Frederick’s of Hollywood Group Inc. got itself some breathing room.

This story first appeared in the May 25, 2012 issue of WWD. Subscribe Today.

The company sold $5 million of convertible preferred stock to TTG Apparel, an investment firm run by Michael Tokarz, who now controls about a quarter of the company’s shares. The preferred stock is convertible into 4.8 million shares of the company’s common stock at a conversion price of $1.05 a share.

The structure of the deal means TTG can continue to boost its stake in the lingerie maker. The preferred stock carries a 9 percent dividend, paying in the form of more preferred stock that can be converted to common stock at 45 cents a share. TTG was also issued warrants for an additional 1.5 million shares over the next seven years.

Frederick’s plans to use the $5 million it raised to pay vendors a portion of their accounts payable and, in turn, receive about $4.9 million in markdown allowances — making for a roughly $10 million cut to the company’s accounts payable. That’s a big help to the company’s balance sheet, which, as of Jan. 28 carried accounts payable and other accrued expenses of $25.7 million.

Thomas Lynch, Frederick’s chairman and chief executive officer, said the deal was part of the company’s turnaround strategy.

“We are also implementing a partner-oriented approach with many of our vendors that will allow us to share the costs of promotional activity for our products,” he said. “This will benefit the company and our vendors by helping push greater volume through our stores and e-commerce site, while improving our gross margins.”

This month, Frederick’s hired investment bank Allen & Co. to explore its strategic options, including a possible sale of the company. In a telephone interview, Lynch said that process was ongoing.

Shares of Frederick’s shot up 27.6 percent to 37 cents.

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