit decreased $2,100 or 28.7%, and gross margin decreased to 18.9% in the thirty-nine weeks ended March 27, 2010 from 20.1% in the thirty-nine weeks ended March 28, 2009. The decline in gross profit and gross margin was attributable to the same factors described above.
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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 | Thirty-nine Weeks Ended | |||||||||||||||||||||||
March 27, 2010 |
Percent of Net Sales |
March 28, 2009 |
Percent of Net Sales |
March 27, 2010 |
Percent of Net Sales |
March 28, 2009 |
Percent of Net Sales |
|||||||||||||||||
Direct Marketing |
$ | 35,200 | 84.6 | % | $ | 31,028 | 65.0 | % | $ | 103,366 | 40.4 | % | $ | 129,786 | 44.0 | % | ||||||||
Stores |
15,859 | 85.9 | % | 16,247 | 81.5 | % | 50,207 | 52.2 | % | 56,162 | 54.2 | % | ||||||||||||
Wholesale |
1,938 | 31.5 | % | 1,523 | 21.1 | % | 4,640 | 16.8 | % | 4,508 | 12.3 | % | ||||||||||||
Total selling, general, and administrative |
$ | 52,997 | 80.1 | % | $ | 48,798 | 65.1 | % | $ | 158,213 | 41.7 | % | $ | 190,456 | 43.8 | % | ||||||||
Selling, general and administrative expenses from continuing operations increased $4,199, or 8.6%, in the thirteen weeks ended March 27, 2010 from the thirteen weeks ended March 28, 2009. The increase in selling, general and administrative expenses was primarily due to $9,732 in non-cash stock option expense, and higher severance expense, partially offset by lower advertising, payroll, and lease expenses.
Selling, general and administrative expenses from continuing operations decreased $32,243, or 16.9%, in the thirty-nine weeks ended March 27, 2010 from the thirty-nine weeks ended March 28, 2009. The decrease in selling, general and administrative expenses was driven primarily by lower advertising, payroll and leases expenses with an additional decline of $13,848 primarily attributable to non-cash impairment charges in the second quarter of fiscal 2009 offset by increased stock option expenses and severance costs.
OTHER (INCOME) EXPENSE
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 | Thirty-nine weeks ended | |||||||||||||||
March 27, 2010 |
March 28, 2009 |
March 27, 2010 |
March 28, 2009 |
|||||||||||||
Net interest expense |
$ | 4,652 | $ | 4,848 | $ | 14,239 | $ | 16,448 | ||||||||
Gain on debt prepayment |
| | | (15,416 | ) | |||||||||||
Other (income) expense, net |
(47 | ) | (27 | ) | (416 | ) | (50 | ) | ||||||||
Total other expense |
$ | 4,605 | $ | 4,821 | $ | 13,823 | $ | 982 | ||||||||
During the thirty-nine weeks ended March 28, 2009, the Company purchased $36,638 in aggregate principal amounts of fixed and floating rate Senior Notes in open-market purchases for $20,366. This debt prepayment resulted in a net gain of $15,416, comprised of a $16,272 discount on the repayment of outstanding principal, partially offset by the write-off of $856 of unamortized deferred financing costs.
INCOME TAXES
For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates from continuing operations for the third quarter of fiscal 2010 and fiscal 2009 were 31.0% and 41.1%, respectively. For the third quarter of fiscal 2010, the difference in the effective rate and the federal statutory rate is primarily due to a valuation allowance adjustment expense of $4,113, relating to certain deferred tax assets, and state tax benefits of $1,541.
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We routinely review the future realization of deferred tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies and projected future taxable income. As of March 27, 2010, we believe that a valuation allowance of $13,155 is required to reduce deferred tax assets to an amount that is more likely than not to be realized. The nature of these analyses requires significant judgment by management about future operating results, including revenues, margins and operating expenses.
EBITDA
EBITDA is defined as earnings before net interest expense, income taxes, depreciation, and amortization. Our EBITDA from continuing operations for the thirteen-week and thirty-nine week periods ended March 27, 2010 decreased $10,358 and $5,426, respectively, primarily due to the increase in the operating loss as a result of the factors discussed above.
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 below. The following table reconciles EBITDA from continuing operations to net cash provided by (used in) operating activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net loss from continuing operations, which we believe to be the closest GAAP performance measure to EBITDA (dollars are in thousands).
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
March 27, 2010 |
March 28, 2009 |
March 27, 2010 |
March 28, 2009 |
|||||||||||||
Net loss from continuing operations |
$ | (27,992 | ) | $ | (18,199 | ) | $ | (17,997 | ) | $ | (3,211 | ) | ||||
Interest expense, net from continuing operations |
4,652 | 4,848 | 14,239 | 16,448 | ||||||||||||
Provision (benefit) for income taxes from continuing operations |
(12,556 | ) | (12,702 | ) | 10,453 | (2,684 | ) | |||||||||
Depreciation and amortization from continuing operations |
4,663 | 5,178 | 14,217 | 15,785 | ||||||||||||
EBITDA from continuing operations |
$ | (31,233 | ) | $ | (20,875 | ) | $ | 20,912 | $ | 26,338 | ||||||
Interest expense, net from continuing operations |
(4,652 | ) | (4,848 | ) | (14,239 | ) | (16,448 | ) | ||||||||
Provision for income taxes from continuing operations |
12,556 | 12,702 | (10,453 | ) | 2,684 | |||||||||||
Amortization of deferred financing costs |
593 | 594 | 1,779 | 1,842 | ||||||||||||
Stock option compensation expense |
9,732 | 118 | 9,903 | 356 | ||||||||||||
Loss on impairment and disposal of fixed assets and other long-lived assets, net |
16 | 11 | 915 | 13,859 | ||||||||||||
Gain on sale of short-term investments |
| | | (64 | ) | |||||||||||
Deferred income taxes |
(557 | ) | (1,993 | ) | 9,818 | 952 | ||||||||||
Amortization of deferred pension loss |
389 | 1,360 | 1,034 | 1,418 | ||||||||||||
Gain on debt repayment |
| | | (15,416 | ) | |||||||||||
Changes in operating assets and liabilities from continuing operations |
(48,537 | ) | (47,094 | ) | 13,161 | (3,554 | ) | |||||||||
Net cash provided by (used in) operating activities from continuing operations |
(61,693 | ) | (60,025 | ) | 32,830 | 11,967 | ||||||||||
Net cash provided by discontinued operations |
| 146 | | 881 | ||||||||||||
Net cash provided by (used in) operating activities |
$ | (61,693 | ) | $ | (59,879 | ) | $ | 32,830 | $ | 12,848 | ||||||
In the thirteen-week period ended March 27, 2010, net loss and EBITDA from continuing operations included:
| $9,732 of non-cash stock option compensation expenses; |
| $4,742 in severance and re-organization payroll and benefits; |
| $414 related to pension settlement expenses; |
| $405 gain on insurance premium refund from prior years; |
| $320 of consulting fees associated with certain corporate initiatives and information technology projects; |
| $250 of fees paid to Wasserstein and Highfields under the management agreement; |
| $77 in approved relocation and recruiting expenses; |
| $60 gain on legal settlement; |
| $24 gain related to certain income tax reserves; and |
| $16 loss on impairment and disposal of fixed assets and other long-lived assets, net. |
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In the thirteen-week period ended March 28, 2009, net loss and EBITDA from continuing operations included:
| $2,585 of severance related benefits and outplacement services; |
| $1,529 of inventory reserve benefit; |
| $287 of consulting fees associated with certain corporate initiatives and information technology projects; |
| $250 of fees paid to Wasserstein and Highfields under the management agreement; |
| $196 in approved relocation and recruitment charges; |
| $145 of integration expenses related to our acquisitions; |
| $118 of non-cash stock option compensation expense; |
| $11 loss on impairment and disposal of fixed assets and other long-lived assets; and |
| $26 gain related to certain income tax reserves. |
In the thirty-nine week period ended March 27, 2010, net loss and EBITDA from continuing operations included:
| $9,903 of non-cash stock option compensation expenses; |
| $5,627 in severance and re-organization payroll and benefit expenses; |
| $915 loss on impairment and disposal of fixed assets and other long-lived assets, net; |
| $750 of fees paid to Wasserstein and Highfields under the management agreement; |
| $741 of consulting fees associated with certain corporate initiatives and information technology projects; |
| $414 related to pension settlement expense; |
| $405 gain on insurance premium refund from prior years; |
| $346 gain on legal settlement; |
| $278 related to store closure expenses and lease termination costs for our Eugene, Oregon call center; |
| $166 in approved recruiting and relocation expenses; |
| $110 of state net worth tax adjustments; and |
| $73 gain related certain income tax reserves. |
In the thirty-nine week period ended March 28, 2009, net loss and EBITDA from continuing operations included:
| $15,416 net gain on repayment of long-term debt; |
| $13,859 loss on impairment and disposal of fixed asset and other long-lived assets; |
| $3,899 of inventory reserve expenses; |
| $3,002 of severance related benefits and outplacement services; |
| $1,336 of consulting fees associated with certain corporate initiatives and information technology projects; |
| $750 of fees paid to Wasserstein and Highfields under the management agreement; |
| $631 of integration expenses related to our acquisitions; |
| $356 of non-cash stock option compensation expense; |
| $300 of income associated with a vendor settlement; |
| $196 of approved relocation and recruitment charges; |
| $89 of expenses related to land rezoning; |
| $87 of expense related to inventory step-up amortization related to our acquisition; and |
| $48 gain related to certain income tax reserves. |
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 October to 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).
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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 primary equity holders, 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 Provided by Operating Activities from Continuing Operations
Cash provided by operating activities from continuing operations totaled $32,830 in the thirty-nine week period ended March 27, 2010, compared to $12,848 in the thirty-nine week period ended March 28, 2009. The increase in cash provided by continuing operations was primarily attributable to improved working capital utilization, which was largely due to improved inventory management.
Cash Flows Provided by (Used in) Investing Activities from Continuing Operations
Cash used in investing activities from continuing operations of $6,476 for the thirty-nine weeks ended March 27, 2010 compared to cash flows provided by investing activities from continuing operations totaled $602 in the thirty-nine weeks ended March 28, 2009. Investing activities in fiscal 2010 consisted primarily of acquisition of a short-term investment and capital expenditures. Investing activities in 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 Used in Financing Activities from Continuing Operations
Cash used in financing activities from continuing operations totaled $147 for the thirty-nine weeks ended March 27, 2010, compared to $20,661 for the thirty-nine weeks ended March 28, 2009. In fiscal 2009, financing activities were primarily comprised of the repurchases of our Senior Notes.
Cash Flows from Discontinued Operations
Cash flows provided by operating activities from discontinued operations totaled $881 for the thirty-nine weeks ended March 28, 2009, and was primarily comprised of 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 during the thirty-nine weeks ended March 27, 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, 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, until we begin to build inventories and other working capital components to support our next holiday selling season.
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As of March 27, 2010, unused borrowings under the revolving credit facility were $123,989, reflecting no borrowings, and $1,011 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 March 27, 2010 was $174. 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 condensed 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 31st of each year 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. As of December 31, 2009, we were in compliance with this covenant. 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 March 27, 2010, we were in compliance with all of our covenants under the revolving credit facility.
Long-term Debt
As of March 27, 2010, 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 5.25% at March 27, 2010. 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 and 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 as well as 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 then outstanding to be immediately due and payable.
At March 27, 2010, 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.
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 and/or our attempt to 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
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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, lower than expected 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.
For details regarding recent accounting pronouncements, see Note 4 New Accounting Pronouncements and Adoptions within Part I of this Form 10-Q.
NON-GAAP FINANCIAL MEASURE: EBITDA
Our measure of EBITDA is 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 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 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; |
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| 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.
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 Senior 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 Senior Notes as of March 27, 2010, 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.
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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 March 27, 2010. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of March 27, 2010, 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.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
None.
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. | [RENAMED AND RESERVED] |
None.
ITEM 5. | OTHER INFORMATION |
None.
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/ STEVEN J. HEYER | |
Steven J. Heyer | ||
Chairman of the Board and Chief Executive Officer | ||
By: |
/S/ EDWARD F. DUNLAP | |
Edward F. Dunlap | ||
Chief Financial Officer |
May 5, 2010
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