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Executive Summary

SCHERER TAKING PACO PUBLIC IN PROPOSED $35 MIL. OFFERING, according to a preliminary registration statement filed with the Securities and Exchange Commission on June 19. The public offering represents the third attempt by R.P. Scherer to divest the contract manufacturing firm. A 1990 deal to sell Paco to its management for about $40 mil. fell through. More recently, a $40 mil. proposed sale to Galen also was abandoned ("The Pink Sheet" Feb. 24, T&G-2, and March 30, In Brief). Scherer acquired Paco (then a public company) for about $64 mil. in 1988. Following a leveraged buyout in October 1989, Scherer decided to focus on its specialized drug delivery business and to divest other holdings, including Paco. After the first attempted sale fell through, Scherer recorded Paco as a discontinued operation. Scherer itself went public again in late 1991 ("The Pink Sheet" Sept. 9, 1991, p. 11). Most of the proceeds will go to Scherer. If the sale goes through at the proposed price of $11 per share for 3.5 mil. shares, Scherer would receive $31.3 mil. and retain 1,000 shares of common stock, the prospectus says. Paco intends to use the first $4 mil. of proceeds from the offering to reduce its bank debt, and the remainder will go to repay an "intercompany promissory note of Paco held by Scherer." The amount owed Scherer totals $38.4 mil.; however, any "remaining outstanding principal balance of the Intercompany Note will be contributed to the capital account of Paco," the prospectus says. The offering is being underwritten by Lehman Brothers (majority owners of Scherer), PaineWebber and Wertheim Schroder & Co. Paco reported net sales of $69.9 mil. (up 35%) for the year ended March 31 and a net loss of $15.9 mil. With pro forma adjustments for debt elimination, Paco would have reported a profit of $3.6 mil., the prospectus says. For future growth, Paco is targeting biotechnology and mail order pharmacies where it believes it can be "a cost-efficient packaging alternative." When the Galen agreement was terminated in March, no reason was given. The prospectus discloses that the acquisition company formed by Galen, Ocap, has filed a breach-of-contract suit in the New York State Supreme Court against Paco and Scherer. The complaint seeks $75 mil. in actual damages, $100 mil. in punitive damages and attorney's fees. Scherer has indemnified Paco against any liability in the case. "The company believes that this action lacks merit," the prospectus says. Scherer has filed a motion to dismiss which is scheduled to be argued in June.

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