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 June 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)
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
August 12, 1999 was 100 shares of common stock.
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 June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for
the three- and six-month periods
ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the six-month periods
ended June 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
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June 30, December 31,
1999 1998
------ ------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 62,402 $ 5,880
Accounts receivable, net 30,485 19,327
Inventories 30,213 23,366
Net assets of discontinued operations - 86,632
Other current assets 8,934 7,234
---------- ----------
Total current assets 132,034 142,439
Property, plant, and equipment, net 242,772 234,944
Intangible assets, net 133,808 113,438
Other noncurrent assets 40,635 39,338
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Total assets $ 549,249 $ 530,159
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 3,211 $ 3,450
Accounts payable 45,983 37,779
Accrued expenses 84,136 80,741
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Total current liabilities 133,330 121,970
Long-term debt (Note 5) 835,650 820,309
Due to Specialty Foods Acquisition Corporation 7,997 7,499
Other noncurrent liabilities 29,809 31,355
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Total liabilities 1,006,786 981,133
Stockholders' equity (457,537) (450,974)
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Total liabilities and
stockholders' equity $ 549,249 $ 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 June 30, Six months ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 225,975 $ 186,297 $ 426,240 $ 357,221
Cost of sales 97,635 82,075 187,079 158,394
--------- --------- --------- ---------
Gross profit 128,340 104,222 239,161 198,827
--------- --------- --------- ---------
Operating expenses:
Selling, distribution, general
and administrative 114,471 95,130 223,008 189,494
Amortization of intangibles 1,088 241 2,105 453
--------- -------- -------- ---------
Total operating expenses 115,559 95,371 225,113 189,947
--------- -------- -------- ---------
Operating profit 12,781 8,851 14,048 8,880
Other expenses:
Interest expense, net 24,183 20,441 47,676 40,071
Third-party financing fees (Note 5) 8,405 - 8,405 -
Other expense, net 2,920 499 3,599 1,300
--------- -------- -------- ---------
Loss before income taxes (22,727) (12,089) (45,632) (32,491)
Provision (benefit) for income taxes 188 (27) 318 2
--------- -------- -------- ---------
Loss from continuing operations (22,915) (12,062) (45,950) (32,493)
Discontinued operations:
Net income 16 2,617 3,826 4,979
Gain on disposal, net 30,238 - 29,826 -
--------- -------- -------- ---------
30,254 2,617 33,652 4,979
--------- -------- -------- ---------
Net income (loss) $ 7,339 $ (9,445) $ (12,298) $ (27,514)
========= ======== ======== ==========
</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)
Six months ended June 30,
----------------------------
1999 1998
---------- ---------
Cash flows from operating activities:
Loss from continuing operations $ (45,950) $ (32,493)
Adjustments to reconcile to net cash
from continuing operating activities
Depreciation and amortization 19,634 11,977
Debt issuance cost amortization 5,427 3,989
Accretion of interest 498 -
Changes in operating assets and liabilities,
net of effects from businesses
acquired or sold 160 (14,334)
--------- ---------
Net cash used by continuing
operating activities (20,231) (30,861)
Net cash used by discontinued operations (1,440) (3,949)
--------- ---------
Net cash used by operating activities (21,671) (34,810)
Cash flows from investing activities:
Proceeds from divestitures of businesses 119,954 -
Acquisition of business (33,685) -
Capital expenditures (10,125) (37,581)
Other (777) (790)
---------- ---------
Net cash provided (used)
by investing activities 75,367 (38,371)
Cash flows from financing activities:
Increase (decrease) in revolving credit 22,801 -
Refinancing costs (18,011) (11,469)
Payments on long-term debt (2,167) (917)
Other 203 (501)
---------- --------
Net cash provided (used)
by financing activities 2,826 (12,887)
Increase (decrease) in cash and cash equivalents 56,522 (86,068)
Cash - beginning of period 5,880 234,266
---------- ---------
Cash - end of period $ 62,402 $ 148,198
========== =========
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"),
as described in Note 5 to the Condensed Consolidated
Financial Statements. 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
its Predecessor 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 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
---------- -----------
June 30, December 31,
1999 1998
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(In thousands)
Raw materials and packaging $ 13,957 $ 12,244
Work in progress 236 264
Finished goods 13,487 8,593
Other 3,689 3,209
-------- --------
31,369 24,310
Less obsolescence and other allowances (1,156) (944)
-------- --------
$ 30,213 $ 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 May 12, 1999, private exchange offers were commenced for
the existing publicly held debt securities of SFC and
Specialty Foods Acquisition Corporation ("SFAC"), the direct
parent of SFC. Under the exchange offers, accredited
investors that held existing debt securities of SFAC and SFC
were provided the opportunity to exchange their debt
securities for the debt securities of three new holding
companies: SFC-Sub, Inc. (the direct parent of SFAC New
Holdings, Inc.), SFAC New Holdings, Inc., and SFC New
Holdings, Inc. The private exchange offers were completed on
June 11, 1999. In order to comply with its obligations under
the registration rights agreement entered into in connection
with the private exchange offers, SFC New Holdings, Inc.
filed a public Form S-4 exchange 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 public exchange is expected
to be completed by September 30, 1999 at which time any
additional exchanged bonds will be reflected as debt on SFC
New Holdings, Inc.'s Condensed Consolidated Balance Sheet.
Concurrent with the exchange offers, the Company amended and
restated its Term Loan, Revolving Credit, and off-balance
sheet Accounts Receivable facilities to extend the maturity
date of these facilities and permit the exchange offers.
The following table reconciles the debt reported by the
Predecessor Company at December 31, 1998 to the debt reported
by the Successor Company at June 30, 1999.
Debt
subject
Predecessor to Normal Successor
December 31, public Operating June 30,
1998 exchange Activity 1999
---------- --------- --------- ---------
Revolving Credit Facility $ 75,000 $ - $ 22,801 $ 97,801
Term Loan Facility 169,080 - (871) 168,209
Senior Notes due 2001 225,000 (4,305) - 220,695
Senior Notes due 2002 150,000 (75) - 149,925
Senior Subordinated Notes
due 2003 200,000 (2,354) 498 198,144
Other 4,679 - (592) 4,087
---------- ---------- --------- --------
823,759 (6,734) 21,836 838,861
Less current portion (3,450) - 239 (3,211)
---------- ---------- -------- --------
$ 820,309 $ (6,734) $ 22,075 $ 835,650
========== ========== ======== ========
<PAGE> 8
Several terms of SFC's debt have been changed as a result of
the exchange offers and amended agreements, including, among
other changes:
- Senior Notes due 2001 - The coupon rate was increased from
10 1/4% to 11 1/4%.
- Senior Notes due 2002 - The coupon rate was increased from
11 1/8% to 12 1/8%.
- Senior Subordinated Notes due 2003 - The coupon rate was
increased from 11 1/4% to 13 1/4% with 12 1/4% payable in
cash and 1% payable in kind.
- Term Loan and Revolver - The interest rate increased by 75
basis points ("bps") to Libor + 450 bps for the Term Loan and
Libor + 325 bps for the Revolver. The maturity dates of these
facilities were extended one year to January 2001.
- Accounts Receivable Facility - The amortization and the
maturity dates were extended one year to December 2000 and
January 2001, respectively.
The Company has incurred approximately $20.5 million in fees
and expenses related 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 $8.4 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> 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 SECOND QUARTER 1999 TO SECOND QUARTER 1998
The three months ended June 30, 1999 comprise the results of
operations of the Predecessor Company for the period from April
1, 1999 to June 11, 1999 and the results of operations of the
Company for the period from June 12, 1999 to June 30, 1999. The
1999 periods are discussed on a combined basis.
Consolidated net sales from continuing operations increased 21.3%
to $226.0 million in 1999 compared to $186.3 million in 1998.
The increase in net sales was primarily due to the inclusion of
acquisitions completed in the last fourteen months, price
increases taken at Metz and higher cafe sales at Boudin.
The Company's gross profit margin percentage increased to 56.8%
in 1999 from 56.0% in 1998. Higher pricing, favorable product
mix, and moderately favorable commodity prices more than offset
inflationary cost increases and higher depreciation.
Selling, distribution, and general and administrative ("SDG&A")
expenses increased $19.3 million in 1999 to $114.5 million
primarily due to the inclusion of acquisitions completed in the
last fourteen months. However, as a percentage of sales, SDG&A
expenses decreased slightly to 50.7% in 1999 due to cost
synergies resulting from the 1998 acquisitions.
Interest expense, net in 1999 increased $3.8 million to $24.2
million from $20.4 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 $2.9 million in 1999 compared to
$0.5 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 $18.7 million in 1999 compared to $12.1
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
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The six months ended June 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 June 30, 1999. The
1999 periods are discussed on a combined basis.
Consolidated net sales from continuing operations increased 19.3%
to $426.2 million in 1999 compared to $357.2 million in 1998. The
increase in net sales was primarily due to the inclusion of
acquisitions completed in the last fourteen months, price
increases taken at Metz and higher cafe sales at Boudin.
The Company's gross profit margin percentage increased to 56.1%
in 1999 from 55.7% 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.
Selling, distribution, and general and administrative expenses
increased $33.5 million in 1999 to $223.0 million primarily due
to the inclusion of acquisitions completed in the last fourteen
months. However, as a percentage of sales, SDG&A expenses
decreased slightly to 52.3% in 1999 due to cost synergies
resulting from the 1998 acquisitions.
Interest expense, net in 1999 increased $7.6 million to $47.7
million from $40.1 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 $3.6 million in 1999 compared to
$1.3 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 $41.7 million in 1999 compared to $32.5
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 six-month periods
ended June 30, 1999 and 1998 is calculated as follows:
<PAGE> 11
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------------------
(In Millions)
Operating Profit $ 12,781 $ 8,851 $ 14,048 $ 8,880
Depreciation and amortization 10,303 6,324 19,634 11,977
-------- ------- -------- ------
EBITDA $ 23,084 $ 15,175 $ 33,682 $ 20,857
======== ======== ======= ========
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended
June 30, 1999 totaled $121.7 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 and decreased funding under the accounts receivable
facility, offset by an increase in accounts payable as the
Company took advantage of favorable terms from creditors. In
1998, cash used by operating activities of $34.8 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 $75.4 million
in 1999 and is primarily due to the proceeds from the sale of
H&M, offset by the cost of the acquisition of Grocers Baking
Company and planned capital expenditures. In 1998, net cash used
by investing activities totaled $38.4 million. The activity in
1998 was primarily attributable to the purchase of $19.5 million
of fleet and production equipment previously leased and planned
capital expenditures.
Net cash provided by financing activities totaled $2.8 million in
1999 principally due to increased revolver borrowings, offset by
payments of debt refinancing costs. In 1998, net cash used in
financing activities amounted to $12.9 million principally due
to refinancing costs.
Based upon the above, the net increase (decrease) in cash in 1999
and 1998 was $56.5 million and ($86.1) million, respectively.
As of June 30, 1999 the Company had a cash balance of $62.4
million and had $97.8 million borrowings under its $122.8 million
Revolving Credit Facility. Outstanding letters of credit of
$10.3 million as of June 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.
On June 11, 1999, the Company completed private exchange offers
as described in Note 5 to the Condensed Consolidated Financial
Statements. In addition, the Company entered into amended and
restated agreements which extend the maturity dates of its
Accounts Receivable, Revolving Credit and Term Loan facilities
from January 2000 to January 2001.
<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 June 30, 1999, the Predecessor Company filed a report on
Form 8-K announcing the completion of its bond exchange and the
extension of the maturity dates of its Accounts Receivable,
Revolving Credit and Term Loan facilities.
<PAGE> 13
SIGNATURE
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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: August 12, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 62,402
<SECURITIES> 0
<RECEIVABLES> 32,129
<ALLOWANCES> 1,644
<INVENTORY> 30,213
<CURRENT-ASSETS> 132,034
<PP&E> 373,421
<DEPRECIATION> 130,649
<TOTAL-ASSETS> 549,249
<CURRENT-LIABILITIES> 133,330
<BONDS> 567,376
0
0
<COMMON> 0
<OTHER-SE> (457,537)
<TOTAL-LIABILITY-AND-EQUITY> 549,249
<SALES> 426,240
<TOTAL-REVENUES> 426,240
<CGS> 187,079
<TOTAL-COSTS> 225,113
<OTHER-EXPENSES> 12,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,676
<INCOME-PRETAX> (45,632)
<INCOME-TAX> 318
<INCOME-CONTINUING> (45,950)
<DISCONTINUED> 33,652
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,298)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
