American Apparel says it may file for bankruptcy

By Nivedita Bhattacharjee

BANGALORE (Reuters) – Clothing chain American Apparel (APP.A: Quote, Profile, Research), known for racy advertising and its founder’s legal problems, may file for bankruptcy if it does not get enough money to keep running, and might even have to liquidate, the company said.

Shares of the company, which is looking for other sources of cash and has hired a financial adviser, fell as much as 27 percent to 70 cents on Friday.

The statement, which was filed with the U.S. Securities and Exchange Commission on Thursday, is the latest threat to the Los Angeles-based clothing maker’s future.

It has been beset by accusations that it used a model who looked underaged in various states of undress, and that it relies on heavily sexualized advertising to attract the hip, young adults who buy its clothes.

More recently, the company’s founder Dov Charney has been fighting charges that he treated an ex-employee as a sex slave.

Charney, reached on his mobile phone early Friday, said it is unlikely that the company would have to file for bankruptcy.

“Why don’t you speak with a legal expert and he’ll tell you why,” Charney said, when asked why the company included the language in the filing. “We have to put it as a risk factor if it’s in the realm of possibility, even if it’s 1 in 1,000.”

The annual report said the company may determine that it is in its best interests to file for a pre-packaged, pre-arranged or other type of Chapter 11 bankruptcy.

“Further, if we were unable to implement a plan of reorganization or if sufficient debtor-in-possession financing were not available, we could be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code,” it said.

American Apparel made the bankruptcy comments in the risk factors section of its filing.

Risk factors are often lengthy lists of nearly every kind of

dire fate that can befall a company. Lawyers add them to the company’s documents to tell people, in essence, that they have been warned before investing.

The company also said it is “currently experiencing significant liquidity constraints.”

Charney said it was not trying to find other lenders.

“We’re… a public company,” he said. “We can do a private placement at any time.”

American Apparel, which has been expressing doubts about its ability to continue as a going concern since last August, has been taking heat for other issues, including a long-running sales slump and immigration probes of its workers.

Representatives of one of the company’s largest lenders also quit the board.

Lion Capital’s directors Lyndon Lea and Neil Richardson resigned on March 30 “to allow Lion flexibility in evaluating its options to optimize its investment in American Apparel,” American Apparel said in the filing.

Lea and Richardson left two days after CEO Charney bought 1.8 million shares in the chain, raising his stake in the company to about 54 percent.

American Apparel had $57.2 million in borrowings under its revolving credit facilities as of December 31, 2010, and $81.2 million of borrowings under its facility with Lion.

As of February 28, 2011, the company had about $5.3 million in cash, the filing said.

American Apparel also reported a quarterly loss after reporting a profit in the quarter a year earlier.

The company is “well along on our journey to restore manufacturing efficiency,” Charney said in a statement. “I believe we will restore the company’s historical levels of profitability by 2013.”

American Apparel said, however, that it expects first-quarter same-store sales to fall in the mid to high single digits, and that it expects to post a pre-tax loss in 2011.

American Apparel’s shares were trading down 16 percent at $0.81 Friday morning on the American Stock Exchange.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Saumyadeb Chakrabarty and Robert MacMillan)

American Apparel says it may file for bankruptcy