NEW YORK -- Propelled by strong investor demand, Norton McNaughton Inc.'s initial public offering was priced at the high-end of its expected range and increased by 1 million shares.

The deal was priced late Monday at $14 a share, reaching the top of the expected range of $12 to $14.

On its first day of trading Tuesday, the issue shot up 1 3/4 to 15 3/4 in over-the-counter trading.

The women's sportswear manufacturer realized $39.2 million before underwriting expenses from the sale of 2.8 million shares.

Merrill Lynch Interfunding Inc., which purchased 49 percent of the company's stock in a leveraged buyout in 1991 for $4,900, sold 1.9 million shares, including the 1 million in additional shares, to net $26.6 million before underwriting costs.

With the sales, Merrill Lynch's stake in the company dropped from 49 percent to 8.7 percent.

Merrill Lynch is also expected to receive $20 million from McNaughton as repayment for loans and to redeem preferred stock. Another $13 million of McNaughton's proceeds is expected to be used to pay NationsBanc Commercial Corp. for factoring advances.

In the year ended Nov. 5, McNaughton had earnings of $3.3 million on sales of $133.3 million. In the prior year, McNaughton's net was $2.6 million on sales of $117.7 million.

The company's coordinated separates are sold under the labels Norton McNaughton, Norton McNaughton Petites, Maggie McNaughton, McNaughton Wear, Modiano and Pant-her.

Its main customers are department stores. In its latest fiscal year, about 36 percent of its merchandise went to May Co., 12 percent to J.C. Penney Co., 8 percent to the Federated Department Stores, 5 percent to R.H. Macy, and 4 percent to Carson Pirie Scott.

The company also operates 12 outlet stores, accounting for sales of $2.4 million in fiscal 1993.

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