APP 2009 10-KA audited
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-K/A
Amendment No. 5
 __________________________________________________
(Mark One)
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission File Number 001-32697
__________________________________________________
American Apparel, Inc.
(Exact name of registrant as specified in its charter)
 _________________________________________________
 
 
 
Delaware
 
20-3200601
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
747 Warehouse Street
Los Angeles, California 90021-1106
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (213) 488-0226
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Common Stock, par value $.0001 per share
 
NYSE Amex
(Title of Each Class)
 
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
__________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  c    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  c    No  x
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  c
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  c    No  c
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
 
 
 
 
 
 
Large accelerated filer o
 
Accelerated filer  x
 
Non-accelerated filer  o
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  c   No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009 was approximately $258,562,875 based upon the closing price of the common stock on such date as reported by the NYSE Amex.
Common stock, $0.0001 par value 98,547,932 shares issued (5,019,616 subject to vesting) on May 16, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report incorporates information by reference from the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders that was filed with the United States Securities and Exchange Commission (the "SEC") on October 15, 2010.
 
 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Amendment No.5 to our Annual Report on Form 10-K/A, 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/A other than statements of historical fact are “forward-looking statements” for purposes of these provisions. Statements that include the use of terminology such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,” or the negative thereof or other and similar expressions are forward-looking statements. In addition, in some cases, you can identify forward-looking statements by words or phrases such as “trend,” “potential,” “opportunity,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions.
 
Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focuses and plans, and other characterizations of future events or circumstances, including statements expressing general expectations or beliefs, whether positive or negative, about future operating results or the development of our products, and any statement of assumptions underlying any of the foregoing are forward-looking statements. Forward-looking statements in this report may include, without limitation, statements about:
 
future financial condition and operating results;
our ability to remain in compliance with financial covenants under our financing arrangements;
our 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 litigation matters;
our intellectual property rights and those of others, including actual or potential competitors;
our personnel, consultants, and collaborators;
operations outside the United States;
economic and political conditions;
overall industry and market performance;
the impact of accounting pronouncements;
management’s goals and plans for future operations; and
other assumptions described in this Annual Report on Form 10-K/A 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 in this Amendment No. 5 to our Annual Report on Form 10-K/A, those contained under the heading, "Risk Factors," contained in Item 1A of American Apparel, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 which was originally filed with the SEC on March 31, 2010, as well as in other reports and documents we file with the SEC and include, without limitation, the following:
 
changes in the level of consumer spending or preferences or demand for our products;
disruptions in the global financial markets;
consequences of our significant indebtedness, including our ability to comply with our debt agreements and generate cash flow to service our debt;
the highly competitive and evolving nature of our business in the U.S. and internationally;
our ability to manage our growth and expansion both in the U.S. and internationally;
retailer consolidation and intensity of competition, both domestic and foreign, from other apparel providers;
technological changes in manufacturing, wholesaling, or retailing;
risks that our suppliers and 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 pronouncements or changes in interpretations of accounting principles;
changes in consumer spending patterns and overall levels of consumer spending;
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;
ability to attract customers to our stores;
seasonality and fluctuations in comparable store sales and margins;
our ability to successfully implement its strategic, operating 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;
location of our facilities in the same geographic area;
our relationships with our lenders and our ability to comply with the terms of our existing debt facilities;
adverse changes in our credit ratings and any related impact on financing costs and structure;
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;
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 may disrupt our supply chain or operations;
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 risk that we or our officers will not be successful in defending any proceedings, lawsuits, disputes, claims or audits;
ability to effectively manage inventory and inventory reserves;
changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;
material weaknesses in internal controls;
costs as a result of operating as a public company; and
general economic conditions, including increases in interest rates, geopolitical events, other regulatory changes and inflation or deflation.
All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
 

 

 

American Apparel, Inc.
ANNUAL REPORT ON FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
EXPLANATORY NOTE
 
1
 
 
 
 
 
 
 
 
PART II
  
2
 
 
 
 
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
2
 
 
 
 
Item 6.
 
Selected Financial Data
  
4
 
 
 
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
7
 
 
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures and Market Risks
  
24
 
 
 
 
Item 8.
 
Financial Statements and Supplementary Data
  
27
 
 
 
 
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
  
61
 
 
 
 
Item 9A.
 
Controls and Procedures
  
62
 
 
 
 
 
 
PART IV
  
66
 
 
 
 
Item 15.
 
Exhibits and Financial Statement Schedules
  
66
 
 

 

 

EXPLANATORY NOTE
 
Reference is made to the Annual Report on Form 10-K for the year ended December 31, 2009 of American Apparel, Inc. and its subsidiaries (collectively, “the Company”) filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2010, as amended by Amendments No. 1, 2, 3 and 4 thereto (collectively, the “Original Filing”).
 
This Amendment No. 5 is being filed (i) to add a new report on internal control over financial reporting at December 31, 2009 and a new audit report on the Company's consolidated financial statements as of and for the year ended December 31, 2009 (the “2009 financials”), issued by the Company's current auditors, Marcum LLP, and (ii) to remove the notation that the 2009 financials are unaudited.
 
This Amendment No. 5 also reflects changes to “Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations” to be consistent with the modifications made and reflected in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 31, 2011, as amended by Amendments No. 1 and 2 filed with the SEC. In addition, this Amendment No. 5 reflects changes to “Item 8. Financial Statements and Supplementary Data” only to the extent that they relate to events occurring subsequent to the Original Filing as reflected in the Company's Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 31, 2010, as amended by Amendments No. 1, 2, 3 and 4 filed with the SEC. Except for the matters described above, the Original Filing has not been amended, updated or otherwise modified and continues to speak as of the date of the Original Filing and does not reflect events occurring after the filing of the Original Filing or update or otherwise modify any related or other disclosures, including forward-looking statements. Accordingly, this Amendment No. 5 should be read in conjunction with the Company's other filings made with the SEC subsequent to the filing of the Original Filing.
 
The filing of this Amendment No. 5 is not an admission that the Form 10-K filed on March 31, 2010 or Amendment No. 1, 2, 3 or 4 thereto, when filed, included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading.
 
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our current principal accounting officer are filed as exhibits to this Amendment.
 
 

 

 

 
PART II
 
 

 
Item 6.
Selected Financial Data
The selected historical financial data presented below under the heading “Selected Statement of Operations Data” and “Per Share Data” for the year ended December 31, 2009 and the selected historical financial data presented below under the heading “Balance Sheet Data” as of December 31, 2009 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A. The selected historical financial data presented below under the heading “Selected Statement of Operations Data” and “Per Share Data” for the years ended December 31, 2008 and 2007 and the selected historical financial data presented below under the heading “Balance Sheet Data” as of December 31, 2008 have been derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A. The selected historical financial data presented below under the heading “Selected Statement of Operations Data” and “Per Share Data” for the years ended December 31, 2006 and 2005 and the selected historical financial data presented below under the heading “Balance Sheet Data” as of December 31, 2007, 2006 and 2005 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/A.
On December 21, 2005, Endeavor Acquisition Corp. consummated its initial public offering, and on December 18, 2006, entered into an Agreement and Plan of Reorganization, amended November 7, 2007, with American Apparel, Inc., a California corporation (“Old American Apparel”), and its affiliated companies. Endeavor Acquisition Corp. consummated the acquisition of Old American Apparel and its affiliated companies on December 12, 2007 (the “Acquisition”) and changed its name to American Apparel, Inc. The Acquisition was accounted for as a reverse merger (“Merger”) and recapitalization for financial reporting purposes. Accordingly, for accounting and financial purposes, Endeavor Acquisition Corp. was treated as the acquired company, and Old American Apparel was treated as the acquiring company. Accordingly, the historical financial information for periods and dates prior to December 12, 2007, is that of Old American Apparel, and its affiliated companies.
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 Consolidated Financial Statements and notes included elsewhere in this Annual Report on Form 10-K/A.
 

 

 

 
 
Year Ended December 31,
 
 
2009
 
2008
 
2007
 
2006
 
2005
 
 
(In Thousands Except Per Share Data)
Selected Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
558,775
 
 
$
545,050
 
 
$
387,044
 
 
$
284,966
 
 
$
201,450
 
Gross profit (5)
 
$
319,912
 
 
$
294,421
 
 
$
213,368
 
 
$
145,636
 
 
$
101,688
 
Income from Operations
 
$
24,415
 
 
$
36,064
 
 
$
31,122
 
 
$
10,572
 
 
$
10,782
 
Net Income (Loss)
 
$
1,112
 
 
$
14,112
 
 
$
15,478
 
 
$
(1,606
)
 
$
3,487
 
Pro forma Net Income—conversion to C Corporation for tax purposes (unaudited) (3)
 
n/a
 
 
n/a
 
 
$
9,457
 
 
$
257
 
 
$
3,121
 
Cash Distributions/Dividends Paid (1)
 
$
 
 
$
 
 
$
22,147
 
 
$
696
 
 
$
1,793
 
Per Share Data (2)
 
 
 
 
 
 
 
 
 
 
Net Earnings (Loss) per share—basic
 
$
0.02
 
 
$
0.20
 
 
$
0.32
 
 
$
(0.03
)
 
$
0.07
 
Net Earnings (Loss) per share—diluted
 
$
0.01
 
 
$
0.20
 
 
$
0.31
 
 
$
(0.03
)
 
$
0.07
 
Pro forma Net Earnings per share—conversion to C Corporation for tax purposes (unaudited)—basic (3)
 
n/a
 
 
n/a
 
 
$
0.19
 
 
$
0.01
 
 
$
0.06
 
Pro forma Net Earnings per share—conversion to C Corporation for tax (unaudited) purposes—diluted (3)
 
n/a
 
 
n/a
 
 
$
0.19
 
 
$
0.01
 
 
$
0.06
 
Weighted—average number of shares—basic
 
71,026
 
 
69,490
 
 
48,890
 
 
48,390
 
 
48,390
 
Weighted—average number of shares—diluted
 
76,864
 
 
70,317
 
 
49,414
 
 
48,390
 
 
48,390
 
Dividends Paid (1)
 
$
 
 
$
 
 
$
0.45
 
 
$
0.01
 
 
$
0.04
 
Balance Sheet Data (4)
 
 
 
 
 
 
 
 
 
 
Total Assets (5)
 
$
327,579
 
 
$
333,609
 
 
$
233,350
 
 
$
163,056
 
 
$
124,226
 
Working Capital (5)
 
$
121,423
 
 
$
83,069
 
 
$
2,120
 
 
$
38,559
 
 
$
40,880
 
Total Long Term Debt Less Current Maturities
 
$
71,372
 
 
$
72,328
 
 
$
10,744
 
 
$
75,546
 
 
$
65,365
 
Stockholders’ Equity
 
$
157,341
 
 
$
136,412
 
 
$
61,821
 
 
$
12,973
 
 
$
14,918
 
(1)
Dividends paid represent cash dividends paid by Old American Apparel to its stockholders prior to becoming a public company. We do not anticipate paying any cash dividends in the foreseeable future.
(2)
The effect of the Merger has been given retroactive application in the earnings per share (“EPS”) calculation. The common stock issued and outstanding with respect to the pre-Merger stockholders of American Apparel, Inc. has been included in the EPS calculation since the Closing date of the Merger. All of American Apparel, Inc.’s outstanding warrants (the “Endeavor Warrants”) which were issued in the initial public offering of Endeavor Acquisition Corp. and underwriter’s purchase option are reflected in the diluted EPS calculation, using the treasury stock method, commencing with the Closing date of the Merger.
(3)
As a result of the Merger, Old American Apparel was required to convert from a Subchapter S Corporation to a C Corporation as of the Closing on December 12, 2007. As a Subchapter S Corporation, U.S. federal and certain state income taxes were the responsibility of the entity’s stockholders. Accordingly, the income taxes were not reflected in the entity’s financial statements. The result of this conversion was to recognize deferred tax assets and liabilities from the expected tax consequences of temporary differences between the book and tax basis of the entity’s assets and liabilities at the date of conversion into a taxable entity. This resulted in a deferred tax benefit of $6,205 being recognized and included in the 2007 tax (benefit).
    
The unaudited pro forma computation of income tax included in the Consolidated Statements of Operations presented elsewhere in this Form 10-K/A, represents the tax effects that would have been reported had Old American Apparel been subject to U.S. federal and state income taxes as a corporation for the year ended December 31, 2007. Pro forma taxes are based upon the statutory income tax rates and adjustments to income for estimated permanent differences occurring during each period. Actual rates and expenses could have differed had Old American Apparel actually been subject to U.S. federal and state income taxes for all periods presented. Therefore, the unaudited pro forma amounts for net earnings per share are for informational purposes only and are intended to be indicative of the results of operations had Old American Apparel been subject to U.S. federal and state income taxes as a corporation for the year ended December 31, 2007.

 

 

(4)
Dov Charney, a 50% owner of Old American Apparel’s common stock and 100% owner of American Apparel Canada Wholesale, Inc. and American Apparel Canada Retail, Inc.’s (collectively, the “CI Companies”) common stock and current Chief Executive Office of the Company received from American Apparel, Inc. 37,258 shares of its common stock in exchange for his ownership interest in Old American Apparel and CI Companies. The other 50% owner of Old American Apparel’s Common Stock, Sang Ho Lim, received $67,903 for his ownership interest, the equivalent of 11,132 shares of common stock.
    
Immediately prior to the closing of the Merger, American Apparel, Inc. had 19,933 shares of Common stock outstanding with a net tangible book value of $121,589, net of $5,494 of transaction costs. The net tangible book value consisted of cash of $123,000, a tax liability of $1,406 and accrued expenses of $5. The net cash proceeds were used as follows: $67,903 was paid to Sang Ho Lim, $15,764 was paid to Dov Charney and Sang Ho Lim as a Company distribution to settle their estimated personal income tax liabilities as a result of Old American Apparel’s subchapter S Corporation status, $13,323 was used to repay related party and third party debt, and $26,010 was available for working capital.
(5)
Certain amounts have been reclassified in fiscal 2008 and 2007 as disclosed in Note 3, Classification and Adjustments, in the Notes to the consolidated financial statements included elsewhere in this Form 10-K/A.
 

 

 

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 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,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K/A.
Overview
We are a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel. We design, manufacture and sell clothing for women, men, children and pets through retail, wholesale and online distribution channels. As of December 31, 2009, we operated 281 retail stores in 20 countries. Our wholesale business is a leading supplier of T-shirts and other casual wear to screen printers and distributors. We also operate an online retail e-commerce website at www.americanapparel.com where we sell our clothing directly to consumers.
We conduct our primary 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 dyeing and finishing facility in Hawthorne, California, which provides fabric dyeing and finishing services. We operate a garment dyeing and finishing facility, acquired in December 2007 and located in South Gate, California, which is used in cutting, sewing, dyeing and finishing garments. We operate a fabric dyeing and finishing facility, acquired in May 2008 and located in Garden Grove, California, which has been expanded to including knitting and cutting and sewing operations. 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.
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 160 retail stores as of December 31, 2009. The Canada segment consists of our retail, wholesale and online consumer operations in Canada. As of December 31, 2009, the retail operations in the Canada segment were comprised of 40 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, 2009, the retail operations in the International segment were comprised of 81 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, among other things, corporate costs such as human resources, legal, finance, information technology, accounting, and executive compensation.
During the period from January 1, 2007 through December 31, 2009, we increased the number of retail stores in the U.S. Retail segment from 93 to 160, increased the number of retail stores in the Canada segment from 26 to 40 and increased the number of retail stores in the International segment from 28 to 81. The following table details, by segment, the growth in retail store count during the years ended December 31, 2009, 2008 and 2007
 
 
 
 
 
 
 
 
 
 
 

 

 

Stores Opened by Year
 
 
 
United States
 
Canada
 
International
 
Total
Stores open as of December 31, 2006
 
93
 
 
26
 
 
28
 
 
147
 
2007
 
 
 
 
 
 
 
 
Opened
 
13
 
 
5
 
 
20
 
 
38
 
Closed
 
(1
)
 
(1
)
 
(1
)
 
(3
)
Stores open as of December 31, 2007
 
105
 
 
30
 
 
47
 
 
182
 
2008
 
 
 
 
 
 
 
 
Opened
 
44
 
 
8
 
 
29
 
 
81
 
Closed
 
(2
)
 
(1
)
 
(1
)
 
(4
)
Stores open as of December 31, 2008
 
147
 
 
37
 
 
75
 
 
259
 
2009
 
 
 
 
 
 
 
 
Opened
 
15
 
 
4
 
 
8
 
 
27
 
Closed
 
(2
)
 
(1
)
 
(2
)
 
(5
)
Stores open of December 31, 2009
 
160
 
 
40
 
 
81
 
 
281
 
Comparable Store Sales
The table below shows the (decrease) increase in comparable store sales for our retail stores, by quarter for the years ended December 31, 2009, 2008 and 2007, including the number of retail stores included in the comparison at the end of each period.
 
 
 
For the Quarter Ended
 
 
 
 
March 31
 
June 30
 
September 30
 
December 31
 
Full year
2009
 
(7
)%
 
(10
)%
 
(16
)%
 
(7
)%
 
(10
)%
Number of Stores
 
169
 
 
175
 
 
200
 
 
235
 
 
 
2008
 
36
 %
 
23
 %
 
24
 %
 
11
 %
 
22
 %
Number of Stores
 
140
 
 
145
 
 
150
 
 
162
 
 
 
2007
 
17
 %
 
24
 %
 
27
 %
 
40
 %
 
29
 %
Number of Stores
 
104
 
 
119
 
 
131
 
 
138
 
 
 
Executive Summary
For the year ended December 31, 2009, we reported net sales of $558.8 million, an increase of $13.8 million, or 2.5%, over the $545.1 million reported for the year ended December 31, 2008. Gross margin increased to 57.3% for the year ended December 31, 2009 compared to 54.0% for the year ended December 31, 2008. The increase in gross margin was due to a favorable shift in mix from wholesale towards retail sales, as retail sales generate a higher gross margin. This increase was partially offset due to an increase in inventory costs caused by a reduction in labor efficiency in the second half of 2009 and a continued shift in production mix towards more complex retail styles. Operating expenses increased $37.1 million, or 14.4%, to $295.5 million for the year ended December 31, 2009 as compared to $258.4 million for the year ended December 31, 2008. Interest expense increased $8.7 million to $22.6 million for the year ended December 31, 2009, as compared to $13.9 million for the year ended December 31, 2008. Net income for the year ended December 31, 2009 decreased to $1.1 million compared to $14.1 million for the year ended December 31, 2008.
On December 30, 2009, our Canadian company replaced its secure revolving credit facility of C$4.0 million with an increased revolving credit facility of C$11.0 million from Bank of Montreal. As of December 31, 2009, C$8.5 million was available on the facility.
During April 2009, we successfully completed the second phase of the implementation of our Enterprise Resources Planning (“ERP”) system, which included the system conversions for our sales and distribution operations and financial accounting and reporting for the U.S. Wholesale segment. Previously, in April 2008, we successfully completed the first phase of the implementation of the ERP system, which included the conversion of our systems for manufacturing and warehouse operations, inventory management and control, and wholesale operations. We expect that the modules in the second phase of the implementation of the ERP system will enable us to better manage our distribution activities and wholesale financial reporting and further improve our ability to manage inventory levels.

 

 

On March 13, 2009, we entered into a private financing agreement with Lion Capital LLP (“Lion”) for $80.0 million in secured second lien notes with a maturity of December 31, 2013 and detachable warrants. The majority of the financing proceeds were used to retire the existing second lien credit facility with SOF Investment, L.P. – Private IV (“SOF”). The remainder of the proceeds was used to reduce the outstanding balance under our U.S. revolving credit facility, repay a portion of a related-party note, pay fees and expenses related to the financing, and for general working capital.
Results of Operations
Year Ended December 31, 2009 compared to Year Ended December 31, 2008
(Dollars in thousands)
 
 
For the Years Ended December 30,
 
2009
 
% of net sales
 
2008
 
% of net sales
U.S. Wholesale
$
141,521
 
 
25.3
 %
 
$
162,668
 
 
29.8
%
U.S. Retail
191,325
 
 
34.2
 %
 
168,653
 
 
30.9
%
Canada
68,983
 
 
12.3
 %
 
67,280
 
 
12.3
%
International
156,946
 
 
28.1
 %
 
146,449
 
 
26.9
%
Total net sales
558,775
 
 
100.0
 %
 
545,050
 
 
100.0
%
Cost of sales
238,863
 
 
42.7
 %
 
250,629
 
 
46.0
%
Gross profit
319,912
 
 
57.3
 %
 
294,421
 
 
54.0
%
 
 
 
 
 
 
 
 
 
 
Selling expenses
198,518
 
 
35.5
 %
 
184,122
 
 
33.8
%
General and administrative expenses
93,636
 
 
16.8
 %
 
73,591
 
 
13.5
%
Retail store impairment
3,343
 
 
0.6
 %
 
644
 
 
0.1
%
Income from operations
24,415
 
 
4.4
 %
 
36,064
 
 
6.6
%
 
 
 
 
 
 
 
 
Interest expense
22,627
 
 
4.0
 %
 
13,921
 
 
2.6
%
Foreign currency transaction (gain) loss
(2,920
)
 
(0.5
)%
 
621
 
 
0.1
%
Other (income) expense
(220
)
 
 %
 
155
 
 
%
Income before income taxes
4,928
 
 
0.9
 %
 
21,367
 
 
3.9
%
Income tax provision
3,816
 
 
0.7
 %
 
7,255
 
 
1.3
%
Net income
$
1,112
 
 
0.2
 %
 
$
14,112
 
 
2.6
%
 
 
 
 
 
 
 
 
U.S. Wholesale: Total net sales for our U.S. Wholesale segment decreased $21.2 million, or 13.0%, to $141.5 million for the year ended December 31, 2009 as compared to $162.7 million for the year ended December 31, 2008. Net sales to wholesale customers (excluding online consumer sales) decreased $19.0 million, or 13.8%, to $118.2 million for the year ended December 31, 2009 as compared to $137.2 million for the year ended December 31, 2008. This decrease was primarily caused by difficult economic conditions for our wholesale customers, especially for private label and manufacturer customers, who significantly reduced their order volumes. Online consumer sales decreased $2.2 million, or 8.6%, to $23.3 million for the year ended December 31, 2009, as compared to $25.5 million for the year ended December 31, 2008. The decrease in online consumer sales was primarily due to a significant reduction in online advertising and the cannibalization of online sales as a result of operating additional retail locations.
U.S. Retail: Net sales for the U.S. Retail segment increased $22.6 million, or 13.4%, to $191.3 million for the year ended December 31, 2009 as compared to $168.7 million for the year ended December 31, 2008. The increase was primarily due to $14.5 million of incremental net sales contributed by 15 new retail stores opened in key markets within the U.S. during 2009, and $33.0 million of incremental net sales from the 44 new stores opened within the U.S. during 2008, for the period before their first full year of operation. The increase was partially offset by a $24.8 million decline in comparable store sales for retail stores in the U.S. Retail segment for the year ended December 31, 2009. Since December 31, 2008, we opened 15 new retail stores in the U.S. Retail segment, while closing two and the number of stores in operation increased from 147 to 160.
 
Canada: Total net sales for our Canada segment increased $1.7 million, or 2.5%, to $69.0 million for the year ended December 31, 2009 as compared to $67.3 million for the year ended December 31, 2008. Net sales to retail customers

 

 

increased $3.1 million, or 5.9% to $56.0 million for the year ended December 31, 2009 compared to $52.9 million for the year ended December 31, 2008. The increase was primarily caused by $3.3 million of incremental net sales contributed by the four new retail stores opened in key markets within Canada during 2009. The increase was partially offset by a $2.4 million, or 5%, decline in same store sales for the year ended December 31, 2009. Holding foreign currency exchange rates constant to those prevailing in fiscal 2008, total revenue for 2009 would have been approximately $73.9 million, or $6.6 million higher when compared to 2008. Since December 31, 2008 we opened 4 new retail stores, while closing one and the number of stores in operation increased from 37 to 40.
Net sales to wholesale customers decreased $1.3 million, or 10.2% to $11.4 million for the year ended December 31, 2009 as compared to $12.7 million for the year ended December 31, 2008. This decrease was primarily caused by difficult economic conditions for our wholesale customers, especially for private label and manufacturer customers, who significantly reduced their order volumes. Holding foreign currency exchange rates constant to those prevailing in fiscal 2008 total revenue for the current year would have been approximately $72.2 million, or $6.6 million higher when compared to 2008.
Online sales decreased $0.1 million, or 5.9%, to $1.6 million for the year ended December 31, 2009 as compared to $1.7 million for the year ended December 31, 2008. Holding foreign currency exchange rates constant to those prevailing in fiscal 2008, total revenue for 2009 would have been approximately $1.7 million, resulting in no change when compared to 2008.
International: Total net sales for the International segment increased $10.5 million, or 7.2%, to $156.9 million for the year ended December 31, 2009 as compared to $146.4 million for the year ended December 31, 2008. Net sales to retail customers increased $12.4 million, or 10.4% to $132.1 million for the year ended December 31, 2009 as compared to $119.7 million for the year ended December 31, 2008. The increase was primarily caused by $6.0 million of incremental net sales contributed by the eight new retail stores opened in key markets during 2009. The increase was partially offset by a 4% decline in same store sales for the year ended December 31, 2009. Holding foreign currency exchange rates constant to those prevailing in fiscal 2008, total revenue for 2009 would have been approximately $167.6 million, or $21.2 million higher when compared to 2008. Since December 31, 2008, we opened 8 new retail stores, while closing two and the number of stores in operation increased from 75 to 81.
Net sales to wholesale customers decreased $2.1 million, or 14.5%, to $12.4 for the year ended December 31, 2009 as compared to $14.5 million for the year ended December 31, 2008. This decrease was primarily caused by difficult economic conditions for our wholesale customers, especially for private label and manufacturer customers, who significantly reduced their order volumes. Holding foreign currency exchange rates constant to those prevailing in fiscal 2008, total revenue for the current year would have been approximately $13.1 million, or $1.4 million lower when compared to the same period last year.
Online net sales increased $0.3 million, or 2.5% to $12.5 million for the year ended December 31, 2009 as compared to $12.2 million for the year ended December 31, 2008. Holding foreign currency exchange rates constant to those prevailing in fiscal 2008, total revenue for 2009 would have been approximately $13.6 million, or $1.4 million higher when compared to 2008.
Cost of sales: Cost of sales as a percentage of net sales was 42.7% and 46.0% for the years ended December 31, 2009 and 2008, respectively. Cost of sales for 2008 was impacted by $13.2 million, or 2.4%, as a percentage of sales, in stock based compensation expense relating to the award of approximately 1.9 million shares of common stock to our manufacturing employees (the “2008 Grant”) during the third quarter of 2008. On a comparative basis, excluding the impact of the 2008 Grant, our cost of sales as a percentage of net sales decreased from 43.6% for the year ended December 31, 2008 to 42.7% for the year ended December 31, 2009. Cost of sales was impacted by a shift in mix from wholesale to retail sales, as retail increased from 62.6% of total net sales in 2008 to 67.9% of total net sales in 2009. The favorable impact from the shift in mix was partially offset by the negative impact of the appreciation of the U.S. dollar versus foreign currencies for the full year 2009 relative to the full year 2008. Cost of sales was also negatively impacted by lower capacity utilization of our manufacturing facilities in the first half of 2009 due to the hiring of additional sewing operators to expand production capacity in 2010 and to replace sewing operators dismissed following the ICE inspection. These lower capacity utilization resulted in lower amount of fixed overhead loss allocation to units of inventory produced.
 
Selling expenses: Selling expenses together with unallocated corporate selling, advertising and promotion expenses, for the year ended December 31, 2009, increased $14.4 million, or 7.8%, to $198.5 million for the year ended December 31, 2009 as compared to $184.1 million for the year ended December 31, 2008. Specifically, rent and occupancy costs increased $18.3 million and payroll and benefit costs increased $5.5 million. The increase in payroll costs was a result of higher staffing costs required to support the increased number of stores in operation compared to in the prior year.
 
Increases in rent and occupancy costs and payroll and benefit costs were partially offset by decreases in advertising, trade

 

 

show and catalog expenses. Advertising, trade show and catalog costs included in selling expenses for the year ended December 31, 2009 were $15.4 million, or 2.8% of net sales, as compared with $25.0 million, or 4.5% of net sales, for the year ended December 31, 2008. The decrease of $9.6 million was mainly due to a reduction in discretionary expenses to promote new store openings and to promote our products through print publications, magazines, trade shows, catalogs and online media.
Pre-opening expenses for the U.S. Retail segment totaled $2.3 million for the year ended December 31, 2009, associated with the opening of 15 new retail stores, as compared with $5.8 million for the year ended December 31, 2008. Pre-opening expenses in the Canada and International segments totaled $1.6 million for the year ended December 31, 2009, associated with the opening of 12 new retail stores, as compared with $4.5 million for the year ended December 31, 2008. Pre-opening expenses include costs related to opening new stores such as materials, pre-opening labor and training; utilities, travel, and IT labor costs. The decrease in pre-opening expenses from the prior year was due to the larger number of stores in the process of being opened in prior year.
General and administrative expenses: General and administrative (“G&A”) expenses increased $20.4 million, or 27.7%, to $94.0 million for the year ended December 31, 2009, as compared to $73.6 million for the year ended December 31, 2008. G&A expenses represented 16.8% and 13.5% of total net sales for the years ended December 31, 2009 and 2008, respectively. G&A expenses increased by $7.5 million due to higher depreciation charges, and $4.1 million due to an increase in salaries, wages and benefits, primarily associated with an increased number of retail stores in operation during the year ended December 31, 2009 as compared to year ended December 31, 2008. An additional $5.1 million of the increase in G&A was due to higher professional fees related to accounting and legal services, and $1.6 million related to bonuses and director stock grants.
Retail store impairment charges: At December 31, 2009, 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 eighteen retail stores was less than their carrying value at December 31, 2009 based on sales performance through the date of issuance of these 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 $3.3 million and $0.6 million for the years ended December 31, 2009 and 2008, respectively, to reduce the assets' carrying value to their estimated fair value.
Interest expense: The major components of interest expense for the year ended December 31, 2009 consisted of interest on our revolving line of credit, loans from our CEO and unrelated parties, capital leases and our term loans. Interest rates on our various debt facilities and capital leases ranged from 4.8% to 16.0% during the year ended December 31, 2009 and 6.2% to 21.0% during the year ended December 31, 2008. Interest expense increased $8.7 million to $22.6 million for the year ended December 31, 2009, as compared to $13.9 million for the year ended December 31, 2008. Interest expense represented 4.0% and 2.6% of the total net sales for the years ended December 31, 2009 and 2008, respectively. For the year ended December 31, 2009, interest expense primarily consisted of BofA related fees and interest of $3.9 million, Lion Credit Agreement fees and interest of $13.8 million and SOF Credit Agreement related fees and interest of $4.8 million. For the year ended December 31, 2008, interest expense primarily consisted of BofA Credit Agreement related fees and interest of $2.7 million and SOF Credit Agreement related fees and interest of approximately $10.2 million.
Foreign currency transaction gain: Foreign currency transaction gain was $2.9 million for the year ended December 31, 2009, as compared to a loss of $0.6 million for the year ended December 31, 2008, mainly due to an appreciation of the U.S. Dollar relative to foreign currencies used by our international subsidiaries during the year ended December 31, 2009, compared to prior periods.
Unrealized (gain) loss on change in fair value of warrants: No change in fair value of warrants was recorded for the year ended December 31, 2009.
Other (income) expense: Other income was $0.2 million for the year ended December 31, 2009 as compared to other expense of $0.2 million for the year ended December 31, 2008.
Income tax provision: Income taxes decreased $3.5 million to a $3.8 million income tax provision for the year ended December 31, 2009, as compared to a $7.3 million income tax provision for the year ended December 31, 2008. The decrease was due to the decline in income before taxes for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The effective income tax rate for the year ended December 31, 2009 was 77.4% as compared to 34% for the year ended December 31, 2008. The significant increase in the effective income tax rate for the year ended December 31, 2009 compared to prior year was primarily due to the establishment of valuation allowances against certain foreign net operating losses and the establishment of certain liabilities related to uncertain tax positions raised in connection with certain income tax audits. We are forecasting a pre-tax loss in 2011 so it will be difficult again to gauge if the tax rate will return to percentage consistent with prior years

 

 

We file income tax returns for various states and foreign jurisdictions. Where applicable, we provide for state and foreign taxes at the applicable statutory state and country rates multiplied by pre-tax income.
Year Ended December 31, 2008 compared to Year Ended December 31, 2007
(Dollars in Thousands)
 
 
 
2008
 
2007
 
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
Net sales
 
$
545,050
 
 
100.0
%
 
$
387,044
 
 
100.0
 %
Cost of sales
 
250,629
 
 
46.0
%
 
173,676
 
 
44.9
 %
Gross profit
 
294,421
 
 
54.0
%
 
213,368
 
 
55.1
 %
Operating expenses
 
258,357
 
 
47.4
%
 
182,246
 
 
47.1
 %
Income from operations
 
36,064
 
 
6.6
%
 
31,122
 
 
8.0
 %
Interest expense
 
13,921
 
 
2.6
%
 
17,541
 
 
4.5
 %
Foreign currency transaction loss (gain)
 
621
 
 
0.1
%
 
(722
)
 
(0.2
)%
Other expense (income)
 
155
 
 
%
 
(980
)
 
(0.3
)%
Income before income taxes
 
21,367
 
 
3.9
%
 
15,283
 
 
3.9
 %
Income tax provision (benefit)
 
7,255
 
 
1.3
%
 
(195
)
 
(0.1
)%
Net income
 
$
14,112
 
 
2.6
%
 
$
15,478
 
 
4.0
 %
Pro forma Computation Related to Conversion to C Corporation for income tax purposes (unaudited) for the year ended December 31, 2007 (dollars in thousands):
 
Historical income before taxes
 
$
15,283
 
 
3.9
%
Pro forma provision for income taxes
 
5,826
 
 
1.5
%
Pro forma net income
 
$
9,457
 
 
2.4
%
 
Net sales:
The following table sets forth our net sales by business segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007 (dollars in thousands):
 
 
 
2008
 
2007
 
Change
 
% Change
 
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
 
U.S. Wholesale
 
$
162,668
 
 
29.8
%
 
$
144,478
 
 
37.3
%
 
$
18,190
 
 
12.6
%
U.S. Retail
 
168,653
 
 
31.0
%
 
115,615
 
 
29.9
%
 
53,038
 
 
45.9
%
Canada
 
67,280
 
 
12.3
%
 
42,407
 
 
11.0
%
 
24,873
 
 
58.7
%
International
 
146,449
 
 
26.9
%
 
84,544
 
 
21.8
%
 
61,905
 
 
73.2
%
Total net sales
 
$
545,050
 
 
100.0
%
 
$
387,044
 
 
100.0
%
 
$
158,006
 
 
40.8
%
One significant factor contributing to the overall growth in net sales was the expansion of our international operations, as evidenced by the opening of 29 international retail stores with one store closing during the year ended December 31, 2008. In our Canada segment, during the year ended December 31, 2008, 8 retail stores were opened and one store was closed. Additionally, during the same period 44 retail stores were opened and one retail store was closed in our U.S. Retail business segment. Also of primary significance to the expansion of American Apparel’s retail business in the U.S. was our increased focus on building brand awareness and targeted advertising campaigns as further described below;
Net sales increased $158.0 million, or 40.8%, from $387.0 million for the year ended December 31, 2007 to $545.0 million for the year ended December 31, 2008.
 
U.S. Wholesale: Net sales for our U.S. Wholesale segment increased $18.2 million, or 12.6%, from $144.5 million for

 

 

the year ended December 31, 2007 to $162.7 million for the year ended December 31, 2008. This increase was primarily due to an increase in online sales due to strategic advertising and increased brand awareness. Third party wholesale and online sales increased from $125.8 million and $18.7 million in 2007 to $137.2 million and $25.5 million in 2008, respectively. One of the primary drivers behind the increase in U.S. Wholesale sales was the ability to meet customer demands through increased stock of inventory on hand. During most of 2008, we continued to increase our production in order to meet customer demand during the peak sales season.
U.S. Retail: Net sales for our U.S. Retail segment increased $53.0 million, or 45.9%, from $115.6 million for the year ended December 31, 2007 to $168.7 million for the year ended December 31, 2008. Growth was fueled by the addition of retail stores in key markets within the U.S. in 2008 which contributed incremental sales of $30.4 million over the prior year, as well as a 20.7% increase of $22.6 million in comparable store sales in 2008 compared to 2007. Same-store sales are calculated as the sales increase over the previous year for stores that have been open for more than twelve months. As of December 31, 2008, the number of open stores was 148, while as of December 31, 2007, the number of open stores was 105.
Canada: Net sales for our Canada segment increased $24.9 million, or 58.7%, from $42.4 million for the year ended December 31, 2007 to $67.3 million for the year ended December 31, 2008. This was a result of the addition of retail stores in key markets within Canada which contributed incremental sales of $13.8 million of the prior year, as well as a 37.7% increase of $11.1 million in same store sales in 2008 compared to 2007. The number of open retail stores increased to 37 retail stores as of December 31, 2008 from 30 retail stores as of December 31, 2007. The increase in comparable store sales was primarily the result of increased brand awareness and higher sales volumes. Canada wholesale and online sales volume was consistent with the prior year.
International: Net sales for our International segment increased $61.9 million, or 73.2%, from $84.5 million for the year ended December 31, 2007 to $146.4 million for the year ended December 31, 2008. This increase was primarily due to the net increase of 28 retail stores in the international segment which contributed incremental sales of $61.9 million over the prior year, from 47 retail stores as of December 31, 2007 to 75 retail stores as of December 31, 2008. Comparable store sales in the International segment increased 18.3% or $11.7 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. During 2008, we opened 29 new stores in Australia, Belgium, Brazil, China, France, Germany, Israel, Italy, Japan, Korea, Mexico, Netherlands, Spain, Switzerland and the United Kingdom. During the year ended December 31, 2008, approximately $14.5 million and $12.2 million of sales were generated by wholesale and online sales, respectively, compared with $12.6 million and $6.6 million for wholesale and online sales, respectively, for the year ended December 31, 2007.
Cost of sales: Cost of sales as a percentage of net sales was 46.0% and 44.9% for the years ended December 31, 2008 and 2007, respectively. The increase was primarily due to the recording $12.1 million of share based compensation expense related to the stock award of approximately 1.9 million shares of common stock to manufacturing employees on August 14, 2008 and $1.1 million of employer related payroll taxes related to the stock grant in cost of sales for the year ended December 31, 2008. The $13.2 million of expenses related to the stock award increased our cost of sales as a percentage of net sales by 2.4%. Excluding the impact of the aforementioned expenses related to the stock award, our cost of sales as a percentage of net sales decreased from 44.3% for the year ended December 31, 2007 to 43.6% for the year ended December 31, 2008. This decrease in cost of sales as a percentage of net sales was primarily due to the change in the overall sales mix during the year ended December 31, 2008 which included a higher level of retail sales as a result of the expansion of the retail business in the U.S. Retail, Canada, and International segments which generate higher gross margins than the U.S. Wholesale segment.
To supplement our in-house production capacity in December 2007, we acquired a new garment dyeing and finishing facility in South Gate, California, which began operations in 2008. The new dyeing and finishing facility is capable of dyeing completely sewn garments and the purchase of these assets added garment dyeing capability to our production process. The new facility began production in January 2008 and will further enhance our capability for in-house quality control. This acquisition included the assumption of the lease for the facility as well as the purchase of all of the tangible personal property at the plant. Startup expenses typically associated with manufacturing at new facilities resulted in approximately $0.9 million of charges in cost of sales, attributable largely to the fact that, at this location, we began to manufacture certain denim based new styles which are more costly to manufacture. The $0.9 million of additional cost of sales charges represents approximately 1.2% of the total increase in cost of sales.
To further supplement our in-house production capacity, in May 2008, we acquired an existing fabric dyeing and finishing facility in Garden Grove, California. In addition to providing substantial new dyeing capacity, the facility has available production space in which our added knitting capacity. The facility was formerly a contract dyeing vendor for our, and operations were not interrupted by the acquisition.
Gross profit: Gross profit percentage decreased from 55.1% of net sales for the year ended December 31, 2007 to 54.0%

 

 

of net sales for the year ended December 31, 2008. Gross margin was negatively impacted by the $13.2 million of expenses from the stock award to manufacturing employees, including related employer payroll taxes of $1.1 million. The $13.2 million of expenses decreased our gross margin by 2.4%. Excluding the impact of the aforementioned expenses related to the stock award, our gross margin for the year ended December 31, 2008 increased from 55.1% for the year ended December 31, 2007 to 56.4% for the year ended December 31, 2008. This increase in our gross margin was primarily due to an increase in the mix of sales coming from retail sales versus wholesale, along with an increase in online consumer sales. As the price of our products have remained relatively consistent in recent history, with no immediate plan to make changes, fluctuations in gross profit are primarily impacted by our sales mix and any production variances that are allocated to cost of sales. This benefit was partially offset by the hiring of a significant number of new manufacturing employees to support increased production.
 
Operating expenses: The following table sets forth our operating expenses for the year ended December 31, 2008 as compared to December 31, 2007 (dollars in thousands).
 
 
 
2008
 
2007
 
Change
 
% Change
 
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
 
Selling
 
$
168,516
 
 
30.9
%
 
$
115,602
 
 
29.9
%
 
$
52,914
 
 
45.8
%
Warehouse and distribution
 
15,606
 
 
2.9
%
 
10,663
 
 
2.8
%
 
4,943
 
 
46.4
%
General and administrative
 
74,235
 
 
13.6
%
 
55,981
 
 
14.5
%
 
18,254
 
 
32.6
%
Total operating expenses
 
$
258,357
 
 
47.4
%
 
$
182,246
 
 
47.1
%
 
$
76,111
 
 
41.8
%
Operating expenses: Operating expenses increased from $182.2 million for the year ended December 31, 2007 to $258.4 million for the year ended December 31, 2008, an increase of $76.1 million or 41.8%. Operating expenses include:
Selling expenses: Selling expenses together with unallocated corporate selling, advertising and promotion expenses, for the year ended December 31, 2008, were $168.5 million, which represented 30.9% of net sales, as compared to $115.6 million for the year ended December 31, 2007, which represented 29.9% of net sales. Increases in selling expenses are due to the increase in worldwide retail store locations as well as the strategic promotional advertising of our products throughout all of its segments.
Advertising costs attributable as selling expenses for the year ended December 31, 2008 were $18.4 million, representing 3.4% of net sales, compared with $12.7 million, or 3.3% of net sales, for the year ended December 31, 2007. Advertising costs increased $5.7 million mainly due to expenses incurred to promote new store openings and to promote our brand and products, primarily online, but also through print media.
The number of open stores increased from 182 as of December 31, 2007 to 260 as of December 31, 2008, resulting in an increase in rent and occupancy costs of $19.4 million during the year ended December 31, 2008 compared to the prior year. Payroll costs increased from $48.4 million for the year ended December 31, 2007 to $69.3 million for the year ended December 31, 2008, for an increase of $20.9 million. This increase in payroll costs was a result of increased staffing levels to support the increased number of stores and higher sales volumes at existing stores. We also increased compensation to certain valued employees, as we believe that we must provide competitive compensation opportunities to attract, motivate and retain qualified employees.
Costs related to preparing for opening new stores include materials, pre-opening labor and training, utilities, travel, rent and IT labor and costs. Pre-opening costs for the U.S. Retail segment were $5.8 million for the year ended December 31, 2008 compared to $1.3 million for the year ended December 31, 2007. The Canadian segment had a total of $0.5 million in pre-opening expenses for the year ended December 31, 2008 compared to no pre-opening expenses for the year ended December 31, 2007. There was a total of $4.0 million in pre-opening expenses in the International segment for the year ended December 31, 2008 compared to $3.9 million for the year ended December 31, 2007.
Warehouse and distribution expenses: Warehouse and distribution expenses for the year ended December 31, 2008 were $15.6 million as compared to $10.7 million for the year ended December 31, 2007, an increase of $4.9 million or 46.4%. These expenses represented 2.9% and 2.8%, respectively, of the total net sales for the years ended December 31, 2008 and 2007. The increase in warehouse and distribution expense is attributable to increases of $4.1 million in staffing expenses necessary to support increased volume and sales growth, primarily in the retail business.
General and administrative expenses: General and administrative expenses for the year ended December 31, 2008 were $74.2 million, as compared to $56.0 million for the year ended December 31, 2007, an increase of $18.2 million or 32.6%. General and administrative expenses represented 13.6% and 14.5% of total net sales for the years ended December 31, 2008

 

 

and 2007, respectively.
 
General and administrative expenses increased by approximately $7.5 million due to an increase in corporate overhead and $13.4 million due to growth in the administrative structure required to support the growth in our retail business in the U.S. Retail, Canada and International segments. The total number of retail stores increased from 182 opened stores at December 31, 2007 to 260 opened stores at December 31, 2008.
Corporate overhead expenses for the year ended December 31, 2008 increased to $37.2 million, as compared to $29.7 million for the year ended December 31, 2007, an increase of $7.5 million. The increase in corporate overhead expenses was the result of additional expenses for higher salaries and payroll related expenses and professional fees due to increased staffing and the regulatory environment of operating as a public company in 2008. Of the $7.5 million increase in corporate expenses, professional and consulting fees increased by $5.8 million and the remaining $1.7 million increase was primarily due to an increase in information technology and web development expenses. Professional and consulting fees were $12.3 million and $6.5 million for the years ended December 31, 2008 and 2007, respectively. The $5.8 million increase in professional and consulting fees primarily related to an increase of $2.5 million in accounting fees directly related to public company reporting and compliance requirements, $1.9 million in legal fees and $1.4 million in consulting fees related to review work required under the Sarbanes-Oxley Act of 2002 and other initiatives.
Interest expense: The major components of interest expense for the year ended December 31, 2008, consisted of interest on the outstanding revolving credit facility, loans from related and unrelated parties and the term loan facility with SOF. We used proceeds from the exercise of the warrants in the first quarter of 2008 to reduce the level of debt outstanding. The reduction in the level of debt resulted in a $3.6 million decrease in interest expense from $17.5 million for the year ended December 31, 2007 to $13.9 million for the year ended December 31, 2008. Interest rates on debt ranged from 6% to 21% during the year ended December 31, 2008, compared to 4.6% to 24% for the year ended December 31, 2007. Interest expense represented 2.6% and 4.5% of the total net sales for the years ended December 31, 2008 and 2007, respectively. The net decrease in interest expense was also attributable to the decreased LIBOR rate in the year ended December 31, 2008. Interest expense also included approximately $0.5 million of loan fees, relating to renegotiating the terms of our Credit Agreement.
Other expense (income): Other expense was $0.2 million for the year ended December 31, 2008 as compared to other income of $1.0 million for the year ended December 31, 2007. The increase in other (income) expense is attributable to tariff charges assessed and prior uncollected receivables. Other expense represented 0.0% of the total net sales for the year ended December 31, 2008 as compared to other income which represented (0.3%) of the total net sales for the year ended December 31, 2007.
Income tax provision (benefit): Income tax provision increased from $0.2 million benefit for the year ended December 31, 2007 to $7.3 million expense for the year ended December 31, 2008.
Prior to July 1, 2004, Old American Apparel operated as a C corporation under U.S. tax law. Effective July 1, 2004, the stockholders elected to be taxed under Subchapter S of the Internal Revenue Code (the “S Corporation Election”). During the period of the S Corporation Election, federal income taxes and certain state taxes were the responsibility of Old American Apparel’s stockholders. The S Corporation Election terminated with the consummation of the Acquisition on December 12, 2007. As a result of the change of Old American Apparel’s S corporation status for U.S. tax purposes to the C corporation status on December 12, 2007, the deferred tax assets and liabilities were adjusted to reflect the change in federal and state tax rates applicable to C corporations.
We file income tax returns for various states and foreign jurisdictions. Where applicable, we provide for state and foreign taxes at the applicable statutory state and country rates multiplied by pre-tax income.
Net income: Our net income for the year ended December 31, 2008 decreased by approximately $1.4 million to $14.1 million compared to $15.5 million for the year ended December 31, 2007 as a result of the various factors described above.
 
 
 
 
 
 
 
 
 
Liquidity and Capital Resources

 

 

Over the past years, our growth has been funded through a combination of borrowings from related and unrelated parties, bank debt and lease financing, and proceeds from the exercise of warrants. Our principal liquidity requirements are for working capital and capital expenditures. We fund our liquidity requirements primarily through cash on hand, cash flow from operations, if any, and borrowings from revolving credit facilities, related party notes from our CEO and term loans under the Lion Credit Agreement. We generate cash primarily through the sale of our products manufactured by us at our retail stores and through our wholesale operations. Primary uses of cash are for the purchase of raw materials, payment to our manufacturing employees and retail employees, retail store opening costs and the payment of rent for retail stores. We believe that cash on hand, future funds from operations and borrowing from revolving credit facilities will be sufficient to fund our cash requirements for the next twelve months. There is no assurance, however, that we will be able to generate sufficient cash flow or that we will be able to maintain our ability to borrow under our revolving credit facilities.
As of December 31, 2009, we had (i) approximately $9.0 million in cash, (ii) $41.2 million available and $6.3 million outstanding under the BofA Credit Agreement, and (iii) $65.6 million of borrowings outstanding under the Lion Credit Agreement, net of discount, and including accrued paid-in-kind interest of $6.1 million. See “Debt Agreements” below for an overview of the BofA Credit Agreement, the Lion Credit Agreement and our other debt agreements.
Cash Flow Overview for the years ended December 31, 2009, 2008 and 2007 is as follows (dollars in thousands):
 
 
 
2009
 
2008
 
2007
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
45,203
 
 
$
18,886
 
 
$
(6,496
)
Investing activities
 
(20,889
)
 
(69,865
)
 
(22,737
)
Financing activities
 
(25,471
)
 
41,171
 
 
44,530
 
Effect of foreign exchange rate changes on cash
 
(1,165
)
 
1,884
 
 
215
 
Net (decrease) increase in cash
 
$
(2,322
)
 
$
(7,924
)
 
$
15,512
 
Cash Flow Overview
Year Ended December 31, 2009
For the year ended December 31, 2009, cash provided by operations was $45.2 million. This was a result of net income of $1.1 million, non-cash expenses of $47.3 million (primarily depreciation and amortization, stock-based compensation, deferred income taxes, deferred rent expense and bad debt recovery) an increase in accrued expenses and other liabilities of $13.9 million and a decrease in inventory of $9.5 million, offset by the decrease in accounts payable of $10.3 million and a decrease in income tax payable of $9.9 million. The decrease in inventory levels during 2009 included a reduction in raw material purchases and moderated production in order to maintain lower levels of inventory in response to the declining economic environment and a projected decrease in demand from wholesale customers.
For the year ended December 31, 2009, we used $20.9 million of cash in investing activities. This was primarily a result of increased investment in property and equipment of $4.6 million for the U.S. wholesale, $11.2 million for the U.S. Retail, $1.4 million in the Canada segment and $3.7 million in the International segment.
For year ended December 31, 2009, cash used in financing activities was $25.5 million. This was primarily the result of using available cash and our new financing received from Lion to pay down our revolving credit facility and our previous term note and notes payable.
 
Year Ended December 31, 2008
For the year ended December 31, 2008, cash provided by operations was $18.9 million. This was a result of income from operations before non-cash expenses (primarily depreciation and amortization, stock-based compensation, deferred income taxes, deferred rent expense and bad debt recovery) of $39.6 million, an increase in accounts payable and accrued expenses of $21.4 million and an increase in income taxes payable of $2.1 million, offset by the increase in inventory of $48.1 million, increase in trade and other receivables of $0.8 million and an increase in prepaid expenses and other current assets of $0.4 million. The increase in inventory levels during 2008 included raw material purchases and production of product to support our growth in the U.S. Wholesale segment and continued expansion of the retail business in U.S. Retail, Canada and International segments.
 
For the year ended December 31, 2008, our used $69.9 million of cash in investing activities. This was primarily a

 

 

result of increased investment in property and equipment for the U.S. wholesale segment by approximately $13.9 million and an increased investment in property and equipment of $29.5 million for the U.S. Retail, $4.7 million in the Canada segment and $18.3 million in the International segment. In addition, we acquired all of the assets of a fabric dyeing and finishing plant for $3.5 million.
For year ended December 31, 2008, cash provided by financing activities was $41.2 million. This was primarily the result of our principal capital requirements to fund working capital needs and to finance opening of new retail stores, as well as to finance purchase of new manufacturing and information systems equipment to support higher production levels and growth in online operations. Proceeds from exercise of warrants amounted to $65.6 million offset by the $10.0 million repurchase of treasury shares and $5.2 million to satisfy the applicable income tax withholding obligations in connection with the net share settlement of some of the Endeavor Warrants which is deemed to be a repurchase by our of its common stock. Other financing activities included receipt of a $2.5 million loan from Dov Charney, offset by debt repayments and financing costs.
Year Ended December 31, 2007
For the year ended December 31, 2007, cash used in operations was $(6.5) million. This was a result of income from operations before non-cash expenses (primarily depreciation and amortization, deferred income taxes, deferred rent expense and bad debt recovery) of $(24.7) million, and an increase in income taxes payable of $3.8 million, offset by the increase in inventory of $22.2 million, decrease in receivables of $0.5 million, increase in prepaid expenses and other current assets of $2.3 million, and decrease in accounts payable and accrued expenses of $8.4 million. Cash used in operations was primarily used to reduce obligations to trade and other vendors. Cash used in operations was also used to finance an increase in inventory production levels during the first two quarters of 2007 through raw material purchases to support American Apparel’s peak selling season that generally occurs from the months of May through September, as well as a related increase in production selling and administrative staff payroll.
For the year ended December 31, 2007, we used $22.7 million of cash in investing activities. This was partially a result of increased investment in property and equipment for the U.S. wholesale segment by approximately $5.3 million and an increased investment in property and equipment of $17.6 million for the U.S. retail and other segments. In 2007, we invested in new cutting, sewing, information systems equipment required to support the increased production levels experienced during 2007. Increase in investment in property and equipment for the retail segment was due to the 38 new retail stores that were opened in the year ended December 31, 2007.
For year ended December 31, 2007, cash from financing activities was $44.5 million. This was primarily the result of $123 million cash acquired in the Acquisition, the buyout of Sang Ho Lim, the other stockholder of Old American Apparel prior to the Acquisition, of $67.9 million, decreases to the line of credit pursuant to the BofA Credit Agreement of $2.7 million, increases to the term loans and notes payable pursuant to the SOF Credit Agreement of $58.2 million offset by payments to term loans notes, payable and capital leases of $41.9 million, and distributions and advances to stockholders of $21.6 million. American Apparel’s principal capital requirements were to fund working capital needs and to finance opening of new retail stores, as well as to finance purchases of new manufacturing and information systems equipment to support higher production levels and growth in online operations.
Debt Agreements
Revolving Credit Facilities:
On July 2, 2007, we replaced our, then existing, credit facility with an increased revolving credit facility (the “BofA Agreement”) of $75 million from Bank of America, N.A (the “Bank”). Availability under the BofA Agreement, which is secured by substantially all of our assets, is calculated by a formula referencing the amounts of accounts receivable and inventory that we maintain at any given time. The BofA Agreement also imposes certain restrictions on us regarding capital expenditures and limits our ability to, among other things, incur additional indebtedness, dispose of assets, make repayments 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.
Borrowings under the BofA Agreement are subject to certain advance provisions established by the Bank and are collateralized by substantially all of our assets. Interest under the agreement is at LIBOR (0.25% at December 31, 2009) plus 4.5% or the Bank’s prime rate (which rate can in no event be lower than LIBOR plus 4.5% per annum) (3.25% at December 31, 2009) plus 2.5%, at our option. In addition, the BofA Agreement requires us to maintain certain amounts of unused availability under the revolving credit facility. The BofA Agreement will mature on July 2, 2012. Net available borrowing capacity, reflecting outstanding letters of credit of approximately $9.4 million and outstanding borrowings of $6.2 million at December 31, 2009, was approximately $41.2 million as determined based on our levels of inventory and amount of account

 

 

receivables.
On December 30, 2009, our Canadian Companies replaced their secured revolving credit facility of C$4.0 million from Toronto Dominion Bank, with an increased revolving credit facility (the “BofM Agreement”) of C$11.0 million from Bank of Montreal (the “Canadian Bank”). The revolving credit facility is secured by movable hypothecs on all present and future movable property of our Canadian Companies. Borrowings under the BofM Agreement are subject to certain advance provisions established by the Canadian Bank. Interest under the agreement is at the Bank’s prime rate (2.25% at December 31, 2009) plus 2%. The credit facility matures on December 30, 2012, and our available borrowing capacity at December 31, 2009 was C$8.5 million.
Long-term debt and capital lease obligations:
On March 13, 2009, we entered into agreement with Lion Capital, LLC (“Lion” and the “Lion Agreement”, respectively), who provided us with term loans in an aggregate principal amount equal to $80.0 million, of which $5.0 million constituted a fee paid by us to Lion in accordance with the Lion Agreement. The term loans under the Lion Agreement mature on December 31, 2013 and bear interest at a rate of 15% per annum, payable quarterly in arrears. The Lion Agreement is subordinated to the BofA 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 us to incur additional debt and liens) and a total leverage ratio financial maintenance covenant. We are permitted to prepay the loans in whole or in part at any time at our option, with no prepayment penalty.
Approximately $51.3 million of the proceeds of the loans made under the Lion Agreement were used by us to repay in full all outstanding principal and interest due under the SOF Credit Agreement. The remaining proceeds were used to repay $3.3 million of loans we owed to our CEO (see Note 13 to the consolidated financial
statements contained elsewhere herein), to pay fees and expenses of $4.3 million that were capitalized as deferred financing costs and included in other assets in the condensed consolidated balance sheet as of December 31, 2009, and to reduce the outstanding revolver balance under the BofA Credit Agreement by $16.0 million. Accordingly, $16.0 million of the revolver balance under the BofA Credit Agreement outstanding has been refinanced on a long-term basis and as of December 31, 2008 was reclassified to long-term debt.
In connection with the loans under the Lion Credit Agreement, we issued the Lion Warrant. We allocated the cash received from the Lion Credit Agreement between debt and warrants based on their relative fair values. The relative fair value of the debt under the Lion Credit Agreement was approximately $56.0 million, based on a net present value of future cash flows using a discount rate of 21.6% determined by comparable financial instruments. The Lion Warrant was recorded as a debt discount and a credit to stockholders’ equity at its relative fair value of approximately $18.7 million. At December 31, 2009, the debt, net of unamortized discount and excluding interest paid-in-kind of $6.1 million, totaled approximately $59.7 million, and will be accreted up to the $80.0 million par value of the loan using the effective interest method over the term of the Lion Credit Agreement. The Lion Warrant may be exercised by Lion by paying the exercise price in cash, pursuant to “cashless exercise” of the warrant or by a combination of the two methods. The Lion Warrant contains 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 of the Company at less than fair market value.
As of December 31, 2009, we had outstanding approximately $65.6 million of second lien debt, net of discount and including accrued paid-in-kind interest, payable to Lion, and we were in compliance with all covenants and restrictions under the Lion Credit Agreement.
We lease certain equipment under capital lease arrangements expiring at various times through September 2013. 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.
Related-party Debt:
As of December 31, 2009, we had outstanding approximately $4.4 million of related party long-term debt payable to our CEO. The notes provide for interest at an annual rate of 6%, payable in kind, and are due in December 2012 and January 2013. One of the notes is subordinated to the Canadian revolving credit facility.
 
 

 

 

The following is an overview of our total debt as of December 31, 2009 (dollars in thousands):
 
Description of Debt
 
Lender Name
 
Stated
Interest Rate
 
December 31, 2009
 
Covenant
Violations
Revolving credit facility
 
Bank of America, N.A.
 
(LIBOR + 4.5%)
 
$
6,249
 
 
No
Revolving credit facility (Canada)
 
Bank of Montreal
 
4.25%
 
 
 
No
Term loan from private investment firm
 
Lion Capital LLP
 
15.0%
 
65,593
 
 
No
Other
 
 
 
 
 
501
 
 
N/A
Capital lease obligations
 
48 individual leases ranging between $1-$764
 
From 6.1% to 19.3%
 
2,927
 
 
N/A
Subordinated notes payable to related parties
 
 
 
6.0%
 
4,355
 
 
N/A
Cash overdraft
 
 
 
 
 
3,741
 
 
N/A
Total debt
 
 
 
 
 
$
83,366
 
 
 
 
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.
The BofA Credit Agreement limits our domestic subsidiaries from incurring capital expenditures of more than approximately $18.8 million, and the Lion Credit Agreement limits us from incurring capital expenditures of more than $27.5 million, respectively, for the year ended December 31, 2009. The BofA Credit Agreement imposes a minimum excess availability covenant, which requires us to maintain minimum excess availability of 10% of our net availability under the credit agreement. The Lion Credit Agreement contains a total debt to consolidated EBITDA ratio financial covenant, as further described within the Lion Credit Agreement, which must be maintained at a level of no more than 2.20:1.00 for the quarters ended June 30, 2009, September 30, 2009, and December 31, 2009. The maximum ratio for future quarters is described further in the credit agreement and decreases successively from the 2.20:1.00 level. Additionally, the BofA Credit Agreement and Lion Credit Agreement contain cross-default provisions, whereby an event of default occurring under one of the credit agreements would cause an event of default under the other credit agreement.
The Bank of Montreal credit facility contains a fixed charge coverage ratio, tested at the end of each month, which measures the ratio of EBITDA less cash income taxes paid, dividends paid and unfinanced capital expenditures divided by interest expense plus scheduled principal payments of long term debt, debt under capital leases, dividends, and shareholder loans and advances, for our Canadian subsidiaries, of not less than 1.25:1.00. The Bank of Montreal credit facility also restricts our Canadian subsidiaries from entering into operating leases which would lead to payments under such leases totaling more than C$8.5 million in any fiscal year, and imposes a minimum excess availability covenant which requires our Canadian subsidiaries to maintain at all times minimum excess availability of 5% of the revolving credit commitment under the credit facility.
As of December 31, 2009, we were in compliance with all covenants and restrictions under our credit facilities. We anticipate that based on our current operating plan for the next twelve months, we will remain in compliance with the covenants under the BofA Credit Agreement, Lion Credit Agreement and the Bank of Montreal credit facility. However, we can provide no assurances that we will maintain compliance with such covenants.
We were in compliance with the covenants under the Lion Credit Agreement as of December 31, 2009 and we anticipate that based on information currently available, we will be in compliance with the same covenants as of March 31, 2010. On March 31, 2010, the Company entered into a Second Amendment to the Lion Credit Agreement, which, among other things, increased the maximum permitted ratio Total Debt to Consolidated EBITDA (as defined in the Lion Credit Agreement) for the four quarter period ending March 31, 2010 from 1.75:1.00 to 2.00:1.00 and for the four quarter period ending June 30, 2010 from 1.70:1.00 to 1.90:1.00. The Second Amendment will enable the Company to make additional capital investments.
Future Capital Requirements
We had cash on hand of $9.0 million at December 31, 2009. We are limited to $18.8 million in capital expenditures, excluding non-cash property and equipment acquisitions, for fiscal 2010 for our U.S. operations, as set by restrictions in the BofA Credit Agreement, and $27.5 million in capital expenditures as set by restrictions in the Lion Credit Agreement. Capital expenditures are primarily necessary to fund the opening of new stores and the remodeling of existing stores, and the purchase of manufacturing equipment, distribution center equipment and computer hardware and software.

 

 

 
Off-Balance Sheet Arrangements and Contractual Obligations
Our material off-balance sheet contractual commitments are operating lease obligations and 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 $9.4 million at December 31, 2009, and were related primarily to workers’ compensation insurance and rent deposits. We also have capital lease obligations which consist principally of leases for our manufacturing equipment.
Contractual Obligations Summary
The following table summarizes our contractual commitments as of December 31, 2009, which relate to future minimum payments due under non-cancelable licenses, leases, revolving credit facility, 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 the related real estate taxes and maintenance costs, are included in the cost of sales and general and administrative expenses in our consolidated financial statements and amounted to approximately $79.3 million for the year ended December 31, 2009.
 
 
 
Total
 
Payments due by period
Contractual Obligations
 
Less than
1 year
 
1-3 years
 
4-5 years
 
More than
5 years
Long term debt, including interest
 
$
110,648
 
 
$
9,839
 
 
$
21,600
 
 
$
78,911
 
 
$
298
 
Current debt, including interest
 
6,972
 
 
6,972
 
 
 
 
 
 
 
Capital lease obligations, including interest
 
3,183
 
 
2079
 
 
927
 
 
177
 
 
 
Operating lease obligations
 
460,033
 
 
67,610
 
 
126,432
 
 
114,095
 
 
151,896
 
Advertising commitments
 
3,567
 
 
3,567
 
 
 
 
 
 
 
Self insurance reserves
 
11,714
 
 
4,807
 
 
4,211
 
 
1,748
 
 
948
 
Total contractual obligations
 
$
596,117
 
 
$
94,874
 
 
$
153,170
 
 
$
194,931
 
 
$
153,142
 
We had approximately $5.2 million of total gross unrecognized tax benefits, including interest. The timing of any payments which could result from these unrecognized tax benefits will depend on a number of factors, and accordingly the amount and timing of any future payments cannot be reasonably estimated. We do not expect a significant tax payment related to these benefits within the next year. Therefore, these amounts are not included in the table above.
Seasonality
We experience seasonality in our operations. Historically, sales during the second and third 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 recent years, inflation has been modest. However, high oil costs can affect the cost of all raw materials and components. The competitive environment limits 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 its business, we 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, except with respect to payroll-related costs and other costs arising from or related to government imposed regulations.
 
 
 

 

 

Critical Accounting Estimates and Policies
Complete descriptions of our significant accounting policies are outlined in Note 3 of the Notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A. 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 accounting estimates and policies include:
revenue recognition
sales returns and other allowances;
allowance for doubtful accounts;
inventory valuation, obsolescence;
valuation and recoverability of long-lived intangible assets including the values assigned to acquired intangible assets, goodwill, and property and equipment;
income taxes;
foreign currency;
accruals for the outcome of current litigation.
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 accordingly. 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, as we do not currently have sufficient historical evidence to recognize gift card breakage. Our gift cards, gift certificates and store credits do not have expiration dates.
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 it by customers. Accordingly, we believe that its historical returns analysis is an accurate basis for its allowance for sales returns. As with any set of assumptions and estimates, there is a range of reasonably likely amounts that may be calculated for our allowance for sales returns above. However, we believe that there would be no significant difference in the amounts reported using other reasonable assumptions than what was used to arrive at the allowance. 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. Actual experience may be significantly different than our estimates due to various factors, including, but not limited to, changes in sales volume based on

 

 

consumer demand and competitive conditions. 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 it made such determination.
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. At times however, we will purposefully engage in inventory build up at a rate that outpaces sales. This is typically done during the first and second quarters in anticipation of the peak selling season which occurs during the summer months of the second and third quarters each year. At such times, we will consider the timing of inventory buildup in order to determine whether the buildup warrants additional reserves for inventory obsolescence. If the inventory buildup occurs in advance of the selling season, management maintains the existing reserve for excess and slow-moving inventory until the peak selling season has passed and the accumulated sales data provides a better basis for an update of our management’s estimate of this provision.
 
We have evaluated the current level of inventories considering historical sales and other factors and, based on this evaluation, have recorded adjustments to cost of goods sold to adjust inventories to net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or competition differ from expectations. Other significant estimates include the allocation of variable and fixed production overheads. While variable production overheads are allocated to each unit of production on the basis of actual use of production facilities, the allocation of fixed production overhead to the costs of conversion is based on the normal capacity of our production facilities, and recognizes abnormal idle facility expenses as current period charges. Certain costs, including categories of indirect materials, indirect labor and other indirect manufacturing costs which are included in the overhead pools are estimated. We determine our normal capacity based upon the amount of direct labor minutes in a reporting period.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of Accounting Standards Update (“ASC 350”), “Intangibles—Goodwill and Other”. The goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit that has goodwill assigned to its carrying value. We estimate the fair value of a reporting unit by using a discounted cash flow model. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit’s net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of goodwill impairment. We completed the annual impairment test of our goodwill as of December 31, 2009 and 2008 and determined that there was not impairment as the fair value of the reporting unit, to which goodwill was assigned, substantially exceeded the carrying value of the reporting unit.
 
 
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.
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 the acquired 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. During the years ended December 31, 2009, 2008 and 2007 we recorded an impairment charge in the amount of $3.3
million, $0.6 million and $0.3 million related to underperforming retail stores located in each of the U.S. Retail, Canada and International segments.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our accompanying consolidated balance sheets, as well as tax credit carrybacks and carryforwards. We periodically review the recoverability of deferred tax assets recorded on our balance sheet and provide valuation allowances as management deems necessary. 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, we operate within multiple taxing jurisdictions and are 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.
Foreign Currency
In preparing our consolidated financial statements, the financial statements of the foreign subsidiaries are translated from the functional currency, generally the local currency, into U.S. Dollars. This process results in exchange rate gains and losses, which, under the relevant accounting guidance, are included as a separate component of stockholders’ equity under the caption “Accumulated other Comprehensive Income.”
Under the relevant accounting guidance, the functional currency of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered.
If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included within the statement of operations. If we dispose of subsidiaries, then any cumulative translation gains or losses would be recorded into our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of operations.
Based on an assessment of the factors discussed above, we consider the relevant subsidiary’s local currency to be the functional currency for each of our foreign subsidiaries.
 
Contingencies

 

 

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. 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. 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. However, 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 Note 16 and 21 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K/A.
 
Self insurance liabilities
We maintain self-insurance programs for our estimated commercial general liability risk and our estimated workers’ compensation liability risk related to our manufacturing and retail operations in the United States. In addition, starting in October 2008, we have a self-insurance program for a portion of our employee medical benefits covering all employees in the United States. Under these programs, we maintain insurance coverage for losses in excess of specified per-occurrence amounts. 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 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. As of December 31, 2009 and 2008, our self-insurance liabilities totaled $11.7 million and $8.4 million, respectively.
Accounting Pronouncements-Newly Issued
See Note 3 to the consolidated financial statements contained elsewhere in this Annual Report on Form 10-K/A.
 
 
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, 2009, a 1% increase in average interest rates on our borrowings would increase future interest expense by approximately $5k per month. We determined this amount based on approximately $6.2 million of variable rate borrowings at December 31, 2009. 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.
Foreign Currency Risk
The majority of our operating activities are conducted in U.S. dollars. Approximately 40.4% of our net sales for the year ended December 31, 2009 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. The functional currencies of our foreign operations consist of the Canadian dollar for Canadian subsidiaries, the pound Sterling for U.K. subsidiaries, the Euro for subsidiaries in Continental Europe, the Yen for the Japanese subsidiary, the Won for the South Korea subsidiary, and local currencies for any of the foreign subsidiaries not mentioned.

 

 

American Apparel, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 
 
 
 
 
  
Page
Consolidated Financial Statements
  
 
 
 
Report of Independent Registered Public Accounting Firm
  
26
 
 
 
Consolidated Balance Sheets as of December 31, 2009 and 2008
  
27
 
 
 
Consolidated Statements of Operations For the Years ended December 31, 2009, 2008 and 2007
  
28
 
 
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) For the Years Ended December 31, 2009, 2008 and 2007
  
29
 
 
 
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007
  
30
 
 
 
Notes to Consolidated Financial Statements For the Years Ended December 31, 2009, 2008 and 2007
  
32
 
 
 
Financial Statement Schedule
  
 
 
 
Schedule II—Valuation and Qualifying Accounts
  
58
 

 

 

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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for the years ended December 31, 2009, 2008 and 2007. 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 its Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the years ended December 31, 2009, 2008 and 2007 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, 2009, 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 31, 2011, expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of the existence of material weaknesses.
 
/s/ Marcum LLP
Marcum LLP
New York, NY
March 31, 2011, except for Note 22 which is May 16, 2011.

 

 

Item 8.    Financial Statements and Supplementary Data
 
American Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in Thousands, except par value)
 
 
December 31,
 
 
2009
 
2008
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash
 
$
9,046
 
 
$
11,368
 
Trade accounts receivable, net of allowances of $1,763 and $1,441 at December 31, 2009 and 2008, respectively
 
16,907
 
 
16,439
 
Prepaid expenses and other current assets
 
9,994
 
 
5,369
 
Inventories
 
141,235
 
 
148,154
 
Income taxes receivable
 
4,494
 
 
604
 
Deferred income taxes
 
4,627
 
 
3,935
 
Total current assets
 
186,303
 
 
185,869
 
PROPERTY AND EQUIPMENT, net
 
103,310
 
 
112,408
 
DEFERRED INCOME TAXES
 
12,033
 
 
10,137
 
OTHER ASSETS, net
 
25,933
 
 
25,195
 
TOTAL ASSETS
 
$
327,579
 
 
$
333,609
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Cash overdraft
 
$
3,741
 
 
$
2,413
 
Revolving credit facilities and current portion of long-term debt
 
6,346
 
 
34,318
 
Accounts payable
 
19,705
 
 
32,731
 
Accrued expenses
 
30,573
 
 
22,140
 
Income taxes payable
 
2,608
 
 
8,582
 
Current portion of capital lease obligations
 
1907
 
 
2,616
 
Total current liabilities
 
64,880
 
 
102,800
 
LONG-TERM DEBT, net of unamortized discount of $20,537 at December 31, 2009 and none at December 31, 2008
 
65,997
 
 
67,050
 
SUBORDINATED NOTES PAYABLE TO RELATED PARTY
 
4,355
 
 
3,292
 
CAPITAL LEASE OBLIGATIONS, net of current portion
 
1,020
 
 
1986
 
DEFERRED RENT
 
22,052
 
 
16,011
 
OTHER LONG-TERM LIABILITIES
 
11,934
 
 
6,058
 
TOTAL LIABILITIES
 
170,238
 
 
197,197
 
COMMITMENTS AND CONTINGENCIES (Note 18)
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred stock, $.0001 par value, authorized 1,000 shares; none issued
 
 
 
 
Common stock, $.0001 par value, authorized 120,000 shares; 72,467 shares issued and 71,033 shares outstanding at December 31, 2009 and 72,221 shares issued and 70,787 shares outstanding at December 31, 2008
 
7
 
 
7
 
Additional paid-in capital
 
150,449
 
 
131,252
 
Accumulated other comprehensive loss
 
(2,083
)
 
(2,703
)
Retained earnings
 
19,012
 
 
17,900
 
 
 
167,385
 
 
146,456
 
Less: Treasury stock, 1,434 shares at cost
 
(10,044
)
 
(10,044
)
TOTAL STOCKHOLDERS’ EQUITY
 
157,341
 
 
136,412
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
327,579
 
 
$
333,609
 
See accompanying notes to consolidated financial statements.

 

 

American Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in Thousands, except per share amounts)
 
 
 
Years ended December 31,
 
 
2009
 
2008
 
2007
Net sales
 
$
558,775
 
 
$
545,050
 
 
$
387,044
 
Cost of sales (including share-based compensation of $12,102 for the year ended December 31, 2008)
 
238,863
 
 
250,629
 
 
173,676
 
Gross profit
 
319,912
 
 
294,421
 
 
213,368
 
Operating expenses (including share-based compensation of $525, $530 and $0 for the years ended December 31, 2009, 2008 and 2007, respectively, and related party charges of $622, $619 and $6,111 for the years ended December 31, 2009, 2008 and 2007, respectively)
 
295,497
 
 
258,357
 
 
182,246
 
Income from operations
 
24,415
 
 
36,064
 
 
31,122
 
Interest expense (including related party interest expense of $271, $346 and $1,633 for the years ended December 31, 2009, 2008 and 2007, respectively)
 
22,627
 
 
13,921
 
 
17,541
 
Foreign currency transaction (gain) loss
 
(2,920
)
 
621
 
 
(722
)
Other (income) expense
 
(220
)
 
155
 
 
(980
)
Income before income taxes
 
4,928
 
 
21,367
 
 
15,283
 
Income tax provision (benefit)
 
3,816
 
 
7,255
 
 
(195
)
Net income
 
$
1,112
 
 
$
14,112
 
 
$
15,478
 
Basic earnings per share
 
$
0.02
 
 
$
0.20
 
 
$
0.32
 
Diluted earnings per share
 
$
0.01
 
 
$
0.20
 
 
$
0.31
 
Weighted average basic shares outstanding
 
71,026
 
 
69,490
 
 
48,890
 
Weighted average diluted shares outstanding
 
76,864
 
 
70,317
 
 
49,414
 
PRO FORMA COMPUTATION RELATED TO CONVERSION TO C CORPORATION FOR INCOME TAX PURPOSES (unaudited):
 
 
 
 
 
 
Historical income before income taxes
 
 
 
 
 
$
15,283
 
Pro forma provision for income taxes
 
 
 
 
 
5,826
 
Pro forma net income
 
 
 
 
 
$
9,457
 
Pro forma Basic Earnings per share
 
 
 
 
 
$
0.19
 
Pro forma Diluted Earnings per share
 
 
 
 
 
$
0.19
 
See accompanying notes to consolidated financial statements.

 

 

American Apparel, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
(Amounts in Thousands)
 
 
 
Number of
Common
Shares
 
Par
Value
Amount
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Due from
Stockholders
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Comprehensive
Income (Loss)
BALANCE, January 1, 2007
 
48,390
 
 
$
5
 
 
$
 
 
$
6,197
 
 
$
(553
)
 
$
361
 
 
$
6,963
 
 
$
12,973
 
 
 
Outstanding shares of the Registrant at time of reverse merger dated December 12, 2007
 
19,933
 
 
2
 
 
 
 
121,587
 
 
 
 
 
 
 
 
121,589
 
 
 
Buy out of Sang Ho Lim
 
(11,132
)
 
(1
)
 
 
 
(67,902
)
 
 
 
 
 
 
 
(67,903
)
 
 
Repayment of stockholders advances
 
 
 
 
 
 
 
 
 
553
 
 
 
 
 
 
553
 
 
 
Distributions to stockholders
 
 
 
 
 
 
 
(15,764
)
 
 
 
 
 
(6,383
)
 
(22,147
)
 
 
Reclass deferred merger costs
 
 
 
 
 
 
 
(1,003
)
 
 
 
 
 
 
 
(1,003
)
 
 
Imputed interest on stockholder loans
 
 
 
 
 
 
 
577
 
 
 
 
 
 
 
 
577
 
 
 
Capitalization of undistributed S Corporation earnings
 
 
 
 
 
 
 
12,270
 
 
 
 
 
 
(12,270
)
 
 
 
 
Exercise of warrants
 
200
 
 
 
 
 
 
1,200
 
 
 
 
 
 
 
 
1,200
 
 
 
Cashless exercise of underwriters unit purchase options
 
204
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
15,478
 
 
15,478
 
 
$
15,478
 
Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
 
 
 
504
 
 
 
 
504
 
 
504
 
BALANCE, December 31, 2007
 
57,595
 
 
6
 
 
 
 
57,162
 
 
 
 
865
 
 
3,788
 
 
61,821
 
 
$
15,982
 
Exercise of Warrants
 
13,521
 
 
1
 
 
 
 
65,617
 
 
 
 
 
 
 
 
65,618
 
 
 
Purchase of treasury stock
 
 
 
 
 
(10,044
)
 
 
 
 
 
 
 
 
 
(10,044
)
 
 
Issuance of common stock for stock-based compensation, net of payroll tax withholding
 
1,105
 
 
 
 
 
 
7,452
 
 
 
 
 
 
 
 
7,452
 
 
 
Issuance of warrants
 
 
 
 
 
 
 
1,021
 
 
 
 
 
 
 
 
1,021
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
14,112
 
 
14,112
 
 
$
14,112
 
Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
 
 
 
(3,568
)
 
 
 
(3,568
)
 
(3,568
)
BALANCE, December 31, 2008
 
72,221
 
 
7
 
 
(10,044
)
 
131,252
 
 
 
 
(2,703
)
 
17,900
 
 
136,412
 
 
$
10,544
 
Issuance of common stock for stock-based compensation
 
246
 
 
 
 
 
 
525
 
 
 
 
 
 
 
 
525
 
 
 
Issuance of warrants
 
 
 
 
 
 
 
18,672
 
 
 
 
 
 
 
 
18,672
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
1,112
 
 
1,112
 
 
$
1,112
 
Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
 
 
 
620
 
 
 
 
620
 
 
620
 
BALANCE, December 31, 2009
 
72,467
 
 
$
7
 
 
$
(10,044
)
 
$
150,449
 
 
$
 
 
$
(2,083
)
 
$
19,012
 
 
$
157,341
 
 
$
1,732
 
See accompanying notes to consolidated financial statements.

 

 

American Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in Thousands)
 
 
 
For the Years ended December 31,
 
 
2009
 
2008
 
2007
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Cash received from customers
 
$
559,089
 
 
$
544,062
 
 
$
386,931
 
Cash paid to suppliers, employees and others
 
(488,858
)
 
(501,469
)
 
(373,653
)
Income taxes paid
 
(16,901
)
 
(11,351
)
 
(3,247
)
Interest paid, net of capitalized interest
 
(8,609
)
 
(12,194
)
 
(17,533
)
Other
 
482
 
 
(162
)
 
1,006
 
Net cash provided by (used in) operating activities
 
45,203
 
 
18,886
 
 
(6,496
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
Capital expenditures
 
(20,889
)
 
(66,365
)
 
(21,137
)
Purchase of net assets under business acquisition
 
 
 
(3,500
)
 
(1,600
)
Net cash used in investing activities
 
(20,889
)
 
(69,865
)
 
(22,737
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
Cash overdraft from financial institution
 
1,307
 
 
(288
)
 
(1,212
)
(Repayment) borrowings under revolving credit facility, net
 
(43,590
)
 
1,381
 
 
(2,659
)
Deferred financing costs paid
 
(5,003
)
 
(4,139
)
 
(1,630
)
Distribution to stockholders, net
 
 
 
 
 
(21,594
)
Proceeds from exercise of warrants
 
 
 
65,619
 
 
1,200
 
Purchase of treasury stock
 
 
 
(10,044
)
 
 
Repurchase of common stock for payment of payroll statutory tax withholding on stock-based compensation
 
 
 
(5,174
)
 
 
Cash acquired in reverse Merger
 
 
 
 
 
123,000
 
Buy out of Sang Ho Lim
 
 
 
 
 
(67,903
)
Payment of merger-related costs
 
 
 
 
 
(1,003
)
Borrowings of subordinated notes payable to related party
 
4,000
 
 
2,500
 
 
4,732
 
Repayments under subordinated notes payable to related party
 
(3,250
)
 
(4,580
)
 
(7,164
)
Borrowings under notes payable to unrelated parties
 
 
 
966
 
 
2,118
 
Repayment under notes payable to unrelated parties
 
 
 
(1,336
)
 
(8,288
)
Repayment of subordinated note payable to unrelated party
 
 
 
 
 
(14,201
)
Borrowings under term loans and notes payable, net of $5,000 discount
 
75,074
 
 
 
 
51,386
 
Repayment of term loans and notes payable
 
(51,183
)
 
 
 
(8,685
)
Repayment of capital lease obligations
 
(2,826
)
 
(3,734
)
 
(3,567
)
Net cash (used in) provided by financing activities
 
(25,471
)
 
41,171
 
 
44,530
 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
 
(1,165
)
 
1,884
 
 
215
 
NET (DECREASE) INCREASE IN CASH
 
(2,322
)
 
(7,924
)
 
15,512
 
CASH, beginning of period
 
11,368
 
 
19,292
 
 
3,780
 
CASH, end of period
 
$
9,046
 
 
$
11,368
 
 
$
19,292
 
See accompanying notes to consolidated financial statements.

 

 

American Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows—(Continued)
(Amounts in Thousands)
 
 
 
Years ended December 31,
 
 
2009
 
2008
 
2007
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 
$
1,112
 
 
$
14,112
 
 
$
15,478
 
Depreciation and amortization of property and equipment and other assets
 
28,151
 
 
20,844
 
 
13,306
 
Amortization of debt discount and deferred financing costs
 
7,713
 
 
1,030
 
 
583
 
Loss on disposal of property and equipment
 
246
 
 
 
 
 
Foreign currency transaction (gain) loss
 
(2,920
)
 
621
 
 
(722
)
Allowance for inventory shrinkage and obsolescence
 
1,184
 
 
1,731
 
 
 
Imputed interest on stockholder loans
 
 
 
 
 
577
 
Accrued interest – paid in kind
 
6,312
 
 
 
 
 
Retail store impairment charges
 
3,343
 
 
644
 
 
252
 
Stock-based compensation expense
 
525
 
 
12,625
 
 
 
Bad debt expense (recovery)
 
572
 
 
598
 
 
(313
)
Deferred income taxes
 
(3,704
)
 
(6,212
)
 
(6,913
)
Deferred rent
 
5,908
 
 
7,746
 
 
2,594
 
Changes in cash due to changes in operating assets and liabilities:
 
 
 
 
 
 
Trade accounts receivables
 
(258
)
 
(816
)
 
(499
)
Inventories
 
9,485
 
 
(48,092
)
 
(21,621
)
Prepaid expenses and other current assets
 
(4,874
)
 
(376
)
 
(2,298
)
Other assets
 
(1,246
)
 
(9,083
)
 
(2,297
)
Accounts payable
 
(10,297
)
 
15,197
 
 
(16,893
)
Accrued expenses and other liabilities
 
13,853
 
 
6,196
 
 
8,503
 
Income taxes receivable/payable
 
(9,902
)
 
2,121
 
 
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