Financial report.

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timer Asked: Mar 3rd, 2018
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please read instrchtns ch1-7 and other pdf(i will post later). then finish Financial report.

i also have similar report for you, you can use it as reference.

AMERICAN APPAREL, INC FORM 10-K (Annual Report) Filed 03/05/13 for the Period Ending 12/31/12 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 747 WAREHOUSE STREET LOS ANGELES, CA 90021 213-488-0226 0001336545 APP 6770 - Blank Checks Retail (Apparel) Services 12/31 http://www.edgar-online.com © Copyright 2013, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________________________ FORM 10-K _________________________________________________ (Mark One)  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  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 Yes  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 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  No  No  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  No  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  No  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  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  Non-accelerated filer  Accelerated filer  (Do not check if a smaller reporting company) Smaller reporting company  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No  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. Table of Contents 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 forwardlooking 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; Table of Contents • 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. Table of Contents American Apparel, Inc. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012 TABLE OF CONTENTS PART I 5 Item 1. Business 5 Item 1A. Risk Factors 12 Item 2. Properties 22 Item 3. Legal Proceedings 27 Item 4. Mine Safety Disclosures 30 PART II 30 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30 Item 6. Selected Financial Data 33 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34 Item 7A. Quantitative and Qualitative Disclosures and Market Risks 54 Item 8. Financial Statements 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 93 Item 9A. Controls and Procedures 94 Item 9B. Other Information 96 PART III 96 Item 10. Directors, Executive Officers and Corporate Governance 96 Item 11. Executive Compensation 96 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 96 Item 13. Certain Relationships and Related Transactions and Director Independence 96 Item 14. Principal Accountant Fees and Services 96 PART IV 96 Exhibits and Financial Statement Schedules 96 Item 5. Item 15. Table of Contents 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. 5 Table of Contents 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 6 Table of Contents 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. 7 Table of Contents 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 independentminded. 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 8 Table of Contents 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 inhouse 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 9 Table of Contents 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 technologydriven 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 10 Table of Contents 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. 11 Table of Contents 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 12 Table of Contents 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). 13 Table of Contents 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. 14 Table of Contents 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. 15 Table of Contents 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; 16 Table of Contents • 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. 17 Table of Contents 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. 18 Table of Contents 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 costeffectively 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 Table of Contents 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. 20 Table of Contents 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. 21 Table of Contents 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 Los Angeles, California Los Angeles, California Hawthorne, California South Gate, California Garden Grove, California Commerce, California La Mirada, California Montreal, Quebec London, England Tokyo, Japan Seoul, South Korea Headquarters, Sewing, Cutting, and Distribution Knitting Facility Warehouse Facility Fabric Dyeing and Finishing Facility Cutting, Sewing, Garment Dyeing and Finishing Facility Cutting, Sewing, Knitting, Fabric Dyeing and Finishing Facility Warehouse Facility Distribution Center Offices, Distribution Offices Offices 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. 22 Table of Contents The following tables set forth American Apparel’s existing retail stores by geographic region, as of December 31, 2012 : Domestic Locations ( 140 ) Arizona (2) Scottsdale Tucson California (38) Arcadia Berkeley Camarillo Claremont Commerce Costa Mesa Gilroy Huntington Beach Irvine Spectrum Los Angeles— Echo Park Factory Store Hollywood Little Tokyo Los Feliz Melrose Robertson Westwood Village West Hollywood Malibu Manhattan Beach Colorado (2) Boulder Napa Palo Alto Pasadena Rancho Cucamonga San Diego— Fashion Valley Hillcrest Pacific Beach San Francisco— China Gate Haight Ashbury Union Street Santa Barbara Santa Clara Santa Cruz Santa Monica— Main Street Third Street Promenade Studio City Venice Ventura Florida (7) Boca Raton Miami Beach— Lincoln Road Sunset Drive Washington Ave. Orlando St. Augustine Wellington Georgia (2) Atlanta— Lenox Mall Little Five Points Massachusetts (4) Boston— Back Bay Newbury Street Cambridge Wrentham Michigan (3) Ann Arbor East Lansing Royal Oak Minnesota (2) Bloomington Minneapolis Hawaii (1) Honolulu— Ala Moana Missouri (1) Kansas City Illinois (7) Nebraska (1) Omaha Chicago— Belmont & Clark Gold Coast Lincoln Park State St. Wicker Park Evanston Schaumburg Nevada (3) Las Vegas— Boca Park Miracle Mile Premium Outlets New Jersey (4) Denver Louisiana (1) New Orleans Connecticut (2) New Haven South Norwalk District of Columbia (2) Georgetown Lincoln Square Maryland (4) Annapolis Baltimore Bethesda Silver Spring 23 Cherry Hill Edison Hoboken Paramus Table of Contents Domestic Locations (140) (cont'd.) New York (23) Brooklyn— Carroll Gardens Court Street Park Slope Williamsburg Central Valley Garden City Manhattan— Bleecker Street Chelsea Columbia University Columbus Circle FIT Flatiron Gramercy Park Harlem Hell’s Kitchen Lower Broadway Lower East Side Noho Soho Tribeca Upper East Side Upper West Side White Plains North Carolina (1) Charlotte— SouthPark Mall Pennsylvania (4) King of Prussia Philadelphia— Sansom Common Walnut Street Pittsburgh— Shadyside Wisconsin (2) Madison Milwaukee South Carolina (1) Charleston Tennessee (2) Memphis Nashville Texas (7) Austin— Congress Ave Guadalupe Street Dallas— Mockingbird NorthPark Center Houston Round Rock San Antonio— La Cantera Utah (1) Salt Lake City Ohio (3) Vermont (1) Burlington Cincinnati Cleveland Columbus Virginia (1) Richmond Oregon (4) Eugene Portland— Hawthorne Blvd. Stark Street Tigard Washington (4) Lynnwood Seattle— Capitol Hill Downtown Seattle University Way 24 Table of Contents Canada ( 35 ) Alberta (4) Ontario (12) Calgary— 17th Avenue Market Mall Edmonton— 82nd Avenue West Edmonton Mall Kingston London Ottawa— Rideau Centre Thornhill Toronto— Bloor Street Queen Street Sherway Gardens Yonge & Dundas Yonge & Eglington Yorkdale Shopping Centre Vaughan Waterloo British Columbia (7) Burnaby Kelowna Vancouver— Granville Robson Street South Granville West 4th Street Victoria Manitoba (1) Winnipeg Newfoundland (1) St. John's Nova Scotia (1) Halifax Quebec (8) Laval Montreal— Cours Mont-Royal Mont-Royal Est St-Denis Ste-Catherine West Pointe-Claire Quebec— Rue St-Jean Westmount 25 Saskatchewan (1) Saskatoon Table of Contents International Locations ( 76 ) Europe (55) Austria (1) Vienna Belgium (1) Antwerp France (12) Aix-en-Provence Lille Paris— Marais Vielle du Temple Beaurepaire Avenue Victor Hugo Saint-Germain Saint-Honore (2) Galeries Lafayette La Defense Toulouse Germany (9) United Kingdom (20) Spain (2) Berlin— Bayreuther Strasse Münzstrasse Düsseldorf Frankfurt Hamburg— Jungfernstieg Schanzenstrasse Köln Munich— Sendlinger Strasse Stuttgart Birmingham Brighton Bristol Glasgow Leeds Liverpool London— Camden High Street Carnaby Street Covent Garden Kensington High Street King's Cross Oxford Street Portobello Road Selfridges Shoreditch Westfield Manchester (3) Nottingham Barcelona Madrid Ireland (1) Dublin Italy (3) Milan Padova Rome Sweden (2) Stockholm— Götgatan Kungsgatan Switzerland (2) Zurich— Josefstrasse Rennweg Netherlands (2) Amsterdam— Noordermarkt Utrechtsestraat Asia (13) Other International (8) China (4) South Korea (5) Beijing— Nali Mall PVG Joy City Shanghai Busan Seoul— Chungdam Hong Dae Kangnam Myung-dong Israel (1) Tel Aviv Mexico (1 ) Mexico City— Polanco Japan (4) Brazil (1) São Paulo Osaka— Shinsaibashi Tokyo— Daikanyama Shibuya (2) 26 Australia (5) Adelaide Melbourne Myer Melbourne Myer Sydney Sydney Table of Contents 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. 37-201100085578-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. 27 Table of Contents 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 Table of Contents 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 Table of Contents 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 Third Quarter Second Quarter First Quarter $ 0.98 1.21 1.69 1.72 $ 0.52 0.75 0.70 0.88 Fourth Quarter Third Quarter Second Quarter First Quarter $ 1.61 1.70 1.09 1.21 $ 0.83 0.82 0.75 0.63 2012 (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 Table of Contents (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 Table of Contents Dates American Apparel December 31, 2007 December 31, 2008 December 31, 2009 December 31, 2010 December 31, 2011 December 31, 2012 100.00 13.27 20.67 11.07 4.80 6.73 32 S&P Retail 100.00 68.12 100.29 124.01 127.63 159.31 S&P 500 100.00 61.51 75.94 85.65 85.65 97.13 Dow 100.00 66.16 78.61 87.28 92.10 97.79 Table of Contents 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 Gross profit $ 327,383 $ 294,900 $ 279,909 $ 319,912 Income (loss) from operations $ 962 $ (23,293) $ (50,053) $ 24,415 Net (loss) income $ (37,272) $ (39,314) $ (86,315) $ 1,112 Per Share Data: Net (loss) earnings per common share - basic $ (0.35) $ (0.42) $ (1.21) $ 0.02 Net (loss) earnings per common share - diluted $ (0.35) $ (0.42) $ (1.21) $ 0.01 Weighted average number of common shares outstanding: Basic 105,980 92,599 71,626 71,026 Diluted 105,980 92,599 71,626 76,864 Consolidated Balance Sheets Data: Total assets $ 328,212 $ 324,721 $ 327,950 $ 327,579 (1) Working capital $ 80,022 $ 97,013 $ 3,379 $ 121,423 Total long-term debt less current maturities (2) $ 112,856 $ 98,868 $ 5,597 $ 71,372 Stockholders’ equity $ 22,084 $ 48,130 $ 75,024 $ 157,341 ___________________________ (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 $ $ $ $ 545,050 294,421 36,064 14,112 $ $ 0.20 0.20 69,490 70,317 $ $ $ $ 333,609 83,069 72,328 136,412 Table of Contents 34 Table of Contents 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 Table of Contents 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 Stores open as of December 31, 2009 2010 Opened Closed Stores open as of December 31, 2010 2011 Opened Closed Stores open as of December 31, 2011 2012 Opened Closed Stores open as of December 31, 2012 Canada International Total 160 40 81 281 1 (4) 157 2 (2) 40 3 (8) 76 6 (14) 273 1 (15) 143 — (3) 37 4 (11) 69 5 (29) 249 1 (4) 140 — (2) 35 9 (2) 76 10 (8) 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 2012 Number of Stores 2011 Number of Stores 2010 Number of Stores March 31 June 30 September 30 December 31 Full year 16% 243 (5)% 249 (10)% 249 16% 242 1% 248 (15)% 257 20% 240 3% 244 (15)% 261 11% 238 8% 241 (11)% 260 15% 2% (13)% 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 Table of Contents 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 Table of Contents 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 Table of Contents Results of Operations Year Ended December 31, 2012 compared to Year Ended December 31, 2011 (Amounts in thousands) For the Years Ended December 31, U.S. Wholesale U.S. Retail Canada International Total net sales Cost of sales Gross profit $ 2012 182,778 198,886 63,669 171,977 617,310 289,927 327,383 Selling expenses General and administrative expenses Retail store impairment Income (loss) from operations 227,447 97,327 1,647 962 Interest expense Foreign currency transaction loss Unrealized loss (gain) on change in fair value of warrants and purchase rights (Gain) loss on extinguishment of debt Other expense (income) Loss before income tax Income tax provision Net loss $ % of net sales 29.6% $ 32.2% 10.3% 27.9% 100.0% 47.0% 53.0% 36.8% 15.8% 0.3% 0.2% 2011 156,454 174,837 61,865 154,180 547,336 252,436 294,900 209,841 104,085 4,267 (23,293) 41,559 120 33,167 1,679 4,126 (11,588) 204 (33,459) 3,813 (37,272) (23,467) 3,114 (193) (37,593) 1,721 (39,314) $ % of net sales 28.6 % 31.9 % 11.3 % 28.2 % 100.0 % 46.1 % 53.9 % 38.3 % 19.0 % 0.8 % (4.3)% 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 Table of Contents 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 Table of Contents 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 Table of Contents Year Ended December 31, 2011 compared to Year Ended December 31, 2010 (Amounts in thousands) For the Years Ended December 31, 2011 U.S. Wholesale U.S. Retail Canada International Total net sales Cost of sales Gross profit $ 156,454 174,837 61,865 154,180 547,336 252,436 294,900 Selling expenses General and administrative expenses Retail store impairment Loss from operations 209,841 104,085 4,267 (23,293) Interest expense Foreign currency transaction loss (gain) Unrealized (gain) loss on change in fair value of warrants and purchase rights Loss on extinguishment of debt Other (income) expense Loss before income taxes Income tax provision Net loss $ % of net sales 28.6 % $ 31.9 % 11.3 % 28.2 % 100.0 % 46.1 % 53.9 % 38.3 % 19.0 % 0.8 % (4.3)% 2010 148,997 177,610 65,638 140,744 532,989 253,080 279,909 218,198 103,167 8,597 (50,053) 33,167 1,679 23,752 (686) (23,467) 3,114 (193) (37,593) 1,721 (39,314) 993 — 39 (74,151) 12,164 (86,315) $ % of net sales 28.0 % 33.3 % 12.3 % 26.4 % 100.0 % 47.5 % 52.5 % 40.9 % 19.4 % 1.6 % (9.4)% 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 Net cash provided by (used in): Operating activities Investing activities Financing activities Effect of foreign exchange rate changes on cash $ $ Net increase (decrease) in cash 23,589 (24,853) 4,214 (390) 2,560 2011 $ $ 2,305 (10,759) 12,582 (1,491) 2,637 2010 $ $ (32,370) (15,662) 48,172 (1,530) (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-inkind 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 45 Table of Contents 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. 46 Table of Contents 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. 47 Table of Contents 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 $2,000 . Sale of Treasury Stock to CEO - On November 26, 2010, we authorized the sale to Mr. Charney of approximately 1,130 treasury shares of our common stock at a price of $1.48 per share for proceeds of $1,650 . See Notes 12 and 13, Related Party Transactions and Stockholders' Equity to our consolidated financial statements under Part II, Item 8. 48 Table of Contents Summary of Debt The following is an overview of our total debt as of December 31, 2012 (dollars in thousands): Description of Debt Lender Name Interest Rate Revolving credit facility Crystal Financial LLC Term loan Crystal Financial LLC (a) 90-day LIBOR of 0.31% plus 9.0% plus unused facility fee ranging (0.375% -1.00%) and for the brand name: (b) 90-day LIBOR of 0.31% plus 19.75% 90-day LIBOR of 0.31% plus 9.0% plus unused facility fee ranging (0.375% -1.00%) Bank of Montreal Bank's prime rate of 3% plus 4% Lion From 15.0% to 18.0% Revolving credit facility (Canada) Term loan, net of discount and including interest paid-inkind December 31, 2012 $ Other Capital lease obligations 15 individual leases ranging between $1$5,217 From 0.4% to 18.0% $ Total debt Covenant Violations 26,113 No 30,000 No 4,387 No 109,680 No 388 N/A 4,547 N/A 175,115 Financial Covenants Our credit agreements impose certain restrictions regarding capital expenditures and limit our ability to: incur additional indebtedness, dispose of assets, make repayment of indebtedness or amendments of debt instruments, pay distributions, create liens on assets, and enter into sale and leaseback transactions, investments, loans or advances and acquisitions. Significant covenants are summarized below. Lion Credit Agreement - Significant covenants in the Lion Credit Agreement include an annual limitation of our capital expenditures to $30,000 for fiscal 2012. The Lion Credit Agreement also requires a minimum Consolidated EBITDA amount (as specified in the credit agreement) for any twelve consecutive months as determined at the end of each fiscal quarter (Quarterly Minimum Consolidated EBITDA). Additionally, beginning with the twelve consecutive months ended July 31, 2012 through the remainder of 2013, the Lion Credit Agreement includes a second minimum Consolidated EBITDA covenant to be determined at the end of each month (Monthly Minimum Consolidated EBITDA) that conforms to the Crystal minimum Consolidated EBITDA covenant. As of December 31, 2012, we were in compliance with the required financial covenants of the Lion Credit Agreement. Crystal Credit Agreement - Significant covenants in the Crystal Credit Agreement include a minimum excess availability covenant that requires us to maintain minimum excess availability of the the greater of $8,000 , or 10.0% of the borrowing base. If the excess availability falls below this minimum, we will be required to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 to be calculated monthly on a consolidated trailing twelve-month basis and continuing until the excess availability exceeds this minimum for sixty consecutive days. Additionally, the Crystal Credit Agreement, as amended, added a new minimum excess availability covenant that required the Company to maintain minimum excess availability to be no less than $5,000 during the period from December 17, 2012 to February 1, 2013 and also added a minimum monthly Consolidated EBITDA covenant for the remainder of 2013 to be determined at the end of each month. Furthermore, the Crystal Credit Agreement included an annual limitation of our capital expenditures at the Company's domestic subsidiaries to no more than $18,000 for the year ended December 31, 2012 and $25,000 for each year thereafter. During the year ended December 31, 2012, our excess availability was below the minimum amount and, as a result, we were required to maintain the fixed charge coverage ratio. 49 Table of Contents As of December 31, 2012, we were in compliance with the required financial covenants of the Crystal Credit Agreement, as amended. Bank of Montreal Credit Agreement - Significant covenants in the Bank of Montreal Credit Agreement include a restriction on our Canadian subsidiaries from entering into operating leases over a specified threshold. The credit agreement also requires our Canadian subsidiaries to maintain minimum excess availability of 5% of the revolving credit commitment under the facility. As of December 31, 2012, we were in compliance with the financial covenants of the Bank of Montreal Credit Agreement. Each of the credit agreements with Lion Capital, Crystal and Bank of Montreal contain cross-default provisions, whereby an event of default occurring under any of the other credit agreements would cause an event of default. Off-Balance Sheet Arrangements and Contractual Obligations Our material off-balance sheet contractual commitments are operating lease obligations and certain letters of credit. These items were excluded from the balance sheet in accordance with GAAP. Operating lease commitments consist principally of leases for our retail stores, manufacturing facilities, main distribution center and corporate office. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. With respect to most of those leases, we intend to renegotiate the leases as they expire. Issued and outstanding letters of credit were $3,147 at December 31, 2012 , and were related primarily to workers’ compensation insurance and rent deposits. Contractual Obligations Summary The following table summarizes our contractual commitments as of December 31, 2012 , which relate to future minimum payments due under noncancelable licenses, leases, revolving credit facilities, long-term debt and advertising commitments. Future minimum rental payment on operating lease obligations presented below do not include any related property insurance, taxes, maintenance or other related costs required by operating leases. Operating lease rent expenses, including some related real estate taxes and maintenance costs, are included in the cost of sales and general and administrative expenses in our consolidated financial statements and amounted to approximately $77,390 for the year ended December 31, 2012 . Payments due by period Total Contractual Obligations Long-term debt, including interest Current debt, including interest Capital lease obligations, including interest Operating lease obligations Advertising commitments Self-insurance reserves Total contractual obligations Less than 1 year $ $ 110,068 60,500 5,536 334,318 4,456 16,132 531,010 $ $ 7,280 60,500 2,291 71,150 4,044 5,438 150,703 1-3 years $ $ 102,788 — 3,240 118,848 412 5,249 230,537 More than 5 years 4-5 years $ $ — — 5 81,837 — 2,749 84,591 $ $ — — — 62,483 — 2,696 65,179 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 our wholesale and retail sales channels. Generally, our retail sales channel has not experienced the same pronounced sales seasonality as other retailers. Inflation Inflation affects the cost of raw materials, goods and services used in our operations. In 2010, the price of yarn and the cost of certain related fabrics began to increase as a result of the compounding effect of added demand, and supply shortages primarily from the effect of severe weather conditions in certain cotton producing countries, and a ban on cotton exports imposed by the government of India. Prices continued to increase throughout 2010 and through the first quarter of 2011. During the first half of 2012, we experienced lower cost of yarn as opposed to sharply rising costs that took place during the first half of 2011. We cannot predict if this decline in the cost of cotton is sustainable. In addition, high oil costs can affect the cost of all raw materials and components. The competitive environment can limit the ability of American Apparel to recover higher costs resulting from inflation by raising prices. Although we cannot precisely determine the effects of inflation on our business, we 50 Table of Contents believe that the effects on revenues and operating results have not been significant. We seek to mitigate the adverse effects of inflation primarily through improved productivity and strategic buying initiatives. We do not believe that inflation has had a material impact on our results of operations for the periods presented. We are unable to predict if we will be able to successfully pass on the added cost of any future raw material cost increases by further increasing the price of our products to our wholesale and retail customers. Critical Accounting Estimates and Policies Complete descriptions of our significant accounting policies are outlined in Note 2, Summary of Significant Accounting Policies to our consolidated financial statements under Item 8—Financial Statements and Supplementary Data. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our critical estimates and policies include: • revenue recognition; • inventory valuation, obsolescence; • fair value calculations including, derivative liabilities such as the Lion warrants; • valuation and recoverability of long-lived assets including the values assigned to acquired intangible assets, goodwill, and property and equipment; • income taxes; • accruals for the outcome of current litigation; and • self-insurance liabilities. In general, estimates are based on historical experience, on information from third party professionals and on various other sources and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our management considers an accounting estimate to be critical if: • it requires assumptions to be made that were uncertain at the time the estimate was made; and • changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on our consolidated results of operations or financial condition. Revenue Recognition We recognize product sales when title and risk of loss have transferred to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collectability is reasonably assured. Wholesale product sales are recorded at the time the product is either picked up by or shipped to the customer. Online product sales are recorded at the time the products are received by the customers. Retail store sales are recorded as revenue upon the sale of product to retail customers. Our net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances and are recorded net of sales or value added tax. Allowances provided for these items are presented in the consolidated financial statements primarily as reductions to sales and cost of sales (see Sales Returns and Allowances discussed below for further information). We recognize revenues from gift cards, gift certificates and store credits as they are redeemed for product. Prior to redemption, we maintain an unearned revenue liability for gift cards, gift certificates and store credits until we are released from such liability or when we determine that some portion of gift cards will not be redeemed. See Gift Cards below. 51 Table of Contents Sales Returns and Allowances We analyze sales returns in order to make reasonable and reliable estimates of product returns for our wholesale, online product sales and retail store sales based upon historical experience. We also monitor the buying patterns of the end-users of our products based on sales data received by our retail outlets. Estimates for sales returns are based on a variety of factors including actual returns based on expected return data communicated to us by our customers. Accordingly, we believe that our historical returns analysis is an accurate basis for our allowance for sales returns. We regularly review the factors that influence our estimates and, if necessary, make adjustments when we believe that actual product returns and credits may differ from established reserves. If actual or expected future returns and claims are significantly greater or lower than the allowance for sales returns established, we would record a reduction or increase to net revenues in the period in which we made such determination. Shipping and Handling Costs We incur shipping and handling costs in our operations. These costs consist primarily of freight expenses incurred for third-party shippers to transport products to our retail stores and distribution centers and to our wholesale and online retail customers. These costs are included in cost of sales and amounts billed to customers for shipping are included in net sales. Gift Cards Upon issuance of a gift card a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of gift cards is not redeemed ("breakage"). We determine breakage income for gift cards based on historical redemption patterns. Breakage income is recorded as a credit to selling expenses, which is a component of operating expenses in the consolidated statements of operations. Currently, we record breakage when gift cards remain unredeemed after two years. Our gift cards, gift certificates and store credits do not have expiration dates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate breakage. However, if the actual rate of redemption of gift cards increases significantly, our operating results could be negatively affected. Trade Receivables and Allowance for Doubtful Accounts Accounts receivable primarily consists of trade receivables, including amounts due from credit card companies, net of allowances. On a periodic basis, we evaluate our trade receivables and establish an allowance for doubtful accounts based on our history of past bad debt expense, collections and current credit conditions. We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. Collections and payments from customers are continuously monitored. We maintain an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (“FIFO”) method. We identify potential excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. We have evaluated the current level of inventories considering historical sales and other factors and, based on this evaluation, we record adjustments to cost of goods sold to reflect inventories at net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, customer demand or competition differ from expectations. Long-Lived Assets We follow the provisions of ASC 360 “Property, Plant and Equipment”, which requires evaluation of the need for an impairment charge relating to long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write down to a new depreciable basis is required. If required, an impairment charge is recorded based on an estimate of future discounted cash flows. 52 Table of Contents We consider the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of retail stores relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of the assets or in our overall strategy with respect to the manner or use of the acquired assets or changes in our overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in American Apparel’s stock price for a sustained period of time; and (vi) regulatory changes. We evaluate acquired assets and our retail stores for potential impairment indicators at least annually and more frequently upon the occurrence of certain events. Judgment regarding the existence of impairment indicators is based on market conditions and operational performance of businesses. Future events could cause us to conclude that impairment indicators exist, and therefore long lived assets could be impaired. Such evaluations are significantly impacted by estimates of future revenues, costs and expenses and other factors. A significant change in cash flows in the future could result in an impairment of long lived assets. Income Taxes We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. During the years ended December 31, 2012 and 2011, we recorded a valuation allowance against deferred tax assets of $77,578 and $73,773. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Contingencies Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Legal fees are expensed as incurred. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. We are subject to proceedings, lawsuits and other claims related to various matters. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We determine the amount of reserves needed, if any, for each individual issue based on our knowledge and experience and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter, the ultimate resolution of each matter or changes in approach, such as a change in settlement strategy, in dealing with these matters. We currently do not believe, based upon information available at this time, that these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows. There is no assurance that such matters will not materially and adversely affect our business, financial position, and results of operations or cash flows. See Notes 15 and 18, Commitments and Contingencies and Litigation to our consolidated financial statements under Part II, Item 8. 53 Table of Contents Self-Insurance Liabilities We maintain self-insurance programs for our estimated commercial general liability, workers’ compensation, and employees medical risks. Under these programs, we maintain insurance coverage for losses in excess of specified per-occurrence amounts. Estimated costs under these programs, including incurred but not reported claims, are recorded as expense based upon historical experience, trends of paid and incurred claims, deductibles, and other actuarial assumptions. If actual claims trends under these programs, including the severity or frequency of claims, differ from our estimates, our financial results may be significantly impacted. Our estimated self-insurance liabilities are classified in our balance sheet as accrued expenses or other long-term liabilities based upon whether they are expected to be paid during or beyond our normal operating cycle of 12 months from the date of our consolidated financial statements. Other Matters Accounting Standards Updates Beginning in the quarter ended March 31, 2012, the Company enhanced its fair value measurement application and disclosures as a result of adopting new requirements issued by the Financial Accounting Standards Board ("FASB") in May 2011. The new rules include revisions to the standards for the use of fair value measurements and additional disclosures for: (i) all transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) Level 3 measurements; and (iii) hierarchy classifications used for assets and liabilities whose fair value is disclosed only in the footnotes. The new rules did not have a material impact on the Company. Accounting standards updates effective after December 31, 2012, are not expected to have a material effect on our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risks (amounts in thousands) Our exposure to market risk is limited to interest rate risk associated with our credit facilities and foreign currency exchange risk associated with our foreign operations. Interest Rate Risk Based on our interest rate exposure on variable rate borrowings at December 31, 2012 , a 1% increase in average interest rates on our borrowings would increase future interest expense by approximately $50 per month. We determined this amount based on approximately $60,500 of variable rate borrowings at December 31, 2012 . We are currently not using any interest rate collars or hedges to manage or reduce interest rate risk. As a result, any increase in interest rates on the variable rate borrowings would increase interest expense and reduce net income. Our primary exposure to variable interest rates is through the effect of fluctuations in LIBOR on the interest rate under the Crystal Credit Agreement. Foreign Currency Risk The majority of our operating activities are conducted in U.S. dollars. Approximately 38.2% of our net sales for the year ended December 31, 2012 were denominated in other currencies such as Euros, British Pounds Sterling or Canadian Dollars. Nearly all of our production costs and material costs are denominated in U.S. dollars although the majority of the yarn is sourced from outside the United States. If the U.S. dollar were to appreciate by 10% against other currencies it could have a significant adverse impact on our earnings. Since an appreciated U.S. dollar makes goods produced in the United States relatively more expensive to overseas customers, other things being equal, we would have to lower our retail margin in order to maintain sales volume overseas. A lower retail margin overseas would adversely affect net income assuming sales volume remains the same. Functional currencies of our foreign operations consist of the Canadian dollar for operations in Canada, the Australian dollar for operations in Australia, the pound Sterling for operations in the U.K., the Euro for operations in the European Union, the Franc for operations in Switzerland, the New Israeli Shekel for operations in Israel, the Yen for the operations in Japan, the Won for operations in South Korea, the Renminbi or Hong Kong dollar for operations in China, the Real for operations in Brazil and the Peso for operations in Mexico, as well as other local currencies for other foreign operations 54 Table of Contents American Apparel, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 56 Consolidated Balance Sheets as of December 31, 2012 and 201 1 57 Consolidated Statements of Operations and Comprehensive Loss For the Years ended December 31, 2012, 2011 and 20 10 58 Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2012, 2011, 20 10 59 Consolidated Statements of Cash Flows For the Years Ended December 31, 2012, 2011 and 20 10 60 Notes to Consolidated Financial Statements For the Years Ended December 31, 2012, 2011, and 20 10 62 Financial Statement Schedule Schedule II—Valuation and Qualifying Accounts 92 Report of Independent Registered Public Accounting Firm on Internal Controls over Financial Reporting 55 94 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Audit Committee of the Board of Directors and Stockholders of American Apparel, Inc. We have audited the accompanying consolidated balance sheets of American Apparel, Inc. and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the years ended December 31, 2012, 2011 and 2010. Our audits also included the financial statement schedule as of and for the years listed in the index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management . Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Apparel, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the years ended December 31, 2012, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2013 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ Marcum LLP Marcum LLP Melville, NY March 5, 2013 56 Table of Contents Item 8. Financial Statements and Supplementary Data American Apparel, Inc. and Subsidiaries Consolidated Balance Sheets (Amounts and shares in thousands, except per share amounts) December 31, 2012 2011 ASSETS CURRENT ASSETS Cash $ Trade accounts receivable, net of allowances of $2,085 and $2,195 at December 31, 2012 and 2011, respectively Prepaid expenses and other current assets 12,853 $ 22,962 10,293 20,939 9,589 7,631 Inventories, net 174,229 185,764 Restricted cash 3,733 — Income taxes receivable and prepaid income taxes 530 5,955 Deferred income taxes, net of valuation allowance of $12,760 and $12,003 at December 31, 2012 and 2011, respectively Total current assets 494 148 224,390 230,730 67,778 67,438 1,261 1,529 PROPERTY AND EQUIPMENT, net DEFERRED INCOME TAXES, net of valuation allowance of $64,818 and $61,770 at December 31, 2012 and 2011, respectively OTHER ASSETS, net TOTAL ASSETS 34,783 25,024 $ 328,212 $ 324,721 $ — $ 1,921 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Cash overdraft Revolving credit facilities and current portion of long-term debt Accounts payable 60,556 50,375 38,160 33,920 Accrued expenses and other current liabilities Fair value of warrant liability 41,516 43,725 17,241 9,633 2,137 2,445 Income taxes payable Deferred income tax liability, current Current portion of capital lease obligations Total current liabilities LONG-TERM DEBT, net of unamortized discount of $27,929 and $20,183 at December 31, 2012 and 2011, respectively CAPITAL LEASE OBLIGATIONS, net of current portion 296 150 1,703 1,181 161,609 143,350 110,012 97,142 2,844 1,726 DEFERRED TAX LIABILITY DEFERRED RENT, net of current portion 262 96 20,706 22,231 OTHER LONG-TERM LIABILITIES 10,695 12,046 306,128 276,591 — — 11 11 177,081 166,486 TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Preferred stock, $0.0001 par value per share, authorized 1,000 shares; none issued Common stock, $0.0001 par value per share, authorized 230,000 shares; 110,111 shares issued and 107,181 shares outstanding at December 31, 2012 and 108,870 shares issued and 105,588 shares outstanding at December 31, 2011 Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Less: Treasury stock, 304 shares at cost TOTAL STOCKHOLDERS’ EQUITY (2,725) (3,356) (150,126) (112,854) (2,157) (2,157) 22,084 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ See accompanying notes to consolidated financial statements. 57 328,212 48,130 $ 324,721 Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Loss (Amounts and shares in thousands, except per share amounts) Years Ended December 31, 2012 Net sales $ 2011 617,310 $ 2010 547,336 $ 532,989 Cost of sales Gross profit 289,927 252,436 253,080 327,383 294,900 279,909 Selling expenses General and administrative expenses (including related party charges of $1,090, $919 and $912 for the years ended December 31, 2012, 2011 and 2010, respectively) 227,447 209,841 218,198 97,327 104,085 103,167 1,647 Retail store impairment 962 Income (loss) from operations Interest expense Foreign currency transaction loss (gain) 41,559 120 Unrealized loss (gain) on change in fair value of warrants and purchase rights (Gain) loss on extinguishment of debt Net loss Basic and diluted loss per share 23,752 1,679 (686) 993 (11,588) 3,114 — (193) 39 (33,459) (37,593) (74,151) 3,813 1,721 12,164 $ (37,272) $ (39,314) $ (86,315) $ (0.35) $ (0.42) $ (1.21) Weighted average basic and diluted shares outstanding 105,980 Net loss (from above) 33,167 (23,467) 204 Income tax provision 8,597 (50,053) 4,126 Other expense (income) Loss before income taxes 4,267 (23,293) $ (37,272) 92,599 $ (39,314) 71,626 $ (86,315) Other comprehensive (loss) income item: Foreign currency translation, net of tax Other comprehensive income (loss), net of tax $ Comprehensive loss (188) 631 (188) (36,641) See accompanying notes to consolidated financial statements. 58 631 $ (39,502) (1,085) (1,085) $ (87,400) Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (Amounts in thousands) Par Value Amount Number of Common Shares Issued BALANCE, January 1, 2010 Sale of treasury stock Issuance of common stock for stock-based compensation Issuance of stock options for stock-based compensation Net loss Foreign currency translation, net of tax BALANCE, December 31, 2010 Stock-based compensation, net Conversion of debt to equity Sale of common stock, net of fees Reclassification of warrants from equity to debt Reclassification of purchase rights upon exercise Net loss Foreign currency translation, net of tax BALANCE, December 31, 2011 Stock-based compensation, net Net loss Foreign currency translation, net of tax BALANCE, December 31, 2012 72,467 $ Treasury Stock 7 $ Accumulated Other Comprehensive Loss Additional Paid-in Capital (10,044) $ 150,449 $ (2,083) — — 7,887 — — 6,725 1 — 3,239 — — — — 193 — — — — — — — — — — 79,192 $ 8 $ (2,157) $ 153,881 $ (3,168) 19,012 $ (6,237) 3,240 — 193 (86,315) (86,315) — $ (73,540) 157,341 1,650 — (1,085) $ Total Stockholders’ Equity Accumulated Deficit (1,085) $ 75,024 801 — — 7,107 — — 7,107 2,113 — — 4,688 — — 4,688 26,764 3 — 9,292 — — 9,295 — — — (11,339) — — (11,339) — — — 2,857 — — — — — — — — — — (188) 108,870 $ 1,241 — 110,111 $ 11 $ (2,157) $ 166,486 $ (3,356) — — 10,595 — — — — — — — — 631 11 $ (2,157) $ 177,081 $ See accompanying notes to consolidated financial statements. 59 (2,725) — 2,857 (39,314) (39,314) — $ (112,854) (188) $ — 10,595 (37,272) (37,272) — $ (150,126) 48,130 631 $ 22,084 Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Amounts in thousands) For the Years ended December 31, 2011 2012 2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ Cash paid to suppliers, employees and others 615,342 $ (580,685) Income taxes (paid) refunded Interest paid Other (10) (866) (10,954) (5,535) (104) Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures 542,930 $ (534,497) 532,601 (559,386) 698 (6,456) 273 173 23,589 2,305 (32,370) (21,607) (11,070) (15,701) Proceeds from sale of fixed assets Restricted cash (3,720) 474 311 39 Net cash used in investing activities (24,853) (10,759) (15,662) (1,921) (1,407) (404) (48,324) (6,874) — — CASH FLOWS FROM FINANCING ACTIVITIES Cash overdraft (Repayments) borrowing under expired revolving credit facilities, net Borrowings under current revolving credit facilities, net 50,852 28,451 — — Borrowings (repayments) under term loans and notes payable 29,987 (13) (15) Payment of debt issuance costs (5,226) Net proceeds from issuance of common stock and purchase rights — Payment of payroll statutory tax withholding on stock-based compensation associated with issuance of common stock Proceeds from equipment lease financing (393) Proceeds (repayment) of capital lease obligations Proceeds from sale of treasury stock (1,881) — 21,710 — (759) 4,533 3,100 (2,893) (1,294) (2,051) — (1,860) — — 1,650 Net cash provided by financing activities EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 4,214 12,582 48,172 (1,491) (1,530) NET INCREASE (DECREASE) IN CASH 2,560 2,637 (1,390) (390) 10,293 CASH , beginning of period $ CASH , end of period See accompanying notes to consolidated financial statements. 60 12,853 7,656 $ 10,293 9,046 $ 7,656 Table of Contents Years Ended December 31, 2011 2012 2010 RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss Depreciation and amortization of property and equipment and other assets $ Retail store impairment Loss on disposal of property and equipment Stock-based compensation expense Unrealized loss (gain) on change in fair value of warrants and purchase rights Amortization of debt discount and deferred financing costs (Gain) loss on extinguishment of debt Accrued interest paid-in-kind Foreign currency transaction loss (gain) Allowance for inventory shrinkage and obsolescence (37,272) $ Deferred rent $ (86,315) 24,980 28,130 1,647 4,267 8,597 102 80 212 10,580 6,814 3,719 4,126 (23,467) 10,261 9,024 5,997 (11,588) 3,114 — 20,344 18,711 11,299 120 1,679 (1,331) Bad debt expense Deferred income taxes (39,314) 22,989 993 (686) (1,652) 1,051 99 996 1,357 154 701 14,789 (895) (1,969) 2,963 Trade accounts receivables (2,067) (5,402) (1,746) Inventories 13,949 (6,771) (37,239) Prepaid expenses and other current assets (1,829) 1,770 624 Other assets (8,455) (5,075) (629) 1,779 3,944 10,057 (4,223) 9,701 3,668 Changes in cash due to changes in operating assets and liabilities: Accounts payable Accrued expenses and other liabilities Income taxes receivable / payable 5,099 Net cash provided by (used in) operating activities NON-CASH INVESTING AND FINANCING ACTIVITIES Property and equipment acquired under a capital lease 174 789 $ 23,589 $ 2,305 $ $ — $ — $ Property and equipment acquired and included in accounts payable (32,370) 92 3,778 1,323 2,735 Reclassification of Lion Warrant from equity to debt — 11,339 — Conversion of debt to equity Issuance of warrants and purchase rights at fair value — 4,688 — — 6,387 — Exercise of purchase rights — 2,857 — See accompanying notes to consolidated financial statements. 61 Table of Contents American Apparel, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Amounts and Shares in thousands, except per share amounts) For the Years Ended December 31, 2012 , 2011 and 2010 Note 1. Organization and Business American Apparel, Inc. and its subsidiaries (collectively “the Company”) is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel products and designs, manufactures and sells clothing and accessories for women, men, children and babies. The Company sells its products through the wholesale distribution channel supplying t-shirts and other casual wear to distributors and screen printers, as well as direct to customers through its retail stores located in the United States and internationally. In addition, the Company operates an online retail e-commerce website. At December 31, 2012 , the Company operated a total of 251 retail stores in 20 countries: the United States, Canada and 18 other countries. Liquidity and Management's Plan As of December 31, 2012 , the Company had approximately $12,853 in cash, $9,177 of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement (as defined in Note 7). Additionally, the Company 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 on a C$11,000 (Canadian dollars) revolving credit facility under the Bank of Montreal Credit Agreement, and $109,680 (including paidin-kind interest of $16,469 and net of discount of $27,929 ) of term loans outstanding under the Lion Credit Agreement (as defined in Note 8). The Company believes that it will have sufficient financing commitments to meet funding requirements for the next twelve months. The Company is in the process of executing a plan, which was commenced in late 2010 , to improve its operating performance and financial position. During 2012, the Company improved its distribution operations and timing of store replenishments, implemented a new e-commerce platform, refined its promotion and inventory allocation strategy and implemented a new production forecasting system. These initiatives allowed the Company to reduce its unit inventory levels and thereby improve working capital. The Company also continued to reduce corporate expenses and enhance store inventory management by installing RFID tracking systems. Finally, the Company was in the process of transitioning its distribution operations into a new modern distribution center located in California. For 2013, the Company intends to complete the installation of RFID tracking systems in all of its stores, rationalize merchandise pricing in the wholesale and retail channels, continue to renovate its stores and continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity. There can be no assurance that plans to improve operating performance and financial position will be successful. Note 2. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of American Apparel, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. Certain reclassifications have been made to the prior year consolidated financial statements and related footnotes to conform them to the 2012 presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most complex and subjective estimates include: inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill, property and equipment; fair value calculations, including derivative liabilities such as the Lion warrants and purchase rights; contingencies, including accruals for the outcome of current litigation and self-insurance liabilities; and income taxes, including uncertain tax positions and recoverability of deferred income taxes. On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. 62 Table of Contents Restricted Cash Restricted cash primarily represents cash collateral on standby letters of credit and certain other obligations. The standby letters of credit are predominantly used as collateral for the Company's workers' compensation program. See Note 16. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of cash (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts) and trade accounts receivable (including credit card receivables), relating substantially to the Company’s U.S. Wholesale segment. The Company mitigates its risk by investing through major financial institutions. The Company had approximately $8,265 and $9,549 held in foreign banks at December 31, 2012 , and 2011 , respectively. The Company mitigates its risks related to trade receivables by performing on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. The Company also maintains an insurance policy for certain customers based on a customer’s credit rating and established limits. Collections and payments from customers are continuously monitored. One customer, in the U.S. Wholesale segment, accounted for 15.1% and 16.3% of the Company’s total accounts receivables as of December 31, 2012 and 2011 , respectively. The Company maintains an allowance for doubtful accounts, which is based upon historical experience and specific customer collection issues that have been identified. While bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Fair Value Measurements The Company’s financial instruments are primarily composed of cash, restricted cash, accounts receivable (including credit card receivables), accounts payable, revolving credit borrowings and term loans. The fair value of cash, restricted cash, accounts receivable, accounts payable, and variable rate borrowings closely approximates their carrying value due to their short maturities. The fair value of the fixed-rate term note is estimated using a discounted cash flow analysis. The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities. The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company's accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company's accounting and finance department and are approved by the Chief Financial Officer. As of December 31, 2012, there were no transfers in or out of Level 3 from other levels. The fair value of the fixed rate term note is estimated using a projected discounted cash flow analysis based on unobservable inputs including interest payments, principal payments and discount rate, and is classified within Level 3 of the valuation hierarchy. An increase or decrease in the discount rate assumption, in isolation, can significantly decrease or increase the fair value of the term note. See Note 9. The fair value of each warrant is estimated using either a Monte Carlo simulation model or the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility, and are classified within Level 3 of the valuation hierarchy. An increase or decrease in volatility, in isolation, can significantly increase or decrease the fair value of the warrant. See Notes 9 and 13. The fair value of indefinite-lived assets, which consists exclusively of goodwill, is measured in connection with the Company’s annual goodwill impairment test. The fair value of the reporting unit to which goodwill has been assigned, is determined using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions, and are classified within Level 3 of the 63 Table of Contents valuation hierarchy. An increase or decrease in the discount rate assumption and/or the terminal value assumption, in isolation, can have a significant effect on the fair value of the reporting unit. See Goodwill and Other Intangible Assets below. Retail stores that have indicators of impairment and whose carrying value of assets are greater than their related projected undiscounted future cash flows, are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit and discount rate, and is classified within Level 3 of the valuation hierarchy. An increase or decrease in the discount rate assumption, in isolation, can significantly decrease or increase the fair value of the assets, which would have an effect on the impairment recorded. See Impairment of Long-Lived Assets below. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually. The Company’s annual impairment test date is December 31. Based on the qualitative assessment provisions of ASC 350 "Intangibles-Goodwill and Other", the Company determined that based on an analysis of qualitative factors, the fair value of the reporting unit was more likely than not greater than its carrying amount, and therefore, a quantitative calculation of the reporting unit's fair value would not be needed. The Company has not historically had any goodwill impairment. Other intangible assets consist of deferred financing costs (amortized over the term of the applicable debt facility) and key money, broker and finder fees and lease rights (amortized over the life of the respective lease). Impairment of Long-Lived Assets The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write down to a new depreciable basis is required. If required, an impairment charge is measured by the difference between the carrying value and the estimated fair value of the assets, with such estimated fair values generally determined using the discounted future cash flows of the assets using a rate that approximates the Company’s weighted average cost of capital. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of retail stores relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of the assets or in the Company's overall strategy with respect to the manner or use of the acquired assets or changes in the Company's overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in American Apparel’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets and its retail stores for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The key assumptions used in management's estimates of projected cash flow at its retail stores deal largely with forecasts of sales levels, gross margins, and payroll costs. These forecasts are typically based on historical trends and take into account recent developments as well as management's plans and intentions. Any difficulty manufacturing or sourcing product on a cost effective basis would significantly impact the projected future cash flows of the Company's retail stores and potentially lead to an impairment charge for long-lived assets. Other factors, such as increased competition or a decrease in the desirability of the Company's products, could lead to lower projected sales levels, which would adversely impact cash flows. A significant change in cash flows in the future could result in an impairment of long lived assets. For the years ended December 31, 2012 , 2011 and 2010 , the Company recognized impairment charges of $1,647 , $4,267 , and $8,597 , respectively, on assets to be held and used. The impairment charges, which primarily related to leasehold improvements and key money of certain U.S. and international retail stores, are included in operating expenses in the accompanying consolidated statements of operations. Web Site Development The Company capitalizes applicable costs incurred during the application and infrastructure website development stage and expenses costs incurred during the planning and operating stage. As of December 31, 2012 and 2011 , the carrying value of the Company's capitalized website development costs were $2,242 and $691 , respectively, and were included in property and equipment in the accompanying consolidated balance sheets. Self-Insurance Accruals The Company self-insures a significant portion of expected losses under workers’ compensation and healthcare benefits programs. Estimated costs under the workers’ compensation program, including incurred but not reported claims, are recorded as expense based upon historical experience, trends of paid and incurred claims, and other actuarial assumptions. If actual 64 Table of Contents claims trends under these programs, including the severity or frequency of claims, differ from the Company's estimates, its financial results may be significantly impacted. The Company's estimated self-insurance liabilities are classified in its balance sheet as accrued expenses or other long-term liabilities based upon whether they are expected to be paid during or beyond the Company's normal operating cycle of 12 months from the date of its consolidated financial statements. Estimated costs under the Company's healthcare program are based on estimated losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event the Company was to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liabilities. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management's opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. The Company's foreign domiciled subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. The Company elected to have their foreign subsidiaries, except for its subsidiaries in Brazil, Canada, China, Spain, Italy, Ireland and Korea, consolidated in the Company's U.S. federal income tax return. The Company will generally be eligible to receive tax credits on its U.S. federal income tax return for most of the foreign taxes paid by the Company's entities included in the United States Federal income tax return. The Company accounts for uncertain tax positions in accordance with ASC 740-“Income Taxes”, and gross unrecognized tax benefits at December 31, 2011 are included in other long term liabilities in the accompanying consolidated balance sheets. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying consolidated statements of operations Contingencies Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Legal fees are expensed as incurred. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. The Company is subject to proceedings, lawsuits and other claims related to various matters and assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. Management determines the amount of reserves needed, if any, for each individual issue based on its knowledge and experience and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter, the ultimate resolution of each matter or changes in approach, such as a change in settlement strategy, in dealing with these matters. The Company currently does not believe, based upon information available at this time, that these matters will have a material adverse effect 65 Table of Contents on its consolidated financial position, results of operations or cash flows. There is no assurance that such matters will not materially and adversely affect the Company's business, financial position, and results of operations or cash flows. See Notes 15 and 18, Commitments and Contingencies and Litigation . Revenue Recognition The Company recognizes product sales when title and risk of loss have transferred to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collectability is reasonably assured. Wholesale product sales are recorded at the time the product is either picked up by or shipped to the customer. Online product sales are recorded at the time the product is received by the customer. Retail store sales are recorded as revenue upon the sale of product to retail customers. The Company’s net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances, and are recorded net of sales or value added tax. Allowances provided for these items are presented in the consolidated financial statements primarily as reductions to sales and cost of sales (see Sales Returns and Allowances below for further information). The Company recognizes revenue from gift cards, gift certificates and store credits as they are redeemed for product or when it is determined that some portion of gift cards will not be redeemed. See Gift Cards below. Sales Returns and Allowances The Company analyzes sales returns in order to make reasonable and reliable estimates of product returns for our wholesale, online product sales and retail store sales based upon historical experience. The Company also monitors the buying patterns of the end-users of its products based on sales data received by its retail outlets. Estimates for sales returns are based on a variety of factors including actual returns based on expected return data communicated to the Company by its customers. Accordingly, the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns. The Company regularly reviews the factors that influence its estimates and, if necessary, makes adjustments when it believes that actual product returns and credits may differ from established reserves. If actual or expected future returns and claims are significantly greater or lower than the allowance for sales returns established, the Company would record a reduction or increase to net revenues in the period in which it made such determination. Shipping and Handling Costs We incur shipping and handling costs in its operations. These costs consist primarily of freight expenses incurred for third-party shippers to transport products to its retail stores and distribution centers and to its wholesale and online retail customers. These costs are included in cost of sales and amounts billed to customers for shipping are included in net sales. Gift Cards Upon issuance of a gift card a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of gift cards is not redeemed ("breakage"). The Company determines breakage income for gift cards based on historical redemption patterns. Breakage income is recorded as a credit to selling expenses, which is a component of operating expenses in the consolidated statements of operations. Currently, the Company records breakage when gift cards remain unredeemed after two-years. The Company's gift cards, gift certificates and store credits do not have expiration dates. See Note 6. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate breakage. However, if the actual rate of redemption of gift cards increases significantly, the Company's operating results could be negatively affected. Trade Receivables and Allowance for Doubtful Accounts Accounts receivable primarily consists of trade receivables, including amounts due from credit card companies, net of allowances. On a periodic basis, the Company evaluates its trade receivables and establishes an allowance for doubtful accounts based on its history of past bad debt expense, collections and current credit conditions. The Company performs on-going credit evaluations of its customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by its review of their current credit information. Collections and payments from customers are continuously monitored. The Company maintains an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that the Company has in the past. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 66 Table of Contents Deferred Rent, Rent Expense and Tenant Allowances The Company occupies its retail stores and combined corporate office, manufacturing, and distribution center under operating leases generally with terms of one to ten years. Some leases contain renewal options for periods ranging from five to fifteen years under substantially the same terms and conditions as the original leases but with rent adjustments based on various factors specific to each agreement. Many of the store leases require payment of a specified minimum rent, a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold, plus defined escalating rent provisions. The Company recognizes its minimum rent expense on a straight-line basis over the term of the lease (including probable lease renewals), plus the construction period prior to occupancy of the retail location, using a mid-month convention. Also included in rent expense are payments of real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum operating lease payments. Certain lease agreements provide for the Company to receive lease inducements or tenant allowances from landlords to assist in the financing of certain property. These inducements are recorded as a component of deferred rent and amortized as a reduction of rent expense over the term of the related lease. Advertising, Promotion and Catalog The Company expenses the production costs of advertising the first time the advertising takes place. Advertising, promotion and catalog expenses for the years ended December 31, 2012 , 2011 and 2010 amounted to $22,114 , $15,194 , and $17,537 respectively, and are included in selling expenses in the accompanying consolidated statements of operations. The Company has cooperative advertising arrangements with certain vendors in its U.S. wholesale segment. For the years ended December 31, 2012 , 2011 and 2010 , cooperative advertising expenses were $311 , $112 , and $243 , respectively. Share-Based Compensation The Company recognizes compensation expense on a straight-line basis net of forfeitures over the vesting period for all share-based awards granted. The Company determines the fair value of restricted stock awards based on the market value at the grant date. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards at the grant date. The Company calculates the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. Due to the lack of historical information, the Company determines the expected term of its stock option awards by using the simplified method, which assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. Estimated forfeitures are zero , as to date, actual forfeitures have been insignificant. The expected dividend yield is zero as the Company has not paid or declared any cash dividends on its Common Stock. Based on these valuations, the Company recognized share-based compensation expense of $10,580 , $6,814 , and $3,719 for the years ended December 31, 2012 , 2011 and 2010 , respectively. Preferred Stock At December 31, 2012 and 2011 , the Company was authorized to issue 1,000 shares of preferred stock with a par value of $0.0001 with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. There were no shares issued or outstanding at December 31, 2012 and 2011 . Shares may be issued in one or more series. Earnings per Share The Company presents earnings per share (“EPS”) utilizing a dual presentation of basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. At December 31, 2012, the calculations of net loss per share included the effect of 2,500 shares related to the CEO performance based-awards as the Company achieved the EBITDA targets and these shares were no longer contingently issuable. See Note 14. The Company had common stock under various options, warrants and other agreements at December 31, 2012 , 2011 and 2010 . The weighted average effects of 53,478 , 49,270 and 23,050 shares at December 31, 2012 , 2011 and 2010 , respectively, were excluded from the calculations of net loss per share for the years ended December 31, 2012 , 2011 and 2010 , because their impact would have been anti-dilutive. See Note 13. 67 Table of Contents Comprehensive Loss Comprehensive loss represents the change in stockholders’ equity resulting from transactions other than stockholder investments and distributions. Accumulated other comprehensive loss includes changes in equity that are excluded from the Company’s net loss, specifically, unrealized gains and losses on foreign currency translation adjustments and is presented in the consolidated statements of stockholders' equity. The Company presents the components of comprehensive loss within the consolidated statements of operations and comprehensive loss. Accounting Standards Updates Beginning in the quarter ended March 31, 2012, the Company enhanced its fair value measurement application and disclosures as a result of adopting new requirements issued by the Financial Accounting Standards Board ("FASB") in May 2011. The new rules include revisions to the standards for the use of fair value measurements and additional disclosures for: (i) all transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) Level 3 measurements; and (iii) hierarchy classifications used for assets and liabilities whose fair value is disclosed only in the footnotes. The new rules did not have a material impact on the Company. Accounting standards updates effective after December 31, 2012 , are not expected to have a material effect on the Company's consolidated financial statements. Subsequent Events The Company has evaluated events that occurred subsequent to December 31, 2012 and through the date the financial statements were issued. Note 3. Inventories The following table presents the components of inventories at December 31, 2012 and 2011 : 2012 Raw materials Work in process Finished goods $ Less: Reserve for inventory shrinkage and obsolescence $ 22,301 $ 2,197 152,384 176,882 (2,653) 174,229 $ 2011 18,326 2,468 168,902 189,696 (3,932) 185,764 Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. The cost elements of inventories include materials, labor and overhead. For the years ended December 31, 2012 , 2011 and 2010 , no one supplier provided more than 10% of the Company’s raw material purchases. The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and provides reserves for lower of cost or market reserves for such identified excess and slow-moving inventories. At December 31, 2012 and 2011 , the Company had a lower of cost or market reserve for excess and slow-moving inventories of $2,140 and $2,050 , respectively. The Company establishes a reserve for inventory shrinkage for each of its retail locations and its warehouse. The reserve is based on the historical results of physical inventory cycle counts. The Company has a reserve for inventory shrinkage in the amount of $513 and $1,882 at December 31, 2012 and 2011 , respectively. 68 Table of Contents Note 4. Property and Equipment The following table presents the components of property and equipment at December 31, 2012 and 2011 : 2012 Machinery and equipment Furniture and fixtures Computers and software Automobiles and light trucks Leasehold improvements Buildings Construction in progress $ Less: Accumulated depreciation and amortization $ Total 2011 50,180 $ 42,430 37,556 1,167 86,623 587 5,293 223,836 (156,058) 67,778 $ 48,251 39,789 30,410 1,066 81,078 574 382 201,550 (134,112) 67,438 Property and equipment is recorded on the basis of cost and depreciated over the estimated used useful lives of fixed assets. The useful lives of the Company's major classes of assets are as follows: Machinery and equipment Furniture and fixtures Computers and software Automobiles and light trucks Leasehold improvements Buildings 5 to 7 years 3 to 5 years 3 to 5 years 3 to 5 years Shorter of lease term or useful life 25 years Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. The costs of normal maintenance and repairs are charged to expense in the year incurred. Expenditures which significantly improve or extend the life of an asset are capitalized and depreciated over the asset’s remaining useful life. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the related assets or the lease term. Upon sale or disposition, the related cost and accumulated depreciation are removed from the Company’s financial statements and the resulting gain or loss, if any, is reflected in income from operations. Property plant and equipment acquired are recorded as construction in progress until placed in-service, at which time the asset is reclassified to the appropriate asset category and depreciation commences. For the years ended December 31, 2012 , 2011 , and 2010 , depreciation and amortization expense relating to property and equipment was $22,989 , $24,980 and $28,130 , respectively. At December 31, 2012 and 2011, property and equipment includes $16,415 and $12,063 , for machinery and equipment held under capital leases, respectively. Accumulated amortization for these capital leases at December 31, 2012 and 2011 was $12,093 and $11,874 . The Company identified indicators of impairment present at certain retail stores within its U.S. Retail, Canadian and International segments, specifically related to under-performance or operating loss relative to expected historical or projected future operating results. The Company performed a recoverability test on these stores, and for the stores which failed the test, measured and recorded an impairment charge as applicable. The key assumptions used in the estimates of projected cash flows utilized in both the test and measurement steps of the impairment analysis were sales, gross margins, and payroll costs. These forecasts were based on historical trends and take into account recent developments as well as the Company's plans and intentions. These inputs are considered level 3 in the fair value hierarchy (See Note 2). Based upon the results of the discounted cash flow analysis, the Company recorded an impairment charge on certain retail store leasehold improvements and key money in the U.S. Retail, Canadian, and International segments of $1,647 , $4,267 and $8,597 for the years ended December 31, 2012 , 2011 , and 2010 , respectively. On January 11, 2011, the Company entered an agreement to sell and simultaneously lease back all of the Company's unencumbered manufacturing equipment, for a term of four years and an interest rate of 14.8% . The sale price of the manufacturing equipment was $3,100 . The Company has an option, exercisable during the fourth year of the lease term, to repurchase the manufacturing equipment for $310 . On November 16, 2012, the Company renewed the lease for a term of three years and an interest rate of 16% . The transaction is accounted for as a financing transaction and is recorded in the accompanying consolidated financial statements as a capital lease. 69 Table of Contents Note 5. Goodwill, Intangible Assets and Other Assets Goodwill of $1,906 is assigned to the U.S. Wholesale segment and is related to the acquisition of American Apparel Dyeing & Finishing, Inc. on June 2, 2005 and American Apparel Garment and Dyeing, Inc. on May 9, 2008. Based on the qualitative assessment provisions of ASC 350 "Intangibles-Goodwill and Other", the Company determined that the fair value of the reporting unit was more likely than not greater than its carrying amount, and therefore, a quantitative calculation of the reporting unit's fair value would not be needed. For the years ended December 31, 2012 , 2011 and 2010 , the Company had no goodwill impairment. The following table presents the net carrying amounts of definite and indefinite lived intangible assets and other assets at December 31, 2012 and 2011 : 2012 Deferred financing costs Broker and finder fees Lease rights Key money store leases Gross amortizable intangible assets Accumulated amortization Total net amortizable intangible assets Goodwill Workers compensation deposit Lease security deposits Other Total $ $ 4,101 1,486 213 2,244 8,044 (2,048) 5,996 1,906 14,624 8,117 4,140 34,783 2011 $ $ 1,833 1,488 274 2,567 6,162 (1,577) 4,585 1,906 7,022 7,919 3,592 25,024 Deferred financing costs represent costs incurred in connection with the issuance of certain indebtedness and were capitalized as deferred costs and are being amortized over the term of the related indebtedness. The Company incurred related amortization expense of $2,287 , $1,634 , and $1,473 , for the years ended December 31, 2012 , 2011 and 2010 , respectively, which is recorded to interest expense. Lease rights are costs incurred to acquire the right to lease a specific property. A majority of the Company's lease rights are related to premiums paid to landlords. Lease rights are recorded at cost and are amortized over the term of the respective leases. Property lease terms are generally for 10 years. Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the respective lease terms. Aggregate amortization expense of intangible assets and other assets (excluding deferred financing costs) is included in operating expenses in the consolidated statements of operations for the years ended December 31, 2012 , 2011 and 2010 and was approximately $472 , $752 , and $990 , respectively. The following table presents the estimated amortization expense of deferred financing costs, broker and finder fees, lease rights and key money for each of the five succeeding years as of December 31, 2012 : Amount 2013 $ 2014 2015 2016 2017 and thereafter 70 2,346 2,217 757 243 433 Table of Contents Note 6. Accrued Expenses and Other Current Liabilities The following table presents the components of accrued expenses and other current liabilities as of December 31, 2012 and 2011 : 2012 Compensation, bonuses and related taxes Workers’ compensation and other self-insurance reserves (Note 16) Sales, value and property taxes Gift cards and store credits Loss contingencies Accrued vacation Deferred revenue Deferred rent Other $ Total accrued expenses $ 11,524 5,288 4,751 5,964 752 1,055 590 2,997 8,595 41,516 2011 $ $ 11,339 5,318 3,721 6,939 1,575 790 892 2,170 10,981 43,725 Note 7. Revolving Credit Facilities and Current Portion of Long-Term Debt The following table presents revolving credit facilities and current portion of long-term debt as of December 31, 2012 and 2011 : 2012 Revolving credit facility (Crystal), maturing March 2015 Term loan (Crystal), maturing March 2015 Revolving credit facility (Bank of America), replaced in March 2012 Revolving credit facility (Bank of Montreal), maturing December 2013 Current portion of long-term debt (Note 8) Total revolving credit facilities and current portion of long-term debt $ $ 26,113 30,000 — 4,387 56 60,556 2011 $ $ — — 48,324 1,995 56 50,375 The Company incurred interest charges of $41,559 , $33,167 and $23,752 for the years ended December 31, 2012 , 2011 and 2010 , respectively, for all outstanding borrowings. The interest charges subject to capitalization for the years ended December 31, 2012 , 2011 and 2010 were no t significant. Revolving Credit Facility and Term Loan - Crystal On March 13, 2012, the Company replaced its existing revolving credit facility of $75,000 with BofA with a $80,000 senior credit facility with Crystal Financial LLC ("Crystal" and the credit facility the "Crystal Credit Agreement") 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 . In connection with the financing from Crystal, the Company entered into an amendment to the Lion Credit Agreement. See Notes 8 and 13. Borrowings under the Crystal Credit Agreement, as amended, are subject to certain borrowing reserves based on eligible inventory and accounts receivable. In addition, the initial availability under the revolving credit facility was increased by $12,500 for the value associated with the brand name. This initial increase based on the brand name was ratably reduced to $0 during the period from April 13, 2012 through January 1, 2013. The Crystal Credit Agreement matures on March 13, 2015 and is collateralized by substantially all of the Company's U.S. and U.K. assets and equity interest in certain of its foreign subsidiaries. At December 31, 2012, the Company had $780 of outstanding letters of credit secured against the Crystal Credit Agreement. The amount available for additional borrowings as of December 31, 2012 was $8,029 . As of December 31, 2012 , the interest under the agreement was 9.31% (the 90-day LIBOR at 0.31% plus 9.0% ) and also includes an unused facility fee ranging from 0.375% to 1.0% 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 20.06% (the 90-day LIBOR at 0.31% 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 3.0% if it occurs the second anniversary of the agreement (b) 2.00% if it occurs in the third year. The Crystal Credit Agreement includes a minimum excess availability covenant that requires the Company to maintain minimum excess availability of the greater of $8,000 , or 10.0% of the borrowing base. If the excess availability falls below this 71 Table of Contents minimum, the Company will be required to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 to be calculated monthly on a consolidated trailing twelve-month basis and continuing until the excess availability exceeds this minimum for sixty consecutive days. Additionally, the Crystal Credit Agreement, as amended, added a new minimum excess availability covenant that required the Company to maintain minimum excess availability to be no less than $5,000 during the period from December 17, 2012 to February 1, 2013 and also added a minimum monthly Consolidated EBITDA covenant for the remainder of 2012 to be determined at the end of each month. Furthermore, the Crystal Credit Agreement included an annual limitation of capital expenditures at the Company's domestic subsidiaries to no more than $18,000 for the year ended December 31, 2012 and $25,000 for each year thereafter. On February 6, 2013, the Company entered into an amendment to the Crystal Credit Agreement ("Crystal Fifth Amendment"), that among other things, (i) allows the Company to borrow based on its trademarks 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, (iv) amended the amount of capital expenditures limit in fiscal year 2012 from $17,000 to $18,000 and (v) provides the consent of the administrative agent and lenders to the Eleventh Amendment to the Lion Credit Agreement. Among other provisions, the Crystal Credit Agreement requires that the Company 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. Consequently, the amounts outstanding under the Crystal Credit Agreement are classified as a current liability. During the year ended December 31, 2012 , the Company's excess availability was below the minimum amount and as a result, it was required to maintain the fixed charge coverage ratio. As of December 31, 2012 , the Company was in compliance with the required financial covenants of the Crystal Credit Agreement. The Crystal Credit Agreement contains cross-default provisions with the Lion Credit Agreement and the Bank of Montreal Credit Agreement, whereby an event of default occurring under the Lion Credit Agreement or the Bank of Montreal Credit Agreement would cause an event of default under the Crystal Credit Agreement. Revolving Credit Facility - Bank of America The Company had a revolving credit facility of $75,000 with BofA, which was replaced with the Crystal Credit Agreement on March 13, 2012 . Borrowings under the BofA Credit Agreement were subject to certain advance provisions established by BofA, and were collateralized by substantially all of the Company's U.S. assets and shares in its foreign subsidiaries. Interest under the BofA Credit Agreement was at either (1) the 2-month London Interbank Offered Rate (“LIBOR”) ( 0.34% at December 31, 2011 ) plus 4.50% or (2) BofA's prime rate (which rate in no event could have been lower than LIBOR plus 4.50% per annum and was 3.25% at December 31, 2011 ) plus 2.50% , at the Company's option. At December 31, 2011 the Company had $7,545 of outstanding letters of credit secured against the BofA Credit Agreement. Revolving Credit Facility - Bank of Montreal 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 an amendment to its existing line of credit with Bank of Montreal (the "Bank of Montreal Credit Agreement") that extended the maturity of the agreement to December 31, 2013. The agreement provides for borrowings up to C$11,000 , bearing interest at 7.0% (the bank's prime rate at 3.0% as of December 31, 2012 plus 4.0% per annum payable monthly.) This line of credit is secured by a lien on the CI Companies' accounts receivable, inventory and certain other tangible assets. Available borrowing capacity at December 31, 2012 was $1,148 . The Bank of Montreal Credit Agreement contains a fixed charge coverage ratio and restricts the Company's Canadian subsidiaries from entering into operating leases above a specified threshold. Additionally, the Bank of Montreal Credit Agreement imposes a minimum excess availability covenant, which requires the Company's Canadian subsidiaries to maintain at all times minimum excess availability of 5.0% of the revolving credit commitment under the facility. The Bank of Montreal Credit Agreement contains cross-default provisions with the Crystal Credit Agreement and the Lion Credit Agreement, whereby an event of default occurring under the Crystal Credit Agreement and Lion Credit Agreement would cause an event of default under the Bank of Montreal Credit Agreement. As of December 31, 2012 , the Company was in compliance with all required financial covenants of the Bank of Montreal Credit Agreement. 72 Table of Contents Note 8. Long-Term Debt The following table presents the components of long-term debt as of December 31, 2012 and 2011 : 2012 Long-term debt with Lion (a) Other Total long-term debt Current portion of debt Long-term debt, net of current portion $ $ 109,680 $ 388 110,068 (56) 110,012 $ 2011 96,760 438 97,198 (56) 97,142 (a) Including accrued interest paid-in-kind of $16,469 and $17,550 and net of discount of $27,929 and $20,183 at December 31, 2012 and 2011 , respectively. Lion Credit Agreement The Company has a loan agreement with Lion Capital, LLC ("Lion" and the "Lion Credit Agreement", respectively) and the other lenders party thereto, that provided the Company 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 the option of the Company. The Company's obligations under the Lion Credit Agreement are secured by a second lien on substantially all of the assets of the Company. The Lion Credit Agreement is subordinated to the Crystal Credit Agreement and contains customary representations, and warranties, events of default, affirmative covenants and negative covenants (which impose restrictions and limitations on, among other things, dividends, investments, asset sales, capital expenditures, and the ability of the Company to incur additional debt and liens), and certain financial covenants. The Company is permitted to prepay the loans in whole or in part at any time at its option, with no prepayment penalty. Significant covenants in the Lion Credit Agreement include an annual limitation of capital expenditures to $30,000 for fiscal 2012. The Lion Credit Agreement contains certain cross-default provisions by which noncompliance with covenants under the Crystal Credit Agreement, the Bank of Montreal Credit Agreement and certain other existing and potential agreements also constitutes an event of default under the Lion Credit Agreement. On March 13, 2012, in connection with the new credit agreement with Crystal Financial (see Note 7), the Company entered into a seventh amendment to the Lion Credit Agreement, which among other things: (i) consented to the Crystal Credit Agreement, (ii) extended the maturity date 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 and, (iv) modified certain other financial covenants, including covenants related to capital expenditures. The amendment also required that the Lion Warrant be amended (see Note 13). In addition, the seventh amendment modified the Lion Credit Agreement to provide for interest at a rate of 5% per annum to be paid in cash commencing on the interest accruing from and after September 1, 2012 (with the remainder of the interest under the Lion Credit Agreement payable in kind or in cash at the option of the Company). In connection with the March 13, 2012 amendment, the Company evaluated the change in cash flows in connection with the amendment to the Lion Credit Agreement. The Company determined that there was a greater than 10% change between the present values of the existing debt and the amended debt causing an extinguishment of debt. The Company recorded the modified debt and related warrant at its fair value and recognized a gain of $11,588 on extinguishment of existing debt. This gain on extinguishment was determined by calculating the difference of the net carrying amount of the Lion debt of $116,507 (which includes the principal, paid-in-kind interest, fair value of the Lion Warrant, unamortized discount and unamortized deferred financing cost immediately prior to the amendment) and the fair value of the modified debt of $104,919 (which includes the fair value of modified debt, fair value of the modified Lion Warrant and amendment related fees). The difference between the carrying net amount of the existing debt of $121,140 and the fair value of the modified debt of $86,898 was recorded as a discount to the modified debt, and will be recognized as interest expense using the effective interest method over the remaining term of the Lion Credit Agreement. 73 Table of Contents The Lion Credit Agreement also requires a minimum Consolidated EBITDA amount (as specified in the credit agreement) for any twelve consecutive months as determined at the end of each fiscal quarter (Quarterly Minimum Consolidated EBITDA). Additionally, beginning with the twelve consecutive months ended July 31, 2012 through the remainder of 2013, the Lion Credit Agreement includes a second minimum Consolidated EBITDA covenant to be determined at the end of each month (Monthly Minimum Consolidated EBITDA) that conforms to the Crystal minimum Consolidated EBITDA covenant. As of December 31, 2012, the Company is in compliance with the financial covenants under the Lion Credit Agreement. Amortization of debt discount included in interest expense was $8,130 , $7,390 and $4,524 for the years ended December 31, 2012 , 2011 and 2010 , respectively. On February 6, 2013, in connection with the Crystal Fifth Amendment, the Company entered into an eleventh amendment to the Lion Credit Agreement which, among other things, conformed the monthly minimum Consolidated EBITDA to the revised minimum EBITDA covenant under the Crystal Credit Agreement and provided for administrative agent and lender consent to the Crystal Fifth Amendment. Note 9. Fair Value of Financial Instruments The fair value of the Company's financial instruments are measured on a recurring basis. The carrying amount reported in the accompanying consolidated balance sheets for cash, accounts receivable (including credit card receivables), accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings under the revolving credit facility with Crystal and Bank of Montreal and the term loan approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the term loan with Lion was estimated using a discounted cash flow analysis and a yield rate that was estimated using yield rates for publicly traded debt instruments of comparable companies with similar features. The fair value of each warrant was estimated using either a Monte Carlo simulation model or the Binomial Lattice option valuation model. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of December 31, 2012 . The following table presents carrying amounts and fair values of the Company's financial instruments as of December 31, 2012 : Level 3 Liabilities Long-term debt with Lion, net of discount of $27,929 and including interest paid-in-kind of $16,469 Lion Warrant SOF Warrant Carrying Amount $ $ 109,680 — (a) — (a) 109,680 Fair Value $ $ (a) No cost is associated with these liabilities (see Note 13). The following table presents carrying amounts and fair values of the Company's financial instruments as of December 31, 2011 : Carrying Amount Fair Value Level 3 Liabilities Long-term debt with Lion, net of discount of $20,183 and including interest paidin-kind of $17,550 $ 96,760 $ 86,766 Lion Warrant — (a) 9,462 — (a) 171 SOF Warrant $ 96,760 $ 96,399 (a) No cost is associated with these liabilities (see Note 13). 74 105,792 17,222 19 123,033 Table of Contents The following summarizes the activity of Level 3 inputs measured on a recurring basis for the years ended December 31, 2012 and 2011 : Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Warrants Balance at January 1, 2011 Additions (see Note 13) Exercises Realized loss Adjustment resulting from change in fair value recognized in earnings Balance at January 1, 2012 Adjustment resulting from change in fair value recognized in earnings Gain on extinguishment of debt (see Note 8) $ Balance at December 31, 2012 $ $ 993 22,547 — — (13,907) 9,633 4,126 3,482 17,241 Purchase Rights $ $ $ — $ 15,605 (2,857) (3,188) (9,560) — $ — — — $ Total 993 38,152 (2,857) (3,188) (23,467) 9,633 4,126 3,482 17,241 Realized loss is the difference between the net proceeds received and the fair value of the purchase rights acquired related to the April 26, 2011 Investor Purchase Agreement (see Note 13). The realized loss is recorded in unrealized (gain) loss on change in fair value of warrants and purchase rights in the accompanying consolidated statements of operations. Adjustment resulting from change in fair value is the amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gain or loss is recorded in unrealized (gain) loss on change in fair value of warrants and purchase rights in the accompanying consolidated statements of operations. Note 10. Capital Lease Obligations The Company leases certain equipment under capital lease arrangements expiring at various times through 2017 . The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The interest rates pertaining to these capital leases range from 0.4% to 18.0% (average interest rate is 10.9% ). Minimum future payments under these capital leases at December 31, 2012 are: Year Ending December 31, 2013 $ 2014 2015 2016 2017 and thereafter Total future minimum lease payments Less: Amount representing interest Net minimum lease payments Current portion Long-term portion $ 75 2,291 1,866 1,374 3 2 5,536 (989) 4,547 1,703 2,844 Table of Contents Note 11. Income Taxes The Company's net loss before income taxes includes the following components for the years ended December 31, 2012 , 2011 and 2010 : 2012 United States Foreign $ $ 2011 (38,365) 4,906 (33,459) $ $ 2010 (37,876) 283 (37,593) $ $ (76,807) 2,656 (74,151) The following table presents the federal and state income tax provision (benefit) for the years ended December 31, 2012 , 2011 and 2010 : 2012 Current: Federal State Foreign $ — 134 3,446 3,580 Deferred: Federal State Foreign — — 233 233 3,813 $ Income tax provision 2011 $ 2010 — 228 879 1,107 — — 614 614 1,721 $ $ $ (2,669) (355) 1,452 (1,572) 10,158 2,429 1,149 13,736 12,164 The following table presents a reconciliation of taxes at the U.S. federal statutory rate and the effective tax rate for the years ended December 31: 2012 Taxes at the statutory federal tax rate of 35% State tax, net of federal benefit Change in valuation allowance Federal general business tax credits Foreign taxes Unrealized loss (gain) on warrants and purchase rights Uncertain tax positions Other (11,711) 4,913 5,123 — (618) 4,809 — 1,297 3,813 Total income tax provision 2011 (13,158) (18) 21,794 — 533 (8,213) — 783 1,721 2010 (25,953) 5,411 31,522 (39) 1,863 — (342) (298) 12,164 Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and b) operating losses and tax credit carryforwards. 76 Table of Contents The following table presents the tax effects of significant items comprising the Company's deferred taxes as of December 31: 2012 Deferred tax assets: Allowance for doubtful accounts Deferred rent Accrued liabilities and workers’ compensation Inventories Federal and California tax credits Net operating loss carryforward Deferred gift card income Fixed assets Foreign tax credits Other comprehensive income Other Total gross deferred tax assets Less valuation allowance Net deferred tax assets Deferred tax liabilities: Prepaid expenses Fixed assets Unrealized (gain) loss on warrants and purchase rights Other Total gross deferred tax liabilities Net deferred tax assets and liabilities $ $ 2011 778 7,773 12,409 6,731 12,067 36,111 1,866 870 8,335 29 848 87,817 (77,578) 10,239 (1,004) — (8,003) (35) (9,042) 1,197 $ $ 811 8,082 10,584 4,885 16,205 27,793 1,978 — 5,662 3 1,654 77,657 (73,773) 3,884 (820) (1,382) — (251) (2,453) 1,431 At December 31, 2012 , the Company has federal net operating loss carryforwards of approximately $95,647 expiring beginning in 2030, state net operating loss carryforwards of approximately $65,390 , expiring beginning in 2020 and foreign net operating loss carryforwards of $7,400 with expiration dates starting in 2014 (certain foreign loss carryforwards do not expire). The Company has performed an analysis and determined it is more likely than not that ownership change has not occurred through December 31, 2012 pursuant to §382 of the I.R.C. and, accordingly, the net operating loss carryfowards through such date are not subject to an annual Section 382 limitation. The California state tax credits do not expire. Management has determined that it is more likely than not that the tax credits will be unrealized due to the Company’s ability to generate substantial credits in excess of credits utilized on an annual basis and has provided a full valuation allowance against the unused California credit carryforwards. The Company accounts for its uncertain tax positions in accordance with ASC 740-10. The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits: 2012 Gross unrecognized tax benefits at January 1 Increases for tax positions in prior periods Increases for tax positions in current period Decreases for tax positions in prior period Gross unrecognized tax benefits at December 31 $ $ 2,163 — — (2,163) — 2011 $ $ 2010 1,311 852 — — 2,163 $ $ 5,138 62 — (3,889) 1,311 Included in the balance of unrecognized tax benefits at December 31, 2012 , 2011 and 2010 are $0 , $1,329 , and $1,311 , respectively, of tax benefits that, if recognized, would affect the effective tax rate. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the calendar years ended December 31, 2011 through December 31, 2012 . The Company's state and foreign tax returns are open to audit under similar statute of limitations for the calendar years ended December 31, 2007 through 2012. 77 Table of Contents The Company agreed to a settlement with the Canadian Revenue Agency (“CRA”) for audit of the years ended December 31, 2005 through December 31, 2007 representing $830 in additional tax interest and penalty. As a result, the Company's unrecognized tax benefits were decreased by $552 for the year ended December 31, 2012 . The Company concluded its audit by the U.S. Internal Revenue Service for the years ended December 31, 2008 through December 31, 2010 with no tax owed due to utilization of federal net operating loss carryback. As a result, the Company's unrecognized tax benefits were decreased by $1,611 . The Company is also currently being audited by various state jurisdictions. At this time, the Company does not anticipate these audits to result in a material impact on the Company. During 2010, the Company filed applications for the change in accounting method resulting in audit protection for prior years for the Company's uncertain tax positions related to United States Federal and State income taxes. As a result, these uncertain tax positions are resolved and the Company's unrecognized tax benefits were decreased by $3,889 for the year ended December 31, 2010, resulting in a benefit to income tax provision of $700 for the reversal of a previously recorded valuation allowance and $300 for accrued interest and penalties. The Company does not provide for U.S. Federal income taxes on the undistributed earnings ( $30,046 at December 31, 2012 ) of its controlled foreign corporations which are considered permanently invested outside of the United States. Undistributed cash at controlled foreign corporations, which remains permanently reinvested at December 31, 2012 was $3,422 . Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated with its hypothetical calculation, but would be substantially eliminated as the Company has U.S. net operating losses of approximately $95,647 at December 31, 2012 and U.S. tax credits of approximately $12,718 available to utilize to offset the tax effect of repatriation. Note 12. Related Party Transactions See Note 8, Long-Term Debt for a description of loans made by Lion to the Company and Note 13, Stockholders' Equity for a description of the warrants issued by the Company to Lion and a purchase agreement, dated April 27, 2011, between Mr. Charney and the Company. Subordinated Notes Payable to Related Party At December 31, 2010, the Company had three outstanding loans payable to its CEO for $4,611 . These loans bearing interest at 6% were due at various dates between December 2012 and January 2013. On March 24, 2011, the Company and its CEO entered into, and closed the transactions under, a purchase agreement pursuant to which (i) Mr. Charney purchased from the Company an aggregate of 1,802 shares of Common Stock at a price of $1.11 per share, for aggregate cash consideration of approximately $2,000 in cash, and (ii) the three outstanding loans payable, which as of March 24, 2011 had an aggregate book value of approximately $4,688 , including principal and accrued and unpaid interest outstanding, were canceled in exchange for an issuance by the Company of an aggregate of 4,223 shares of 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 common stock exceeds $3.50 for 30 consecutive trading days or there is a change of control of the Company, as defined in the purchase agreement. For the years ended December 31, 2012 , 2011 and 2010 interest expense related to these loans was $0 , $64 , and $266 , respectively. Personal Guarantees by the Company’s CEO As of December 31, 2012 , the CEO of the Company has personally guaranteed the obligations of American Apparel under four property leases aggregating $7,660 in obligations. Additionally, the CEO of the Company has personally guaranteed the obligations of the Company with one vendor aggregating $600 . Lease Agreement Between the Company and Related Parties In December 2005, the Company entered into an operating lease, which commenced on November 15, 2006, for its knitting facility with a related company (“American Central Plaza, LLC”), which is partially owned by the CEO and the Chief Manufacturing Officer (“CMO”) of the Company. The Company’s CEO holds an 18.75% ownership interest in American Central Plaza, LLC, while the CMO holds a 6.25% interest. The remaining members of American Central Plaza, LLC are not affiliated with the Company. The lease expired in November 2011 and was subsequently extended for the next five years on substantially the same terms. Rent expense (including property taxes and insurance payments) related to this lease was $830 , $622 and $712 for the years ended December 31, 2012 , 2011 and 2010 , respectively. 78 Table of Contents Payments to Morris Charney Morris Charney, (“Mr. M. Charney”), is the father of the Company's CEO and serves as a director of American Apparel Canada Wholesale Inc. and a director of American Apparel Canada Retail Inc. Day to day operations of these two Canadian subsidiaries are handled by management and other employees of these subsidiaries, none of whom performs any policy making functions for the Company. Management of American Apparel sets the policies for American Apparel and its subsidiaries as a whole. Mr. M. Charney does not perform any policy making functions for the Company or any of its subsidiaries. Instead, Mr. M. Charney only provides architectural consulting services primarily for stores located in Canada and, in limited cases, in the U.S. Mr. M. Charney was paid architectural consulting and director fees amounting to $260 , $297 and $200 for the years ended December 31, 2012 , 2011 and 2010 , respectively. Registration Rights Pursuant to a registration rights agreement between the Company and Dov Charney, entered into in connection with the 2006 reverse merger between American Apparel, Inc. and Endeavor Acquisition Corp, Mr. Charney has both demand and piggyback registration rights relating to the shares of the Company's common stock that he received from that transaction. Employment Agreement with the Company's CEO In March 2012 the Company's Board of Directors approved a three -year employment agreement with Mr. Charney commencing on April 1, 2012 that will automatically extend for successive one-year periods unless earlier terminated by the Company. The agreement provides for, among other things, a minimum annual base compensation of $800 plus performance bonuses and the right to receive 7,500 shares of the Company's common stock, subject to performance hurdles and other terms, and conditions as described in the agreement. See Note 13. Bonus to the Company's CEO For the years ended December 31, 2012, 2011 and 2010, the Company recorded $1,003 , $754 and $0 in CEO bonus in operating expenses in the consolidated statements of operations. Note 13. Stockholders' Equity 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 . Common Stock Warrants Lion Warrants As of December 31, 2012, Lion held warrants to purchase 21,606 shares of the Company's common stock, with an exercise price of $0.75 per share. These warrants expire on February 18, 2022. The Lion Warrants, as amended, contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of the Company's common stock issuable upon exercise of the Lion Warrant, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges. The fair value for the warrants at December 31, 2012 was estimated using the Binomial Lattice option valuation model. The fair value of the warrants at December 31, 2011 was estimated using the Monte Carlo simulation valuation model. The calculations as of December 31, 2012 assumed a contractual remaining term of 9.27 years , exercise price of $0.75 , stock price of $1.01 , interest rate of 1.63% , volatility of 73.87% and no dividends. As of December 31, 2012 and December 31, 2011 , the fair value of the Lion Warrants was estimated to be $17,222 and $9,462 , respectively, and in accordance with ASC 815-40 "Derivatives and Hedging - Contracts in Entity's Own Equity", was recorded as a liability in the accompanying consolidated balance sheets. On March 13, 2012, in connection with the new credit agreement with Crystal Financial, LLC, the Company entered into an amendment to the Lion Credit Agreement (see Note 8), which required that the warrants issued to Lion be amended to, among other things, extend the term of the warrants to February 18, 2022 and add a provision pursuant to which, if American Apparel did not meet a certain quarterly EBITDA amount, the exercise price of the warrants would be reduced by $0.25 (a one-time adjustment for the first violation of such covenant; subsequent violations would not result in further adjustment). As of March 31, 2012 , the Company did not meet the EBITDA requirement, and, as a result, the exercise price of the existing Lion warrants was reduced by $0.25 to $0.75 per share. 79 Table of Contents SOF Warrants As of December 31, 2012, SOF Investments, L.P. ("SOF") held warrants to purchase 1,000 shares of the Company's common stock, with an exercise price of $2.148 per share, subject to adjustment under certain circumstances. These warrants expire on December 19, 2013. On March 31, 2012, as a result of the change in exercise price for the Lion Warrants discussed above, the exercise price of the SOF warrants were changed to $2.148 per share. The fair value for the warrants at December 31, 2012 and December 31, 2011 was estimated using the Binomial Lattice option valuation model. The calculations as of December 31, 2012 assumed a contractual remaining term of 1.0 year , exercise price of $2.148 , stock price of $1.01 , interest rate of 0.16% , volatility of 50.82% and no dividends. As of December 31, 2012 and December 31, 2011 , the fair value of the warrants were estimated to be $19 and $171 , respectively, and in accordance with ASC 815-40, was recorded as a liability in the accompanying consolidated balance sheets. The following table summarizes common stock warrants issued, forfeited, expired and outstanding (shares in thousands): Weighted Average Exercise Price Number of Shares Outstanding - January 1, 2010 Issued Forfeited Expired Outstanding - December 31, 2010 Issued (1) Forfeited (2) Expired Outstanding - December 31, 2011 Issued (2) Forfeited (2) Expired 17,000 — — — 17,000 41,366 (35,760) — 22,606 44,212 (44,212) — 22,606 Outstanding - December 31, 2012 $ Fair value - December 31, 2012 $ $ 2.05 — — — 2.05 1.14 1.63 — 1.05 0.90 1.03 — 0.81 Weighted Average Contractual Life (Years) 6.1 — — — 5.1 — — 6.0 — — 8.8 17,241 (1) Issued shares at December 31, 2011 include issuances and repriced shares. (2) Represents repriced shares. Common Stock and Purchase Rights On April 26, 2011 and in connection with the February 18, 2011 amendment to the Lion Credit Agreement, the Company entered into a purchase and investment agreement with a group of investors ("Investors") and sold approximately 15,777 shares of common stock at a price of $0.90 per share and purchase rights to acquire additional shares of common stock for the aggregate net cash purchase price of approximately $12,417 . The purchase rights gave the Investors the right to purchase up to approximately 27,443 additional shares of common stock at a price of $0.90 per share. In connection with the purchase agreement with the Investors, the Company entered into a purchase agreement with Mr. Charney that, among other things, allowed Mr. Charney to purchase from the Company 778 shares of common stock at $0.90 per share, generating net proceeds of $700 , and granted to Mr. Charney a right to purchase up to 1,556 additional shares of common stock on substantially the same terms as the purchase agreement with the Investors (the "Charney Purchase Rights"). The Investor Purchase Rights and Charney Purchase Rights (collectively, the "Purchase Rights") had a fair value of $15,605 at the date of the agreement. The Company recorded the Purchase Rights as a liability since they met the classification requirements for liability accounting in accordance with the ASC 815-40. The fair value was calculated using the Monte Carlo simulation pricing model, and assumed a stock price of $1.58 , exercise price of $0.90 , volatility of 99.08% , annual risk free rate of 0.11% and a term of 0.5 years . Net proceeds of $12,417 were allocated entirely to the Purchase Rights. The difference between the net proceeds received and the fair value of the purchase rights aggregating $3,188 were recorded in unrealized (gain) loss on change in fair value of warrants and purchase rights in the consolidated statements of operations. 80 Table of Contents In July 2011, the Investors exercised their purchase rights and acquired 8,407 shares of the Company's common stock for $0.90 per share, generating net proceeds of $6,593 . The fair value of these exercised rights aggregated $2,857 , which was reclassified in accordance with ASC 815-40 from a liability to stockholders' equity. As a result of the exercise of their purchase rights, the Investors have one remaining demand registration right with respect to their shares, subject to the terms and conditions of the relevant purchase agreement. In October 2011, the remaining 19,036 Investor Purchase Rights and the 1,556 Charney Purchase Rights expired without being exercised. The following table summarizes Purchase Rights issued, forfeited and expired (shares in thousands): Number of Shares Outstanding - January 1, 2011 Issued Forfeited Exercised Expired — 28,999 — (8,407) (20,592) — Outstanding - December 31, 2011 Weighted Average Exercise Price $ $ Weighted Average Contractual Life (Years) — 0.90 — 0.90 — — — 0.5 — — — — The Company's CEO Anti-Dilution Rights As a condition to the Investors purchasing the shares and as a result of the July 2011 exercises of the Investor Purchase Rights, the Company provided Mr. Charney with certain anti-dilution rights (the ''Charney Anti-Dilution Rights"). The Charney Anti-Dilution Rights provided that Mr. Charney has a right to receive from the Company, subject to the satisfaction of certain average volume weighted closing price targets, and other terms and conditions set forth in the agreement, up to approximately 20,416 shares of the Company's common stock as anti-dilution protection. On October 16, 2012, the Company and Mr. Charney entered into an amendment to the anti-dilution provisions contained in the Purchase Agreement with Mr. Charney dated as of April 27, 2011. Subject to receipt of any required stockholder approval under the rules of the NYSE MKT, the amendment extends by one year the measurement periods for Mr. Charney’s anti-dilution protection provisions and reduces the length of the corresponding stock price target periods from 60 days to 30 days. The fair value of these awards of $13,192 was determined under the Monte Carlo simulation pricing model. The calculation was based on the exercise price of $0 , the stock price of $1.3 , annual risk free rate of 0.45% , volatility of 90.46% and a term of 3.5 years . As amended, each of the shares associated with the anti-dilution provision is issuable in three equal installments, one per each measurement period set forth below, subject to meeting the applicable average volume weighted closing price (“VWAP ”) for 30 consecutive trading days, calculated as set forth in the purchase agreement with Mr. Charney as follows: (i) for the measurement period from April 16, 2012 to and including April 15, 2014, if the VWAP of the common stock during a period of 30 consecutive trading days exceeds $3.25 per share; (ii) for the measurement period from but not including April 16, 2014 to and including April 15, 2015, if the VWAP of the common stock during a period of 30 consecutive trading days exceeds $4.25 per share; and (iii) for the measurement period from but not including April 16, 2015 to and including April 15, 2016, the VWAP of the common stock during a period of 30 consecutive trading days exceeds $5.25 per share. The Company considered the shares to be awards with market conditions under ASC 718 "Stock Based Compensation," (“ASC 718”). The related service and amortization period for the shares occurs in three probability-weighted terms of 0.9 , 1.8 and 2.7 years corresponding to the three measurement periods above. These awards expire after completion of each respective measurement period. See Note 14. Sale of Treasury Stock to the Company's CEO On November 26, 2010, the Board of Directors authorized the sale of 1,130 treasury shares of its common stock at approximately $1.48 per share, for a total cost of $1,650 to Mr. Charney. 81 Table of Contents Sale of Common Stock to the Company's CEO On July 7, 2011, the Company sold 778 shares of the Company's common stock to Mr. Charney at $0.90 per share for total proceeds of $700 . On March 24, 2011, the Company sold to Mr. Charney 1,802 shares of common stock at a price of $1.11 per share in cash, for approximately $2,000 . Also on March 24, 2011, the three promissory notes issued by two subsidiaries of the Company to Mr. Charney, which as of March 24, 2011 had an aggregate outstanding balance of $4,688 , including principal and accrued and unpaid interest (to but not including March 24, 2011), were canceled in exchange for an issuance by the Company to Mr. Charney of an aggregate of 4,223 shares of common stock at a price of $1.11 per share, with 50% of such shares being issued on March 24, 2011 and the remaining shares issuable to Mr. Charney only if prior to March 24, 2014, (1) the closing sale price of common stock exceeds $3.50 for 30 consecutive trading days or (2) there is a change of control of the Company. Earnings Per Share The Company presents earnings per share (“EPS”) utilizing a dual presentation of basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. At December 31, 2012, the calculations of net loss per share included the effect of 2,500 shares related to the CEO performance based-awards as the Company achieved the EBITDA targets and these shares were no longer contingently issuable. See Note 14. The Company had common stock under various options, warrants and other agreements at December 31, 2012 and 2011 . The weighted average effects of 53,478 , 49,270 and 23,050 shares at December 31, 2012 , 2011 and 2010, respectively, were excluded from the calculations of net loss per share for the years ended December 31, 2012 and 2011 , because their impact would have been anti-dilutive. A summary of the potential stock issuances under various options, warrants and other agreements that could have a dilutive effect on the shares outstanding as of December 31, 2012 and 2011 are as follows: SOF Warrants Lion Warrants Shares issuable to Mr. Charney based on market conditions (1) Contingent shares issuable to Mr. Charney based on market conditions (2) Contingent shares issuable to Mr. Charney based on performance factors (3) Employee options & restricted shares 2012 1,000 21,606 20,416 2,112 5,000 3,344 53,478 2011 1,000 21,606 20,416 2,112 — 4,136 49,270 2010 1,000 16,000 — — — 6,050 23,050 (1) Included Charney Anti-Dilution Rights pursuant to the April 26, 2011 Investor Purchase Agreement (2) Pursuant to the March 24, 2011 conversion of debt to equity (3) Pursuant to Mr. Charney's employment agreement commencing April 1, 2012 The table above does not include additional warrants that may be issuable to Lion pursuant to the anti-dilution provisions under the Lion Credit Agreement such as in the event anti-dilutive shares are issued to Mr. Charney pursuant to the Charney Anti-Dilution Rights. Note 14. Share-Based Compensation Plan Description - On June 21, 2011 the Company's Board of Directors and stockholders approved the American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the “2011 Plan”). The 2011 Plan authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 10,000 shares of the Company's common stock to be acquired by the holders of such awards. In addition, the Board amended the 2007 Performance Equity Plan ("2007 Plan") to provide that as of the July 11, 2011 effective date of registration of the 2011 Plan shares, no new awards shall be made under the 2007 Plan, and any and all shares that would otherwise become available for issuance under the terms of the 2007 Plan by reason of the expiration, cancellation, forfeiture or termination of an outstanding award under such plan shall again be available for grant under the 2011 Plan as of the date of such expiration, cancellation, forfeiture or termination. 82 Table of Contents The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of December 31, 2012, there were approximately 9,251 shares available for future grants under the 2011 Plan. Restricted Share Awards - The following table summarizes shares of restricted stock that were granted, vested, forfeited and outstanding (shares in thousands): Weighted Average Grant Date Fair Value Weighted Average Remaining Vesting Period (in years) $ — — $ $ 1.53 1.53 1.53 1.53 3.9 $ 0.88 1.38 1.53 1.45 2.7 $ 0.93 1.23 1.13 1.33 1.3 Number of Restricted Shares — Non-vested - January 1, 2010 Granted Vested Forfeited 6,533 (1,263) (220) 5,050 Non-vested - December 31, 2010 Granted Vested Forfeited 1,006 (2,668) (202) 3,186 Non-vested - December 31, 2011 Granted Vested Forfeited 1,418 (1,783) (177) 2,644 Non-vested - December 31, 2012 Vesting of the restricted share awards to employees may be either immediately upon grant or over a period of four to five years of continued service by the employee in equal annual installments. Vesting is immediate in the case of members of the Board of Directors. Stock-based compensation is recognized over the vesting period based on the grant-date fair value. 83 Table of Contents Stock Option Awards - The following table summarizes stock options granted, forfeited, expired and outstanding (shares in thousands): Number of Shares — Outstanding - January 1, 2010 Granted Forfeited Expired Granted Forfeited Expired Granted Forfeited Expired Outstanding - December 31, 2012 Vested (exercisable) - December 31, 2012 Non-vested (exercisable) - December 31, 2012 Aggregate Intrinsic Value — $ 1.75 — — 1.75 9.8 $ 0.82 1.75 — 1.06 9.5 — — (250) 700 $ — — 1.75 0.82 8.8 350 350 $ $ 0.82 0.82 8.8 $ 8.8 $ 700 (750) — 950 Outstanding - December 31, 2011 Weighted Average Contractual Remaining Life (Years) $ 1,000 — — 1,000 Outstanding - December 31, 2010 Weighted Average Exercise Price — — Stock-Based Compensation Expense - During the years ended December 31, 2012 , 2011 and 2010 , the Company recorded share-based compensation expense of $10,580 , $6,814 and $3,719 , respectively, related to its share based compensation awards that are expected to vest. No amounts have been capitalized. As of December 31, 2012 , unrecorded compensation cost related to non-vested awards was $14,943 that is expected to be recognized through 2015. CEO Anti-Dilution Rights - On October 16, 2012, the Company and Mr. Charney entered into an amendment to Mr. Charney's anti-dilution rights (see Note 13). As the amendment lengthened the requisite service period, the Company will recognize the unrecorded compensation cost from the original award of $2,738 over its remaining service period and recognize the incremental compensation cost as a result of the modification of $6,854 over the requisite service period of the modified award. During the year ended December 31, 2012 and 2011 , the Company recorded share-based compensation expense (included in the above) associated with Mr. Charney's certain anti-dilution rights of $5,440 and $3,055 , respectively. As of December 31, 2012 , unrecorded compensation cost was $8,444 , which is expected to be recognized through 2015. CEO Performance-Based Award - Pursuant to an employment agreement with Mr. Charney commencing on April 1, 2012, the Company provided to the CEO rights to 7,500 shares of the Company's stock (see Note 12). The shares are issuable in three equal installments, one per each measurement period, only upon the achievement of certain EBITDA targets for each of fiscal 2012 , 2013 and 2014 . For the fiscal 2012 measurement period, the Company achieved the target EBITDA and as a result, subject to approval by the compensation committee of the Board of Directors, the Company will issue 2,500 shares to Mr. Charney on April 1, 2013. The grant date fair value of the award is based on the share price of $0.75 and will be recognized over the related service and amortization period in three probability-weighted terms of 1.2 , 2.1 and 3.1 years corresponding to the three measurement periods. During the year ended December 31, 2012 , the Company recorded share-based compensation expense of $2,578 . As of December 31, 2012 , unrecorded compensation cost was $3,047 , which is expected to be recognized through 2015. Non-Employee Directors On January 2, 2013, October 1, 2012, July 2, 2012 and April 1, 2012, the Company issued a quarterly stock grant to each non-employee director of approximately 9 , 7 , 11 and 12 shares of common stock, based upon the closing prices of $1.13 , $1.53 , $0.90 and $0.82 per share, respectively. Additionally, Messrs. Danzinger and Igelman each received an additional 23 shares for services performed during the second half of 2011. On January 19, 2010, the Company issued the annual stock grant to each non-employee director of approximately 22 shares of common stock, based upon the closing price of $3.45 per share. Messrs. Capps and Richardson, two former directors who were also representatives of Lion Capital, each agreed to forgo receipt of annual stock grant having an aggregate market value of $75 at the time of grant. For the year ended December 31, 2011, a $75 84 Table of Contents cash award was paid to five non-employee directors in lieu of the annual stock grant. The share-based compensation is reflected in operating expenses in the accompanying consolidated statements of operations. Note 15. Commitments and Contingencies Operating Leases The Company conducts retail operations under operating leases, which expire at various dates through September 2022. The Company’s primary manufacturing facilities and executive offices are currently under a long-term lease which expires on July 31, 2019. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or non-cancelable lease terms in excess of one year at December 31, 2012 are as follows: Amount 2013 $ 2014 2015 2016 2017 Thereafter Total $ 71,150 65,947 52,901 44,707 37,130 62,483 334,318 Operating lease rent expense (including some real estate taxes and maintenance costs) and leases on a month to month basis were approximately $77,390 , $78,138 , and $86,708 , for the years ended December 31, 2012 , 2011 , and 2010 , respectively. The Company did not incur any significant contingent rent during the same periods. Rent expense is allocated to cost of sales (for production-related activities) and selling expenses (primarily for retail stores) in the accompanying consolidated statements of operations. Sales Tax The Company sells its products through its wholesale business, retail stores and the internet. The Company operates these channels separately and accounts for sales and use tax accordingly. The Company is periodically audited by state taxing authorities and it is possible they may disagree with the Company’s method of assessing and remitting these taxes. The Company believes that it properly assesses and remits all applicable state sales taxes in the applicable jurisdictions and has accrued approximately $289 at both December 31, 2012 and 2011 for state sales tax contingencies. Customs and duties The Company is being audited by German customs authorities for the years ended December 31, 2009 through December 31, 2011. In connection with the audit, the German customs has issued retroactive assessments on the Company's imports totaling $4,802 at the December 31, 2012 exchange rates (assessment was issued in Euros). The size of the retroactive assessments are largely due to member countries of the European Union (“E.U.”) limited right to impose retaliatory duties on certain imports of U.S. origin goods into the E.U., based upon the World Trade Organization's (“WTO”) Dispute Settlement procedures and the related WTO arbitrator rulings brought into place as a result of EU complaint against the U.S. " Continued Dumping and Subsidy Offset Act of 2000 " (the "CDSOA") usually referred to as "the Byrd Amendment". Consequently, the German customs are attempting to impose a substantially higher tariff rate than the original rate that the Company had paid on the imports, approximately doubling the amount of the tariff that the Company would have to pay. The Company believes that it has valid arguments to challenge the merit of the German customs assessment and has filed litigation in German courts to contest such assessment. However, as the case is still in its preliminary stages, the Company is unable to reasonably estimate the financial outcome of the matter at this time as it cannot predict whether the outcome will be favorable or unfavorable to the Company, or if the Company will be required to advance material amounts during the pendancy of the litigation, and accordingly has not recorded a provision for this matter. No assurance can be made that this matter will not result in a material financial exposure in connection with the audit, which could have a material effect on the Company's financial condition, results of operations or cash flows. Advertising At December 31, 2012 and 2011 , the Company had approximately $4,456 and $4,378 , respectively, in open advertising commitments, which primarily relate to print advertisements in various newspapers, magazines, as well as outdoor advertising and other advertisements. The majority of these commitments are expected to be paid during the remainder of 2013 and 2012 , respectively. 85 Table of Contents Note 16. Workers’ Compensation and Other Self-Insurance Reserves The Company uses a combination of third-party insurance and/or self-insurance for a number of risks including workers’ compensation, medical benefits provided to employees, and general liability claims. General liability costs relate primarily to litigation that arises from store operations. Selfinsurance reserves include estimates of both filed claims carried at their expected ultimate settlement value and claims incurred but not yet reported. The Company’s estimated claim amounts are discounted using a rate of 0.62% with a duration that approximates the duration of the Company’s selfinsurance reserve portfolio. As of December 31, 2012 the undiscounted liability amount was $14,727 . The Company’s liability reflected on the accompanying consolidated balance sheets represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. In estimating this liability, the Company utilizes loss development factors based on Company-specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. These projections are subject to a high degree of variability based upon future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although the Company does not expect the amounts ultimately paid to differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the assumptions applied. The workers’ compensation liability is based on estimate of losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. To guarantee performance under the workers' compensation program, as of December 31, 2012 and 2011 , the Company had issued standby letters of credit in the amounts of $1,100 and $5,492 , respectively, with insurance companies being the beneficiaries, through a bank, and cash deposits of $14,624 and $7,022 , respectively, in favor of insurance company beneficiaries. At December 31, 2012 , the Company recorded a total reserve of $14,472 , of which $3,778 is included in accrued expenses and $10,694 is included in other long-term liabilities on the accompanying consolidated balance sheets. At December 31, 2011 , the Company recorded a total reserve of $14,189 , of which, $3,598 is included in accrued expenses and $10,591 is included in other long-term liabilities on the accompanying consolidated balance sheets. These reserves for potential losses on existing claims are believed to be for potential losses which are probable and reasonably estimable. In addition to the above workers' compensation liabilities, at December 31, 2012 and 2011 , the Company also recorded an accrual of $150 and $646 , respectively for the estimated liability associated with the ICE inspection. The Company self-insures its health insurance benefit obligations while the claims are administered through a third party administrator. The medical benefit liability is based on estimated losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. At December 31, 2012 and 2011 , the Company’s total reserve of $1,510 and $1,720 was included in accrued expenses in the accompanying consolidated balance sheets. Note 17. Business Segment and Geographic Area Information The Company reports the following four operating segments: U.S. Wholesale, U.S. Retail, Canada, and International. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated. U.S. Wholesale segment consists of the Company's wholesale operations of sales of undecorated apparel products to distributors and third party screen printers in the United States, as well as the Company's online consumer sales to U.S. customers. U.S. Retail segment consists of the Company's retail operations in the United States, which comprised 140 retail stores operating in the United States as of December 31, 2012 . Canada segment includes retail, wholesale and online consumer operations in Canada. As of December 31, 2012 , the retail operations in the Canada segment comprised 35 retail stores. The International segment includes 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 76 retail stores operating in 18 countries outside of the United States and Canada. All of the Company's retail stores sell the Company's apparel products directly to consumers. The Company's management evaluates performance based on a number of factors; however, the primary measures of performance are net sales and income or loss from operations of each business segment, as these are the key performance indicators reviewed by management. Operating income or loss for each segment does not include unallocated corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to: human resources, legal, finance, information technology, accounting, executive compensation and various other corporate level expenses. 86 Table of Contents The following table represents key financial information of the Company’s reportable segments before unallocated corporate expenses: For the Year Ended December 31, 2012 U.S. Wholesale Wholesale net sales $ U.S. Retail 149,611 Retail net sales $ Canada — — $ 198,886 International 13,006 $ 10,278 48,499 Consolidated $ 141,738 172,895 389,123 33,167 — 2,164 19,961 55,292 182,778 198,886 63,669 171,977 617,310 Gross profit 51,723 130,498 37,500 107,662 327,383 Income (loss) from segment operations Online consumer net sales Total net sales to external customers 26,634 4,197 11,929 42,703 Depreciation and amortization 6,322 10,909 1,543 4,215 22,989 Capital expenditures 9,791 6,626 1,607 3,583 21,607 1,274 1,647 Retail store impairment Deferred rent expense (benefit) (57) — 243 130 523 (706) (197) (515) (895) For the Year Ended December 31, 2011 U.S. Wholesale Wholesale net sales $ 132,135 Retail net sales Online consumer net sales Total net sales to external customers U.S. Retail $ Canada — $ International 11,492 $ 10,406 Consolidated $ 154,033 — 174,837 48,527 126,868 350,232 24,319 — 1,846 16,906 43,071 156,454 174,837 61,865 154,180 547,336 Gross profit 42,599 117,228 35,799 99,274 294,900 Income (loss) from segment operations 22,406 (4,659) (3,695) 8,434 22,486 Depreciation and amortization 7,757 10,492 1,567 5,164 24,980 Capital expenditures 3,638 4,889 407 2,136 11,070 808 2,901 Retail store impairment Deferred rent expense (benefit) — 558 257 (1,662) (121) 4,267 (443) (1,969) For the Year Ended December 31, 2010 U.S. Wholesale Wholesale net sales Retail net sales $ U.S. Retail 127,749 $ Canada — $ International 11,915 $ 11,474 Consolidated $ 151,138 — 177,610 51,969 116,800 21,248 — 1,754 12,470 35,472 148,997 177,610 65,638 140,744 532,989 Gross profit 32,007 117,496 43,309 87,097 279,909 Income (loss) from segment operations Depreciation and amortization 11,200 (18,455) 5,051 (5,064) (7,268) 9,282 10,484 2,170 6,194 28,130 4,696 7,584 1,456 1,965 15,701 — 4,366 1,348 2,883 8,597 431 1,437 1,247 2,963 Online consumer net sales Total net sales to external customers Capital expenditures Retail store impairment Deferred rent expense (benefit) 87 (152) 346,379 Table of Contents Reconciliation of reportable segments consolidated income (loss) from operations for the years ended December 31, 2012 , 2011 and 2010 to the consolidated loss before income taxes is as follows: 2012 Income (loss) from operations of reportable segments Unallocated corporate expenses Interest expense Foreign currency transaction loss (gain) Unrealized loss (gain) on change in fair value of warrant and purchase rights (Gain) loss on extinguishment of debt Other expense (income) $ Consolidated loss before income taxes $ 2011 42,703 (41,741) 41,559 120 4,126 (11,588) 204 (33,459) $ 22,486 (45,779) 33,167 1,679 (23,467) 3,114 (193) (37,593) $ 2010 $ $ (7,268) (42,785) 23,752 (686) 993 — 39 (74,151) Net sales by each reportable segment’s class of customer and geographic location of customer for the years ended December 31, 2012 , 2011 , and 2010 consist of the following: Years Ended December 31, 2011 2012 Net sales by geographic location of customer: United States Canada Europe (excluding United Kingdom) United Kingdom South Korea China Japan Australia Other foreign countries Total consolidated net sales $ $ 381,664 63,669 66,861 47,694 10,732 5,317 20,336 14,035 7,002 617,310 $ 331,290 61,866 68,130 40,039 9,749 3,857 14,176 11,557 6,672 547,336 $ 2010 $ $ 326,607 65,638 68,958 32,535 9,547 2,609 10,716 9,474 6,905 532,989 Long-lived assets—property and equipment, net by geographic location, is summarized as follows as of December 31, : 2012 United States Canada Europe (excluding the United Kingdom) United Kingdom South Korea China Japan Australia Other foreign countries Total consolidated long-lived assets $ $ Identifiable assets by reportable segment: U.S. Wholesale U.S. Retail Canada International Total $ $ 88 2011 50,551 5,079 3,987 4,500 433 358 1,097 1,057 716 67,778 $ 153,856 76,709 28,586 69,061 328,212 $ $ $ 49,906 5,041 4,134 5,091 308 110 1,141 1,146 561 67,438 141,732 84,840 30,129 68,020 324,721 Table of Contents Foreign subsidiaries accounted for the following percentages of total assets and total liabilities as of December 31, : 2012 Total assets Total liabilities 2011 29.8% 10.9% 30.2% 11.2% Note 18. Litigation The Company is 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 the Company is aware of a claim or potential claim, it assesses 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, the Company 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 the Company's business, financial position, and results of operations or cash flows. Individual Actions On February 7, 2006, Sylvia Hsu, a former employee of American Apparel, filed a Charge of Discrimination with the Los Angeles District Office of the Equal Employment Opportunity Commission (“EEOC”) (Hsu v. American Apparel: Charge No. 480- 2006-00418), alleging that she was subjected to sexual harassment by a co-worker and constructively discharged as a result of the sexual harassment and a hostile working environment. On March 9, 2007, the EEOC expanded the scope of its investigation to other employees of American Apparel who may have been sexually harassed. On August 9, 2010, the EEOC issued a written determination finding that reasonable cause exists to believe the Company discriminated against Ms. Hsu and women, as a class, on the basis of their female gender, by subjecting them to sexual harassment. No finding was made on the issue of Ms. Hsu's alleged constructive discharge. In 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. The Company has not recorded a provision for this matter and is working cooperatively with the EEOC to resolve the claim in a manner acceptable to all parties. The Company does 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 the Company's 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 the Company on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of the Company's employees. The complaint further alleges that the Company failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On June 21, 2010, Antonio Partida, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that the Company failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On or about December 2, 2010, Emilie Truong, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to timely provide final paychecks upon separation. Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices. This matter is now proceeding in arbitration. 89 Table of Contents 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. 37-201100085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On or about September 9, 2011, Anthony Heupel, a former retail employee initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages in an amount in excess of $3,600 , as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. The Company does not have insurance coverage for the above matters. The Company has accrued an estimate for the loss contingency for each of the above matters (excluding the Hsu case as noted above) in the Company's accompanying consolidated balance sheet as of December 31, 2012. The Company 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 the Company's estimate, which could have a material adverse effect upon the Company's financial condition and results of operations. Additionally, the Company is currently engaged in other employment-related claims and other matters incidental to the Company's business. The Company believes that all such claims against the Company are without merit or not material, and the Company intends to vigorously dispute the validity of the plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information at this time, the Company believes, but the Company cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, the Company 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) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a “Nominal Defendant” 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 the Company's behalf. The Company 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) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination 90 Table of Contents 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 the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights. Other Proceedings Four putative class action lawsuits, (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in the United States District Court for the Central District of California in the Fall of 2010 against American Apparel and certain of the Company's officers and executives on behalf of American Apparel shareholders who purchased the Company's 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 the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper. The Company filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013 to which the Company must respond by April 1, 2013. The Federal Securities Action is covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights. Should any of the above matters (i.e., the Federal Derivative Action, the State Derivative Action, or the Federal Securities Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds which fall outside the scope of the Company's insurance coverage, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon the Company's 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, the Company believes, but the Company cannot provide assurances that, the amount and ultimate liability, if any, with respect to these remaining actions will not materially affect the Company's business, financial position, results of operations, or cash flows. 91 Table of Contents Schedule II American Apparel, Inc. and Subsidiaries Valuation and Qualifying Accounts (Amounts in thousands) Balance at Beginning of Year Description Allowance for trade accounts receivable: For the year ended December 31, 2012 For the year ended December 31, 2011 For the year ended December 31, 2010 $ $ $ 2,195 2,630 1,763 Balance at Beginning of Year Description Reserve for inventory shrinkage and obsolescence: For the year ended December 31, 2012 For the year ended December 31, 2011 For the year ended December 31, 2010 $ $ $ $ $ $ Balance at Beginning of Year $ $ $ 73,773 51,979 20,457 92 Deductions (Recoveries) 99 996 1,357 Charged to Costs and Expenses 3,932 $ 5,853 $ 4,802 $ Description Valuation allowance of deferred tax assets: For the year ended December 31, 2012 For the year ended December 31, 2011 For the year ended December 31, 2010 Charged to Costs and Expenses $ $ $ Deductions (Recoveries) 690 $ (1,652) $ 1,033 $ Increase in Allowance $ $ $ — — — — — — Deductions to Allowance 4,720 $ 21,794 $ 31,522 $ (915) — — Other $ $ $ (209) (1,431) (490) (1,969) (269) 18 $ $ $ 2,653 3,932 5,853 Balance at End of Year Other $ $ $ $ $ $ Balance at End of Year Other $ $ $ Balance at End of Year — — — $ $ $ 77,578 73,773 51,979 2,085 2,195 2,630 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. 93 Table of Contents Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Annual Report that our disclosure controls and procedures were effective. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, and the opinion expressed by our external auditor's attestation report, our management concluded that our internal controls over financial reporting were operating effectively as of December 31, 2012. Based on the COSO criteria, management remediated control deficiencies that constituted a material weakness in our prior reported financial statements. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is more than a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Remediation of Previously Identified Material Weakness & Other Remediation Activities We implemented certain internal controls to remediate the weakness in our internal controls over financial reporting and inventory during 2012. Our remediated material weakness as of December 31, 2012 represented a continuing material weakness identified as of December 31, 2008. The following describes the remediation activities performed during 2012 for the completed remediation of the material weakness over financial reporting and inventory as disclosed in the annual report on Form 10-K for the year ended December 31, 2011. Over the course of 2012, we implemented the following activities to fully remediate the material weakness: 1) We implemented a continuing professional education training system for our financial reporting and consolidation team. 2) We performed adequate independent reviews and maintained effective controls related to the preparation of consolidated financial statements. 3) We improved our internal controls over forecasting and inventory demand planning performed by our production planning and forecasting department. 4) We streamlined our inventory costing process and analysis which facilitated timelier and more accurate reporting. 5) We refreshed and updated our standard costing systems to reflect the recent trends in raw material costs, labor rates, and manufacturing overhead absorption rates. 6) We implemented a reoccurring update process for our standard costing system to ensure standard cost continually reflects timely updates. 7) We completed the process to review and improve internal controls related to cost accounting and established procedures for cost data validation and enhanced historical cost reporting, including implementation of inventory control and checklist procedures. 8) We simplified specific accounting analysis reducing the potential for error in accruals. 9) We substantially improved the procedures related to analysis of inventory reserve accounts. 10) We continued to enhance our international cost accounting procedures for intercompany inventory transfers and inventory valuation. 11) We implemented improved controls over analysis of budget to actual results. 12) We implemented monthly financial statement detailed review meetings with all divisional controllers to further improve our review controls over detail trial balance reviews and supporting documentation. Changes in Internal Controls over Financial Reporting There have been no changes (other than those described above) in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 94 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Audit Committee of the Board of Directors and Stockholders of American Apparel, Inc. We have audited American Apparel, Inc. and Subsidiaries' (the “Company”) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate. In our opinion, American Apparel, Inc. and Subsidiaries maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2012 and 2011 and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows and the related financial statement schedule for the years ended December 31, 2012, 2011 and 2010 of the Company and our report dated March 5, 2013 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ Marcum LLP Marcum LLP Melville, NY March 5, 2013 95 Table of Contents Item 9B. Other Information Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item will be included under the following captions in the 2013 Proxy Statement and is incorporated herein by reference: “Directors and Executive Officers,” “Corporate Governance and Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Item 11. Executive Compensation The information required by this item will be included under the following captions in the 2013 Proxy Statement and is incorporated herein by reference: “Process and Procedures for Determination of Executive and Director Compensation,” “Compensation of Directors,” “Director Compensation—Fiscal 2012,” “Compensation Discussion and Analysis,” “Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Summary Compensation Table,” and “Grants of Plan-Based Awards Table.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be included under the following captions in the 2013 Proxy Statement and is incorporated herein by reference: “Equity Compensation Plan Information” and “Beneficial Ownership of Shares.” Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this item will be included under the following captions in the 2013 Proxy Statement and is incorporated herein by reference: “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters.” Item 14. Principal Accountant Fees and Services The information required by this item will be included under the caption “Relationship with Independent Auditors” in the 2013 Proxy Statement and is incorporated herein by reference. PART IV Item 15. a. Exhibits, Financial Statement Schedules Documents filed as part of this Annual Report on Form 10-K: 1. Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K. 2. Financial Statement Schedule: The following consolidated financial statement schedule of American Apparel, Inc. and its subsidiaries is included in Part II, Item 8: Schedule II—Valuation and Qualifying Accounts Schedules other than those listed above are omitted because of an absence of the conditions under which they are required or because the required information is shown in the consolidated financial statements and/or notes thereto. b. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about our or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and: 96 Table of Contents • should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; • have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; • may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and • were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about our may be found elsewhere in this Annual Report on Form 10-K and in our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. 97 Table of Contents Exhibit No . Description 2.1 Acquisition Agreement, dated as of December 18, 2006 and amended and restated on November 7, 2007, by and among American Apparel, Inc., AAI Acquisition LLC, American Apparel, Inc., a California corporation, American Apparel, LLC, each of American Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc. (together the “CI companies”), Dov Charney, Sam Lim, and the stockholders of each of the CI companies (included as Annex A of the Definitive Proxy Statement (File No. 001-32697) filed November 28, 2007 and incorporated by reference herein). 3.1 Amended and Restated Certificate of Incorporation of American Apparel, Inc. (included as Exhibit 3.1 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of American Apparel, Inc. (included as Exhibit 3.1 of the Current Report on Form 8-K (File No. 001-32697) filed June 27, 2011 and incorporated by reference herein). 3.3 Bylaws of American Apparel, Inc. (included as Exhibit 4.1 of the Registration Statement on Form S-8 (File No. 333-175430) filed July 7, 2011 and incorporated by reference herein). 3.4 Certificate of Amendment to Certificate of Formation of American Apparel (USA), LLC (included as Exhibit 3.3 to Form 10-K (File No 001-32697) filed March 17, 2008 and incorporated by reference herein). 4.1 Specimen Common Stock Certificate (included as Exhibit 4.2 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 4.2 Registration Rights Agreement, dated December 12, 2007, by and among American Apparel, Inc. and the stockholders listed on the signature page therein (included as Annex H of the Definitive Proxy Statement (File No. 001-32697) filed November 28, 2007 and incorporated by reference herein). 4.3 Lock-Up Agreement, dated December 12, 2007, between American Apparel, Inc. and Dov Charney (included as Annex D of the Definitive Proxy Statement (File No. 001-32697), filed November 28, 2007 and incorporated by reference herein). 4.4 Letter Agreement Re: Extension of Lock-Up Agreement, dated March 13, 2009, among Dov Charney, Lion Capital (Guernsey) II Limited and American Apparel, Inc. (included as Exhibit 10.5 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). 4.5 Warrants to Purchase Shares of Common Stock of American Apparel, Inc., dated December 19, 2008, issued to SOF Investments, L.P.-Private IV (included as Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed December 19, 2008 and incorporated by reference herein). 4.6 Warrants to Purchase Shares of Common Stock of American Apparel, Inc., dated March 13, 2009, issued to Lion Capital (Guernsey) II Limited (included as Exhibit 10.3 of the Current Report on Form 8-K (File No 001-32697) filed March 13, 2009 and incorporated by reference herein). 4.7 Investment Agreement, dated March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited (included as Exhibit 10.2 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). 4.8 Investment Voting Agreement, dated March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited (included as Exhibit 10.4 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). 4.9 Voting Agreement, dated as of February 18, 2011, between Dov Charney, an individual, and Lion/Hollywood L.L.C., in its capacity as a lender under the Lion Credit Agreement (included as Exhibit 10.2 of the Current Report on Form 8-K filed on February 22, 2011 and incorporated by reference herein). 4.10 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 24, 2011, issued to Lion/Hollywood L.L.C (included as Exhibit 10.2 of the Current Report on Form 8-K filed on March 28, 2011 and incorporated by reference herein). 4.11 Amendment No. 1, dated March 24, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 13, 2009 (included as Exhibit 10.3 of the Current Report on Form 8-K filed on March 28, 2011 and incorporated by reference herein). 4.12 Form of Voting Agreement, dated as of April 26, 2011, between Dov Charney and the other persons signatory thereto (included as Exhibit 10.3 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). 98 Table of Contents 4.13 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated April 26, 2011, issued to Lion/Hollywood L.L.C. (included as Exhibit 10.6 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). 4.14 Amendment No. 1, dated April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 24, 2011, issued to Lion/Hollywood L.L.C. (included as Exhibit 10.7 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). 4.15 Amendment No. 2, dated April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated March 13, 2009, issued to Lion/Hollywood L.L.C. (included as Exhibit 10.8 of the Current Report on Form 8-K filed on April 28, 2011 and incorporated by reference herein). 4.16 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated July 7, 2011, issued to Lion/Hollywood L.L.C. (included as exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed July 13, 2011 and incorporated by reference herein). 4.17 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated July 12, 2011, issued to Lion/Hollywood L.L.C. (included as exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed July 13, 2011 and incorporated by reference herein). 4.18 Amendment No. 1, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated July 12, 2011 (included as exhibit 10.5 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). 4.19 Amendment No. 1, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated July 7, 2011 (included as exhibit 10.6 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). 4.20 Amendment No. 1, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated April 26, 2011 (included as exhibit 10.7 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). 4.21 Amendment No. 2, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated March 24, 2011 (included as exhibit 10.8 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). 4.22 Amendment No. 2, dated March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated March 13, 2009 (included as exhibit 10.7 of the Current Report on Form 8-K (File No. 001-32697) filed March 19, 2012 and incorporated by reference herein). 10.1.+ American Apparel, Inc. 2007 Performance Incentive Equity Plan (included as Annex C of the Definitive Proxy Statement (File No. 001-32697) filed November 28, 2007 and incorporated by reference herein). 10.2.+ First Amendment to the 2007 Performance Equity Plan (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed October 30, 2008 and incorporated by reference herein). 10.3.+ American Apparel, Inc. Incentive Compensation Plan (included as Appendix A of the Revised Definitive Proxy Statement (No. 00132697), filed September 11, 2009 and incorporated by reference herein). 10.4.+ American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (included as Annex B of the Definitive Proxy Statement (File No. 00132697) filed on May 20, 2011 and incorporated by reference herein). 10.5.+ Employment Agreement, dated December 12, 2007, between American Apparel, Inc., American Apparel, LLC and Dov Charney (included as Annex J of the Definitive Proxy Statement (File No. 001-32697) filed November 28, 2007 and incorporated by reference herein). 10.6.+ Employment Agreement, dated January 27, 2009, by and between Glenn A. Weinman and American Apparel, Inc. (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed February 2, 2009 and incorporated by reference herein). 10.7.+ Employment Agreement, dated October 7, 2010, by and between Thomas M. Casey and American Apparel, Inc. (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed February 8, 2010 and incorporated by reference herein). 10.8.+ Employment Agreement, dated February 7, 2011 by and between John Luttrell and American Apparel, Inc. (included as Exhibit 10.1 of the Current Report on Form 8-K filed on February 3, 2011 and incorporated by reference herein). 99 Table of Contents 10.9.+ Employment Agreement, dated March 17, 2011 by and between Martin Staff and American Apparel, Inc. (included as Exhibit 10.1 of the Current Report on Form 8-K filed on March 23, 2011 and incorporated by reference herein). 10.10. Separation Agreement and Full Mutual Release of All Claims, dated October 7, 2011, by and between Adrian Kowalewski and American Apparel, Inc. (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed October 11, 2011 and incorporated by reference herein). 10.11. Separation Agreement and Full Mutual Release of All Claims, dated October 24, 2011, by and between Martin Staff and American Apparel, Inc. (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed October 28, 2011 and incorporated by reference herein). 10.12. Separation Agreement and Mutual Release of Claims, dated November 18, 2011 by and between Thomas M. Casey and American Apparel, Inc. (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed November 18, 2011 and incorporated by reference herein). 10.13. Lease, dated as of January 1, 2004, by and between Alameda Produce Market, Inc. and AAI (included as Exhibit 10.21 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.14. Lease, dated as of May 12, 2004, by and between Alameda Produce Market, Inc. and AAI (included as Exhibit 10.22 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.15. Lease, dated June 9, 2004, by and between Titan Real Estate Investment Group, Inc., and Textile Unlimited Corp., E&J Textile Group, Inc., and Johnester Knitting, Inc. (jointly and severally) (included as Exhibit 10.15 of the Current Report on Form 8-K (File No. 00l32697) filed December 18, 2007 and incorporated by reference herein). 10.16. Assignment of Lessee's Interest in Lease and Assumption Agreement, dated as of June 2, 2005, by and between Textile Unlimited Corp., E&J Textile Group, Inc., and Johnester Knitting, Inc. (jointly and severally) and American Apparel Dyeing and Finishing, Inc. (included as Exhibit 10.16 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.17. Lease, dated December 13, 2005, by and between American Central Plaza and AAI (included as Exhibit 10.17 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.18. Lease Amendment, effective as of November 15, 2006, by and between American Central Plaza and AAI (included as Exhibit 10.18 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.19. Lease Amendment, effective as of March 22, 2007, by and between American Central Plaza and AAI (included as Exhibit 10.19 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.20. Lease, dated as of July 30, 2009, by and between Alameda Produce Market, LLC and AAI (included as Exhibit 10.21 of the Current Report on Form 8-K (File No. 00l-32697) filed December 18, 2007 and incorporated by reference herein). 10.21. Purchase Agreement, dated as of March 24, 2011, between American Apparel, Inc. and Dov Charney (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 00l-32697) filed on March 28, 2011 and incorporated by reference herein). 10.22. Form of Purchase and Investment Agreement, dated as of April 21, 2011, by and among American Apparel, Inc. and the purchasers signatory thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 00l-32697) filed on April 28, 2011 and incorporated by reference herein). 10.23. Purchase Agreement, dated as of April 27, 2011, between American Apparel, Inc. and Dov Charney (included as Exhibit 10.2 of the Current Report on Form 8-K/A (File No. 00l-32697) filed on April 28, 2011 and incorporated by reference herein). 10.24. Asset Purchase Agreement, dated as of December 1, 2007, by and between PNS Apparel, Inc., Blue Man Group, Inc., Allen S. Yi and American Apparel, Inc. (included as Exhibit 10.24 of Amendment No. 1 to the Annual Report on Form 10-K/A (File No. 001-32697) filed March 28, 2008 and incorporated by reference herein). 100 Table of Contents 10.25. Credit facilities agreement, dated December 3, 2007, among The Toronto-Dominion Bank and American Apparel Canada Wholesale Inc./American Apparel Canada Grossiste Inc. and Les Boutiques American Apparel Canada Inc./American Apparel Canada Retail Inc. (included as Exhibit 10.20 of Amendment No. 1 to the Annual Report on Form 10-K/A (File No. 001-32697) filed March 28, 2008 and incorporated by reference herein). 10.26. Promissory Note, dated December 11, 2007, between American Apparel Canada Wholesale Inc. and Dov Charney (included as Exhibit 10.26 of Amendment No. 1 to the Annual Report on Form 10-K/A (File No. 001-32697) filed March 28, 2008 and incorporated by reference herein). 10.27. Severance Agreement and Release, dated May 22, 2008, by and between American Apparel, Inc., AAUSA and all of its subsidiaries and Ken Cieply, former Chief Financial Officer (included as Exhibit 10.5 of Quarterly Report on Form 10-Q (File No. 001-32697) filed August 15, 2008 and incorporated by reference herein). 10.28. Promissory Note, dated March 13, 2009 (amending and restating Promissory Note dated December 19, 2008), between AAUSA, as maker, and Dov Charney, as payee (included as Exhibit 10.4 of Current Report on Form 8-K (File No. 001-32697) filed December 19, 2008 and incorporated by reference herein). 10.29. Promissory Note, dated March 13, 2009 (amending and restating Promissory Note dated February 10, 2009), between AAUSA, as maker, and Dov Charney, as payee (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed February 12, 2009 and incorporated by reference herein). 10.30. Letter Agreement Re: Extension of Non-Competition and Non-Solicitation Covenants in Section 5.27(a) of the Merger Agreement, dated March 13, 2009, among Dov Charney, Lion Capital (Guernesey) II Limited and American Apparel, Inc. (included as Exhibit 10.6 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). 10.31. Amendment and Agreement, dated as of April 10, 2009, by and between American Apparel, Inc. and Lion/Hollywood L.L.C. (included as Exhibit 10.1 of Current Report on Form 8-K (File No 001-32697) filed April 16, 2009 and incorporated by reference herein). 10.32. Second Amendment and Agreement, dated as of June 17, 2009, by and between American Apparel, Inc. and Lion/Hollywood L.L.C. (included as Exhibit 10.1 of Current Report on Form 8-K (File No 001-32697) filed June 19, 2009 and incorporated by reference herein). 10.33. Third Amendment and Agreement, dated as of August 18, 2009, by and between American Apparel, Inc. and Lion/Hollywood L.L.C. (included as Exhibit 10.1 of Current Report on Form 8-K (File No 001-32697) filed August 20, 2009 and incorporated by reference herein). 10.34. Letter Agreement Re: Pledging of Restricted Securities, dated October 28, 2009, among Dov Charney, Lion/Hollywood L.L.C. and American Apparel, Inc. (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed November 3, 2009 and incorporated by reference herein). 10.35. Credit Agreement, dated as of December 30, 2009, between American Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc. and Bank of Montreal (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed January 6, 2010 and incorporated by reference herein). 10.36. Credit Agreement, dated as of March 13, 2009, among American Apparel, Inc., in its capacity as Borrower, certain subsidiaries of American Apparel, Inc., in their capacity as Facility Guarantors, Lion Capital LLP, in its capacity as administrative agent and collateral agent, Lion Capital (Guernsey) II Limited, as Initial Lender, and the other lenders from time to time party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No 001-32697) filed March 16, 2009 and incorporated by reference herein). 10.37. Waiver to Credit Agreement, dated as of September 30, 2009, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed October 6, 2009 and incorporated by reference herein). 10.38. First Amendment to Credit Agreement, dated as of December 30, 2009, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of Current Report on Form 8-K (File No. 001-32697) filed January 6, 2010 and incorporated by reference herein). 10.39. Second Amendment to Credit Agreement, dated as of March 31, 2010, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed April 1, 2010 and incorporated by reference herein). 101 Table of Contents 10.40. Third Amendment to Credit Agreement, dated as of June 23, 2010, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed June 24, 2010 and incorporated by reference herein). 10.41. Fourth Amendment to Credit Agreement, dated as of September 30, 2010, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of Current Report on Form 8-K (File No. 001-32697) filed October 1, 2010 and incorporated by reference herein). 10.42. Waiver to Credit Agreement, dated as of January 31, 2011, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on February 1, 2011 and incorporated by reference herein). 10.43. Fifth Amendment to Credit Agreement, dated as of February 18, 2011, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on February 22, 2011 and incorporated by reference herein). 10.44. Waiver and Sixth Amendment to Credit Agreement, dated as of April 26, 2011, among American Apparel, Inc., the facility guarantors from time to time party thereto, Wilmington Trust FSB, as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.5 of the Current Report on Form 8-K (File No. 001-32697) filed on April 28, 2011 and incorporated by reference herein). 10.45. Seventh Amendment to Credit Agreement, dated as of March 13, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of the Amendment filed on June 21, 2012 to the Current Report on Form 8-K (File No. 001-32697) filed on March 19, 2012 and incorporated by reference herein). 10.46. Eighth Amendment to Credit Agreement, dated August 30, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of the Current Report on Form 8-K (File No. 001-32697) filed on September 11, 2012 and incorporated by reference herein). 10.47. Ninth Amendment and Waiver to Credit Agreement, dated September 28, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.3 of the Quarterly Report on Form 10-Q (File No. 001-32697) filed on November 14, 2012 and incorporated by reference herein). 10.48. Tenth Amendment to Credit Agreement, dated November 12, 2012, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.5 of the Quarterly Report on Form 10-Q (File No. 001-32697) filed on November 14, 2012 and incorporated by reference herein). 10.49. Eleventh Amendment to Credit Agreement, dated February 6, 2013, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed on February 11, 2013 and incorporated by reference herein). 10.50. Intercreditor Agreement, dated as of March 13, 2012, among American Apparel, Inc. and certain of its Subsidiaries party thereto, Crystal Financial, LLC as first lien administrative agent and collateral agent (included as Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-32697) filed on March 19, 2012 and incorporated by reference herein). 102 Table of Contents 10.51. Credit Agreement dated as of March 13, 2012, among American Apparel, Inc., American Apparel (USA), LLC, the other Credit Parties party thereto, Crystal Financial LLC and other signatories thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on March 19, 2012 and incorporated by reference herein). 10.52. Amendment No. 2, dated August 30, 2012, among American Apparel, Inc., American Apparel (USA), LLC, the other Borrowers and Credit Parties party thereto, Crystal Financial LLC and other signatories thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on September 11, 2012 and incorporated by reference herein). 10.53. Amendment No. 3, dated November 12, 2012, among American Apparel, Inc., American Apparel (USA), LLC, the other Borrowers and Credit Parties party thereto, Crystal Financial LLC and other signatories thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on November 15, 2012 and incorporated by reference herein). 10.54. Amendment No. 5, dated February 6, 2013, among American Apparel, Inc., American Apparel (USA), LLC, the other Borrowers and Credit Parties party thereto, Crystal Financial LLC and other signatories thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on February 11, 2013 and incorporated by reference herein). 14.1 American Apparel, Inc. Code of Ethics (included as Exhibit 14.1 of the Current Report for 8-K (File No. 001-32697) filed December 18, 2007 and incorporated by reference herein). 21.1* List of subsidiaries as of December 31, 2012 23.1* Consent of Independent Registered Public Accounting Firm 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document ___________________________ * Filed herewith. + Management contract or compensatory plan or arrangement. 103 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN APPAREL, INC. March 5, 2013 /s/ DOV CHARNEY By: Dov Charney Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ DOV CHARNEY Chief Executive Officer and Director (Principal Executive Officer) March 5, 2013 Chief Financial Officer and Principal Accounting Officer March 5, 2013 Director March 5, 2013 Director March 5, 2013 Director March 5, 2013 Director March 5, 2013 Director March 5, 2013 Director March 5, 2013 Dov Charney /s/ JOHN LUTTRELL John Luttrell /s/ ALBERTO CHEHEBAR Alberto Chehebar /s/ DAVID DANZIGER David Danziger /s/ ROBERT GREENE Robert Greene /s/ MARVIN IGELMAN Marvin Igelman /s/ WILLIAM MAUER William Mauer /s/ ALLAN MAYER Allan Mayer 104 Exhibit 21.1 List of Wholly-Owned Subsidiaries American Apparel as of December 31, 2012 Percentage Investment In American Apparel (USA), LLC American Apparel Canada Retail Inc. American Apparel Canada Wholesale Inc. American Apparel Retail, Inc. KCL Knitting, LLC American Apparel Dyeing and Finishing, Inc. Fresh Air Freight, Inc. American Apparel Deutschland GmbH American Apparel (Carnaby) Limited American Apparel (UK) Limited American Apparel Australia Pty Ltd. American Apparel do Brasil Comercio de Location Owned By Ownership California, USA Canada Canada California, USA California, USA California, USA California, USA Germany United Kingdom United Kingdom Australia Brazil American Apparel, Inc. American Apparel, Inc. American Apparel, Inc. American Apparel (USA), LLC American Apparel (USA), LLC American Apparel (USA), LLC American Apparel (USA), LLC American Apparel (USA), LLC American Apparel (USA), LLC American Apparel (USA), LLC American Apparel Retail, Inc. American Apparel Retail, Inc. 100 100 100 100 100 100 100 100 100 100 100 99 % % % % % % % % % % % % New Zealand Mexico American Apparel (USA), LLC American Apparel Retail, Inc. American Apparel Retail, Inc. American Apparel (USA), LLC 1 100 50 50 % % % % American Apparel Retail, Inc. American Apparel (USA), LLC American Apparel Retail, Inc. American Apparel Retail, Inc. American Apparel Retail, Inc. 50 50 100 100 100 % % % % % Roupas Ltda. American Apparel New Zealand Limited American Apparel Mexico, S. de R.L. de C.V. American Apparel Mexico Labor, S. de R.L. de C.V. Mexico American Apparel Retail (Israel), Ltd. American Apparel Japan Y.K. American Apparel Korea Co., Ltd. Israel Japan Korea Percentage Investment In Location American Apparel Ireland Limited American Apparel Hong Kong American Apparel Shanghai China Ltd American Apparel (Beijing) Trading Company, Ltd. Ireland China China China American Apparel Italia SRL Italy American Apparel Spain, S.L. Spain Owned By American Apparel Retail, Inc. American Apparel Retail, Inc. American Apparel Retail, Inc. American Apparel Retail, Inc. American Apparel Deutschland GmbH American Apparel Deutschland GmbH All our direct and indirect subsidiaries of are wholly owned by their respective parent companies. Ownership 100 100 100 100 % % % % 100 % 100 % Exhibit 23.1 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT We consent to the incorporation by reference in the Registration Statement of American Apparel, Inc. on Form S-8, File Nos. 333-163322 and 333150293 of our report dated March 5, 2013, with respect to our audits of the consolidated financial statements and related consolidated financial statement schedule of American Apparel, Inc. and Subsidiaries as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 and our report dated March 5, 2013 with respect to our audit of the effectiveness of internal control over financial reporting of American Apparel, Inc. as of December 31, 2012, which reports appear in the Annual Report on Form 10-K of American Apparel, Inc. for the year ended December 31, 2012. /s/ Marcum LLP Marcum LLP Melville, New York March 5, 2013 Exhibit 31.1 CERTIFICATIONS I, Dov Charney, certify that: 1. I have reviewed this annual report on Form 10-K of American Apparel, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 5. a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2013 By: /s/ DOV CHARNEY Dov Charney Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 CERTIFICATIONS I, John Luttrell, certify that: 1. I have reviewed this annual report on Form 10-K of American Apparel, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 5. a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2013 By: /s/ JOHN LUTTRELL John Luttrell Chief Financial Officer (Principal Accounting Officer) Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of American Apparel, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dov Charney, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. Date: March 5, 2013 By: /s/ D OV C HARNEY Dov Charney Chief Executive Officer Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of American Apparel, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Luttrell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. Date: March 5, 2013 By: /s/ JOHN LUTTRELL John Luttrell Chief Financial Officer
AMERICAN APPAREL, INC FORM 10-K (Annual Report) Filed 03/25/15 for the Period Ending 12/31/14 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 747 WAREHOUSE STREET LOS ANGELES, CA 90021 213-488-0226 0001336545 APP 6770 - Blank Checks Retail (Apparel) Services 12/31 http://www.edgar-online.com © Copyright 2015, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________________________ FORM 10-K _________________________________________________ (Mark One)  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2014 OR  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period 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) 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 Yes  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. No  Yes  No  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  No  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  No  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  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  Non-accelerated filer  Accelerated filer  (Do not check if a smaller reporting company) Smaller reporting company  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No  The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant at June 30, 2014 was $85,370,030 (which represents 94,855,589 shares of common stock held by non-affiliates multiplied by $0.90 , the closing sales price on the NYSE MKT LLC for such date). At March 13, 2015 , the Registrant had issued and outstanding 176,566,222 and 176,260,566 shares of its common stock, respectively. Table of Contents DOCUMENTS INCORPORATED BY REFERENCE Certain information from the Registrant's definitive proxy statement for the 2015 Annual Meeting of Stockholders (the " 2015 Proxy Statement"), to be filed within 120 days of the end of the fiscal year ended December 31, 2014, is incorporated by reference into Part III hereof. Except with respect to the information specifically incorporated by reference in Part III of this Form 10-K, the 2015 Proxy Statement is not deemed to be filed as part of this Form 10-K. Table of Contents 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," "expect," "believe," "plan," "estimate," "potential," "continue," or the negative thereof or other and similar expressions are forward-looking statements. In addition, in some cases, you can identify forward-looking statements by words or phrases such as "trend," "opportunity," "comfortable," "anticipate," "current," "intention," "position," "assume," "outlook," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions. Any statements that refer to projections of our future financial performance, anticipated growth and trends in our business, goals, strategies, focuses and plans, and other characterizations of future events or circumstances, including statements expressing general expectations or beliefs, whether positive or negative, about future operating results or the development of our products and any statement of assumptions underlying any of the foregoing are forward-looking statements. Forward-looking statements in this report may include, without limitation, statements about: • consequences of the termination of Dov Charney, our former chief executive officer (or the internal investigation related thereto), including any litigation or regulatory investigations, or any impact on our sales or brand related thereto; • ability to hire and/or retain qualified employees, including executive officers; • our future financial condition, results of operations, plans and prospects, expectations, operating improvements and cost savings, and the timing of any of the foregoing; • growth, expansion and acquisition prospects and strategies, the success of such strategies, and the benefits we believe can be derived from such strategies; • our ability to make debt payments; ability to remain in compliance with financial covenants under financing arrangements; and ability to obtain appropriate waivers or amendments with respect to any noncompliance; • liquidity and projected cash flows; • plans to make continued investments in advertising and marketing; • the outcome of investigations, enforcement actions and litigation matters, including exposure that could exceed expectations; • intellectual property rights and those of others, including actual or potential competitors, our personnel, consultants, and collaborators; • trends in raw material costs and other costs both in the industry and specific to us; • the supply of raw materials and the effects of supply shortages on our financial condition, results of operations, and cash flows; • economic and political conditions; • currency fluctuations and the impact thereof; • overall industry and market performance; • operations outside the U.S.; • the impact of accounting pronouncements; • ability to maintain compliance with the listing requirements of NYSE MKT LLC; • ability to improve efficiency and control costs at our production and supply chain facilities; 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 and those expressed in or implied by the forward-looking statements. Such assumptions, events, risks, uncertainties and other factors are found in "Item 1A. Risk Factors" in Part I and elsewhere in this Annual Report on Form 10-K and other reports and documents we file with the Securities and Exchange Commission (the "SEC") and include, without limitation, the following: • consequences of the termination of Dov Charney, our former chief executive officer (or the internal investigation related thereto), including any litigation or regulatory investigations, or any impact on our sales or brand related thereto; • changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees; Table of Contents • voting control by our directors, lenders and other affiliates, including Standard General and Dov Charney; • ability to successfully implement our strategic, operating, financial and personnel initiatives; • ability to effectively carry out and manage our strategy; • ability to maintain the value and image of our brand and protect our intellectual property rights; • general economic conditions, geopolitical events, other regulatory changes, and inflation or deflation; • disruptions in the global financial markets; • the highly competitive and evolving nature of our industry in the U.S. and internationally; • risks associated with fluctuations and trends of consumer apparel spending in the U.S.; • changes in consumer preferences or demand for our products; • our ability to attract customers to our retail and online stores; • loss or reduction in sales to wholesale or retail customers or financial nonperformance by our wholesale customers; • seasonality and fluctuations in comparable store sales and wholesale net sales and associated margins; • ability to improve manufacturing efficiency at our production facilities; • changes in the price of materials and labor, including increases in the price of raw materials in the global market and minimum wages; • ability to pass on the added cost of raw materials and labor to customers; • ability to effectively manage inventory levels; • risks that our suppliers or distributors may not timely produce or deliver products; • ability to renew leases on economic terms; • risks associated with our facilities being concentrated in one geographic area; • ability to identify new store locations and the availability of store locations at appropriate terms; ability to negotiate new store leases effectively; and ability to open new stores and expand internationally; • ability to generate or obtain from external sources sufficient liquidity for operations and debt service; • consequences of our significant indebtedness, including our relationships with lenders, ability to comply with debt agreements, ability to generate cash flow to service our debt, and the risk of acceleration of borrowings thereunder as a result of noncompliance; • adverse changes in our credit ratings and any related impact on financial costs and structure; • continued compliance with U.S. and foreign government regulations and legislation, including environmental, immigration, labor, and occupational health and safety laws and regulations; • loss of U.S. import protections or changes in duties, tariffs and quotas, risks associated with our foreign operations and supply sources such as market disruption, changes in import and export laws, and currency restrictions and exchange rate fluctuations; • litigation and other inquiries and investigations, including the risks that we, our officers or directors in cases where indemnification applies, will not be successful in defending any proceedings, lawsuits, disputes, claims or audits, and that exposure could exceed expectations or insurance coverage; • tax assessments by domestic or foreign governmental authorities, including import or export duties on our products and the applicable rates for any such taxes or duties; • ability to maintain compliance with the exchange rules of the NYSE MKT LLC; • the adoption of new accounting standards or changes in interpretations of accounting principles; • adverse weather conditions or natural disaster, including those which may be related to climate change; • technological changes in manufacturing, wholesaling, or retailing; • the risk, including costs and timely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and could impact cash flow and liquidity, and ability to upgrade information technology infrastructure and other risks associated with the systems that operate our online retail operations; and • the risk of failure to protect the integrity and security of our information systems and customers' information. All forward-looking statements included in this document are made based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statements. Table of Contents AMERICAN APPAREL, INC. TABLE OF CONTENTS Page PART I 6 Item 1. Business 6 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 20 Item 2. Properties 20 Item 3. Legal Proceedings 26 Item 4. Mine Safety Disclosures 26 PART II 26 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26 Item 6. Selected Financial Data 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures and Market Risks 41 Item 8. Financial Statements and Supplementary Data 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 88 Item 9A. Controls and Procedures 88 Item 9B. Other Information 88 PART III 89 Item 10. Directors, Executive Officers and Corporate Governance 89 Item 11. Executive Compensation 89 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 89 Item 13. Certain Relationships and Related Transactions and Director Independence 89 Item 14. Principal Accountant Fees and Services 89 PART IV 89 Exhibits and Financial Statement Schedules 89 Item 15. SIGNATURES 94 Table of Contents PART I Item 1. Business Unless the context requires otherwise, all references in the Annual Report on Form 10-K to the "Company," "Registrant," "we," "us," and "our" refer to American Apparel, Inc., a Delaware Corporation, together with its direct and indirect subsidiaries on a consolidated basis. 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 March 13, 2015 , we had approximately 10,000 employees and operated 239 retail stores in 20 countries. We operate a global e-commerce site that serves over 50 countries worldwide at www.americanapparel.com . We operate a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers. We were founded in 1998. In 2003, we opened our first retail store in Los Angeles, California. In 2004, we began our online retail operations and opened our first retail stores in Canada and Europe. Since 2005, we have opened stores in Asia, Australia, Israel, Latin America, and have further expanded throughout the U.S., Canada, and Europe. All of our retail stores sell our apparel products directly to consumers. Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and changing fashion trends and to closely monitor product quality. Our products are noted for quality and fit, and together with our distinctive branding, these attributes have differentiated our products in the marketplace. All of our trademarks, service marks, and certain other trademarks have been either registered or the subject of pending trademark applications with the U.S. Patent and Trademark Office and the registries of many foreign countries, and/or are protected by common law. In the U.S., 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 material licensed intellectual property. Core Business Strengths We have relied on various core business strengths that have contributed to our past success and will contribute to our future growth. Quality We pride ourselves on our quality fabrics and quality garment construction. We have an active quality control department that oversees our in-house knitting facilities, outside knitting contractors who work under our strict specifications, and cutting, sewing, dyeing and finishing facilities in the Los Angeles area. Because cutting and sewing operations are conducted mostly in-house, we believe we have the ability to exercise greater control over clothing manufacturing than competitors who use contract sewing facilities. Design Vision Our design vision and aesthetic are intended to appeal to young and metropolitan adults by providing them with a core line of iconic and timeless styles that are offered year-round in a wide variety of colors at reasonable prices. Since our founding, we have operated with the belief that there is a large potential market among young adults for well-designed and high-quality fashion essentials. Speed to Market With our manufacturing and other business processes centered in downtown Los Angeles, California, our vertically-integrated business model allows us to play a role in originating and defining new and innovative trends in fashion while enabling us to quickly respond to market and customer demand for classic styles and new products. Our wholesale operations are able to fulfill orders of any size with quick turn-around, which allows us 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. Advertising and Branding We attract customers through internally-developed, edgy, high-impact, and visual advertising campaigns, which use print, outdoor, in-store, and electronic communication vehicles. These advertising campaigns communicate a distinct brand image that differentiates us from our competitors and seek to establish a connection with our customers. Retail stores are an important part 6 Table of Contents of our branding and convey a modern and 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. 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 create 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. Business Strategy Throughout 2014 and into early 2015, we have brought on a new board of directors and hired new senior management including Paula Schneider, Chief Executive Officer ("CEO"), Hassan Natha, Chief Financial Officer ("CFO"), and Chelsea Grayson, General Counsel as well as other additions to the management team. Together, our new board of directors and new management team are focused on implementing a turnaround strategy and enhancing our corporate governance policies and practices. We have started implementing additional operational and financial processes and disciplines to improve liquidity and profitability. To that end, we have added new members to our executive team in the areas of planning and forecasting, operations, marketing and e-commerce. We have also added members to our legal and human resources departments and have introduced a new code of ethics which we ask all of our new and current employees to read. We believe that a strong operational and financial discipline along with a robust corporate governance structure is an important element of our long-term business strategy. In addition to enhancing and ensuring compliance with our corporate governance policies, over the next year, we will also be focused on strengthening business fundamentals to create a stable platform for future growth. We believe the following elements enhance our core business strengths and will contribute to the success of our business strategy. Merchandising As we have expanded beyond our original product offering of T-shirts, we have increased the variety of products available to our customers such as denim, shoes, sweaters, jackets and accessories. We recently embarked on a study of our current merchandise offerings and are analyzing which categories contribute the most to the value of our company and brand. We intend to streamline our assortment so that we can focus on making those items that our customers really want. By deepening our focus on these core products, we believe we can assure better availability of popular items during peak demand and improve the in-store experience of our customers. Additionally, a more streamlined offering will also give us improved capacity to experiment with new style introductions, produce short runs of these new styles at lower incremental costs, and conduct robust testing of market acceptance for these new designs. We intend to continue to judiciously introduce new merchandise to complement our existing products in order to attract new customers and increase the frequency of customer visits and the size of customer purchases. Retail Stores Strategy Our long-term growth strategy and the success of our business depend in part on an effective management of our global retail stores portfolio and the operation of these stores in a cost-efficient manner. Although we have always actively monitored store performance, we have recently begun a more formal study of our retail stores portfolio in order to identify underperforming stores that should be exited, unfavorable store leases that should be discontinued or renegotiated, as well as stores or geographical areas that will benefit from further investments. We believe that this study will enhance our long-term growth strategy to judiciously open new stores in desirable locations on favorable terms that meet our financial targets. Over the long term, we plan to expand our presence in the U.S. and increase our store footprint in markets throughout Europe and Asia. We evaluate potential store sites based on traffic patterns, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics, store contribution margin projections, demographic characteristics and other factors considered important regarding the specific location. Online Sales Strategy Our online store presence represents a growth opportunity with the potential to increase not only 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. In 2014, we enhanced the functionality of our online stores in Korea, Mexico and Brazil. We continue to open new online stores in additional countries and in late 2014, launched a new online store in China. We also intend to invest in targeted marketing and advertisement that will enhance our online presence. We have recently brought on new senior management whose responsibility will be to focus on this strategically important aspect of our business. 7 Table of Contents Wholesale Sales Strategy Growth in the wholesale sales channel is an important part of our business strategy. We are developing a plan to identify further growth opportunities in the U.S. and international markets. In order to grow in this channel, we may have to develop new products, continue to be focused on being cost efficient, invest in sales development resources and activities and improve our marketing efforts. Planning and Forecasting We believe that a strong production planning process that is aligned with our merchandising calendar will increase the efficiency of our manufacturing activities as well as ensuring that we get the right products to our customers at the right time. In early 2015, we invested in new leadership to enhance our production planning and demand forecasting capabilities through the development of formal roles and responsibilities for assortment planning and purchasing. Additionally, we are implementing a merchandising calendar for our Fall 2015 season which will ensure a balanced assortment of our product offerings, set deadlines for product development milestones and enable lead time for materials purchasing and production planning, thus reducing the need for unnecessary overtime. We believe that these improvements are key to our near-term strategy of strengthening our business fundamentals. In-Sourced Manufacturing Capabilities 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. We also believe that our vertically integrated manufacturing capabilities can be used to our competitive advantage. We intend to leverage our in-sourced production facilities to increase the speed of new product introductions to market, react more swiftly than our competitors to changing trends and quickly ramp up production to capitalize on our best sellers. Distribution Logistics Our distribution center located in La Mirada, California is fully operational and contributing to more efficient and effective processing of orders and offers an improved distribution platform to scale our wholesale, retail and online order fulfillment. Our centralized distribution facility has had a positive impact on our operating expenses and cost of sales. We continue to evaluate our current shipping and replenishment activities in order to further reduce freight costs. We also intend to expand our distribution logistics strategy to a more global level. To that end, we have invested in new logistics management who will focus on ensuring that we not only distribute our products in a cost efficient manner, but that we also comply with local import regulations. We believe that this will allow us to operate more effectively in our existing markets as well as enter new markets with less risk of disruption to our business operations. Information Systems Infrastructure An efficient and effective information systems infrastructure is an important element of our business strategy, and to that end, we are conducting an in-depth analysis of our current systems. We believe this study will identify the systems that we will need to invest in to support our future long-term growth. Cost Reduction and Improved Liquidity The success of our future growth strategy will depend in part on our ability to create a stable operating platform. To that end, we continue to focus on driving cost efficiencies throughout our operations and seek new avenues to improve our liquidity situation. Execution of the Strategy The execution of our business strategy and internal initiatives may cause material additional costs. Any store expansion initiatives will require the opening of new retail locations and additional retail personnel. Investments in additional sales personnel to service new geographic territories will also be necessary to grow our wholesale distribution channel. Both of these initiatives will increase our occupancy and payroll expenses. New merchandise introductions will also require expenditures to design new products in existing and new categories as well as incremental manufacturing costs associated with new products. To support these and other initiatives, ongoing infrastructure investments may be required. In the intermediate term, this may include expenditures for machinery and equipment, upgraded information systems and additions to our management team. In order to reduce the impact of these additional costs, we will continue to identify ways to improve the efficiency of our current manufacturing operations and enhance other operating processes. 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 design and marketing team works to create edgy, high-impact, provocative ads which are produced yearround and are sometimes featured in leading national and local lifestyle publications, 8 Table of Contents on billboards and online. While the primary intent of this advertising is to support our retail and online e-commerce operations, the wholesale business also benefits from the greater overall brand awareness generated by this advertising. For our wholesale operations, we annually participate in industry trade shows to expand and enhance customer relationships, exhibit product offerings, print product catalogs, and share new promotions with customers. Competition We operate in the highly competitive apparel industry which is characterized by rapid shifts in fashion, consumer demand, and competitive pressures, resulting in both price and demand volatility. Our wholesale operations compete on quality, fashion, pricing, and availability of merchandise. Our primary competitors are Gildan Activewear, HanesBrands, Russell Athletic, and Fruit of the Loom. Many of these companies have greater name recognition than us in the wholesale market. They are also larger and well-capitalized companies with broad distribution networks. Our retail operations compete on store location, customer service, and the breadth, quality, fit, style, pricing, and availability of merchandise. Some of our competitors are larger and well-capitalized companies which have broad distribution networks. Companies that operate in this space include, but are not limited to, The Gap, Urban Outfitters, H&M, Uniqlo, and Forever 21. Reputation for the fit and quality of our garments as well as the broad variety of colors and styles are the principal means by which we compete with others. Along with the competitive factors noted above, other key competitive factors for our online e-commerce operations include social media acceptance, advertising response rates, merchandise delivery, web site design, and web site availability. Our 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. Employees As of December 31, 2014 , we employed a work force of approximately 10,000 employees worldwide. 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 include 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. 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. 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 consist of purchased and internally developed software and are accessed over a company-wide network providing corporate employees with access to key business applications. We dedicate a significant portion of 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 . Regulation We are subject to various environmental and occupational health and safety laws and regulations. Because we monitor, control and manage environmental issues, we believe we are in compliance in all material respects with the regulatory requirements of those jurisdictions in which our facilities are located. In line with our commitment to the environment as well as to the health and safety of our employees, we will continue to make expenditures to comply with these requirements and do not believe that compliance will have a material adverse effect on our business. See "Current environmental laws, or laws enacted in the future, may harm our business" in "Item 1A. Risk Factors" in Part I. Available Information We make available, free of charge, on our internet website, www.americanapparel.net - Investor Relations , Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to such reports (the "SEC Reports") filed with or furnished to the SEC pursuant to federal securities laws, as soon as reasonably practicable after each SEC Report is filed with or furnished to the SEC. References herein to our corporate website, www.americanapparel.net , and our online retail website, www.americanapparel.com , are not intended to function as hyperlinks and the information on our websites is not and should not be considered part of this report and is not incorporated by reference in this document. In addition, copies of our SEC Reports are available at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the public reference facilities by calling the SEC 9 Table of Contents 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. Item 1A. Risk Factors Our business involves various risks and uncertainties in addition to the normal risks of business, some of which are discussed in this section. It should be noted that our business may be adversely affected by a downturn in general economic conditions and other forces beyond our control. In addition, other risks and uncertainties not presently known or that we currently believe to be immaterial may also adversely affect our business. Any such risks or uncertainties, or any of the following risks or uncertainties, that develop into actual events could result in a material and adverse effect on our business, financial condition, results of operations, or liquidity. The information discussed below should be considered carefully with the other information contained in this Annual Report on Form 10-K and the other documents and materials filed by us with the SEC, as well as news releases and other information publicly disseminated by us from time to time. Risks Related to the Company's Business Turnover of our key executives and Board of Directors (the "Board") and difficulty of recruiting and retaining key employees could have a material adverse impact on our business. We experienced a significant amount of executive-level turnover in 2014, which has had and could continue to have a negative impact on our ability to retain key executives and employees and could have a material negative impact on our operations. We recently appointed newly hired executives as CEO, CFO, and General Counsel, among others, and seven of the nine members of the Board, including our current Chair of the Board, were appointed since July 2014. We cannot provide assurance that we will effectively manage this or any other management transition, which may impact our ability to retain our remaining key executives and employees and which could harm our business and operations to the extent there is customer or employee uncertainty regarding the prospects of our business. The termination of Dov Charney as our chief executive officer could have a material adverse impact on our business. On June 18, 2014, the Board voted to replace Dov Charney as Chairman of the Board, suspended him and notified him of its intent to terminate his employment as our Chairman and CEO for cause. In connection with the Nomination, Standstill and Support Agreement, dated July 9, 2014 (the "Standstill and Support Agreement"), the Board formed a new special committee (the "Suitability Committee") for the purpose of overseeing the investigation into alleged misconduct by Mr. Charney (the "Internal Investigation"). Based on the findings of the Internal Investigations in December 2014, the Suitability Committee determined that it would be inappropriate for Mr. Charney to be reinstated as our CEO or serve as an officer or employee of us or any of our subsidiaries, and the Board terminated Mr. Charney for cause under his employment agreement. There can be no assurance that Mr. Charney's termination and any transition in management arising from his termination will not have a material adverse impact on our business or our ability to hire and retain employees and executive officers. In addition, as a result of the findings of the Internal Investigation and/or the determination to terminate Mr. Charney for cause, we may incur liability as a result of litigation and regulatory investigations, which could have a material adverse impact on our business. We depend on key personnel, and our ability to grow and compete will be harmed if we do not retain the continued services of such personnel or we fail to identify, hire and retain additional qualified personnel. We depend on the efforts and skills of our management team and other key personnel, and the loss of services of one or more members of this team, many of whom have substantial experience in the apparel industry, could have an adverse effect on our business. Our senior officers closely supervise all aspects of our business, in particular the design and production of merchandise and the operation of our stores. If we are unable to hire and retain qualified management or if any member of our management leaves, such departure could adversely affect our operations and ability to design new products and to maintain and grow the distribution channels for our products. In addition, the Board's decision to terminate Mr. Charney as our CEO and to not reinstate Mr. Charney in another capacity could result in departure of other key employees. Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising and marketing areas, and other functions. In addition, if we experience material growth, we will need to attract and retain additional qualified personnel. The market for qualified and talented design and marketing personnel in the apparel industry is intensely competitive, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. If we are unable to attract or retain qualified personnel as needed, our growth will be hampered and our operating results could be materially adversely affected. Litigation exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations. 10 Table of Contents We are subject to regulatory inquiries, investigations, claims and suits, including, among others, consolidated shareholder derivative actions, wage and hour suits, and numerous employment related claims and suits. In addition, on or about June 23, 2014, Mr. Charney submitted a demand in arbitration against us in connection with his suspension, which had been stayed pending the determination of the Suitability Committee in the Internal Investigation. As a result of Mr. Charney's termination for cause, such stay is no longer in effect and we recently have received correspondence indicating that he intends to reinstate his demand for arbitration. Additionally, Mr. Charney may seek to file additional lawsuits against us arising from his termination for cause. In the event that any current or future inquiries, investigations, claims or suits are decided against us, we may incur substantial liability, experience an increase in similar suits or suffer reputational harm. We are unable to predict the outcome that could result from these matters at this time and any views we form as to the viability of these claims or the financial exposure in which they could result could change from time to time as the matters proceed through their course or as facts are established. No assurance can be made that these matters will not result in material financial exposure, which together with the potential for similar suits and reputational harm, could have a material adverse effect upon our financial condition and results of operations. See "Note 18 of Notes to Consolidated Financial Statements" in Item 8, Part II. Increases in the number and magnitude of personal injury claims could adversely affect our operating results. We face inherent business risk from exposure to personal injury or occupational claims and claims from outside parties resulting from our operations. Accidents at our manufacturing facilities have resulted, in some cases, in serious injuries and loss of life. For example, in the first quarter of 2015, an industrial accident at our dyeing facility in Hawthorne, California resulted in injuries to one of our employees. We could experience material personal injury or occupational claims and investigations arising from this accident and future accidents and we may incur significant costs to defend such claims and investigations. If we fail to maintain the value and image of our brand, our sales are likely to decline. Our success depends on the value and image of our brand. Our name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brand depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation or those of our senior personnel were to be tarnished by negative publicity. Any of these events, including the publicity surrounding the termination of Mr. Charney as our CEO, the results of the Internal Investigation and any litigation or regulatory investigations relating thereto, could adversely impact our image and result in decreases in sales. Our failure to adequately protect our trademarks and other intellectual property rights could diminish the value of our brand and reduce demand for our merchandise. Our trademarks and service marks, and certain other intellectual property, have been registered, or are the subject of pending applications with the U.S. Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. Our products are noted for their quality and fit, and our edgy, distinctive branding has differentiated us in the marketplace. As such, the trademark and variations thereon are valuable assets that are critical to our success. We intend to continue to vigorously protect our trademark and brand against infringement, but we may not be successful in doing so. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the U.S. The unauthorized reproduction or other misappropriation of our trademark would diminish the value of our brand, which could reduce demand for our products or the prices at which we can sell our products. We have substantial indebtedness, which could have adverse consequences to us, and we may not be able to generate sufficient cash flow to fund our liquidity needs, including servicing our indebtedness. We currently have substantial indebtedness. Our level of indebtedness has important consequences to us and to you and your investment. For example, our level of indebtedness may: • • • • • require us to dedicate a substantial portion of cash flow from operations to pay interest and principal on 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 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 other indebtedness, an acceleration of indebtedness or foreclosure on the assets securing indebtedness, which could have a material adverse effect on our business or financial condition; limit our ability to obtain additional financing or to sell assets or equity to raise funds, if needed, for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement business strategies; result in higher interest expense if interest rates increase on our floating rate borrowings; 11 Table of Contents • • • place us at a competitive disadvantage relative to others in the industry, as it is not common for companies involved in the retail apparel business to operate with such high leverage; heighten our vulnerability to downturns in our business, the retail industry or in the general economy and limit our flexibility in planning for or reacting to changes in our business, the retail industry or in the general economy; or reduce our ability to carry out our plans to expand store base, product offerings and sales channels. Our ability to service indebtedness is dependent on 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. We are permitted by the terms of our indebtedness, including our senior secured notes and the Capital One Credit Facility (as defined in Note 1 of Notes to Consolidated Financial Statements in Item 8, Part II), to incur additional indebtedness, subject to the restrictions therein. We have experienced negative cash flows from operating activities in the past, and our business may not generate sufficient cash flow from operations to enable us to service indebtedness or to fund other liquidity needs. The inability to access sufficient liquidity could have a material adverse effect on us and we may need to take various actions, which also could have material adverse consequences to us, including seeking to refinance all or a portion of 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. We have amended the Capital One Credit Facility from time to time in order to waive certain obligations relating to, among other things, financial ratio covenants including the third amendment dated November 14, 2013 and the fifth amendment dated March 25, 2014. As of December 31, 2014, we were not in compliance with the financial covenants under the Capital One Credit Facility. We obtained a waiver of such noncompliance in connection with the sixth amendment to the Capital One Credit Facility on March 25, 2015; however, there can be no assurance that we will maintain compliance therewith going forward and we may need to obtain further amendments to avoid an event of default under the facility. Under the indenture governing our senior secured notes, a special interest trigger event occurred as of December 31, 2013 because our consolidated total net leverage ratio, as calculated under the indenture, exceeded 4.50 to 1.00. As a result, interest on the senior secured notes now accrues at a rate of 15% annum, with the interest in excess of 13% per annum payable in-kind for any interest payment date prior to April 15, 2018 and in cash for any interest payment date thereafter. The additional 2% per annum of interest accrues retroactively from the issue date of the senior secured notes. Similarly, because of the special interest trigger event, the interest rate on the Lion Loan Agreement (as defined in Note 1 of Notes to Consolidated Financial Statements in Item 8, Part II) also increased from 18% to 20% per annum with the additional 2% payable retroactively from the date of the loan agreement. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General Group ("Standard General" and such agreement, subsequent to the assignment, the "Standard General Loan Agreement" ). On September 8, 2014, we entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. Interest under the Standard General Loan Agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind. We are currently paying the interest in cash as the terms of our other debt agreements do not currently permit payment in-kind. On March 25, 2015, one of our subsidiaries borrowed $15,000 under an unsecured credit agreement with Standard General, dated as of March 25, 2015 (the "Standard General Credit Agreement"). The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to us as contemplated by the Standstill and Support Agreement. 12 Table of Contents Our credit agreements contain, and any future credit agreements or loan agreements may contain, certain financial and maintenance covenants, including covenants relating to our capital expenditures, fixed charge coverage, borrowing availability and leverage, some of which may be tied to consolidated EBITDA, in each case as defined in the applicable debt agreements. Such restrictive and other covenants could limit our ability to respond to market conditions, to provide for unanticipated capital requirements or to take advantage of business or acquisition opportunities. 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 working capital, and as a result may adversely affect our ability to finance our operations or pursue our expansion plans. Our debt agreements contain cross-default or cross-acceleration provisions by which non-compliance with covenants, or the acceleration of other indebtedness of at least a specified outstanding principal amount, could also constitute an event of default under such debt agreements. Accordingly, such a failure could result in the acceleration of all of our outstanding debt, and may adversely affect our ability to obtain financing that may be necessary to effectively operate our business and grow the business going forward. In addition, substantially all of our assets are used to secure indebtedness, including loans under our credit agreements, our senior secured notes and certain equipment leasing agreements. In the event of a default on these agreements, substantially all of our assets could be subject to liquidation by the creditors, which liquidation could result in no assets being left for the stockholders after the creditors receive their required payment. In such an event, we would be required to seek alternative sources of liquidity, and there can be no assurance that any alternative source of liquidity would be available on terms acceptable to us, or at all. Fluctuations in our results of operations from quarter to quarter could have a disproportionate effect on our overall financial condition and results of operations. We experience seasonal fluctuations in revenues and operating income. Historically, sales during the third and fourth fiscal quarters have generally been the highest while sales during the first fiscal quarter have been the lowest. Any factors that harm our third or fourth quarter operating results, including adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year. In order to prepare for our peak selling season, we must produce and keep in stock more merchandise than we would carry at other times of the year. Any unanticipated decrease in demand for our products during our peak selling season could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross profit. A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, pricing, inflation, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs, timing and level of markdowns and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from our expectations. Our plans to expand our product offerings and sales channels might not be successful, and implementation of these plans might divert our operational, managerial and administrative resources, which could impact our competitive position. Our ability to grow our existing brand and develop or identify new growth opportunities depends in part on our ability to appropriately identify, develop and effectively execute strategies and initiatives. Failure to effectively identify, develop and execute strategies and initiatives may lead to increased operating costs without offsetting benefits and could have a material adverse effect on our results of operations. These plans involve various risks discussed elsewhere in these risk factors, including: • • • implementation of these plans may be delayed or may not be successful; if our expanded product offerings and sales channels fail to maintain and enhance our distinctive brand identity, our brand image may be diminished and our sales may decrease; implementation of these plans may divert management's attention from other aspects of our business and place a strain on our management, operational and financial resources, as well as our information systems. In addition, our ability to successfully carry out our plans to expand our product offerings may be affected by, among other things, economic and competitive conditions, changes in consumer spending patterns and 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. 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 consumer 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. Other factors beyond our control that impact consumer traffic include economic conditions nationally or in a particular area, severe weather, competition from internet 13 Table of Contents 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. 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 prime store 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 needed to sustain our projected revenues. All these factors may have a material adverse effect on our financial condition and results of operations. Our business strategy relies in part on the opening of new stores, the remodeling of existing stores and expanding our business internationally, which may strain our resources, adversely impact the performance of our existing stores, and delay or prevent successful penetration into international markets. Our business strategy depends in part on opening new retail stores, both domestically and internationally, renewal of existing store leases on terms that meet our financial targets, remodeling existing stores in a timely manner, and cost-efficient operation of these stores. Successful implementation of this portion of our strategy depends on a number of factors including, but not limited to, our ability to: • • • • • • • • • • • identify and obtain suitable store locations and negotiate acceptable leases for these locations; complete store design and remodeling projects on time and on budget; manage and expand our infrastructure to accommodate growth; generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund expansion and remain in compliance with the relevant covenants in our credit facilities, which may limit our ability to fund such expansion; 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 rate risks effectively; address existing and changing legal, regulatory and political environments in target foreign markets; and manage international growth, if any, in a manner that does not unduly strain our financial, operating and management resources. Any expansion of our store base and remodeling of existing stores may not result in an increase in our revenues even though they increase our costs. New stores may place increased demands on our existing financial, operational, managerial and administrative resources, which could cause us to operate less effectively. Further, our ability to fund expansion and other capital expenditures will depend on sufficient cash from internal operations (after taking into account our debt service obligations and subject to the covenants in debt agreements) or financing subject to general economic, legislative, regulatory and other factors that are beyond our control and which financing may not be available on commercially reasonable terms or at all. Our ability to obtain real estate to open new stores in desirable locations depends upon the availability of real estate that meets our criteria, which includes projected foot traffic, square footage, customer demographics and whether we are able to negotiate lease terms that meet our operating budget. In addition, we must be able to effectively renew our existing store leases from time to time. Failure to secure real estate in desirable locations on economically beneficial terms or to renew leases on existing store locations on economically beneficial terms could have a material adverse effect on our results of operations. We anticipate that we will incur significant costs related to starting up and maintaining additional foreign operations. Costs may include, and will not be limited to, setting up foreign offices and hiring experienced management. These increased demands may cause us to operate our business less effectively, which in turn could cause deterioration in the performance of our stores. In addition, our ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks. Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our revenues, operating income, net income, earnings per share, and 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. Lowering our price in local currency may result in lower revenue. Conversely, a decrease in the value of the U.S. dollar relative to foreign currencies could increase operating expenses. Because we utilize foreign suppliers and sell into foreign markets, we are subject to numerous risks associated with international business that could increase our costs or disrupt the supply of our products, resulting in a negative impact on our business and financial condition. Our international operations subject us to risks, including: 14 Table of Contents • • • • • • • • economic and political instability; restrictive actions by foreign governments; greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights; changes in import duties or import or export restrictions; fluctuations in currency exchange rates, which could negatively affect profit margins; timely shipping of product; complications complying with the laws and policies of the United States affecting the exportation of goods, including duties, quotas, and taxes; and complications complying with trade and foreign tax laws. These and other factors beyond our control could disrupt the supply of our products, influence the ability of our suppliers to export our products cost-effectively or at all, inhibit our suppliers' ability to procure certain materials and increase our expenses, any of which could harm our business, financial condition and results of operations. Cost increases in, or shortages of, the materials or labor used to manufacture our products could negatively impact our business and financial condition. The manufacture of our products is labor intensive and utilizes raw materials supplied by third parties. An important part of our branding and marketing is that our products are made in the U.S. 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 U.S. The term "U.S." 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 Federal Trade Commission'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 U.S., either directly by us in our knitting, manufacturing, dyeing and finishing facilities located in Los Angeles or through commission knitters, dyers and sewers in the Los Angeles metropolitan area and other regions in the U.S. If the cost of labor materially increases, our financial results could be materially adversely affected and our ability to compete against companies with lower labor costs could be hampered. Material increases in labor costs in the U.S. could also force us to move all or a portion of our manufacturing overseas, which could adversely affect our brand identity. Similarly, increases in the prices of raw materials or the prices we pay to the suppliers of the raw materials used in the manufacturing of our products, and shortages in such materials, could have a material adverse effect on our financial condition and results of operations. For example, the price of yarn and the cost of certain related fabrics has historically fluctuated. Such shortages may result in an increase in our manufacturing costs and could result in a material adverse effect on our financial condition and results of operations, and we are unable to predict whether we will be able to successfully pass on the added cost of raw materials to our wholesale and retail customers. In addition, increases in the cost of, or shortages in, our raw material inputs could adversely affect our ability to compete. Further, we could be forced to seek to offset any increased raw material costs by relocating all or a portion of our manufacturing overseas to locations with lower labor costs. Our manufacturing operations are located and will be located in higher-cost geographic locations, placing us at a possible disadvantage to competitors that have a higher percentage of their manufacturing operations overseas. Despite the general industry-wide migration of manufacturing operations to lower-cost locations, such as Central America, the Caribbean Basin and Asia, our textile manufacturing operations are still located in the U.S., which is a higher-cost location relative to these offshore locations. In addition, our competitors generally source or produce a greater portion of their textiles from foreign sources with lower costs than us. Our competitors' lower costs of production may allow them to offer their products at lower prices. This could force us to lower our margins or to compete more vigorously with non-price competitive strategies to preserve our margins and sales volume. Our reliance on operational facilities located in the same vicinity makes our business susceptible to local and regional disruptions or adverse conditions. We conduct all of our manufacturing operations in the Los Angeles metropolitan area. Among other facilities in the area, our 800,000 square foot facility in downtown Los Angeles houses executive offices as well as cutting and sewing operations. Our distribution operations are located in La Mirada, 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, and 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. In addition, if there were a major earthquake, we may have to cease operations for a significant period due to possible damage to our factory or inability to deliver products to our distribution center. 15 Table of Contents Unionization of employees at our facilities could result in increased risk of work stoppages and high labor costs. Our employees are not party to any collective bargaining agreement or union. If employees at our manufacturing or distribution facilities were to unionize, our relationship with our employees could be adversely affected. We would also face an increased risk of work stoppages and higher labor costs. One non-union organization that purports to represent the rights of some of our current and former employees has communicated demands to us that are purportedly made on behalf of such current and former employees. We understand that one related group has solicited support with an intention to attempt to be recognized by us as a union. If employees at our manufacturing or distribution facilities were to unionize, or otherwise make collective demands on us, it could adversely affect our relationship with our employees, increase the risk of work stoppages and increase our labor costs and legal fees. Such employee actions could also have a material adverse impact on our operating costs and financial condition and could force us to take actions such as raising prices on our products, curtailing operations and/or relocating all or a portion of our operations overseas. A disruption in our information technology infrastructure may interrupt our operations. We depend 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 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 could cause information, including data related to customer orders, to be lost or delayed, delays in the delivery of merchandise to our stores and customers or lost sales. Moreover, we may not be successful in developing or acquiring technology that is competitive and responsive to the needs of our customers and might lack sufficient resources to make the necessary investments in technology to compete with our competitors. Accordingly, if changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose customers. A failure in our online retail operations could significantly disrupt our business and lead to reduced sales and reputational damage. Our online retail operations accounted for approximately 10% of net sales for the year ended December 31, 2014 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; website downtime; difficulty in recreating the in-store experience on our website; and risks related to the failure of the systems that operate the web sites and their related support systems, including computer viruses, theft of customer information, telecommunication failures and electronic break-ins and similar disruptions. Our failure to successfully respond to these risks and uncertainties could reduce Internet sales and damage our brand's reputation. Failure to protect the integrity and security of our information systems and our customers’ information could materially adversely affect our results of operations, damage our reputation and expose us to litigation. Our operations, including sales through our e-commerce website and retail stores, involve the collection, storage and transmission of customers' credit card information and personal identification data, as well as employee information and non-public company data. The costs associated with maintaining the security of such information, including increased investments in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud or a malicious breach of our information systems, could materially adversely affect our results of operations. If the security of the customer data stored on our servers or transmitted by our network is breached, our reputation could be materially adversely affected, which could negatively impact our sales results, and we could be subject to litigation. To date, we have not experienced a significant security breach. We rely heavily on immigrant labor, and changes in immigration laws or enforcement actions or investigations under such laws could materially adversely affect our labor force, manufacturing capabilities, operations and financial results. We rely heavily on immigrant labor. Adverse changes to existing laws and regulations applicable to employment of immigrants, enforcement requirements or practices under those laws and regulations, and inspections or investigations by immigration authorities or the prospects or rumors of any of the foregoing, even if no violations exist, could negatively impact the availability and cost of personnel and labor to us. As a result, we could experience very substantial turnover of employees on short or no notice, which could result in manufacturing and other delays. We may also have difficulty attracting or hiring new employees in a timely manner, resulting in further delays. These delays could materially adversely affect our revenues and costs and our ability to compete. If we are not able to continue to attract and retain sufficient employees, our manufacturing capabilities, operations and financial results would be adversely affected. 16 Table of Contents We are subject to customs, advertising, consumer protection, privacy, zoning and occupancy, and labor and employment laws that could require us to modify our current business practices and incur increased costs. We are subject to numerous regulations, including customs, advertising, consumer protection and privacy, zoning and occupancy laws and ordinances that regulate the operation of retail stores and warehouse facilities and/or govern the importation, promotion and sale of merchandise. If these regulations were to change or were violated, we could be subject to litigations, fines and penalties and experience increased costs of certain goods and delays in shipments of goods, which would hurt our business and results of operations. We are also subject to numerous federal and state labor laws, such as minimum wage laws and other laws relating to employee benefits. If these laws were to change, we may incur additional wage and benefit costs, which could adversely affect our profitability. We are currently defending several wage and hour suits. Should these matters be decided against us, we could incur substantial liability, experience an increase in similar suits, and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, but no assurance can be made that these matters will not result in material financial exposure. See "Note 18 of Notes to Consolidated Financial Statements" in Item 8, Part II for a more detailed discussion of our pending litigation. Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business. We are currently being audited by government tax agencies regarding our operating activities in previous periods which may result in an assessment of a material amount, the payment of which may adversely impact our financial conditions and operations. As of December 31, 2014, we are being audited by government agencies in various jurisdictions in regards to sales, VAT, income, and other taxes and customs duties for certain previous years. For example, in connection with one such audit, the German customs audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on our imports. The German authorities demanded, and we paid, in connection with such assessments, $5,183 in 2014. Although we believe that we properly assess and remit all required sales, VAT, income, and other taxes and customs duties in applicable jurisdictions, no assurance can be made that these matters will not have a material adverse effect on our financial condition and results of operations. Third party failure to deliver merchandise to stores and customers could result in lost sales or reduced demand for our merchandise. The efficient operation of our stores and wholesale business depends on the timely receipt of merchandise from our distribution centers. Independent third party transportation companies deliver a substantial portion of our merchandise to our stores. These shippers may not continue to ship our products at current pricing or terms. These shippers may employ personnel represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees or contractors of these third parties could delay the timely receipt of merchandise, which could result in canceled sales, a loss of loyalty to our brand and excess inventory. There can be no assurance that such stoppages or disruptions will not occur in the future. Any failure by these third parties to respond adequately to our distribution needs would disrupt our operations and could have a material adverse effect on our financial condition and results of operations. Timely receipt of merchandise by our stores and our customers may also be affected by factors such as inclement weather, natural disasters and acts of terrorism. We may respond by increasing markdowns or initiating marketing promotions, which would decrease our gross profits and net income. We have potential exposure to credit risks on our wholesale sales. We are exposed to the risk of financial non-performance by our customers, primarily in our wholesale business. Sales to wholesale customers represented approximately 31% of our net sales for the year ended December 31, 2014. Our extension of credit involves considerable use of judgment and is based on an evaluation of each customer's financial condition and payment history. We monitor our credit risk exposure by periodically obtaining credit reports and updated financials of our customers. One customer in our U.S. wholesale business accounted for 16.6% of our total trade accounts receivable as of December 31, 2014 . We maintain an allowance for doubtful accounts for potential credit losses based upon historical trends and other available information. However, delays in collecting or the inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our results of operations. Risks Related to the Company's Stock Our stock price may be volatile. 17 Table of Contents Our stock price may fluctuate substantially as a result of quarter to quarter variations in our actual or anticipated financial results or the financial results of other companies in the retail and apparel industries. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies. Failure to meet the expectations of investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline. In addition, the fluctuation of our stock price also could cause us to fail to meet listing standards on the NYSE MKT if our stock price trades at a low price per share for a substantial period of time and we fail to effect a reverse split of our shares. If we are unable to maintain the listing of our common stock on the NYSE MKT or any other securities exchange, it may be more difficult for you to sell your securities. Our common stock is currently traded on the NYSE MKT. We are currently in compliance with the continued listing standards of the NYSE MKT; however, in the past we have failed to meet such standards. We are subject to periodic review by NYSE MKT and no assurance can be given that we will continue to meet the listing requirements of NYSE MKT in the future. If for any reason the NYSE MKT should delist our common stock, and we are unable to obtain listing on another national securities exchange, we could face significant material adverse consequences, including: • • • • a limited availability of market quotations for our securities; a limited amount of news and analyst coverage; a decreased ability to issue additional securities or obtain additional financing in the future; and a determination that the common stock is a "penny stock," if the securities sell for a substantial period of time at a low price per share which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock. Voting control by our directors, lenders and other affiliates, including Standard General and Dov Charney, may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval. In connection with the Standstill and Support Agreement, five directors resigned from the Board, effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and us. The Standstill and Support Agreement provides Standard General and Mr. Charney with specified rights with respect to the appointment of their mutually agreed designees to the Board and the nomination of such designees for election at our annual meeting of stockholders, subject to specified limitations, including that Mr. Charney will not serve as a member of our Board or be nominated by us or Standard General as a Board member. In 2014, Lion exercised its right to designate two members to our Board, whose appointments were effective as of September 15, 2014 and January 13, 2015, respectively. On March 6, 2015, a member appointed by Lion resigned from the Board, and, on March 24, 2015, the Board elected a member designated by Lion to fill that vacancy. As of March 13, 2015, Mr. Charney owned approximately 42% of our outstanding common stock and Mr. Charney and Standard General collectively controlled the right to vote such common stock. On July 9, 2014, Mr. Charney and Standard General, on behalf of one or more of its funds, entered into a cooperation agreement (the "Cooperation Agreement"), which provides among other things that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that, notwithstanding the terms of the Standstill and Support Agreement, Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement (defined below). In addition, according to Mr. Charney's Schedule 13D/A, dated June 25, 2014, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right, exercisable on or prior to July 15, 2017, to purchase from Mr. Charney shares representing approximately 18.4% of our currently outstanding common stock (consisting of the 27,351,407 shares purchased by Mr. Charney from Standard General using the proceeds of a loan from Standard General and 10% of Mr. Charney’s 47,209,407 original shares which original shares also are pledged as security for such loan, which shares are further referenced in the Cooperation Agreement). As of March 13, 2015, Lion owned warrants to acquire 24.5 million shares, or approximately 14%, of our outstanding common stock. Mr. Charney and Lion have the right to acquire additional beneficial ownership under certain circumstances. In addition, Mr. Charney and Lion are parties to an investment agreement pursuant to which Lion has the right to designate up to two directors on the Board and a board observer (or, if we increase our board size to 12, up to three directors and no board observers), subject to maintaining certain minimum ownership thresholds of common stock or shares of common stock issuable under Lion's warrants. Mr. Charney and Lion also are parties to an investment voting agreement, dated March 13, 2009 (the "Investment Voting Agreement") which provides that, for so long as Lion has the right to designate any person or persons to the Board, Mr. Charney will vote his shares of common stock in favor of Lion's designees, and Lion will vote its shares of common stock in favor of Mr. Charney and each other designee of Mr. Charney, in each case subject to Mr. Charney maintaining certain minimum ownership thresholds of common stock. 18 Table of Contents This concentration of share ownership, agreements allowing Standard General and Lion to appoint members to the Board, and voting agreements between Mr. Charney and Standard General and Mr. Charney and Lion, may adversely affect the trading price for the common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, some or all of our significant stockholders, if they were to act together, would be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of facilitating, delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or encouraging or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, depending on the desires of our significant stockholders. Among other things, such actions may prevent our stockholders from realizing a premium over the current market price for their shares of common stock. Our significant stockholders may also have interests that differ from yours and may vote their shares of common stock in a way with which you disagree and which may be adverse to your interests. Furthermore, Standard General and its affiliates could be our sole lender under our revolving credit facility if it acquires our revolving credit facility. Our adoption of a stockholders rights plan may delay or make it more difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders. On December 21, 2014, our Board adopted a stockholders rights plan (the "Rights Plan"). Under the Rights Plan, we declared a dividend of one preferred share purchase right for each share of our common stock held by shareholders of record as of January 2, 2015. Each right entitles the registered holder to purchase from us a unit consisting of one ten-thousandth of a share (a "Unit") of Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a purchase price of $3.25 per Unit, subject to adjustment. The Rights Plan was implemented by us to protect our stockholders from a threat of creeping control and provide the Board and our stockholders with adequate time to properly assess any take-over bid without undue pressure. However, the Rights Plan may have the effect of delaying, deterring or preventing acquisitions that would otherwise have provided value to our stockholders and may not be effective in preventing an acquirer from ultimately acquiring control over us. Risks Related to the Company's Industry We operate in the highly competitive retail and apparel industries and our market share may be adversely impacted at any time by the significant number of competitors in our industries that may compete more effectively than we can. The apparel industry is characterized by rapid shifts in fashion, consumer demand, and competitive pressures, resulting in both price and demand volatility. The retail apparel industry - specifically, the imprintable apparel market - is fragmented and highly competitive. Prices of certain products we manufacture 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 these competitors have greater name recognition and are better capitalized than us, which may enable them to adapt to changes in customer requirements more quickly, devote greater resources to the marketing and sale of their products, generate greater national brand recognition, or adopt more aggressive pricing policies than we can. We also face competition in European, Asian and Canadian markets from established regional and national chains. Our success in these markets depends on determining a sustainable profit formula to build brand loyalty and gain market share in these challenging retail environments. If our international business is not successful, our results of operations could be adversely affected. The wholesale business competes with numerous wholesale companies based on the quality, fashion, availability, and price of wholesale product offerings. Many of these companies have greater name recognition and greater financial and other resources than us. If we cannot successfully compete with these companies, our business and results of operations could be adversely affected. Purchases of retail apparel merchandise are generally discretionary and economic conditions may cause a decline in consumer spending which could adversely affect our business and financial performance. Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of consumer spending, particularly in discretionary areas such as fashion apparel. Our business and financial performance, including sales and the collection of accounts receivable, may be adversely affected by, among other things, any future decrease in economic activity in the markets we serve, increased unemployment levels, higher fuel and energy costs, rising interest rates, adverse conditions in the housing markets, financial market volatility, recession, decreased access to credit, reduced consumer confidence in future economic and political conditions, acts of terrorism, consumer perceptions of personal well-being and security, and other macroeconomic factors affecting consumer spending behavior. A decrease in consumer discretionary spending as a result of macroeconomic conditions may decrease the demand for our products. In addition, reduced consumer spending may cause us to lower prices or drive us to offer additional products at promotional prices, any of which would have a negative impact on gross profit. 19 Table of Contents Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of materials, parts and components from our suppliers. Global financial conditions may materially and adversely affect the ability of our suppliers to obtain financing for significant purchases and operations. If certain key suppliers were to become capacity constrained or insolvent as a result of a financial crisis, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact consumer purchases and our financial results. As a consequence, our operating results for a particular period are difficult to predict, and prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, financial condition, and results of operations. If we are unable to gauge fashion trends and react to changing consumer preferences in a timely manner, our sales will decrease. Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The retail apparel business fluctuates according to changes in consumer preferences, which are dictated, in part, by fashion and season. To the extent we misjudge the market for our merchandise or the products suitable for our market, our sales will be adversely affected. Merchandise misjudgments could have a material adverse effect on our brand image. Fluctuations in the apparel retail market affect the level of inventory owned by apparel retailers since merchandise must be manufactured in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the retail apparel business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we build up our inventory levels. As a result, we will be vulnerable to demand pricing shifts, suboptimal selection and timing of merchandise production. If sales do not meet expectations, excess inventory may lower planned margins. Elimination or scaling back of U.S. import protections would weaken an important barrier to the entry of foreign competitors who produce their merchandise in lower labor cost locations. This could place us at a disadvantage to those competitors. Our products are subject to foreign competition. Foreign competitors 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 could have a material adverse effect on our business, financial condition and results of operation. 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. Item 1B. Unresolved Staff Comments None. Item 2. Properties We conduct our primary apparel manufacturing operations out of an 800,000 square-foot facility in the warehouse district of downtown Los Angeles, California. The following table presents non-retail facilities. Each of our domestic properties is used in connection with all of our operating segments. Our foreign offices are solely used in connection with our Canada and International segments, respectively. 20 Table of Contents Location Los Angeles, California Los Angeles, California Hawthorne, California South Gate, California Garden Grove, California La Mirada, California Montreal, Quebec London, England Tokyo, Japan Seoul, South Korea Beijing, China Berlin, Germany Purpose Headquarters, wholesale and web sales operations, hosiery knitting, cutting and sewing of garments and warehousing Fabric knitting Fabric dyeing and finishing Cutting, sewing, garment dyeing and finishing Fabric knitting, fabric dyeing and finishing, cutting and sewing of garments Distribution Center Offices and warehousing Offices Offices Offices Offices Offices Düsseldorf, Germany Offices All of our retail stores are leased, and lease terms are typically five to ten years with renewal options for an additional five to ten years. Most of these leases provide for base rent as well as maintenance and common area charges, real estate taxes, and certain other expenses. These retail stores are well maintained, adequately meet our needs, and are being utilized for their intended purposes. Selling space of opened stores sometimes changes due to store renovations that modify space utilization, use of staircases, the configuration of cash registers, and other factors. As of December 31, 2014 , we operated seven concession locations among our retail operations. 21 Table of Contents The following tables present our existing retail stores by geographic region as of December 31, 2014 : Domestic Locations ( 136 ) Arizona (2) Scottsdale Tucson California (36) Arcadia Berkeley Claremont Commerce Costa Mesa Gilroy Huntington Beach Irvine Spectrum Los Angeles— Beverly Canoga Park Downtown Echo Park Factory Store Hollywood Little Tokyo Los Feliz Melrose Westwood Village West Hollywood Malibu Manhattan Beach Palo Alto Rancho Cucamonga San Diego— Fashion Valley Hillcrest Pacific Beach San Francisco— China Gate Haight Ashbury Union Street Santa Barbara Santa Clara Santa Cruz Santa Monica— Main Street Third Street Promenade Studio City Venice Florida (7) Boca Raton Miami Beach— Lincoln Road Sunset Drive Washington Ave. Orlando St. Augustine Wellington Connecticut (2) New Haven South Norwalk District of Columbia (2) Georgetown Lincoln Square Michigan (3) Ann Arbor East Lansing Royal Oak Georgia (3) Atlanta— Lenox Mall Little Five Points Atlantic Station Hawaii (1) Honolulu Minnesota (2) Bloomington Minneapolis Missouri (1) Kansas City Nevada (3) Illinois (6) Chicago— Belmont & Clark Gold Coast State St. Wicker Park Evanston Schaumburg Colorado (2) Boulder Denver Massachusetts (3) Boston— Back Bay Newbury Street Cambridge Louisiana (1) New Orleans Maryland (4) Annapolis Baltimore Bethesda Silver Spring 22 Las Vegas— Boca Park Miracle Mile Premium Outlets New Jersey (4) Cherry Hill Edison Hoboken Paramus Table of Contents Domestic Locations ( 136 ) (cont'd.) New York (24) Brooklyn— Bond Street Carroll Gardens Court Street Nassau Avenue Park Slope Williamsburg Central Valley Garden City Manhattan— Chelsea Columbia University Columbus Circle FIT Flatiron Gramercy Park Harlem Hell’s Kitchen Lower Broadway Lower East Side Noho Soho Tribeca Upper East Side Upper West Side White Plains Pennsylvania (4) King of Prussia Philadelphia— Sansom Common Walnut Street Pittsburgh Oregon (4) Eugene Portland— Hawthorne Blvd. Stark Street Bridgeport Road South Carolina (1) Charleston Wisconsin (2) North Carolina (1) Vermont (1) Burlington Charlotte— SouthPark Mall Ohio (3) Cincinnati Cleveland Columbus Madison Milwaukee Tennessee (2) Memphis Nashville Texas (7) Austin— Congress Ave Guadalupe Street Dallas— Mockingbird NorthPark Center Houston Round Rock San Antonio Utah (1) Salt Lake City Virginia (1) Richmond 23 Washington (3) Seattle— Capitol Hill Downtown Seattle University Way Table of Contents Canada ( 31 ) Alberta (4) Ontario (12) Calgary— 17th Avenue Market Mall Edmonton— 82nd Avenue West Edmonton Mall Kingston London Ottawa Thornhill Toronto— Bloor Street Queen Street Sherway Gardens Yonge & Dundas Yonge & Eglington Yorkdale Shopping Centre Vaughan Waterloo British Columbia (6) Burnaby Kelowna Vancouver— Granville South Granville West 4th Street Victoria Manitoba (1) Winnipeg Nova Scotia (1) Halifax Quebec (6) Laval Montreal— Cours Mont-Royal Mont-Royal Est St-Denis Ste-Catherine West Pointe-Claire 24 Saskatchewan (1) Saskatoon Table of Contents International Locations ( 75 ) Europe (55) Austria (1) Vienna Belgium (1) Antwerp France (12) Aix-en-Provence Lyon Paris— Marais Vielle du Temple Beaurepaire Avenue Victor Hugo Saint-Germain Saint-Honore (2) Galeries Lafayette La Defense Toulouse Germany (9) United Kingdom (21) Birmingham Brighton Bristol Glasgow Leeds Liverpool London— Camden High Street Carnaby Street Covent Garden Kensington High Street King's Cross Oxford Street Portobello Road Selfridges Shoreditch Stratford Westfield Manchester— Berlin— Bayreuther Strasse Münzstrasse Düsseldorf Frankfurt Hamburg Köln Munich Oberhausen Stuttgart Ireland (1) Dublin Italy (2) Milan Rome Netherlands (3) Amsterdam— Bijenkorf Noordermarkt Utrechtsestraat Spain (1) Barcelona Sweden (2) Stockholm— Götgatan Kungsgatan Switzerland (2) Zurich— Josefstrasse Rennweg Manchester Picadilly Selfridges Nottingham Asia (12) Other International (8) China (3) South Korea (5) Beijing— Nali Mall PVG Joy City Busan Seoul— Chungdam Hong Dae Kangnam Myung-dong Israel (1) Tel Aviv Mexico (1 ) Mexico City Japan (4) Brazil (1) São Paulo Osaka Tokyo— Daikanyama Shibuya (2) 25 Australia (5) Adelaide Melbourne Myer Melbourne Myer Sydney Sydney Table of Contents Item 3. Legal Proceedings We are, from time to time, subject to various claims and contingencies in the ordinary course of business that arise from litigation, business transactions, employee-related matters, or taxes. We establish reserves when we believe a loss is probable and are able to estimate its potential exposure. For a discussion of our reserving methods, see "Critical Accounting Estimates and Policies" in Part II, Item 7 and "Note 1 of Notes to Consolidated Financial Statements" in Item 8, Part II,. For loss contingencies believed to be reasonably possible, we also disclose the nature of the loss contingency and an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters could arise for which we do not have insurance coverage or for which insurance provides only partial coverage. These matters could have a material negative effect on our business, financial position, results of operations, or cash flows. In all cases, we vigorously defend ourselves unless a reasonable settlement appears appropriate. For a discussion of legal matters, see "Note 18 of Notes to Consolidated Financial Statements" in Item 8, Part II, which is incorporated herein by reference. There are no environmental proceedings arising under federal, state, or local laws or regulations to be discussed. 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 Market Information The following table presents the high and low sales price per share on the NYSE MKT (symbol: APP) since January 2013. Common Stock High Low 2014 Fourth Quarter $ Third Quarter 1.20 1.30 0.72 Second Quarter 1.00 0.46 First Quarter 1.45 0.46 $ 0.50 2013 Fourth Quarter $ 1.52 $ 1.01 Third Quarter 2.09 1.23 Second Quarter 2.20 1.76 First Quarter 2.40 1.00 Holders As of March 13, 2015 , there were 1,049 registered holders of record of our common stock. Dividends As a public company, we have not paid any cash dividends since the public offerings of our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, restrictions imposed by our debt agreements significantly restrict us from making dividends or distributions to stockholders. Authorization of Common Stock On March 13, 2015 , the Company had 230 million authorized shares of common stock with par value of $0.0001 per share. Securities Authorized for Issuance Under Equity Compensation Plans See "Note 14 of Notes to Consolidated Financial Statements" in Item 8. Recent Sales of Unregistered Securities None. 26 Table of Contents Performance Graph The following graph compares the cumulative total shareholder returns on our common stock with the cumulative total return on the companies comprising the Dow Jones Industrial Average, the Dow Jones U.S. Retail Index, and the Standard and Poor's 500 Composite Stock Price Index ("S&P 500 Index") over the last five years. The graph assumes that $100 was invested on December 31, 2009 in each of our common stock, the Dow Jones Industrial Average, the Dow Jones U.S. Retail Index, and the S&P 500 Index, assuming reinvestment of all dividends, if any, paid on the securities. We have not paid any cash dividends and, therefore, the cumulative total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance. 2009 American Apparel $ 2010 100 $ 2011 54 $ 2012 23 $ 2013 33 $ 2014 40 $ 33 Dow Jones U.S. Retail 100 116 122 147 200 228 Dow Jones Industrial 100 111 117 126 159 171 S&P 500 Index 100 113 113 128 166 185 27 Table of Contents Item 6. Selected Financial Data The following selected financial data presented are derived from, and are qualified by reference to, our audited consolidated financial statements. The selected financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands, except per share data) Consolidated Statements of Operations Data: Net sales $ 608,891 $ 633,941 $ 617,310 $ 547,336 $ 532,989 Gross profit $ 309,135 $ 320,885 $ 327,383 $ 294,900 $ 279,909 (Loss) income from operations $ (27,583) $ (29,295) $ 962 $ (23,293) $ (50,053) Net loss $ (68,817) $ (106,298) $ (37,272) $ (39,314) $ (86,315) $ (0.43) $ (0.96) $ (0.35) $ (0.42) $ (1.21) Per Share Data: Net loss per common share - basic and diluted Weighted-average basic and diluted shares outstanding (a) 158,844 110,326 105,980 92,599 71,626 December 31, 2014 2013 2012 2011 2010 (in thousands) Consolidated Balance Sheets Data: Inventories, net $ 147,578 $ 169,378 $ 174,229 $ 185,764 $ 178,052 Total assets $ 294,389 $ 333,752 $ 328,212 $ 324,721 $ 327,950 Working capital (b) $ 55,955 $ 74,261 $ 80,022 $ 97,013 $ 3,379 Long-term debt, net of current portion (c) $ 219,370 $ 218,921 $ 112,856 $ 98,868 $ 5,597 Stockholders' (deficit) equity $ (115,516) $ (77,404) $ 22,084 $ 48,130 $ 75,024 ___________________________ (a) The dilutive impact of incremental shares is excluded from loss position in accordance with U.S. generally accepted accounting principles ("GAAP"). (b) Excludes fair value of warrants of $19,239 , $20,954 , $17,241 , $9,633 , and $993 as of December 31, 2014 , 2013 , 2012 , 2011 and 2010, respectively. (c) Includes capital leases. 28 Table of Contents Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with "Item 6. Selected Financial Data" and our audited consolidated financial statements and the related notes thereto included in "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 Item 7 are presented in thousands, except for per share items and unless otherwise specified. OVERVIEW A. General 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. We also operate a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers. In 2003, we opened our first retail store in Los Angeles, California. As of March 13, 2015 , we had approximately 10,000 employees and operated 239 retail stores in 20 countries, including the U.S., Canada, the U.K., Australia, Austria, Belgium, Brazil, China, France, Germany, Ireland, Israel, Italy, Japan, Mexico, the Netherlands, South Korea Spain, Sweden, and Switzerland. We currently operate 13 e-commerce stores in eight languages that serve customers from over 50 countries worldwide at www.americanapparel.com . Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and changing fashion trends and to closely monitor product quality. Our products are noted for quality and fit, and together with our distinctive branding, these attributes have differentiated our products in the marketplace. We have four operating segments; U.S. Wholesale, U.S. Retail, Canada, and International. The U.S. Wholesale segment consists of our wholesale operations of undecorated apparel products sold to distributors and third party screen printers in the U.S. as well as our online consumer sales in the U.S. The U.S. Retail segment consists of our retail operations in the U.S., which comprised 136 retail stores as of December 31, 2014 . The Canada segment includes wholesale, retail and online consumer operations in Canada. As of December 31, 2014 , the retail operations in the Canada segment comprised 31 retail stores. The International segment includes wholesale, retail, and online consumer operations outside of the U.S. and Canada. As of December 31, 2014 , the retail operations in the International segment comprised 75 retail stores operating in 18 countries outside the U.S. and Canada. The following table presents, by segment, the change in retail store count during the years ended December 31, 2014 , 2013 and 2012 : U.S. Retail Canada International Total 2014 Open at December 31, 2013 Opened 139 32 77 248 3 0 3 6 (6) Closed Open at December 31, 2014 (1) (5) (12) 136 31 75 242 140 35 76 251 2013 Open at December 31, 2012 Opened 3 0 6 9 Closed (4) (3) (5) (12) 139 32 77 248 Open at December 31, 2013 2012 143 37 69 249 Opened 1 0 9 10 Closed (4) (2) (2) (8) 35 76 Open at December 31, 2011 140 Open at December 31, 2012 251 B. Comparable Store Sales The table below shows the change in comparable store sales for our retail and online stores, by quarter, for the years ended December 31, 2014 , 2013 , and 2012 , 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 during the following twelve months 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. 29 Table of Contents In calculating constant currency amounts, we convert the results of our foreign operations during the current and the prior year comparable period by using the weighted-average foreign exchange rate for the current comparable period to achieve a consistent basis for comparison. For the Quarter Ended March 31 June 30 September 30 December 31 Full Year (5)% (6)% (7)% (7)% (6)% Number of Stores 236 233 230 229 2013 (a) 8% 7% 2% (3)% Number of Stores 238 237 237 235 14% 16% 20% 11% 243 244 242 238 2014 (a) 2012 (a) Number of Stores 3% 15% ______________________ (a) Comparable store sales results include the impact of online store sales and has been adjusted to exclude impact of extra leap-year day in 2012. C. Executive Summary Recent Developments On December 16, 2014, the Board appointed Paula Schneider as CEO, effective January 5, 2015. This appointment followed the termination of Dov Charney, former President and CEO, for cause in accordance with the terms of his employment agreement. Scott Brubaker, who served as Interim CEO since September 29, 2014, continued in the post until Ms. Schneider joined us. Additionally, on September 29, 2014, the Board appointed Hassan Natha as CFO, and John Luttrell resigned as Interim CEO and CFO. On July 7, 2014, we received a notice from Lion asserting an event of default and an acceleration of the maturity of the loans and other outstanding obligations under the Lion Loan Agreement as a result of the suspension of Dov Charney as CEO by the Board. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General. Standard General waived any default under the Standard General Loan Agreement that may have resulted or that might result from Mr. Charney not being the CEO. On September 8, 2014, we and Standard General entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO would constitute an event of default. On March 25, 2015, we entered into the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted us to borrow $15,000 under the Standard General Credit Agreement. On March 25, 2015, one of our subsidiaries borrowed $15,000 under the Standard General Credit Agreement. The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020. In connection with the Standstill and Support Agreement among us, Standard General and Mr. Charney, five directors including Mr. Charney resigned from the Board effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and us. In addition, Lion exercised its rights to designate two members to our Board, whose appointments were effective as of September 15, 2014 and January 13, 2015, respectively. On March 6, 2015, a member appointed by Lion resigned from the Board, and on March 24, 2015, the Board elected a member designated by Lion to fill that vacancy. In 2012, German customs audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. The German customs imposed a substantially higher tariff rate than the original rate that we had paid on the imports, more than doubling the amount of the tariff that we would have to pay. The assessments of additional retaliatory duty originated from a trade dispute. Despite the ongoing appeals of the assessment, the German authorities demanded, and we paid, in connection with such assessment, $4,390 in the third quarter of 2014 and the 30 Table of Contents final balance of $85 in the fourth quarter of 2014. We recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in our consolidated statements of operations. Summary of Financial Results Net sales for the year ended December 31, 2014 decreased $25,050, or 4.0%, from the year ended December 31, 2013 due to lower sales at our U.S. Retail, Canada and International segments, partly offset by an increase in the U.S. Wholesale segment. Gross profits as a percentage of sales were 50.8% and 50.6% for the year ended December 31, 2014 and 2013, respectively. Excluding the effects of the significant events described below, gross profits as a percentage of net sales increased slightly to 52.2% and 51.1% for the year ended December 31, 2014 and 2013, respectively. The increase was mainly due to a reduction in freight costs associated with the completion of our transition to the La Mirada distribution center in late 2013. Operating expenses for the year ended December 31, 2014 decreased $14,660 , or 4.2% , from the year ended December 31, 2013. Excluding the effects of the significant events discussed below, operating expenses for the year ended December 31, 2014 decreased $27,616 from the year ended December 31, 2013. The decrease was primarily due to lower payroll from our cost reduction efforts and reduced expenditures on advertising and promotional activities. Loss from operations was $27,583 for the year ended December 31, 2014 as compared to $29,295 for the year ended December 31, 2013. Excluding the effects of the significant events discussed below, our operating results for the year ended December 31, 2014 would have been an income from operations of $6,838 as compared with a loss from operations of $13,482 for the year ended December 31, 2013. Lower operating expenses as discussed above were offset by lower sales volume and higher retail store impairments. Net loss for the year ended December 31, 2014 was $68,817 as compared to $106,298 for the year ended December 31, 2013. The improvement was mainly due to the $1,712 reduction in loss from operations due to the significant events discussed below, the change of $5,428 in fair value of warrants between periods, and the $32,101 loss on the extinguishment of debt in 2013. See Results of Operations for further details. Cash used in operating activities for the year ended December 31, 2014 was $5,212 compared to $12,723 for the year ended December 31, 2013 from the corresponding period in 2013. The decrease was mainly due to decreased inventory levels and improved operating income excluding certain significant costs discussed below. The decrease was partially offset by an increase in interest payments and payments related to the significant costs. Significant Events The table below summarizes the impact to our earnings of certain costs which we consider to be significant and presents gross profit, operating expenses, and income from operations on an as-adjusted basis, together with the reconciliation to the mostly directly comparable GAAP measure: 31 Table of Contents Year Ended December 31, 2014 Gross profit $ % of Net Sales 309,135 Changes to supply chain operations 50.8 % 2013 $ % of Net Sales 320,885 0 3,027 Additional inventory reserves 4,525 0 Customs settlements and contingencies 4,154 0 50.6 % Gross profit - adjusted (Non-GAAP) $ 317,814 52.2 % $ 323,912 51.1 % Operating expenses $ 333,980 54.9 % $ 348,640 55.0 % Changes to supply chain operations 0 Customs settlements and contingencies (11,847) (8,341) Internal investigation 0 (10,376) 0 (7,025) Employment settlements and severance (939) Operating expenses - adjusted (Non-GAAP) $ 308,238 50.6 % $ 335,854 53.0 % Loss from operations $ (27,583) (4.5)% $ (29,295) (4.6)% Changes to supply chain operations 0 14,874 4,525 0 Customs settlements and contingencies 12,495 0 Internal investigation 10,376 0 7,025 939 Additional inventory reserves Employment settlements and severance Income (loss) from operations - adjusted (Non-GAAP) $ 6,838 1.1 % $ (13,482) (2.1)% Changes to Supply Chain Operations - In 2013, the transition to our new distribution center in La Mirada, California resulted in significant incremental costs (primarily labor). The issues surrounding the transition primarily related to improper design and integration and inadequate training and staffing. These issues caused processing inefficiencies that required us to employ additional staffing in order to meet customer demand. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced. Additional inventory reserves - In late 2014, new management undertook a strategic shift to change its inventory profile and actively reduce inventory levels to improve store merchandising, working capital and liquidity. As a result, we implemented an initiative to accelerate the sale of slowmoving inventory through our retail and online sales channels, as well as through certain off-price channels. As part of this process, management conducted a style-by-style review of inventory and identified certain slow-moving, second quality finished goods and raw materials inventories that required additional reserves as a result of the decision to accelerate sales of those items. Based on our analysis of the quantities on hand as well as the estimated recovery on these items, we significantly increased our excess and obsolescence reserve by $4,525 through a charge against cost of sales in our consolidated statements of operations. Customs settlements and contingencies - In 2012, German authorities audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. Despite ongoing appeals of the assessment, the German authorities demanded, and we paid, the outstanding balance of approximately $4,500 in the latter half of 2014. We recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in our consolidated statements of operations. Additionally, during the fourth quarter of 2014, we wrote off approximately $3,300 in duty receivables to cost of sales in our consolidated statements of operations. These duty receivables related to changes in transfer costs for products sold to our European subsidiaries. We are also subject to, and have recorded charges related to, customs and similar audit settlements and contingencies in other jurisdictions. Internal Investigation - On June 18, 2014, the Board voted to replace Mr. Charney as Chairman of the Board, suspended him as our President and CEO and notified him of its intent to terminate his employment for cause. In connection with the Standstill and Support Agreement, the Board formed the Internal Investigation which ultimately concluded with his termination for cause on December 16, 2014. The suspension, internal investigation, and termination have resulted in substantial legal and consulting fees. Employment Settlements and Severance - In 2011, an industrial accident at our facility in Orange County, California resulted in a fatality to one of our employees, and in accordance with law, a mandatory criminal investigation was initiated. On August 19, 2014, a settlement of all claims related to the criminal investigation, pursuant to which the Company paid $1,000, was approved 32 Table of Contents by the California Superior Court in Orange County. In addition, we had previously disclosed employment-related claims and experienced unusually high employee severance costs during 2014. See Note 15 and 18 of Notes to Consolidated Financial Statements in Item 8. Management's Plan Throughout 2014 and into early 2015, we have brought on a new board of directors and hired on new senior management, including our CEO, CFO and General Counsel, as well as other additions to the management team. Together, our new board of directors and new management team are focused on implementing a turnaround strategy and enhancing our corporate governance policies and practices. We have started implementing additional operational and financial processes and disciplines to improve liquidity and profitability. To that end, we have added new members to our executive team in the areas of planning and forecasting, operations, marketing and e-commerce. Additionally, we continue to drive productivity from our distribution center, reduce inventory, reduce labor costs, and consolidate our administrative and manufacturing functions. We have also added members to our legal and human resources departments and have introduced a new code of ethics which we ask all of our new and current employees to read. We believe that a strong operational and financial discipline, along with a robust corporate governance structure, is an important element of our long-term business strategy. Although we have made progress under these programs, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Our cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. Accordingly, there can be no assurance that our planned improvements will be successful. D. Critical Accounting Estimates and Policies The preparation of our consolidated financial statements requires judgment and estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amount of revenues and expenses during the reporting period. In general, estimates are based on historical experience, information from third party professionals and various other sources, and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions. Our management considers an accounting estimate to be critical if: • • it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on our consolidated results of operations or financial condition. We consider our most critical accounting policies and estimates to include: • revenue recognition; • inventory valuation and obsolescence; • valuation and recoverability of long-lived assets, including the values assigned to goodwill, intangible assets, and property and equipment; • fair value calculations including derivative liabilities; • contingencies, including accruals for the outcome of current litigation and assessments and self-insurance • income taxes, including uncertain income tax positions and recoverability of deferred income taxes and any limitations as to net operating losses. Complete descriptions of our significant accounting policies are outlined in Note 2 of Notes to Consolidated Financial Statements in Item 8. 33 Table of Contents RESULTS OF OPERATIONS Year Ended December 31, 2014 compared to Year Ended December 31, 2013 (in thousands) Year Ended December 31, 2014 U.S. Wholesale $ U.S. Retail Canada International Total net sales % of net sales 208,969 34.3 % 191,442 51,544 2013 $ % of net sales 201,251 31.8 % 31.4 % 205,011 32.3 % 8.5 % 60,134 9.5 % 156,936 25.8 % 167,545 26.4 % 608,891 100.0 % 633,941 100.0 % Cost of sales Gross profit 299,756 49.2 % 313,056 49.4 % 309,135 50.8 % 320,885 50.6 % Selling and distribution expenses 212,557 34.9 % 241,683 38.1 % General and administrative expenses 121,423 19.9 % 106,957 16.9 % 2,738 0.4 % 1,540 0.2 % (27,583) (4.5)% (29,295) (4.6)% Retail store impairment Loss from operations Interest expense Foreign currency transaction loss 39,853 (a) 1,479 Unrealized (gain) loss on change in fair value of warrants (b) (Gain) loss on extinguishment of debt 1 (1,715) 3,713 (171) 32,101 (371) Other (income) expense Loss before income tax 131 (66,658) (104,527) 2,159 Income tax provision Net loss 39,286 $ (68,817) 1,771 $ (106,298) ______________________ (a) Related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries. (b) Mark-to-market adjustments associated with our warrants . (1) U.S. Wholesale U.S. Wholesale net sales for the year ended December 31, 2014 , excluding online consumer net sales, increased by $8,113 or 5.1% , from the year ended December 31, 2013 mainly due to a significant new distributor that we added during the second quarter of 2014. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third-party screen printers. Online consumer net sales for the year ended December 31, 2014 decreased $395 , or 1.0% , from the year ended December 31, 2013 mainly due to lower sales order volume. We continue our focus on targeted online advertising and promotional efforts. (2) U.S. Retail U.S. Retail net sales for the year ended December 31, 2014 decreased $13,569 , or 6.6% , from the year ended December 31, 2013 mainly due to a decrease of approximately $14,000 in comparable store sales as a result of lower store foot traffic. Net sales decreased approximately $4,800 due to the closure of six stores in 2014, offset by an increase of approximately $1,100 from two new stores added since the beginning of January 2013. (3) Canada Canada net sales for the year ended December 31, 2014 decreased $8,590 , or 14.3% , from the year ended December 31, 2013 mainly due to approximately $4,900 in lower sales, primarily in the retail and wholesale channels, and the unfavorable impact of foreign currency exchange rate changes of approximately $3,700. Retail net sales for the year ended December 31, 2014 decreased $7,076 , or 15.7% , from the year ended December 31, 2013 due to $4,300 lower sales resulting from the closure of one retail store and approximately $1,700 from lower comparable store sales due to lower store foot traffic. Additionally, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $2,800. 34 Table of Contents Wholesale net sales for the year ended December 31, 2014 decreased $1,868 , or 15.4% , from the year ended December 31, 2013 . The decrease was largely due to lower sales orders resulting from a tightening focus on higher margin customers and lingering effects of order fulfillment delays associated with transition issues at the La Mirada distribution center. In addition, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $700. Online consumer net sales for the year ended December 31, 2014 increased $354 , or 12.3% , from the year ended December 31, 2013 mainly due to email advertising campaign, as well as improvements to the online store rolled out in the second half of 2013. This increase in sales was partially offset by the impact of foreign currency exchange rate changes of approximately $200. (4) International International net sales for the year ended December 31, 2014 decreased $10,609 , or 6.3% , from the year ended December 31, 2013 due to approximately $10,500 lower sales in all three sales channels and the unfavorable impact of foreign currency exchange rate changes of approximately $100. Retail net sales for the year ended December 31, 2014 decreased $10,404 , or 7.4% , from the year ended December 31, 2013 . The decrease was due to lower comparable store sales of approximately $10,500 and lower sales of approximately $1,400 for the closure of five retail stores in 2014. The decrease was offset by approximately $200 higher sales due to seven new stores added since the beginning of January 2013 and the unfavorable impact of foreign currency exchange rate changes of approximately $400. Wholesale net sales for the year ended December 31, 2014 were flat as compared to the year ended December 31, 2013 . The favorable impact of foreign currency exchange rate changes was approximately $100. Online consumer net sales for the year ended December 31, 2014 decreased $154 , or 0.9% , from the year ended December 31, 2013 mainly due to lower sales order volume in Japan and Continental Europe, offset by higher sales order volume in Korea and the favorable impact of foreign currency exchange rate changes of approximately $200. (5) Gross profit Gross profit for the year ended December 31, 2014 decreased to $309,135 from $320,885 for the year ended December 31, 2013 due to lower retail sales volume at our U.S. Retail, Canada and International segments, offset by higher sales at our U.S. Wholesale segment. Excluding the effects of the significant events described above, gross profit as a percentage of net sales for the year ended December 31, 2014 slightly increased to 52.2% from 51.1% . The increase was mainly due to a decrease in freight costs associated with the completion of our transition to our La Mirada facility, offset by lower sales at our retail store operations. (6) Selling and distribution expenses Selling and distribution expenses for the year ended December 31, 2014 decreased $29,126 , or 12.1% , from the year ended December 31, 2013. Excluding the effects of the changes to our supply chain operations discussed above, selling and distribution expenses decreased $17,279 , or 7.5% from the year ended December 31, 2013 due primarily to lower selling related payroll costs of approximately $9,000, lower advertising costs of approximately $4,600 and lower travel and entertainment expenses of $1,400, all primarily as a result of our cost reduction efforts. (7) General and administrative expenses General and administrative expenses for the year ended December 31, 2014 increased $14,466 , or 13.5% , from the year ended December 31, 2013 . Excluding the effects of customs settlements and contingencies, the internal investigation, and employment settlements and severance discussed above, general and administrative expenses decreased $10,337 , or 9.8% from the year ended December 31, 2013. The decrease was primarily due to $3,600 in lower share based compensation expense relating to the expiration and forfeiture of certain market based and performance based share awards and decreases in salaries and wages of approximately $3,800 and miscellaneous expenses such as travel, repair, and bank fees. (8) Loss from operations Loss from operations was $27,583 for the year ended December 31, 2014 as compared to $29,295 for the year ended December 31, 2013. Excluding the effects of the significant events described above, our operating results for the year ended December 31, 2014 would have been an income from operations of $6,838 as compared with a loss from operations of $13,482 for the year ended December 31, 2013. Lower sales volume and higher retail store impairments were offset by decreases in our operating expenses as discussed above. (9) Income tax provision The provision for income tax for the year ended December 31, 2014 increased to $2,159 as compared to $1,771 for the year ended December 31, 2013 . Although we incurred a loss from operations on a consolidated basis for the years ended December 31, 2014 and 2013, some of our foreign domiciled subsidiaries reported income from operations and are taxed on a stand-alone reporting basis. In 2014 and 2013, we recorded valuation allowances against a majority of our deferred tax assets, including 100% of the U.S. deferred tax assets and certain foreign deferred tax assets. We recognized no tax benefits on our loss before income taxes in 2014 and 2013. See Note 11 of Notes to Consolidated Financial Statements in Item 8. 35 Table of Contents Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 (in thousands) For the Year Ended December 31, 2013 U.S. Wholesale $ U.S. Retail Canada % of net sales 201,251 31.7 % 205,011 32.3 % 2012 $ % of net sales 185,355 30.0% 198,886 32.2% 10.3% 60,134 9.5 % 63,669 167,545 26.4 % 169,400 27.5% 633,941 100.0 % 617,310 100.0% Cost of sales Gross profit 313,056 49.4 % 289,927 47.0% 320,885 50.6 % 327,383 53.0% Selling and distribution expenses 241,683 38.1 % 227,447 36.8% General and administrative expenses 106,957 16.9 % 97,327 15.8% 1,540 0.2 % 1,647 0.3% (29,295) (4.6)% 962 0.2% International Total net sales Retail store impairment (Loss) income from operations Interest expense 39,286 Foreign currency transaction loss (a) Unrealized loss on change in fair value of warrants (b) Loss (gain) on extinguishment of debt 120 3,713 4,126 32,101 (11,588) 131 Other expense Loss before income tax 204 (104,527) (33,459) 1,771 Income tax provision Net loss 41,559 1 $ (106,298) 3,813 $ (37,272) ______________________ (a) Related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries. (b) Mark-to-market adjustments associated with our warrants. (1) U.S. Wholesale U.S. Wholesale net sales, excluding online consumer net sales, increased $10,071, or 6.7%, to $159,682 for the year ended December 31, 2013 as compared to $149,611 for the year ended December 31, 2012 due to higher sales order volume. This increase was attributed to the continued strength of our existing and new product offerings. Additionally, in early 2013, we released an expanded wholesale catalog, and as new styles were added, released quarterly updates to the catalog. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers. Online consumer net sales increased $5,825 or 16.3%, to $41,569 for the year ended December 31, 2013 as compared to $35,744 for the year ended December 31, 2013 primarily due to certain targeted promotional efforts and improved merchandising of the web store and as a result of the implementation of a new e-commerce platform in late 2012, which improved web store functionality. (2) U.S. Retail U.S. Retail net sales increased $6,125 , or 3.1% , to $205,011 for the year ended December 31, 2013 as compared to $198,886 for the year ended December 31, 2012. Net sales growth was generated by the continued strength of our product offerings and targeted strategic promotions, which contributed to a 3%, or $5,270, increase in our comparable store sales. Additionally, new stores contributed $4,037 in net sales. These increases were partially offset by $2,035 of lower warehouse sales in 2013 as compared to 2012 and a decrease of $1,861 as a result of store closures. (3) Canada Canada net sales decreased $3,535 , or 5.6% , to $60,134 for the year ended December 31, 2013 as compared to $63,669 for the year ended December 31, 2012 due primarily to lower sales in the retail sales channel as a result of store closures. Additionally, the impact of foreign currency changes contributed to the sales decrease: holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total revenue for the current period would have been approximately $61,948, or 2.7% lower when compared to 2012. Retail net sales decreased by $3,336, or 6.9%, to $45,163 in 2013 as compared to $48,499 in 2012 due to $1,140 lower sales as a result of the closure of three stores and the negative impact of foreign currency fluctuation. Holding foreign currency exchange rates constant to those prevailing in fiscal 2012, retail sales for 2013 would have been approximately $46,526, or 4.1% lower when compared to 2012. 36 Table of Contents Wholesale net sales decreased $914, or 7.0%, to $12,092 in 2013 as compared to $13,006 in 2012, largely as a result of foreign currency fluctuation and lower sales volume from smaller customers. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total wholesale net sales for the Canada segment for 2013 would have been approximately $12,457, or 4.2% lower when compared to 2012. Online consumer net sales increased $715, or 33.0%, to $2,879 in 2013 as compared to $2,164 to 2012. This increase was primarily a result of targeted promotion efforts and email advertising campaigns. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total revenue for the Canada segment for 2013 would have been approximately $2,965, or 37.1% higher when compared to 2012. (4) International International net sales decreased $1,855, or 1.1%, to $167,545 for the year ended December 31, 2013 as compared to $169,400 for the year ended December 31, 2012 as a result of the negative impact of foreign currency fluctuation. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total revenue for the International segment for 2013 would have been approximately $170,084, or 0.4% higher when compared to 2012. Retail net sales decreased $221, or 0.2%, to $141,517 for the year ended December 31, 2013 as compared to $141,738 for the year ended December 31, 2012 as a result of the negative impact of foreign currency fluctuation. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, retail sales for 2013 would have been approximately $143,601, or 1.3% higher when compared to the same period last year. Higher sales of $1,274 from new stores were partially offset by $610 of lower sales from store closures. Wholesale net sales decreased $1,385, or 13.5%, to $8,893 in 2013 as compared to $10,278 in 2012, primarily as a result of a decrease in wholesale sales in the U.K. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, sales for the current period would have been approximately $8,741, or 15.0% lower during 2013 when compared to 2012. Online consumer net sales decreased $249, or 1.4%, to $17,135 in 2013 as compared to $17,384 in 2012, primarily as a result of changes in foreign currency exchange rates. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, sales for the current period would have been approximately $17,742, or 2.1% higher when compared to 2012. (5) Gross profit Gross profit for the year ended December 31, 2013 was 50.6% compared to 53.0% for the year ended December 31, 2012. The decrease in gross profit was due to higher distribution costs and promotions associated with our retail operation and increased production costs associated with our manufacturing operation. (6) Selling expenses: Selling expenses increased $14,236 , or 6.3% , to $241,683 for the year ended December 31, 2013 as compared to $227,447 for the year ended December 31, 2012. As a percentage of sales, selling expenses increased to 38.1% in 2013 from 36.8% in 2012. The increase in selling expenses was primarily due to approximately $11,847 higher distribution labor and rent costs at our U.S. Wholesale operations associated with the changes to our supply chain operations as discussed above. This was partially offset by $5,996 lower payroll and rent costs at our Canadian operations as a result of the closure of our warehouse in Montreal, Canada. Additionally, we incurred higher rent expense of $2,827 at our U.S. Retail and International segments primarily related to new stores and lease renewals, higher travel and related expenses of $964 as we completed our RFID implementation and make other store improvements, and higher supplies expenses of $2,760 associated with our RFID implementation activities. The increases were partly offset by lower advertising and marketing expenses of $2,300. (7) General and administrative expenses General and administrative expenses increased $9,630 , or 9.9% , to $106,957 for the year ended December 31, 2013 as compared to $97,327 for the year ended December 31, 2012. As a percentage of sales, general and administrative expenses increased to 16.9% in 2013 from 15.8% in 2012. The increase in general and administrative expenses was primarily due to higher computer software licensing related costs of $3,109 associated with the recent improvements to our online store stores and other software upgrades, higher equipment lease expenses of $3,181 and higher depreciation and amortization expenses of $2,584 consistent with increased capital expenditures. (8) Interest expense Interest expense decreased $2,273 to $39,286 for the year ended December 31, 2013 from $41,559 for the year ended December 31, 2012, primarily due to lower average interest rates on our outstanding debt. Interest expense for the year ended December 31, 2013 relates primarily to interest on our Notes and our credit agreement with Lion that was terminated in April 2013 (the "Lion Credit Agreement"). 37 Table of Contents (9) Loss (gain) on extinguishment of debt During the year ended December 31, 2013, we recorded a loss on extinguishment of debt of $32,101 relating to the termination of our credit agreements with Crystal and Lion in April 2013. During the year ended December 31, 2012, we recorded a gain on extinguishment of debt pertaining to an amendment to the Lion Credit Agreement of approximately $11,588 . See Note 7 of Notes to Consolidated Financial Statements. (10) Income tax provision The provision for income tax decreased to $1,771 for the year ended December 31, 2013 as compared to $3,813 for the year ended December 31, 2012. Although we incurred a loss from operations on a consolidated basis for the year ended December 31, 2013, some of our foreign domiciled subsidiaries reported income from operations and are taxed on a stand-alone reporting basis. In 2013 and 2012, we recorded valuation allowances against a majority of our deferred tax assets, including 100% of the U.S. deferred tax assets and certain foreign deferred tax assets. We recognized no tax benefits on our loss before income taxes in 2013 and 2012. See Note 11 of Notes to Consolidated Financial Statements in Item 8. LIQUIDITY AND CAPITAL RESOURCES Over the past years, our operations have been funded through a combination of borrowings from related and unrelated parties, bank and other debt, lease financing, and proceeds from the exercise of purchase rights and issuance of common stock. We continue to develop initiatives intended to increase sales, reduce costs or improve working capital and liquidity. Beginning with the fourth quarter of 2013, we instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. We also limited capital expenditures starting the first quarter of 2014. In addition, we continue to drive productivity improvements from our new distribution center, retail stores, inventory reductions, other labor cost reductions, and consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing. As we implement the turnaround plan in 2015, we expect to incur additional costs, such as sales discounts and write-downs, on the sale and disposal of slow-moving inventory and the closure of non-performing stores. Our principal liquidity requirements are for operations, working capital interest payments, and capital expenditures. We fund liquidity requirements primarily through cash on hand, cash flow from operations, and borrowings under our credit facilities. Our credit agreements contain covenants requiring us to meet specified targets for measures related to earnings, capital expenditures, and minimum fixed charge coverage ratio and maximum leverage ratio requirements. Our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under our credit facilities or result in an event of default. Recent Developments As of December 31, 2014 , we had $8,343 in cash, $34,299 outstanding on our $50,000 asset-backed revolving credit facility with Capital One and $13,146 of availability for additional borrowings under the Capital One Credit Facility. As of March 13, 2015, we had $5,837 availability for additional borrowings under the Capital One Credit Facility. The scheduled interest payment on the Notes due on April 15, 2015 is approximately $13,900 . On March 25, 2015, we entered into the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted us to borrow $15,000 under the Standard General Credit Agreement. As of December 31, 2014, we were not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124 . However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8,000 . We were in compliance with these covenants at December 31, 2014. On March 25, 2015, one of our subsidiaries borrowed $15,000 under the Standard General Credit Agreement. The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to us as contemplated by the Standstill and Support Agreement. 38 Table of Contents We believe that we have sufficient financing commitments to make the April 15, 2015 interest payment as well as meet other funding requirements for the next twelve months. A. Cash Flow 2014 Net cash (used in) provided by: Operating activities $ 2013 (5,212) $ 2012 (12,723) $ 23,589 Investing activities (9,583) (25,147) (24,853) Financing activities 15,552 34,228 4,214 Effect of foreign exchange rate changes on cash (1,090) $ Net (decrease) increase in cash (333) (535) $ (4,177) (390) $ 2,560 Year Ended December 31, 2014 compared to Year Ended December 31, 2013 Cash used in operating activities decreased for the year ended December 31, 2014 from the corresponding period in 2013. The decrease was mainly due to decreased inventory levels and improved operating income excluding certain significant costs discussed in Results of Operations. The decrease was partially offset by approximately $15,500 increase in interest payments, primarily on our Notes, and payments related to the significant costs discussed in Results of Operations . The scheduled interest payments on our Notes in April and October 2015 will be approximately $13,900 per pay period. Cash used in investing activities decreased for the year ended December 31, 2014 from the corresponding period in 2013, mainly due to our ongoing efforts to reduce capital expenditures. Cash provided by financing activities decreased for the year ended December 31, 2014 from the corresponding period in 2013. In March 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,435. During the year ended December 31, 2014, we repaid a net amount of $9,709 borrowed under the Capital One Credit Facility. On April 4, 2013, we issued the Notes for aggregate net proceeds of $199,820 and entered into a new asset-backed revolving credit agreement with Capital One. The net proceeds of the Notes, together with borrowings under the new credit facility, were used to repay and terminate the outstanding amounts with Lion of $144,149 and with Crystal Financial LLP of $66,411. Year Ended December 31, 2013 compared to Year Ended December 31, 2012 Cash used in operating activities was $12,723 as compared with cash provided by operating activities of $23,589 as a result of a decrease in our gross profit percentage, the impact to our cost of sales and operating expenses from the transition to our new distribution facility, and higher computer software and store supply expenses as we continue to improve both our online and retail stores. These were offset by a decrease in working capital requirements of $7,811. The decrease in working capital requirements was primarily due to a $11,764 increase in accrued expenses as a result of accrued interest related to the Notes and timing of deferred revenue related to recent promotional activities. Additionally, inventory decreased $3,715 as a result of our efforts to reduce inventory levels. These decreases in working capital requirements were offset by a $6,063 increase in prepaid expenses related primarily to higher prepaid software maintenance fees and higher prepaid store supplies. Additionally, other assets increased $4,393 due primarily to an increase in deferred financing costs related to our April 2013 refinancing and higher deposits related to our workers compensation program. Cash used in investing activities increased mainly due to capital expenditures as we continue to make improvements to our existing stores and open new stores, investments in equipment and software for our new distribution center, and continuing investments in our manufacturing equipment, software and website development. During this period, six new retail stores were opened in the International segment. Cash provided by financing activities increased mainly due to issuance of the Notes and borrowings from our Capital One and Bank of Montreal revolving credit facilities. The net proceeds from the offering of the Notes, together with borrowings under the new credit facility, were used to repay and terminate the outstanding amounts with Lion Capital and Crystal Financial. 39 Table of Contents B. Debt The following is an overview of our total debt as of December 31, 2014: Description of Debt Revolving credit facility Lender Interest Rate Capital One (a) Capital lease obligations $ Covenant Violations 34,299 Yes 15.0% 208,084 No Standard General 17.0% 9,049 No (b) 0.4% ~ 24.1% 4,960 N/A 268 N/A 5,714 N/A Senior Secured Notes Standard General Loan Agreement December 31, 2014 Other Cash overdraft $ Total 262,374 ______________________ (a) LIBOR plus 5.0% or the bank's prime rate plus 4.0% at our option according to the Fifth Amendment. (b) 31 individual leases ranging between from $2 to $2,402. For additional disclosures regarding our debts, see Note 7 and Note 8 of Notes to Consolidated Financial Statements in Item 8. Financial Covenants Capital One Credit Facility - In March 2014, we entered into the Fifth Amendment to the Capital One Credit Facility ("the "Fifth Amendment"), which waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December 31, 2013 and March 31, 2014. Under the Fifth Amendment, we are subject to specified borrowing requirements and covenants including minimum fixed charge coverage ratios, maximum leverage ratios, and maximum capital expenditures and minimum adjusted EBITDA. On March 25, 2015, we entered into the Sixth Amendment which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted us to borrow $15,000 under the Standard General Credit Agreement. As of December 31, 2014, we were not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124 . However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8,000 . We were in compliance with these covenants at December 31, 2014. The Capital One Credit Facility is secured by a lien on substantially all of the assets of our domestic subsidiaries and equity interests in certain of foreign subsidiaries, subject to some restrictions. It requires that we maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may adjust the advance restriction and criteria for eligible inventory and accounts receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Indenture governing the Notes or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility. As of December 31, 2014 , we had $1,080 of outstanding letters of credit secured against the Capital One Credit Facility. Senior Secured Notes - The Indenture governing our Notes imposes certain limitations on our ability to, among other things and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan of liquidation. We must annually report to the trustee on compliance with such limitations. The Indenture also contains cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes. We were in compliance with the required covenants at December 31, 2014 . 40 Table of Contents Standard General Loan Agreement - The Standard General Loan Agreement contains the same restrictive covenants as Lion Loan Agreement, which incorporated by reference several of the covenants contained in the Indenture governing our Notes, including covenants restricting our ability to incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan of liquidation. As of December 31, 2014 , we were in compliance with the required covenants of the Standard General Loan Agreement. Standard General Credit Agreement - The Standard General Credit Agreement contains customary defaults, including cross event of default to the Notes and the Standard General Loan Agreement and cross acceleration to other indebtedness above a threshold amount. If we experience certain change of control events, we are required to offer to prepay the Standard General Credit Agreement at 101% of the outstanding principal amount plus accrued and unpaid interest on the date of the prepayment. We will be required to prepay loans under the Standard General Credit Agreement to the extent necessary to avoid the loan being characterized as an "applicable high yield discount obligation" within the meaning of the Internal Revenue Code, by the first interest payment date following the fifth anniversary of closing. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS Our material off-balance sheet contractual commitments are mainly operating lease obligations and letters of credit. Operating lease commitments mainly consist of leases for our retail stores, manufacturing facilities, main distribution centers, and corporate office. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. As appropriate, we intend to negotiate lease renewals as the leases approach expiration. We also have capital lease obligations, which consist of our manufacturing equipment leases. Issued and outstanding letters of credit were $1,080 at December 31, 2014 , related primarily to workers' compensation insurance and store leases. Contractual Obligations The following table summarizes our contractual obligations as of December 31, 2014 , which relate to future minimum payments due under noncancelable licenses, leases, revolving credit facilities, long-term debt and advertising commitments. Future minimum rental payment on operating lease obligations presented below do not include any related property insurance, taxes, maintenance or other related costs required by operating leases. Payments due by period Total Contractual Obligations Current debt Long-term debt $ (a) Capital lease obligations, including interest Operating lease obligations Advertising commitments Self-insurance reserves Total contractual obligations Less than 1 year $ 34,312 $ 1-3 years 34,312 $ More than 5 years 4-5 years 0 $ 0 $ 0 217,388 0 0 0 5,385 3,328 2,057 0 0 247,317 63,007 93,676 43,945 46,689 1,283 1,283 0 0 0 22,071 6,989 7,745 4,047 3,290 527,756 $ 108,919 $ 103,478 $ 47,992 217,388 $ 267,367 ______________________ (a) Excludes unamortized discount of $5,965 at December 31, 2014 and estimates of future cash and paid-in-kind interest of $7,233 related to the Notes and Standard General Loan Agreement. (b) The table excludes liabilities of $477 related to uncertainty in tax settlement as we are unable to reasonably estimate the timing and amount of related future payments. Item 7A. Quantitative and Qualitative Disclosures about Market Risks We are subject to various market risk exposures such as interest rate risk associated with our credit facilities, foreign currency exchange rate risk associated with our foreign operations, and inflation. Adverse changes to these risks may occur due to changes in the liquidity of a market, or to changes in market perceptions of creditworthiness and risk tolerance. The following disclosure reflects estimates of future performance and economic conditions. Actual results may differ. Interest Rate Risk Based on our interest rate exposure on variable rate borrowings at December 31, 2014 , a 1% increase in average interest rate on our borrowings would increase future interest expense by approximately $29 per month. We determined this amount based on $34,299 of variable rate borrowings at December 31, 2014 . We are currently not using any interest rate collars or hedges to manage 41 Table of Contents or reduce interest rate risk. As a result, any increase in interest rates on the variable rate borrowings would increase interest expense and reduce net income. Our primary exposure to variable interest rates is through the effect of fluctuations in LIBOR on the interest rate under the Capital One Credit Agreement. Foreign Currency Exchange Rate Risk The majority of our operating activities are conducted in U.S. dollars. Approximately 34.2% of our net sales for the year ended December 31, 2014 were denominated in foreign currencies. Nearly all of our production costs and material costs are denominated in U.S. dollars although the majority of the yarn is sourced from outside the U.S. If the U.S. dollar were to appreciate by 10% against other currencies it could have a significant adverse impact on our earnings. Since an appreciated U.S. dollar makes goods produced in the U.S. relatively more expensive to overseas customers, other things being equal, we would have to lower our retail margin in order to maintain sales volume overseas. A lower retail margin overseas would adversely affect net income assuming sales volume remains the same. Functional currencies of our foreign operations consist of the Canadian dollar for operations in Canada, the Australian dollar for operations in Australia, the pound Sterling for operations in the U.K., the Euro for operations in the European Union, the Franc for operations in Switzerland, the New Israeli Shekel for operations in Israel, the Yen for the operations in Japan, the Won for operations in South Korea, the Renminbi for operations in China, the Real for operations in Brazil and the Peso for operations in Mexico. Commodity Price Risk Our major market risk exposure is the commodity pricing of cotton in the cost of yarn and fabric used in our manufacturing processes. In addition, high oil costs can affect the cost of all raw materials and components. The competitive environment can limit our ability to recover cost increases by raising prices. Although we cannot precisely determine the effects of changes in cotton prices on our business, we believe that the effects on revenues and operating results have not been significant, except for the impact of the dramatic increase in yarn prices in 2010 and part of 2011. We are unable to predict if we will be able to successfully pass on the added cost of any future raw material cost increases by further increasing the price of our products to our wholesale and retail customers. 42 Table of Contents Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 44 Consolidated Balance Sheets as of December 31, 2014 and 201 3 46 Consolidated Statements of Operations and Comprehensive Loss For E ach of the Years in the Three-Year Period Ended December 31, 2014 47 Consolidated Statements of Stockholders' (Deficit) Equity For Each of the Years in the Three-Year Period Ended December 31, 2014 48 Consolidated Statements of Cash Flows For Each of the Years in the Three-Year Period Ended December 31, 2014 49 Notes to Consolidated Financial Statements 51 Financial Statement Schedule Schedule II—Valuation and Qualifying Accounts 87 43 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Audit Committee of the Board of Directors and Stockholders of American Apparel, Inc. We have audited the accompanying consolidated balance sheets of American Apparel, Inc. and Subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements operations and comprehensive loss, stockholders' deficit and cash flows for the years ended December 31, 2014, 2013, and 2012. Our audits also included the financial statement schedule as of and for the years listed in the index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Apparel, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for the years ended December 31, 2014, 2013, and 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Apparel, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 and our report dated March 25, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ Marcum LLP Marcum LLP Melville, NY March 25, 2015 44 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Audit Committee of the Board of Directors and Shareholders of American Apparel, Inc. We have audited American Apparel, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management Annual Report on Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate. In our opinion, American Apparel, Inc. and Subsidiaries' maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive loss, shareholders' deficit, and cash flows and the related financial statement schedule for the years ended December 31, 2014, 2013, and 2012 of the Company and our report dated March 25, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ Marcum LLP Marcum LLP Melville, NY March 25, 2015 45 Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share amounts) December 31, 2014 2013 ASSETS Current assets: Cash $ 8,343 $ 8,676 Trade accounts receivable (net of allowances $458; $2,229) 25,298 20,701 Prepaid expenses and other current assets 16,442 15,636 Inventories, net 147,578 169,378 Income taxes receivable and prepaid income taxes 648 306 Deferred income taxes, net of valuation allowance 681 599 198,990 215,296 49,317 69,303 2,194 2,426 Total current assets Property and equipment, net Deferred income taxes, net of valuation allowance 43,888 Other assets, net TOTAL ASSETS 46,727 $ 294,389 $ 333,752 $ 5,714 $ 3,993 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Cash overdraft Revolving credit facilities and current portion of long-term debt 34,312 44,042 Accounts payable 35,554 38,290 Accrued expenses and other current liabilities 61,369 50,018 Fair value of warrant liability 19,239 20,954 Income taxes payable 2,063 1,742 Deferred income tax liability, current 1,045 1,241 Current portion of capital lease obligations Total current liabilities Long-term debt (net of unamortized discount of $5,149; $5,779) Capital lease obligations, net of current portion Deferred tax liability Deferred rent, net of current portion 2,978 1,709 162,274 161,989 217,388 213,468 1,982 5,453 200 536 13,346 18,225 Other long-term liabilities 14,715 11,485 TOTAL LIABILITIES 409,905 411,156 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred stock, $0.0001 par value per-share, authorized 1,000 shares; none issued Common stock, $0.0001 par value per-share, authorized 230,000 shares; Issued 176,566; 113,469; Outstanding 176,194; 111,330; Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Less: Treasury stock, 304 shares at cost 0 0 18 11 218,779 185,472 (6,915) (4,306) (325,241) (256,424) (2,157) (2,157) (115,516) TOTAL STOCKHOLDERS' DEFICIT $ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT See accompanying notes to consolidated financial statements. 46 294,389 (77,404) $ 333,752 Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) Year Ended December 31, 2013 2014 Net sales $ 608,891 $ 2012 633,941 $ 617,310 299,756 313,056 289,927 309,135 320,885 327,383 Selling and distribution expenses 212,557 241,683 227,447 General and administrative expenses (including related party charges of $787; $1,016; $1,090) 121,423 106,957 97,327 2,738 1,540 1,647 (27,583) (29,295) 39,853 39,286 1,479 1 120 (1,715) 3,713 4,126 (Gain) loss on extinguishment of debt (171) 32,101 (11,588) Other (income) expense (371) 131 Cost of sales Gross profit Retail store impairment (Loss) income from operations Interest expense Foreign currency transaction loss Unrealized (gain) loss on change in fair value of warrants Loss before income taxes (66,658) $ Net loss Basic and diluted loss per-share (a) $ Weighted-average basic and diluted shares outstanding (a) $ $ (0.43) $ (68,817) 204 (33,459) 1,771 (68,817) 3,813 (106,298) $ (0.96) $ 158,844 Net loss (from above) 41,559 (104,527) 2,159 Income tax provision 962 110,326 $ (106,298) (37,272) (0.35) 105,980 $ (37,272) Other comprehensive (loss) income item: Foreign currency translation Other comprehensive (loss) income, net of tax $ Comprehensive loss (2,609) (1,581) (2,609) (1,581) (71,426) $ (107,879) (a) The dilutive impact of incremental shares is excluded from loss position in accordance with U.S. generally accepted accounting principles ("GAAP"). See accompanying notes to consolidated financial statements. 47 631 631 $ (36,641) Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Statements of Stockholders' (Deficit) Equity (in thousands) Number of Common Shares Issued Balance as of January 1, 2012 Share-based compensation, net Par Value 108,870 $ Treasury Stock 11 $ (2,157) Accumulated Other Comprehensive Loss Additional Paid-in Capital $ 166,486 $ (3,356) Total Stockholders' Equity (Deficit) Accumulated Deficit $ $ 0 10,595 Net loss 0 0 0 0 0 Foreign currency translation 0 0 0 0 631 Balance as of December 31, 2012 110,111 11 Share-based compensation, net Net loss 3,358 0 0 8,391 0 0 0 0 0 0 0 0 0 0 (1,581) Balance as of December 31, 2013 Public offering 113,469 11 185,472 (4,306) 61,645 6 0 28,435 0 0 28,441 Share-based compensation, net 752 0 0 4,299 0 0 4,299 Stock options exercised 700 1 0 573 0 0 0 0 0 0 Foreign currency translation Net loss Foreign currency translation Balance as of December 31, 2014 0 176,566 (2,157) 0 $ 18 177,081 0 $ (2,157) 218,779 See accompanying notes to consolidated financial statements. 48 (6,915) (37,272) 0 631 (150,126) 22,084 0 8,391 (106,298) (106,298) 0 (1,581) (256,424) (77,404) 0 574 (68,817) (2,609) $ 10,595 (37,272) (2,725) 0 $ 0 48,130 0 (2,157) 0 (112,854) 1,241 (68,817) 0 $ (325,241) (2,609) $ (115,516) Table of Contents American Apparel, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2013 2014 2012 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ Cash paid to suppliers, employees and others 604,796 $ (575,124) Income taxes paid Interest paid Other $ 615,342 (580,685) (2,055) (2,033) (10) (33,250) (18,948) (10,954) 421 Net cash (used in) provided by operating activities 636,049 (627,910) 119 (104) (5,212) (12,723) 23,589 (9,818) (27,054) (21,607) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures 21 Proceeds from sale of fixed assets Restricted cash 173 214 Net cash used in investing activities (9,583) 474 1,734 (3,720) (25,147) (24,853) CASH FLOWS FROM FINANCING ACTIVITIES 1,720 Cash overdraft 0 Repayments of expired revolving credit facilities, net (Repayments) borrowings under current revolving credit facilities, net (9,709) (Repayments) borrowings of term loans and notes payable 3,993 (1,921) (28,513) (48,324) 39,794 28,451 (60) (20,466) 29,987 Repayment of Lion term loan 0 (144,149) 0 Issuance of Senior Secured Notes 0 199,820 0 Payments of debt issuance costs (2,102) Net proceeds from issuance of common stock 28,435 0 0 573 0 0 Proceeds from stock option exercise Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock (11,909) (646) Proceeds from equipment lease financing (2,623) 0 Repayment of capital lease obligations (5,226) (393) 0 4,533 (2,659) (1,719) (2,893) Net cash provided by financing activities 15,552 34,228 4,214 Effect of foreign exchange rate on cash (1,090) (535) (333) (4,177) 2,560 12,853 10,293 Net (decrease) increase in cash 8,676 Cash, beginning of period $ Cash, end of period See accompanying notes to consolidated financial statements. 49 8,343 $ 8,676 (390) $ 12,853 Table of Contents Year Ended December 31, 2013 2014 2012 RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ Net loss Depreciation and amortization of property and equipment and other assets (68,817) $ (106,298) $ (37,272) 25,897 26,076 22,989 2,738 1,540 1,647 52 241 102 4,317 8,451 10,580 Unrealized (gain) loss on change in fair value of warrants (1,715) 3,713 4,126 Amortization of debt discount and deferred financing costs 2,546 4,325 10,261 32,101 (11,588) 20,344 Retail store impairment Loss on disposal of property and equipment Share-based compensation expense (Gain) loss on extinguishment of debt (171) Accrued interest paid-in-kind 4,189 9,949 Foreign currency transaction loss 1,479 1 Allowance for inventory shrinkage and obsolescence 6,049 116 Bad debt expense 1,563 1,512 Deferred income taxes Deferred rent (574) (168) (4,316) (2,093) 120 (1,331) 99 154 (895) Changes in cash due to changes in operating assets and liabilities: Trade accounts receivables (5,658) Inventories 12,682 3,715 13,949 Prepaid expenses and other current assets (1,210) (6,063) (1,829) (4,393) (8,455) Other assets 596 381 (2,067) Accounts payable (1,078) 2,287 1,779 Accrued expenses and other liabilities 16,344 11,764 (4,223) Income taxes receivable / payable 90 $ Net cash (used in) provided by operating activities (5,212) (95) 5,099 $ (12,723) $ 23,589 195 $ 1,576 $ 3,778 NON-CASH INVESTING AND FINANCING ACTIVITIES Property and equipment acquired and included in accounts payable $ Property and equipment acquired under capital lease $ 434 $ 4,213 $ 0 Standard General Loan Agreement assigned from Lion $ 9,865 $ 0 $ 0 Lion Loan Agreement assigned to Standard General $ (9,865) $ 0 $ 0 See accompanying notes to consolidated financial statements. 50 Table of Contents American Apparel, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) Note 1. Organization and Business American Apparel, Inc. and its subsidiaries (collectively the "Company") is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel products and designs. The Company manufactures and sells clothing and accessories for women, men, children and babies. The Company sells its products through the wholesale distribution channel supplying t-shirts and other casual wear to distributors and screen printers, as well as direct to customers through its retail stores located in the U.S. and internationally. In addition, the Company operates an online retail ecommerce website. At December 31, 2014 , the Company operated a total of 242 retail stores in 20 countries including the U.S. and Canada. Company Highlights Recent Developments - On December 16, 2014, the Board of Directors (the "Board") appointed Paula Schneider as Chief Executive Officer ("CEO") of the Company, effective January 5, 2015. This appointment followed the termination of Dov Charney, former President and CEO, for cause in accordance with the terms of his employment agreement. Scott Brubaker, who served as Interim CEO since September 29, 2014, continued in the post until Ms. Schneider joined the Company. Additionally, on September 29, 2014, the Board appointed Hassan Natha as Chief Fi nancial Officer ("CFO"), and John Luttrell resigned as Interim CEO and CFO of the Company. On July 7, 2014, the Company received a notice from Lion Capital LLP ("Lion") asserting an event of default and an acceleration of the maturity of the loans and other outstanding obligations under the loan agreement (the "Lion Loan Agreement") as a result of the suspension of Dov Charney as CEO of the Company by the Board. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General Group ("Standard General" and such agreement, subsequent to the assignment, the "Standard General Loan Agreement"). Standard General has waived any default under the Standard General Loan Agreement that may have resulted or that might result from Mr. Charney not being the CEO of the Company. On September 8, 2014, the Company and Standard General entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17% , extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. See Note 8. In connection with the Nomination, Standstill and Support Agreement, dated July 9, 2014, (the "Standstill and Support Agreement") among the Company, Standard General and Mr. Charney, five directors including Mr. Charney resigned from the Company's Board effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and the Company. In addition, Lion exercised its rights to designate two members to the Board, whose appointments were effective as of September 15, 2014 and January 13, 2015, respectively. In 2012, the German authorities audited the import records of the Company's German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. The German customs imposed a substantially higher tariff rate than the original rate that the Company had paid on the imports, more than doubling the amount of the tariff that the Company would have to pay. The assessments of additional retaliatory duty originated from a trade dispute. Despite the ongoing appeals of the assessment, the German authorities demanded, and the Company paid, in connection with such assessment, $4,390 in the third quarter of 2014 and the final balance of $85 in the fourth quarter of 2014. The Company recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in its consolidated statements of operations. Liquidity - As of December 31, 2014 , the Company had $8,343 in cash, $34,299 outstanding on a $50,000 asset-backed revolving credit facility with Capital One Business Credit Corp. ("Capital One" and such facility the "Capital One Credit Facility") and $13,146 of availability for additional borrowings. On March 13, 2015 , the Company had $5,837 of availability for additional borrowings under the Capital One Credit Facility. In March 2014, the Company entered into the Fifth Amendment to the Capital One Credit Facility ("the "Fifth Amendment") which waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December 31, 2013 and March 31, 2014 . Based on the Fifth Amendment, the interest rates on borrowings under the Capital One Credit Facility are equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% at the Company's option and are subject to specified borrowing requirements and covenants. In addition, the Fifth Amendment reset the minimum fixed charge coverage ratios, maximum leverage ratios, maximum capital expenditures and minimum adjusted EBITDA. 51 Table of Contents On March 25, 2015, the Company entered into the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit the Company to enter into the Standard General Credit Agreement (as defined below), (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted the Company to borrow $15,000 under the Standard General Credit Agreement. As of December 31, 2014, the Company was not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124 . However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, the Company was required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8,000 . We were in compliance with these covenants at December 31, 2014. On March 25, 2015, one of the Company's subsidiaries borrowed $15,000 under an unsecured credit agreement with Standard General, dated as of March 25, 2015 (the "Standard General Credit Agreement"). The Standard General Credit Agreement is guaranteed by the Company, bears interest at 14% per annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to the Company as contemplated by the Standstill and Support Agreement. Management's Plan - Throughout 2014 and into early 2015, the Company brought on a new board of directors and hired on new senior management, including CEO, CFO, and General Counsel, as well as other additions to the management team. Together, the new board of directors and new management team are focused on implementing a turnaround strategy and enhancing the Company's corporate governance policies and practices. The Company has started implementing additional operational and financial processes and disciplines to improve liquidity and profitability. To that end, new members to the executive team in the areas of planning and forecasting, operations, marketing and e-commerce were added. The Company continues to drive productivity from its distribution center, reduce inventory, reduce labor costs, and consolidate its administrative and manufacturing functions. Additionally, new members were added to the legal and human resources departments and the Company has introduced a new code of ethics which all new and current employees are asked to read. Management believes that a strong operational and financial discipline, along with a robust corporate governance structure, is an important element of the Company's long-term business strategy. Although the Company has made progress under these programs, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. The Company's cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. Accordingly, there can be no assurance that the Company's planned improvements will be successful. Note 2. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of American Apparel, Inc. and its 100% owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. Certain prior year amounts have been reclassified to confirm to the current period presentation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include: revenue recognition, inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill, intangible assets, and property and equipment; fair value calculations, including derivative liabilities; contingencies, including accruals for the outcome of current litigation and assessments and self-insurance; and income taxes, including uncertain income tax positions and recoverability of deferred income taxes and any limitations as to net operating losses ("NOL"). Actual results could differ from those estimates. 52 Table of Contents Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts) and trade accounts receivable (including credit card receivables) relating substantially to the Company's U.S. Wholesale segment. Cash is managed within established guidelines, and the Company mitigates its risk by investing through major financial institutions. The Company had $6,361 and $7,374 held in foreign banks at December 31, 2014 , and 2013 , respectively. Concentration of credit risk with respect to trade accounts receivable is limited by performing on-going credit evaluations of its customers and adjusting credit limits based upon payment history and the customer's current credit worthiness. The Company also maintains an insurance policy for certain customers based on a customer's credit rating and established limits. Collections and payments from customers are continuously monitored. One customer in the Company's U.S. Wholesale segment accounted for 16.6% and 14.2% of its total trade accounts receivable as of December 31, 2014 and 2013 , respectively. The Company maintains an allowance for doubtful accounts which is based upon historical experience and specific customer collection issues that have been identified. While bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Trade Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable is primarily receivable from customers including amounts due from credit card companies, net of allowances. On a periodic basis, the Company evaluates its trade accounts receivable and establishes an allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by its review of current credit information. Payments from customers are continuously monitored. The Company maintains an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories Inventories consist of material, labor, and overhead, and are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. No supplier provided more than 10% of the Company's raw material purchases as of December 31, 2014 and 2013 . The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and records lower of cost or market reserves for such identified excess and slow-moving inventories. The Company also establishes reserves for inventory shrinkage for each of its retail locations and warehouse based on the historical results of physical inventory cycle counts. Fair Value Measurements The financial instruments recorded in the consolidated balance sheets include cash, trade accounts receivable (including credit card receivables), accounts payable, revolving credit facilities, senior secured notes, term loans and warrants. Due to their short-term maturity, the carrying values of cash, trade accounts receivables, and accounts payable approximate their fair market values. In addition, the carrying amount of the revolving credit facility from Capital One approximates its fair value because of the variable market interest rate charged to the Company. The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data is not readily available, the Company's own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows: Level 1 – Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 2 – Pricing inputs are other than unadjusted quoted prices in active markets, which are based on the following: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in non-active markets; or • Either directly or indirectly observable inputs as of the reporting date. 53 Table of Contents Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. The valuation policies and procedures underlying are determined by the Company's accounting and finance team and are approved by the CFO. In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. As of December 31, 2014, there were no transfers between Levels 1, 2 and 3 of the fair value hierarchy. Summary of Significant Valuation Techniques Level 2 Measurements: Senior secured notes : Estimated based on quoted prices for identical senior secured notes in non-active market. Level 3 Measurements: Term loans : Estimated using a projected discounted cash flow analysis based on unobservable inputs including principal and interest payments and discount rate. A yield rate was estimated using yields rates for publicly traded debt instruments of comparable companies with similar features. An increase or decrease in the stock price and the discount rate assumption can significantly decrease or increase the fair value of team loans. See Note 9. Warrants : Estimated using the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility. An increase or decrease in these inputs could significantly increase or decrease the fair value of the warrant. See Notes 9 and 13. Indefinite-lived assets - goodwill: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions. An increase or decrease in the discount rate assumption and/or the terminal value assumption, in isolation, can have a significant effect on the fair value of the reporting unit. See Goodwill and Other Intangible Assets below. Retail stores - leasehold improvements: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit and discount rate. The key assumptions used in the estimates of projected cash flows were sales, gross margins, and payroll costs. These forecasts were based on historical trends and take into account recent developments as well as the Company's plans and intentions. An increase or decrease in the discount rate assumption and/or projected cash flows, in isolation, can significantly decrease or increase the fair value of the assets, which would have an effect on the impairment recorded. See Impairment of Long-Lived Assets below. Website Development The Company capitalizes applicable costs incurred during the application and website infrastructure development stage while expensing costs incurred during the planning and operating stage. The carrying values of the Company's capitalized website development costs were $2,445 and $2,805 as of December 31, 2014 and 2013 , respectively, and were included in property and equipment in the accompanying consolidated balance sheets. Goodwill and Other Intangible Assets Goodwill and other intangible assets arise as a result of business acquisitions and consist of the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable intangible assets acquired. The Company annually evaluates goodwill and other intangible assets for impairment. The Company also reviews its goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that it is more likely than not the carrying amount of goodwill may exceed its implied fair value. The Company quantitative determines whether, more likely than not, the fair value exceeds the carrying amount of a reporting unit. There are numerous assumptions and estimates underlying the quantitative assessments including future earnings, long-term strategies, and the Company's annual planning and forecasts. If these planned initiatives do not accomplish the targeted objectives, the assumptions and estimates underlying the quantitative assessments could be adversely affected and have a material effect upon the Company's financial condition and results of operations. As of December 31, 2014 and 2013, goodwill and other intangible impairment assessments indicated that there was no impairment. 54 Table of Contents Other intangible assets consist of deferred financing costs, key money, broker and finder fees, and lease rights. See Note 5. Impairment of Long-Lived Assets The Company assesses long-lived assets or asset groups for recoverability on a quarterly basis and when events or changes in circumstances indicate that their carrying amount may not be recoverable. The Company considers the following indicators, among others, that may trigger an impairment: (i) loss from operations or income from operations significantly below historical or projected future operating results; (ii) significant changes in the manner or use of the assets or in its overall strategy with respect to the manner or use of the acquired assets or changes in its overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company's stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates the performance of its stores to determine impairment of its long-lived assets at retail stores. New stores less than 12 months are excluded from the analysis because of lack of historical financial results or trends. Each new store needs between 12 months and 24 months to mature and begin generating positive cash flows. For purposes of this evaluation, long-lived assets subject to store impairments include leasehold improvements as well as certain intangible assets such as broker and finder fees, lease rights, key money on store leases, and any other nontransferable assets. All intangible assets are subject to impairment analysis if they are non-refundable in nature. If the Company identifies an indicator of impairment, it assesses recoverability by comparing, per store, the carrying amount of the store assets to the estimated future undiscounted cash flows associated with the store. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. Such estimated fair values are generally determined by using the discounted future cash flows using a rate that approximates the Company's weighted average cost of capital. The key assumptions used in management's estimates of projected cash flow at its retail stores deal largely with forecasts of sales levels, gross margins, and payroll costs. These forecasts are typically based on historical trends and take into account recent developments as well as management's plans and intentions. Any material change in manufacturing costs or raw material costs could significantly impact projected future cash flows of retail stores, and these factors are considered in evaluating impairment. Other factors, such as increased competition or a decrease in the desirability of the Company's products, could lead to lower projected sales levels which would adversely impact cash flows. A significant change in cash flows in the future could result in an impairment of long lived assets. The Company identified indicators of impairment at some retail stores in its U.S. Retail, Canada, and International segments. The Company performed a recoverability test on these stores and recorded impairment charges, as applicable, of $2,738 , $1,540 and $1,647 for the years ended December 31, 2014 , 2013 , and 2012 , respectively. Self-Insurance Liabilities The Company self-insures a significant portion of expected losses under workers' compensation and health care benefits programs. Estimated costs under the workers' compensation program, including incurred but not reported claims, are recorded as expense based upon historical experience, trends of paid and incurred claims, and other actuarial assumptions. If actual claim trends under these programs, including the severity or frequency of claims, differ from the Company's estimates, its financial results may be significantly impacted. The Company's estimated self-insurance liabilities are classified in its balance sheets as accrued expenses or other long-term liabilities based upon whether they are expected to be paid during or beyond the Company's normal operating cycle of 12 months from the date of its consolidated financial statements. Estimated costs under the Company's health care program are based on estimated losses for claims incurred but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of its assets and liabilities, and are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such amounts will more likely than not go unrealized. Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of cumulative losses and current operating performance and includes an assessment of the degree to which any losses are driven by items that are unusual in nature or incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions and any other factors arising during the period which may impact its future operating results. If it becomes more likely than not that a tax asset will be realized, any related valuation allowance of such assets would be reversed. The Company recorded a valuation allowance against deferred tax assets of $143,062 and $120,694 for the years ended December 31, 2014 and 2013 . 55 Table of Contents Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. Management believes that adequate provisions have been made for all years, but the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. The Company's foreign domiciled subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. The Company elected to have its foreign subsidiaries, except for its subsidiaries in Brazil, Canada, China, Ireland, Italy, South Korea, and Spain, consolidated in the Company's U.S. federal income tax return. The Company is generally eligible to receive tax credits on its U.S. federal income tax return for most of the foreign taxes paid by the Company's subsidiaries included in the U.S. federal income tax return. For financial statement purposes, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its financial statements. Gross unrecognized tax benefits are included in current liabilities in the consolidated balance sheets, and interest and penalties on unrecognized tax benefits are recorded in the income tax provision in the consolidated statements of operations. Contingencies Certain conditions may exist at the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings or governmental assessments that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of these matters as well as the merits of the amount of relief sought or expected to be sought. The Company establishes reserves when it believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters could arise for which we do not have insurance coverage or for which insurance provides only partial coverage. These matters could have a material negative effect on our business, financial position, results of operations, or cash flows. See Notes 15 and 18. Revenue Recognition The Company recognizes revenue when all of the following criteria are met: (i) title and risk of loss have transferred to the customer, (ii) there is persuasive evidence of an arrangement, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Wholesale product sales are recorded at the time the product is either picked up by or shipped to the customer. Online sales are recorded at the time the product is received by the customer. Retail store sales are recorded upon the sale of product to retail customers. The Company's net sales represent gross sales invoiced to customers less certain related charges for discounts, returns, and other promotional allowances. The Company recognizes revenue from gift cards, gift certificates and store credits as they are redeemed for product or when it is determined that some portion of gift cards will not be redeemed. See Gift Cards below. Sales Returns and Allowances The Company analyzes its historical sales return experience and records an allowance for its wholesale, online and retail store sales. Estimating sales returns are based on many factors including expected return data communicated by customers. The Company regularly reviews those factors and makes adjustments when it believes that actual product returns and claims may differ from established reserves. If actual or expected future returns and claims are significantly greater or lower than reserves established, the Company would decrease or increase net revenues in the period in which it made such determination. Gift Cards Upon issuance of a gift card, a liability is established for the cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of gift cards is not redeemed ("breakage"). The Company determines breakage income for gift cards based on historical redemption patterns. Breakage income is recorded as a credit to selling expenses, which is a component of operating expenses in the consolidated statements of operations. The Company currently records breakage when gift cards remain unredeemed after two years. The Company's gift cards, gift certificates and store credits do not have expiration dates. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate breakage. 56 Table of Contents Shipping and Handling Costs Shipping and handling costs consist primarily of freight expenses incurred to transport products to the Company's retail stores, distribution center, and wholesale and online retail customers. These costs are included in cost of sales while amounts billed to customers for shipping are included in net sales. Deferred Rent, Rent Expense and Tenant Allowances The Company occupies its retail stores, corporate office, manufacturing facilities, and distribution center under operating leases with terms of one to ten years. Some leases contain renewal options for periods ranging from five to fifteen years under substantially the same terms and conditions as the original leases but with rent adjustments based on various factors specific to each agreement. Many of the store leases require payment of a specified minimum rent, a contingent rent based on a percentage of the store's net sales in excess of a specified threshold, plus defined escalating rent provisions. The Company recognizes its minimum rent expense on a straight-line basis over the term of the lease (including probable lease renewals) plus the construction period prior to occupancy of the retail location using a mid-month convention. Further, rent expenses include payments of real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum operating lease payments. Certain lease agreements provide for the Company to receive lease inducements or tenant allowances from landlords to assist in the financing of certain property. These inducements are recorded as a component of deferred rent and amortized as a reduction of rent expense over the term of the related lease. Advertising The Company does not defer advertising expenses but expenses them as incurred. Advertising expenses were $15,176 , $19,814 , and $22,114 for the years ended December 31, 2014 , 2013 and 2012 , respectively, and were included in selling expenses in the consolidated statements of operations. The Company has cooperative advertising arrangements with certain vendors in its U.S. wholesale segment. For the years ended December 31, 2014 , 2013 and 2012 , cooperative advertising expenses were not significant. Share-Based Compensation Share-based compensation expense for all share-based payment awards granted or modified is based on the estimated grant date fair value. The Company recognizes these compensation expenses on a straight-line basis over the vesting period for all share-based awards granted. The fair value of stock option awards is estimated using the Black-Scholes option pricing model at the grant date. The Company calculates the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. Due to the lack of historical information, the Company determines the expected term of its stock option awards by using the simplified method, which assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. Estimated forfeitures are zero , and actual forfeitures have been insignificant to date. The expected dividend yield is zero as the Company has not paid or declared any cash dividends on its common stock. Based on these valuations, the Company recognized share-based compensation expense of $4,317 , $8,451 , and $10,580 for the years ended December 31, 2014 , 2013 and 2012 , respectively. Earnings per Share Basic earnings per share ("EPS") excludes dilution and reflects net loss divided by the weighted average shares of common stock outstanding during the period presented. Diluted EPS is based on the weighted average shares of common stock and potential dilutive common stock outstanding during the period presented. See Note 13. Comprehensive Loss Comprehensive loss represents the change in stockholders' equity resulting from transactions other than stockholder investments and distributions. Accumulated other comprehensive loss includes changes in equity that are excluded from the Company's net loss, specifically, unrealized gains and losses on foreign currency translation adjustments and is presented in the consolidated statements of stockholders' equity. The Company presents the components of comprehensive loss within the consolidated statements of operations and comprehensive loss. Foreign Currency Translation The Company's 100% owned direct and indirect foreign operations present their financial reports in the currency used in the economic environment in which they mainly operate, known as the functional currency. The Company's functional currencies consist of the Canadian dollar for operations in Canada, the Australian dollar for operations in Australia, the pound Sterling for operations in the U.K., the Euro for operations in the European Union (excluding the Swiss Franc for operations in Switzerland and the Swedish Kronor for operations in Sweden, which are remeasured to Euro before translated into U.S. dollar), the New Israeli Shekel for operations in Israel, the Yen for the operations in Japan, the Won for operations in South Korea, the Renminbi for operations in China, the Real for operations in Brazil, and the Peso for operations in Mexico. 57 Table of Contents Assets and liabilities in foreign subsidiaries are translated into U.S. dollars at the exchange rate on the closing date, while the income statement is translated at the average exchange rate for the financial year. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive loss in the consolidated statements of stockholders' deficit. Recently Issued Accounting Standards In August 2014 , the Financial Accounting Standards Board ("FASB") issued a new standard on disclosure of uncertainties about an entity's ability to continue as a going concern. The new standard provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entity's ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016 . Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements. In June 2014 , the FASB issued a new standard on accounting for share-based payments. The new standard clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant date fair value of the award. The new standard also clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015 . Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements. In May 2014 , the FASB issued a new standard on recognizing revenue in contracts with customers. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard creates a five-step process to recognize revenue that requires entities to exercise judgment when considering contract terms and relevant facts and circumstances. The new standard also requires expanded disclosures surrounding revenue recognition. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016 . The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements. Other recently issued accounting standards are not expected to have a material effect on the Company's consolidated financial statements. Note 3. Inventories The components of inventories are as follows: December 31, 2014 Raw materials $ Work in process Finished goods 17,738 2013 $ 2,596 135,813 146,361 156,356 172,156 (8,778) Less reserve for inventory shrinkage and obsolescence Total, net of reserves $ 23,199 2,805 147,578 (2,778) $ 169,378 The Company increased its lower of cost or market reserves for excess and slow-moving inventories to $6,684 at December 31, 2014 from $1,951 at December 31, 2013 . As part of the Company's valuation analysis of inventory, the Company identified certain slow-moving, second quality finished goods and raw materials inventory for additional reserves. Inventory shrinkage reserves were $2,094 and $827 at December 31, 2014 and 2013 , respectively. 58 Table of Contents Note 4. Property and Equipment Property and equipment consist of the following: December 31, 2014 Machinery and equipment $ 2013 59,703 $ 58,069 Furniture and fixtures 47,404 46,749 Computers and software 47,220 45,402 1,309 1,334 94,747 95,886 Automobiles and light trucks Leasehold improvements Buildings 503 547 Construction in progress 115 1,353 Less accumulated depreciation and amortization $ Total 251,001 249,340 (201,684) (180,037) 49,317 $ 69,303 Property and equipment is recorded on the basis of cost and is depreciated using a straight-line method over the estimated useful lives of fixed assets. Leasehold improvements are amortized over the shorter of the useful life of the assets or the lease term. Expenditures which significantly improve or extend the life of an asset are capitalized and depreciated over the asset's remaining useful life. The Company expenses maintenance and repair costs as incurred. The useful lives of the Company's major classes of assets are as follows: Machinery and equipment Furniture and fixtures Computers and software Automobiles and light trucks Leasehold improvements Buildings 5 to 7 years 3 to 5 years 3 to 5 years 3 to 5 years Shorter of lease term or useful life 25 years Upon sale or disposition, the related cost and accumulated depreciation are removed from the Company's financial statements and the resulting gain or loss, if any, is reflected in income from operations. Property and equipment acquired are recorded as construction in progress until placed in-service, at which time the asset is reclassified to the appropriate asset category and depreciation commences. Depreciation and amortization expenses were $25,897 , $26,076 and $22,989 for the years ended December 31, 2014 , 2013 , and 2012 , respectively. Machinery and equipment held under capital leases were $15,743 and $15,115 as of December 31, 2014 and 2013 , respectively, which were included in property and equipment. Accumulated amortizations for these capital leases were $13,099 and $12,252 as of December 31, 2014 , and 2013 , respectively. 59 Table of Contents Note 5. Goodwill, Intangible Assets and Other Assets The following table presents the net carrying amounts of definite and indefinite lived intangible assets and other assets. December 31, 2014 Deferred financing costs $ Broker and finder fees 2013 9,816 $ 1,775 Lease rights Key money on store leases Total intangible assets, gross Accumulated amortization Total intangible assets, net Goodwill Workers compensation deposit 10,275 1,779 172 187 2,027 1,652 13,790 13,893 (2,739) (2,361) 11,051 11,532 1,906 1,906 16,124 16,124 Lease security deposits 7,389 9,013 Restricted cash 1,650 2,078 Other 5,768 Total intangible and other assets, net $ 43,888 6,074 $ 46,727 Intangible assets Deferred financing costs represent costs associated with issuing debt and are amortized on a straight-line basis over the term of the related indebtedness. Deferred financing cost amortization expenses were $1,901 , $1,895 , and $2,287 for the years ended December 31, 2014 , 2013 and 2012 , respectively, which were included in interest expense on the consolidated statements of operations. Lease rights are costs incurred to acquire the right to lease a specific property. A majority of the Company's lease rights are related to premiums paid to landlords. Lease rights are recorded at cost and are amortized on a straight-line basis over the term of the respective leases. Key money is funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the "right to lease" with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered in case a landlord refuses to allow the automatic right of renewal. Key money is amortized on a straight-line basis over the respective lease terms. Aggregate amortization expenses of intangible assets and other assets, excluding deferred financing costs, were $595 , $456 , and $472 for the years ended December 31, 2014 , 2013 and 2012 , respectively, which were included in operating expenses in the consolidated statements of operations. None of the intangible assets are anticipated to have a residual value. The following table presents the estimated future amortization expenses related to amortizable intangible assets as of December 31, 2014 : Amortization Expense Year Ending December 31, 2015 $ 2,209 2016 2,190 2017 2,170 2018 1,910 2,305 2019 and thereafter Total $ 10,784 Goodwill There were no changes in the carrying amount of goodwill for the year ended December 31, 2014. Goodwill is reviewed for impairment on an annual basis and more frequently if potential impairment indicators exist. No impairment indications were identified during any of the periods presented. 60 Table of Contents Note 6. Accrued Expenses and Other Current Liabilities The components of accrued expenses and other current liabilities are as follows: December 31, 2014 Compensation, bonuses and related taxes $ 2013 13,010 $ 12,254 Accrued interest 5,932 6,064 Workers' compensation and other self-insurance reserves (Note 16) 6,760 6,383 Sales, value and property taxes 5,984 5,240 Gift cards and store credits 8,462 7,391 Loss contingencies 2,360 1,177 962 1,258 3,422 3,363 Deferred revenue Deferred rent 14,477 Other $ Total accrued expenses and other current liabilities 61,369 6,888 $ 50,018 Note 7. Revolving Credit Facilities and Current Portion of Long-Term Debt The following table presents revolving credit facilities and current portion of long-term debt: December 31, Lender Maturity Revolving credit facility Capital One April 14, 2018 Revolving credit facility Bank of Montreal March 31, 2014 2014 $ 2013 34,299 $ 0 443 13 Current portion of long-term debt $ Total 34,312 43,526 73 $ 44,042 The Company incurred interest expenses of $39,853 , $39,286 and $41,559 for the years ended December 31, 2014 , 2013 and 2012 , respectively, for all outstanding borrowings. The interests subject to capitalization were no t significant for the years ended December 31, 2014 , 2013 and 2012 . Revolving Credit Facility - Capital One The Company had $34,299 and $43,526 outstanding on a $50,000 asset-backed revolving credit facility with Capital One as of December 31, 2014 and 2013 , respectively. The amount available for additional borrowings on December 31, 2014 was $13,146 . The Capital One Credit Facility matures on April 14, 2018 and is subject to a January 15, 2018 maturity if excess availability is less than $15,000 at the time of notice to Capital One that an "applicable high yield discount obligation" redemption will be required pursuant to Section 3.01(e) of the Indenture governing the Notes (as defined in Note 8). In March 2014, the Company entered into the Fifth Amendment to the Capital One Credit Facility which waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December 31, 2013 and March 31, 2014. Based on the Fifth Amendment, the interest rates on borrowings under the Capital One Credit Facility are equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% at the Company's option and are subject to specified borrowing requirements and covenants. In addition, the Fifth Amendment reset the minimum fixed charge coverage ratios, maximum leverage ratios, maximum capital expenditures and minimum adjusted EBITDA. On March 25, 2015, the Company entered into the Sixth Amendment which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit the Company to enter into the Standard General Credit Agreement, (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted the Company to borrow $15,000 under the Standard General Credit Agreement. Standard General informed the Company that it entered into an agreement with Capital One that could result in it purchasing all of the loans and commitments outstanding under the Capital One Credit Facility by September 30, 2015 or earlier under certain other circumstances. 61 Table of Contents As of December 31, 2014, the Company was not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38,186 as compared with the covenant minimum of $41,124 . However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, the Company was required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8,000 . The Company was in compliance with these covenants at December 31, 2014. The Capital One Credit Facility is secured by a lien on substantially all of the assets of the Company's domestic subsidiaries and equity interests in certain of the Company's foreign subsidiaries, subject to some restrictions. It requires that the Company maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may adjust the advance restriction and criteria for eligible inventory and accounts receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Senior Notes Indenture (the "Indenture") or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility. As of December 31, 2014, the Company had $1,080 of outstanding letters of credit secured against the Capital One Credit Facility. Revolving Credit Facility - Bank of Montreal The Company's 100% owned Canadian subsidiaries had a revolving credit facility with Bank of Montreal. Outstanding amounts under this credit facility were repaid, and the agreement expired, on March 31, 2014. Note 8. Long-Term Debt Long-term debt consists of the following: December 31, 2014 Senior Secured Notes due 2020 (a) $ Standard General Loan Agreement (b) Lion Loan Agreement Other (c) Total long-term debt 2013 208,084 $ 0 0 9,865 268 411 217,401 213,541 (13) Current portion of debt Long-term debt, net of current portion $ 203,265 9,049 217,388 (73) $ 213,468 ______________________ (a) Includes accrued interest paid-in-kind of $7,233 and $3,044 and net of unamortized discount of $5,149 and $5,779 at December 31, 2014 and 2013 , respectively. (b) Net of unamortized discount of $816 at December 31, 2014 . (c) Includes accrued interest paid-in-kind of $365 at December 31, 2013 . Assigned to Standard General on July 16, 2014. Senior Secured Notes due 2020 The Company has outstanding senior secured notes (the "Notes") issued at 97% of the $206,000 par value on April 4, 2013. The Notes mature on April 15, 2020 and bear interest at 15% per annum, of which 2% is payable in-kind until April 14, 2018 and in cash on subsequent interest dates. Interest of approximately $13,900 per payment period in 2015 is payable semi-annually, in arrears, on April 15 and October 15. On April 14, 2014 and October 15, 2014, the Company paid $13,390 and $13,666 in interest on the Notes, respectively. On or after April 15, 2017, the Company may, at its option, redeem some or all of the Notes at a premium, decreasing ratably over time to zero as specified in the Indenture, plus accrued and unpaid interest to, but not including, the redemption date. Prior to April 15, 2017, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 15, 2017, the Company may, at its option, redeem some or all of the Notes by paying a "make whole" premium, plus accrued and unpaid interest to, but not including, the redemption date. If the Company experiences certain change of control events, the holders of the Notes will have the right to require the Company to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, the Company is required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, the Company will be required to redeem, for cash, a portion of each Note then outstanding equal to the 62 Table of Contents amount necessary to prevent such Note from being treated as an "applicable high yield discount obligation" within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption. The Notes are guaranteed, jointly and severally, on a senior secured basis by the Company's existing and future domestic subsidiaries. The Notes and the related guarantees are secured by a first-priority lien on the Company's and its domestic subsidiaries' assets (other than the Credit Facility Priority Collateral, as defined below, subject to some exceptions and permitted liens). The Notes and the related guarantees also are secured by a secondpriority lien on all of Company's and its domestic subsidiaries' cash, trade accounts receivable, inventory and certain other assets (collectively, the "Credit Facility Priority Collateral"), subject to certain exceptions and permitted liens. The Notes and the guarantees, respectively, rank equal in right of payment with the Company's and its domestic subsidiaries' senior indebtedness, including indebtedness under the Capital One Credit Facility, before giving effect to collateral arrangements. The Notes impose certain limitations on the ability of the Company and its domestic subsidiaries to, among other things, and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of their capital stock or certain indebtedness, enter into transactions with affiliates, create dividend or other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. The Company must annually report to the trustee on compliance with such limitations. The Notes also contain cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes. As of December 31, 2014 , the Company was in compliance with the required covenants of the Indenture. Standard General Loan Agreement On July 7, 2014, Lion issued a notice of acceleration to the Company under the Lion Loan Agreement as a result of the Board's decision to suspend Mr. Charney as CEO of the Company. The notice accelerated and declared the amounts outstanding under the Lion Loan Agreement and any accrued interest immediately due and payable. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to Standard General. Standard General has waived any default under the Standard General Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of the Company. On September 8, 2014, the Company entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17% , extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. The principal amount of the term loan was $9,865 . Interest under the loan agreement is payable in cash or, to the extent permitted by the Company's other debt agreements, in-kind. As a result of the September 8, 2014 amendment, the Company evaluated the change in cash flows and determined that there was a greater than 10% change between the present values of the existing loan and the amended loan causing an extinguishment of debt. The Company recorded the amended loan at its fair value of $9,034 and recorded a gain of $171 on extinguishment of debt. Additionally, the $831 difference between the original principal amount of $9,865 and the fair value of the amended loan of $9,034 was recorded as a discount and will be recognized as interest expense using the effective interest method over the remaining term of the amended loan. Standard General Credit Agreement On March 25, 2015, one of the Company's subsidiaries borrowed $15,000 under the Standard General Credit Agreement. The Standard General Credit Agreement is guaranteed by the Company, bears interest at 14% per annum, and will mature on October 15, 2020. The Standard General Credit Agreement contains customary defaults, including cross event of default to the Notes and the Standard General Loan Agreement and cross acceleration to other indebtedness above a threshold amount. If the Company experiences certain change of control events, the Company is required to offer to prepay the Standard General Credit Agreement at 101% of the outstanding principal amount plus accrued and unpaid interest on the date of the prepayment. The Company will be required to prepay loans under the Standard General Credit Agreement to the extent necessary to avoid the loan being characterized as an "applicable high yield discount obligation" within the meaning of the Internal Revenue Code, by the first interest payment date following the fifth anniversary of closing. 63 Table of Contents Note 9. Fair Value of Financial Instruments The Company's financial instruments at fair value are measured on a recurring basis. Related unrealized gains or losses are recognized in unrealized (gain) loss on change in fair value of warrants in the consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note 2. The following tables present carrying amounts and fair values of the Company's financial instruments as of December 31, 2014 and 2013 , and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Company did not have any assets or liabilities categorized as Level 1 as of December 31, 2014 . December 31, 2014 Carrying Amount Senior Secured Notes due 2020 Level 2 Liability Standard General Loan Agreement Level 3 Liability Lion Warrant Level 3 Liability $ 208,084 Fair Value $ 211,538 9,049 8,868 (a) $ 217,133 19,239 $ 239,645 December 31, 2013 Carrying Amount Fair Value Senior Secured Notes due 2020 Level 3 Liability Lion Loan Agreement Level 3 Liability 9,865 9,773 Lion Warrant Level 3 Liability (a) 20,954 $ 203,265 $ 213,130 $ 191,065 $ 221,792 ______________________ (a) No cost is associated with these liabilities (see Note 13). The following table presents a summary of changes in fair value of the Lion Warrant (Level 3 financial liabilities) which are marked to market on a periodic basis: 2014 Beginning balance $ Adjustments included in earnings (a) 2013 20,954 $ 17,241 $ 20,954 (1,715) $ Ending balance 19,239 3,713 ______________________ (a) The amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gains or losses are recorded in unrealized (gain) loss on change in fair value of warrants in the consolidated statements of operations. Note 10. Capital Lease Obligations The Company leases certain equipment under capital lease arrangements expiring at various dates through the year 2017 . The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The interest rates pertaining to these capital leases range from 0.4% to 24.1% (weighted average interest rate is 9.4% ). 64 Table of Contents The following table presents future minimum commitments for capital leases as of December 31, 2014 : Year Ending December 31, Capital Leases 2015 $ 3,328 2016 2,030 2017 27 2018 0 2019 0 0 Thereafter Total future minimum lease payments 5,385 Less: Amount representing interest 425 Net minimum lease payments $ 4,960 Current portion $ 2,978 Long-term portion $ 1,982 Note 11. Income Taxes Income tax provision Components of income (loss) before income taxes are as follows: Year Ended December 31, 2014 U.S. $ 2013 (68,695) Foreign $ (107,637) 2,037 $ (66,658) 2012 $ (38,365) $ (33,459) 3,110 $ (104,527) 4,906 Components of the income tax provision are as follows: Year Ended December 31, 2014 2013 2012 Current: Federal $ State Foreign Total current 0 $ 0 $ 0 401 200 134 2,137 2,024 3,446 2,538 2,224 3,580 Deferred: Federal 0 State (402) 0 Foreign Total deferred $ Income tax provision 65 0 0 0 (379) (51) 233 (379) (453) 233 2,159 $ 1,771 $ 3,813 Table of Contents The following presents a reconciliation of income taxes at the U.S. federal statutory rate to the Company's actual taxes. Year Ended December 31, 2014 Taxes at the statutory federal tax rate of 35% $ 2013 (23,330) $ 2012 (36,585) $ (11,711) State tax, net of federal benefit (1,610) (4,059) 4,913 Change in valuation allowance 20,966 42,771 5,123 1,731 0 0 0 Return to provision adjustments Tax differential on vesting of stock grants 2,820 0 Change in state deferred rate 670 0 Foreign tax rate differential (148) 10 Unrealized (gain) loss on warrants (600) Other 1,299 1,660 $ Total income tax provision 2,159 0 (618) 4,809 (1,665) $ 1,771 1,297 $ 3,813 Deferred Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of the Company's assets and liabilities, and expected benefits of utilizing net operating loss and tax-credit carryforwards. The Company reduces deferred tax assets resulting from future tax benefits by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of these deferred taxes will not be realized. The Company has determined it is more likely than not that it will not realize the benefit of its deferred tax assets and accordingly has recorded full valuation allowances against U.S. and most foreign jurisdiction deferred tax assets. Significant components of the Company's net deferred tax assets and liabilities are as follows: December 31, 2014 2013 Deferred tax assets: Net operating loss carryforwards $ 76,582 $ 62,052 Accrued liabilities 18,997 16,134 Federal and California tax credits 12,067 12,067 Foreign tax credits 11,034 9,296 Inventory reserves 7,583 6,877 Fixed assets 8,713 5,723 Deferred rent 5,536 7,295 Deferred gift card income 2,784 2,379 Other 2,426 1,833 158 831 Allowance for doubtful accounts Total gross deferred tax assets Less valuation allowance Deferred tax assets, net of valuation allowance Deferred tax liabilities: Prepaid expenses 145,880 124,487 (143,062) (120,694) $ 2,818 $ 3,793 $ (1,188) $ (1,432) Other 0 Total gross deferred tax liabilities (1,113) (1,188) $ Net deferred tax assets 1,630 (2,545) $ 1,248 At December 31, 2014 , the Company had U.S. Federal NOL carryforwards of $202,781 expiring beginning in 2030, state NOL carryforwards of $121,211 expiring beginning in 2020 and foreign NOL carryforwards of $9,596 with expiration dates starting in 2015 (certain foreign loss carryforwards do not expire). Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), may limit the ability to use U.S. federal NOL and tax credit carryforwards as a result of ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of certain 66 Table of Contents shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company believes that an ownership change has not occurred through December 31, 2014 , and U.S. federal NOL and other tax attribute carryforwards are not limited. The Company has California state tax credits of $11,800 , which carryover for ten years. Management determined that it is more likely than not that the state tax credits are not realizable due to the Company's inability to generate future tax liabilities and accordingly has provided a full valuation allowance against the unused California credit carryforwards. The Company does not provide for U.S. federal income taxes on the undistributed earnings ( $21,004 at December 31, 2014 ) of its controlled foreign corporations because earnings are considered to be permanently reinvested outside of the U.S. Determination of U.S. income taxes, as adjusted for tax credits and foreign withholding taxes, that would be incurred upon any future distribution is not practicable because of the complexities associated with its hypothetical calculation. Any U.S. tax consequences more likely than not will be substantially eliminated as a result of significant U.S. federal and state NOLs to utilize to offset any tax effect of repatriation. Uncertainty in Income Taxes The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if, "more-than-likely-than-not" the positions are sustainable. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its financial statements. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows: 2014 Balance at January 1 $ Increases for tax positions in prior periods 2013 0 $ 477 Balance at December 31 $ 477 0 0 $ 0 The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued interest and penalties of $24 and $48 , respectively for the year ended December 31, 2014. The Company does not believe that it is reasonably possible that there will be any decrease in unrecognized tax benefits during the next twelve months. The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Internal Revenue Service ("IRS") completed its audit on the Company's tax year 2011, and there was no assessment. Tax years that remain subject to examination by the IRS are 2012 through 2014. The Company's state and foreign tax returns are open to audit under similar statute of limitations for the calendar years 2009 through 2014. Note 12. Related Party Transactions Personal Guarantees by Mr. Charney As of December 31, 2014, Mr. Charney personally guaranteed the Company's obligations under two property leases aggregating $9,210 in obligations. Lease Agreement between the Company and a Related Party The Company has an operating lease expiring in November 2016 for its knitting facility with American Central Plaza, LLC, which is partially owned by Mr. Charney and Marty Bailey, the Company's Chief Manufacturing Officer ("CMO"). Mr. Charney holds an 18.75% ownership interest in American Central Plaza, LLC, while the CMO holds a 6.25% interest. The remaining members of American Central Plaza, LLC are not affiliated with the Company. Rent expenses (including property taxes and insurance payments) related to this lease were $717 , $778 and $830 for the years ended December 31, 2014 , 2013 and 2012 , respectively. Payments to Morris Charney Morris Charney ("Mr. M. Charney") is Mr. Charney's father and served as a director of American Apparel Canada Wholesale Inc. and a director of American Apparel Canada Retail Inc. until June 28, 2014. Day to day operations of these two Canadian subsidiaries are handled by their management and employees, none of whom performs any policy making functions for the Company. The Company's management sets the policies for American Apparel, Inc. and its subsidiaries as a whole. Mr. M. Charney did not perform any policy making functions for the Company or any of its subsidiaries. Mr. M. Charney only provided architectural consulting services primarily for stores located in Canada and, in limited cases, in the U.S. Mr. M. Charney was paid architectural consulting and director fees amounting to $70 , $238 and $260 for the years ended December 31, 2014 , 2013 and 2012 , respectively. 67 Table of Contents Agreements between Mr. Charney and Standard General As of December 31, 2014, Mr. Charney owned 42.3% of the Company's outstanding common stock. Mr. Charney and Standard General collectively controlled the right to vote such common stock. On June 25, 2014, Mr. Charney entered into a letter agreement with Standard General in which, if Standard General was able to acquire at least 10% of the Company's outstanding shares, Standard General would loan Mr. Charney the funds needed for him to purchase those acquired shares from Standard General (the "SG-Charney Loan"). Between June 26, 2014 and June 27, 2014, Standard General acquired 27,351 of the Company's outstanding shares, and Mr. Charney purchased those shares at a price of $0.715 per share using the proceeds from the SG-Charney Loan. According to Mr. Charney's Schedule 13D/A, dated June 25, 2014, the loan bears interest at 10% per annum, payable in-kind and matures on July 15, 2019, with no prepayment penalty. The loan is collateralized by the newly acquired shares as well as by Mr. Charney's original shares of the Company's outstanding common stock. On July 9, 2014, Mr. Charney and Standard General entered into a cooperation agreement, which provides, among other things, that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement dated March 13, 2009 between Mr. Charney and Lion. In addition, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right exercisable, on or prior to July 15, 2017, to purchase from Mr. Charney 32,072 shares (consisting of the 27,351 shares purchased by using the proceeds from the SG-Charney Loan and 10% of Mr. Charney's 47,209 original shares). Loans held by Standard General See Note 8 for a description of the Standard General Loan Agreement assigned to Standard General on July 16, 2014 and Standard General Credit Agreement between the Company and Standard General in March 2015. Loan and Warrants held by Lion See Note 8 for a description of the loan made by Lion to the Company (and assigned to Standard General on July 16, 2014) and Note 13 for a description of the warrants issued by the Company to Lion. Note 13. Stockholders' Deficit Rights Plan On December 21, 2014, the Board adopted a stockholders rights plan (the "Rights Plan"). Under the Rights Plan, the Company declared a dividend of one preferred share purchase right for each share of its common stock held by shareholders of record as of January 2, 2015. Each right entitles the registered holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a "Unit") of Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a purchase price of $3.25 per Unit, subject to adjustment. Public Offering On March 31, 2014, the Company completed a public offering of 61,645 shares of its common stock at $0.50 per share for net proceeds of $28,435 . Common Stock Warrants As a result of the public offering in March 2014, Lion received the right to purchase an additional 2,905 shares of the Company's common stock, and the exercise price of all of Lion held warrants (the "Lion Warrants") was adjusted from $0.75 per share to $0.66 per share. Such adjustments were required by the terms of the existing Lion Warrants. As of December 31, 2014, Lion held warrants to purchase 24,511 shares of the Company's common stock, with an exercise price of $0.66 per share. These warrants will expire on February 18, 2022. The Lion Warrants, as amended, contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of the Company's common stock issuable upon exercise of the Lion Warrants, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges. The fair value of the Lion Warrants as of December 31, 2014 and 2013 , estimated using the Binomial Lattice option valuation model, were $19,239 and $20,954 , respectively, and recorded as a current liability in the consolidated balance sheets. The calculation assumed a stock price of $1.03 , exercise price of $0.66 , volatility of 73.85% , annual risk free interest rate of 1.99% , a contractual remaining term of 7.2 years and no dividends. 68 Table of Contents The following table presents a summary of common stock warrants activities: Weighted -Average Contractual Life (in years) Weighted -Average Exercise Price Shares (in thousands) Outstanding - January 1, 2012 22,606 1.05 6.0 Issued (a) 44,212 0.90 0 (44,212) 1.03 0 Forfeited (a) 0 Expired 0.00 0 0.81 8.8 0 0.00 0 0 0.00 0 22,606 Outstanding - December 31, 2012 Issued (a) Forfeited $ (a) Expired (1,000) Outstanding - December 31, 2013 21,606 Issued (a) Forfeited (a) $ 2.15 0 0.75 8.2 24,511 0.66 8.0 (21,606) 0.75 0 0.00 0 0.66 7.2 $ 0 Expired 24,511 Outstanding - December 31, 2014 $ Fair Value - December 31, 2014 $ 19,239 ______________________ (a) Issued and forfeited warrants represent repriced shares. Earnings Per Share The Company presents EPS utilizing a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and reflects net loss divided by the weighted-average shares of common stock outstanding for the period presented. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company had common stock under various options, warrants, and other agreements at December 31, 2014 , 2013 and 2012. The weightedaverage effects of 38,225 , 46,684 and 53,478 shares at December 31, 2014 , 2013 and 2012, respectively, were excluded from the calculation of net loss per share for the years ended December 31, 2014 , 2013 , and 2012 because their impact would have been anti-dilutive. A summary of the potential stock issuances under various options, warrants, and other agreements that could have a dilutive effect on the shares outstanding as of December 31, 2014 , 2013 , and 2012 are as follows: 2014 2013 2012 SOF Warrants 0 0 1,000 Lion Warrants 24,511 21,606 21,606 13,611 20,416 20,416 0 2,112 2,112 5,000 Shares issuable to Mr. Charney based on market conditions (a) Contingent shares issuable to Mr. Charney based on market conditions (b) Contingent shares issuable to Mr. Charney based on performance factors (c) Employee options & restricted shares 0 0 103 2,550 3,344 38,225 46,684 53,478 ______________________ (a) Charney Anti-Dilution Rights pursuant to the April 26, 2011 Investor Purchase Agreement, of which 6,805 expired unexercised on April 15, 2014 (Note 14). (b) Pursuant to the March 24, 2011 conversion of debt to equity, which expired unexercised on March 24, 2014. (c) Pursuant to Mr. Charney's employment agreement commenced April 1, 2012, of which 5,000 expired unexercised on December 31, 2013 (Note 14). Note 14. Share-Based Compensation The American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the "2011 Plan") authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 17,500 shares of the Company's common stock to be acquired by the holders of such awards and authorizes up to 3,000 shares that may be awarded to any participant during any calendar year. The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of December 31, 2014, there were approximately 12,664 shares available for future grants under the 2011 Plan. 69 Table of Contents The Company has identified a clerical discrepancy in its records pertaining to the total historic number of shares issued in connection with grants of common stock to non-executive employees under its stock incentive plans. The Company has not yet determined the full impact of the discrepancy but anticipates that it may result in a non-material reduction in the number of outstanding shares of common stock reported by the Company. Restricted Share Awards - The following table presents a summary of the restricted share awards activity: Weighted-Average Grant Date Fair Value Per Share Shares (in thousands) Non-vested - January 1, 2012 3,186 $ 1.45 Granted 1,418 0.93 Vested (1,783) 1.23 (177) 1.13 Forfeited Non-vested - December 31, 2012 2,644 Granted $ 963 Vested 1.33 1.60 Non-vested - December 31, 2013 1,850 Granted 1,055 0.74 Vested (2,519) 1.14 (283) 1.65 103 Non-vested - December 31, 2014 1.3 1.42 (107) Forfeited 2.7 1.75 (1,650) Forfeited Weighted-Average Remaining Vesting Period (in years) $ $ 1.46 0.9 1.17 0.3 Vesting of the restricted share awards to employees may be either immediately upon grant or over a period of three to five years of continued service by the employee in equal annual installments. Vesting is immediate in the case of members of the Board. Share-based compensation is recognized over the vesting period based on the grant-date fair value. Stock Option Awards - The following table presents a summary of the stock option activity: Shares (in thousands) Outstanding - January 1, 2012 Weighted-Average Exercise Price 950 Granted Weighted-Average Contractual Remaining Life (in years) $ 1.06 9.5 (250) $ 1.75 700 $ 0.82 8.8 $ 0.82 7.8 $ 0.82 0 Forfeited 0 Expired Outstanding - December 31, 2012 Granted 0 Forfeited 0 0 Expired Outstanding - December 31, 2013 700 Granted 0 Exercised (700) Forfeited 0 Expired 0 Outstanding - December 31, 2014 0 Vested (exercisable) - December 31, 2014 0 Non-vested - December 31, 2014 0 70 Aggregate Intrinsic Value (in thousands) Table of Contents Share-Based Compensation Expense - The Company recorded share-based compensation expenses of $4,317 , $8,451 and $10,580 for the years ended December 31, 2014 , 2013 and 2012 , respectively, related to its share-based compensation awards that are expected to vest. No amounts have been capitalized. As of December 31, 2014 , unrecorded compensation cost related to non-vested awards was $101 , which is expected to be recognized through 2017. Mr. Charney Anti-Dilution Rights - In 2011, the Company provided Mr. Charney with certain anti-dilution rights (the ''Charney Anti-Dilution Rights"), which provided that Mr. Charney has a right to receive from the Company, subject to the satisfaction of certain average volume weighted closing price targets, and other terms and conditions set forth in the agreement, up to 20,416 shares of the Company's common stock as anti-dilution protection. The fair value of these awards was determined under the Monte Carlo simulation pricing model. The calculation was based on the exercise price of $0 , the stock price of $1.3 , annual risk free rate of 0.45% , volatility of 90.46% and a term of 3.5 years . The Company considered the shares to be awards with market conditions, and the related service and amortization period for the shares occur in three measurement periods. On April 15, 2014, the last day of the first measurement period, the Company determined that the vesting requirements for such period were not met and 6,805 of the 20,416 anti-dilution rights expired unexercised. On December 16, 2014, the Board terminated Mr. Charney for cause in accordance with the terms of his employment agreement. Despite the termination, the unexercised anti-dilution rights remain exercisable under the 2011 Investor Purchase Agreement but are immediately vested. The remaining unrecognized compensation cost of $233 was recognized as of December 31, 2014 . The Company recorded share-based compensation expense associated with Mr. Charney's certain anti-dilution rights of $1,985 , $6,459 and $5,440 for the years ended December 31, 2014 , 2013 and 2012 , respectively. Mr. Charney Performance-Based Award - Effective April 1, 2012, the Company provided Mr. Charney the rights to 7,500 shares of the Company's stock which were issuable in three equal installments, one per each measurement period, only upon the achievement of certain EBITDA targets for each of fiscal 2014, 2013 and 2012. The fair value of the award was based on the grant-date share price of $0.75 per share. For 2012, the Company achieved the target EBITDA and Mr. Charney received 2,500 shares. For 2013, the Company did not achieve the target EBITDA and reversed previously recorded share-based compensation expense of $703 . For 2014, the achievement of the performance condition was no longer considered probable, and previously recognized compensation costs of $469 were reversed during 2013. As of December 31, 2014, there was no unrecorded compensation cost related to this EBITDA award. Non-Employee Directors - On January 2, 2014, April 1, 2014, July 1, 2014, and January 2, 2015, the Company issued a quarterly stock grant to each director for services performed of approximately 8 , 20 , 11 , and 11 shares based on grant date fair values of $1.21 , $0.50 , $0.87 , and $1.05 per share, respectively. In connection with the Standstill and Support Agreement, four non-employee directors resigned from the Board, and seven new directors were appointed to the Board. On September 15, 2014, each of the four resigned non-employee directors received a pro-rated quarterly stock grant of approximately 4 shares based on grant date fair value of $0.88 per share. On October 1, 2014, the Company issued quarterly stock grants ranging from approximately 4 to 16 shares based on the grant date fair value of $0.81 per share. On January 2, 2015, the Company issued quarterly stock grants to each director ranging from approximately 10 to 19 shares based on the grant date fair value of $1.05 per share. 71 Table of Contents Note 15. Commitments and Contingencies Operating Leases The Company conducts retail operations under operating leases, which expire at various dates through 2034. The Company's primary manufacturing facilities and executive offices are currently under a long-term lease which expires on July 31, 2019. For leases that contain predetermined escalations of the minimum rentals, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent. This liability amounted to $16,768 and $21,587 as of December 31, 2014 and 2013, respectively. Total rent expenses, including some real estate taxes and maintenance costs, were approximately $70,018 , $79,794 , and $77,390 for the years ended December 31, 2014 , 2013 , and 2012 , respectively. The Company did not incur any significant contingent rent during the same periods. Rent expense is allocated to cost of sales for production-related activities, selling expenses for retail stores, and general and administrative expenses in the consolidated statements of operations. The following table presents future minimum commitments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or non-cancelable lease terms exceed one year as of December 31, 2014 : Operating Leases Year Ending December 31, 2015 $ 2016 2017 2018 2019 Thereafter 63,007 50,121 43,555 25,624 18,321 46,689 Customs and Duties In 2012, the German authorities audited the import records of the Company's German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments on certain containers of goods imported. The German customs imposed a substantially higher tariff rate than the original rate that the Company had paid on the imports, more than doubling the amount of the tariff that the Company would have to pay. The assessments of additional retaliatory duty originated from a trade dispute. Despite the ongoing appeals of the assessment, the German authorities demanded, and the Company paid, in connection with such assessments, $4,390 in the third quarter of 2014 and the final balance of $85 in the fourth quarter of 2014. The Company recorded the duty portion of $79 in cost of sales and the retaliatory duties, interest and penalties of $5,104 in general and administrative expenses in its consolidated statements of operations. Additionally, during the fourth quarter of 2014, the Company wrote off approximately $3,300 in duty receivables to cost of sales in its consolidated statements of operations. These duty receivables related to changes in transfer costs for products sold to the Company's European subsidiaries. The Company is also subject to, and has recorded charges related to, customs and similar audit settlements and contingencies in other jurisdictions. Mr. Charney Investigation In connection with the suspension of Mr. Charney on June 18, 2014, the Board formed a new special committee (the "Suitability Committee") for the purpose of overseeing the investigation into alleged misconduct by Mr. Charney (the "Internal Investigation") which ultimately concluded with his termination for cause on December 16, 2014. OSHA Settlement In 2011, an industrial accident at the Company's facility in Orange County, California resulted in the fatality of a Company employee. In accordance with law, a mandatory criminal investigation was initiated. In early August 2014, the Company and the Orange County district attorney's office began to negotiate a resolution of potential claims related to the accident, and the Company accrued $1,000 in costs representing its best estimate of the cost to settle this matter. On August 19, 2014, a settlement of all claims related to the criminal investigation, pursuant to which the Company paid $1,000 , was approved by the California Superior Court in Orange County. 72 Table of Contents Real Estate Matter The landlord for the Company's headquarters and manufacturing facility in Los Angeles, California has identified certain alleged breaches under its lease. The Company is currently engaging with the landlord to resolve this dispute. Should the Company fail to resolve this matter on acceptable terms, they could result in material liability. Advertising The Company had approximately $1,300 in advertising commitments at December 31, 2014 , which primarily relate to print advertisements in newspapers and magazines as well as outdoor advertising. The majority of these commitments are expected to be paid during 2015. Note 16. Workers' Compensation and Other Self-Insurance Reserves The Company uses a combination of third-party insurance and self-insurance for a number of risks including workers' compensation, medical benefits provided to employees, and general liability claims. General liability claims primarily relate to litigation that arises from store operations. Estimating liability is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve required. Changes in future inflation rates, litigation trends, legal interpretations, benefit levels, and settlement patterns, among other factors, can impact ultimate claim costs. The Company estimates liability by utilizing loss development factors based on its specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. Although the Company does not expect ultimate claim costs significantly differ from its estimates, self-insurance reserves could be affected if actual developed claims considerably fluctuate from the historical trends and the assumptions applied. The Company's estimated claims are discounted using a rate of 1.54% with a duration that approximates the duration of its self-insurance reserve portfolio. The undiscounted liabilities were $20,409 and $15,809 as of December 31, 2014 and 2013, respectively. The workers' compensation liability is based on an estimate of losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. To guarantee performance under the workers' compensation program, the Company issued standby letters of credit of $300 and $450 with insurance companies being the beneficiaries as of December 31, 2014 and 2013, respectively and cash deposits of $16,124 in favor of insurance company beneficiaries as of both December 31, 2014 and 2013. In early 2015, the Company increased cash deposits to approximately $18,000 . At December 31, 2014 , the Company recorded a total reserve of $19,560 , of which $5,321 is included in accrued expenses and $14,239 is included in other long-term liabilities on the consolidated balance sheets. At December 31, 2013 , the Company recorded a total reserve of $15,356 , of which, $3,871 is included in accrued expenses and $11,485 is included in other long-term liabilities on the consolidated balance sheets. The Company self-insures its health insurance benefit obligations while the claims are administered through a third party administrator. The medical benefit liability is based on estimated losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. The Company's total reserves of $1,439 and $2,512 are included in accrued expenses in the consolidated balance sheets at December 31, 2014 and 2013 , respectively. Note 17. Business Segment and Geographic Area Information The Company reports the following four operating segments based on the management approach: U.S. Wholesale, U.S. Retail, Canada, and International. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments. The U.S. Wholesale segment consists of the Company's wholesale operations of undecorated apparel products sold to distributors and third party screen printers in the U.S. as well as its online consumer sales. The Retail segment consists of the Company's retail operations in the U.S., which comprised 136 retail stores as of December 31, 2014 . The Canada segment includes wholesale, retail, and online consumer operations in Canada. As of December 31, 2014 , the retail operations in the Canada segment comprised 31 retail stores. The International segment includes wholesale, retail, and online consumer operations outside of the U.S. and Canada. As of December 31, 2014 , the retail operations in the International segment comprised 75 retail stores operating in 18 countries outside the U.S. and Canada. All of the Company's retail stores sell its apparel products directly to consumers. The Company evaluates performance of its operating segments primarily based on net sales and operating income or loss from operations. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to, human resources, legal, finance, information technology, accounting, executive compensation and various other corporate level expenses. 73 Table of Contents The following tables present key financial information of the Company's reportable segments before unallocated corporate expenses: For the Year Ended December 31, 2014 U.S. Retail U.S. Wholesale Wholesale net sales $ 167,795 Retail net sales Online consumer net sales Total net sales $ Canada 0 $ International 10,224 $ 8,842 Consolidated $ 186,861 0 191,442 38,087 131,113 360,642 41,174 0 3,233 16,981 61,388 208,969 191,442 51,544 156,936 608,891 Gross profit 60,182 123,738 28,023 97,192 309,135 Income (loss) from segment operations 31,068 3,838 (1,380) 32,732 (794) Depreciation and amortization 8,645 11,614 1,672 3,966 25,897 Capital expenditures 2,424 4,018 415 2,961 9,818 0 696 178 1,864 2,738 Retail store impairment Deferred rent benefit (443) (3,025) (202) (646) (4,316) For the Year Ended December 31, 2013 U.S. Retail U.S. Wholesale Wholesale net sales $ 159,682 Retail net sales Online consumer net sales Total net sales to external customers $ Canada 0 $ International 12,092 $ 8,893 Consolidated $ 180,667 0 205,011 45,163 141,517 391,691 41,569 0 2,879 17,135 61,583 201,251 205,011 60,134 167,545 633,941 Gross profit 49,877 131,912 34,720 104,376 320,885 Income (loss) from segment operations 11,981 (2,731) 3,684 3,916 16,850 Depreciation and amortization Capital expenditures 7,418 12,420 1,853 4,385 26,076 10,115 11,204 1,167 4,568 27,054 0 642 144 754 1,540 (375) (121) (2,093) Retail store impairment Deferred rent expense (benefit) 81 (1,678) For the Year Ended December 31, 2012 U.S. Retail U.S. Wholesale Wholesale net sales Retail net sales $ 149,611 $ Canada 0 $ International 13,006 $ 10,278 Consolidated $ 172,895 0 198,886 48,499 141,738 35,744 0 2,164 17,384 55,292 185,355 198,886 63,669 169,400 617,310 Gross profit 53,195 130,498 37,500 106,190 327,383 Income (loss) from segment operations 27,893 4,197 10,670 42,703 Depreciation and amortization 6,322 10,909 1,543 4,215 22,989 Capital expenditures 9,791 6,626 1,607 3,583 21,607 0 243 130 1,274 1,647 (706) (197) Online consumer net sales Total net sales to external customers Retail store impairment Deferred rent expense (benefit) 523 74 (57) (515) 389,123 (895) Table of Contents Reconciliation of reportable segments combined income from operations to the consolidated loss before income taxes is as follows: Year Ended December 31, 2014 Income from operations of reportable segments $ 2013 32,732 $ 2012 16,850 $ 42,703 Unallocated corporate expenses 60,315 46,145 41,741 Interest expense 39,853 39,286 41,559 1,479 1 120 (1,715) 3,713 4,126 (Gain) loss on extinguishment of debt (171) 32,101 (11,588) Other (income) expense (371) 131 Foreign currency transaction loss Unrealized (gain) loss on change in fair value of warrant $ Consolidated loss before income taxes (66,658) $ 204 (104,527) $ (33,459) Net sales by geographic location of customers are as follows: Year Ended December 31, 2013 2014 United States $ 400,411 $ 2012 406,262 $ 384,241 Europe (excluding United Kingdom) 64,760 70,347 66,861 Canada 51,544 60,134 63,669 United Kingdom 42,601 44,153 47,694 South Korea 12,696 10,380 10,732 Japan 12,836 18,119 20,336 Australia 9,293 10,218 11,458 China 7,613 6,894 5,317 Other foreign countries 7,137 7,434 $ Total consolidated net sales 608,891 $ 633,941 7,002 $ 617,310 Property and equipment, net by geographic location and total assets by reporting segments are as follows: December 31, 2014 United States $ 2013 38,932 $ 53,424 Europe (excluding the United Kingdom) 3,818 4,741 United Kingdom 2,482 4,434 Canada 2,301 3,913 Australia 566 846 Japan 506 750 South Korea 189 344 80 291 China 443 Other foreign countries 560 Total consolidated long-lived assets $ 49,317 $ 69,303 U.S. Wholesale $ 165,936 $ 169,474 U.S. Retail 57,933 77,150 Canada 15,271 17,761 International 55,249 $ Total assets 75 294,389 69,367 $ 333,752 Table of Contents Foreign subsidiaries accounted for the following percentages of total assets and total liabilities: December 31, 2014 Total assets Total liabilities 2013 24.0% 26.1% 6.3% 6.8% Note 18. Litigation The Company is subject to various claims and contingencies in the ordinary course of business that arise from litigation, business transactions, operations, employee-related matters, or taxes. The Company establishes reserves when it believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters could arise for which we do not have insurance coverage or for which insurance provides only partial coverage. These matters could have a material negative effect on the Company's business, financial position, results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. SEC Investigation On February 5, 2015, the Company learned that the Securities and Exchange Commission had issued a formal order of investigation with respect to matters arising from the Suitability Committee's review relating to Mr. Charney. The SEC's investigation is a non-public, fact-finding inquiry to determine whether any violations of law have occurred. The Company intends to cooperate fully with the SEC in its investigation. Shareholder Derivative Actions In 2010, two shareholder derivative lawsuits were filed in the United States District Court for the Central District of California (the "Court") that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the "First Derivative Action"). Plaintiffs in the First Derivative Action alleged a cause of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company filed a motion to dismiss the First 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. In 2010, four shareholder derivative lawsuits were filed in the Superior Court of the State of California for the County of Los Angeles (the "Superior Court") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action"). Three of the matters comprising the State Derivative Action alleged causes of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011, the Superior Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that, among other reasons, the case is duplicative of the First Derivative Action. In July 2014, two shareholder derivative lawsuits were filed in the Court that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. 2014 Shareholder Derivative Litigation, Lead Case No. 14-CV-5699 (the "Second Derivative Action," and together with the First Derivative Action, the "Federal Derivative Actions"). Plaintiffs in the Second Derivative Action alleged similar causes of action for breach of fiduciary duty by failing to (i) maintain adequate internal control and exercise proper oversight over Mr. Charney, whose alleged misconduct and mismanagement has purportedly harmed the Company's operations and financial condition, (ii) ensure Mr. Charney's suspension as CEO did not trigger material defaults under two of the Company's credit agreements, and (iii) prevent Mr. Charney from increasing his ownership percentage of the Company. The Second Derivative Action primarily seeks to recover damages and reform corporate governance and internal procedures. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's 76 Table of Contents status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company has filed a motion to dismiss, and the parties are currently briefing this motion. Both the Federal Derivative Actions and State Derivative Action are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights. Should the above matters (i.e., the Federal Derivative Actions or the State Derivative Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds that fall outside the scope of the Company's Directors and Officers Liability insurance coverage, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows. Employment Matters The Company has previously disclosed arbitrations filed on or about February 17, 2011, related to cases filed in the Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the State of California for the County of Los Angeles (Case Nos. BC457920 and BC460331) against American Apparel, Mr. Charney and certain members of the Board asserting claims of sexual harassment, assault and battery, impersonation through the internet, defamation and other related claims. The Company has settled or obtained a dismissal of all of these claims. In addition, the Company is currently engaged in other employment-related claims and other matters incidental to its business. The Company believes that all such claims are without merit or not material and intends to vigorously dispute the validity of the plaintiffs' claims. While the final resolution of such claims cannot be determined based on information at this time, the Company believes, but cannot provide assurance that, the amount and ultimate liability, if any, with respect to these actions will not materially affect its business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, it could not only incur liability but also experience an increase in similar suits and suffer reputational harm. Federal Securities Action Four putative class action lawsuits (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in fall of 2010 in the United States District Court for the Central District of California ("USDC") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx). The lead plaintiff appointed by the USDC alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the USDC may deem proper. On November 6, 2013, the USDC issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed motion of preliminary approval which was granted on April 16, 2014 without oral argument. On July 28, 2014, the USDC approved the settlement, and final judgment was entered on July 30, 2014. Wage and Hour Actions In April 2014, the five former employees' wage and hour cases including Guillermo Ruiz, Antonio Partida, Emily Truong, Jessica Heupel, and Anthony Heupel were settled on an aggregate and class-wide basis for $850 , and a final approval was granted by the presiding arbitrator. On September 12, 2014, the court granted final approval of the settlement. The Company did not have insurance coverage for this matter. 77 Table of Contents Note 19. Condensed Consolidating Financial Information The Notes which constitute debt obligations of American Apparel Inc. (the "Parent") are fully and unconditionally guaranteed, jointly and severally, by the Company's existing and future 100% owned direct and indirect domestic subsidiaries. The Notes are subject to certain customary automatic release provisions including the satisfaction and discharge, defeasance, or full payment of the principal, premium and, if any, accrued and unpaid interests. In certain circumstances, the Notes are subject to the sale or substantial disposition of the subsidiary guarantor's assets. No guarantor subsidiaries are less than 100% owned, directly or indirectly, by the Company. The following presents the Parent's condensed consolidating balance sheets as of December 31, 2014 and 2013, and its condensed consolidating statements of operations and comprehensive (loss) income and condensed consolidating statements of cash flows for the years ended December 31, 2014, 2013 and 2012, the Company's material guarantor subsidiaries and the non-guarantor subsidiaries, and the elimination entries necessary to present the Company's financial statements on a consolidated basis. These condensed consolidating financial information should be read in conjunction with the Company's consolidated financial statements. 78 Table of Contents Condensed Consolidating Balance Sheets December 31, 2014 (in thousands) Combined Guarantor Subsidiaries Parent Combined NonGuarantor Subsidiaries Elimination Entries Consolidated ASSETS CURRENT ASSETS Cash $ Trade accounts receivable, net $ 0 Intercompany accounts receivable, net 240,989 Inventories, net 0 90 Other current assets Total current assets 241,079 Property and equipment, net 0 Investments in subsidiaries (115,109) 8,861 Other assets, net TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 0 1,370 $ 6,973 $ 0 $ 8,343 19,422 5,876 0 (229,956) (11,033) 0 25,298 0 116,335 31,137 106 147,578 11,290 6,391 0 17,771 (81,539) 39,344 106 198,990 38,932 10,385 0 49,317 15,874 0 99,235 0 27,463 9,758 0 46,082 $ 134,831 $ 730 $ $ 0 $ 34,299 $ 59,487 $ 99,341 $ 294,389 13 $ 0 $ 34,312 CURRENT LIABILITIES Revolving credit facilities and current portion of long-term debt Accounts payable 0 32,508 3,046 0 35,554 Accrued expenses and other current liabilities 13,498 31,855 16,016 0 61,369 Fair value of warrant liability 19,239 0 0 0 19,239 0 9,762 2,038 0 11,800 Other current liabilities Total current liabilities Long-term debt, net Other long-term liabilities TOTAL LIABILITIES 32,737 108,424 21,113 0 162,274 217,133 0 255 0 217,388 477 25,431 4,335 0 30,243 250,347 133,855 25,703 0 409,905 18 100 494 (594) 18 218,779 STOCKHOLDERS' (DEFICIT) EQUITY Common stock Additional paid-in capital 218,779 Accumulated other comprehensive (loss) income (Accumulated deficit) retained earnings 7,967 (14,693) (2,493) (4,136) 6,629 (6,915) (325,241) (137,458) 107,999 (325,241) (2,157) Less: Treasury stock TOTAL STOCKHOLDERS' (DEFICIT) EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 6,726 (6,915) 0 (115,516) $ 134,831 79 29,459 (133,125) $ 730 $ 0 0 (2,157) 33,784 99,341 (115,516) 59,487 $ 99,341 $ 294,389 Table of Contents Condensed Consolidating Balance Sheets December 31, 2013 (in thousands) Combined Guarantor Subsidiaries Parent Combined NonGuarantor Subsidiaries Elimination Entries Consolidated ASSETS CURRENT ASSETS Cash $ Trade accounts receivable, net $ 0 Intercompany accounts receivable, net 247,414 Inventories, net Other current assets Total current assets Other assets, net $ 8,164 5,592 $ 0 $ 0 8,676 20,701 (224,181) (23,233) 0 129,716 39,736 (74) 169,378 97 10,442 6,002 0 16,541 (68,402) 36,261 (74) 215,296 53,424 15,879 0 69,303 (94,161) 18,158 0 76,003 0 9,282 27,934 11,937 0 49,153 0 Investments in subsidiaries 512 15,109 0 247,511 Property and equipment, net TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 0 0 $ 162,632 $ 31,114 $ 64,077 $ 75,929 $ 333,752 $ 0 $ 43,586 $ 456 $ 0 $ 44,042 CURRENT LIABILITIES Revolving credit facilities and current portion of long-term debt Accounts payable Accrued expenses and other current liabilities Fair value of warrant liability Other current liabilities Total current liabilities Long-term debt, net Other long-term liabilities TOTAL LIABILITIES 0 34,738 3,552 0 38,290 5,952 28,344 15,722 0 50,018 20,954 0 0 0 20,954 0 6,830 1,855 0 8,685 26,906 113,498 21,585 0 161,989 213,130 47 291 0 213,468 0 29,711 5,988 0 35,699 240,036 143,256 27,864 0 411,156 STOCKHOLDERS' (DEFICIT) EQUITY Common stock Additional paid-in capital Accumulated other comprehensive (loss) income (Accumulated deficit) retained earnings 100 492 (592) 11 6,726 7,685 (14,411) 185,472 (4,306) (543) (256,424) (118,425) (2,157) Less: Treasury stock TOTAL STOCKHOLDERS' (DEFICIT) EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 11 185,472 0 (77,404) $ 162,632 80 (671) 28,707 (112,142) $ 31,114 $ 1,214 (4,306) 89,718 (256,424) 0 0 (2,157) 36,213 75,929 (77,404) 64,077 $ 75,929 $ 333,752 Table of Contents Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income For the Year Ended December 31, 2014 (in thousands) Combined Guarantor Subsidiaries Parent Net sales $ 0 175,463 134,264 (592) 309,135 124,470 88,087 0 212,557 16,130 63,093 42,126 74 121,423 695 2,043 (16,130) (12,795) 33,874 5,226 18,336 $ (71,426) (19,033) $ (1,950) $ (20,983) 18,281 1,281 0 $ 18,281 (3,465) $ (2,713) 39,075 (18,947) 2,033 752 (27,583) 0 0 401 2,738 (666) (25) 611 (2,609) $ Comprehensive (loss) income (68,817) 0 2,008 (18,632) 477 $ 608,891 0 Income tax provision Net (loss) income $ 0 (68,340) Other comprehensive (loss) income, net of tax Consolidated (47,557) 299,756 0 (Loss) income before income taxes $ (46,965) Retail store impairment Equity in loss (earnings) of subsidiaries 208,480 74,216 Gross profit Interest expense and other expense $ 272,505 Selling and distribution expenses (Loss) income from operations 447,968 Elimination Entries 0 Cost of sales General and administrative expenses $ Combined NonGuarantor Subsidiaries 0 (66,658) 2,159 $ (68,817) $ (71,426) 5,415 $ 23,696 (2,609) Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income For the Year Ended December 31, 2013 (in thousands) Combined Guarantor Subsidiaries Parent Net sales $ Cost of sales Gross profit Selling and distribution expenses General and administrative expenses Retail store impairment 0 Comprehensive (loss) income (56,471) $ 633,941 313,056 0 176,785 142,742 1,358 320,885 0 143,379 98,304 0 241,683 502 67,779 38,676 0 106,957 0 642 898 0 1,540 4,864 1,358 618 0 41,804 (35,015) 10,622 (106,298) 0 $ (106,298) $ (107,879) 81 (95) 0 (45,542) 4,246 43,067 (202) 1,973 0 $ (45,340) $ (45,502) (1,581) Other comprehensive (loss) income, net of tax $ (57,829) Equity in loss (earnings) of subsidiaries (Loss) income before income taxes 227,680 84,938 63,992 Income tax provisions $ Consolidated 285,947 (502) (Loss) income from operations 462,732 Elimination Entries 0 Interest expense and other expense Net (loss) income $ Combined NonGuarantor Subsidiaries $ (162) 2,273 866 75,232 (41,709) $ 43,067 $ 44,636 (1,407) $ (29,295) 0 (104,527) 1,771 $ (106,298) $ (107,879) 1,569 (1,581) Table of Contents Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income For the Year Ended December 31, 2012 (in thousands) Combined Guarantor Subsidiaries Parent Net sales $ Cost of sales Gross profit Selling and distribution expenses General and administrative expenses (Loss) income from operations Interest expense and other expense Equity in loss (earnings) of subsidiaries (Loss) income before income taxes $ $ $ 233,069 $ Consolidated (67,993) $ 617,310 271,809 85,958 (67,840) 289,927 0 180,425 147,111 (153) 327,383 0 126,492 100,955 0 227,447 1,276 59,420 36,518 113 97,327 243 1,404 0 1,647 (1,276) (5,730) 23,975 9,629 8,234 (266) 817 12,021 (1,057) 0 (14,302) 7,417 10,698 3,680 0 (37,272) 133 $ (36,641) 82 (14,435) $ 164 $ (14,271) 3,737 4,235 34,421 (10,964) $ 498 $ 962 0 (37,272) 631 Other comprehensive income, net of tax 452,234 Elimination Entries 0 0 Income tax provision Comprehensive (loss) income $ 0 Retail store impairment Net (loss) income 0 Combined NonGuarantor Subsidiaries 10,698 0 (33,459) 3,813 $ (37,272) $ (36,641) (662) $ 10,036 631 Table of Contents Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2014 (in thousands) Combined Guarantor Subsidiaries Parent Combined NonGuarantor Subsidiaries Elimination Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in) operating activities $ 6,361 $ (26,715) $ 15,142 $ 0 $ (5,212) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures 0 (6,441) (3,377) Proceeds from sale of fixed assets 0 (1) 22 0 21 Restricted cash 0 0 214 0 214 Net cash used in investing activities 0 (6,442) 0 (3,141) (9,818) 0 (9,583) CASH FLOWS FROM FINANCING ACTIVITIES Cash overdraft 0 1,720 0 1,720 Repayments under current revolving credit facilities, net 0 (9,280) (429) 0 (9,709) 0 Repayments of term loans and notes payable 0 (47) (13) 0 (60) Payments of debt issuance costs (2,102) 0 0 0 (2,102) Net proceeds from issuance of common stock 28,435 0 0 0 28,435 574 0 0 0 574 Proceeds from stock option exercise Payment of statutory payroll tax withholding on share-based compensation associated with issuance of common stock (647) Repayments of capital lease obligations 0 0 Advances to/from affiliates (2,595) 0 0 (647) (64) 0 (2,659) (32,621) 44,217 (11,596) 0 0 (6,361) 34,015 (12,102) 0 15,552 Effect of foreign exchange rate on cash 0 0 (1,090) 0 (1,090) Net increase (decrease) in cash 0 858 (1,191) 0 (333) Net cash provided by (used in) financing activities 0 Cash, beginning of period 512 8,164 0 8,676 $ 0 $ 1,370 $ 6,973 $ 0 $ 8,343 Property and equipment acquired and included in accounts payable $ 0 $ 130 $ 65 $ 0 $ 195 Property and equipment acquired under capital lease $ 0 $ 434 $ 0 $ 0 $ 434 Standard General Loan Agreement assigned from Lion $ 9,865 $ 0 $ 0 $ 0 $ 9,865 Lion Loan Agreement assigned to Standard General $ (9,865) $ 0 $ 0 $ 0 $ (9,865) Cash, end of period NON-CASH INVESTING AND FINANCING ACTIVITIES 83 Table of Contents Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2013 (in thousands) Combined Guarantor Subsidiaries Parent Combined NonGuarantor Subsidiaries Elimination Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES Net cash (used in) provided by operating activities $ (13,825) $ (16,811) $ 17,913 $ 0 $ (12,723) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures 0 (21,319) (5,735) 0 Proceeds from sale of fixed assets 0 109 0 173 Restricted cash 0 3,265 (1,531) 0 1,734 Net cash used in investing activities 0 (17,945) (7,202) 0 (25,147) 64 (27,054) CASH FLOWS FROM FINANCING ACTIVITIES Cash overdraft 0 3,993 0 0 3,993 Repayments of expired revolving credit facilities, net 0 (28,513) 0 0 (28,513) Borrowings (repayments) under current revolving credit facilities, net 0 Repayments of term loans and notes payable 43,579 9,500 Repayment of Lion term loan (144,149) Issuance of Senior Secured Notes 199,820 Payments of debt issuance costs Payment of statutory payroll tax withholding on share-based compensation associated with issuance of common stock (10,540) 0 39,794 (13) 0 (20,466) 0 0 0 (144,149) 0 0 0 199,820 0 0 (11,909) (1,369) (2,623) Repayments of capital lease obligations (3,785) (29,953) 0 0 (1,662) 0 0 (2,623) (57) 0 (1,719) (38,183) 45,397 (7,214) 0 0 13,825 31,472 (11,069) 0 34,228 Effect of foreign exchange rate on cash 0 0 (535) 0 Net decrease in cash 0 (3,284) (893) 0 (4,177) Cash, beginning of period 0 3,796 0 12,853 Advances to/from affiliates Net cash provided by (used in) financing activities $ 0 $ Property and equipment acquired and included in accounts payable $ 0 Property and equipment acquired under capital lease $ 0 Cash, end of period 9,057 (535) 512 $ 8,164 $ 0 $ 8,676 $ 818 $ 758 $ 0 $ 1,576 $ 4,213 $ 0 $ 0 $ 4,213 NON-CASH INVESTING AND FINANCING ACTIVITIES 84 Table of Contents Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2012 (in thousands) Combined Guarantor Subsidiaries Parent Combined NonGuarantor Subsidiaries Elimination Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES Net cash (used in) provided by operating activities $ (584) $ 15,181 $ 8,992 $ 0 $ 23,589 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures 0 (16,418) (5,189) Proceeds from sale of fixed assets 0 60 0 Restricted cash 0 (3,265) (455) 0 (3,720) Net cash used in investing activities 0 (19,269) (5,584) 0 (24,853) 414 0 (21,607) 474 CASH FLOWS FROM FINANCING ACTIVITIES Cash overdraft 0 (1,921) 0 0 (1,921) Repayments of expired revolving credit facilities, net 0 (48,324) 0 0 (48,324) Borrowings under current revolving credit facilities, net 0 26,113 2,338 0 28,451 Borrowings (repayments) of term loans and notes payable, net 0 30,000 (13) 0 29,987 (4,995) 0 0 (5,226) 0 0 (393) Payments of debt issuance costs Payment of statutory payroll tax withholding on stock-based compensation associated with issuance of common stock (231) (393) 0 Proceeds from equipment lease financing 0 4,533 0 0 4,533 (Repayments) proceeds of capital lease obligations 0 (2,979) 86 0 (2,893) Advances to/from affiliates 1,208 5,167 (6,375) 0 0 4,214 584 7,594 (3,964) 0 Effect of foreign exchange rate on cash 0 0 (390) 0 Net increase (decrease) in cash 0 3,506 (946) 0 Net cash provided by (used in) financing activities 0 Cash, beginning of period Cash, end of period 290 10,003 (390) 2,560 0 10,293 $ 0 $ 3,796 $ 9,057 $ 0 $ 12,853 $ 0 $ 3,160 $ 618 $ 0 $ 3,778 NON-CASH INVESTING AND FINANCING ACTIVITIES Property and equipment acquired and included in accounts payable Note 20. Unaudited Quarterly Financial Information Summarized quarterly financial information for fiscal 2014 and 2013 are listed below. Quarter Ended December 31 September 30 June 30 March 31 2014 Net sales $ 153,529 $ 155,869 $ 162,397 $ 137,096 Gross profit $ 72,235 $ 82,539 $ 82,387 $ 71,974 Net loss $ (27,962) $ (19,184) $ (16,205) $ (5,466) Loss per share basic and diluted $ (0.16) $ (0.11) $ (0.09) $ (0.05) 2013 Net sales $ Gross profit Net loss Loss per share basic and diluted 169,102 $ 164,543 $ $ 79,507 $ 84,640 $ (20,770) $ (1,513) $ (0.19) $ (0.01) 85 162,236 $ 138,060 $ 83,870 $ 72,868 $ (37,504) $ (46,511) $ (0.34) $ (0.42) Table of Contents The Company experiences seasonality in its operations; sales during the third and fourth fiscal quarters have generally been the highest while sales during the first fiscal quarter have been the lowest. This reflects the combined impact of the seasonality of the wholesale and retail segments. Generally, the Company's retail segment has not experienced the same pronounced sales seasonality as other retailers. Net loss during 2014 was primarily affected by lower sales volumes and significant expenses related to certain professional fees and contingency settlements, particularly during the third and fourth quarter of 2014. In connection with the suspension of Mr. Charney on June 18, 2014, the Board formed the Internal Investigation which ultimately concluded with his termination for cause on December 16, 2014. The suspension and the Internal Investigation have resulted in substantial legal and consulting fees. Additionally, as discussed in Notes 15 and 18, the Company entered into certain settlements with the German customs authorities and other jurisdictions, the Orange County district attorney's office related to an OSHA matter, and various previously disclosed employment-related claims. Finally, the Company experienced unusually high employee severance costs during 2014. The primary causes of the net losses during the first and second quarters of 2014 were driven by lower sales volume and the unrealized losses on the Company's warrants, respectively. Net loss during 2013 was affected by the transition to the Company's new distribution center in La Mirada, California resulted in significant incremental costs (primarily labor). The issues surrounding the transition primarily related to improper design and integration and inadequate training and staffing. These issues caused processing inefficiencies that required the Company to employ additional staffing in order to meet customer demand. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced. The primary causes of the net losses during the first and second quarters of 2013 were driven by the unrealized losses on the Company's warrants and the loss on early extinguishment of debt, respectively. 86 Table of Contents Schedule II American Apparel, Inc. and Subsidiaries Valuation and Qualifying Accounts (in thousands) Charged to Costs and Expenses Balance, Beginning of Year Description Deductions (Recoveries) Balance, End of Year Other Allowance for trade accounts receivable: For the year ended December 31, 2014 For the year ended December 31, 2013 $ 2,229 $ 1,563 $ 0 $ (3,334) $ 458 $ 2,085 $ 1,512 $ 0 $ (1,368) $ 2,229 For the year ended December 31, 2012 $ 2,195 $ 99 $ 0 $ (209) $ 2,085 Balance, Beginning of Year Description Charged to Costs and Expenses Deductions (Recoveries) Balance, End of Year Other Reserve for inventory shrinkage and obsolescence: For the year ended December 31, 2014 $ 2,778 $ 6,948 $ 0 $ For the year ended December 31, 2013 $ 2,653 $ 912 $ 0 For the year ended December 31, 2012 $ 3,932 $ 690 $ 0 Balance, Beginning of Year Description Increase in Allowance Deductions to Allowance (948) $ 8,778 $ (787) $ 2,778 $ (1,969) $ 2,653 Balance, End of Year Other Valuation allowance of deferred tax assets: For the year ended December 31, 2014 $ 120,694 $ 22,368 $ 0 $ 0 $ 143,062 For the year ended December 31, 2013 $ 77,578 $ 43,116 $ 0 $ 0 $ 120,694 For the year ended December 31, 2012 $ 73,773 $ 4,720 $ $ 0 $ 77,578 87 (915) Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992) . Based on this assessment, and the opinion expressed by our external auditor's attestation report included herein, our management believes that our internal controls over financial reporting were effective as of December 31, 2014. Based on the COSO (1992) criteria, management did not note control deficiencies that constituted a material weakness in our prior reported financial statements. A "material weakness" is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is more than a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Changes in Internal Controls over Financial Reporting We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. As we expand globally, we are increasingly dependent on information systems to operate our website, process transactions, respond to customer inquiries, manage inventory and production, purchase, well and ship goods on a timely basis and maintain cost-efficient operations. In connection with the process of upgrading our information technology infrastructure and resulting business process changes, we continue to create and enhance the design and documentation of our internal control processes to ensure effective controls over financial reporting. There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process. Item 9B. Other Information None. 88 Table of Contents PART III Item 10. Directors, Executive Officers, and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services The information called for by Items 10, 11, 12, 13 and 14 will be included in the Company's definitive proxy statement for the 2015 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after December 31, 2014. The relevant portions of such definitive proxy statement are incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules The following documents are filed as a part of this Annual Report on Form 10-K: 1. Financial Statements: See "Index to Consolidated Financial Statements" in Item 8, Part II of this Annual Report on Form 10-K. 2. Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements and/or Notes thereto. 3. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about our or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement, and; • should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; • have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; • may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and • were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information may be found elsewhere in this Annual Report on Form 10-K and in our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. 89 Table of Contents Incorporated by Reference Exhibit No. Filing Date/Period Exhibit/Annex End Date Description Form 2.1 Acquisition Agreement by and among American Apparel, Inc., AAI Acquisition LLC, American Apparel, Inc., a California corporation, American Apparel, LLC, each of American Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc. (together the “CI companies”), Dov Charney, Sam Lim, and the stockholders of each of the CI companies. PRER 14A Annex A 11/28/2007 3.1 Amended and Restated Certificate of Incorporation of American Apparel, Inc. 8-K 3.1 12/18/2007 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of American Apparel, Inc. 8-K 3.1 06/27/2011 3.3 Amended and Restated Bylaws of American Apparel, Inc. as amended effective as of December 21, 2014. 8-K 3.2 12/22/2014 3.4 Certificate of Amendment to Certificate of Formation of American Apparel (USA), LLC. 10-K 3.3 03/17/2008 3.5 Certificate of Designation of Series A Junior Participating Preferred Stock of American Apparel, Inc. filed with the Secretary of State of the State of Delaware on June 30, 2014. 8-K 3.1 06/30/2014 3.6 Certificate of Designation of Series B Junior Participating Preferred Stock of American Apparel, Inc. filed with the Secretary of State of the State of Delaware on December 22, 2014. 8-K 3.1 12/22/2014 3.7 Specimen Common Stock Certificate 8-K 4.2 12/18/2007 4.1 Registration Rights Agreement, dated as of December 12, 2007 Annex H 11/28/2007 4.2 Lock-Up Agreement, dated as of December 12, 2007, between American Apparel, Inc. and Dov Charney 4.3 Letter Agreement Re: Extension of Lock-Up Agreement, dated as of March 13, 2009, among Dov Charney, Lion Capital (Guernsey) II Limited and American Apparel, Inc. 8-K 10.5 4.4 Warrants to Purchase Shares of Common Stock of American Apparel, Inc., dated as of March 13, 2009, issued to Lion Capital (Guernsey) II Limited. 8-K 10.3 4.5 Investment Agreement, dated as of March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited. 8-K 10.2 03/16/2009 4.6 Investment Voting Agreement, dated as of March 13, 2009, between American Apparel, Inc. and Lion Capital (Guernsey) II Limited. 8-K 10.4 03/16/2009 4.7 Voting Agreement, dated as of February 18, 2011, between Dov Charney, an individual, and Lion/Hollywood LLC., in its capacity as a lender under the Lion Credit Agreement. 8-K 10.2 02/22/2011 4.8 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of March 24, 2011, issued to Lion/Hollywood LLC. 8-K 10.2 03/28/2011 4.9 Amendment No. 1, dated as of March 24, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc. 8-K 10.3 03/28/2011 4.10 Form of Voting Agreement, dated as of April 26, 2011, between Dov Charney and the other persons signatory thereto. 8-K 10.3 04/28/2011 4.11 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of April 26, 2011, issued to Lion/Hollywood LLC. 8-K 10.6 04/28/2011 DEFM14A DEFM14A Annex D 11/28/2007 03/16/2009 03/13/2009 4.12 Amendment No. 1, dated as of April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., issued to Lion/Hollywood LLC. 8-K 10.7 04/28/2011 4.13 Amendment No. 2, dated as of April 26, 2011, to the Warrant to Purchase Shares of Common Stock of American Apparel, Inc., issued to Lion/Hollywood LLC. 8-K 10.8 04/28/2011 90 Table of Contents 4.14 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of July 7, 2011, issued to Lion/Hollywood LLC. 8-K 10.1 07/13/2011 4.15 Warrant to Purchase Shares of Common Stock of American Apparel, Inc., dated as of July 12, 2011, issued to Lion/Hollywood LLC. 8-K 10.2 07/13/2011 4.16 Amendment No. 1, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of July 12, 2011. 8-K 10.5 03/19/2012 4.17 Amendment No. 1, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of July 7, 2011. 8-K 10.6 03/19/2012 4.18 Amendment No. 1, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of April 26, 2011. 8-K 10.7 03/19/2012 4.19 Amendment No. 2, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of March 24, 2011. 8-K 10.8 03/19/2012 4.20 Amendment No. 3, March 13, 2012, to the Warrant to Purchase Shares of Common Stock of of American Apparel, Inc., dated as of March 13, 2009. 8-K 10.9 03/19/2012 4.21 Indenture, dated as of April 4, 2013, by and among the Company, the Guarantors and U.S. Bank National Association. 8-K 4.1 04/09/2013 4.22 Form of Note 8-K 4.2 04/09/2013 4.23 Registration Rights Agreement, dated as of April 4, 2013, by and among the Company, the Guarantors and Cowen and Company, LLC and Sea Port Group Securities, LLC, as representatives of the initial purchasers. 8-K 4.3 04/09/2013 4.24 Rights Agreement, dated as of June 27, 2014, between American Apparel, Inc. and Continental Stock Transfer & Trust Company, including the form of Certificate of Designations as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C. 8-K 4.1 06/30/2014 4.25 Amendment No. 1 to Rights Agreement, dated as of July 9, 2014, by and between American Apparel, Inc. and Continental Stock Transfers & Trust Company. 8-K 4.1 07/09/2014 4.26 Rights Agreement, dated as of December 21, 2014, between American Apparel, Inc. and Continental Stock Transfer & Trust Company & Trust Company, including the form of Certificate of Designation as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C. 8-K 4.1 12/22/2014 4.27 Amendment No. 1 to Rights Agreement, dated as of January 16, 2015, by and between American Apparel, Inc. and Continental Stock Transfer & Trust Company. 8-K 4.1 01/16/2015 10.1 + American Apparel, Inc. 2011 Omnibus Stock Incentive Plan, as amended and restated, dated as of June 25, 2013 10.2 Lease by and between Titan Real Estate Investment Group, Inc., and Textile Unlimited Corp., E&J Textile Group, Inc., and Johnester Knitting, Inc. 10.3 DEF 14A Annex A 04/30/2013 8-K 10.15 12/18/2007 Lease, dated as of December 13, 2005, by and between American Apparel, Inc. and American Central Plaza. 8-K 10.17 12/18/2007 10.4 Lease Amendment, effective as of November 15, 2006, by and between American Apparel, Inc. and American Central Plaza. 8-K 10.18 12/18/2007 10.5 Lease Amendment, effective as of March 22, 2007, by and between American Apparel, Inc. and American Central Plaza. 8-K 10.19 12/18/2007 10.6 Lease, dated as of January 1, 2004, by and between American Apparel, Inc. and Alameda Produce 8-K 10.21 12/18/2007 Market, Inc. 10.7 Lease, dated as of May 12, 2004, by and between American Apparel, Inc. and Alameda Produce Market, Inc. 8-K 10.22 12/18/2007 10.8 Lease, dated as of July 30, 2009, by and between American Apparel, Inc. and Alameda Produce Market, Inc. 8-K 10.21 12/18/2007 10.9 Form of Purchase and Investment Agreement by and among American Apparel, Inc. and the purchasers signatory thereto. 8-K 10.1 12/18/2007 91 Table of Contents 10.10 Purchase Agreement, dated as of April 27, 2011, between American Apparel, Inc. and Dov Charney. 8-K/A 10.2 04/28/2011 10.11 Amendment to Purchase Agreement, dated as of October 16, 2012, by and between American Apparel, Inc. and Dov Charney. 8-K 10.1 10/22/2012 10.12 Amendment and Agreement, dated as of April 10, 2009, by and between American Apparel, Inc. and Lion/Hollywood LLC. 8-K 10.1 04/16/2009 10.13 Second Amendment and Agreement, dated as of June 17, 2009, by and between American Apparel, Inc. and Lion/Hollywood LLC. 8-K 10.1 06/19/2009 10.14 Third Amendment and Agreement, dated as of August 18, 2009, by and between American Apparel, Inc. and Lion/Hollywood LLC. 8-K 10.1 08/20/2009 10.15 Letter Agreement, Re: Pledging of Restricted Securities, dated as of October 28, 2009 8-K 10.1 11/03/2009 10.16 Intercreditor Agreement, dated as of April 4, 2013, by and among U.S. Bank National Association and Capital One Leverage Finance Corp. 8-K 10.2 04/09/2013 10.17 Credit Agreement, dated as of April 4, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. 8-K 10.1 04/09/2013 10.18 Amendment No. 1, dated as of May 22, 2013, to Credit Agreement by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. 10-K 10.39 04/01/2013 10.19 Amendment No. 2 to Credit Agreement, dated as of July 5, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. 8-K 10.1 07/09/2013 10.20 Amendment No. 3 to Credit Agreement and Limited Waiver, dated as of November 14, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. 10-K 10.41 04/01/2014 10.21 Amendment No. 4 to Credit Agreement and Limited Consent, dated as of November 29, 2013, by and among the Company, the Borrowers, the Guarantors, Capital One Leverage Finance Corp., and the Lenders party thereto. 10-K 10.42 04/01/2014 10.22 Amendment No. 5 to Credit Agreement and Limited Waiver, dated as of March 25, 2014, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp (i/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto. 8-K 10.1 03/25/2014 10.23 Credit Agreement, dated as of May 22, 2013, by and among American Apparel, Inc. and Lion/Hollywood LLC. 10-K 10.44 04/01/2014 10.24 Amendment No. 1 to Credit Agreement, dated as of November 29, 2013, by and among American Apparel, Inc. and Lion/Hollywood LLC. 10-K 10.45 04/01/2014 10.25 Amendment to Credit Agreement, dated as of September 8, 2014, by and among American Apparel, Inc. and Standard General Master Fund L.P. 10-Q 10.6 11/10/2014 10.26† Separation Agreement and General Release of All Claims, dated as of May 16, 2014, by and between American Apparel, Inc. and Glenn A. Weinman. 8-K 10.1 05/13/2014 10.27 Nomination Standstill and Support Agreement, by and among American Apparel, Inc., Standard General Master Fund L.P., P Standard General Ltd and Dov Charney. 8-K 10.1 07/09/2014 10.28† Employment Agreement, effective as of July 14, 2014, between American Apparel, Inc. and John J. Luttrell. 8-K 10.1 07/18/2014 10.29† American Apparel, Inc. Severance Plan 8-K 10.1 07/25/2014 10.30† Employment Agreement, dated as of September 29, 2014, by and between American Apparel, Inc. and Hassan Natha. 10-Q 10.4 11/10/2014 10.31† Letter Agreement, dated as of September 28, 2014, by and between American Apparel, Inc. and Alvarez & Marsal North America, LLC. 10-Q 10.3 11/10/2014 10.32* Employment Agreement, effective as of November 20, 2014, by and between American Apparel, Inc. and Chelsea A. Grayson. 92 Table of Contents 10.33* Employment Agreement, effective as of January 9, 2015, by and between American Apparel, Inc. and Paula Schneider. 10.34* Amendment No. 6 to Credit Agreement and Waiver, dated as of March 25, 2015, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp (i/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto. 10.35* Credit Agreement, dated as of March 25, 2015, by and among American Apparel, Inc. and Standard General L.P. 14.1 American Apparel, Inc. Code of Ethics 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 8-K ________________ * † Filed herewith. Management contract or compensatory plan or arrangement. 93 14.1 12/18/2007 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN APPAREL, INC. March 25, 2015 /s/ PAULA SCHNEIDER By: Paula Schneider Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ PAULA SCHNEIDER Chief Executive Officer March 25, 2015 Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 25, 2015 Hassan N. Natha /s/ COLLEEN B. BROWN Chairperson of the Board of Directors March 25, 2015 Director March 25, 2015 Director March 25, 2015 Paula Schneider /s/ HASSAN N. NATHA Colleen B. Brown /s/ DAVID DANZIGER David Danziger /s/ DAVID GLAZEK David Glazek /s/ LYNDON LEA Director March 25, 2015 Lyndon Lea /s/ LAURA A. LEE Director March 25, 2015 Director March 25, 2015 Director March 25, 2015 Director March 25, 2015 Laura A. Lee /s/ JOSEPH MAGNACCA Joseph Magnacca /s/ ALLAN MAYER Allan Mayer /s/ THOMAS J. SULLIVAN Thomas J. Sullivan 94 Exhibit 10.32 EXECUTED VERSION EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the “ Agreement ”), effective as of November 20, 2014 (the “Effective Date”), by and between American Apparel, Inc., a Delaware corporation (the “ Company ”), and Chelsea A. Grayson (herein referred to as the “ Executive ”). WHEREAS, the Company and the Executive deem it to be in their respective best interests to enter into an agreement providing for the Company’s employment of the Executive pursuant to the terms herein stated; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Employment; Position and Duties; Exclusive Services. (a) Employment . The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the Term provided in Section 2 below and upon the other terms and conditions hereinafter provided. (b) Position and Duties . During the Term, the Executive (i) agrees to serve as the General Counsel, Executive Vice President and Secretary of the Company and to perform such reasonably related duties as may be assigned to her from time to time by the Board of Directors of the Company (the “ Board ”), (ii) shall report only to the Board, the Chairman of the Board, the Chief Executive Officer, and the President of the Company, (iii) shall be given such authority as is appropriate given the Executive’s position in a company the nature and size of the Company to carry out the duties described above, and (iv) agrees to serve, if elected, at no additional compensation in the position of officer or director of any subsidiary or affiliate of the Company. (c) Exclusive Services . During the Term, and except for illness or incapacity and service on non-profit boards, approved by the Board in its discretion, that do not materially adversely affect or interfere with the performance of the Executive’s duties and obligations to the Company or any of its subsidiaries or affiliates, the Executive shall devote all of her business time, attention, skill and efforts exclusively to the business and affairs of the Company and its subsidiaries and affiliates, shall not be engaged in any other business activity, and shall perform and discharge the duties which may be assigned to her from time to time by the Board, the Chairman of the Board or the Chief Executive Officer consistent with her position. (d) Place of Employment . The Executive shall perform her duties out of the Company’s Los Angeles, California office (as same may be relocated in the same metropolitan area from time to time) or at such other location as shall be agreed to in writing by the Company and the Executive. 2. Term of Agreement . The term of employment under this Agreement shall initially be the twelve months commencing on December 15, 2014 (the “ Effective Date ”) and ending on December 14, 2015, and shall be automatically extended without further action by either party for successive one-year periods as of each December 15 (beginning December 15, 2015) (each, an “ Extension Date ”), unless written notice of either party’s intention to terminate this Agreement has been given to the other party at least 90 calendar days prior to the expiration of the Term (including any one-year extension thereof). As used in this Agreement, the “ Term ” shall mean the initial one year term plus any extensions thereof as provided in this Section 2. 3. Salary and Bonuses . The Executive’s cash compensation for all services to be rendered by her in any capacity hereunder shall consist of base salary and other compensation as provided in this Section. (a) Salary . The Executive shall be paid a base salary at the rate of $400,000.00 per annum. The Salary shall be payable in accordance with the customary payroll practices for executives of the Company. The amount of the Executive’s Salary will be reviewed not less often than annually by the Compensation Committee of the Board (the “ Compensation Committee ”) and may be increased on the basis of such review. The Executive’s annual base salary, as in effect from time to time, is hereinafter referred to as the “Salary.” (b) Performance Bonuses . The Executive will be eligible to receive an annual incentive compensation award in respect of each fiscal year of the Company during the Term, commencing with fiscal year 2015, with a target payment equal to 50% of Salary during each such fiscal year, subject to the terms and conditions of the Company’s annual bonus plan, and further subject to written sales, EBITDA, net debt and inventory goals, criteria or targets, including, without limitation, the timely delivery of reviewed and audited, as applicable, financial statements and timely required SEC filings, all as determined by the Board or the Compensation Committee in its or their sole discretion in respect of each such fiscal year (each such bonus, an “ Annual Bonus ”). Any Annual Bonus earned shall be payable in a lump sum in cash. The Annual Bonus earned in respect of each fiscal year of the Company during the Term, if any, shall be paid to the Executive in the fiscal year immediately following the fiscal year for which the bonus is earned, but in all events no later than the earlier of (A) ten days after the filing of the Company’s Form 10-K with the Securities Exchange Commission, and (B) 90 days after the end of the applicable fiscal year for which the bonus is earned. 4. Equity Awards . The Compensation Committee of the Board is in the process of developing a long term incentive plan (the “ LTIP ”) for senior management. If an LTIP becomes effective, the Executive shall be entitled to participate in the LTIP at a level commensurate with Executive’s title and responsibilities. Any equity awards pursuant to the LTIP will be at the sole discretion of the Board. Immediately upon (a) a change of control of the Company, as defined in the LTIP, or (b) a termination of Executive’s employment (i) upon the Executive’s death or Disability (as defined below), (ii) by the Company without Cause (as defined below), or (iii) by the Executive with Good Reason (as defined below), all outstanding stock-based awards (including without limitation, restricted stock, phantom stock, and performance stock), stock options, and similar equity-based awards, and all restricted cash awards, in each case made to the Executive under the LTIP, shall be payable and/or vest as provided in the LTIP and the award to Executive, as applicable. 5. Pension and Welfare Benefits . During the Term, the Executive will be entitled to participate in all pension and welfare plans, programs and benefits that are applicable to executives of the Company. 6. Other Benefits . (a) Travel and Business-related Expenses . During the Term, the Executive shall be promptly reimbursed in accordance with the written policies of the Company for traveling and other expenses reasonably incurred in the performance of the business of the Company. (b) Vacation; Leaves of Absence . During the Term, the Executive shall be allowed time away with pay on the same basis as the Company generally provides to other executives of the Company, provided, that the Executive shall be provided with no less than 20 paid vacation days and paid federal holidays. 7. Termination of Employment . Upon termination of the Executive’s employment for any reason, the Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board (and any committees thereof) and the board of directors of any of the Company’s affiliates and direct or indirect subsidiaries (and any committees thereof), if applicable, and agrees to resign as an officer of the Company and each of the Company’s affiliates and direct or indirect subsidiaries. (a) Termination for Cause; Resignation Without Good Reason . (i) If the Executive’s employment is terminated by the Company for Cause (as defined below in this Section) or if the Executive resigns from her employment without Good Reason other than for death or Disability (as defined below in Section 7(d)), prior to the expiration of the Term, the Executive shall be entitled to receive: (A) the Salary provided for in Section 3(a) as accrued through the date of such resignation or termination; and (B) any unreimbursed expenses, each within 30 days following termination. The Executive shall not accrue or otherwise be eligible to receive Salary payments or to participate in any plans, programs or benefits described in Section 5 hereof with respect to periods after the date of such termination or resignation and shall not be eligible to receive any annual performance bonus or long term performance bonus in respect of the year of such termination or resignation or any calendar year following the year in which such termination or resignation occurs. Any bonus earned in respect of a year prior to the year in which such termination or resignation occurs shall be payable at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan. Subject to Section 18, the Executive shall have no right under this Agreement or otherwise to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of employment (except to the extent provided for under the terms of any such plan, arrangement or benefit). (ii) Termination for “ Cause ” shall mean termination by action of the Board because of: (A) the Executive’s willful and continued failure (other than by reason of the incapacity of the Executive due to physical or mental illness) substantially to perform her duties hereunder; (B) the Executive’s failure (other than by reason of the incapacity of the Executive due to physical or mental illness) to perform such reasonable duties as are assigned to her from time to time by the Board, the Chairman of the Board, the Chief Executive Officer, or the President of the Company; (C) the conviction of the Executive or the Executive entering a plea of guilty or nolo contendere to a crime that constitutes a felony or the perpetration by the Executive of a serious dishonest act against the Company or any of its affiliates or subsidiaries; (D) any willful misconduct by the Executive in connection with the performance of her duties, including, without limitation, conduct that is materially injurious to the financial condition or business reputation of the Company or any of its affiliates or subsidiaries, misappropriation of funds or property of the Company, securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company, misrepresentation to the Company, or any violation of law or regulations on Company premises or to which the Company is subject; (E) commission by Executive of an act involving moral turpitude, dishonesty, theft, unethical business conduct, or conduct that materially impairs or injures the reputation of, or harms, the Company; (F) aiding a competitor to the Company in a manner that adversely affects the Company; (G) failure by Executive to devote her full time and best efforts to the Company’s business and affairs; (H) misappropriation of a Company opportunity for the Executive’s personal benefit; (I) a material breach of the Executive’s obligations under this Agreement or under any Company written policy applicable to the Executive; or (J) chronic alcoholism or drug abuse which materially affects the Executive’s performance hereunder, provided, however, that no event or circumstance shall be considered to constitute Cause within the meaning of this clause (ii) unless the Executive has been given written notice of the events or circumstances constituting Cause within 30 calendar days of the Company becoming aware of the initial occurrence of such event or circumstance and, for those events or circumstances capable of cure (but only for those capable of a cure), Executive has failed to effect a cure thereof within 30 calendar days following the receipt of such notice. (iii) Resignation for “ Good Reason ” shall mean the resignation of the Executive because of (A) a material reduction in the Executive’s responsibilities, duties, authority, status or titles as described in Section 1 above or any reduction in the Executive’s Annual Salary or Annual Bonus opportunity, or a material reduction in the benefits provided to the Executive; (B) failure by the Company to pay or provide the Executive when due any compensation, benefits or perquisites to which the Executive is entitled pursuant to this Agreement or any other plan, contract or arrangement in which the Executive participates or is entitled to participate; (C) a material change in the Executive’s reporting structure; (D) failure of any successor (whether direct or indirect, by stock or asset purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume this Agreement (either by operation of law or in writing), (E) a relocation of the principal location at which the Executive is required to provide services to any office or location more than fifty (50) miles from the one described in Section 1(d) hereof; or (F) a material breach of the Company’s obligations under this Agreement; provided, however, that no event or circumstance shall be considered to constitute Good Reason within the meaning of this clause (iii) unless the Company has been given written notice of the events or circumstances constituting Good Reason by the Executive within 30 calendar days of the initial occurrence of such event or circumstance and, for those events or circumstances capable of cure (but only for those capable of a cure), the Company has failed to effect a cure thereof within 30 calendar days following the receipt of such notice. (iv) The date of termination of employment by the Company pursuant to this Section 7(a) shall be the date specified in a written notice of termination from the Company to the Executive, which, in the case of a proposed termination to which the 30-day cure period provided for in subsection (ii) above applies shall be no less than 31 calendar days after the delivery of such notice to the Executive. The date of a resignation by the Executive pursuant to this Section 7(a) shall be the date specified in the written notice of resignation from the Executive to the Company or, if no date is specified therein, ten (10) business days after receipt by the Company of the written notice of resignation from the Executive. (b) Termination Without Cause, Resignation for Good Reason . (i) If the Executive’s employment is terminated by the Company without Cause or if the Executive should resign for Good Reason, prior to the expiration of the Term, she shall be entitled to receive: (A) the Salary provided for in Section 3(a) as accrued through the date of such resignation or termination, payable within 30 days following termination and (subject to the Executive’s execution and delivery of a general release of all claims against the Affiliated Companies and the expiration of any release revocation period, which release shall be consistent with the terms of this Agreement and in form reasonably acceptable to the Company (the “ Release ”), within sixty (60) calendar days following termination of employment), continued payment of the Executive’s then-current Salary for a period of six (6) months (the “ Continuation Period ”), payable in accordance with the Company’s usual payment practices; provided that the first payment shall be made on the sixtieth (60th) calendar day following termination of employment and shall include payment of any amounts that would otherwise be due prior thereto; (B) at the time of, on the terms of, and otherwise consistent with payments to similarly-situated executives, (x) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which such termination or resignation occurs and (y) an Annual Bonus for the calendar year in which the Executive’s termination of employment or resignation occurs equal to a pro rata portion of the Executive’s target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executive’s termination of employment or resignation, provided , however, that if the Executive’s employment is terminated during the first three months of a fiscal year, no such bonus shall be payable with respect to that fiscal year; and (C) any unreimbursed expenses. Except to the extent required pursuant to Section 22 hereof, during the Continuation Period, Salary payments to the Executive shall be payable in accordance with the customary payroll practices of the Company. Subject to the Executive’s execution and delivery of the Release and the expiration of any release revocation period within sixty (60) calendar days following termination of employment, the Executive (and those eligible dependents who were participants in the applicable plans as of the termination date) shall also be entitled to continued participation in the medical, dental and insurance plans and arrangements described in Section 5, on the same terms and conditions as are in effect immediately prior to such termination or resignation, until the earlier to occur of (i) the last day of the Continuation Period and (ii) such time as the Executive is entitled to comparable benefits provided by a subsequent employer. Anything herein to the contrary notwithstanding, the Company shall have no obligation to continue to maintain during the Continuation Period any plan or program solely as a result of the provisions of this Agreement. If, during the Continuation Period, the Executive is precluded from participating in a plan or program by its terms or applicable law or if the Company for any reason ceases to maintain such plan or program, the Company shall provide the Executive with compensation or benefits the aggregate value of which, in the reasonable judgment of the Company, is no less than the aggregate value of the compensation or benefits that the Executive would have received under such plan or program had she been eligible to participate therein or had such plan or program continued to be maintained by the Company. (ii) Except as may be provided under the terms of any applicable grants to the Executive under the LTIP, Section 18, any plan or arrangement in which the Executive participates, or as may be otherwise required by applicable law (including, without limitation, the provisions of Section 4980B(f) of the Internal Revenue Code of 1986, as amended (the “ Code ”)), the Executive shall have no right under this Agreement or any other agreement to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of employment. In the event of a termination or resignation pursuant to this Section 7(b), the Executive shall have no duty of mitigation with respect to amounts payable to her pursuant to this Section 7(b) or other benefits to which she is entitled pursuant hereto, except as provided in the immediately preceding paragraph. Notwithstanding anything to the contrary in this Agreement, the right of the Executive to receive payments provided for in this Section 7(b) shall be subject to Section 8 of this Agreement. (iii) The date of termination of employment by the Company pursuant to this Section 7(b) shall be the date specified in the written notice of termination from the Company to the Executive or, if no date is specified therein, ten business days after receipt by the Executive of the written notice of termination from the Company. The date of a resignation by the Executive pursuant to this Section 7(b) shall be the date specified in the written notice of resignation from the Executive to the Company which, in the case of a proposed resignation to which the 30-day cure period provided for in subsection 7(a)(iii) above applies shall be no less than 31 days after the delivery of such notice to the Company; and in the case of a proposed resignation to which the 30-day cure period does not apply and in which no date is specified therein, the date of resignation shall be ten business days after receipt by the Company of the written notice of resignation from the Executive. (c) Death . If the Executive’s employment hereunder terminates by reason of death prior to expiration of the Term, the Executive’s beneficiary (or if no such beneficiary is designated, her estate) shall be entitled to receive: (i) the Salary provided for in Section 3(a) as accrued through the date of the Executive’s death; (ii) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which the Executive’s death occurs; (iii) an Annual Bonus for the calendar year in which the Executive’s death occurs equal to a pro rata portion of the Executive’s target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executive’s death; and (iv) any unreimbursed expenses. Annual Bonus payments provided for in this Section 7(c) shall be made at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan. As used in this Section, the term “ beneficiary ” includes both the singular and the plural of such term, as may be appropriate. (d) Disability . If, the Executive is terminated from employment by the Company as a result of the Executive’s Disability (as defined below in this Section), the Executive, her conservator or guardian, as the case may be, shall be entitled to receive: (i) the Salary provided for in Section 3(a) as accrued through the date of the Executive’s termination of employment; (ii) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which the Executive’s termination of employment occurs; (iii) an Annual Bonus for the calendar year in which the Executive’s termination of employment occurs equal to a pro rata portion of the Executive’s target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executive’s termination of employment; and (iv) any unreimbursed expenses. Annual Bonus payments provided for in this Section 7(d) shall be made at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan. For purposes of this Agreement, “ Disability ” shall mean that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve months. Any dispute as to whether or not the Executive is disabled within the meaning of the preceding sentence shall be resolved by a physician reasonably satisfactory to the Executive and the Company, and the determination of such physician shall be final and binding upon both the Executive and the Company. (e) Non-Renewal of the Term . In the event the Company elects not to extend the Term pursuant to Section 2, unless the Executive’s employment is earlier terminated pursuant to paragraphs (a), (b), (c) or (d) of this Section 7, the expiration of the Term and Executive’s termination of employment hereunder shall be deemed to occur on the close of business on the day immediately preceding the next scheduled Extension Date and the Executive shall be entitled to receive the benefits and payments set forth under Section 7(b)(i)(A)-(D) above. Following such termination of Executive’s employment under this Section 7(e), except as set forth in this Section 7(e) and Section 18, Executive shall have no further rights to any compensation or any other benefits under this Agreement. 8. Tax Withholding . Payments to the Executive of all compensation contemplated under this Agreement shall be subject to all applicable legal requirements with respect to the withholding of taxes. 9. Confidentiality and Proprietary Rights . (a) Confidentiality . The Executive acknowledges that as a result of her employment with the Company, the Executive will obtain secret and confidential information concerning the business of the Company, and its subsidiaries and affiliates (all of such entities referred to collectively in this Section as the “ Affiliated Companies ”). Other than in the performance of her duties hereunder or if confidential information is required to be disclosed by law, court order or other legal process (provided that the Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment) or to the extent necessary to enable the Executive to enforce (or defend) her rights under this Agreement or any other agreement with the Company or any affiliate, the Executive agrees not to disclose, either during the Term of her employment with the Company or at any time thereafter, to any person, firm or corporation any confidential information concerning the Company which is not in the public domain or known within the relevant trade or industry (other than as a result of an unauthorized disclosure by the Executive) including trade secrets, budgets, strategies, operating plans, marketing plans, supplier lists, non-public company agreements, employee lists, or the customer lists or similar confidential information of the Company. (b) Proprietary Rights . All records, files, memoranda, reports, price lists, customer lists, drawings, plans, sketches, documents and the like (together with all copies thereof) relating to the business of the Affiliated Companies, which the Executive shall use or prepare or come in contact with in the course of, or as a result of her employment, or as a result of work performed by the Executive for the Company, shall, as between the parties, remain the sole property of the Company. Upon termination of her employment with the Company, the Executive agrees to promptly return all such materials and shall not thereafter cause removal thereof from the premises of the Company. Further, the Executive agrees to disclose and assign, and does hereby assign, to the Company as its exclusive property, all ideas, writings, inventions, discoveries, improvements and technical or business innovations made or conceived by the Executive, whether or not patentable or copyrightable, either solely or jointly with others during the course of her employment with the Company, relating directly to the business, work or investigations of the Company or its subsidiaries (“ Company Inventions ”). Notwithstanding the foregoing, the Executive understands that the provisions of this Agreement requiring assignment of Company Inventions to the Company do not apply to any invention that qualifies under the provisions of California Labor Code Section 2870 (as set forth in Exhibit A hereto). The Executive understands that Company will keep in confidence and will not disclose to third parties without the Executive’s consent any confidential information disclosed in writing to Company relating to inventions that qualify under the provisions of Section 2870 of the California Labor Code. (c) Except as may be required by applicable law, without the Executive’s prior written consent, the Executive shall not be subject to any restrictions on her activities following termination of employment with the Company other than as expressly set forth in this Agreement or the LTIP. 10. Cooperation . The Executive agrees that following the date of termination of employment, she shall reasonably cooperate with the Company, if so requested, with respect to the Company’s business affairs, as well as any internal or external investigation, claims or litigation (whether or not currently pending) involving the Company, including providing information and assistance and making herself reasonably available for both pre-trial discovery and trial proceedings. The Company shall promptly reimburse Executive for any out-ofpocket expenses incurred by Executive in connection with her cooperation with the Company pursuant to this Section 10, including, without limitation, any reasonable attorneys’ fees and travel and lodging costs incurred by the Executive. 11. Nonassignability; Binding Agreement . Neither this Agreement nor any right, duty, obligation or interest thereunder shall be assignable or delegable by the Executive without the Company’s prior written consent; provided, however, that nothing in this Section shall preclude the Executive from designating any of her beneficiaries to receive any benefits payable hereunder upon her death or disability, or her executors, administrators, or other legal representatives, from assigning any rights hereunder to the person or persons entitled thereto. If the Executive should die while any payment, benefit or entitlement is due to her pursuant to this Agreement, such payment, benefit or entitlement shall be paid or provided to her designated beneficiary (or, if there is no designated beneficiary, her estate). This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or assigns of the Company and the Executive’s heirs and the personal representatives of the Executive’s estate. In addition, the Company shall assign to and require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 12. Amendment; Waiver . This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by the parties hereto. No delay or failure by any party hereto in exercising, protecting or enforcing any of its rights, titles, interests or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. 13. Notices . Any notice hereunder by either party to the other shall be given in writing by personal delivery, email or certified mail, return receipt requested, to the applicable address set forth below: (a) To the Company: (b) To the Executive: American Apparel, Inc. 747 Warehouse Street Los Angeles, California 90021 Attention: Scott Brubaker and/or Chief Executive Officer Email: scott@AmericanApparel.net Chelsea A. Grayson 747 Warehouse Street Los Angeles, California 90021 Email: cgrayson@americanapparel.net (or such other address as may from time to time be designated by written notice by any party hereto for such purpose). Notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by email, on the business day following receipt of confirmation or, if by certified mail, on the date shown on the applicable return receipt. 14 . California Law . This Agreement is to be governed by and interpreted in accordance with the laws of the State of California, without giving effect to the choice-of-law provisions thereof. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 15. Arbitration . The Company and the Executive agree that any and all disputes based upon, relating to or arising out of this Agreement, the Executive’s employment relationship with the Company or any of its subsidiaries or affiliates and/or the termination of that relationship, and/or any other dispute by and between the Executive and the Company or any of its subsidiaries or affiliates, including any and all claims that the Executive may at any time attempt to assert against the Company or any of its subsidiaries or affiliates, shall be submitted to binding arbitration in Los Angeles County, California, pursuant to the American Arbitration Association’s (“ AAA ”) Employment Arbitration Rules and Mediation Procedures, including the Optional Rules for Emergency Measures of Protection (the “ Rules ”), provided that the arbitrator shall allow for discovery sufficient to adequately arbitrate any asserted claims, including access to essential documents and witnesses, and otherwise in accordance with California Code of Civil Procedure § 1283.05, and provided further that the Rules shall be modified by the arbitrator to the extent necessary to be consistent with applicable law. The arbitrator shall be a retired judge of the California Superior Court, California Court of Appeal, or United States District Court, to be mutually agreed upon by the parties. If, however, the parties are unable to agree upon an arbitrator, then an arbitrator, who is a retired judge of the California Superior Court, California Court of Appeal, or United States District Court, shall be selected by AAA in accordance with the Rules. The Company and the Executive further agree that each party shall pay its own costs and attorneys’ fees, if any; provided, however, that if either party prevails on a claim which affords the prevailing party an award of attorneys’ fees, then the arbitrator may award reasonable attorneys’ fees to the prevailing party, consistent with applicable law. In any event, the Company shall pay any expenses that the Executive would not otherwise have incurred if the dispute had been adjudicated in a court of law, rather than through arbitration, including the arbitrator’s fee, any administrative fee and any filing fee in excess of the maximum court filing fee in the jurisdiction in which the arbitration is commenced. The Company and the Executive further agree that any hearing must be transcribed by a certified shorthand reporter, and that the arbitrator shall issue a written decision and award supported by essential findings of fact and conclusions of law in order to facilitate judicial review. Said award and decision shall be issued within thirty (30) calendar days of the completion of the arbitration. Judgment in a court of competent jurisdiction may be had on said decision and award of the arbitrator. For these purposes, the parties agree to submit to the jurisdiction of the state and federal courts located in Los Angeles County, California. 16. Injunctive Relief . The Executive acknowledges and agrees that the services being rendered by the Executive to the Company under this Agreement are of a special, unique and extraordinary character that gives them peculiar value to the Affiliated Companies, the loss of which (in violation of this Agreement) would cause irreparable harm to the Affiliated Companies and affiliates, for which the Affiliated Companies would have no adequate remedy at law. The Executive further acknowledges and agrees that the trade secrets and confidential and related information referred to in this Agreement each are of substantial value to the Affiliated Companies and that a breach of any of the terms and conditions of this Agreement relating to those subjects would cause irreparable harm to the Affiliated Companies, for which the Affiliated Companies would have no adequate remedy at law. Therefore, in addition to any other remedies (in law or in equity) that may be available to the Company and/or any of its subsidiaries and affiliates under this Agreement or otherwise, the Affiliated Companies shall be entitled to obtain (pursuant to the Rules) temporary restraining orders, preliminary and permanent injunctions and/or other equitable relief (pursuant to the Rules) to specifically enforce the Executive’s duties and obligations under this Agreement, or to enjoin any breach of this Agreement, without the need to post a bond or other security and without the need to demonstrate special damages. 17. Counterparts . This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 18. Indemnification . With respect to any acts or omissions that may have occurred prior to termination of the Executive’s employment, the Company will indemnify the Executive (and her legal representatives or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of a proceeding) by the laws of the State of California, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and By-Laws of the Company, as in effect at such time, or by the terms of any indemnification agreement between the Company and the Executive, whichever affords greatest protection to the Executive, and the Executive shall be entitled to the protection of any insurance policies the Company maintained by the Company generally for the benefit of its directors and officers (the “ D&O Policies ) (and the Executive shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by her or her legal representatives at the time such costs, charges and expenses are incurred or sustained (including any time following Executive’s termination of employment), in connection with any action, suit or proceeding to which she (or her legal representatives or other successors) may be made a party by reason of her being or having been a director, officer or employee of the Company or any subsidiary thereof, or her serving or having served any other enterprises as a director, officer or employee at the request of the Company. During the Term and for a customary tail period, the Company shall maintain in full force and effect one or more D&O Policies covering the Executive with coverage amounts customary for a business of the nature and size as the Company. 19. Cumulative Remedies . Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy. 20. Headings; Construction . The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement. In construing this Agreement, no party hereto shall have any term or provision construed against such party solely by reason of such party having drafted or written such term or provision. 21. Survival . Any provision of this Agreement which imposes an obligation after termination or expiration of this Agreement (including but not limited to the obligations set forth in Section 9 hereof) shall, unless otherwise specified, survive the termination or expiration of this Agreement and be binding on the Executive and the Company. 22. General 409A Compliance . To the maximum extent applicable, it is intended that the Agreement comply with the provisions of Section 409A of the Code, as amended. This Agreement will be administered and interpreted in a manner consistent with this intent, and any provision that would cause this Agreement to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply therewith (which amendment may be retroactive to the extent permitted by Section 409A of the Code). Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, the Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement which are payable upon the Executive's termination of employment until the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code. To the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following the Executive's termination of employment shall instead be paid in a lump sum on the first business day after the date that is six months following the Executive's termination of employment (or upon the Executive's death, if earlier). In addition, for purposes of the Agreement, each amount to be paid or benefit to be provided to the Executive pursuant to this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code. With respect to expenses eligible for reimbursement under the terms of the Agreement, (i) the amount of such expenses eligible for reimbursement in any taxable year shall not affect the expenses eligible for reimbursement in another taxable year and (ii) any reimbursements of such expenses shall be made no later than the end of the calendar year following the calendar year in which the related expenses were incurred, except, in each case, to the extent that the right to reimbursement does not provide for a “deferral of compensation” within the meaning of Section 409A of the Code. 23. Section 280G. (a) Notwithstanding any other provision of this Agreement, in the event that the Executive becomes entitled to receive or receives any payments, options, awards or benefits (including, without limitation, the monetary value of any non-cash benefits and the accelerated vesting of equity-based awards) under this Agreement or under any other plan, agreement or arrangement with the Company, any person whose actions result in a change of control of the Company or any person affiliated with the Company or such person (collectively, the “ Payments ”), that may separately or in the aggregate constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “ Code ”), or any similar or successor provision (“ Section 280G ”) and it is determined that, but for this Section 23(a), any of the Payments will be subject to any excise tax pursuant to Section 4999 of the Code or any similar or successor provision, the Company shall pay to the Executive an amount equal to the Payments, reduced by the minimum amount necessary to prevent any portion of the Payments from being an “excess parachute payment” (within the meaning of Section 280G). (b) All computations and determinations called for by this Section 23 shall be made and reported in writing to the Company and the Executive by an independent accounting firm or independent tax counsel appointed by the Company (the “ Tax Advisor ”), and all such computations and determinations shall be conclusive and binding on the Company and the Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services. (c) In the event that Section 23(a) applies and a reduction is required to be applied to the Payments thereunder, the Payments shall be reduced by the Company in its reasonable discretion in the following order: (i) reduction of any Payments that are exempt from Code Section 409A and (ii) reduction of any Payments that are subject to Code Section 409A on a pro-rata basis or such other manner that complies with Code Section 409A, as determined by the Company. 24. Preemption . In the event there is a conflict between any provision of this Agreement and any other agreement, plan, policy or program of the Company, the provisions of this Agreement shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above, effective as of the Effective Date. American Apparel, Inc. By: /s/ Scott Brubaker Scott Brubaker, Interim Chief Executive Officer /s/ Chelsea A. Grayson Chelsea A. Grayson Exhibit A CALIFORNIA LABOR CODE SECTION 2870 EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS “(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under Subdivision (a), the provision is against the public policy of this state and is unenforceable.” Exhibit 10.33 EXECUTED VERSION EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the “ Agreement ”), effective as of December 16, 2014, by and between American Apparel, Inc., a Delaware corporation (the “ Company ”), and Paula Schneider (herein referred to as the “ Executive ”). WHEREAS, the Company and the Executive deem it to be in their respective best interests to enter into an agreement providing for the Company’s employment of the Executive pursuant to the terms herein stated; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Employment; Position and Duties; Exclusive Services. (a) Employment . The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the Term provided in Section 2 below and upon the other terms and conditions hereinafter provided. (b) Position and Duties . During the Term, the Executive (i) agrees to serve as the Chief Executive Officer of the Company and to perform such reasonably related duties as may be assigned to her from time to time by the Board of Directors of the Company (the “ Board ”), (ii) shall report only to the Board and the Chairman of the Board, (iii) shall be given such authority as is appropriate given the Executive’s position in a company the nature and size of the Company to carry out the duties described above, and (iv) agrees to serve, if elected, at no additional compensation in the position of officer or director of any subsidiary or affiliate of the Company. In addition, to the extent that the Board determines that it is not otherwise inconsistent with its fiduciary obligations, the Company shall invite Executive to attend all meetings of the Board in a nonvoting observer capacity. Executive shall be bound by any confidentiality policies relating to the Board and shall execute a written acknowledgement agreeing to be so bound. (c) Exclusive Services . During the Term, and except for illness or incapacity and service on non-profit boards approved by the Board in its discretion and that do not materially adversely affect or interfere with the performance of the Executive’s duties and obligations to the Company or any of its subsidiaries or affiliates, the Executive shall devote all of her business time, attention, skill and efforts exclusively to the business and affairs of the Company and its subsidiaries and affiliates, shall not be engaged in any other business activity, and shall perform and discharge the duties which may be assigned to her from time to time by the Board or the Chairman of the Board consistent with her position. (d) Place of Employment . The Executive shall perform her duties out of the Company’s Los Angeles, California office (as same may be relocated in the same metropolitan area from time to time) or at such other location as shall be agreed to in writing by the Company and the Executive. 2. Term of Agreement . The term of employment under this Agreement shall commence on January 5, 2015 (the “ Effective Date ”) until terminated in accordance with Section 7 hereof. As used in this Agreement, the “ Term ” shall mean the Effective Date until termination of this Agreement as provided in Section 7 hereof. 3. Salary and Bonuses . The Executive’s cash compensation for all services to be rendered by her in any capacity hereunder shall consist of base salary and other compensation as provided in this Section. (a) Salary . The Executive shall be paid a base salary at the rate of Six Hundred Thousand Dollars ($600,000) per annum. The Salary shall be payable in accordance with the customary payroll practices for executives of the Company. The amount of the Executive’s Salary will be reviewed not less often than annually by the Compensation Committee of the Board (the “ Compensation Committee ”) and may be increased on the basis of such review. The Executive’s annual base salary, as in effect from time to time, is hereinafter referred to as the “ Salary .” (b) Performance Bonuses . The Executive will be eligible to receive an annual incentive compensation award in respect of each fiscal year of the Company during the Term, with the incentive based on a bonus matrix providing for a target payment with a range of 50% to 75% of Salary during each such fiscal year, subject to the terms and conditions of the Company’s annual bonus plan, and further goals, criteria or targets to be determined by the Board or the Compensation Committee in its or their sole discretion in respect of each such fiscal year (each such bonus, an “ Annual Bonus ”). Any Annual Bonus earned shall be payable in a lump sum in cash. The Annual Bonus earned in respect of each fiscal year of the Company during the Term, if any, shall be paid to the Executive in the fiscal year immediately following the fiscal year for which the bonus is earned, but in all events no later than the earlier of (A) ten days after the filing of the Company’s Form 10-K with the Securities Exchange Commission, and (B) 90 days after the end of the applicable fiscal year for which the bonus is earned. (c) Ninety-Day Assessment and Plan . On or before April 5, 2015, the Executive shall provide the Board with an assessment of the Company and an operational plan for the balance of the fiscal year or such other period as the Executive and Board shall deem appropriate. Within thirty (30) calendar days of the delivery and presentation of such assessment and plan, the Company shall pay Executive a bonus of One Hundred Thousand Dollars ($100,000). 4. Equity Awards . The Compensation Committee of the Board is in the process of developing a long term incentive plan (the “ LTIP ”) for senior management. If an LTIP becomes effective, the Executive shall be entitled to participate in the LTIP at a level commensurate with Executive’s title and responsibilities and shall be considered for awards during the Term as part of the Board’s regular compensation determination process with respect to its senior executives. Any equity awards pursuant to the LTIP will be at the sole discretion of the Board. Immediately upon (a) a change of control of the Company, as defined in the LTIP, or (b) a termination of Executive’s employment (i) upon the Executive’s death or Disability (as defined below), (ii) by the Company without Cause (as defined below), or (iii) by the Executive with Good Reason (as defined below), all outstanding stock-based awards (including without limitation, restricted stock, phantom stock, and performance stock), stock options, and similar equity-based awards, and all restricted cash awards, in each case made to the Executive under the LTIP, shall be payable and/or vest as provided in the LTIP and the award to Executive, as applicable. The Company represents that the LTIP referred to in this paragraph is intended to provide additional compensation, separate and apart from all other compensation referred to in the other provisions of this Agreement, in an amount to be determined by the Board. 5. Pension and Welfare Benefits . During the Term, the Company shall provide Executive medical insurance coverage and benefits on terms consistent with those being offered to other of the Company’s executives, including dental coverage for the Executive and her two (2) daughters. Executive shall also be entitled to participate in all pension and welfare plans, programs and benefits that are applicable to executives of the Company. 6. Other Benefits . (a) Travel and Business-related Expenses . During the Term, the Executive shall be promptly reimbursed in accordance with the written policies of the Company for traveling and other expenses reasonably incurred in the performance of the business of the Company. During the Term, Executive shall be permitted to travel via business-class service for domestic and international flights over three (3) hours in duration. (b) Vacation; Leaves of Absence . During the Term, the Executive shall be allowed time away with pay on the same basis as the Company generally provides to other executives of the Company, provided, that the Executive shall be provided with no less than twenty (20) paid vacation days, exclusive of and in addition to paid federal holidays. 7. Termination of Employment . Upon termination of the Executive’s employment for any reason, the Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board (and any committees thereof) and the board of directors of any of the Company’s affiliates and direct or indirect subsidiaries (and any committees thereof), if applicable, and agrees to resign as an officer of the Company and each of the Company’s affiliates and direct or indirect subsidiaries. (a) Termination for Cause; Resignation Without Good Reason . (i) If the Executive’s employment is terminated by the Company for Cause (as defined below in this Section) or if the Executive resigns from her employment without Good Reason other than for death or Disability (as defined below in Section 7(d)), prior to the expiration of the Term, the Executive shall be entitled to receive: (A) the Salary provided for in Section 3(a) as accrued through the date of such resignation or termination; and (B) any unreimbursed expenses, each within 30 days following termination. The Executive shall not accrue or otherwise be eligible to receive Salary payments or to participate in any plans, programs or benefits described in Section 5 hereof with respect to periods after the date of such termination or resignation and shall not be eligible to receive any annual performance bonus or long term performance bonus in respect of the year of such termination or resignation or any calendar year following the year in which such termination or resignation occurs. Any bonus earned in respect of a year prior to the year in which such termination or resignation occurs shall be payable at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan. Subject to Section 18, the Executive shall have no right under this Agreement or otherwise to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of employment (except to the extent provided for under the terms of any such plan, arrangement or benefit). (ii) Termination for “ Cause ” shall mean termination by action of the Board because of: (A) the Executive’s willful and continued failure (other than by reason of the incapacity of the Executive due to physical or mental illness) substantially to perform her duties hereunder; (B) the Executive’s failure (other than by reason of the incapacity of the Executive due to physical or mental illness) to perform such reasonable duties as are assigned to her from time to time by the Board or the Chairman of the Board; (C) the conviction of the Executive or the Executive entering a plea of guilty or nolo contendere to a crime that constitutes a felony or the perpetration by the Executive of a serious dishonest act against the Company or any of its affiliates or subsidiaries; (D) any willful misconduct by the Executive in connection with the performance of her duties, including, without limitation, conduct that is materially injurious to the financial condition or business reputation of the Company or any of its affiliates or subsidiaries, misappropriation of funds or property of the Company, securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company, misrepresentation to the Company, or any violation of law or regulations on Company premises or to which the Company is subject; (E) commission by Executive of an act involving moral turpitude, dishonesty, theft, unethical business conduct, or conduct that materially impairs or injures the reputation of, or harms, the Company; (F) aiding a competitor to the Company in a manner that adversely affects the Company; (G) failure by Executive to devote her full time and best efforts to the Company’s business and affairs; (H) misappropriation of a Company opportunity for the Executive’s personal benefit; (I) a material breach of the Executive’s obligations under this Agreement or under any Company written policy applicable to the Executive; or (J) chronic alcoholism or drug abuse which materially affects the Executive’s performance hereunder, provided, however, that no event or circumstance shall be considered to constitute Cause within the meaning of this clause (ii) unless the Executive has been given written notice of the events or circumstances constituting Cause within 30 calendar days of the Company becoming aware of the initial occurrence of such event or circumstance and, for those events or circumstances capable of cure (but only for those capable of a cure), Executive has failed to effect a cure thereof within 30 calendar days following the receipt of such notice. (iii) Resignation for “ Good Reason ” shall mean the resignation of the Executive because of (A) a material reduction in the Executive’s responsibilities, duties, authority, status or titles as described in Section 1 above or any reduction in the Executive’s Salary or Annual Bonus opportunity, or a material reduction in the benefits provided to the Executive; (B) failure by the Company to pay or provide the Executive when due any compensation, benefits or perquisites to which the Executive is entitled pursuant to this Agreement or any other plan, contract or arrangement in which the Executive participates or is entitled to participate; (C) a material change in the Executive’s reporting structure; (D) failure of any successor (whether direct or indirect, by stock or asset purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume this Agreement (either by operation of law or in writing), (E) a relocation of the principal location at which the Executive is required to provide services to any office or location more than fifty (50) miles from the one described in Section 1(d) hereof; or (F) a material breach of the Company’s obligations under this Agreement; provided, however, that no event or circumstance shall be considered to constitute Good Reason within the meaning of this clause (iii) unless the Company has been given written notice of the events or circumstances constituting Good Reason by the Executive within 30 calendar days of the initial occurrence of such event or circumstance and, for those events or circumstances capable of cure (but only for those capable of a cure), the Company has failed to effect a cure thereof within 30 calendar days following the receipt of such notice. (iv) The date of termination of employment by the Company pursuant to this Section 7(a) shall be the date specified in a written notice of termination from the Company to the Executive, which, in the case of a proposed termination to which the 30-day cure period provided for in subsection (ii) above applies shall be no less than 31 calendar days after the delivery of such notice to the Executive. The date of a resignation by the Executive pursuant to this Section 7(a) shall be the date specified in the written notice of resignation from the Executive to the Company or, if no date is specified therein, ten (10) business days after receipt by the Company of the written notice of resignation from the Executive. (b) Termination Without Cause, Resignation for Good Reason . (i) If the Executive’s employment is terminated by the Company without Cause or if the Executive should resign for Good Reason, prior to the expiration of the Term, she shall be entitled to receive: (A) the Salary provided for in Section 3(a) as accrued through the date of such resignation or termination, payable within 30 days following termination and (subject to the Executive’s execution and delivery of a general release of all claims against the Affiliated Companies and the expiration of any release revocation period, which release shall be consistent with the terms of this Agreement and in form reasonably acceptable to the Company (the “ Release ”), within sixty (60) calendar days following termination of employment), continued payment of the Executive’s then-current Salary for a period of eighteen (18) months (the “ Continuation Period ”), payable in accordance with the Company’s usual payment practices; provided that the first payment shall be made on the sixtieth (60th) calendar day following termination of employment and shall include payment of any amounts that would otherwise be due prior thereto; (B) at the time of, on the terms of, and otherwise consistent with payments to similarly-situated executives, (x) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which such termination or resignation occurs and (y) an Annual Bonus for the calendar year in which the Executive’s termination of employment or resignation occurs equal to a pro rata portion of the Executive’s target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executive’s termination of employment or resignation, provided , however, that if the Executive’s employment is terminated during the first three months of a fiscal year, no such bonus shall be payable with respect to that fiscal year; and (C) any unreimbursed expenses. Except to the extent required pursuant to Section 22 hereof, during the Continuation Period, Salary payments to the Executive shall be payable in accordance with the customary payroll practices of the Company. Subject to the Executive’s execution and delivery of the Release and the expiration of any release revocation period within sixty (60) calendar days following termination of employment, the Executive (and those eligible dependents who were participants in the applicable plans as of the termination date) shall also be entitled to continued participation in the medical, dental and insurance plans and arrangements described in Section 5, on the same terms and conditions as are in effect immediately prior to such termination or resignation, until the earlier to occur of (i) the last day of the Continuation Period and (ii) such time as the Executive is entitled to comparable benefits provided by a subsequent employer. Anything herein to the contrary notwithstanding, the Company shall have no obligation to continue to maintain during the Continuation Period any plan or program solely as a result of the provisions of this Agreement. If, during the Continuation Period, the Executive is precluded from participating in a plan or program by its terms or applicable law or if the Company for any reason ceases to maintain such plan or program, the Company shall provide the Executive with compensation or benefits the aggregate value of which, in the reasonable judgment of the Company, is no less than the aggregate value of the compensation or benefits that the Executive would have received under such plan or program had she been eligible to participate therein or had such plan or program continued to be maintained by the Company. (ii) Except as may be provided under the terms of any applicable grants to the Executive under the LTIP, Section 18, any plan or arrangement in which the Executive participates, or as may be otherwise required by applicable law (including, without limitation, the provisions of Section 4980B(f) of the Internal Revenue Code of 1986, as amended (the “ Code ”)), the Executive shall have no right under this Agreement or any other agreement to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of employment. In the event of a termination or resignation pursuant to this Section 7(b), the Executive shall have no duty of mitigation with respect to amounts payable to her pursuant to this Section 7(b) or other benefits to which she is entitled pursuant hereto, except as provided in the immediately preceding paragraph. Notwithstanding anything to the contrary in this Agreement, the right of the Executive to receive payments provided for in this Section 7(b) shall be subject to Section 8 of this Agreement. (iii) The date of termination of employment by the Company pursuant to this Section 7(b) shall be the date specified in the written notice of termination from the Company to the Executive or, if no date is specified therein, ten business days after receipt by the Executive of the written notice of termination from the Company. The date of a resignation by the Executive pursuant to this Section 7(b) shall be the date specified in the written notice of resignation from the Executive to the Company which, in the case of a proposed resignation to which the 30-day cure period provided for in subsection 7(a)(iii) above applies shall be no less than 31 days after the delivery of such notice to the Company; and in the case of a proposed resignation to which the 30-day cure period does not apply and in which no date is specified therein, the date of resignation shall be ten (10) business days after receipt by the Company of the written notice of resignation from the Executive. (c) Death . If the Executive’s employment hereunder terminates by reason of death prior to expiration of the Term, the Executive’s beneficiary (or if no such beneficiary is designated, her estate) shall be entitled to receive: (i) the Salary provided for in Section 3(a) as accrued through the date of the Executive’s death; (ii) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which the Executive’s death occurs; (iii) an Annual Bonus for the calendar year in which the Executive’s death occurs equal to a pro rata portion of the Executive’s target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executive’s death; and (iv) any unreimbursed expenses. Annual Bonus payments provided for in this Section 7(c) shall be made at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan. As used in this Section, the term “ beneficiary ” includes both the singular and the plural of such term, as may be appropriate. (d) Disability . If, the Executive is terminated from employment by the Company as a result of the Executive’s Disability (as defined below in this Section), the Executive, her conservator or guardian, as the case may be, shall be entitled to receive: (i) the Salary provided for in Section 3(a) as accrued through the date of the Executive’s termination of employment; (ii) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which the Executive’s termination of employment occurs; (iii) an Annual Bonus for the calendar year in which the Executive’s termination of employment occurs equal to a pro rata portion of the Executive’s target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executive’s termination of employment; and (iv) any unreimbursed expenses. Annual Bonus payments provided for in this Section 7(d) shall be made at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan. For purposes of this Agreement, “ Disability ” shall mean that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve months. Any dispute as to whether or not the Executive has a Disability within the meaning of the preceding sentence shall be resolved by a physician reasonably satisfactory to the Executive and the Company, and the determination of such physician shall be final and binding upon both the Executive and the Company. 8. Tax Withholding . Payments to the Executive of all compensation contemplated under this Agreement shall be subject to all applicable legal requirements with respect to the withholding of taxes. 9. Confidentiality and Proprietary Rights . (a) Confidentiality . The Executive acknowledges that as a result of her employment with the Company, the Executive will obtain secret and confidential information concerning the business of the Company, and its subsidiaries and affiliates (all of such entities referred to collectively as the “ Affiliated Companies ”). Other than in the performance of her duties hereunder or if confidential information is required to be disclosed by law, court order or other legal process (provided that the Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment) or to the extent necessary to enable the Executive to enforce (or defend) her rights under this Agreement or any other agreement with the Company or any affiliate, the Executive agrees not to disclose, either during the Term of her employment with the Company or at any time thereafter, to any person, firm or corporation any confidential information concerning the Affiliated Companies which is not in the public domain or known within the relevant trade or industry (other than as a result of an unauthorized disclosure by the Executive) including trade secrets, budgets, strategies, operating plans, marketing plans, supplier lists, non-public company agreements, employee lists, or the customer lists or similar confidential information of the Affiliated Companies. (b) Proprietary Rights . All records, files, memoranda, reports, price lists, customer lists, drawings, plans, sketches, documents and the like (together with all copies thereof) relating to the business of the Affiliated Companies, which the Executive shall use or prepare or come in contact with in the course of, or as a result of her employment, or as a result of work performed by the Executive for the Company, shall, as between the parties, remain the sole property of the Company. Upon termination of her employment with the Company, the Executive agrees to promptly return all such materials and shall not thereafter cause removal thereof from the premises of the Company. Further, the Executive agrees to disclose and assign, and does hereby assign, to the Company as its exclusive property, all ideas, writings, inventions, discoveries, improvements and technical or business innovations made or conceived by the Executive, whether or not patentable or copyrightable, either solely or jointly with others during the course of her employment with the Company, relating directly to the business, work or investigations of the Affiliated Companies (“ Company Inventions ”). Notwithstanding the foregoing, the Executive understands that the provisions of this Agreement requiring assignment of Company Inventions to the Company do not apply to any invention that qualifies under the provisions of California Labor Code Section 2870 (as set forth in Exhibit A hereto). The Executive understands that Company will keep in confidence and will not disclose to third parties without the Executive’s consent any confidential information disclosed in writing to Company relating to inventions that qualify under the provisions of Section 2870 of the California Labor Code. (c) Except as may be required by applicable law, without the Executive’s prior written consent, the Executive shall not be subject to any restrictions on her activities following termination of employment with the Company other than as expressly set forth in this Agreement or the LTIP. 10. Cooperation . The Executive agrees that following the date of termination of employment, she shall reasonably cooperate with the Company, if so requested, with respect to the Company’s business affairs, as well as any internal or external investigation, claims or litigation (whether or not currently pending) involving the Company, including providing information and assistance and making herself reasonably available for both pre-trial discovery and trial proceedings. The Company shall promptly reimburse Executive for any out-ofpocket expenses incurred by Executive in connection with her cooperation with the Company pursuant to this Section 10, including, without limitation, any reasonable attorneys’ fees and travel and lodging costs incurred by the Executive. 11. Nonassignability; Binding Agreement . Neither this Agreement nor any right, duty, obligation or interest thereunder shall be assignable or delegable by the Executive without the Company’s prior written consent; provided, however, that nothing in this Section shall preclude the Executive from designating any of her beneficiaries to receive any benefits payable hereunder upon her death or disability, or her executors, administrators, or other legal representatives, from assigning any rights hereunder to the person or persons entitled thereto. If the Executive should die while any payment, benefit or entitlement is due to her pursuant to this Agreement, such payment, benefit or entitlement shall be paid or provided to her designated beneficiary (or, if there is no designated beneficiary, her estate). This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or assigns of the Company and the Executive’s heirs and the personal representatives of the Executive’s estate. In addition, the Company shall assign to and require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 12. Amendment; Waiver . This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by the parties hereto. No delay or failure by any party hereto in exercising, protecting or enforcing any of its rights, titles, interests or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. 13. Notices . Any notice hereunder by either party to the other shall be given in writing by personal delivery, email or certified mail, return receipt requested, to the applicable address set forth below: American Apparel, Inc. 747 Warehouse Street Los Angeles, California 90021 Attention: Chairman of the Board (a) To the Company: Email: bod@americanapparel.net Paula Schneider 747 Warehouse Street Los Angeles, California 90021 Email: pschneider@americanapparel.net (b) To the Executive: (or such other address as may from time to time be designated by written notice by any party hereto for such purpose). Notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by email, on the business day following receipt of confirmation or, if by certified mail, on the date shown on the applicable return receipt. 14 . California Law . This Agreement is to be governed by and interpreted in accordance with the laws of the State of California, without giving effect to the choice-of-law provisions thereof. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 15. Arbitration . The Company and the Executive agree that any and all disputes based upon, relating to or arising out of this Agreement, the Executive’s employment relationship with the Company or any of its subsidiaries or affiliates and/or the termination of that relationship, and/or any other dispute by and between the Executive and the Company or any of its subsidiaries or affiliates, including any and all claims that the Executive may at any time attempt to assert against the Company or any of its subsidiaries or affiliates, shall be submitted to binding arbitration in Los Angeles County, California, pursuant to the American Arbitration Association’s (“ AAA ”) Employment Arbitration Rules and Mediation Procedures, including the Optional Rules for Emergency Measures of Protection (the “ Rules ”), provided that the arbitrator shall allow for discovery sufficient to adequately arbitrate any asserted claims, including access to essential documents and witnesses, and otherwise in accordance with California Code of Civil Procedure § 1283.05, and provided further that the Rules shall be modified by the arbitrator to the extent necessary to be consistent with applicable law. The arbitrator shall be a retired judge of the California Superior Court, California Court of Appeal, or United States District Court, to be mutually agreed upon by the parties. If, however, the parties are unable to agree upon an arbitrator, then an arbitrator, who is a retired judge of the California Superior Court, California Court of Appeal, or United States District Court, shall be selected by AAA in accordance with the Rules. The Company and the Executive further agree that each party shall pay its own costs and attorneys’ fees, if any; provided, however, that if either party prevails on a claim which affords the prevailing party an award of attorneys’ fees, then the arbitrator may award reasonable attorneys’ fees to the prevailing party, consistent with applicable law. In any event, the Company shall pay any expenses that the Executive would not otherwise have incurred if the dispute had been adjudicated in a court of law, rather than through arbitration, including the arbitrator’s fee, any administrative fee and any filing fee in excess of the maximum court filing fee in the jurisdiction in which the arbitration is commenced. The Company and the Executive further agree that any hearing must be transcribed by a certified shorthand reporter, and that the arbitrator shall issue a written decision and award supported by essential findings of fact and conclusions of law in order to facilitate judicial review. Said award and decision shall be issued within thirty (30) calendar days of the completion of the arbitration. Judgment in a court of competent jurisdiction may be had on said decision and award of the arbitrator. For these purposes, the parties agree to submit to the jurisdiction of the state and federal courts located in Los Angeles County, California. 16. Injunctive Relief . The Executive acknowledges and agrees that the services being rendered by the Executive to the Company under this Agreement are of a special, unique and extraordinary character that gives them peculiar value to the Affiliated Companies, the loss of which (in violation of this Agreement) would cause irreparable harm to the Affiliated Companies and affiliates, for which the Affiliated Companies would have no adequate remedy at law. The Executive further acknowledges and agrees that the trade secrets and confidential and related information referred to in this Agreement each are of substantial value to the Affiliated Companies and that a breach of any of the terms and conditions of this Agreement relating to those subjects would cause irreparable harm to the Affiliated Companies, for which the Affiliated Companies would have no adequate remedy at law. Therefore, in addition to any other remedies (in law or in equity) that may be available to the Company and/or any of its subsidiaries and affiliates under this Agreement or otherwise, the Affiliated Companies shall be entitled to obtain (pursuant to the Rules) temporary restraining orders, preliminary and permanent injunctions and/or other equitable relief (pursuant to the Rules) to specifically enforce the Executive’s duties and obligations under this Agreement, or to enjoin any breach of this Agreement, without the need to post a bond or other security and without the need to demonstrate special damages. 17. Counterparts . This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 18. Indemnification . With respect to any acts or omissions that may have occurred prior to termination of the Executive’s employment, the Company will indemnify and hold harmless the Executive (and her legal representatives or other successors) to the fullest extent permitted, against any and all claims, charges, and/or expenses (including attorney's fees), witness fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the Executive in connection with any threatened, pending or completed action, lawsuit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation) to which Executive is, was or at any time becomes a party, or is threatened to be made a party. The Company will indemnify Executive to the fullest extent permitted (including payment of expenses in advance of final disposition of a proceeding) by the laws of the State of California, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and By-Laws of the Company, as in effect at such time, or by the terms of any indemnification agreement between the Company and the Executive, whichever affords greatest protection to the Executive. The Executive shall be entitled to the protection of any insurance policies the Company maintained by the Company generally for the benefit of its directors and officers (the “ D&O Policies ) (and the Executive shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by her or her legal representatives at the time such costs, charges and expenses are incurred or sustained (including any time following Executive’s termination of employment), in connection with any action, suit or proceeding to which she (or her legal representatives or other successors) may be made a party by reason of her being or having been a director, officer or employee of the Company or any subsidiary thereof, or her serving or having served any other enterprises as a director, officer or employee at the request of the Company. During the Term and for a customary tail period, the Company shall maintain in full force and effect one or more D&O Policies covering the Executive with coverage amounts customary for a business of the nature and size as the Company. 19. Cumulative Remedies . Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy. 20. Headings; Construction . The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement. In construing this Agreement, no party hereto shall have any term or provision construed against such party solely by reason of such party having drafted or written such term or provision. 21. Survival . Any provision of this Agreement which imposes an obligation after termination or expiration of this Agreement (including but not limited to the obligations set forth in Section 9 hereof) shall, unless otherwise specified, survive the termination or expiration of this Agreement and be binding on the Executive and the Company. 22. General 409A Compliance . To the maximum extent applicable, it is intended that the Agreement comply with the provisions of Section 409A of the Code, as amended. This Agreement will be administered and interpreted in a manner consistent with this intent, and any provision that would cause this Agreement to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply therewith (which amendment may be retroactive to the extent permitted by Section 409A of the Code). Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, the Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement which are payable upon the Executive's termination of employment until the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code. To the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following the Executive's termination of employment shall instead be paid in a lump sum on the first business day after the date that is six months following the Executive's termination of employment (or upon the Executive's death, if earlier). In addition, for purposes of the Agreement, each amount to be paid or benefit to be provided to the Executive pursuant to this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code. With respect to expenses eligible for reimbursement under the terms of the Agreement, (i) the amount of such expenses eligible for reimbursement in any taxable year shall not affect the expenses eligible for reimbursement in another taxable year and (ii) any reimbursements of such expenses shall be made no later than the end of the calendar year following the calendar year in which the related expenses were incurred, except, in each case, to the extent that the right to reimbursement does not provide for a “deferral of compensation” within the meaning of Section 409A of the Code. 23. Section 280G. (a) Notwithstanding any other provision of this Agreement, in the event that the Executive becomes entitled to receive or receives any payments, options, awards or benefits (including, without limitation, the monetary value of any non-cash benefits and the accelerated vesting of equity-based awards) under this Agreement or under any other plan, agreement or arrangement with the Company, any person whose actions result in a change of control of the Company or any person affiliated with the Company or such person (collectively, the “ Payments ”), that may separately or in the aggregate constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “ Code ”), or any similar or successor provision (“ Section 280G ”) and it is determined that, but for this Section 23(a), any of the Payments will be subject to any excise tax pursuant to Section 4999 of the Code or any similar or successor provision, the Company shall pay to the Executive an amount equal to the Payments, reduced by the minimum amount necessary to prevent any portion of the Payments from being an “excess parachute payment” (within the meaning of Section 280G). (b) All computations and determinations called for by this Section 23 shall be made and reported in writing to the Company and the Executive by an independent accounting firm or independent tax counsel appointed by the Company (the “ Tax Advisor ”), and all such computations and determinations shall be conclusive and binding on the Company and the Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services. (c) In the event that Section 23(a) applies and a reduction is required to be applied to the Payments thereunder, the Payments shall be reduced by the Company in its reasonable discretion in the following order: (i) reduction of any Payments that are exempt from Code Section 409A and (ii) reduction of any Payments that are subject to Code Section 409A on a pro-rata basis or such other manner that complies with Code Section 409A, as determined by the Company. 24. Preemption . In the event there is a conflict between any provision of this Agreement and any other agreement, plan, policy or program of the Company, the provisions of this Agreement shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above, effective as of the Effective Date. American Apparel, Inc. By: December 15, 2014 /s/ Allan Mayer Co-Chairman, Board of Directors /s/ Paula Schneider Paula Schneider Exhibit A CALIFORNIA LABOR CODE SECTION 2870 EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS “(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under Subdivision (a), the provision is against the public policy of this state and is unenforceable.” Exhibit 10.34 EXECUTED VERSION AMENDMENT NO. 6 TO CREDIT AGREEMENT AND WAIVER THIS AMENDMENT NO. 6 TO CREDIT AGREEMENT AND WAIVER dated as of March 25, 2015 (this “ Amendment ”), is among AMERICAN APPAREL (USA), LLC , a California limited liability company (“ AA USA ”), AMERICAN APPAREL RETAIL, INC. , a California corporation (“ AA Retail ”), AMERICAN APPAREL DYEING & FINISHING, INC. , a California corporation (“ AA Dyeing & Finishing ”), KCL KNITTING, LLC , a California limited liability company (“ KCL ” and, together with AA USA, AA Retail and AA Dyeing & Finishing, collectively, the “ Borrowers ” and each, individually, a “ Borrower ”), AMERICAN APPAREL, INC. , a Delaware corporation (“ Holdings ”), FRESH AIR FREIGHT, INC. , a California corporation (“ Fresh Air ” and, together with Holdings, collectively, the “ Guarantors ” and each, individually, a “ Guarantor ”), CAPITAL ONE BUSINESS CREDIT CORP. (f/k/a Capital One Leverage Finance Corp.), as administrative agent (in such capacity, the “ Administrative Agent ”), and each of the Lenders party hereto. RECITALS: A. The Borrowers, the other borrowers from time to time party thereto, the Guarantors, the other guarantors from time to time party thereto, the lenders from time to time party thereto (collectively, “ Lenders ”) and the Administrative Agent have entered into that certain Credit Agreement dated as of April 4, 2013 (as amended by that certain Amendment No. 1 to Credit Agreement dated as of May 22, 2013, that certain Amendment No. 2 to Credit Agreement dated as of July 5, 2013, that certain Amendment No. 3 to Credit Agreement and Limited Waiver dated as of November 14, 2013, that certain Amendment No. 4 to Credit Agreement and Limited Consent dated as of November 29, 2013, and that certain Amendment No. 5 to Credit Agreement and Limited Consent dated as of March 25, 2014 the “ Credit Agreement ”). Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. B. The Guarantors have entered into that certain Guaranty dated as of April 4, 2013, in favor of the Administrative Agent. C. The Borrowers have requested that the Administrative Agent and Lenders amend certain provisions of the Credit Agreement as set forth below. D. Subject to the terms and conditions set forth below, the Administrative Agent and Lenders party hereto are willing to so amend the Credit Agreement. In furtherance of the foregoing, the parties agree as follows: Section 1. AMENDMENTS. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties set forth herein, the Credit Agreement is amended as follows: (a) The following definitions are added to Section 1.01 of the Credit Agreement in the appropriate alphabetical order: “ “ Permitted Unsecured Debt ” means the obligations of certain Foreign Subsidiaries incurred pursuant to the Indebtedness permitted under Section 7.02(q) .” “ “ Permitted Unsecured Debt Documents ” means any credit agreement, note and any other related material documents or instruments evidencing or from time to time executed in connection with the Permitted Unsecured Debt. “ “ Purchase Rights ” means purchase rights described in the Form 8-K report of Holdings, filed with the Securities and Exchange Commission on June 30, 2014, relating to a dividend distribution of rights to purchase preferred stock.” ““ Sixth Amendment Effective Date ” means March 25, 2015. (b) Clause (h) of the definition of “Adjusted Earnings” in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and is replaced with the following in lieu thereof: “(h) extraordinary, unusual or non-recurring losses, charges or expenses, including restructuring charges and severance costs, not to exceed $31,000,000 in the Reference Period ending December 31, 2014, $10,000,000 in any subsequent Reference Period or other applicable covenant measurement period (calculated without regard to such losses, charges or expenses incurred in the Reference Period ending December 31, 2014), unless approved by the Administrative Agent; provided that with respect to any such extraordinary, unusual or non-recurring losses, charges or expenses occurring on or after January 1, 2015, only non-cash extraordinary, unusual or non-recurring losses, charges or expenses shall be added back to EBITDA for purposes of any determination of the Fixed Charge Coverage Ratio.” (c) The definition of “Change of Control” in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and is replaced with the following in lieu thereof: ‘“ Change of Control ” means an event or series of events by which: (a) except with respect to Permitted Holders, any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that (i) a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “ option right ”), and (ii) Persons party to a stockholders agreement, investment agreement, voting agreement or similar agreement with a Permitted Holder pursuant to which such Persons have the right to designate directors and agree to vote for one another’s designees shall not be deemed to constitute a “group” and/or “person” under Section 13 of the Exchange Act or any of the rules and regulations promulgated thereunder solely because they are parties to, or as a result of their exercise of such designation and voting rights under, such agreement so long as such Person without inclusion of the equity securities held by Permitted Holders, directly or indirectly, owns less than 35% or more of the equity securities of Holdings entitled to vote for members of the board of directors or equivalent governing body on a fully diluted basis), directly or indirectly, of 35% or more of the equity securities of Holdings entitled to vote for members of the board of directors or equivalent governing body of Holdings on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); provided that notwithstanding the foregoing, no Change of Control shall be deemed to occur as a result of or in connection with (x) the equity securities of Holdings owned by Standard General L.P. and its Affiliates, or (y) any voting agreements between any Permitted Holders and any of Standard General L.P. or any of its Affiliates, in each case of clause (x) or (y), so long as Standard General L.P. and its Affiliates do not beneficially own in excess of 49% of the equity securities of Holdings entitled to vote for members of the board of directors; or (b) Other than pursuant to a transaction permitted by Section 7.05 , Holdings shall cease to directly own and control legally and beneficially (i) 100% of the Capital Stock of AA USA (free and clear of all Liens other than Liens in favor of the Administrative Agent granted under the Security Documents and Senior Notes Liens accordance with the terms of the Senior Notes Intercreditor Agreement), (ii) 100% of the Capital Stock of each of the AA Canadian Subsidiaries (free and clear of all Liens other than (x) Liens granted to the lenders under the Canadian Documents in accordance with the terms of the Canadian Intercreditor Agreement, (y) Liens in favor of the Administrative Agent granted under the Security Documents and (z) the Senior Notes Liens in accordance with the terms of the Senior Notes Intercreditor Agreement and the Canadian Intercreditor Agreement) and (iii) 100% of the Capital Stock of any of its Subsidiaries acquired or formed after the date hereof and directly held by Holdings (other than directors’ qualifying shares and other similar equity interest holdings of Foreign Subsidiaries required to be held by local Persons in accordance with applicable law), in the case of clause (b)(iii) , free and clear of all Liens other than Liens in favor of the Administrative Agent granted under the Security Documents and the Senior Notes Liens in accordance with the terms of the Senior Notes Intercreditor Agreement); or (c) Other than pursuant to a transaction permitted by Section 7.05 , any Borrower or any Subsidiary of any Borrower shall cease to directly own and control legally and beneficially 100% of the Capital Stock of each of its Subsidiaries in existence on the date hereof or acquired or formed after the date hereof to the extent directly held by such Borrower or such Subsidiary (other than directors’ qualifying shares and other similar equity interest holdings of Foreign Subsidiaries required to be held by local Persons in accordance with applicable law), free and clear of all Liens other than Liens in favor of the Administrative Agent granted under the Security Documents and Senior Notes Liens in accordance with the terms of the Senior Notes Intercreditor Agreement); or (d) a change of control occurs under the Senior Notes Indenture, the Lion Debt Documents or the Permitted Unsecured Debt Documents. For purposes of this definition, notwithstanding anything to the contrary set forth above, a Person shall not be deemed to have beneficial ownership of Capital Stock subject to a stock purchase agreement, merger agreement or similar agreement until the consummation of the transactions contemplated by such agreement and, until the consummation of such transactions, a Change of Control will be deemed not to have occurred with respect to any such stock purchase agreement, merger agreement or similar agreement.” (d) The definition of "Fixed Charge Coverage Ratio is hereby amended by inserting the following in clause (a)(i) of such definition, immediately after the words "Reference Period": "(or other applicable period being measured)". (e) The definition of “Line Reserve” in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and is replaced with the following in lieu thereof: ““ Line Reserve ” means an amount initially equal to $2,500,000, which shall be increased to $5,000,000 on July 1, 2015.” (f) Section 5.01 (a ) of the Credit Agreement is hereby amended by deleting "Each" in the first sentence of such Section and replacing it with "Except as previously disclosed to the Administrative Agent with respect to clause (c) hereof (such disclosure including the draft 10-K for the period ended December 31, 2014, provided to the Administrative Agent on or prior to the Sixth Amendment Effective Date), each”. (g) Section 5.04 of the Credit Agreement is deleted in its entirety ad the following is inserted in lieu thereof: “Since September 30, 2014, there has occurred no Material Adverse Effect.” (h) Schedule 5.07 of the Credit Agreement is deleted in its entirety and replaced by Schedule 5.07 attached hereto. (i) Section 5.18 of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: “Based upon the actual knowledge of the Chief Executive Officer and Chief Financial Officer of Holdings, and except as specifically disclosed in Schedule 5.18 , existing Environmental Laws and claims, as they relate to the Credit Parties and their Subsidiaries, could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.” (j) Section 5.20 of the Credit Agreement is hereby amended by deleting “There” in the second sentence and replacing it with “Except as otherwise disclosed to the Administrative Agent (such disclosure including the draft 10-K for the period ended December 31, 2014, provided to the Administrative Agent on or prior to the Sixth Amendment Effective Date; provided that such draft 10-K is not materially different from the 10-K filed with the SEC for such period, with respect to the matters referenced in this Section 5.20 ), there”. (k) Section 5.21 of the Credit Agreement is hereby amended by deleting “)” in the first sentence and replacing it with “, and the draft 10-K for the period ended December 31, 2014, provided to the Administrative Agent on or prior to the Sixth Amendment Effective Date; provided that such draft 10-K is not materially different from the 10-K filed with the SEC for such period with respect to the matters referenced in this Section 5.21 )”. (l) Section 5.23 of the Credit Agreement is hereby amended by deleting “No Credit Party, nor” in the first sentence and replacing it with “No Credit Party, nor, to the knowledge of any Credit Party,”. (m) The last sentence in Section 5.24 of the Credit Agreement is deleted in its entirety and the following sentence is inserted in lieu thereof: “No Credit Party is in violation of any provision of any Lion Debt Document or Permitted Unsecured Debt Document, and the Loans and the Loan Documents and the transactions contemplated hereby and thereby do not violate and/or conflict with any provision of the Lion Debt Documents or Permitted Unsecured Debt Documents.” (n) Section 6.04(i) of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: “(i) promptly after delivery or receipt thereof, copies of all notices, reports and other communications delivered or received by any Credit Party in connection with the Senior Notes Documents, the Permitted Unsecured Debt Documents, the Lion Debt Documents or the Subordinated Debt Documents and not later than five (5) Business Days following the effectiveness thereof, copies of any new Senior Notes Documents, Permitted Unsecured Debt Documents or Lion Debt Documents or any amendment, supplement, waiver, or other modification, replacement or renewal with respect to any Senior Notes Document, Permitted Unsecured Debt Documents or Lion Debt Document.” (o) Section 7.01 of the Credit Agreement is hereby amended by (i) deleting “and” at the end of clause (p) thereof, (ii) deleting the “.” at the end of clause (q) thereof and replacing it with “;”, and (iii) inserting the following clauses (r) and (s) thereafter: “(r) Investments consisting of any Credit Party or any Subsidiary thereof guaranteeing the Permitted Unsecured Debt; and (s) Investments in any Foreign Subsidiary to be used by such Foreign Subsidiaries solely (and substantially contemporaneously) to make payments on or in respect of Permitted Unsecured Debt to the extent such payments are permitted under Section 7.04(b)(vi) and the Borrowers have delivered to the Administrative Agent the certificate required thereunder (to the extent applicable).” (p) Section 7.02 of the Credit Agreement is hereby amended by (i) deleting “and” at the end of clause (o) thereof, (ii) deleting the “.” at the end of clause (p) thereof and replacing it with “; and”, and (iii) inserting the following clause (q) thereafter: “(q) unsecured Debt of one or more Foreign Subsidiaries in an aggregate principal amount not to exceed $15,000,000 plus the amount of any increase in principal for the purpose of paying interest in kind or as a result of accretion thereof; provided that (i) the maturity date of such Indebtedness shall be at least one hundred and eighty (180) days following the Maturity Date; (ii) such Indebtedness is not secured and permits prepayments without penalty, (iii) the terms, covenants and defaults applicable to such Indebtedness shall be no more restrictive in all material respects, taken as a whole, than the covenants and defaults applicable to the Credit Parties and their Subsidiaries under the Senior Notes Indenture (it being agreed that such Indebtedness contains representations and warranties and cross events of defaults to the Senior Notes Indenture and the Lion Debt Documents, and such terms do not violate this clause (iii)) ; and (iv) not less than 3 Business Days (or such shorter period as agreed by the Administrative Agent in its discretion) prior to such incurrence, the Borrower Representative has delivered copies of the Permitted Unsecured Debt Documents to be executed or delivered in connection therewith (with delivery of true copies of the executed and delivered Permitted Unsecured Debt Documents to be delivered to the Administrative Agent promptly after the execution thereof).” (q) Section 7.04(a) of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: “ Restricted Payments . No Credit Party nor any Subsidiary shall make any Restricted Payment, except (a) Restricted Payments to a Credit Party; (b) Restricted Payments solely in shares of common stock or preferred stock (other than Disqualified Capital Stock) or warrants or rights to purchase common stock or preferred stock (other than Disqualified Capital Stock) so long as no Change of Control would result therefrom, (c) Restricted Payments in the form of splits of Capital Stock or reclassifications of Capital Stock into additional shares of common stock, (d) Restricted Payments by a Subsidiary of a Credit Party that is not a Credit Party made ratably to the holders of its Capital Stock, (e) repurchases of Capital Stock in any Credit Party or any Subsidiary deemed to occur upon “cashless” exercise of stock options or warrants, and (f) to the extent constituting Restricted Payments, the issuance of the Purchase Rights and the payment of an amount not to exceed $200,000 in redemption of the Purchase Rights.” (r) Section 7.04(b) of the Credit Agreement is hereby amended by inserting “, the Permitted Unsecured Debt” immediately after “the Subordinated Debt Documents” in the introductory provision thereof, which precedes clause (i) thereof. (s) Section 7.04(b) of the Credit Agreement is further hereby amended by (i) deleting “and” at the end of clause (iii) thereof, (ii) deleting the “.” at the end of clause (iv) thereof and replacing it with “; and”, and (iii) inserting the following clauses (v) and (vi) thereafter: “(v) With respect to the Indebtedness consisting of Permitted Unsecured Debt, payments thereunder only to the extent made by the Foreign Subsidiaries party to such Indebtedness and so long as no Loan proceeds or Collateral are used, directly or indirectly to make such payments; and (vi) With respect to Indebtedness consisting of the Permitted Unsecured Debt or Lion Debt, (A) regularly scheduled payments of interest and fees when due; provided that if any Default or Event of Default exists at the time of such payment or would arise therefrom, such payments of interest shall be paid in kind to the extent permitted under the terms of such Permitted Unsecured Debt, Lion Debt and the Senior Notes Indenture; (B) payment of principal and interest on the scheduled maturity date thereof; (C) prepayments, redemptions, repurchases, defeasances or acquisition or retirement of the Permitted Unsecured Debt or Lion Debt if (x) the Fixed Charge Coverage Ratio for the Reference Period most recently ended prior to such prepayment (and for which the financial statements required by Section 6.04(b) have been delivered to the Administrative Agent) is at least 1.10 to 1.00 (which such calculation, for the avoidance of doubt, shall exclude such prepayment), (y) Overall Excess Availability is at least $5,000,000 on the date of such prepayment (after giving effect to such prepayment and any other Credit extensions made on such date) and average daily Overall Excess Availability is projected by Holdings to be at least $5,000,000 for each day during the 30-day period after such prepayment, and (z) no Default or Event of Default exists before or immediately after giving effect to such prepayment and not less than 10 Business Days (or such shorter period as agreed by the Administrative Agent in its discretion) prior to such prepayment, the Borrower Representative has delivered a certificate to the Administrative Agent demonstrating compliance with this clause (C); (D) Permitted Refinancings of Permitted Unsecured Debt or Lion Debt and (E) amounts required to be paid in connection with a change of control offer to the extent required to be made under the Permitted Unsecured Debt or Lion Debt, provided that the Borrower Agent has given the Administrative Agent five (5) Business Days prior written notice of any such payment.” (t) Section 7.08 of the Credit Agreement is hereby amended by (i) deleting “and” at the end of clause (vi) thereof and replacing it with “,” and (ii) inserting the following immediately preceding the period at the end of such Section: “, and the transactions referenced in and contemplated by that certain Nomination, Standstill and Support Agreement, dated as of July 9, 2014, provided that any Debt incurred thereunder is Permitted Unsecured Debt and Lion Debt.” (u) Section 7.10 of the Credit Agreement is hereby deleted and replaced in its entirety with the following: “ Change in Terms of Governing Documents; Material Agreements . No Credit Party nor any Subsidiary shall change or amend, modify, supplement or waive the terms of any (a) of its Governing Documents, except amendments, modifications, supplements or waivers that do not adversely affect the rights or interests of the Administrative Agent or the Lenders, (b) Senior Notes Documents, the Lion Debt Documents, or the Permitted Unsecured Debt without the prior written consent of the Administrative Agent, to the extent such amendment, modification, supplement or waiver shall (i) increase the aggregate principal amount of the Senior Notes, the Lion Debt or the Permitted Unsecured Debt or interest, premiums or fees owing thereon, except to the extent permitted under Section 7.02(c) , 7.02(p) or 7.02(q) , as applicable, (ii) shorten the weighted average life, (iii) change the amortization (other than to extend the same), (iv) amend the maturity date (other than to extend the same), (v) increase the overall interest rate, or (vi) otherwise amend the representations, covenants and defaults under the Senior Notes Documents, the Lion Debt Documents or the Permitted Unsecured Debt in a manner that would result in such covenants and defaults being materially less favorable to the Credit Parties, taken as a whole, or materially more adverse to the interests of the Lenders; or (c) any Subordinated Debt Document, except to the extent permitted by the Subordination Agreement applicable thereto.” (v) Section 7.13 of the Credit Agreement is hereby deleted and replaced in its entirety with the following: “ 7.13 Fixed Charge Coverage Ratio. The Credit Parties shall not permit the Fixed Charge Coverage Ratio, determined as of the end of each period set forth below to be less than the amount set forth below opposite such period: Period April 1, 2015 through June 30, 2015 July 1, 2015 through September 30, 2015 October 1, 2015 through December 31, 2015 April 1, 2015 through March 31, 2016 July 1, 2015 through June 30, 2016 October 1, 2015 through September 30, 2016 and each Reference Period ended thereafter ” (w) Minimum Fixed Charge Coverage Ratio 0.33 to 1.00 1.27 to 1.00 1.17 to 1.00 .75 to 1.00 .91 to 1.00 1.15 to 1.00 Section 7.15 of the Credit Agreement is hereby deleted and replaced in its entirety with the following: “ 7.15 Maximum Leverage Ratio. The Credit Parties shall not permit the Leverage Ratio, determined as of the end of each Fiscal Quarter set forth below to be greater than the amount set forth below opposite such period: Reference Period December 31, 2015 March 31, 2016 and each Fiscal Quarter end thereafter ” Maximum Leverage Ratio 7.02 to 1.00 6.00 to 1.00 (x) Section 7.19 of the Credit Agreement is hereby deleted and replaced in its entirety with the following: “ 7.19 Adjusted Earnings. The Credit Parties shall not permit the Adjusted Earnings for each period set forth below to be less than the amount set forth below opposite such period: Period April 1, 2015 through June 30, 2015 April 1, 2015 through September 30, 2015 April 1, 2015 through December 31, 2015 April 1, 2015 through March 31, 2016 and each Reference Period ended thereafter (y) “[Reserved]”. Minimum Adjusted Earnings $ 7,350,000 $ 25,071,000 $ 41,581,000 $ 43,000,000 The existing Section 8.01(s) of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: (z) The existing Section 9.06(a) of the Credit Agreement is amended by deleting the second sentence thereof in its entirety and inserting the following in lieu thereof: “Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrowers, to appoint a successor from among the Lenders (or an Affiliate of a Lender) or a financial institution or other entity that provides agency or trustee services, in each case, having an office in the United States.” (aa) The existing Section 10.06(b) of the Credit Agreement is amended by inserting the following at the end thereof: “Notwithstanding the foregoing, with the consent of the Administrative Agent, but without the consent of any Borrower, any Lender may assign to Standard General, L.P. and/or its Affiliates all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b), participations in L/C Obligations and in Swing Line Loans) at the time owing to it.” The amendments to the Credit Agreement are limited to the extent specifically set forth above and no other terms, covenants or provisions of the Credit Agreement are intended to be affected hereby. Section 2. WAIVER. (a) Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties set forth herein, the Administrative Agent and the Lenders party hereto hereby waive any Default or Event of Default arising from (i) any actions taken prior to the Sixth Amendment Effective Date that would be permitted under Section 7.04(a)(f) if taken after the Sixth Amendment Effective Date and (ii) any failure of the Credit Parties to comply with the financial covenants set forth in Sections 7.13 , 7.15 and 7.19 of the Credit Agreement, in each case, solely for the Reference Period ended December 31, 2014. For the avoidance of doubt, the covenants set forth in Sections 7.13 , 7.15 and 7.19 of the Credit Agreement shall not be applicable for the period ending March 31, 2015. (b) Notwithstanding anything to the contrary contained in any Loan Document, the proceeds of Permitted Unsecured Debt which are loaned or otherwise transferred to Holdings or any other Credit Party shall not be required to be deposited into any Local Account, Concentration Account or Main Concentration Account or otherwise held in any particular account, to the extent to be utilized to make interest payments with respect to the Senior Notes, and the provisions of the Loan Documents are waived to the extent necessary to permit such proceeds to be held by Holdings or any other Credit Party, provided that substantially all such proceeds are utilized to make payment of interest due on the Senior Notes on or before April 15, 2015 and such amounts not so applied are deposited as required by the Loan Documents without giving effect to this clause (b). The waivers set forth in this Section 2 are limited to the extent and time period specifically set forth above and no other terms, covenants or provisions of the Credit Agreement (nor compliance for any other applicable time period) are intended to be waived or affected hereby. Section 3. CONDITIONS PRECEDENT. The parties hereto agree that this Amendment and the amendments set forth in Section 1 above and the waivers set forth in Section 2 above shall not be effective until the satisfaction of each of the following conditions precedent (the date on which such conditions precedent are satisfied or waived, the “ Amendment 6 Effective Date ”): (a) Documentation . The Administrative Agent shall have received (i) a counterpart of this Amendment, duly executed and delivered by each Borrower, each Guarantor and each Lender, (ii) true copies of amendments and waivers of the Lion Debt Documents, in form and substance reasonably satisfactory to Administrative Agent and (ii) such other documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Credit Party, the authorization of this Amendment and any other legal matters relating to the Credit Parties or the transactions contemplated hereby. (b) Amendment Fee . The Borrowers shall pay to the Administrative Agent, for the pro rata benefit of the Lenders a fee of $250,000 upon execution of this Amendment (which fee may be charged to the Borrowers’ Loan Account). (c) Fees and Expenses. All fees and expenses of counsel to the Administrative Agent estimated to date shall have been paid in full (without prejudice to final settling of accounts for such fees and expenses), in each case to the extent invoiced. (d) Proceeds of Intercompany Loan/Permitted Unsecured Debt . American Apparel (Carnaby) Limited, a private company with limited liability incorporated under the laws of England and Wales shall have received, in immediately available funds, $15,000,000 in gross proceeds from borrowings of Permitted Unsecured Debt. Section 4. REPRESENTATIONS AND WARRANTIES . (a) In order to induce the Administrative Agent and Lenders to enter into this Amendment, each Credit Party represents and warrants to the Administrative Agent and Lenders as follows: (i) The representations and warranties made by such Credit Party contained in Article V of the Credit Agreement (other than Section 5.04 thereof) shall be true and correct in all material respects (but without any duplication of any materiality qualifications) on and as of the Amendment 6 Effective Date (after giving effect to the amendments and waivers contained herein), except to the extent that such representations and warranties expressly relate to an earlier date, in which case on the Amendment 6 Effective Date such representations and warranties shall be true and correct in all material respects (but without any duplication of any materiality qualifications) on and as of such earlier date. (ii) Since the Balance Sheet Date, no act, event, condition or circumstance (except for any act, event, condition or circumstance publicly disclosed by Holdings prior to the date hereof in a filing with the SEC or as otherwise disclosed to the Administrative Agent , including to the extent disclosed in the draft 10-K for the period ended December 31, 2014, provided to the Administrative Agent on or prior to the Sixth Amendment Effective Date) has occurred or arisen which, individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect. (iii) No Default or Event of Default has occurred and is continuing or will exist after giving effect to this Amendment. (b) In order to induce the Administrative Agent and Lenders to enter into this Amendment, each Credit Party represents and warrants to the Administrative Agent and Lenders that this Amendment has been duly authorized, executed and delivered by such Credit Party and constitutes its legal, valid and binding obligation. Section 5. MISCELLANEOUS. (a) Ratification and Confirmation of Loan Documents . Each Credit Party hereby consents, acknowledges and agrees to the amendments and waivers set forth herein and hereby confirms and ratifies in all respects the Loan Documents to which such Person is a party (including, without limitation, with respect to each Guarantor, the continuation of its payment and performance obligations under the Guaranty upon and after the effectiveness of the amendments and waivers contemplated hereby and, with respect to each Credit Party, the continuation and existence of the liens granted under the Security Documents to secure the Obligations). (b) Fees and Expenses . The Borrowers, jointly and severally, shall promptly pay on demand (and, in any event, within 10 Business Days after demand therefor) all reasonable costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (c) Headings . Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) Governing Law; Waiver of Jury Trial . This Amendment shall be governed by and construed in accordance with the laws of the State of New York, and shall be further subject to the provisions of Section 10.14 of the Credit Agreement. (e) Counterparts . This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page of this Amendment by facsimile or electronic transmission (including .pdf file) shall be effective as delivery of a manually executed counterpart hereof. (f) Entire Agreement . This Amendment, together with all the Loan Documents (collectively, the “ Relevant Documents ”), sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relating to such subject matter. No promise, condition, representation or warranty, express or implied, not set forth in the Relevant Documents shall bind any party hereto, and no such party has relied on any such promise, condition, representation or warranty. Each of the parties hereto acknowledges that, except as otherwise expressly stated in the Relevant Documents, no representations, warranties or commitments, express or implied, have been made by any party to the other. None of the terms or conditions of this Amendment may be changed, modified, waived or canceled orally or otherwise except in a writing signed by the parties hereto for such purpose. (g) Enforceability . Should any one or more of the provisions of this Amendment be determined to be illegal or unenforceable as to one or more of the parties hereto, all other provisions nevertheless shall remain effective and binding on the parties hereto. (h) Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of each Borrower, each Guarantor, the Administrative Agent, each Lender and their respective successors and assigns (subject to Section 10.06 of the Credit Agreement). [Remainder of page intentionally left blank; signatures begin on following page] The following parties have caused this Amendment No. 6 to Credit Agreement and Waiver to be executed as of the date first written above. BORROWERS : AMERICAN APPAREL (USA), LLC By: Name: Title: AMERICAN APPAREL RETAIL, INC. By: Name: Title: AMERICAN APPAREL DYEING & FINISHING, INC. By: Name: Title: KCL KNITTING, LLC By: Name: Title: AMENDMENT NO. 6 TO CREDIT AGREEMENT AND WAIVER Signature Page GUARANTORS : AMERICAN APPAREL, INC. By: Name: Title: FRESH AIR FREIGHT, INC. By: Name: Title: AMENDMENT NO. 6 TO CREDIT AGREEMENT AND WAIVER Signature Page ADMINISTRATIVE AGENT AND LENDERS : CAPITAL ONE BUSINESS CREDIT CORP. , as Administrative Agent and Lender By: Name: Julianne Low Title: Senior Vice President AMENDMENT NO. 6 TO CREDIT AGREEMENT AND WAIVER Signature Page BANK OF MONTREAL, CHICAGO BRANCH , as Lender By: Name: Title: SCHEDULE 5.07 Litigation 1. Shareholder Derivative Actions . In 2010, two shareholder derivative lawsuits were filed in the United States District Court for the Central District of California (the “Court”) that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “First Derivative Action”). Plaintiffs in the First Derivative Action alleged a cause of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company filed a motion to dismiss the First 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. In 2010, four shareholder derivative lawsuits were filed in the Superior Court of the State of California for the County of Los Angeles (the "Superior Court") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action"). Three of the matters comprising the State Derivative Action alleged causes of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011, the Superior Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that, among other reasons, the case is duplicative of the First Derivative Action. In July 2014, two shareholder derivative lawsuits were filed in the Court that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. 2014 Shareholder Derivative Litigation, Lead Case No. 14-CV-5699 (the “Second Derivative Action,” and together with the First Derivative Action, the “Federal Derivative Actions”). Plaintiffs in the Second Derivative Action alleged similar causes of action for breach of fiduciary duty by failing to (i) maintain adequate internal control and exercise proper oversight over Mr. Charney, whose alleged misconduct and mismanagement has purportedly harmed the Company's operations and financial condition, (ii) ensure Mr. Charney's suspension as CEO did not trigger material defaults under two of the Company's credit agreements, and (iii) prevent Mr. Charney from increasing his ownership percentage of the Company. The Second Derivative Action primarily seeks to recover damages and reform corporate governance and internal procedures. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company has filed a motion to dismiss, and the parties are currently briefing this motion. Both the Federal Derivative Actions and State Derivative Actions are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights. Should the above matters (i.e., the Federal Derivative Actions or the State Derivative Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds that fall outside the scope of the Company's Directors and Officers Liability insurance coverage, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon the Company's financial condition, results of operations, or cash flows. 2. Charney v. American Apparel . On June 18, 2014, American Apparel’s Board of Directors suspended its CEO, Dov Charney, and gave notice of the Company’s intention to terminate him for cause. On June 23, 2014, Mr. Charney commenced arbitration against the Company and asserted claims “in excess of $50 million” for the Company’s alleged “breach of employment agreement, breach of covenant of good faith and fair dealing, retaliatory discharge, violation of Age Discrimination in Employment Act, intentional infliction of emotional distress, defamation and related claims.” That matter has been stayed by agreement of the parties pursuant to the Nomination, Support, and Standstill Agreement dated as of July 9, 2014, and appended to the Form 8-K filed by the Company with the SEC. Exhibit 10.35 EXECUTED VERSION CREDIT AGREEMENT dated as of March 25, 2015 among AMERICAN APPAREL (CARNABY) LIMITED, as the Initial Borrower, THE ADDITIONAL BORROWERS PARTY HERETO, AMERICAN APPAREL, INC., as Guarantor, STANDARD GENERAL L.P., on behalf of one or more of its controlled funds and THE LENDERS FROM TIME TO TIME PARTY HERETO TABLE OF CONTENTS Page ARTICLE I Definitions1 SECTION 1.01Definitions SECTION 1.02Terms Generally. SECTION 1.03Accounting Terms; GAAP. 1 9 10 ARTICLE II Amount and Terms of Credit10 SECTION 2.01Loans. 10 SECTION 2.02Making of Loans. 10 SECTION 2.03Notes. 12 SECTION 2.04Mandatory Principal and Interest Payments on Loans. 12 SECTION 2.05Default Interest. 14 SECTION 2.06Increased Costs. 14 SECTION 2.07Optional Prepayment of Loans; Reimbursement of Lenders. 15 SECTION 2.08Mandatory Prepayment; Commitment Termination. 15 SECTION 2.09Maintenance of Loan Account; Statements of Account. 16 SECTION 2.10Payments. 16 SECTION 2.11Settlement Amongst Lenders. 16 SECTION 2.12Taxes. 17 SECTION 2.13Mitigation Obligations; Replacement of Lenders. 19 ARTICLE III Representations and Warranties20 SECTION 3.01Organization; Powers. 20 SECTION 3.02Authorization; Enforceability. 21 SECTION 3.03Governmental Approvals; No Conflicts. 21 SECTION 3.04Compliance with Law. 21 SECTION 3.05Borrower Representations. 21 SECTION 3.06Solvency. 22 SECTION 3.07Financial Statements; No Material Adverse Change. SECTION 3.08Litigation. 23 SECTION 3.09No Default 23 SECTION 3.10Investment Company Act. 23 SECTION 3.11Regulations U and X. 24 SECTION 3.12True Copies of Charter Documents. 24 SECTION 3.13Environmental Compliance. 24 SECTION 3.14Labor Contracts. 24 SECTION 3.15Disclosure. 24 SECTION 3.16OFAC. 24 ARTICLE IV Conditions25 SECTION 4.01Closing Date. SECTION 4.02Funding Dates for Loans. ARTICLE V Covenants27 25 26 22 SECTION 5.01Notices. SECTION 5.02Use of Proceeds. ARTICLE VI Events of Default SECTION 6.01Events of Default. SECTION 6.02Remedies on Default. SECTION 6.03Application of Proceeds. 27 27 27 27 28 29 ARTICLE VII Guarantee29 SECTION 7.01Guarantee. 29 SECTION 7.02Release of Guarantee. 30 SECTION 7.03Limitation of the Guarantor’s Liability. SECTION 7.04[Reserved]. 31 SECTION 7.05Waiver of Subrogation. 31 SECTION 7.06Waiver of Stay, Extension or Usury Laws. 30 31 ARTICLE VIII Miscellaneous31 SECTION 8.01Notices. 31 SECTION 8.02Waivers; Amendments. 32 SECTION 8.03Expenses; Indemnity; Damage Waiver. 33 SECTION 8.04Successors and Assigns. 34 SECTION 8.05Survival. 37 SECTION 8.06Counterparts; Integration; Effectiveness. 37 SECTION 8.07Severability. 38 SECTION 8.08Right of Setoff. 38 SECTION 8.09Governing Law; Jurisdiction; Consent to Service of Process. SECTION 8.10WAIVER OF JURY TRIAL. 39 SECTION 8.11Press Releases and Related Matters. 39 SECTION 8.12Headings. 39 SECTION 8.13Interest Rate Limitation. 39 SECTION 8.14Additional Waivers. 40 SECTION 8.15Confidentiality. 41 SECTION 8.16Patriot Act. 42 SECTION 8.17Foreign Asset Control Regulations. 42 38 EXHIBITS Exhibit A: Exhibit B: Exhibit C: Exhibit D-1: Exhibit D-2: Exhibit D-3: Exhibit D-4: Form of Assignment and Acceptance Form of Note Form of Joinder Form of U.S. Tax Compliance Certificate Form of U.S. Tax Compliance Certificate Form of U.S. Tax Compliance Certificate Form of U.S. Tax Compliance Certificate SCHEDULES Schedule 1.01(a): Lenders and Commitments Schedule 3.01: Organization Information Litigation Schedule 3.08 Schedule 3.13 Environmental Compliance Schedule 3.14 Labor Contracts CREDIT AGREEMENT, dated as of March 25, 2015 among: (a) AMERICAN APPAREL (CARNABY) LIMITED , a private company incorporated under the laws of England and Wales with registration number 05114129, with its principal executive offices at 3 rd Floor, 60-66 National House, Wardour Street, W1F 0TA, London, United Kingdom (in such capacity, the “ Initial Borrower ”); (b) the ADDITIONAL BORROWERS now or hereafter party hereto; (c) AMERICAN APPAREL, INC. , a corporation organized under the laws of the State of Delaware (the “ Guarantor ”); (d) STANDARD GENERAL L.P., on behalf of one or more of its controlled funds; and (e) the LENDERS from time to time party hereto; in consideration of the mutual covenants herein contained and benefits to be derived herefrom, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01 Definitions. As used in this Agreement, the following terms have the meanings specified below: “ Additional Borrower ” means any Foreign Subsidiary that becomes a Borrower in accordance with Section 2.02. “ Affiliate ” means, with respect to a specified Person, any Person that directly or indirectly through one or more intermediaries Controls, is Controlled by or is under common Control with the Person specified. “ Aggregate Exposure ” means, with respect to any Lender at any time, an amount equal to, without duplication, (i) the aggregate amount of such Lender’s unfunded Commitments then in effect, plus (ii) the aggregate then unpaid principal amount of such Lender’s Loans, including PIK Interest added to the principal amount of such Loans, if any. If the Aggregate Exposure is determined with respect to a particular Class of Loans or Commitments, such Commitments, Loan and PIK Interest shall be determined solely with respect to such Class. “ Aggregate Exposure Percentage ” means, with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender’s Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time. “ Agreement ” means this Credit Agreement, as amended, restated, supplemented or otherwise modified and in effect from time to time. “ American Apparel (USA) ” means American Apparel (USA), LLC, a California limited liability company. “ Applicable Law ” means as to any Person: (i) all laws, statutes, rules, regulations, orders, codes, ordinances or other requirements having the force of law and (ii) all court orders, decrees, judgments, injunctions, notices, binding agreements and/or rulings, in each case of or by any Governmental Authority which has jurisdiction over such Person, or any property of such Person. “ Approved Fund ” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender or (b) an affiliate of a Lender. “ Assignment and Acceptance ” means an assignment and acceptance entered into by a Lender and an assignee (with, if applicable, the consent of any party whose consent is required by Section 8.04), in the form of Exhibit A. “ Bankruptcy Code ” means the Bankruptcy Reform Act of 1978, as amended, and codified as 11 U.S.C. §101 et seq . “ Board ” means the Board of Governors of the Federal Reserve System of the United States of America. “ Borrowers ” means the Initial Borrower and any Additional Borrowers. “ Borrowing ” means the incurrence of Loans. “ Borrowing Notice ” means a request by a Borrower for a Borrowing of Loans delivered in accordance with Section 2.02. “ Business Day ” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York are authorized or required by law to remain closed. “ Capital Stock ” means, as to any Person that is a corporation, the authorized shares of such Person’s capital stock, including all classes of common, preferred, voting and nonvoting capital stock, and, as to any Person that is not a corporation or an individual, the membership or other ownership interests in such Person, including, without limitation, the right to share in profits and losses, the right to receive distributions of cash and other property, and the right to receive allocations of items of income, gain, loss, deduction and credit and similar items from such Person, whether or not such interests include voting or similar rights entitling the holder thereof to exercise control over such Person, collectively with, in any such case, all warrants, options and other rights to purchase or otherwise acquire, and all other instruments convertible into or exchangeable for, any of the foregoing; provided that, notwithstanding the foregoing, Capital Stock shall not include Indebtedness convertible into or exchangeable for Capital Stock. “ Cash Interest ” has the meaning provided in Section 2.04(a). “ CERCLA ” means the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §9601 et seq . “ Change in Law ” means (i) the adoption of any law, rule or regulation after the Closing Date, (ii) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the Closing Date or (iii) compliance by any Credit Party with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the Closing Date. Notwithstanding anything herein to the contrary, (x) all requests, rules, guidelines, requirements and directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or by United States or foreign regulatory authorities, in each case pursuant to Basel III, and (y) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements and directives thereunder or issued in connection therewith or in implementation thereof, shall in each case be deemed to be a Change in Law, regardless of the date enacted, adopted, issued or implemented. “ Change of Control ” has the meaning provided in the Senior Notes Indenture as of the date hereof. “ Change of Control Offer ” has the meaning provided therefor in Section 2.08(a). “ Change of Control Payment ” has the meaning provided therefor in Section 2.08(a). “ Change of Control Payment Date ” has the meaning provided therefor in Section 2.08(a). “ Charges ” has the meaning provided therefor in Section 8.13. “ Charter Document ” means as to any Person, its partnership agreement, certificate of incorporation, operating agreement, membership agreement or similar constitutive document or agreement, its by-laws and all shareholder or other equity holder agreements, voting trusts and similar arrangements to which such Person is a party or which is applicable to its Capital Stock, and all other arrangements relating to the Control or management of such Person. “ Class ” means in the event Loans have been made to multiple Borrowers, each Loan or Loans made to a particular Borrower. “ Closing Date ” means March 25, 2015. “ Code ” means the Internal Revenue Code of 1986 and the Treasury regulations promulgated thereunder, as amended from time to time. “ Commitment ” means, with respect to each Lender, the aggregate commitment(s) of such Lender hereunder to make Loans to any Borrower in an amount not to exceed the amount set forth opposite its name on Schedule 1.01(a) hereto or such other amount as may be set forth in an Assignment and Acceptance to which such Lender is a party. As of the Closing Date, the aggregate amount of the Commitments is $15,000,000. “ Consolidated ” means, when used to modify a financial term, test, statement, or report of a Person, the application or preparation of such term, test, statement or report (as applicable) based upon the consolidation, in accordance with GAAP, of the financial condition or operating results of such Person and its Subsidiaries. “ Contractual Obligation ” means, as to any Person, any provision of any security issued by such Person or any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. “ Control ” means the possession, directly or indirectly, of the power (i) to vote 25% or more of the securities having ordinary voting power for the election of directors (or any similar governing body) of a Person, or (ii) to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms “ Controlling ” and “ Controlled ” have meanings correlative thereto. “ Credit Party ” means (i) the Lenders, (ii) the beneficiaries of each indemnification obligation undertaken by any Borrower under any Loan Document, (iii) any other Person to whom Obligations under this Agreement and other Loan Documents are owing and (iv) the successors and assigns of each of the foregoing. “ Custodian ” means any receiver, trustee, assignee, liquidator, sequestrator or similar official under the Bankruptcy Code. “ Default ” means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would become an Event of Default. “ Default Rate ” has the meaning provided in Section 2.05. “ Designated Jurisdiction ” means any country or territory to the extent that such country or territory itself is the subject of any Sanction. “ dollars ” or “ $ ” refers to lawful money of the United States of America. “ Eligible Assignee ” means any assignee permitted by and consented to in accordance with Section 8.04(b); provided that in no event shall any Loan Party or any of their respective Affiliates (other than the Initial Lender and its Affiliates) be Eligible Assignees. “ Environmental Laws ” means all Applicable Laws issued, promulgated or entered into by or with any Governmental Authority, relating in any way to the protection of human health or the environment, to the preservation or reclamation of natural resources, to the handling, treatment, storage, disposal of Hazardous Materials or to the assessment or remediation of any Release or threatened Release of any Hazardous Material or to the environment. “ Environmental Liability ” means any liability, contingent or otherwise (including, without limitation, any liability for damages, natural resource damage, costs of environmental remediation, administrative oversight costs, fines, penalties or indemnities), of any Loan Party or any of their Subsidiaries directly or indirectly resulting from or based upon (i) violation of any Environmental Law, (ii) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (iii) exposure to any Hazardous Materials, (iv) the Release or threatened Release of any Hazardous Materials into the environment or (v) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. “ Events of Default ” has the meaning assigned to such term in Section 6.01. “ Excluded Taxes ” means, with respect to any Credit Party or any other recipient of any payment to be made by or on account of any obligation of any Loan Party hereunder, (i) Taxes imposed on (or measured by) its net income, franchise taxes and branch profits taxes in each case (a) by the jurisdiction under the laws of which such recipient is organized or tax resident or in which its principal office is located or, in the case of any Credit Party, in which its applicable lending office is located or (b) that are Other Connection Taxes, (ii) in the case of a Credit Party or other recipient (other than an assignee pursuant to a request by the Borrower under Section 2.13(b), any United States withholding Tax on amounts payable to such Credit Party to the extent that is not a result of a change in Applicable Law after the time such Credit Party becomes a party to this Agreement (or designates a new lending office), except to the extent that such Credit Party (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding Tax pursuant to Section 2.12(a) and, (iii) Taxes attributable to such recipient’s failure to comply with Section 2.12(e), and (iv) any United States withholding Taxes imposed under FATCA. “ FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code. “ First Lien Credit Agreement ” means the Credit Agreement, dated as of April 4, 2013, by and among American Apparel (USA), LLC, as borrower, and the other borrowers and credit parties party thereto, the lenders party thereto, Capital One Leverage Finance Corp., as administrative agent and the other parties party thereto, as amended, restated, supplemented or otherwise modified and in effect from time to time. “ Fiscal Quarter ” means any fiscal quarter of any Fiscal Year, which quarters shall generally end on the last day of each March, June, September or December of such Fiscal Year in accordance with the fiscal accounting calendar of the Guarantor. “ Fiscal Year ” means any period of twelve consecutive months ending on December 31 of any calendar year. “ Foreign Lender ” means a Lender that is not a United States Person as defined in Section 7701(a)(30) of the Code. “ Foreign Subsidiary ” means any Subsidiary of the Guarantor that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. “ Funding Date ” means the Closing Date and each date on which a Loan is made to a Borrower. “ GAAP ” means accounting principles generally accepted in the United States set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect from time to time. “ Governmental Authority ” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. “ Guarantee ” has the meaning provided in Section 7.01. “ Guarantor ” has the meaning set forth in the Preamble to this Agreement. “ Hazardous Materials ” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes, mold, fungi or similar bacteria, and all other substances or wastes of any nature regulated pursuant to any Environmental Law, including any material listed as a hazardous substance under Section 101(14) of CERCLA. “ Indebtedness ” has the meaning provided in the Senior Notes Indenture as of the date hereof. “ Indemnified Taxes ” means Taxes other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document. “ Indemnitee ” has the meaning provided in Section 8.03(a). “ Information ” has the meaning provided in Section 8.15(a). “ Initial Borrower ” has the meaning set forth in the Preamble to this Agreement. “ Initial Lender ” means an entity controlled by Standard General and organized under the laws of the United States of America that shall be designated (and is capable of funding the initial Loans) by Standard General, by notice in writing to the Guarantor prior to the initial Funding Date, to act as the “Initial Lender” hereunder. Prior to any such designation, Standard General shall be deemed to be the “Initial Lender.” “ Interest Election ” has the meaning provided in Section 2.04(a). “ Interest Payment Date ” means the last day of each of March, June, September and December. “ Interest Rate ” means a per annum rate equal to 14%. “ Joinder Agreement ” means an agreement, in the form attached hereto as Exhibit C , pursuant to which, among other things, a Foreign Subsidiary becomes a party to, and bound by the terms of, this Agreement and the other applicable Loan Documents as a Borrower. “ Lenders ” means the Initial Lender, the other Persons identified on Schedule 1.01(a) hereto and each assignee that becomes a party to this Agreement as set forth in Section 8.04(b), in each case, until such Person ceases to hold any Loans or Commitments. “ Lion Credit Agreement ” means that certain Credit Agreement, dated as of May 22, 2013, among the Guarantor, the guarantors party thereto, Lion/Hollywood L.L.C., as the initial lender, and the other lenders from time to time party thereto (as amended, supplemented or otherwise modified from time to time). “ Loan Account ” has the meaning provided in Section 2.09(a). “ Loan Documents ” means this Agreement, the Notes and any other instrument or agreement now or hereafter executed and delivered in connection herewith by any Loan Party and the Initial Lender or any other Lender, each as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof. “ Loan Parties ” means the Borrowers and the Guarantor. “ Loans ” means all loans made pursuant to this Agreement pursuant to Section 2.01(b). “ Mandatory Principal Prepayment Amount ” means, as of each AHYDO Prepayment Date, the portion of Loans required to be redeemed to prevent the Loans from being treated as an “applicable high yield discount obligation” within the meaning of Section 163(i) (1) of the Code. “ Material Adverse Effect ” means (a) a material adverse change in, or a material adverse effect on, the operations, business, assets, properties, liabilities (actual or contingent) or condition (financial or otherwise) of the Guarantor and its Subsidiaries, taken as a whole; (b) a material impairment of the rights and remedies of any Lender under any Loan Document, or of the ability of the Borrowers, taken as a whole, to pay any Obligations under the Loan Documents, when due; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Documents to which it is a party. “ Material Indebtedness ” means Indebtedness (other than the Obligations) of the Guarantor and its Subsidiaries in an aggregate principal amount exceeding $2,500,000. “ Maturity Date ” means October 15, 2020, and if such date is not a Business Day, the next succeeding Business Day. “ Maximum Rate ” has the meaning provided therefor in Section 8.13. “ Minority Lenders ” has the meaning provided therefor in Section 8.02(c). “ Notes ” means the notes, if any, executed and delivered pursuant to Section 2.03(a) in substantially the form as attached hereto as Exhibit B , as may be amended, supplemented or modified from time to time. “ Obligations ” means (a) the due and punctual payment of (i) the principal of, and interest (including all interest that accrues after the commencement of any case or proceeding by or against any Loan Party under the Bankruptcy Code or any state, federal or provincial bankruptcy, insolvency, receivership or similar law, whether or not allowed in such case or proceeding) on the Loans and the Guarantee as and when due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise and (ii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise, of the Loan Parties to the Credit Parties under this Agreement and the other Loan Documents, and (b) the due and punctual payment and performance of all the covenants, agreements, obligations and liabilities of each Loan Party under or pursuant to this Agreement and the other Loan Documents. “ Other Connection Taxes ” means with respect to any recipient, Taxes imposed as a result of a present or former connection between such recipient and the jurisdiction imposing such Tax (other than connections arising from such recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document). “ Other Taxes ” means any and all current or future stamp or documentary taxes, value-added taxes (VAT) or any other excise or property taxes, charges or similar levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document. “ Participant ” has the meaning provided therefor in Section 8.04(e). “ Participation Register ” has the meaning provided therefor in Section 8.04(e). “ Person ” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. “ Register ” has the meaning provided in Section 8.04(c). “ Regulation U ” means Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. “ Regulation X ” means Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. “ Related Parties ” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers and advisors of such Person and of such Person’s Affiliates. “ Release ” has the meaning provided in Section 101(22) of CERCLA. “ Required Lenders ” means (i) if there are two or fewer Lenders, all Lenders or (ii) if there are three or more Lenders, at any time, Lenders holding more than 50% of the aggregate unpaid principal amount of the Loans (or the Loans of any Class) outstanding, plus the amount of any unutilized outstanding Commitments (or the Commitments of such Class). “ Restricted Subsidiary ” means any “Restricted Subsidiary” under the Senior Notes Indenture or, if the Senior Notes Indenture is no longer in effect, any Subsidiary of the Borrower that was a Restricted Subsidiary immediately prior to when the Senior Notes Indenture ceased to be in effect. “ Sanction(s) ” means any international economic sanction administered or enforced by the United States Government (including, without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority. “ Senior Management ” means with respect to any of the Loan Parties or any of its Subsidiaries, its chairman, president, chief financial officer, treasurer, controller, assistant controller, chief executive officer or general counsel. “ Senior Notes ” means the senior secured notes due 2020 issued pursuant to the Senior Notes Indenture “ Senior Notes Indenture ” means the Indenture dated April 4, 2013, by and among the Guarantor, the guarantors party thereto and U.S. Bank National Association, as trustee and collateral agent, as such Indenture is in effect from time to time. “ Settlement Date ” has the meaning provided in Section 2.11. “ Significant Subsidiaries ” means each Restricted Subsidiary that satisfies the criteria for a “significant subsidiary” set forth in Rule 1-02(w) of Regulation S-X under the Exchange Act. “ Solvent ” means, with respect to any Person on a particular date, that on such date (i) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (ii) the present fair saleable value of the properties and assets of such Person is not less than the amount that would be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts beyond such Person’s ability to pay as such debts mature, and (v) such Person is not engaged in a business or a transaction, and is not about to engage in a business or transaction, for which such Person’s properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. “ Standard General ” means Standard General L.P., on behalf of one or more of its Affiliates. “ Subsidiary ” means with respect to any Person (the “ parent ”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s Consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (i) of which Capital Stock representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, Controlled or held, or (ii) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless the context otherwise requires, “Subsidiary” or “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Guarantor. “ Taxes ” means any and all current or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto. “ United States Person ” means any person that is a “United States Person” as defined in Section 7701(a)(30) of the Code. SECTION 1.02 Terms Generally . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in the other Loan Documents), (b) any reference herein to any Person shall be construed to include such Person’s successors and permitted assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights and (f) all financial statements and other financial information provided by the Borrowers to any Lender shall be provided with reference to dollars, (g) all references to “$” or “dollars” or to amounts of money shall be deemed to be references to the lawful currency of the United States of America, and (h) this Agreement and the other Loan Documents are the result of negotiation among, and have been reviewed by counsel to, among others, the Loan Parties and the Initial Lender and are the product of discussions and negotiations among all parties. Accordingly, this Agreement and the other Loan Documents are not intended to be construed against any of the Lenders merely on account of any Lender’s involvement in the preparation of such documents. SECTION 1.03 Accounting Terms; GAAP . Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP. ARTICLE II Amount and Terms of Credit SECTION 2.01 Loans . Subject to the terms and conditions set forth herein, the Lenders holding Commitments agree to make Loans to the Borrowers from time to time (provided that there shall not be more than five Borrowings of Loans) (i) in an amount, as to each such Lender, not to exceed such Lender’s Commitment and (ii) in an aggregate principal amount not to exceed $15,000,000. Amounts borrowed under this Section 2.01 and repaid or prepaid may not be reborrowed. SECTION 2.02 Making of Loans . (i) The Guarantor may from time to time on or after the Closing Date request that any Foreign Subsidiary become an Additional Borrower hereunder (such Foreign Subsidiary, prior to becoming an Additional Borrower pursuant to this Section 2.02, an “ Applicant Borrower ”). Within ten (10) Business Days after receipt of such notice, the Initial Lender shall notify the Guarantor whether it consents to such Person becoming an Additional Borrower hereunder, such consent not to be unreasonably withheld, and, provided , that no consent shall be required for a Foreign Subsidiary that exists on the Closing Date and is organized under the laws of the United Kingdom. The parties hereto acknowledge and agree that prior to any such Applicant Borrower becoming entitled to incur Loans, the Initial Lender and any other Lenders shall have received, (A) copies of the Charter Documents of such Applicant Borrower and other documents, confirmations or information as may reasonably be requested by any Lender (collectively, the “ Applicant Borrower Documents ”), (B) customary legal opinions (addressed to the Lenders) of counsel for such Applicant Borrower covering such matters relating to the Loan Parties, the Loan Documents or the Transactions contemplated thereby as any Lender shall reasonably request and (C) Notes signed by such Applicant Borrower to the extent any Lender so requests. If the Applicant Borrower shall be entitled to receive Loans hereunder, the Applicant Borrower shall send a notice to the Lenders specifying the effective date upon which the requested Applicant Borrower shall constitute an Additional Borrower for purposes hereof, whereupon each of the Lenders agrees to permit such Borrower to receive Loans hereunder, on the terms and conditions set forth herein, and each of the parties hereto agrees that such Additional Borrower otherwise shall be a Borrower for all purposes of this Agreement. (ii) The Obligations of all Additional Borrowers shall be several in nature, and no Borrower, in its capacity as a Borrower, will be liable for the Obligations of another Borrower. (iii) Any acknowledgment, consent, direction, certification or other action which might otherwise be valid or effective only if given or taken by all Borrowers, or by each Borrower acting singly, shall be valid and effective if given or taken only by the Guarantor, whether or not any such other Borrower joins therein. The Guarantor shall be entitled to act on behalf of any other Borrower, and the Initial Lender and any other Lenders may rely on any notice, action, acknowledgment or ratification made by the Guarantor acting on behalf of or purporting to act on behalf of any other Borrower. Any notice, demand, consent, acknowledgement, direction, certification or other communication delivered to the Guarantor in accordance with the terms of this Agreement shall be deemed to have been delivered to each Borrower. (iv) The Guarantor may from time to time, upon not less than five (5) Business Days’ notice from the Guarantor to the Initial Lender (or such shorter period as may be agreed by the Initial Lender in its reasonable discretion), terminate a Borrower’s status as such; provided that there are no outstanding Loans payable by such Borrower or other amounts payable by such Borrower on account of any Loans made to it, as of the effective date of such termination. The Initial Lender will promptly notify any other Lenders of any such termination of a Borrower’s status. (v) The applicable Borrower shall give the Initial Lender irrevocable notice (which notice must be received by the Initial Lender prior to 6:00 p.m., New York City time, at least five Business Days prior to the requested Funding Date) requesting that the Lenders holding Commitments make Loans on such Funding Date and specifying (a) the requested Funding Date, (b) the aggregate principal amount to be borrowed (which shall be in a minimum amount of $1,000,000 and integral multiples of $1,000,000 above such amount) and (c) instructions for remittance of the proceeds of such Loan to be borrowed. Not later than 1:30 p.m., New York City time, on such Funding Date, the Lenders holding Commitments shall fund its pro rata share of the Loan (as determined in accordance with its Commitment) in immediately available funds to such Borrower by wire transfer of such funds in accordance with instructions provided to the Lenders making such Loan. (vi) Each Lender may fulfill its Commitment with respect to any Loan by causing any lending office of such Lender to make such Loan; provided , however , that any such use of a lending office shall not affect the obligation of the such Borrower to repay such Loan in accordance with the terms of the applicable Note. Each Lender shall, subject to its overall policy considerations, use reasonable efforts to select a lending office which will not result in the payment of increased costs by the Borrowers pursuant to Section 2.06. SECTION 2.03 Notes . (a) Upon the request of any Lender, the applicable Borrower shall duly execute and deliver a Note evidencing the Loan, as applicable, made by such Lender. (b) Each Lender is hereby authorized by the Borrowers to endorse on a schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender’s internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of interest on any such Loan and the other information provided for on such schedule; provided , however , that the failure of any Lender to make such a notation or any error therein shall not affect the obligation of the applicable Borrowers to repay the Loans made by such Lender in accordance with the terms of this Agreement and the applicable Notes. (c) Upon receipt of an affidavit of a Lender as to the loss, theft, destruction or mutilation of such Lender’s Note and upon cancellation of such Note, the applicable Borrower will issue, in lieu thereof, a replacement Note in favor of such Lender, in the same principal amount thereof and otherwise of like tenor. SECTION 2.04 Mandatory Principal and Interest Payments on Loans . (a) Any Borrower may, at the option of the Guarantor (subject to the proviso at the end of this sentence) (an “ Interest Election ”), elect to pay interest on the Class of Loans made to it on each Interest Payment Date (i) in cash (“ Cash Interest ”), (ii) by increasing the outstanding principal amount of the applicable Loans on the relevant Interest Payment Date by the amount of interest accrued from the effective date of any such Interest Election until such Interest Payment Date (“ PIK Interest ”), with such increases to the principal amount of such Class of Loans allocated on a pro rata basis to the outstanding Loans of such Class in accordance with such Lenders’ Aggregate Exposure Percentages with respect to such Class immediately prior to such allocation and/or (iii) at the Guarantor’s discretion, subject to the following proviso, partially in PIK Interest and partially in Cash Interest; provided , that (x) the Guarantor must elect to have the applicable Borrower pay interest in the form of Cash Interest to the extent such Borrower either (A) has unrestricted cash available or (B) the Guarantor or a Restricted Subsidiary has unrestricted cash available and has the ability without violating any then-existing contract to transfer cash to the applicable Borrower, in the case of each of (A) and (B), only to the extent it would be commercially prudent from the perspective of the Guarantor and its Subsidiaries, taken as a whole, for such Borrower to pay Cash Interest in the light of all the facts and circumstances existing at such time including budgeted, expected and reasonably likely liabilities or expenses as they become, or are reasonably likely to become, due and payable and (y) the outstanding principal amount of Loans shall in no event exceed $15,000,000. Unless the context otherwise requires, for all purposes hereof, references to “principal amount” of the Loans refers to the face amount of the Loans and not gross proceeds funded hereunder and includes any interest so capitalized and added to the principal amount of the Loans from the date on which such interest has been so added. (b) The Guarantor must make an Interest Election on behalf of the applicable Borrower by delivering a notice to each of the Lenders no later than ten (10) Business Days prior to the effective date of any Interest Election (or, if the initial Interest Payment Date with regard to such Loan is less than ten (10) Business Days after the making of such Loan, the date such Loan is made (with regard to such Interest Payment Date)), which notice shall specify (x) whether such Interest Election is made under clause (i) and/or (ii) of the immediately preceding paragraph and (y) the effective date of such Interest Election, which effective date must be the next succeeding Interest Payment Date to occur after the date of the giving of such notice, or, if not a Business Day, the first Business Day to occur thereafter. An Interest Election shall remain in effect until the earlier of (i) next Interest Payment Date following the effective date of such Interest Election and (ii) the Maturity Date; provided that no more than one Interest Election may be given by the Guarantor in any three-month period. In the absence of such an election for any interest period, interest on the Loans shall be payable as Cash Interest. (c) Subject to Section 2.05, each Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 (or 366 days, if applicable) at a rate per annum that shall be equal to the Interest Rate compounding quarterly to the extent provided in Section 2.04(c). (d) Cash Interest accrued on each Loan shall be payable on the Interest Payment Dates applicable to such Loan, except as otherwise provided in this Agreement. PIK Interest accrued on each Loan shall be payable by increasing the outstanding principal amount of the Loans by the amount of PIK Interest on the Interest Payment Date applicable to such Loan for such period and in such amounts as required by the relevant Interest Election(s). Any interest so added to the principal amount of the Loans shall bear interest as provided in this Section 2.04 from the date on which such interest has been so added. The obligation of the Borrowers to pay PIK Interest shall be automatically evidenced by this Agreement or, if applicable, any Notes issued pursuant to this Agreement. (e) All accrued and unpaid interest shall be paid in cash at maturity (whether by acceleration or otherwise), after such maturity on demand and upon any repayment or prepayment thereof (on the amount prepaid). (f) In addition to interest payments required to be made hereunder, and subject to the rights of acceleration hereunder, the full unpaid principal balance of the Loans, including PIK Interest, if any, that has been added to the principal balance of the Loans, shall be payable in full on the Maturity Date. (g) In computing interest on any Loan, the date on which such interest is paid shall not be included and the first date of the interest period applicable to such Loan shall be included. (h) If any Loans would otherwise constitute “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Code, at the end of each “accrual period” (as defined in Section 1272(a)(5) of the Code) ending after the fifth anniversary of the applicable Funding Date (each, an “ AHYDO Prepayment Date ”), the Borrower will be required to prepay for cash a portion of each applicable Loan then outstanding equal to the Mandatory Principal Prepayment Amount (each such redemption, a “ Mandatory Principal Prepayment ”). The prepayment amount for the portion of the applicable Loans prepaid pursuant to any Mandatory Principal Prepayment will be 100% of the principal amount of such portion plus any accrued interest thereon on the date of prepayment. No partial prepayment of the Loans prior to any AHYDO Prepayment Date pursuant to any other provision of this Agreement will alter the Borrower’s obligation to make any Mandatory Principal Prepayment with respect to any Loans that remain outstanding on such AHYDO Prepayment Date. SECTION 2.05 Default Interest . After the occurrence of any Default which remains unremedied for twenty (20) days and at all times thereafter while such Default remains unremedied, interest shall accrue on all outstanding Loans including on PIK Interest, if any, that has been added to the principal amount of the Loan (after as well as before judgment, as and to the extent permitted by law) at a rate per annum (the “ Default Rate ”) equal to the Interest Rate in effect from time to time plus 2% per annum and such interest shall be payable in cash on each Interest Payment Date (or any earlier maturity of the Loans). SECTION 2.06 (a) Increased Costs . If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any holding company of any Lender; or (ii) impose on any Lender any other condition affecting this Agreement or Loans made by such Lender; and the result of any of the foregoing shall be to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the applicable Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender determines that any Change in Law regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender’s capital or liquidity or on the capital or liquidity of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time the applicable Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered. (c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section 2.06 and setting forth in reasonable detail the manner in which such amount or amounts were determined shall be delivered to the Initial Borrower and shall be conclusive absent manifest error. The applicable Borrower shall pay such Lender the amount shown as due on any such certificate within fifteen (15) Business Days after receipt thereof. (d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section 2.06 shall not constitute a waiver of such Lender’s right to demand such compensation; provided that no compensation will be paid to any Lender with respect to any Change in Law that has occurred 180 days before such Lender has demanded compensation under this Section 2.06. SECTION 2.07 Optional Prepayment of Loans; Reimbursement of Lenders . The Borrowers shall have the right to prepay any outstanding Loans of any Class, in whole or part, upon at least two (2) Business Day’s prior written notice or facsimile notice to each Lender having Loans (a) with respect to the applicable Class (with notices or payments delivered or made after 5:00 p.m. New York City time on a particular Business Day being deemed delivered or made on the next succeeding Business Day). (b) [Reserved.] Any prepayment made pursuant to this Section 2.07 shall be subject to the following limitations: (i) All prepayments shall be paid to all Lenders having a Loan with respect to the applicable Class being prepaid for application to the prepayment of outstanding Loans of such Class, including PIK Interest, if any, together with any accrued and unpaid interest, ratably in accordance with each Lender’s Aggregate Exposure Percentage with respect to such Class; and (c) (ii) Each notice of prepayment shall specify the Class of Loans to be prepaid, the prepayment date and the principal amount of the Loans to be prepaid. Each notice of prepayment shall be irrevocable and shall commit the applicable Borrower to prepay such Loan by the amount and on the date stated therein; provided that if a notice of prepayment is expressly conditioned upon the effectiveness of an acquisition, debt incurrence or equity issuance, then such notice of prepayment may be revoked (by notice to the each Lender on or prior to the specified prepayment date) if such condition is not satisfied. In the event any Borrower fails to prepay the Loans on the date specified in any prepayment notice delivered pursuant to Section 2.07(a), such Borrower, on demand by any Lender, shall pay to such Lender, any amounts required to compensate such Lender for any loss incurred by such Lender as a result of such failure to prepay. Any Lender demanding such payment shall deliver to the Guarantor from time to time one or more certificates setting forth the amount of such loss as determined by such Lender and setting forth in reasonable detail the manner in which such amount was determined. (d) SECTION 2.08 Mandatory Prepayment; Commitment Termination . (a) Upon the occurrence of a Change of Control, each Borrower will make an offer to the Lenders to repurchase the Loans at a purchase price in cash equal to one hundred one percent (101%) of (x) the aggregate principal amount of such Loans outstanding, including PIK Interest, if any, plus (y) accrued and unpaid interest thereon (any such offer, a “ Change of Control Offer ” and any such payment, the “ Change of Control Payment ”). Within five (5) Business Days following any Change of Control, the Guarantor will provide irrevocable notice to each Lender describing the transaction or transactions that constitute the Change of Control and stating the purchase price and the purchase date, which shall be no later than five (5) Business Days from the date such notice is given (the “ Change of Control Payment Date ”). On the Change of Control Payment Date, the Borrowers will deposit with the applicable Lenders an amount equal to the Change of Control Payment in respect of the Loans of each Lender that has accepted the Change of Control Offer. (b) The Commitments shall terminate at 5:00 p.m., New York City time, on the second anniversary of the Closing Date. SECTION 2.09 Maintenance of Loan Account; Statements of Account . Each Lender shall maintain an account on its books in the name of each Borrower (each a “ Loan Account ”) which will reflect (i) all Loans made by such Lender to such Borrower and the Class of each such Loan, (ii) all increases in the outstanding principal amount of the Loans resulting from the payment of PIK Interest and (iii) any and all other monetary Obligations that have become payable. (a) (b) Each Loan Account will be credited with all amounts received from such Borrower or from others for the Borrower’s account. At the reasonable request of any Borrower, each Lender shall send such Borrower a statement accounting for its Loan Account during such Fiscal Quarter. Any such quarterly statements shall, absent manifest error, be an account stated, which is final, conclusive and binding on the Borrowers. SECTION 2.10 Payments . (a) The Borrowers shall make each payment required to be made hereunder or under any other Loan Document (whether of principal, interest or fees, of amounts payable under Section 2.06, Section 2.07(d) or Section 2.12, or otherwise) prior to 2:00 p.m., New York City time, on the date when due, in immediately available funds, without setoff or counterclaim. Any amounts received after such time on any date shall be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars. (b) All funds received by any Person entitled thereto shall be applied in accordance with the provisions of Section 6.03 hereof, as applicable, ratably among the Persons entitled thereto in accordance with the amounts of principal, interest, and fees then due to such respective parties. SECTION 2.11 Settlement Amongst Lenders . The amount of each Lender’s applicable Aggregate Exposure Percentage of outstanding Loans of each Class shall be computed quarterly and shall be adjusted based on all Loans of such Class, all increases in the outstanding principal amount of the Loans of such Class resulting from the payment of interest in kind and repayments of Loans of such Class received by the Lenders as of 2:00 p.m., New York City time, on the first Business Day (such date, the “ Settlement Date ”) following the end of each Fiscal Quarter. SECTION 2.12 Taxes . (a) Any and all payments by or on account of any obligation of the Loan Parties hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Taxes, except as required by applicable law. If any applicable law (as determined in the reasonable judgment of the Guarantor) requires the deduction or withholding of any Tax from any such payment by or on behalf of any Loan Party, then the Loan Party (or the applicable withholding agent) shall be entitled to and shall make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with Applicable Law and, if such Tax is an Indemnified Tax or Other Tax, then the sum payable shall be increased as necessary so that after making all required deductions or withholdings for Taxes (including deductions applicable to additional sums payable under this Section 2.12) the applicable Credit Party receives an amount equal to the sum it would have received had no such deductions been made. (b) In addition, the Loan Parties shall pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law. (c) Without duplicating the provisions of Section 2.12(a) and (b) above, the Loan Parties shall indemnify each Credit Party, within ten (10) days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by such Credit Party on or with respect to any payment by or on account of any obligation of the Loan Parties hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section 2.12) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Guarantor by a Credit Party, setting forth in reasonable detail the manner in which such amount was determined, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Taxes pursuant to this Section 2.12 by a Loan Party to a Governmental Authority, the Guarantor shall deliver to each Lender the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Required Lenders. (e) (i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to the Guarantor, at the time or times reasonably requested by the Guarantor, such properly completed and executed documentation reasonably requested by the Guarantor as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Guarantor, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Guarantor as will enable the Borrower or the Guarantor to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 2.12(e) (ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lender's reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense. (ii) Without limiting the generality of the foregoing, (A) any Lender that is a U.S. Person shall deliver to the Guarantor on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Guarantor), executed copies of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax; (B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Guarantor (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Guarantor) whichever of the following is applicable: (1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed copies of IRS Form W-8BEN or W-8BENE establishing an exemption from, or reduction of U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN or W-8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty. (2) executed copies of IRS Form W-ECI; (3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit D-1 to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Guarantor within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “ U.S. Tax Compliance Certificate ”) and (y) executed copies of IRS Form W-8BEN or W-8BEN-E; or (4) to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS Form W-8IMY, accompanied by IRS Form W-ECI, IRS Form W-8BEN or W-8BEN-E, a U.S. Tax Compliance Certificate substantially in the form of Exhibit D-2 or Exhibit D-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable, provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit D-4 on behalf of each such direct and indirect partner; (C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Guarantor (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Guarantor), executed copies of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Guarantor to determine the withholding or deduction required to be made; and (D) if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Guarantor at the time or times prescribed by law and at such time or times reasonably requested by the Guarantor such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Guarantor as may be necessary for the Guarantor and Borrower to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender's obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), "FATCA" shall include any amendments made to FATCA after the date of this Agreement. Each Lender agrees (x) that if any form or certification it previously delivered pursuant to Section 2.12(e)(ii) expires or becomes obsolete, it shall update such form or certification or promptly notify the Guarantor in writing of its legal inability to do so and (y) that if such Lender has actual knowledge that any form or certification it previously delivered pursuant to Section 2.12(e) becomes inaccurate in any respect, it shall promptly notify the Guarantor such inaccuracy. (f) If any Loan Party shall be required pursuant to Section 2.12(a), (b) or (c) to pay any additional amount to, or to indemnify, any Credit Party to the extent that such Credit Party becomes subject to Taxes subsequent to the Closing Date (or, if applicable, subsequent to the date such Person becomes a party to this Agreement) as a result of any change in the circumstances of such Credit Party (other than a change in Applicable Law), including without limitation a change in the residence, place of incorporation, principal place of business of such Credit Party or a change in the branch or lending office of such Credit Party, as the case may be, such Credit Party shall use reasonable efforts to avoid or minimize any amounts which might otherwise be payable pursuant to Section 2.12 (a), (b) or (c); provided however , that such efforts shall not include the taking of any actions by such Credit Party that would result in any tax, costs or other expense to such Credit Party (other than a tax, cost or other expense for which such Credit Party shall have been reimbursed or indemnified by the Loan Parties pursuant to this Agreement or otherwise) or any action which would or might in the reasonable opinion of such Credit Party have an adverse effect upon its business, operations or financial condition or otherwise be disadvantageous to such Credit Party. (g) If any Credit Party reasonably determines that it has received a refund of any Taxes paid, indemnified or reimbursed by the Loan Parties pursuant to Section 2.12 (including by the payment of additional amounts pursuant to this Section 2.12), such Credit Party shall pay to the applicable Loan Party, with reasonable promptness following the date upon which it receives the refund an amount equal to the refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.12 with respect to the Taxes giving rise to such refund), net of all out of pocket expenses incurred in securing such refund by the Credit Party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided , that the Borrower, upon the request of the Credit Party, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Credit Party in the event the Credit Party is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require the Credit Party to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Guarantor or any other Person. (h) For purposes of this Section 2.12, the term Applicable Law includes FATCA. SECTION 2.13 Mitigation Obligations; Replacement of Lenders . (a) If any Lender requests compensation under Section 2.06, or if any Loan Party is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.12, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the reasonable judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.06 or Section 2.12, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The applicable Loan Party hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment; provided , however , that no Loan Party shall be liable for such costs and expenses of a Lender requesting compensation if (i) such Lender becomes a party to this Agreement on a date after the Closing Date and (ii) the relevant Change in Law occurs on a date prior to the date such Lender becomes a party hereto. (b) If any Lender requests compensation under Section 2.06, or if any Loan Party is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.12, or if any Lender defaults in its obligation to fund Loans hereunder, then the Guarantor may, at its sole expense and effort, upon notice to such Lender, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 8.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided , however , that (i) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, including PIK Interest, if any, accrued interest on the Loans, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal, including PIK Interest, if any, accrued interest and fees) or the Borrowers (in the case of all other amounts) and (ii) in the case of any such assignment resulting from a claim for compensation under Section 2.06 or payments required to be made pursuant to Section 2.12, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Guarantor to require such assignment and delegation cease to apply. ARTICLE III Representations and Warranties To induce the Credit Parties to make the Loans, the Initial Borrower, the Guarantor and, if applicable, any Additional Borrowers, jointly and severally, make, on the Closing Date and each Funding Date thereafter, the following representations and warranties to each Credit Party, all of which shall survive the execution and delivery of this Agreement and the making of the Loans ( provided that the representations and warranties set forth in Section 3.05 shall be made only on each Funding Date on which Loans are made and only by the Guarantor and each Borrower to which Loans are extended on such Funding Date): SECTION 3.01 Organization; Powers . Each Loan Party and each Subsidiary of a Loan Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to own its property and assets and to carry on its business as now conducted and each Loan Party has all requisite power and authority to execute and deliver and perform all its obligations under all Loan Documents to which such Loan Party is a party. Each Loan Party and each Subsidiary of a Loan Party is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure to do so individually or in the aggregate could not reasonably be expected to result in a Material Adverse Effect. Schedule 3.01 annexed hereto sets forth, as of the Closing Date, the Guarantor and the Initial Borrower’s names as they appear in official filings in their jurisdiction of incorporation, organization type, organization number, if any, issued by such jurisdiction of incorporation and their federal employer identification number. SECTION 3.02 Authorization; Enforceability . The transactions contemplated hereby and by the other Loan Documents to be entered into by each Loan Party on the Closing Date or such other Funding Date are within such Loan Party’s corporate or other organizational powers and have been duly authorized by all necessary corporate, membership, partnership or other necessary action. This Agreement has been duly executed and delivered by the Guarantor and the Initial Borrower and constitutes, and each other Loan Document to which any Loan Party is a party, when executed and delivered by such Loan Party will constitute, a legal, valid and binding obligation of such Loan Party, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03 Governmental Approvals; No Conflicts . The transactions to be entered into and contemplated by the Loan Documents (a) (i) on the Closing Date do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except for such as have been obtained or made and are in full force and effect and (ii) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except for such as have been obtained or made and are in full force and effect as of the date of any Borrowing, (b) will not violate any material Applicable Law or the Charter Documents of any Loan Party and (c) will not violate or result in a default under any indenture or any other agreement, instrument or other evidence of Material Indebtedness, or any other material instrument binding upon any Loan Party or its assets, or give rise to a right thereunder to require any payment to be made by any Loan Party. SECTION 3.04 Compliance with Law . The Guarantor and each of its Subsidiaries is in compliance in all material respects with the requirements of all Applicable Law and all orders, writs, injunctions and decrees applicable to it, except in such instances in which (a) such Applicable Law or such order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. SECTION 3.05 Borrower Representations . (a) Each Borrower is subject to civil and commercial Laws with respect to its obligations under this Agreement and the other Loan Documents to which it is a party (collectively as to such Borrower, the “ Applicable Borrower Documents ”), and the execution, delivery and performance by such Borrower of the Applicable Borrower Documents constitute and will constitute private and commercial acts and not public or governmental acts. Neither such Borrower nor any of its property has any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) under the laws of the jurisdiction in which such Borrower is organized and existing in respect of its obligations under the Applicable Borrower Documents. The Applicable Borrower Documents are in proper legal form under the Laws of the jurisdiction in which such Borrower is organized and existing for the enforcement thereof against such Borrower under the Laws of such jurisdiction, and are sufficient to ensure the legality, validity, enforceability, priority or admissibility in evidence of the Applicable Borrower Documents. (b) (c) It is not necessary to ensure the legality, validity, enforceability, priority or admissibility in evidence of the Applicable Borrower Documents that the Applicable Borrower Documents be filed, registered or recorded with, or executed or notarized before, any court or other authority in the jurisdiction in which such Borrower is organized and existing or that any registration charge or stamp or similar tax be paid on or in respect of the Applicable Borrower Documents or any other document, except for (A) any such filing, registration, recording, execution, translation or notarization as has been made or is not required to be made until the Applicable Borrower Document or any other document is sought to be enforced and (B) any charge or tax as has been timely paid. (d) There is no tax, levy, impost, duty, fee, assessment or other governmental charge, or any deduction or withholding, imposed by any Governmental Authority in or of the jurisdiction in which such Borrower is organized and existing either (A) on or by virtue of the execution or delivery or enforcement of or performance by the parties of their respective obligations under the Applicable Borrower Documents or (B) on any payment to be made by such Borrower pursuant to the Applicable Borrower Documents, except as has been disclosed in writing to the Initial Lender. None of the Borrowers is a foreign financial institution as defined in section 1471(d)(4) of the Code. (e) The execution, delivery and performance of the Applicable Borrower Documents executed by such Borrower are, under applicable foreign exchange control regulations of the jurisdiction in which such Borrower is organized and existing, not subject to any notification or authorization except (A) such as have been made or obtained or (B) such as cannot be made or obtained until a later date (provided that any notification or authorization described in clause (b) shall be made or obtained as soon as is reasonably practicable). (f) The execution, delivery and performance of the Applicable Borrower Documents executed by such Borrower and the making of the applicable Loans will not violate or result in a default under any indenture or any other agreement, instrument or other evidence of Material Indebtedness, or any other material instrument binding upon any Borrower or its assets, or give rise to a right thereunder to require any payment to be made by any Borrower. SECTION 3.06 Solvency . As of the Closing Date, the Guarantor and its Subsidiaries, taken as a whole on a consolidated basis, are Solvent. SECTION 3.07 Financial Statements; No Material Adverse Change . (a) There has been furnished to the Initial Lender a consolidated and consolidating balance sheet of the Guarantor and its Subsidiaries as of December 31, 2013, and a consolidated and consolidating statements of income or operations, cash flows and shareholders’ equity of the Guarantor and its Subsidiaries for the Fiscal Year then ended, and in the case of the consolidated financial statements, certified by Marcum LLP. Such financial statements have been prepared in accordance with GAAP and fairly present the financial condition of the Guarantor and its Subsidiaries as at the close of business on the date thereof and the results of operations for the Fiscal Year then ended. There are no contingent liabilities of the Guarantor or any Subsidiary as of such date involving material amounts, known to the officers of Guarantor or any Subsidiary, required to be disclosed in such balance sheet and the notes related thereto in accordance with GAAP, which were not disclosed in such balance sheet and the notes related thereto. (b) There has been furnished to the Initial Lender an unaudited consolidated and consolidating balance sheet of the Guarantor and its Subsidiaries as of the close of the Fiscal Quarter ending September 30, 2014 and unaudited consolidated and consolidating statements of income or operations and cash flow of the Guarantor and its Subsidiaries as of the close of such Fiscal Quarter, in each case, certified by a financial officer of Guarantor. Such balance sheet and statement of income or operations and cash flows have been prepared in accordance with GAAP and fairly present the financial condition of the Guarantor and its Subsidiaries as at the close of business on the date thereof and the results of operations subject to year-end and quarterly adjustments and the absence of footnotes. There are no contingent liabilities of the Guarantor or any Subsidiary as of such date involving material amounts, known to the officers of the Guarantor or any Subsidiary required to be disclosed in such balance sheet and the notes related thereto in accordance with GAAP which were not disclosed in such balance sheet and the notes related thereto. (c) Since September 30, 2014, there has occurred no Material Adverse Effect. SECTION 3.08 Litigation . There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Loan Parties, threatened in writing, at law, in equity, in arbitration or before any Governmental Authority, by or against the Loan Parties, any of its Subsidiaries or any member of the Senior Management of any Loan Party or any of its Subsidiaries or against any of their properties or revenues that (a) as of the Closing Date purport to affect or pertain to this Agreement or any of the transactions contemplated hereby or (b) could reasonably be expected to result in material liabilities against the Loan Parties and their Subsidiaries, taken as a whole, either individually or in the aggregate except as specifically disclosed in Schedule 3.08 , and there has been no material adverse change in the status, or financial effect on the Loan Parties and their Subsidiaries, taken as a whole, of the matters described on Schedule 3.08 . SECTION 3.09 No Default . From and after the Closing Date, (i) no Default or Event of Default has first occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement, and (ii) no Event of Default (as defined in each of the First Lien Credit Agreement and the Senior Notes Indenture) has first occurred and is continuing. SECTION 3.10 Investment Company Act . None of the Loan Parties is required to be registered as an “investment company” under the Investment Company Act of 1940. SECTION 3.11 Regulations U and X. The proceeds of the Loans shall be used solely for the purposes specified in Section 5.02. No portion of any Loan is to be used for the purpose of purchasing or carrying any “margin security” or “margin stock” as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 COFFER. Parts 221 and 224. SECTION 3.12 True Copies of Charter Documents . The Loan Parties (as of the Closing Date or, with respect to any Additional Borrower, the initial Funding Date for such Additional Borrower) have furnished or caused to be furnished to the Lender true and complete copies of the Charter Documents (together with any amendments thereto) of each Loan Party. SECTION 3.13 Environmental Compliance . Based upon the actual knowledge of the executive officers of the Guarantor, and except as specifically disclosed in Schedule 3.13 , existing Environmental Laws and claims, as they relate to the Loan Parties and their Subsidiaries, could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 3.14 Labor Contracts . Except as set forth on Schedule 3.14 , as of the Closing Date, none of the Loan Parties is party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or other organization of any Loan Party’s employees, or threats of strikes or work stoppages that would reasonably be expected to result in a Material Adverse Effect. SECTION 3.15 Disclosure . Each Loan Party has disclosed to the Initial Lender all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect (which disclosure includes matters disclosed pursuant to filings with the United States Securities and Exchange Commission made by the Guarantor so long as the Loan Parties have alerted the Initial Lender to the existence thereof, and the draft 10-K for the period ended December 31, 2014, provided to the Initial Lender prior to the Closing Date). No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of any Loan Party to the Initial Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading. SECTION 3.16 OFAC . No Loan Party, nor, to the knowledge of any Guarantor, any Related Party, (i) is currently the subject of any Sanctions, (ii) is located, organized or residing in any Designated Jurisdiction, or (iii) is or has been (within the previous five (5) years) engaged in any transaction with any Person who is now or was then the subject of Sanctions or who is located, organized or residing in any Designated Jurisdiction. No Loan, nor the proceeds from any Loan, has been used, directly or indirectly, to lend, contribute, provide or has otherwise made available to fund any activity or business in any Designated Jurisdiction or to fund any activity or business of any Person located, organized or residing in any Designated Jurisdiction or who is the subject of any Sanctions, or in any other manner that will result in any violation by any Person (including any Lender, the Arranger, the Administrative Agent or the L/C Issuer) of Sanctions. ARTICLE IV Conditions SECTION 4.01 Closing Date . The obligation of each Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit, of the following conditions precedent: (a) The Initial Lender (or its counsel) shall have received a counterpart of this Agreement signed on behalf of each party hereto. (b) The Initial Lender shall have received a favorable written opinion (addressed to the Initial Lender and dated the Closing Date) of counsel for the Loan Parties covering such matters relating to the Loan Parties, the Loan Documents or the Transactions contemplated thereby as the Initial Lender shall reasonably request. (c) The Initial Lender shall have received Charter Documents and such other documents and certificates as the Initial Lender or its counsel may reasonably request relating to the organization, existence and good standing of the Guarantor and the Initial Borrower, the authorization of the transactions contemplated by the Loan Documents and any other legal matters relating to the Guarantor, the Initial Borrower, the Loan Documents or the transactions contemplated thereby, all in form and substance reasonably satisfactory to the Initial Lender and its counsel. (d) The Initial Lender shall have received a certificate, reasonably satisfactory in form and substance to the Initial Lender, certifying (i) that the Guarantor and its Subsidiaries, taken as a whole, are Solvent as of the Closing Date and (ii) that as of the Closing Date, the representations and warranties made by the Guarantor and the Initial Borrower in the Loan Documents, or which are contained in any document furnished in connection herewith and therewith, are true and correct in all material respects; provided that any representation and warranty that is qualified as to materiality or “Material Adverse Effect” or similar language and the representation and warranty contained in Section 3.04 shall be true and correct in all respects; (iii) that immediately after giving effect to the consummation of the transactions contemplated under this Agreement and the other Loan Documents on the Closing Date (including any Loans made hereunder on the Closing Date), no Default or Event of Default exists, and (iv) as to compliance with the terms of the First Lien Credit Agreement and the Senior Notes Indenture. (e) Immediately after giving effect to the consummation of the transactions contemplated under this Agreement and the other Loan Documents on the Closing Date (including any Loans made hereunder on the Closing Date), no Default or Event of Default shall exist. (f) All necessary consents and approvals to the transactions contemplated hereby shall have been obtained and shall be reasonably satisfactory to the Initial Lender. (g) There shall have been delivered to the Initial Lender such additional instruments and documents as the Initial Lender or its counsel reasonably may require or request. (h) The Initial Lender shall have received a Borrowing Notice as required by Section 2.02. (i) The Initial Lender shall have received a true, correct and complete copy, certified as such by the Guarantor, of (1) the First Lien Credit Agreement, (2) the Senior Notes Indenture, (3) the Intercreditor Agreement (as defined in the Senior Notes Indenture), in each case, in effect as of the Closing Date, and (4) an amendment to the First Lien Credit Agreement, explicitly permitting all of the transactions contemplated hereby and by the other Loan Documents, and such amendment shall be in form and substance reasonably satisfactory to the Initial Lender and be in full force and effect on or prior to the Closing Date. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless all of the foregoing conditions are satisfied (or waived as provided in Section 4.01 hereof) at or prior to 3:00 p.m., New York City time, on the Closing Date (and, in the event such conditions are not so satisfied or waived, this Agreement shall terminate at such time). The conditions set forth in this Section 4.01 are for the sole benefit of each Credit Party and may be waived by the Initial Lender, in whole or in part, without prejudice to any other Credit Party. SECTION 4.02 Funding Dates for Loans . The obligations of the Lenders holding Commitments to make Loans on each Funding Date are subject solely to the following conditions precedent: (a) The Foreign Subsidiary requesting Loans on such Funding Date shall have been made a Borrower, and delivery of the Applicant Borrower Documents shall have occurred, in accordance with Section 2.02. (b) The Initial Lender shall have received a certificate certifying that as of such Funding Date, the representations and warranties made by any Borrowers in the Loan Documents, or which are contained in any document furnished in connection herewith and therewith, are true and correct in all material respects; provided that any representation and warranty that is qualified as to materiality or “Material Adverse Effect” or similar language and the representation and warranty contained in Section 3.04 shall be true and correct in all respects; and immediately after giving effect to the making of the Loans requested on such Funding Date no Default or Event of Default shall exist. (c) Immediately after giving effect to the making of the Loans requested on such Funding Date, no Default or Event of Default shall exist. (d) All necessary consents and approvals to the making of the Loans requested on such Funding Date shall have been obtained. (e) The Initial Lender shall have received a Borrowing Notice as required by Section 2.02. ARTICLE V Covenants SECTION 5.01 Notices . The Initial Borrower will furnish to each Lender prompt written notice of a Default or Event of Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto. SECTION 5.02 Use of Proceeds . The proceeds of any Loans made hereunder will be used only for general corporate purposes of the Guarantor and its Subsidiaries and may be distributed, loaned or transferred by the applicable Borrower to the Guarantor or any Subsidiary of the Guarantor. No part of the proceeds of the Loans will be used, whether directly or indirectly, for any purpose that entails a violation of any of the regulations of the Board, including Regulations U and X. ARTICLE VI Events of Default SECTION 6.01 Events of Default . If any of the following events (“ Events of Default ”) shall occur: (a) any Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) any Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in Section 6.01(a)) payable under this Agreement or any other Loan Document and such failure shall continue for a period of five (5) consecutive Business Days following written demand therefor by the Lenders; (c) any representation or warranty of any Loan Party in, or in connection with, any Loan Document or any amendment, supplement or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been materially incorrect when made; (d) a default in the observance of performance of any other covenant or agreement contained in this Agreement or any other Loan Document which default continues for a period of sixty (60) days after the Initial Borrower receives written notice specifying the default (and demanding that such default will be remedied) from the Required Lenders; (e) the occurrence of (i) an “Event of Default” under and as defined in the Senior Notes Indenture or (ii) an “Event of Default” under and as defined in the Lion Credit Agreement; (f) the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Guarantor or any Subsidiary of the Guarantor, or the acceleration of the final stated maturity of any such Indebtedness, in each case, if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $10,000,000 or more at any time; (g) any Borrower, the Guarantor, any of its Significant Subsidiaries or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary (i) commences a voluntary case or proceeding under the Bankruptcy Code with respect to itself, (ii) consents to the entry of an order for relief against it in an involuntary case under the Bankruptcy Code, (iii) consents to the appointment of a Custodian of it or for substantially all of its property, (iv) makes a general assignment for the benefit of its creditors; or (v) takes any corporate action to authorize or effect any of the foregoing; or (h) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of any Borrower, the Guarantor, any of its Significant Subsidiaries or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary in an involuntary case or proceeding under the Bankruptcy Code, which shall (i) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of such Borrower, the Guarantor, such Significant Subsidiary or group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, (ii) appoint a Custodian of such Borrower, the Guarantor, such Significant Subsidiary or group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, or for substantially all of its property or (iii) order the winding up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of sixty (60) days; then, and in every such event (other than an event described in Section 6.01(g) or Section 6.01(h) with respect to any Loan Party), and at any time thereafter during the continuance of such event, the Required Lenders may, by notice to the Guarantor, declare the Obligations then outstanding to be due and payable in whole, and thereupon the principal of the Loans, including any interest paid-in-kind, and all other Obligations so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Loan Parties accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Loan Parties. In case of any event with respect to any Loan Party described in Section 6.01(g) or Section 6.01(h), the Commitments shall automatically and irrevocably terminate and the principal of the Loans, including any interest paid-in-kind, and other Obligations then outstanding, together with accrued interest thereon and all fees and other obligations of the Loan Parties accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Loan Parties. SECTION 6.02 Remedies on Default . In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the maturity of the Obligations shall have been accelerated pursuant hereto, the Required Lenders may proceed to protect and enforce their rights and remedies under this Agreement or any of the other Loan Documents by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement and the other Loan Documents or any instrument pursuant to which the Obligations are evidenced, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Credit Parties. No remedy herein is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. SECTION 6.03 Application of Proceeds . After the occurrence of an Event of Default and acceleration of the Obligations, any amounts received on account of the Obligations shall be applied in the following order: (a) FIRST, ratably to pay interest accrued (other than any PIK Interest) in respect of the Obligations until paid in full; (b) SECOND, ratably to pay principal due, including any PIK Interest, in respect of the Loans to the Borrowers until paid in full; (c) THIRD, ratably to pay any other Obligations; and (d) FOURTH, to the applicable Borrower or such other Person entitled thereto under Applicable Law. ARTICLE VI Guarantee SECTION 7.01 Guarantee. Subject to this Article VII, on and after the initial Funding Date with respect to any Loans, the Guarantor hereby fully and unconditionally, jointly and severally guarantees (such guarantee, as amended or supplemented from time to time, to be referred to herein as the “ Guarantee ”), to each of the Lenders and their respective successors and assigns that (i) the principal of, premium, if any and interest on the Loans shall be promptly paid in full when due, subject to any applicable grace period, whether upon redemption pursuant to the terms of the Loans, by acceleration or otherwise, and interest on the overdue principal (including interest accruing at the then applicable rate provided in this Agreement after the occurrence of any Event of Default set forth in Section 6.01(d) or (e), whether or not a claim for post-filing or post-petition interest is allowed under Applicable Law following the institution of a proceeding under bankruptcy, insolvency or similar laws), if any, and interest on any interest, to the extent lawful, of the Loans and all other obligations of the Additional Borrowers to the Lenders hereunder, thereunder or under any other Loan Document shall be promptly paid in full or performed, all in accordance with the terms hereof, thereof and of the other Loan Documents; and (ii) in case of any extension of time of payment or renewal of any of the Loans or of any such other obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration or otherwise, subject, however, in the case of clauses (i) and (ii) above, to the limitations set forth in this Section 7.01 and Section 7.03. The Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Loans, this Agreement, or any other Loan Document, the absence of any action to enforce the same, any waiver or consent by any of the Lenders with respect to any provisions hereof or thereof, the recovery of any judgment against any Borrower, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of the Guarantor under this Guarantee. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of any Borrower, any right to require a proceeding first against any Borrower, protest, notice and all demands whatsoever and covenants that this Guarantee shall not be discharged except by complete performance of the obligations contained in the Loans, this Agreement and in this Guarantee. The obligations of the Guarantor are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of the Guarantor, shall result in the obligations of the Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. The net worth of the Guarantor for such purpose shall include any claim of the Guarantor against any Borrower for reimbursement. If any Lender is required by any court or otherwise to return to any Borrower or any custodian, trustee, liquidator or other similar official acting in relation to any Borrower, any amount paid by any Borrower to the such Lender and this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor further agrees that, as between it, on the one hand, and the Lenders on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article VI for the purposes of this Guarantee notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article VI, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purpose of this Guarantee. SECTION 7.02 Release of Guarantee. The Guarantor will be automatically and unconditionally released from its Guarantee without any action required on the part of any Lender upon payment in full in cash of the principal of, premium, if any, accrued and unpaid interest on the Loans and all other Obligations under this Agreement that are then due and payable in respect of the Loans. At the Guarantor’s request and expense, the Lenders will promptly execute and deliver an instrument evidencing such release. The Guarantor may also be released from its obligations under its Guarantee in connection with a permitted amendment of this Agreement. SECTION 7.03 Limitation of the Guarantor’s Liability. The Guarantor and, by its acceptance hereof, each of the Lenders hereby confirms that it is the intention of all such parties that the guarantee by the Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Lenders and the Guarantor hereby irrevocably agree that the obligations of the Guarantor under the Guarantee shall be limited to the maximum amount as shall, after giving effect to all other contingent and fixed liabilities of the Guarantor, result in the obligations of the Guarantor under the Guarantee not constituting such fraudulent transfer or conveyance. SECTION 7.04 [Reserved]. SECTION 7.05 Waiver of Subrogation. The Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Lenders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. SECTION 7.06 Waiver of Stay, Extension or Usury Laws. The Guarantor covenants to the extent permitted by law that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law that would prohibit or forgive the Guarantor from performing its Guarantee as contemplated herein, wherever enacted, now or at any time hereafter in force; and the Guarantor hereby expressly waives to the extent permitted by law all benefit or advantage of any such law, and covenants that it shall not hinder, delay or impede the execution of any power herein granted to the Lenders, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VIII Miscellaneous SECTION 8.01 Notices . Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile or e-mail, as follows: (a) if to any Loan Party, to it at American Apparel, Inc. 747 Warehouse St., Los Angeles, CA 90021, Attention: General Counsel, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, Attention: David Reamer (Telecopy No. (917) -777-2850); E-Mail dreamer@skadden.com); (b) if to Standard General, to it at the following address: Standard General L.P. 767 5th Avenue New York, New York 10153 Attention: Gail D. Steiner E-Mail Address: GSteiner@standgen.com with a copy to: Debevoise & Plimpton LLP 919 Third Avenue New York, New York 10022 Attention: Craig A. Bowman E-Mail Address: cabowman@debevoise.com (c) if to any Credit Party, to it at its address (or facsimile number or e-mail address) as set forth on Schedule 1.01(a) hereto or on any Assignment and Acceptance. Notwithstanding the foregoing, any notice hereunder sent by e-mail shall be solely for the distribution of (i) routine communications such as financial statements and (ii) documents and signature pages for execution by the parties hereto, and for no other purpose. Any party hereto may change its address, facsimile number or email address for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given three (3) days after mailing or otherwise upon delivery. SECTION 8.02 Waivers; Amendments . (a) No failure or delay by any Credit Party in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Credit Parties hereunder and under the other Loan Documents are cumulative and are not exclusive of any other rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Borrower therefrom shall in any event be effective unless the same shall be permitted by Section 8.02 (b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default or Event of Default, regardless of whether any Credit Party may have had notice or knowledge of such Default or Event of Default at the time. Except as otherwise specifically provided herein, neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; provided however , that no such waiver, amendment, modification or other agreement shall: (b) (i) increase the Commitment of any Lender without the prior written consent of such Lender; (ii) reduce the principal amount of any Obligation or reduce the rate of interest thereon, or reduce any fees payable under the Loan Documents without the consent of the Lenders adversely affected thereby; (iii) postpone the scheduled date of payment of the principal amount of any Obligation, or any interest thereon, or any fees payable under the Loan Documents, or reduce the amount of, waive or excuse any such payment, or postpone the expiration of the Commitments or postpone the Maturity Date without the consent of the Lenders adversely affected thereby; (iv) change Section 2.08(a) without the prior written consent of each Lender adversely affect thereby; or (v) without prior written consent of all Lenders: (A) subordinate the Obligations hereunder to any other Indebtedness; (B) change any of the provisions of this Section 8.02 or the definition of “Required Lenders” or any other provision of any Loan Document specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder; or (C) change Section 8.04(a). (c) Notwithstanding anything to the contrary contained in this Section 8.02, in the event that any Loan Party shall request that this Agreement or any other Loan Document be modified, amended or waived in a manner which would require the consent of the Lenders pursuant to Section 8.02(b) and such amendment is approved by the Required Lenders, but not by the requisite percentage of all of the Lenders, the Guarantor and such Required Lenders shall be permitted to amend this Agreement without the consent of the Lender or Lenders which did not agree to the modification or amendment requested by the Guarantor (such Lender or Lenders, collectively the “ Minority Lenders ”) subject to their providing for (i) the termination of each Commitment of each of the Minority Lenders, (ii) the addition to this Agreement of one or more other Eligible Assignees, or an increase in the Commitment of one or more of the Required Lenders, so that the aggregate amount of the Commitments after giving effect to such amendment shall be in the same amount as the aggregate amount of the Commitments immediately before giving effect to such amendment, (iii) if any Loans are outstanding at the time of such amendment, the making of such additional Loans by such new or increasing Lender or Lenders, as the case may be, as may be necessary to repay in full the outstanding Loans (including principal, interest, fees and other amounts) of the Minority Lenders immediately before giving effect to such amendment and (iv) such other modifications to this Agreement or the Loan Documents as may be appropriate and incidental to the foregoing. (d) No notice to or demand on any Borrower shall entitle any Borrower to any other or further notice or demand in the same, similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not a Note shall have been marked to indicate such amendment, modification, waiver or consent and any consent by a Lender, or any holder of a Note, shall bind any Person subsequently acquiring a Note, whether or not a Note is so marked. No amendment to this Agreement or any other Loan Document shall be effective against any Borrower unless signed by such Borrower. SECTION 8.03 Expenses; Indemnity; Damage Waiver . (a) The Loan Parties shall be jointly and severally obligated to pay all reasonable out-of-pocket expenses incurred by the Initial Lender, any Lender and any Collateral Agent, including reasonable fees, charges and disbursements of counsel and outside consultants for each of the Initial Lender, such Lender and such Collateral Agent (including, without limitation, commercial finance examiners), in connection with the enforcement or protection of their rights in connection with the Loan Documents, or in connection with the Loans made hereunder, including all reasonable out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of the Obligations; provided that the Lenders who are not the Initial Lender and any Collateral Agent shall be entitled to reimbursement for no more than one counsel representing all such Lenders (absent a conflict of interest in which case the Lenders may engage and be reimbursed for additional counsel). For the avoidance of doubt, each party hereto shall pay its own expenses incurred in connection with the negotiation and documentation of this Agreement. The Borrowers shall, jointly and severally, indemnify the Credit Parties and each of their Subsidiaries and Affiliates, and each of their respective stockholders, directors, officers, employees, agents, attorneys, and advisors of any of the foregoing Persons (each such Person being called an “ Indemnitee ”) against, and hold each Indemnitee harmless from, any and all damages, actual out-of-pocket losses, claims, actions, causes of action, settlement payments, obligations, liabilities and related expenses (including the reasonable fees, charges and disbursements of any counsel for any Indemnitee incurred in connection with any such damages, actual out-of-pocket losses, claims, actions, causes of action, settlement payments, obligations or liabilities), incurred, suffered, sustained or required to be paid by, or asserted against, any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated hereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the consummation of the transactions contemplated by the Loan Documents or any other transactions contemplated hereby, (ii) any Loans or the use of the proceeds therefrom, (iii) any actual or alleged presence or Release of Hazardous Materials on or from any property currently or formerly owned, leased or operated by any Borrower or any Subsidiary of a Borrower, or any Environmental Liability related in any way to any Borrower or any Subsidiary of a Borrower, (iv) any actual or prospective claim, litigation, investigation or proceeding relating to or arising from any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto or (v) without duplication to Section 2.12(b), any documentary taxes, assessments or similar charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any other Loan Document; provided , however , that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such Indemnitee or any Affiliate of such Indemnitee (or any officer, director, employee, advisor or agent of such Indemnitee or any such Indemnitee’s Affiliates). In connection with any indemnified claim hereunder, the Indemnitee shall be entitled to select its own counsel, and the Borrower shall promptly pay the reasonable and documented fees and expenses of such counsel; provided that such fees and expenses of counsel shall be limited to one primary counsel (and one counsel in each relevant material jurisdiction) representing all similarly situated Indemnitees (absent a conflict of interest, written notice of which is given to the Guarantor, in which case the Indemnitees may engage and be reimbursed for additional counsel). This Section 8.03 shall not apply to Taxes with respect to payments on the Loans other than Taxes referred in 8.03(b)(v). (b) (c) No Borrower shall assert and, to the extent permitted by Applicable Law, each Borrower hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the transactions contemplated by the Loan Documents, any Loans or the use of the proceeds thereof. (d) The provisions of this Section 8.03 shall remain operative and in full force and effect regardless of the termination of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Obligations, the invalidity or unenforceability of any term or provision of any Loan Document, or any investigation made by or on behalf of any Credit Party. All amounts due under this Section 8.03 shall be payable no later than ten (10) days after written demand therefor. SECTION 8.04 (a) Successors and Assigns . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Borrower may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any such attempted assignment or transfer without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, Indemnitees), any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) (A) Any Lender may assign to one or more Eligible Assignees all or a portion of its outstanding Loans under this Agreement; provided , however, that each assignment of outstanding Loans shall be subject to the following conditions: (i) except in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender’s Loans, the amount of the Loans of the assigning Lender subject to an assignment shall not be less than $1,000,000, or, if less, the entire remaining amount of the assigning Lender’s Loans; (ii) each partial assignment of outstanding Loans shall be made as an assignment of a proportionate part of all the assigning Lender’s Loans;, (iii) the parties to each assignment shall execute and deliver to the Guarantor and the other Lenders an Assignment and Acceptance. (B) Any Lender may assign to one or more Eligible Assignees all or a portion of its undrawn Commitments under this Agreement; provided , however, that the parties to each assignment of undrawn Commitments shall execute and deliver to the Guarantor and the other Lenders an Assignment and Acceptance. (C) Subject to acceptance and recording thereof pursuant to Section 8.04(d), from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Section 8.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 8.04(b) shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 8.04(e). The Borrowers hereby acknowledge and agree that any assignment shall give rise to a direct obligation of the Borrowers to the assignee and that the assignee shall be considered to be a “Credit Party” for all purposes under this Agreement and the other Loan Documents. (c) The Guarantor and each Lender, acting for this purpos