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R. P. SCHERER PUTS PACO UP FOR SALE

Executive Summary

R. P. SCHERER PUTS PACO UP FOR SALE as part of a plan to reduce debt incurred from a leveraged buy-out completed in October. In an Oct. 31 prospectus, Scherer said it "anticipates it will sell certain diversified health care products and services businesses to satisfy certain debt obligations." Paco Pharmaceuticals, acquired by Scherer in early 1988, is one of six businesses earmarked for sale by Scherer, including Lorvic, Scientific Associates, Southern Optical, Franz Pohl GmbH and PharmaTech. Combined, the six businesses generated sales of $ 114 mil. in FY 1989. Scherer expects the net proceeds from the divestiture of its diversified businesses will "exceed $ 50 mil." Scherer has already divested Pohl and PharmaTech and has an agreement-in-principle to sell Southern Optical. On Sept. 15, Scherer sold Pohl, a West German seals and closures business, and its stake in PharmaTech, a seals and closures manufacturing joint venture in the U.S., to joint venture partner IPC Health Care for $ 8 mil. Scherer signed an agreement-in-principle to sell all of Southern Optical to its current president on Aug. 17. Scherer said it "is anticipated that the other divestitures will be completed by the end of fiscal 1990" (March 31), although no other agreements have been reached. If Scherer can get at least what it paid for Paco, the company will have a ready source of funds to meet a $ 50 mil. payment due Oct. 5, 1990 from a facilities credit agreement. Scherer paid $ 64 mil. for Paco when it acquired the firm in February 1988 -- or more than 40 times earnings for the contract manufacturer. In its last full year as an independent company, Paco generated $ 41.6 mil. in revenues and $ 1.4 mil. in net income during the fiscal year ended Aug. 29, 1987. The acquisition of Paco moved Scherer into contract manufacturing and packaging. Paco also brought Scherer a line of proprietary ophthalmic products, which were licensed for marketing to International Hydron -- now an Allergan subsidiary. Paco further manufactures sterile solutions for private label distributor Pennex. At the time of the acquisition, Paco was moving into R&D with the development of a new drug delivery systems, including a transdermal patch. Southern Optical manufactures and distributes prescription eyewear and diagnostic equipment in the southeastern and mid-Atlantic states. Scherer acquired the firm in May 1986 for $ 9.6 mil. Lorvic, based in St. Louis and acquired in March 1985, manufactures proprietary dental supplies. Scientific Associates, also in St. Louis and acquired at the same time as Lorvic, provides analytical and testing services for drug, chemical and food companies. In other cost lowering moves, Scherer has reduced its corporate administrative staff by 70% since June, and has instituted plans to cut manufacturing and administrative staffs at its operating subsidiaries. To this end, the company sold its Ann Arbor, Michigan research facility in June. The $ 352 mil. Scherer buy-out resulted in the company taking on some $ 343.2 mil. in debt: $ 155 mil. under the facilities credit agreement with Citicorp and other banks; $ 160 mil. under a senior subordinated loan agreement (bridge loan) with Shearson Lehman Hutton Holdings, which was a partner in the buy-out; and $ 28.2 mil. of "other indebtedness," according to the prospectus. Scherer currently is offering $ 169.2 mil. principal amount of 14% senior subordiated debentures due 1999 to be applied toward repaying the bridge loan. Additionally, the company is privately offering 306,453 shares of common stock and 612,870 shares of Series B redeemable preferred stock, both at $ 10 per share. Underwriter is Shearson Lehman. Proceeds from the offerings, which could total $ 9.2 mil., will be used to help repay the bridge loan. The $ 8 mil. from the Pohl and PharmaTech transactions are not available to repay these debts.

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