UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20132014
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______ to ______
Commission File Number 001-32697
American Apparel, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 20-3200601 |
| (State of Incorporation) | | (I.R.S. Employer Identification No.) |
747 Warehouse Street
Los Angeles, California 90021-1106
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (213) 488-0226
Securities registered pursuant to Section 12(b) of the Act: |
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| | Common Stock, par value $0.0001 per share | | NYSE MKT |
| | (Title of Each Class) | | (Name of Each Exchange on Which Registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer ¨ | | Accelerated filer ¨x |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company xo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as ofRegistrant at June 28, 201330, 2014 was approximately $115,070,051 based upon$85,370,030 (which represents 94,855,589 shares of common stock held by non-affiliates multiplied by $0.90, the closing sales price of the common stock on such date as reported by the NYSE MKT.MKT LLC for such date).
The number of shares ofAt March 13, 2015, the registrant’s common stockRegistrant had issued and outstanding as176,566,222 and 176,260,566 shares of March 31, 2014 was approximately 175,108,823 and 173,377,302.its common stock, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions ofCertain information from the Registrant's definitive proxy statement for the registrant’s 20142015 Annual Meeting of Stockholders (the “"20142015 Proxy Statement”Statement"), to be filed within 120 days of the end of the fiscal year ended December 31, 2013, are2014, is incorporated by reference into Part III herein. If the 2014 Proxy Statement is not filed in the 120-day period, the Items comprising the Part III information will be filed as an amendment to this Form 10-K not later than the end of the 120-day period.hereof. Except with respect to the information specifically incorporated by reference in Part III of this Form 10-K, the 20142015 Proxy Statement is not deemed to be filed as part of this Form 10-K.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the documents incorporated by reference herein, contains forward-looking statements within the “safe harbor”"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Annual Report on Form 10-K other than statements of historical fact are “forward-looking statements”"forward-looking statements" for purposes of these provisions. Statements that include the use of terminology such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,”"may," "will," "expect," "believe," "plan," "estimate," "potential," "continue," or the negative thereof or other and similar expressions are forward-looking statements. In addition, in some cases, you can identify forward-looking statements by words or phrases such as “trend,” “potential,” “opportunity,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,”"trend," "opportunity," "comfortable," "anticipate," "current," "intention," "position," "assume," "outlook," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions.
Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focuses and plans, and other characterizations of future events or circumstances, including statements expressing general expectations or beliefs, whether positive or negative, about future operating results or the development of our products and any statement of assumptions underlying any of the foregoing are forward-looking statements. Forward-looking statements in this report may include, without limitation, statements about:
•consequences of the termination of Dov Charney, our former chief executive officer (or the internal investigation related thereto), including any litigation or regulatory investigations, or any impact on our sales or brand related thereto;
ability to hire and/or retain qualified employees, including executive officers;
our future financial condition, results of operations, our plans and our prospects, expectations, goals and
strategies for future growth, operating improvements and cost savings, and the timing of any of the foregoing;
our ability to make our debt service payments and remain in compliance or achieve compliance with financial covenants under our financing arrangements and obtain appropriate waivers or amendments with respect to any noncompliance;
•our liquidity and projected cash flows;
•our plan to make continued investments in advertising and marketing;
•our growth, expansion and acquisition prospects and strategies, the success of such strategies, and the benefits we
believe can be derived from such strategies;
•our ability to make debt payments; ability to remain in compliance with financial covenants under financing arrangements; and ability to obtain appropriate waivers or amendments with respect to any noncompliance;
liquidity and projected cash flows;
plans to make continued investments in advertising and marketing;
the outcome of investigations, enforcement actions and litigation matters, including exposure whichthat could exceed
expectations;
•our intellectual property rights and those of others, including actual or potential competitors, our personnel,
consultants, and collaborators;
•operations outside the United States;
•trends in raw material costs and other costs both in the industry and specific to the Company;us;
•the supply of raw materials and the effects of supply shortages on our financial condition, results of operations,
and cash flows;
•economic and political conditions;
•currency fluctuations and the impact thereof;
overall industry and market performance;
•operations outside the U.S.;
the impact of accounting pronouncements;
•our ability to regain and maintain compliance with the listing requirements of NYSE MKT LLC;
•our ability to improve manufacturing efficiency at our production facilities;
•our ability to improve efficiency and control costs at our distribution facility located in La Mirada, Californiaproduction and supply chain facilities; and
and successful operation of that facility;
•management's goals and plans for future operations; and
•other assumptions described in this Annual Report on Form 10-K underlying or relating to any forward-looking
statements.
The forward-looking statements in this report speak only as of the date of this report and caution should be taken not to place undue reliance on any such forward-looking statements, which are qualified in their entirety by this cautionary statement. Forward-looking statements are subject to numerous assumptions, events, risks, uncertainties and other factors, including those that may be outside of our control and that change over time. As a result, actual results and/or the timing of events could differ materially from those expressed in or implied by the forward-looking statements and future results could differ materially from
historical performance.performance and those expressed in or implied by the forward-looking statements. Such assumptions, events, risks, uncertainties and other factors include, among others, those described underare found in "Item 1A. Risk Factors" in Part I Item 1A and elsewhere in this report, as well as inAnnual Report on Form 10-K and other reports and documents we file with the United States Securities and Exchange Commission (the "SEC") and include, without limitation, the following:
consequences of the termination of Dov Charney, our former chief executive officer (or the internal investigation related thereto), including any litigation or regulatory investigations, or any impact on our sales or brand related thereto;
changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;
voting control by our directors, lenders and other affiliates, including Standard General and Dov Charney;
ability to successfully implement our strategic, operating, financial and personnel initiatives;
ability to effectively carry out and manage our strategy;
ability to maintain the value and image of our brand and protect our intellectual property rights;
general economic conditions, geopolitical events, other regulatory changes, and inflation or deflation;
disruptions in the global financial markets;
the highly competitive and evolving nature of our industry in the U.S. and internationally;
risks associated with fluctuations and trends of consumer apparel spending in the U.S.;
changes in consumer preferences or demand for our products;
our ability to attract customers to our retail and online stores;
loss or reduction in sales to wholesale or retail customers or financial nonperformance by our wholesale customers;
seasonality and fluctuations in comparable store sales and wholesale net sales and associated margins;
ability to improve manufacturing efficiency at our production facilities;
changes in the price of materials and labor, including increases in the price of raw materials in the global market and minimum wages;
ability to pass on the added cost of raw materials and labor to customers;
ability to effectively manage inventory levels;
risks that our suppliers or distributors may not timely produce or deliver products;
ability to renew leases on economic terms;
risks associated with our facilities being concentrated in one geographic area;
ability to identify new store locations and the availability of store locations at appropriate terms; ability to negotiate new store leases effectively; and ability to open new stores and expand internationally;
ability to generate or obtain from external sources sufficient liquidity for operations and debt service;
our financial condition, operating results and projected cash flows;
consequences of our significant indebtedness, including our relationships with our lenders, and our ability to comply with our debt agreements, and generate cash flow to service our debt;
our ability to generate cash flow to service our debt, and the risk of acceleration of borrowings thereunder as a result of noncompliance;
disruptions in the global financial markets;
our ability to regain and maintain compliance with the exchange rules of NYSE MKT, LLC;
adverse changes in our credit ratings and any related impact on financial costs and structure;
continued compliance with U.S. and foreign government regulations legislation and regulatory environments,legislation, including environmental, immigration, labor, and occupational health and safety laws and regulations;
loss of U.S. import protections or changes in duties, tariffs and quotas, and other risks associated with international business including disruption of markets and foreign supply sources, changes in import and export laws, currency restrictions, and currency exchange rate fluctuations;
the highly competitive and evolving nature of our business in the U.S. and internationally;
changes in the level of consumer spending or preferences or demand for our products;
our ability to pass on the added cost of raw materials and labor to customers;
our ability to attract customers to our stores;
the availability of store locations at appropriate terms and our ability to identify locations and negotiate new store leases effectively and to open new stores and expand internationally;
loss or reduction in sales to our wholesale or retail customers or financial nonperformance by our wholesale customers;
risks that our suppliers or distributors may not timely produce or deliver our products;
changes in the cost of materials and labor, including increases in the price of raw materials in the global market and increases in minimum wages;
our ability to effectively carry out and manage our strategy, including growth and expansion both in the U.S. and internationally;
technological changes in manufacturing, wholesaling, or retailing;
our ability to successfully implement our strategic, operating, financial and personnel initiatives;
changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;
our ability to maintain the value and image of our brand and protect our intellectual property rights;
our ability to improve manufacturing efficiency at our production facilities;
our ability to operate our distribution facility located in La Mirada, California without further unanticipated costs or, negative sales impacts, including the ability to achieve, as and when planned, labor cost reductions;
location of our facilities in the same geographic area;
risks associated with our foreign operations and foreign supply sources such as market disruption, of markets, changes in import and export laws, and currency restrictions and currency exchange rate fluctuations;
the risk, including costs and timely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and could impact our cash flow and liquidity, and our ability to upgrade our information technology infrastructure and other risks associated with the systems that operate our online retail operations;
our ability to effectively manage inventory levels;
our ability to renew leases at existing locations on economic terms;
risks associated with the recent downturn in apparel spending in the United States;
litigation and other inquiries and investigations, including the risks that we, our officers or directors in cases where indemnification applies, will not be successful in defending any proceedings, lawsuits, disputes, claims or audits, and that exposure could exceed expectations or insurance coverages;coverage;
tax assessments by domestic or foreign governmental authorities, including import or export duties on our products and the applicable rates for any such taxes or duties;
ability to maintain compliance with the exchange rules of the NYSE MKT LLC;
the adoption of new accounting standards or changes in interpretations of accounting principles;
seasonalityadverse weather conditions or natural disaster, including those which may be related to climate change;
technological changes in manufacturing, wholesaling, or retailing;
the risk, including costs and fluctuations in comparable store salestimely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and wholesale net sales,could impact cash flow and liquidity, and ability to upgrade information technology infrastructure and other risks associated margins;
general economic conditions, including increases in interest rates, geopolitical events, other regulatory changes and inflation or deflation;
disruptions due to severe weather or climate change;with the systems that operate our online retail operations; and
disruptions duethe risk of failure to earthquakes, flooding, tsunamis or other natural disasters.protect the integrity and security of our information systems and customers' information.
All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.statements.
American Apparel, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013AMERICAN APPAREL, INC.
TABLE OF CONTENTS
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| Item 1B. | | Unresolved Staff Comments | |
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| Item 9B. | | Other Information | |
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PART I
Item 1. Business
Unless the context indicatesrequires otherwise, when we refer to “we”, “us”, “our”, "American Apparel" orall references in the “Company” in thisAnnual Report on Form 10-K we are referringto the "Company," "Registrant," "we," "us," and "our" refer to American Apparel, Inc., a Delaware Corporation, together with its direct and itsindirect subsidiaries on a consolidated basis. Our year ends on December 31 and references to fiscal 2013, fiscal 2012 and fiscal 2011 refer to the years ended December 31, 2013, 2012 and 2011, respectively. In addition, all amounts in this Form 10-K are presented in thousands, except for per share items and unless otherwise specified.
Overview
We are a vertically integratedvertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel and accessories for women, men, children and babies. We are based in downtown Los Angeles, California. As of February 28, 2014,March 13, 2015, we had approximately 10,000 employees and operated 246239 retail stores in 20 countries: the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China.countries. We also operate ana global e-commerce website with 12 different localized online stores in seven languagessite that serves customers from 30over 50 countries worldwide at www.americanapparel.com. In addition, American Apparel operates
We operate a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and the imprintable industry.
screen printers. We conduct our primary apparel manufacturing operations out of an 800,000 square foot facility in the warehouse district of downtown Los Angeles, California. The facility houses our executive offices, as well as cutting, sewing and warehousing operations. We conduct knitting operations in Los Angeles and Garden Grove, California, which produce a majority of the fabric we use in our products. We also operate dye houses that currently provide dyeing and finishing services for nearly all of the raw fabric used in production. We operate a fabric dyeing and finishing facility in Hawthorne, California. We also operate a cutting, sewing and garment dyeing and finishing facility located in South Gate, California. We operate a fabric dyeing and finishing facility located in Garden Grove, California, which also includes cutting, sewing and knitting operations. Since 2013 we have conducted our warehousing and distribution operations out of La Mirada, California.
Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and to changing fashion trends and to closely monitor product quality. Our products are noted for their quality and fit, and together with our distinctive branding these attributes have differentiated our products in the marketplace. “American Apparel®” is a registered trademark of American Apparel (USA), LLC.
American Apparel waswere founded in 1998. Since inception, we have operated a wholesale business that supplies high quality T-shirts and other casual wear to distributors and the imprintable industry. In October 2003, we opened our first retail store in Los Angeles.Angeles, California. In 2004, we began our online retail operations and opened our first retail stores in Canada and Europe. Since 2005, we have opened stores in Asia, Australia, Israel, Latin America, and have further expanded throughout the United States,U.S., Canada, Europe, and Asia.Europe. All of our retail stores sell the Company'sour apparel products directly to consumers.
Business Segments
We report the following four operating segments: U.S. Wholesale, U.S. Retail, Canada,Because we manufacture domestically and International. Weare vertically integrated, we believe this methodenables us to more quickly respond to customer demand and changing fashion trends and to closely monitor product quality. Our products are noted for quality and fit, and together with our distinctive branding, these attributes have differentiated our products in the marketplace.
All of segment reporting reflects bothour trademarks, service marks, and certain other trademarks have been either registered or the way our business segments are managedsubject of pending trademark applications with the U.S. Patent and Trademark Office and the wayregistries of many foreign countries, and/or are protected by common law. In the performance of each segment is evaluated. The U.S. Wholesale segment consists of our wholesale operations of sales of undecorated apparel products to distributors and third party screen printers in, we are the United States, as well as our online consumer sales to U.S. customers. The U.S. Retail segment consists of our retail store operations in the United States, which were comprised of 139 retail stores as of December 31, 2013. The Canada segment consists of our retail, wholesale and online consumer operations in Canada. As of December 31, 2013, the retail operations in the Canada segment were comprised of 32 retail stores. The International segment consists of our retail, wholesale and online consumer operations outsideregistered owner of the United States,"American Apparel®," "Classic Girl®," "Standard American®," "Classic Baby®," and Canada. As of "Sustainable EditionDecember 31, 2013, the retail operations in the International segment were comprised of 77 retail stores in the following 18 countries: the United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Brazil, Mexico, Japan, South Korea, and China.
The results of the respective business segments exclude corporate expenses, which consist of shared overhead costs. These costs are presented separately and generally include information technology, human resources, accounting and finance, executive management and legal. Financial information by segment, together with certain geographical information, for the fiscal years ended December 31, 2013, 2012®" trademarks, among others. We have licensed certain logos and 2011designs from third-parties for use in products featuring those logos and designs, but there is included in Note 17 - Business Segment and Geographic Area Information to our consolidated financial statements under Part II, Item 8.no material licensed intellectual property.
Core Business Strengths
American Apparel hasWe have relied on a number ofvarious core business strengths that we believe have contributed to our past success and will contribute to our future growth:growth.
Quality
We pride ourselves on our quality fabrics and quality garment construction. We have an active quality control department that oversees our in-house knitting facilities, outside knitting contractors who work under our strict specifications, and cutting, sewing, dyeing and finishing facilities in the Los Angeles area. Because cutting and sewing operations are conducted mostly in-house, we believe we have the ability to exercise greater control over clothing manufacturing than competitors who use contract sewing facilities.
Design Vision
American Apparel’sOur design vision and aesthetic are intended to appeal to young and metropolitan adults by providing them with a core line of iconic and timeless styles whichthat are offered year-round in a wide variety of colors at reasonable prices. Since our founding, American Apparel haswe have operated with the belief that there is a large potential market among young adults for well-designed and high-quality fashion essentials. Led by Dov Charney, our founder and chief executive officer, our in-house creative team has carefully developed the product line based on this core belief.
Advertising and Branding
American Apparel attracts customers through internally-developed, edgy, high-impact, visual advertising campaigns which use print, outdoor, in-store, and electronic communication vehicles. These advertising campaigns communicate a distinct brand image that differentiates us from our competitors and seek to establish a connection with our customers. Our retail stores are an important part of the American Apparel branding and convey a modern, internationalist lifestyle. At various times, we have also drawn attention to the “Made in USA” nature of our products and the “Sweatshop Free” environment in which our garments are produced.
Speed to Market
Our vertically integrated business model, withWith our manufacturing and various other elements of our business processes centered in downtown Los Angeles, California, our vertically-integrated business model allows us to play a role in originating and defining new and innovative trends in fashion while enabling us to quickly respond to market and customer demand for classic styles and new products. For ourOur wholesale operations beingare able to fulfill orders of any size with quick turn-around, which allows American Apparelus to capture business. The ability to swiftly respond to the market means that our retail operations can deliver on-trend apparel in a timely manner and maximize sales of popular styles by replenishing product that would have otherwise sold out.
QualityAdvertising and Branding
American Apparel prides itself on itsWe attract customers through internally-developed, edgy, high-impact, and visual advertising campaigns, which use print, outdoor, in-store, and electronic communication vehicles. These advertising campaigns communicate a distinct brand image that differentiates us from our competitors and seek to establish a connection with our customers. Retail stores are an important part
of our branding and convey a modern and internationalist lifestyle. At various times, we have an active quality control department that overseesalso drawn attention to the in-house production"Made in USA" nature of fabric at our knitting facilities, the outside knitting contractors who work to our strict specifications,products and the cutting, sewing, dyeing and finishing of"Sweatshop Free" environment in which our garments at our Los Angeles area facilities. Because cutting and sewing operations are conducted mostly in-house, we believe we have the ability to exercise greater control over clothing manufacturing than competitors who use contract sewing facilities.
produced.
Broad Appeal
While our marketing and products initially targeted young, metropolitan adults in the U.S., the clean, simple styles and quality of our garments createscreate a product that appeals to various demographics around the world. We believe that our product appeal has been augmented by, and should continue to benefit from, the growing trends toward casual attire and higher quality apparel.
GrowthBusiness Strategy
Throughout 2014 and into early 2015, we have brought on a new board of directors and hired new senior management including Paula Schneider, Chief Executive Officer ("CEO"), Hassan Natha, Chief Financial Officer ("CFO"), and Chelsea Grayson, General Counsel as well as other additions to the management team. Together, our new board of directors and new management team are focused on implementing a turnaround strategy and enhancing our corporate governance policies and practices. We have developedstarted implementing additional operational and financial processes and disciplines to improve liquidity and profitability. To that end, we have added new members to our executive team in the areas of planning and forecasting, operations, marketing and e-commerce. We have also added members to our legal and human resources departments and have introduced a growth strategynew code of ethics which we ask all of our new and current employees to read. We believe that a strong operational and financial discipline along with a robust corporate governance structure is designedan important element of our long-term business strategy.
In addition to capitalizeenhancing and ensuring compliance with our corporate governance policies, over the next year, we will also be focused on strengthening business fundamentals to create a stable platform for future growth. We believe the following elements enhance our core business strengths. The principal elements contributingstrengths and will contribute to the success of this growth strategy are:
Store Expansion
Our long-term growth strategy and the success of our business depends in part on opening new American Apparel retail stores, the renewal of existing store leases on favorable terms that meet our financial targets, the remodeling of existing stores in a timely manner and the operation of these stores in a cost-efficient manner. We opened nine new stores and closed twelve stores in 2013. Over the long term, we plan to expand our presence in the U.S. and increase our store footprint in markets throughout Europe and Asia.strategy.
We evaluate potential store sites based on traffic patterns, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics, demographic characteristics and other factors considered important regarding the specific location.
New Merchandise IntroductionMerchandising
As we have expanded beyond our original product offering of T-shirts, we have increased the variety of products available to our growing customer base. We have strategically expanded our product offerings to includecustomers such as denim, shoes, sweaters, jackets and
accessories,our current merchandise offerings and are analyzing which categories contribute the most to namethe value of our company and brand. We intend to streamline our assortment so that we can focus on making those items that our customers really want. By deepening our focus on these core products, we believe we can assure better availability of popular items during peak demand and improve the in-store experience of our customers.
Additionally, a few such categories.more streamlined offering will also give us improved capacity to experiment with new style introductions, produce short runs of these new styles at lower incremental costs, and conduct robust testing of market acceptance for these new designs. We also intend to continue to judiciously introduce new merchandise to complement our existing products in order to attract new customers and increase the frequency of customer visits and the size of customer purchases.
Web Business RefinementRetail Stores Strategy
Our websitelong-term growth strategy and the success of our business depend in part on an effective management of our global retail stores portfolio and the operation of these stores in a cost-efficient manner. Although we have always actively monitored store performance, we have recently begun a more formal study of our retail stores portfolio in order to identify underperforming stores that should be exited, unfavorable store leases that should be discontinued or renegotiated, as well as stores or geographical areas that will benefit from further investments. We believe that this study will enhance our long-term growth strategy to judiciously open new stores in desirable locations on favorable terms that meet our financial targets. Over the long term, we plan to expand our presence in the U.S. and increase our store footprint in markets throughout Europe and Asia.
We evaluate potential store sites based on traffic patterns, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics, store contribution margin projections, demographic characteristics and other factors considered important regarding the specific location.
Online Sales Strategy
Our online store presence represents a growth opportunity for American Apparel as it haswith the potential to increase not only increase online sales but also in-store sales. Improvements to the online shopping experience have contributed to our financial growth. In order to remain competitive, we intend to continue refining our online stores with improved functionality, personalized offers, increased service levels and visually optimized contentcontent. In 2014, we enhanced the functionality of our online stores in Korea, Mexico and Brazil. We continue to open new online stores in additional countries and in late 2014, launched a new online store in China. We also intend to invest in targeted marketing and advertisement that will enhance our online presence. We have recently brought on new senior management whose responsibility will be to focus on this strategically important aspect of our business.
Wholesale Sales Strategy
Growth in the wholesale sales channel is an important part of our business strategy. We are developing a plan to identify further growth opportunities in the U.S. and international markets. In order to grow in this channel, we may have to develop new products, continue to be focused on being cost efficient, invest in sales development resources and activities and improve our marketing efforts.
Planning and Forecasting
We believe that a strong production planning process that is aligned with our merchandising calendar will increase the efficiency of our manufacturing activities as well as expandingensuring that we get the right products to our web presencecustomers at the right time.
In early 2015, we invested in more countriesnew leadership to enhance our production planning and channels.demand forecasting capabilities through the development of formal roles and responsibilities for assortment planning and purchasing. Additionally, we are implementing a merchandising calendar for our Fall 2015 season which will ensure a balanced assortment of our product offerings, set deadlines for product development milestones and enable lead time for materials purchasing and production planning, thus reducing the need for unnecessary overtime. We currently operate 12 e-commerce stores in seven languagesbelieve that serve customers from 30 countries around the world.these improvements are key to our near-term strategy of strengthening our business fundamentals.
Continue In-SourcingIn-Sourced Manufacturing ActivitiesCapabilities
We believe that having certain elements of our production process in-house affords us the opportunity to exert higher quality control while simultaneously lowering production costs. InWe also believe that our vertically integrated manufacturing capabilities can be used to our competitive advantage. We intend to leverage our in-sourced production facilities to increase the past we have made strategic acquisitionsspeed of new product introductions to consolidatemarket, react more swiftly than our manufacturing operationscompetitors to changing trends and continuequickly ramp up production to produce high quality products. We may pursue strategic opportunities to further consolidatecapitalize on our operations while maintaining production in the United States; however, we have no such strategic opportunities identified and will not make any such strategic investments until we see a substantial improvement in our financial performance and financial condition.best sellers.
New Distribution CenterLogistics
In June 2012 we entered into a new operating lease agreement for a newOur distribution center located in La Mirada, California is fully operational and fully transitioned our distribution operations into this new facility during 2013. Relatedcontributing to these efforts, we installed the High Jump warehouse management system for all distribution activities. Although we incurred significant transition costsmore efficient and implementation delays associated with this transition, we believe that the new distribution center will contribute toeffective processing efficienciesof orders and effectiveness and will reduce operating expenses and cost of sales as it offers an improved distribution platform to scale bothour wholesale, retail and wholesale sales channels. The transitiononline order fulfillment. Our centralized distribution facility has had a positive impact on our operating expenses and cost of sales. We continue to the newevaluate our current shipping and replenishment activities in order to further reduce freight costs. We also intend to expand our distribution center was successfully completed during the fourth quarter of 2013. The center is now fully operational, and labor costs have been reduced.
Enhance Information Systems Infrastructure
We successfully completed the first phase of an enterprise resources planning (“ERP”) system in 2008. This phase included the conversion of our systems for manufacturing and warehouse operations, inventory management and control and wholesale operations. After this first successful implementation, from 2009 through 2013,logistics strategy to a more global level. To that end, we have been upgrading and consolidating the financial accounting and control systems forinvested in new logistics management who will focus on ensuring that we not only distribute our U.S., European and Canadian operations.
In 2011products in a cost efficient manner, but that we completed the implementation of workforce and labor scheduling optimization systems in all of our retail and manufacturing locations.
In 2012, we upgraded our production forecasting and allocation systems and as a result, enhanced our forecasting accuracyalso comply with Logility's demand planning solution.
From 2010 through 2013, we have been installing sales conversion tracking devices and radio frequency identification (RFID) at our stores and as of the end of 2013, achieved full implementation. We believe that these systems will enhance sales through improvements in stock positions and replenishment activities.
Additionally, during 2012, we replaced our web and e-commerce systems with Oracle's ATG Web Commerce application for our U.S. online store. As of the end of 2013, we have implemented this system for our Canada, United Kingdom, Europe (Euro zone countries), Australia, Hong Kong and Singapore online stores. We intend to implement this system to our remaining online stores by the middle of 2014. The new system offers a complete e-commerce software platform that speeds response times and enables us to deliver a personalized customer buying experience.
In conjunction with the implementation of the Oracle ATG Web Commerce application, we replaced our existing payment processing system with new electronic payment services from CyberSource. In addition, we implemented a payment fraud detection solution. We intend to complete the upgrade of our payment processing system by the middle of 2014.
During 2012 and 2013 we successfully completed the virtualization of over 300 servers, including all our key servers. We plan to complete the virtualization of our servers and move our data center to an off-site location during 2014.local import regulations. We believe that this not only maximizeswill allow us to operate more effectively in our server resources butexisting markets as well as enter new markets with less risk of disruption to our business operations.
Information Systems Infrastructure
An efficient and effective information systems infrastructure is an important element of our business strategy, and to that end, we are conducting an in-depth analysis of our current systems. We believe this study will also enhance system performanceidentify the systems that we will need to invest in to support our future long-term growth.
Cost Reduction and enable faster uptimeImproved Liquidity
The success of our future growth strategy will depend in part on our ability to create a disaster recoverystable operating platform. To that end, we continue to focus on driving cost efficiencies throughout our operations and seek new avenues to improve our liquidity situation.
Execution of the Strategy
The execution of our growthbusiness strategy and internal initiatives may result incause material additional costs.
Store Any store expansion initiatives will require the opening of new retail locations and additional retail personnel. Investments in additional sales personnel to service new geographic territories will also be necessary to grow our wholesale distribution channel. Both of these initiatives will increase our occupancy and payroll expenses.
New merchandise introductions will also require expenditures to design new products in existing and new categories as well as incremental manufacturing costs associated with new products.
To support these and other initiatives, ongoing infrastructure investments may be required. In the intermediate term, this may include expenditures for machinery and equipment, upgraded information systems and additions to our management team.
In order to reduce the impact of these additional costs, we will continue to identify ways to improve the efficiency of our current manufacturing operations and enhance other operating processes.
Manufacturing Operations
We conduct all of our manufacturing operations in the Los Angeles metropolitan area, and principally at our cutting and sewing facility in downtown Los Angeles. We also have knitting, garment dyeing, cutting and sewing operations at our South Gate and Garden Grove, California facilities.
Purchased yarn is sent to knitters to be knit into “greige” fabric, which is fabric that is not dyed or processed. We operate circular and flat knitting machines, which use jersey, piqué, fleece and ribbing to produce fabric using cotton and cotton/polyester yarns. We also utilize third-party commissioned knitters. As of December 31, 2013, our knitting facilities knit approximately 63% of the total greige fabric used in our garments and had approximately 84 employees. Knitted greige fabric produced by our Los Angeles and Garden Grove facilities, or by other commissioned knitters, is batched for bleaching and dyeing. The greige fabric is then transported to our dyeing and finishing facilities or other commissioned dye houses. In some cases, dyed fabric is transferred to subcontractors for fabric laundering.
As of December 31, 2013, our dyeing and finishing facilities in the Los Angeles metropolitan area dye approximately 99% of the dyed fabric used in our garments and had approximately 226 employees. Most fabric is shipped to our primary manufacturing facility in downtown Los Angeles, where it is inspected and then cut on manual and automated cutting tables, and subsequently sewn into finished garments. Approximately 19% of our fabric is purchased directly from third parties, along with all trims. Garments are sewn by teams of sewing operators typically ranging from ten to thirty operators, depending on the complexity of a particular garment. Each sewing operator performs a different sewing operation on a garment before passing it to the next operator. Sewing operators are compensated on a modified piece-rate basis. Quality control personnel inspect finished garments for defects and reject any defective product. We also manufacture certain hosiery products in-house at the downtown Los Angeles facility, where we do knitting and inspection. Washing, boarding and packaging is performed at our South Gate facility. As of December 31, 2013, approximately 3,835 employees were directly involved in the cutting, sewing, and hosiery operations at the downtown Los Angeles facility, as well as our South Gate and Garden Grove facilities.
We purchase yarn, certain fabrics and other raw materials from a variety of vendors during the course of a year. The inputs that we use are produced competitively by a large number of potential suppliers.
Retail
As of December 31, 2013, our retail operations consisted of 248 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, Germany, France, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea and China. Our retail operations principally target young adults aged 18 to 35 via our unique assortment of fashionable clothing, accessories and compelling in-store experience. We have established a reputation with our customers who are culturally sophisticated, creative, and independent-minded. Our product offerings include basic apparel and accessories for men and women, as well as apparel for children. Stores average approximately 2,500-3,000 square feet of selling space. Our stores are primarily located in large metropolitan areas, emerging neighborhoods, and select university communities.
We strive to instill enthusiasm and dedication in our store managers and sales associates through regular communication with the stores.
Wholesale
Our wholesale operations sell to over a dozen authorized distributors and approximately 10,000 screen printers and advertising specialty companies. These screen printers and advertising specialty companies decorate our blank product with corporate logos, brands and other images. Our wholesale customers sell imprinted sportswear and accessories to a highly diversified range of end-consumers, including corporations, sporting venues, concert promoters, athletic leagues, and educational institutions, among others. In order to better serve customers, we allow customers to order products by the piece, by the dozen, or in full case quantities. We also, to a lesser extent, fulfill custom and private-label orders. We do not have any major customers that account for ten percent or more of our total consolidated net sales.
To serve our wholesale customers, we operate a call center out of our Los Angeles headquarters. The call center is staffed with approximately 50 customer service representatives initiating sales calls, answering incoming phone calls, emails and faxes, and assisting customers in placing orders, checking stock levels, looking for price quotes or requesting adjustments. During the second half of 2012, we moved one of our call centers from Neuss, Germany to Montreal, Canada.
While we operate primarily on a “make-to-stock” basis, manufacturing and maintaining a sufficient inventory of products to meet demand, our in-house manufacturing capacity also allows us to fulfill orders rapidly. Credit approved orders to be shipped by ground service are generally shipped the same day if the order is received before 7:30 pm Eastern time while those to be shipped by air are generally shipped the same day when received by 6:30 pm Eastern time. The majority of our wholesale and internet customer orders are processed within these parameters. For these reasons, we do not typically maintain a large backlog of orders.
Online Consumer Sales
We currently have 12 different online stores in the United States, Canada, the United Kingdom, Continental Europe, Switzerland, Japan, South Korea, Australia, Mexico, Brazil, Singapore and Hong Kong. All online stores can be accessed at www.americanapparel.com.
Brand, Advertising, and Marketing
Our advertising and direct marketing initiatives have been developed to elevate brand awareness, facilitate customer acquisition and retention, and support key growth strategies. Our in-house creativedesign and marketing team works to create edgy, high-impact, provocative ads which are produced year-round and are sometimes featured in leading national and local lifestyle publications,
on billboards and on specialty online websites. We maintain a photo studio at our headquarters. Content for our website and online store are also generated in-house.online. While the primary intent of this advertising is to support our retail and online e-commerce operations, the wholesale business also benefits from the greater overall brand awareness generated by this advertising.
For our wholesale operations, we utilizeannually participate in industry trade shows to expand and enhance customer relationships, exhibit product offerings, print product catalogs, and share new promotions with customers. We participate in approximately two dozen trade shows annually. We also produce print catalogs of our wholesale products, designed to be of the standard of high-end consumer retail catalogs with attractive models, appealing photographs and a clear display of products.
Product DevelopmentCompetition
We employ an in-house staff of designers and creative professionals to develop updated versions of timeless, iconic styles. Led by our chief executive officer, Dov Charney, this team takes its inspiration from classic styles ofoperate in the past, as well as the latest emerging fashion trends. Our design team will often continue to update or renew a style long after its launch.
Intellectual Property
Our trademarks and service marks, and certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. In the United States, we are the registered owner of the “American Apparel®,” “Classic Girl®,” “Standard American®,” “Classic Baby®,” and “Sustainable Edition®” trademarks, among others. We have
licensed certain logos and designs from third-parties for use in products featuring those logos and designs, but there is no
licensed intellectual property which accounts for a material portion of our products or revenues.
Competition
The specialty retail, online retail and wholesale apparel businesses are each highly competitive. Thecompetitive apparel industry which is characterized by rapid shifts in fashion, consumer demand, and competitive pressures, resulting in both price and demand volatility. We believe that our emphasis
Our wholesale operations compete on quality, fashion, essentials mitigates these factors.
Our retail operations compete on the basis of store location, the breadth, quality, style,pricing, and availability of merchandise, the level of customer service offered, and the price of goods for similar brand name quality. While we believe that the fit and quality of our garments as well as the broad variety of colors and styles of casual fashion essentials that we offer help differentiate us, we compete against a wide variety of smaller, independent specialty stores, as well as department stores and national and international specialty chains. Companies that operate in this space include, butmerchandise. Our primary competitors are not limited to: The Gap, Urban Outfitters, H&M, Uniqlo and Forever 21. Many of these companies have greater financial, marketing, and other resources when compared to American Apparel.
The wholesale business competes with numerous wholesale companies based on the quality, fashion, availability, and price of our wholesale product offering. These companies include Gildan Activewear, HanesBrands, Russell Athletic, and Fruit of the Loom. Many of these companies have greater name recognition than American Apparelus in the wholesale market. ManyThey are also larger and well-capitalized companies with broad distribution networks.
Our retail operations compete on store location, customer service, and the breadth, quality, fit, style, pricing, and availability of thesemerchandise. Some of our competitors are larger and well-capitalized companies alsowhich have greater financialbroad distribution networks. Companies that operate in this space include, but are not limited to, The Gap, Urban Outfitters, H&M, Uniqlo, and other resources when compared to American Apparel.Forever 21. Reputation for the fit and quality of our garments as well as the broad variety of colors and styles are the principal means by which we compete with others.
Along with the competitive factors noted above, other key competitive factors for American Apparel’sour online e-commerce operations include the success or effectiveness of customer mailing lists, social media acceptance, advertising response rates, merchandise delivery, web site design, and web site availability. TheOur online e-commerce operations compete against numerous web sites, many of which may have a greater volume of web traffic and greater financial, marketing and other resources.
Seasonality
We experience seasonality in our operations. Historically, sales during the third and fourth fiscal quarters have generally been the highest, with sales during the first fiscal quarter the lowest. This reflects the combined impact of the seasonality of the wholesale and retail segments. Generally, our retail segment has not experienced the same pronounced sales seasonality as other retailers.
Employees
As of December 31, 20132014, we employed a work force of approximately 10,000 employees worldwide. To ensure our long-term success, we must attract, hire, develop, and retain skilled manufacturing, retail, sales, creative, and administrative employees, as well as executives. Competition for such employees can be intense.
We view our employees as long-term investments and adhere to a philosophy of providing employees with good working conditions in a technology-driven environment, which allows us to attain improved efficiency while promoting employee loyalty. We provide a compensation structure and benefits package for manufacturing employees that includesinclude above-market wages, company-subsidized health insurance, free massage, free parking as well as other benefits. We also provide for a well-lit working environment that is properly ventilated and heated or cooled in our manufacturing facilities.cooled. We believe these factors are key elements in achieving our desire to be an “employer"employer of choice”choice" in the Los Angeles area. None of our employees are covered by a collective bargaining agreement. We believe that our relations with our employees are excellent. We make diligent efforts to comply with all employment and labor regulations, including immigration laws, in the many jurisdictions in which we conduct operations. See “Risk Factors—We are subject to customs, advertising, consumer protection, zoning and occupancy and labor and employment laws that could require us to modify our current business practices and incur increased costs.” and “Risk Factors—Litigation exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations.” in Part I, Item 1A.
Information Technology
We are committed to utilizing technology to enhance our competitive position. Our information systems provide data for production, merchandising, distribution, retail stores and financial systems. Our core business systems which consist of both purchased and to a much lesser degree, internally developed software and are accessed over a company-wide network providing corporate employees with access to key business applications. We dedicate a significant portion of our information technology resources to web services, which include the operation of our corporate website at www.americanapparel.net and our online retail site at www.americanapparel.com.
To support continued growth, we have initiated a strategic review of our information systems. We implemented an ERP system that replaced, enhanced and integrated many elements of our existing information systems. In 2013, we completed a financial system consolidation for our Canadian, Japan and Australian operations; replaced our web and e-commerce systems with Oracle's ATG Web Commerce application for our Canada, United Kingdom, Europe (Euro countries), Australia, Hong Kong
and Singapore online stores; and installed the High Jump warehouse management system for all distribution activities at our La Mirada distribution center.
Environmental Regulation
Our operationsWe are subject to various environmental and occupational health and safety laws and regulations. Because we monitor, control and manage environmental issues, we believe we are in compliance in all material respects with the regulatory requirements of those jurisdictions in which our facilities are located. In line with our commitment to the environment as well as to the health and safety of our employees, we will continue to make expenditures to comply with these requirements and do not believe that compliance will have a material adverse effect on our business. See "Risk Factors - Current"Current environmental laws, or laws enacted in the future, may harm our business."business" in "Item 1A. Risk Factors" in Part I, Item 1A.I.
Available Information
We will make available, free of charge, on our internet website, www.americanapparel.net- Investor Relations, under “Investor Relations” free of charge, our annual reportsAnnual Reports on Form 10-K, as well as the latest quarterly reportsQuarterly Reports on Form 10-Q, the latest reportsCurrent Reports on Form 8-K, the latest proxy statementsProxy Statements, and amendments to those documentssuch reports (the "SEC Reports") filed with or furnished to the SEC pursuant to federal securities laws, as soon as reasonably practicable after we electronically fileeach SEC Report is filed with or furnish such materialsfurnished to the SEC. You can also obtainReferences herein to our corporate website, www.americanapparel.net, and our online retail website, www.americanapparel.com, are not intended to function as hyperlinks and the information on our websites is not and should not be considered part of this report and is not incorporated by reference in this document. In addition, copies of these materialsour SEC Reports are available at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the public reference facilities by calling the SEC
at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that makes available reports, proxy statements and other information regarding American Apparel that we file electronically with it. By referring to our corporate website, www.americanapparel.net, and our online retail website, www.americanapparel.com, we do not incorporate these websites or their contents into this Form 10-K.
Item 1A. Risk Factors
Our business involves various risks and uncertainties in addition to the normal risks of business, some of which are discussed in this section. It should be noted that our business may be adversely affected by a downturn in general economic conditions and other forces beyond our control. In addition, other risks and uncertainties not presently known or that we currently believe to be immaterial may also adversely affect our business. Any such risks or uncertainties, or any of the following risks or uncertainties, that develop into actual events could result in a material and adverse effect on our business, financial condition, results of operations, or liquidity.
The information discussed below should be considered carefully with the other information contained in this Annual Report on Form 10-K and the other documents and materials filed by us with the SEC, as well as news releases and other information publicly disseminated by us from time to time.
Risks Related to the Company's Business
Turnover of our key executives and Board of Directors (the "Board") and difficulty of recruiting and retaining key employees could have a material adverse impact on our business.
We experienced a significant amount of executive-level turnover in 2014, which has had and could continue to have a negative impact on our ability to retain key executives and employees and could have a material negative impact on our operations. We recently appointed newly hired executives as CEO, CFO, and General Counsel, among others, and seven of the nine members of the Board, including our current Chair of the Board, were appointed since July 2014. We cannot provide assurance that we will effectively manage this or any other management transition, which may impact our ability to retain our remaining key executives and employees and which could harm our business and operations to the extent there is customer or employee uncertainty regarding the prospects of our business.
The termination of Dov Charney as our chief executive officer could have a material adverse impact on our business.
On June 18, 2014, the Board voted to replace Dov Charney as Chairman of the Board, suspended him and notified him of its intent to terminate his employment as our Chairman and CEO for cause. In connection with the Nomination, Standstill and Support Agreement, dated July 9, 2014 (the "Standstill and Support Agreement"), the Board formed a new special committee (the "Suitability Committee") for the purpose of overseeing the investigation into alleged misconduct by Mr. Charney (the "Internal Investigation"). Based on the findings of the Internal Investigations in December 2014, the Suitability Committee determined that it would be inappropriate for Mr. Charney to be reinstated as our CEO or serve as an officer or employee of us or any of our subsidiaries, and the Board terminated Mr. Charney for cause under his employment agreement.
There can be no assurance that Mr. Charney's termination and any transition in management arising from his termination will not have a material adverse impact on our business or our ability to hire and retain employees and executive officers. In addition, as a result of the findings of the Internal Investigation and/or the determination to terminate Mr. Charney for cause, we may incur liability as a result of litigation and regulatory investigations, which could have a material adverse impact on our business.
We depend on key personnel, and our ability to grow and compete will be harmed if we do not retain the continued services of such personnel or we fail to identify, hire and retain additional qualified personnel.
We depend on the efforts and skills of our management team and other key personnel, and the loss of services of one or more members of this team, many of whom have substantial experience in the apparel industry, could have an adverse effect on our business. Our senior officers closely supervise all aspects of our business, in particular the design and production of merchandise and the operation of our stores.
If we are unable to hire and retain qualified management or if any member of our management leaves, such departure could adversely affect our operations and ability to design new products and to maintain and grow the distribution channels for our products. In addition, the Board's decision to terminate Mr. Charney as our CEO and to not reinstate Mr. Charney in another capacity could result in departure of other key employees.
Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising and marketing areas, and other functions. In addition, if we experience material growth, we will need to attract and retain additional qualified personnel. The market for qualified and talented design and marketing personnel in the apparel industry is intensely competitive, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. If we are unable to attract or retain qualified personnel as needed, our growth will be hampered and our operating results could be materially adversely affected.
Litigation exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations.
We are subject to regulatory inquiries, investigations, claims and suits, including, among others, consolidated shareholder derivative actions, wage and hour suits, and numerous employment related claims and suits. In addition, on or about June 23, 2014, Mr. Charney submitted a demand in arbitration against us in connection with his suspension, which had been stayed pending the determination of the Suitability Committee in the Internal Investigation. As a result of Mr. Charney's termination for cause, such stay is no longer in effect and we recently have received correspondence indicating that he intends to reinstate his demand for arbitration. Additionally, Mr. Charney may seek to file additional lawsuits against us arising from his termination for cause.
In the event that any current or future inquiries, investigations, claims or suits are decided against us, we may incur substantial liability, experience an increase in similar suits or suffer reputational harm. We are unable to predict the outcome that could result from these matters at this time and any views we form as to the viability of these claims or the financial exposure in which they could result could change from time to time as the matters proceed through their course or as facts are established. No assurance can be made that these matters will not result in material financial exposure, which together with the potential for similar suits and reputational harm, could have a material adverse effect upon our financial condition and results of operations. See "Note 18 of Notes to Consolidated Financial Statements" in Item 8, Part II.
Increases in the number and magnitude of personal injury claims could adversely affect our operating results.
We face inherent business risk from exposure to personal injury or occupational claims and claims from outside parties resulting from our operations. Accidents at our manufacturing facilities have resulted, in some cases, in serious injuries and loss of life. For example, in the first quarter of 2015, an industrial accident at our dyeing facility in Hawthorne, California resulted in injuries to one of our employees. We could experience material personal injury or occupational claims and investigations arising from this accident and future accidents and we may incur significant costs to defend such claims and investigations.
If we fail to maintain the value and image of our brand, our sales are likely to decline.
Our success depends on the value and image of our brand. Our name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brand depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation or those of our senior personnel were to be tarnished by negative publicity. Any of these events, including the publicity surrounding the termination of Mr. Charney as our CEO, the results of the Internal Investigation and any litigation or regulatory investigations relating thereto, could adversely impact our image and result in decreases in sales.
Our failure to adequately protect our trademarks and other intellectual property rights could diminish the value of our brand and reduce demand for our merchandise.
Our trademarks and service marks, and certain other intellectual property, have been registered, or are the subject of pending applications with the U.S. Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. Our products are noted for their quality and fit, and our edgy, distinctive branding has differentiated us in the marketplace. As such, the trademark and variations thereon are valuable assets that are critical to our success. We intend to continue to vigorously protect our trademark and brand against infringement, but we may not be successful in doing so. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the U.S. The unauthorized reproduction or other misappropriation of our trademark would diminish the value of our brand, which could reduce demand for our products or the prices at which we can sell our products.
We have substantial indebtedness, which could have adverse consequences to us, and we may not be able to generate sufficient cash flow to fund our liquidity needs, including servicing our indebtedness.
We currently have substantial indebtedness. Our level of indebtedness has important consequences to us and to you and your investment. For example, our level of indebtedness may:
require us to dedicate a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to use for operations, investments, future business opportunities and other general corporate purposes;
make it more difficult for us to satisfy our debt obligations, and any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default or an inability to borrow under the agreements governing such indebtedness;
in the case of a default or an event of default, as applicable, lead to, among other things, cross-defaults with our other indebtedness, an acceleration of our indebtedness or foreclosure on the assets securing our indebtedness, which could have a material adverse effect on our business or financial condition;
limit our ability to obtain additional financing or to sell assets or equity to raise funds, if needed, for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;strategies;
result in higher interest expense if interest rates increase on our floating rate borrowings;
place us at a competitive disadvantage relative to others in the industry, as it is not common for companies involved in the retail apparel business to operate with such high leverage;
heighten our vulnerability to downturns in our business, the retail industry or in the general economy and limit our flexibility in planning for or reacting to changes in our business, and the retail industry;industry or in the general economy; or
reduce our ability to carry out our plans to expand our store base, product offerings and sales channels.
Our ability to service our indebtedness is dependent on our ability to generate cash from internal operations sufficient to make required payments on such indebtedness, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, some of which factors are further described in this “Risk Factors”"Risk Factors" section. We are permitted by the terms of our indebtedness, including our senior secured notes and the Capital One Credit Facility (as defined below)in Note 1 of Notes to Consolidated Financial Statements in Item 8, Part II), to incur additional indebtedness, subject to the restrictions therein. We have experienced negative cash flows from operating activities in the past, and our business may not generate sufficient cash flow from operations to enable us to service our indebtedness or to fund our other liquidity needs. Such eventThe inability to access sufficient liquidity could have a material adverse effect on us and we may need to take various actions, which also could have material adverse consequences to us, including seeking to refinance all or a portion of our indebtedness, seeking additional debt or equity financing or reducing or delaying capital expenditures, strategic acquisitions or investments, and we may not be able to do so on commercially reasonable terms or at all.
The terms of our indebtedness contain various covenants that may limit our business activities, and our failure to comply with these covenants could have material adverse consequences to us.
The terms of our indebtedness contain, and our future indebtedness may contain, various restrictive covenants that limit our management's discretion in operating our business. In particular, these agreements include, or may include, covenants relating to limitations on:
dividends on, and redemptions and repurchases of capital stock;
payments on subordinated debt;
liens and sale-leaseback transactions;
loans and investments;
debt and hedging arrangements;
mergers, acquisitions and asset sales;
transactions with affiliates;
disposals of assets;
changes in business activities conducted by us and our subsidiaries; and
capital expenditures, including to fund future store openings.
UnderWe have amended the Capital One Credit Facility we werefrom time to time in violation oforder to waive certain obligations relating to, among other things, financial ratio covenants forincluding the twelve consecutive fiscal months ended September 30, 2013 and December 31, 2013, and we anticipated a violation for the twelve months ended March 31, 2014.
Onthird amendment dated November 14, 2013 and the fifth amendment dated March 25, 2014. As of December 31, 2014, we entered intowere not in compliance with the financial covenants under the Capital One Credit Facility. We obtained a thirdwaiver of such noncompliance in connection with the sixth amendment to the Capital One Credit Facility which among other things, waived the obligationon March 25, 2015; however, there can be no assurance that we will maintain compliance therewith going forward and we may need to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, we agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at our option) and limitations on
amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certainobtain further amendments to the borrowing base calculation.
On March 25, 2014, we entered into a fifth amendment to the Capital One Credit Facility which, effective upon its receiptavoid an event of at least $25,000 of net proceeds from a financing prior to April 15, 2014, among other things: waives the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; resets for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payabledefault under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at our option); and increases the fees payable upon early termination.facility.
Under the indenture governing our senior secured notes, a special interest trigger event occurred as of December 31, 2013 because our consolidated total net leverage ratio, as calculated under the indenture, exceeded 4.50 to 1.00. As a result, interest on the senior secured notes now accrues at a rate of 15% annum, with the interest in excess of 13% per annum payable in-kind for any interest payment date prior to April 15, 2018 and in cash for any interest payment date thereafter. The additional 2% per annum of interest accrues retroactively from the issue date of the senior secured notes. Similarly, because of the special interest trigger event, the interest rate on the Lion Loan Agreement (as defined in Note 1 of Notes to Consolidated Financial Statements in Item 8, Part II) also increased from 18% to 20% per annum with the additional 2% payable retroactively from the date of the loan agreement. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General Group ("Standard General" and such agreement, subsequent to the assignment, the "Standard General Loan Agreement"). On September 8, 2014, we entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. Interest under the loan agreementStandard General Loan Agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind. We are currently paying the interest under the Lion Loan Agreement in cash as the terms of our other debt agreements do not currently permit payment in-kind. On March 25, 2015, one of our subsidiaries borrowed $15,000 under an unsecured credit agreement with Standard General, dated as of March 25, 2015 (the "Standard General Credit Agreement"). The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to us as contemplated by the Standstill and Support Agreement.
In addition, our
Our credit agreements contain, and any future credit agreements or loan agreements may contain, certain financial and maintenance covenants, including covenants relating to our capital expenditures, fixed charge coverage, borrowing availability and leverage, some of which may be tied to consolidated EBITDA, in each case as defined in the applicable debt agreements.
Such restrictive and other covenants could limit our ability to respond to market conditions, to provide for unanticipated capital requirements or to take advantage of business or acquisition opportunities.
In addition, ourOur failure to comply with the various covenants under our indebtedness could have material adverse consequences to us. Such failure may result in our being unable to borrow under our revolving credit facility, which we utilize to access our working capital, and as a result may adversely affect our ability to finance our operations or pursue our expansion plans. Our debt agreements contain cross-default or cross-acceleration provisions by which non-compliance with covenants, or the acceleration of other indebtedness of at least a specified outstanding principal amount, could also constitute an event of default under such debt agreements. Accordingly, such a failure could result in the acceleration of all of our outstanding debt, and may adversely affect our ability to obtain financing that may be necessary to effectively operate our business and grow the business going forward. In addition, substantially all of our assets are used to secure our indebtedness, including loans under our credit agreements, our senior secured notes and certain equipment leasing agreements. In the event of a default on these agreements, substantially all of our assets could be subject to liquidation by the creditors, which liquidation could result in no assets being left for the stockholders after the creditors receive their required payment. In such an event, we would be required to seek alternative sources of liquidity, and there can be no assurance that any alternative source of liquidity would be available on terms acceptable to us, or at all.
Fluctuations in our results of operations from quarter to quarter could have a disproportionate effect on our overall financial condition and results of operations.
We experience seasonal fluctuations in revenues and operating income. Historically, sales during the third and fourth fiscal quarters have generally been the highest withwhile sales during the first fiscal quarter beinghave been the lowest. Any factors that harm our third or fourth quarter operating results, including adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year.
In order to prepare for our peak selling season, we must produce and keep in stock more merchandise than we would carry at other times of the year. Any unanticipated decrease in demand for our products during our peak selling season could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross profit.
A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, pricing, inflation, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs, timing and level of markdowns and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from our expectations, which could cause a decrease in our earnings.
Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our revenues, operating income, net income and earnings per share, as well as future cash flows.
We face exposure to adverse movements in foreign currency exchange rates as a result of our international operations. These exposures may change over time, and they could have a material adverse impact on our financial results and cash flows. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore potentially less competitive in foreign markets. Conversely, lowering our price in local currency may result in lower U.S.-based revenue. A decrease in the value of the U.S. dollar relative to foreign currencies could increase the cost of local operating expenses.
Our stock price may be volatile.
Our stock price may fluctuate substantially as a result of quarter to quarter variations in our actual or anticipated financial results or the financial results of other companies in the retail and apparel industries. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies. Failure to meet the expectations of investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline. In addition, the fluctuation of our stock price also could cause us to fail to meet listing standards on the NYSE MKT if our stock price trades at a low price per share for a substantial period of time and we fail to effect a reverse split of our shares.
If we are unable to maintain the listing of the common stock on the NYSE MKT or any other securities exchange, it may be more difficult for you to sell your securities.
The common stock is currently traded on the NYSE MKT. On February 28, 2014, we received a letter from NYSE MKT indicating that we are not in compliance with the continued listing standards of NYSE MKT set forth in Section 1003(a)(iv) of the NYSE MKT LLC Company Guide. In order to maintain its listing, we have submitted a plan of compliance by addressing how we intend to regain compliance with Section 1003(a)(iv) of the Company Guide by April 15, 2014. If the plan is accepted, we may be able to continue our listing but will be subject to periodic review by NYSE MKT. If the plan is not accepted or if we do not make progress consistent with the plan by April 15, 2014, NYSE MKT will initiate delisting proceedings as appropriate. No assurance can be given that we will regain compliance with those listing requirements or that we will continue to meet the listing requirements of NYSE MKT in the future. If for any reason the NYSE MKT should delist the common stock, and we are unable to obtain listing on another national securities exchange, we could face significant material adverse consequences, including:
a limited availability of market quotations for our securities;
a limited amount of news and analyst coverage;
a decreased ability to issue additional securities or obtain additional financing in the future; and
a determination that the common stock is a “penny stock,” if the securities sell for a substantial period of time at a low price per share which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock.
There will be a substantial number of shares of our common stock available for issuance or sale in the future that would result in dilution to existing public stockholders, may increase the volume of common stock available for sale in the open market and may cause a decline in the market price of our common stock.
Dov Charney and our warrant-holders currently own or have the right to acquire a substantial number of shares of our common stock. As of December 31, 2013, Mr. Charney owned 47.2 million shares of our common stock and has the contractual right to receive, upon the satisfaction of certain performance conditions or stock price thresholds, up to an additional 25.0 million shares of our common stock. We also have outstanding warrants exercisable to purchase an aggregate of 21.6 million shares of our common stock. Mr. Charney and Lion Capital LLP ("Lion") also have certain registration rights with respect to their shares of common stock (in the case of Lion, the shares underlying its warrants).
As of December 31, 2013 assuming (i) issuance in full of the shares of common stock that Mr. Charney has a right to purchase or receive as described above, (ii) exercise in full of the warrants described above (including new warrants issuable to Lion if such shares are issued to Mr. Charney), (iii) exercise in full of currently outstanding employee options to purchase, vesting of unvested restricted stock awards, including issuance of contingent employee restricted stock awards and options, with respect to a total of 25.0 million shares of common stock and (iv) no other issuances of common stock or securities convertible, exercisable or exchangeable for common stock, the percentage ownership of stockholders other than Mr. Charney, the Investors (as defined below), and holders of outstanding warrants as described above would be reduced from approximately 45% to approximately 30%.
Voting control by our executive officers, directors, lenders and other affiliates may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval.
As of March 31, 2014, Mr. Charney beneficially owned approximately 27% of our outstanding common stock and Lion beneficially owned approximately 12% of our outstanding common stock. Mr. Charney and Lion also have the right to acquire additional beneficial ownership under certain circumstances as described above.
In addition, Mr. Charney and Lion are parties to an investment agreement pursuant to which Lion has the right to designate up to two directors on our Board of Directors and a board observer (or, if we increase our board size to 12, up to three directors and no board observers), subject to maintaining certain minimum ownership thresholds of common stock or shares of common stock issuable under Lion's warrants. The investment agreement also restricts us from increasing the size of our Board of Directors to more than 10 directors (or 13 directors in the event we elect to increase the size of our Board of Directors to 12 directors as described above). The two Lion designees on our board of directors and Lion's board observer resigned on March 30, 2011. Lion retains its ability to re-designate directors to our board of directors and a board observer.
Mr. Charney and Lion also are parties to an investment voting agreement which provides that, for so long as Lion has the right to designate any person or persons to the Board of Directors, Mr. Charney will vote his shares of common stock in favor of Lion's designees, and Lion will vote its shares of common stock in favor of Mr. Charney and each other designee of Mr. Charney, in each case subject to Mr. Charney maintaining certain minimum ownership thresholds of common stock.
This concentration of share ownership and agreements may adversely affect the trading price for the common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, some or all of our significant stockholders, if they were to act together, would be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders and may prevent our stockholders from realizing a premium over the current market price for their shares of common stock. Furthermore, our significant stockholders may also have interests that differ from yours and may vote their shares of common stock in a way with which you disagree and which may be adverse to your interests.
Purchases of retail apparel merchandise are generally discretionary and economic conditions may cause a decline in consumer spending which could adversely affect our business and financial performance.
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of consumer spending, particularly in discretionary areas such as fashion apparel. Our business and financial performance, including our sales and the collection of our accounts receivable, may be adversely affected by any future decreases in economic activity in the markets we serve that could potentially cause a decline in consumer spending, including a reduction in the availability of credit, increased unemployment levels, higher fuel and energy costs, rising interest rates, adverse conditions in the housing markets, financial market volatility, recession, decreased access to credit, reduced consumer confidence in future economic conditions and political conditions, acts of terrorism, consumer perceptions of personal well-being and security and other macroeconomic factors affecting consumer spending behavior. A decrease in consumer discretionary spending as a result of economic conditions may decrease the demand for our products. In addition, reduced consumer spending may cause us to lower prices, or drive us to offer additional products at promotional prices, any of which would have a negative impact on gross profit.
Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of materials, parts and components from our suppliers. Global financial conditions may materially and adversely affect the ability of our suppliers to obtain financing for significant purchases and operations. If certain key suppliers were to become capacity constrained or insolvent as a result of the financial crisis, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact consumer purchases and our financial results. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect our stock price.
If we are unable to gauge fashion trends and react to changing consumer preferences in a timely manner, our sales will decrease.
Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The retail apparel business fluctuates according to changes in consumer preferences dictated, in part, by fashion and season. To the extent we misjudge the market for our merchandise or the products suitable for our market, our sales will be adversely affected. Merchandise misjudgments could have a material adverse effect
on our image with our customers and on our operating results. Fluctuations in the apparel retail market affect the inventory owned by apparel retailers, since merchandise usually must be manufactured in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the retail apparel business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we build up our inventory levels. As a result, we will be vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise production. If sales do not meet expectations, too much inventory may lower planned margins. Our brand image may also suffer if customers believe we are no longer able to offer the latest fashion. The occurrence of these events could adversely affect our financial results by decreasing sales.
Our failure to adequately protect our trademarks and other intellectual property rights could diminish the value of our brand and reduce demand for our merchandise.
Our trademarks and service marks, and certain other intellectual property, have been registered, or are the subject of pending applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. Our products are noted for their quality and fit, and our edgy, distinctive branding has differentiated us in the marketplace. As such, the trademark and variations thereon are valuable assets that are critical to our success. We intend to continue to vigorously protect our trademark and brand against infringement, but we may not be successful in doing so. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. The unauthorized reproduction or other misappropriation of our trademark would diminish the value of our brand, which could reduce demand for our products or the prices at which we can sell our products.
If we fail to maintain the value and image of our brand, our sales are likely to decline.
Our success depends on the value and image of our brand. Our name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brand depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation or those of our senior personnel were to be tarnished by negative publicity. Any of these events could result in decreases in sales.
Our ability to attract customers to our stores depends heavily on the success of the shopping areas in which they are located.
In order to generate customer traffic, we locate many of our stores in prominent locations within successful shopping areas. Net sales at these stores are partly dependent on the volume of traffic in those shopping areas. Our stores benefit from the ability of a shopping area's other tenants to generate consumer traffic in the vicinity of our stores and the continuing popularity of the shopping areas. We cannot control the availability or cost of appropriate locations within existing or new shopping areas, competition with other retailers for prominent locations or the success of individual shopping areas. In addition, factors beyond our control impact shopping area traffic, such as economic conditions nationally or in a particular area, competition from internet retailers, changes in consumer demographics in a particular market, the closing or decline in popularity of other stores in the shopping areas where our stores are located, deterioration in the financial conditions of the operators of the shopping areas or developers and consumer spending levels. A significant decrease in shopping area traffic could have a material adverse effect on our financial condition or results of operations. Furthermore, in pursuing our growth strategy, we will be competing with other retailers for prominent locations within the same successful shopping areas. If we are unable to secure these locations or unable to renew store leases on acceptable terms as they expire from time-to-time we may not be able to continue to attract the number or quality of customers we normally have attracted or would need to attract to sustain our projected growth. All these factors may also impact our ability to meet our growth targets and could have a material adverse effect on our financial condition or results of operations.
Our growth strategy relies in part on the opening of new stores, the remodeling of existing stores and expanding our business internationally, which may strain our resources, adversely impact the performance of our existing store base and delay or prevent successful penetration into international markets.
Our growth strategy and the success of our business depends in part on the opening of new retail stores, both domestically and internationally, the renewal of existing store leases on terms that meet our financial targets, the remodeling of existing stores in a timely manner, and the operation of these stores in a cost-efficient manner. Successful implementation of this portion of our growth strategy depends on a number of factors including, but not limited to, our ability to:
identify and obtain suitable store locations and negotiate acceptable leases for these locations;
complete store design and remodeling projects on time and on budget;
manage and expand our infrastructure to accommodate growth;
generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund our expansion plan and remain in compliance with the capital expenditure covenant and other relevant covenants in our credit facilities that may limit our ability to fund such expansion plans;
manage inventory effectively to meet the needs of new and existing stores on a timely basis;
avoid construction delays and cost overruns in connection with the build-out of new stores;
hire, train and retain qualified store managers and sales people.
gain acceptance from foreign customers;
manage foreign exchange risks effectively;
address existing and changing legal, regulatory and political environments in target foreign markets; and
manage international growth, if any, in a manner that does not unduly strain our financial, operating and management resources.
Our plans to expand our store base and to remodel certain existing stores may not be successful and the implementation of these plans may not result in an increase in our revenues even though they increase our costs. Additionally, new stores that we open may place increased demands on our existing financial, operational, managerial and administrative resources, which could cause us to operate less effectively.
Our ability to obtain real estate to open new stores in desirable locations depends upon the availability of real estate that meets our criteria, which includes, among other items, projected foot traffic, square footage, customer demographics and whether we are able to negotiate lease terms that meet our operating budget. In addition, we must be able to effectively renew our existing store leases from time to time. Failure to secure real estate in desirable locations on economically beneficial terms or to renew leases on existing store locations on economically beneficial terms could have a material adverse effect on our results of operations.
Further, our ability to fund expansion in the future and other capital expenditures will depend on our ability to generate sufficient cash from internal operations (after taking into account our debt service obligations and subject to the covenants in our debt agreements) or to access financing, which ability is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control and which financing may not be available on commercially reasonable terms or at all.
Furthermore, it is possible that by opening a new store in an existing market, we could adversely affect the previously existing stores in that market by drawing away traffic from the previously existing stores. Our new stores may not be immediately profitable and, as such, we may incur losses until these stores become profitable. Any failure to successfully open and operate new stores would adversely affect our results of operations.
We anticipate that we will incur significant costs related to starting up and maintaining additional foreign operations. Costs may include, and will not be limited to, setting up foreign offices and hiring experienced management. These increased demands may cause us to operate our business less effectively, which in turn could cause deterioration in the performance of our stores. Furthermore, our ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks.expectations.
Our plans to expand our product offerings and sales channels maymight not be successful, and implementation of these plans maymight divert our operational, managerial and administrative resources, which could impact our competitive position.
Our ability to grow our existing brand and develop or identify new growth opportunities depends in part on our ability to appropriately identify, develop and effectively execute strategies and initiatives. Failure to effectively identify, develop and execute strategies and initiatives may lead to increased operating costs without offsetting benefits and could have a material adverse effect on our results of operations. These plans involve various risks discussed elsewhere in these risk factors, including:
implementation of these plans may be delayed or may not be successful;
if our expanded product offerings and sales channels fail to maintain and enhance our distinctive brand identity, our brand image may be diminished and our sales may decrease;
implementation of these plans may divert management's attention from other aspects of our business and place a strain on our management, operational and financial resources, as well as our information systems.
In addition, our ability to successfully carry out our plans to expand our product offerings may be affected by, among other things, economic and competitive conditions, changes in consumer spending patterns and changes in consumer preferences, and fashion trends. Our expansion plans could be delayed or abandoned, could cost more than anticipated and could divert resources from other areas of our business;business, any of which could impact our competitive position and reduce our revenue and profitability.
We depend on key personnel, and ourOur ability to grow and compete will be harmed if we do not retain the continued services of such personnel, or we failattract customers to identify, hire and retain additional qualified personnel.
We dependour stores depends heavily on the efforts and skillssuccess of the shopping areas in which they are located.
In order to generate consumer traffic, we locate many of our management team andstores in prominent locations within successful shopping areas. Net sales at these stores are partly dependent on the volume of traffic in those shopping areas. Our stores benefit from the ability of a shopping area's other key personnel,tenants to generate consumer traffic in the vicinity of our stores and the losscontinuing popularity of servicesthe shopping areas. We cannot control the availability or cost of oneappropriate locations within existing or more membersnew shopping areas, competition with other retailers for prominent locations or the success of this team, each of whom have substantial experienceindividual shopping areas. Other factors beyond our control that impact consumer traffic include economic conditions nationally or in the apparel industry, could have an adverse effect on our business. Our senior officers closely supervise all aspects of our business, ina particular the design and production ofarea, severe weather, competition from internet
merchandiseretailers, changes in consumer demographics in a particular market, the closing or decline in popularity of other stores in the shopping areas where our stores are located, deterioration in the financial conditions of the operators of the shopping areas or developers and consumer spending levels. Furthermore, in pursuing our growth strategy, we will be competing with other retailers for prominent locations within the operation of our stores.same successful shopping areas. If we are unable to hire and retain qualified managementsecure prime store locations or if any memberunable to renew store leases on acceptable terms as they expire from time to time, we may not be able to continue to attract the number or quality of customers needed to sustain our management leaves, such departure couldprojected revenues. All these factors may have ana material adverse effect on our operationsfinancial condition and couldresults of operations.
Our business strategy relies in part on the opening of new stores, the remodeling of existing stores and expanding our business internationally, which may strain our resources, adversely affectimpact the performance of our existing stores, and delay or prevent successful penetration into international markets.
Our business strategy depends in part on opening new retail stores, both domestically and internationally, renewal of existing store leases on terms that meet our financial targets, remodeling existing stores in a timely manner, and cost-efficient operation of these stores. Successful implementation of this portion of our strategy depends on a number of factors including, but not limited to, our ability to:
identify and obtain suitable store locations and negotiate acceptable leases for these locations;
complete store design and remodeling projects on time and on budget;
manage and expand our infrastructure to accommodate growth;
generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund expansion and remain in compliance with the relevant covenants in our credit facilities, which may limit our ability to designfund such expansion;
manage inventory effectively to meet the needs of new products and existing stores on a timely basis;
avoid construction delays and cost overruns in connection with the build-out of new stores;
hire, train and retain qualified store managers and sales people.
gain acceptance from foreign customers;
manage foreign exchange rate risks effectively;
address existing and changing legal, regulatory and political environments in target foreign markets; and
manage international growth, if any, in a manner that does not unduly strain our financial, operating and management resources.
Any expansion of our store base and remodeling of existing stores may not result in an increase in our revenues even though they increase our costs. New stores may place increased demands on our existing financial, operational, managerial and administrative resources, which could cause us to maintainoperate less effectively. Further, our ability to fund expansion and growother capital expenditures will depend on sufficient cash from internal operations (after taking into account our debt service obligations and subject to the distribution channels forcovenants in debt agreements) or financing subject to general economic, legislative, regulatory and other factors that are beyond our products. In particular, we believe we have benefited substantially from the leadershipcontrol and strategic guidance of Dov Charney. The loss of Dov Charney wouldwhich financing may not be particularly harmful as he is considered intimately connected to our brand identity and is the principal driving force behind our core concepts, designs and growth strategy.available on commercially reasonable terms or at all.
Our ability to obtain real estate to open new stores in desirable locations depends upon the availability of real estate that meets our criteria, which includes projected foot traffic, square footage, customer demographics and whether we are able to negotiate lease terms that meet our operating budget. In addition, we must be able to effectively renew our existing store leases from time to time. Failure to secure real estate in desirable locations on economically beneficial terms or to renew leases on existing store locations on economically beneficial terms could have a material adverse effect on our results of operations.
We anticipate that we will incur significant costs related to starting up and maintaining additional foreign operations. Costs may include, and will not be limited to, setting up foreign offices and hiring experienced management. These increased demands may cause us to operate our business less effectively, respond to changing fashion trends dependswhich in part onturn could cause deterioration in the performance of our stores. In addition, our ability to attractconduct business in international markets may be affected by legal, regulatory, political and retain key personneleconomic risks.
Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our design, merchandisingrevenues, operating income, net income, earnings per share, and marketing areas, and other functions. In addition, if we experience material growth, we will needcash flows.
We face exposure to attract and retain additional qualified personnel. The market for qualified and talented design and marketing personneladverse movements in the apparel industry is intensely competitive, and we cannot be sure that we will be able to attract and retainforeign currency exchange rates as a sufficient number of qualified personnel in future periods. If we are unable to attract or retain qualified personnel as needed, our growth will be hampered and our operating results could be materially adversely affected.
Unionization of employees at our facilities could result in increased risk of work stoppages and high labor costs.
Our employees are not party to any collective bargaining agreement or union. If employees at our manufacturing or distribution facilities were to unionize, our relationship with our employees could be adversely affected. We would also face an increased risk of work stoppages and higher labor costs. Accordingly, unionization of our employeesinternational operations. These exposures may change over time, and they could have a material adverse impact on our financial results and cash flows. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore potentially less competitive in foreign markets. Lowering our price in local currency may result in lower revenue. Conversely, a decrease in the value of the U.S. dollar relative to foreign currencies could increase operating expenses.
Because we utilize foreign suppliers and sell into foreign markets, we are subject to numerous risks associated with international business that could increase our costs or disrupt the supply of our products, resulting in a negative impact on our business and financial condition.
Our international operations subject us to risks, including:
economic and political instability;
restrictive actions by foreign governments;
greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights;
changes in import duties or import or export restrictions;
fluctuations in currency exchange rates, which could negatively affect profit margins;
timely shipping of product;
complications complying with the laws and policies of the United States affecting the exportation of goods, including duties, quotas, and taxes; and
complications complying with trade and foreign tax laws.
These and other factors beyond our control could disrupt the supply of our products, influence the ability of our suppliers to export our products cost-effectively or at all, inhibit our suppliers' ability to procure certain materials and increase our expenses, any of which could harm our business, financial condition and could force us to raise prices on our products, curtail operations and/or relocate all or a portionresults of our operations overseas.operations.
Cost increases in, or shortages of, the materials or labor used to manufacture our products could negatively impact our business and financial condition.
The manufacture of our products is labor intensive and utilizes raw materials supplied by third parties. An important part of American Apparelour branding and marketing is that our products are made in the United States.U.S. The Federal Trade Commission has stated that for a product to be called “Made"Made in USA”,USA," or claimed to be of domestic origin without qualifications or limits on the claim, the product must be “all"all or virtually all”all" made in the United States.U.S. The term “United States”"U.S." includes the 50 states, the District of Columbia, and the U.S. territories and possessions. “All"All or virtually all”all" means that all significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no, - or negligible, - foreign content. We meet the Federal Trade Commission's “Made"Made in USA”USA" standard and from the knitting process to the final sewing of a garment, all of the processes are conducted in the United States,U.S., either directly by us in our knitting, manufacturing, dyeing and finishing facilities located in Los Angeles or through commission knitters, dyers and sewers in the Los Angeles metropolitan area and other regions in the United States.U.S. If the cost of labor materially increases, our financial results could be materially adversely affected and our ability to compete against companies with lower labor costs could be hampered. Material increases in labor costs in the United StatesU.S. could also force us to move all or a portion of our manufacturing overseas, which could adversely affect our brand identity.
Similarly, increases in the prices of raw materials or the prices we pay to the suppliers of the raw materials used in the manufacturing of our products, and shortages in such materials, could have a material adverse effect on our financial condition and results of operations. For example, the price of yarn and the cost of certain related fabrics has historically fluctuated. Such shortages may result in an increase in our manufacturing costs and could result in a material adverse effect on our financial condition and results of operations, and we are unable to predict whether we will be able to successfully pass on the added cost of raw materials to our wholesale and retail customers. In addition, increases in the cost of, or shortages in, our raw material inputs could adversely affect our ability to compete. Further, we could be forced to seek to offset any increased raw material costs by relocating all or a portion of our manufacturing overseas to locations with lower labor costs.
Our manufacturing operations are located and will be located in higher-cost geographic locations, placing us at a possible disadvantage to competitors that have a higher percentage of their manufacturing operations overseas.
Despite the general industry-wide migration of manufacturing operations to lower-cost locations, such as Central America, the Caribbean Basin and Asia, our textile manufacturing operations are still located in the United States,U.S., which is a higher-cost location relative to these offshore locations. In addition, our competitors generally source or produce a greater portion of their textiles from regionsforeign sources with lower costs than we, which also places us at a cost disadvantage.us. Our competitor'scompetitors' lower costs of production may allow them to offer their products at a lower price than our selling prices for similar products.prices. This could force us to lower our margins or to compete more vigorously with non-price competitive strategies to preserve our margins and sales volume.
Our reliance on operational facilities located in the same vicinity makes our business susceptible to local and regional disruptions or adverse conditions affecting the location of our facilities.conditions.
We conduct all of our manufacturing operations in the Los Angeles metropolitan area. Specifically, we operate principally out of anAmong other facilities in the area, our 800,000 square foot facility in downtown Los Angeles which houses our executive offices as well as our cutting and sewing operations. Our distribution operations are located in La Mirada, California. We also operate the following: a knitting facility in Los Angeles, California; a cutting, sewing, garment dyeing and finishing facility in South Gate, California; a fabric dyeing and finishing facility in Hawthorne, California; as well as a a cutting, sewing, fabric dyeing and finishing facility in Garden Grove, California. As a result of geographic concentration, our operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, natural disasters, and demographic and population changes, as well asand other unforeseen events and circumstances.
Southern California is particularly susceptible to earthquakes. Any significant interruption in the operation of any of these facilities could reduce our ability to receive and process orders and provide products and services to our stores and customers, which could result in lost sales, canceled sales and a loss of loyalty to our brand. Furthermore,In addition, if there were a major earthquake, we may have to cease operations for a significant portion of timeperiod due to possible damage to our factory or inability to deliver products to our distribution center.
Unionization of employees at our facilities could result in increased risk of work stoppages and high labor costs.
Our employees are not party to any collective bargaining agreement or union. If employees at our manufacturing or distribution facilities were to unionize, our relationship with our employees could be adversely affected. We would also face an increased risk of work stoppages and higher labor costs. One non-union organization that purports to represent the rights of some of our current and former employees has communicated demands to us that are purportedly made on behalf of such current and former employees. We understand that one related group has solicited support with an intention to attempt to be recognized by us as a union. If employees at our manufacturing or distribution facilities were to unionize, or otherwise make collective demands on us, it could adversely affect our relationship with our employees, increase the risk of work stoppages and increase our labor costs and legal fees. Such employee actions could also have a material adverse impact on our operating costs and financial condition and could force us to take actions such as raising prices on our products, curtailing operations and/or relocating all or a portion of our operations overseas.
The process of upgradingA disruption in our information technology infrastructure may disruptinterrupt our operations.
We are increasingly dependentdepend on information systems to operate our website, process transactions, respond to customer inquiries, manage inventory and production, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. We have performed an evaluation of our information technology systems and requirements and have implemented upgrades to our information technology systems supporting the business. These upgrades involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. There are inherent risks associated with replacing and changing these systems, including accurately capturing data and system disruptions. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers”"hackers" or other causes.
Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade our systems could cause information, including data related to customer orders, to be lost or delayed, which could-especially if the disruption or slowdown occurred during the holiday season-result in delays in the delivery of merchandise to our stores and customers or lost sales, which could reduce demand for our merchandise and cause our sales to decline.sales.
Moreover, we may not be successful in developing or acquiring technology that is competitive and responsive to the needs of our customers and might lack sufficient resources to make the necessary investments in technology to compete with our competitors. Accordingly, if changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose customers.
A failure in our Internetonline retail operations could significantly disrupt our business and lead to reduced sales and reputational damage.
Our online retail operations accounted for approximately 10% of net sales for the year ended December 31, 20132014 and are subject to numerous risks that could have a material adverse effect on our operational results. Risks to online revenue include, but are not limited to, the following:
changes in consumer preferences and buying trends relating to Internetinternet usage;
changes in required technology interfaces;
web sitewebsite downtime;
difficulty in recreating the in-store experience on our website; and
risks related to the failure of the systems that operate the web sites and their related support systems, including computer viruses, theft of customer information, telecommunication failures and electronic break-ins and similar disruptions.
Our failure to successfully respond to these risks and uncertainties could reduce Internet sales and damage our brand's reputation.
Failure to protect the integrity and security of our information systems and our customers’ information could materially adversely affect our results of operations, damage our reputation and expose us to litigation.
Our operations, including sales through our e-commerce website and retail stores, involve the collection, storage and transmission of customers' credit card information and personal identification data, as well as employee information and non-public company data. The costs associated with maintaining the security of such information, including increased investments in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud or a malicious breach of our information systems, could materially adversely affect our results of operations. If the security of the customer data stored on our servers or transmitted by our networks werenetwork is breached, our reputation maycould be materially adversely affected, which could negatively impact our sales results, and we maycould be subject to litigation. To date, we have not experienced a significant security breach.
We rely heavily on immigrant labor, and changes in immigration laws or enforcement actions or investigations under such laws could materially adversely affect our labor force, manufacturing capabilities, operations and financial results.
We rely heavily on immigrant labor. Adverse changes to existing laws and regulations applicable to employment of immigrants, enforcement requirements or practices under those laws and regulations, and inspections or investigations by immigration authorities or the prospects or rumors of any of the foregoing, even if no violations exist, could negatively impact the availability and cost of personnel and labor to us. As a result, we could experience very substantial turnover of employees on short or no notice, which could result in manufacturing and other delays. We may also have difficulty attracting or hiring new employees in a timely manner, resulting in further delays. These delays could materially adversely affect our revenues and costs and our ability to compete. If we are not able to continue to attract and retain sufficient employees, our manufacturing capabilities, operations and financial results would be adversely affected.
We are subject to customs, advertising, consumer protection, privacy, zoning and occupancy, and labor and employment laws that could require us to modify our current business practices and incur increased costs.
We are subject to numerous regulations, including customs, advertising, consumer protection and privacy, zoning and occupancy laws and ordinances that regulate the operation of retail stores and warehouse facilities and/or govern the importation, promotion and sale of merchandise. If these regulations were to change or were violated, we could be subject to litigations, fines and penalties and experience increased costs of certain goods and delays in shipments of goods, which would hurt our business and results of operations.
We are also subject to numerous federal and state labor laws, such as minimum wage laws and other laws relating to employee benefits. If these laws were to change, we may incur additional wage and benefit costs, which could adversely affect our profitability. We are currently defending several wage and hour suits. Should these matters be decided against us, we could incur substantial liability, experience an increase in similar suits, and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, but no assurance can be made that these matters will not result in material financial exposure. See "Note 18 of Notes to Consolidated Financial Statements" in Item 8, Part II for a more detailed discussion of our pending litigation.
Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business.
We are currently being audited by government tax agencies regarding our operating activities in previous periods which may result in an assessment of a material amount, the payment of which may adversely impact our financial conditions and operations.
As of December 31, 2014, we are being audited by government agencies in various jurisdictions in regards to sales, VAT, income, and other taxes and customs duties for certain previous years. For example, in connection with one such audit, the German customs audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on our imports. The German authorities demanded, and we paid, in connection with such assessments, $5,183 in 2014.
Although we believe that we properly assess and remit all required sales, VAT, income, and other taxes and customs duties in applicable jurisdictions, no assurance can be made that these matters will not have a material adverse effect on our financial condition and results of operations.
Third party failure to deliver merchandise to stores and customers could result in lost sales or reduced demand for our merchandise.
The efficient operation of our stores and wholesale business depends on the timely receipt of merchandise from our distribution centers. Independent third party transportation companies deliver a substantial portion of our merchandise to our stores. These shippers may not continue to ship our products at current pricing or terms. These shippers may employ personnel represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees or contractors of these third parties could delay the timely receipt of merchandise, which could result in canceled sales, a loss of loyalty to our brand and excess inventory. There can be no assurance that such stoppages or disruptions will not occur in the future. Any failure by these third parties to respond adequately to our distribution needs would disrupt our operations and could have a material adverse effect on our financial condition and results of operations.
Timely receipt of merchandise by our stores and our customers may also be affected by factors such as inclement weather, natural disasters and acts of terrorism. We may respond by increasing markdowns or initiating marketing promotions, which would decrease our gross profits and net income.
We have potential exposure to credit risks on our wholesale sales.
We are exposed to the risk of financial non-performance by our customers, primarily in our wholesale business. Sales to wholesale customers represented approximately 31% of our net sales for the year ended December 31, 2014. Our extension of credit involves considerable use of judgment and is based on an evaluation of each customer's financial condition and payment history. We monitor our credit risk exposure by periodically obtaining credit reports and updated financials of our customers. One customer in our U.S. wholesale business accounted for 16.6% of our total trade accounts receivable as of December 31, 2014. We maintain an allowance for doubtful accounts for potential credit losses based upon historical trends and other available information. However, delays in collecting or the inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our results of operations.
Risks Related to the Company's Stock
Our stock price may be volatile.
Our stock price may fluctuate substantially as a result of quarter to quarter variations in our actual or anticipated financial results or the financial results of other companies in the retail and apparel industries. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies. Failure to meet the expectations of investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline. In addition, the fluctuation of our stock price also could cause us to fail to meet listing standards on the NYSE MKT if our stock price trades at a low price per share for a substantial period of time and we fail to effect a reverse split of our shares.
If we are unable to maintain the listing of our common stock on the NYSE MKT or any other securities exchange, it may be more difficult for you to sell your securities.
Our common stock is currently traded on the NYSE MKT. We are currently in compliance with the continued listing standards of the NYSE MKT; however, in the past we have failed to meet such standards. We are subject to periodic review by NYSE MKT and no assurance can be given that we will continue to meet the listing requirements of NYSE MKT in the future. If for any reason the NYSE MKT should delist our common stock, and we are unable to obtain listing on another national securities exchange, we could face significant material adverse consequences, including:
a limited availability of market quotations for our securities;
a limited amount of news and analyst coverage;
a decreased ability to issue additional securities or obtain additional financing in the future; and
a determination that the common stock is a "penny stock," if the securities sell for a substantial period of time at a low price per share which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock.
Voting control by our directors, lenders and other affiliates, including Standard General and Dov Charney, may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval.
In connection with the Standstill and Support Agreement, five directors resigned from the Board, effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and us. The Standstill and Support Agreement provides Standard General and Mr. Charney with specified rights with respect to the appointment of their mutually agreed designees to the Board and the nomination of such designees for election at our annual meeting of stockholders, subject to specified limitations, including that Mr. Charney will not serve as a member of our Board or be nominated by us or Standard General as a Board member. In 2014, Lion exercised its right to designate two members to our Board, whose appointments were effective as of September 15, 2014 and January 13, 2015, respectively. On March 6, 2015, a member appointed by Lion resigned from the Board, and, on March 24, 2015, the Board elected a member designated by Lion to fill that vacancy.
As of March 13, 2015, Mr. Charney owned approximately 42% of our outstanding common stock and Mr. Charney and Standard General collectively controlled the right to vote such common stock. On July 9, 2014, Mr. Charney and Standard General, on behalf of one or more of its funds, entered into a cooperation agreement (the "Cooperation Agreement"), which provides among other things that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that, notwithstanding the terms of the Standstill and Support Agreement, Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement (defined below). In addition, according to Mr. Charney's Schedule 13D/A, dated June 25, 2014, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right, exercisable on or prior to July 15, 2017, to purchase from Mr. Charney shares representing approximately 18.4% of our currently outstanding common stock (consisting of the 27,351,407 shares purchased by Mr. Charney from Standard General using the proceeds of a loan from Standard General and 10% of Mr. Charney’s 47,209,407 original shares which original shares also are pledged as security for such loan, which shares are further referenced in the Cooperation Agreement).
As of March 13, 2015, Lion owned warrants to acquire 24.5 million shares, or approximately 14%, of our outstanding common stock. Mr. Charney and Lion have the right to acquire additional beneficial ownership under certain circumstances. In addition, Mr. Charney and Lion are parties to an investment agreement pursuant to which Lion has the right to designate up to two directors on the Board and a board observer (or, if we increase our board size to 12, up to three directors and no board observers), subject to maintaining certain minimum ownership thresholds of common stock or shares of common stock issuable under Lion's warrants.
Mr. Charney and Lion also are parties to an investment voting agreement, dated March 13, 2009 (the "Investment Voting Agreement") which provides that, for so long as Lion has the right to designate any person or persons to the Board, Mr. Charney will vote his shares of common stock in favor of Lion's designees, and Lion will vote its shares of common stock in favor of Mr. Charney and each other designee of Mr. Charney, in each case subject to Mr. Charney maintaining certain minimum ownership thresholds of common stock.
This concentration of share ownership, agreements allowing Standard General and Lion to appoint members to the Board, and voting agreements between Mr. Charney and Standard General and Mr. Charney and Lion, may adversely affect the trading price for the common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, some or all of our significant stockholders, if they were to act together, would be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of facilitating, delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or encouraging or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, depending on the desires of our significant stockholders. Among other things, such actions may prevent our stockholders from realizing a premium over the current market price for their shares of common stock. Our significant stockholders may also have interests that differ from yours and may vote their shares of common stock in a way with which you disagree and which may be adverse to your interests. Furthermore, Standard General and its affiliates could be our sole lender under our revolving credit facility if it acquires our revolving credit facility.
Our adoption of a stockholders rights plan may delay or make it more difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders.
On December 21, 2014, our Board adopted a stockholders rights plan (the "Rights Plan"). Under the Rights Plan, we declared a dividend of one preferred share purchase right for each share of our common stock held by shareholders of record as of January 2, 2015. Each right entitles the registered holder to purchase from us a unit consisting of one ten-thousandth of a share (a "Unit") of Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a purchase price of $3.25 per Unit, subject to adjustment. The Rights Plan was implemented by us to protect our stockholders from a threat of creeping control and provide the Board and our stockholders with adequate time to properly assess any take-over bid without undue pressure. However, the Rights Plan may have the effect of delaying, deterring or preventing acquisitions that would otherwise have provided value to our stockholders and may not be effective in preventing an acquirer from ultimately acquiring control over us.
Risks Related to the Company's Industry
We operate in the highly competitive retail and apparel industries and our market share may be adversely impacted at any time by the significant number of competitors in our industries that may compete more effectively than we can.
The apparel industry is characterized by rapid shifts in fashion, consumer demand, and competitive pressures, resulting in both price and demand volatility. The retail apparel industry in general, and- specifically, the imprintable apparel market specifically,- is fragmented and highly competitive. Prices of certain products we manufacture particularly T-shirts, are determined based on market conditions including the price of raw materials. There can be no assurance that we will be able to compete successfully in the future.
We compete with national and local department stores, specialty and discount store chains, independent retail stores, and Internetinternet businesses that market similar lines of merchandise. Many of ourthese competitors are, and many of our potential competitors may be, larger, have substantially greater name recognition and are better capitalized than we do and have greater financial, marketing and other resources and, therefore,us, which may be ableenable them to adapt to changes in customer requirements more quickly, devote greater resources to the marketing and sale of their products, generate greater national brand recognition, or adopt more aggressive pricing policies than we can.
We also face competition in European, Asian and Canadian markets from established regional and national chains. Our success in these markets depends on determining a sustainable profit formula to build brand loyalty and gain market share in these challenging retail environments. If our international business is not successful, our results of operations could be adversely affected.
The wholesale business competes with numerous wholesale companies based on the quality, fashion, availability, and price of our wholesale product offerings. Many of these companies have greater name recognition than American Apparel in the wholesale market. Many of these companies also haveand greater financial and other resources when compared to American Apparel.than us. If we cannot successfully compete with these companies, our business and results of operations could be adversely affected.
Purchases of retail apparel merchandise are generally discretionary and economic conditions may cause a decline in consumer spending which could adversely affect our business and financial performance.
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of consumer spending, particularly in discretionary areas such as fashion apparel. Our business and financial performance, including sales and the collection of accounts receivable, may be adversely affected by, among other things, any future decrease in economic activity in the markets we serve, increased unemployment levels, higher fuel and energy costs, rising interest rates, adverse conditions in the housing markets, financial market volatility, recession, decreased access to credit, reduced consumer confidence in future economic and political conditions, acts of terrorism, consumer perceptions of personal well-being and security, and other macroeconomic factors affecting consumer spending behavior. A decrease in consumer discretionary spending as a result of macroeconomic conditions may decrease the demand for our products. In addition, reduced consumer spending may cause us to lower prices or drive us to offer additional products at promotional prices, any of which would have a negative impact on gross profit.
Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of materials, parts and components from our suppliers. Global financial conditions may materially and adversely affect the ability of our suppliers to obtain financing for significant purchases and operations. If certain key suppliers were to become capacity constrained or insolvent as a result of a financial crisis, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact consumer purchases and our financial results. As a consequence, our operating results for a particular period are difficult to predict, and prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to gauge fashion trends and react to changing consumer preferences in a timely manner, our sales will decrease.
Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The retail apparel business fluctuates according to changes in consumer preferences, which are dictated, in part, by fashion and season. To the extent we misjudge the market for our merchandise or the products suitable for our market, our sales will be adversely affected. Merchandise misjudgments could have a material adverse effect on our brand image.
Fluctuations in the apparel retail market affect the level of inventory owned by apparel retailers since merchandise must be manufactured in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the retail apparel business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we build up our inventory levels. As a result, we will be vulnerable to demand pricing shifts, suboptimal selection and timing of merchandise production. If sales do not meet expectations, excess inventory may lower planned margins.
Elimination or scaling back of U.S. import protections would weaken an important barrier to the entry of foreign competitors who produce their merchandise in lower labor cost locations. This could place us at a disadvantage to those competitors.
Our products are subject to foreign competition. Foreign producers of apparelcompetitors often have significant labor cost advantages, which can enable them to sell their products at relatively lower prices. However, foreign competitors have faced significant U.S. government import restrictions in the form of tariffs and quotas. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain, subject to political considerations, and is therefore unpredictable. Given the number of foreign low cost producers, the substantial elimination or scaling back of the import protections that protect domestic apparel producers such as American Apparel could have a material adverse effect on our business, and the financial condition and results of operation.
Because we utilize foreign suppliers and sell into foreign markets, we are subject to numerous risks associated with international business that could increase our costs or disrupt the supply of our products, resulting in a negative impact on our business and financial condition.
Our international operations subject us to risks, including:
economic and political instability;
restrictive actions by foreign governments;
greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights;
changes in import duties or import or export restrictions;
fluctuations in currency exchange rates, which could negatively affect profit margins;
timely shipping of product;
complications complying with the laws and policies of the United States affecting the exportation of goods, including duties, quotas, and taxes; and
complications in complying with trade and foreign tax laws.
These and other factors beyond our control could disrupt the supply of our products, influence the ability of our suppliers to export our products cost-effectively or at all, inhibit our suppliers' ability to procure certain materials and increase our expenses, any of which could harm our business, financial condition and results of operations.
We rely heavily on immigrant labor, and changes in immigration laws or enforcement actions or investigations under such laws could significantly adversely affect our labor force, manufacturing capabilities, operations and financial results.
We rely heavily on immigrant labor. Adverse changes to existing laws and regulations applicable to employment of immigrants, enforcement requirements or practices under those laws and regulations, and inspections or investigations by immigration authorities or the prospects or rumors of any of the foregoing, even if no violations exist, could negatively impact the availability and cost of personnel and labor to us. As a result, we could experience very substantial turnover of employees on short or no notice, which could result in manufacturing and other delays. We may also have difficulty attracting or hiring
new employees in a timely manner, resulting in further delays. These delays could materially adversely affect our revenues and costs and our ability to compete. If we are not able to continue to attract and retain sufficient employees, our manufacturing capabilities, operations and financial results would be adversely affected.
We are subject to customs, advertising, consumer protection, zoning and occupancy and labor and employment laws that could require us to modify our current business practices and incur increased costs.
We are subject to numerous regulations, including customs, truth-in-advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and warehouse facilities. We also are subject to numerous federal and state labor laws, such as minimum wage laws and other laws relating to employee benefits. If these regulations were to change or were violated by our management, employees, suppliers, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefits costs, which could adversely affect our profitability. We are currently defending five wage and hour suits. Should these matters be decided against us, we could incur substantial liability, experience an increase in similar suits, and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, and any views we form as to the viability of these claims or the financial exposure in which they could result may change. No assurance can be made that these matters will not result in material financial exposure, which together with the potential for similar suits and reputational harm, could have a material adverse effect upon our financial condition and results of operations. See the section entitled “Item 3. Legal Proceedings” for a more detailed discussion of our pending litigation.
Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business.
Current environmental laws, or laws enacted in the future, may harm our business.
We are subject to federal, state and local laws, regulations and ordinances that govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes). We are also subject to laws, regulations and ordinances that impose liability for the costs of clean up or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. Certain of our operations routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. Our product design and procurement operations must comply with new and future requirements relating to the materials composition of our products. If we fail to comply with the rules and regulations regarding the use and sale of such regulated substances, we could be subject to liability. The costs and timing of costs under environmental laws are difficult to predict.
As is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties or any associated offsite disposal locations, or if contamination from prior activities is discovered at any of our properties, we may be held liable. The amount of such liability could be material.
Litigation exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations.
We are subject to regulatory inquiries, investigations, claims and suits. We are currently defending a consolidated putative shareholder class action, two consolidated shareholder derivative actions proceeding in federal and state court, respectively, five wage and hour suits, and numerous employment related claims and suits. In the event one or more of these matters are decided against us, we may incur substantial liability, experience an increase in similar suits or suffer reputational harm. We are unable to predict the financial outcome that could result from these matters at this time and any views we form as to the viability of these claims or the financial exposure in which they could result could change from time to time as the matters proceed through their course, as facts are established and various judicial determinations are made. No assurance can be made that these matters will not result in material financial exposure, which together with the potential for similar suits and reputational harm, could have a material adverse effect upon our financial condition and results of operations. See the section entitled “Item 3. Legal Proceedings” for a more detailed discussion of American Apparel's pending litigation.
We are currently being audited by government tax agencies regarding our operating activities in previous periods which may result in an assessment of a material amount, the payment of which may adversely impact our financial conditions and operations.
As of December 31, 2013, we are being audited by Government agencies in various jurisdictions in regards to sales, VAT, income, and other taxes and customs duties for certain previous years. In connection with one such audit, the German customs authority has issued retroactive assessments on our imports totaling €3,634 or $5,003 at the December 31, 2013 exchange rates. Although we believe that we properly assess and remit all required sales, VAT, income, and other taxes and customs duties in Germany and other applicable jurisdictions, no assurance can be made that these matters will not have a material adverse effect on our financial condition and results of operations. In particular, disruptions in our operations in Germany as a result of customs enforcement actions or otherwise could have a material adverse effect on our E.U. business and operations.Item 1B. Unresolved Staff Comments
Third party failure to deliver merchandise to stores and customers could result in lost sales or reduced demand for our merchandise.None.
The efficient operation of our stores and wholesale business depends on the timely receipt of merchandise from our distribution centers. Independent third party transportation companies deliver a substantial portion of our merchandise to our stores. These shippers may not continue to ship our products at current pricing or terms. These shippers may employ personnel represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees or contractors of these third parties could delay the timely receipt of merchandise, which could result in canceled sales, a loss of loyalty to our brand and excess inventory. There can be no assurance that such stoppages or disruptions will not occur in the future. Any failure by these third parties to respond adequately to our distribution needs would disrupt our operations and could have a material adverse effect on our financial condition and results of operations.
Timely receipt of merchandise by our stores and our customers may also be affected by factors such as inclement weather, natural disasters and acts of terrorism. We may respond by increasing markdowns or initiating marketing promotions, which would decrease our gross profits and net income.
We have potentially adverse exposure to credit risks on our wholesale sales.
We are exposed to the risk of financial non-performance by our customers, primarily in our wholesale business. Sales to wholesale customers represented approximately 28% of our net sales for the year ended December 31, 2013. Our extension of credit involves considerable use of judgment and is based on an evaluation of each customer's financial condition and payment history. We monitor our credit risk exposure by periodically obtaining credit reports and updated financials of our customers. We maintain an allowance for doubtful accounts for potential credit losses based upon historical trends and other available information. However, delays in collecting or the inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our results of operations.
Item 2. Properties
We conduct our primary apparel manufacturing operations out of an 800,000 square-foot facility in the warehouse district of downtown Los Angeles, California. The following table sets forth the location and usepresents non-retail facilities. Each of each of American Apparel’s principal non-retailour domestic properties which are all leased each of which is used in connection with all of our operating segments, with the exception of oursegments. Our foreign offices
which are solely used solely in connection with our Canada and International segments, respectively:respectively.
|
| | |
Los Angeles, CaliforniaLocation | | Headquarters, Sewing, Cutting and WarehousingPurpose |
| Los Angeles, California | | Knitting FacilityHeadquarters, wholesale and web sales operations, hosiery knitting, cutting and sewing of garments and warehousing |
| Los Angeles, California | | Fabric knitting |
| Hawthorne, California | | Fabric Dyeingdyeing and Finishing Facilityfinishing |
| South Gate, California | | Cutting, Sewing, Garment Dyeingsewing, garment dyeing and Finishing Facilityfinishing |
| Garden Grove, California | | Cutting, Sewing, Knitting, Fabric Dyeingknitting, fabric dyeing and Finishing Facilityfinishing, cutting and sewing of garments |
| La Mirada, California | | Distribution Center |
| Montreal, Quebec | | Offices and warehousing |
| London, England | | Offices |
| Tokyo, Japan | | Offices |
| Seoul, South Korea | | Offices |
| Beijing, China | | Offices |
| Berlin, Germany | | Offices |
Düsseldorf, Germany
| | Offices |
All of our retail stores are leased, well maintained and in good operating condition. Our retail storeslease terms are typically leased for a term of five to ten years with renewal options for an additional five to ten years. Most of these leases provide for base rent as well as maintenance and common area charges, real estate taxes, and certain other expenses. These retail stores are well maintained, adequately meet our needs, and are being utilized for their intended purposes. Selling space of opened stores will sometimes changechanges due to store renovations that modify space utilization, use of staircases, the configuration of cash registers, and other factors. As well, a number of our store locations have undergone expansions in the past several years. Among our retail operations,December 31, 2014, we also operateoperated seven concession locations as of December 31, 2013.among our retail operations.
The following tables set forth American Apparel’spresent our existing retail stores by geographic region as of December 31, 20132014:
Domestic Locations (139)(136)
|
| | | | | |
| Arizona (2) | | | Florida (7) | | Massachusetts (3) |
| Scottsdale | | | Boca Raton | | Boston— |
| Tucson | | | Miami Beach— | | Back Bay |
| | | | Lincoln Road | | Newbury Street |
California (38)(36) | | | Sunset Drive | | Cambridge |
| Arcadia | Manhattan Beach | | Washington Ave. | | |
| Berkeley | Palo Alto | | Orlando | | |
Camarillo | Pasadena | | St. Augustine | | Michigan (3) |
| Claremont | Rancho Cucamonga | | WellingtonSt. Augustine | | Ann Arbor |
| Commerce | San Diego— | | Wellington | | East Lansing |
| Costa Mesa | Fashion Valley | | Georgia (2) | | Royal Oak |
| Gilroy | Hillcrest | | Atlanta—Georgia (3) | | |
| Huntington Beach | Pacific Beach | | Lenox MallAtlanta— | | Minnesota (2) |
| Irvine Spectrum | San Francisco— | | Little Five PointsLenox Mall | | Bloomington |
| Los Angeles— | China Gate | | Little Five Points | | Minneapolis |
| Beverly | Haight Ashbury | | Atlantic Station | | |
| Canoga Park | Haight AshburyUnion Street | | | | Missouri (1) |
| Downtown | Santa Barbara | | Hawaii (1) | | Kansas City |
| Echo Park | Union StreetSanta Clara | | Honolulu—Honolulu | | Missouri (1) |
| Factory Store | Santa BarbaraCruz | | Ala Moana | | Kansas City |
Hollywood | Santa Clara | | | | |
Little Tokyo | Santa Cruz | | Illinois (7) | | Nevada (3) |
Los FelizHollywood | Santa Monica— | | Chicago—Illinois (6) | | Las Vegas— |
MelroseLittle Tokyo | Main Street | | Chicago— | | Boca Park |
| Los Feliz | Third Street Promenade | | Belmont & Clark | | Boca ParkMiracle Mile |
RobertsonMelrose | Third Street PromenadeStudio City | | Gold Coast | | Miracle MilePremium Outlets |
| Westwood Village | Studio City | | Lincoln Park | | Premium Outlets |
West Hollywood | Venice | | State St. | | |
Malibu West Hollywood | Ventura | | Wicker Park | | New Jersey (4) |
| Malibu | | | Evanston | | Cherry Hill |
Colorado (2) | | | Schaumburg | | Edison |
Boulder
Colorado (2) | | | | | Hoboken |
DenverBoulder
| | | Louisiana (1) | | Paramus |
| Denver | | | New Orleans | | |
| | | | | |
| Connecticut (2) | | | Maryland (4) | | |
| New Haven | | | Maryland (4)Annapolis | | |
| South Norwalk | | | AnnapolisBaltimore | | |
| | | | BaltimoreBethesda | | |
| District of Columbia (2) | | | BethesdaSilver Spring | | |
| Georgetown | | | Silver Spring | | |
| Lincoln Square | | | | | |
| | | | | |
| | | | | |
| | | | | |
Domestic Locations (139)(136) (cont'd.)
|
| | | | | | |
New York (25)(24) | | Pennsylvania (4) | | Oregon (4) | | Washington (3) |
| Brooklyn— | | King of Prussia | | Eugene | | Seattle— |
| Bond Street | | Philadelphia— | | Portland— | | Capitol Hill |
| Carroll Gardens | | Sansom Common | | Hawthorne Blvd. | | Downtown Seattle |
| Court Street | | Walnut Street | | Stark Street | | University Way |
| Nassau Avenue | | Pittsburgh—Pittsburgh | | TigardBridgeport Road | | |
| Park Slope | | Shadyside | | | | |
| Williamsburg | | South Carolina (1) | | Wisconsin (2) | | |
| Central Valley | | South Carolina (1)Charleston | | Madison | | |
| Garden City | | Charleston | | Milwaukee | | |
| Manhattan— | | | | | | |
Bleecker Street | | Tennessee (2) | | | | |
| Chelsea | | Memphis | | | | |
| Columbia University | | Nashville | | | | |
| Columbus Circle | | | | | | |
| FIT | | Texas (7) | | | | |
| Flatiron | | Austin— | | | | |
| Gramercy Park | | Congress Ave | | | | |
| Harlem | | Guadalupe Street | | | | |
| Hell’s Kitchen | | Dallas— | | | | |
| Lower Broadway | | Mockingbird | | | | |
| Lower East Side | | NorthPark Center | | | | |
| Noho | | Houston | | | | |
| Soho | | Round Rock | | | | |
| Tribeca | | San Antonio—Antonio | | | | |
| Upper East Side | | La Cantera | | | | |
| Upper West Side | | Utah (1) | | | | |
| White Plains | | Salt Lake City | | | | |
| | | | | | | |
| North Carolina (1) | | UtahVermont (1) | | | | |
| Charlotte— | | Salt Lake CityBurlington | | | | |
| SouthPark Mall | | | | | | |
| | | VermontVirginia (1) | | | | |
| Ohio (3) | | BurlingtonRichmond | | | | |
| Cincinnati | | | | | | |
| Cleveland | | Virginia (1) | | | | |
| Columbus | | Richmond | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | |
Canada (32)(31)
|
| | | | | |
| Alberta (4) | | Ontario (12) | | Saskatchewan (1) | |
| Calgary— | | Kingston | | Saskatoon | |
| 17th Avenue | | London | | | |
| Market Mall | | Ottawa—Ottawa | | | |
| Edmonton— | | Rideau CentreThornhill | | | |
| 82nd Avenue | | ThornhillToronto— | | | |
| West Edmonton Mall | | Toronto— Bloor Street | | | |
| | | BloorQueen Street | | | |
| British Columbia (6) | | Queen StreetSherway Gardens | | | |
| Burnaby | | Sherway GardensYonge & Dundas | | | |
| Kelowna | | Yonge & DundasEglington | | | |
| Vancouver— | | Yonge & Eglington | | | |
Granville | | Yorkdale Shopping Centre | | | |
| Granville | | Vaughan | | | |
| South Granville | | VaughanWaterloo | | | |
| West 4th Street | | Waterloo | | | |
| Victoria | | Quebec (6) | | | |
| | | Quebec (7)Laval | | | |
| Manitoba (1) | | LavalMontreal— | | | |
| Winnipeg | | Montreal— Cours Mont-Royal | | | |
| | | Cours Mont-Royal Est | | | |
| Nova Scotia (1) | | Mont-Royal EstSt-Denis | | | |
| Halifax | | St-Denis | | | |
| | Ste-Catherine West | | | |
| | | Pointe-Claire | | | |
| | | Quebec— | | | |
| | Westmount | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
International Locations (77)(75)
|
| | | | | | |
Europe (57)(55) | | | | | | |
| | | | | | | |
| Austria (1) | | Germany (10)(9) | | United Kingdom (22)(21) | | Spain (1) |
| Vienna | | Berlin— | | Birmingham | | Barcelona |
| | | Bayreuther Strasse | | Brighton | | |
| Belgium (1) | | Münzstrasse | | Bristol | | Sweden (2) |
| Antwerp | | Düsseldorf | | Glasgow | | Stockholm— |
| | | Frankfurt | | Leeds | | Götgatan |
| France (12) | | Hamburg—Hamburg | | Liverpool | | Kungsgatan |
| Aix-en-Provence | | JungfernstiegKöln | | London— | | |
| Lyon | | SchanzenstrasseMunich | | Camden High Street | | Switzerland (2) |
| Paris— | | KölnOberhausen | | Carnaby Street | | Zurich— |
| Marais | | Munich—Stuttgart | | Covent Garden | | Josefstrasse |
| Vielle du Temple | | Sendlinger Strasse | | Kensington High Street | | Rennweg |
| Beaurepaire | | OberhausenIreland (1) | | King's Cross | | |
| Avenue Victor Hugo | | StuttgartDublin | | Oxford Street | | |
| Saint-Germain | | | | Portobello Road | | |
| Saint-Honore (2) | | Ireland (1)Italy (2) | | Selfridges | | |
| Galeries Lafayette | | DublinMilan | | Shoreditch | | |
| La Defense | | | | Stanstead | | |
Toulouse | | Italy (2)Rome | | Stratford | | |
| Toulouse | | Milan | | Westfield | | |
| | Rome | | Manchester (3) | | |
| | | | | NottinghamWestfield | | |
| | | Netherlands (3) | | Manchester— | | |
| | | Amsterdam— | | Manchester | | |
| | | Bijenkorf | | Picadilly | | |
| | | Noordermarkt | | Selfridges | | |
| | | Utrechtsestraat | | Nottingham | | |
| | | | | | |
| | | | | | | |
| Asia (12) | | | | Other International (8) | | |
| | | | | | | |
| China (3) | | South Korea (5) | | Israel (1) | | Australia (5) |
| Beijing— | | Busan | | Tel Aviv | | Adelaide |
| Nali Mall | | Seoul— | | | | Melbourne |
| PVG | | Chungdam | | Mexico (1 ) | | Myer Melbourne |
| Joy City | | Hong Dae | | Mexico City—City | | Myer Sydney |
| | | Kangnam | | Polanco | | Sydney |
| | | Myung-dong | | | | |
| Japan (4) | | | | Brazil (1) | | |
Osaka—Osaka | | | | São Paulo | | |
Shinsaibashi | | | | | | |
| Tokyo— | | | | | | |
| Daikanyama | | | | | | |
| Shibuya (2) | | | | | | |
| | | | | | |
Item 3. Legal Proceedings
We are, from time to time, subject to various claims and contingencies in the ordinary course of business including those related tothat arise from litigation, business transactions, employee-related matters, and taxes, and others. Whenor taxes. We establish reserves when we are aware ofbelieve a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable thatand are able to estimate its potential exposure. For a discussion of our reserving methods, see "Critical Accounting Estimates and Policies" in Part II, Item 7 and "Note 1 of Notes to Consolidated Financial Statements" in Item 8, Part II,.
For loss will result andcontingencies believed to be reasonably possible, we also disclose the amountnature of the loss can be reasonably estimated, we will recordcontingency and an estimate of the possible loss or range of loss, or a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. There is no assurancestatement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters will not materially and adversely affect our business, financial position, and results of operations or cash flows.
Individual Actions
On February 7, 2006, Sylvia Hsu, a former employee of American Apparel, filed a Charge of Discrimination with the Los Angeles District Office of the Equal Employment Opportunity Commission (“EEOC”) (Hsu v. American Apparel: Charge No. 480- 2006-00418), alleging that she was subjected to sexual harassment by a co-worker and constructively discharged as a result of the sexual harassment and a hostile working environment. On March 9, 2007, the EEOC expanded the scope of its investigation to other employees of American Apparel who may have been sexually harassed. On August 9, 2010, the EEOC issued a written determination finding that reasonable cause exists to believecould arise for which we discriminated against Ms. Hsu and women, as a class, on the basis of their female gender, by subjecting them to sexual harassment. No finding was made on the issue of Ms. Hsu's alleged constructive discharge. In August 2013 the parties entered into a Conciliation Agreement providing for an immaterial compensatory payment to Ms. Hsu and our agreement to comply with our Policy on Sexual Harassment and Sexual Discrimination, which Policy was reviewed by the EEOC, and take certain administrative measures relating thereto. The Conciliation Agreement remains in effect for three years.
On November 5, 2009, Guillermo Ruiz, a former employee of American Apparel, filed suit against us on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging we failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of our employees. The complaint further alleges that we failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit.
On June 21, 2010, Antonio Partida, a former employee of American Apparel, filed suit against us on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that we failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
On or about December 2, 2010, Emilie Truong, a former employee of American Apparel, filed suit against us on behalf of putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging we failed to timely provide final paychecks upon separation. Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices.
On or about February 9, 2011, Jessica Heupel, a former retail employee filed suit on behalf of putative classes of current and former non-exempt California employees (Jessica Heupel, individually and on behalf of all others similarly situated v. American Apparel Retail, Inc., Case No. 37-2011-00085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On or about September 9, 2011, Anthony Heupel, a former retail employee initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages in an amount in excess of $3,600, as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the
same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
We do not have insurance coverage or for the above matters. Each of the aforementioned wage and hour caseswhich insurance provides only partial coverage. These matters could have been proceeding in arbitration. All of these cases have been settleda material negative effect on an aggregate and class-wide basis for a payment by us in the total amount of $875, most of which will be paid to class members and to their attorneys. Certain class members have opted out of the settlement and so may proceed with individual claims. Also, the settlement is subject to and conditional upon approval of the arbitrator, and if the arbitrator approves, one or more of the California Superior Courts. There is no guarantee that such approvals will be obtained.
Additionally, we are currently engaged in other employment-related claims and other matters incidental to our business. We believe that all such claims against us are without merit or not material, and we intend to vigorously dispute the validity of the plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information at this time, we believe, but we cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect our business, financial position, results of operations, or cash flows. Should anyIn all cases, we vigorously defend ourselves unless a reasonable settlement appears appropriate.
For a discussion of theselegal matters, see "Note 18 of Notes to Consolidated Financial Statements" in Item 8, Part II, which is incorporated herein by reference.
There are no environmental proceedings arising under federal, state, or local laws or regulations to be decided against us, we could not only incur liability but also experience an increase in similar suits and suffer reputational harm.discussed.
Derivative Matters
Two shareholder derivative lawsuits (Case No. CV106576 GAF (JCx) and Case No. CV107518 RSWL (FFMx)) were filed in the United States District Court for the Central District of California which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal Derivative Action”). Plaintiffs in the Federal Derivative Action allege a cause of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) our alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. We do not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. Our status as a “Nominal Defendant” in the actions reflects the fact that the lawsuits are maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on our behalf. We filed a motion to dismiss the Federal Derivative Action which was granted with leave to amend on July 31, 2012. Plaintiffs did not amend the complaint and subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the Plaintiffs' motion to dismiss and entered judgment accordingly. On November 12, 2012, Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals where the case is currently pending.
Four shareholder derivative lawsuits (Case No. BC 443763, Case No. BC 443902, Case No. BC 445094, and Case No. BC 447890) were filed in fall of 2010 in the Superior Court of the State of California for the County of Los Angeles, which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action").
Three of the matters comprising the State Derivative Action allege causes of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011, the Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).
Both the Federal Derivative Action and State Derivative Actions are covered under our Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.
Other Proceedings
Four putative class action lawsuits, (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in the United States District Court for the Central District of California in the Fall of 2010 against American Apparel and certain of our officers and executives on behalf of American Apparel shareholders. On December 3, 2010, the four lawsuits were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal Securities Action”). The lead plaintiff filed a consolidated class action complaint on April 29, 2011 on behalf of shareholders who purchased our common stock between November 28, 2007 and August 17, 2010. The lead plaintiff alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in our press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of our internal and financial control policies and procedures; (ii) our employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on us. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper. We filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013. We filed a motion to dismiss the complaint on March 15, 2013. The hearing on the motion was held on June 3, 2013, at which time, the Court took the matter under submission. On August 8, 2013, the court issued its final order granting the motion to dismiss in regards to certain claims. Defendants answered the complaint's remaining claims on September 27, 2013. On November 6, 2013, the Court issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed Motion for Preliminary Approval of the settlement on December 16, 2013. The settlement, if approved, would result in a payment by our insurance carrier of $4,800. The Federal Securities Action is covered under our Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.
Should any of the above matters (i.e., the Federal Derivative Action, the State Derivative Action, or the Federal Securities Action) be decided against us in an amount that exceeds our insurance coverage, or if liability is imposed on grounds which fall outside the scope of our insurance coverage, we could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon our financial condition, results of operations, or cash flows.
The Company has previously disclosed an arbitration filed by the Company on February 17, 2011, related to cases filed in the Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the State of California for the County of Los Angeles (Case Nos. BC457920 and BC460331) against American Apparel, Dov Charney and certain members of the Board of Directors asserting claims of sexual harassment, assault and battery, impersonation through the internet, defamation and other related claims. The Company settled one of these cases with no monetary liability to the Company. In another case, the arbitrator ruled that both American Apparel and the plaintiff had established certain claims and damages against one another resulting in a net inconsequential amount awarded to the plaintiff. The Company is awaiting the arbitrator’s ruling on the outstanding attorney’s fees issue in this case. The Company cannot provide assurances that, the amount and ultimate liability, if any, with respect to the remaining actions will not materially affect the Company's business, financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
The principal market on which our common stock is traded is the NYSE MKT. Our common stock is traded under the symbol APP.
The following table sets forthpresents the range of high and low sales prices for our common stock and forprice per share on the periods indicated:NYSE MKT (symbol: APP) since January 2013.
| | | | Common Stock | Common Stock |
| | High | | Low | High | | Low |
| 2012 | | | | |
| 2014 | | | | |
| Fourth Quarter | $ | 1.61 |
| | $ | 0.83 |
| $ | 1.20 |
| | $ | 0.50 |
|
| Third Quarter | 1.70 |
| | 0.82 |
| 1.30 |
| | 0.72 |
|
| Second Quarter | 1.09 |
| | 0.75 |
| 1.00 |
| | 0.46 |
|
| First Quarter | 1.21 |
| | 0.63 |
| 1.45 |
| | 0.46 |
|
| 2013 | | | | | | |
| Fourth Quarter | $ | 1.52 |
| | $ | 1.01 |
| $ | 1.52 |
| | $ | 1.01 |
|
| Third Quarter | 2.09 |
| | 1.23 |
| 2.09 |
| | 1.23 |
|
| Second Quarter | 2.20 |
| | 1.76 |
| 2.20 |
| | 1.76 |
|
| First Quarter | 2.40 |
| | 1.00 |
| 2.40 |
| | 1.00 |
|
(b) Holders
OnAs of March 31, 201413, 2015, there were 1,2501,049 registered holders of record holders and approximately 9,036 beneficial holders of our common stock.
(c) Dividends
As a public company, we have not paid any cash dividends.dividends since the public offerings of our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, restrictions imposed by our debt agreements significantly restrict us from making dividends or distributions to stockholders.
(d) Authorization of Common Stock
On June 21, 2011March 13, 2015, the Company's stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number ofCompany had 230 million authorized shares of the Common Stock from 120,000 to 230,000common stock with par value of $0.0001 per share.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
See Note"Note 14 Share-Based Compensationof Notes to the consolidated financial statements includedConsolidated Financial Statements" in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.8.
(f) Recent Sales of Unregistered Securities
None.
Performance Graph
The following graph below compares the cumulative total return ofshareholder returns on our common stock from December 31, 2009 through December 31, 2013 with the cumulative total return ofon the companies comprising the Dow Jones Industrial Average, the Dow Jones U.S. Retail Index, and the Standard and Poor's 500 Composite Stock Price Index ("S&P500.&P 500 Index") over the last five years. The graph plots the growth in value of an initial investment ofassumes that $100 was invested on December 31, 2009 in each of our common stock, the Dow Jones Industrial Average, the Dow Jones U.S. Retail Index, and the S&P500 over the indicated time periods,&P 500 Index, assuming reinvestment of all dividends, if any, paid on the securities. We have not paid any cash dividends and, therefore, the cumulative
total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance.
|
| | | | | | | | | | | |
| Dates | American Apparel | | Dow Jones U.S. Retail | | Dow Jones Industrial | | S&P 500 |
| December 31, 2008 | 100.00 |
| | 100.00 |
| | 100.00 |
| | 100.00 |
|
| December 31, 2009 | 155.78 |
| | 127.75 |
| | 118.82 |
| | 123.45 |
|
| December 30, 2010 | 83.42 |
| | 147.91 |
| | 131.92 |
| | 139.24 |
|
| December 31, 2011 | 36.18 |
| | 156.29 |
| | 139.21 |
| | 139.23 |
|
| December 31, 2012 | 50.75 |
| | 188.34 |
| | 149.31 |
| | 157.90 |
|
| December 31, 2013 | 117.59 |
| | 255.28 |
| | 188.88 |
| | 204.63 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 |
| American Apparel | $ | 100 |
| | $ | 54 |
| | $ | 23 |
| | $ | 33 |
| | $ | 40 |
| | $ | 33 |
|
| Dow Jones U.S. Retail | 100 |
| | 116 |
| | 122 |
| | 147 |
| | 200 |
| | 228 |
|
| Dow Jones Industrial | 100 |
| | 111 |
| | 117 |
| | 126 |
| | 159 |
| | 171 |
|
| S&P 500 Index | 100 |
| | 113 |
| | 113 |
| | 128 |
| | 166 |
| | 185 |
|
Item 6. Selected Financial Data
The following selected historical financial data presented below under the heading “Consolidated Statement of Operations Data” and “Per Share Data” for the years ended December 31, 2013, 2012 and 2011 and the selected historical financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2013 and 2012 have beenare derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.statements. The selected historical financial data presented below under the heading “Consolidated Statement of Operations Data” and “Per Share Data” for the years ended December 31, 2010 and 2009 and the selected historical financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2011, 2010 and 2009 have been derived from, and are qualified by reference to, our audited consolidated financial statements which are not included in this Annual Report on Form 10-K.
The data set forth below should be read in conjunction with “Management’s"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and our audited consolidated financial statements and the related notes thereto includedcontained elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| | (In Thousands Except Per Share Data) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Net sales | $ | 633,941 |
| | $ | 617,310 |
| | $ | 547,336 |
| | $ | 532,989 |
| | $ | 558,775 |
|
| Gross profit | $ | 320,885 |
| | $ | 327,383 |
| | $ | 294,900 |
| | $ | 279,909 |
| | $ | 319,912 |
|
| (Loss) income from operations | $ | (29,295 | ) | | $ | 962 |
| | $ | (23,293 | ) | | $ | (50,053 | ) | | $ | 24,415 |
|
| Net (loss) income | $ | (106,298 | ) | | $ | (37,272 | ) | | $ | (39,314 | ) | | $ | (86,315 | ) | | $ | 1,112 |
|
| Per Share Data: | | | | | | | | | |
| Net (loss) earnings per common share - basic | $ | (0.96 | ) | | $ | (0.35 | ) | | $ | (0.42 | ) | | $ | (1.21 | ) | | $ | 0.02 |
|
| Net (loss) earnings per common share - diluted | $ | (0.96 | ) | | $ | (0.35 | ) | | $ | (0.42 | ) | | $ | (1.21 | ) | | $ | 0.01 |
|
| Weighted average number of common shares outstanding: | | | | | | | | | |
| Basic | 110,326 |
| | 105,980 |
| | 92,599 |
| | 71,626 |
| | 71,026 |
|
| Diluted | 110,326 |
| | 105,980 |
| | 92,599 |
| | 71,626 |
| | 76,864 |
|
| Consolidated Balance Sheets Data: | | | | | | | | | |
| Total assets | $ | 333,752 |
| | $ | 328,212 |
| | $ | 324,721 |
| | $ | 327,950 |
| | $ | 327,579 |
|
Working capital (1) | $ | 74,261 |
| | $ | 80,022 |
| | $ | 97,013 |
| | $ | 3,379 |
| | $ | 121,423 |
|
Total long-term debt less current maturities (2) | $ | 218,921 |
| | $ | 112,856 |
| | $ | 98,868 |
| | $ | 5,597 |
| | $ | 71,372 |
|
| Stockholders’ (deficit) equity | $ | (77,404 | ) | | $ | 22,084 |
| | $ | 48,130 |
| | $ | 75,024 |
| | $ | 157,341 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (in thousands, except per share data) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Net sales | $ | 608,891 |
| | $ | 633,941 |
| | $ | 617,310 |
| | $ | 547,336 |
| | $ | 532,989 |
|
| Gross profit | $ | 309,135 |
| | $ | 320,885 |
| | $ | 327,383 |
| | $ | 294,900 |
| | $ | 279,909 |
|
| (Loss) income from operations | $ | (27,583 | ) | | $ | (29,295 | ) | | $ | 962 |
| | $ | (23,293 | ) | | $ | (50,053 | ) |
| Net loss | $ | (68,817 | ) | | $ | (106,298 | ) | | $ | (37,272 | ) | | $ | (39,314 | ) | | $ | (86,315 | ) |
| Per Share Data: | | | | | | | | | |
| Net loss per common share - basic and diluted | $ | (0.43 | ) | | $ | (0.96 | ) | | $ | (0.35 | ) | | $ | (0.42 | ) | | $ | (1.21 | ) |
Weighted-average basic and diluted shares outstanding (a) | 158,844 |
| | 110,326 |
| | 105,980 |
| | 92,599 |
| | 71,626 |
|
| | | | | | | | | | |
| | December 31, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (in thousands) |
| Consolidated Balance Sheets Data: | | | | | | | | | |
| Inventories, net | $ | 147,578 |
| | $ | 169,378 |
| | $ | 174,229 |
| | $ | 185,764 |
| | $ | 178,052 |
|
| Total assets | $ | 294,389 |
| | $ | 333,752 |
| | $ | 328,212 |
| | $ | 324,721 |
| | $ | 327,950 |
|
Working capital (b) | $ | 55,955 |
| | $ | 74,261 |
| | $ | 80,022 |
| | $ | 97,013 |
| | $ | 3,379 |
|
Long-term debt, net of current portion (c) | $ | 219,370 |
| | $ | 218,921 |
| | $ | 112,856 |
| | $ | 98,868 |
| | $ | 5,597 |
|
| Stockholders' (deficit) equity | $ | (115,516 | ) | | $ | (77,404 | ) | | $ | 22,084 |
| | $ | 48,130 |
| | $ | 75,024 |
|
___________________________
(1)(a) The dilutive impact of incremental shares is excluded from loss position in accordance with U.S. generally accepted accounting principles ("GAAP").
(b) Excludes fair value of warrants of $19,239, $20,954, $17,241, $9,633, and $993$993 as of December 31, 2014, 2013,, 2012,, 2011 and 2010, respectively.
(2)(c) Includes capital leases.
Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with Part II, Item 6 “Selected"Item 6. Selected Financial Data”Data" and our audited consolidated financial statements and the related notes thereto included in Part II, Item 8 “Financial"Item 8. Financial Statements and Supplementary Data.”" In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ from these expectations as a result of factors including those described under Item 1A “Risk Factors”"Item 1A. Risk Factors" and “Special"Special Note Regarding Forward-Looking Statements”Statements" in Part I and elsewhere in this Annual Report on Form 10-K. In addition, all dollar and share amounts in this Form Item 7 are presented in thousands, except for per share items and unless otherwise specified.
OverviewOVERVIEW
A. General
We are a vertically integratedvertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel and accessories for women, men, children and babies. We are based in downtown Los Angeles, California. As of February 28, 2014, we had approximately 10,000 employees and operated 246 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China. We currentlyalso operate 12 e-commerce stores in seven languages that serve customers from 30 countries worldwide at www.americanapparel.com. In addition, American Apparel operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and the imprintable industry
We conductscreen printers. In 2003, we opened our primary apparel manufacturing operations out of an 800,000 square foot facilityfirst retail store in the warehouse district of downtown Los Angeles, California. The facility houses our executive offices, as well as cutting, sewingAs of March 13, 2015, we had approximately 10,000 employees and warehousing operations.operated 239 retail stores in 20 countries, including the U.S., Canada, the U.K., Australia, Austria, Belgium, Brazil, China, France, Germany, Ireland, Israel, Italy, Japan, Mexico, the Netherlands, South Korea Spain, Sweden, and Switzerland. We conduct knitting operationscurrently operate 13 e-commerce stores in Los Angeles and Garden Grove, California, which produce a majority of the fabric we use in our products. We also operate dye houseseight languages that currently provide dyeing and finishing services for nearly all of the raw fabric used in production. We operate a fabric dyeing and finishing facility in Hawthorne, California. We also operate a cutting, sewing and garment dyeing and finishing facility located in South Gate, California. We operate a fabric dyeing and finishing facility located in Garden Grove, California, which also includes cutting, sewing and knitting operations. Since 2013 we have conducted our warehousing and distribution operations out of La Mirada, California.serve customers from over 50 countries worldwide at www.americanapparel.com.
Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and to changing fashion trends and to closely monitor product quality. Our products are noted for their quality and fit, and together with our distinctive branding, these attributes have differentiated our products in the marketplace. “American Apparel®” is a registered trademark of American Apparel (USA), LLC.
We report the followinghave four operating segments:segments; U.S. Wholesale, U.S. Retail, Canada, and International. We believe this method of segment reporting reflects both the way our business segments are managed and the way the performance of each segment is evaluated. The U.S. Wholesale segment consists of our wholesale operations of undecorated apparel products sold to distributors and third party screen printers in the U.S. as well as our online consumer operationssales in the United States.U.S. The U.S. Retail segment consists of our retail store operations in the United States,U.S., which were comprised of 139136 retail stores as of December 31, 2013.2014. The Canada segment consists of ourincludes wholesale, retail wholesale and online consumer operations in Canada. As of December 31, 2013,2014, the retail operations in the Canada segment were comprised of 3231 retail stores. The International segment consists of ourincludes wholesale, retail, wholesale and online consumer operations outside of the United StatesU.S. and Canada. As of December 31, 2013,2014, the retail operations in the International segment comprised 7775 retail stores operating in 18 countries outside the following 18 countries: the United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Brazil, Mexico, Japan, South Korea,U.S. and China.Canada.
The results of the respective business segments exclude unallocated corporate expenses, which consist of our shared overhead costs. These costs are presented separately and generally include corporate costs such as human resources, legal, finance, information technology, accounting, and executive management.
The following table details,presents, by segment, the change in retail store count during the years ended December 31, 20132014, 20122013 and 20112012:
| | | | United States | | Canada | | International | | Total | U.S. Retail | | Canada | | International | | Total |
| Stores open as of December 31, 2010 | 157 |
| | 40 |
| | 76 |
| | 273 |
| |
| 2011 | | | | | | | | |
| 2014 | | | | | | | | |
| Open at December 31, 2013 | | 139 |
| | 32 |
| | 77 |
| | 248 |
|
| Opened | 1 |
| | — |
| | 4 |
| | 5 |
| 3 |
| | 0 |
| | 3 |
| | 6 |
|
| Closed | (15 | ) | | (3 | ) | | (11 | ) | | (29 | ) | (6 | ) | | (1 | ) | | (5 | ) | | (12 | ) |
| Stores open as of December 31, 2011 | 143 |
| | 37 |
| | 69 |
| | 249 |
| |
| 2012 | | | | | | | | |
| Open at December 31, 2014 | | 136 |
| | 31 |
| | 75 |
| | 242 |
|
| | | | | | | | | |
| 2013 | | | | | | | | |
| Open at December 31, 2012 | | 140 |
| | 35 |
| | 76 |
| | 251 |
|
| Opened | 1 |
| | — |
| | 9 |
| | 10 |
| 3 |
| | 0 |
| | 6 |
| | 9 |
|
| Closed | (4 | ) | | (2 | ) | | (2 | ) | | (8 | ) | (4 | ) | | (3 | ) | | (5 | ) | | (12 | ) |
| Stores open as of December 31, 2012 | 140 |
| | 35 |
| | 76 |
| | 251 |
| |
| 2013 | | | | | | | | |
| Open at December 31, 2013 | | 139 |
| | 32 |
| | 77 |
| | 248 |
|
| | | | | | | | | |
| 2012 | | | | | | | | |
| Open at December 31, 2011 | | 143 |
| | 37 |
| | 69 |
| | 249 |
|
| Opened | 3 |
| | — |
| | 6 |
| | 9 |
| 1 |
| | 0 |
| | 9 |
| | 10 |
|
| Closed | (4 | ) | | (3 | ) | | (5 | ) | | (12 | ) | (4 | ) | | (2 | ) | | (2 | ) | | (8 | ) |
| Stores open as of December 31, 2013 | 139 |
| | 32 |
| | 77 |
| | 248 |
| |
| Open at December 31, 2012 | | 140 |
| | 35 |
| | 76 |
| | 251 |
|
B. Comparable Store Sales
The table below shows the increase (decrease)change in comparable store sales for our retail and online stores, by quarter, for the years ended December 31, 2014, 2013,, 2012, and 20112012, and the number of retail stores included in the comparison at the end of each period. Comparable store sales are defined as the percentage change in sales for stores that have been open for more than twelve full months. Remodeled and expanded stores are excluded from the determination of comparable stores forduring the following twelve month periodmonths if the remodel or expansion results in a change of greater than 20% of selling square footage. Closed stores are excluded from the base of comparable stores following their last full month of operation.
In calculating constant currency amounts, we convert the results of our foreign operations both induring the current period and the prior year comparable period by using the weighted-average foreign exchange rate for the priorcurrent comparable period to achieve a consistent basis for comparison.
| | | | For the Quarter Ended | For the Quarter Ended |
| | March 31 | | June 30 | | September 30 | | December 31 | | Full year | March 31 | | June 30 | | September 30 | | December 31 | | Full Year |
2013 (1) | 8% | | 7% | | 2% | | (3)% | | 3% | |
2014 (a) | | (5)% | | (6)% | | (7)% | | (7)% | | (6)% |
| Number of Stores | 238 | | 237 | | 237 | | 235 | | 236 | | 233 | | 230 | | 229 | |
| 2012 | 14% | | 16% | | 20% | | 11% | | 15% | |
| | | |
2013 (a) | | 8% | | 7% | | 2% | | (3)% | | 3% |
| Number of Stores | 243 | | 244 | | 242 | | 238 | | 238 | | 237 | | 237 | | 235 | |
| 2011 | (5)% | | 1% | | 3% | | 8% | | 2% | |
| | | |
2012 (a) | | 14% | | 16% | | 20% | | 11% | | 15% |
| Number of Stores | 249 | | 248 | | 244 | | 241 | | 243 | | 244 | | 242 | | 238 | |
(1)______________________
(a) Comparable store sales results include the impact of online store sales and has been adjusted to exclude impact of extra leap-year day in 2012.
C. Executive Summary
Recent Developments
On December 16, 2014, the Board appointed Paula Schneider as CEO, effective January 5, 2015. This appointment followed the termination of Dov Charney, former President and CEO, for cause in accordance with the terms of his employment agreement. Scott Brubaker, who served as Interim CEO since September 29, 2014, continued in the post until Ms. Schneider joined us. Additionally, on September 29, 2014, the Board appointed Hassan Natha as CFO, and John Luttrell resigned as Interim CEO and CFO.
On July 7, 2014, we received a notice from Lion asserting an event of default and an acceleration of the maturity of the loans and other outstanding obligations under the Lion Loan Agreement as a result of the suspension of Dov Charney as CEO by the Board. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General. Standard General waived any default under the Standard General Loan Agreement that may have resulted or that might result from Mr. Charney not being the CEO.
On September 8, 2014, we and Standard General entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO would constitute an event of default.
On March 25, 2015, we entered into the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted us to borrow $15,000 under the Standard General Credit Agreement.
On March 25, 2015, one of our subsidiaries borrowed $15,000 under the Standard General Credit Agreement. The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020.
In connection with the Standstill and Support Agreement among us, Standard General and Mr. Charney, five directors including Mr. Charney resigned from the Board effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and us. In addition, Lion exercised its rights to designate two members to our Board, whose appointments were effective as of September 15, 2014 and January 13, 2015, respectively. On March 6, 2015, a member appointed by Lion resigned from the Board, and on March 24, 2015, the Board elected a member designated by Lion to fill that vacancy.
In 2012, German customs audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. The German customs imposed a substantially higher tariff rate than the original rate that we had paid on the imports, more than doubling the amount of the tariff that we would have to pay. The assessments of additional retaliatory duty originated from a trade dispute. Despite the ongoing appeals of the assessment, the German authorities demanded, and we paid, in connection with such assessment, $4,390 in the third quarter of 2014 and the
final balance of $85 in the fourth quarter of 2014. We recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in our consolidated statements of operations.
Executive Summary of Financial Results
Results of Operations
Net sales for the year ended December 31, 2013 increased $16,6312014 decreased $25,050, or 4.0%, or 2.7%, to $633,941from$617,310 reported for the year ended December 31, 20122013 due to higher sales at our U.S. Wholesale and U.S. Retail segments.
Net sales at our U.S. Wholesale segment increased by $15,896, or 8.6%, driven by higher sales order volume from existing and new customers. We improved our service levels through better inventory planning, which helped facilitate new account generation as well as grow business with our existing client roster. The launch of a new and expanded wholesale catalog and the addition of new products to our wholesale offering attracted a more diversified customer base. We continue our focus on increasing our customer base by targeting direct sales, particularly to third party screen printers. Online consumer net sales increased primarily as a result of the implementation of a new e-commerce platform in late 2012, which improved web store functionality, as well as a result of targeted online advertising and promotion efforts.
Netlower sales at our U.S. Retail, segment increased $6,125, or 3.1%, due to a 3% increase in comparable store sales as a result of continued strength in product offerings and targeted strategic promotions.
Net sales at our Canada and International segments, decreased $5,390, or 2.3%, due primarily to store closures and the negative impact of foreign currency fluctuations.
Gross margin for the year ended December 31, 2013 was 50.6% compared to 53.0% for the year ended December 31, 2012. The decreasepartly offset by an increase in the gross margin was primarily due to higher distribution costs and promotions associated with our retail operation and increased production costs associated with our manufacturing operation. See Changes in Supply Chain Operation below.U.S. Wholesale segment.
Operating expenses include selling, general and administrative costs, and retail store impairment charges, andGross profits as a percentage of sales was approximately 55.2% in 2013were 50.8% and 52.9% in 2012.50.6% for the year ended December 31, 2014 and 2013, respectively. Excluding the effects of depreciation, amortization, impairment charges and share-based compensation expenses between the two periods, operating expensessignificant events described below, gross profits as a percentage of net sales increased from 47.2%slightly to 49.5%.52.2% and 51.1% for the year ended December 31, 2014 and 2013, respectively. The increase was primarily attributablemainly due to incrementala reduction in freight costs associated with the completion of our transition to the La Mirada distribution center in late 2013.
Operating expenses for the year ended December 31, 2014 decreased $14,660, or 4.2%, from the year ended December 31, 2013. Excluding the effects of the significant events discussed below, operating expenses for the year ended December 31, 2014 decreased $27,616 from the year ended December 31, 2013. The decrease was primarily due to lower payroll from our cost reduction efforts and reduced expenditures on advertising and promotional activities.
Loss from operations was $27,583 for the year ended December 31, 2014 as compared to $29,295 for the year ended December 31, 2013. Excluding the effects of the significant events discussed below, our operating results for the year ended December 31, 2014 would have been an income from operations of $6,838 as compared with a loss from operations of $13,482 for the year ended December 31, 2013. Lower operating expenses as discussed above were offset by lower sales volume and higher retail store impairments.
Net loss for the year ended December 31, 2014 was $68,817 as compared to $106,298 for the year ended December 31, 2013. The improvement was mainly due to the $1,712 reduction in loss from operations due to the significant events discussed below, the change of $5,428 in fair value of warrants between periods, and the $32,101 loss on the extinguishment of debt in 2013. See Results of Operations for further details.
Cash used in operating activities for the year ended December 31, 2014 was $5,212 compared to $12,723 for the year ended December 31, 2013 from the corresponding period in 2013. The decrease was mainly due to decreased inventory levels and improved operating income excluding certain significant costs discussed below. The decrease was partially offset by an increase in interest payments and payments related to the significant costs.
Significant Events
The table below summarizes the impact to our earnings of certain costs which we consider to be significant and presents gross profit, operating expenses, and income from operations on an as-adjusted basis, together with the reconciliation to the mostly directly comparable GAAP measure:
|
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | % of Net Sales | | 2013 | | % of Net Sales |
| Gross profit | $ | 309,135 |
| | 50.8 | % | | $ | 320,885 |
| | 50.6 | % |
| Changes to supply chain operations | 0 |
| | | | 3,027 |
| | |
| Additional inventory reserves | 4,525 |
| | | | 0 |
| | |
| Customs settlements and contingencies | 4,154 |
| | | | 0 |
| | |
| Gross profit - adjusted (Non-GAAP) | $ | 317,814 |
| | 52.2 | % | | $ | 323,912 |
| | 51.1 | % |
| | | | | | | | |
| Operating expenses | $ | 333,980 |
| | 54.9 | % | | $ | 348,640 |
| | 55.0 | % |
| Changes to supply chain operations | 0 |
| | | | (11,847 | ) | | |
| Customs settlements and contingencies | (8,341 | ) | | | | 0 |
| | |
| Internal investigation | (10,376 | ) | | | | 0 |
| | |
| Employment settlements and severance | (7,025 | ) | | | | (939 | ) | | |
| Operating expenses - adjusted (Non-GAAP) | $ | 308,238 |
| | 50.6 | % | | $ | 335,854 |
| | 53.0 | % |
| | | | | | | | |
| Loss from operations | $ | (27,583 | ) | | (4.5 | )% | | $ | (29,295 | ) | | (4.6 | )% |
| Changes to supply chain operations | 0 |
| | | | 14,874 |
| | |
| Additional inventory reserves | 4,525 |
| | | | 0 |
| | |
| Customs settlements and contingencies | 12,495 |
| | | | 0 |
| | |
| Internal investigation | 10,376 |
| | | | 0 |
| | |
| Employment settlements and severance | 7,025 |
| | | | 939 |
| | |
| Income (loss) from operations - adjusted (Non-GAAP) | $ | 6,838 |
| | 1.1 | % | | $ | (13,482 | ) | | (2.1 | )% |
Changes to Supply Chain Operations - In 2013, the transition to our new distribution center in La Mirada, California. See ChangesCalifornia resulted in Supply Chain Operation below.
Loss from operations was $29,295 for the year ended December 31, 2013 as compared to income from operations of $962 for the year ended December 31, 2012. Higher sales volume was offset by lower gross margins and an increase in our operating expenses as discussed above.
Net loss for the year ended December 31, 2013 was $106,298 as compared to $37,272 for the year ended December 31, 2012 primarily as a result of a loss on extinguishment of debt related to our April 2013 refinancing and addedsignificant incremental costs associated with our distribution center. For the year ended December 31, 2013, we recognized a loss on extinguishment of debt of $32,101 related to our April debt refinancing. For the year ended December 31, 2012, we recognized a gain on extinguishment of debt of $11,588(primarily labor). See Results of Operations for further details.
Changes in Supply Chain Operation
The transition to our new distribution center in La Mirada, California had a significant negative impact on our earnings and cash flow in 2013. We incurred incremental distribution costs associated with these transition activities and recorded additional cost of sales of approximately $3,027 and selling expenses of approximately $11,847 in our statement of operations for the year ended December 31, 2013. The issues related tosurrounding the transition primarily relaterelated to improper system design and integration and inadequate training and staffing. These issues caused processing inefficiencies that required us to employ additional staffstaffing in order to meet customer demand. In addition, although we are unable to quantify the impact, we believe the disruption caused by the cut-over to the new distribution center had a negative impact on sales. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced.
Liquidity Trends
We generate cash primarily throughAdditional inventory reserves - In late 2014, new management undertook a strategic shift to change its inventory profile and actively reduce inventory levels to improve store merchandising, working capital and liquidity. As a result, we implemented an initiative to accelerate the sale of slow-moving inventory through our retail and online sales channels, as well as through certain off-price channels. As part of this process, management conducted a style-by-style review of inventory and identified certain slow-moving, second quality finished goods and raw materials inventories that required additional reserves as a result of the decision to accelerate sales of those items. Based on our analysis of the quantities on hand as well as the estimated recovery on these items, we significantly increased our excess and obsolescence reserve by $4,525 through a charge against cost of sales in our consolidated statements of operations.
Customs settlements and contingencies - In 2012, German authorities audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. Despite ongoing appeals of the assessment, the German authorities demanded, and we paid, the outstanding balance of approximately $4,500 in the latter half of 2014. We recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in our consolidated statements of operations. Additionally, during the fourth quarter of 2014, we wrote off approximately $3,300 in duty receivables to cost of sales in our consolidated statements of operations. These duty receivables related to changes in transfer costs for products manufactured by ussold to our European subsidiaries. We are also subject to, and have recorded charges related to, customs and similar audit settlements and contingencies in other jurisdictions.
Internal Investigation - On June 18, 2014, the Board voted to replace Mr. Charney as Chairman of the Board, suspended him as our President and CEO and notified him of its intent to terminate his employment for cause. In connection with the Standstill and Support Agreement, the Board formed the Internal Investigation which ultimately concluded with his termination for cause on December 16, 2014. The suspension, internal investigation, and termination have resulted in substantial legal and consulting fees.
Employment Settlements and Severance - In 2011, an industrial accident at our retail storesfacility in Orange County, California resulted in a fatality to one of our employees, and through our wholesale operations. Primary usesin accordance with law, a mandatory criminal investigation was initiated. On August 19, 2014, a settlement of cash are forall claims related to the purchase of raw materials, payroll for our manufacturing and retail employees, retail store operating expenses and rent for retail stores.
As of December 31, 2013, we had approximately $8,676 in cash and $6,268 of availability for additional borrowings under our asset-backed revolving credit facility with Capital One Business Credit Corp. ("Capital One" and such facility,criminal investigation, pursuant to which the "Capital One Credit Facility") and our credit agreement with Bank of Montreal ("the Bank of Montreal Credit Agreement"). Additionally, we had $43,526 outstanding on a $50,000 asset-backed revolving credit facility under our Capital One Credit Facility and $443Company paid $1,000, was approved
outstanding on a C$5,000 (Canadian dollars) revolving credit facility underby the Bank of Montreal Credit Agreement, which was reduced to C$2,000 (Canadian dollars) effective February 28, 2014. Amounts outstanding under the Bank of Montreal Credit Agreement were repaid, and on March 31, 2014 expired by its terms. See Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt and Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
As of February 28, 2014, we had approximately $4,878California Superior Court in cash and $3,299 of availability for additional borrowings under the Capital One Credit Facility and Bank of Montreal Credit Agreement.
On April 4, 2013, we closed a private offering of $206,000 aggregate principal amount of our 13% Senior Secured Notes (the "Notes") due April 15, 2020 at 97% of par and also entered into a new $35,000 asset-backed revolving credit facility with Capital One maturing on April 4, 2018, subject to a January 15, 2018 maturity under certain circumstances. Subsequently, on July 5, 2013, we entered into an amendment to the credit agreement governing our credit facility with Capital One, pursuant to which the total commitment under the credit facility was raised to $50,000. Interest on the Notes approximating $13,500 per payment period (in 2014), is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013. We used the net proceeds from the offering of the notes, together with borrowings under the new credit facility to repay and terminate our credit agreement with Crystal Financial LLC ("Crystal") and our loan agreement with Lion. The notes and the new credit facility are our senior secured obligations and are guaranteed, on a senior secured basis, by our domestic restricted subsidiaries, subject to some exceptions. See Notes 7 and 8 to our consolidated financial statements under Part II, Item 8.
During the third quarter of 2013, we determined it was probable that a special interest trigger event under the indenture governing the Notes would occur as of December 31, 2013 and accrued interest on the Notes at 15% retroactive to April 4, 2013, representing an additional 2% interest, which additional interest is payable in kind until April 15, 2018 and in cash on subsequent interest dates. We recorded $3,044 in additional interest expense related to the special interest trigger event for the year ended December 31, 2013. We will pay in-kind the additional 2% interest retroactive to the issue date of the Notes on the next interest payment date, April 15, 2014.
Under the Capital One Credit Facility, we were in violation of certain covenants for the twelve consecutive fiscal months ended September 30, 2013 and December 31, 2013, and we anticipated a violation for the twelve months ended March 31, 2014.
On November 14, 2013, we entered into a third amendment to the Capital One Credit Facility, which among other things, waived the obligation to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, we agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at our option) and limitations on amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certain amendments to the borrowing base calculation.Orange County. In addition, we paidhad previously disclosed employment-related claims and experienced unusually high employee severance costs during 2014. See Note 15 and 18 of Notes to Consolidated Financial Statements in Item 8.
Management's Plan
Throughout 2014 and into early 2015, we have brought on a waiver feenew board of $75.
On March 25, 2014, we entered into a fifth amendmentdirectors and hired on new senior management, including our CEO, CFO and General Counsel, as well as other additions to the Capital One Credit Facility which, effective upon its receiptmanagement team. Together, our new board of at least $25,000 of net proceeds fromdirectors and new management team are focused on implementing a financing priorturnaround strategy and enhancing our corporate governance policies and practices. We have started implementing additional operational and financial processes and disciplines to April 15, 2014, among other things: waives the obligationimprove liquidity and profitability. To that end, we have added new members to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; resets for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payable under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at our option); and increases the fees payable upon early termination.
On May 22, 2013 we entered into a loan agreement with Lion (the “Lion Loan Agreement”) in a principal amount of $4,500. On November 29, 2013, the Lion Loan Agreement was amended to increase the amount we borrowed by $5,000 and to make certain other technical amendments. The term loans under the Lion Loan Agreement mature on October 4, 2018 and bear interest at an initial interest rate of 18% per annum, which interest rate increased to 20% per annum due to the occurrence of a special interest trigger event under our Notes. Interest under the loan agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind.
On March 31, 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of approximately $28,500. As a result of this offering, our common stock issued and outstanding were 175,109 and 173,377 shares. Additionally, our underwriters have a 30 day option to acquire up to an additional 8,500 shares of our common stock at $0.50 per share.
Management Plan
We continue to develop initiatives intended to either increase sales, reduce costs or improve liquidity. In the fourth quarter of 2013 and continuing into January of 2014, significant reductions were made in payroll and related costs associated with
manufacturing and administrative overheads. We also instituted a programexecutive team in the first quarterareas of 2014 to limit capital expenditures.planning and forecasting, operations, marketing and e-commerce. Additionally, we intend to continue to drive productivity improvements from our new distribution center, further reduce inventories,inventory, reduce store labor costs, and evaluate further consolidation ofconsolidate our administrative and manufacturing functions. EffortsWe have also added members to identify additional ways to reduce costsour legal and improve productivity are ongoing.
Somehuman resources departments and have introduced a new code of our key initiatives in 2013 include:
Completed RFID implementation – From 2010 through 2013,ethics which we enhanced our stores by installing sales conversion tracking device and radio frequency identification (RFID) tracking systems. As of the end of 2013, we completed the enhancement of our stores by installing sales conversion tracking device and radio frequency identification (RFID) tracking systems atask all of our stores worldwide.new and current employees to read. We believe that these systems will enhance sales through improvements in stock positionsa strong operational and replenishment activities.
New e-commerce platform – During the third quarter of 2012 we implementedfinancial discipline, along with a new online store platform for our U.S. online stores that resulted in functional improvements to our website and fulfillment processes and will allow us to tailor the look and feel of the online store to enhance the customer online shopping experience. The new store platform will also enable faster deployment of online stores to new international regions. As of the end of 2013, we have implemented this system for our Canada, United Kingdom, Europe (Euro zone countries), Australia, Hong Kong and Singapore online stores. We intend to implement this system to our remaining online stores by the middle of 2014. The new system offers a complete e-commerce software platform that speeds response times and enables us to deliver a personalized customer buying experience and we believe that these improvements will contribute to our continued financial growth as our website has the potential to not only increase online sales but also in-store sales.
In conjunction with the implementation of the Oracle ATG Web Commerce application discussed above, we replaced our existing payment processing system with new electronic payment services from CyberSource. In addition, we implemented a payment fraud detection solution. We intend to complete the upgraderobust corporate governance structure, is an important element of our payment processing system by the middle of 2014.
In addition to completing the implementation of the Oracle ATG Web Commerce application for our retail online stores, we intent to roll-out a new business-to-business online platform for our wholesale channel in 2014. The new system will improve distributors' ability to place sales order and will be mobile optimized, which we believe will enhance the shopping experience for our distributors.
During 2012 and 2013 we successfully completed the virtualization of over 300 servers, including all our key servers. We plan to complete the virtualization of our servers and move our data center to an off-site location during 2014. We believe that this not only maximizes our server resources but will also enhance system performance and enable faster uptime in a disaster recovery situation.
New distribution center - In June 2012 we entered into a new operating lease agreement for a new distribution center located in La Mirada, California and fully transitioned our distribution operations into this new facility during 2013. Related to these efforts, we installed the High Jump warehouse management system for all distribution activities. Although we incurred significant transition costs and implementation delays associated with this transition, we believe that the new distribution center will contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales as it offers an improved distribution platform to scale both retail and wholesale sales channels. The transition to the new center was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced.long-term business strategy.
Although we have made significant improvementsprogress under this plan,these programs, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Our cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. Accordingly, there can be no assurance that furtherour planned improvementimprovements will be successful.
D. Critical Accounting Estimates and Policies
The preparation of our consolidated financial statements requires judgment and estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amount of revenues and expenses during the reporting period.
In general, estimates are based on historical experience, information from third party professionals and various other sources, and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions. Our management considers an accounting estimate to be critical if:
•it requires assumptions to be made that were uncertain at the time the estimate was made; and
•changes in the estimate, or the use of different estimating methods that could have been selected, could have a material
impact on our consolidated results of operations or financial condition.
We consider our most critical accounting policies and estimates to include:
•revenue recognition;
•inventory valuation and obsolescence;
•valuation and recoverability of long-lived assets, including the values assigned to goodwill, intangible assets, and property
and equipment;
•fair value calculations including derivative liabilities;
•contingencies, including accruals for the outcome of current litigation and assessments and self-insurance
•income taxes, including uncertain income tax positions and recoverability of deferred income taxes and any
limitations as to net operating losses.
Complete descriptions of our significant accounting policies are outlined in Note 2 of Notes to Consolidated Financial Statements in Item 8.
RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 20132014 compared to Year Ended December 31, 20122013
(Amounts in thousands)
| | | | For the Years Ended December 31, | Year Ended December 31, |
| | 2013 | | % of net sales | | 2012 | | % of net sales | 2014 | | % of net sales | | 2013 | | % of net sales |
| U.S. Wholesale | $ | 201,251 |
| | 31.7 | % | | $ | 185,355 |
| | 29.6 | % | $ | 208,969 |
| | 34.3 | % | | $ | 201,251 |
| | 31.8 | % |
| U.S. Retail | 205,011 |
| | 32.3 | % | | 198,886 |
| | 32.2 | % | 191,442 |
| | 31.4 | % | | 205,011 |
| | 32.3 | % |
| Canada | 60,134 |
| | 9.5 | % | | 63,669 |
| | 10.3 | % | 51,544 |
| | 8.5 | % | | 60,134 |
| | 9.5 | % |
| International | 167,545 |
| | 26.4 | % | | 169,400 |
| | 27.9 | % | 156,936 |
| | 25.8 | % | | 167,545 |
| | 26.4 | % |
| Total net sales | 633,941 |
| | 100.0 | % | | 617,310 |
| | 100.0 | % | 608,891 |
| | 100.0 | % | | 633,941 |
| | 100.0 | % |
| Cost of sales | 313,056 |
| | 49.4 | % | | 289,927 |
| | 47.0 | % | 299,756 |
| | 49.2 | % | | 313,056 |
| | 49.4 | % |
| Gross profit | 320,885 |
| | 50.6 | % | | 327,383 |
| | 53.0 | % | 309,135 |
| | 50.8 | % | | 320,885 |
| | 50.6 | % |
| | | | | | | | | |
| Selling expenses | 241,683 |
| | 38.1 | % | | 227,447 |
| | 36.8 | % | |
| Selling and distribution expenses | | 212,557 |
| | 34.9 | % | | 241,683 |
| | 38.1 | % |
| General and administrative expenses | 106,957 |
| | 16.9 | % | | 97,327 |
| | 15.8 | % | 121,423 |
| | 19.9 | % | | 106,957 |
| | 16.9 | % |
| Retail store impairment | 1,540 |
| | 0.2 | % | | 1,647 |
| | 0.3 | % | 2,738 |
| | 0.4 | % | | 1,540 |
| | 0.2 | % |
| (Loss) income from operations | (29,295 | ) | | (4.6 | )% | | 962 |
| | 0.2 | % | |
| Loss from operations | | (27,583 | ) | | (4.5 | )% | | (29,295 | ) | | (4.6 | )% |
| | | | | | | | | | | | | | | |
| Interest expense | 39,286 |
| |
| | 41,559 |
| | | 39,853 |
| | | | 39,286 |
| | |
| Foreign currency transaction loss | 1 |
| |
| | 120 |
| | | |
| Unrealized loss on change in fair value of warrants | 3,713 |
| |
| | 4,126 |
| | | |
| Loss (gain) on extinguishment of debt | 32,101 |
| |
| | (11,588 | ) | | | |
| Other expense | 131 |
| |
| | 204 |
| | | |
Foreign currency transaction loss (a) | | 1,479 |
| | | | 1 |
| | |
Unrealized (gain) loss on change in fair value of warrants (b) | | (1,715 | ) | | | | 3,713 |
| | |
| (Gain) loss on extinguishment of debt | | (171 | ) | | | | 32,101 |
| | |
| Other (income) expense | | (371 | ) | | | | 131 |
| | |
| Loss before income tax | (104,527 | ) | |
| | (33,459 | ) | | | (66,658 | ) | | | | (104,527 | ) | | |
| Income tax provision | 1,771 |
| |
| | 3,813 |
| | | 2,159 |
| | | | 1,771 |
| | |
| Net loss | $ | (106,298 | ) | |
| | $ | (37,272 | ) | | | $ | (68,817 | ) | | | | $ | (106,298 | ) | | |
______________________
(a) Related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries.
(b) Mark-to-market adjustments associated with our warrants.
(1) U.S. Wholesale
U.S. Wholesale: TotalWholesale net sales for the U.S. Wholesale segmentyear ended December 31, 2014, excluding online consumer net sales, increased $15,896by $8,113 or 5.1%, or 8.6%,from the year ended December 31, 2013 mainly due to $201,251a significant new distributor that we added during the second quarter of 2014. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third-party screen printers. Online consumer net sales for the year ended December 31, 2014 decreased $395, or 1.0%, from the year ended December 31, 2013 mainly due to lower sales order volume.We continue our focus on targeted online advertising and promotional efforts.
(2) U.S. Retail
U.S. Retail net sales for the year ended December 31, 2014 decreased $13,569, or 6.6%, from the year ended December 31, 2013 mainly due to a decrease of approximately $14,000 in comparable store sales as a result of lower store foot traffic. Net sales decreased approximately $4,800 due to the closure of six stores in 2014, offset by an increase of approximately $1,100 from two new stores added since the beginning of January 2013.
(3) Canada
Canada net sales for the year ended December 31, 2014 decreased $8,590, or 14.3%, from the year ended December 31, 2013 mainly due to approximately $4,900 in lower sales, primarily in the retail and wholesale channels, and the unfavorable impact of foreign currency exchange rate changes of approximately $3,700.
Retail net sales for the year ended December 31, 2014 decreased $7,076, or 15.7%, from the year ended December 31, 2013 due to $4,300 lower sales resulting from the closure of one retail store and approximately $1,700 from lower comparable store sales due to lower store foot traffic. Additionally, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $2,800.
Wholesale net sales for the year ended December 31, 2014 decreased $1,868, or 15.4%, from the year ended December 31, 2013. The decrease was largely due to lower sales orders resulting from a tightening focus on higher margin customers and lingering effects of order fulfillment delays associated with transition issues at the La Mirada distribution center. In addition, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $700.
Online consumer net sales for the year ended December 31, 2014 increased $354, or 12.3%, from the year ended December 31, 2013 mainly due to email advertising campaign, as well as improvements to the online store rolled out in the second half of 2013. This increase in sales was partially offset by the impact of foreign currency exchange rate changes of approximately $200.
(4) International
International net sales for the year ended December 31, 2014 decreased $10,609, or 6.3%, from the year ended December 31, 2013 due to approximately $10,500 lower sales in all three sales channels and the unfavorable impact of foreign currency exchange rate changes of approximately $100.
Retail net sales for the year ended December 31, 2014 decreased $10,404, or 7.4%, from the year ended December 31, 2013. The decrease was due to lower comparable store sales of approximately $10,500 and lower sales of approximately $1,400 for the closure of five retail stores in 2014. The decrease was offset by approximately $200 higher sales due to seven new stores added since the beginning of January 2013 and the unfavorable impact of foreign currency exchange rate changes of approximately $400.
Wholesale net sales for the year ended December 31, 2014 were flat as compared to the year ended December 31, 2013. The favorable impact of foreign currency exchange rate changes was approximately $100.
Online consumer net sales for the year ended December 31, 2014 decreased $154, or 0.9%, from the year ended December 31, 2013 mainly due to lower sales order volume in Japan and Continental Europe, offset by higher sales order volume in Korea and the favorable impact of foreign currency exchange rate changes of approximately $200.
(5) Gross profit
Gross profit for the year ended December 31, 2014 decreased to $309,135 from $320,885 for the year ended December 31, 2013 due to lower retail sales volume at our U.S. Retail, Canada and International segments, offset by higher sales at our U.S. Wholesale segment. Excluding the effects of the significant events described above, gross profit as a percentage of net sales for the year ended December 31, 2014 slightly increased to 52.2% from 51.1%. The increase was mainly due to a decrease in freight costs associated with the completion of our transition to our La Mirada facility, offset by lower sales at our retail store operations.
(6) Selling and distribution expenses
Selling and distribution expenses for the year ended December 31, 2014 decreased $29,126, or 12.1%, from the year ended December 31, 2013. Excluding the effects of the changes to our supply chain operations discussed above, selling and distribution expenses decreased $17,279, or 7.5% from the year ended December 31, 2013 due primarily to lower selling related payroll costs of approximately $9,000, lower advertising costs of approximately $4,600 and lower travel and entertainment expenses of $1,400, all primarily as a result of our cost reduction efforts.
(7) General and administrative expenses
General and administrative expenses for the year ended December 31, 2014 increased $14,466, or 13.5%, from the year ended December 31, 2013. Excluding the effects of customs settlements and contingencies, the internal investigation, and employment settlements and severance discussed above, general and administrative expenses decreased $10,337, or 9.8% from the year ended December 31, 2013. The decrease was primarily due to $3,600 in lower share based compensation expense relating to the expiration and forfeiture of certain market based and performance based share awards and decreases in salaries and wages of approximately $3,800 and miscellaneous expenses such as travel, repair, and bank fees.
(8) Loss from operations
Loss from operations was $27,583 for the year ended December 31, 2014 as compared to $29,295 for the year ended December 31, 2013. Excluding the effects of the significant events described above, our operating results for the year ended December 31, 2014 would have been an income from operations of $6,838 as compared with a loss from operations of $13,482 for the year ended December 31, 2013. Lower sales volume and higher retail store impairments were offset by decreases in our operating expenses as discussed above.
(9) Income tax provision
The provision for income tax for the year ended December 31, 2014 increased to $2,159 as compared to $1,771 for the year ended December 31, 2013. Although we incurred a loss from operations on a consolidated basis for the years ended December 31, 2014 and 2013, some of our foreign domiciled subsidiaries reported income from operations and are taxed on a stand-alone reporting basis. In 2014 and 2013, we recorded valuation allowances against a majority of our deferred tax assets, including 100% of the U.S. deferred tax assets and certain foreign deferred tax assets. We recognized no tax benefits on our loss before income taxes in 2014 and 2013. See Note 11 of Notes to Consolidated Financial Statements in Item 8.
Year Ended December 31, 2013 as comparedCompared to $185,355 for the year endedYear Ended December 31, 2012.
(in thousands)
|
| | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2013 | | % of net sales | | 2012 | | % of net sales |
| U.S. Wholesale | $ | 201,251 |
| | 31.7 | % | | $ | 185,355 |
| | 30.0 | % |
| U.S. Retail | 205,011 |
| | 32.3 | % | | 198,886 |
| | 32.2 | % |
| Canada | 60,134 |
| | 9.5 | % | | 63,669 |
| | 10.3 | % |
| International | 167,545 |
| | 26.4 | % | | 169,400 |
| | 27.5 | % |
| Total net sales | 633,941 |
| | 100.0 | % | | 617,310 |
| | 100.0 | % |
| Cost of sales | 313,056 |
| | 49.4 | % | | 289,927 |
| | 47.0 | % |
| Gross profit | 320,885 |
| | 50.6 | % | | 327,383 |
| | 53.0 | % |
| Selling and distribution expenses | 241,683 |
| | 38.1 | % | | 227,447 |
| | 36.8 | % |
| General and administrative expenses | 106,957 |
| | 16.9 | % | | 97,327 |
| | 15.8 | % |
| Retail store impairment | 1,540 |
| | 0.2 | % | | 1,647 |
| | 0.3 | % |
| (Loss) income from operations | (29,295 | ) | | (4.6 | )% | | 962 |
| | 0.2 | % |
| Interest expense | 39,286 |
| | | | 41,559 |
| | |
Foreign currency transaction loss (a) | 1 |
| | | | 120 |
| | |
Unrealized loss on change in fair value of warrants (b) | 3,713 |
| | | | 4,126 |
| | |
| Loss (gain) on extinguishment of debt | 32,101 |
| | | | (11,588 | ) | | |
| Other expense | 131 |
| | | | 204 |
| | |
| Loss before income tax | (104,527 | ) | | | | (33,459 | ) | | |
| Income tax provision | 1,771 |
| | | | 3,813 |
| | |
| Net loss | $ | (106,298 | ) | | | | $ | (37,272 | ) | | |
______________________
(a) Related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries.
(b) Mark-to-market adjustments associated with our warrants.
(1) U.S. Wholesale
U.S. Wholesale net sales, excluding online consumer net sales, increased $10,071,$10,071, or 6.7%, to $159,682 for the year ended December 31, 2013 as compared to $149,611$149,611 for the year ended December 31, 2012 due to higher sales order volume. This increase was attributed to the continued strength of our existing and new product offerings. Additionally, in early 2013, we released an expanded wholesale catalog, and as new styles were added, released quarterly updates to the catalog. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.
Online consumer net sales increased $5,825,$5,825 or 16.3%, to $41,569 for the year ended December 31, 2013 as compared to $35,744$35,744 for the year ended December 31, 20122013 primarily due to certain targeted promotional efforts and improved merchandising of the web store and as a result of the implementation of a new e-commerce platform in late 2012, which improved web store functionality.
U.S. Retail: Net sales for the(2) U.S. Retail segment
U.S. Retail net sales increased $6,125,$6,125, or 3.1%, to $205,011$205,011 for the year ended December 31, 2013 as compared to $198,886$198,886 for the year ended December 31, 2012.2012. Net sales growth was generated by the continued strength of our product offerings and targeted strategic promotions, which contributed to a 3%, or $5,270, increase in our comparable store sales. Additionally, new stores contributed $4,037 in net sales. These increases were partially offset by $2,035 of lower warehouse sales in 2013 as compared to 2012 and a decrease of $1,861 as a result of store closures.
(3) Canada
Canada:TotalCanada net sales for the Canada segment decreased $3,535,$3,535, or 5.6%, to $60,134$60,134 for the year ended December 31, 2013 as compared to $63,669$63,669 for the year ended December 31, 2012 due primarily to lower sales in the retail sales channel as a result of store closures. Additionally, the impact of foreign currency changes contributed to the sales decrease: holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total revenue for the current period would have been approximately $61,948, or 2.7% lower when compared to 2012.
Retail net sales decreased by $3,336, or 6.9%, to $45,163 in 2013 as compared to $48,499 in 2012 due to $1,140 lower sales as a result of the closure of three stores and the negative impact of foreign currency fluctuation. Holding foreign currency exchange rates constant to those prevailing in fiscal 2012,, retail sales for 2013 would have been approximately $46,526,$46,526, or 4.1% lower when compared to 2012.
Wholesale net sales decreased $914,$914, or 7.0%, to $12,092 in 2013 as compared to $13,006$13,006 in 2012, largely as a result of foreign currency fluctuation and lower sales volume from smaller customers. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012,, total wholesale net sales for the Canada segment for 2013 would have been approximately $12,457,$12,457, or 4.2% lower when compared to 2012.
Online consumer net sales increased $715,$715, or 33.0%, to $2,879 in 2013 as compared to $2,164$2,164 to 2012. This increase was primarily a result of targeted promotion efforts and email advertising campaigns. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012,, total revenue for the Canada segment for 2013 would have been approximately $2,965, or 37.1% higher when compared to 2012.
International: Total(4) International
International net sales for the International segment decreased $1,855, or 1.1%, to $167,545 for the year ended December 31, 2013 as compared to $169,400 for the year ended December 31, 2012 as a result of the negative impact of foreign currency fluctuation. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012,, total revenue for the International segment for 2013 would have been approximately $170,084,$170,084, or 0.4% higher when compared to 2012.
Retail net sales decreased $221,$221, or 0.2%, to $141,517 for the year ended December 31, 2013 as compared to $141,738 for the year ended December 31, 2012 as a result of the negative impact of foreign currency fluctuation. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012,, retail sales for 2013 would have been approximately $143,601,$143,601, or 1.3% higher when compared to the same period last year. Higher sales of $1,274 from new stores were partially offset by $610 of lower sales from store closures.
Wholesale net sales decreased $1,385,$1,385, or 13.5%, to $8,893$8,893 in 2013 as compared to $10,278$10,278 in 2012, primarily as a result of a decrease in wholesale sales in the U.K. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012,, sales for the current period would have been approximately $8,741,$8,741, or 15.0% lower during 2013 when compared to 2012.
Online consumer net sales decreased $249,$249, or 1.4%, to $17,135$17,135 in 2013 as compared to $17,384$17,384 in 2012, primarily as a result of changes in foreign currency exchange rates. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012,, sales for the current period would have been approximately $17,742,$17,742, or 2.1% higher when compared to 2012.
Changes in supply chain operation: The transition to our new distribution center in La Mirada, California had a significant negative impact on our earnings and cash flow. For the year ended December 31, 2013, we incurred incremental distribution costs associated with these transition activities and recorded additional cost of sales of approximately $3,027 and selling expenses of approximately $11,847 for a total charge of $14,874 in our statement of operations for the year ended December 31, 2013. These issues caused processing inefficiencies that required us to employ additional staff in order to meet customer demand. In addition, although we are unable to quantify the impact, we believe the disruption caused by the cut-over to the new distribution center had a negative impact on sales. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced.(5) Gross profit
Gross margin: Gross marginprofit for the year ended December 31, 2013 was 50.6% compared to 53.0% for the year ended December 31, 2012.2012. The decrease in gross marginprofit was due to higher distribution costs and promotions associated with our retail operation and increased production costs associated with our manufacturing operation. See Changes in Supply Chain Operation above.
(6) Selling expenses:
Selling expenses increased $14,236,$14,236, or 6.3%, to $241,683$241,683 for the year ended December 31, 2013 as compared to $227,447 for the year ended December 31, 2012. As a percentage of sales, selling expenses increased to 38.1% in 2013 from 36.8% in 2012.
The increase in selling expenses was primarily due to approximately $11,847 higher distribution labor and rent costs at our U.S. Wholesale operations associated with the changes to our supply chain operations as discussed above. This was partially offset by $5,996 lower payroll and rent costs at our Canadian operations as a result of the closure of our warehouse in Montreal, Canada. Additionally, we incurred higher rent expense of $2,827 at our U.S. Retail and International segments primarily related to new stores and lease renewals, higher travel and related expenses of $964 as we completed our RFID implementation and make other store improvements, and higher supplies expenses of $2,760 associated with our RFID implementation activities. The increases were partly offset by lower advertising and marketing expenses of $2,300.
(7) General and administrative expenses:expenses
General and administrative expenses increased $9,630,$9,630, or 9.9%, to $106,957$106,957 for the year ended December 31, 2013 as compared to $97,327$97,327 for the year ended December 31, 2012.2012. As a percentage of sales, general and administrative expenses increased to 16.9% in 2013 from 15.8% in 2012. The increase in general and administrative expenses was primarily due to higher computer software licensing related costs of $3,109 associated with the recent improvements to our online store stores and other software upgrades, higher equipment lease expenses of $3,181 and higher depreciation and amortization expenses of $2,584 consistent with increased capital expenditures.
Retail store impairment charges: For(8) Interest expense
Interest expense decreased $2,273 to $39,286 for the yearsyear ended December 31, 2013 and 2012, we recorded impairment charges relating to retail stores of $1,540 and $1,647, respectively.
Interest expense: Interest expense decreased $2,273 to $39,286from $41,559 for the year ended December 31, 2013 from $41,559 for the year ended December 31, 2012,, primarily due to lower average interest rates on our outstanding debt. Interest expense for the year ended December 31, 2013 relates primarily to interest on our Notes and our credit agreement with Lion that was terminated in April 2013 ("the Lion(the "Lion Credit Agreement"). For
(9) Loss (gain) on extinguishment of debt
During the year ended December 31, 2013, amortization of debt discount and deferred financing cost was $4,325 and interest paid in cash was $18,948.
Unrealized loss on change in fair value of warrants: We recorded a loss of $3,713 and loss of $4,126 in fair value of warrants for the years ended December 31, 2013 and 2012, respectively associated with the fair value measurements of the Lion and SOF warrants. See Note 13, Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
Loss (gain) on extinguishment of debt: During the year ended December 31, 2013, we recorded a loss on extinguishment of debt of $32,101 relating to the termination of our credit agreements with Crystal and Lion in April 2013. During the year ended December 31, 2012, we recorded a gain on extinguishment of debt pertaining to an amendment to the Lion Credit Agreement of approximately $11,588.$11,588. See Note 7 Revolving Credit Facilities and Current Portion of Long-Term Debt and Note 8, Long-Term DebtNotes to our consolidated financial statements under Part II, Item 8.Consolidated Financial Statements.
(10) Income tax provision: provision
The provision for income tax decreased to $1,771$1,771 for the year ended December 31, 2013 as compared to $3,813$3,813 for the year ended December 31, 2012.2012. Although we incurred a loss from operations on a consolidated basis for the year ended December 31, 2013, some of our foreign domiciled subsidiaries reported income from operations and are taxed on a stand-alone reporting basis. In 2013 and 2012, we recorded valuation allowances against a majority of our deferred tax assets, including 100% of the U.S. deferred tax assets and certain foreign deferred tax assets. We recognized no tax benefits on our loss before income taxes in 2013 and 2012. See Note 11 Income Taxesof Notes to our consolidated financial statements under Part II,Consolidated Financial Statements in Item 8.
Year Ended December 31, 2012 compared to Year Ended December 31, 2011
(Amounts in thousands)
|
| | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2012 | | % of net sales | | 2011 | | % of net sales |
| U.S. Wholesale | $ | 185,355 |
| | 30.0 | % | | $ | 158,628 |
| | 29.0 | % |
| U.S. Retail | 198,886 |
| | 32.2 | % | | 174,837 |
| | 31.9 | % |
| Canada | 63,669 |
| | 10.3 | % | | 61,865 |
| | 11.3 | % |
| International | 169,400 |
| | 27.4 | % | | 152,006 |
| | 27.8 | % |
| Total net sales | 617,310 |
| | 100.0 | % | | 547,336 |
| | 100.0 | % |
| Cost of sales | 289,927 |
| | 47.0 | % | | 252,436 |
| | 46.1 | % |
| Gross profit | 327,383 |
| | 53.0 | % | | 294,900 |
| | 53.9 | % |
| | | | | | | | |
| Selling expenses | 227,447 |
| | 36.8 | % | | 209,841 |
| | 38.3 | % |
| General and administrative expenses | 97,327 |
| | 15.8 | % | | 104,085 |
| | 19.0 | % |
| Retail store impairment | 1,647 |
| | 0.3 | % | | 4,267 |
| | 0.8 | % |
| Income (loss) from operations | 962 |
| | 0.2 | % | | (23,293 | ) | | (4.3 | )% |
| | | | | | | | |
| Interest expense | 41,559 |
| |
|
| | 33,167 |
| |
|
|
| Foreign currency transaction loss | 120 |
| |
|
| | 1,679 |
| |
|
|
| Unrealized loss (gain) on change in fair value of warrants and purchase rights | 4,126 |
| |
|
| | (23,467 | ) | |
|
|
| (Gain) loss on extinguishment of debt | (11,588 | ) | | | | 3,114 |
| | |
| Other expense (income) | 204 |
| |
|
| | (193 | ) | |
|
|
| Loss before income taxes | (33,459 | ) | |
|
| | (37,593 | ) | |
|
|
| Income tax provision | 3,813 |
| |
|
| | 1,721 |
| |
|
|
| Net loss | $ | (37,272 | ) | |
|
| | $ | (39,314 | ) | |
|
|
| | | | | | | | |
U.S. Wholesale: Total net sales for the U.S. Wholesale segment increased $26,727, or 16.8%, to $185,355 for the year ended December 31, 2012 as compared to $158,628 for the year ended December 31, 2011.
Wholesale net sales, excluding online consumer net sales, increased $17,476, or 13.2%, to $149,611 for the year ended December 31, 2012 as compared to $132,135 for the year ended December 31, 2011, driven by higher sales order volume from a significant number of existing and new customers. We improved our service levels through better inventory planning, which helped facilitate new account generation as well as grow business with our existing client roster. The launch of a new wholesale catalog and the addition of new products to our wholesale offering attracted a more diversified customer base. We continue our focus on increasing our customer base by targeting direct sales, particularly to third party screen printers.
Online consumer net sales increased $9,251, or 34.9%, to $35,744 for the year ended December 31, 2012 as compared to $26,493 for the year ended December 31, 2011, as a result of targeted online advertising and promotion efforts and implementation of a new e-commerce platform, which improved web store functionality.
U.S. Retail: Net sales for the U.S. Retail segment increased $24,049 or 14%, to $198,886 for the year ended December 31, 2012 as compared to $174,837 for the year ended December 31, 2011. Net sales growth was generated by a stronger inventory position in high volume categories, improvements to distribution operations, strategic promotions to drive volume in key basics, success in new women's and unisex fashion, including women's denim, and improved presentation of our floor sets. Throughout the period, improvements to logistics and the speed of allocation helped to support a buying strategy that is faster and more proactive.
Comparable store sales for the year ended December 31, 2012 increased by $24,233, or 15%, while warehouse sales consisting primarily of discounted merchandise contributed an incremental $4,288 increase from 2011 to 2012. The sales increase was partially offset by a $1,710 sales decrease as a result of a reduction in the number of stores in operation from 143 at December 31, 2011 to 140 stores at December 31, 2012.
Canada:Net sales for the Canada segment increased $1,804, or 3%, to $63,669 for the year ended December 31, 2012 as compared to $61,865 for the year ended December 31, 2011. The increase is primarily due to higher net sales in the wholesale
channel. Holding foreign currency exchange rates constant to those prevailing in the comparable period in fiscal 2011, total net sales for the Canada segment for 2012 would have been approximately $64,357, or 4% higher when compared to the same period last year.
Retail net sales for the year ended December 31, 2012 was $48,499 and was essentially unchanged from the prior year. Comparable store sales for the year ended December 31, 2012 increased by $2,747, or 6%. Since December 31, 2011, the number of retail stores in the Canada segment in operation decreased from 37 to 35. Holding foreign currency exchange rates constant to those prevailing in fiscal 2011, total retail net sales for the Canada segment for 2012 would have been approximately $49,023, or 1% higher when compared to the same period last year.
Wholesale net sales increased $1,514, or 13%, to $13,006 for the year ended December 31, 2012 as compared to $11,492 for the year ended December 31, 2011. The increase in net sales is due to better focus on key customers and an improved pricing strategy. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total wholesale net sales for the Canada segment for 2012 would have been approximately $13,147, or 14% higher when compared to the same period last year.
Online consumer net sales increased $318, or 17%, to $2,164 for the year ended December 31, 2012 as compared to $1,846 for the year ended December 31, 2011. Foreign currency effects were minimal.
International: Total net sales for the International segment increased $17,394, or 11.4%, to $169,400 for the year ended December 31, 2012 as compared to $152,006 for the year ended December 31, 2011. The increase is due to higher sales in the retail and online sales channels. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the International segment for 2012 would have been approximately $176,131, or 16% higher when compared to the same period last year.
Retail net sales increased $14,870, or 12%, to $141,738 for the year ended December 31, 2012 as compared to $126,868 for the year ended December 31, 2011. The change is mainly due to higher sales in the U.K. of $7,655, Japan of $6,159 and Australia of $2,478 offset by lower sales in Continental Europe of $1,269 primarily due to the closure of two stores during 2012. Comparable store sales for the year ended December 31, 2012 increased by $17,026, or 15% as compared to the year ended December 31, 2011. Since December 31, 2011, the number of retail stores in the International segment increased from 69 to 76 at December 31, 2012. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail net sales for 2012 would have been approximately $147,349, or 16% higher when compared to the same period last year.
Wholesale net sales decreased $128, or 1%, to $10,278 for the year ended December 31, 2012 as compared to $10,406 for the year ended December 31, 2011. The decrease is due to unfavorable exchange rates. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately $10,802, or 4% higher during 2012 when compared to the same period last year.
Online consumer net sales increased $2,652 or 18%, to $17,384 for the year ended December 31, 2012 as compared to $14,732 for the year ended December 31, 2011. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately $17,980, or 22% higher when compared to the same period last year.
Gross margin: Gross margin as a percentage of net sales was 53% and 53.9% for the years ended December 31, 2012 and 2011, respectively. The decrease in gross margin was due to the net sales impact of planned promotional activities and the effect of warehouse type clearance sales as part of our overall inventory reduction strategy, as well as reduced production in connection with our inventory turn improvement efforts.
Selling expenses: Selling expenses increased $17,606, or 8%, to $227,447 for the year ended December 31, 2012 from $209,841 for the year ended December 31, 2011. The increase was a result of improving sales. Additionally, we increased our spending on print, outdoor and online advertising to $22,114 for the year ended December 31, 2012 from $15,194 for the comparable period in 2011 in order to continue the sales momentum. As a percentage of sales, selling expenses decreased to 36.8% for the year ended December 31, 2012 from 38.3% for the year ended December 31, 2011.
General and administrative expenses: General and administrative expenses decreased $6,758, or 6%, to $97,327 for the year ended December 31, 2012 as compared to $104,085 for the year ended December 31, 2011. As a percentage of sales, general and administrative expenses decreased to 15.8% during the year ended December 31, 2012 from 19.0% during the year ended December 31, 2011. The decrease in general and administrative expenses was primarily due a $6,482 reduction in professional fees (primarily consulting, accounting and legal related fees), a decrease of $1,878 in medical benefit costs in the U.S., a decrease of $1,694 in depreciation and amortization expenses and certain other items, offset by an increase of $3,033 in share-based compensation expense and $2,284 higher salaries, wages and bonus expenses.
Retail store impairment charges: At December 31, 2012, we performed a recoverability test and an impairment test of our long lived assets at our retail stores and we recorded impairment charges relating primarily to certain retail store leasehold improvements of $1,647 and $4,267 for the years ended December 31, 2012 and 2011, respectively.
Interest expense: Interest expense increased $8,392 to $41,559 for the year ended December 31, 2012 from $33,167 for the year ended December 31, 2011 primarily due to a higher average balance of debt outstanding and higher interest rates related to our credit agreement with Crystal ("the Crystal Credit Agreement"). Interest expense for the year ended December 31, 2012 relates primarily to interest on the Lion Credit Agreement and Crystal Credit Agreement. For the year ended December 31, 2012, amortization of debt discount and deferred financing cost was $10,261 and interest paid in cash was $10,954.
Foreign currency transaction loss: Foreign currency transaction loss was $120 for the year ended December 31, 2012, as compared to a loss of $1,679 for the year ended December 31, 2011. The change related to a lower valuation of the U.S. dollar relative to functional currencies used by our subsidiaries.
Unrealized (gain) loss on change in fair value of warrants and purchase rights: We recorded a $4,126 loss in fair value of warrants for the year ended December 31, 2012 associated with the fair value measurements of the Lion and SOF warrants. We recorded a $23,467 gain in the fair value of warrants and purchase rights for the year ended December 31, 2011 associated with the fair value measurement of purchase rights to an investor group and Mr. Charney, and additional warrants to Lion at December 31, 2011. There were no purchase rights outstanding in 2012. See Note 13, Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
(Gain) loss on extinguishment of debt: During the year ended December 31, 2012, we recorded a gain on extinguishment of debt relating to an amendment to the Lion Credit Agreement of approximately $11,588. During the year ended December 31, 2011, we recorded a loss on extinguishment of debt pertaining to an amendment to the Lion Credit Agreement of approximately $3,114. See Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Income tax provision: The provision for income tax increased to $3,813 for the year ended December 31, 2012 as compared to $1,721 for the year ended December 31, 2011. We have recorded valuation allowances against a majority of our deferred tax assets, including 100% of the U.S. deferred tax assets and certain foreign deferred tax assets. Similarly, we recognized no tax benefits on our loss before income taxes in 2012. See Note 11, Income Taxes to our consolidated financial statements under Part II, Item 8.
Liquidity and Capital Resources
Summary
As of December 31, 2013, we had approximately $8,676 in cash and $6,268 of availability for additional borrowings under the Capital One Credit Facility and Bank of Montreal Credit Agreement. Additionally, we had $43,526 outstanding out of $50,000 of commitments under the Capital One Credit Facility and $443 outstanding on the C$2,000 (Canadian dollars) Bank of Montreal Credit Agreement, which was reduced from C$11,000 (Canadian dollars) effective February 28, 2014. Amounts outstanding under the Bank of Montreal Credit Agreement were repaid, and on March 31, 2014 expired by its terms. See Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt and Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
As of February 28, 2014, we had approximately $4,878 in cash and $3,299 of availability for additional borrowings under the Capital One Credit Facility and Bank of Montreal Credit Agreement.
On April 4, 2013, we closed a private offering of $206,000 aggregate principal amount of our Senior Secured Notes due April 15, 2020 at 97% of par and also entered into a new $35,000 asset-backed revolving credit facility with Capital One maturing on April 4, 2018, subject to a January 15, 2018 maturity under certain circumstances. Subsequently, on July 5, 2013, we entered into an amendment to the Capital One Credit Facility increasing the total commitment to $50,000. Interest on the Notes approximating $13,500 per payment period (in 2014), is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013. We used the net proceeds from the offering of the Notes, together with borrowings under the new credit facility, to repay and terminate our credit agreement with Crystal Financial LLC and our loan agreement with Lion Capital LLP. The notes and the new credit facility are our senior secured obligations and are guaranteed, on a senior secured basis, by our domestic restricted subsidiaries, subject to some exceptions.
During the third quarter ended September 30, 2013, we determined it was probable that a special interest trigger event under the indenture governing the Notes would occur as of the December 31, 2013 measurement date, and accrued interest on the Notes at 15% retroactive to April 4, 2013 representing an additional 2% interest, which additional interest is payable in kind until April 15, 2018 and in cash on subsequent interest dates. We recorded $3,044 in additional interest expense related to the
special interest trigger event for the year ended December 31, 2013. We will pay in kind the additional 2% interest retroactive to the issue date of the Notes on the next interest payment date, April 15, 2014.
Under the Capital One Credit Facility, we were in violation of certain covenants for the twelve consecutive fiscal months ended September 30, 2013 and December 31, 2013, and we anticipated a violation for the twelve months ended March 31, 2014.
On November 14, 2013, we entered into a third amendment to the Capital One Credit Facility, which among other things, waived the obligation to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, we agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at our option) and limitations on amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certain amendments to the borrowing base calculation. In addition, we paid a waiver fee of $75.
On March 25, 2014, we entered into a fifth amendment to the Capital One Credit Facility which, effective upon its receipt of at least $25,000 of net proceeds from a financing prior to April 15, 2014, among other things: waives the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; resets for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payable under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at our option); and increases the fees payable upon early termination.
On May 22, 2013 we entered into the Lion Loan Agreement in a principal amount of $4,500. On November 29, 2013, the Lion Loan Agreement was amended to increase the amount we borrowed by $5,000 and to make certain other technical amendments. The term loans under the Lion Loan Agreement mature on October 4, 2018 and bear interest at an initial interest rate of 18% per annum, which interest rate increased to 20% per annum due to the occurrence of a special interest trigger event under our Notes. Interest under the loan agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind.
On March 31, 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of approximately $28,500. As a result of this offering, our common stock issued and outstanding were 175,109 and 173,377 shares. Additionally, our underwriters have a 30 day option to acquire up to an additional 8,500 shares of our common stock at $0.50 per share.
Over the past years, our operations have been funded through a combination of borrowings from related and unrelated parties, bank and other debt, lease financing, and proceeds from the exercise of purchase rights and issuance of common stock. As discussed under Management Plan above, weWe continue to develop initiatives intended to either increase sales, reduce costs or improve working capital and liquidity. InBeginning with the fourth quarter of 2013, and continuing into January of 2014, significant reductions were made inwe instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overheads.overhead. We also instituted a program inlimited capital expenditures starting the first quarter of 2014 to limit capital expenditures. Additionally,2014. In addition, we intend to continue to drive productivity improvements from our new distribution center, further reduce inventories, reduce storeretail stores, inventory reductions, other labor costs,cost reductions, and evaluate further consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing. As we implement the turnaround plan in 2015, we expect to incur additional costs, such as sales discounts and write-downs, on the sale and disposal of slow-moving inventory and the closure of non-performing stores.
Our principal liquidity requirements are for operations, working capital interest payments, and capital expenditures and to fund operations.expenditures. We fund our liquidity requirements primarily through cash on hand, cash flow from operations, and borrowings under our credit facilities. Our credit agreements have from time to time containedcontain covenants requiring us to meet specified targets for measures related to earnings, limits on capital expenditures, and minimum fixed charge coverage ratiosratio and maximum leverage ratios, and ourratio requirements. Our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under thoseour credit facilities or result in an event of default.
Recent Developments
As of December 31, 2014, we had $8,343 in cash, $34,299 outstanding on our $50,000 asset-backed revolving credit facility with Capital One and $13,146 of availability for additional borrowings under the Capital One Credit Facility. As of March 13, 2015, we had $5,837 availability for additional borrowings under the Capital One Credit Facility. The scheduled interest payment on the Notes due on April 15, 2015 is approximately $13,900.
On March 25, 2015, we entered into the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted us to borrow $15,000 under the Standard General Credit Agreement.
As of December 31, 2014, we were not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124. However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8,000. We were in compliance with these covenants at December 31, 2014.
On March 25, 2015, one of our subsidiaries borrowed $15,000 under the Standard General Credit Agreement. The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to us as contemplated by the Standstill and Support Agreement.
We believe that we have sufficient financing commitments to make the April 15, 2015 interest payment as well as meet other funding requirements for the next twelve months.
A. Cash Flow Overview
Cash Flow Overview for the years ended |
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Net cash (used in) provided by: | | | | | |
| Operating activities | $ | (5,212 | ) | | $ | (12,723 | ) | | $ | 23,589 |
|
| Investing activities | (9,583 | ) | | (25,147 | ) | | (24,853 | ) |
| Financing activities | 15,552 |
| | 34,228 |
| | 4,214 |
|
| Effect of foreign exchange rate changes on cash | (1,090 | ) | | (535 | ) | | (390 | ) |
| Net (decrease) increase in cash | $ | (333 | ) | | $ | (4,177 | ) | | $ | 2,560 |
|
Year Ended December 31,
2013, 2012 and 2011 is as follows (dollars in thousands): |
| | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
| Net cash (used in) provided by: | | | | | |
| Operating activities | $ | (12,723 | ) | | $ | 23,589 |
| | $ | 2,305 |
|
| Investing activities | (25,147 | ) | | (24,853 | ) | | (10,759 | ) |
| Financing activities | 34,228 |
| | 4,214 |
| | 12,582 |
|
| Effect of foreign exchange rate changes on cash | (535 | ) | | (390 | ) | | (1,491 | ) |
| Net (decrease) increase in cash | $ | (4,177 | ) | | $ | 2,560 |
| | $ | 2,637 |
|
2014 compared to Year Ended December 31, 2013
Cash used in operating activities decreased for the year ended December 31, 2014 from the corresponding period in 2013. The decrease was $12,723. Thismainly due to decreased inventory levels and improved operating income excluding certain significant costs discussed in Results of Operations. The decrease was partially offset by approximately $15,500 increase in interest payments, primarily on our Notes, and payments related to the significant costs discussed in Results of Operations. The scheduled interest payments on our Notes in April and October 2015 will be approximately $13,900 per pay period.
Cash used in investing activities decreased for the year ended December 31, 2014 from the corresponding period in 2013, mainly due to our ongoing efforts to reduce capital expenditures.
Cash provided by financing activities decreased for the year ended December 31, 2014 from the corresponding period in 2013. In March 2014, we completed a resultpublic offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,435. During the year ended December 31, 2014, we repaid a net lossamount of $106,298$9,709 borrowed under the Capital One Credit Facility. On April 4, 2013, we issued the Notes for aggregate net proceeds of $199,820 and entered into a new asset-backed revolving credit agreement with Capital One. The net proceeds of the Notes, together with borrowings under the new credit facility, were used to repay and terminate the outstanding amounts with Lion of $144,149 and with Crystal Financial LLP of $66,411.
Year Ended December 31, 2013 compared to Year Ended December 31, 2012
Cash used in operating activities was $12,723 as compared with cash provided by operating activities of $23,589 as a result of a decrease in our gross profit rate,percentage, the impact to our cost of sales and operating expenses from the transition to our new distribution facility, and higher computer software and store supply expenses as we continue to improve both our online and retail stores. These were offset by non-cash expenses of $85,764 and a decrease in working capital requirements of $7,811.
Non-cash expenses during the year relate primarily to loss on extinguishment of debt from our April 2013 refinancing, depreciation, amortization and impairment charges, the fair value of our warrant liability, stock-based compensation expense, and non-cash interest expense from the amortization of deferred financing costs and loan discounts and from the accrual for paid-in-kind interest.
The decrease in working capital requirements was primarily due to a $11,764 increase in accrued expenses as a result of accrued interest related to the Notes and timing of deferred revenue related to recent promotional activities. Additionally, inventory decreased $3,715 as a result of our efforts to reduce inventory levels. These decreases in working capital requirements were offset by a $6,063 increase in prepaid expenses related primarily to higher prepaid software maintenance fees and higher prepaid store supplies. Additionally, other assets increased $4,393 due primarily to an increase in deferred financing costs related to our April 2013 refinancing and higher deposits related to our workers compensation program.
Cash used in investing activities was $25,147. This was primarily relatedincreased mainly due to$27,054 in capital expenditures as we continue to make improvements to our existing stores and open new stores, investinvestments in equipment and software for our new distribution center, and continue to investcontinuing investments in our manufacturing equipment, computer software and website development. During this period, six new retail stores were opened in the International segment.
Cash provided by financing activities was $34,228. This consisted primarily of proceeds of $199,820 fromincreased mainly due to issuance of the Notes and $39,794 in borrowings from our Capital One and Bank of Montreal revolving credit facilities. The net proceeds from the offering of the Notes, together with borrowings under the new credit facility, were used to repay and terminate the outstanding amounts with Lion Capital of $144,149 and with Crystal Financial of $66,411.
Year Ended December 31, 2012
Cash provided by operating activities was $23,589. This was a result of a net loss of $37,272 offset by non-cash expenses of $56,608 and a decrease in working capital of $4,253.
Non-cash expenses during the year relate primarily to depreciation, amortization and impairment charges, a decrease in the fair value of our warrant liability, stock-based compensation expense, and non-cash interest expense from the amortization of deferred financing costs and loan discounts and from the accrual for paid-in-kind interest. These non-cash charges were offset by a gain on extinguishment of debt.
The decrease in working capital was primarily due to a decrease in inventories of $13,949. The decrease in inventory is due to a year-over-year 20% decrease in units as a result of improvements in our sales and improvements in inventory planning. This was partially offset by an increase in other assets of $8,455 as a result of higher deposits required for our self-insured workers compensation policy.
Cash used in investing activities was $24,853. This consisted primarily of $21,607 in capital expenditures and $3,720 in restricted cash used as collateral to secure our standby letters of credit associated with the worker's compensation self-insurance program and other liabilities. Net investments in property and equipment in the U.S. Wholesale segment consisted mostly of expenditures for manufacturing equipment and computer hardware and software. We upgraded our production forecasting and allocation systems and significantly enhanced our online web store capabilities with a new back office web platform. We alsoFinancial.
invested inB. Debt
The following is an overview of our new distribution center in La Mirada, California. Net investments in the U.S. Retail segment were primarily to upgrade and remodel certain existing stores. Additionally, we continued implementing radio frequency identification (RFID) tracking systems at our stores. Astotal debt as of the end of February 2013, we had implemented RFID systems at approximately 213 stores worldwide.
Cash provided by financing activities was $4,214. This consisted primarily of proceeds from borrowings of $28,451 under the new revolving credit facility and $29,987 for a term loan, both under the Crystal Credit Agreement, partially offset by the repayment of the previous revolving credit facility for $48,324 with BofA. Borrowings are primarily used to fund our operating and working capital needs.
Year Ended December 31, 20112014:
Cash provided by operating activities was $2,305. This was a result of non-cash expenses of $43,278 offset by a net loss of $39,314 and an increase in working capital requirements of $1,659. |
| | | | | | | | | | |
| Description of Debt | | Lender | | Interest Rate | | December 31, 2014 | | Covenant Violations |
| Revolving credit facility | | Capital One | | (a) | | $ | 34,299 |
| | Yes |
| Senior Secured Notes | | | | 15.0% | | 208,084 |
| | No |
| Standard General Loan Agreement | | Standard General | | 17.0% | | 9,049 |
| | No |
| Capital lease obligations | | (b) | | 0.4% ~ 24.1% | | 4,960 |
| | N/A |
| Other | | | | | | 268 |
| | N/A |
| Cash overdraft | | | | | | 5,714 |
| | N/A |
| Total | | | | | | $ | 262,374 |
| | |
Non-cash expenses include depreciation, amortization, loss on disposal of property and equipment, foreign exchange transaction gain, allowance forinventory shrinkage and obsolescence, change in fair value of warrant liability, loss on extinguishment of debt, accrued interest-in-kind, impairment charges, stock-based compensation, bad debt expense, deferred income taxes, and deferred rent.______________________
The increase in working capital was due primarily to an increase in inventory of $6,771. Although our unit inventory levels declined 7% at December 31, 2011 compared to December 31, 2010, the increase in yarn and fabric prices beginning in 2010, and continuing throughout the first half of 2011, resulted in an increase to the cost of our inventory, despite overall reductions to the other direct costs in our manufacturing processes. In addition, our production planning and scheduling methodology calls for maintaining normal production levels throughout the year, regardless of seasonality in demand. This approach allows us to have efficient inventory levels in stock and to be well positioned in anticipation of key selling seasons.
Cash used by investing activities was $10,759 and related primarily to capital expenditures. Net investments in property and equipment were $3,638 for the U.S. Wholesale segment, $4,889 for the U.S. Retail segment, $407 for the Canada segment and $2,136 for the International segment. During this period, four new retail stores were opened in the International segment. Investments in the U.S. Wholesale segment consisted mostly of expenditures for manufacturing equipment, computer hardware and software. Investments in the U.S. Retail segment were primarily to upgrade and remodel certain existing stores.
Cash provided by financing activitieswas $12,582. This consisted primarily of proceeds of $21,710 from the sale of common stock and purchase rights and $3,100 in proceeds from a sale-leaseback financing transaction for manufacturing equipment, partially offset by the repayment of $6,874 under our revolving credit facilities.
Debt Agreements and Other Capital Resources
Capital One Credit Facility - On April 4, 2013, we replaced our credit facility with Crystal with a new $35,000 asset-based revolving facility with Capital One. Subsequently, on July 5, 2013, we entered into an amendment to the credit agreement with Capital One, pursuant to which the total commitment under the credit facility was raised to $50,000. The additional commitment was made under substantially the same terms as the existing facility. The Capital One Credit Facility matures on April 4, 2018, subject to a January 15, 2018 maturity if excess availability is less than $15,000 at the time of notice to Capital One of a determination by the Company that an Applicable High Yield Discount Obligation ("AHYDO") redemption will be required pursuant to Section 3.01(e) of the indenture governing the Notes. Borrowings under the Capital One Credit Facility bore interest equal to(a) LIBOR plus 3.5%5.0% or the bank's prime rate plus 2.5% (at4.0% at our option according to the Company's option)Fifth Amendment.
(b) 31 individual leases ranging between from $2 to $2,402.
For additional disclosures regarding our debts, see Note 7 and were subjectNote 8 of Notes to maintenance of specified borrowing base requirements and covenants.Consolidated Financial Statements in Item 8.
Financial Covenants
Under the Capital One Credit Facility we were in violation of certain covenants for the twelve consecutive fiscal months ended September 30, 2013 and December 31, 2013, and we anticipated a violation for the twelve months ended - In March 31, 2014.
On November 14, 2013,2014, we entered into a third amendmentthe Fifth Amendment to the Capital One Credit Facility ("the "Fifth Amendment"), which among other things, waived the obligation to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, we agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at our option) and limitations on amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certain amendments to the borrowing base calculation. In addition, we paid a waiver fee of $75.
On March 25, 2014, we entered into a fifth amendment to the Capital One Credit Facility which, effective upon its receipt of at least $25,000 of net proceeds from a financing prior to April 15, 2014, among other things: waives the obligation to maintain
the minimum fixed charge coverage and maximum leverage ratios for the three month periodsmonths ended December 31, 2013 and March 31, 2014; resets for future periods2014. Under the Fifth Amendment, we are subject to specified borrowing requirements and covenants including minimum fixed charge coverage ratios, maximum leverage ratios, and maximum capital expenditures and minimum adjusted EBITDA.
On March 25, 2015, we entered into the Sixth Amendment which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted us to borrow $15,000 under the Standard General Credit Agreement.
As of December 31, 2014, we were not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124. However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payable under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at our option); and increases the fees payable upon early termination.expenditure of not more than $8,000. We were in compliance with these covenants at December 31, 2014.
The Capital One Credit Facility is secured by a lien on substantially all of the assets of our domestic subsidiaries and equity interests in certain of our foreign subsidiaries, subject to some exceptions. The amount available for additional borrowings on December 31, 2013 was $4,179. See Financial Covenants below and Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Bank of Montreal Credit Facility - On December 31, 2013, our wholly-owned Canadian subsidiaries, entered into a fourth amendment to the Bank of Montreal Credit Agreement that reduced the existing revolving credit facility amount from C$11,000 (Canadian dollars) to C$5,000 (Canadian dollars) and extended the maturity date to February 28, 2014. On February 28, 2014, the revolving credit facility commitment was further reduced to C$2,000 (Canadian dollars) and the maturity set to March 31, 2014. Amounts outstanding under the Bank of Montreal Credit Agreement were repaid, and on March 31, 2014 expired by its terms.
The Bank of Montreal Credit Agreement bore interest at 7.0% (the bank's prime rate at 3.0% as of December 31, 2013 plus 4.0% per annum) payable monthly. This line of credit was secured by a lien on the accounts receivable, inventory and certain other tangible assets of the CI Companies. Our available borrowing capacity was $2,089 on December 31, 2013. See Financial Covenants below and Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Senior Secured Notes due 2020 - On April 4, 2013, we issued the Notes in an aggregate principal amount of $206,000. The Notes will mature on April 15, 2020. The Notes were issued at 97% of par value with an interest rate at issuance of 13% per annum, subject to adjustment. Interest on the Notes approximating $13,500 per payment period (in 2014), is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013.
A "special interest trigger event" is deemed to have occurred under the indenture governing the Notes if our net leverage ratio for the year ended December 31, 2013 is greater than 4.50 to 1.00. Upon the occurrence of a special interest trigger event, interest on the Notes accrues at the rate of 15% per annum, retroactive to April 4, 2013, with the interest in excess of 13% per annum payable (i) in the case of any interest payment date prior to April 15, 2018, by adding such excess interest to the principal amount of the Notes on the interest payment date, and (ii) for any interest payment date on or after April 15, 2018, in cash.
During the third quarter of 2013, we determined it was probable that a special interest trigger event under the indenture governing the Notes would occur as of December 31, 2013, and we accrued interest on the Notes at 15% retroactive to April 4, 2013, representing an additional 2% interest, which is payable-in kind until April 15, 2018 and in cash on subsequent interest payment dates. We recorded $3,044 in additional interest expense for the special interest trigger event for the year ended December 31, 2013. We will pay in-kind the additional 2% interest retroactive to the issue date of the Notes on the next interest payment date, April 15, 2014.
On or after April 15, 2017, we may redeem some or all of the Notes at a premium decreasing ratably to zero as specified in the indenture, plus accrued and unpaid interest to, but not including, the redemption date. Prior to April 15, 2017, we may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 15, 2017 we may redeem some or all of the Notes by paying a premium, plus accrued and unpaid interest to, but not including, the redemption date. If we experience certain change of control events, the holders of the Notes will have the right to require us to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, we are required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, we will be required to redeem, for cash, a portion of each Note then outstanding equal to the amount necessary to prevent such Note from being treated as an “applicable high yield discount obligation” within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.
The Notes are guaranteed, jointly and severally, on a senior secured basis by our existing and future domestic restricted subsidiaries. See Financial Covenants below and Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Crystal Credit Facility - On April 4, 2013, we replaced our existing revolving credit facility and term loan with Crystal Financial LLC ("Crystal" and the "Crystal Credit Agreement", respectively), with a new asset-based revolving credit agreement with Capital One.
All amounts owed under the Crystal credit facility were repaid with the net proceeds from the offering of the Notes and the new credit facility.
The difference between the net carrying amount of the Crystal loans of $60,533 (which includes the outstanding balance, accrued but unpaid interest, and unamortized financing cost immediately prior to the date of the extinguishment) and the cash paid to Crystal of $66,411 (which includes a $2,400 early termination fee) was recorded as a $5,878 loss on early extinguishment of debt in our statement of operations for the year ended December 31, 2013. See Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Lion Loan Agreement - On May 22, 2013 we entered into the Lion Loan Agreement in a principal amount of $4,500. On November 29, 2013, the Lion Loan Agreement was amended to increase the amount we borrowed by $5,000 and to make certain other technical amendments. The term loans under the Lion Loan Agreement mature on October 4, 2018 and bear interest at an initial interest rate of 18% per annum, which interest rate increased to 20% per annum due to the occurrence of a special interest trigger event under our Notes. Interest under the loan agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind.
Lion Credit Agreement - On April 4, 2013, we repaid and terminated the outstanding obligations under the Lion Credit Agreement with a portion of the proceeds of the issuance of the Notes and entry into the Capital One Credit Facility. The difference between the net carrying amount of the Lion debt of $117,926 (which includes the principal, accrued but unpaid interest, unamortized discount and unamortized financing cost immediately prior to the date of extinguishment) and the cash paid to Lion of $144,149 was recorded in our statement of operations for the year ended December 31, 2013 as a $26,223 loss on the early extinguishment of this debt. See Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Lion Warrants - As of December 31, 2013, Lion held warrants to purchase 21,606 shares of our common stock, with an exercise price of $0.75 per share. These warrants expire on February 18, 2022. The estimated fair value of $20,954 at December 31, 2013 is recorded as a current liability in our consolidated balance sheets under Part II, Item 8.
The Lion Warrants also contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of our common stock issuable upon exercise of the Lion Warrant, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges. See Note 13, Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
On March 31, 2014, as a result of the public offering of our common shares as discussed below, we estimate that Lion received the right to purchase approximately 2,900 shares of our common stock under their existing warrants and the exercise price of all of Lion's warrants will be adjusted to approximately $0.66 per share. Such adjustments were required by the terms of the existing Lion warrants.
Sale of Common Shares - On March 31, 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of approximately $28,500. As a result of this offering, our common stock issued and outstanding were 175,109 and 173,377 shares. Additionally, our underwriters have a 30 day option to acquire up to an additional 8,500 shares of our common stock at $0.50 per share.
Investor Purchase Rights - On April 26, 2011 and in connection with the February 18, 2011 amendment to the Lion Credit Agreement, we entered into a purchase and investment agreement with a group of investors ("Investors") and sold approximately 15,777 shares of common stock at a price of $0.90 per share and purchase rights to acquire additional shares of common stock for the aggregate net cash purchase price of approximately $12,417. The purchase rights gave the Investors the right to purchase up to an aggregate of approximately 27,443 additional shares of common stock at a price of $0.90 per share.
We also entered into a purchase agreement with Dov Charney that, among other things, allowed Mr. Charney to purchase 778 initial shares and up to 1,556 additional shares of common stock on the same terms as the purchase agreement with the Investors ("Charney Purchase Rights").
In July 2011, the Investors exercised their purchase rights and acquired 8,407 shares of our common stock for $0.90 per share. These transactions resulted in $6,593 in aggregate proceeds, net of transaction costs.
In October 2011, the remaining 19,036 Investor Purchase Rights and the 1,556 Charney Purchase Rights expired without being exercised. See Note 13, Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
Related Party Debt and Sale of Stock to CEO
Related-Party Debt - On March 24, 2011, we entered into an agreement with Mr. Charney, which canceled our $4,688 promissory notes payable to Mr. Charney in exchange for 4,223 shares of our common stock at a price of $1.11 per share, with 50% of these shares issued at closing and the remaining shares issuable to Mr. Charney only if prior to March 24, 2014, the closing sale price of our common stock exceeds $3.50 for 30 consecutive trading days or there is a change of control of American Apparel.
Sale of Common Stock to CEO - On July 7, 2011, we sold 778 shares of our common stock to Dov Charney, pursuant to his purchase agreement described above, at $0.90 per share, for total proceeds of $700. On March 24, 2011, we entered into an agreement to sell to Mr. Charney approximately 1,802 shares of our common stock at a price of $1.11 per share for proceeds of $2,000.
See Notes 12 and 13, Related Party Transactions and Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
Summary of Debt
The following is an overview of our total debt as of December 31, 2013 (dollars in thousands):
|
| | | | | | | | | | |
| Description of Debt | | Lender Name | | Interest Rate | | December 31, 2013 | | Covenant Violations |
| Revolving credit facility | | Capital One Leverage Finance Corp. | | (1) 30-day LIBOR of 0.167% plus 4.5% plus unused facility fee of 0.5%; or (2) bank's prime rate of 3.25% plus 3.5% plus unused facility fee of 0.5%; | | $ | 43,526 |
| | Yes (1) |
| Revolving credit facility (Canada) | | Bank of Montreal | | Bank's prime rate of 3% plus 4%; | | 443 |
| | No |
| Senior Secured Notes, net of discount and including 2% interest paid in kind | | | | 15.0% | | 203,265 |
| | No |
| Term loan including interest paid-in-kind | | Lion | | 20.0% | | 9,865 |
| | No |
| Other | | | | | | 411 |
| | |
| Capital lease obligations | | 25 individual leases ranging between $2-$3,832 | | from 0.4% to 23.5% | | 7,162 |
| | N/A |
| Cash overdraft | | | | | | 3,993 |
| | N/A |
| Total debt including cash overdraft | | | | | | $ | 268,665 |
| | |
(1) Violations were waived in connection with Amendment No. 5 to the Capital One Credit Facility. See Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Financial Covenants
Our credit agreements, the Lion Loan Agreement and the indenture under which our Notes were issued contain certain restrictive covenants. Significant covenants are summarized below.
Capital One Credit Facility - We are required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and we are also required to not exceed certain maximum leverage ratio thresholds, both determined at the end of each fiscal quarter. Additionally, our domestic subsidiaries are subject to an annual limitation of certain specified capital expenditure amounts as determined at the end of each fiscal year.
Among other provisions, the Capital One Credit Facilityrestrictions. It requires that we maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable.receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Bank of Montreal Credit Agreement, the indentureIndenture governing the Notes or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility.
On November 14, 2013, As of December 31, 2014, we entered into a third amendment tohad $1,080 of outstanding letters of credit secured against the Capital One Credit Facility, which among other things, waived the obligation to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, we agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at our option) and limitations on amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certain amendments to the borrowing base calculation. In addition, we paid a waiver fee of $75.
On March 25, 2014, we entered into a fifth amendment to the Capital One Credit Facility which, effective upon our receipt of at least $25,000 of net proceeds from a financing prior to April 15, 2014, among other things: waives the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; resets for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payable under the credit agreement by 0.5% per annum; and increases the fees payable upon early termination.
Bank of Montreal Credit Agreement - Significant covenants in the Bank of Montreal Credit Agreement include a fixed charge coverage ratio and a restriction on our Canadian subsidiaries from entering into operating leases that would lead to payments
under such leases totaling more than C$8,500 (Canadian dollars) in any fiscal year. The credit agreement also requires our Canadian subsidiaries to maintain minimum excess availability of 5% of the revolving credit commitment under the facility. As of December 31, 2013, we were in compliance with the required financial covenants of the Bank of Montreal Credit Agreement. Outstanding amounts under the Bank of Montreal Credit Agreement was repaid and on March 31, 2014 expired by its terms.Facility.
Senior Secured Notes due 2020 - The indentureIndenture governing our Notes imposes certain limitations on our ability to, among other things and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan of liquidation. We must annually report to the trustee on compliance with such limitations. The indentureIndenture also contains cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes. As of December 31, 2013, weWe were in compliance with the required covenants at December 31, 2014.
LionStandard General Loan Agreement - The Standard General Loan Agreement contains the same restrictive covenants as Lion Loan Agreement, contains restrictive covenants that incorporatewhich incorporated by reference several of the covenants contained in the indentureIndenture governing our Notes, including covenants restricting our ability to incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan of liquidation. The Lion Loan Agreement also contains cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default. As of December 31, 2013,2014, we were in compliance with the required covenants of the LionStandard General Loan Agreement.
Standard General Credit Agreement - The Standard General Credit Agreement contains customary defaults, including cross event of default to the Notes and the Standard General Loan Agreement and cross acceleration to other indebtedness above a threshold amount. If we experience certain change of control events, we are required to offer to prepay the Standard General Credit Agreement at 101% of the outstanding principal amount plus accrued and unpaid interest on the date of the prepayment. We will be required to prepay loans under the Standard General Credit Agreement to the extent necessary to avoid the loan being characterized as an "applicable high yield discount obligation" within the meaning of the Internal Revenue Code, by the first interest payment date following the fifth anniversary of closing.
Off-Balance Sheet Arrangements and Contractual ObligationsOFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Our material off-balance sheet contractual commitments are mainly operating lease obligations and certain letters of credit. These items were excluded from the balance sheet in accordance with GAAP.
Operating lease commitments mainly consist principally of leases for our retail stores, manufacturing facilities, main distribution centercenters, and corporate office. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. As appropriate, we intend to negotiate lease renewals as the leases approach expiration. We also have capital lease obligations, which consist of our manufacturing equipment leases.
Issued and outstanding letters of credit were $1,230$1,080 at December 31, 20132014, related primarily to workers’workers' compensation insurance and store leases. We also have capital lease obligations, which consist principally of leases for our manufacturing equipment.
Contractual Obligations Summary
The following table summarizes our contractual commitmentsobligations as of December 31, 2013,2014, which relate to future minimum payments due under non-cancelable licenses, leases, revolving credit facilities, long-term debt and advertising commitments. Future minimum rental payment on operating lease obligations presented below do not include any related property insurance, taxes, maintenance or other related costs required by operating leases. Operating lease rent expenses, including some related real estate taxes and maintenance costs, are included in the cost of sales and general and administrative expenses in our consolidated financial statements and amounted to approximately $79,794 for the year ended December 31, 2013.
| | | | Total | | Payments due by period | Total | | Payments due by period |
| Contractual Obligations | Less than 1 year | | 1-3 years | | 4-5 years | | More than 5 years | Less than 1 year | | 1-3 years | | 4-5 years | | More than 5 years |
| Long-term debt (1) | $ | 219,320 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 219,320 |
| |
| Current debt | 44,042 |
| | 44,042 |
| | — |
| | — |
| | — |
| $ | 34,312 |
| | $ | 34,312 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Long-term debt (a) | | 217,388 |
| | 0 |
| | 0 |
| | 0 |
| | 217,388 |
|
| Capital lease obligations, including interest | 8,755 |
| | 2,616 |
| | 6,121 |
| | 18 |
| | — |
| 5,385 |
| | 3,328 |
| | 2,057 |
| | 0 |
| | 0 |
|
| Operating lease obligations | 291,277 |
| | 74,161 |
| | 115,494 |
| | 69,690 |
| | 31,932 |
| 247,317 |
| | 63,007 |
| | 93,676 |
| | 43,945 |
| | 46,689 |
|
| Advertising commitments | 2,450 |
| | 2,450 |
| | — |
| | — |
| | — |
| 1,283 |
| | 1,283 |
| | 0 |
| | 0 |
| | 0 |
|
| Self-insurance reserves | 18,412 |
| | 6,494 |
| | 6,027 |
| | 3,195 |
| | 2,696 |
| 22,071 |
| | 6,989 |
| | 7,745 |
| | 4,047 |
| | 3,290 |
|
| Total contractual obligations | $ | 584,256 |
| | $ | 129,763 |
| | $ | 127,642 |
| | $ | 72,903 |
| | $ | 253,948 |
| $ | 527,756 |
| | $ | 108,919 |
| | $ | 103,478 |
| | $ | 47,992 |
| | $ | 267,367 |
|
(1)______________________
(a) Excludes unamortized discount of $5,779$5,965 at December 31, 20132014 and estimates of future cash and paid-in-kind interest of $7,233 related to the Notes and LionStandard General Loan Agreement.
Seasonality
We experience seasonality$477 related to uncertainty in our operations. Historically, sales during the third and fourth fiscal quarters have generally been the highest, with sales during the first fiscal quarter the lowest. This reflects the combined impact of the seasonality of our wholesale and retail sales channels.
Critical Accounting Estimates and Policies
Complete descriptions of our significant accounting policies are outlined in Note 2, Summary of Significant Accounting Policies to our consolidated financial statements under Item 8—Financial Statements and Supplementary Data. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our critical estimates and policies include:
inventory valuation, obsolescence;
fair value calculations including, derivative liabilities suchtax settlement as the Lion warrants;
valuation and recoverability of long-lived assets including the values assigned to acquired intangible assets, goodwill, and property and equipment;
accruals for the outcome of current litigation; and
self-insurance liabilities.
In general, estimates are based on historical experience, on information from third party professionals and on various other sources and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our management considers an accounting estimate to be critical if:
it requires assumptions to be made that were uncertain at the time the estimate was made; and
changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on our consolidated results of operations or financial condition.
Revenue Recognition
We recognize product sales when title and risk of loss have transferred to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collectability is reasonably assured. Wholesale product sales are recorded at the time the product is either picked up by or shipped to the customer. Online product sales are recorded at the time the products are received by the customers. Retail store sales are recorded as revenue upon the sale of product to retail customers. Our net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances and are recorded net of sales or value added tax. Allowances provided for these items are presented in the consolidated financial statements primarily as reductions to sales and cost of sales (see Sales Returns and Allowances discussed below for further information).
We recognize revenues from gift cards, gift certificates and store credits as they are redeemed for product. Prior to redemption, we maintain an unearned revenue liability for gift cards, gift certificates and store credits until we are released from such liability or when we determine that some portion of gift cards will not be redeemed. See Gift Cards below.
Sales Returnsunable to reasonably estimate the timing and Allowances
We analyze sales returns in order to make reasonable estimates of product returns based upon historical experience. Estimates for sales returns are based on a variety of factors including actual returns based on expected return data communicated to us by our customers. Accordingly, we believe that our historical returns analysis is an accurate basis for our allowance for sales returns. We regularly review the factors that influence our estimates and, if necessary, make adjustments when we believe that actual product returns and credits may differ from established reserves. If actual or expected future returns and claims are
significantly greater or lower than the allowance for sales returns established, we would record a reduction or increase to net revenues in the period in which we made such determination.
Shipping and Handling Costs
Shipping and handling costs consist primarily of freight expenses incurred to transport products to our retail stores and distribution center, and to our wholesale and online retail customers. These costs are included in cost of sales. Amounts billed to customers for shipping are included in net sales.
Gift Cards
Upon issuance of a gift card a liability is established for the cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of gift cards is not redeemed ("breakage"). We determine breakage income for gift cards based on historical redemption patterns. Breakage income is recorded as a credit to selling expenses, which is a component of operating expenses in the consolidated statements of operations. Currently, we record breakage when gift cards remain unredeemed after two years. Our gift cards, gift certificates and store credits do not have expiration dates.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate breakage.
Trade Receivables and Allowance for Doubtful Accounts
Accounts receivable primarily consists of trade receivables, including amounts due from credit card companies, net of allowances. On a periodic basis, we evaluate our trade receivables and establish an allowance for doubtful accounts.
We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. Payments from customers are continuously monitored. We maintain an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (“FIFO”) method. We identify potential excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences.
We have evaluated the current level of inventories considering historical sales and other factors and, based on this evaluation, we record adjustments to cost of goods sold to reflect inventories at net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, customer demand or competition differ from expectations.
Long-Lived Assets
We follow the provisions of ASC 360 “Property, Plant and Equipment”, which requires evaluation of the need for an impairment charge relating to long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The estimatedrelated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write down to a new depreciable basis is required. If required, an impairment charge is recorded based on an estimate of future discounted cash flows.
We consider the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of retail stores relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of the assets or in our overall strategy with respect to the manner or use of the acquired assets or changes in our overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in our stock price for a sustained period of time; and (vi) regulatory changes.
We evaluate acquired assets and our retail stores for potential impairment indicators at least annually and more frequently upon the occurrence of events that could impact prior conclusions. Judgment regarding the existence of impairment indicators is based on market conditions and operational performance of our businesses. Future events could cause us to conclude that impairment indicators exist, and therefore long lived assets could be impaired. Such evaluations are significantly impacted by estimates of future revenues, costs and expenses and other factors. A significant change in cash flows in the future could result in an impairment of long lived assets.
Income Taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. During the years ended December 31, 2013 and 2012, we recorded a valuation allowance against deferred tax assets of $120,694 and $77,578. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance.
Contingencies
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings or governmental assessments that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of these matters as well as the merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, is disclosed. Associated legal fees are expensed as incurred.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees are disclosed.
There can be no assurance that such matters will not materially and adversely affect our business, financial position, and results of operations or cash flows.
In making these determinations, we assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We determine the amount of reserves needed, if any, for each individual issue based on our knowledge and experience and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter, the ultimate resolution of each matter, or changes in approach, such as a change in settlement strategy. There is no assurance that such matters will not materially and adversely affect our business, financial position, and results of operations or cash flows. See Notes 15 and 18, Commitments and Contingencies and Litigation to our consolidated financial statements under Part II, Item 8.
Self-Insurance Liabilities
We maintain self-insurance programs for our estimated commercial general liability, workers’ compensation, and employees medical risks. Under these programs, we maintain insurance coverage for losses in excess of specified per-occurrence amounts. Estimated costs under these programs, including incurred but not reported claims, are recorded as expense based upon historical experience, trends of paid and incurred claims, deductibles, and other actuarial assumptions. If actual claim trends under these programs, including the severity or frequency of claims, differ from our estimates, our financial results may be significantly impacted.
Other Matters
Accounting Standards Updates
Accounting standards updates effective after December 31, 2013, are not expected to have a material effect on our consolidated financial statements.
payments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks (amounts in thousands)
Our exposureWe are subject to various market risk is limited toexposures such as interest rate risk associated with our credit facilities, and foreign currency exchange rate risk associated with our foreign operations.operations, and inflation. Adverse changes to these risks may occur due to changes in the liquidity of a market, or to changes in market perceptions of creditworthiness and risk tolerance. The following disclosure reflects estimates of future performance and economic conditions. Actual results may differ.
Interest Rate Risk
Based on our interest rate exposure on variable rate borrowings at December 31, 2013,2014, a 1% increase in average interest ratesrate on our borrowings would increase future interest expense by approximately $37$29 per month. We determined this amount based on approximately $43,969$34,299 of variable rate borrowings at December 31, 2013.2014. We are currently not using any interest rate collars or hedges to manage
or reduce interest rate risk. As a result, any increase in interest rates on the variable rate
borrowings would increase interest expense and reduce net income. Our primary exposure to variable interest rates is through the effect of fluctuations in LIBOR on the interest rate under the Capital One Credit Agreement.
Foreign Currency Exchange Rate Risk
The majority of our operating activities are conducted in U.S. dollars. Approximately 36.1%34.2% of our net sales for the year ended December 31, 20132014 were denominated in foreign currencies. Nearly all of our production costs and material costs are denominated in U.S. dollars although the majority of the yarn is sourced from outside the United States.U.S. If the U.S. dollar were to appreciate by 10% against other currencies it could have a significant adverse impact on our earnings. Since an appreciated U.S. dollar makes goods produced in the United StatesU.S. relatively more expensive to overseas customers, other things being equal, we would have to lower our retail margin in order to maintain sales volume overseas. A lower retail margin overseas would adversely affect net income assuming sales volume remains the same. Functional currencies of our foreign operations consist of the Canadian dollar for operations in Canada, the Australian dollar for operations in Australia, the pound Sterling for operations in the U.K., the Euro for operations in the European Union, the Franc for operations in Switzerland, the New Israeli Shekel for operations in Israel, the Yen for the operations in Japan, the Won for operations in South Korea, the Renminbi or Hong Kong dollar for operations in China, the Real for operations in Brazil and the Peso for operations in Mexico, as well as other local currencies for other foreign operations.Mexico.
InflationCommodity Price Risk
Inflation affectsOur major market risk exposure is the costcommodity pricing of raw materials, goods and services usedcotton in our operations. The largest of these are the cost of yarn and fabric.fabric used in our manufacturing processes. In addition, high oil costs can affect the cost of all raw materials and components. The competitive environment can limit our ability to recover higher costs resulting from inflationcost increases by raising prices. Although we cannot precisely determine the effects of inflationchanges in cotton prices on our business, we believe that the effects on revenues and operating results have not been significant, except for the impact of the dramatic increase in yarn prices in 2010 and part of 2011. We do not believe that inflation has had a material impact on our results of operations for the periods presented, except for the higher prices we paid for yarn and fabrics in the first part of 2011. We are unable to predict if we will be able to successfully pass on the added cost of any future raw material cost increases by further increasing the price of our products to our wholesale and retail customers.
American Apparel, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders of
American Apparel, Inc.
We have audited the accompanying consolidatedbalance sheets of American Apparel, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the relatedconsolidated statements operations and comprehensive loss, stockholders’ (deficit) equity and cash flows for the years ended December 31, 2013, 2012, and 2011. Our audits also included the financial statement schedule as of and for the years listed in the index at Item 15. These consolidated financial statements and financial statement scheduleare the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Apparel, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidatedresults of its operations and its cash flows for the years ended December 31, 2013, 2012, and 2011in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Apparel, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 1, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Very truly yours,
/s/ Marcum LLP
Marcum LLP
Melville, NY
April 1, 2014
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders of
American Apparel, Inc.
We have audited the accompanying consolidatedbalance sheets of American Apparel, Inc. and Subsidiaries (the "Company") as of December 31, 2014 and 2013, and the relatedconsolidated statements operations and comprehensive loss, stockholders' deficit and cash flows for the years ended December 31, 2014, 2013, and 2012. Our audits also included the financial statement schedule as of and for the years listed in the index at Item 15. These consolidated financial statements and financial statement scheduleare the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Apparel, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the consolidatedresults of its operations and its cash flows for the years ended December 31, 2014, 2013, and 2012in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Apparel, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 and our report dated March 25, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Marcum LLP
Marcum LLP
Melville, NY
March 25, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Audit Committee of the
Board of Directors and Shareholders of
American Apparel, Inc.
We have audited American Apparel, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management Annual Report on Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
In our opinion, American Apparel, Inc. and Subsidiaries'maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive loss, shareholders' deficit, and cash flows and the related financial statement schedule for the years ended December 31, 2014, 2013, and 2012 of the Company and our report dated March 25, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Marcum LLP
Marcum LLP
Melville, NY
March 25, 2015
American Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts and shares in thousands, except per share amounts)
| | | | December 31, | December 31, |
| | 2013 | | 2012 | 2014 | | 2013 |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | |
| Current assets: | | | | |
| Cash | $ | 8,676 |
| | $ | 12,853 |
| $ | 8,343 |
| | $ | 8,676 |
|
| Trade accounts receivable, net of allowances of $2,229 and $2,085 at December 31, 2013 and 2012, respectively | 20,701 |
| | 22,962 |
| |
| Restricted cash | — |
| | 3,733 |
| |
| Trade accounts receivable (net of allowances $458; $2,229) | | 25,298 |
| | 20,701 |
|
| Prepaid expenses and other current assets | 15,636 |
| | 9,589 |
| 16,442 |
| | 15,636 |
|
| Inventories, net | 169,378 |
| | 174,229 |
| 147,578 |
| | 169,378 |
|
| Income taxes receivable and prepaid income taxes | 306 |
| | 530 |
| 648 |
| | 306 |
|
| Deferred income taxes, net of valuation allowance | 599 |
| | 494 |
| 681 |
| | 599 |
|
| Total current assets | 215,296 |
| | 224,390 |
| 198,990 |
| | 215,296 |
|
| PROPERTY AND EQUIPMENT, net | 69,303 |
| | 67,778 |
| |
| DEFERRED INCOME TAXES, net of valuation allowance | 2,426 |
| | 1,261 |
| |
| OTHER ASSETS, net | 46,727 |
| | 34,783 |
| |
| Property and equipment, net | | 49,317 |
| | 69,303 |
|
| Deferred income taxes, net of valuation allowance | | 2,194 |
| | 2,426 |
|
| Other assets, net | | 43,888 |
| | 46,727 |
|
| TOTAL ASSETS | $ | 333,752 |
| | $ | 328,212 |
| $ | 294,389 |
| | $ | 333,752 |
|
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | | | |
| CURRENT LIABILITIES | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | |
| Current liabilities: | | | | |
| Cash overdraft | $ | 3,993 |
| | $ | — |
| $ | 5,714 |
| | $ | 3,993 |
|
| Revolving credit facilities and current portion of long-term debt | 44,042 |
| | 60,556 |
| 34,312 |
| | 44,042 |
|
| Accounts payable | 38,290 |
| | 38,160 |
| 35,554 |
| | 38,290 |
|
| Accrued expenses and other current liabilities | 50,018 |
| | 41,516 |
| 61,369 |
| | 50,018 |
|
| Fair value of warrant liability | 20,954 |
| | 17,241 |
| 19,239 |
| | 20,954 |
|
| Income taxes payable | 1,742 |
| | 2,137 |
| 2,063 |
| | 1,742 |
|
| Deferred income tax liability, current | 1,241 |
| | 296 |
| 1,045 |
| | 1,241 |
|
| Current portion of capital lease obligations | 1,709 |
| | 1,703 |
| 2,978 |
| | 1,709 |
|
| Total current liabilities | 161,989 |
| | 161,609 |
| 162,274 |
| | 161,989 |
|
| LONG-TERM DEBT, net of unamortized discount of $5,779 and $27,929 at December 31, 2013 and 2012, respectively | 213,468 |
| | 110,012 |
| |
| CAPITAL LEASE OBLIGATIONS, net of current portion | 5,453 |
| | 2,844 |
| |
| DEFERRED TAX LIABILITY | 536 |
| | 262 |
| |
| DEFERRED RENT, net of current portion | 18,225 |
| | 20,706 |
| |
| OTHER LONG-TERM LIABILITIES | 11,485 |
| | 10,695 |
| |
| Long-term debt (net of unamortized discount of $5,149; $5,779) | | 217,388 |
| | 213,468 |
|
| Capital lease obligations, net of current portion | | 1,982 |
| | 5,453 |
|
| Deferred tax liability | | 200 |
| | 536 |
|
| Deferred rent, net of current portion | | 13,346 |
| | 18,225 |
|
| Other long-term liabilities | | 14,715 |
| | 11,485 |
|
| TOTAL LIABILITIES | 411,156 |
| | 306,128 |
| 409,905 |
| | 411,156 |
|
| | | | | |
| COMMITMENTS AND CONTINGENCIES |
|
| |
|
|
|
| |
|
|
| STOCKHOLDERS’ (DEFICIT) EQUITY | | | | |
| Preferred stock, $0.0001 par value per share, authorized 1,000 shares; none issued | — |
| | — |
| |
| Common stock, $0.0001 par value per share, authorized 230,000 shares; 113,469 shares issued and 111,330 shares outstanding at December 31, 2013 and 110,111 shares issued and 107,181 shares outstanding at December 31, 2012 | 11 |
| | 11 |
| |
| | | | | |
| STOCKHOLDERS' DEFICIT | | | | |
| Preferred stock, $0.0001 par value per-share, authorized 1,000 shares; none issued | | 0 |
| | 0 |
|
| Common stock, $0.0001 par value per-share, authorized 230,000 shares; Issued 176,566; 113,469; Outstanding 176,194; 111,330; | | 18 |
| | 11 |
|
| Additional paid-in capital | 185,472 |
| | 177,081 |
| 218,779 |
| | 185,472 |
|
| Accumulated other comprehensive loss | (4,306 | ) | | (2,725 | ) | (6,915 | ) | | (4,306 | ) |
| Accumulated deficit | (256,424 | ) | | (150,126 | ) | (325,241 | ) | | (256,424 | ) |
| Less: Treasury stock, 304 shares at cost | (2,157 | ) | | (2,157 | ) | (2,157 | ) | | (2,157 | ) |
| TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY | (77,404 | ) | | 22,084 |
| |
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | 333,752 |
| | $ | 328,212 |
| |
| TOTAL STOCKHOLDERS' DEFICIT | | (115,516 | ) | | (77,404 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 294,389 |
| | $ | 333,752 |
|
See accompanying notes to consolidated financial statements.
American Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(Amounts and shares in thousands, except per share amounts)
| | | | Years Ended December 31, | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Net sales | $ | 633,941 |
| | $ | 617,310 |
| | $ | 547,336 |
| $ | 608,891 |
| | $ | 633,941 |
| | $ | 617,310 |
|
| Cost of sales | 313,056 |
| | 289,927 |
| | 252,436 |
| 299,756 |
| | 313,056 |
| | 289,927 |
|
| Gross profit | 320,885 |
| | 327,383 |
| | 294,900 |
| 309,135 |
| | 320,885 |
| | 327,383 |
|
| Selling expenses | 241,683 |
| | 227,447 |
| | 209,841 |
| |
| General and administrative expenses (including related party charges of $1,016, $1,090 and $919 for the years ended December 31, 2013, 2012 and 2011, respectively) | 106,957 |
| | 97,327 |
| | 104,085 |
| |
| Selling and distribution expenses | | 212,557 |
| | 241,683 |
| | 227,447 |
|
| General and administrative expenses (including related party charges of $787; $1,016; $1,090) | | 121,423 |
| | 106,957 |
| | 97,327 |
|
| Retail store impairment | 1,540 |
| | 1,647 |
| | 4,267 |
| 2,738 |
| | 1,540 |
| | 1,647 |
|
| (Loss) income from operations | (29,295 | ) | | 962 |
| | (23,293 | ) | (27,583 | ) | | (29,295 | ) | | 962 |
|
| Interest expense | 39,286 |
| | 41,559 |
| | 33,167 |
| 39,853 |
| | 39,286 |
| | 41,559 |
|
| Foreign currency transaction loss | 1 |
| | 120 |
| | 1,679 |
| 1,479 |
| | 1 |
| | 120 |
|
| Unrealized loss (gain) on change in fair value of warrants and purchase rights | 3,713 |
| | 4,126 |
| | (23,467 | ) | |
| Loss (gain) on extinguishment of debt | 32,101 |
| | (11,588 | ) | | 3,114 |
| |
| Other expense (income) | 131 |
| | 204 |
| | (193 | ) | |
| Unrealized (gain) loss on change in fair value of warrants | | (1,715 | ) | | 3,713 |
| | 4,126 |
|
| (Gain) loss on extinguishment of debt | | (171 | ) | | 32,101 |
| | (11,588 | ) |
| Other (income) expense | | (371 | ) | | 131 |
| | 204 |
|
| Loss before income taxes | (104,527 | ) | | (33,459 | ) | | (37,593 | ) | (66,658 | ) | | (104,527 | ) | | (33,459 | ) |
| Income tax provision | 1,771 |
| | 3,813 |
| | 1,721 |
| 2,159 |
| | 1,771 |
| | 3,813 |
|
| Net loss | $ | (106,298 | ) | | $ | (37,272 | ) | | $ | (39,314 | ) | $ | (68,817 | ) | | $ | (106,298 | ) | | $ | (37,272 | ) |
| | | | | | | | | | | |
| Basic and diluted loss per share | $ | (0.96 | ) | | $ | (0.35 | ) | | $ | (0.42 | ) | |
| | | | | | | |
| Weighted average basic and diluted shares outstanding | 110,326 |
| | 105,980 |
| | 92,599 |
| |
Basic and diluted loss per-share (a) | | $ | (0.43 | ) | | $ | (0.96 | ) | | $ | (0.35 | ) |
Weighted-average basic and diluted shares outstanding (a) | | 158,844 |
| | 110,326 |
| | 105,980 |
|
| | | | | | | | | | | |
Net loss (from above) | $ | (106,298 | ) | | $ | (37,272 | ) | | $ | (39,314 | ) | $ | (68,817 | ) | | $ | (106,298 | ) | | $ | (37,272 | ) |
| Other comprehensive (loss) income item: | | | | | | | | | | |
| Foreign currency translation, net of tax | (1,581 | ) | | 631 |
| | (188 | ) | |
| Foreign currency translation | | (2,609 | ) | | (1,581 | ) | | 631 |
|
| Other comprehensive (loss) income, net of tax | (1,581 | ) | | 631 |
| | (188 | ) | (2,609 | ) | | (1,581 | ) | | 631 |
|
| Comprehensive loss | $ | (107,879 | ) | | $ | (36,641 | ) | | $ | (39,502 | ) | $ | (71,426 | ) | | $ | (107,879 | ) | | $ | (36,641 | ) |
(a) The dilutive impact of incremental shares is excluded from loss position in accordance with U.S. generally accepted accounting principles ("GAAP").
See accompanying notes to consolidated financial statements.
American Apparel, Inc. and Subsidiaries
Consolidated Statements of Stockholders’Stockholders' (Deficit) Equity
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Common Shares Issued | | Par Value Amount | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated Deficit | | Total Stockholders’ (Deficit) Equity |
BALANCE, January 1, 2011 | 79,192 |
| | $ | 8 |
| | $ | (2,157 | ) | | $ | 153,881 |
| | $ | (3,168 | ) | | $ | (73,540 | ) | | $ | 75,024 |
|
| Share-based compensation, net | 801 |
| | — |
| | — |
| | 7,107 |
| | — |
| | — |
| | 7,107 |
|
| Conversion of debt to equity | 2,113 |
| | — |
| | — |
| | 4,688 |
| | — |
| | — |
| | 4,688 |
|
| Sale of common stock, net of fees | 26,764 |
| | 3 |
| | — |
| | 9,292 |
| | — |
| | — |
| | 9,295 |
|
| Reclassification of warrants from equity to debt | — |
| | — |
| | — |
| | (11,339 | ) | | — |
| | — |
| | (11,339 | ) |
| Reclassification of purchase rights upon exercise | — |
| | — |
| | — |
| | 2,857 |
| | — |
| | — |
| | 2,857 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (39,314 | ) | | (39,314 | ) |
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | (188 | ) | | — |
| | (188 | ) |
BALANCE, December 31, 2011 | 108,870 |
| | 11 |
| | (2,157 | ) | | 166,486 |
| | (3,356 | ) | | (112,854 | ) | | 48,130 |
|
| Share-based compensation, net | 1,241 |
| | — |
| | — |
| | 10,595 |
| | — |
| | — |
| | 10,595 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (37,272 | ) | | (37,272 | ) |
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | 631 |
| | — |
| | 631 |
|
| BALANCE, December 31, 2012 | 110,111 |
| | 11 |
| | (2,157 | ) | | 177,081 |
| | (2,725 | ) | | (150,126 | ) | | 22,084 |
|
| Share-based compensation, net | 3,358 |
| | — |
| | — |
| | 8,391 |
| | — |
| | — |
| | 8,391 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (106,298 | ) | | (106,298 | ) |
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | (1,581 | ) | | — |
| | (1,581 | ) |
| BALANCE, December 31, 2013 | 113,469 |
| | $ | 11 |
| | $ | (2,157 | ) | | $ | 185,472 |
| | $ | (4,306 | ) | | $ | (256,424 | ) | | $ | (77,404 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Common Shares Issued | | Par Value | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity (Deficit) |
| Balance as of January 1, 2012 | 108,870 |
| | $ | 11 |
| | $ | (2,157 | ) | | $ | 166,486 |
| | $ | (3,356 | ) | | $ | (112,854 | ) | | $ | 48,130 |
|
| Share-based compensation, net | 1,241 |
| | 0 |
| | 0 |
| | 10,595 |
| | 0 |
| | 0 |
| | 10,595 |
|
| Net loss | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (37,272 | ) | | (37,272 | ) |
| Foreign currency translation | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 631 |
| | 0 |
| | 631 |
|
| Balance as of December 31, 2012 | 110,111 |
| | 11 |
| | (2,157 | ) | | 177,081 |
| | (2,725 | ) | | (150,126 | ) | | 22,084 |
|
| Share-based compensation, net | 3,358 |
| | 0 |
| | 0 |
| | 8,391 |
| | 0 |
| | 0 |
| | 8,391 |
|
| Net loss | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (106,298 | ) | | (106,298 | ) |
| Foreign currency translation | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (1,581 | ) | | 0 |
| | (1,581 | ) |
| Balance as of December 31, 2013 | 113,469 |
| | 11 |
| | (2,157 | ) | | 185,472 |
| | (4,306 | ) | | (256,424 | ) | | (77,404 | ) |
| Public offering | 61,645 |
| | 6 |
| | 0 |
| | 28,435 |
| | 0 |
| | 0 |
| | 28,441 |
|
| Share-based compensation, net | 752 |
| | 0 |
| | 0 |
| | 4,299 |
| | 0 |
| | 0 |
| | 4,299 |
|
| Stock options exercised | 700 |
| | 1 |
| | 0 |
| | 573 |
| | 0 |
| | 0 |
| | 574 |
|
| Net loss | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (68,817 | ) | | (68,817 | ) |
| Foreign currency translation | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (2,609 | ) | | 0 |
| | (2,609 | ) |
| Balance as of December 31, 2014 | 176,566 |
| | $ | 18 |
| | $ | (2,157 | ) | | $ | 218,779 |
| | $ | (6,915 | ) | | $ | (325,241 | ) | | $ | (115,516 | ) |
See accompanying notes to consolidated financial statements.
American Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
| | | | For the Years ended December 31, | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | |
| Cash received from customers | $ | 636,049 |
| | $ | 615,342 |
| | $ | 542,930 |
| $ | 604,796 |
| | $ | 636,049 |
| | $ | 615,342 |
|
| Cash paid to suppliers, employees and others | (627,910 | ) | | (580,685 | ) | | (534,497 | ) | (575,124 | ) | | (627,910 | ) | | (580,685 | ) |
| Income taxes paid | (2,033 | ) | | (10 | ) | | (866 | ) | (2,055 | ) | | (2,033 | ) | | (10 | ) |
| Interest paid | (18,948 | ) | | (10,954 | ) | | (5,535 | ) | (33,250 | ) | | (18,948 | ) | | (10,954 | ) |
| Other | 119 |
| | (104 | ) | | 273 |
| 421 |
| | 119 |
| | (104 | ) |
| Net cash (used in) provided by operating activities | (12,723 | ) | | 23,589 |
| | 2,305 |
| (5,212 | ) | | (12,723 | ) | | 23,589 |
|
| | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Capital expenditures | (27,054 | ) | | (21,607 | ) | | (11,070 | ) | (9,818 | ) | | (27,054 | ) | | (21,607 | ) |
| Proceeds from sale of fixed assets | 173 |
| | 474 |
| | 311 |
| 21 |
| | 173 |
| | 474 |
|
| Restricted cash | 1,734 |
| | (3,720 | ) | | — |
| 214 |
| | 1,734 |
| | (3,720 | ) |
| Net cash used in investing activities | (25,147 | ) | | (24,853 | ) | | (10,759 | ) | (9,583 | ) | | (25,147 | ) | | (24,853 | ) |
| | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| Cash overdraft | 3,993 |
| | (1,921 | ) | | (1,407 | ) | 1,720 |
| | 3,993 |
| | (1,921 | ) |
| Repayments of expired revolving credit facilities, net | (28,513 | ) | | (48,324 | ) | | (6,874 | ) | 0 |
| | (28,513 | ) | | (48,324 | ) |
| Borrowings under current revolving credit facilities, net | 39,794 |
| | 28,451 |
| | — |
| |
| (Repayments) borrowings under current revolving credit facilities, net | | (9,709 | ) | | 39,794 |
| | 28,451 |
|
| (Repayments) borrowings of term loans and notes payable | (20,466 | ) | | 29,987 |
| | (13 | ) | (60 | ) | | (20,466 | ) | | 29,987 |
|
| Repayment of Lion term loan | (144,149 | ) | | — |
| | — |
| 0 |
| | (144,149 | ) | | 0 |
|
| Issuance of Senior Secured Notes | 199,820 |
| | — |
| | — |
| 0 |
| | 199,820 |
| | 0 |
|
| Payment of debt issuance costs | (11,909 | ) | | (5,226 | ) | | (1,881 | ) | |
| Net proceeds from issuance of common stock and purchase rights | — |
| | — |
| | 21,710 |
| |
| Payments of debt issuance costs | | (2,102 | ) | | (11,909 | ) | | (5,226 | ) |
| Net proceeds from issuance of common stock | | 28,435 |
| | 0 |
| | 0 |
|
| Proceeds from stock option exercise | | 573 |
| | 0 |
| | 0 |
|
| Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock | (2,623 | ) | | (393 | ) | | (759 | ) | (646 | ) | | (2,623 | ) | | (393 | ) |
| Proceeds from equipment lease financing | — |
| | 4,533 |
| | 3,100 |
| 0 |
| | 0 |
| | 4,533 |
|
| Repayment of capital lease obligations | (1,719 | ) | | (2,893 | ) | | (1,294 | ) | (2,659 | ) | | (1,719 | ) | | (2,893 | ) |
| Net cash provided by financing activities | 34,228 |
| | 4,214 |
| | 12,582 |
| 15,552 |
| | 34,228 |
| | 4,214 |
|
| EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | (535 | ) | | (390 | ) | | (1,491 | ) | |
| NET (DECREASE) INCREASE IN CASH | (4,177 | ) | | 2,560 |
| | 2,637 |
| |
CASH, beginning of period | 12,853 |
| | 10,293 |
| | 7,656 |
| |
CASH, end of period | $ | 8,676 |
| | $ | 12,853 |
| | $ | 10,293 |
| |
| | | | | | | |
| Effect of foreign exchange rate on cash | | (1,090 | ) | | (535 | ) | | (390 | ) |
| Net (decrease) increase in cash | | (333 | ) | | (4,177 | ) | | 2,560 |
|
| Cash, beginning of period | | 8,676 |
| | 12,853 |
| | 10,293 |
|
| Cash, end of period | | $ | 8,343 |
| | $ | 8,676 |
| | $ | 12,853 |
|
See accompanying notes to consolidated financial statements.
| | | | Years Ended December 31, | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | | | | | | | | | | |
| Net loss | $ | (106,298 | ) | | $ | (37,272 | ) | | $ | (39,314 | ) | $ | (68,817 | ) | | $ | (106,298 | ) | | $ | (37,272 | ) |
| Depreciation and amortization of property and equipment and other assets | 26,076 |
| | 22,989 |
| | 24,980 |
| 25,897 |
| | 26,076 |
| | 22,989 |
|
| Retail store impairment | 1,540 |
| | 1,647 |
| | 4,267 |
| 2,738 |
| | 1,540 |
| | 1,647 |
|
| Loss on disposal of property and equipment | 241 |
| | 102 |
| | 80 |
| 52 |
| | 241 |
| | 102 |
|
| Share-based compensation expense | 8,451 |
| | 10,580 |
| | 6,814 |
| 4,317 |
| | 8,451 |
| | 10,580 |
|
| Unrealized loss (gain) on change in fair value of warrants and purchase rights | 3,713 |
| | 4,126 |
| | (23,467 | ) | |
| Unrealized (gain) loss on change in fair value of warrants | | (1,715 | ) | | 3,713 |
| | 4,126 |
|
| Amortization of debt discount and deferred financing costs | 4,325 |
| | 10,261 |
| | 9,024 |
| 2,546 |
| | 4,325 |
| | 10,261 |
|
| Loss (gain) on extinguishment of debt | 32,101 |
| | (11,588 | ) | | 3,114 |
| |
| (Gain) loss on extinguishment of debt | | (171 | ) | | 32,101 |
| | (11,588 | ) |
| Accrued interest paid-in-kind | 9,949 |
| | 20,344 |
| | 18,711 |
| 4,189 |
| | 9,949 |
| | 20,344 |
|
| Foreign currency transaction loss | 1 |
| | 120 |
| | 1,679 |
| 1,479 |
| | 1 |
| | 120 |
|
| Allowance for inventory shrinkage and obsolescence | 116 |
| | (1,331 | ) | | (1,652 | ) | 6,049 |
| | 116 |
| | (1,331 | ) |
| Bad debt expense | 1,512 |
| | 99 |
| | 996 |
| 1,563 |
| | 1,512 |
| | 99 |
|
| Deferred income taxes | (168 | ) | | 154 |
| | 701 |
| (574 | ) | | (168 | ) | | 154 |
|
| Deferred rent | (2,093 | ) | | (895 | ) | | (1,969 | ) | (4,316 | ) | | (2,093 | ) | | (895 | ) |
| Changes in cash due to changes in operating assets and liabilities: | | | | | | | | | | |
| Trade accounts receivables | 596 |
| | (2,067 | ) | | (5,402 | ) | (5,658 | ) | | 596 |
| | (2,067 | ) |
| Inventories | 3,715 |
| | 13,949 |
| | (6,771 | ) | 12,682 |
| | 3,715 |
| | 13,949 |
|
| Prepaid expenses and other current assets | (6,063 | ) | | (1,829 | ) | | 1,770 |
| (1,210 | ) | | (6,063 | ) | | (1,829 | ) |
| Other assets | (4,393 | ) | | (8,455 | ) | | (5,075 | ) | 381 |
| | (4,393 | ) | | (8,455 | ) |
| Accounts payable | 2,287 |
| | 1,779 |
| | 3,944 |
| (1,078 | ) | | 2,287 |
| | 1,779 |
|
| Accrued expenses and other liabilities | 11,764 |
| | (4,223 | ) | | 9,701 |
| 16,344 |
| | 11,764 |
| | (4,223 | ) |
| Income taxes receivable / payable | (95 | ) | | 5,099 |
| | 174 |
| 90 |
| | (95 | ) | | 5,099 |
|
| Net cash (used in) provided by operating activities | $ | (12,723 | ) | | $ | 23,589 |
| | $ | 2,305 |
| $ | (5,212 | ) | | $ | (12,723 | ) | | $ | 23,589 |
|
| | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | |
| Property and equipment acquired and included in accounts payable | $ | 1,576 |
| | $ | 3,778 |
| | $ | 1,323 |
| $ | 195 |
| | $ | 1,576 |
| | $ | 3,778 |
|
| Property and equipment acquired under capital lease | 4,213 |
| | — |
| | — |
| $ | 434 |
| | $ | 4,213 |
| | $ | 0 |
|
| Reclassification of Lion Warrant from equity to debt | — |
| | — |
| | 11,339 |
| |
| Conversion of debt to equity | — |
| | — |
| | 4,688 |
| |
| Issuance of warrants and purchase rights at fair value | — |
| | — |
| | 6,387 |
| |
| Exercise of purchase rights | $ | — |
| | $ | — |
| | $ | 2,857 |
| |
| Standard General Loan Agreement assigned from Lion | | $ | 9,865 |
| | $ | 0 |
| | $ | 0 |
|
| Lion Loan Agreement assigned to Standard General | | $ | (9,865 | ) | | $ | 0 |
| | $ | 0 |
|
See accompanying notes to consolidated financial statements.
American Apparel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts and Shares in thousands, except per share amounts)
For the Years Ended December 31, 2013, 2012 and 2011
Note 1. Organization and Business
American Apparel, Inc. and its subsidiaries (collectively “the Company”the "Company") is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel products and designs,designs. The Company manufactures and sells clothing and accessories for women, men, children and babies. The Company sells its products through the wholesale distribution channel supplying t-shirts and other casual wear to distributors and screen printers, as well as direct to customers through its retail stores located in the United States,U.S. and internationally. In addition, the Company operates an online retail e-commerce website. At December 31, 2013,2014, the Company operated a total of 248242 retail stores in 20 countries including the U.S. and Canada.
Company Highlights
20Recent Developments countries:- On December 16, 2014, the United States, CanadaBoard of Directors (the "Board") appointed Paula Schneider as Chief Executive Officer ("CEO") of the Company, effective January 5, 2015. This appointment followed the termination of Dov Charney, former President and CEO, for cause in accordance with the terms of his employment agreement. Scott Brubaker, who served as Interim CEO since September 29, 2014, continued in the post until Ms. Schneider joined the Company. Additionally, on September 29, 2014, 18the Board appointed Hassan Natha as Chief Financial Officer ("CFO"), and John Luttrell resigned as Interim CEO and CFO of the Company.
On July 7, 2014, the Company received a notice from Lion Capital LLP ("Lion") asserting an event of default and an acceleration of the maturity of the loans and other outstanding obligations under the loan agreement (the "Lion Loan Agreement") as a result of the suspension of Dov Charney as CEO of the Company by the Board. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General Group ("Standard General" and such agreement, subsequent to the assignment, the "Standard General Loan Agreement"). other countries.Standard General has waived any default under the Standard General Loan Agreement that may have resulted or that might result from Mr. Charney not being the CEO of the Company.
LiquidityOn September 8, 2014, the Company and Management's PlanStandard General entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. See Note 8.
AsIn connection with the Nomination, Standstill and Support Agreement, dated July 9, 2014, (the "Standstill and Support Agreement") among the Company, Standard General and Mr. Charney, five directors including Mr. Charney resigned from the Company's Board effective as of December 31, 2013,August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and the Company. In addition, Lion exercised its rights to designate two members to the Board, whose appointments were effective as of September 15, 2014 and January 13, 2015, respectively.
In 2012, the German authorities audited the import records of the Company's German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. The German customs imposed a substantially higher tariff rate than the original rate that the Company had approximately $8,676paid on the imports, more than doubling the amount of the tariff that the Company would have to pay. The assessments of additional retaliatory duty originated from a trade dispute. Despite the ongoing appeals of the assessment, the German authorities demanded, and the Company paid, in connection with such assessment, $4,390 in the third quarter of 2014 and the final balance of $85 in the fourth quarter of 2014. The Company recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in its consolidated statements of operations.
Liquidity - As of December 31, 2014, the Company had $8,343 in cash, and $6,268 of availability for additional borrowings under the$34,299 outstanding on a $50,000 asset-backed revolving credit facility with Capital One Business Credit Corp. ("Capital One" and such facility the "Capital One Credit Facility") and the Company's credit agreement with Bank$13,146 of Montreal ("the Bank of Montreal Credit Agreement") (as defined in Note 7). Additionally,availability for additional borrowings. On March 13, 2015, the Company had $43,526 outstanding on a $50,000 asset-backed revolving credit facility (increased from $35,000 to $50,000 on July 5, 2013) under the Capital One Credit Facility and $443 outstanding on the C$5,000 (Canadian dollars) revolving credit facility under the Bank of Montreal Credit Agreement. On February 28, 2014 the Bank of Montreal Credit Agreement was reduced to C$2,000. Amounts outstanding were repaid, and the agreement expired by its own terms on March 31, 2014.
On February 28, 2014, the Company had approximately $4,878 in cash and $3,299$5,837 of availability for additional borrowings under the Capital One Credit Facility and Bank of Montreal Credit Agreement.Facility.
On April 4, 2013, the Company closed a private offering of $206,000 aggregate principal amount of its Senior Secured Notes due April 15, 2020 (the "Notes") at 97% of par and also entered into a new $35,000 asset-backed revolving credit facility with Capital One maturing on April 4, 2018, subject to a January 15, 2018 maturity under certain circumstances. Subsequently, on July 5, 2013,In March 2014, the Company entered into an amendmentthe Fifth Amendment to the Capital One Credit Facility pursuant to("the "Fifth Amendment") which the total commitment under the credit facility was raised to $50,000. Interest on the Notes approximating $13,500 per payment period (in 2014), is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013. The Company used the net proceeds from the offering of the Notes, together with borrowings under the new credit facility, to repay and terminate its credit agreement with Crystal Financial LLC ("Crystal") and its loan agreement with Lion Capital LLP ("Lion"). The notes and the new credit facility are the Company's senior secured obligations and are guaranteed, on a senior secured basis, by the Company's domestic restricted subsidiaries, subject to some exceptions.
During the third quarter of 2013, the Company determined it was probable that a special interest trigger event under the indenture governing the Notes would occur as of December 31, 2013 and accrued interest on the Notes at 15% retroactive to April 4, 2013 representing an additional 2% interest, which additional interest is payable in-kind until April 15, 2018 and in cash on subsequent interest dates. The Company recorded $3,044 in additional interest expense for the special interest trigger event for the year ended December 31, 2013. The company will pay in-kind the additional 2% interest retroactive to the issue date of the Notes on the next interest payment date, April 15, 2014.
Under the Capital One Credit Facility, the Company was in violation of certain covenants for the twelve consecutive fiscal months ended September 30, 2013 and December 31, 2013, and anticipated a violation for the twelve months ended March 31, 2014.
On November 14, 2013, the Company entered into a third amendment to the Capital One Credit Facility, which among other things, waived the obligation to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, the Company agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at the Company's option) and limitations on amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certain amendments to the borrowing base calculation. In addition, the Company paid a waiver fee of $75.
On March 25, 2014, the Company entered into a fifth amendment to the Capital One Credit Facility which, effective upon its receipt of at least $25,000 of net proceeds from a financing prior to April 15, 2014, among other things: waives the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periodsmonths ended December 31, 2013 and March 31, 2014; resets for future periods2014. Based on the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increasesFifth Amendment, the interest rate payablerates on borrowings under the credit
agreement by 0.5% per annumCapital One Credit Facility are equal to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (atat the Company's option);option and increasesare subject to specified borrowing requirements and covenants. In addition, the fees payable upon early termination.Fifth Amendment reset the minimum fixed charge coverage ratios, maximum leverage ratios, maximum capital expenditures and minimum adjusted EBITDA.
On May 22, 2013March 25, 2015, the Company entered into a loan agreement with Lion (the “Lion Loan Agreement”the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") in a principal amount of $4,500. On November 29, 2013, the Lion Loan Agreement was amended to increase the amount we borrowed by $5,000 and to make certain other technical amendments. The term loanswhich (i) waived any defaults under the Lion Loan Agreement mature on October 4, 2018 and bear interest at an initial interest rate of 18% per annum, which interest rate increased to 20% per annumCapital One Credit Facility due to the occurrence of a special interest trigger eventfailure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit the Company to enter into the Standard General Credit Agreement (as defined below), (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted the Company to borrow $15,000 under the Notes. Interest under the loan agreement is payable in cash or, to the extent permitted by the Company’s other debt agreements, in-kind.Standard General Credit Agreement.
On MarchAs of December 31, 2014, the Company completedwas not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124. However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, the Company was required to maintain a public offeringminimum fixed charge coverage ratio of approximately 61,645 sharesnot less than 1.00 to 1.00 and a maximum capital expenditure of its common stocknot more than $8,000. We were in compliance with these covenants at $0.50 per share for net proceeds of approximately $28,500. As a result of this offering, common stock issued and outstanding were 175,109 and 173,377 shares, respectively. Additionally, the underwriters have a 30 day option to acquire up to an additional 8,500 sharesDecember 31, 2014.
On March 25, 2015, one of the Company's common stocksubsidiaries borrowed $15,000 under an unsecured credit agreement with Standard General, dated as of March 25, 2015 (the "Standard General Credit Agreement"). The Standard General Credit Agreement is guaranteed by the Company, bears interest at $0.5014% per share.annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to the Company as contemplated by the Standstill and Support Agreement.
Management's Plan - Throughout 2014 and into early 2015, the Company brought on a new board of directors and hired on new senior management, including CEO, CFO, and General Counsel, as well as other additions to the management team. Together, the new board of directors and new management team are focused on implementing a turnaround strategy and enhancing the Company's corporate governance policies and practices. The Company believeshas started implementing additional operational and financial processes and disciplines to improve liquidity and profitability. To that it has sufficient financing commitmentsend, new members to meet funding requirements for the next twelve months.
The Company's transition to its new distribution center in La Mirada, California has had a significant negative impact on the Company's earnings and cash flow in 2013. For the yearended December 31, 2013, the Company incurred incremental distribution costs associated with these transition activities of approximately $14,874. All such costs have been charged to cost of sales and operating expenseexecutive team in the accompanying statementsareas of operations. The issues surrounding the transition primarily relate to improper system designplanning and integrationforecasting, operations, marketing and inadequate training and staffing. These issues caused processing inefficiencies that required the Company to employ additional staffing, among other things, in order to meet customer demand. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced.
e-commerce were added. The Company continues to develop other initiatives intended to either increase sales, reduce costs or improve liquidity. In the fourth quarter of 2013 and continuing into January of 2014, significant reductions were made in payroll and related costs associated with manufacturing and administrative overheads. The Company also instituted a program in the first quarter of 2014 to limit capital expenditures. Additionally, the Company intends to continue to drive productivity improvements from its new distribution center, reduce inventories,inventory, reduce store labor costs, and evaluate further consolidation ofconsolidate its administrative and manufacturing functions. EffortsAdditionally, new members were added to identify additional waysthe legal and human resources departments and the Company has introduced a new code of ethics which all new and current employees are asked to reduce costsread. Management believes that a strong operational and improve productivity are ongoing.financial discipline, along with a robust corporate governance structure, is an important element of the Company's long-term business strategy.
Although the Company has made significant improvementsprogress under this plan,these programs, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. The Company's cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. ThereAccordingly, there can be no assurance that the Company's planned improvements will be successful.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of American Apparel, Inc. and its wholly-owned100% owned subsidiaries. All intercompany accountsbalances and transactions have been eliminated upon consolidation. Certain reclassificationsprior year amounts have been madereclassified to confirm to the prior year consolidated financial statements and related footnotes to conform them to the 2013current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP")GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most complex and subjectivesignificant estimates include: revenue recognition, inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill, intangible assets, and property and equipment; fair value calculations, including derivative liabilities such as warrants;liabilities; contingencies, including accruals for the outcome of current litigation and assessments and self-insurance; and income taxes, including uncertain income tax positions and recoverability of deferred income taxes;taxes and cash flow projections in assessing future performance relatedany limitations as to financial standards requiring a prospective analysis in valuing and classifying assets and liabilities.
On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted.net operating losses ("NOL"). Actual results could differ from thethose estimates.
Restricted Cash
Restricted cash primarily represented cash collateral on standby letters of credit. The standby letters of credit are predominantly used as collateral for the Company's workers' compensation program. See Note 16.
Concentration of Credit Risk
Financial instruments whichthat potentially subject the Company to concentration of credit risk consist primarily of cash (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts) and trade accounts receivable (including credit card receivables) relating substantially to the Company’sCompany's U.S. Wholesale segment. TheCash is managed within established guidelines, and the Company mitigates its cash risk by investing through major financial institutions. The Company had approximately $7,374$6,361 and $8,265$7,374 held in foreign banks at December 31, 2013,2014, and 2012,2013, respectively.
The Company mitigates its risks relatedConcentration of credit risk with respect to trade receivablesaccounts receivable is limited by performing on-going credit evaluations of its customers and adjustsadjusting credit limits based upon payment history and the customer’scustomer's current credit worthiness, as determined by the review of their current credit information.worthiness. The Company also maintains an insurance policy for certain customers based on a customer’scustomer's credit rating and established limits. Collections and payments from customers are continuously monitored. One customer in the Company's U.S. Wholesale segment accounted for 14.2%16.6% and 15.1%14.2% of the Company’sits total trade accounts receivablesreceivable as of December 31, 20132014 and 2012,2013, respectively. The Company maintains an allowance for doubtful accounts which is based upon historical experience and specific customer collection issues that have been identified. While bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable is primarily receivable from customers including amounts due from credit card companies, net of allowances. On a periodic basis, the Company evaluates its trade accounts receivable and establishes an allowance for doubtful accounts.
The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by its review of current credit information. Payments from customers are continuously monitored. The Company maintains an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories consist of material, labor, and overhead, and are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. No supplier provided more than 10% of the Company's raw material purchases as of December 31, 2014 and 2013.
The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and records lower of cost or market reserves for such identified excess and slow-moving inventories. The Company also establishes reserves for inventory shrinkage for each of its retail locations and warehouse based on the historical results of physical inventory cycle counts.
Fair Value Measurements
The Company’s financial instruments are primarily composed ofrecorded in the consolidated balance sheets include cash, restricted cash,trade accounts receivable (including credit card receivables), accounts payable, revolving credit borrowings, itsfacilities, senior secured notes, term loans and warrants. Due to their short-term maturity, the carrying values of cash, trade accounts receivables, and accounts payable approximate their fair market values. In addition, the carrying amount of the revolving credit facility from Capital One approximates its fair value because of the variable market interest rate charged to the Company.
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of cash, restricted cash, accounts receivablea financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data is not readily available, the Company's own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and accounts payable closely approximates their carrying value due to their short maturities and variable rates. Theliabilities recorded on the consolidated balance sheets at fair value of fixed-rate borrowings notare categorized based on quoted prices is estimated using a discounted cash flow analysis.
The valuation techniques utilized are based upon observable and unobservable inputs. Observablethe level of judgment associated with inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the followingused to measure their fair value hierarchy:and the level of market price observability, as follows:
Level 1 – QuotedUnadjusted quoted prices are available in active markets for identical assets or liabilities.liabilities as of the reporting date.
Level 2 – ObservablePricing inputs are other than Level 1unadjusted quoted prices such as quotedin active markets, which are based on the following:
•Quoted prices for similar assets or liabilities; quotedliabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in markets that are not activenon-active markets; or other
•Either directly or indirectly observable inputs that are observable or can be corroborated by observable market data for substantially the full termas of the related asset or liabilities.reporting date.
Level 3 – UnobservablePricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. The valuation policies and procedures underlying are determined by the Company's accounting and finance team and are approved by the CFO.
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that are supported by little or no market activity and that areis significant to the fair value of assets or liabilities.
Wherever possible, the Company utilizes observable market inputs (quoted market prices) when measuring fair value.
Formeasurement in its entirety. Thus, a Level 3 fair value measurements categorized withinmeasurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.
As of December 31, 2014, there were no transfers between Levels 1, 2 and 3 of the fair value hierarchy, the Company's accounting and finance department determine valuation policies and procedures. Their determinations are approved by the Chief Financial Officer.hierarchy.
AsSummary of December 31, 2013, there were no transfers in or out of Significant Valuation Techniques
Level 2 and Level 3 from other levels.Measurements:
The fair value of fixed rate borrowings notSenior secured notes: Estimated based on quoted prices are estimatedfor identical senior secured notes in non-active market.
Level 3 Measurements:
Term loans: Estimated using a projected discounted cash flow analysis based on unobservable inputs including principal and interest payments, principal payments and discount rate. A yield rate and is classified within Level 3was estimated using yields rates for publicly traded debt instruments of the valuation hierarchy.comparable companies with similar features. An increase or decrease in the stock price and the discount rate assumption can significantly decrease or increase the fair value of the fixed rate borrowings.team loans. See Note 9.
The fair value of each warrant was estimatedWarrants: Estimated using the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility, and were classified within Level 3 of the valuation hierarchy.volatility. An increase or decrease in these inputs could significantly increase or decrease the fair value of the warrant. See Notes 9 and 13.
The fair value of indefinite-livedIndefinite-lived assets which consists exclusively of goodwill, is measured in connection with the Company’s annual goodwill impairment test. The fair value of the reporting unit to which goodwill has been assigned, is determined- goodwill: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions, and are classified within Level 3 of the valuation hierarchy.assumptions. An increase or decrease in the discount rate assumption and/or the terminal value assumption, in isolation, can have a significant effect on the fair value of the reporting unit. See Goodwill and Other Intangible Assetsbelow.
Retail stores that have indicators of impairment and whose carrying value of assets are greater than their related projected undiscounted future cash flows, are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimated- leasehold improvements: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit and discount rate, and is classified within Level 3 of the valuation hierarchy.rate. The key assumptions used in the estimates of projected cash flows were sales, gross marginmargins, and payroll costs. These forecasts arewere based on historical trends and take into account recent developments as well as the Company's plans and intentions. An increase or decrease in the discount rate assumption and/or projected cash flows, in isolation, can significantly decrease or increase the fair value of the assets, which would have an effect on the impairment recorded. See Impairment of Long-Lived Assetsbelow.
Website Development
The Company capitalizes applicable costs incurred during the application and website infrastructure development stage while expensing costs incurred during the planning and operating stage. The carrying values of the Company's capitalized website development costs were $2,445 and $2,805 as of December 31, 2014 and 2013, respectively, and were included in property and equipment in the accompanying consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill representsand other intangible assets arise as a result of business acquisitions and consist of the excess of the purchase pricecost of the acquisitions over the fair value oftangible and intangible assets acquired and liabilities assumed and identifiable netintangible assets of companies acquired. Goodwill
The Company annually evaluates goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually. The Company’s annual impairment test date is December 31.
Based on the qualitative assessment provisions of ASC 350 "Intangibles-Goodwill and Other", the Company determined that based on an analysis of qualitative factors, the fair value of the reporting unit was more likely than not greater than its carrying amount, and therefore, a quantitative calculation of the reporting unit's fair value was not be needed.impairment. The Company has not historically had anyalso reviews its goodwill impairment.
Otherand other intangible assets consist of deferred financing costs (amortized over the term of the applicable debt facility) and key money, broker and finder fees and lease rights (amortized over the life of the respective lease).
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that it is more likely than not the carrying amount of angoodwill may exceed its implied fair value. The Company quantitative determines whether, more likely than not, the fair value exceeds the carrying amount of a reporting unit. There are numerous assumptions and estimates underlying the quantitative assessments including future earnings, long-term strategies, and the Company's annual planning and forecasts. If these planned initiatives do not accomplish the targeted objectives, the assumptions and estimates underlying the quantitative assessments could be adversely affected and have a material effect upon the Company's financial condition and results of operations. As of December 31, 2014 and 2013, goodwill and other intangible impairment assessments indicated that there was no impairment.
Other intangible assets consist of deferred financing costs, key money, broker and finder fees, and lease rights. See Note 5.
Impairment of Long-Lived Assets
The Company assesses long-lived assets or asset groups for recoverability on a quarterly basis and when events or changes in circumstances indicate that their carrying amount may not be recoverable. The estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write down to a new depreciable basis is required. If required, an impairment charge is measured by the difference between the carrying value and the estimated fair value of the assets, with such estimated fair values generally determined using the discounted future cash flows of the assets using a rate that approximates the Company’s weighted average cost of capital. The Company considers the following to be some examples of important indicators, among others, that may trigger an impairment review:impairment: (i) significant under-performanceloss from operations or losses of retail stores relative to expectedincome from operations significantly below historical or projected future operating results; (ii) significant changes in the manner or use of the assets or in the Company'sits overall strategy with respect to the manner or use of the acquired assets or changes in the Company'sits overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company's stock price for a sustained period of time; and (vi) regulatory changes.
The Company evaluates acquiredthe performance of its stores to determine impairment of its long-lived assets at retail stores. New stores less than 12 months are excluded from the analysis because of lack of historical financial results or trends. Each new store needs between 12 months and its retail stores for potential24 months to mature and begin generating positive cash flows. For purposes of this evaluation, long-lived assets subject to store impairments include leasehold improvements as well as certain intangible assets such as broker and finder fees, lease rights, key money on store leases, and any other non-transferable assets. All intangible assets are subject to impairment indicators at least annuallyanalysis if they are non-refundable in nature.
If the Company identifies an indicator of impairment, it assesses recoverability by comparing, per store, the carrying amount of the store assets to the estimated future undiscounted cash flows associated with the store. An impairment loss is recognized when the carrying amount is not recoverable and more frequently uponis measured as the occurrenceexcess of eventscarrying value over fair value. Such estimated fair values are generally determined by using the discounted future cash flows using a rate that could impact prior conclusions.approximates the Company's weighted average cost of capital.
The key assumptions used in management's estimates of projected cash flow at its retail stores deal largely with forecasts of sales levels, gross margins, and payroll costs. These forecasts are typically based on historical trends and take into account recent developments as well as management's plans and intentions. Any material change in manufacturing costs or a raw material costs could significantly impact projected future cash flows of retail stores, and these factors are considered in evaluating impairment. Other factors, such as increased competition or a decrease in the desirability of the Company's products, could lead to lower projected sales levels which would adversely impact cash flows. A significant change in cash flows in the future could result in an impairment of long lived assets.
Web Site Development
The Company capitalizesidentified indicators of impairment at some retail stores in its U.S. Retail, Canada, and International segments. The Company performed a recoverability test on these stores and recorded impairment charges, as applicable, costs incurred duringof $2,738, $1,540 and $1,647 for the application and infrastructure website development stage and expenses costs incurred during the planning and operating stage. As of years ended December 31, 2014, 2013, and 2012,, the carrying value of the Company's capitalized website development costs were $2,805 and $2,242, respectively, and were included in property and equipment in the accompanying consolidated balance sheets. respectively.
Self-Insurance Liabilities
The Company self-insures a significant portion of expected losses under workers’workers' compensation and healthcarehealth care benefits programs. Estimated costs under the workers’workers' compensation program, including incurred but not reported claims, are recorded as expense based upon historical experience, trends of paid and incurred claims, and other actuarial assumptions. If actual claim trends under these programs, including the severity or frequency of claims, differ from the Company's estimates, its financial results may be significantly impacted.
The Company's estimated self-insurance liabilities are classified in its balance sheets as accrued expenses or other long-term liabilities based upon whether they are expected to be paid during or beyond the Company's normal operating cycle of 12 months from the date of its consolidated financial statements. Estimated costs under
the Company's healthcarehealth care program are based on estimated losses for claims incurred but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based onrecognized for the estimated future tax consequences attributable to differences between the financial statementsreporting basis and the respective tax basis of its assets and liabilities, and are measured using the enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferredCompany estimates the degree to which tax assets and liabilitiescredit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is recognizedprovided when it is determined that such amounts will more likely than not go unrealized. Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of cumulative losses and current operating performance and includes an assessment of the degree to which any losses are driven by items that are unusual in incomenature or incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions and any other factors arising during the period which may impact its future operating results. If it becomes more likely than not that includes the enactment date. For the years ended December 31, 2013, 2012 and 2011, thea tax asset will be realized, any related valuation allowance of such assets would be reversed. The Company recorded a valuation allowance against deferred tax assets of $143,062 and $120,694 $77,578for the years ended December 31, 2014 and $73,773. For all years presented, the Company recorded a valuation allowance against substantially all deferred tax assets. In the event the Company determines that it will be able to realize deferred income tax assets in the future, it will make an adjustment to the valuation allowance.2013.
The Company records net deferred tax assets to the extent it believes these assets will be realized using a more likely than not standard. In making such determination, the Company considers all available positive and negative evidence, including future reversals55
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liabilities.liability. In management's opinion,addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. Management believes that adequate provisions for income taxes have been made for all years.years, but the outcome of tax audits cannot be predicted with certainty. If actual taxableany issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.in the period such resolution occurs.
The Company's foreign domiciled subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. The Company accountselected to have its foreign subsidiaries, except for its subsidiaries in Brazil, Canada, China, Ireland, Italy, South Korea, and Spain, consolidated in the Company's U.S. federal income tax return. The Company is generally eligible to receive tax credits on its U.S. federal income tax return for most of the foreign taxes paid by the Company's subsidiaries included in the U.S. federal income tax return.
For financial statement purposes, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in accordance with ASC 740-“Income Taxes”.its financial statements. Gross unrecognized tax benefits are included in other long-termcurrent liabilities in the accompanying consolidated balance sheets. The Company accruessheets, and interest and penalties if incurred, on unrecognized tax benefits as components ofare recorded in the income tax provision in the accompanying consolidated statements of operations.
Contingencies
Certain conditions may exist at the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings or governmental assessments that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of these matters as well as the merits of the amount of relief sought or expected to be sought.
If the assessment ofThe Company establishes reserves when it believes a contingency indicates that itloss is probable that a materialand is able to estimate its potential exposure. For loss has been incurred and the amount of the liability cancontingencies believed to be estimated, then the estimated liability is accrued in the Company's consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, thenthe Company also discloses the nature of the contingent liability,loss contingency and an estimate of the possible loss or range of possible losses, if determinable and material, is disclosed. Associated legal fees are expensed as incurred.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
There can be no assuranceloss, or a statement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters willcould arise for which we do not materially and adversely affect the Company’s business, financial position, and results of operationshave insurance coverage or cash flows.
In making these determinations, the Company assesses the likelihood of any adverse judgments or outcomes to thesefor which insurance provides only partial coverage. These matters as well as potential ranges of probable losses. Management determines the amount of reserves needed, if any, for each individual issue based on its knowledge and experience and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter, the ultimate resolution of each matter, or changes in approach, such as a change in settlement strategy. The Company currently does not believe, based upon information available, that these matters willcould have a material adversenegative effect on its consolidatedour business, financial position, results of operations, or cash flows. There can be no assurance that such matters will not materially and adversely affect the Company's business, financial position, and results of operations or cash flows. See Notes 15 and 18, Commitments and Contingencies and Litigation.18.
Revenue Recognition
The Company recognizes product salesrevenue when all of the following criteria are met: (i) title and risk of loss have transferred to the customer, (ii) there is persuasive evidence of an arrangement, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Wholesale product sales are recorded at the time the product is either picked up by or shipped to the customer. Online product sales are recorded at the time the product is received by the customer. Retail store sales are recorded as revenue upon the sale of product to retail customers.
The Company’sCompany's net sales represent gross sales invoiced to customers less certain related charges for discounts, returns, and other promotional allowances, and are recorded net of sales or value added tax. Allowances provided for these items are presented in the consolidated financial statements primarily as reductions to sales and cost of sales (see Sales Returns and Allowances below for further information).allowances.
The Company recognizes revenue from gift cards, gift certificates and store credits as they are redeemed for product or when it is determined that some portion of gift cards will not be redeemed. See Gift Cards below.
Sales Returns and Allowances
The Company analyzes its historical sales returns in order to make reasonable estimates of product returnsreturn experience and records an allowance for its wholesale, online and retail store sales based upon historical experience. Estimates forsales. Estimating sales returns are based on a variety ofmany factors including actual returns based on expected return data communicated to the Company by its customers. Accordingly, the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns. The Company regularly reviews thethose factors that influence its estimates and if necessary, makes adjustments when it believes that actual product returns and creditsclaims may differ from established reserves. If actual or expected future returns and claims are significantly greater or lower than the allowance for sales returnsreserves established, the Company would record a reductiondecrease or increase to net revenues in the period in which it made such determination.
Shipping and Handling Costs
Shipping and handling costs consist primarily of freight expenses incurred to transport products to the Company's retail stores and distribution center, and to its wholesale and online retail customers. These costs are included in cost of sales. Amounts billed to customers for shipping are included in net sales.
Gift Cards
Upon issuance of a gift card, a liability is established for the cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of gift cards is not redeemed ("breakage"). The Company determines breakage income for gift cards based on historical redemption patterns. Breakage income is recorded as a credit to selling expenses, which is a component of operating expenses in the consolidated statements of operations. Currently, theThe Company currently records breakage when gift cards remain unredeemed after two-years.two years. The Company's gift cards, gift certificates and store credits do not have expiration dates. See Note 6.
The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate breakage.
Shipping and AllowanceHandling Costs
Shipping and handling costs consist primarily of freight expenses incurred to transport products to the Company's retail stores, distribution center, and wholesale and online retail customers. These costs are included in cost of sales while amounts billed to customers for Doubtful Accounts
Accounts receivable primarily consists of trade receivables, including amounts due from credit card companies,shipping are included in net of allowances. On a periodic basis, the Company evaluates its trade receivables and establishes an allowance for doubtful accounts.
The Company performs on-going credit evaluations of its customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by its review of current credit information. Payments from customers are continuously monitored. The Company maintains an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.sales.
Deferred Rent, Rent Expense and Tenant Allowances
The Company occupies its retail stores, corporate office, manufacturing facilities, and distribution center under operating leases generally with terms of one to ten years. Some leases contain renewal options for periods ranging from five to fifteen years under substantially the same terms and conditions as the original leases but with rent adjustments based on various factors specific to each agreement. Many of the store leases require payment of a specified minimum rent, a contingent rent based on a percentage of the store’sstore's net sales in excess of a specified threshold, plus defined escalating rent provisions. The Company recognizes its minimum rent expense on a straight-line basis over the term of the lease (including probable lease renewals), plus the construction period prior to occupancy of the retail location using a mid-month convention. Also included inFurther, rent expense areexpenses include payments of real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum operating lease payments. Certain lease agreements provide for the Company to receive lease inducements or tenant allowances from landlords to assist in the financing of certain property. These inducements are recorded as a component of deferred rent and amortized as a reduction of rent expense over the term of the related lease.
Advertising Promotion and Catalog
The Company does not defer advertising expenses the production costs of advertising the first time the advertising takes place.but expenses them as incurred. Advertising promotionexpenses were $15,176, $19,814, and catalog expenses$22,114 for the years ended December 31, 2014, 2013, 2012 and 2011 amounted to $19,814, $22,114, and $15,1942012, respectively, and arewere included in selling expenses in the accompanying consolidated statements of operations. The Company has cooperative advertising arrangements with certain vendors in its U.S. wholesale segment. For the years ended December 31, 2014, 2013, 2012 and 2011,2012, cooperative advertising expenses were not significant.
Share-Based Compensation
Share-based compensation expense for all share-based payment awards granted or modified is based on the estimated grant date fair value. The Company recognizes these compensation expenseexpenses on a straight-line basis net of forfeitures over the vesting period for all share-based awards granted. The Company determines the fair value of restricted stock awards based on the market value at the grant date. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards is estimated using the Black-Scholes option pricing model at the grant date. The Company calculates the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. Due to the lack of historical information, the Company determines the expected term of its stock option awards by using the simplified method, which assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. Estimated forfeitures are zero,, as to date, and actual forfeitures have been insignificant.insignificant to date. The expected dividend yield is zero as the Company has not paid or declared any cash dividends on its Common Stock.common stock. Based on these valuations, the Company recognized share-based compensation expense of $8,451, $10,580,$4,317, $8,451, and $6,814$10,580 for the years ended December 31, 2014, 2013, 2012 and 2011,2012, respectively.
Preferred Stock
At December 31, 2013 and 2012, the Company was authorized to issue 1,000 shares of preferred stock with a par value of $0.0001 with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. There were no shares issued or outstanding at December 31, 2013 and 2012. Shares may be issued in one or more series.
Earnings per Share
The Company presentsBasic earnings per share (“EPS”("EPS") utilizing a dual presentation of basic and diluted EPS. Basic EPS includes noexcludes dilution and is computed by dividingreflects net (loss) income available to common stockholdersloss divided by the weighted average numbershares of common sharesstock outstanding forduring the period.period presented. Diluted EPS includesis based on the potential dilution that could occur if securities or other contracts to issueweighted average shares of common stock were exercised or converted into common stock.
The Company hadand potential dilutive common stock under various options, warrants and other agreements at December 31, 2013, 2012 and 2011. The weighted average effects of 46,684, 53,478 and 49,270 shares at December 31, 2013, 2012 and 2011, respectively, were excluded fromoutstanding during the calculations of net loss per share for the years ended December 31, 2013, 2012 and 2011, because their impact would have been anti-dilutive.period presented. See Note 13.
Comprehensive Loss
Comprehensive loss represents the change in stockholders’stockholders' equity resulting from transactions other than stockholder investments and distributions. Accumulated other comprehensive loss includes changes in equity that are excluded from the Company’sCompany's net loss, specifically, unrealized gains and losses on foreign currency translation adjustments and is presented in the consolidated statements of stockholders' equity. The Company presents the components of comprehensive loss within the consolidated statements of operations and comprehensive loss.
Foreign Currency Translation
The Company's 100% owned direct and indirect foreign operations present their financial reports in the currency used in the economic environment in which they mainly operate, known as the functional currency. The Company's functional currencies consist of the Canadian dollar for operations in Canada, the Australian dollar for operations in Australia, the pound Sterling for operations in the U.K., the Euro for operations in the European Union (excluding the Swiss Franc for operations in Switzerland and the Swedish Kronor for operations in Sweden, which are remeasured to Euro before translated into U.S. dollar), the New Israeli Shekel for operations in Israel, the Yen for the operations in Japan, the Won for operations in South Korea, the Renminbi for operations in China, the Real for operations in Brazil, and the Peso for operations in Mexico.
Assets and liabilities in foreign subsidiaries are translated into U.S. dollars at the exchange rate on the closing date, while the income statement is translated at the average exchange rate for the financial year. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive loss in the consolidated statements of stockholders' deficit.
Recently Issued Accounting Standards
In August 2014, the Financial Accounting Standards UpdatesBoard ("FASB") issued a new standard on disclosure of uncertainties about an entity's ability to continue as a going concern. The new standard provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entity's ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.
AccountingIn June 2014, the FASB issued a new standard on accounting for share-based payments. The new standard clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant date fair value of the award. The new standard also clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.
In May 2014, the FASB issued a new standard on recognizing revenue in contracts with customers. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard creates a five-step process to recognize revenue that requires entities to exercise judgment when considering contract terms and relevant facts and circumstances. The new standard also requires expanded disclosures surrounding revenue recognition. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.
Other recently issued accounting standards updates effective after December 31, 2013, are not expected to have a material effect on the Company's consolidated financial statements.
Subsequent EventsNote 3. Inventories
The components of inventories are as follows:
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Raw materials | $ | 17,738 |
| | $ | 23,199 |
|
| Work in process | 2,805 |
| | 2,596 |
|
| Finished goods | 135,813 |
| | 146,361 |
|
| | 156,356 |
| | 172,156 |
|
| Less reserve for inventory shrinkage and obsolescence | (8,778 | ) | | (2,778 | ) |
| Total, net of reserves | $ | 147,578 |
| | $ | 169,378 |
|
The Company has evaluated events that occurred subsequentincreased its lower of cost or market reserves for excess and slow-moving inventories to $6,684 at December 31, 20132014 from $1,951 at December 31, 2013. As part of the Company's valuation analysis of inventory, the Company identified certain slow-moving, second quality finished goods and through the date the financial statementsraw materials inventory for additional reserves. Inventory shrinkage reserves were issued.$2,094 and $827 at December 31, 2014 and 2013, respectively.
Note 3. Inventories
The following table presents the components of inventories at December 31, 2013 and 2012:
|
| | | | | | | |
| | 2013 | | 2012 |
| Raw materials | $ | 23,199 |
| | $ | 22,301 |
|
| Work in process | 2,596 |
| | 2,197 |
|
| Finished goods | 146,361 |
| | 152,384 |
|
| | 172,156 |
| | 176,882 |
|
| Less: Reserve for inventory shrinkage and obsolescence | (2,778 | ) | | (2,653 | ) |
| | $ | 169,378 |
| | $ | 174,229 |
|
Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. The cost elements of inventories include materials, labor and overhead. For the years ended December 31, 2013, 2012 and 2011, no one supplier provided more than 10% of the Company’s raw material purchases.
The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and provides reserves for lower of cost or market reserves for such identified excess and slow-moving inventories. At December 31, 2013 and 2012, the Company had a lower of cost or market reserve for excess and slow-moving inventories of $1,951 and $2,140, respectively.
The Company establishes a reserve for inventory shrinkage for each of its retail locations and its warehouse. The reserve is based on the historical results of physical inventory cycle counts. The Company has a reserve for inventory shrinkage in the amount of $827 and $513 at December 31, 2013 and 2012, respectively.
Note 4. Property and Equipment
The following table presents the components of propertyProperty and equipment at December 31, 2013 and 2012:consist of the following:
| | | | | | | | | December 31, |
| | 2013 | | 2012 | 2014 | | 2013 |
| Machinery and equipment | $ | 58,069 |
| | $ | 50,180 |
| $ | 59,703 |
| | $ | 58,069 |
|
| Furniture and fixtures | 46,749 |
| | 42,430 |
| 47,404 |
| | 46,749 |
|
| Computers and software | 45,402 |
| | 37,556 |
| 47,220 |
| | 45,402 |
|
| Automobiles and light trucks | 1,334 |
| | 1,167 |
| 1,309 |
| | 1,334 |
|
| Leasehold improvements | 95,886 |
| | 86,623 |
| 94,747 |
| | 95,886 |
|
| Buildings | 547 |
| | 587 |
| 503 |
| | 547 |
|
| Construction in progress | 1,353 |
| | 5,293 |
| 115 |
| | 1,353 |
|
| | 249,340 |
| | 223,836 |
| 251,001 |
| | 249,340 |
|
| Less: Accumulated depreciation and amortization | (180,037 | ) | | (156,058 | ) | |
| Less accumulated depreciation and amortization | | (201,684 | ) | | (180,037 | ) |
| Total | $ | 69,303 |
| | $ | 67,778 |
| $ | 49,317 |
| | $ | 69,303 |
|
Property and equipment is recorded on the basis of cost and is depreciated using a straight-line method over the estimated used useful lives of fixed assets. Leasehold improvements are amortized over the shorter of the useful life of the assets or the lease term. Expenditures which significantly improve or extend the life of an asset are capitalized and depreciated over the asset's remaining useful life. The Company expenses maintenance and repair costs as incurred.
The useful lives of the Company's major classes of assets are as follows:
|
| |
| Machinery and equipment | 5 to 7 years |
| Furniture and fixtures | 3 to 5 years |
| Computers and software | 3 to 5 years |
| Automobiles and light trucks | 3 to 5 years |
| Leasehold improvements | Shorter of lease term or useful life |
| Buildings | 25 years |
Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. The costs of normal maintenance and repairs are charged to expense in the year incurred. Expenditures which significantly improve or extend the life of an asset are capitalized and depreciated over the asset’s remaining useful life. Amortization of leasehold improvements
is computed using the straight-line method over the shorter of the estimated useful lives of the related assets or the lease term. Upon sale or disposition, the related cost and accumulated depreciation are removed from the Company’sCompany's financial statements and the resulting gain or loss, if any, is reflected in income from operations. Property plant and equipment acquired are recorded as construction in progress until placed in-service, at which time the asset is reclassified to the appropriate asset category and depreciation commences. For
Depreciation and amortization expenses were $25,897, $26,076 and $22,989 for the years ended December 31, 2013, 2012, and 2011, depreciation and amortization expense relating to property and equipment was $26,076, $22,989 and $24,980, respectively. At December 31,2014, 2013, and 2012, property and equipment includes $15,115 and $16,415, for machineryrespectively. Machinery and equipment held under capital leases respectively.were $15,743 and $15,115 as of December 31, 2014 and 2013, respectively, which were included in property and equipment. Accumulated amortizationamortizations for these capital leases atwere $13,099 and $12,252 as of December 31, 2014, and 2013, and 2012 was $12,252 and $12,093.respectively.
The Company identified indicators59
Table of impairment present at certain retail stores within its U.S. Retail, Canadian and International segments, specifically related to under-performance or operating losses relative to expected historical or projected future operating results. The Company performed a recoverability test on these stores, and for the stores which failed the test, measured and recorded an impairment charge as applicable. The key assumptions used in the estimates of projected cash flows utilized in both the test and measurement steps of the impairment analysis were sales, gross margins, and payroll costs. These forecasts were based on historical trends and take into account recent developments as well as the Company's plans and intentions. Based upon the results of the discounted cash flow analysis, the Company recorded an impairment charge, primarily on certain retail store leasehold improvements, of $1,540, $1,647 and $4,267 for the years ended December 31, 2013, 2012, and 2011, respectively.Contents
Note 5. Goodwill, Intangible Assets and Other Assets
Goodwill of $1,906 is assigned to the U.S. Wholesale segment and is related to the acquisition of American Apparel Dyeing & Finishing, Inc. on June 2, 2005 and American Apparel Garment and Dyeing, Inc. on May 9, 2008.
Based on the quantitative assessment provisions of ASC 350 "Intangibles-Goodwill and Other", the Company determined that the fair value of the reporting unit was more likely than not greater than its carrying amount. For the years ended December 31, 2013, 2012 and 2011, the Company had no goodwill impairment.
The following table presents the net carrying amounts of definite and indefinite lived intangible assets and other assets at December 31, 2013 and 2012:assets.
| | | | | | | December 31, |
| | 2013 | | 2012 | 2014 | | 2013 |
| Deferred financing costs | $ | 10,275 |
| | $ | 4,101 |
| $ | 9,816 |
| | $ | 10,275 |
|
| Broker and finder fees | 1,779 |
| | 1,486 |
| 1,775 |
| | 1,779 |
|
| Lease rights | 187 |
| | 213 |
| 172 |
| | 187 |
|
| Key money on store leases | 1,652 |
| | 2,244 |
| 2,027 |
| | 1,652 |
|
| Gross amortizable intangible assets | 13,893 |
| | 8,044 |
| |
| Total intangible assets, gross | | 13,790 |
| | 13,893 |
|
| Accumulated amortization | (2,361 | ) | | (2,048 | ) | (2,739 | ) | | (2,361 | ) |
| Total net amortizable intangible assets | 11,532 |
| | 5,996 |
| |
| Total intangible assets, net | | 11,051 |
| | 11,532 |
|
| Goodwill | 1,906 |
| | 1,906 |
| 1,906 |
| | 1,906 |
|
| Workers compensation deposit | 16,124 |
| | 14,624 |
| 16,124 |
| | 16,124 |
|
| Lease security deposits | 9,013 |
| | 8,117 |
| 7,389 |
| | 9,013 |
|
| Restricted cash | 2,078 |
| | — |
| 1,650 |
| | 2,078 |
|
| Other | 6,074 |
| | 4,140 |
| 5,768 |
| | 6,074 |
|
| Total | $ | 46,727 |
| | $ | 34,783 |
| |
| Total intangible and other assets, net | | $ | 43,888 |
| | $ | 46,727 |
|
Intangible assets
Deferred financing costs represent costs incurred in connectionassociated with the issuance of certain indebtedness and were capitalized as deferred costsissuing debt and are being amortized on a straight-line basis over the term of the related indebtedness. The Company incurred relatedDeferred financing cost amortization expense of $1,895, $2,287,expenses were $1,901, $1,895, and $1,634,$2,287 for the years ended December 31, 2014, 2013, 2012 and 2011,2012, respectively, which is recorded towere included in interest expense.expense on the consolidated statements of operations.
Lease rights are costs incurred to acquire the right to lease a specific property. A majority of the Company's lease rights are related to premiums paid to landlords. Lease rights are recorded at cost and are amortized on a straight-line basis over the term of the respective leases.
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right"right to lease”lease" with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should thein case a landlord refuserefuses to allow the automatic right of renewal to be exercised.renewal. Key money is amortized on a straight-line basis over the respective lease terms.
Aggregate amortization expenseexpenses of intangible assets and other assets, (excludingexcluding deferred financing costs) iscosts, were $595, $456, and $472 for the years ended December 31, 2014, 2013 and 2012, respectively, which were included in operating expenses in the consolidated statements of operations foroperations. None of the years ended December 31, 2013, 2012 and 2011 and was approximately $456, $472, and $752, respectively.
intangible assets are anticipated to have a residual value. The following table presents the estimated future amortization expense of deferred financing costs, broker and finder fees, lease rights and key money for each of the five succeeding yearsexpenses related to amortizable intangible assets as of December 31, 2013:2014:
| | | | Amount | |
| 2014 | $ | 2,119 |
| |
| Year Ending December 31, | | | Amortization Expense |
| 2015 | 2,013 |
| | $ | 2,209 |
|
| 2016 | 1,901 |
| | 2,190 |
|
| 2017 | 1,877 |
| | 2,170 |
|
| 2018 and thereafter | 3,622 |
| |
| 2018 | | | 1,910 |
|
| 2019 and thereafter | | | 2,305 |
|
| Total | | | $ | 10,784 |
|
Goodwill
There were no changes in the carrying amount of goodwill for the year ended December 31, 2014. Goodwill is reviewed for impairment on an annual basis and more frequently if potential impairment indicators exist. No impairment indications were identified during any of the periods presented.
Note 6. Accrued Expenses and Other Current Liabilities
The following table presents the components of accrued expenses and other current liabilities are as of December 31, 2013 and 2012:follows:
| | | | | | | December 31, |
| | 2013 |
| 2012 | 2014 |
| 2013 |
| Compensation, bonuses and related taxes | $ | 10,170 |
| | $ | 11,524 |
| $ | 13,010 |
| | $ | 12,254 |
|
| Accrued interest | 6,064 |
| | 520 |
| 5,932 |
| | 6,064 |
|
| Workers’ compensation and other self-insurance reserves (Note 16) | 6,383 |
| | 5,288 |
| |
| Workers' compensation and other self-insurance reserves (Note 16) | | 6,760 |
| | 6,383 |
|
| Sales, value and property taxes | 3,868 |
| | 4,751 |
| 5,984 |
| | 5,240 |
|
| Gift cards and store credits | 7,391 |
| | 5,964 |
| 8,462 |
| | 7,391 |
|
| Loss contingencies | 1,177 |
| | 752 |
| 2,360 |
| | 1,177 |
|
| Accrued vacation | 1,603 |
| | 1,055 |
| |
| Deferred revenue | 1,258 |
| | 590 |
| 962 |
| | 1,258 |
|
| Deferred rent | 3,363 |
| | 2,997 |
| 3,422 |
| | 3,363 |
|
| Other | 8,741 |
| | 8,075 |
| 14,477 |
| | 6,888 |
|
| Total accrued expenses | $ | 50,018 |
| | $ | 41,516 |
| |
| Total accrued expenses and other current liabilities | | $ | 61,369 |
| | $ | 50,018 |
|
Note 7. Revolving Credit Facilities and Current Portion of Long-Term Debt
The following table presents revolving credit facilities and current portion of long-term debt as of December 31, 2013 and 2012:debt:
|
| | | | | | | |
| | 2013 | | 2012 |
| Revolving credit facility (Capital One), maturing April 2018 | $ | 43,526 |
| | $ | — |
|
| Revolving credit facility (Crystal), replaced in April 2013 | — |
| | 26,113 |
|
| Term loan (Crystal), replaced in April 2013 | — |
| | 30,000 |
|
| Revolving credit facility (Bank of Montreal), maturing March 2014 | 443 |
| | 4,387 |
|
| Current portion of long-term debt (Note 8) | 73 |
| | 56 |
|
| Total revolving credit facilities and current portion of long-term debt | $ | 44,042 |
| | $ | 60,556 |
|
|
| | | | | | | | | | | |
| | | | | | December 31, |
| | Lender | | Maturity | | 2014 | | 2013 |
| Revolving credit facility | Capital One | | April 14, 2018 | | $ | 34,299 |
| | $ | 43,526 |
|
| Revolving credit facility | Bank of Montreal | | March 31, 2014 | | 0 |
| | 443 |
|
| Current portion of long-term debt | | | | | 13 |
| | 73 |
|
| Total | | | | | $ | 34,312 |
| | $ | 44,042 |
|
The Company incurred interest chargesexpenses of $39,286, $41,559$39,853, $39,286 and $33,167$41,559 for the years ended December 31, 2014, 2013, 2012 and 2011,2012, respectively, for all outstanding borrowings. The interest chargesinterests subject to capitalization were not significant for the years ended December 31, 2014, 2013, 2012 and 2011 were not significant.2012.
Revolving Credit Facility - Capital One
On April 4, 2013, theThe Company had $34,299 and its domestic subsidiaries replaced the$43,526 outstanding on a $50,000 asset-backed revolving credit facility with Crystal with a new $35,000 asset-based revolving facility with Capital One. On July 5, 2013, the Company entered into an amendment to the credit agreement with Capital One pursuant to which the total commitment under the credit facilityas of December 31, 2014 and 2013, respectively. The amount available for additional borrowings on December 31, 2014 was raised to $50,000. The additional commitment was made under substantially the same terms as the existing facility.
$13,146. The Capital One Credit Facility matures on April 4,14, 2018 and is subject to a January 15, 2018 maturity if excess availability is less than $15,000 at the time of notice to Capital One of a determination by the Company that an Applicable High Yield Discount Obligation ("AHYDO")"applicable high yield discount obligation" redemption will be required pursuant to Section 3.01(e) of the indentureIndenture governing the Notes. SeeNotes (as defined in Note 8, Long-Term Debt8). Borrowings
In March 2014, the Company entered into the Fifth Amendment to the Capital One Credit Facility which waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December 31, 2013 and March 31, 2014. Based on the Fifth Amendment, the interest rates on borrowings under the Capital One Credit Facility bear interestare equal to LIBOR plus 4.5%5.0% or the bank's prime rate plus 3.5% (at4.0% at the Company's option)option and are subject to maintenance of specified borrowing base requirements and covenants. In addition, the Fifth Amendment reset the minimum fixed charge coverage ratios, maximum leverage ratios, maximum capital expenditures and minimum adjusted EBITDA.
On March 25, 2015, the Company entered into the Sixth Amendment which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit the Company to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted the Company to borrow $15,000 under the Standard General Credit Agreement.
Standard General informed the Company that it entered into an agreement with Capital One that could result in it purchasing all of the loans and commitments outstanding under the Capital One Credit Facility by September 30, 2015 or earlier under certain other circumstances.
As of December 31, 2014, the Company was not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124. However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, the Company was required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8,000. The Company was in compliance with these covenants at December 31, 2014.
The Capital One Credit Facility is secured by a lien on substantially all of the assets of the Company's domestic subsidiaries and equity interests in certain of the Company's foreign subsidiaries, subject to some exceptions. As of December 31, 2013, the Company had $1,230 of outstanding letters of credit secured against the Capital One Credit Facility. The amount available for additional borrowings on December 31, 2013 was $4,179.
Among other provisions, the Capital One Credit Facilityrestrictions. It requires that the Company maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable.receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Bank of Montreal Credit Agreement, under the indenture governing theSenior Notes Indenture (the "Indenture") or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility.
The As of December 31, 2014, the Company is required to maintain a minimum fixed charge coverage ratiohad $1,080 of not less than 1.00 to 1.00 and is also required to not exceed certain maximum leverage ratio thresholds, both determined as at the endoutstanding letters of each fiscal quarter. Additionally, the Company's domestic subsidiaries are subject to an annual limitation of certain specified capital expenditure amounts as determined at the end of each fiscal year.
Undercredit secured against the Capital One Credit Facility, the Company was in violation of certain covenants for the twelve consecutive fiscal months ended September 30, 2013 and December 31, 2013, and anticipated a violation for the twelve months ended March 31, 2014.
On November 14, 2013, the Company entered into a third amendment to the Capital One Credit Facility, which among other things, waived the obligation to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio for the twelve consecutive fiscal month period ending September 30, 2013. As a condition to the waiver, the Company agreed to a one percentage point increase in the interest rate to either LIBOR plus 4.5% or the bank's prime rate plus 3.5% (at the Company's option) and limitations on amounts available to be borrowed, consisting of the imposition of a reserve against the line that gradually reduced the total borrowing capacity to $47,500 and certain amendments to the borrowing base calculation. In addition, the Company paid a waiver fee of $75 .
On March 25, 2014, the Company entered into a fifth amendment to the Capital One Credit Facility which, effective upon its receipt of at least $25,000 of net proceeds from a financing prior to April 15, 2014, among other things: waives the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; resets for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payable under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at the Company's option); and increases the fees payable upon early termination.Facility.
Revolving Credit Facility - Bank of Montreal
On December 31, 2013, theThe Company's wholly-owned100% owned Canadian subsidiaries entered intohad a fourth amendment to the Bank of Montreal Credit Agreement that reduced the existing revolving credit facility amount from C$11,000 (Canadian dollars) to C$5,000 (Canadian dollars) and extended the maturity date to February 28, 2014. On February 28, 2014, the revolving credit facility commitment was further reduced to C$2,000 (Canadian dollars) and the maturity set to March 31, 2014. Additionally, the Company paid an extension feewith Bank of $10 plus certain legal fees.Montreal. Outstanding amounts under the Bank of Montreal Credit Agreement wasthis credit facility were repaid, and the agreement expired, on March 31, 2014 expired by its terms.
The Bank of Montreal Credit Agreement bore interest at 7.0% (the bank's prime rate at 3.0% as of December 31, 2013 plus 4.0% per annum) payable monthly. This line of credit was secured by a lien on the Canadian subsidiaries' accounts receivable, inventory and certain other tangible assets. Available borrowing capacity at December 31, 2013 was $2,089.
The Bank of Montreal Credit Agreement contained a fixed charge coverage ratio and restricts the Company's Canadian subsidiaries from entering into operating leases above a specified threshold. Additionally, the Bank of Montreal Credit
Agreement imposed a minimum excess availability covenant, which required the Company's Canadian subsidiaries to maintain at all times minimum excess availability of 5.0% of the revolving credit commitment under the facility.
The Bank of Montreal Credit Agreement contained cross-default provisions with the Capital One Credit Facility and the Notes, whereby an event of default occurring thereunder would cause an event of default under the Bank of Montreal Credit Agreement.
As of December 31, 2013, the Company was in compliance with all required financial covenants of the Bank of Montreal Credit Agreement.
Revolving Credit Facility and Term Loan - Crystal
On April 4, 2013, the Company replaced its existing revolving credit facility and term loan with Crystal (the "Crystal Credit Agreement"), with a new asset-based revolving credit agreement with Capital One.
In connection with the termination of the Crystal Credit Agreement, the Company paid an early termination fee of $2,400 . The difference between the net carrying amount of the Crystal loans of $60,533 (which includes the outstanding balance, accrued but unpaid interest, and unamortized financing cost immediately prior to the date of the extinguishment) and the cash paid to Crystal of $66,411 , which includes the early termination fee, was recorded as a $5,878 loss on early extinguishment of debt in the statement of operations for the year ended December 31, 2013.
On March 13, 2012, the Company replaced its revolving credit facility of $75,000 with Bank of America with an $80,000 senior credit facility with Crystal and other lenders. The Crystal Credit Agreement called for the $80,000 to be allocated between an asset based revolving credit facility of $50,000 and term loan of $30,000. In connection with the financing from Crystal, the Company entered into an amendment to the Lion Credit Agreement. See Notes 8 and 13.
2014.
Note 8. Long-Term Debt
The following table presentsLong-term debt consists of the components of long-term debt as of December 31, 2013 and 2012:following: | | | | 2013 | | 2012 | | December 31, |
| Senior secured notes due 2020 | $ | 203,265 |
| (a) | | $ | — |
| | |
| Long-term debt with Lion, replaced in April 2013 | — |
| | 109,680 |
| (b) | |
| Long-term debt with Lion, maturing October 2018 | 9,865 |
| (c) | | — |
| | |
| | | 2014 | | 2013 |
Senior Secured Notes due 2020 (a) | | $ | 208,084 |
| | $ | 203,265 |
|
Standard General Loan Agreement (b) | | 9,049 |
| | 0 |
|
Lion Loan Agreement (c) | | 0 |
| | 9,865 |
|
| Other | 411 |
| | 388 |
| | 268 |
| | 411 |
|
| Total long-term debt | 213,541 |
| | 110,068 |
| | 217,401 |
| | 213,541 |
|
| Current portion of debt | (73 | ) | | (56 | ) | | (13 | ) | | (73 | ) |
| Long-term debt, net of current portion | $ | 213,468 |
| | $ | 110,012 |
| | $ | 217,388 |
| | $ | 213,468 |
|
______________________
(a) Includes accrued interest paid-in-kind of $7,233 and $3,044 of and net of unamortized discount of $5,149 and $5,779 at December 31, 2013.2014 and 2013, respectively.
(b)Includes accrued interest paid-in-kind of $16,469 and net Net of unamortized discount of $27,929$816 at December 31, 2012.2014.
(c) Includes accrued interest paid-in-kind of $365 at December 31, 2013. Assigned to Standard General on July 16, 2014.
Senior Secured Notes due 2020
OnThe Company has outstanding senior secured notes (the "Notes") issued at 97% of the $206,000 par value on April 4, 2013, the Company issued the Notes in an aggregate principal amount of $206,000.2013. The Notes mature on April 15, 2020. The Notes were issued2020 and bear interest at 97% of par value with an interest rate at issuance of 13%15% per annum, subject to adjustment.of which 2% is payable in-kind until April 14, 2018 and in cash on subsequent interest dates. Interest on the Notes approximating $13,500of approximately $13,900 per payment period (in 2014),in 2015 is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on15. On April 14, 2014 and October 15, 2013.
A "special interest trigger event" is deemed to have occurred under2014, the indenture governing the Notes if the Company's net leverage ratio for the year ended December 31, 2013 is greater than 4.50 to 1.00. Upon the occurrence of a special interest trigger event,Company paid $13,390 and $13,666 in interest on the Notes, accrues at the rate of 15% per annum, retroactive to April 4, 2013, with the interest in excess of 13% per annum payable (i) in the case of any interest payment date prior to April 15, 2018, by adding such excess interest to the principal amount of the Notes on the interest payment date, and (ii) for any interest payment date on or after April 15, 2018, in cash.
During the third quarter of 2013, the Company determined it was probable that a special interest trigger event under the indenture governing the Notes would occur as of December 31, 2013 and accrued interest on the Notes at 15% retroactive to April 4, 2013 representing an additional 2% interest, which additional interest is payable in kind until April 15, 2018 and in cash on subsequent interest dates. The Company recorded $3,044 in additional interest expense for the special interest trigger
event for the year ended December 31, 2013. The company will pay in-kind the additional 2% interest retroactive to the issue date of the notes on the next interest payment date, April 15, 2014.respectively.
On or after April 15, 2017, the Company may, at its option, redeem some or all of the Notes at a premium, decreasing ratably over time to zero as specified in the indenture,Indenture, plus accrued and unpaid interest to, but not including, the redemption date. Prior to April 15, 2017, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 15, 2017, the Company may, at its option, redeem some or all of the Notes by paying a "make whole" premium, plus accrued and unpaid interest to, but not including, the redemption date. If the Company experiences certain change of control events, the holders of the Notes will have the right to require the Company to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, the Company is required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, the Company will be required to redeem, for cash, a portion of each Note then outstanding equal to the
amount necessary to prevent such Note from being treated as an “applicable"applicable high yield discount obligation”obligation" within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.
The Notes are guaranteed, jointly and severally, on a senior secured basis by the Company's existing and future domestic subsidiaries. The Notes and the related guarantees are secured by a first-priority lien on the Company's and its domestic subsidiaries' assets (other than the Credit Facility Priority Collateral, as defined below, subject to some exceptions and permitted liens). The Notes and the related guarantees also are secured by a second-priority lien on all of Company's and its domestic subsidiaries' cash, trade accounts receivable, inventory cash, and certain other assets (collectively, the "Credit Facility Priority Collateral"), subject to certain exceptions and permitted liens. The Notes and the guarantees, respectively, rank equal in right of payment with the Company's and its domestic subsidiaries' senior indebtedness, including indebtedness under the Capital One Credit Facility, before giving effect to collateral arrangements.
The Notes impose certain limitations on the ability of the Company and its domestic subsidiaries to, among other things, and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of their capital stock or certain indebtedness, enter into transactions with affiliates, create dividend or other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. The Company must annually report to the trustee on compliance with such limitations. The Notes also contain cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes.
As of December 31, 2013,2014, the Company was in compliance with the required covenants of the Notes.Indenture.
LionStandard General Loan Agreement
On May 22, 2013July 7, 2014, Lion issued a notice of acceleration to the Company entered into a loan agreement with Lion (the “Lion Loan Agreement”) in a principal amount of $4,500. On November 29, 2013, the Lion Loan Agreement was amended to increase the amount we borrowed by $5,000 and to make certain other technical amendments. The term loans under the Lion Loan Agreement mature on October 4, 2018as a result of the Board's decision to suspend Mr. Charney as CEO of the Company. The notice accelerated and beardeclared the amounts outstanding under the Lion Loan Agreement and any accrued interest atimmediately due and payable. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to Standard General. Standard General has waived any default under the Standard General Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of the Company.
On September 8, 2014, the Company entered into an initialamendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of 18% per annum, which interest rate increased to 20% per annum due to the occurrenceCompany would constitute an event of a special interest trigger event underdefault. The principal amount of the Notes.term loan was $9,865. Interest under the loan agreement is payable in cash or, to the extent permitted by the Company’sCompany's other debt agreements, in-kind.
LionAs a result of the September 8, 2014 amendment, the Company evaluated the change in cash flows and determined that there was a greater than 10% change between the present values of the existing loan and the amended loan causing an extinguishment of debt. The Company recorded the amended loan at its fair value of $9,034 and recorded a gain of $171 on extinguishment of debt. Additionally, the $831 difference between the original principal amount of $9,865 and the fair value of the amended loan of $9,034 was recorded as a discount and will be recognized as interest expense using the effective interest method over the remaining term of the amended loan.
Standard General Credit Agreement
On April 4, 2013,March 25, 2015, one of the Company's subsidiaries borrowed $15,000 under the Standard General Credit Agreement. The Standard General Credit Agreement is guaranteed by the Company, repaidbears interest at 14% per annum, and terminated its previous outstanding obligations with Lion Capital LLP withwill mature on October 15, 2020.
The Standard General Credit Agreement contains customary defaults, including cross event of default to the Notes and the Standard General Loan Agreement and cross acceleration to other indebtedness above a portionthreshold amount.
If the Company experiences certain change of control events, the Company is required to offer to prepay the Standard General Credit Agreement at 101% of the proceeds of the financing transactions. The difference between the net carryingoutstanding principal amount of the Lion debt of $117,926 (which includes the principal,plus accrued butand unpaid interest unamortized discount and unamortized financing cost immediately prior toon the date of extinguishment) and the cash paidprepayment. The Company will be required to Lionprepay loans under the Standard General Credit Agreement to the extent necessary to avoid the loan being characterized as an "applicable high yield discount obligation" within the meaning of $144,149 was recorded in the statementInternal Revenue Code, by the first interest payment date following the fifth anniversary of operations for the year ended December 31, 2013 as a $26,223 loss on the early extinguishmentclosing.
Note 9. Fair Value of Financial Instruments
The fair value of the Company's financial instruments at fair value are measured on a recurring basis. The carrying amount reportedRelated unrealized gains or losses are recognized in the accompanying consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings from Capital One and Bank of Montreal approximates fair value because of the variable market interest rate charged to the Company for these borrowings. Theunrealized (gain) loss on change in fair value of warrants in the Notes was calculated based on the quoted market priceconsolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note 2.
The following tables present carrying amounts and fair values of the Notes. TheCompany's financial instruments as of December 31, 2014 and 2013, and indicate the fair value hierarchy of the
Lion Loan Agreement was estimated using a discounted cash flow analysis and a yield rate that was estimated using yield rates for publicly traded debt instruments of comparable companies with similar features. The valuation techniques utilized by the Company to determine such fair value of each warrant was estimated using the Binomial Lattice option valuation model.
value. The Company did not have any assets or liabilities categorized as Level 1 as of December 31, 2013.2014.
The following table presents carrying amounts and fair values of the Company's financial instruments as of December 31, 2013 and 2012: |
| | | | | | | | |
| | | December 31, 2013 |
| | | Carrying Amount | | Fair Value |
| Senior Secured Notes due 2020, net of discount of $5,779 and including interest paid-in-kind of $3,044 | Level 2 Liability | $ | 203,265 |
| | $ | 191,065 |
|
| Lion Loan due 2018 including interest paid-in-kind of $365 | Level 3 Liability | 9,865 |
| | 9,773 |
|
| Lion Warrant | Level 3 Liability | — |
| (a) | 20,954 |
|
| | | $ | 213,130 |
| | $ | 221,792 |
|
| | | | | |
| | | December 31, 2012 |
| | | Carrying Amount | | Fair Value |
| Long-term debt with Lion, net of discount of $27,929 and including interest paid-in-kind of $16,469 | Level 3 Liability | $ | 109,680 |
| | $ | 105,792 |
|
| Lion Warrant | Level 3 Liability | — |
| (a) | 17,222 |
|
| SOF Warrant | Level 3 Liability | — |
| (a) | 19 |
|
| | | $ | 109,680 |
| | $ | 123,033 |
|
|
| | | | | | | | |
| | | December 31, 2014 |
| | | Carrying Amount | | Fair Value |
| Senior Secured Notes due 2020 | Level 2 Liability | $ | 208,084 |
| | $ | 211,538 |
|
| Standard General Loan Agreement | Level 3 Liability | 9,049 |
| | 8,868 |
|
| Lion Warrant | Level 3 Liability | (a) |
| | 19,239 |
|
| | | $ | 217,133 |
| | $ | 239,645 |
|
| | | | | |
| | | December 31, 2013 |
| | | Carrying Amount | | Fair Value |
| Senior Secured Notes due 2020 | Level 3 Liability | $ | 203,265 |
| | $ | 191,065 |
|
| Lion Loan Agreement | Level 3 Liability | 9,865 |
| | 9,773 |
|
| Lion Warrant | Level 3 Liability | (a) |
| | 20,954 |
|
| | | $ | 213,130 |
| | $ | 221,792 |
|
______________________
(a) No cost is associated with these liabilities (see Note 13).
The following summarizes the activitytable presents a summary of Level 3 inputs measured on a recurring basis for the years ended December 31, 2013, 2012 and 2011:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | | | | | | | | | | | |
| | | Warrants | | Purchase Rights | | Total | |
| Balance at January 1, 2011 | | $ | 993 |
| | $ | — |
| | $ | 993 |
| |
| Additions (see Note 13) | | 22,547 |
| | 15,605 |
| | 38,152 |
| |
| Exercises | | — |
| | (2,857 | ) | | (2,857 | ) | |
| Realized loss | | — |
| | (3,188 | ) | | (3,188 | ) | |
| Adjustment resulting from change in fair value recognized in earnings | | (13,907 | ) | | (9,560 | ) | | (23,467 | ) | |
| Balance at January 1, 2012 | | 9,633 |
| | — |
| | 9,633 |
| |
| Adjustment resulting from change in fair value recognized in earnings | | 4,126 |
| | — |
| | 4,126 |
| |
| Gain on extinguishment of debt (see Note 8) | | 3,482 |
| | — |
| | 3,482 |
| |
| Balance at January 1, 2013 | | 17,241 |
| | — |
| | 17,241 |
| |
| Adjustment resulting from change in fair value recognized in earnings | | 3,713 |
| | — |
| | 3,713 |
| |
| Balance at December 31, 2013 | | $ | 20,954 |
| | $ | — |
| | $ | 20,954 |
| |
Realized loss is the difference between the net proceeds received and thechanges in fair value of the purchase rights acquired relatedLion Warrant (Level 3 financial liabilities) which are marked to the April 26, 2011 Investor Purchase Agreement (see Note 13).market on a periodic basis:
|
| | | | | | | |
| | 2014 | | 2013 |
| Beginning balance | $ | 20,954 |
| | $ | 17,241 |
|
Adjustments included in earnings (a) | (1,715 | ) | | 3,713 |
|
| Ending balance | $ | 19,239 |
| | $ | 20,954 |
|
______________________
(a) The realized loss is recorded in unrealized (gain) loss on change in fair value of warrants and purchase rights in the accompanying consolidated statements of operations.
Adjustment resulting from change in fair value is the amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gaingains or loss islosses are recorded in unrealized (gain) loss on change in fair value of warrants and purchase rights in the accompanying consolidated statements of operations.
Note 10. Capital Lease Obligations
The Company leases certain equipment under capital lease arrangements expiring at various timesdates through 2017.the year 2017. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The interest rates pertaining to these capital leases range from 0.4% to 23.5% (average24.1% (weighted average interest rate is 14.1%9.4%).
MinimumThe following table presents future payments under theseminimum commitments for capital leases atas of December 31, 20132014 are::
| | | Year Ending December 31, | | | Capital Leases |
| 2014 | $ | 2,616 |
| |
| 2015 | 3,097 |
| | $ | 3,328 |
|
| 2016 | 3,024 |
| | 2,030 |
|
| 2017 | 18 |
| | 27 |
|
| 2018 and thereafter | — |
| |
| 2018 | | | 0 |
|
| 2019 | | | 0 |
|
| Thereafter | | | 0 |
|
| Total future minimum lease payments | 8,755 |
| | 5,385 |
|
| Less: Amount representing interest | (1,593 | ) | | 425 |
|
| Net minimum lease payments | 7,162 |
| | $ | 4,960 |
|
| | | | |
| Current portion | 1,709 |
| | $ | 2,978 |
|
| Long-term portion | $ | 5,453 |
| | $ | 1,982 |
|
Note 11. Income Taxes
The Company's net lossIncome tax provision
Components of income (loss) before income taxes includes the following components for the years ended December 31, 2013, 2012 and 2011:are as follows:
| | | | 2013 | | 2012 | | 2011 | Year Ended December 31, |
| United States | $ | (107,637 | ) | | $ | (38,365 | ) | | $ | (37,876 | ) | |
| | | 2014 | | 2013 | | 2012 |
| U.S. | | $ | (68,695 | ) | | $ | (107,637 | ) | | $ | (38,365 | ) |
| Foreign | 3,110 |
| | 4,906 |
| | 283 |
| 2,037 |
| | 3,110 |
| | 4,906 |
|
| | $ | (104,527 | ) | | $ | (33,459 | ) | | $ | (37,593 | ) | $ | (66,658 | ) | | $ | (104,527 | ) | | $ | (33,459 | ) |
The following table presentsComponents of the federal and state income tax provision (benefit) for the years ended December 31, 2013, 2012 and 2011:are as follows:
| | | | | | | | | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Current: | | | | | | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
| $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| State | 200 |
| | 134 |
| | 228 |
| 401 |
| | 200 |
| | 134 |
|
| Foreign | 2,024 |
| | 3,446 |
| | 879 |
| 2,137 |
| | 2,024 |
| | 3,446 |
|
| | 2,224 |
| | 3,580 |
| | 1,107 |
| |
| Total current | | 2,538 |
| | 2,224 |
| | 3,580 |
|
| Deferred: | | | | | | | | | | |
| Federal | (402 | ) | | — |
| | — |
| 0 |
| | (402 | ) | | 0 |
|
| State | — |
| | — |
| | — |
| 0 |
| | 0 |
| | 0 |
|
| Foreign | (51 | ) | �� | 233 |
| | 614 |
| (379 | ) | | (51 | ) | | 233 |
|
| | (453 | ) | | 233 |
| | 614 |
| |
| Total deferred | | (379 | ) | | (453 | ) | | 233 |
|
| Income tax provision | $ | 1,771 |
| | $ | 3,813 |
| | $ | 1,721 |
| $ | 2,159 |
| | $ | 1,771 |
| | $ | 3,813 |
|
The following table presents a reconciliation of income taxes at the U.S. federal statutory rate andto the effective tax rate for the years ended December 31:Company's actual taxes.
| | | | | | | | | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Taxes at the statutory federal tax rate of 35% | (36,585 | ) | | (11,711 | ) | | (13,158 | ) | $ | (23,330 | ) | | $ | (36,585 | ) | | $ | (11,711 | ) |
| State tax, net of federal benefit | (4,059 | ) | | 4,913 |
| | (18 | ) | (1,610 | ) | | (4,059 | ) | | 4,913 |
|
| Change in valuation allowance | 42,771 |
| | 5,123 |
| | 21,794 |
| 20,966 |
| | 42,771 |
| | 5,123 |
|
| Foreign taxes | 10 |
| | (618 | ) | | 533 |
| |
| Unrealized loss (gain) on warrants and purchase rights | 1,299 |
| | 4,809 |
| | (8,213 | ) | |
Return to provision adjustments
| | 1,731 |
| | 0 |
| | 0 |
|
| Tax differential on vesting of stock grants | | 2,820 |
| | 0 |
| | 0 |
|
| Change in state deferred rate | | 670 |
| | 0 |
| | 0 |
|
| Foreign tax rate differential | | (148 | ) | | 10 |
| | (618 | ) |
| Unrealized (gain) loss on warrants | | (600 | ) | | 1,299 |
| | 4,809 |
|
| Other | (1,665 | ) | | 1,297 |
| | 783 |
| 1,660 |
| | (1,665 | ) | | 1,297 |
|
| Total income tax provision | 1,771 |
| | 3,813 |
| | 1,721 |
| $ | 2,159 |
| | $ | 1,771 |
| | $ | 3,813 |
|
Deferred income taxes reflectIncome Taxes
Deferred tax assets and liabilities are recognized for the netestimated future tax effects of (a) temporaryconsequences attributable to differences between the carrying amountsfinancial reporting basis and the respective tax basis of the Company's assets and liabilities, for financial reporting purposes and the amounts used for income tax purposes, and b) operating losses and tax credit carryforwards.expected benefits of utilizing
The following table presents the tax effects of significant items comprising the Company's deferred taxes as of December 31: |
| | | | | | | |
| | 2013 | | 2012 |
| Deferred tax assets: | | | |
| Allowance for doubtful accounts | $ | 831 |
| | $ | 778 |
|
| Deferred rent | 7,295 |
| | 7,773 |
|
| Accrued liabilities and workers’ compensation | 16,134 |
| | 12,409 |
|
| Inventories | 6,877 |
| | 6,731 |
|
| Federal and California tax credits | 12,067 |
| | 12,067 |
|
| Net operating loss carryforward | 62,052 |
| | 36,111 |
|
| Deferred gift card income | 2,379 |
| | 1,866 |
|
| Fixed assets | 5,723 |
| | 870 |
|
| Foreign tax credits | 9,296 |
| | 8,335 |
|
| Other comprehensive income | — |
| | 29 |
|
| Other | 1,833 |
| | 848 |
|
| Total gross deferred tax assets | 124,487 |
| | 87,817 |
|
| Less valuation allowance | (120,694 | ) | | (77,578 | ) |
| Net deferred tax assets | 3,793 |
| | 10,239 |
|
| Deferred tax liabilities: | | | |
| Prepaid expenses | (1,432 | ) | | (1,004 | ) |
| Unrealized (gain) loss on warrants and purchase rights | — |
| | (8,003 | ) |
| Other | (1,113 | ) | | (35 | ) |
| Total gross deferred tax liabilities | (2,545 | ) | | (9,042 | ) |
| Net deferred tax assets and liabilities | $ | 1,248 |
| | $ | 1,197 |
|
At December 31, 2013, the Company had net operating loss carryforwards of approximately $163,455 expiring beginning in 2030, state net operating loss carryforwards of approximately $113,747, expiring beginning in 2020 and foreign net operating loss carryforwards of $8,000 with expiration dates starting in 2014 (certain foreign loss carryforwards do not expire).tax-credit carryforwards. The Company performed an analysis andreduces deferred tax assets resulting from future tax benefits by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of these deferred taxes will not be realized. The Company has determined it is more likely than not that it will not realize the benefit of its deferred tax assets and accordingly has recorded full valuation allowances against U.S. and most foreign jurisdiction deferred tax assets. Significant components of the Company's net deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 76,582 |
| | $ | 62,052 |
|
| Accrued liabilities | 18,997 |
| | 16,134 |
|
| Federal and California tax credits | 12,067 |
| | 12,067 |
|
| Foreign tax credits | 11,034 |
| | 9,296 |
|
| Inventory reserves | 7,583 |
| | 6,877 |
|
| Fixed assets | 8,713 |
| | 5,723 |
|
| Deferred rent | 5,536 |
| | 7,295 |
|
| Deferred gift card income | 2,784 |
| | 2,379 |
|
| Other | 2,426 |
| | 1,833 |
|
| Allowance for doubtful accounts | 158 |
| | 831 |
|
| Total gross deferred tax assets | 145,880 |
| | 124,487 |
|
| Less valuation allowance | (143,062 | ) | | (120,694 | ) |
| Deferred tax assets, net of valuation allowance | $ | 2,818 |
| | $ | 3,793 |
|
| Deferred tax liabilities: | | | |
| Prepaid expenses | $ | (1,188 | ) | | $ | (1,432 | ) |
| Other | 0 |
| | (1,113 | ) |
| Total gross deferred tax liabilities | (1,188 | ) | | (2,545 | ) |
| Net deferred tax assets | $ | 1,630 |
| | $ | 1,248 |
|
At December 31, 2014, the Company had U.S. Federal NOL carryforwards of $202,781 expiring beginning in 2030, state NOL carryforwards of $121,211 expiring beginning in 2020 and foreign NOL carryforwards of $9,596 with expiration dates starting in 2015 (certain foreign loss carryforwards do not expire).
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), may limit the ability to use U.S. federal NOL and tax credit carryforwards as a result of ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of certain
shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company believes that an ownership change has not occurred through December 31, 2013 pursuant to §382 of the I.R.C.2014, and accordingly, theU.S. federal net operating loss carryfowards through such dateNOL and other tax attribute carryforwards are not subject to an annual Section 382 limitation. As a result of the March 31, 2014 public offering of the Company's common shares, there may have been an ownership change pursuant to §382 of the I.R.C.; however, an analysis has not yet been completed. See Note 13.limited.
The Company has California state tax credits of $11,800, which carryover for ten years. Management determined that it is more likely than not that the state tax credits are not realizable due to the Company’sCompany's inability to generate future tax liabilities and accordingly has provided a full valuation allowance against the unused California credit carryforwards.
The Company accountsdoes not provide for U.S. federal income taxes on the undistributed earnings ($21,004 at December 31, 2014) of its uncertaincontrolled foreign corporations because earnings are considered to be permanently reinvested outside of the U.S. Determination of U.S. income taxes, as adjusted for tax credits and foreign withholding taxes, that would be incurred upon any future distribution is not practicable because of the complexities associated with its hypothetical calculation. Any U.S. tax consequences more likely than not will be substantially eliminated as a result of significant U.S. federal and state NOLs to utilize to offset any tax effect of repatriation.
Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if, "more-than-likely-than-not" the positions are sustainable. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in accordance with ASC 740-10.
The following table presents aits financial statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits: |
| | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
| Gross unrecognized tax benefits at January 1 | $ | — |
| | $ | 2,163 |
| | $ | 1,311 |
|
| Increases for tax positions in prior periods | — |
| | — |
| | 852 |
|
| Decreases for tax positions in prior period | — |
| | (2,163 | ) | | — |
|
| Gross unrecognized tax benefits at December 31 | $ | — |
| | $ | — |
| | $ | 2,163 |
|
Included in the balancebalances of unrecognized tax benefits at December 31, 2013, 2012 and 2011 are $0, $0, and $1,329, respectively, ofis as follows:
|
| | | | | | | |
| | 2014 | | 2013 |
| Balance at January 1 | $ | 0 |
| | $ | 0 |
|
| Increases for tax positions in prior periods | 477 |
| | 0 |
|
| Balance at December 31 | $ | 477 |
| | $ | 0 |
|
The Company recognizes interest accrued related to unrecognized tax benefits that, if recognized, would affectand penalties as income tax expense. Related to the effectiveunrecognized tax rate.
Thebenefits noted above, the Company is currently open to audit under the statuteaccrued interest and penalties of limitations by the Internal Revenue Service ("IRS") for the calendar years ended December 31, 2010 through December 31, 2013. The IRS is currently auditing the Company's tax return$24 and $48, respectively for the year ended December 31, 2011.2014. The Company does not believe that it is reasonably possible that there will be any decrease in unrecognized tax benefits during the next twelve months.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Internal Revenue Service ("IRS") completed anits audit withon the Company's tax year 2011, and there was no assessment. Tax years that remain subject to examination by the IRS are 2012 through December 31, 2010.2014. The Company's state and foreign tax returns are open to audit under similar statute of limitations for the calendar years ended December 31, 20082009 through 2013.
The Company agreed to a settlement with the Canadian Revenue Agency (“CRA”) for audit of the years ended December 31, 2005 through December 31, 2007 representing $830 in additional tax interest and penalty. As a result, the Company's unrecognized tax benefits were decreased by $552 for the year ended December 31, 2012.
The Company does not provide for U.S. Federal income taxes on the undistributed earnings ($34,075 at December 31, 2013) of its controlled foreign corporations which are considered permanently invested outside of the United States. Undistributed cash at controlled foreign corporations, which remains permanently reinvested at December 31, 2013 was $3,109. Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated with its hypothetical calculation, but would be substantially eliminated as the Company has U.S. net operating losses of approximately $163,455 at December 31, 2013 and U.S. tax credits of approximately $9,296 available to utilize to offset the tax effect of repatriation.
2014.
Note 12. Related Party Transactions
See Note 8, Long-Term Debt for a descriptionPersonal Guarantees by Mr. Charney
As of loans made by Lion toDecember 31, 2014, Mr. Charney personally guaranteed the Company's obligations under two property leases aggregating $9,210 in obligations.
Lease Agreement between the Company and Note 13, Stockholders' Equity for a description of the warrants issued by the Company to Lion and a purchase agreement, dated April 27, 2011, between Mr. Charney and the Company.Related Party
Personal Guarantees by the Company’s CEO
As of December 31, 2013, the CEO of theThe Company has personally guaranteed the obligations of American Apparel under seven property leases aggregating $17,465 in obligations. Additionally, the CEO of the Company has personally guaranteed the obligations of the Company with two vendor aggregating $1,000.
Lease Agreement Between the Company and Related Parties
The Company is party to an operating lease expiring in November 2016 for its knitting facility with a related company (“American Central Plaza, LLC”),LLC, which is partially owned by Mr. Charney and Marty Bailey, the CEO and theCompany's Chief Manufacturing Officer (“CMO”("CMO") of the Company. The Company’s CEO. Mr. Charney holds an 18.75% ownership interest in American Central Plaza, LLC, while the CMO holds a 6.25% interest. The remaining members of American Central Plaza, LLC are not affiliated with the Company. Rent expenseexpenses (including property taxes and insurance payments) related to this lease was $778, $830were $717, $778 and $622$830 for the years ended December 31, 2014, 2013, 2012 and 2011,2012, respectively.
Payments to Morris Charney
Morris Charney (“("Mr. M. Charney”Charney"), is theMr. Charney's father of the Company's CEO and servesserved as a director of American Apparel Canada Wholesale Inc. and a director of American Apparel Canada Retail Inc. until June 28, 2014. Day to day operations of these two Canadian subsidiaries are handled by their management and other employees, of these subsidiaries, none of whom performs any policy making functions for the Company. Management of American ApparelThe Company's management sets the policies for American Apparel, Inc. and its subsidiaries as a whole. Mr. M. Charney doesdid not perform any policy making functions for the Company or any of its subsidiaries. Instead, Mr. M. Charney only providesprovided architectural consulting services primarily for stores located in Canada and, in limited cases, in the U.S. Mr. M. Charney was paid architectural consulting and director fees amounting to $238, $260$70, $238 and $297$260 for the years ended December 31, 2014, 2013, 2012 and 2011,2012, respectively.
Registration RightsAgreements between Mr. Charney and Standard General
PursuantAs of December 31, 2014, Mr. Charney owned 42.3% of the Company's outstanding common stock. Mr. Charney and Standard General collectively controlled the right to vote such common stock.
On June 25, 2014, Mr. Charney entered into a registration rightsletter agreement with Standard General in which, if Standard General was able to acquire at least 10% of the Company's outstanding shares, Standard General would loan Mr. Charney the funds needed for him to purchase those acquired shares from Standard General (the "SG-Charney Loan"). Between June 26, 2014 and June 27, 2014, Standard General acquired 27,351 of the Company's outstanding shares, and Mr. Charney purchased those shares at a price of $0.715 per share using the proceeds from the SG-Charney Loan. According to Mr. Charney's Schedule 13D/A, dated June 25, 2014, the loan bears interest at 10% per annum, payable in-kind and matures on July 15, 2019, with no prepayment penalty. The loan is collateralized by the newly acquired shares as well as by Mr. Charney's original shares of the Company's outstanding common stock.
On July 9, 2014, Mr. Charney and Standard General entered into a cooperation agreement, which provides, among other things, that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement dated March 13, 2009 between Mr. Charney and Lion. In addition, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right exercisable, on or prior to July 15, 2017, to purchase from Mr. Charney 32,072 shares (consisting of the 27,351 shares purchased by using the proceeds from the SG-Charney Loan and 10% of Mr. Charney's 47,209 original shares).
Loans held by Standard General
See Note 8 for a description of the Standard General Loan Agreement assigned to Standard General on July 16, 2014 and Standard General Credit Agreement between the Company and Dov Charney, entered intoStandard General in connection withMarch 2015.
Loan and Warrants held by Lion
See Note 8 for a description of the 2006 reverse merger between American Apparel, Inc. and Endeavor Acquisition Corp, Mr. Charney has both demand and piggyback registration rights relatingloan made by Lion to the sharesCompany (and assigned to Standard General on July 16, 2014) and Note 13 for a description of the Company's common stock that he received from that transaction.
Employment Agreement with the Company's CEO
In March 2012 the Company's Board of Directors approved a three-year employment agreement with Mr. Charney commencing on April 1, 2012 that will automatically extend for successive one-year periods unless earlier terminatedwarrants issued by the Company. The agreement provides for, among other things, a minimum annual base compensation of $800 plus performance bonuses and the rightCompany to receive 7,500 shares of the Company's common stock, subject to performance hurdles and other terms, and conditions as described in the agreement. See Note 13.
Bonus to the Company's CEO
For the years ended December 31, 2013, 2012 and 2011, the Company recorded $406, $1,003 and $754, respectively, in CEO bonus in operating expenses in the consolidated statements of operations.
Lion.
Note 13. Stockholders' (Deficit) EquityDeficit
AuthorizationRights Plan
On December 21, 2014, the Board adopted a stockholders rights plan (the "Rights Plan"). Under the Rights Plan, the Company declared a dividend of Commonone preferred share purchase right for each share of its common stock held by shareholders of record as of January 2, 2015. Each right entitles the registered holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a "Unit") of Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a purchase price of $3.25 per Unit, subject to adjustment.
On June 21, 2011 the Company's stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Common Stock from Public Offering120,000 to 230,000.
On March 31, 2014, the Company completed a public offering of approximately 61,645 shares of its common stock at $0.50 per share for net proceeds of approximately $28,500. $28,435.
Common Stock Warrants
As a result of thisthe public offering common stock issued and outstanding were 175,109 and 173,377 shares. Additionally,in March 2014, Lion received the underwriters have a 30 day optionright to acquire up topurchase an additional 8,5002,905 shares of the Company's common stock, at $0.50 per share.
Common Stock Warrants
Lion Warrants
Asand the exercise price of December 31, 2013,all of Lion held warrants (the "Lion Warrants") was adjusted from $0.75 per share to $0.66 per share. Such adjustments were required by the terms of the existing Lion Warrants. As of December 31, 2014, Lion held warrants to purchase 21,60624,511 shares of the Company's common stock, with an exercise price of $0.75$0.66 per share. These warrants will expire on February 18, 2022.
The Lion Warrants, as amended, contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of the Company's common stock issuable upon exercise of the Lion Warrant,Warrants, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges.
The fair value forof the warrants at Lion Warrants as of December 31, 20132014 and 2012 were2013, estimated using the Binomial Lattice option valuation model.model, were $19,239 and $20,954, respectively, and recorded as a current liability in the consolidated balance sheets. The fair valuecalculation assumed a stock price of the warrants at December 31, 2011 was estimated using the Monte Carlo simulation valuation model. The calculations as$1.03, exercise price of December 31, 2013 assumed$0.66, volatility of 73.85%, annual risk free interest rate of 1.99%, a contractual remaining term of 8.257.2 years exercise price of $0.75, stock price of $1.23, interest rate of 2.7%, volatility of 70.84%and no dividends. As of December 31, 2013 and 2012, the fair value of the Lion Warrants were estimated to be $20,954 and $17,222, respectively, and in accordance with ASC 815-40 "Derivatives and Hedging - Contracts in Entity's Own Equity", was recorded as a liability in the accompanying consolidated balance sheets.
On March 13, 2012, in connection with the new credit agreement with Crystal Financial, LLC, the Company entered into an amendment to the Lion Credit Agreement (see Note 8), which required that the warrants issued to Lion be amended to, among other things, extend the term of the warrants to February 18, 2022 and add a provision pursuant to which, if American Apparel did not meet a certain quarterly EBITDA amount, the exercise price of the warrants would be reduced by $0.25 (a one-time adjustment for the first violation of such covenant; subsequent violations would not result in further adjustment). As of March 31, 2012, the Company did not meet the EBITDA requirement, and, as a result, the exercise price of the existing Lion warrants was reduced by $0.25 to $0.75 per share.
On March 31, 2014, as a result of the public offering of the Company's common shares as discussed above, the Company estimated that Lion received the right to purchase approximately 2,900 shares of the Company's common stock under their existing warrants and the exercise price of all of Lion's warrants will be adjusted to approximately $0.66 per share. Such adjustments were required by the terms of the existing Lion warrants.
SOF Warrants
On December 19, 2013, warrants held by SOF Investments, L.P. ("SOF") to purchase 1,000 of the Company's shares with the exercise price of $2.148 per share expired.
The fair value for the warrants at December 31, 2012 was estimated using the Binomial Lattice option valuation model. The calculations as of December 31, 2012 assumed a contractual remaining term of 1.0 year, exercise price of $2.148, stock price of $1.01, interest rate of 0.16%, volatility of 50.82% and no dividends. As of December 31, 2012, the fair value of the warrants were estimated to be $19, respectively, and in accordance with ASC 815-40, was recorded as a liability in the accompanying consolidated balance sheets.
The following table summarizespresents a summary of common stock warrants issued, forfeited, expired and outstanding (shares in thousands):activities:
|
| | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Contractual Life (Years) |
| Outstanding - January 1, 2011 | 17,000 | | | | $ | 2.05 |
| | | 5.1 |
| |
| Issued (1) | 41,366 | | | | 1.14 | | | | — |
| |
| Forfeited (2) | (35,760 | ) | | | 1.63 | | | | — |
| |
| Expired | — | | | | — | | | | — |
| |
| Outstanding - December 31, 2011 | 22,606 | | | | 1.05 | | | | 6.0 |
| |
| Issued (1) | 44,212 | | | | 0.90 | | | | — |
| |
| Forfeited (2) | (44,212 | ) | | | 1.03 | | | | — |
| |
| Expired | — | | | | — | | | | — |
| |
| Outstanding - December 31, 2012 | 22,606 | | | | 0.81 | | | | 8.8 |
| |
| Issued (1) | — | | | | — | | | | — |
| |
| Forfeited (2) | — | | | | — | | | | — |
| |
| Expired | (1,000 | ) | | | 2.15 | | | | — |
| |
| Outstanding - December 31, 2013 | 21,606 | | | | $ | 0.75 |
| | | 8.2 |
| |
| | | | | | | | | | |
| Fair value - December 31, 2013 | $ | 20,954 | | | | | | | | | |
|
| | | | | | | | | |
| | Shares (in thousands) | | Weighted -Average Exercise Price | | Weighted -Average Contractual Life (in years) |
| Outstanding - January 1, 2012 | 22,606 |
| | $ | 1.05 |
| | 6.0 |
Issued (a) | 44,212 |
| | 0.90 |
| | 0 |
Forfeited (a) | (44,212 | ) | | 1.03 |
| | 0 |
| Expired | 0 |
| | 0.00 |
| | 0 |
| Outstanding - December 31, 2012 | 22,606 |
| | $ | 0.81 |
| | 8.8 |
Issued (a) | 0 |
| | 0.00 |
| | 0 |
Forfeited (a) | 0 |
| | 0.00 |
| | 0 |
| Expired | (1,000 | ) | | 2.15 |
| | 0 |
| Outstanding - December 31, 2013 | 21,606 |
| | $ | 0.75 |
| | 8.2 |
Issued (a) | 24,511 |
| | 0.66 |
| | 8.0 |
Forfeited (a) | (21,606 | ) | | 0.75 |
| | 0 |
| Expired | 0 |
| | 0.00 |
| | 0 |
| Outstanding - December 31, 2014 | 24,511 |
| | $ | 0.66 |
| | 7.2 |
| Fair Value - December 31, 2014 | $ | 19,239 |
| | | | |
(1)______________________
(a) Issued shares at December 31, 2011 include issuances and forfeited warrants represent repriced shares.
(2) Represents repriced shares.
Common Stock and Purchase Rights
On April 26, 2011 and in connection with the February 18, 2011 amendment to the Lion Credit Agreement, the Company entered into a purchase and investment agreement with a group of investors ("Investors") and sold approximately 15,777 shares of common stock at a price of $0.90 per share and purchase rights to acquire additional shares of common stock for the aggregate net cash purchase price of approximately $12,417. The purchase rights gave the Investors the right to purchase up to approximately 27,443 additional shares of common stock at a price of $0.90 per share.
In connection with the purchase agreement with the Investors, the Company entered into a purchase agreement with Mr. Charney that, among other things, allowed Mr. Charney to purchase from the Company 778 shares of common stock at $0.90 per share, generating net proceeds of $700, and granted to Mr. Charney a right to purchase up to 1,556 additional shares of common stock on substantially the same terms as the purchase agreement with the Investors (the "Charney Purchase Rights").
The Investor Purchase Rights and Charney Purchase Rights (collectively, the "Purchase Rights") had a fair value of $15,605 at the date of the agreement. The Company recorded the Purchase Rights as a liability since they met the classification requirements for liability accounting in accordance with the ASC 815-40. The fair value was calculated using the Monte Carlo simulation pricing model, and assumed a stock price of $1.58, exercise price of $0.90, volatility of 99.08%, annual risk free rate of 0.11% and a term of 0.5 years. Net proceeds of $12,417 were allocated entirely to the Purchase Rights. The difference between the net proceeds received and the fair value of the purchase rights aggregating $3,188 were recorded in unrealized (gain) loss on change in fair value of warrants and purchase rights in the consolidated statements of operations.
In July 2011, the Investors exercised their purchase rights and acquired 8,407 shares of the Company's common stock for $0.90 per share, generating net proceeds of $6,593. The fair value of these exercised rights aggregated $2,857, which was reclassified in accordance with ASC 815-40 from a liability to stockholders' equity. As a result of the exercise of their purchase rights, the Investors have one remaining demand registration right with respect to their shares, subject to the terms and conditions of the relevant purchase agreement.
In October 2011, the remaining 19,036 Investor Purchase Rights and the 1,556 Charney Purchase Rights expired without being exercised.
The following table summarizes Purchase Rights issued, forfeited and expired (shares in thousands): |
| | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Contractual Life (Years) |
| Outstanding - January 1, 2011 | — |
| | $ | — |
| | — |
|
| Issued | 28,999 |
| | 0.90 |
| | 0.5 |
|
| Forfeited | — |
| | — |
| | — |
|
| Exercised | (8,407 | ) | | 0.90 |
| | — |
|
| Expired | (20,592 | ) | | 0.90 |
| | — |
|
| Outstanding - December 31, 2011 | — |
| | $ | — |
| | — |
|
The Company's CEO Anti-Dilution Rights
As a condition to the Investors purchasing the shares and as a result of the July 2011 exercises of the Investor Purchase Rights, the Company provided Mr. Charney with certain anti-dilution rights (the ''Charney Anti-Dilution Rights"). The Charney Anti-Dilution Rights provided that Mr. Charney has a right to receive from the Company, subject to the satisfaction of certain average volume weighted closing price targets, and other terms and conditions set forth in the agreement, up to approximately 20,416 shares of the Company's common stock as anti-dilution protection.
On October 16, 2012, the Company and Mr. Charney entered into an amendment to the anti-dilution provisions contained in the Purchase Agreement with Mr. Charney dated as of April 27, 2011. The amendment extended by one year the measurement periods for Mr. Charney’s anti-dilution protection provisions and reduced the length of the corresponding stock price target periods from 60 days to 30 days. The fair value of these awards of $13,192 was determined under the Monte Carlo simulation pricing model. The calculation was based on the exercise price of $0, the stock price of $1.3, annual risk free rate of 0.45%, volatility of 90.46% and a term of 3.5 years.
As amended, each of the shares associated with the anti-dilution provision is issuable in three equal installments, one per each measurement period set forth below, subject to meeting the applicable average volume weighted closing price (“VWAP ”) for 30 consecutive trading days, calculated as set forth in the purchase agreement with Mr. Charney as follows: (i) for the measurement period from April 16, 2012 to and including April 15, 2014, if the VWAP of the common stock during a period of 30 consecutive trading days exceeds $3.25 per share; (ii) for the measurement period from but not including April 16, 2014 to and including April 15, 2015, if the VWAP of the common stock during a period of 30 consecutive trading days exceeds $4.25 per share; and (iii) for the measurement period from but not including April 16, 2015 to and including April 15, 2016, the VWAP of the common stock during a period of 30 consecutive trading days exceeds $5.25 per share.
The Company considered the shares to be awards with market conditions under ASC 718 "Stock Based Compensation," (“ASC 718”). The related service and amortization period for the shares occurs in three probability-weighted terms of 0.9, 1.8 and 2.7 years corresponding to the three measurement periods above. These awards expire after completion of each respective measurement period. See Note 14.
Sale of Common Stock to the Company's CEO
On July 7, 2011, the Company sold 778 shares of the Company's common stock to Mr. Charney at $0.90 per share for total proceeds of $700.
On March 24, 2011, the Company sold to Mr. Charney 1,802 shares of common stock at a price of $1.11 per share in cash, for approximately $2,000.
Also on March 24, 2011, the three promissory notes issued by two subsidiaries of the Company to Mr. Charney, which as of March 24, 2011 had an aggregate outstanding balance of $4,688, including principal and accrued and unpaid interest (to but not including March 24, 2011), were canceled in exchange for an issuance by the Company to Mr. Charney of an aggregate of 4,223 shares of common stock at a price of $1.11 per share, with 50% of such shares being issued on March 24, 2011 and the remaining shares issuable to Mr. Charney only if prior to March 24, 2014, (1) the closing sale price of common stock exceeds $3.50 for 30 consecutive trading days or (2) there is a change of control of the Company. On March 24, 2014, the Company determined that it did not meet the closing share price target and the remaining shares expired unissued.
Earnings Per Share
The Company presents earnings per share (“EPS”)EPS utilizing a dual presentation of basic and diluted EPS. Basic EPS includes noexcludes dilution and is computed by dividingreflects net loss available to common stockholdersdivided by the weighted average numberweighted-average shares of common sharesstock outstanding for the period.period presented. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The Company had common stock under various options, warrants, and other agreements at December 31, 2014, 2013, 2012 and 2011.2012. The weighted averageweighted-average effects of 38,225, 46,684, 53,478 and 49,27053,478 shares at December 31, 2014, 2013, 2012 and 2011,2012, respectively, were excluded from the calculationscalculation of net loss per share for the years ended December 31, 2014, 2013, and 2012, because their impact would have been anti-dilutive.
A summary of the potential stock issuances under various options, warrants, and other agreements that could have a dilutive effect on the shares outstanding as of December 31, 2014, 2013, and 2012 are as follows:
| | | | | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| SOF Warrants | | — |
| | 1,000 |
| | 1,000 |
| 0 |
| | 0 |
| | 1,000 |
|
| Lion Warrants | | 21,606 |
| | 21,606 |
| | 21,606 |
| 24,511 |
| | 21,606 |
| | 21,606 |
|
Shares issuable to Mr. Charney based on market conditions (1)(a) | | 20,416 |
| | 20,416 |
| | 20,416 |
| 13,611 |
| | 20,416 |
| | 20,416 |
|
Contingent shares issuable to Mr. Charney based on market conditions (2)(b) | | 2,112 |
| | 2,112 |
| | 2,112 |
| 0 |
| | 2,112 |
| | 2,112 |
|
Contingent shares issuable to Mr. Charney based on performance factors (3)(c) | | — |
| | 5,000 |
| | — |
| 0 |
| | 0 |
| | 5,000 |
|
| Employee options & restricted shares | | 2,550 |
| | 3,344 |
| | 4,136 |
| 103 |
| | 2,550 |
| | 3,344 |
|
| | | 46,684 |
|
| 53,478 |
| | 49,270 |
| 38,225 |
|
| 46,684 |
| | 53,478 |
|
(1) Included______________________
(a) Charney Anti-Dilution Rights pursuant to the April 26, 2011 Investor Purchase Agreement, of which 6,805 expired unexercised on April 15, 2014 (Note 14).
(2)(b) Pursuant to the March 24, 2011 conversion of debt to equity, which expired unexercised on March 24, 2014.
(3)(c) Pursuant to Mr. Charney's employment agreement commencingcommenced April 1, 2012,
The table above does not include additional warrants that may be issuable to Lion pursuant to the anti-dilution provisions under the Lion Credit Agreement such as in the event anti-dilutive shares are issued to Mr. Charney pursuant to the Charney Anti-Dilution Rights.
of which 5,000 expired unexercised on December 31, 2013 (Note 14).
Note 14. Share-Based Compensation
Plan Description - On June 21, 2011 the Company's Board of Directors and stockholders approved theThe American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the “2011 Plan”"2011 Plan"). The 2011 Plan authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 10,00017,500 shares of the Company's common stock to be acquired by the holders of such awards. The Board amended the 2007 Performance Equity Plan ("2007 Plan")awards and authorizes up to provide that as of the July 11, 2011 effective date of registration of the 2011 Plan shares, no new awards shall be made under the 2007 Plan, and any and all shares that would otherwise become available for issuance under the terms of the 2007 Plan by reason of the expiration, cancellation, forfeiture or termination of an outstanding award under such plan shall again be available for grant under the 2011 Plan as of the date of such expiration, cancellation, forfeiture or termination.
On June 25, 2013, the Company's Board of Directors and stockholders approved amendments to the 2011 Plan to increase the maximum number of shares reserved under the 2011 Plan to 17,500 shares and increase the number of3,000 shares that may be awarded to any one participant during any calendar year to 3,000 shares.year. The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of December 31, 2013,2014, there were approximately 13,41612,664 shares available for future grants under the 2011 Plan.
The Company has identified a clerical discrepancy in its records pertaining to the total historic number of shares issued in connection with grants of common stock to non-executive employees under its stock incentive plans. The Company has not yet determined the full impact of the discrepancy but anticipates that it may result in a non-material reduction in the number of outstanding shares of common stock reported by the Company.
Restricted Share Awards - The following table summarizes sharespresents a summary of the restricted stock that were granted, vested, forfeited and outstanding (shares in thousands):share awards activity: | | | | Number of Restricted Shares | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Vesting Period (in years) | Shares (in thousands) | | Weighted-Average Grant Date Fair Value Per Share | | Weighted-Average Remaining Vesting Period (in years) |
| Non-vested - January 1, 2011 | 5,050 |
| | $ | 1.53 |
| | 3.9 | |
| Granted | 1,006 |
| | 0.88 |
| |
| |
| Vested | (2,668 | ) | | 1.38 |
| |
| |
| Forfeited | (202 | ) | | 1.53 |
| |
| |
| Non-vested - December 31, 2011 | 3,186 |
| | $ | 1.45 |
| | 2.7 | |
| Non-vested - January 1, 2012 | | 3,186 |
| | $ | 1.45 |
| | 2.7 |
| Granted | 1,418 |
| | 0.93 |
| |
| 1,418 |
| | 0.93 |
| |
|
| Vested | (1,783 | ) | | 1.23 |
| |
| (1,783 | ) | | 1.23 |
| |
|
| Forfeited | (177 | ) | | 1.13 |
| |
| (177 | ) | | 1.13 |
| |
|
| Non-vested - December 31, 2012 | 2,644 |
| | $ | 1.33 |
| | 1.3 | 2,644 |
| | $ | 1.33 |
| | 1.3 |
| Granted | 963 |
| | 1.75 |
| | 963 |
| | 1.75 |
| |
|
| Vested | (1,650 | ) | | 1.42 |
| | (1,650 | ) | | 1.42 |
| |
|
| Forfeited | (107 | ) | | 1.60 |
| | (107 | ) | | 1.60 |
| |
|
| Non-vested - December 31, 2013 | 1,850 |
| | $ | 1.46 |
| | 0.9 | 1,850 |
| | $ | 1.46 |
| | 0.9 |
| Granted | | 1,055 |
| | 0.74 |
| |
| Vested | | (2,519 | ) | | 1.14 |
| |
| Forfeited | | (283 | ) | | 1.65 |
| |
| Non-vested - December 31, 2014 | | 103 |
| | $ | 1.17 |
| | 0.3 |
Vesting of the restricted share awards to employees may be either immediately upon grant or over a period of three to five years of continued service by the employee in equal annual installments. Vesting is immediate in the case of members of the Board of Directors.Board. Share-based compensation is recognized over the vesting period based on the grant-date fair value. As of December 31, 2013, the weighted average remaining amortization period was 0.9 years.
Stock Option Awards - The following table summarizespresents a summary of the stock options granted, forfeited, expired and outstanding (shares in thousands):option activity: | | | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Contractual Remaining Life (Years) | | Aggregate Intrinsic Value | Shares (in thousands) | | Weighted-Average Exercise Price | | Weighted-Average Contractual Remaining Life (in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding - January 1, 2011 | 1,000 |
| | $ | 1.75 |
| | 9.8 | | | |
| Granted | 700 |
| | 0.82 |
| | | |
| Forfeited | (750 | ) | | 1.75 |
| | | |
| Expired | — |
| | — |
| | | |
| Outstanding - December 31, 2011 | 950 |
| | $ | 1.06 |
| | 9.5 | | | |
| Outstanding - January 1, 2012 | | 950 |
| | $ | 1.06 |
| | 9.5 | |
| Granted | — |
| | — |
| | | 0 |
| | | |
| Forfeited | — |
| | — |
| | | 0 |
| | | |
| Expired | (250 | ) | | 1.75 |
| | | | | (250 | ) | | $ | 1.75 |
| |
| Outstanding - December 31, 2012 | 700 |
| | $ | 0.82 |
| | 8.8 | | | 700 |
| | $ | 0.82 |
| | 8.8 | |
| Granted | — |
| | — |
| | | | | 0 |
| | | |
| Forfeited | — |
| | — |
| | | 0 |
| | | |
| Expired | — |
| | — |
| | | 0 |
| | | |
| Outstanding - December 31, 2013 | 700 |
| | $ | 0.82 |
| | 7.8 | | | 700 |
| | $ | 0.82 |
| | 7.8 | |
| Vested (exercisable) - December 31, 2013 | 525 |
| | $ | 0.82 |
| | 7.8 | | $ | — |
| |
| Non-vested - December 31, 2013 | 175 |
| | $ | 0.82 |
| | 7.8 | | $ | — |
| |
| Granted | | 0 |
| | | |
| Exercised | | (700 | ) | | $ | 0.82 |
| |
| Forfeited | | 0 |
| | | |
| Expired | | 0 |
| | | |
| Outstanding - December 31, 2014 | | 0 |
| | | |
| Vested (exercisable) - December 31, 2014 | | 0 |
| | | |
| Non-vested - December 31, 2014 | | 0 |
| | | |
Share-Based Compensation Expense - During the years ended December 31, 2013, 2012 and -2011, the The Company recorded share-based compensation expenseexpenses of $8,451, $10,580$4,317, $8,451 and $6,814,$10,580 for the years ended December 31, 2014, 2013 and 2012, respectively, related to its share-based compensation awards that are expected to vest. No amounts have been capitalized. As of December 31, 2013,2014, unrecorded compensation cost related to non-vested awards was $5,062,$101, which is expected to be recognized through 2016.2017.
CEOMr. Charney Anti-Dilution Rights - On October 16, 2012,In 2011, the Company andprovided Mr. Charney entered into an amendment to Mr. Charney'swith certain anti-dilution rights (see Note 13). As(the ''Charney Anti-Dilution Rights"), which provided that Mr. Charney has a right to receive from the amendment lengthenedCompany, subject to the requisitesatisfaction of certain average volume weighted closing price targets, and other terms and conditions set forth in the agreement, up to 20,416 shares of the Company's common stock as anti-dilution protection.
The fair value of these awards was determined under the Monte Carlo simulation pricing model. The calculation was based on the exercise price of $0, the stock price of $1.3, annual risk free rate of 0.45%, volatility of 90.46% and a term of 3.5 years. The Company considered the shares to be awards with market conditions, and the related service and amortization period for the shares occur in three measurement periods.
On April 15, 2014, the last day of the first measurement period, the Company will recognizedetermined that the unrecordedvesting requirements for such period were not met and 6,805 of the 20,416 anti-dilution rights expired unexercised. On December 16, 2014, the Board terminated Mr. Charney for cause in accordance with the terms of his employment agreement. Despite the termination, the unexercised anti-dilution rights remain exercisable under the 2011 Investor Purchase Agreement but are immediately vested. The remaining unrecognized compensation cost from the original award of $2,738 over its remaining service period and recognize the incremental compensation cost$233 was recognized as a result of the modification of $6,854 over the requisite service period of the modified award. During the year ended December 31, 20132014, 2012. and 2011, theThe Company recorded share-based compensation expense (included in the above) associated with Mr. Charney's certain anti-dilution rights of $1,985, $6,459 $5,440and $3,055, respectively. As of $5,440 for the years ended December 31, 2014, 2013, unrecorded compensation cost was $1,984, which is expected to be recognized through 2015. and 2012, respectively.
CEOMr. Charney Performance-Based Award - Pursuant to an employment agreement with Mr. Charney commencing onEffective April 1, 2012, the Company provided toMr. Charney the CEO rights to 7,500 shares of the Company's stock (see Note 12). The shares vestwhich were issuable in three equal installments, one per each measurement period, only upon the achievement of certain EBITDA targets for each of fiscal 2012, 2014, 2013 and 2014.2012. The fair value of the award was based on the grant-date share price of $0.75 per share. For the fiscal 2012, measurement period, the Company achieved the target EBITDA and Mr. Charney received 2,500 shares on June 25, 2013. shares. For the fiscal 2013, measurement period, the Company did not achieve the target EBITDA and as a result, the Company recorded an adjustment of $703 to reversereversed previously recorded share-based compensation related to unvested shares.expense of $703. For 2014, the fiscal 2014 measurement period, based on currently available information,achievement of the Company does not believe that the target EBITDA will be achievedperformance condition was no longer considered probable, and as a result, the Company recorded an adjustmentpreviously recognized compensation costs of $469 to reverse previously recorded share-based compensation related to unvested shares.were reversed during 2013. As of December 31, 2013,2014, there was no unrecorded compensation cost related to this grant.EBITDA award.
The grant date fair value of the award was based on the share price of $0.75. During the year ended December 31, 2013Non-Employee Directors and 2012, the Company recorded share-based compensation expense of $(703) and- $2,578, respectively.
Non-Employee Directors
On January 2, 2014, OctoberApril 1, 2013,2014, July 1, 20132014, and April 1, 2013,January 2, 2015, the Company issued a quarterly stock grant to each non-employee director for services performed of approximately 8,, 8, 5 20, 11, and 511 shares of common stock, based on grant date fair values of $1.21, $1.28, $1.88$1.21, $0.50, $0.87, and $2.10$1.05 per share, respectively. Additionally, Messrs. Danzinger
In connection with the Standstill and Igelman each received an additional 23 shares for services performed during the second half of 2011. For the yearended December 31, 2011, a $75 cash award was paid to fiveSupport Agreement, four non-employee directors in lieuresigned from the Board, and seven new directors were appointed to the Board. On September 15, 2014, each of the annualfour resigned non-employee directors received a pro-rated quarterly stock grant. The share-based compensation is reflected in operating expenses ingrant of approximately 4 shares based on grant date fair value of $0.88 per share. On October 1, 2014, the accompanying consolidated statementsCompany issued quarterly stock grants ranging from approximately 4 to 16 shares based on the grant date fair value of operations.$0.81 per share. On January 2, 2015, the Company issued quarterly stock grants to each director ranging from approximately 10 to 19 shares based on the grant date fair value of $1.05 per share.
Note 15. Commitments and Contingencies
Operating Leases
The Company conducts retail operations under operating leases, which expire at various dates through November 2023.2034. The Company’sCompany's primary manufacturing facilities and executive offices are currently under a long-term lease which expires on July 31, 2019. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other
For leases that have initial or non-cancelable lease terms in excesscontain predetermined escalations of one year at the minimum rentals, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent. This liability amounted to $16,768 and $21,587 as of December 31, 2014 and 2013, are as follows:
|
| | | |
| | Amount |
| 2014 | $ | 74,161 |
|
| 2015 | 63,599 |
|
| 2016 | 51,895 |
|
| 2017 | 41,293 |
|
| 2018 | 28,397 |
|
| Thereafter | 31,932 |
|
| Total | $ | 291,277 |
|
Operating lease respectively. Total rent expense (includingexpenses, including some real estate taxes and maintenance costs) and leases on a month to month basiscosts, were approximately $79,794, $77,390,$70,018, $79,794, and $78,138,$77,390 for the years ended December 31, 2014, 2013,, 2012, and 2011,2012, respectively. The Company did not incur any significant contingent rent during the same periods. Rent expense is allocated to cost of sales (forfor production-related activities) andactivities, selling expenses (primarily for retail stores)stores, and general and administrative expenses in the accompanying consolidated statements of operations.
Sales Tax
The Company sells its products through its wholesale business,following table presents future minimum commitments (excluding real estate tax and maintenance costs) for retail storeslocations and the internet. The Company operates these channels separately and accounts for sales and use tax accordingly. The Company is periodically audited by state taxing authorities and it is possible they may disagree with the Company’s method of assessing and remitting these taxes. The
Company believesother leases that it properly assesses and remits all applicable state sales taxes in the applicable jurisdictions and has accrued $0 and $289have initial or non-cancelable lease terms exceed one year as of December 31, 2013 and 2012, respectively, for state sales tax contingencies.2014:
|
| | | |
| Year Ending December 31, | Operating Leases |
| 2015 | $ | 63,007 |
|
| 2016 | 50,121 |
|
| 2017 | 43,555 |
|
| 2018 | 25,624 |
|
| 2019 | 18,321 |
|
| Thereafter | 46,689 |
|
Customs and dutiesDuties
The Company is beingIn 2012, the German authorities audited bythe import records of the Company's German customs authoritiessubsidiary for the years ended December 31, 2009 through December 31, 2011. In connection with the audit,2011 and issued retroactive punitive duty assessments on certain containers of goods imported. The German customs authorities have issued retroactive assessments on the Company's imports totaling $5,003 at the December 31, 2013 exchange rates (assessment was issued in Euros). The size of the retroactive assessments are largely due to member countries of the European Union (“E.U.”) limited right to impose retaliatory duties on certain imports of U.S. origin goods into the E.U., based upon the World Trade Organization's (“WTO”) Dispute Settlement procedures and the related WTO arbitrator rulings brought into place as a result of EU complaint against the U.S. "Continued Dumping and Subsidy Offset Act of 2000" (the "CDSOA") usually referred to as "the Byrd Amendment". Consequently, German customs authorities are attempting to imposeimposed a substantially higher tariff rate than the original rate that the Company had paid on the imports, approximatelymore than doubling the amount of the tariff that the Company would have to pay. The assessments of additional retaliatory duty originated from a trade dispute. Despite the ongoing appeals of the assessment, the German authorities demanded, and the Company paid, in connection with such assessments, $4,390 in the third quarter of 2014 and the final balance of $85 in the fourth quarter of 2014. The Company recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in its consolidated statements of operations.
Additionally, during the fourth quarter of 2014, the Company wrote off approximately $3,300 in duty receivables to cost of sales in its consolidated statements of operations. These duty receivables related to changes in transfer costs for products sold to the Company's European subsidiaries. The Company is also subject to, and has recorded charges related to, customs and similar audit settlements and contingencies in other jurisdictions.
Mr. Charney Investigation
In connection with the suspension of Mr. Charney on June 18, 2014, the Board formed a new special committee (the "Suitability Committee") for the purpose of overseeing the investigation into alleged misconduct by Mr. Charney (the "Internal Investigation") which ultimately concluded with his termination for cause on December 16, 2014.
OSHA Settlement
In 2011, an industrial accident at the Company's facility in Orange County, California resulted in the fatality of a Company employee. In accordance with law, a mandatory criminal investigation was initiated. In early August 2014, the Company and the Orange County district attorney's office began to negotiate a resolution of potential claims related to the accident, and the Company accrued $1,000 in costs representing its best estimate of the cost to settle this matter. On August 19, 2014, a settlement of all claims related to the criminal investigation, pursuant to which the Company paid $1,000, was approved by the California Superior Court in Orange County.
Real Estate Matter
The landlord for the Company's headquarters and manufacturing facility in Los Angeles, California has identified certain alleged breaches under its lease. The Company is currently engaging with the landlord to resolve this dispute. Should the Company fail to resolve this matter on acceptable terms, they could result in material liability.
Advertising
The Company believes that it has valid arguments to challenge the merit of the German customs assessment and has filed litigationhad approximately $1,300 in German courts to contest such assessment. However, as the appeals as to the assessment are not decided, the Company is unable to reasonably estimate the financial outcome of the matteradvertising commitments at this time and it cannot predict whether the outcome will be favorable or unfavorable to the Company, or if the Company will be required to advance material amounts during the pendancy of the litigation, and accordingly has not recorded a provision for this matter. No assurance can be made that this matter will not result in a material financial exposure in connection with the audit, which could have a material effect on the Company's financial condition, results of operations or cash flows.
New York Stock Exchange Compliance
The common stock is currently traded on the NYSE MKT. On February 28, 2014, the Company received a letter from NYSE MKT indicating that it was not in compliance with the continued listing standards of NYSE MKT set forth in Section 1003(a)(iv) of the NYSE MKT LLC Company Guide. In order to maintain its listing, the Company has submitted a plan of compliance by addressing how it intends to regain compliance with Section 1003(a)(iv) of the Company Guide by April 15, 2014. If the plan is accepted, the Company may be able to continue its listing but will be subject to periodic review by NYSE MKT. If the plan is not accepted or if the Company does not make progress consistent with the plan by April 15, 2014, NYSE MKT will initiate delisting proceedings as appropriate. No assurance can be given that the Company will regain compliance with those listing requirements or that it will continue to meet the listing requirements of NYSE MKT in the future.
Advertising
At December 31, 2013 the Company had approximately $2,450, in open advertising commitments,2014, which primarily relate to print advertisements in various newspapers and magazines as well as outdoor advertising and other advertisements.advertising. The majority of these commitments are expected to be paid during the remainder of 2014.
2015.
Note 16. Workers’Workers' Compensation and Other Self-Insurance Reserves
The Company uses a combination of third-party insurance and/orand self-insurance for a number of risks including workers’workers' compensation, medical benefits provided to employees, and general liability claims. General liability costsclaims primarily relate primarily to litigation that arises from store operations. Self-insurance reserves include
Estimating liability is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve required. Changes in future inflation rates, litigation trends, legal interpretations, benefit levels, and settlement patterns, among other factors, can impact ultimate claim costs. The Company estimates of both filed claims carried at their expected ultimate settlement value and claims incurred but not yet reported. The Company’s estimated claim amounts are discounted using a rate of 1.03% with a duration that approximates the duration of the Company’s self-insurance reserve portfolio. As of December 31, 2013 the undiscounted liability amount was $15,809. The Company’s liability reflected on the accompanying consolidated balance sheets represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. In estimating this liability, the Company utilizesby utilizing loss development factors based on Company-specificits specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. These projections are subject to a high degree of variability based upon future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although the Company does not expect the amounts ultimately paid toultimate claim costs significantly differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantlyactual developed claims considerably fluctuate from the historical trends and the assumptions applied. The Company's estimated claims are discounted using a rate of 1.54% with a duration that approximates the duration of its self-insurance reserve portfolio. The undiscounted liabilities were $20,409 and $15,809 as of December 31, 2014 and 2013, respectively.
The workers’workers' compensation liability is based on an estimate of losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. To guarantee performance under the workers' compensation program, as of the both December 31, 2013 and 2012, the Company had issued standby letters of credit in the amounts of $450$300 and $450 with insurance companies being the beneficiaries through a bank,as of December 31, 2014 and 2013, respectively and cash deposits of $16,124 and $14,624, respectively,$16,124 in favor of insurance company beneficiaries. At beneficiaries as of both December 31, 2013,2014 and 2013. In early 2015, the Company increased cash deposits to approximately $18,000. At December 31, 2014, the Company recorded a total reserve of $15,356,$19,560, of which $3,871$5,321 is included in accrued expenses and $11,485 is included in other long-term liabilities on
the accompanying consolidated balance sheets. At December 31, 2012, the Company recorded a total reserve of $14,472, of which, $3,778 is included in accrued expenses and $10,694$14,239 is included in other long-term liabilities on the accompanying consolidated balance sheets. These reserves for potential lossesAt December 31, 2013, the Company recorded a total reserve of $15,356, of which, $3,871 is included in accrued expenses and $11,485 is included in other long-term liabilities on existing claims are believed to be for potential losses which are probable and reasonably estimable.the consolidated balance sheets.
The Company self-insures its health insurance benefit obligations while the claims are administered through a third party administrator. The medical benefit liability is based on estimated losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. At December 31, 2013The Company's total reserves of $1,439 and 2012, the Company’s total reserve of $2,512 and $1,510 was$2,512 are included in accrued expenses in the accompanying consolidated balance sheets.
sheets at December 31, 2014 and 2013, respectively.
Note 17. Business Segment and Geographic Area Information
The Company reports the following four operating segments:segments based on the management approach: U.S. Wholesale, U.S. Retail, Canada, and International. The Company believes this methodmanagement approach designates the internal reporting used by management for making decisions and assessing performance as the source of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated.Company's reportable segments.
The U.S. Wholesale segment consists of the Company's wholesale operations of sales of undecorated apparel products sold to distributors and third party screen printers in the United States,U.S. as well as the Company'sits online consumer sales to U.S. customers. U.S.sales. The Retail segment consists of the Company's retail operations in the United States,U.S., which comprised 139136 retail stores operating in the United States as of December 31, 2013.2014. The Canada segment includes wholesale, retail, wholesale and online consumer operations in Canada. As of December 31, 2013,2014, the retail operations in the Canada segment comprised 3231 retail stores. The International segment includes wholesale, retail, wholesale and online consumer operations outside of the United StatesU.S. and Canada. As of December 31, 2013,2014, the retail operations in the International segment comprised 7775 retail stores operating in 18 countries outside of the United StatesU.S. and Canada. All of the Company's retail stores sell the Company'sits apparel products directly to consumers.
The Company's managementCompany evaluates performance of its operating segments primarily based on a number of factors; however, the primary measures of performance are net sales and operating income or loss from operations of each business segment, as these are the key performance indicators reviewed by management.operations. Operating income or loss for each segment does not include unallocated corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to:to, human resources, legal, finance, information technology, accounting, executive compensation and various other corporate level expenses.
The following table representstables present key financial information of the Company’sCompany's reportable segments before unallocated corporate expenses: | | | | | For the Year Ended December 31, 2014 |
| | | U.S. Wholesale | | U.S. Retail | | Canada | | International | | Consolidated |
| Wholesale net sales | | $ | 167,795 |
| | $ | 0 |
| | $ | 10,224 |
| | $ | 8,842 |
| | $ | 186,861 |
|
| Retail net sales | | 0 |
| | 191,442 |
| | 38,087 |
| | 131,113 |
| | 360,642 |
|
| Online consumer net sales | | 41,174 |
| | 0 |
| | 3,233 |
| | 16,981 |
| | 61,388 |
|
| Total net sales | | 208,969 |
| | 191,442 |
| | 51,544 |
| | 156,936 |
| | 608,891 |
|
| Gross profit | | 60,182 |
| | 123,738 |
| | 28,023 |
| | 97,192 |
| | 309,135 |
|
| Income (loss) from segment operations | | 31,068 |
| | (794 | ) | | 3,838 |
| | (1,380 | ) | | 32,732 |
|
| Depreciation and amortization | | 8,645 |
| | 11,614 |
| | 1,672 |
| | 3,966 |
| | 25,897 |
|
| Capital expenditures | | 2,424 |
| | 4,018 |
| | 415 |
| | 2,961 |
| | 9,818 |
|
| Retail store impairment | | 0 |
| | 696 |
| | 178 |
| | 1,864 |
| | 2,738 |
|
| Deferred rent benefit | | (443 | ) | | (3,025 | ) | | (202 | ) | | (646 | ) | | (4,316 | ) |
| | For the Year Ended December 31, 2013 | For the Year Ended December 31, 2013 |
| | U.S. Wholesale | | U.S. Retail | | Canada | | International | | Consolidated | U.S. Wholesale | | U.S. Retail | | Canada | | International | | Consolidated |
| Wholesale net sales | 159,682 |
| | — |
| | 12,092 |
| | 8,893 |
| | 180,667 |
| $ | 159,682 |
| | $ | 0 |
| | $ | 12,092 |
| | $ | 8,893 |
| | $ | 180,667 |
|
| Retail net sales | — |
| | 205,011 |
| | 45,163 |
| | 141,517 |
| | 391,691 |
| 0 |
| | 205,011 |
| | 45,163 |
| | 141,517 |
| | 391,691 |
|
| Online consumer net sales | 41,569 |
| | — |
| | 2,879 |
| | 17,135 |
| | 61,583 |
| 41,569 |
| | 0 |
| | 2,879 |
| | 17,135 |
| | 61,583 |
|
| Total net sales to external customers | 201,251 |
| | 205,011 |
| | 60,134 |
| | 167,545 |
| | 633,941 |
| 201,251 |
| | 205,011 |
| | 60,134 |
| | 167,545 |
| | 633,941 |
|
| Gross profit | 49,877 |
| | 131,912 |
| | 34,720 |
| | 104,376 |
| | 320,885 |
| 49,877 |
| | 131,912 |
| | 34,720 |
| | 104,376 |
| | 320,885 |
|
| Income (loss) from segment operations | 11,981 |
| | (2,731 | ) | | 3,684 |
| | 3,916 |
| | 16,850 |
| 11,981 |
| | (2,731 | ) | | 3,684 |
| | 3,916 |
| | 16,850 |
|
| Depreciation and amortization | 7,418 |
| | 12,420 |
| | 1,853 |
| | 4,385 |
| | 26,076 |
| 7,418 |
| | 12,420 |
| | 1,853 |
| | 4,385 |
| | 26,076 |
|
| Capital expenditures | 10,115 |
| | 11,204 |
| | 1,167 |
| | 4,568 |
| | 27,054 |
| 10,115 |
| | 11,204 |
| | 1,167 |
| | 4,568 |
| | 27,054 |
|
| Retail store impairment | — |
| | 642 |
| | 144 |
| | 754 |
| | 1,540 |
| 0 |
| | 642 |
| | 144 |
| | 754 |
| | 1,540 |
|
| Deferred rent expense (benefit) | 81 |
| | (1,678 | ) | | (375 | ) | | (121 | ) | | (2,093 | ) | 81 |
| | (1,678 | ) | | (375 | ) | | (121 | ) | | (2,093 | ) |
| | | | | | | | | | | For the Year Ended December 31, 2012 |
| | For the Year Ended December 31, 2012 | U.S. Wholesale | | U.S. Retail | | Canada | | International | | Consolidated |
| | U.S. Wholesale | | U.S. Retail | | Canada | | International | | Consolidated | |
| Wholesale net sales | $ | 149,611 |
| | $ | — |
| | $ | 13,006 |
| | $ | 10,278 |
| | $ | 172,895 |
| $ | 149,611 |
| | $ | 0 |
| | $ | 13,006 |
| | $ | 10,278 |
| | $ | 172,895 |
|
| Retail net sales | — |
| | 198,886 |
| | 48,499 |
| | 141,738 |
| | 389,123 |
| 0 |
| | 198,886 |
| | 48,499 |
| | 141,738 |
| | 389,123 |
|
| Online consumer net sales | 35,744 |
| | — |
| | 2,164 |
| | 17,384 |
| | 55,292 |
| 35,744 |
| | 0 |
| | 2,164 |
| | 17,384 |
| | 55,292 |
|
| Total net sales to external customers | 185,355 |
| | 198,886 |
| | 63,669 |
| | 169,400 |
| | 617,310 |
| 185,355 |
| | 198,886 |
| | 63,669 |
| | 169,400 |
| | 617,310 |
|
| Gross profit | 53,195 |
| | 130,498 |
| | 37,500 |
| | 106,190 |
| | 327,383 |
| 53,195 |
| | 130,498 |
| | 37,500 |
| | 106,190 |
| | 327,383 |
|
| Income (loss) from segment operations | 27,893 |
| | 4,197 |
| | (57 | ) | | 10,670 |
| | 42,703 |
| 27,893 |
| | 4,197 |
| | (57 | ) | | 10,670 |
| | 42,703 |
|
| Depreciation and amortization | 6,322 |
| | 10,909 |
| | 1,543 |
| | 4,215 |
| | 22,989 |
| 6,322 |
| | 10,909 |
| | 1,543 |
| | 4,215 |
| | 22,989 |
|
| Capital expenditures | 9,791 |
| | 6,626 |
| | 1,607 |
| | 3,583 |
| | 21,607 |
| 9,791 |
| | 6,626 |
| | 1,607 |
| | 3,583 |
| | 21,607 |
|
| Retail store impairment | — |
| | 243 |
| | 130 |
| | 1,274 |
| | 1,647 |
| 0 |
| | 243 |
| | 130 |
| | 1,274 |
| | 1,647 |
|
| Deferred rent expense (benefit) | 523 |
| | (706 | ) | | (197 | ) | | (515 | ) | | (895 | ) | 523 |
| | (706 | ) | | (197 | ) | | (515 | ) | | (895 | ) |
| | | | | | | | | | | |
| | For the Year Ended December 31, 2011 | |
| | U.S. Wholesale | | U.S. Retail | | Canada | | International | | Consolidated | |
| Wholesale net sales | $ | 132,135 |
| | $ | — |
| | $ | 11,492 |
| | $ | 10,406 |
| | $ | 154,033 |
| |
| Retail net sales | — |
| | 174,837 |
| | 48,527 |
| | 126,868 |
| | 350,232 |
| |
| Online consumer net sales | 26,493 |
| | — |
| | 1,846 |
| | 14,732 |
| | 43,071 |
| |
| Total net sales to external customers | 158,628 |
| | 174,837 |
| | 61,865 |
| | 152,006 |
| | 547,336 |
| |
| Gross profit | 44,000 |
| | 117,228 |
| | 35,799 |
| | 97,873 |
| | 294,900 |
| |
| Income (loss) from segment operations | 23,500 |
| | (4,659 | ) | | (3,695 | ) | | 7,340 |
| | 22,486 |
| |
| Depreciation and amortization | 7,757 |
| | 10,492 |
| | 1,567 |
| | 5,164 |
| | 24,980 |
| |
| Capital expenditures | 3,638 |
| | 4,889 |
| | 407 |
| | 2,136 |
| | 11,070 |
| |
| Retail store impairment | — |
| | 558 |
| | 808 |
| | 2,901 |
| | 4,267 |
| |
| Deferred rent expense (benefit) | 257 |
| | (1,662 | ) | | (121 | ) | | (443 | ) | | (1,969 | ) | |
Reconciliation of reportable segments consolidatedcombined income (loss) from operations for the years ended December 31, 2013, 2012 and 2011 to the consolidated loss before income taxes is as follows:
| | | | | | | | | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Income from operations of reportable segments | $ | 16,850 |
| | $ | 42,703 |
| | $ | 22,486 |
| $ | 32,732 |
| | $ | 16,850 |
| | $ | 42,703 |
|
| Unallocated corporate expenses | (46,145 | ) | | (41,741 | ) | | (45,779 | ) | 60,315 |
| | 46,145 |
| | 41,741 |
|
| Interest expense | 39,286 |
| | 41,559 |
| | 33,167 |
| 39,853 |
| | 39,286 |
| | 41,559 |
|
| Foreign currency transaction loss | 1 |
| | 120 |
| | 1,679 |
| 1,479 |
| | 1 |
| | 120 |
|
| Unrealized loss (gain) on change in fair value of warrant and purchase rights | 3,713 |
| | 4,126 |
| | (23,467 | ) | |
| Loss (gain) on extinguishment of debt | 32,101 |
| | (11,588 | ) | | 3,114 |
| |
| Other expense (income) | 131 |
| | 204 |
| | (193 | ) | |
| Unrealized (gain) loss on change in fair value of warrant | | (1,715 | ) | | 3,713 |
| | 4,126 |
|
| (Gain) loss on extinguishment of debt | | (171 | ) | | 32,101 |
| | (11,588 | ) |
| Other (income) expense | | (371 | ) | | 131 |
| | 204 |
|
| Consolidated loss before income taxes | $ | (104,527 | ) | | $ | (33,459 | ) | | $ | (37,593 | ) | $ | (66,658 | ) | | $ | (104,527 | ) | | $ | (33,459 | ) |
Net sales by each reportable segment’s class of customer and geographic location of customer for the years ended December 31, 2013, 2012, and 2011 consist of the following:customers are as follows:
| | | | Years Ended December 31, | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Net sales by geographic location of customer: | | | | | | |
| United States | $ | 406,262 |
| | $ | 384,241 |
| | $ | 333,464 |
| $ | 400,411 |
| | $ | 406,262 |
| | $ | 384,241 |
|
| Europe (excluding United Kingdom) | | 64,760 |
| | 70,347 |
| | 66,861 |
|
| Canada | 60,134 |
| | 63,669 |
| | 61,865 |
| 51,544 |
| | 60,134 |
| | 63,669 |
|
| Europe (excluding United Kingdom) | 70,347 |
| | 66,861 |
| | 68,130 |
| |
| United Kingdom | 44,153 |
| | 47,694 |
| | 40,039 |
| 42,601 |
| | 44,153 |
| | 47,694 |
|
| South Korea | 10,380 |
| | 10,732 |
| | 9,749 |
| 12,696 |
| | 10,380 |
| | 10,732 |
|
| China | 6,894 |
| | 5,317 |
| | 3,857 |
| |
| Japan | 18,119 |
| | 20,336 |
| | 14,176 |
| 12,836 |
| | 18,119 |
| | 20,336 |
|
| Australia | 10,218 |
| | 11,458 |
| | 9,383 |
| 9,293 |
| | 10,218 |
| | 11,458 |
|
| China | | 7,613 |
| | 6,894 |
| | 5,317 |
|
| Other foreign countries | 7,434 |
| | 7,002 |
| | 6,673 |
| 7,137 |
| | 7,434 |
| | 7,002 |
|
| Total consolidated net sales | $ | 633,941 |
| | $ | 617,310 |
| | $ | 547,336 |
| $ | 608,891 |
| | $ | 633,941 |
| | $ | 617,310 |
|
Long-lived assets—propertyProperty and equipment, net by geographic location is summarizedand total assets by reporting segments are as follows as of December 31,:follows:
| | | | | | | December 31, |
| | 2013 | | 2012 | 2014 | | 2013 |
| United States | $ | 53,424 |
| | $ | 50,551 |
| $ | 38,932 |
| | $ | 53,424 |
|
| Canada | 3,913 |
| | 5,079 |
| |
| Europe (excluding the United Kingdom) | 4,741 |
| | 3,987 |
| 3,818 |
| | 4,741 |
|
| United Kingdom | 4,434 |
| | 4,500 |
| 2,482 |
| | 4,434 |
|
| Canada | | 2,301 |
| | 3,913 |
|
| Australia | | 566 |
| | 846 |
|
| Japan | | 506 |
| | 750 |
|
| South Korea | 344 |
| | 433 |
| 189 |
| | 344 |
|
| China | 291 |
| | 358 |
| 80 |
| | 291 |
|
| Japan | 750 |
| | 1,097 |
| |
| Australia | 846 |
| | 1,057 |
| |
| Other foreign countries | 560 |
| | 716 |
| 443 |
| | 560 |
|
| Total consolidated long-lived assets | $ | 69,303 |
| | $ | 67,778 |
| $ | 49,317 |
| | $ | 69,303 |
|
| | | | | | | |
| Identifiable assets by reportable segment: | | | | |
| U.S. Wholesale | $ | 169,474 |
| | $ | 153,856 |
| $ | 165,936 |
| | $ | 169,474 |
|
| U.S. Retail | 77,150 |
| | 76,709 |
| 57,933 |
| | 77,150 |
|
| Canada | 17,761 |
| | 28,586 |
| 15,271 |
| | 17,761 |
|
| International | 69,367 |
| | 69,061 |
| 55,249 |
| | 69,367 |
|
| Total | $ | 333,752 |
| | $ | 328,212 |
| |
| Total assets | | $ | 294,389 |
| | $ | 333,752 |
|
Foreign subsidiaries accounted for the following percentages of total assets and total liabilities as of December 31,:liabilities: | | | | | | December 31, |
| | 2013 | | 2012 | 2014 | | 2013 |
| Total assets | 26.1 | % | | 29.8 | % | 24.0 | % | | 26.1 | % |
| Total liabilities | 6.8 | % | | 10.9 | % | 6.3 | % | | 6.8 | % |
Note 18. Litigation
The Company is subject to various claims and contingencies in the ordinary course of business including those related tothat arise from litigation, business transactions, operations, employee-related matters, or taxes. The Company establishes reserves when it believes a loss is probable and taxes, and others. Whenis able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company is aware of a claim or potential claim, it assessesalso discloses the likelihood of any loss or exposure. If it is probable that a loss will result and the amountnature of the loss can be reasonably estimated,contingency and an estimate of the Company will recordpossible loss or range of loss, or a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. There is no assurancestatement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters will not materially and adversely affect the Company's business, financial position, and results of operations or cash flows.
Individual Actions
On February 7, 2006, Sylvia Hsu, a former employee of American Apparel, filed a Charge of Discrimination with the Los Angeles District Office of the Equal Employment Opportunity Commission (“EEOC”) (Hsu v. American Apparel: Charge No. 480- 2006-00418), alleging that she was subjected to sexual harassment by a co-worker and constructively discharged as a result of the sexual harassment and a hostile working environment. On March 9, 2007, the EEOC expanded the scope of its investigation to other employees of American Apparel who may have been sexually harassed. On August 9, 2010, the EEOC issued a written determination finding that reasonable cause exists to believe the Company discriminated against Ms. Hsu and women, as a class, on the basis of their female gender, by subjecting them to sexual harassment. No finding was made on the issue of Ms. Hsu's alleged constructive discharge. In August 2013 the parties entered into a Conciliation Agreement providingcould arise for an immaterial compensatory payment to Ms. Hsu and the Company's agreement to comply with the Company's Policy on Sexual Harassment and Sexual Discrimination, which Policy was reviewed by the EEOC, and take certain administrative measures relating thereto. The Conciliation Agreement remains in effect for three years.
On November 5, 2009, Guillermo Ruiz, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of the Company's employees. The complaint further alleges that the Company failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit.
On June 21, 2010, Antonio Partida, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that the Company failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
On or about December 2, 2010, Emilie Truong, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to timely provide final paychecks upon separation. Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices.
On or about February 9, 2011, Jessica Heupel, a former retail employee filed suit on behalf of putative classes of current and former non-exempt California employees (Jessica Heupel, individually and on behalf of all others similarly situated v. American Apparel Retail, Inc., Case No. 37-2011-00085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages as follows:
(1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On or about September 9, 2011, Anthony Heupel, a former retail employee initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages in an amount in excess of $3,600, as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
The Company doeswe do not have insurance coverage or for the above matters. Each of the aforementioned wage and hour caseswhich insurance provides only partial coverage. These matters could have been proceeding in arbitration. All of these cases have been settleda material negative effect on an aggregate and class-wide basis for a payment by the Company in the total amount of $875, most of which will be paid to class members and to their attorneys. Certain class members have opted out of the settlement and so may proceed with individual claims. Also, the settlement is subject to and conditional upon approval of the arbitrator, and if the arbitrator approves, one or more of the California Superior Courts. There is no guarantee that such approvals will be obtained.
Additionally, the Company is currently engaged in other employment-related claims and other matters incidental to the Company's business. The Company believes that all such claims against the Company are without merit or not material, and the Company intends to vigorously dispute the validity of the plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information at this time, the Company believes, but the Company cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, financial position, results of operations, or cash flows. Should any of these matters be decided againstIn all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate.
SEC Investigation
On February 5, 2015, the Company could not only incur liability but also experience an increaselearned that the Securities and Exchange Commission had issued a formal order of investigation with respect to matters arising from the Suitability Committee's review relating to Mr. Charney. The SEC's investigation is a non-public, fact-finding inquiry to determine whether any violations of law have occurred. The Company intends to cooperate fully with the SEC in similar suits and suffer reputational harm.its investigation.
Shareholder Derivative MattersActions
TwoIn 2010, two shareholder derivative lawsuits (Case No. CV106576 GAF (JCx) and Case No. CV107518 RSWL (FFMx)) were filed in the United States District Court for the Central District of California which(the "Court") that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal"First Derivative Action”Action"). Plaintiffs in the FederalFirst Derivative Action allegealleged a cause of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a “Nominal Defendant”"Nominal Defendant" in the actions reflects the fact that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company filed a motion to dismiss the FederalFirst Derivative Action which was granted with leave to amend on July 31, 2012. Plaintiffs did not amend the complaint and subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the Plaintiffs'plaintiffs' motion to dismiss and entered judgment accordingly. On November 12, 2012, Plaintiffsplaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals where the case is currently pending.
FourIn 2010, four shareholder derivative lawsuits (Case No. BC 443763, Case No. BC 443902, Case No. BC 445094, and Case No. BC 447890) were filed in fall of 2010 in the Superior Court of the State of California for the County of Los Angeles (the "Superior Court") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action").
Three of the matters comprising the State Derivative Action allegealleged causes of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011, the Superior Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that, among other reasons, the case is duplicative of the FederalFirst Derivative Action.
In July 2014, two shareholder derivative lawsuits were filed in the Court that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. 2014 Shareholder Derivative Litigation, Lead Case No. 14-CV-5699 (the "Second Derivative Action," and together with the First Derivative Action, as well as the Federal Securities Action currently pending"Federal Derivative Actions"). Plaintiffs in the United States District CourtSecond Derivative Action alleged similar causes of action for breach of fiduciary duty by failing to (i) maintain adequate internal control and exercise proper oversight over Mr. Charney, whose alleged misconduct and mismanagement has purportedly harmed the Central DistrictCompany's operations and financial condition, (ii) ensure Mr. Charney's suspension as CEO did not trigger material defaults under two of California (see below).the Company's credit agreements, and (iii) prevent Mr. Charney from increasing his ownership percentage of the Company. The Second Derivative Action primarily seeks to recover damages and reform corporate governance and internal procedures. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's
status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company has filed a motion to dismiss, and the parties are currently briefing this motion.
Both the Federal Derivative ActionActions and State Derivative ActionsAction are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.
Other Proceedings
Four putative class action lawsuits, (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in the United States District Court for the Central District of California in the Fall of 2010 against American Apparel and certain of the Company's officers and executives on behalf of American Apparel shareholders. On December 3, 2010, the four lawsuits were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal Securities Action”). The lead plaintiff filed a consolidated class action complaint on April 29, 2011 on behalf of shareholders who purchased the Company's common stock between November 28, 2007 and August 17, 2010. The lead plaintiff alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper. The Company filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013. The Company filed a motion to dismiss the complaint on March 15, 2013. The hearing on the motion was held on June 3, 2013, at which time, the Court took the matter under submission. On August 8, 2013, the court issued its final order granting the motion to dismiss in regards to certain claims. Defendants answered the complaint's remaining claims on September 27, 2013. On November 6, 2013, the Court issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed Motion for Preliminary Approval of the settlement on December 16, 2013. The settlement, if approved, would result in a payment by the Company's insurance carrier of $4,800. The Federal Securities Action is covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.
Should any of the above matters (i.e., the Federal Derivative Action,Actions or the State Derivative Action, or the Federal Securities Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds whichthat fall outside the scope of the Company's Directors and Officers Liability insurance coverage, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect uponon the Company's financial condition, results of operations, or cash flows.
Employment Matters
The Company has previously disclosed an arbitrationarbitrations filed by the Company on or about February 17, 2011, related to cases filed in the Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the State of California for the County of Los Angeles (Case Nos. BC457920 and BC460331) against American Apparel, DovMr. Charney and certain members of the Board of Directors asserting claims of sexual harassment, assault and battery, impersonation through the internet, defamation and other related claims. The Company has settled oneor obtained a dismissal of all of these cases with no monetary liability toclaims.
In addition, the Company. In another case, the arbitrator ruled that both American Apparel and the plaintiff had established certainCompany is currently engaged in other employment-related claims and damages against one another resulting in a net inconsequential amount awardedother matters incidental to the plaintiff.its business. The Company is awaitingbelieves that all such claims are without merit or not material and intends to vigorously dispute the arbitrator’s rulingvalidity of the plaintiffs' claims. While the final resolution of such claims cannot be determined based on information at this time, the outstanding attorney’s fees issue in this case. The Company believes, but cannot provide assurancesassurance that, the amount and ultimate liability, if any, with respect to the remainingthese actions will not materially affect the Company'sits business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, it could not only incur liability but also experience an increase in similar suits and suffer reputational harm.
Federal Securities Action
Four putative class action lawsuits (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in fall of 2010 in the United States District Court for the Central District of California ("USDC") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx). The lead plaintiff appointed by the USDC alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the USDC may deem proper. On November 6, 2013, the USDC issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed motion of preliminary approval which was granted on April 16, 2014 without oral argument. On July 28, 2014, the USDC approved the settlement, and final judgment was entered on July 30, 2014.
Wage and Hour Actions
In April 2014, the five former employees' wage and hour cases including Guillermo Ruiz, Antonio Partida, Emily Truong, Jessica Heupel, and Anthony Heupel were settled on an aggregate and class-wide basis for $850, and a final approval was granted by the presiding arbitrator. On September 12, 2014, the court granted final approval of the settlement. The Company did not have insurance coverage for this matter.
Note 19. Condensed Consolidating Financial Information
On April 4, 2013,The Notes which constitute debt obligations of American Apparel Inc. ("Parent") issued $206,000 aggregate principal amount of its 13% Senior Secured Notes due 2020 (the "Notes""Parent") with a maturity date of April 15, 2020. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Company's existing and future 100% owned direct and indirect domestic subsidiaries,subsidiaries. The Notes are subject to certain customary automatic release provisions including releasethe satisfaction and discharge, defeasance, or full payment of the principal, premium and, if any, accrued and unpaid interests. In certain circumstances, the Notes are subject to the sale or substantial disposition of the subsidiary guarantor's guarantee uponassets. No guarantor subsidiaries are less than 100% owned, directly or indirectly, by the sale of all of such guarantor's equity interest or all or substantially all of its assets, designation of such guarantor as an unrestricted or immaterial subsidiary for purposes of the indenture and satisfaction of the defeasance or discharge provisions of the indenture. Company.
The following presents the Parent's condensed consolidating balance sheets as of December 31, 2014 and 2013, and 2012, theits condensed consolidating statements of operations for the years ended December 31, 2013, 2012 and 2011comprehensive (loss) income and the condensed consolidating statements of cash flows for the years ended December 31, 2014, 2013 2012 and 2011 of the Parent,2012, the Company's material guarantor subsidiaries and the non-guarantor subsidiaries, and the elimination entries necessary to present the Company's financial statements on a consolidated basis. ThisThese condensed consolidating financial information should be read in conjunction with the accompanyingCompany's consolidated financial statements of the Company.statements.
Condensed Consolidating Balance Sheets
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| ASSETS | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | |
| Cash | $ | 0 |
| | $ | 1,370 |
| | $ | 6,973 |
| | $ | 0 |
| | $ | 8,343 |
|
| Trade accounts receivable, net | 0 |
| | 19,422 |
| | 5,876 |
| | 0 |
| | 25,298 |
|
| Intercompany accounts receivable, net | 240,989 |
| | (229,956 | ) | | (11,033 | ) | | 0 |
| | 0 |
|
| Inventories, net | 0 |
| | 116,335 |
| | 31,137 |
| | 106 |
| | 147,578 |
|
| Other current assets | 90 |
| | 11,290 |
| | 6,391 |
| | 0 |
| | 17,771 |
|
| Total current assets | 241,079 |
| | (81,539 | ) | | 39,344 |
| | 106 |
| | 198,990 |
|
| Property and equipment, net | 0 |
| | 38,932 |
| | 10,385 |
| | 0 |
| | 49,317 |
|
| Investments in subsidiaries | (115,109 | ) | | 15,874 |
| | 0 |
| | 99,235 |
| | 0 |
|
| Other assets, net | 8,861 |
| | 27,463 |
| | 9,758 |
| | 0 |
| | 46,082 |
|
| TOTAL ASSETS | $ | 134,831 |
| | $ | 730 |
| | $ | 59,487 |
| | $ | 99,341 |
| | $ | 294,389 |
|
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY |
| CURRENT LIABILITIES | | | | | | | | | |
| Revolving credit facilities and current portion of long-term debt | $ | 0 |
| | $ | 34,299 |
| | $ | 13 |
| | $ | 0 |
| | $ | 34,312 |
|
| Accounts payable | 0 |
| | 32,508 |
| | 3,046 |
| | 0 |
| | 35,554 |
|
| Accrued expenses and other current liabilities | 13,498 |
| | 31,855 |
| | 16,016 |
| | 0 |
| | 61,369 |
|
| Fair value of warrant liability | 19,239 |
| | 0 |
| | 0 |
| | 0 |
| | 19,239 |
|
| Other current liabilities | 0 |
| | 9,762 |
| | 2,038 |
| | 0 |
| | 11,800 |
|
| Total current liabilities | 32,737 |
| | 108,424 |
| | 21,113 |
| | 0 |
| | 162,274 |
|
| Long-term debt, net | 217,133 |
| | 0 |
| | 255 |
| | 0 |
| | 217,388 |
|
| Other long-term liabilities | 477 |
| | 25,431 |
| | 4,335 |
| | 0 |
| | 30,243 |
|
| TOTAL LIABILITIES | 250,347 |
| | 133,855 |
| | 25,703 |
| | 0 |
| | 409,905 |
|
| STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | | | | |
| Common stock | 18 |
| | 100 |
| | 494 |
| | (594 | ) | | 18 |
|
| Additional paid-in capital | 218,779 |
| | 6,726 |
| | 7,967 |
| | (14,693 | ) | | 218,779 |
|
| Accumulated other comprehensive (loss) income | (6,915 | ) | | (2,493 | ) | | (4,136 | ) | | 6,629 |
| | (6,915 | ) |
| (Accumulated deficit) retained earnings | (325,241 | ) | | (137,458 | ) | | 29,459 |
| | 107,999 |
| | (325,241 | ) |
| Less: Treasury stock | (2,157 | ) | | 0 |
| | 0 |
| | 0 |
| | (2,157 | ) |
| TOTAL STOCKHOLDERS' (DEFICIT) EQUITY | (115,516 | ) | | (133,125 | ) | | 33,784 |
| | 99,341 |
| | (115,516 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 134,831 |
| | $ | 730 |
| | $ | 59,487 |
| | $ | 99,341 |
| | $ | 294,389 |
|
Condensed Consolidating Balance Sheets
December 31, 2013
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| ASSETS | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | |
| Cash | $ | — |
| | $ | 512 |
| | $ | 8,164 |
| | $ | — |
| | $ | 8,676 |
|
| Trade accounts receivable, net | — |
| | 15,109 |
| | 5,592 |
| | — |
| | 20,701 |
|
| Intercompany accounts receivable, net | 247,414 |
| | (224,181 | ) | | (23,233 | ) | | — |
| | — |
|
| Inventories, net | — |
| | 129,716 |
| | 39,736 |
| | (74 | ) | | 169,378 |
|
| Other current assets | 97 |
| | 10,442 |
| | 6,002 |
| | — |
| | 16,541 |
|
| Total current assets | 247,511 |
| | (68,402 | ) | | 36,261 |
| | (74 | ) | | 215,296 |
|
| PROPERTY AND EQUIPMENT, net | — |
| | 53,424 |
| | 15,879 |
| | — |
| | 69,303 |
|
| INVESTMENTS IN SUBSIDIARIES | (94,161 | ) | | 18,158 |
| | — |
| | 76,003 |
| | — |
|
| OTHER ASSETS, net | 9,282 |
| | 27,934 |
| | 11,937 |
| | — |
| | 49,153 |
|
| TOTAL ASSETS | $ | 162,632 |
| | $ | 31,114 |
| | $ | 64,077 |
| | $ | 75,929 |
| | $ | 333,752 |
|
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | |
| Revolving credit facilities and current portion of long-term debt | $ | — |
| | $ | 43,586 |
| | $ | 456 |
| | $ | — |
| | $ | 44,042 |
|
| Accounts payable | — |
| | 34,738 |
| | 3,552 |
| | — |
| | 38,290 |
|
| Accrued expenses and other current liabilities | 5,952 |
| | 28,344 |
| | 15,722 |
| | — |
| | 50,018 |
|
| Fair value of warrant liability | 20,954 |
| | — |
| | — |
| | — |
| | 20,954 |
|
| Other current liabilities | — |
| | 6,830 |
| | 1,855 |
| | — |
| | 8,685 |
|
| Total current liabilities | 26,906 |
| | 113,498 |
| | 21,585 |
| | — |
| | 161,989 |
|
| LONG-TERM DEBT, net | 213,130 |
| | 47 |
| | 291 |
| | — |
| | 213,468 |
|
| OTHER LONG-TERM LIABILITIES | — |
| | 29,711 |
| | 5,988 |
| | — |
| | 35,699 |
|
| TOTAL LIABILITIES | 240,036 |
| | 143,256 |
| | 27,864 |
| | — |
| | 411,156 |
|
| STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | | | | |
| Common stock | 11 |
| | 100 |
| | 492 |
| | (592 | ) | | 11 |
|
| Additional paid-in capital | 185,472 |
| | 6,726 |
| | 7,685 |
| | (14,411 | ) | | 185,472 |
|
| Accumulated other comprehensive (loss) income | (4,306 | ) | | (543 | ) | | (671 | ) | | 1,214 |
| | (4,306 | ) |
| (Accumulated deficit) retained earnings | (256,424 | ) | | (118,425 | ) | | 28,707 |
| | 89,718 |
| | (256,424 | ) |
| Less: Treasury stock | (2,157 | ) | | — |
| | — |
| | — |
| | (2,157 | ) |
| TOTAL STOCKHOLDERS' (DEFICIT) EQUITY | (77,404 | ) | | (112,142 | ) | | 36,213 |
| | 75,929 |
| | (77,404 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 162,632 |
| | $ | 31,114 |
| | $ | 64,077 |
| | $ | 75,929 |
| | $ | 333,752 |
|
Condensed Consolidating Balance Sheets
December 31, 2012
(Amounts in thousands)
| | | | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| ASSETS | | | | | | | | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | | | | | | | | |
| Cash | $ | — |
| | $ | 3,796 |
| | $ | 9,057 |
| | $ | — |
| | $ | 12,853 |
| $ | 0 |
| | $ | 512 |
| | $ | 8,164 |
| | $ | 0 |
| | $ | 8,676 |
|
| Trade accounts receivable, net | — |
| | 15,697 |
| | 7,265 |
| | — |
| | 22,962 |
| 0 |
| | 15,109 |
| | 5,592 |
| | 0 |
| | 20,701 |
|
| Intercompany accounts receivable, net | 200,529 |
| | (169,818 | ) | | (30,711 | ) | | — |
| | — |
| 247,414 |
| | (224,181 | ) | | (23,233 | ) | | 0 |
| | 0 |
|
| Inventories, net | — |
| | 125,988 |
| | 49,493 |
| | (1,252 | ) | | 174,229 |
| 0 |
| | 129,716 |
| | 39,736 |
| | (74 | ) | | 169,378 |
|
| Other current assets | 438 |
| | 8,200 |
| | 5,708 |
| | — |
| | 14,346 |
| 97 |
| | 10,442 |
| | 6,002 |
| | 0 |
| | 16,541 |
|
| Total current assets | 200,967 |
| | (16,137 | ) | | 40,812 |
| | (1,252 | ) | | 224,390 |
| 247,511 |
| | (68,402 | ) | | 36,261 |
| | (74 | ) | | 215,296 |
|
| PROPERTY AND EQUIPMENT, net | — |
| | 50,551 |
| | 17,227 |
| | — |
| | 67,778 |
| |
| INVESTMENTS IN SUBSIDIARIES | (50,773 | ) | | 17,766 |
| | — |
| | 33,007 |
| | — |
| |
| OTHER ASSETS, net | 204 |
| | 25,607 |
| | 10,233 |
| | — |
| | 36,044 |
| |
| Property and equipment, net | | 0 |
| | 53,424 |
| | 15,879 |
| | 0 |
| | 69,303 |
|
| Investments in subsidiaries | | (94,161 | ) | | 18,158 |
| | 0 |
| | 76,003 |
| | 0 |
|
| Other assets, net | | 9,282 |
| | 27,934 |
| | 11,937 |
| | 0 |
| | 49,153 |
|
| TOTAL ASSETS | $ | 150,398 |
| | $ | 77,787 |
| | $ | 68,272 |
| | $ | 31,755 |
| | $ | 328,212 |
| $ | 162,632 |
| | $ | 31,114 |
| | $ | 64,077 |
| | $ | 75,929 |
| | $ | 333,752 |
|
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY |
| CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | |
| Revolving credit facilities and current portion of long-term debt | $ | — |
| | $ | 56,156 |
| | $ | 4,400 |
| | $ | — |
| | $ | 60,556 |
| $ | 0 |
| | $ | 43,586 |
| | $ | 456 |
| | $ | 0 |
| | $ | 44,042 |
|
| Accounts payable | — |
| | 34,120 |
| | 4,040 |
| | — |
| | 38,160 |
| 0 |
| | 34,738 |
| | 3,552 |
| | 0 |
| | 38,290 |
|
| Accrued expenses and other current liabilities | 1,679 |
| | 24,137 |
| | 15,700 |
| | — |
| | 41,516 |
| 5,952 |
| | 28,344 |
| | 15,722 |
| | 0 |
| | 50,018 |
|
| Fair value of warrant liability | 17,241 |
| | — |
| | — |
| | — |
| | 17,241 |
| 20,954 |
| | 0 |
| | 0 |
| | 0 |
| | 20,954 |
|
| Other current liabilities | (286 | ) | | 1,778 |
| | 2,644 |
| | — |
| | 4,136 |
| 0 |
| | 6,830 |
| | 1,855 |
| | 0 |
| | 8,685 |
|
| Total current liabilities | 18,634 |
| | 116,191 |
| | 26,784 |
| | — |
| | 161,609 |
| 26,906 |
| | 113,498 |
| | 21,585 |
| | 0 |
| | 161,989 |
|
| LONG-TERM DEBT, net | 109,680 |
| | 6 |
| | 326 |
| | — |
| | 110,012 |
| |
| OTHER LONG-TERM LIABILITIES | — |
| | 28,230 |
| | 6,277 |
| | — |
| | 34,507 |
| |
| Long-term debt, net | | 213,130 |
| | 47 |
| | 291 |
| | 0 |
| | 213,468 |
|
| Other long-term liabilities | | 0 |
| | 29,711 |
| | 5,988 |
| | 0 |
| | 35,699 |
|
| TOTAL LIABILITIES | 128,314 |
| | 144,427 |
| | 33,387 |
| | — |
| | 306,128 |
| 240,036 |
| | 143,256 |
| | 27,864 |
| | 0 |
| | 411,156 |
|
| STOCKHOLDERS' EQUITY (EQUITY) | | | | | | | | | | |
| STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | | | | | |
| Common stock | 11 |
| | 100 |
| | 492 |
| | (592 | ) | | 11 |
| 11 |
| | 100 |
| | 492 |
| | (592 | ) | | 11 |
|
| Additional paid-in capital | 177,081 |
| | 6,726 |
| | 7,223 |
| | (13,949 | ) | | 177,081 |
| 185,472 |
| | 6,726 |
| | 7,685 |
| | (14,411 | ) | | 185,472 |
|
| Accumulated other comprehensive (loss) income | (2,725 | ) | | (381 | ) | | 736 |
| | (355 | ) | | (2,725 | ) | (4,306 | ) | | (543 | ) | | (671 | ) | | 1,214 |
| | (4,306 | ) |
| (Accumulated deficit) retained earnings | (150,126 | ) | | (73,085 | ) | | 26,434 |
| | 46,651 |
| | (150,126 | ) | (256,424 | ) | | (118,425 | ) | | 28,707 |
| | 89,718 |
| | (256,424 | ) |
| Less: Treasury stock | (2,157 | ) | | — |
| | — |
| | — |
| | (2,157 | ) | (2,157 | ) | | 0 |
| | 0 |
| | 0 |
| | (2,157 | ) |
| TOTAL STOCKHOLDERS' (DEFICIT) EQUITY | 22,084 |
| | (66,640 | ) | | 34,885 |
| | 31,755 |
| | 22,084 |
| (77,404 | ) | | (112,142 | ) | | 36,213 |
| | 75,929 |
| | (77,404 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 150,398 |
| | $ | 77,787 |
| | $ | 68,272 |
| | $ | 31,755 |
| | $ | 328,212 |
| $ | 162,632 |
| | $ | 31,114 |
| | $ | 64,077 |
| | $ | 75,929 |
| | $ | 333,752 |
|
Condensed Consolidating Statement of Operations and Comprehensive Loss(Loss) Income
For the Year Ended December 31, 20132014
(Amounts in thousands)
| | | | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| Net sales | $ | — |
| | $ | 462,732 |
| | $ | 227,680 |
| | $ | (56,471 | ) | | $ | 633,941 |
| $ | 0 |
| | $ | 447,968 |
| | $ | 208,480 |
| | $ | (47,557 | ) | | $ | 608,891 |
|
| Cost of sales | — |
| | 285,947 |
| | 84,938 |
| | (57,829 | ) | | 313,056 |
| 0 |
| | 272,505 |
| | 74,216 |
| | (46,965 | ) | | 299,756 |
|
| Gross profit | — |
| | 176,785 |
| | 142,742 |
| | 1,358 |
| | 320,885 |
| 0 |
| | 175,463 |
| | 134,264 |
| | (592 | ) | | 309,135 |
|
| Selling expenses | — |
| | 143,379 |
| | 98,304 |
| | — |
| | 241,683 |
| |
| Selling and distribution expenses | | 0 |
| | 124,470 |
| | 88,087 |
| | 0 |
| | 212,557 |
|
| General and administrative expenses | 502 |
| | 67,779 |
| | 38,676 |
| | — |
| | 106,957 |
| 16,130 |
| | 63,093 |
| | 42,126 |
| | 74 |
| | 121,423 |
|
| Retail store impairment | — |
| | 642 |
| | 898 |
| | — |
| | 1,540 |
| 0 |
| | 695 |
| | 2,043 |
| | 0 |
| | 2,738 |
|
| (Loss) income from operations | (502 | ) | | (35,015 | ) | | 4,864 |
| | 1,358 |
| | (29,295 | ) | (16,130 | ) | | (12,795 | ) | | 2,008 |
| | (666 | ) | | (27,583 | ) |
| Interest expense and other expense | 63,992 |
| | 10,622 |
| | 618 |
| | — |
| | 75,232 |
| 33,874 |
| | 5,226 |
| | (25 | ) | | 0 |
| | 39,075 |
|
| Equity in loss (earnings) of subsidiaries | 41,804 |
| | (95 | ) | | — |
| | (41,709 | ) | | — |
| 18,336 |
| | 611 |
| | 0 |
| | (18,947 | ) | | 0 |
|
| (Loss) income before income taxes | (106,298 | ) | | (45,542 | ) | | 4,246 |
| | 43,067 |
| | (104,527 | ) | (68,340 | ) | | (18,632 | ) | | 2,033 |
| | 18,281 |
| | (66,658 | ) |
| Income tax provision | — |
| | (202 | ) | | 1,973 |
| | — |
| | 1,771 |
| 477 |
| | 401 |
| | 1,281 |
| | 0 |
| | 2,159 |
|
| Net (loss) income | $ | (106,298 | ) | | $ | (45,340 | ) | | $ | 2,273 |
| | $ | 43,067 |
| | $ | (106,298 | ) | $ | (68,817 | ) | | $ | (19,033 | ) | | $ | 752 |
| | $ | 18,281 |
| | $ | (68,817 | ) |
| Other comprehensive (loss) income, net of tax | (1,581 | ) | | (162 | ) | | (1,407 | ) | | 1,569 |
| | (1,581 | ) | (2,609 | ) | | (1,950 | ) | | (3,465 | ) | | 5,415 |
| | (2,609 | ) |
| Comprehensive (loss) income | $ | (107,879 | ) | | $ | (45,502 | ) | | $ | 866 |
| | $ | 44,636 |
| | $ | (107,879 | ) | $ | (71,426 | ) | | $ | (20,983 | ) | | $ | (2,713 | ) | | $ | 23,696 |
| | $ | (71,426 | ) |
Condensed Consolidating Statement of Operations and Comprehensive Loss(Loss) Income
For the Year Ended December 31, 20122013
(Amounts in thousands)
| | | | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| Net sales | $ | — |
| | $ | 452,234 |
| | $ | 233,069 |
| | $ | (67,993 | ) | | $ | 617,310 |
| $ | 0 |
| | $ | 462,732 |
| | $ | 227,680 |
| | $ | (56,471 | ) | | $ | 633,941 |
|
| Cost of sales | — |
| | 271,809 |
| | 85,958 |
| | (67,840 | ) | | 289,927 |
| 0 |
| | 285,947 |
| | 84,938 |
| | (57,829 | ) | | 313,056 |
|
| Gross profit | — |
| | 180,425 |
| | 147,111 |
| | (153 | ) | | 327,383 |
| 0 |
| | 176,785 |
| | 142,742 |
| | 1,358 |
| | 320,885 |
|
| Selling expenses | — |
| | 126,492 |
| | 100,955 |
| | — |
| | 227,447 |
| |
| Selling and distribution expenses | | 0 |
| | 143,379 |
| | 98,304 |
| | 0 |
| | 241,683 |
|
| General and administrative expenses | 1,276 |
| | 59,420 |
| | 36,518 |
| | 113 |
| | 97,327 |
| 502 |
| | 67,779 |
| | 38,676 |
| | 0 |
| | 106,957 |
|
| Retail store impairment | — |
| | 243 |
| | 1,404 |
| | — |
| | 1,647 |
| 0 |
| | 642 |
| | 898 |
| | 0 |
| | 1,540 |
|
| (Loss) income from operations | (1,276 | ) | | (5,730 | ) | | 8,234 |
| | (266 | ) | | 962 |
| (502 | ) | | (35,015 | ) | | 4,864 |
| | 1,358 |
| | (29,295 | ) |
| Interest expense and other expense | 23,975 |
| | 9,629 |
| | 817 |
| | — |
| | 34,421 |
| 63,992 |
| | 10,622 |
| | 618 |
| | 0 |
| | 75,232 |
|
| Equity in loss (earnings) of subsidiaries | 12,021 |
| | (1,057 | ) | | — |
| | (10,964 | ) | | — |
| 41,804 |
| | (95 | ) | | 0 |
| | (41,709 | ) | | 0 |
|
| (Loss) income before income taxes | (37,272 | ) | | (14,302 | ) | | 7,417 |
| | 10,698 |
| | (33,459 | ) | (106,298 | ) | | (45,542 | ) | | 4,246 |
| | 43,067 |
| | (104,527 | ) |
| Income tax provisions | — |
| | 133 |
| | 3,680 |
| | — |
| | 3,813 |
| 0 |
| | (202 | ) | | 1,973 |
| | 0 |
| | 1,771 |
|
| Net (loss) income | $ | (37,272 | ) | | $ | (14,435 | ) | | $ | 3,737 |
| | $ | 10,698 |
| | $ | (37,272 | ) | $ | (106,298 | ) | | $ | (45,340 | ) | | $ | 2,273 |
| | $ | 43,067 |
| | $ | (106,298 | ) |
| Other comprehensive income, net of tax | 631 |
| | 164 |
| | 498 |
| | (662 | ) | | 631 |
| |
| Other comprehensive (loss) income, net of tax | | (1,581 | ) | | (162 | ) | | (1,407 | ) | | 1,569 |
| | (1,581 | ) |
| Comprehensive (loss) income | $ | (36,641 | ) | | $ | (14,271 | ) | | $ | 4,235 |
| | $ | 10,036 |
| | $ | (36,641 | ) | $ | (107,879 | ) | | $ | (45,502 | ) | | $ | 866 |
| | $ | 44,636 |
| | $ | (107,879 | ) |
Condensed Consolidating Statement of Operations and Comprehensive Loss(Loss) Income
For the Year Ended December 31, 20112012
(Amounts in thousands)
| | | | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| Net sales | $ | — |
| | $ | 396,303 |
| | $ | 213,872 |
| | $ | (62,839 | ) | | $ | 547,336 |
| $ | 0 |
| | $ | 452,234 |
| | $ | 233,069 |
| | $ | (67,993 | ) | | $ | 617,310 |
|
| Cost of sales | — |
| | 234,755 |
| | 82,445 |
| | (64,764 | ) | | 252,436 |
| 0 |
| | 271,809 |
| | 85,958 |
| | (67,840 | ) | | 289,927 |
|
| Gross profit | — |
| | 161,548 |
| | 131,427 |
| | 1,925 |
| | 294,900 |
| 0 |
| | 180,425 |
| | 147,111 |
| | (153 | ) | | 327,383 |
|
| Selling expenses | — |
| | 115,319 |
| | 94,522 |
| | — |
| | 209,841 |
| |
| Selling and distribution expenses | | 0 |
| | 126,492 |
| | 100,955 |
| | 0 |
| | 227,447 |
|
| General and administrative expenses | 2,668 |
| | 69,624 |
| | 31,793 |
| | — |
| | 104,085 |
| 1,276 |
| | 59,420 |
| | 36,518 |
| | 113 |
| | 97,327 |
|
| Retail store impairment | — |
| | 558 |
| | 3,709 |
| | — |
| | 4,267 |
| 0 |
| | 243 |
| | 1,404 |
| | 0 |
| | 1,647 |
|
| (Loss) income from operations | (2,668 | ) | | (23,953 | ) | | 1,403 |
| | 1,925 |
| | (23,293 | ) | (1,276 | ) | | (5,730 | ) | | 8,234 |
| | (266 | ) | | 962 |
|
| Interest and other expense | 7,202 |
| | 4,896 |
| | 2,214 |
| | (12 | ) | | 14,300 |
| |
| Interest expense and other expense | | 23,975 |
| | 9,629 |
| | 817 |
| | 0 |
| | 34,421 |
|
| Equity in loss (earnings) of subsidiaries | 29,444 |
| | 1,543 |
| | — |
| | (30,987 | ) | | — |
| 12,021 |
| | (1,057 | ) | | 0 |
| | (10,964 | ) | | 0 |
|
| (Loss) income before income taxes | (39,314 | ) | | (30,392 | ) | | (811 | ) | | 32,924 |
| | (37,593 | ) | (37,272 | ) | | (14,302 | ) | | 7,417 |
| | 10,698 |
| | (33,459 | ) |
| Income tax provision | — |
| | 228 |
| | 1,493 |
| | — |
| | 1,721 |
| 0 |
| | 133 |
| | 3,680 |
| | 0 |
| | 3,813 |
|
| Net loss | $ | (39,314 | ) | | $ | (30,620 | ) | | $ | (2,304 | ) | | $ | 32,924 |
| | $ | (39,314 | ) | |
| Other comprehensive (loss) income, net of tax | (188 | ) | | 214 |
| | (53 | ) | | (161 | ) | | (188 | ) | |
| Comprehensive loss | $ | (39,502 | ) | | $ | (30,406 | ) | | $ | (2,357 | ) | | $ | 32,763 |
| | $ | (39,502 | ) | |
| Net (loss) income | | $ | (37,272 | ) | | $ | (14,435 | ) | | $ | 3,737 |
| | $ | 10,698 |
| | $ | (37,272 | ) |
| Other comprehensive income, net of tax | | 631 |
| | 164 |
| | 498 |
| | (662 | ) | | 631 |
|
| Comprehensive (loss) income | | $ | (36,641 | ) | | $ | (14,271 | ) | | $ | 4,235 |
| | $ | 10,036 |
| | $ | (36,641 | ) |
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 6,361 |
| | $ | (26,715 | ) | | $ | 15,142 |
| | $ | 0 |
| | $ | (5,212 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
| Capital expenditures | 0 |
| | (6,441 | ) | | (3,377 | ) | | 0 |
| | (9,818 | ) |
| Proceeds from sale of fixed assets | 0 |
| | (1 | ) | | 22 |
| | 0 |
| | 21 |
|
| Restricted cash | 0 |
| | 0 |
| | 214 |
| | 0 |
| | 214 |
|
| Net cash used in investing activities | 0 |
| | (6,442 | ) | | (3,141 | ) | | 0 |
| | (9,583 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
| Cash overdraft | 0 |
| | 1,720 |
| | 0 |
| | 0 |
| | 1,720 |
|
| Repayments under current revolving credit facilities, net | 0 |
| | (9,280 | ) | | (429 | ) | | 0 |
| | (9,709 | ) |
| Repayments of term loans and notes payable | 0 |
| | (47 | ) | | (13 | ) | | 0 |
| | (60 | ) |
| Payments of debt issuance costs | (2,102 | ) | | 0 |
| | 0 |
| | 0 |
| | (2,102 | ) |
| Net proceeds from issuance of common stock | 28,435 |
| | 0 |
| | 0 |
| | 0 |
| | 28,435 |
|
| Proceeds from stock option exercise | 574 |
| | 0 |
| | 0 |
| | 0 |
| | 574 |
|
| Payment of statutory payroll tax withholding on share-based compensation associated with issuance of common stock | (647 | ) | | 0 |
| | 0 |
| | 0 |
| | (647 | ) |
| Repayments of capital lease obligations | 0 |
| | (2,595 | ) | | (64 | ) | | 0 |
| | (2,659 | ) |
| Advances to/from affiliates | (32,621 | ) | | 44,217 |
| | (11,596 | ) | | 0 |
| | 0 |
|
| Net cash provided by (used in) financing activities | (6,361 | ) | | 34,015 |
| | (12,102 | ) | | 0 |
| | 15,552 |
|
| Effect of foreign exchange rate on cash | 0 |
| | 0 |
| | (1,090 | ) | | 0 |
| | (1,090 | ) |
| Net increase (decrease) in cash | 0 |
| | 858 |
| | (1,191 | ) | | 0 |
| | (333 | ) |
| Cash, beginning of period | 0 |
| | 512 |
| | 8,164 |
| | 0 |
| | 8,676 |
|
| Cash, end of period | $ | 0 |
| | $ | 1,370 |
| | $ | 6,973 |
| | $ | 0 |
| | $ | 8,343 |
|
| | | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | |
| Property and equipment acquired and included in accounts payable | $ | 0 |
| | $ | 130 |
| | $ | 65 |
| | $ | 0 |
| | $ | 195 |
|
| Property and equipment acquired under capital lease | $ | 0 |
| | $ | 434 |
| | $ | 0 |
| | $ | 0 |
| | $ | 434 |
|
| Standard General Loan Agreement assigned from Lion | $ | 9,865 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 9,865 |
|
| Lion Loan Agreement assigned to Standard General | $ | (9,865 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | (9,865 | ) |
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2013
(Amounts in thousands)
| | | | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (13,825 | ) | | $ | (16,811 | ) | | $ | 17,913 |
| | $ | — |
| | $ | (12,723 | ) | $ | (13,825 | ) | | $ | (16,811 | ) | | $ | 17,913 |
| | $ | 0 |
| | $ | (12,723 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Capital expenditures | — |
| | (21,319 | ) | | (5,735 | ) | | — |
| | (27,054 | ) | 0 |
| | (21,319 | ) | | (5,735 | ) | | 0 |
| | (27,054 | ) |
| Proceeds from sale of fixed assets | — |
| | 109 |
| | 64 |
| | — |
| | 173 |
| 0 |
| | 109 |
| | 64 |
| | 0 |
| | 173 |
|
| Restricted cash | — |
| | 3,265 |
| | (1,531 | ) | | — |
| | 1,734 |
| 0 |
| | 3,265 |
| | (1,531 | ) | | 0 |
| | 1,734 |
|
| Net cash used in investing activities | — |
| | (17,945 | ) | | (7,202 | ) | | — |
| | (25,147 | ) | 0 |
| | (17,945 | ) | | (7,202 | ) | | 0 |
| | (25,147 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Cash overdraft | — |
| | 3,993 |
| | — |
| | — |
| | 3,993 |
| 0 |
| | 3,993 |
| | 0 |
| | 0 |
| | 3,993 |
|
| Repayments of expired revolving credit facilities, net | — |
| | (28,513 | ) | | — |
| | — |
| | (28,513 | ) | 0 |
| | (28,513 | ) | | 0 |
| | 0 |
| | (28,513 | ) |
| Borrowings (repayments) under current revolving credit facilities, net | — |
| | 43,579 |
| | (3,785 | ) | | — |
| | 39,794 |
| 0 |
| | 43,579 |
| | (3,785 | ) | | 0 |
| | 39,794 |
|
| Repayments of term loans and notes payable | 9,500 |
| | (29,953 | ) | | (13 | ) | | — |
| | (20,466 | ) | 9,500 |
| | (29,953 | ) | | (13 | ) | | 0 |
| | (20,466 | ) |
| Repayment of Lion term loan | (144,149 | ) | | — |
| | — |
| | — |
| | (144,149 | ) | (144,149 | ) | | 0 |
| | 0 |
| | 0 |
| | (144,149 | ) |
| Issuance of Senior Secured Notes | 199,820 |
| | — |
| | — |
| | — |
| | 199,820 |
| 199,820 |
| | 0 |
| | 0 |
| | 0 |
| | 199,820 |
|
| Payments of debt issuance costs | (10,540 | ) | | (1,369 | ) | | — |
| | — |
| | (11,909 | ) | (10,540 | ) | | (1,369 | ) | | 0 |
| | 0 |
| | (11,909 | ) |
| Payment of statutory payroll tax withholding on stock-based compensation associated with issuance of common stock | (2,623 | ) | | — |
| | — |
| | — |
| | (2,623 | ) | |
| Payment of statutory payroll tax withholding on share-based compensation associated with issuance of common stock | | (2,623 | ) | | 0 |
| | 0 |
| | 0 |
| | (2,623 | ) |
| Repayments of capital lease obligations | — |
| | (1,662 | ) | | (57 | ) | | — |
| | (1,719 | ) | 0 |
| | (1,662 | ) | | (57 | ) | | 0 |
| | (1,719 | ) |
| Advances to/from affiliates | (38,183 | ) | | 45,397 |
| | (7,214 | ) | | — |
| | — |
| (38,183 | ) | | 45,397 |
| | (7,214 | ) | | 0 |
| | 0 |
|
| Net cash provided by (used in) financing activities | 13,825 |
| | 31,472 |
| | (11,069 | ) | | — |
| | 34,228 |
| 13,825 |
| | 31,472 |
| | (11,069 | ) | | 0 |
| | 34,228 |
|
| EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | — |
| | — |
| | (535 | ) | | — |
| | (535 | ) | |
| NET DECREASE IN CASH | — |
| | (3,284 | ) | | (893 | ) | | — |
| | (4,177 | ) | |
CASH, beginning of period | — |
| | 3,796 |
| | 9,057 |
| | — |
| | 12,853 |
| |
CASH, end of period | $ | — |
| | $ | 512 |
| | $ | 8,164 |
| | $ | — |
| | $ | 8,676 |
| |
| Effect of foreign exchange rate on cash | | 0 |
| | 0 |
| | (535 | ) | | 0 |
| | (535 | ) |
| Net decrease in cash | | 0 |
| | (3,284 | ) | | (893 | ) | | 0 |
| | (4,177 | ) |
| Cash, beginning of period | | 0 |
| | 3,796 |
| | 9,057 |
| | 0 |
| | 12,853 |
|
| Cash, end of period | | $ | 0 |
| | $ | 512 |
| | $ | 8,164 |
| | $ | 0 |
| | $ | 8,676 |
|
| | | | | | | | | | | | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Property and equipment acquired, and included in accounts payable | $ | — |
| | $ | 818 |
| | $ | 758 |
| | $ | — |
| | $ | 1,576 |
| |
| Property and equipment acquired and included in accounts payable | | $ | 0 |
| | $ | 818 |
| | $ | 758 |
| | $ | 0 |
| | $ | 1,576 |
|
| Property and equipment acquired under capital lease | — |
| | 4,213 |
| | — |
| | — |
| | 4,213 |
| $ | 0 |
| | $ | 4,213 |
| | $ | 0 |
| | $ | 0 |
| | $ | 4,213 |
|
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2012
(Amounts in thousands)
| | | | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (584 | ) | | $ | 15,181 |
| | $ | 8,992 |
| | $ | — |
| | $ | 23,589 |
| $ | (584 | ) | | $ | 15,181 |
| | $ | 8,992 |
| | $ | 0 |
| | $ | 23,589 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Capital expenditures | — |
| | (16,418 | ) | | (5,189 | ) | | — |
| | (21,607 | ) | 0 |
| | (16,418 | ) | | (5,189 | ) | | 0 |
| | (21,607 | ) |
| Proceeds from sale of fixed assets | — |
| | 414 |
| | 60 |
| | — |
| | 474 |
| 0 |
| | 414 |
| | 60 |
| | 0 |
| | 474 |
|
| Restricted cash | — |
| | (3,265 | ) | | (455 | ) | | — |
| | (3,720 | ) | 0 |
| | (3,265 | ) | | (455 | ) | | 0 |
| | (3,720 | ) |
| Net cash used in investing activities | — |
| | (19,269 | ) | | (5,584 | ) | | — |
| | (24,853 | ) | 0 |
| | (19,269 | ) | | (5,584 | ) | | 0 |
| | (24,853 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Cash overdraft | — |
| | (1,921 | ) | | — |
| | — |
| | (1,921 | ) | 0 |
| | (1,921 | ) | | 0 |
| | 0 |
| | (1,921 | ) |
| Repayments of expired revolving credit facilities, net | — |
| | (48,324 | ) | | — |
| | — |
| | (48,324 | ) | 0 |
| | (48,324 | ) | | 0 |
| | 0 |
| | (48,324 | ) |
| Borrowings under current revolving credit facilities, net | — |
| | 26,113 |
| | 2,338 |
| | — |
| | 28,451 |
| 0 |
| | 26,113 |
| | 2,338 |
| | 0 |
| | 28,451 |
|
| Borrowings (repayments) of term loans and notes payable, net | — |
| | 30,000 |
| | (13 | ) | | — |
| | 29,987 |
| 0 |
| | 30,000 |
| | (13 | ) | | 0 |
| | 29,987 |
|
| Payments of debt issuance costs | (231 | ) | | (4,995 | ) | | — |
| | — |
| | (5,226 | ) | (231 | ) | | (4,995 | ) | | 0 |
| | 0 |
| | (5,226 | ) |
| Payment of statutory payroll tax withholding on stock-based compensation associated with issuance of common stock | (393 | ) | | — |
| | — |
| | — |
| | (393 | ) | (393 | ) | | 0 |
| | 0 |
| | 0 |
| | (393 | ) |
| Proceeds from equipment lease financing | — |
| | 4,533 |
| | — |
| | — |
| | 4,533 |
| 0 |
| | 4,533 |
| | 0 |
| | 0 |
| | 4,533 |
|
| (Repayments) proceeds of capital lease obligations | — |
| | (2,979 | ) | | 86 |
| | — |
| | (2,893 | ) | 0 |
| | (2,979 | ) | | 86 |
| | 0 |
| | (2,893 | ) |
| Advances to/from affiliates | 1,208 |
| | 5,167 |
| | (6,375 | ) | | — |
| | — |
| 1,208 |
| | 5,167 |
| | (6,375 | ) | | 0 |
| | 0 |
|
| Net cash provided by (used in) financing activities | 584 |
| | 7,594 |
| | (3,964 | ) | | — |
| | 4,214 |
| 584 |
| | 7,594 |
| | (3,964 | ) | | 0 |
| | 4,214 |
|
| EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | — |
| | — |
| | (390 | ) | | — |
| | (390 | ) | |
| NET INCREASE (DECREASE) IN CASH | — |
| | 3,506 |
| | (946 | ) | | — |
| | 2,560 |
| |
CASH, beginning of period | — |
| | 290 |
| | 10,003 |
| | — |
| | 10,293 |
| |
CASH, end of period | $ | — |
| | $ | 3,796 |
| | $ | 9,057 |
| | $ | — |
| | $ | 12,853 |
| |
| Effect of foreign exchange rate on cash | | 0 |
| | 0 |
| | (390 | ) | | 0 |
| | (390 | ) |
| Net increase (decrease) in cash | | 0 |
| | 3,506 |
| | (946 | ) | | 0 |
| | 2,560 |
|
| Cash, beginning of period | | 0 |
| | 290 |
| | 10,003 |
| | 0 |
| | 10,293 |
|
| Cash, end of period | | $ | 0 |
| | $ | 3,796 |
| | $ | 9,057 |
| | $ | 0 |
| | $ | 12,853 |
|
| | | | | | | | | | | | | | | | | | | |
| NON-CASH INVESTING ACTIVITIES | | | | | | | | | | |
| Property and equipment acquired, and included in accounts payable | $ | — |
| | $ | 3,160 |
| | $ | 618 |
| | $ | — |
| | $ | 3,778 |
| |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | |
| Property and equipment acquired and included in accounts payable | | $ | 0 |
| | $ | 3,160 |
| | $ | 618 |
| | $ | 0 |
| | $ | 3,778 |
|
Note 20. Unaudited Quarterly Financial Information
Summarized quarterly financial information for fiscal 2014 and 2013 are listed below.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | December 31 | | September 30 | | June 30 | | March 31 |
| 2014 | | | | | | | |
| Net sales | $ | 153,529 |
| | $ | 155,869 |
| | $ | 162,397 |
| | $ | 137,096 |
|
| Gross profit | $ | 72,235 |
| | $ | 82,539 |
| | $ | 82,387 |
| | $ | 71,974 |
|
| Net loss | $ | (27,962 | ) | | $ | (19,184 | ) | | $ | (16,205 | ) | | $ | (5,466 | ) |
| Loss per share basic and diluted | $ | (0.16 | ) | | $ | (0.11 | ) | | $ | (0.09 | ) | | $ | (0.05 | ) |
| | | | | | | | |
| 2013 | | | | | | | |
| Net sales | $ | 169,102 |
| | $ | 164,543 |
| | $ | 162,236 |
| | $ | 138,060 |
|
| Gross profit | $ | 79,507 |
| | $ | 84,640 |
| | $ | 83,870 |
| | $ | 72,868 |
|
| Net loss | $ | (20,770 | ) | | $ | (1,513 | ) | | $ | (37,504 | ) | | $ | (46,511 | ) |
| Loss per share basic and diluted | $ | (0.19 | ) | | $ | (0.01 | ) | | $ | (0.34 | ) | | $ | (0.42 | ) |
The Company experiences seasonality in its operations; sales during the third and fourth fiscal quarters have generally been the highest while sales during the first fiscal quarter have been the lowest. This reflects the combined impact of the seasonality of the wholesale and retail segments. Generally, the Company's retail segment has not experienced the same pronounced sales seasonality as other retailers.
Net loss during 2014 was primarily affected by lower sales volumes and significant expenses related to certain professional fees and contingency settlements, particularly during the third and fourth quarter of 2014. In connection with the suspension of Mr. Charney on June 18, 2014, the Board formed the Internal Investigation which ultimately concluded with his termination for cause on December 16, 2014. The suspension and the Internal Investigation have resulted in substantial legal and consulting fees. Additionally, as discussed in Notes 15 and 18, the Company entered into certain settlements with the German customs authorities and other jurisdictions, the Orange County district attorney's office related to an OSHA matter, and various previously disclosed employment-related claims. Finally, the Company experienced unusually high employee severance costs during 2014. The primary causes of the net losses during the first and second quarters of 2014 were driven by lower sales volume and the unrealized losses on the Company's warrants, respectively.
Net loss during 2013 was affected by the transition to the Company's new distribution center in La Mirada, California resulted in significant incremental costs (primarily labor). The issues surrounding the transition primarily related to improper design and integration and inadequate training and staffing. These issues caused processing inefficiencies that required the Company to employ additional staffing in order to meet customer demand. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced. The primary causes of the net losses during the first and second quarters of 2013 were driven by the unrealized losses on the Company's warrants and the loss on early extinguishment of debt, respectively.
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2011
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Combined Guarantor Subsidiaries | | Combined Non-Guarantor Subsidiaries | | Elimination Entries | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
| Net cash used in operating activities | $ | (3,949 | ) | | $ | (7,139 | ) | | $ | 13,393 |
| | $ | — |
| | $ | 2,305 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
| Capital expenditures | — |
| | (8,527 | ) | | (2,543 | ) | | — |
| | (11,070 | ) |
| Proceeds from sale of fixed assets | — |
| | 249 |
| | 62 |
| | — |
| | 311 |
|
| Restricted cash | — |
| | — |
| | — |
| | — |
| | — |
|
| Net cash used in investing activities | — |
| | (8,278 | ) | | (2,481 | ) | | — |
| | (10,759 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
| Cash overdraft | — |
| | (1,407 | ) | | — |
| | — |
| | (1,407 | ) |
| Repayments of expired revolving credit facilities, net | — |
| | (5,089 | ) | | (1,785 | ) | | — |
| | (6,874 | ) |
| Borrowings (repayments) of term loans and notes payable | — |
| | — |
| | (13 | ) | | — |
| | (13 | ) |
| Payments of debt issuance costs | (903 | ) | | (978 | ) | | — |
| | — |
| | (1,881 | ) |
| Net proceeds from issuance of common stock and purchase rights | 21,710 |
| | — |
| | — |
| | — |
| | 21,710 |
|
| Payment of statutory payroll tax withholding on stock-based compensation associated with issuance of common stock | (759 | ) | | — |
| | — |
| | — |
| | (759 | ) |
| Proceeds from equipment lease financing | — |
| | 3,100 |
| | — |
| | — |
| | 3,100 |
|
| (Repayments) proceeds of capital lease obligations | — |
| | (1,314 | ) | | 20 |
| | — |
| | (1,294 | ) |
| Advances to/from affiliates | (16,099 | ) | | 20,777 |
| | (4,678 | ) | | — |
| | — |
|
| Net cash provided by (used in) financing activities | 3,949 |
| | 15,089 |
| | (6,456 | ) | | — |
| | 12,582 |
|
| EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | — |
| | — |
| | (1,491 | ) | | — |
| | (1,491 | ) |
| NET INCREASE (DECREASE) IN CASH | — |
| | (328 | ) | | 2,965 |
| | — |
| | 2,637 |
|
CASH, beginning of period | — |
| | 618 |
| | 7,038 |
| | — |
| | 7,656 |
|
CASH, end of period | $ | — |
| | $ | 290 |
| | $ | 10,003 |
| | $ | — |
| | $ | 10,293 |
|
| | | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | |
| Property and equipment acquired, and included in accounts payable | $ | — |
| | $ | 1,255 |
| | $ | 68 |
| | $ | — |
| | $ | 1,323 |
|
| Reclassification of Lion Warrant from equity to debt | 11,339 |
| | — |
| | — |
| | — |
| | 11,339 |
|
| Conversion of debt to equity | 4,688 |
| | — |
| | — |
| | — |
| | 4,688 |
|
| Issuance of warrants and purchase rights at fair value | 6,387 |
| | — |
| | — |
| | — |
| | 6,387 |
|
| Exercise of purchase rights | 2,857 |
| | — |
| | — |
| | — |
| | 2,857 |
|
Schedule II
American Apparel, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(Amounts in thousands)
| | | Description | Balance at Beginning of Year | | Charged to Costs and Expenses | | Deductions (Recoveries) | | Other | | Balance at End of Year | | Balance, Beginning of Year | | Charged to Costs and Expenses | | Deductions (Recoveries) | | Other | | Balance, End of Year |
| Allowance for trade accounts receivable: | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2014 | | | $ | 2,229 |
| | $ | 1,563 |
| | $ | 0 |
| | $ | (3,334 | ) | | $ | 458 |
|
| For the year ended December 31, 2013 | $ | 2,085 |
| | $ | 1,512 |
| | $ | — |
| | $ | (1,368 | ) | | $ | 2,229 |
| | $ | 2,085 |
| | $ | 1,512 |
| | $ | 0 |
| | $ | (1,368 | ) | | $ | 2,229 |
|
| For the year ended December 31, 2012 | $ | 2,195 |
| | $ | 99 |
| | $ | — |
| | $ | (209 | ) | | $ | 2,085 |
| | $ | 2,195 |
| | $ | 99 |
| | $ | 0 |
| | $ | (209 | ) | | $ | 2,085 |
|
| For the year ended December 31, 2011 | $ | 2,630 |
| | $ | 996 |
| | $ | — |
| | $ | (1,431 | ) | | $ | 2,195 |
| |
| | | Description | Balance at Beginning of Year | | Charged to Costs and Expenses | | Deductions (Recoveries) | | Other | | Balance at End of Year | | Balance, Beginning of Year | | Charged to Costs and Expenses | | Deductions (Recoveries) | | Other | | Balance, End of Year |
| Reserve for inventory shrinkage and obsolescence: | | | | | | | | | | Reserve for inventory shrinkage and obsolescence: | | | | | | | | |
| For the year ended December 31, 2014 | | | $ | 2,778 |
| | $ | 6,948 |
| | $ | 0 |
| | $ | (948 | ) | | $ | 8,778 |
|
| For the year ended December 31, 2013 | $ | 2,653 |
| | $ | 912 |
| | $ | — |
| | $ | (787 | ) | | $ | 2,778 |
| | $ | 2,653 |
| | $ | 912 |
| | $ | 0 |
| | $ | (787 | ) | | $ | 2,778 |
|
| For the year ended December 31, 2012 | $ | 3,932 |
| | $ | 690 |
| | $ | — |
| | $ | (1,969 | ) | | $ | 2,653 |
| | $ | 3,932 |
| | $ | 690 |
| | $ | 0 |
| | $ | (1,969 | ) | | $ | 2,653 |
|
| For the year ended December 31, 2011 | $ | 5,853 |
| | $ | (1,652 | ) | | $ | — |
| | $ | (269 | ) | | $ | 3,932 |
| |
| | | Description | Balance at Beginning of Year | | Increase in Allowance | | Deductions to Allowance | | Other | | Balance at End of Year | | Balance, Beginning of Year | | Increase in Allowance | | Deductions to Allowance | | Other | | Balance, End of Year |
| Valuation allowance of deferred tax assets: | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2014 | | | $ | 120,694 |
| | $ | 22,368 |
| | $ | 0 |
| | $ | 0 |
| | $ | 143,062 |
|
| For the year ended December 31, 2013 | $ | 77,578 |
| | $ | 43,116 |
| | $ | — |
| | $ | — |
| | $ | 120,694 |
| | $ | 77,578 |
| | $ | 43,116 |
| | $ | 0 |
| | $ | 0 |
| | $ | 120,694 |
|
| For the year ended December 31, 2012 | $ | 73,773 |
| | $ | 4,720 |
| | $ | (915 | ) | | $ | — |
| | $ | 77,578 |
| | $ | 73,773 |
| | $ | 4,720 |
| | $ | (915 | ) | | $ | 0 |
| | $ | 77,578 |
|
| For the year ended December 31, 2011 | $ | 51,979 |
| | $ | 21,794 |
| | $ | — |
| | $ | — |
| | $ | 73,773 |
| |
Supplementary Financial Information
The following quarterly data are derived from the Company’s consolidated statements of operations.
QUARTERLY INFORMATION (unaudited)
(Amounts in thousands except per share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| | Quarter Ended December 31, 2013 | | Quarter Ended September 30, 2013 | | Quarter Ended June 30, 2013 | | Quarter Ended March 31, 2013 | | Year Ended December 31, 2013 |
| Fiscal 2013 | | | | | | | | | |
| Net sales | $ | 169,102 |
| | $ | 164,543 |
| | $ | 162,236 |
| | $ | 138,060 |
| | $ | 633,941 |
|
| Gross profit | $ | 79,507 |
| | $ | 84,640 |
| | $ | 83,870 |
| | $ | 72,868 |
| | $ | 320,885 |
|
| Net loss | $ | (20,770 | ) | | $ | (1,513 | ) | | $ | (37,504 | ) | | $ | (46,511 | ) | | $ | (106,298 | ) |
| Loss per share-basic and diluted | $ | (0.19 | ) | | $ | (0.01 | ) | | $ | (0.34 | ) | | $ | (0.42 | ) | | $ | (0.96 | ) |
| | | | | | | | | | |
| | Quarter Ended December 31, 2012 | | Quarter Ended September 30, 2012 | | Quarter Ended June 30, 2012 | | Quarter Ended March 31, 2012 | | Year Ended December 31, 2012 |
| Fiscal 2012 | | | | | | | | | |
| Net sales | $ | 173,028 |
| | $ | 162,160 |
| | $ | 149,462 |
| | $ | 132,660 |
| | $ | 617,310 |
|
| Gross profit | $ | 93,091 |
| | $ | 85,200 |
| | $ | 79,036 |
| | $ | 70,056 |
| | $ | 327,383 |
|
| Net loss | $ | 4,903 |
| | $ | (19,012 | ) | | $ | (15,272 | ) | | $ | (7,891 | ) | | $ | (37,272 | ) |
| Loss per share-basic and diluted | $ | 0.05 |
| | $ | (0.18 | ) | | $ | (0.14 | ) | | $ | (0.07 | ) | | $ | (0.35 | ) |
Seasonality
The Company experiences seasonality in its operations. Historically, sales during the third and fourth fiscal quarters have generally been the highest, with sales during the first fiscal quarter the lowest. This reflects the combined impact of the seasonality of the wholesale and retail segments. Generally, the Company’s retail segment has not experienced the same pronounced sales seasonality as other retailers.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under10-K. Based on the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). Based upon that evaluation,foregoing, our Chief Executive Officer and Chief Financial Officer concluded as of the end of the period covered by this Annual Report that our disclosure controls and procedures were effective.effective at the reasonable assurance level.
Management's Report on Internal Control Overover Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in the Exchange Act.reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (1992) issuedset forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992.Internal Control-Integrated Framework (1992). Based on this evaluation,assessment, and the opinion expressed by our external auditor's attestation report included herein, our management concludedbelieves that our internal controls over financial reporting were operating effectivelyeffective as of December 31, 2013.2014.
Based on the COSO (1992) criteria, management did not note control deficiencies that constituted a material weakness in our prior reported financial statements. A “material weakness”"material weakness" is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is more than a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Changes in Internal Controls over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. As we expand globally, we are increasingly dependent on information systems to operate our website, process transactions, respond to customer inquiries, manage inventory and production, purchase, well and ship goods on a timely basis and maintain cost-efficient operations. In connection with the process of upgrading our information technology infrastructure and resulting business process changes, we continue to create and enhance the design and documentation of our internal control processes to ensure effective controls over financial reporting.
There havehas been no changeschange in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act)Act of 1934, as amended) during theour most recent fiscal quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Audit Committee of the
Board of Directors and Shareholders of
American Apparel, Inc.
We have audited American Apparel, Inc. and Subsidiaries' (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherestablished controls and procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsremediation of any evaluation of effectiveness to future periods are subject to the risk that controlsdeficiencies which may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.be identified during this process.
In our opinion, American Apparel, Inc. and Subsidiaries'maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive loss, shareholders’ (deficit) equity, and cash flows and the related financial statement schedule for the years ended December 31, 2013, 2012, and 2011 of the Company and our report dated April 1, 2014 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Marcum LLP
Marcum LLP
Melville, NY
April 1, 2014
Item 9B. Other Information
Not applicable.None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item will be included under the following captions in the 2014 Proxy Statement and is incorporated herein by reference: “Directors and Executive Officers,” “Corporate Governance and Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation
The information required by this item will be included under the following captions in the 2014 Proxy Statement and is incorporated herein by reference: “Process and Procedures for Determination of Executive and Director Compensation,” “Compensation of Directors,” “Director Compensation—Fiscal 2013,” “Compensation Discussion and Analysis,” “Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Summary Compensation Table,” and “Grants of Plan-Based Awards Table."
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included under the following captions in the 2014 Proxy Statement and is incorporated herein by reference: “Equity Compensation Plan Information” and “Beneficial Ownership of Shares.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included under the following captions in the 2014 Proxy Statement and is incorporated herein by reference: “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters.”
Item 14. Principal Accountant Fees and Services
The information requiredcalled for by this itemItems 10, 11, 12, 13 and 14 will be included under the caption “Relationship with Independent Auditors” in the 2014 Proxy Statement and isCompany's definitive proxy statement for the 2015 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after December 31, 2014. The relevant portions of such definitive proxy statement are incorporated herein by reference.
PART IV
| |
Item 15. | Exhibits, Financial Statement Schedules |
| |
a. | Documents filed as part of this Annual Report on Form 10-K: |
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as a part of this Annual Report on Form 10-K:
| |
| 1. | Financial Statements: See “Index"Index to Consolidated Financial Statements”Statements" in Item 8, Part II Item 8 of this Annual Report on Form 10-K. |
| |
| 2. | Financial Statement Schedule: The following consolidated financial statement schedule of American Apparel, Inc. and its subsidiaries is included in PartSchedule II Item 8: |
|
|
Schedule II—- Valuation and Qualifying Accounts |
SchedulesAll other than those listed aboveschedules are omitted because of an absence of the conditions under which they are required or becauseas the required information is showninapplicable or the information is presented in the consolidated financial statementsConsolidated Financial Statements and/or notesNotes thereto.
| |
b.3. | Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. |
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about our or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement, and:and;
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about our may be found elsewhere in this Annual Report on Form 10-K and in our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
|
| | |
Exhibit No.
| | Description |
2.1 | | Acquisition Agreement, dated as of December 18, 2006 and amended and restated on November 7, 2007, by and among American Apparel, Inc., AAI Acquisition LLC, American Apparel, Inc., a California corporation, American Apparel, LLC, each of American Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc. (together the “CI companies”), Dov Charney, Sam Lim, and the stockholders of each of the CI companies (included as Annex A of the Definitive Proxy Statement (File No. 001-32697) filed November 28, 2007 and incorporated by reference herein). |
| | |
3.1 | | Amended and Restated Certificate of Incorporation of American Apparel, Inc. (included as Exhibit 3.1 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
3.2 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of American Apparel, Inc. (included as Exhibit 3.1 of the Current Report on Form 8-K (File No. 001-32697) filed June 27, 2011 and incorporated by reference herein). |
| | |
3.3 | | Bylaws of American Apparel, Inc. (included as Exhibit 4.1 of the Registration Statement on Form S-8 (File No. 333-175430) filed July 7, 2011 and incorporated by reference herein). |
| | |
3.4 | | Certificate of Amendment to Certificate of Formation of American Apparel (USA), LLC (included as Exhibit 3.3 to Form 10-K (File No 001-32697) filed March 17, 2008 and incorporated by reference herein). |
| | |
4.1 | | Specimen Common Stock Certificate (included as Exhibit 4.2 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
4.2 | | Registration Rights Agreement, dated December 12, 2007, by and among American Apparel, Inc. and the stockholders listed on the signature page therein (included as Annex H of the Definitive Proxy Statement (File No. 001-32697) filed November 28, 2007 and incorporated by reference herein). |
| | |
4.3 | | Lock-Up Agreement, dated December 12, 2007, between American Apparel, Inc. and Dov Charney (included as Annex D of the Definitive Proxy Statement (File No. 001-32697), filed November 28, 2007 and incorporated by reference herein). |
| | |
4.4 | | Letter Agreement Re: Extension of Lock-Up Agreement, dated March 13, 2009, among Dov Charney, Lion Capital (Guernsey) II Limited and American Apparel, Inc. (included as Exhibit 10.5 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). |
| | |
4.5 | | Warrants to Purchase Shares of Common Stock of American Apparel, Inc., dated March 13, 2009, issued to Lion Capital (Guernsey) II Limited (included as Exhibit 10.3 of the Current Report on Form 8-K (File No 001-32697) filed March 13, 2009 and incorporated by reference herein). |
| | |
4.6 | | Investment Agreement, dated March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited (included as Exhibit 10.2 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). |
| | |
4.7 | | Investment Voting Agreement, dated March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited (included as Exhibit 10.4 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). |
| | |
4.8 | | Voting Agreement, dated as of February 18, 2011, between Dov Charney, an individual, and Lion/Hollywood L.L.C., in its capacity as a lender under the Lion Credit Agreement (included as Exhibit 10.2 of the Current Report on Form 8-K filed on February 22, 2011 and incorporated by reference herein). |
| | |
4.9 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 24, 2011, issued to Lion/Hollywood L.L.C (included as Exhibit 10.2 of the Current Report on Form 8-K filed on March 28, 2011 and incorporated by reference herein). |
| | |
4.10 | | Amendment No. 1, dated March 24, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 13, 2009 (included as Exhibit 10.3 of the Current Report on Form 8-K filed on March 28, 2011 and incorporated by reference herein). |
| | |
4.11 | | Form of Voting Agreement, dated as of April 26, 2011, between Dov Charney and the other persons signatory thereto (included as Exhibit 10.3 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). |
| | |
|
| | | | | |
| | | | Incorporated by Reference |
| Exhibit No. | | Description | Form | Exhibit/Annex | Filing Date/Period End Date |
| | | | | | |
| 2.1 | | Acquisition Agreement by and among American Apparel, Inc., AAI Acquisition LLC, American Apparel, Inc., a California corporation, American Apparel, LLC, each of American Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc. (together the “CI companies”), Dov Charney, Sam Lim, and the stockholders of each of the CI companies. | PRER 14A | Annex A | 11/28/2007 |
| | | | | | |
| 3.1 | | Amended and Restated Certificate of Incorporation of American Apparel, Inc. | 8-K | 3.1 | 12/18/2007 |
| | | | | | |
| 3.2 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of American Apparel, Inc. | 8-K | 3.1 | 06/27/2011 |
| | | | | | |
| 3.3 | | Amended and Restated Bylaws of American Apparel, Inc. as amended effective as of December 21, 2014. | 8-K | 3.2 | 12/22/2014 |
| | | | | | |
| 3.4 | | Certificate of Amendment to Certificate of Formation of American Apparel (USA), LLC. | 10-K | 3.3 | 03/17/2008 |
| | | | | | |
| 3.5 | | Certificate of Designation of Series A Junior Participating Preferred Stock of American Apparel, Inc. filed with the Secretary of State of the State of Delaware on June 30, 2014. | 8-K | 3.1 | 06/30/2014 |
| | | | | | |
| 3.6 | | Certificate of Designation of Series B Junior Participating Preferred Stock of American Apparel, Inc. filed with the Secretary of State of the State of Delaware on December 22, 2014. | 8-K | 3.1 | 12/22/2014 |
| | | | | | |
| 3.7 | | Specimen Common Stock Certificate | 8-K | 4.2 | 12/18/2007 |
| | | | | | |
| 4.1 | | Registration Rights Agreement, dated as of December 12, 2007 | DEFM14A | Annex H | 11/28/2007 |
| | | | | | |
| 4.2 | | Lock-Up Agreement, dated as of December 12, 2007, between American Apparel, Inc. and Dov Charney | DEFM14A | Annex D | 11/28/2007 |
| | | | | | |
| 4.3 | | Letter Agreement Re: Extension of Lock-Up Agreement, dated as of March 13, 2009, among Dov Charney, Lion Capital (Guernsey) II Limited and American Apparel, Inc. | 8-K | 10.5 | 03/16/2009 |
| | | | | | |
| 4.4 | | Warrants to Purchase Shares of Common Stock of American Apparel, Inc., dated as of March 13, 2009, issued to Lion Capital (Guernsey) II Limited. | 8-K | 10.3 | 03/13/2009 |
| | | | | | |
| 4.5 | | Investment Agreement, dated as of March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited. | 8-K | 10.2 | 03/16/2009 |
| | | | | | |
| 4.6 | | Investment Voting Agreement, dated as of March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited. | 8-K | 10.4 | 03/16/2009 |
| | | | | | |
| 4.7 | | Voting Agreement, dated as of February 18, 2011, between Dov Charney, an individual, and Lion/Hollywood LLC., in its capacity as a lender under the Lion Credit Agreement. | 8-K | 10.2 | 02/22/2011 |
| | | | | | |
| 4.8 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of March 24, 2011, issued to Lion/Hollywood LLC. | 8-K | 10.2 | 03/28/2011 |
| | | | | | |
| 4.9 | | Amendment No. 1, dated as of March 24, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc. | 8-K | 10.3 | 03/28/2011 |
| | | | | | |
| 4.10 | | Form of Voting Agreement, dated as of April 26, 2011, between Dov Charney and the other persons signatory thereto. | 8-K | 10.3 | 04/28/2011 |
| | | | | | |
| 4.11 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of April 26, 2011, issued to Lion/Hollywood LLC. | 8-K | 10.6 | 04/28/2011 |
| | | | | | |
| 4.12 | | Amendment No. 1, dated as of April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., issued to Lion/Hollywood LLC. | 8-K | 10.7 | 04/28/2011 |
| | | | | | |
| 4.13 | | Amendment No. 2, dated as of April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., issued to Lion/Hollywood LLC. | 8-K | 10.8 | 04/28/2011 |
| | | | | | |
|
| | |
Exhibit No.
| | Description |
4.12 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated April 26, 2011, issued to Lion/Hollywood L.L.C. (included as Exhibit 10.6 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). |
| | |
4.13 | | Amendment No. 1, dated April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 24, 2011, issued to Lion/Hollywood L.L.C. (included as Exhibit 10.7 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). |
| | |
4.14 | | Amendment No. 2, dated April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 13, 2009, issued to Lion/Hollywood L.L.C. (included as Exhibit 10.8 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). |
| | |
4.15 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated July 7, 2011, issued to Lion/Hollywood L.L.C. (included as exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed July 13, 2011 and incorporated by reference herein). |
| | |
4.16 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated July 12, 2011, issued to Lion/Hollywood L.L.C. (included as exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed July 13, 2011 and incorporated by reference herein). |
| | |
4.17 | | Amendment No. 1, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated July 12, 2011 (included as exhibit 10.5 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). |
| | |
4.18 | | Amendment No. 1, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated July 7, 2011 (included as exhibit 10.6 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). |
| | |
4.19 | | Amendment No. 1, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated April 26, 2011 (included as exhibit 10.7 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). |
| | |
4.20 | | Amendment No. 2, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated March 24, 2011 (included as exhibit 10.8 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). |
| | |
4.21 | | Amendment No. 3, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated March 13, 2009 (included as exhibit 10.7 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). |
| | |
4.22 | | Indenture, dated as of April 4, 2013, by and among the Company, the Guarantors and U.S. Bank National Association (included as exhibit 4.1 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein). |
| | |
4.23 | | Form of Note (included as exhibit 4.2 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein).
|
| | |
4.24 | | Registration Rights Agreement, dated as of April 4, 2013, by and among the Company, the Guarantors and Cowen and Company, LLC and Sea Port Group Securities, LLC, as representatives of the initial purchasers (included as exhibit 4.3 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein). |
| | |
10.1 + | | American Apparel, Inc. 2011 Omnibus Stock Incentive Plan, as amended and restated as of June 25, 2013 (included as Annex A of the Definitive Proxy Statement (File No. 001-32697) filed on April 30, 2013 and incorporated by reference herein). |
| | |
10.2 + | | Employment Agreement, dated March 22, 2012, between American Apparel, Inc. and Dov Charney (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed March 27, 2012 and incorporated by reference herein). |
| | |
10.3 + | | Employment Agreement, dated January 27, 2009, by and between Glenn A. Weinman and American Apparel, Inc. (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed February 2, 2009 and incorporated by reference herein). |
| | |
10.4 + | | Employment Agreement, dated February 7, 2011 by and between John Luttrell and American Apparel, Inc. (included as Exhibit 10.1 of the Current Report on Form 8-K filed on February 3, 2011 and incorporated by reference herein). |
|
| | | | | |
| 4.14 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of July 7, 2011, issued to Lion/Hollywood LLC. | 8-K | 10.1 | 07/13/2011 |
| | | | | | |
| 4.15 | | Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of July 12, 2011, issued to Lion/Hollywood LLC. | 8-K | 10.2 | 07/13/2011 |
| | | | | | |
| 4.16 | | Amendment No. 1, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of July 12, 2011. | 8-K | 10.5 | 03/19/2012 |
| | | | | | |
| 4.17 | | Amendment No. 1, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of July 7, 2011. | 8-K | 10.6 | 03/19/2012 |
| | | | | | |
| 4.18 | | Amendment No. 1, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of April 26, 2011. | 8-K | 10.7 | 03/19/2012 |
| | | | | | |
| 4.19 | | Amendment No. 2, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of March 24, 2011. | 8-K | 10.8 | 03/19/2012 |
| | | | | | |
| 4.20 | | Amendment No. 3, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of March 13, 2009. | 8-K | 10.9 | 03/19/2012 |
| | | | | | |
| 4.21 | | Indenture, dated as of April 4, 2013, by and among the Company, the Guarantors and U.S. Bank National Association. | 8-K | 4.1 | 04/09/2013 |
| | | | | | |
| 4.22 | | Form of Note | 8-K | 4.2 | 04/09/2013 |
| | | | | | |
| 4.23 | | Registration Rights Agreement, dated as of April 4, 2013, by and among the Company, the Guarantors and Cowen and Company, LLC and Sea Port Group Securities, LLC, as representatives of the initial purchasers. | 8-K | 4.3 | 04/09/2013 |
| | | | | | |
| 4.24 | | Rights Agreement, dated as of June 27, 2014, between American Apparel, Inc. and Continental Stock Transfer & Trust Company, including the form of Certificate of Designations as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C. | 8-K | 4.1 | 06/30/2014 |
| | | | | | |
| 4.25 | | Amendment No. 1 to Rights Agreement, dated as of July 9, 2014, by and between American Apparel, Inc. and Continental Stock Transfers & Trust Company. | 8-K | 4.1 | 07/09/2014 |
| | | | | | |
| 4.26 | | Rights Agreement, dated as of December 21, 2014, between American Apparel, Inc. and Continental Stock Transfer & Trust Company & Trust Company, including the form of Certificate of Designation as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C. | 8-K | 4.1 | 12/22/2014 |
| | | | | | |
| 4.27 | | Amendment No. 1 to Rights Agreement, dated as of January 16, 2015, by and between American Apparel, Inc. and Continental Stock Transfer & Trust Company. | 8-K | 4.1 | 01/16/2015 |
| | | | | | |
| 10.1 + | | American Apparel, Inc. 2011 Omnibus Stock Incentive Plan, as amended and restated, dated as of June 25, 2013 | DEF 14A | Annex A | 04/30/2013 |
| | | | | | |
| 10.2 | | Lease by and between Titan Real Estate Investment Group, Inc., and Textile Unlimited Corp., E&J Textile Group, Inc., and Johnester Knitting, Inc. | 8-K | 10.15 | 12/18/2007 |
| | | | | | |
| 10.3 | | Lease, dated as of December 13, 2005, by and between American Apparel, Inc. and American Central Plaza. | 8-K | 10.17 | 12/18/2007 |
| | | | | | |
| 10.4 | | Lease Amendment, effective as of November 15, 2006, by and between American Apparel, Inc. and American Central Plaza. | 8-K | 10.18 | 12/18/2007 |
| | | | | | |
| 10.5 | | Lease Amendment, effective as of March 22, 2007, by and between American Apparel, Inc. and American Central Plaza. | 8-K | 10.19 | 12/18/2007 |
| | | | | | |
| 10.6 | | Lease, dated as of January 1, 2004, by and between American Apparel, Inc. and Alameda Produce Market, Inc. | 8-K | 10.21 | 12/18/2007 |
| | | | | | |
| 10.7 | | Lease, dated as of May 12, 2004, by and between American Apparel, Inc. and Alameda Produce Market, Inc. | 8-K | 10.22 | 12/18/2007 |
| | | | | | |
| 10.8 | | Lease, dated as of July 30, 2009, by and between American Apparel, Inc. and Alameda Produce Market, Inc. | 8-K | 10.21 | 12/18/2007 |
| | | | | | |
| 10.9 | | Form of Purchase and Investment Agreement by and among American Apparel, Inc. and the purchasers signatory thereto. | 8-K | 10.1 | 12/18/2007 |
| | | | | | |
|
| | |
Exhibit No.
| | Description |
| | |
10.5 | | Lease, dated as of January 1, 2004, by and between Alameda Produce Market, Inc. and AAI (included as Exhibit 10.21 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.6 | | Lease, dated as of May 12, 2004, by and between Alameda Produce Market, Inc. and AAI (included as Exhibit 10.22 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.7 | | Lease, dated June 9, 2004, by and between Titan Real Estate Investment Group, Inc., and Textile Unlimited Corp., E&J Textile Group, Inc., and Johnester Knitting, Inc. (jointly and severally) (included as Exhibit 10.15 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.8 | | Assignment of Lessee's Interest in Lease and Assumption Agreement, dated as of June 2, 2005, by and between Textile Unlimited Corp., E&J Textile Group, Inc., and Johnester Knitting, Inc. (jointly and severally) and American Apparel Dyeing and Finishing, Inc. (included as Exhibit 10.16 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.9 | | Lease, dated December 13, 2005, by and between American Central Plaza and AAI (included as Exhibit 10.17 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.10 | | Lease Amendment, effective as of November 15, 2006, by and between American Central Plaza and AAI (included as Exhibit 10.18 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.11 | | Lease Amendment, effective as of March 22, 2007, by and between American Central Plaza and AAI (included as Exhibit 10.19 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.12 | | Lease, dated as of July 30, 2009, by and between Alameda Produce Market, LLC and AAI (included as Exhibit 10.21 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). |
| | |
10.13 | | Form of Purchase and Investment Agreement, dated as of April 21, 2011, by and among American Apparel, Inc. and the purchasers signatory thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 00l-32697) filed on April 28, 2011 and incorporated by reference herein). |
| | |
10.14 | | Purchase Agreement, dated as of April 27, 2011, between American Apparel, Inc. and Dov Charney (included as Exhibit 10.2 of the Current Report on Form 8-K/A (File No. 00l-32697) filed on April 28, 2011 and incorporated by reference herein).
|
| | |
10.15 | | Amendment to Purchase Agreement, dated as of October 16, 2012, by and between American Apparel, Inc. and Dov Charney (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 00l-32697) filed on October 22, 2012 and incorporated by reference herein).
|
| | |
10.16 | | Asset Purchase Agreement, dated as of December 1, 2007, by and between PNS Apparel, Inc., Blue Man Group, Inc., Allen S. Yi and American Apparel, Inc. (included as Exhibit 10.24 of Amendment No. 1 to the Annual Report on Form 10-K/A (File No. 001-32697) filed March 28, 2008 and incorporated by reference herein). |
| | |
10.17 | | Letter Agreement Re: Extension of Non-Competition and Non-Solicitation Covenants in Section 5.27(a) of the Merger Agreement, dated March 13, 2009, among Dov Charney, Lion Capital (Guernesey) II Limited and American Apparel, Inc. (included as Exhibit 10.6 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). |
| | |
10.18 | | Amendment and Agreement, dated as of April 10, 2009, by and between American Apparel, Inc. and Lion/Hollywood L.L.C. (included as Exhibit 10.1 of Current Report on Form 8-K (File No 001-32697) filed April 16, 2009 and incorporated by reference herein). |
| | |
10.19 | | Second Amendment and Agreement, dated as of June 17, 2009, by and between American Apparel, Inc. and Lion/Hollywood L.L.C. (included as Exhibit 10.1 of Current Report on Form 8-K (File No 001-32697) filed June 19, 2009 and incorporated by reference herein). |
| | |
10.20 | | Third Amendment and Agreement, dated as of August 18, 2009, by and between American Apparel, Inc. and Lion/Hollywood L.L.C. (included as Exhibit 10.1 of Current Report on Form 8-K (File No 001-32697) filed August 20, 2009 and incorporated by reference herein). |
| | |
|
| | | | | |
| 10.10 | | Purchase Agreement, dated as of April 27, 2011, between American Apparel, Inc. and Dov Charney.
| 8-K/A | 10.2 | 04/28/2011 |
| | | | | | |
| 10.11 | | Amendment to Purchase Agreement, dated as of October 16, 2012, by and between American Apparel, Inc. and Dov Charney. | 8-K | 10.1 | 10/22/2012 |
| | | | | | |
| 10.12 | | Amendment and Agreement, dated as of April 10, 2009, by and between American Apparel, Inc. and Lion/Hollywood LLC. | 8-K | 10.1 | 04/16/2009 |
| | | | | | |
| 10.13 | | Second Amendment and Agreement, dated as of June 17, 2009, by and between American Apparel, Inc. and Lion/Hollywood LLC. | 8-K | 10.1 | 06/19/2009 |
| | | | | | |
| 10.14 | | Third Amendment and Agreement, dated as of August 18, 2009, by and between American Apparel, Inc. and Lion/Hollywood LLC. | 8-K | 10.1 | 08/20/2009 |
| | | | | | |
| 10.15 | | Letter Agreement, Re: Pledging of Restricted Securities, dated as of October 28, 2009 | 8-K | 10.1 | 11/03/2009 |
| | | | | | |
| 10.16 | | Intercreditor Agreement, dated as of April 4, 2013, by and among U.S. Bank National Association and Capital One Leverage Finance Corp. | 8-K | 10.2 | 04/09/2013 |
| | | | | | |
| 10.17 | | Credit Agreement, dated as of April 4, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. | 8-K | 10.1 | 04/09/2013 |
| | | | | | |
| 10.18 | | Amendment No. 1, dated as of May 22, 2013, to Credit Agreement by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. | 10-K | 10.39 | 04/01/2013 |
| | | | | | |
| 10.19 | | Amendment No. 2 to Credit Agreement, dated as of July 5, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. | 8-K | 10.1 | 07/09/2013 |
| | | | | | |
| 10.20 | | Amendment No. 3 to Credit Agreement and Limited Waiver, dated as of November 14, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. | 10-K | 10.41 | 04/01/2014 |
| | | | | | |
| 10.21 | | Amendment No. 4 to Credit Agreement and Limited Consent, dated as of November 29, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. | 10-K | 10.42 | 04/01/2014 |
| | | | | | |
| 10.22 | | Amendment No. 5 to Credit Agreement and Limited Waiver, dated as of March 25, 2014, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp (i/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto. | 8-K | 10.1 | 03/25/2014 |
| | | | | | |
| 10.23 | | Credit Agreement, dated as of May 22, 2013, by and among American Apparel, Inc. and Lion/Hollywood LLC. | 10-K | 10.44 | 04/01/2014 |
| | | | | | |
| 10.24 | | Amendment No. 1 to Credit Agreement, dated as of November 29, 2013, by and among American Apparel, Inc. and Lion/Hollywood LLC.
| 10-K | 10.45 | 04/01/2014 |
| | | | | | |
| 10.25 | | Amendment to Credit Agreement, dated as of September 8, 2014, by and among American Apparel, Inc. and Standard General Master Fund L.P. | 10-Q | 10.6 | 11/10/2014 |
| | | | | | |
| 10.26† | | Separation Agreement and General Release of All Claims, dated as of May 16, 2014, by and between American Apparel, Inc. and Glenn A. Weinman. | 8-K | 10.1 | 05/13/2014 |
| | | | | | |
| 10.27 | | Nomination Standstill and Support Agreement, by and among American Apparel, Inc., Standard General Master Fund L.P., P Standard General Ltd and Dov Charney. | 8-K | 10.1 | 07/09/2014 |
| | | | | | |
| 10.28† | | Employment Agreement, effective as of July 14, 2014, between American Apparel, Inc. and John J. Luttrell. | 8-K | 10.1 | 07/18/2014 |
| | | | | | |
| 10.29† | | American Apparel, Inc. Severance Plan | 8-K | 10.1 | 07/25/2014 |
| | | | | | |
| 10.30† | | Employment Agreement, dated as of September 29, 2014, by and between American Apparel, Inc. and Hassan Natha. | 10-Q | 10.4 | 11/10/2014 |
| | | | | | |
| 10.31† | | Letter Agreement, dated as of September 28, 2014, by and between American Apparel, Inc. and Alvarez & Marsal North America, LLC. | 10-Q | 10.3 | 11/10/2014 |
| | | | | | |
| 10.32* | | Employment Agreement, effective as of November 20, 2014, by and between American Apparel, Inc. and Chelsea A. Grayson. | | | |
| | | | | | |
|
| | | | | |
| 10.33* | | Employment Agreement, effective as of January 9, 2015, by and between American Apparel, Inc. and Paula Schneider. | | | |
| | | | | | |
| 10.34* | | Amendment No. 6 to Credit Agreement and Waiver, dated as of March 25, 2015, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp (i/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto. | | | |
| | | | | | |
| 10.35* | | Credit Agreement, dated as of March 25, 2015, by and among American Apparel, Inc. and Standard General L.P. | | | |
| | | | | | |
| 14.1 | | American Apparel, Inc. Code of Ethics | 8-K | 14.1 | 12/18/2007 |
| | | | | | |
| 101.INS* | | XBRL Instance Document | | | |
| | | | | | |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document | | | |
| | | | | | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
| | | | | | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | | |
| | | | | | |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
| | | | | | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | | |
| | | | | | |
|
| | |
Exhibit No________________.
| | Description |
10.21 | | Letter Agreement Re: Pledging of Restricted Securities, dated October 28, 2009, among Dov Charney, Lion/Hollywood L.L.C. and American Apparel, Inc. (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed November 3, 2009 and incorporated by reference herein). |
| | |
10.22 | | Credit Agreement, dated as of December 30, 2009, between American Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc. and Bank of Montreal (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed January 6, 2010 and incorporated by reference herein). |
| | |
10.23 | | Credit Agreement, dated as of March 13, 2009, among American Apparel, Inc., in its capacity as Borrower, certain subsidiaries of American Apparel, Inc., in their capacity as Facility Guarantors, Lion Capital LLP, in its capacity as administrative agent and collateral agent, Lion Capital (Guernsey) II Limited, as Initial Lender, and the other lenders from time to time party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). |
| | |
10.24 | | Waiver to Credit Agreement, dated as of September 30, 2009, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed October 6, 2009 and incorporated by reference herein). |
| | |
10.25 | | First Amendment to Credit Agreement, dated as of December 30, 2009, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of Current Report on Form 8-K (File No. 001-32697) filed January 6, 2010 and incorporated by reference herein). |
| | |
10.26 | | Second Amendment to Credit Agreement, dated as of March 31, 2010, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed April 1, 2010 and incorporated by reference herein). |
| | |
10.27 | | Third Amendment to Credit Agreement, dated as of June 23, 2010, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed June 24, 2010 and incorporated by reference herein). |
| | |
10.28 | | Fourth Amendment to Credit Agreement, dated as of September 30, 2010, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed October 1, 2010 and incorporated by reference herein). |
| | |
10.29 | | Waiver to Credit Agreement, dated as of January 31, 2011, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on February 1, 2011 and incorporated by reference herein). |
| | |
10.30 | | Fifth Amendment to Credit Agreement, dated as of February 18, 2011, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on February 22, 2011 and incorporated by reference herein). |
| | |
10.31 | | Waiver and Sixth Amendment to Credit Agreement, dated as of April 26, 2011, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.5 of the Current Report on Form 8-K (File No. 001-32697) filed on April 28, 2011 and incorporated by reference herein). |
| | |
10.32 | | Seventh Amendment to Credit Agreement, dated as of March 13, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of the Amendment filed on June 21, 2012 to the Current Report on Form 8-K (File No. 001-32697) filed on March 19, 2012 and incorporated by reference herein). |
|
| | |
Exhibit No.
| | Description |
| | |
10.33 | | Eighth Amendment to Credit Agreement, dated August 30, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of the Current Report on Form 8-K (File No. 001-32697) filed on September 11, 2012 and incorporated by reference herein). |
| | |
10.34 | | Ninth Amendment and Waiver to Credit Agreement, dated September 28, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of the Quarterly Report on Form 10-Q (File No. 001-32697) filed on November 14, 2012 and incorporated by reference herein). |
| | |
10.35 | | Tenth Amendment to Credit Agreement, dated November 12, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.5 of the Quarterly Report on Form 10-Q (File No. 001-32697) filed on November 14, 2012 and incorporated by reference herein). |
| | |
10.36 | | Eleventh Amendment to Credit Agreement, dated February 6, 2013, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed on February 11, 2013 and incorporated by reference herein). |
| | |
10.37 | | Intercreditor Agreement, dated as of April 4, 2013, by and among U.S. Bank National Association and Capital One Leverage Finance Corp. (included as Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein). |
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10.38 | | Creditor Agreement, dated as of April 4, 2013, by and among the Credit Parties, Capital One Leverage Finance Corp., as administrative agent, swing line lender, and lender, Capital One, N.A., as L/C issuer and the other lenders party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein). |
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10.39* | | Amendment No. 1 to Credit Agreement, dated as of May 22, 2013, by and among the Borrowers, the Guarantors, Capital One Leverage Finance Corp., as administrative agent, and the Lenders party thereto. |
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10.40 | | Amendment No. 2 to Credit Agreement, dated as of July 5, 2013, by and among the Borrowers, the Guarantors, Capital One Leverage Finance Corp., as administrative agent, and the Lenders party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed July 9, 2013 and incorporated by reference herein). |
| | |
10.41* | | Amendment No. 3 to Credit Agreement and Limited Waiver, dated as of November 14, 2013, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp. (f/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto. |
| | |
10.42* | | Amendment No. 4 to Credit Agreement and Limited Consent, dated as of November 29, 2013, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp. (f/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto. |
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10.43 | | Amendment No. 5 to Credit Agreement and Limited Waiver, dated as of March 25, 2014, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp. (f/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed March 25, 2014 and incorporated by reference herein). |
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10.44* | | Credit Agreement, dated as of May 22, 2013, by and among American Apparel, Inc., the facility guarantors party thereto, and Lion/Hollywood L.L.C. |
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10.45* | | Amendment No. 1 to Credit Agreement, dated as of November 29, 2013, by and among American Apparel, Inc., the facility guarantors party thereto, and Lion/Hollywood L.L.C.
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14.1 | | American Apparel, Inc. Code of Ethics (included as Exhibit 14.1 of the Current Report for 8-K (File No. 001-32697) filed December 18, 2007 and incorporated by reference herein). |
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21.1* | | List of subsidiaries as of December 31, 2013 |
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23.1* | | Consent of Independent Registered Public Accounting Firm |
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31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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|
| | |
Exhibit No.
| | Description |
31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1* | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2* | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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___________________________
| |
+† | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| | | |
| | AMERICAN APPAREL, INC. |
| | | | |
April 1, 2014March 25, 2015 | By: | | /s/ DOV CHARNEYPAULA SCHNEIDER |
| | | | Dov CharneyPaula Schneider |
| | | | Chief Executive Officer |
| | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ DOV CHARNEYPAULA SCHNEIDER | | Chief Executive Officer and Director (Principal Executive Officer) | | April 1, 2014March 25, 2015 |
Dov CharneyPaula Schneider | | | | |
| | | | | |
/s/ JOHN LUTTRELLHASSAN N. NATHA | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting OfficerOfficer) | | April 1, 2014March 25, 2015 |
John Luttrell | Hassan N. Natha | | | |
| | | | | |
/s/ ALBERTO CHEHEBARCOLLEEN B. BROWN | | DirectorChairperson of the Board of Directors | | April 1, 2014March 25, 2015 |
Alberto ChehebarColleen B. Brown | | | | |
| | | | | |
| /s/ DAVID DANZIGER | | Director | | April 1, 2014March 25, 2015 |
| David Danziger | | | | |
| | | | | |
/s/ ROBERT GREENEDAVID GLAZEK | | Director | | April 1, 2014March 25, 2015 |
Robert GreeneDavid Glazek | | | | |
| | | | | |
/s/ MARVIN IGELMANLYNDON LEA | | Director | | April 1, 2014March 25, 2015 |
Marvin IgelmanLyndon Lea | | | | |
| | | | | |
/s/ WILLIAM MAUERLAURA A. LEE | | Director | | April 1, 2014March 25, 2015 |
William MauerLaura A. Lee | | | | |
| | | | |
| /s/ JOSEPH MAGNACCA | | Director | | March 25, 2015 |
| Joseph Magnacca | | | | |
| | | | | |
| /s/ ALLAN MAYER | | Director | | April 1, 2014March 25, 2015 |
| Allan Mayer | | | | |
| | | | | |
| /s/ THOMAS J. SULLIVAN | | Director | | March 25, 2015 |
| Thomas J. Sullivan | | | | |
