10-K 1 app12311210k.htm 10-K APP 12.31.12 10K


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
For the fiscal year ended December 31, 2012
or
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)
_____________________________________________
          
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:
 
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:
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer o (Do not check if a smaller reporting company) 
 
Smaller reporting company x
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 of June 29, 2012 was approximately $50,685,487 based upon the closing price of the common stock on such date as reported by the NYSE MKT.
The number of shares of the registrant’s common stock issued and outstanding as of February 28, 2013 was approximately 110,111,193 and 107,596,241.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2013 Annual Meeting of Stockholders (the “2013 Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended December 31, 2012, are incorporated by reference into Part III herein. If the 2013 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. Except with respect to the information specifically incorporated by reference in Part III of this Form 10-K, the 2013 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” 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” for purposes of these provisions. Statements that include the use of terminology such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,” or “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,” 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:
future financial condition and operating results;
our ability to remain in compliance with financial covenants under our financing arrangements;
our ability to extend, renew or refinance our existing debt;
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;
the outcome of investigations, enforcement actions and litigation matters, including exposure which 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;
the supply of raw materials and the effects of supply shortages on our financial condition and results of operations;
economic and political conditions;
overall industry and market performance;
the impact of accounting pronouncements;
our ability to improve manufacturing efficiency at our production facilities;
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. Such assumptions, events, risks, uncertainties and other factors include, among others, those described under Part I, Item 1A and elsewhere in this report, as well as in other reports and documents we file with the United States Securities and Exchange Commission (the "SEC") and include, without limitation, the following:
our ability to generate or obtain from external sources sufficient liquidity for operations and debt service;
changes in the level of consumer spending or preferences or demand for our products;
our financial condition, operating results and projected cash flows;



disruptions in the global financial markets;
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 maintain compliance with the exchange rules of the NYSE MKT, LLC;
the highly competitive and evolving nature of our business in the U.S. and internationally;
our ability to effectively carry out and manage our strategy, including growth and expansion both in the U.S. and internationally;
loss of U.S. import protections or changes in duties, tariffs and quotas and other risks associated with international business;
intensity of competition, both domestic and foreign;
technological changes in manufacturing, wholesaling, or retailing;
risks that our suppliers or distributors may not timely produce or deliver our products;
loss or reduction in sales to our wholesale or retail customers or financial nonperformance by our wholesale customers;
the adoption of new accounting standards or changes in interpretations of accounting principles;
our ability to pass on the added cost of raw materials to our wholesale and retail customers;
the availability of store locations at appropriate terms and our ability to identify and negotiate new store locations effectively and to open new stores and expand internationally;
our ability to attract customers to our stores;
seasonality and fluctuations in comparable store sales and margins;
our ability to successfully implement our strategic, operating, financial and personnel initiatives;
our ability to maintain the value and image of our brand and protect our intellectual property rights;
changes in the cost of materials and labor, including increases in the price of raw materials in the global market;
our ability to improve manufacturing efficiency at our production facilities;
location of our facilities in the same geographic area;
risks associated with our foreign operations and foreign supply sources, such as disruption of markets, changes in import and export laws, currency restrictions and currency exchange rate fluctuations;
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, including environmental, immigration, labor and occupational health and safety laws and regulations;
the risk that information technology systems changes and the transition to our new distribution center in La Mirada, California (as described herein) may disrupt our supply chain or operations and our ability to upgrade our information technology infrastructure and other risks associated with the systems that operate our online retail operations;
litigation and other inquiries and investigations, including the risks that we or our officers will not be successful in defending any proceedings, lawsuits, disputes, claims or audits, and that exposure could exceed expectations or insurance coverages;
our ability to effectively manage inventory levels;
changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;
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; and
disruptions due to earthquakes, flooding, tsunamis or other natural disasters.
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.



American Apparel, Inc.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012

TABLE OF CONTENTS
 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
 
 
 
 
 
PART II
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 

Item 7.
 
 
 
 

Item 7A.
 
 
 
 

Item 8.
 
 
 
 

Item 9.
 
 
 
 

Item 9A.
 
 
 
 

Item 9B.
 
Other Information
 
 
 
 
 
 
PART III
 
 
 

Item 10.
 
 
 
 

Item 11.
 
 
 
 

Item 12.
 
 
 
 

Item 13.
 
 
 
 

Item 14.
 
 
 
 

 
 
PART IV
 
 
 

Item 15.
 




PART I
 
Item 1. Business
Unless the context indicates otherwise, when we refer to “we”, “us”, “our”, "American Apparel" or the “Company” in this Form 10-K, we are referring to American Apparel, Inc. and its subsidiaries on a consolidated basis. Our year ends on December 31 and references to fiscal 2012, fiscal 2011 and fiscal 2010 refer to the years ended December 31, 2012, 2011 and 2010, 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 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 January 31, 2013, we had approximately 10,000 employees and operated 251 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. We also operate an e-commerce site that serves over 60 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 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, warehousing, and distribution 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. In February 2013 we began to transition our distribution operation out of our facilities in downtown Los Angeles, California to a leased facility in 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 was 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. 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, Canada, Europe, and Asia. All of our retail stores sell the Company's apparel products directly to consumers.
Business Segments
We report the following four operating 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 sales of undecorated apparel products to distributors and third party screen printers in 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 140 retail stores as of December 31, 2012. The Canada segment consists of our retail, wholesale and online consumer operations in Canada. As of December 31, 2012, the retail operations in the Canada segment were comprised of 35 retail stores. The International segment consists of our retail, wholesale and online consumer operations outside of the United States, and Canada. As of December 31, 2012, the retail operations in the International segment were comprised of 76 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, 2012, 2011 and 2010 is included in Note 17 - Business Segment and Geographic Area Information to our consolidated financial statements under Part II, Item 8.


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Core Business Strengths
American Apparel has relied on a number of core business strengths that we believe have contributed to our past success and will contribute to our future growth:
Design Vision
American Apparel’s design vision and aesthetic are intended to appeal to young, metropolitan adults by providing them with a core line of iconic, timeless styles which are offered year-round in a wide variety of colors at reasonable prices. Since our founding, American Apparel has operated with the belief that there is a large potential market among young adults, for well-designed, 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, with manufacturing and various other elements of our business processes centered in downtown Los Angeles, 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 our wholesale operations, being able to fulfill orders of any size with quick turn-around allows American Apparel 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.
Quality
American Apparel prides itself on its use of quality fabrics with quality construction. We have an active quality control department that oversees the in-house production of fabric at our knitting facilities, the outside knitting contractors who work to our strict specifications, and the cutting, sewing, dyeing and finishing of 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.

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 creates 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.

Growth Strategy
We have developed a growth strategy that is designed to capitalize on our core business strengths. The principal elements contributing 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 ten new stores and closed eight stores in 2012. 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, demographic characteristics and other factors considered important regarding the specific location.
New Merchandise Introduction
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 include denim, sweaters, jackets and accessories, to name a few such categories. We also intend to judiciously introduce new merchandise to complement our

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existing products in order to attract new customers and increase the frequency of customer visits and the size of customer purchases.
Web Business Refinement
Our website operation represents a growth opportunity for American Apparel as it has the potential to 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 content as well as expanding our web presence in more countries and channels. We currently operate 12 e-commerce portals in seven languages that serve customers from thirty countries around the world.
Continue In-Sourcing Manufacturing Activities
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. In the past we have made strategic acquisitions to consolidate our manufacturing operations and continue to produce high quality products. We may pursue strategic opportunities to further consolidate 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.
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 expect to fully transition our distribution operations into this new facility in 2013. We believe that the new distribution center will contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales. We began transitioning shipment operations to this facility in February 2013. Related to these efforts, we installed the High Jump warehouse management system for all distribution activities that will be implemented in conjunction with the transition to our new distribution center.
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. The second phase of the ERP implementation, which included upgrading the financial accounting and control systems for our U.S. operations, was completed in 2009. In 2010 and 2011, we continued to refine and enhance these systems. In January 2012, we completed a financial system consolidation for our European operations and in March 2012, we upgraded the financial accounting and control systems for our Canada operations. As planned, in 2012, we upgraded our production forecasting and allocation systems. We raised our forecast accuracy with Logility's demand planning solution.
In 2011 we completed the implementation of workforce and labor scheduling optimization systems in all of our retail and manufacturing locations.
Throughout 2012, we continued to install sales conversion tracking devices and radio frequency identification (RFID).  As of the end of February 2013, we implemented RFID systems at approximately 213 stores worldwide. We expect full implementation in 2013. We believe that these systems 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. website. We intend to implement this system on a world-wide basis in 2013. The new system offers a complete e-commerce software platform that speeds response times and enables us to deliver a personalized customer buying experience.
During the past year, we successfully replaced our existing payment processing system with new electronic payment services from CyberSource. In addition, we implemented a payment fraud detection solution.
To help maximize our server resources, during 2012 we successfully completed virtualization of 300 servers, including all our key servers.
To improve operational flexibility and optimize warehouse processes, during the first quarter of 2013, we plan to finalize the implementation of a new warehouse management solution.
Execution of the Strategy
The execution of our growth strategy and internal initiatives may result in material additional costs.
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.

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New merchandise introductions will 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. 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 and will continue to employ return on investment measures to financially justify any such expenditures.
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, 2012, our knitting facilities knit approximately 73% of the total fabric used in our garments and had approximately 78 employees.
Knitted greige fabric produced by our Los Angeles and Garden Grove facilities or by other commissioned knitters is batched for bleaching and dyeing and 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, 2012, 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 238 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 27% 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, 2012, approximately 3,474 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.
In addition to the warehouse and distribution center at our downtown Los Angeles facility, we maintain two other warehouses in the Los Angeles metropolitan area, where we store fabric rolls, trims, and finished goods. We also maintain a warehouse in Montreal, Quebec.
Retail
As of December 31, 2012, our retail operations consisted of 251 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 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

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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 48 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 twelve 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. For segment reporting purposes, U.S. online consumer sales are included in the U.S. Wholesale business segment. Canada online consumer sales are included in the Canada business segment, and international online consumer sales are included in the International business segment.
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 creative 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. 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 utilize industry trade shows to expand and enhance customer relationships, exhibit product offerings 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 Development
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 of 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. The apparel industry is characterized by rapid shifts in fashion, consumer demand, and competitive pressures, resulting in both price and demand volatility. We believe that our emphasis on quality fashion essentials mitigates these factors.
Our retail operations compete on the basis of store location, the breadth, quality, style, 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

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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, but 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 Apparel in the wholesale market. Many of these companies also have greater financial and other resources when compared to American Apparel.
Along with the competitive factors noted above, other key competitive factors for American Apparel’s 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. The 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, 2012, 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 includes 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. We believe these factors are key elements in achieving our desire to be an “employer of 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, 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 2012, we completed a financial system consolidation for our European operations, upgraded the financial accounting and control systems for our Canada office and upgraded our production forecasting and allocation system.
Environmental Regulation
Our operations 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

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not believe that compliance will have a material adverse effect on our business. See "Risk Factors - Current environmental laws, or laws enacted in the future, may harm our business." in Part I, Item 1A.
Available Information
We will make available on our website, www.americanapparel.net, under “Investor Relations” free of charge, our annual reports on Form 10-K, as well as the latest quarterly reports on Form 10-Q, the latest reports on Form 8-K, the latest proxy statements and amendments to those documents as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. You can also obtain copies of these materials 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.






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Item 1A. Risk Factors
We have substantial indebtedness, which could have adverse consequences to us, and we may not be able to generate significant cash flow in the future to service our indebtedness.
As of December 31, 2012, we had substantial indebtedness. Our level of indebtedness has important consequences to us and 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 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; 
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 industry or in the general economy and limit our flexibility in planning for or reacting to changes in our business and the retail industry; 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” section. While our cash flows from operating activities for the year ended December 31, 2012 were slightly positive, 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 event 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.
In addition, our indebtedness contains certain financial and maintenance covenants, including covenants relating to our capital expenditures, fixed charge coverage, availability under our revolving credit facility and minimum Consolidated EBITDA 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 investments or to take advantage of business or acquisition opportunities.
In addition, our 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

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working capital, and as a result may adversely affect our ability to finance our operations or pursue our expansion plans. Our credit agreements contain cross-default provisions by which non-compliance with covenants under any of our credit facilities could also constitute an event of default under our other credit facilities. Such a failure could also 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 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.
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, with sales during the first fiscal quarter being 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.
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, 2012, Mr. Charney owned 45.8 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 30.0 million shares of our common stock. We also have outstanding warrants exercisable to purchase an aggregate of 22.6 million shares of our common stock, of which 21.6 million shares are issuable at an exercise price lower than our current common stock price. In addition, pursuant to the Lion Credit Agreement, in the event of certain other issuances and sales of common or preferred stock (including securities convertible, exercisable or exchangeable for common stock and including the shares issuable to Mr. Charney as described above) or a debt-for-equity exchange by the Company prior to the repayment of obligations under the Lion Credit Agreement, the Company is required to issue additional warrants to Lion exercisable for a number of shares sufficient to prevent the dilution of Lion's fully-diluted beneficial ownership of common stock as a result of such transaction at an initial exercise price less than our current common stock price. Mr. Charney and Lion also have certain registration rights with respect to their shares of common stock (in the case of Lion, the shares underlying its warrants).

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As of December 31, 2012 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 30.0 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 30% to approximately 20%.
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 December 31, 2012, Mr. Charney beneficially owned approximately 45% of our outstanding common stock, Lion beneficially owned approximately 16% of our outstanding common stock, and a group of Investors beneficially owned in the aggregate approximately 16% 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 has indicated that it will retain its ability to re-designate directors to our board of directors and a board observer at the appropriate time in the future, pursuant to its designation rights under the investment agreement.
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, in the United States and many other countries and regions and may remain depressed for the foreseeable future. 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 United States or in other regions of the world in which we do business 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. Consumers are generally more willing to make discretionary purchases, including purchases of fashion products, during periods in which favorable economic conditions prevail. 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, suffer significant product returns from our customers or drive us to offer additional products at promotional prices, any of which would have a negative impact on gross profit.

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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. The current global financial crisis 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 spending and our financial results. As a consequence, American Apparel's 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 it 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.

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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, 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 distribution facilities 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.
Our plans to expand our product offerings and sales channels may not be successful, and implementation of these plans may 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;  

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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; any of which could impact our competitive position and reduce our revenue and profitability.
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 the loss of services of one or more members of this team, each 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 have an adverse effect on our operations and could adversely affect our ability to design new products and to maintain and grow the distribution channels for our products. In particular, we believe we have benefited substantially from the leadership and strategic guidance of Dov Charney. The loss of Dov Charney would 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.
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.
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 employees could have a material adverse impact on our operating costs and financial condition and could force us to raise prices on our products, curtail operations and/or relocate all or a portion of our operations overseas.
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 Apparel branding and marketing is that our products are made in the United States. The Federal Trade Commission has stated that for a product to be called “Made in USA”, or claimed to be of domestic origin without qualifications or limits on the claim, the product must be “all or virtually all” made in the United States. The term “United States” includes the 50 states, the District of Columbia, and the U.S. territories and possessions. “All or virtually 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 FTC's “Made in USA” standard and from the knitting process to the final sewing of a garment, all of the processes are conducted in the United States, 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. 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 States 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 and been subject to periodic shortages. 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.

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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, 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 regions with lower costs than we, which also places us at a cost disadvantage. Our competitor's lower costs of production may allow them to offer their products at a lower price than our selling prices for similar products. 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 disruptions or adverse conditions affecting the location of our facilities.
We conduct all of our manufacturing operations in the Los Angeles metropolitan area. Specifically, we operate principally out of an 800,000 square foot facility in downtown Los Angeles, which houses our executive offices, as well as our cutting, sewing, and distribution operations. 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; a cutting, sewing, fabric dyeing and finishing facility in Garden Grove, California; as well as a warehouse facility in Commerce, California and Los Angeles, 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 as 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, if there were a major earthquake, we may have to cease operations for a significant portion of time due to possible damage to our factory or inability to deliver products to our distribution centers.
The process of upgrading our information technology infrastructure may disrupt our operations.
We are increasingly dependent 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” 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.
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 Internet operations could significantly disrupt our business and lead to reduced sales and reputational damage.
Our online retail operations accounted for approximately 9% of net sales for the year ended December 31, 2012 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 Internet usage; 
changes in required technology interfaces; 
web site downtime; 
difficulty in recreating the in-store experience on a web site; 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. 

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Our failure to successfully respond to these risks and uncertainties could reduce Internet sales and damage our brand's reputation.
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 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 Internet businesses that market similar lines of merchandise. Many of our competitors are, and many of our potential competitors may be, larger, have substantially greater name recognition than American Apparel and have greater financial, marketing and other resources and, therefore, may be able 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 have greater financial and other resources when compared to American Apparel. If we cannot successfully compete with these companies, our results of operations could be adversely affected.
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 apparel 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

19


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 ability to complete. 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.

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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, 2012, 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 has issued retroactive assessments on the Company's imports totaling €3,634 or $4,802 at the December 31, 2012 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, and we account for any uncertain tax position or tax contingency in accordance with the provisions of ASC 740-“Income Taxes” or ASC 450-“Contingencies”. 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.
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 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, 2012. 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.

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Item 2. Properties
The following table sets forth the location and use of each of American Apparel’s principal non-retail properties, which are all leased each of which is used in connection with all of our operating segments, with the exception of our foreign offices,
which are used solely in connection with our Canada and International segments respectively:
Los Angeles, California
  
Headquarters, Sewing, Cutting, and Distribution
Los Angeles, California
  
Knitting Facility
Los Angeles, California
  
Warehouse Facility
Hawthorne, California
  
Fabric Dyeing and Finishing Facility
South Gate, California
  
Cutting, Sewing, Garment Dyeing and Finishing Facility
Garden Grove, California
  
Cutting, Sewing, Knitting, Fabric Dyeing and Finishing Facility
Commerce, California
  
Warehouse Facility
La Mirada, California
 
Distribution Center
Montreal, Quebec
  
Offices, Distribution
London, England
  
Offices
Tokyo, Japan
  
Offices
Seoul, South Korea
  
Offices
All of our retail stores are leased, well maintained and in good operating condition. Our retail stores 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. Selling space of opened stores will sometimes change 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.

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The following tables set forth American Apparel’s existing retail stores by geographic region, as of December 31, 2012:
Domestic Locations (140)
 
Arizona (2)
 
 
Florida (7)
 
Massachusetts (4)
Scottsdale
 
 
Boca Raton
 
Boston—
Tucson
 
 
Miami Beach—
 
   Back Bay
 
 
 
   Lincoln Road
 
   Newbury Street
California (38)
 
 
   Sunset Drive
 
Cambridge
Arcadia
Napa
 
   Washington Ave.
 
Wrentham
Berkeley
Palo Alto
 
Orlando
 
 
Camarillo
Pasadena
 
St. Augustine
 
Michigan (3)
Claremont
Rancho Cucamonga
 
Wellington
 
Ann Arbor
Commerce
San Diego—
 

 
East Lansing
Costa Mesa
   Fashion Valley
 
Georgia (2)
 
Royal Oak
Gilroy
   Hillcrest
 
Atlanta—
 
 
Huntington Beach
   Pacific Beach
 
   Lenox Mall
 
Minnesota (2)
Irvine Spectrum
San Francisco—
 
   Little Five Points
 
Bloomington
Los Angeles—
   China Gate
 

 
Minneapolis
   Echo Park
   Haight Ashbury
 
Hawaii (1)
 
 
   Factory Store
   Union Street
 
Honolulu—
 
Missouri (1)
   Hollywood
Santa Barbara
 
   Ala Moana
 
Kansas City
   Little Tokyo
Santa Clara
 

 

   Los Feliz
Santa Cruz
 
Illinois (7)
 
Nebraska (1)
   Melrose
Santa Monica—
 
Chicago—
 
Omaha
   Robertson
   Main Street
 
   Belmont & Clark
 

   Westwood Village
   Third Street Promenade
 
   Gold Coast
 
Nevada (3)
   West Hollywood
Studio City
 
   Lincoln Park
 
Las Vegas—
Malibu
Venice
 
   State St.
 
   Boca Park
Manhattan Beach
Ventura
 
   Wicker Park
 
   Miracle Mile


 
Evanston
 
   Premium Outlets
Colorado (2)

 
Schaumburg
 
 
Boulder


 
 
 
New Jersey (4)
Denver

 
Louisiana (1)
 
Cherry Hill


 
New Orleans
 
Edison
Connecticut (2)

 
 
 
Hoboken
New Haven
 
 
Maryland (4)
 
Paramus
South Norwalk
 
 
Annapolis
 
 

 
 
Baltimore
 
 
District of Columbia (2)
 
 
Bethesda
 
 
Georgetown
 
 
Silver Spring
 
 
Lincoln Square
 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 




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Domestic Locations (140) (cont'd.)
New York (23)
 
Pennsylvania (4)
 
Wisconsin (2)
 
Brooklyn—
 
King of Prussia
 
Madison
 
   Carroll Gardens
 
Philadelphia—
 
Milwaukee
 
   Court Street
 
   Sansom Common
 
 
 
   Park Slope
 
   Walnut Street
 
 
 
   Williamsburg
 
Pittsburgh—
 
 
 
Central Valley
 
   Shadyside
 
 
 
Garden City
 
 
 
 
 
Manhattan—
 
South Carolina (1)
 
 
 
   Bleecker Street
 
Charleston
 
 
 
   Chelsea
 
 
 
 
 
   Columbia University
 
Tennessee (2)
 
 
 
   Columbus Circle
 
Memphis
 
 
 
   FIT
 
Nashville
 
 
 
   Flatiron
 
 
 
 
 
   Gramercy Park
 
Texas (7)
 
 
 
   Harlem
 
Austin—
 
 
 
   Hell’s Kitchen
 
   Congress Ave
 
 
 
   Lower Broadway
 
   Guadalupe Street
 
 
 
   Lower East Side
 
Dallas—
 
 
 
   Noho
 
   Mockingbird
 
 
 
   Soho
 
   NorthPark Center
 
 
 
   Tribeca
 
Houston
 
 
 
   Upper East Side
 
Round Rock
 
 
 
   Upper West Side
 
San Antonio—
 
 
 
White Plains
 
   La Cantera
 
 
 
 
 
 
 
 
 
North Carolina (1)
 
Utah (1)
 
 
 
Charlotte—
 
Salt Lake City
 
 
 
   SouthPark Mall
 
 
 
 
 
 
 
Vermont (1)
 
 
 
Ohio (3)
 
Burlington
 
 
 
Cincinnati
 
 
 
 
 
Cleveland
 
Virginia (1)
 
 
 
Columbus
 
Richmond
 
 
 
 
 
 
 
 
 
Oregon (4)
 
Washington (4)
 
 
 
Eugene
 
Lynnwood
 
 
 
Portland—
 
Seattle—
 
 
 
   Hawthorne Blvd.
 
   Capitol Hill
 
 
 
   Stark Street
 
   Downtown Seattle
 
 
 
   Tigard
 
   University Way
 
 
 






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Canada (35)
 
Alberta (4)
 
Ontario (12)
 
Saskatchewan (1)
 
Calgary—
 
Kingston
 
Saskatoon
 
   17th Avenue
 
London
 
 
 
   Market Mall
 
Ottawa—
 
 
 
Edmonton—
 
   Rideau Centre
 
 
 
   82nd Avenue
 
Thornhill
 
 
 
   West Edmonton Mall
 
Toronto—
 
 
 
 
 
   Bloor Street
 
 
 
British Columbia (7)
 
   Queen Street
 
 
 
Burnaby
 
   Sherway Gardens
 
 
 
Kelowna
 
   Yonge & Dundas
 
 
 
Vancouver—
 
   Yonge & Eglington
 
 
 
   Granville
 
   Yorkdale Shopping Centre
 
 
 
   Robson Street
 
   Vaughan
 
 
 
   South Granville
 
   Waterloo
 
 
 
   West 4th Street
 
 
 
 
 
   Victoria
 
Quebec (8)
 
 
 
 
 
Laval
 
 
 
Manitoba (1)
 
Montreal—
 
 
 
Winnipeg
 
   Cours Mont-Royal
 
 
 
 
 
   Mont-Royal Est
 
 
 
Newfoundland (1)
 
   St-Denis
 
 
 
St. John's
 
   Ste-Catherine West
 
 
 
 
 
   Pointe-Claire
 
 
 
Nova Scotia (1)
 
Quebec—
 
 
 
Halifax
 
   Rue St-Jean
 
 
 
 
 
   Westmount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






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International Locations (76)

Europe (55)
 
 
 
 
 
 
 
 
 
 
 
 
 
Austria (1)
 
Germany (9)
 
United Kingdom (20)
 
Spain (2)
Vienna
 
Berlin—
 
Birmingham
 
Barcelona
 
 
   Bayreuther Strasse
 
Brighton
 
Madrid
Belgium (1)
 
   Münzstrasse
 
Bristol
 
 
Antwerp
 
Düsseldorf
 
Glasgow
 
Sweden (2)
 
 
Frankfurt
 
Leeds
 
Stockholm—
France (12)
 
Hamburg—
 
Liverpool
 
   Götgatan
Aix-en-Provence
 
   Jungfernstieg
 
London—
 
   Kungsgatan
Lille
 
   Schanzenstrasse
 
   Camden High Street
 
 
Paris—
 
Köln
 
   Carnaby Street
 
Switzerland (2)
   Marais
 
Munich—
 
   Covent Garden
 
Zurich—
   Vielle du Temple
 
   Sendlinger Strasse
 
   Kensington High Street
 
   Josefstrasse
   Beaurepaire
 
Stuttgart
 
   King's Cross
 
   Rennweg
   Avenue Victor Hugo
 
 
 
   Oxford Street
 
 
   Saint-Germain
 
Ireland (1)
 
   Portobello Road
 
 
   Saint-Honore (2)
 
Dublin
 
   Selfridges
 
 
   Galeries Lafayette
 

 
   Shoreditch
 
 
   La Defense
 
Italy (3)
 
   Westfield
 
 
Toulouse
 
Milan
 
   Manchester (3)
 
 
 
 
Padova
 
   Nottingham
 
 

 
Rome
 
 
 
 

 

 

 
 

 
Netherlands (2)
 

 
 

 
Amsterdam—
 
 
 
 
 
 
   Noordermarkt
 
 
 
 

 
   Utrechtsestraat
 
 
 
 
 
 
 
 
 
 
 
Asia (13)
 
 
 
Other International (8)
 
 
 
 
 
 
 
 
 
China (4)
 
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—
 
Myer Sydney
   Shanghai
 
   Kangnam
 
   Polanco
 
Sydney
 
 
   Myung-dong
 
 
 
 
Japan (4)
 
 
 
Brazil (1)
 
 
Osaka—
 
 
 
São Paulo
 
 
   Shinsaibashi
 
 
 
 
 
 
Tokyo—
 
 
 
 
 
 
   Daikanyama
 
 
 
 
 
 
   Shibuya (2)
 
 
 
 
 
 

 


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Item 3. Legal Proceedings
We are subject to various claims and contingencies in the ordinary course of business, including those related to litigation, business transactions, employee-related matters and taxes, and others. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we will record 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 assurance that such 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 believe 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 its August 19, 2010 written determination, the EEOC has invited the parties to engage in informal conciliation. If the parties are unable to reach a settlement which is acceptable to the EEOC, the EEOC will advise the parties of the court enforcement alternatives available to Ms. Hsu, aggrieved persons, and the EEOC. We have not recorded a provision for this matter and are working cooperatively with the EEOC to resolve the claim in a manner acceptable to all parties. We do not believe at this time that any settlement will involve a payment of damages in an amount that would be material to and adversely affect our business, financial position, and results of operations or cash flows.
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. This matter is now proceeding in arbitration.
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. This matter is now proceeding in arbitration.
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. This matter is now proceeding in arbitration.
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.

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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. This matter is now proceeding in arbitration.
We do not have insurance coverage for the above matters. We have accrued an estimate for the loss contingency for each of the above matters (excluding the Hsu case as noted above) in our accompanying consolidated balance sheet as of December 31, 2012. We may have an exposure to loss in excess of the amounts accrued, however, an estimate of such potential loss cannot be made at this time. Moreover, 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, larger than our estimate, which could have a material adverse effect upon our financial condition and results of operations.
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 any of these matters be decided against us, we could not only incur liability but also experience an increase in similar suits and suffer reputational harm.
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.



28


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 who purchased our common stock between December 19, 2006 and August 17, 2010. 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 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 to which we must respond by April 1, 2013. 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 and results of operations.

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 recently settled one of these cases with no monetary liability to the Company.  The Company recently prevailed on the sexual harassment claims in another of these cases.  While the ultimate resolution of the remaining claims cannot be determined, in light of the favorable ruling in one of these cases, the amount of settlement in the other of these cases, and based on information available at this time regarding the remaining cases, we believe, but we cannot provide assurances that, the amount and ultimate liability, if any, with respect to these remaining actions will not materially affect our business, financial position, results of operations, or cash flows. 


    











29


Item 4. Mine Safety Disclosures
Not applicable.

PART II
 

Item 5. Market for Registrant’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 forth the range of high and low sales prices for our common stock and for the periods indicated:
 
Common Stock
 
High
 
Low
2011
 
 
 
Fourth Quarter
$
0.98

 
$
0.52

Third Quarter
1.21

 
0.75

Second Quarter
1.69

 
0.70

First Quarter
1.72

 
0.88

2012
 
 
 
Fourth Quarter
$
1.61

 
$
0.83

Third Quarter
1.70

 
0.82

Second Quarter
1.09

 
0.75

First Quarter
1.21

 
0.63

(b) Holders
On February 28, 2013 there were 1,267 record holders and approximately 9,000 beneficial holders of our common stock.
(c) Dividends
As a public company, we have not paid any cash dividends. 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, 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 120,000 to 230,000 with par value of $0.0001 per share.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
See Note 14, Share-Based Compensation to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(f) Recent Sales of Unregistered Securities
Share numbers (but not dollar amounts) below are shown in thousands.
Issuance of Lion Warrants - On each of March 13, 2009, March 24, 2011, April 26, 2011, July 7, 2011 and July 12, 2011, we issued warrants to Lion to purchase a total of 16,000, 760, 3,063, 1,445, and 338, respectively, shares of common stock. Each of the warrants was issued to Lion in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 (Securities Act), in connection with entering into the Lion Credit Agreement and the Investment Agreement. We did not receive any proceeds from the issuance of the warrants to Lion.
Issuance of Shares to Investors - On April 26, 2011, we (1) issued a total of 15,777 initial shares of common stock to a group of Investors (as defined below) at a price of $0.90 per share in cash, for net cash proceeds of approximately $12.4 million, and

30


(2) granted to such Investors rights to purchase a total of up to 27,443 additional shares of common stock at a price of $0.90 per share in cash, subject to adjustment in certain circumstances. On July 7, 2011, we issued a total of 6,667 shares of common stock to the Investors upon exercise of their purchase rights at a price of $0.90 per share in cash and on July 12, 2011, we issued a total of 1,740 shares of common stock to the Investors upon exercise of their purchase rights at a price of $0.90 per share in cash. The July 7, 2011 and July 12, 2011 transactions resulted in net cash proceeds of approximately $6.6 million. All of these shares and the purchase rights were issued in private placements exempt from registration pursuant to Section 4(2) of the Securities Act. We used the proceeds from the issuance and sale of the shares for working capital and general corporate purposes. On October 23, 2011, the remaining 19,036 Investors' right to purchase shares of common stock expired.
Issuance of Shares to Dov Charney - On November 26, 2010, we sold 1,130 treasury shares of common stock to Dov Charney, our Chairman and Chief Executive Officer, at a price of $1.48 per share in cash, for total cash consideration of $1.65 million. These shares were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act. Proceeds of the sale were used to facilitate equity grants to certain of our employees and to fund the payment of the related withholding taxes for such grants.
On March 24, 2011, we sold to Mr. Charney 1,802 shares of common stock at a price of $1.11 per share in cash, for total consideration of approximately $2.0 million. These shares were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act. We used the proceeds from the issuance and sale of these shares for working capital and general corporate purposes.
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 $4.7 million, 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. These shares were issued or are issuable to Mr. Charney, in exchange for the three promissory notes owed by the Company to Mr. Charney, pursuant to the exemption under Section 3(a)(9) of the Securities Act (See Note 12-Related Party Transactions, to the Consolidated Financial Statements).
On April 27, 2011, subject to receipt of stockholder approval, we (1) agreed to issue to Mr. Charney 778 initial shares of common stock at a price of $0.90 per share in cash, (2) granted to Mr. Charney the right to purchase a total of up to 1,556 additional shares of common stock, subject to adjustment in certain circumstances, and (iii) granted to Mr. Charney the right to receive up to 37,980 shares of common stock as anti-dilution protection if the market price of the common stock meets certain thresholds during certain measurement periods. On July 7, 2011, Mr. Charney purchased the 778 initial shares of common stock for total cash consideration of $0.7 million. The shares, the purchase rights and the right to receive the anti-dilution protection were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act. We used the proceeds from the issuance and sale of the shares for working capital and general corporate purposes.
On October 23, 2011, the number of shares Mr. Charney would have the right to receive as anti-dilution protection, as described above, was reduced from 37,980 shares to 20,416 shares, as the Investors' right to purchase additional shares of common stock expired on such date. On October 24, 2011, Mr. Charney's right to purchase 1,556 additional shares of common stock shares expired without having been exercised.
(g) Stock Price Performance Graph
The graph below compares the cumulative total return of our common stock from December 31, 2008 through December 31, 2012 with the cumulative total return of companies comprising the Dow Jones Industrial Average, the S&P Retail Index, and the S&P500. The graph plots the growth in value of an initial investment of $100 in each of our common stock, the Dow Jones Industrial Average, the S&P Retail Index, and the S&P500 over the indicated time periods, 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.



31


Dates
American Apparel
 
S&P Retail
 
S&P 500
 
Dow
December 31, 2007
100.00

 
100.00

 
100.00

 
100.00

December 31, 2008
13.27

 
68.12

 
61.51

 
66.16

December 31, 2009
20.67

 
100.29

 
75.94

 
78.61

December 31, 2010
11.07

 
124.01

 
85.65

 
87.28

December 31, 2011
4.80

 
127.63

 
85.65

 
92.10

December 31, 2012
6.73

 
159.31

 
97.13

 
97.79



32


Item 6. Selected Financial Data
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, 2012, 2011 and 2010 and the selected historical financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2012 and 2011 have been derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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, 2009 and 2008 and the selected historical financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2010, 2009 and 2008 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 Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.
 
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In Thousands Except Per Share Data)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
617,310

 
$
547,336

 
$
532,989

 
$
558,775

 
$
545,050

Gross profit
$
327,383

 
$
294,900

 
$
279,909

 
$
319,912

 
$
294,421

Income (loss) from operations
$
962

 
$
(23,293
)
 
$
(50,053
)
 
$
24,415

 
$
36,064

Net (loss) income
$
(37,272
)
 
$
(39,314
)
 
$
(86,315
)
 
$
1,112

 
$
14,112

Per Share Data:
 
 
 
 
 
 
 
 
 
Net (loss) earnings per common share - basic
$
(0.35
)
 
$
(0.42
)
 
$
(1.21
)
 
$
0.02

 
$
0.20

Net (loss) earnings per common share - diluted
$
(0.35
)
 
$
(0.42
)
 
$
(1.21
)
 
$
0.01

 
$
0.20

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
105,980

 
92,599

 
71,626

 
71,026

 
69,490

Diluted
105,980

 
92,599

 
71,626

 
76,864

 
70,317

Consolidated Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Total assets
$
328,212

 
$
324,721

 
$
327,950

 
$
327,579

 
$
333,609

Working capital (1)
$
80,022

 
$
97,013

 
$
3,379

 
$
121,423

 
$
83,069

Total long-term debt less current maturities (2)
$
112,856

 
$
98,868

 
$
5,597

 
$
71,372

 
$
72,328

Stockholders’ equity
$
22,084

 
$
48,130

 
$
75,024

 
$
157,341

 
$
136,412

___________________________
(1) Excludes fair value of warrants of $17,241, $9,633, and $993 as of December 31, 2012, 2011, and 2010, respectively.
(2) Includes capital leases.
            
        





33




34


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with Part II, Item 6 “Selected Financial Data” and our audited consolidated financial statements and the related notes thereto included in Part II, 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” and “Special Note Regarding Forward-Looking 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.
Overview
We are a vertically 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 January 31, 2013, we had approximately 10,000 employees and operated 251 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 also operate a global e-commerce site that serves over 60 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 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, warehousing, and distribution 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. During the first half of 2013 we are transitioning our distribution operations to a distribution center in 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.
We report the following four operating 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 and our online consumer operations in the U.S. The U.S. Retail segment consists of our retail store operations in the United States, which were comprised of 140 retail stores as of December 31, 2012. The Canada segment consists of our retail, wholesale and online consumer operations in Canada. As of December 31, 2012, the retail operations in the Canada segment were comprised of 35 retail stores. The International segment consists of our retail, wholesale and online consumer operations outside of the United States and Canada. As of December 31, 2012, the retail operations in the International segment comprised of 76 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 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.



35


The following table details, by segment, the change in retail store count during the years ended December 31, 2012, 2011 and 2010:
Stores Opened by Year
 
United States
 
Canada
 
International
 
Total
Stores open as of December 31, 2009
160

 
40

 
81

 
281

2010
 
 
 
 
 
 
 
Opened
1

 
2

 
3

 
6

Closed
(4
)
 
(2
)
 
(8
)
 
(14
)
Stores open as of December 31, 2010
157

 
40

 
76

 
273

2011
 
 
 
 
 
 
 
Opened
1

 

 
4

 
5

Closed
(15
)
 
(3
)
 
(11
)
 
(29
)
Stores open as of December 31, 2011
143

 
37

 
69

 
249

2012
 
 
 
 
 
 
 
Opened
1

 

 
9

 
10

Closed
(4
)
 
(2
)
 
(2
)
 
(8
)
Stores open as of December 31, 2012
140

 
35

 
76

 
251

Comparable Store Sales
The table below shows the increase (decrease) in comparable store sales for our retail and online stores, by quarter, for the years ended December 31, 2012, 2011, and 2010 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 for the following twelve month period 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 in the current period and the prior year comparable period using the weighted-average foreign exchange rate for the prior comparable period to achieve a consistent basis for comparison.
 
For the Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
Full year
2012
16%
 
16%
 
20%
 
11%
 
15%
Number of Stores
243
 
242
 
240
 
238
 
 
2011
(5)%
 
1%
 
3%
 
8%
 
2%
Number of Stores
249
 
248
 
244
 
241
 
 
2010
(10)%
 
(15)%
 
(15)%
 
(11)%
 
(13)%
Number of Stores
249
 
257
 
261
 
260
 
 


Executive Summary
Results of Operations
Net sales for the year ended December 31, 2012 increased $69,974, or 12.8%, to $617,310 from $547,336 reported for the year ended December 31, 2011 due to higher sales across all of our segments.
Net sales at our U.S. Wholesale segment increased by $26,324, or 16.8%, 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 primarily as a result of the implementation of a new e-commerce platform, which improved web store functionality, as well as a result of targeted online advertising and promotion efforts.

36


Net sales at our U.S. Retail, Canada and International segments increased by $43,650, or 11.2%, due to strong performance across categories, particularly women's denim and other apparel and accessories, as well as better inventory composition driven by improvement in distribution operations and allocation efforts.
Gross margin for the year ended December 31, 2012 was 53.0% compared to 53.9% for the year ended December 31, 2011. The decrease in gross margin was due to the impact of planned promotional activities and the effect of warehouse type clearance sales as part of our overall inventory reduction strategy.
Operating expenses include selling, general and administrative costs, and retail store impairment charges, and as a percentage of sales decreased from 58.1% in 2011 to 52.9% in 2012. Operating expenses were $326,421 as compared to $318,193 for the years ended December 31, 2012 and 2011, respectively. Excluding the effects of depreciation, amortization, impairment charges and share-based compensation expenses between the two periods, operating expenses as a percentage of sales decreased from 52.3% to 47.9%. The decrease as a percentage of sales was primarily due to a reduction in corporate overhead expenses and the fixed cost leverage as a result of increased sales. Consequently, we generated income from operations of $962 for the year ended December 31, 2012 as compared to loss from operations of $23,293 for the year ended December 31, 2011.
Net loss for the year ended December 31, 2012 was $37,272 as compared to $39,314 for the year ended December 31, 2011. In 2012, the net loss included interest expense of $41,559 and unrealized loss of $4,126 on change in fair value of our warrants liability, offset by a $11,588 gain on extinguishment of debt related to a first quarter 2012 amendment to the Lion Credit Agreement (as defined below). In 2011, the net loss included interest expense of $33,167, a loss of $3,114 on extinguishment of debt related to a first quarter 2011 amendment to the Lion Credit Agreement. This was offset by an unrealized gain of $23,467 on change in fair value of our warrant and purchase rights liability. The higher interest expense is due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement (as defined below). See "Results of Operations - Year ended December 31, 2012 compared to Year ended December 31, 2011" for further details. 
Liquidity Trends
We generate cash primarily through the sale of products manufactured by us at our retail stores and through our wholesale operations. Primary uses of cash are for 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, 2012, we had approximately $12,853 in cash and $9,177 of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement (as defined below). We had $26,113 outstanding on a $50,000 revolving credit facility under the Crystal Credit Agreement with Crystal Financial LLC ("Crystal"), $30,000 of term loans outstanding under the Crystal Credit Agreement, $4,387 outstanding on a C$11,000 revolving credit facility under the Bank of Montreal Credit Agreement, and $109,680 of term loans outstanding under the Lion Credit Agreement with Lion Capital LLP ("Lion"). 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.
On March 13, 2012, we replaced our existing revolving credit facility of $75,000 with Bank of America ("BofA") with a three year $80,000 senior secured credit facility with Crystal and other lenders. Among other provisions, the Crystal Credit Agreement requires that we maintain an arrangement similar to a traditional lockbox and contains certain subjective acceleration clauses. In addition, Crystal may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable. Proceeds from the Crystal Credit Agreement were used to repay the existing revolving credit facility with BofA, fees and expenses related to the transaction, and for general working capital purposes. See Note 7, Revolving Credit Facilities and Current Portion of Long-Term Debt to our consolidated financial statements under Part II, Item 8.
On December 29, 2012 , the Company's wholly-owned subsidiaries, American Apparel Canada Wholesale, Inc. and American Apparel Canada Retail Inc. (collectively, the “CI Companies”), entered into a third amendment to the Bank of Montreal Credit Agreement that extended the maturity date to December 31, 2013.
Over the past years, our operations have been funded through a combination of borrowings from related and unrelated parties, bank debt and lease financing, proceeds from the exercise of purchase rights and issuance of common stock. Our principal liquidity requirements are for working capital and capital expenditures and to fund operating losses. We fund our liquidity requirements primarily through cash on hand, cash flow from operations, borrowings from revolving credit facilities and term loans under the Crystal and Lion Credit Agreements. Those credit agreements contain financial covenants requiring us to meet specified targets and our inability to achieve such financial targets or to obtain a waiver of compliance would negatively impact the availability of credit under those credit facilities or result in an event of default.
We continue to evaluate other alternative sources of capital for ongoing cash needs, however, there can be no assurance we will be successful in those efforts.

37


As a result of these financing transactions described above, we believe that we will have sufficient financing commitments to meet funding requirements for the next twelve months.
Management Plan
We are in the process of executing a plan, which we commenced in 2010, to improve our operating performance and our financial position. This plan includes optimizing production levels at our manufacturing facilities including raw material purchases and labor; reducing inventories; streamlining our logistics operations; web platform refinement; reducing corporate expenses; merchandise price rationalization in the wholesale and retail channels; store renovations; and improving merchandise distribution and allocation procedures. Some of our key initiatives in 2012 include:
New production forecasting system - In September 2012 we implemented a new production forecasting and inventory allocation system that integrates our sales forecasts with our retail inventory tracking system and therefore allows us to better manage our production schedule. It also gives us greater visibility into seasonal and other trends, which will enable a faster reaction to changes in demand.
Refined promotion and inventory allocation strategy - The second and the third quarter of 2012 benefited from an adjustment to the global promotional strategy and improvements to our in-stock position at stores.  We leveraged targeted promotions, which established pricing incentives for customers to buy multiple items in volume driving categories.  Unit sales increased as a result of this change as well as from improvements to our allocation and logistics processes.  During this period, we also ran successful markdowns on aged and seasonal merchandise.  We believe this helped decrease inventory levels in slower turning goods, increase foot traffic, and improve sales on items on markdown as well as full price items.   
New e-commerce platform - In September 2012 we implemented a new online store platform for our U.S. online store 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. 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.
As a result of the above initiatives, we were able to reduce our inventory unit levels by approximately 20%, or 4,500 units.
Reduced corporate expenses - During 2012, our general and administrative expenses decreased by 6%, or $6,758, and as a percentage of sales decreased from 19.0% in 2011 to 15.8% in 2012. This decrease was achieved primarily as a result of a $6,482 reduction in professional fees.
Continued RFID implementation - Throughout 2012, we continued to enhance our stores by installing sales conversion tracking device and radio frequency identification (RFID) tracking systems. As of the end of February 2013, we have implemented RFID systems at approximately 213 stores worldwide. We believe that these systems will enhance sales through improvements in stock positions and replenishment activities.
New distribution center - In June 2012 we entered into a new operating lease agreement for a new distribution center located in California and expect to fully transition our distribution operations into this new facility in the first half 2013. We believe that the new distribution center will contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales.
We continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.
Although we have made significant improvements under this plan, there can be no assurance that further planned improvement will be successful.



38




Results of Operations
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
$
182,778

 
29.6
%
 
$
156,454

 
28.6
 %
U.S. Retail
198,886

 
32.2
%
 
174,837

 
31.9
 %
Canada
63,669

 
10.3
%
 
61,865

 
11.3
 %
International
171,977

 
27.9
%
 
154,180

 
28.2
 %
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 tax
(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 $26,324, or 17%, to $182,778 for the year ended December 31, 2012 as compared to $156,454 for the year ended December 31, 2011. Wholesale net sales, excluding online consumer net sales, increased $17,476, or 13%, 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 $8,848, or 36%, to $33,167 for the year ended December 31, 2012 as compared to $24,319 for the year ended December 31, 2011, as a result of the implementation of a new e-commerce platform, which improved web store functionality, as well as a result of targeted online advertising and promotion efforts.
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.

39


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 2011.
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 2011.
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 2011.
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 $17,797, or 12%, to $171,977 for the year ended December 31, 2012 as compared to $154,180 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 $178,700, or 16% higher when compared to 2011.
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 2011.
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 2011.
Online consumer net sales increased $3,055, or 18%, to $19,961 for the year ended December 31, 2012 as compared to $16,906 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 $20,549, or 21% higher when compared to 2011.
Gross margin: Gross margin as a percentage of net sales was 53.0% 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.

40


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 determined that the fair value of the assets at eleven retail stores was less than their carrying value at December 31, 2012 based on sales performance, and we projected future cash flows over the respective remaining lease terms for these retail stores. 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 the Crystal Credit Agreement. Interest rates on our various debt facilities and capital leases ranged from 0.4% to 18.0% for the year ended December 31, 2012 and 5% to 18% for the year ended December 31, 2011. Interest expense for the year ended December 31, 2012 mainly consisted of interest on the Lion Credit Agreement of $22,561, interest on the Crystal Credit Agreement of $5,278, interest on the BofA Credit Agreement of $512 and amortization of debt discount and deferred financing cost of approximately $10,261. Interest paid in cash was $10,954 for the year ended December 31, 2012.
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. In 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. 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.



41


Year Ended December 31, 2011 compared to Year Ended December 31, 2010
(Amounts in thousands)
 
 
For the Years Ended December 31,
 
2011
 
% of net sales
 
2010
 
% of net sales
U.S. Wholesale
$
156,454

 
28.6
 %
 
$
148,997

 
28.0
 %
U.S. Retail
174,837

 
31.9
 %
 
177,610

 
33.3
 %
Canada
61,865

 
11.3
 %
 
65,638

 
12.3
 %
International
154,180

 
28.2
 %
 
140,744

 
26.4
 %
Total net sales
547,336

 
100.0
 %
 
532,989

 
100.0
 %
Cost of sales
252,436

 
46.1
 %
 
253,080

 
47.5
 %
Gross profit
294,900

 
53.9
 %
 
279,909

 
52.5
 %
 
 
 
 
 
 
 
 
Selling expenses
209,841

 
38.3
 %
 
218,198

 
40.9
 %
General and administrative expenses
104,085

 
19.0
 %
 
103,167

 
19.4
 %
Retail store impairment
4,267

 
0.8
 %
 
8,597

 
1.6
 %
Loss from operations
(23,293
)
 
(4.3
)%
 
(50,053
)
 
(9.4
)%
 
 
 
 
 
 
 
 
Interest expense
33,167

 


 
23,752

 


Foreign currency transaction loss (gain)
1,679

 


 
(686
)
 


Unrealized (gain) loss on change in fair value of warrants and purchase rights
(23,467
)
 


 
993

 


Loss on extinguishment of debt
3,114

 
 
 

 
 
Other (income) expense
(193
)
 


 
39

 


Loss before income taxes
(37,593
)
 


 
(74,151
)
 


Income tax provision
1,721

 


 
12,164

 


Net loss
$
(39,314
)
 


 
$
(86,315
)
 


 
 
 
 
 
 
 
 
U.S. Wholesale: Total net sales for the U.S. Wholesale segment increased $7,457, or 5%, to $156,454 for the year ended December 31, 2011 as compared to $148,997 for the year ended December 31, 2010. Wholesale net sales, excluding online consumer net sales, increased $4,386, or 3%, to $132,135 for the year ended December 31, 2011 as compared to $127,749 for the year ended December 31, 2010, primarily due to the launch of a new wholesale catalog and focused effort on expanding our wholesale customer base, specifically, to imprintable wholesale customers. We also added new products to our wholesale offering that attracted a more diversified customer base.
Online consumer net sales increased $3,071, or 14%, to $24,319 for the year ended December 31, 2011 as compared to $21,248 for the year ended December 31, 2010, primarily as a result of functional improvements to our website and fulfillment process, and as well as a targeted online advertising and promotion effort.
U.S. Retail: Net sales for the U.S. Retail segment decreased $2,773, or 2%, to $174,837 for the year ended December 31, 2011 as compared to $177,610 for the year ended December 31, 2010. The decline is due to store closures, partially offset by an increase in average sales prices, warehouse sales in major cities and a modest improvement in our comparable store sales. Although we experienced improvements in comparable store sales throughout the latter half of 2011, these improvements were offset by lower comparable store sales in the first half of the year.
The number of U.S. Retail stores in operation decreased from 157 at December 31, 2010 to 143 at December 31, 2011, which resulted in a $7,449 sales decrease. Warehouse sales contributed $3,165 in 2011 as compared with $509 in 2010. In addition, comparable store sales for the year ended December 31, 2011 increased by 1%, or $981 over the prior year.
Canada: Net sales for the Canada segment decreased $3,773, or 6%, to $61,865 for the year ended December 31, 2011 as compared to $65,638 for the year ended December 31, 2010. The decrease is primarily due to lower sales in the retail sales channel. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total net sales for the Canada segment for 2011 would have been approximately $59,380, or 10% lower when compared to 2010.

Retail net sales decreased $3,442, or 7%, to $48,527 for the year ended December 31, 2011 as compared to $51,969 for the year ended December 31, 2010. The decrease is due to lower comparable store sales and lost sales from store closures, partially

42


offset by favorable foreign currency exchange rates. Comparable store sales for the year ended December 31, 2011 decreased by 12%, or $6,110. From December 31, 2010 to December 31, 2011, the number of retail stores in operation in the Canada segment decreased from 40 to 37, which resulted in a $536 sales decrease. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total retail net sales for the Canada segment for 2011 would have been approximately $46,577, or 10% lower when compared to 2010.
Wholesale net sales decreased $423, or 4%, to $11,492 for the year ended December 31, 2011 as compared to $11,915 for the year ended December 31, 2010. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total wholesale net sales for the Canada segment for 2011 would have been approximately $11,030, or 7% lower when compared to 2010.
Online consumer net sales for the years ended December 31, 2011 was $1,846, essentially flat when compared to the prior year.
International: Net sales for the International segment increased $13,436, or 10%, to $154,180 for the year ended December 31, 2011 as compared to $140,744 for the year ended December 31, 2010. The increase is due to higher sales in both the retail and online sales channels. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total net sales for the international segment for 2011 would have been approximately $146,012, or 4% higher when compared to 2010.
Retail net sales increased $10,068, or 9%, to $126,868 for the year ended December 31, 2011 as compared to $116,800 for the year ended December 31, 2010. The increase is due to higher comparable store sales and favorable foreign currency exchange rates, partially offset by lost sales from store closures. Comparable store sales for the year ended December 31, 2011 increased by 6%, or $6,494. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total retail net sales for the international segment for 2011 would have been approximately $120,176, or 3% higher when compared to 2010. From December 31, 2010 to December 31, 2011, the number of international retail segment stores in operation decreased from 76 to 69, which resulted in a $4,200 sales decrease.
Wholesale net sales decreased $1,068, or 9%, to $10,406 for the year ended December 31, 2011 as compared to $11,474 for the year ended December 31, 2010. The decrease is primarily due to a reduction in customer demand in Germany, partially offset by more sales from new wholesale customers in the U.K. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total wholesale net sales for the international segment for 2011 would have been approximately $9,952, or 8%n lower when compared to 2010.
Online consumer net sales increased $4,436, or 36%, to $16,906 for the year ended December 31, 2011 as compared to $12,470 for the year ended December 31, 2010. The increase is attributable to higher online sales in the U.K. and Japan as a result of improvements to the online shopping experience and promotional campaigns. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total online consumer net sales for the international segment for 2011 would have been approximately $15,884, or 21% higher when compared to 2010.
Cost of sales: Cost of goods sold for the year ended December 31, 2011 was $252,436 and was essentially unchanged from the prior year. As a percentage of net sales, cost of goods sold decreased by 1.4% to 46.1% from 47.5% for the years ended December 31, 2011 and December 31, 2010, respectively. The decrease in cost of goods sold as a percentage of sales was primarily due to an improvement in our manufacturing labor productivity, partially offset by lower production volumes and the resulting lower absorption of our fixed overhead costs and the effect of higher yarn prices on our cost of sales.
During 2010 and throughout the first half of 2011, we experienced continual increases in the costs of cotton and fabric used in our manufacturing processes. Cotton prices reached a high in the second quarter of 2011 and started to decrease in the third quarter of 2011. While we believe cotton and fabric prices have now stabilized, the impact of cotton price decreases is not expected to be reflected in our operating results until the second half of 2012.
Selling expenses: Selling expenses decreased $8,357, or 4%, to $209,841 for the year ended December 31, 2011 from $218,198 for the year ended December 31, 2010. The change was attributable to decreases of $7,576 in facility-related expenses (primarily rent) and $3,139 in advertising, partially offset by an increase of $535 for a new wholesale catalog. As a percentage of sales, selling expenses decreased to 38.3% in the year ended December 31, 2011 from 40.9% in the year ended December 31, 2010.
General and administrative expenses: General and administrative expenses increased $918, or 1%, to $104,085 the year ended December 31, 2011 as compared to $103,167 for the year ended December 31, 2010. As a percentage of sales, general and administrative expenses decreased to 19.0% in 2011 from 19.4% in 2010. The change was primarily due to increases of $3,095 in stock-based compensation and $2,180 in salaries and wages, offset by decreases of $3,034 in depreciation expense and $2,756 in professional fees (primarily legal and accounting fees). The increase in stock-based compensation is primarily due to expenses associated with anti-dilution provisions for Dov Charney related to the company's financing transactions in the

43


second and third quarter of 2011 and the accelerated vesting of restricted shares related to the departure of an executive officer (see Notes 13 and 14, Stockholders' Equity and Share Based Compensation to our consolidated financial statements under Part II, Item 8). The increase in salaries is primarily due to the addition of new senior management positions.
Retail store impairment charges: At December 31, 2011, we performed a recoverability test and an impairment test of our long lived assets at our retail stores and determined that the fair value of the assets at eleven retail stores were less than their carrying value at December 31, 2011 based on sales performance through the date of issuance of the financial statements, and projected future cash flows over the respective remaining lease terms for these retail stores. We recorded impairment charges relating primarily to certain retail store leasehold improvements in the U.S. Retail, Canada and International segments of $4,267 and $8,597 for the years ended December 31, 2011 and 2010, respectively.
Interest expense: Interest expense increased $9,415 to $33,167 for the year ended December 31, 2011 from $23,752 for the year ended December 31, 2010 primarily from an increase in the average balance of debt outstanding. Interest rates on our various debt facilities and capital leases ranged from 5% to 18.0% for the year ended December 31, 2011 and 3.4% to 18.0% for the year ended December 31, 2010. Interest expense for the year ended December 31, 2011 primarily consisted of amortization of debt discount and deferred financing cost of approximately $9,024, interest on the Lion Credit Agreement of approximately $18,711, of which approximately $17,550 was paid in kind, and interest on borrowings under our revolving credit facilities. Interest paid in cash was $5,535.
Foreign currency transaction loss (gain): Foreign currency transaction loss was $1,679 for the year ended December 31, 2011, as compared to a gain of $686 for the year ended December 31, 2010. The change related to a lower valuation of the U.S. dollar relative to foreign currencies with which we transact our business.
Unrealized (gain) loss on change in fair value of warrants and purchase rights: The $23,467 unrealized gain in the fair value of warrants and purchase rights for the year ended December 31, 2011 relates primarily to the issuance of purchase rights to a group of investors in April 2011 and the subsequent decrease in the fair value of both the warrants and the purchase rights. See Note 13, Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
Loss on extinguishment of debt: During the year ended December 31, 2011, we recorded a loss of $3,114 on extinguishment of debt associated with the amended terms of the Lion Credit Agreement. See Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Income tax provision: Income tax provision was $1,721 for the year ended December 31, 2011 as compared to $12,164 for the year ended December 31, 2010. In 2010, 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. Similarly, we recognized no tax benefits on our loss before income taxes in 2011. See Note 11, Income Taxes to our consolidated financial statements under Part II, Item 8.


Liquidity and Capital Resources
Summary
As of December 31, 2012, we had approximately $12,853 in cash and $9,177 of availability for additional borrowings under the $80,000 Crystal Credit Agreement and the C$11,000 Bank of Montreal Credit Agreement. We had outstanding $26,113 on the $50,000 revolving credit facility under the Crystal Credit Agreement, $30,000 of term loans outstanding under the Crystal Credit Agreement, $4,387 outstanding under the Bank of Montreal Credit Agreement, and $109,680 (including paid-in-kind interest of $16,469 and net of discount of $27,929) of term loans outstanding under the Lion Credit Agreement. Income from operations was $962 for the year ended December 31, 2012. 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.
On March 13, 2012, we replaced our $75,000 senior secured revolving credit facility with BofA with the Crystal Credit Agreement, a three year $80,000 senior secured credit facility with Crystal. In addition, during 2012, the initial borrowing base under the revolving credit facility was increased by $12,500 for the value associated with the American Apparel brand name. This initial increase was ratably reduced to $0 during the period from April 13, 2012 through January 1, 2013.
In connection with the Crystal Credit Agreement, we entered into a seventh amendment to the Lion Credit Agreement, which among other things: (i) consented to the Crystal Credit Agreement, (ii) extends the maturity date of the term loan with Lion Capital LLP ("Lion") to December 31, 2015, (iii) reduced the minimum Consolidated EBITDA amounts for any twelve consecutive months as determined at the end of each fiscal quarter (Quarterly Minimum Consolidated EBITDA), (iv) modified certain financial covenants and covenants related to capital expenditures and (v) required a minimum of 5% of each interest payment on the outstanding principal in cash starting on September 1, 2012.

44


On February 6, 2013, we entered into amendments to both the Crystal Credit Agreement (the "Crystal Fifth Amendment") and the Lion Credit Agreement (the "Lion Eleventh Amendment). The Crystal Fifth Amendment, among other things, (i) allows us to borrow up to $7,500 (with quarterly step downs in availability to December 31, 2013) based on the American Apparel brand name and for such loans to remain outstanding until January 1, 2014; (ii) extends the applicability of the existing minimum EBITDA covenant for the remainder of 2013, (iii) adds a minimum excess availability covenant for the period of December 16, 2013 through February 1, 2014, and (iv) raises the amount of capital expenditures that we are allowed to make in 2012 from $17,000 to $18,000. The Lion Eleventh Amendment, among other things, conforms the minimum EBITDA covenant to the revised minimum EBITDA covenant under the Crystal Credit Agreement.
On December 29, 2012 , our wholly-owned subsidiaries, American Apparel Canada Wholesale, Inc. and American Apparel Canada Retail Inc., entered into a third amendment to the Bank of Montreal Credit Agreement that extended the maturity date to December 31, 2013.
As a result of our improved operating performance and the attendant added financial flexibility, we believe that we will have sufficient financing commitments to meet funding requirements for the next twelve months.
Over the past years, our operations have been funded through a combination of borrowings from related and unrelated parties, bank debt and lease financing, proceeds from the exercise of purchase rights and issuance of common stock. Our principal liquidity requirements are for working capital interest payments, capital expenditures and to fund operations. We fund our liquidity requirements primarily through cash on hand, cash flow from operations and borrowings under our existing credit facilities. Those credit agreements contain covenants requiring us to meet specified targets for minimum consolidated EBITDA and our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under those credit facilities or result in an event of default.
We are in the process of executing a plan to improve the operating performance and our financial position. During 2012, we improved our distribution operations and timing of store replenishments, implemented a new e-commerce platform, refined our promotion and inventory allocation strategy and implemented a new production forecasting system.  These initiatives allowed us to reduce our unit inventory levels and thereby improve working capital.  We also continued to reduce corporate expenses and enhance store inventory management by installing RFID tracking systems in our stores worldwide.  Finally, we are in the process of transitioning our distribution operations into a new modern distribution center located in California.
For 2013, we intend to complete the installation of RFID tracking systems in all of our stores, rationalize merchandise pricing in the wholesale and retail channels, continue to renovate our stores and continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.
Although our plan reflects improvements in these trends, there can be no assurance that our plan to improve the operating performance and our financial position will be successful.
Cash Flow Overview
Cash Flow Overview for the years ended December 31, 2012, 2011 and 2010 is as follows (dollars in thousands):
 
2012
 
2011
 
2010
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
23,589

 
$
2,305

 
$
(32,370
)
Investing activities
(24,853
)
 
(10,759
)
 
(15,662
)
Financing activities
4,214

 
12,582

 
48,172

Effect of foreign exchange rate changes on cash
(390
)
 
(1,491
)
 
(1,530
)
Net increase (decrease) in cash
$
2,560

 
$
2,637

 
$
(1,390
)
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, non-cash interest expense from the amortization of deferred financing costs, loan discounts and 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

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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 also invested in 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. 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, 2011
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.

Non-cash expenses include depreciation, amortization, loss on disposal of property and equipment, foreign exchange transaction gain, allowance for inventory 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 activities was $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.

Year Ended December 31, 2010
Cash used by operating activities was $32,370. This was a result of non-cash expenses of $78,421 offset by net losses of $86,315 and a decrease in working capital requirements of $24,476.
Non-cash expenses include depreciation, amortization, loss on disposal of property and equipment, foreign exchange transaction gain, allowance for inventory shrinkage and obsolescence, change in fair value of warrant liability, accrued interest-in-kind, impairment charges, stock-based compensation, bad debt expense, deferred income taxes, and deferred rent and cash used by changes in operating assets and liabilities.
The decrease in working capital was due to an increase in trade receivables of $1,746, increases in inventory of $37,239, a decreases in prepaid expenses and other current assets of $624, increase in other long-term assets of $629, an increase in accounts payable and accrued expenses and other liabilities of $13,725 and an increase in income taxes of $789. The increase in inventory was due to higher levels of production during fiscal 2010, increased manufacturing costs, and introduction of new product styles.


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Cash used by investing activities was $15,662. This consisted of increased net investment in property and equipment of $4,696 for the U.S. Wholesale segment, $7,584 for the U.S. Retail segment, $1,456 for the Canada segment and $1,965 for the International segment. During this period, one new retail store was opened in the United States, two new retail store were opened in Canada, and three 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 activities was $48,172. This consisted primarily from net borrowings of $50,852 under our revolving credit facilities, offset by net cash overdraft, stock-based compensation expense and the repayments of capital lease obligations. Borrowings were used primarily to fund our working capital needs required for higher production levels.

Debt Agreements and Other Capital Resources
Revolving Credit Facilities
Crystal Credit Facility - On March 13, 2012, we replaced our $75,000 senior secured revolving credit facility with BofA with a $80,000 senior credit facility with Crystal and other lenders. The Crystal Credit Agreement calls for the $80,000 to be allocated between an asset-based revolving credit facility of $50,000 and term loan of $30,000. The Crystal Credit Agreement matures on March 13, 2015.
Borrowings under the Crystal Credit Agreement, as amended, are subject to certain borrowing reserves based on eligible inventory and accounts receivable as established by Crystal and are collateralized by substantially all of our U.S. and U.K. assets and equity interests in certain of our foreign subsidiaries. Our available borrowing capacity at December 31, 2012 was $8,029.
Interest under the agreement was at the 90-day LIBOR plus 9.0%, and also included an unused facility fee ranging from 0.375% to 1.00% on the unused portion of the revolving credit facility, payable monthly. Additionally, the interest rate with respect to the brand name portion of the outstanding principal amount was at the 90-day LIBOR plus 19.75%.
The Crystal Credit Agreement also includes an early termination fee, if the term loan is prepaid or if the commitments under the revolving credit facility is permanently reduced, of 3.00% if such payment or reduction occurs the second anniversary of the agreement and 2.00% if such payment or reduction occurs in the third year.
Proceeds from the Crystal Credit Agreement were used to repay our existing BofA Credit Facility, fees and expenses related to the transaction, and for general working capital purposes. 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 29, 2012, we entered into an amendment to our existing revolving credit facility with Bank of Montreal (the "Bank of Montreal Credit Agreement") that extended the maturity date to December 31, 2013. The Bank of Montreal Credit Facility bears interest at the bank's prime rate (3.0% at December 31, 2012) plus 4.0% per annum payable monthly. The revolving credit facility is secured by liens on personal property on all present and future movable property of our Canadian operations. 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. Borrowings under the Bank of Montreal Credit Agreement are subject to certain advance provisions established by BofM. Our available borrowing capacity at December 31, 2012 was $1,148.
Lion Credit Agreement
We have a loan agreement with Lion Capital, LLC (“Lion” and the “Lion Credit Agreement”, respectively) that provided us with term loans in an aggregate principal amount equal to $80,000. The term loan, as amended, matures on December 31, 2015 and bears interest at a range between 15% and 18% per annum, depending on certain financial covenants, payable quarterly in arrears. For the year end December 31, 2012, the interest rate was 18% per annum. Additionally, for the period from October 1, 2012 to December 31, 2012, the interest rate was increased by 0.52%.
Beginning with the interest accruing from and after September 1, 2012, the Lion Credit Agreement provides for interest at a rate of 5% per annum to be paid in cash. The remainder of the interest, including the additional 0.52% interest, may be payable in kind or in cash at our option.
As of December 31, 2012, we had outstanding approximately $109,680 of second lien debt, net of discount and including accrued paid-in-kind interest, payable to Lion.

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The Lion Credit Agreement is subordinated to the Crystal Credit Agreement and contains customary representations, and warranties, events of default, affirmative covenants, negative covenants (which impose restrictions and limitations on, among other things, dividends, investments, asset sales, capital expenditures, and the ability to incur additional debt and liens), and other financial covenants. We are permitted to prepay the loans in whole or in part at any time at our option, with no prepayment penalty. See Financial Covenants below and Note 8, Long-Term Debt to our consolidated financial statements under Part II, Item 8.
Lion Warrants
As of December 31, 2012, 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 $17,222 at December 31, 2012 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.
SOF Warrants - As of December 31, 2012, SOF Investments, L.P. ("SOF") held warrants to purchase 1,000 shares of our common stock, with an exercise price of $2.148 per share, subject to adjustment under certain circumstances. These warrants expire on December 19, 2013. As of December 31, 2012, the estimated fair value of $19 is recorded as a current liability in our consolidated balance sheets. See Note 13, Stockholders' Equity to our consolidated financial statements under Part II, Item 8.
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