SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number 33-383063
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SFC New Holdings, Inc.
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(Exact name of registrant as specified in its charter)
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State of Delaware 52-2173533
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
520 Lake Cook Road, Suite 550, Deerfield, IL 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 405-5300
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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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of the Registrant's common stock as of
October 22, 1999 was 100 shares of common stock.
<PAGE> 1
SFC NEW HOLDINGS, INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION Page No.
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ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for
the three- and nine-month periods
ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the nine-month periods
ended September 30, 1999 and 1998 5
Notes to Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-12
PART II - OTHER INFORMATION 13
SIGNATURE 14
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
SFC NEW HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ In thousands)
Successor Predecessor
---------- ------------
September 30, December 31,
1999 1998
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Assets (unaudited)
Current assets:
Cash and cash equivalents $ 30,042 $ 5,880
Accounts receivable, net 29,615 19,327
Inventories 31,670 23,366
Net assets of discontinued operations - 86,632
Other current assets 9,874 7,234
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Total current assets 101,201 142,439
Property, plant, and equipment, net 246,642 234,944
Intangible assets, net 137,855 113,438
Other noncurrent assets 36,540 39,338
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Total assets $ 522,238 $ 530,159
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 2,828 $ 3,450
Accounts payable 43,923 37,779
Accrued expenses 78,691 80,741
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Total current liabilities 125,442 121,970
Long-term debt (Note 5) 841,747 820,309
Due to Specialty Foods Acquisition
Corporation 7,751 7,499
Other noncurrent liabilities 28,110 31,355
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Total liabilities 1,003,050 981,133
Stockholders' equity (480,812) (450,974)
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Total liabilities and
stockholders' equity $ 522,238 $ 530,159
========== =========
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
SFC NEW HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
($ In thousands)
<TABLE>
Successor Predecessor Successor Predecessor
---------- ------------ --------- -----------
Three months ended September 30, Nine months ended September 30,
--------------------------------------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 231,997 $ 185,425 $ 658,237 $ 542,646
Cost of sales 101,765 80,691 288,844 239,085
---------- --------- ---------- ---------
Gross profit 130,232 104,734 369,393 303,561
Operating expenses:
Selling, distribution, general
and administrative 114,724 91,028 337,732 280,522
Amortization of intangibles 1,458 225 3,563 678
--------- --------- ---------- ---------
Total operating expenses 116,182 91,253 341,295 281,200
Operating profit 14,050 13,481 28,098 22,361
Other expenses:
Interest expense, net 29,288 21,426 77,304 61,497
Third-party financing
fees (Note 5) 605 - 9,010 -
Other expense, net 727 712 4,326 2,012
--------- -------- --------- ---------
Loss before income taxes (16,570) (8,657) (62,542) (41,148)
Provision (benefit) for
income taxes (69) (241) 249 (239)
--------- --------- -------- ---------
Loss from continuing
operations (16,501) (8,416) (62,791) (40,909)
Discontinued operations:
Net income - 3,072 3,826 8,051
Gain on disposal, net - - 29,826 -
--------- -------- -------- ---------
- 3,072 33,652 8,051
--------- -------- -------- ---------
Net loss $ (16,501) $ (5,344) $ (29,139) $ (32,858)
========= ======== ======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
SFC NEW HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ In thousands)
Nine months ended September 30,
-------------------------------
1999 1998
---- ----
Cash flows from operating activities:
Loss from continuing operations $ (62,791) $ (40,909)
Adjustments to reconcile to net cash
from continuing operating activities
Depreciation and amortization 31,583 18,696
Debt issuance cost amortization 8,107 6,753
Accretion of interest 702 -
Changes in operating assets and liabilities,
net of effects from businesses
acquired or sold (10,312) (27,396)
----------- -----------
Net cash used by continuing
operating activities (32,711) (42,856)
Net cash used by discontinued operations (1,440) (8,331)
----------- -----------
Net cash used by operating activities (34,151) (51,187)
Cash flows from investing activities:
Proceeds from divestitures of businesses 119,954 -
Acquisitions of businesses (43,824) -
Capital expenditures (16,981) (61,748)
Other (152) (3,964)
----------- -----------
Net cash provided (used)
by investing activities 58,997 (65,712)
Cash flows from financing activities:
Increase in revolving credit 22,801 -
Refinancing costs (20,196) (11,862)
Payments on long-term debt (3,065) (1,815)
Other (224) (625)
----------- -----------
Net cash used by financing activities (684) (14,302)
Increase (decrease) in cash and
cash equivalents 24,162 (131,201)
Cash - beginning of period 5,880 234,266
----------- -----------
Cash - end of period $ 30,042 $ 103,065
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
SFC NEW HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
($ In thousands)
NOTE 1 - General
(a) Reorganization
SFC New Holdings, Inc. and Subsidiaries ("Successor Company"
or the "Company") was formed to exchange debt securities
issued by the Company for certain debt securities of
Specialty Foods Corporation ("Predecessor Company" or "SFC").
SFC contributed its interest in the operating subsidiaries
and other assets through a wholly-owned subsidiary, SFC-Sub,
to SFAC New Holdings, Inc., the direct parent of SFC New
Holdings, Inc. SFAC New Holdings, Inc. then contributed
those interests to SFC New Holdings, Inc. As a result of
this reorganization completed on June 11, 1999, SFC New
Holdings, Inc. is treated as a successor company for
accounting purposes.
(b) Interim Financial Information
In the opinion of management, the accompanying unaudited
interim condensed financial information of the Company and
the Predecessor Company contains all adjustments, consisting only of
those of a normal recurring nature, except as otherwise
indicated, necessary to present fairly the Company's and the
Predecessor Company's financial position and results of
operations. All significant intercompany accounts,
transactions and profits have been eliminated.
These financial statements are for interim periods and do not
include all information normally provided in annual financial
statements and should be read in conjunction with the
financial statements of the Predecessor Company for the year
ended December 31, 1998 included in the annual report filed
on Form 10-K. The results of operations for interim periods
are not necessarily indicative of the results that may be
expected for the full year. The financial information of the
Successor Company for 1999 has been combined with the results
of operations of the Predecessor Company from January 1, 1999
through June 11, 1999.
Prior period financial information of the Predecessor Company
is based on its historical financial information. Certain
amounts in the Predecessor Company 1998 financial statements have
been reclassified to conform to the manner in which the 1999
financial statements have been presented.
<PAGE> 6
NOTE 2 - Inventories
The components of inventories are as follows:
Successor Predecessor
------------ ------------
September 30, December 31,
1999 1998
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(In thousands)
Raw materials and packaging $ 14,677 $ 12,244
Work in progress 161 264
Finished goods 14,000 8,593
Other 3,677 3,209
--------- ---------
32,515 24,310
Less obsolescence and other allowances (845) (944)
--------- ---------
$ 31,670 $ 23,366
========= =========
Inventories are stated at the lower of cost or market. Cost
is determined principally by the first-in first-out ("FIFO")
method.
NOTE 3 -Discontinued Operations
Discontinued operations relate to the divestiture of H&M Food
Systems, Inc. ("H&M") in April 1999. This divestiture has
been reported as discontinued operations in the accompanying
financial statements in accordance with Accounting Principles
Board Opinion No. 30. The net assets of H&M are reported as
a single line item in the Company's Condensed Consolidated
Balance Sheet for December 31, 1998 and the pre-divestiture
operating results of H&M are reported in the discontinued
operations section of the accompanying Condensed Consolidated
Statements of Operations. No interest expense has been
allocated to discontinued operations.
NOTE 4 - Acquisitions
On June 7, 1999, the Company's wholly-owned subsidiary Metz
Baking Company ("Metz") acquired Grocers Baking Company of
Grand Rapids, Michigan for $33.6 million plus an additional
$5.8 million of indebtedness. Grocers Baking Company, which
had 1998 sales of approximately $60 million, sells a variety
of bread, buns, sweet goods, cookie dough and other frozen
products throughout Michigan. Additionally, in July 1999,
Metz completed a small add-on acquisition of a Detroit-based
baker, Blue Bird Products, Inc. Blue Bird bakes a variety of
fresh buns and rolls that are distributed throughout the
Detroit area.
<PAGE> 7
NOTE 5 - Debt
On June 11, 1999, the Company completed private exchange
offers for the existing publicly held debt securities of SFC
and Specialty Foods Acquisition Corporation ("SFAC"), the
direct parent of SFC. In order to comply with their
obligations under the registration rights agreements entered
into in connection with the private exchange offers, SFC New
Holdings, Inc. filed a Form S-4 registration statement on July
16,1999 with the Securities Exchange Commission. This filing
also allows the remaining holders of the SFC debt securities
the opportunity to exchange their existing debt securities
for the debt securities of the Company. This exchange
was completed on September 30, 1999 at which time an
additional $6.4 million of debt securities were exchanged and reflected
as debt on the Company's Condensed Consolidated
Balance Sheet.
The following table reconciles the debt reported by the
Predecessor Company at December 31, 1998 to the debt reported
by the Successor Company at September 30, 1999.
Predecessor Normal Successor
December 31, Debt not Operating September 30,
1998 Exchanged Activity 1999
------ --------- -------- ----------
Revolving Credit Facility $ 75,000 $ - $ 22,801 $ 97,801
Term Loan Facility 169,080 - (1,302) 167,778
Senior Notes due 2001 225,000 (130) - 224,870
Senior Notes due 2002 150,000 (25) - 149,975
Senior Subordinated Notes
due 2003 200,000 (170) 702 200,532
Other 4,679 - (1,060) 3,619
-------- ------- -------- --------
823,759 (325) 21,141 844,575
Less current portion (3,450) - 622 (2,828)
-------- -------- -------- --------
$ 820,309 $ (325) $ 21,763 $ 841,747
======== ======== ======== ========
The Company has incurred approximately $21.1 million in fees
and expenses related to the exchange offers and refinancing.
Approximately $12.1 million of fees have been paid to
debtholders and have been classified as a long-term asset on
the Company's Condensed Consolidated Balance Sheet. The
remaining $9.0 million of fees and expenses were paid to
third parties and have been recorded as a non-operating
expense on the Company's Condensed Consolidated Statement of
Operations.
<PAGE> 8
NOTE 5 - Litigation
As previously reported, Cacique, Inc. ("Cacique") commenced
proceedings against Stella Foods, Inc. ("Stella"), a former
subsidiary of the Company, on May 20, 1993, prior to the Company's
acquisition of Stella from Artal Group S.A.. The proceeding
was filed in the California Superior Court and related to
"Hispanic-style cheese" formerly produced by Stella. As part
of the sale of Stella in December 1997, SFC indemnified the
purchaser with respect to this proceeding. Although SFAC New
Holdings, Inc. is not a defendant in the litigation, it
continues to control the defense. The facts that give rise
to this litigation are more fully described in the SFAC
Annual Report on Form 10-K for the fiscal year ended December
31, 1998.
Recently, a jury in the Los Angeles Superior Court returned a
verdict of $4.5 million of compensatory damages against
Stella and certain other defendants. On September 8, 1999,
the Court ruled in a Tentative Statement of Decision that
Stella and certain other defendants must also pay interest of
$1.7 million on the compensatory damages. In addition, the
Court assessed aggregate punitive damages of $12.5 million
against Stella and C. Dean Metropoulos, former CEO of Stella.
The court has yet to rule on the amount of the plaintiff's
attorney fees to be paid by the defendants.
The Company strongly disagrees with the verdict in this case.
Furthermore, the Company believes that numerous reversible
errors occurred at the trial and it will vigorously pursue
certain post trial motions, its right of appeal, and other
sources of recovery. Post-trial motions are expected to take
several months and the appeal process could take several
years.
Although no assurance can be given due to the uncertainties
related to the outcome of these legal proceedings, the
Company continues to believe that the ultimate resolution of
this matter will not have a material adverse effect on the
Company's financial condition, results of operations or near-
term liquidity.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Seasonality
The Company's businesses are moderately seasonal with lower
sales, operating profit, and cash flows generally occurring in
the first quarter of the year. This seasonality is due primarily
to higher bread and cookie sales in the summer months, as well as
the winter holiday season.
Results of Operations
COMPARISON OF THIRD QUARTER 1999 TO THIRD QUARTER 1998
Consolidated net sales from continuing operations increased 25.1%
to $232.0 million in 1999 compared to $185.4 million in 1998.
The increase in net sales was primarily due to the inclusion of
net sales reported by acquired businesses and price increases taken at Metz.
The Company's gross profit margin percentage was negatively
impacted by increased depreciation of approximately $2.5 million
in 1999. Depreciation expense increased due to purchases made in
1998 of fleet and production equipment previously leased and a
higher than normal level of planned capital expenditures.
Excluding the impact of depreciation, the gross profit margin
increased by approximately one percentage point in 1999 due
principally to pricing and favorable product mix.
Selling, distribution, and general and administrative ("SDG&A")
expenses increased $23.7 million in 1999 to $114.7 million
primarily due to the inclusion of expenses reported by acquired businesses
and higher depreciation expense. Excluding the impact of depreciation,
SDG&A expenses as a percentage of sales declined by approximately
one-half percentage point in 1999 reflecting the cost reductions
resulting from the acquisitions.
Interest expense, net in 1999 increased $7.9 million to $29.3
million from $21.4 million in 1998. The increase is primarily due
to increased interest rates and debt issuance amortization as a
result of the debt exchange and refinancing and lower interest
income in 1999.
Other expense, net remained constant at $0.7 million in 1999.
These expenses consist primarily of discount expense on the
Company's Accounts Receivable Facility.
As a result of the above factors, net loss from continuing
operations increased to $16.5 million in 1999 compared to $8.4
million in 1998.
The Company reports minimal state income tax and no federal
income tax due to its net operating loss position for tax
purposes.
<PAGE> 10
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1998
The nine months ended September 30, 1999 comprise the results of
operations of the Predecessor Company for the period from January
1, 1999 to June 11, 1999 and the results of operations of the
Company for the period from June 12, 1999 to September 30, 1999.
The 1999 periods are discussed on a combined basis.
Consolidated net sales from continuing operations increased 21.3%
to $658.2 million in 1999 compared to $542.6 million in 1998. The
increase in net sales was primarily due to the inclusion of
net sales reported by businesses acquired in the last year and a half and price
increases taken at Metz.
The Company's gross profit margin percentage increased to 56.1%
in 1999 from 55.9% in 1998 primarily due to pricing, a favorable
sales mix shift at Mother's and slightly lower flour costs, which
more than offset inflationary cost increases and higher
depreciation.
SDG&A expenses increased $57.2 million in 1999 to $337.7 million primarily due
to the inclusion of expenses reported by businesses acquired over the
last year and a half. However, as a percentage of sales, SDG&A expenses
decreased slightly to 51.3% in 1999 due to cost synergies
resulting from the 1998 acquisitions.
Interest expense, net in 1999 increased $15.8 million to $77.3
million from $61.5 million in 1998. The increase is primarily
due to increased interest rates as a result of the debt exchange
and refinancing and lower interest income in 1999.
Included in other expenses in 1999 are third-party financing fees
related to the debt exchange and refinancing.
Other expense, net increased to $4.3 million in 1999 compared to
$2.0 million in 1998. The increase is primarily due to the loss
on the disposal of property, plant and equipment.
As a result of the above factors, net loss from continuing
operations increased to $62.8 million in 1999 compared to $40.9
million in 1998.
The Company reports minimal state income tax and no federal
income tax due to its net operating loss position for tax
purposes.
Because of the highly leveraged status of the Company, earnings
before interest, taxes, depreciation, and amortization ("EBITDA")
is an important performance measure used by the Company and its
stakeholders. The Company believes that EBITDA provides
additional information for determining its ability to meet future
debt service requirements. However, EBITDA is not indicative of
operating income or cash flow from operations as determined under
generally accepted accounting principles. The Company's EBITDA
from continuing operations for the three and nine-month periods
ended September 30, 1999 and 1998 is calculated as follows:
<PAGE> 11
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------------------------------
(Successor) (Predecessor) (Successor) (Predecessor)
(In Thousands)
Operating Profit $ 14,050 $ 13,481 $ 28,098 $ 22,361
Depreciation and amortization 11,949 6,719 31,583 18,696
-------- -------- --------- ---------
EBITDA $ 25,999 $ 20,200 $ 59,681 $ 41,057
======== ======== ========= =========
Liquidity and Capital Resources
Net cash used in operating activities for the nine months ended
September 30, 1999 totaled $34.2 million. Net of the effects of
acquisitions, the use of cash for changes in operating assets and
liabilities included increased inventories for seasonal inventory
build, decreased funding under the accounts receivable facility,
and a reduction in accrued expenses which is impacted by the
timing of interest payments. In 1998, cash used by operating
activities of $51.2 million was principally driven by increased
working capital requirements, including higher levels of
receivables and inventories and reductions in accounts payable
and accrued expenses.
Net cash provided by investing activities totaled $59.0 million
in 1999 and is primarily due to the proceeds from the sale of
H&M, offset by the cost of the acquisitions of Grocers Baking
Company and Blue Bird Products, Inc. and planned capital
expenditures. In 1998, net cash used by investing activities
totaled $65.7 million. The activity in 1998 was primarily
attributable to the purchase of $35.0 million of fleet and
production equipment previously leased and planned capital
expenditures.
Net cash used in financing activities totaled $0.7 million in
1999 due to payments of debt refinancing costs and debt principal
offset by increased revolver borrowings. In 1998, net cash used
in financing activities amounted to $14.3 million principally due
to refinancing costs and scheduled payments on long-term debt.
Based upon the above, the net increase (decrease) in cash in 1999
and 1998 was $24.2 million and ($131.2) million, respectively.
As of September 30, 1999, the Company had a cash balance of $30.0
million and had $97.8 million of borrowings under its $122.8
million Revolving Credit Facility. Outstanding letters of credit
of $10.8 million as of September 30, 1999 reduce available funds
under the facility. Liquidity was significantly enhanced by the
$110 million of net cash proceeds received upon the closing of
the H&M sale on April 12, 1999. Management believes that
available funds should be adequate to fund the Company's 1999
operations, capital expenditures and acquisitions. However,
there can be no assurances that available funds will be adequate
to meet such needs.
<PAGE> 12
Cautionary Statement for Purposes of the "Safe Harbor" Provision
of the Private Securities Litigation Reform Act of 1995
This Form 10-Q contains statements that constitute forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this Form 10-Q, the
words "anticipates", "intends", "plans", "believes", "estimates",
"expects", and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements
involve known and unknown risks,
uncertainties and other factors which may cause actual results,
performance or achievements of the Company to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, but are not limited to: the Company's highly leveraged
capital structure, its substantial principal repayment
obligations, weather, economic and market conditions, cost and
availability of raw materials, competitive activities or other
business conditions. Further, any forward-looking statement
speaks only as of the date on which such statement is made, and
the Company undertakes no obligation to update any forward-
looking statement or statements to reflect events or
circumstances after the date on which such statement is made or
to reflect the occurrence of unanticipated events. New factors
emerge from time to time, and it is not possible for management
to predict all of such factors. Further, management cannot
assess the impact of each such factor on the Company's actual
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 6: Exhibits and Reports on Form 8-K
(a) See Exhibit Index filed herewith.
(b) On September 16, 1999, the Predecessor Company filed a
report on Form 8-K discussing the Cacique litigation.
<PAGE> 13
SIGNATURE
------------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SFC New Holdings, Inc.
---------------------------
(Registrant)
----------
By:
Date: November 1, 1999 /s/ Robert L. Fishbune
------------------
Robert L. Fishbune
Vice President and Chief
Financial Officer
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- ------------------------
27* Financial Data Schedule
___________
*Filed Herewith.
<PAGE> 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,042
<SECURITIES> 0
<RECEIVABLES> 31,044
<ALLOWANCES> 1,429
<INVENTORY> 31,670
<CURRENT-ASSETS> 101,201
<PP&E> 387,343
<DEPRECIATION> 140,701
<TOTAL-ASSETS> 522,238
<CURRENT-LIABILITIES> 125,442
<BONDS> 575,377
0
0
<COMMON> 0
<OTHER-SE> (480,812)
<TOTAL-LIABILITY-AND-EQUITY> 522,238
<SALES> 658,237
<TOTAL-REVENUES> 658,237
<CGS> 288,844
<TOTAL-COSTS> 341,295
<OTHER-EXPENSES> 13,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,304
<INCOME-PRETAX> (62,542)
<INCOME-TAX> 249
<INCOME-CONTINUING> (62,791)
<DISCONTINUED> 33,652
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,139)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
