UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2012~~March 31, 2013


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 No. 001-32697

American Apparel, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware	20-3200601
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

747 Warehouse Street, Los Angeles, California	90021
(Address of Principal Executive Offices)	(Zip Code)

Registrant's Telephone Number, Including area code: (213) 488-0226

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

The number of shares of the registrant's common stock issued and outstanding as of ~~November~~May 1, ~~2012~~2013 was approximately~~110,035,094~~110,643,198 and ~~106,439,304~~107,763,103.

Table of Contents

AMERICAN APPAREL, INC.

TABLE OF CONTENTS



Part I-Financial Information		5
Item 1.	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets - ~~September 30, 2012~~March 31, 2013 and December 31, 201112	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss - Three ~~and Nine~~ Months Ended ~~September 30, 2012~~March 31, 2013 and 201112	6
	Condensed Consolidated Statements of Cash Flows - ~~Nine~~Three Months Ended ~~September 30, 2012~~March 31, 2013 and 201112	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	4827
Item 4.	Controls and Procedures	4939
Part II-Other Information		5040
Item 1.	Legal Proceedings	5040
Item 1A.	Risk Factors	5443
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5444
Item 3.	Defaults Under Senior Securities	5444
Item 4.	Mine Safety Disclosures	5444
Item 5.	Other Information	5444
Item 6.	Exhibits	5444
Signatures		5646

Table of Contents

Unless the context requires otherwise, all references in this report to the “Company,” “Registrant”, “we,” “our,” and “us” refer to American Apparel, Inc., a Delaware corporation, together with its wholly owned subsidiary, American Apparel (USA), LLC, and its other direct and indirect subsidiaries.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q other than statements of historical fact are “forward-looking statements” for purposes of these provisions. Statements that include the use of terminology such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,” or the negative thereof or other and similar expressions are forward-looking statements. In addition, in some cases, you can identify forward-looking statements by words or phrases such as “trend,” “potential,” “opportunity,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions.

Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focuses and plans and other characterizations of future events or circumstances, including statements expressing general expectations or beliefs, whether positive or negative, about future operating results or the development of our products and any statement of assumptions underlying any of the foregoing are forward-looking statements. Forward-looking statements in this report may include, without limitation, statements about:

future financial condition and operating results;

our ability to remain in compliance with financial covenants under our financing arrangements;

our ~~ability to extend, renew or refinance our existing debt;~~

~~our~~ liquidity ~~operating results~~ and projected cash flows;

our plan to make continued investments in advertising and marketing;

our growth, expansion and acquisition prospects and strategies, the success of such strategies, and the benefits we believe can be derived from such strategies;

the outcome of investigations, enforcement actions and litigation matters, including exposure, which could exceed expectations;

our intellectual property rights and those of others, including actual or potential competitors, our personnel, consultants, and collaborators;

operations outside the United States;

trends in raw material costs and other costs both in the industry, and specific to the Company;

the supply of raw materials and the effects of supply shortages on our financial condition, and results of operations;

economic and political conditions;

overall industry and market performance;

the impact of accounting pronouncements;

our ability to improve manufacturing efficiency at our production facilities;

management's goals and plans for future operations; and

other assumptions described in this Quarterly Report on Form 10-Q 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

~~Table of Contents~~

under Part II, Item IA and elsewhere in this report and in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012 (filed with the United States Securities and Exchange Commission (the “SEC”) on March ~~14, 2012)~~5, 2013) as well as in other reports and documents we file with the SEC and include, without limitation, the following:

Table of Contents

our ability to generate or obtain from external sources sufficient liquidity for operations and debt service;

changes in the level of consumer spending or preferences or demand for our products;

our ~~liquidity,~~financial condition, operating results and projected cash flows;

disruptions in the global financial markets;

consequences of our significant indebtedness, including our relationship with our lenders, our ability to comply with our debt agreements and generate cash flow to service our debt;

our ability to maintain compliance with the exchange rules of the NYSE MKT, ~~LLC.;~~LLC;

the highly competitive and evolving nature of our business in the U.S. and internationally;

our ability to effectively carry out and manage our strategy, including growth and expansion both in the U.S. and internationally;

loss of U.S. import protections or changes in duties, tariffs and quotas, and other risks associated with international business;

intensity of competition, both domestic and foreign;

technological changes in manufacturing, wholesaling, or retailing;

risks that our suppliers or distributors may not timely produce or deliver our products;

loss or reduction in sales to our wholesale or retail customers or financial nonperformance by our wholesale customers;

the adoption of new accounting standards or changes in interpretations of accounting principles;

our ability to pass on the added cost of raw materials to our wholesale and retail customers;

the availability of store locations at appropriate terms and our ability to identify and negotiate new store locations effectively and to open new stores and expand internationally;

our ability to attract customers to our stores;

seasonality and fluctuations in comparable store sales and margins;

our ability to successfully implement our strategic, operating, financial and personnel initiatives;

our ability to maintain the value and image of our brand and protect our intellectual property rights;

changes in the cost of materials and labor, including increases in the price of raw materials in the global market;

our ability to improve manufacturing efficiency at our production facilities;

location of our facilities in the same geographic area;

risks associated with our foreign operations and foreign supply sources, such as disruption of markets, changes in import and export laws, currency restrictions, and currency exchange rate fluctuations;

adverse changes in our credit ratings and any related impact on financial costs and structure;

continued compliance with U.S. and foreign government regulations, legislation, and regulatory environments, including environmental, immigration, labor, and occupational health and safety laws and regulations;

the risk that information technology systems changes and the transition to our new distribution center in La Mirada, California (as described herein) may disrupt our supply chain or operations and our ability to upgrade our information technology infrastructure and other risks associated with the systems that operate our online retail operations;

litigation and other inquiries and investigations, including the risks that we or our officers will not be successful in defending any proceedings, lawsuits, disputes, claims or audits, and that exposure could exceed expectations or insurance coverages;

our ability to effectively manage inventory levels;

changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;

~~material weaknesses in internal controls;~~

~~costs as a result of operating as a public company;~~

general economic conditions, including increases in interest rates, geopolitical events, other regulatory changes and inflation or deflation;

disruptions due to severe weather or climate change; and

disruptions due to earthquakes, flooding, tsunamis or other natural disasters.

All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statements.

PART I-FINANCIAL INFORMATION


Item 1.	Financial Statements (unaudited)

American Apparel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts and shares in thousands, except per share amounts)

(unaudited)


	September 30, 2012			December 31, 2011*			March 31, 2013			December 31, 2012*
ASSETS
CURRENT ASSETS
Cash	$	7,186		$	10,293		$	5,688		$	12,853
Trade accounts receivable, net of allowances of $2,143 and $2,195 at September 30, 2012 and December 31, 2011, respectively	25,951			20,939
Trade accounts receivable, net of allowances of $1,915 and $2,085 at March 31, 2013 and December 31, 2012, respectively							23,042			22,962
Prepaid expenses and other current assets	10,800			7,631			9,295			9,589
Inventories, net	180,879			185,764			177,351			174,229
Restricted cash	5,928			—			2,678			3,733
Income taxes receivable and prepaid income taxes	1,475			5,955			259			530
Deferred income taxes, net of valuation allowance of $12,003 at both September 30, 2012 and December 31, 2011	639			148
Deferred income taxes, net of valuation allowance of $12,760 at both March 31, 2013 and December 31, 2012							426			494
Total current assets	232,858			230,730			218,739			224,390
PROPERTY AND EQUIPMENT, net	65,959			67,438			68,173			67,778
DEFERRED INCOME TAXES, net of valuation allowance of $61,770 at both September 30, 2012 and December 31, 2011	1,559			1,529
DEFERRED INCOME TAXES, net of valuation allowance of $64,818 at both March 31, 2013 and December 31, 2012							1,209			1,261
RESTRICTED CASH							1,629			—
OTHER ASSETS, net	33,269			25,024			37,201			34,783
TOTAL ASSETS	$	333,645		$	324,721		$	326,951		$	328,212
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Cash overdraft	$	2,625		$	1,921		$	1,340		$	—
Revolving credit facilities and current portion of long-term debt	71,586			50,375			68,116			60,556
Accounts payable	37,247			33,920			41,784			38,160
Accrued expenses and other current liabilities	38,750			43,725			40,675			41,516
Fair value of warrant liability	28,455			9,633			40,886			17,241
Income taxes payable	389			2,445			2,257			2,137
Deferred income tax liability, current	697			150			257			296
Current portion of capital lease obligations	1,017			1,181			1,737			1,703
Total current liabilities	180,766			143,350			197,052			161,609
LONG-TERM DEBT, net of unamortized discount of $29,959 and $20,183 at September 30, 2012 and December 31, 2011, respectively	103,964			97,142
LONG-TERM DEBT, net of unamortized discount of $25,899 and $27,929 at March 31, 2013 and December 31, 2012, respectively							118,358			110,012
CAPITAL LEASE OBLIGATIONS, net of current portion	1,083			1,726			2,632			2,844
DEFERRED TAX LIABILITY	108			96			247			262
DEFERRED RENT, net of current portion	21,597			22,231			20,115			20,706
OTHER LONG-TERM LIABILITIES	12,250			12,046			10,932			10,695
TOTAL LIABILITIES	319,768			276,591			349,336			306,128
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $0.0001 par value per share, authorized 1,000 shares; none issued	—			—			—			—
Common stock, $0.0001 par value per share, authorized 230,000 shares; 110,020 shares issued and 106,384 shares outstanding at September 30, 2012 and 108,870 shares issued and 105,588 shares outstanding at December 31, 2011	11			11
Common stock, $0.0001 par value per share, authorized 230,000 shares; 110,533 shares issued and 107,624 shares outstanding at March 31, 2013 and 110,111 shares issued and 107,181 shares outstanding at December 31, 2012							11			11
Additional paid-in capital	173,787			166,486			180,627			177,081
Accumulated other comprehensive loss	(2,735		)	(3,356		)	(4,229		)	(2,725		)
Accumulated deficit	(155,029		)	(112,854		)	(196,637		)	(150,126		)
Less: Treasury stock, 304 shares at cost	(2,157		)	(2,157		)	(2,157		)	(2,157		)
TOTAL STOCKHOLDERS' EQUITY	13,877			48,130
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	333,645		$	324,721
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY							(22,385		)	22,084
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY							$	326,951		$	328,212

* Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

American Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Amounts and shares in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2012			2011			2012			2011			2013			2012
Net sales	$	162,160		$	140,889		$	444,282		$	389,760		$	138,060		$	132,660
Cost of sales	76,960			65,898			209,990			178,705			65,192			62,604
Gross profit	85,200			74,991			234,292			211,055			72,868			70,056
Selling expenses	58,017			52,283			168,258			152,536			55,463			54,929
General and administrative expenses (including related party charges of $332 and $177 for the three months ended September 30, 2012 and 2011, respectively, and $883 and $628 for the nine months ended September 30, 2012 and 2011, respectively)	22,566			24,552			71,792			77,025
General and administrative expenses (including related party charges of $217 and $321 for the three months ended March 31, 2013 and 2012, respectively)													27,804			24,922
Retail store impairment	—			784			129			2,436			78			—

Income (loss) from operations	4,617			(2,628		)	(5,887		)	(20,942		)
Loss from operations													(10,477		)	(9,795		)

Interest expense	10,454			8,832			30,274			23,715			11,214			9,553
Foreign currency transaction (gain) loss	(685		)	1,855			141			780
Unrealized loss (gain) on change in fair value of warrants and purchase rights	13,312			(6,101		)	15,340			(21,201		)
(Gain) loss on extinguishment of debt	—			—			(11,588		)	3,114
Other expense (income)	36			(186		)	188			(240		)
Foreign currency transaction loss (gain)													713			(950		)
Unrealized loss on change in fair value of warrants													23,645			651
Gain on extinguishment of debt													—			(11,588		)
Other (income) expense													(5		)	128
Loss before income taxes	(18,500		)	(7,028		)	(40,242		)	(27,110		)	(46,044		)	(7,589		)
Income tax provision	512			166			1,933			1,042			467			302
Net loss	$	(19,012	)	$	(7,194	)	$	(42,175	)	$	(28,152	)	$	(46,511	)	$	(7,891	)

Basic and diluted loss per share	$	(0.18	)	$	(0.07	)	$	(0.40	)	$	(0.32	)	$(0.42)			$(0.07)
Weighted average basic and diluted shares outstanding	106,248			102,279			105,960			88,614			109,918			105,707

Net loss (from above)	$	(19,012	)	$	(7,194	)	$	(42,175	)	$	(28,152	)	$	(46,511	)	$	(7,891	)
Other comprehensive income (loss) item:
Other comprehensive (loss) income item:
Foreign currency translation, net of tax	1,073			(1,279		)	622			135			(1,504		)	331
Other comprehensive income (loss), net of tax	1,073			(1,279		)	622			135
Other comprehensive (loss) income, net of tax													(1,504		)	331
Comprehensive loss	$	(17,939	)	$	(8,473	)	$	(41,553	)	$	(28,017	)	$	(48,015	)	$	(7,560	)

See accompanying notes to condensed consolidated financial statements.

American Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2012			2011			2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers	$	439,634		$	387,780		$	137,654		$	133,818
Cash paid to suppliers, employees and others	(431,915		)	(392,684		)	(139,649		)	(141,724		)
Income taxes refunded (paid)	646			(1,413		)
Income taxes refunded							9			745
Interest paid	(6,635		)	(3,959		)	(4,040		)	(1,376		)
Other	(160		)	323			18			(109		)
Net cash provided by (used in) operating activities	1,570			(9,953		)
Net cash used in operating activities							(6,008		)	(8,646		)

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(14,257		)	(7,284		)	(7,354		)	(3,690		)
Proceeds from sale of fixed assets	70			72			12			34
Restricted cash	(5,926		)	—			(622		)	(6,802		)
Net cash used in investing activities	(20,113		)	(7,212		)	(7,964		)	(10,458		)

CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft	704			(2,484		)	1,340			114
Repayments of expired revolving credit facilities, net	(48,324		)	(1,309		)	—			(45,121		)
Borrowings under current revolving credit facilities, net	39,337			—			7,624			29,997
Borrowings (repayments) of term loans and notes payable	30,042			(10		)
Payment of debt issuance costs	(4,965		)	(1,690		)
Net proceeds from issuance of common stock and purchase rights	—			21,710
Proceeds from equipment lease financing	—			3,100
Repayment of capital lease obligations	(810		)	(996		)
(Repayments) borrowings of term loans and notes payable							(3		)	35,785
Payments of debt issuance costs							(1,678		)	(4,696		)
Repayments of capital lease obligations							(176		)	(271		)
Net cash provided by financing activities	15,984			18,321			7,107			15,808

EFFECT OF FOREIGN EXCHANGE RATE ON CASH	(548		)	(844		)	(300		)	305

NET (DECREASE) INCREASE IN CASH	(3,107		)	312
NET DECREASE IN CASH							(7,165		)	(2,991		)
CASH, beginning of period	10,293			7,656			12,853			10,293
CASH, end of period	$	7,186		$	7,968		$	5,688		$	7,302

See accompanying notes to condensed consolidated financial statements.

American Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (continued)

(Amounts in thousands)

(unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2012			2011			2013				2012
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES
Net loss	$	(42,175	)	$	(28,152	)	$	(46,511	)		$	(7,891	)
Depreciation and amortization of property and equipment, and other assets	17,040			19,109			6,031				5,852
Retail store impairment	129			2,436			78				—
Loss on disposal of property and equipment	28			83			13				18
Share-based compensation expense	7,333			4,538			3,547				1,842
Unrealized loss (gain) on change in fair value of warrants and purchase rights	15,340			(21,201		)
Unrealized loss on change in fair value of warrants							23,645				651
Amortization of debt discount and deferred financing costs	7,655			6,120			2,610				2,943
(Gain) loss on extinguishment of debt	(11,588		)	3,114
Gain on extinguishment of debt							—				(11,588		)
Accrued interest paid-in-kind	15,984			13,636			4,564				5,234
Foreign currency transaction loss	141			780
Foreign currency transaction loss (gain)							713				(950		)
Allowance for inventory shrinkage and obsolescence	(339		)	783			254				128
Bad debt expense	73			503			139				41
Deferred income taxes	32			793			—				(7		)
Deferred rent	(649		)	(1,862		)	(448		)		(8		)
Changes in cash due to changes in operating assets and liabilities:
Trade accounts receivables	(4,721		)	(2,483		)	(545		)		1,117
Inventories	6,238			(8,651		)	(4,811		)	��	(93		)
Prepaid expenses and other current assets	(3,343		)	(174		)	220				(1,668		)
Other assets	(5,756		)	(2,880		)	(1,825		)		(583		)
Accounts payable	2,471			1,492			3,999				2,333
Accrued expenses and other liabilities	(4,750		)	3,227			1,859				(7,043		)
Income taxes receivable / payable	2,427			(1,164		)	460				1,026
Net cash provided by (used in) operating activities	$	1,570		$	(9,953	)
Net cash used in operating activities							$	(6,008	)		$	(8,646	)

NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired, and included in accounts payable	$	98		$	1,488		$	3,433			$	782
Reclassification of Lion Warrant from equity to debt	—			11,339
Conversion of debt to equity	—			4,688
Issuance of warrants and purchase rights at fair value	—			6,387
Exercise of purchase rights	—			2,857

See accompanying notes to condensed consolidated financial statements.

American Apparel, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~

(Amounts and shares in thousands, except per share amounts)

(unaudited)

Note 1. Organization and Business

American Apparel, Inc. and its subsidiaries (collectively the “Company”) is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel products and designs, manufactures and sells clothing and accessories for women, men, children and babies. The Company sells its products through the wholesale distribution channel supplying t-shirts and other casual wear to distributors and screen printers, as well as direct to customers through its retail stores located in the United States, and internationally. In addition, the Company operates an online retail e-commerce website. At ~~September 30, 2012~~March 31, 2013, the Company operated a total of ~~251~~249 retail stores in 20 ~~countries, including~~countries: the United States, Canada and 18 other countries.

Liquidity and Management's Plan

On April 4, 2013, the Company closed a private offering of $206,000 aggregate principal amount of its 13% Senior Secured Notes due 2020 at 97% of par and also entered into a new $35,000 asset-backed revolving credit facility with Capital One Leverage Finance Corp. maturing on April 4, 2018, subject to a January 15, 2018 maturity under certain circumstances.

The Company used the net proceeds from the offering of the notes, together with borrowings under the new credit facility to repay and terminate its credit agreement with Crystal Financial LLC and its loan agreement with Lion Capital LLP. The notes and the new credit facility are senior secured obligations of the Company and are guaranteed, on a senior secured basis, by the Company's domestic restricted subsidiaries, subject to some exceptions (see Notes 6 and 7).

As of ~~September 30, 2012~~March 31, 2013, the Company had approximately $~~7,186~~5,688 in cash, ~~and~~ $~~3,493~~2,417 of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement (as defined in Note 6). Additionally, the Company had outstanding $~~35,576~~37,594 on the $50,000 revolving credit facility under the Crystal Credit Agreement, $30,000 of term loans outstanding under the Crystal Credit Agreement, $~~5,901~~477 outstanding on a C$11,000 (Canadian dollars) revolving credit facility under the Bank of Montreal Credit Agreement, and $~~103,614~~118,039 (including paid-in-kind interest of $~~12,433~~22,798 and net of discount $~~29,959~~25,899) of term loans outstanding under the Lion ~~Credit~~Loan Agreement (as defined in Note 7).

On ~~March 13, 2012, the Company replaced its existing revolving credit facility of~~ ~~$75,000~~ ~~with Bank of America ("BofA") with a~~ ~~$80,000~~ ~~senior secured credit facility with Crystal Financial LLC ("Crystal") and other lenders.~~ The ~~Crystal Credit Agreement calls for the~~ ~~$80,000~~ ~~to be allocated between an asset based revolving credit facility of~~ ~~$50,000~~ ~~and term loan of~~ ~~$30,000~~ ~~that matures on~~ ~~March 13, 2015~~. Among other provisions, the Crystal Credit Agreement requires that the Company maintain an arrangement similar to a traditional lockbox and contains certain subjective acceleration clauses. In addition, Crystal may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable. Proceeds from the Crystal Credit Agreement were used to repay the existing revolving credit facility with BofA, fees and expenses related to the transaction, and for general working capital purposes. See Note 6.

In connection with the Crystal Credit Agreement, the Company entered into a seventh amendment to the Lion Credit Agreement, which among other things: (i) consented to the Crystal Credit Agreement, (ii) extends the maturity date of the term loan with Lion Capital LLP ("Lion") to ~~December 31, 2015~~, (iii) reduced the minimum Consolidated EBITDA amounts for any twelve consecutive months as determined at the end of each fiscal quarter (Quarterly Minimum Consolidated EBITDA), (iv) modified certain financial covenants and covenants related to capital expenditures and (v) requires a minimum of 5% ~~of each interest payment on the outstanding principal in cash starting on~~ ~~September 1, 2012~~.

On August 30, 2012, the Company entered into a second amendment to the Crystal Credit Agreement ("Crystal Second Amendment") and an eighth amendment to the Lion Credit Agreement ("Lion Eighth Amendment"). The Crystal Second Amendment extended until December 31, 2012 the period during, which loans under the Crystal Credit Agreement based on the American Apparel brand name may remain outstanding, added a minimum Consolidated EBITDA covenant for the remainder of 2012 and a minimum excess availability covenant for the period of December 17, 2012 through February 1, 2013. In connection with the Crystal Second Amendment, the Lion Eighth Amendment added a second minimum Consolidated EBITDA covenant that conforms to the Crystal minimum Consolidated EBITDA covenant (Monthly Minimum Consolidated EBITDA). See Notes 6 and 7.

~~The Company entered into a ninth amendment and waiver to the Lion Credit Agreement (the "Lion Ninth Amendment") effective as of~~ ~~September 30, 2012, which among other things, waived the Company's obligation to maintain the minimum Consolidated EBITDA covenants specified in the Lion Credit Agreement, as amended, for the twelve month period ended~~ ~~September 30, 2012. As a result, the Company was in compliance with the required financial covenants of the Lion Credit Agreement on~~ ~~September 30, 2012~~.

On ~~November 12, 2012, the Company and certain of its subsidiaries entered into amendments to both the Crystal Credit Agreement and the Lion Credit Agreement that, among other things, reduced by~~ ~~$600~~ ~~the target minimum EBITDA for the twelve months ended~~ ~~October 31, 2012~~ ~~under the financial covenants of each credit agreement, respectively.~~

~~As a result of these financing transactions described above, the~~ Company believes that it ~~will have~~has sufficient financing commitments to meet funding requirements for the next twelve months.

~~The~~ ~~C$11,000~~ ~~Bank of Montreal Credit Agreement matures in~~ ~~December 2012~~. While the Company intends to negotiate an extension of this credit agreement, it does not believe that this credit agreement represents a material component of the Company's current or future capital requirements.

The Company ~~is in the process of~~continues to executing aits plan, which was commenced in late 2010, to improve its operating performance and financial position. ~~This plan includes optimizing production levels at~~Among other things, in 2013, the ~~Company's manufacturing facilities including raw material purchases~~Company intends to complete the installation of RFID tracking systems in all of its stores, complete the opening of its new distribution facility in La Mirada, California, continue with expansion of its selling square footage in its stores, continue with its inventory productivity improvement program, further reduce operating expenses, and ~~labor; streamlining~~improve online sales performance with the ~~logistics operations; Web platform refinement; reducing corporate expenses; merchandise price rationalization~~implementation of the Oracle ATG back-end online system for international store fronts. In addition, the Company continues to seek improvements in store labor productivity and workers' compensation exposure. The Company expects to fully transition its distribution operations into the new distribution facility in the ~~wholesale and retail channels; store renovations; and improving merchandise distribution and allocation procedures.~~first half of 2013. The Company believes that the new distribution center will ~~continue~~contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales. The Company continues to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.

There can be no assurance that plans to improve operating performance and financial position will be successful.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of American Apparel, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. Certain reclassifications have been made to the prior year's condensed consolidated financial statements and related footnotes to conform them to the ~~2012~~2013 presentation.

The accompanying unaudited condensed consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared by the Company, in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X, and have not been audited. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in

conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, ~~2011~~2012 included in the Company's Annual Report on Form 10-K. In the opinion of management, the interim unaudited condensed consolidated financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company's financial position, the results of operations and cash flows for the periods presented.

The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets, and liabilities at the date of the financial statements, and reported amounts of revenues, and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, and liabilities that are not readily apparent from other sources. The most complex and subjective estimates include: self-insured liabilities, inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill, property and equipment; fair value calculations, including derivative liabilities such as the Lion warrants; contingencies, including accruals for the outcome of current ~~litigation and self-insurance liabilities; gift card liabilities;~~litigation; and income taxes as well as other taxes and governmental assessments, including uncertain income tax positions and recoverability of deferred income taxes.

On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

Restricted Cash

Restricted cash primarily represents cash collateral on standby letters of credit ~~the value of which was previously deducted against the availability of the Company's prior revolving credit agreement,~~ and certain other obligations. The standby letters of credit are predominantly used as collateral for the Company's workers' compensation ~~program (see~~program. See Note ~~14).~~

14.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to credit risk consist primarily of cash (the amounts of which

may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts) and trade accounts receivable (including credit card receivables), relating substantially to the Company’s U.S. Wholesale segment. The Company mitigates its risk by investing through major financial institutions. The Company had approximately $~~5,504~~4,495 and $~~9,549~~8,265 held in foreign banks at ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, respectively.

The Company mitigates its risks related to trade receivables by performing on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. The Company also maintains an insurance policy for certain customers based on a customer’s credit rating and established limits. Collections and payments from customers are continuously monitored. One customer in the Company's U.S. Wholesale segment accounted for ~~22.5%~~20.6% and ~~16.3%~~15.1% of the Company’s total accounts receivables as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, respectively. The Company maintains an allowance for doubtful accounts, which is based upon historical experience and specific customer collection issues that have been identified. While bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.

Fair Value Measurements

The Company’s financial instruments are primarily composed of cash, restricted cash, accounts receivable (including credit card receivables), accounts payable, revolving credit borrowings, its term loan and ~~term loan.~~warrants. The fair value of cash, restricted cash, accounts receivable, accounts payable and variable rate borrowings closely approximates their carrying value due to their short ~~maturities.~~maturities and variable rates. The fair value of the fixed-rate term note is estimated using a discounted cash flow analysis.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company's accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company's accounting and finance department and are approved by the Chief Financial Officer.

As of ~~September 30, 2012~~March 31, 2013, there were no transfers in or out of Level 3 from other ~~levels in the fair value hierarchy.~~levels.

The fair value of the fixed rate term note is estimated using a projected discounted cash flow analysis based on unobservable inputs including interest payments, principal payments and discount rate, and is classified within Level 3 of the valuation hierarchy. An increase or decrease in the discount rate assumption, in isolation, can significantly decrease or increase the fair value of the term ~~note (see~~note. See Note ~~8).~~8.

The fair value of each warrant is estimated using either a Monte Carlo simulation model or the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility, and are classified within Level 3 of the valuation hierarchy. An increase or decrease in volatility, in isolation, can significantly increase or decrease the fair value of the ~~warrant (see~~warrant. See Notes 8 and ~~11).~~11.

The fair value of indefinite-lived assets, which consists exclusively of goodwill, is measured in connection with the Company’s annual goodwill impairment test. The fair value of the reporting unit to which goodwill has been assigned, is determined using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions, and are classified within Level 3 of the valuation hierarchy. An increase or decrease in the discount rate assumption and/or the terminal value assumption, in isolation, can have a significant effect on the fair value of the reporting unit.

Retail stores that have indicators of impairment and whose carrying value of assets are greater than their related projected undiscounted future cash flows, are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimated using a projected discounted cash flow analysis based on unobservable inputs

including gross profit and discount rate, and is classified within Level 3 of the valuation hierarchy. An increase or decrease in the discount rate assumption, in isolation, can significantly decrease or increase the fair value of the assets, which would have an effect on the impairment recorded.

~~Gift Cards~~

Upon issuance of a gift card a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of gift cards is not redeemed ("breakage"). The Company determines breakage income for gift cards based on historical redemption patterns. Breakage income is recorded in selling expenses, which is a component of operating expenses in the condensed consolidated statements of operations and comprehensive loss, when the Company can determine the portion of the selling expense where redemption is remote, which is two years after the gift card is issued. The Company's gift cards do not have expiration dates.

The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions the Company uses to calculate its breakage income. However, if the actual rate of redemption of gift cards increases significantly, the Company's operating results could be adversely affected.

Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that ~~it is~~such amounts will more likely than not ~~that those assets will not be realized.~~go unrealized. If it becomes more likely than not that a tax asset will be realized, ~~the~~any related valuation allowance of such assets would be reversed.

During the three months ended March 31, 2013 and 2012, the Company incurred losses from operations. Based upon these results, and trends in the Company's performance projected through 2013, it is more likely than not that the Company will not realize any benefit from the deferred tax assets recorded by the Company in previous periods. The Company did not record income tax benefits in the condensed consolidated financial statements for the three months ended March 31, 2013 and 2012 as the Company determined that it was more likely than not that sufficient taxable income in the future will not be generated in the respective jurisdictions to realize the deferred income tax assets.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax ~~liabilities.~~liability. In ~~management’s~~addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management's opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

The ~~Company’s~~Company's foreign domiciled subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. The Company elected to have their foreign subsidiaries, except for its subsidiaries in Brazil, Canada, ~~Korea,~~ China, Spain, Italy, Ireland and ~~Ireland,~~Korea, consolidated in the ~~Company’s~~Company's U.S. federal income tax return. The Company will generally be eligible to receive tax credits on its U.S. federal income tax return for most of the foreign taxes ~~paid.~~paid by the Company's entities included in the United States Federal income tax return.

The Company accounts for uncertain tax positions in accordance with ~~Accounting Standards Codification ("ASC") 740—~~ASC 740-“Income Taxes”, and gross unrecognized tax benefits at ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012 are included in ~~other long-term~~current liabilities in the accompanying condensed

consolidated balance sheets. The Company accrues interest and penalties ~~if incurred,~~ on unrecognized tax benefits as components of the income tax provision in the accompanying condensed consolidated statements of ~~operations and comprehensive loss.~~

operations.

Accounting Standards Updates

~~Beginning in the quarter ended~~ ~~March 31, 2012, the Company enhanced its fair value measurement application and disclosures as a result of adopting new requirements~~Recently issued ~~by the Financial Accounting Standards Board ("FASB") in~~ ~~May 2011. The new rules include revisions~~accounting standards updates are not expected to the standards for the use of fair value measurements and additional disclosures for: (i) all transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) Level 3 measurements; and (iii) hierarchy classifications used for assets and liabilities whose fair value is disclosed only in the footnotes. The new rules did not have a material ~~impact~~effect on the ~~Company.~~Company's condensed consolidated financial statements.

Subsequent Events

The Company has evaluated events that occurred subsequent to ~~September 30, 2012~~March 31, 2013 and through the date the financial statements were available to be issued. ~~Management~~Other than those events disclosed in these notes to these financial statements, including the financing transactions that closed on April 4, 2013, management concluded that no additional subsequent events required disclosure in these financial ~~statements other than those disclosed in these notes to these financial~~ statements.

Note 3. Inventories

The components of inventories are as follows:


	September 30, 2012			December 31, 2011			March 31, 2013			December 31, 2012
Raw materials	$	21,695		$	18,326		$	22,261		$	22,301
Work in process	2,383			2,468			2,999			2,197
Finished goods	160,429			168,902			154,984			152,384
	184,507			189,696			180,244			176,882
Less reserve for inventory shrinkage and obsolescence	(3,628		)	(3,932		)	(2,893		)	(2,653		)
Total, net of reserves	$	180,879		$	185,764		$	177,351		$	174,229

Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. The cost elements of inventories include materials, labor and overhead. For the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, no one supplier provided more than 10% of the Company’s raw material purchases.

The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and provides reserves for lower of cost or market reserves for such identified excess and slow-moving inventories. At ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, the Company had a lower of cost or market reserve for excess and slow-moving inventories of $~~2,164~~1,921 and $~~2,050~~2,140, respectively.

The Company establishes a reserve for inventory shrinkage for each of its retail locations and its warehouse. The reserve is based on the historical results of physical inventory cycle counts. The Company had a reserve for inventory shrinkage in the amount of $~~1,464~~972 and $~~1,882~~513 at ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, respectively.

Note 4. Property and Equipment

Depreciation and amortization expense relating to property and equipment (including capitalized leases) is recorded in cost of sales and operating expenses. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 and 2012,, depreciation and amortization expense was $~~5,538~~6,031 and $~~17,040, respectively. For the~~ ~~three and nine months ended September 30, 2011, depreciation and amortization expense was~~ ~~$6,126~~ ~~and~~ ~~$19,109~~5,852, respectively.

The Company evaluates its retail stores for indicators of impairment, specifically related to under-performance or operating losses relative to expected historical or projected future operating results. Stores whose carrying value of assets are greater than their related projected undiscounted future cash flows, are measured for impairment by comparing the fair value of the assets against their carrying value. The fair value of the assets is estimated using a projected discounted cash flow analysis (Level 3 in the fair value hierarchy). The key assumptions used in the estimates of projected cash flows were sales, gross margins, and payroll costs. These forecasts were based on historical trends and take into account recent developments, as well as the Company's plans and intentions.

~~Based upon~~For the ~~results~~three months ended March 31, 2013, the Company recorded impairment charges relating to retail stores leasehold improvements of ~~the analyses above, the~~$78. The Company determined that no impairment charges for the three months ended ~~September 30,~~March 31, 2012 were required. ~~For the~~ ~~nine months ended September 30, 2012, the Company incurred impairment charges of~~ ~~$129~~ ~~relating to a store closure in Canada. For the~~ ~~three and nine months ended September 30, 2011, the Company incurred impairment charges of~~ ~~$784~~ ~~and~~ ~~$2,436, respectively, primarily related to certain retail store leasehold improvements and key money in the International and the U.S. Retail segments.~~

1312

Note 5. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities are as follows:


	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012
Compensation, bonuses and related taxes	$	9,682	$	11,339	$	9,778	$	11,524
Workers' compensation and other self-insurance reserves (Note 14)	5,807		5,318		5,609		5,288
Sales, value and property taxes	3,640		3,721		3,752		4,751
Gift cards and store credits	4,223		6,939		5,070		5,964
Loss contingencies	572		1,575		752		752
Accrued vacation	898		790		1,522		1,055
Deferred revenue	830		892		414		590
Deferred rent	2,303		2,170		2,913		2,997
Other	10,795		10,981		10,865		8,595
Total accrued expenses	$	38,750	$	43,725	$	40,675	$	41,516

Note 6. Revolving Credit Facilities and Current Portion of Long-Term Debt

~~Revolving~~The following table presents revolving credit facilities and current portion of long-term ~~debt consists of the following:~~debt:


	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012
Revolving credit facility (Crystal), maturing March 2015(a)	$	35,576	$	—	$	37,594	$	26,113
Term loan (Crystal), maturing March 2015(a)	30,000		—		30,000		30,000
Revolving credit facility (Bank of America), replaced in March 2012	—		48,324
Revolving credit facility (Bank of Montreal), maturing December 2012	5,901		1,995
Revolving credit facility (Bank of Montreal), maturing December 2013					477		4,387
Current portion of long-term debt (Note 7)	109		56		45		56
Total revolving credit facilities and current portion of long-term debt	$	71,586	$	50,375	$	68,116	$	60,556

(a) All outstanding principal amounts and accrued and unpaid interest and fees under the Crystal revolving credit facility and term loan were repaid with the proceeds of the financing transactions that the Company closed on April 4, 2013.

The Company incurred interest charges of $~~10,454~~11,214 and $~~30,274~~9,553 for the three ~~and nine~~ months ended ~~September 30, 2012, respectively, and~~ ~~$8,832~~March 31, 2013 and ~~$23,715~~ ~~for the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2011~~,2012, respectively, for all outstanding borrowings. The interest charges subject to capitalization for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012 were ~~not~~not significant.

Revolving Credit Facility ~~and Term Loan~~ - ~~Crystal~~Capital One

On ~~March 13, 2012~~,April 4, 2013, the Company and its domestic subsidiaries replaced ~~its existing revolving credit facility of~~ ~~$75,000~~ ~~with BofA with a~~ ~~$80,000~~ ~~senior secured~~the credit facility with Crystal ~~Financial LLC~~with a new $35,000 asset-based revolving facility with Capital One Leverage Finance Corp. ("~~Crystal"~~Capital One" and the credit facility, the ~~"Crystal~~"Capital One Credit ~~Agreement"~~Facility")~~, and other lenders.~~ .

The ~~Crystal~~Capital One Credit ~~Agreement calls for~~Facility permits the ~~$80,000~~Company to ~~be allocated between an asset based revolving credit facility of~~increase commitments to up to $50,000 in the aggregate, subject to obtaining additional commitments from other third parties and ~~term loan of~~other customary conditions. The Capital One Credit Facility matures on April 4, 2018, subject to a January 15, 2018 maturity if excess availability is less than $~~30,000~~15,000 at the time of notice to Capital One of a determination by the Company that an Applicable High Yield Discount Obligation ("AHYDO") redemption will be required pursuant to Section 3.01(e) of the indenture governing the Senior Secured Notes due 2020 (the "Notes"). Borrowings under the ~~Crystal~~Capital One Credit ~~Agreement~~Facility bear interest equal to LIBOR plus 3.5% or the bank's prime rate plus 2.5% (at the Company's option) and are subject to ~~certain borrowing reserves based on eligible inventory and accounts receivable. In addition, the initial~~maintenance of specified borrowing base ~~under the revolving credit facility was increased~~requirements and covenants. The Capital One Credit Facility is secured by ~~$12,500~~ ~~for the value associated with the brand name. On August 30, 2012, the Company entered into~~ a ~~second amendment to the Crystal Credit Agreement ("Crystal Second Amendment"), which extended until December 31, 2012 the period during which loans under the Crystal Credit Agreement based~~lien on ~~the American Apparel brand name may remain outstanding. This initial increase based on the brand name will be ratably reduced to~~ $0 ~~during the period from~~ ~~April 13, 2012~~ ~~through~~ ~~January 1, 2013. The Crystal Credit Agreement matures on~~ ~~March 13, 2015~~ ~~and is collateralized by~~ substantially all of the assets of the Company's ~~U.S. and U.K. assets~~domestic subsidiaries and equity interests in certain of ~~its~~the Company's foreign ~~subsidiaries.~~ subsidiaries, subject to some exceptions.

The ~~amount available for additional borrowings on~~Company is required to maintain a minimum fixed charge coverage ratio of not less than ~~September 30, 2012~~1.00 ~~was~~ ~~$1,443~~.to 1.00 and is also required to not exceed certain maximum leverage ratio thresholds, both determined as at the end of each fiscal quarter. Additionally, the Company's domestic subsidiaries are subject to an annual limitation of certain specified capital expenditure amounts as determined at the end of each fiscal year.

Among other provisions, the ~~Crystal~~Capital One Credit ~~Agreement~~Facility requires that the Company maintain ana lockbox arrangement ~~similar to a traditional lockbox~~ and contains certain subjective acceleration clauses. In addition, ~~Crystal~~Capital One may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable. ~~Consequently, the amounts outstanding under the Crystal~~The Capital One Credit ~~Agreement are classified as a current liability.~~

~~As of~~ ~~September 30, 2012, the interest rate under the agreement was~~ ~~9.47%~~ ~~(the 90-day LIBOR at~~ ~~0.47%~~ ~~plus~~ ~~9.0%) and also included an unused facility fee ranging from~~ ~~0.375%~~ to ~~1.0%~~ ~~on the unused portion of the revolving credit facility, payable~~Facility contains cross-default provisions

1413

~~monthly. Beginning August 30, 2012, as a result~~whereby an event of ~~the second amendment, the interest rate with respect to the brand name portion of the outstanding principal amount of the revolving credit facility of~~ ~~$5,000~~ ~~was~~ ~~20.22%~~ ~~(the 90-day LIBOR at~~ ~~0.47%~~ ~~plus~~ ~~19.75%). The Crystal Credit Agreement also includes an early termination fee if the term loan is prepaid or if the commitments~~default under ~~the revolving credit facility are permanently reduced of (a)~~ ~~3.0%~~ ~~if such payment or reduction occurs in the first year, (b)~~ ~~2.0%~~ ~~if such payment or reduction occurs in the second year, and (c)~~ ~~0.0%~~ ~~thereafter.~~

~~In connection with the financing from Crystal, the Company entered into amendments to the Lion Credit Agreement. See Notes 7 and 11.~~

~~Significant covenants in the Crystal Credit Agreement include a minimum excess availability covenant that requires us to maintain minimum excess availability of the greater of (1)~~ ~~$8,000, or (2)~~ ~~10.0%~~ ~~of the borrowing base. If the excess availability falls below this minimum, then we will be required to maintain a fixed charge coverage ratio of not less than~~ ~~1.00~~:1.00 to be calculated monthly on a consolidated trailing twelve-month basis and continuing until the excess availability exceeds this minimum for sixty consecutive days. The Crystal Second Amendment adds a new minimum excess availability covenant that requires the Company to maintain minimum excess availability to be no less than $5,000 during the period from December 17, 2012 to February 1, 2012 and also adds a minimum monthly Consolidated EBITDA covenant for the remainder of 2012 to be determined at the end of each month. Furthermore, the Crystal Credit Agreement includes an annual limitation of our capital expenditures at the Company's domestic subsidiaries to no more than ~~$17,000~~ ~~for the year ending~~ ~~December 31, 2012~~ ~~and~~ ~~$25,000~~ ~~for each year thereafter.~~

~~The Crystal Credit Agreement contains cross-default provisions with the Lion Credit Agreement and~~ the Bank of Montreal Credit Agreement, ~~whereby an event of default (as defined) occurring~~ under the ~~Lion Credit Agreement~~indenture governing the Notes or ~~the Bank~~other indebtedness, in each case of ~~Montreal Credit Agreement~~an amount greater than a specified threshold, would cause an event of default under the ~~Crystal~~Capital One Credit ~~Agreement.~~

~~During~~Facility. If an event of default occurs and is continuing under the ~~nine months ended September 30, 2012~~,Capital One Credit Facility, Capital One may, among other things, terminate the ~~Company's excess availability was below~~obligations of the ~~minimum amount~~lenders to make loans, and ~~as a result, it was required~~the obligation of the letter of credit issuer to ~~maintain the fixed charge coverage ratio. As~~make letter of ~~September 30, 2012~~,credit extensions, and require the Company ~~was in compliance with the required financial covenants of the Crystal Credit Agreement.~~

~~Revolving Credit Facility - Bank of America~~

~~The Company had a revolving credit facility of~~ ~~$75,000~~ ~~with BofA, which was replaced with the Crystal Credit Agreement on~~ ~~March 13, 2012~~.to repay all outstanding amounts.

Revolving Credit Facility - Bank of Montreal

~~The~~On December 29, 2012, the Company's wholly-owned subsidiaries, American Apparel Canada Wholesale, Inc. and American Apparel Canada Retail Inc. (collectively, the “CI Companies”), ~~have a~~entered into an amendment to their existing line of credit with Bank of Montreal (the "Bank of Montreal Credit Agreement") that extended the maturity of the agreement to December 31, 2013. The agreement provides for borrowings up to C$11,000 ~~with a fixed maturity date of~~ ~~December 30, 2012~~(Canadian dollars), bearing interest at 7.0% (the bank's prime rate at 3.0% as of ~~September 30, 2012~~March 31, 2013 plus 4.0% per annum payable monthly). This line of credit is secured by a lien on the CI Companies' accounts receivable, inventory and certain other tangible assets. Available borrowing capacity at ~~September 30, 2012~~March 31, 2013 was $~~2,050~~656.

The Bank of Montreal Credit Agreement contains a fixed charge coverage ratio ~~tested at the end of each month which, as defined in the agreement, must not be less than~~ ~~1.25~~ ~~to 1.00. The Bank of Montreal Credit Agreement also~~and restricts the Company's Canadian subsidiaries from entering into operating leases ~~that would lead to payments under such leases totaling more than~~ ~~$8,500~~ ~~in any fiscal year, and~~above a specified threshold. Additionally, the Bank of Montreal Credit Agreement imposes a minimum excess availability covenant, which requires the Company's Canadian subsidiaries to maintain at all times minimum excess availability of 5.0% of the revolving credit commitment under the facility.

~~Additionally, the~~The Bank of Montreal Credit Agreement also contains cross-default provisions with the Crystal Credit Agreement and the Lion ~~Credit~~Loan Agreement, whereby an event of default occurring under either of those credit agreements would have caused an event of default under the ~~Crystal~~Bank of Montreal Credit Agreement. The Bank of Montreal Credit Agreement also contains cross-default provisions with the Capital-One Credit Facility and ~~Lion Credit Agreement~~the Notes, whereby an event of default occurring thereunder would cause an event of default under the Bank of Montreal Credit Agreement.

As of ~~September 30, 2012~~March 31, 2013, the Company was in compliance with all required financial covenants of the Bank of Montreal Credit Agreement.

Revolving Credit Facility and Term Loan - Crystal

As of March 31, 2013, the Company was party to a credit agreement, maturing on March 13, 2015, with Crystal Financial LLC ("Crystal" and the "Crystal Credit Agreement", respectively), and other lenders party thereto, that provided the Company with a $80,000 senior credit facility. The Crystal Credit Agreement calls for the $80,000 to be allocated between an asset-based revolving credit facility of $50,000 and term loan of $30,000. As of March 31, 2013, the Company had $780 of outstanding letters of credit secured against the Crystal Credit Agreement. The amount available for additional borrowings on March 31, 2013 was $1,761.

As of March 31, 2013, the interest under the Crystal Credit Agreement was 9.78% (the 90-day LIBOR at 0.28% plus 9.5%) and included an unused facility fee ranging from 0.375% to 1.0% on the unused portion of the revolving credit facility, payable monthly. Additionally, the interest rate with respect to the brand name portion of the outstanding principal amount was 19.28% (the 90-day LIBOR at 0.28% plus 19.0%).

On April 4, 2013, the Company replaced its existing revolving credit facility and term loan with Crystal with a new $35,000 asset-based revolving credit agreement with Capital One. In connection with the termination of the Crystal Credit Agreement, the Company paid an early termination fee of $2,400. The difference between the net carrying amount of the Crystal loans of $60,533 (which includes the outstanding balance, accrued but unpaid interest, and unamortized financing cost immediately prior to the date of the extinguishment) and the cash paid to Crystal of $66,468, which includes the early termination fee, will be recorded as a $5,935 loss on early extinguishment of debt in the statement of operations for the quarter ended June 30, 2013.

1514

Note 7. Long-Term Debt

Long-term debt consists of the following:


	September 30, 2012			December 31, 2011			March 31, 2013			December 31, 2012
Long-term debt with Lion (a)	$	103,614		$	96,760		$	118,039		$	109,680
Other	459			438			364			388
Total long-term debt	104,073			97,198			118,403			110,068
Current portion of debt	(109		)	(56		)	(45		)	(56		)
Long-term debt, net of current portion	$	103,964		$	97,142		$	118,358		$	110,012

(a) Including accrued interest paid-in-kind of $~~12,433~~22,798 and $~~17,550~~16,469 and net of unamortized discount of $~~29,959~~25,899 and $~~20,183~~27,929 at ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, respectively. All amounts owed to Lion were repaid with the proceeds of the financing transactions that the Company closed on April 4, 2013.

~~Lion Credit Agreement~~Senior Secured Notes due 2020

On ~~March 13, 2009~~,April 4, 2013, the Company ~~entered into an~~issued $~~80,000~~206,000 ~~term loan with Lion Capital LLP (the "Lion Credit Agreement"). Pursuant to the Lion Credit Agreement, Lion made term loans to the Company in an~~ aggregate principal amount ~~equal to~~of its ~~$80,000~~13% Senior Secured Notes due 2020 (the "Notes"). The ~~original term loans under the Lion Credit Agreement were scheduled to~~Notes will mature on April 15, 2020. The Notes were issued at ~~December 13, 2013~~97% of par value and ~~bore~~will bear interest at a rate of 13% per annum. Interest on the Notes is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013.

A "special interest trigger event" will be deemed to have occurred under the indenture governing the Notes if the Company's net leverage ratio for the year ended December 31, 2013 is greater than 4.50 to 1.00. If a special interest trigger event occurs, interest on the Notes will accrue at the rate of 15% per annum, ~~payable quarterly in arrears. Effective June 23, 2010 and on~~ ~~February 18, 2011, the Lion Credit Agreement was amended~~retroactive to ~~increase~~April 4, 2013, with the interest ~~rate~~in excess of 13% per annum payable (i) in the case of any interest payment date prior to April 15, 2018, by adding such excess interest to the principal amount of the Notes on the interest payment date, and (ii) for any interest payment date on or after April 15, 2018, in cash.

On or after April 15, 2017, the Company may, at its option, redeem some or all of the Notes at a premium decreasing ratably to zero as specified in the indenture, plus accrued and unpaid interest to, but not including, the redemption date. Prior to April 15, 2017, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 15, 2017 the Company may, at its option, redeem some or all of the Notes by paying a "make whole" premium, plus accrued and unpaid interest to, but not including, the redemption date. If the Company experiences certain change of control events, the holders of the Notes will have the right to require the Company to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, the Company is required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, the Company will be required to redeem, for cash, a portion of each Note then outstanding equal to the amount necessary to prevent such Note from being treated as an “applicable high yield discount obligation” within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.

The Notes are guaranteed, jointly and severally, on a senior secured basis by the Company's existing and future domestic subsidiaries. The Notes and the related guarantees are secured by a first-priority lien on the Company's and its domestic subsidiaries' assets (other than the Credit Facility Priority Collateral, as defined below, subject to some exceptions and permitted liens). The Notes and the related guarantees also are secured by a second-priority lien on all of Company's and its domestic subsidiaries' accounts receivable, inventory, cash, and certain other assets (collectively, the "Credit Facility Priority Collateral"), subject to certain exceptions and permitted liens. The Notes and the guarantees, respectively, rank equal in right of payment with the Company's and its domestic subsidiaries' senior indebtedness, including indebtedness under the Capital One Credit Facility, before giving effect to collateral arrangements.

The Notes impose certain limitations on the ability of the Company and its domestic subsidiaries to, among other things, and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of their capital stock or certain indebtedness, enter into transactions with affiliates, create dividend or other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. The Company must annually report to the trustee on compliance with such limitations.

The Notes also contain cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes.

In connection with the issuance of the Notes, the Company entered into a Registration Rights Agreement under which the Company has agreed to, among other things, conduct a registered exchange offer with respect to the Notes. If the Company fails to fulfill its obligations under the Registration Rights Agreement in a timely manner, it may be required to pay additional interest on the Notes.

Lion Loan Agreement

On March 31, 2013, the Company had a loan agreement, maturing on December 31, 2015, with Lion Capital LLP ("Lion" and the "Lion Loan Agreement", respectively) and the other lenders party thereto. The term loan, as amended, bore interest at a range between 15% and 18% per annum, depending on certain financial covenants, ~~relating to the ratio of Total Debt to Consolidated EBITDA for the trailing four quarters and Consolidated EBITDA for the trailing twelve months.~~payable quarterly in arrears. For the three ~~and nine~~ months ended ~~September 30, 2012, the Company did not meet these financial covenants and as a result,~~March 31, 2013, the interest rate was 18% per ~~annum. On~~annum on an outstanding amount of $118,039, net of discount and including paid-in-kind interest. Amortization of debt discount included in interest expense was $2,030 and $2,193 for the three months ended March ~~13, 2012, in connection with the Crystal Credit Agreement (see Note 6), the Company entered into a seventh amendment to extend the maturity date of the Lion Credit Agreement to~~ ~~December~~ 31, ~~2015~~, as described below. On August 30, 2012, in connection with the Crystal Second Amendment (see Note 6), the Lion Eighth Amendment added a second minimum Consolidated EBITDA covenant that conforms to the Crystal minimum consolidated EBITDA covenant, as described below. The Company entered into the Lion Ninth Amendment effective as of ~~September 30, 2012, which waived the requirement that the Company meet the minimum Consolidated EBITDA covenants for the twelve month period ended~~ ~~September 30, 2012. The Lion Ninth Amendment further provides for an increase of~~ ~~0.52%~~2013 ~~in the interest rate under the Lion Credit Agreement for the period from October 1,~~and 2012, ~~to December 31, 2012, payable in-kind.~~

At the Company's option, except as described below, accrued interest may be paid (i) entirely in cash, (ii) paid half in cash and half in-kind, or (iii) entirely in-kind. In connection with the seventh amendment (described below), beginning on ~~September 1, 2012, the Company is required to pay a portion of its interest in cash. The additional~~ ~~0.52%~~ ~~interest payable under the Lion Credit Agreement for the period of October 1, 2012 to December 31, 2012 is payable in-kind.~~respectively. The Company's obligations under the Lion ~~Credit~~Loan Agreement ~~are~~were secured by a second lien on substantially all of the assets of the ~~Company. The Lion Credit Agreement is~~Company and was subordinated to the Crystal Credit Agreement and contains customary representations, and warranties, events of default, affirmative covenants and negative covenants (which impose restrictions and limitations on, among other things, dividends, investments, asset sales, capital expenditures, and the ability of the Company to incur additional debt and liens), and certain financial covenants. Agreement.

The Company ~~is permitted to prepay the loans in whole or in part at any time at~~repaid and terminated its ~~option, with no prepayment penalty.~~

~~Significant covenants in the Lion Credit Agreement include an annual limitation of the Company's capital expenditures to~~ ~~$30,000. Other covenants~~outstanding obligations under the Lion ~~Credit~~Loan Agreement ~~have been modified over time in connection~~ with ~~amendments.~~

~~Seventh Amendment~~ ~~- On~~ ~~March 13, 2012, in connection~~a portion of the proceeds of the financing transactions closed by the Company on April 4, 2013. There were no early termination penalties associated with the ~~new credit agreement with Crystal (see Note 6), the Company entered into a seventh amendment to~~termination of the Lion ~~Credit Agreement, which among other things: (i) consented to the Crystal Credit Agreement, (ii) extends the maturity date to~~ ~~December 31, 2015~~, (iii) reduced the minimum Consolidated EBITDA amounts for any twelve consecutive months as determined at the end of each fiscal quarter (Quarterly Minimum Consolidated EBITDA) and, (iv) modifies certain other financial covenants, including covenants related to capital expenditures. The amendment also required that the Lion Warrant be amended (see Note 11). In addition, the seventh amendment modifies the Lion Credit Agreement to provide for interest at a rate of 5% ~~per annum to be paid in cash commencing on the interest accruing from and after~~ ~~September 1, 2012~~ ~~(with the remainder of the interest under the Lion Credit Agreement payable in-kind or in cash at the option of the Company).~~

~~In connection with the~~ ~~March 13, 2012~~ ~~amendment, the Company evaluated the change in cash flows in connection with the amendment to the Lion Credit~~Loan Agreement. The ~~Company determined that there was a greater than~~ ~~10%~~ ~~change~~difference between ~~the present values of the existing debt and the amended debt causing an extinguishment of debt. The Company recorded the~~

~~modified debt and related warrant at its fair value and recognized a gain of~~ ~~$11,588~~ ~~on extinguishment of existing debt. This gain on extinguishment was determined by calculating the difference of~~ the net carrying amount of the Lion debt of $~~116,507~~117,926 (which includes the principal, ~~paid-in-kind~~accrued but unpaid interest, ~~fair value of the Lion Warrant,~~ unamortized discount and unamortized ~~deferred~~ financing cost immediately prior to the ~~amendment)~~date of extinguishment) and the ~~fair value of the modified debt~~cash paid to Lion of $~~104,919~~144,177 ~~(which includes~~will be recorded in its statement of operations for the ~~fair value of modified debt, fair value of the modified Lion Warrant and amendment related fees). The difference between the carrying net amount of the existing debt of~~ ~~$121,140~~ ~~and the fair value of the modified debt of~~ ~~$86,898~~ ~~was recorded~~quarter ended June 30, 2013 as a ~~discount to~~$26,251 loss on the ~~modified debt, and will be recognized as interest expense using the effective interest method over the remaining term~~early extinguishment of ~~the Lion Credit Agreement.~~this debt.

~~Eighth Amendment~~ - On August 30, 2012, in connection with the second amendment to the Crystal Credit Agreement (see Note 6), the Company entered into an eighth amendment to the Lion Credit Agreement that, among other things, adds a second minimum Consolidated EBITDA covenant for the remainder of 2012 to be determined at the end of each month (Monthly Minimum Consolidated EBITDA) that conforms to the minimum Consolidated EBITDA covenant in the Crystal Credit Agreement.

~~Ninth Amendment~~ - The Company entered into the Lion Ninth Amendment effective September 30, 2012, which among other things waived the the Company's obligation to maintain the minimum Consolidated EBITDA covenants for the twelve month period ended September 30, 2012. As of result, the Company was in compliance with the required financial covenants of the Lion Credit Agreement on ~~September 30, 2012~~.

~~Amortization of debt discount included in interest expense was~~ ~~$1,986~~ ~~and~~ ~~$6,100~~ ~~for the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012, respectively, and~~ ~~$2,178~~ ~~and~~ ~~$5,064~~ ~~for the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2011, respectively.~~

The Lion Credit Agreement contains certain cross-default provisions by which noncompliance with covenants under the Crystal Credit Agreement, the Bank of Montreal Credit Agreement and certain other existing and potential agreements also constitutes an event of default under the Lion Credit Agreement.

Note 8. Fair Value of Financial Instruments

The fair value of the Company's financial instruments are measured on a recurring basis. The carrying amount reported in the accompanying condensed consolidated balance sheets for cash, accounts receivable (including credit card receivables), accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings ~~under the revolving credit facilities with~~from Crystal and the Bank of Montreal ~~and the term loan with Crystal~~ approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the term loan with Lion was estimated using a discounted cash flow analysis and a yield rate that was estimated using yield rates for publicly traded debt instruments of comparable companies with similar features. The fair value of each warrant was estimated using either a Monte Carlo simulation model or the Binomial Lattice option valuation model.

The Company did not have any assets or liabilities categorized as Level 1 or 2 as of ~~September 30, 2012~~March 31, 2013.

The following table presents carrying amounts and fair values of the Company's financial instruments ~~are presented below~~ as of ~~September 30, 2012~~March 31, 2013:

Carrying Amount Fair Value
Liabilities
Long-term debt with Lion, net of discount of $29,959 and including interest paid-in-kind of $12,433 (Level 3) $ 103,614
$ 100,646
Lion Warrant (Level 3) —
(a) 28,243
SOF Warrant (Level 3) —
(a) 212
$ 103,614
$ 129,101



	Carrying Amount			Fair Value
Liabilities
Long-term debt with Lion, net of discount of $25,899 and including interest paid-in-kind of $22,798	$	118,039		$	113,080
Lion Warrant	—		(a)	40,524
SOF Warrant	—		(a)	362
	$	118,039		$	153,966

(a) noNo cost is associated with these liabilities (see Note 11)

1716

The following table summarizes the activity of Level 3 inputs measured on a recurring basis:

Fair Value Measurements of Common Stock Warrants and Purchase Rights using Significant Unobservable Inputs (Level 3) Nine Months Ended September 30,
2012 2011
Balance at January 1, $ 9,633
$ 993
Additions —
38,154
Exercises —
(2,857 )
Adjustment resulting from change in value recognized in earnings 15,340
(24,391 )
Gain on extinguishment of debt (see Note 7) 3,482
—
Balance at September 30, $ 28,455
$ 11,899



Fair Value Measurements of Common Stock Warrants using Significant Unobservable Inputs (Level 3)	Three Months Ended March 31,
	2013		2012
Balance at January 1,	$	17,241	$	9,633
Adjustment resulting from change in value recognized in earnings (a)	23,645		651
Gain on extinguishment of debt	—		3,482
Balance at March 31,	$	40,886	$	13,766

(a) Adjustment resulting from change in fair value is the amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gain or loss is recorded in unrealized loss on change in fair value of warrants in the accompanying condensed consolidated statements of operations.

Note 9. Income Taxes

Income taxes for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 were computed using the effective tax rate estimated to be applicable

for the full fiscal year, which is subject to ongoing review and evaluation by management. In accordance with ASC 740, ~~“Income~~

“Income Taxes”, the Company evaluates whether a valuation allowance should be established against the net deferred tax assets

based upon the consideration of all available evidence and using a “more likely than not” standard. Significant weight is given

to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of

cumulative losses and current operating performance. In conducting the analysis, the Company utilizes an approach, which

considers the current year loss, including an assessment of the degree to which any losses are driven by items that are unusual

in nature and incurred to improve future profitability. In addition, the Company reviews changes in near-term market

conditions and any other factors arising during the period, which may impact its future operating results.

~~The Company reported income from operations for the~~ ~~three months ended September 30, 2012~~ ~~and a loss from operations for the~~ ~~nine months ended September 30, 2012~~. The Company incurred a loss from operations for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2013 and ~~also incurred a loss for the year ended~~ ~~December 31, 2011~~.2012. Based primarily upon recent history of cumulative losses and the results of operations for the ~~nine~~three months ended ~~September 30,~~March 31, 2013 and 2012,, the Company determined that it is more likely than not it will not realize benefits from the deferred tax assets in certain jurisdictions. The Company will not record income tax benefits in the condensed consolidated financial statements until it is determined that it is more likely than not that the Company will generate sufficient taxable income in the respective jurisdictions to realize the deferred income tax assets. As a result of the analysis, the Company determined that a full valuation allowance against the net deferred tax assets in certain jurisdictions, primarily in the U.S., and a partial valuation allowances in certain foreign jurisdictions, is required. At ~~September 30, 2012~~,March 31, 2013, the Company recorded valuation allowances against its current and non-current deferred tax assets totaling $~~73,773~~77,578. At ~~September 30, 2012~~March 31, 2013 the Company had federal net operating loss carryforwards of approximately $~~73,271~~95,647. Section 382 of the Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. The Company has ~~not completed~~performed an analysis ~~of its Section 382~~and determined it is more likely than not that ownership ~~changes to determine whether~~change has not occurred through December 31, 2012 and, accordingly, the ~~utilization of certain of its~~ net operating loss ~~carryforwards in the United States is limited.~~carryfowards through such date are not subject to an annual Section 382 limitation.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions.

The Company is currently subject to audit under the statute of limitations by the Internal Revenue Service for the ~~calendar~~ years ended ~~December 31, 2008~~ ~~through~~ December 31, 2011. through December 31, 2012. The Company and its subsidiaries' state and foreign tax returns are open to audit under similar statute of limitations for the ~~calendar~~ years ended December 31, 2007 through December 31, ~~2011~~,2012, depending on the particular jurisdiction. The ~~Company's uncertain tax positions are related to tax years that remain subject to examination by~~Company concluded its audit with the ~~relevant taxing authorities and there have been no material changes~~Internal Revenue Service for the ~~three months~~years ended ~~September 30, 2012.~~December 31, 2008 through December 31, 2010 with no tax owed due to utilization of net operating losses. The Company ~~recognizes interest and penalties related~~agreed to ~~unrecognized tax benefits as~~ a ~~component~~settlement with Canada Revenue Agency for audit of the ~~income tax expense~~years ended December 31, 2005 through December 31, 2007. Amounts to be paid pursuant to the agreed settlement are recorded in the accompanying condensed consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the accompanying condensed consolidated balance sheets.current liabilities at March 31, 2013.

The Company is currently being audited by various state jurisdictions. In management's opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

~~The Company is being audited by the Canadian Revenue Agency (“CRA”) for the years ended~~ ~~December 31, 2005~~ ~~through~~ ~~December 31, 2007~~. In connection with the audit, the CRA issued a proposed adjustment disallowing certain management fees. At this time, the Company does not anticipate this audit to result in a material impact on the Company. The Company

~~concluded its audit by the U.S. Internal Revenue Service for the years ended~~ ~~December 31, 2008~~ ~~through~~ ~~December 31, 2010~~ ~~with~~ no tax owed due to utilization of federal net operating loss carryback. The state jurisdiction impact of the federal audit adjustments is included in the Company's current liabilities. The Company is also currently being audited by various state jurisdictions. At this time, the Company does not anticipate these audits to result in a material impact on the Company.

Note 10. Related Party Transactions

~~For~~See Note 8 for a description of loans made by Lion to the Company and Note 11 for a description of the warrants issued by the Company to ~~Lion see Notes 7 and 11.~~Lion.

Personal Guarantees by the Company’s CEO

As of ~~September 30, 2012~~March 31, 2013, the CEO of the Company has personally guaranteed the obligations of American Apparel under four property leases aggregating $~~8,098~~7,202 in obligations. Additionally, the CEO of the Company has personally guaranteed the obligations of the Company with ~~two~~one ~~vendors~~vendor aggregating $~~900~~600.

Lease Agreement Between the Company and a Related Party

In December 2005, the Company entered into an operating lease, which commenced on November 15, 2006, for its knitting facility with a related company (“American Central Plaza, LLC”), which is partially owned by the CEO and the Chief Manufacturing Officer ("CMO") of the Company. The Company's CEO holds an 18.75% ownership interest in American Central Plaza, LLC, while the CMO holds a 6.25% interest. The remaining members of American Central Plaza, LLC are not affiliated with the Company. The lease expired in November 2011, and was subsequently extended for the next five years on substantially the same terms. Rent expense (including property taxes and insurance payments) for the three ~~and nine~~ months ended ~~September 30, 2012~~ ~~was~~ ~~$272~~March 31, 2013 and ~~$675, and for the~~ ~~three and nine months ended September 30, 2011~~2012 was $155 and $~~466~~247, respectively.

Payments to Morris Charney

Morris Charney, (“Mr. M. Charney”), is the father of the Company's CEO and serves as a director of American Apparel Canada Wholesale Inc. and a director of American Apparel Canada Retail Inc. Day to day operations of these two Canadian subsidiaries are handled by management and other employees of these subsidiaries, none of whom performs any policy making functions for the Company. Management of American Apparel sets the policies for American Apparel and its subsidiaries as a whole. Mr. M. Charney does not perform any policy making functions for the Company or any of its subsidiaries. Instead, Mr. M. Charney only provides architectural consulting services primarily for stores located in Canada and, in limited cases, in the ~~United States.~~U.S. Mr. M. Charney was paid architectural consulting and director fees amounting to $6062 and $~~208~~74 for the three ~~and nine~~ months ended ~~September 30, 2012, and~~ ~~$22~~March 31, 2013 and ~~$162~~ ~~for the~~ ~~three~~ ~~and~~ ~~nine months endedSeptember 30, 2011~~,2012, respectively.

~~Employment Agreement with the Company's CEO~~

In ~~March 2012~~ ~~the Company's Board of Directors approved a three-year employment agreement with Mr. Charney commencing on~~ ~~April 1, 2012~~ ~~that will automatically extend for successive one-year periods unless earlier terminated by the Company. The agreement provides for, among other things, a minimum annual base compensation of~~ ~~$800~~ ~~plus performance bonuses and the right to receive~~ ~~7,500~~ ~~shares of the Company's common stock, subject to performance hurdles and other terms, and conditions as described in the agreement. See Note 12.~~

Note 11. Stockholders' (Deficit) Equity

Common Stock Warrants

Lion Warrants

OnAs of March 31, 2013, Lion held warrants (the "Lion Warrants") to purchase ~~March 13, 2012~~21,606, in connection with the new credit agreement with Crystal Financial, LLC, the Company entered into an amendment to the Lion Credit Agreement (see Note 7), which required that the warrants issued to Lion be amended to, among other things, extend the term shares of the ~~warrants to~~ ~~February 18, 2022~~ ~~and add a provision pursuant to which, if American Apparel does not meet a certain quarterly EBITDA amount, the~~Company's common stock, with an exercise price of ~~the warrants would be reduced by~~ ~~$0.25~~ ~~(a one-time adjustment for the first violation of such covenant; subsequent violations would not result in further adjustment). As of~~ ~~March 31, 2012, the Company did not meet the EBITDA requirement, and, as a result, the exercise price of the existing Lion warrants was reduced by~~ ~~$0.25~~ to $0.75 per share. These warrants expire on February 18, 2022.

The fair value for the ~~warrants~~Lion Warrants at ~~September 30, 2012~~March 31, 2013 was estimated using the Binomial Lattice option valuation model. The fair value of the ~~warrants~~Lion Warrants at ~~September 30, 2011~~March 31, 2012 was estimated using the Monte Carlo simulation valuation model. ~~On a weighted average basis, the calculations assumed a stock price of~~ ~~$1.06, exercise price of~~ ~~$0.81, volatility of~~ ~~76.05%, annual risk free rate of~~ ~~2.01%, and a term of~~ ~~9.78 years~~.

As of ~~September 30, 2012~~March 31, 2013, the fair value of the 21,606 Lion Warrants was estimated to be $~~28,243~~40,524 and was recorded as a current liability in the accompanying condensed consolidated balance sheets. The calculation as of March 31, 2013 assumed a stock price of $2.17, exercise price of $0.75, volatility of 73.72%, annual risk free interest rate of 1.66%, a contractual remaining term of 9.02 years and no dividends.

SOF Warrants

As ~~a result~~of March 31, 2013, SOF Investments, L.P. ("SOF") held warrants to purchase 1,000 shares of the ~~change in~~Company's common stock, with an exercise price ~~for the Lion Warrants on~~ ~~March 31, 2012, the exercise price~~ of ~~the SOF warrants were changed to~~ $2.148 per ~~share.~~ share, subject to adjustment under certain circumstances. These warrants expire on December 19, 2013.

As of ~~September 30, 2012~~March 31, 2013, the fair value of the SOF warrants, estimated using the Binomial Lattice option valuation model, was $~~212~~362 and ~~was~~is recorded as a current liability in the accompanying condensed consolidated balance sheets. ~~On a weighted average basis, the~~The calculation as of ~~September 30, 2012~~March 31, 2013 ~~was based on~~assumed a ~~contractual remaining term~~stock price of ~~1.2 years~~$2.17, exercise price of $2.148, volatility of 49.77%, annual risk free interest rate of ~~0.19%~~0.12%, ~~volatility~~a contractual remaining term of ~~58.99%~~0.72 years and no dividends.

The following table summarizes common stock warrants issued, forfeited, expired and outstanding (shares in thousands):

Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life (Years)
Outstanding - January 1, 2012 22,606
$ 1.05
6.0

Issued ⁽¹⁾
44,212
0.90
7.3

Forfeited ⁽¹⁾
(44,212 ) 1.03
—

Expired —
—
—

Outstanding - September 30, 2012 22,606
$ 0.81
9.0

Fair value - September 30, 2012 $ 28,455

⁽¹⁾ ~~Issued and forfeited warrants represents repriced shares.~~



	Number of Shares		Weighted Average Exercise Price		Weighted Average Contractual Life (Years)
Outstanding - January 1, 2013	22,606		$	0.81	8.8
Issued	—		—		—
Forfeited	—		—		—
Expired	—		—		—
Outstanding - March 31, 2013	22,606		$	0.81	8.5
Fair value - March 31, 2013	$	40,886

Earnings Per Share

The Company presents earnings per share (“EPS”) utilizing a dual presentation of basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The Company had common stock under various options, warrants and other agreements at ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012. The weighted average effects of ~~56,874~~53,456 and ~~51,862~~56,566 shares at ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, respectively, were excluded from the calculations of net loss per share for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, because their impact would have been anti-dilutive.

A summary of the potential stock issuances under various options, warrants and other agreements that could have a dilutive effect on the shares outstanding as of ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012 are as follows:


	2012	2011	2013	2012
SOF warrants	1,000	1,000	1,000	1,000
Lion warrants	21,606	21,606	21,606	21,606
Shares issuable to Mr. Charney based on market conditions ⁽¹⁾	20,416	20,416	20,416	20,416
Contingent shares issuable to Mr. Charney based on market conditions⁽²⁾	2,112	2,112	2,112	2,112
Contingent shares issuable to Mr. Charney based on performance factors ⁽³⁾	7,500	—	5,000	7,500
Employee options & restricted shares	4,240	6,728	3,322	3,932
	56,874	51,862	53,456	56,566

⁽¹⁾ Included Charney Anti-Dilution Rights pursuant to the April 26, 2011 Investor Purchase Agreement

⁽²⁾ Pursuant to the March 24, 2011 conversion of debt to equity

⁽³⁾ Pursuant to ~~his~~Mr. Charney's employment agreement commencing April 1, 2012

The table above does not include additional warrants that may be issuable to Lion pursuant to the anti-dilution provisions under the Lion ~~Credit~~Loan Agreement such as in the event anti-dilutive shares are issued to Mr. Charney pursuant to the Charney Anti-Dilution Rights.

Note 12. Share-Based Compensation

~~Plans~~Plan Description

~~2007~~ - ~~Plan~~

On ~~December 12, 2007, the Company's stockholders approved the~~ ~~2007~~ ~~Performance Equity Plan (as amended, the “2007~~ ~~Plan”). The~~ ~~2007~~ ~~Plan authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of~~ ~~11,000~~ ~~shares of the Company's common stock to be acquired by the holders of such awards. The purpose of the~~ ~~2007~~ Plan is to enable the Company to offer its employees, officers, directors and consultants whose past, present and/or potential contributions to the Company has been, are or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. The ~~2007~~ Plan provides for various types of incentive awards including, but not limited to: incentive stock options, non-qualifying stock options, reload stock options, restricted stock and stock appreciation rights. The ~~2007~~ Plan enables the compensation committee to exercise its discretion to determine virtually all terms of each grant, which allowed the Company to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its business.

~~2011~~ ~~Plan~~

On June 21, 2011 the Company's Board of Directors and stockholders approved the American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the “~~2011~~“2011 Plan”). The 2011 Plan authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 10,000 shares of the Company's common stock to be acquired by the holders of such awards. On March 21, 2013, the Company's Board of Directors approved, subject to stockholders approval at the June 25, 2013 Annual Meeting of Stockholders of American Apparel, Inc., amendments to the 2011 Plan to increase the maximum number of shares reserved under the 2011 Plan to 17,500 shares and increase the number of shares that may be awarded to any one participant during any calendar year to 3,000 shares. The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. ~~The~~ ~~2011~~ Plan provides for each of the Company's non-employee directors to automatically receive an annual stock grant, equal to the number of shares of the Company's common stock having an aggregate market value of ~~$80, at the beginning of each year of Board service.~~ As of ~~September 30, 2012~~,March 31, 2013, there were approximately ~~9,295~~8,841 shares available for future grants under the 2011 Plan.

Restricted Share Awards - The following table summarizes shares of restricted stock that were granted, vested, forfeited and outstanding ~~under the~~ ~~2007~~ ~~and~~ ~~2011~~ ~~Plans~~ (shares in thousands):


	Number of Restricted Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Vesting Period (in years)	Number of Restricted Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Vesting Period (in years)
Non-vested - January 1, 2012	3,186		$	1.45	2.7
Non-vested - January 1, 2013						2,644		$	1.33	1.3
Granted	1,348		0.92			434		1.80
Vested	(796	)	0.88			(443	)	1.00
Forfeited	(198	)	1.25			(13	)	1.53
Non-vested - September 30, 2012	3,540		$	1.38	1.1
Non-vested - March 31, 2013						2,622		$	1.46	1.3

Vesting of the restricted share awards to employees may be either immediately upon grant or over a period of ~~four~~three to five years of continued service by the employee in equal annual installments. Vesting is immediate in the case of members of the Board of Directors. Share-based compensation is recognized over the vesting period based on the grant-date fair value.

Stock Option Awards - The following table summarizes stock options granted, forfeited, expired and outstanding (shares in thousands):

Number of Shares Weighted Average Exercise Price Weighted Average Contractual Remaining Life (Years) Aggregate Intrinsic Value
Outstanding - January 1, 2012 950
$ 1.06
9.5

Granted —
—
—

Forfeited —
—
—

Expired (250 ) 1.75
—

Outstanding - September 30, 2012 700
$ 0.82
9.0

Vested (exercisable) - September 30, 2012 350
$ 0.82
9.0
$ —
Non-vested (exercisable) - September 30, 2012 350
$ 0.82
9.0
$ —



	Number of Shares	Weighted Average Exercise Price		Weighted Average Contractual Remaining Life (Years)	Aggregate Intrinsic Value
Outstanding - January 1, 2013	700	$	0.82	8.8
Granted	—	—		—
Forfeited	—	—		—
Expired	—	—		—
Outstanding - March 31, 2013	700	$	0.82	8.5
Vested (exercisable) - March 31, 2013	525	$	0.82	8.5	$	—
Non-vested (exercisable) - March 31, 2013	175	$	0.82	8.5	$	—

Share-Based Compensation Expense

- During the three months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, the Company recorded share-based compensation expense of $~~2,949~~3,547 and $~~2,093~~1,842, respectively, related to its share-based compensation awards that are expected to vest. ~~During the~~ ~~nine months ended September 30, 2012~~No ~~and~~ ~~2011, the Company recorded share-based compensation expense of~~ ~~$7,333~~ ~~and~~ ~~$4,538, respectively, related to its share-based compensation awards that are expected to vest. No~~ amounts have been capitalized. As of ~~September 30, 2012~~March 31, 2013 unrecorded compensation cost related to non-vested awards was $~~11,024~~12,380, which is expected to be recognized through ~~2015~~2016.

CEO Anti-Dilution Rights - During the three months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, the Company recorded share-based compensation expense (included in the above) associated with Mr. Charney's certain anti-dilution rights of $~~1,105~~2,071 and $~~1,197, respectively. During the~~ ~~nine months ended September 30, 2012~~ ~~and~~ ~~2011, the Company recorded share-based compensation expense of~~ ~~$3,599~~ ~~and~~ ~~$1,808~~1,247, respectively. As of ~~September 30, 2012~~March 31, 2013, unrecorded compensation cost was $~~3,431~~6,373, which is expected to be recognized through 2015.

On ~~October 16, 2012~~, the Company and Mr. Charney entered into an amendment to the anti-dilution provisions contained in the Purchase Agreement with Mr. Charney dated as of April 27, 2011. Subject to receipt of any required shareholder approval under the rules of the NYSE MKT, the amendment extends by one year the measurement periods for Mr. Charney’s anti-dilution protection provisions and reduces the length of the corresponding stock price target periods from 60 days to 30 days. As of ~~October 16, 2012, the fair value of these awards of~~ ~~$13,192~~ ~~was determined under the Monte Carlo simulation pricing model. The calculation was based on the exercise price of~~ $0~~, the stock price of~~ ~~$1.3, annual risk free rate of~~ ~~0.45%, volatility of~~ ~~90.46%~~ ~~and a term of~~ ~~3.5 years~~.

CEO Performance-Based Award - Pursuant to an employment agreement with Mr. Charney commencing on April 1, 2012, the Company provided to the CEO rights to 7,500 shares of the Company's ~~stock (see Note 10).~~stock. The shares are issuable in three equal installments, one per each measurement period, only upon the achievement of certain EBITDA targets for each of fiscal 2012, 2013 and 2014. For the fiscal 2012 measurement period, the Company achieved the target EBITDA and approved the award of such shares. Subject to approval of the Amended and Restated 2011 Omnibus Stock Incentive Plan by the stockholders of the Company, 2,500 shares will be issued during 2013.

The grant date fair value of the award is based on the share price of $0.75 and will be recognized over the related service and amortization period in three probability-weighted terms of 1.2, 2.1 and 3.1 years corresponding to the three measurement periods. During the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013, the Company recorded share-based compensation expense of $859 ~~and~~ ~~$1,718, respectively.~~. As of ~~September 30, 2012~~March 31, 2013, unrecorded compensation cost was $~~3,906~~2,188, which is expected to be recognized through 2015.

Non-Employee Directors

On January 2 and April 1, ~~2012~~, ~~July 2, 2012~~ ~~and~~ ~~October 1, 2012~~2013, the Company issued ~~a quarterly stock grant~~ to each non-employee director of approximately 12, 11$10 ~~and~~ 7 ~~shares~~worth of the Company's common stock, based ~~upon the closing prices~~on grant date fair values of $~~0.82~~, ~~$0.90~~1.13 and $~~1.53~~2.10 per share, ~~respectively. Additionally, Messrs. Danzinger and Igelman each received an additional~~ 23 ~~shares~~respectively, for services performed during the ~~second half~~ of ~~2011. The share-based compensation is reflected in operating expenses in the accompanying condensed consolidated statements of operations.~~quarters ended December 31, 2012 and March 31, 2013, respectively.

Note 13. Commitments and Contingencies

Operating Leases

The Company conducts retail operations under operating leases, which expire at various dates through September 2022. The Company's primary manufacturing facilities and executive offices are currently under a long-term lease, which expires on

July 31, 2019. Operating lease rent expense (including real estate taxes and common area maintenance costs) was approximately $~~19,667~~19,902 and $~~57,483~~18,788 for the three ~~and nine~~ months ended ~~September 30, 2012, respectively, and~~ ~~$19,612~~March 31, 2013 and ~~$58,874~~ ~~for the~~ ~~three and nine months ended September 30, 2011~~,2012, respectively. The Company did not incur any significant contingent rent during these periods. Rent expense is allocated to cost of sales (for production-related activities), selling expenses (primarily for retail stores) and general and administrative expenses in the accompanying condensed consolidated statements of operations.

Sales Tax

The Company sells its products through its wholesale business, retail stores and the internet. The Company operates these channels separately and accounts for sales and use tax accordingly. The Company is periodically audited by state taxing authorities and it is possible they may disagree with the Company's method of assessing and remitting these taxes. The Company believes that it properly assesses and remits all applicable state sales taxes in the applicable jurisdictions and has accrued approximately $289 as of ~~September 30, 2012~~March 31, 2013 and ~~as of~~ December 31, ~~2011~~2012 for state sales tax contingencies.

Customs and duties

The Company is being audited by ~~the~~ German customs authorities for the years ended December 31, 2009 through December 31, ~~2011. As~~2011. In connection with the audit, the German customs has issued retroactive assessments on the Company's imports totaling $4,657 at the March 31, 2013 exchange rates (assessment was issued in Euros). The size of the retroactive assessments are largely due to member countries of the European Union (“E.U.”) limited right to impose retaliatory duties on certain imports of U.S. origin goods into the E.U., based upon the World Trade Organization's (“WTO”) Dispute Settlement procedures and the related WTO arbitrator rulings brought into place as a result of EU complaint against the U.S. "Continued Dumping and Subsidy Offset Act of 2000" (the "CDSOA") usually referred to as "the Byrd Amendment". Consequently, the German customs are attempting to impose a substantially higher tariff rate than the original rate that the Company had paid on the imports, approximately doubling the amount of the tariff that the Company would have to pay.

The Company believes that it has valid arguments to challenge the merit of the German customs assessment and has filed litigation in German courts to contest such assessment. However, as the case is still in its preliminary stages, the Company is unable to ~~predict~~reasonably estimate the financial outcome of the matter at this time as it cannot predict whether the outcome will be favorable or unfavorable to the Company, or if the Company will be required to advance material amounts during the pendency of the litigation, and accordingly has not recorded a provision for this matter. ~~However, no~~No assurance can be made that this matter will not result in a material financial exposure in connection with the audit, which could have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Advertising

At ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, the Company had approximately $~~1,607~~3,242 and $~~4,378~~4,456, respectively, in open advertising commitments, which primarily relate to print advertisements in various newspapers and magazines, as well as outdoor ~~advertising~~advertising. The majority of these commitments are expected to be paid during the remainder of ~~2012~~2013.

Note 14. Workers' Compensation and Other Self-Insurance Reserves

The Company uses a combination of third-party insurance and/or self-insurance for a number of risks including workers’ compensation, medical benefits provided to employees, and general liability claims. General liability costs relate primarily to litigation that arises from store operations. Self-insurance reserves include estimates of both filed claims carried at their expected ultimate settlement value and claims incurred but not yet reported. The Company’s estimated claim amounts are discounted using a rate of 0.62% with a duration that approximates the duration of the Company’s self-insurance reserve portfolio. As of ~~September 30, 2012~~March 31, 2013 the undiscounted liability amount was $~~14,940~~15,035. The Company’s liability reflected on the accompanying condensed consolidated balance sheets represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. In estimating this liability, the Company utilizes loss development factors based on Company specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. These projections are subject to a high degree of variability based upon future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although the Company does not expect the amounts ultimately paid to differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the assumptions applied.

The workers' compensation liability is based on an estimate of losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. To guarantee performance under the

workers' compensation program, as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, the Company had issued standby letters of credit in the ~~amounts~~amount of $~~3,326~~ ~~and~~ ~~$5,492~~1,100, ~~respectively,~~ with ~~three~~ insurance companies being the beneficiaries, through a ~~bank.~~bank, and cash deposits of $16,124 and $14,624, respectively, in favor of insurance company beneficiaries. At ~~September 30, 2012~~March 31, 2013, the Company recorded a total reserve of $~~14,685~~14,773, of which $~~3,897~~3,857 is included in accrued expenses and $~~10,788~~10,916 is included in other long-term liabilities on the accompanying condensed consolidated balance sheets. At December 31, ~~2011~~2012, the Company recorded a total reserve of $~~14,189~~14,472, of which $~~3,598~~3,778 is included in accrued expenses and $~~10,591~~10,694 is included in other long-term liabilities on the accompanying condensed consolidated balance sheets. These reserves for potential losses on existing claims are believed to be for potential losses, which are probable and reasonably estimable.

The Company self-insures its health insurance benefit obligations while the claims are administered through a third party administrator. The medical benefit liability is based on estimated losses for claims incurred, but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. At ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012, the Company's total reserve of $~~1,910~~1,752 and $~~1,720~~1,510, respectively, was included in accrued expenses in the accompanying condensed consolidated balance sheets.

Note 15. Business Segment and Geographic Area Information

The Company reports the following four operating segments: U.S. Wholesale, U.S. Retail, Canada, and International. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated. The U.S. Wholesale segment consists of the Company's wholesale operations of sales of ~~imprintable~~undecorated apparel products to distributors and third party screen printers in the United States, as well as the Company's online consumer sales to U.S. customers. The U.S. Retail segment consists of the Company's retail operations in the United States, which was comprised of ~~140~~139 retail stores operating in the United States, as of ~~September 30, 2012~~March 31, 2013. ~~The~~ Canada segment includes retail, wholesale and online consumer operations in Canada. As of ~~September 30, 2012~~March 31, 2013, the retail operations in the Canada segment ~~were~~ comprised of 3534 retail stores. The International segment includes retail, wholesale and online consumer operations outside of the United States and Canada. As of ~~September 30, 2012~~March 31, 2013, the retail operations in the International segment ~~were~~ comprised of 76 retail stores operating in 18 countries outside the United States and Canada. All of the Company's retail stores sell the Company's apparel products directly to consumers.

The Company's management evaluates performance based on a number of factors; however, the primary measures of performance are net sales and income or loss from operations of each business segment, as these are the key performance indicators reviewed by management. Operating income or loss for each segment does not include unallocated corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to: human resources, legal, finance, information technology, accounting, executive compensation and various other corporate level expenses.

2422

The following tables ~~represents~~represent key financial information of the Company's reportable segments before unallocated corporate expenses:

Three Months Ended September 30, 2012

U.S. Wholesale
U.S. Retail Canada International Consolidated
Wholesale net sales $ 39,862
$ —
$ 3,215
$ 2,113
$ 45,190
Retail net sales —
52,714
13,086
39,256
105,056
Online consumer net sales 6,985
—
416
4,513
11,914
Total net sales to external customers 46,847
52,714
16,717
45,882
162,160
Gross profit 12,873
34,361
10,166
27,800
85,200
Income from segment operations 5,811
3,116
721
4,192
13,840
Depreciation and amortization 1,446
2,747
394
951
5,538
Capital expenditures 3,300
2,136
328
894
6,658
Deferred rent expense (benefit) 297
(349 ) (58 ) (122 ) (232 )

Three Months Ended September 30, 2011
U.S. Wholesale U.S. Retail Canada International Consolidated
Wholesale net sales $ 36,780
$ —
$ 2,958
$ 2,825
$ 42,563
Retail net sales —
43,104
11,944
33,244
88,292
Online consumer net sales 5,625
—
362 4,047
10,034
Total net sales to external customers 42,405
43,104
15,264
40,116
140,889
Gross profit 8,897
29,607
9,432
27,055
74,991
Income (loss) from segment operations 4,465
(622 ) (527 ) 5,339
8,655
Depreciation and amortization 1,833
2,599
404
1,290
6,126
Capital expenditures 838
1,169
77
473
2,557
Retail store impairment —
119
640
25
784
Deferred rent expense (benefit) 59
(294 ) (30 ) (219 ) (484 )


	Nine Months Ended September 30, 2012														Three Months Ended March 31, 2013
	U.S. Wholesale		U.S. Retail			Canada			International			Consolidated			U.S. Wholesale		U.S. Retail			Canada			International			Consolidated
Wholesale net sales	$	110,380	$	—		$	9,449		$	7,183		$	127,012		$	34,708	$	—		$	2,579		$	1,941		$	39,228
Retail net sales	—		143,444			34,181			102,859			280,484			—		44,344			9,112			30,452			83,908
Online consumer net sales	21,232		—			1,466			14,088			36,786			9,118		—			666			5,140			14,924
Total net sales to external customers	131,612		143,444			45,096			124,130			444,282			43,826		44,344			12,357			37,533			138,060
Gross profit	36,582		93,977			26,627			77,106			234,292			12,021		29,191			7,420			24,236			72,868
Income (loss) from segment operations	18,324		449			(1,888		)	8,339			25,224			5,165		(2,447		)	(652		)	1,031			3,097
Depreciation and amortization	4,795		8,074			1,107			3,064			17,040			1,603		2,970			433			1,025			6,031
Capital expenditures	6,502		3,990			1,144			2,621			14,257			3,076		2,900			183			1,195			7,354
Retail store impairment	—		—			129			—			129			—		78			—			—			78
Deferred rent expense (benefit)	393		(509		)	(156		)	(377		)	(649		)	20		(212		)	(131		)	(125		)	(448		)

	Nine Months Ended September 30, 2011														Three Months Ended March 31, 2012
	U.S. Wholesale		U.S. Retail			Canada			International			Consolidated			U.S. Wholesale		U.S. Retail			Canada			International			Consolidated
Wholesale net sales	$	98,840	$	—		$	8,711		$	7,479		$	115,030		$	33,920	$	—		$	2,855		$	2,222		$	38,997
Retail net sales	—		120,483			32,246			92,059			244,788			—		42,609			9,920			28,703			81,232
Online consumer net sales	16,353		—			1,299			12,290			29,942			7,415		—			563			4,453			12,431
Total net sales to external customers	115,193		120,483			42,256			111,828			389,760			41,335		42,609			13,338			35,378			132,660
Gross profit	30,518		82,031			25,463			73,043			211,055			11,758		28,288			7,068			22,942			70,056
Income (loss) from segment operations	16,002		(7,126		)	(1,954		)	7,618			14,540			6,526		(3,104		)	(2,714		)	597			1,305
Depreciation and amortization	6,015		7,887			1,246			3,961			19,109			1,738		2,645			339			1,130			5,852
Capital expenditures	2,179		3,848			209			1,048			7,284			1,093		1,444			512			641			3,690
Retail store impairment	—		296			642			1,498			2,436
Deferred rent expense (benefit)	211		(1,341		)	(78		)	(654		)	(1,862		)	49		117			(48		)	(126		)	(8		)

Reconciliation of reportable segments combined income from operations for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012 to the consolidated ~~(loss) income~~loss before income taxes is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2012			2011			2012			2011			2013			2012
Consolidated income from operations of reportable segments	$	13,840		$	8,655		$	25,224		$	14,540		$	3,097		$	1,305
Unallocated corporate expenses	(9,223		)	(11,283		)	(31,111		)	(35,482		)	(13,574		)	(11,100		)
Interest expense	(10,454		)	(8,832		)	(30,274		)	(23,715		)	(11,214		)	(9,553		)
Foreign currency transaction gain (loss)	685			(1,855		)	(141		)	(780		)
Unrealized (loss) gain on change in fair value of warrants and purchase rights	(13,312		)	6,101			(15,340		)	21,201
Gain (loss) on extinguishment of debt	—			—			11,588			(3,114		)
Other (expense) income	(36		)	186			(188		)	240
Foreign currency transaction (loss) gain													(713		)	950
Unrealized loss on change in fair value of warrants													(23,645		)	(651		)
Gain on extinguishment of debt													—			11,588
Other income (expense)													5			(128		)
Consolidated loss before income taxes	$	(18,500	)	$	(7,028	)	$	(40,242	)	$	(27,110	)	$	(46,044	)	$	(7,589	)

2623

Net sales by geographic location of ~~customer~~customers for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2012		2011		2012		2011		2013		2012
United States	$	99,562	$	85,509	$	275,056	$	235,676	$	88,170	$	83,944
Canada	16,717		15,264		45,096		42,256		12,357		13,338
Europe (excluding United Kingdom)	17,311		17,292		48,901		50,194		15,069		14,767
United Kingdom	12,060		9,888		32,811		27,299		9,595		9,274
South Korea	3,451		3,098		8,371		7,836		2,169		1,961
China	1,549		1,118		3,791		2,896		1,494		906
Japan	6,151		4,240		15,190		10,189		4,438		3,960
Australia	3,629		2,851		10,116		8,572		3,171		2,959
Other foreign countries	1,730		1,629		4,950		4,842		1,597		1,551
Total consolidated net sales	$	162,160	$	140,889	$	444,282	$	389,760	$	138,060	$	132,660

Note 16. Litigation

The Company is subject to various claims and contingencies in the ordinary course of business, including those related to litigation, business transactions, employee-related matters and taxes, and others. When the Company is aware of a claim or potential claim, ~~the Company~~it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. There is no assurance that such matters will not materially and adversely affect the Company's business, financial position, and results of operations or cash flows.

Individual Actions

On February 7, 2006, Sylvia Hsu, a former employee of American Apparel, filed a Charge of Discrimination with the Los Angeles District Office of the Equal Employment Opportunity Commission (“EEOC”) (Hsu v. American Apparel: Charge No. 480- 2006-00418), alleging that she was subjected to sexual harassment by a co-worker and constructively discharged as a result of the sexual harassment and a hostile working environment. On March 9, 2007, the EEOC expanded the scope of its investigation to other employees of American Apparel who may have been sexually harassed. On August 9, 2010, the EEOC issued a written determination finding that reasonable cause exists to believe the Company discriminated against Ms. Hsu and women, as a class, on the basis of their female gender, by subjecting them to sexual harassment. No finding was made on the issue of Ms. Hsu's alleged constructive discharge. In its August 19, 2010 written determination, the EEOC has invited the parties to engage in informal conciliation. If the parties are unable to reach a settlement which is acceptable to the EEOC, the EEOC will advise the parties of the court enforcement alternatives available to Ms. Hsu, aggrieved persons, and the EEOC. The ~~insurance carrier for the Company has asserted that it is not obligated to provide coverage for this proceeding. The~~ Company has not recorded a provision for this matter and ~~intends to work~~is working cooperatively with the EEOC to resolve the claim in a manner acceptable to all parties. ~~Should the matter be decided against the Company, the Company could experience an increase in similar suits and suffer reputational harm.~~ The Company does not believe at this time ~~believe~~ that any settlement will involve ~~the~~a payment of damages in an amount that would be material to and adversely affect the Company's business, financial position, and results of operations ~~and~~or cash flows.

On November 5, 2009, Guillermo Ruiz, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of the Company's employees. The complaint further alleges that the Company failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. The Company does not have insurance coverage for this matter. Should the matter be decided against the Company, the Company could not only incur substantial liability but also experience an increase in similar suits and suffer reputational harm. The Company has accrued an estimate for this loss contingency in its accompanying condensed consolidated balance sheet as of September 30, 2012. The Company may have an exposure to loss in excess of the amounts accrued, however, an estimate of such potential loss cannot be made at this time. Moreover, no assurance can be made that this matter either individually or together with the potential for similar suits and

reputational harm, will not result in a material financial exposure, larger than the Company's estimate, which could have a material adverse effect upon its financial condition and results of operations.

On June 21, 2010, Antonio Partida, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that the Company failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage

statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. There is no known insurance coverage for this matter. Should the matter be decided against the Company, the Company could not only incur substantial liability but also experience an increase in similar suits and suffer reputational harm. The Company has accrued an estimate for this loss contingency in its accompanying condensed consolidated balance sheet as of September 30, 2012. The Company may have an exposure to loss in excess of the amounts accrued, however, an estimate of such potential loss cannot be made at this time. Moreover, no assurance can be made that this matter either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, larger than its estimate, which could have a material adverse effect upon the Company's financial condition and results of operations.

On or about December 2, 2010, Emilie Truong, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to timely provide final paychecks upon separation. Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices. This matter is now proceeding in arbitration. There is no known insurance coverage for this matter. Should the matter be decided against the Company, the Company could not only incur substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon its financial condition and results of operations.

On or about February 9, 2011, Jessica Heupel, a former retail employee filed suit on behalf of putative classes of current and former non-exempt California employees (Jessica Heupel, individually and on behalf of all others similarly situated v. American Apparel Retail, Inc., Case No. 37-2011-00085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. There is no known insurance coverage for this matter. Should the matter be decided against the Company, the Company could not only incur substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure, which result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon its financial condition and results of operations.

On or about September 9, 2011, Anthony Heupel, a former retail employee initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages in an amount in excess of ~~$3,600,~~$3,600, as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. ~~There~~This matter is ~~no known~~now proceeding in arbitration.

The Company does not have insurance coverage for ~~this matter. Should~~ the ~~matter be decided against the Company, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm.~~above matters. The Company ~~is unable~~has accrued an estimate for the loss contingency for each of the above matters (excluding the Hsu case as noted above) in the Company's accompanying condensed consolidated balance sheet as of March 31, 2013. The Company may have an exposure to ~~predict~~loss in excess of the ~~financial outcome~~amounts accrued, however, an estimate of ~~these matters~~such potential loss cannot be made at this ~~time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However,~~time. Moreover, no assurance

can be made that these matters either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, larger than the Company's estimate, which could have a material adverse effect upon ~~its~~the Company's financial condition and results of operations.

Additionally, the Company is currently engaged in other employment-related claims and other matters incidental to the Company's business. The Company believes that all such claims against the Company are without merit or not material, and the Company intends to vigorously dispute the validity of the plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information at this time, the Company believes, but the Company cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, the Company could not only incur liability but also experience an increase in similar suits and suffer reputational harm.

Derivative Matters

Two shareholder derivative lawsuits ~~entitled Nikolai Grigoriev v. Dov Charney, et al., Case~~(Case No. CV106576 GAF (JCx) ~~(the “Grigoriev Action”)~~ and ~~Andrew Smukler v. Dov Charney, et al.,~~ Case No. CV107518 RSWL (FFMx) ~~(the “Smukler Action”~~), were filed in the United States District Court for the Central District of California on September 2, 2010 and October 7, 2010, respectively, and four shareholder derivative lawsuits, entitled John L. Smith v. Dov Charney, et al., Case No. BC 443763 (the "Smith Action"), Lisa Kim v. Dov Charney, et al., Case No. BC 443902 (the "Kim Action"), Teresa Lankford v. Dov Charney, et al., Case No. BC 445094 (the "Lankford Action"), and Wesley Norris v. Dov Charney, et al., Case No. BC 447890 (the "Norris Action")which were filed in the Superior Court of the State of California for the County of Los Angeles on August 16, 2010, September 3, 2010, September 7, 2010, and October 21, 2010, respectively, by persons identifying themselves as American Apparel shareholders and purporting to act on behalf of American Apparel, naming American Apparel as a nominal defendant and certain current and former officers, directors, and executives of the Company as defendants.

Plaintiffs in the Smith Action, Kim Action, and Norris Action allege causes of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The Lankford Action alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. On November 4, 2010, the four lawsuits filed in the Superior Court of the State of California were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action"). On April 12, 2011, the Court issued an order staying the State Derivative Action on the grounds that the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).

~~On November 12, 2010, the Grigoriev Action and Smukler Action were~~subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal Derivative Action”). Plaintiffs in the Federal Derivative Action ~~filed a Consolidated Amended Shareholder Derivative Complaint on June 13, 2011. The amended complaint alleges~~allege a cause of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. ~~Plaintiffs in each of the derivative cases seek damages on behalf of American Apparel in an unspecified amount, as well as equitable and injunctive relief.~~ The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. ~~The lawsuits do not assert any claims against the Company.~~ The Company's status as a “Nominal Defendant” in the actions reflects the fact that the lawsuits are maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. ~~On August 29, 2011, defendants~~The Company filed a motion to dismiss the Federal Derivative ~~Action. A hearing on the motion~~Action which was ~~held on December 12, 2011. On July 31, 2012, the Court dismissed the Federal Derivative Action,~~granted with leave to ~~amend.~~amend on July 31, 2012. Plaintiffs indid not amend the ~~Federal Derivative Action~~complaint and subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the Plaintiffs' motion to dismiss ~~the consolidated derivative complaint~~ and entered

judgment accordingly. On November 12, 2012, Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of ~~Appeals.~~Appeals where the case is currently pending.

Four shareholder derivative lawsuits (Case No. BC 443763, Case No. BC 443902, Case No. BC 445094, and Case No. BC 447890) were filed in fall of 2010 in the Superior Court of the State of California for the County of Los Angeles which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action").

Three of the matters comprising the State Derivative Action allege causes of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011, the Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).

Both the Federal Derivative Action and State Derivative Actions are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.

Other Proceedings

Four putative class action lawsuits, ~~entitled Anthony Andrade v. American Apparel, et al., Case~~(Case No. CV106352 MMM (RCx)~~, Douglas Ormsby v. American Apparel, et al.~~, Case No. CV106513 MMM (RCx)~~, James Costa v. American Apparel, et al.~~, Case No. CV106516 MMM (RCx), and ~~Wesley Childs v. American Apparel, et al.,~~ Case No. CV106680 GW (JCGx),) were filed in the United States District Court for the Central District of California ~~on August 25,~~in the Fall of 2010 ~~August 31, 2010, August 31, 2010, and September 8, 2010, respectively,~~ against American Apparel and certain of the Company's officers and executives on behalf of American Apparel shareholders who purchased the Company's common stock between December 19, 2006 and August 17, 2010. On December 3, 2010, the four lawsuits were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal Securities Action”). ~~On March 14, 2011, the Court appointed the firm of Barroway Topaz, LLP (now Kessler Topaz Meltzer & Check, LLP) to serve as~~The lead counsel and Mr. Charles Rendelman to serve as lead plaintiff. On April 29, 2011, Mr. Rendelman filed a Consolidated Class Action Complaint against American Apparel, certain of the Company's officers, and Lion, allegingplaintiff alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and ~~Rules~~Rule 10b-5 promulgated under Section 10(b), arising out of alleged

misrepresentations contained in the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper. ~~On May 31, 2011, defendants~~The Company filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013. The Company filed a motion to dismiss the Federal Securities Action. On January 13, 2012, the Court dismissed the Federal Securities Action, with leave to amend. Plaintiff filed an amended complaint on February 27, 2012. The Company moved to dismiss the amended complaint on March ~~30, 2012. A~~15, 2013. The hearing on the motion ~~was heard on May 21, 2012.~~will be held June 3, 2013. The ~~Court took the matter under submission. Discovery is stayed in the~~ Federal Securities Action ~~as well as in~~is covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.

Should any of the above matters (i.e., the Federal Derivative Action, ~~pending resolution of motions to dismiss~~the State Derivative Action, or the Federal Securities ~~Action.~~

Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds which fall outside the scope of the Company's insurance coverage, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon the Company's financial condition and results of operations.

OnThe Company has previously disclosed an arbitration filed by the Company on February 17, 2011, ~~the Company~~related to cases filed complaints in arbitration against five former employees seeking: (1) declaratory relief that the arbitration, confidentiality, severance and bonus agreements signed by the former employees are valid and enforceable; (2) damages in the ~~event~~Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the ~~former employees or anyone~~State of them breaches their confidentiality agreements, as threatened; (3) attorneys' fees and costs incurred to compel the suit into arbitration; (4) declaratory relief that the former employees' claims of sexual harassment and sexual assault are false and without merit; and (5) declaratory relief that the former employees have attempted to engage in abuse of processCalifornia for the ~~purpose~~County of ~~extorting from the Company~~Los Angeles (Case Nos. BC457920 and ~~Dov Charney money solely to avoid public shame and economic loss. On March 4, 2011, one such former employee filed suit~~BC460331) against American Apparel, Dov Charney and certain members of the Board of Directors asserting claims of ~~American Apparel in the Supreme Court of New York, County of Kings, Case No. 5018-11. The suit alleges~~ sexual harassment, gender discrimination, retaliation, negligent hiring and supervision, intentional and negligent infliction of emotional distress, fraud and unpaid wages, and seeks, among other things, an award of compensatory damages, exemplary damages, attorneys' fees and costs, all in an amount of at least $250,000 (the "New York Suit"). In March 2012, the court ordered this case into arbitration. On March 23, 2011, three of the other former employees filed a consolidated suit against American Apparel and Dov Charney in the Superior Court of the State of California for the County of Los Angeles, Case No. BC457920 (the "Los Angeles Suit"). Such action alleges sexual harassment, failure to prevent harassment and discrimination, intentional infliction of emotional distress, assault and battery, impersonation through the internet, defamation and a declaratory judgment that the confidentiality and arbitration agreements signed by plaintiffs are unenforceable. Such action seeks monetary damages, various forms of injunctive relief, and attorneys' fees and costs. On July 28, 2011, the court ordered this case into arbitration. The Company's insurance carrier has acknowledged coverage of the New York Suit and Los Angeles Suit, subject to a deductible and a reservation of rights.

On April 27, 2011, three of the former employees filed suit against the Company, Dov Charney and a Company employee in the Superior Court of the State of California for the County of Los Angeles, Case No. BC460331, asserting claims for Impersonation through Internet or Electronic Means, Intentional Infliction of Emotional Distress, Defamation, Invasion of Privacy/False Light, and Invasion of Privacy/Appropriation of Likeness. Such action seeks monetary damages, injunctive relief and attorneys' fees and costs. The Court has ordered this case into arbitration. The Company's insurance carrier has acknowledged coverage of this suit, subject to a deductible and a reservation of rights.

other related claims. The Company ~~is currently engaged in other employment-related claims and other matters incidental~~recently settled one of these cases with no monetary liability to ~~its business.~~the Company. The Company ~~believes that all such~~recently prevailed on the sexual harassment claims ~~against the Company are without merit or not material, and the Company intends to vigorously dispute the validity~~in another of ~~the plaintiffs' claims. Should~~ these ~~matters be decided against the Company, the Company could not only incur substantial liability but also experience an increase in similar suits and suffer reputational harm.~~cases. While the ultimate resolution of ~~such~~the remaining claims cannot be determined, in light of the favorable ruling in one of these cases, the amount of settlement in the other of these cases, and based on information available at this time regarding the remaining cases, the Company believes, but the Company cannot provide assurances that, the amount and ultimate liability, if any, with respect to these remaining actions will not materially affect the Company's business, financial position, results of operations, or cash flows. ~~The Company cannot assure you, however, that such actions will not have a material adverse effect on its consolidated results of operations, financial position or cash flows.~~

3026

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(All dollar and share amounts in the Item 2 are presented in thousands, except for per share items and unless otherwise specified.)

Overview

We are a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic ~~apparel. We design, manufacture~~apparel and ~~sell clothing,~~ accessories ~~and personal care products~~ for women, men, children and ~~babies through retail, wholesale and online distribution channels.~~babies. We are based in downtown Los Angeles, California. As of ~~September 30, 2012~~March 31, 2013, we had approximately 10,000 employees and operated ~~a total of~~ ~~251~~249 retail stores in 20 countries: the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and ~~18 other countries. Our~~China. We also operate a global e-commerce site that serves over 60 countries worldwide at www.americanapparel.com. In addition, American Apparel operates a leading wholesale business ~~is a leading supplier of~~ that supplies high qualityT-shirts and other casual wear to ~~screen printers~~distributors and ~~distributors. In addition, we operate an online retail e-commerce website at~~ ~~www.americanapparel.com~~ ~~where we sell our clothing and accessories directly to consumers.~~the imprintable industry.

We conduct our primary apparel manufacturing operations out of an 800,000 square foot facility in the warehouse district of downtown Los Angeles, California. The facility houses our executive offices, as well as cutting, sewing, warehousing, and distribution operations. We conduct knitting operations ~~at our facilities~~ in Los Angeles and Garden Grove, California, which produce a majority of the fabric we use in our products. We also operate dye houses that currently provide dyeing and finishing services for nearly all of the raw fabric used in production. We operate a fabric dyeing and finishing facility in Hawthorne, ~~California, which provides fabric dyeing and finishing services.~~California. We also operate a cutting, sewing and garment dyeing and finishing facility located in South Gate, ~~California, which is used in cutting, sewing, dyeing and finishing garments.~~California. We operate a fabric dyeing and finishing facility, located in Garden Grove, California, which ~~has been expanded~~also includes cutting, sewing and knitting operations. We are in the process of transitioning our distribution operations to ~~include knitting, cutting and sewing operations.~~ a new distribution center in La Mirada, California.

Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and to changing fashion trends and to closely monitor product quality. Our products are ~~recognized~~noted for their quality and fit, and together with our distinctive branding these attributes have differentiated our products in the marketplace. “American Apparel^®” is a registered trademark of American Apparel (USA), LLC.

The results of the respective business segments exclude unallocated corporate expenses, which consist of our shared overhead costs. These costs are presented separately and generally include corporate costs such as human resources, legal, finance, information technology, accounting, and executive ~~compensation.~~management.

The following ~~sets forth~~table details, by segment, the change in retail store count during the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012.

U.S. Retail Canada International Total
Three Months Ended September 30, 2012
Open at June 30, 2012 140
36
76
252
Opened —
—
—
—
Closed —
(1 ) —
(1 )
Open at September 30, 2012 140
35
76
251

Three Months Ended September 30, 2011
Open at June 30, 2011 146
38
70
254
Opened —
—
—
—
Closed (3 ) —
(4 ) (7 )
Open at September 30, 2011 143
38
66
247



	U.S. Retail		Canada		International		Total
Three Months Ended March 31, 2013
Open at January 1, 2013	140		35		76		251
Opened	1		—		1		2
Closed	(2	)	(1	)	(1	)	(4	)
Open at March 31, 2013	139		34		76		249

Three Months Ended March 31, 2012
Open at January 1, 2012	143		37		69		249
Opened	—		—		2		2
Closed	(2	)	—		—		(2	)
Open at March 31, 2012	141		37		71		249

U.S. Retail Canada International Total
Nine Months Ended September 30, 2012
Open at January 1, 2012 143
37
69
249
Opened —
—
8
8
Closed (3 ) (2 ) (1 ) (6 )
Open at September 30, 2012 140
35
76
251

Nine Months Ended September 30, 2011
Open at January 1, 2011 157
40
76
273
Opened —
—
—
—
Closed (14 ) (2 ) (10 ) (26 )
Open at September 30, 2011 143
38
66
247

~~Table of Contents~~

Comparable Store Sales

The table below shows the increase in comparable store sales for our retail and online stores, for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011~~2012, and the number of retail stores included in the comparison at the end of each period. Comparable store sales are defined as the percentage change in sales for stores that have been open for more than twelve full months. Remodeled and expanded stores are excluded from the determination of comparable stores for the following twelve month period if the remodel or expansion results in a change of greater than 20% of selling square footage. Closed stores are excluded from the base of comparable stores following their last full month of operation.

Table of Contents

In calculating constant currency amounts, we convert the results of our foreign operations both in the ~~current period~~three months ended March 31, 2013 and the prior year comparable period using the weighted-average foreign exchange rate for the prior comparable period to achieve a consistent basis for comparison.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2012		2011		2012		2011		2013		2012
Comparable store sales ⁽¹⁾	20	%	3	%	17	%	—	%	8	%	14	%
Number of stores in comparison	242		244		242		244		238		243

⁽¹⁾ Comparable store sales results include the impact of online store ~~sales.~~sales and has been adjusted

to exclude impact of extra leap-year day in 2012.

Executive Summary

Results of Operations

Net sales for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 increased $~~54.5 million~~5,400, or ~~14.0%~~4.1%, to $~~444.3 million~~138,060 from $~~389.8 million~~132,660 ~~reported~~ ~~nine~~for the three months ended ~~September 30, 2011~~March 31, 2012 due to higher sales ~~across all of~~at our U.S. Wholesale, U.S. Retail and International segments.

Net sales at our U.S. Wholesale segment increased by $~~16.4 million~~2,491, or ~~14.3%~~6.0%, ~~driven~~in part due to the transfer of certain wholesale customers from our U.K. wholesale business to our U.S. Wholesale business. Net sales growth was also generated by higher sales order volume ~~from a significant number~~ of ~~new~~men's and ~~existing customers. Our ability to service orders reliably helped facilitate new account generation, as well as the maintenance of our existing client roster. The launch of a new wholesale catalog~~women's tank tops, poly-cotton and ~~the addition of new products to our wholesale offering attracted a more diversified customer base.~~tri-blend styles. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers. ~~Online~~Our online consumer net sales increased primarily as a result of targeted promotion efforts, improved merchandising and content differentiation by region, as well as functional improvements to our website and fulfillment ~~process, and as well as a targeted online advertising and promotion effort.~~process.

Net sales ~~at our~~for the U.S. Retail ~~Canada and International segments~~segment increased by $~~38.1 million~~1,735, or ~~13.9%~~4.1%, to $44,344 for the three months ended March 31, 2013 as compared to $42,609 for the three months ended March 31, 2012, primarily due to ~~strong~~higher comparable store sales. This increase was generated by a stronger performance across categories, particularly women's ~~fashion~~bottoms, including disco pants and easy jeans and accessories, as well as better inventory composition and our promotional strategy for key volume drivers.

~~Gross margin~~Net sales for the International segment increased ~~nine months ended September 30, 2012~~$2,155 ~~was~~, or ~~52.7%~~6.1% ~~compared~~, to ~~54.1%~~$37,533 for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2013. as compared to $35,378 for the three months ended March 31, 2012, due to higher sales in both the retail and online sales channels. The ~~decrease~~increase in ~~gross margin~~the retail sales channel was due to higher comparable store sales, particularly in Asia, as well as the ~~net~~addition of new stores in this segment. The increase in online sales ~~impact of planned promotional activities~~was due to greater brand awareness, particularly in the U.K., Continental Europe and Japan.

Net sales for the ~~effect of warehouse type clearance~~Canada segment decreased $981, or 7.4%, mainly due to a colder than average winter, resulting in lower comparable store sales.

Gross margin remained unchanged at 52.8% for the three months ended March 31, 2013 and 2012. Higher margins due to improved sales ~~as part of our overall inventory reduction strategy. This decrease was partially~~mix were offset by ~~shift towards~~ higher ~~margin retail sales.~~freight costs, particularly in the International segment.

Operating expenses include selling, general and administrative costs, and retail store impairment charges, and as a percentage of sales ~~decreased from~~ ~~59.5%~~ to ~~54.1%. Operating expenses were~~ ~~$240.2 million~~ ~~as compared to~~ ~~$232.0 million~~was approximately 60% for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 and ~~2011, respectively.~~2012. Excluding the effects of share-based compensation, depreciation, amortization and impairment charges, ~~between the two periods,~~ operating expenses as a percentage of sales decreased from ~~54.0%~~55% to ~~50.2%. The decrease as a percentage~~54% from the first quarter of ~~sales was~~2012 to the same period in 2013. Operating expenses increased $3,494 to $83,345 for the three months ended March 31, 2013 from $79,851 for the three months ended March 31, 2012, due primarily ~~due~~ to ~~a reduction~~$1,680 higher share-based compensation expense recorded in ~~corporate overhead~~operating expenses and higher expenses associated with RFID-related supplies and other store refurbishment activities. Additionally, we incurred additional rent expense for the ~~fixed cost leverage as a result of increased sales.~~new distribution center in La Mirada, California.

Loss from operations was $~~5.9 million~~10,477 for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 as compared to $9,795 for the three months ended March 31, 2012.

Net loss for the three months ended March 31, 2013 was $46,511 as compared to $~~20.9 million~~7,891 for the ~~nine~~three months ended ~~September 30, 2011~~.

~~Net loss for the~~ ~~nine months ended September 30,~~March 31, 2012 ~~was~~ ~~$42.2 million~~ ~~as compared to~~ ~~$28.2 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~ due primarily to a net increase in non-operating expenses of ~~$28.2 million~~$37,773, primarily as ~~well as higher income tax provision expense~~a result of ~~$0.9 million. The~~an increase in ~~non-operating expenses was primarily due to~~ the ~~increase in~~ market value of our outstanding warrants: the unrealized losses on our warrants ~~at September 30,~~were $23,645 and $651 for the three months ended March 31, 2013 and 2012, ~~as compared with September 30, 2011, resulting in~~respectively. Additionally, for the three months ended March 31, 2012, we recognized a net change in unrealized loss of $36.5 million. Additionally, we incurred higher interest expense due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement. These were offset by a net $14.7 million gain on extinguishment of ~~debt.~~debt of $11,588. See Results of Operations for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 for further details.

3228

Table of Contents

Liquidity Trends

As of ~~September 30, 2012~~March 31, 2013, we had approximately $~~7.2~~5,688 ~~million~~ in cash and $~~3.5~~$2,417 ~~million~~ of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement. Additionally, we had $~~35.6~~37,594 ~~million~~ outstanding on a $~~50.0~~50,000 ~~million~~ revolving credit facility under the Crystal Credit Agreement, $~~30.0~~30,000 ~~million~~ of term loan outstanding under the Crystal Credit Agreement, $~~5.9~~477 ~~million~~ outstanding on a C$~~11.0~~11,000 ~~million~~(Canadian dollars) revolving credit facility under the Bank of Montreal Credit Agreement, and $~~103.6~~118,039 ~~million~~ of term loans outstanding under the Lion ~~Credit~~Loan Agreement. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1.

On ~~March 13, 2012~~,April 4, 2013, we ~~replaced~~closed a private offering of $206,000 aggregate principal amount of our ~~$75.0~~ ~~million senior secured~~13% Senior Secured Notes due 2020 at 97% of par and entered into a new $35,000 asset-backed revolving credit facility with ~~Bank~~Capital One Leverage Finance Corp. maturing on April 4, 2018, subject to a January 15, 2018 maturity under certain circumstances. We used the net proceeds from the offering of ~~America ("BofA")~~the notes, together with a ~~$80.0~~ ~~million senior~~borrowings under the new credit facility, to repay and terminate our credit agreement with Crystal Financial LLC ~~("Crystal"~~ and ~~"Crystal Credit Agreement").~~our loan agreement with Lion Capital LLP. The ~~Crystal Credit Agreement calls for~~notes and the ~~$80.0~~ ~~million to be allocated between an asset-based revolving~~new credit facility of ~~$50.0~~ ~~million~~are our senior secured obligations and ~~term loan of~~ ~~$30.0~~ ~~million. Proceeds from the Crystal Credit Agreement were used~~are guaranteed, on a senior secured basis, by our domestic subsidiaries, subject to repay our existing credit facility with BofA, fees and expenses related to the transaction and for general working capital purposes. See Note 6 to our condensed consolidated financial statements under Part I, Item 1.

~~The Crystal Credit Agreement matures on~~ ~~March 13, 2015~~ ~~and is collateralized by substantially all of our U.S. and U.K. assets and equity interests in certain of our foreign subsidiaries. Interest under the agreement is at the 90-day LIBOR plus~~ ~~9.0%~~ ~~and also includes an unused facility fee ranging from~~ ~~0.375%~~ to ~~1.00%~~ ~~on the unused portion of the revolving credit facility, as well as an early termination fee if prepaid within the first two years.~~

In connection with the financing from Crystal, we also entered into an amendment to the Lion Credit Agreement to, among other things: (i) consent to the Crystal Credit Agreement, (ii) fix the maturity date at December 31, 2015, and (iii) modify certain financial covenants, including covenants related to minimum quarterly EBITDA and capital expenditures. In addition, the amendment to the Lion Credit Agreement modifies the Lion Credit Agreement to provide for a minimum of 5% ~~of each interest payment on the outstanding principal in cash commencing on September 1, 2012.~~

On August 30, 2012, we entered into a second amendment to the Crystal Agreement ("Crystal Second Amendment") and an eighth amendment to the Lion Credit Agreement ("Lion Eighth Amendment"). The Crystal Second Amendment extended until December 31, 2012 the period during which loans under the Crystal Credit Agreement based on the American Apparel brand name may remain outstanding, added a minimum Consolidated EBITDA covenant for the remainder of 2012 and a minimum excess availability covenant for the period of December 17, 2012 through February 1, 2013. In connection with the Crystal Second Amendment, the Lion Eighth Amendment added a second minimum Consolidated EBITDA covenant that conforms to the Crystal minimum consolidated EBITDA covenant.some exceptions. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1.

~~We entered into a ninth amendment and waiver to the Lion Credit Agreement (the "Lion Ninth Amendment") effective as of~~ ~~September 30, 2012, which among other things, waived our obligation to maintain the minimum Consolidated EBITDA covenants specified in the Lion Credit Agreement, as amended, for the twelve month period ended~~ ~~September 30, 2012. As a result, we were in compliance with the required financial covenants of the Lion Credit Agreement on~~ ~~September 30, 2012~~.

~~Our~~ ~~C$11.0~~ million credit agreement with Bank of Montreal ("Bank of Montreal Credit Agreement") matures in December 2012. There can be no assurances that we will be able to negotiate a renewal or extension of this credit agreement with our existing lender or enter into a replacement credit agreement with new lenders on commercially reasonably terms or at all and we may be required to repay this loan. If we are not able to enter into a renewal, extension or replacement of the Bank of Montreal Credit Agreement prior to its maturity, we would no longer have access to liquidity from such revolving credit facility after its maturity date. While we intend to negotiate an extension of this credit agreement, we do not believe that this credit agreement represents a material component of our current or future capital requirements.

Management Plan

We ~~are in the process of executing~~continue to execute a plan, which we commenced in late 2010, to improve ~~the~~our operating performance and ~~our~~ financial position. ~~This plan includes optimizing production levels at~~Among other things, in 2013, we intend to complete the installation of RFID tracking systems in all of our ~~manufacturing facilities including raw material purchases~~stores, complete the opening of our new distribution facility in La Mirada, California, continue with expansion of our selling square footage in our stores, continue with our inventory productivity improvement program, further reduce operating expenses, and ~~labor; streamlining our logistics operations; web platform refinement; reducing corporate expenses; merchandise price rationalization in~~improve online sales performance with the ~~wholesale and retail channels; store renovation; and improving merchandise distribution and allocation procedures.~~

In September 2012, we implemented a new online store platform for our U.S. online store that resulted in functional improvements to our website and fulfillment processes and will allow us to tailor the look and feelimplementation of the Oracle ATG back-end online system for international store fronts. In addition, we continue to ~~enhance the customer online shopping experience. The new~~seek improvements in store ~~platform will also enable faster deployment of online stores~~labor productivity and workers' compensation exposure. We continue to ~~new international regions. We believe that these improvements will contribute~~develop other initiatives intended to ~~our continued financial growth as our website has the potential to not only~~either increase ~~online~~ sales, ~~but also in-store sales.~~

~~Table of Contents~~reduce costs or improve liquidity.

~~In September 2012~~Continued RFID implementation - For 2013, we implemented a new production forecasting and inventory allocation system that integrates our sales forecasts with our retail inventory tracking system and therefore allows us to better manage our production schedule so that inventory is maintained at the right amount for the right season. It also gives us greater visibility into seasonal and new trends, which will enable a faster reaction to changes in demand.

The second and the third quarter of 2012 benefited from an adjustment to the global promotional strategy and improvements to our in-stock position at stores. We migrated to targeted promotions, which established pricing incentives for customers to buy multiple items in volume driving categories. Unit sales increased as a result of this change and that increase in selling volume was facilitated by improvements to our allocation and logistics processes. During this period, we also ran successful markdowns on aged and seasonal merchandises. We believe this helped decrease inventory levels in slower turning goods, increase foot traffic, and improve sales to both items on markdown, as well as the full price assortment.

~~Throughout 2012, we continued~~continue to enhance our stores by installing sales conversion tracking device and radio frequency identification (RFID) tracking systems. ~~To date,~~As of March 31, 2013, we have implemented RFID systems at ~~126~~approximately 222 stores worldwide. We believe that these systems will enhance sales ~~and contribute to store productivity~~ through improvements in stock positions and replenishment activities.

New distribution center - In June 2012 we entered into a new operating lease agreement for a new distribution center located in La Mirada, California and expect to fully transition our distribution operations into this new facility in the first half of 2013. We believe that the new distribution center will contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales.

We continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.

Although we have made significant improvements under this plan, there can be no assurance that further planned improvement will be successful.

Table of Contents

Results of Operations

The results of operations of the interim periods are not necessarily indicative of results for the entire year.

Three Months EndedMarch 31, 2013 Compared to the Three Months EndedMarch 31, 2012

The following table sets forth our results of operations from our unaudited condensed consolidated statements of operations by dollar and as a percentage of net sales for the periods indicated (dollars in thousands):



	Three Months Ended March 31,
	2013			% of net sales		2012			% of net sales
U.S. Wholesale	$	43,826		31.7	%	$	41,335		31.2	%
U.S. Retail	44,344			32.1	%	42,609			32.1	%
Canada	12,357			9.0	%	13,338			10.1	%
International	37,533			27.2	%	35,378			26.7	%
Total net sales	138,060			100.0	%	132,660			100.0	%
Cost of sales	65,192			47.2	%	62,604			47.2	%
Gross profit	72,868			52.8	%	70,056			52.8	%

Selling expenses	55,463			40.2	%	54,929			41.4	%
General and administrative expenses	27,804			20.1	%	24,922			18.8	%
Retail store impairment	78			0.1	%	—			—	%

Loss from operations	(10,477		)	(7.6	)%	(9,795		)	(7.4	)%


Interest expense	11,214					9,553
Foreign currency transaction loss (gain)	713					(950		)
Unrealized loss on change in fair value of warrants	23,645					651
Gain on extinguishment of debt	—					(11,588		)
Other (income) expense	(5		)			128
Loss before income tax	(46,044		)			(7,589		)
Income tax provision	467					302
Net loss	$	(46,511	)			$	(7,891	)

U.S. Wholesale: Total net sales for the U.S. Wholesale segment increased $2,491, or 6.0%, to $43,826 for the three months ended March 31, 2013 as compared to $41,335 for the three months ended March 31, 2012. Wholesale net sales, excluding online consumer net sales, increased $788, or 2.3%, to $34,708 for the three months ended March 31, 2013 as compared to $33,920 for the three months ended March 31, 2012, due to the transfer of certain wholesale customers from our U.K. wholesale business to the U.S. wholesale business, as well as higher sales order volume of men's and women's tank tops, poly-cotton and tri-blend styles. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.

Online consumer net sales increased $1,703, or 23.0%, to $9,118 for the three months ended March 31, 2013 as compared to $7,415 for the three months ended March 31, 2012, primarily as a result of certain targeted promotions and functional improvements to our website and fulfillment process.

U.S. Retail: Net sales for the U.S. Retail segment increased $1,735, or 4.1%, to $44,344 for the three months ended March 31, 2013 as compared to $42,609 for the three months ended March 31, 2012, due primarily to an increase in comparable store sales.

Comparable store sales for the three months ended March 31, 2013 grew by $2,590, or 6.5%, as a result of stronger performance across categories, particularly women's bottoms, in particular, disco pants and easy jeans, and accessories. This increase was partially offset by $291 lower warehouse and flea market sales in 2013 as compared to 2012 and $126 lower sales as a result of a reduction in the number of stores in operations from 141 at March 31, 2012 to 139 stores at March 31, 2013.

Table of Contents

Canada:Total net sales for the Canada segment decreased $981, or 7.4%, to $12,357 for the three months ended March 31, 2013 as compared to $13,338 for the three months ended March 31, 2012 due to lower sales in the retail and wholesale channel, partially offset by higher sales in our online channel. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total revenue for the current period would have been approximately $12,425, or 6.8% lower when compared to the same period last year.

Retail sales decreased by $808, or 8.1%, to $9,112 for the three months ended March 31, 2013 as compared to $9,920 for the three months ended March 31, 2012 due to a $227, or 2%, decrease in comparable store sales as a result of a colder than average winter and store closures. Since March 31, 2012, the number of retail stores in the Canada segment in operation decreased from 37 to 34. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, retail sales for the current period would have been approximately $9,162, or 7.6% lower when compared to the same period last year.

Wholesale net sales decreased by $276, or 9.7%, to $2,579 for the three months ended March 31, 2013 as compared to $2,855 for the three months ended March 31, 2012, in part, due to the timing of orders from a large wholesale customer. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total wholesale net sales for the current period would have been approximately $2,593, or 9.2% lower when compared to the same period last year.

Online consumer net sales increased by $103, or 18.3%, to $666 for the three months ended March 31, 2013 as compared to $563 for the three months ended March 31, 2012. The increase was primarily a result of targeted promotion efforts resulting in greater brand awareness. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total online consumer net sales for the current period would have been approximately $669, or 18.9% higher when compared to the same period last year.

International: Total net sales for the International segment increased $2,155, or 6.1%, to $37,533 for the three months ended March 31, 2013 as compared to $35,378 for the three months ended March 31, 2012. The increase was due to higher sales in the retail sale and online channels, partially offset by lower sales in the wholesale channel. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, total revenue for the current period would have been approximately $38,208, or 8.0% higher when compared to the same period last year.

Retail net sales increased $1,749, or 6.1%, to $30,452 for the three months ended March 31, 2013 as compared to $28,703 for the three months ended March 31, 2012. The increase was primarily due to a $1,522 or 5% increase in comparable store sales (of which approximately $1,200 is from the Asia-Pacific region) as well as new store openings. Since March 31, 2012, the number of retail stores in the International segment increased from 71 to 76 at March 31, 2013. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, retail sales for the current period would have been approximately $30,958, or 7.9% higher when compared to the same period last year.

Wholesale net sales decreased $281, or 12.6%, to $1,941 for the three months ended March 31, 2013 as compared to $2,222 for the three months ended March 31, 2012, primarily due to a transfer of certain customers from our U.K. wholesale business to the U.S. wholesale business. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, sales for the current period would have been approximately $1,937, or 12.8% lower when compared to the same period last year.

Online consumer net sales increased $687, or 15.4%, to $5,140 for the three months ended March 31, 2013 as compared to $4,453 for the three months ended March 31, 2012, due primarily to higher sales in the U.K of $324 and Japan of $148 relating to targeted promotion efforts resulting in greater brand awareness. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2012, sales for the current period would have been approximately $5,313, or 19.3% higher when compared to the same period last year.

Gross margin: Gross margin as a percentage of net sales remained unchanged at 52.8% for the three months ended March 31, 2013 and 2012. Higher margins due to improved sales mix were offset by higher freight costs, particularly in the International segment.

Selling expenses: Selling expenses increased $534, or 1%, to $55,463 for the three months ended March 31, 2013 as compared to $54,929 for the three months ended March 31, 2012. The increase was primarily due to higher rent expenses of $1,622 related to higher CAM charges and lease termination costs, as well as rent for the new distribution center and $771 higher expenses primarily associated with RFID-related supplies and travel for other store refurbishment activities. This increase was offset by lower salaries, wages and benefits of $1,146 due to a decrease in store hours, and lower advertising expenses of $1,060. As a percentage of sales, selling expenses decreased to 40.2% in the three months ended March 31, 2013 from 41.4% in the three months ended March 31, 2012.

Table of Contents

General and administrative expenses: General and administrative expenses increased $2,882 to $27,804 for the three months ended March 31, 2013 as compared to $24,922 for the three months ended March 31, 2012. As a percentage of sales, general and administrative expenses increased to 20.1% during the three months ended March 31, 2013 from 18.8% during the three months ended March 31, 2012. The increase was primarily due to higher share-based compensation expense of $1,753.

Retail store impairment: For the three months ended March 31, 2013, we recorded impairment charges relating to retail stores leasehold improvements of $78 at the U.S. Retail segment. There was no such charge in the corresponding quarter of the prior year.

Interest expense: Interest expense increased $1,661 to $11,214 for the three months ended March 31, 2013 from $9,553 for the three months ended March 31, 2012, primarily due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement. Interest rates on our various debt facilities and capital leases ranged from 0.4% to 19.3% for the three months ended March 31, 2013 and 5.0% to 18.0% for the three months ended March 31, 2012. Interest expense for the three months ended March 31, 2013 mainly consisted of interest on the Lion Loan Agreement of $6,329, interest on the Crystal Credit Agreement of $1,609, and amortization of debt discount and deferred financing cost of $2,610. Interest paid in cash was $4,040.

Foreign currency transaction loss (gain): For the three months ended March 31, 2013, foreign currency transaction loss totaled $713 as compared to a gain of $950 for the three months ended March 31, 2012. The change related to the strengthening of the U.S. Dollar relative to the functional currencies used by our subsidiaries.

Unrealized loss on change in fair value of warrants: We recorded a $23,645 loss in the fair value of warrants for the three months ended March 31, 2013 associated with the fair value measurements of the Lion and SOF warrants. We recorded a $651 loss in the fair value of warrants for the three months ended March 31, 2012.

Income tax provision: The provision for income tax increased to $467 for the three months ended March 31, 2013 as compared to $302 for the three months ended March 31, 2012. Although we incurred a loss before income taxes on a consolidated basis for the three months ended March 31, 2013, some of our foreign domiciled subsidiaries reported income before income taxes and will be taxable on a stand-alone reporting basis in their respective foreign jurisdictions. As a result, we recorded a provision for income tax expense for the three months ended March 31, 2013. There were no charges or benefits recorded to income tax expense for valuation allowances.

Table of Contents

Liquidity and Capital Resources

As of March 31, 2013, we had approximately $5,688 in cash and $2,417 of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement. Additionally, we had (i) $37,594 outstanding on a $50,000 revolving credit facility under the Crystal Credit Agreement, (ii) $30,000 of term loan outstanding under the Crystal Credit Agreement, (iii) $477 outstanding on a C$11,000 (Canadian dollars) revolving credit facility under the Bank of Montreal Credit Agreement, and (iv) $118,039, net of discount of $25,899 and including paid-in-kind interest of $22,798 of term loan outstanding under the Lion Loan Agreement. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1.

On April 4, 2013, we closed a private offering of $206,000 aggregate principal amount of our 13% Senior Secured Notes (the "Notes") at 97% of par due 2020 and we entered into a new $35,000 asset-backed revolving credit facility (the "Capital One Credit Facility") with Capital One Leverage Finance Corp. ("Capital One") maturing on April 4, 2018, subject to a January 15, 2018 maturity under certain circumstances. We used the net proceeds from the offering of the Notes, together with borrowings under the Capital One Credit Facility to repay and terminate our credit facility with Crystal and our loan agreement with Lion. The notes and the new credit facility are our senior secured obligations and are guaranteed, on a senior secured basis, by our domestic subsidiaries, subject to some exceptions. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1.

Over the past years, our growth has been funded through a combination of borrowings from related and unrelated parties, bank debt, lease financing, proceeds from the exercise of purchase rights and issuance of common stock. Our principal liquidity requirements are for working capital, interest payments, capital expenditures and to fund operations. We fund our liquidity requirements primarily through cash on hand, cash flow from operations and borrowings under our credit facilities. Our credit agreements have from time to time contained covenants requiring us to meet specified targets for minimum fixed charge coverage ratios and maximum leverage ratios, and our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under those credit facilities or result in an event of default.

We believe that we have sufficient financing commitments to meet funding requirements for the next twelve months.

We are in the process of executing a plan, which was commenced in late 2010, to improve our operating performance and financial position. Among other things, in 2013, we intend to complete the installation of RFID tracking systems in all of our stores, complete the opening of our new distribution facility in La Mirada, California, continue increasing our selling square footage in our stores, continue with our inventory productivity improvement program, further reduce operating expenses, improve online sales performance with the implementation of the Oracle ATG back-end online system for international store fronts. In addition, we continue to seek improvements in store labor productivity and workers' compensation exposure. As noted above, in June 2012 we entered into a new operating lease agreement for a new distribution center located in California and expect to fully transition our distribution operations into this new facility in ~~early~~the first half of 2013. We believe that the new distribution center will contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales.

We continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.

Although our plan reflects improvements in these trends, there can be no assurance that our plan to improve the operating performance and our financial position will be successful.

3433

Table of Contents

~~Results of Operations~~Cash Flow Overview

~~The results of operations of the interim periods are not necessarily indicative of results for the entire year.~~



	Three Months Ended March 31, 2013
	2013			2012
Net cash (used in) provided by:
Operating activities	$	(6,008	)	$	(8,646	)
Investing activities	(7,964		)	(10,458		)
Financing activities	7,107			15,808
Effect of foreign exchange rate on cash	(300		)	305
Net decrease in cash	$	(7,165	)	$	(2,991	)

Three Months Ended~~September 30, 2012~~ March 31, 2013 Compared to the Three Months Ended~~September 30, 2011~~ March 31, 2012

~~The following table sets forth our results of operations~~Cash used in operating activities improved by $2,638 from ~~our unaudited condensed consolidated statements of operations by dollar and as a percentage of net sales~~$8,646 for the ~~periods indicated (dollars in thousands):~~

Three Months Ended September 30,
2012 % of net sales 2011 % of net sales
U.S. Wholesale $ 46,847
28.9 % $ 42,405
30.1 %
U.S. Retail 52,714
32.5 % 43,104
30.6 %
Canada 16,717
10.3 % 15,264
10.8 %
International 45,882
28.3 % 40,116
28.5 %
Total net sales 162,160
100.0 % 140,889
100.0 %
Cost of sales 76,960
47.5 % 65,898
46.8 %
Gross profit 85,200
52.5 % 74,991
53.2 %

Selling expenses 58,017
35.8 % 52,283
37.1 %
General and administrative expenses 22,566
13.9 % 24,552
17.4 %
Retail store impairment —
— % 784
0.6 %

Income (loss) from operations 4,617
2.8 % (2,628 ) (1.9 )%

Interest expense 10,454

8,832

Foreign currency transaction (gain) loss (685 )

1,855

Unrealized loss (gain) on change in fair value of warrants and purchase rights 13,312

(6,101 )
Other expense (income) 36

(186 )
Loss before income tax (18,500 )

(7,028 )
Income tax provision 512

166

Net loss $ (19,012 )

$ (7,194 )

~~U.S. Wholesale:~~ ~~Total net sales for the U.S. Wholesale segment increased~~ ~~$4.4 million, or~~ ~~10.5%, to $46.8 million~~ ~~for the~~ three months ended ~~September 30,~~March 31, 2012 ~~as compared~~ to $~~42.4 million~~$6,008 for the comparable period in 2013.

~~three months ended September 30, 2011. Wholesale net sales, excluding online consumer net sales, increased~~The improvement was due to higher gross profits of $~~3.1 million, or~~ ~~8.4%, to~~ ~~$39.9 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$36.8 million~~ ~~for the~~ ~~three months ended September 30, 2011~~ driven by higher sales order volume from a significant number of new and existing customers. Our ability to service orders reliably by keeping appropriate levels of inventory to support any fluctuations in customer demand, helped facilitate new account generation, as well as the maintenance of our existing client roster. The launch of a new wholesale catalog and the addition of new products to our wholesale offering attracted a more diversified customer base. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.

~~Online consumer net sales increased~~ ~~$1.4 million, or~~ ~~24.2%, to~~ ~~$7.0 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$5.6 million~~ ~~for the~~ ~~three months ended September 30, 2011, primarily as a result of improved merchandising, segmented and refined email marketing, extensive email list growth and offering of faster shipping options.~~

~~U.S. Retail:~~ ~~Net sales for the U.S. Retail segment increased~~ ~~$9.6 million, or~~ ~~22.3%, to $52.7 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to $43.1 million~~ ~~for the~~ ~~three months ended September 30, 2011~~. Net sales growth was generated by a stronger inventory position in high volume categories, effectively timed seasonal promotions, success in new women's and unisex fashion and an overall improved presentation of our floor sets. Throughout the period, improvements to logistics and the speed of allocation helped to support a buying strategy that is faster and more proactive.

~~Comparable store sales for the~~ ~~three months ended September 30, 2012~~ ~~increased by~~ ~~$8.8 million, or~~ ~~20.9%, while warehouse~~

~~Table of Contents~~

sales consisting primarily of slower moving merchandise contributed an incremental $1.9 million increase from 2011 to 2012. The sales increase was partially offset by a $1.1 million sales decrease as a result of a reduction in the number of stores in operations from ~~143~~ at ~~September 30, 2011~~ to ~~140~~ ~~stores at~~ ~~September 30, 2012~~.

~~Canada:Total net sales for the Canada segment increased~~ ~~$1.5 million, or~~ ~~9.5%, to $16.7 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to $15.3 million~~ ~~for the~~ ~~three months ended September 30, 2011~~2,812 as a result of improved performance across all sales channels. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the current period would have been approximately ~~$17.0 million, or~~ ~~$1.8 million~~ ~~higher when compared to the same period last year.~~

~~Retail sales increased by~~ ~~$1.1 million, or~~ ~~9.6%, to~~ ~~$13.1 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$11.9 million~~ ~~for the~~ ~~three months ended September 30, 2011~~ ~~due primarily to a~~ ~~$1.5 million, or~~ ~~13%, increase in comparable store sales. Since~~ ~~September 30, 2011, the number of retail stores in the Canada segment in operation decreased from~~ 38 to 35~~. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail sales for 2012 would have been approximately~~ ~~$13.3 million, or~~ ~~17.0%~~ ~~higher when compared to the same period last year.~~

~~Wholesale net sales increased by~~ ~~$0.2 million, or~~ ~~8.7%, to~~ ~~$3.2 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$3.0 million~~ ~~for the~~ ~~three months ended September 30, 2011. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total wholesale net sales for the Canada segment for 2012 would have been approximately~~ ~~$3.5 million, or~~ ~~7.0%~~ ~~lower when compared to the same period last year.~~

~~Online consumer net sales for the~~ ~~three months ended September 30, 2012~~ ~~and~~ ~~2011~~ ~~were~~ ~~$0.4 million. Foreign currency effects were minimal.~~

~~International:~~ ~~Total net sales for the International segment increased~~ ~~$5.8 million, or~~ ~~14.4%, to~~ ~~$45.9 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$40.1 million~~ ~~for the~~ ~~three months ended September 30, 2011. The increase was due to~~ higher sales and a decrease in ~~the retail sale channel. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the current period would have been approximately~~working capital requirements of $~~48.9 million~~4,268~~, or~~ ~~$8.8 million~~ ~~higher when compared to the same period last year.~~

~~Retail net sales increased~~ ~~$6.0 million, or~~ ~~18.1%, to~~ ~~$39.3 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$33.2 million~~ ~~for the~~ ~~three months ended September 30, 2011. The change is mainly attributed to higher sales in the U.K. of $2.2 million, Japan of $1.8 million and Australia of $0.7 million. Comparable store sales for the~~ ~~three months ended September 30, 2012~~ ~~increased~~ ~~$6.2 million, or~~ ~~20%~~ ~~as compared to the~~ ~~three months ended September 30, 2011. Since~~ ~~September 30, 2011, the number of retail stores in the International segment increased from~~ 66 to 76 at ~~September 30, 2012. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail sales for 2012 would have been approximately~~ ~~$41.9 million, or~~ ~~25.9%~~ ~~higher when compared to the same period last year.~~

~~Wholesale net sales decreased~~ ~~$0.7 million, or~~ ~~25.2%, to~~ ~~$2.1 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$2.8 million~~ ~~for the~~ ~~three months ended September 30, 2011. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately~~ ~~$2.3 million, or~~ ~~18.5%~~ ~~lower when compared to the same period last year.~~

~~Online consumer net sales increased~~ ~~$0.5 million, or~~ ~~11.5%, to~~ ~~$4.5 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to~~ ~~$4.0 million~~ ~~for the~~ ~~three months ended September 30, 2011~~, due primarily to higher sales in the U.K and Australia. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately ~~$4.7 million, or~~ ~~16.8%~~ ~~higher when compared to the same period last year.~~

~~Gross margin:~~ ~~Gross margin as a percentage of net sales was~~ ~~52.5%~~ ~~and~~ ~~53.2%~~ ~~for the~~ ~~three months ended September 31, 2012 and 2011, respectively. The decrease in gross margin was~~ due to the ~~net sales impact~~timing of ~~planned promotional activities~~vendor payments. Increases in trade payables and the effect of warehouse type clearance sales as part of our overall inventory reduction strategy as well as the negative impact of foreign currency exchange rates on the cost of sales at our International segment. This decrease wasaccrued expenses were partially offset by higher inventory levels as a ~~shift towards higher margin retail sales, lower inventory shrink reserves reflecting the benefits~~result of ~~our RFID implementation and lower costs of~~increased production ~~in our manufacturing operations.~~volume.

~~Selling expenses:~~These increases were offset by higher operating expenses (excluding depreciation & amortization, stock compensation and impairment charges) of $1,532 as a result of store rent increases and other operating costs related to store improvement activities. We also paid $2,664 ~~Selling expenses increased~~ ~~$5.7 million, or~~ ~~11.0%, to~~ ~~$58.0 million~~ ~~for~~more cash interest during the ~~three months ended September 30, 2012~~ ~~as compared to $52.3 million~~ ~~for the~~ ~~three months ended September 30, 2011. The increase is consistent with improving sales. Additionally, we increased our spending on print, outdoor and online advertising to $5.5 million for the~~ ~~three months ended September 30, 2012~~ ~~from $3.9 million for the comparable period in 2011 in order to continue the sales momentum. As a percentage~~first quarter of ~~sales, selling expenses decreased to~~ ~~35.8%~~ ~~in the~~ ~~three months ended September 30, 2012~~ ~~from~~

~~Table of Contents~~

~~37.1%~~ ~~in the~~ ~~three months ended September 30, 2011~~.2013.

~~General and administrative expenses:~~Cash used in investing activities ~~General and administrative expenses decreased~~ ~~$2.0 million~~ to ~~$22.6 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to $24.6 million~~ ~~for the~~ ~~three months ended September 30, 2011. As a percentage of sales, general and administrative expenses decreased to~~ ~~13.9%~~ ~~during the~~ ~~three months ended September 30, 2012~~ ~~from~~ ~~17.4%~~ ~~during the~~ ~~three months ended September 30, 2011. The decrease in general and administrative expenses~~ was primarily due to rent and occupancy related expenses of $1.5 million, a decrease of $0.9 million in professional fees (primarily accounting and outside services related fees) and a reduction to our reserves related to a legal contingency of $0.9 million offset by an increase in bonus expense of $1.0 million and share-based compensation expense of $0.7 million.

~~Retail store impairment~~: ~~For the~~ ~~three months ended September 30, 2012, we evaluated our retail stores for impairment indicators and determined that no additional impairment charges were required~~$7,964 for the three months ended ~~September 30, 2012. For~~March 31, 2013 as compared with $10,458 for the three months ended ~~September 30, 2011, we recorded impairment charges relating to retail stores leasehold improvements of $0.8 million~~.March 31, 2012.

Capital expenditures in the first quarter of 2013 increased by $3,664 as we neared completion of our RFID implementation activities. In addition, we continued to make other improvements to our stores and make additional investments in manufacturing equipment and computer hardware and related software.

Use of restricted cash in 2012 was related to cash collateral used to secure our standby letters of credit with the worker's compensation self-insurance policy and other liabilities.

~~Interest expense:~~Cash provided by financing activities ~~Interest expense increased~~ ~~$1.6 million~~ to ~~$10.5 million~~ ~~for~~decreased from $15,808 during the three months ended ~~September 30,~~March 31, 2012 ~~from $8.8 million~~ to $7,107 for the ~~three months ended September 30, 2011~~, primarily due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement. Interest rates on our various debt facilities and capital leases ranged from 5.0% to 19.8% for the ~~three months ended September 30, 2012~~ ~~and 4.7% to 18.0% for the~~ ~~three months ended September 30, 2011. Interest expense for the~~ ~~three months ended September 30, 2012~~ ~~mainly consisted of interest on the Lion Credit Agreement of $5.6 million, interest on the Crystal Credit Agreement of~~ ~~$1.7 million, and amortization of debt discount and deferred financing cost of~~ ~~$2.4 million. Interest paid~~same period in ~~cash was~~ ~~$2.8 million~~.

~~Foreign currency transaction gain:~~ ~~For the~~ ~~three months ended September 30, 2012, foreign currency transaction gain totaled~~ ~~$0.7 million~~ ~~as compared to a loss of $1.9 million~~ ~~for the~~ ~~three months ended September 30, 2011. The change related to the weakening of the U.S. Dollar relative to the functional currencies used by our subsidiaries.~~

~~Unrealized loss (gain) on change in fair value of warrants and purchase rights:~~ ~~We recorded a~~ ~~$13.3 million~~ ~~loss in the fair value of warrants for the~~ ~~three months ended September 30, 2012~~ ~~associated with the fair value measurements of the Lion and SOF warrants. We recorded a $6.1 million~~ ~~gain in the fair value of warrants and purchase rights for the~~ ~~three months ended September 30, 2011~~ ~~associated with the fair value measurement of purchase rights to an investor group and Mr. Charney, and additional warrants to Lion at~~ ~~September 30, 2011~~.

~~Income tax provision:~~ ~~The provision for income tax increased to~~ ~~$0.5 million~~ ~~for the~~ ~~three months ended September 30, 2012~~ ~~as compared to $0.2 million~~ ~~for the~~ ~~three months ended September 30, 2011. Although we incurred a loss before income taxes on a consolidated basis for the~~ ~~three months ended September 30, 2012~~, some of our foreign domiciled subsidiaries reported income before income taxes and will be taxable on a stand-alone reporting basis in their respective foreign jurisdictions. As a result, we recorded a provision for income tax expense for the ~~three months ended September 30, 2012. There were no charges or benefits recorded to income tax expense for valuation allowances.~~

~~Table of Contents~~

~~Nine Months EndedSeptember 30, 2012~~ ~~Compared to the~~ ~~Nine Months EndedSeptember 30, 2011~~

Nine Months Ended September 30,
2012 % of net sales 2011 % of net sales
U.S. Wholesale $ 131,612
29.6 % $ 115,193
29.6 %
U.S. Retail 143,444
32.3 % 120,483
30.9 %
Canada 45,096
10.2 % 42,256
10.8 %
International 124,130
27.9 % 111,828
28.7 %
Total net sales 444,282
100.0 % 389,760
100.0 %
Cost of sales 209,990
47.3 % 178,705
45.9 %
Gross profit 234,292
52.7 % 211,055
54.1 %

Selling expenses 168,258
37.9 % 152,536
39.1 %
General and administrative expenses 71,792
16.2 % 77,025
19.8 %
Retail store impairment 129
— % 2,436
0.6 %

Loss from operations (5,887 ) (1.3 )% (20,942 ) (5.4 )%

Interest expense 30,274

23,715

Foreign currency transaction loss 141

780

Unrealized loss (gain) on change in fair value of warrants and purchase rights 15,340

(21,201 )

(Gain) loss on extinguishment of debt (11,588 )

3,114

Other expense (income) 188

(240 )

Loss before income tax (40,242 )

(27,110 )

Income tax provision 1,933

1,042

Net loss $ (42,175 )

$ (28,152 )

~~U.S. Wholesale:~~ ~~Total net sales for the U.S. Wholesale segment increased~~ ~~$16.4 million, or~~ ~~14.3%, to~~ ~~$131.6 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$115.2 million~~ ~~for the~~ ~~nine months ended September 30, 2011. Wholesale net sales, excluding online consumer net sales, increased~~ ~~$11.5 million, or~~ ~~11.7%, to~~ ~~$110.4 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$98.8 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~, driven by higher sales order volume from a significant number of new and existing customers. Our ability to service orders reliably by keeping appropriate levels of inventory to support any fluctuations in customer demand, helped facilitate new account generation, as well as the maintenance of our existing client roster. The launch of a new wholesale catalog and the addition of new products to our wholesale offering attracted a more diversified customer base. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.

~~Online consumer net sales increased~~ ~~$4.9 million, or~~ ~~29.8%, to~~ ~~$21.2 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$16.4 million~~ ~~for the~~ ~~nine months ended September 30, 2011, primarily~~2013 as a result of ~~functional improvements to~~lower net borrowing requirements.

Debt Agreements and Other Capital Resources

Capital One Credit Facility - On April 4, 2013, we replaced our ~~website~~borrowings from Crystal and ~~fulfillment process,~~Lion with the Capital One Credit Facility and ~~as well as targeted online advertising, and promotion efforts.~~the Notes.

~~U.S. Retail:~~ ~~Net sales for~~Our new Capital One Credit Facility permits us to increase commitments to up to $50,000 in the ~~U.S. Retail segment increased~~ ~~$23.0~~aggregate, subject to obtaining additional commitments and other customary conditions. The Capital One Credit Facility matures on April 4, 2018, subject to a January 15, 2018 maturity if excess availability is less than $15 million, at the time of notice to Capital One of a determination by the Company that an Applicable High Yield Discount Obligation ("AHYDO") redemption will be required pursuant to Section 3.01(e) of the indenture governing the Senior Secured Notes due 2020 (the "Notes"). Borrowings under the facility bear interest at LIBOR plus 3.5% or ~~19.1%~~,the bank's prime rate plus 2.5% (at our option) and are subject to ~~$143.4 million~~ ~~for~~ the ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$120.5 million~~ ~~for the~~ ~~nine months ended September 30, 2011. Net sales growth was generated~~maintenance of specified borrowing base requirements and covenants. The Capital One Credit Facility is secured by a ~~stronger inventory position in high volume categories, strategic promotions to drive volume in key basics, success in new women's and unisex fashion and improved presentation~~lien on substantially all of the assets of our ~~floor sets. Throughout the period, improvements to logistics~~domestic subsidiaries and ~~the speed of allocation helped to support a buying strategy that is faster and more proactive.~~

~~Comparable store sales for the~~ ~~nine months ended September 30, 2012~~ ~~increased by~~ ~~$20.9 million, or~~ ~~18%~~, while warehouse sales consisting primarily of slower moving merchandise contributed an incremental $5.8 million increase from 2011 to 2012, respectively. The sales increase was partially offset by a $3.5 million sales decrease as a result of a reductionequity interests in ~~the number of stores in operations from~~ ~~143~~ at ~~September 30, 2011~~ to ~~140~~ ~~stores at~~ ~~September 30, 2012~~.

~~Table of Contents~~

~~Canada:Total net sales for the Canada segment increased~~ ~~$2.8 million, or~~ ~~6.7%, to~~ ~~$45.1 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$42.3 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~ as a result of improved performance across all sales channels. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the current period would have been approximately ~~$46.3 million, or~~ ~~$4.0 million~~ ~~higher when compared to the same period last year.~~

~~Retail sales increased by~~ ~~$1.9 million, or~~ ~~6.0%, to~~ ~~$34.2 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$32.2 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~ ~~due primarily to a~~ ~~$2.9 million, or~~ ~~10%, increase in comparable store sales. Since~~ ~~September 30, 2011, the number of retail stores in the Canada segment in operation decreased from~~ 38 to 35~~. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail sales for 2012 would have been approximately~~ ~~$35.1 million, or~~ ~~10.6%~~ ~~higher when compared to the same period last year.~~

~~Wholesale net sales increased~~ ~~$0.7 million, or~~ ~~8.5%, to~~ ~~$9.4 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$8.7 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~. The increase in net sales is due to better focus on key customers and an improved pricing strategy. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total wholesale net sales for the Canada segment for 2012 would have been approximately ~~$9.7 million, or~~ ~~4.5%~~ ~~higher when compared to the same period last year.~~

~~Online consumer net sales for the~~ ~~nine months ended September 30, 2012~~ ~~were~~ ~~$1.5 million~~ ~~as compared to~~ ~~$1.3 million~~ ~~for the~~ ~~nine months ended September 30, 2011. Foreign currency effects were minimal.~~

~~International:~~ ~~Total net sales for the International segment increased~~ ~~$12.3 million, or~~ ~~11.0%, to~~ ~~$124.1 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$111.8 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~. The increase is due to higher sales across all sales channels. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the current period would have been approximately ~~$130.2 million, or~~ ~~$18.4 million~~ ~~higher when compared to the same period last year.~~

~~Retail net sales increased~~ ~~$10.8 million, or~~ ~~11.7%, to~~ ~~$102.9 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$92.1 million~~ ~~for the~~ ~~nine months ended September 30, 2011. The change is mainly attributed to higher sales in Japan of $4.6 million and the U.K. of $3.9 million. Comparable store sales for the~~ ~~nine months ended September 30, 2012~~ ~~increased by~~ ~~$13.4 million, or~~ ~~16%, as compared to the~~ ~~nine months ended September 30, 2011. Since~~ ~~September 30, 2011, the number retail stores in the International segment increased from~~ 66 to 76 at ~~September 30, 2012. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail sales for 2012 would have been approximately~~ ~~$108.0 million, or~~ ~~17.3%~~ ~~higher when compared to the same period last year.~~

~~Wholesale net sales decreased~~ ~~$0.3 million, or~~ ~~4.0%, to~~ ~~$7.2 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$7.5 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~. The decrease is due to unfavorable exchange rates. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately ~~$7.7 million, or~~ ~~2.3%~~ ~~higher when compared to the same period last year.~~

~~Online consumer net sales increased~~ ~~$1.8 million, or~~ ~~14.6%, to~~ ~~$14.1 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$12.3 million~~ ~~for the~~ ~~nine months ended September 30, 2011. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately~~ ~~$14.6 million, or~~ ~~18.9%~~ ~~higher when compared to the same period last year.~~

~~Gross margin:~~ ~~Gross margin as a percentage of net sales was~~ ~~52.7%~~ ~~and~~ ~~54.1%~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~and~~ ~~2011, respectively. The decrease in gross margin was due to the net sales impact of planned promotional activities and the effect of warehouse type clearance sales as part~~certain of our ~~overall inventory reduction strategy. This decrease was partially offset by shift towards higher margin retail sales.~~foreign subsidiaries, subject to some exceptions. See

~~Selling expenses:~~Financial Covenants ~~Selling expenses increased~~below and Note 6, ~~$15.7 million, or~~ ~~10.3%, to~~ ~~$168.3 million~~Revolving Credit Facilities and Current Portion of Long-Term Debt ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$152.5 million~~ ~~for the~~ ~~nine months ended September 30, 2011. The increase is consistent with improving sales. Additionally, we increased our spending on print, outdoor and online advertising to $16.3 million for the~~ ~~nine months ended September 30, 2012~~ ~~from $11.2 million for the comparable period in 2011 in order to continue the sales momentum. As a percentage of sales, selling expenses decreased to~~ ~~37.9%~~ ~~in the~~ ~~nine months ended September 30, 2012~~ ~~from~~ ~~39.1%~~ ~~in the~~ ~~nine months ended September 30, 2011~~.

~~General and administrative expenses:~~ ~~General and administrative expenses decreased~~ ~~$5.2 million~~ to ~~$71.8 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$77.0 million~~ ~~for the~~ ~~nine months ended September 30, 2011. As a percentage of sales, general and administrative expenses decreased to~~ ~~16.2%~~ ~~during the~~ ~~nine months ended September 30, 2012~~ ~~from~~ ~~19.8%~~ ~~during the~~ ~~nine months ended September 30, 2011. The decrease in general and administrative expenses was~~

~~Table of Contents~~

primarily due to a $5.6 million reduction in professional fees (primarily consulting, legal and accounting related fees), a decrease of $1.8 million of depreciation and amortization expenses and a reduction to our reserves related to a legal contingency, offset by an increase of $1.9 million of bonus expense and $2.6 million in higher share-based compensation expense.

~~Retail store impairment~~: ~~For the~~ ~~nine months ended September 30, 2012, we recorded an impairment charge of~~ ~~$0.1 million~~ ~~primarily as a result of a store closure. For the~~ ~~nine months ended September 30, 2011, we recorded impairment charges relating to retail stores leasehold improvements of~~ ~~$2.4~~ ~~million.~~

~~Interest expense:~~ ~~Interest expense increased~~ ~~$6.6 million~~ to ~~$30.3 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~from~~ ~~$23.7 million~~ ~~for the~~ ~~nine months ended September 30, 2011~~, primarily due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement. Interest rates on our various debt facilities and capital leases ranged from 5.0% to 19.8% for the ~~nine months ended September 30, 2012~~ ~~and 4.7% to 18.0% for the~~ ~~nine months ended September 30, 2011. Interest expense for the~~ ~~nine months ended September 30, 2012~~ mainly consisted of interest on the Lion Credit Agreement of $16.3 million, interest on the Crystal Credit Agreement of $3.7 million, interest on the BofA Credit Agreement of $0.5 million, and amortization of debt discount and deferred financing cost of ~~$7.7 million. Interest paid in cash was~~ ~~$6.6 million~~.

~~Foreign currency transaction loss:~~ ~~For the~~ ~~nine months ended September 30, 2012, foreign currency transaction loss totaled~~ ~~$0.1 million~~ ~~as compared to a loss of~~ ~~$0.8 million~~ ~~for the~~ ~~nine months ended September 30, 2011. The change related to strengthening of the U.S. Dollar relative to functional currencies used by our subsidiaries.~~

~~Unrealized loss (gain) on change in fair value of warrants and purchase rights:~~ ~~We recorded a~~ ~~$15.3 million~~ ~~loss in fair value of warrants for the~~ ~~nine months ended September 30, 2012~~ ~~associated with the fair value measurements of Lion and SOF warrants. We recorded a~~ ~~$21.2 million~~ ~~gain in the fair value of warrants and purchase rights for the~~ ~~nine months ended September 30, 2011~~ ~~associated with the fair value measurement of purchase rights to an investor group and Mr. Charney, and additional warrants to Lion at~~ ~~September 30, 2011~~.

~~(Gain) loss on extinguishment of debt:~~ ~~During the~~ ~~nine months ended September 30, 2012, we recorded a gain on extinguishment of debt relating to the amendment to the Lion Credit Agreement terms of approximately~~ ~~$11.6 million. During the~~ ~~nine months ended September 30, 2011, we recorded a loss on extinguishment of debt pertaining to the amendment to the Lion Credit Agreement terms of approximately~~ ~~$3.1 million. See Note 7,~~ ~~Long-Term Debt~~ to our condensed consolidated financial statements under Part I, Item 1.

~~Income tax provision:~~Crystal Credit Facility - ~~The provision for income tax increased to~~ ~~$1.9 million~~ ~~for the~~ ~~nine months ended September 30, 2012~~ ~~as compared to~~ ~~$1.0 million~~ ~~for the~~ ~~nine months ended September 30, 2011. Although we incurred a loss before income taxes on a consolidated basis for the~~ ~~nine months ended September 30, 2012~~, some of our foreign domiciled subsidiaries reported income before income taxes and will be taxable on a stand-alone reporting basis in their respective foreign jurisdictions. As a result, we recorded a provision for income tax expense for the ~~nine months ended September 30, 2012. There were no charges or benefits recorded to income tax expense for valuation allowances.~~

~~Liquidity and Capital Resources~~

As of ~~September 30, 2012~~,March 31, 2013, we had ~~approximately~~ ~~$7.2 million~~ ~~in cash and $3.5 million~~ ~~of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement. Additionally, we had (i)~~ ~~$35.6 million~~ ~~outstanding on~~ a $~~50.0 million~~ ~~revolving credit facility under the Crystal Credit Agreement, (ii) $30.0 million~~ ~~of term loan outstanding under the Crystal Credit Agreement, (iii) $5.9 million~~ ~~outstanding on a~~ ~~C$11.0 million~~ ~~revolving credit facility under the Bank of Montreal Credit Agreement, and (iv)~~ ~~$103.6 million, net of discount of $30.0 million~~ ~~and including paid-in-kind interest of $12.4 million~~ ~~of term loan outstanding under the Lion Credit Agreement. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1.~~

~~On March 13, 2012, we replaced our~~ ~~$75.0 million~~80,000 senior ~~secured revolving credit facility with BofA with the Crystal Credit Agreement, a~~ ~~$80.0 million~~ ~~senior secured~~ credit facility with Crystal and other ~~lenders. The Crystal Credit Agreement calls~~lenders, and maturing on March 13, 2015 that called for the $~~80.0 million~~80,000 to be allocated between an asset-based revolving credit facility of $~~50.0 million~~50,000 and term loan of $~~30.0 million~~30,000 ~~and matures on~~ . Our available borrowing capacity at March ~~13, 2015. In addition, the initial borrowing base under the revolving credit facility was increased by~~ ~~$12.5 million~~ ~~for the value associated with the American Apparel brand name. This initial increase will be ratably reduced to~~ $0 ~~during the period from April 13, 2012 through January 1, 2013.~~

Over the past years, our growth has been funded through a combination of borrowings from related and unrelated parties, bank debt and lease financing, proceeds from the exercise of purchase rights and issuance of common stock. Our principal liquidity requirements are for working capital and capital expenditures and to fund operating losses. We fund our liquidity requirements

~~Table of Contents~~

primarily through cash on hand, cash flow from operations, borrowings from revolving credit facilities and term loans under the Crystal and Lion Credit Agreements. Those credit agreements contain covenants requiring us to meet specified targets for minimum consolidated EBITDA and our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under those credit facilities or result in an event of default.

We generate cash primarily through the sale of products manufactured by us at our retail stores and through our wholesale operations. Primary uses of cash are for the purchase of raw materials, payroll payments to our manufacturing employees and retail employees, retail store opening costs and the payment of rent for retail stores.

We are in the process of executing a plan, which we commenced in late 2010, to improve the operating performance and our financial position. This plan includes optimizing production levels at our manufacturing facilities including raw material purchases and labor; streamlining our logistics operations; reducing corporate expenses; merchandise price rationalization in our wholesale and retail channels; improving merchandise distribution and allocation procedures and rationalizing staffing levels. We continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.

Although our plan reflects improvements in these trends, there can be no assurance that our plan to improve the operating performance and our financial position will be successful. We continue to evaluate other alternative sources of capital for ongoing cash needs, however, there can be no assurance we will be successful in those efforts.

~~Cash Flow Overview~~

Nine Months Ended September 30,
2012 2011
Net cash provided by (used in):
Operating activities $ 1,570
$ (9,953 )
Investing activities (20,113 ) (7,212 )
Financing activities 15,984
18,321
Effect of foreign exchange rate on cash (548 ) (844 )
Net (decrease) increase in cash $ (3,107 ) $ 312

~~Nine Months EndedSeptember 30, 2012~~

~~Cash provided by operating activities~~31, 2013 was $~~1.6 million~~1,761. ~~This was a result of non-cash expenses of~~ ~~$51.2 million~~ ~~offset by net losses of~~ ~~$42.2 million~~ ~~and a decrease in working capital requirements of~~ ~~$7.4 million~~. Non-cash expenses include depreciation, amortization, loss on disposal of property and equipment, impairment charges, foreign currency exchange transaction gain, allowance for inventory shrinkage and obsolescence, change in fair value of warrant liability, gain on extinguishment of debt, accrued interest-in-kind, stock based compensation, bad debt expense, deferred income taxes, and deferred rent. Cash was used for working capital primarily due to an increase in other assets of ~~$5.8 million, increase in prepaid and other current assets of~~ ~~$3.3 million~~ ~~and increase in trade receivables of~~ ~~$4.7 million, partially offset by a decrease in inventories of~~ ~~$6.2 million~~ ~~and a decrease in income taxes receivable/payable of~~ ~~$2.4 million~~ ~~and a decrease in accrued expenses and other liabilities of~~ ~~$4.8 million~~. Improvements in liquidity from new equity financing in 2011 as well as higher sales have allowed us to gradually reduce accrued expenses and other liabilities. The decrease in inventory levels is due to the gradual improvements in our sales as well as the effects of stabilizing raw material costs.

~~Cash used in investing activities~~ ~~was~~ ~~$20.1 million. This consisted primarily of~~ ~~$14.3 million~~ ~~in capital expenditures and~~ ~~$5.9 million~~ in restricted cash used as collateral to secure our standby letters of credit associated with the worker's compensation self-insurance policy and other liabilities. Net investments in property and equipment in the U.S. Wholesale segment consisted mostly of expenditures for manufacturing equipment and computer hardware and software. We upgraded our production forecasting and allocation systems and significantly enhanced our on-line web store capabilities with a new back office web platform. We also invested in our new distribution center in California. Net investments in the U.S. Retail segment were primarily to upgrade and remodel certain existing stores. Additionally, we continued implementing radio frequency identification (RFID) tracking systems at our stores.

~~Cash provided by financing activities~~ ~~was~~ ~~$16.0 million. This consisted primarily of proceeds from borrowings of~~ ~~$39.3 million~~ ~~under the new revolving credit facility and~~ ~~$30.0 million~~ ~~for a term loan, both~~All amounts owed under the Crystal ~~Credit Agreement, partially offset by~~credit facility were repaid with the ~~repayment~~net proceeds from the offering of the ~~previous revolving~~Notes and the new credit ~~facility for~~ ~~$48.3 million~~ ~~with BofA. Borrowings are primarily used to fund our operating and working capital needs.~~

~~Table of Contents~~

~~Nine Months EndedSeptember 30, 2011~~facility.

~~Cash used in operating activities~~ ~~was~~ ~~$10.0 million. This was a result~~As of ~~net losses of~~ ~~$28.2 million, cash used in working capital of~~ ~~$10.6 million, partially offset by non-cash expenses of~~ ~~$28.8 million~~. Non-cash expenses primarily include depreciation, amortization, gain on disposal of property and equipment, foreign exchange transaction loss, allowance for inventory shrinkage and obsolescence, change in fair value of warrant liability, loss on extinguishment of debt, accrued interest-in-kind, impairment charges, share-based compensation, bad debt expense, deferred income taxes, and deferred rent. Cash was used for working capital primarily due to an increase in inventory of ~~$8.7 million, an increase in income taxes receivable of~~ ~~$1.2 million, an increase in other long-term assets of~~ ~~$2.9 million~~ ~~and an increase in trade receivables of~~ ~~$2.5 million, an increase in prepaid expenses, and other current assets of~~ ~~$0.2 million, partially offset by a net increase in accounts payable, accrued expenses and other liabilities of~~ ~~$4.7 million. Inventory increased in part due to~~March 31, 2013, interest under the effect of a historically high cost of yarn and related increase in fabric costs. The increase in accounts payable was as a result of higher inventory and reduced liquidity. The new equity investments in the second and third quarter of 2011 and improving sales have resulted in the reduction of the accounts payable balance in 2012.

~~Cash used in investing activities~~ ~~was~~ ~~$7.2 million. This consisted of increased net investment in property and equipment of $2.2 million~~ ~~for the U.S. Wholesale segment, $3.8 million~~ ~~for the U.S. Retail segment,~~ ~~$0.2 million~~ ~~for the Canada segment and~~ ~~$1.0 million~~ for the International segment. We did not open any new stores during the nine months ended September 30, 2011. Investments in the U.S. Wholesale segment consisted mostly of expenditures for manufacturing equipment and computer hardware and software. Investments in the U.S. Retail segment, were primarily to make maintenance replacements and other minor upgrades for existing stores.

~~Cash provided by financing activities~~ ~~was~~ ~~$18.3 million. This consisted primarily of proceeds of~~ ~~$21.7 million~~ ~~from the sale of common stock and purchase rights, and~~ ~~$3.1 million~~ ~~in proceeds from a sale-leaseback financing transaction for manufacturing equipment, partially offset by repayment of~~ ~~$1.3 million~~ ~~under our revolving credit facilities and repayment other net borrowings.~~

~~Debt Agreements and Other Capital Resources~~

~~Revolving Credit Facilities~~

~~Crystal Credit Facility -~~ ~~On March 13, 2012, we replaced our~~ ~~$75.0 million~~ ~~senior secured revolving credit facility with BofA with a~~ ~~$80.0 million~~ senior credit facility ~~with Crystal and other lenders. On August 30, 2012, we entered into the Crystal Second Amendment. The Crystal Credit Agreement calls for the~~was ~~$80.0 million~~9.78% ~~to be allocated between an asset-based revolving credit facility of~~ ~~$50.0 million~~ ~~and term loan of~~ ~~$30.0 million~~. The Crystal Credit Agreement matures on March 13, 2015. Borrowings under the Crystal Credit Agreement are subject to certain borrowing reserves based on eligible inventory and accounts receivable as established by Crystal and are collateralized by substantially all of our U.S. and U.K. assets and equity interests in certain of our foreign subsidiaries. In addition, the initial borrowing base under the revolving credit facility was increased by ~~$12.5 million~~ ~~for the value associated with the American Apparel brand name. This initial increase will be ratably reduced to~~ $0 ~~during the period April 13, 2012 through January 1, 2013. Interest under the agreement was at the~~(the 90-day LIBOR at 0.28%plus ~~9.0%~~9.5%), and also included an unused facility fee ranging from 0.375% to 1.00% on the unused portion of the revolving credit ~~facility. Beginning August 30, 2012, based on the Crystal Second Amendment,~~facility, payable monthly. Additionally, the interest rate ~~relating~~with respect to the brand name portion of the outstanding principal amount ~~of the revolving credit facility of $5.0 million as September 30, 2012~~ was ~~the~~19.28% (the 90-day LIBOR at 0.28%plus ~~19.75% and the interest rate~~19.0%).

Table of ~~the residual portion of outstanding principal of the revolving credit facility in excess of the brand name was the 90-day LIBOR plus 9.0%.~~ Contents

The Crystal Credit Agreement also ~~includes~~included an early termination fee if the term loan iswas prepaid or if the commitments under the revolving credit facility iswere permanently reduced, ~~of (a)~~such fee being 3.00% ~~if such payment or reduction occurs in~~, for $2,400, at the ~~first year, (b)~~ time of repayment on April 4, 2013.

~~2.00%~~ ~~if such payment or reduction occurs in~~The difference between the ~~second year,~~net carrying amount of the Crystal loans of $60,533 (which includes the outstanding balance, accrued but unpaid interest, and ~~(c)~~ ~~0.00%~~ ~~thereafter. Our available borrowing capacity at~~ ~~September 30, 2012~~ ~~was~~ ~~$1.4 million~~.

~~In connection with the~~unamortized financing ~~from Crystal, we also entered into an amendment~~cost immediately prior to the ~~Lion Credit Agreement~~date of the extinguishment) and the cash paid to ~~among other things: (i) consent to the~~ Crystal Credit Agreement, (ii) fix the maturity date at December 31, 2015, and (iii) modify certain financial covenants, including covenants related to minimum quarterly EBITDA and capital expenditures. In addition, the amendment to the Lion Credit Agreement modifies the Lion Credit Agreement to provide forof $66,468 will be recorded as a ~~minimum~~$5,935 loss on early extinguishment of 5%debt in our statement of ~~each interest payment on the outstanding principal in cash starting on September 1, 2012.~~

~~Additionally, the Crystal Second Amendment includes, among other things, a minimum EBITDA covenant~~operations for the ~~remainder of 2012, and a $5.0 million minimum excess availability for the period of December 17, 2012 through February 1,~~quarter ended June 30, 2013.

~~Proceeds from the Crystal Credit Agreement were used to repay our existing BofA Credit Facility, fees and expenses related to the transaction, and for general working capital purposes.~~ See~~Financial Covenants~~ ~~below and~~ Note 6, Revolving Credit

~~Table of Contents~~

Facilities and Current Portion of Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.

Bank of Montreal Credit Facility - ~~We also have a~~On December 29, 2012, we entered into an amendment to our C$11,000 (Canadian dollars) revolving credit facility with Bank of Montreal (the “Bank of Montreal Credit Agreement”) of

~~C$11.0 million~~ ~~from Bank of Montreal (BofM). The revolving credit facility is secured by liens on personal property on all present and future movable property of our Canadian operations. Borrowings under~~that extended the ~~Bank of Montreal Credit Agreement are subject~~maturity date to ~~certain advance provisions established by BofM.~~December 31, 2013. Interest under the agreement is at the bank’s prime rate (3.0% at ~~September 30, 2012~~March 31, 2013) plus 4.0%. per annum payable monthly. This line of credit is secured by a lien on the accounts receivable, inventory and certain other tangible assets owned by American Apparel Canada Wholesale, Inc. and American Apparel Canada Retail, Inc. Our available borrowing capacity at ~~September 30, 2012~~March 31, 2013 was $~~2.1 million~~656. See Financial Covenants below and Note 6, Revolving Credit Facilities and Current Portion of Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.

~~The Bank~~Lion Loan Agreement - As of ~~Montreal Credit Agreement matures in December 2012. There can be no assurances that~~March 31, 2013, we will be able to negotiate a renewal or extension of this credit agreement with our existing lender or enter into a replacement credit agreement with new lenders on commercially reasonably terms or at all and we may be required to repay this loan. While we intend to negotiate an extension of this credit agreement, we do not believe that this credit agreement represents a material component of our current or future capital requirements.

~~Lion Credit Agreement~~

~~Term Loan~~ ~~- We have~~had a loan agreement, maturing on December 31, 2015, with Lion Capital ~~LLC~~LLP (“Lion” and the “Lion ~~Credit~~Loan Agreement”, respectively) that provided us with term loans ~~in an aggregate principal amount equal to~~ ~~$80.0 million. The term loan under the Lion Credit Agreement matures on December 31, 2015 and bears~~bearing interest at ~~a range between~~ ~~15%~~ ~~and~~ 18% per annum, ~~depending on certain financial covenants relating to the ratio of Total Debt to Consolidated EBITDA for the trailing four quarters and Consolidated EBITDA for the trailing twelve months,~~ payable quarterly in ~~arrears. As~~arrears, on an outstanding amount of ~~September 30, 2012, we had outstanding approximately~~ $~~103.6 million~~118,039 of second lien debt, net of discount and including accrued paid-in-kind ~~interest, payable to Lion.~~

~~On March 13, 2012, in connection~~interest. All amounts owed under the Lion Loan Agreement were repaid with the net proceeds from the offering of the Notes and the new credit ~~agreement~~facility. There were no early termination penalties associated with ~~Crystal Financial, we entered into a seventh amendment~~the termination of the Lion Loan Agreement. The difference between the net carrying amount of the Lion debt of $117,926 (which includes the principal, accrued but unpaid interest, unamortized discount and unamortized financing cost immediately prior to the date of extinguishment) and the cash paid to Lion ~~Credit Agreement, which among other things: (i) consented~~of $144,177 will be recorded as a $26,251 loss on early extinguishment of debt in our statement of operations for the quarter ended June 30, 2013. See Note 7, Long-Term Debt to ~~the Crystal Credit Agreement, (ii) extends the maturity date to December 31, 2015, (iii) reduced the minimum Consolidated EBITDA amounts for any twelve consecutive months as determined~~our condensed consolidated financial statements under Part I, Item 1.

Senior Secured Notes due 2020 - On April 4, 2013, we issued $206,000 aggregate principal amount of our 13% Senior Secured Notes due 2020. The Notes will mature on April 15, 2020. The Notes were issued at ~~the end~~97% of ~~each fiscal quarter~~par value and (iv) modifies certain other financial covenants, including covenants related to capital expenditures. The amendment also required that the Lion Warrant be amended. In addition, the amendment to the Lion Credit Agreement modifies the Lion Credit Agreement to provide forwill bear interest at a rate of ~~5.0%~~13% per annum. Interest on the Notes is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013.

A "special interest trigger event" will be deemed to have occurred under the indenture governing the Notes if our net leverage ratio for the year ended December 31, 2013 is greater than 4.50 to 1.00. If a special interest trigger event occurs, interest on the Notes will accrue at the rate of 15% per annum, retroactive to ~~be paid~~April 4, 2013, with the interest in ~~cash commencing~~excess of 13% per annum payable (i) in the case of any interest payment date prior to April 15, 2018, by adding such excess interest to the principal amount of the Notes on the interest ~~accruing from~~payment date, and (ii) for any interest payment date on or after ~~September 1, 2012 (with the remainder~~April 15, 2018, in cash.

On or after April 15, 2017, we may redeem some or all of the Notes at a premium decreasing ratably to zero as specified in the indenture, plus accrued and unpaid interest ~~under~~to, but not including, the ~~Lion Credit Agreement payable in-kind or in cash at our option).~~

~~On August 30, 2012, in connection~~redemption date. Prior to April 15, 2017, we redeem up to 35% of the aggregate principal amount of the Notes with the ~~Crystal Second Amendment, we entered into an eighth amendment~~net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the ~~Lion Credit Agreement that adds, among other things, a second minimum Consolidated EBITDA covenant for the remainder of 2012 conforming to Crystal's EBITDA covenant.~~

The Lion Credit Agreement is subordinated to the Crystal Credit Agreement and contains customary representations, and warranties, events of default, affirmative covenants, negative covenants (which impose restrictions and limitations on, among other things, dividends, investments, asset sales, capital expenditures, and the ability of us to incur additional debt and liens), and other financial covenants. We are permitted to prepay the loans in whole or in partredemption date. In addition, at any time prior to April 15, 2017 we may redeem some or all of the Notes by paying a premium, plus accrued and unpaid interest to, but not including, the redemption date. If we experience certain change of control events, the holders of the Notes will have the right to require us to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, we are required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, we will be required to redeem, for cash, a portion of each Note then outstanding equal to the amount necessary to prevent such Note from being treated as an “applicable high yield discount obligation” within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.

The Notes are guaranteed, jointly and severally, on a senior secured basis by our ~~option, with no prepayment penalty.~~existing and future domestic restricted subsidiaries. See Financial Covenants below and Note 7, Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.

WeIn connection with the issuance of the Notes, we entered into a ~~ninth amendment and waiver~~Registration Rights Agreement pursuant to ~~the Lion Credit Agreement (the "Lion Ninth Amendment") effective as of~~ ~~September 30, 2012~~, which we have agreed to, among other things, ~~waived~~conduct a registered exchange offer with respect to the Notes. If we fail to fulfill our ~~obligation~~obligations

Table of Contents

under the Registration Rights Agreement in a timely manner, we may be required to ~~maintain~~pay additional interest on the ~~minimum Consolidated EBITDA covenants specified in the Lion Credit Agreement, as amended, for the twelve month period ended~~ ~~September 30, 2012. As a result, we were in compliance with the required financial covenants of the Lion Credit Agreement on~~ ~~September 30, 2012~~.Notes. See Note 7, Long-Term Debt to our condensed consolidated financial statements inunder Part I, Item 1.

Warrants

Lion Warrants - In connection with the Lion Credit Agreement, we issued warrants ("Lion Warrants") to Lion, which may be exercised by Lion by (1) paying the exercise price in cash, (2) pursuant to a “cashless exercise” of the warrant, or (3) by a combination of the two methods. On March 13, 2012, in connection with the new credit agreement with Crystal Financial, LLC, we entered into an amendment to the Lion Credit Agreement, which required that the warrants issued to Lion be amended to, among other things, extend the term of the warrants to February 18, 2022 and add a provision pursuant to which, if American Apparel does not meet a certain quarterly EBITDA ratio, the exercise price of the warrants would be reduced by $0.25 (a one-time adjustment for the first violation of such covenant; subsequent violations would not result in further adjustment). The amendments to the Lion Warrant were approved by the Company's shareholders at the 2012 Annual Meeting. On March 31, 2012, we did not meet the EBITDA requirement and, as a result, the exercise price of the existing Lion warrants

~~Table of Contents~~

~~was reduced by $0.25 to $0.75 per share.~~

As of ~~September 30, 2012~~March 31, 2013, Lion held warrants to purchase 21,606 shares of our common stock, with an exercise price of $0.75 per share. These warrants expire on February 18, 2022. The estimated fair value of $~~28.2 million~~40,524 at ~~September 30, 2012~~March 31, 2013 is recorded as a current liability in our condensed consolidated balance sheets under Part I, Item 1.

The Lion Warrants also contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of our common stock issuable upon exercise of the Lion Warrant, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges. See Note 11, Stockholders' (Deficit) Equity to our condensed consolidated financial statements under Part I, Item 1.

SOF Warrants - ~~In connection with the Ninth Amendment with~~As of March 31, 2013, SOF Investments, L.P. ("SOF") ~~to extend the maturity date of our credit agreement with SOF from January 18, 2009 to April 20, 2009, we issued~~held warrants ~~("SOF Warrants") to SOF,~~ to purchase 1,000 shares of our common ~~stock.~~stock, with an exercise price of $2.148 per share, subject to adjustment under certain circumstances. These warrants expire on December 19, 2013. The exercise price of the SOF Warrants at the time of issuance was $3.00 per share and is subject to adjustment under certain circumstances. As a result of the issuance of warrants to Lion in February and April 2011, and the sale of common stock to the Investors in April and July 2011, the exercise price of the SOF Warrant was reduced to $2.139 per share. As a result of the change in exercise price for the Lion Warrants on ~~September 30, 2012, the exercise price of the SOF Warrant was changed to $2.148 per share.~~ As of ~~September 30, 2012~~March 31, 2013, the estimated fair value of $~~0.2 million~~$362 is recorded as a current liability in our condensed consolidated balance sheets. See Note 11, Stockholders' (Deficit) Equity to our consolidated financial statements under Part I, Item 1.

Summary of Debt

The following is an overview of our total debt as of ~~September 30, 2012~~March 31, 2013 (dollars in thousands):

Description of Debt

Lender Name

Interest Rate

September 30, 2012

Covenant Violations

Lender Name

Interest Rate

March 31, 2013

Covenant Violations

Revolving credit facility(a)

Crystal Financial LLC

(a) 90-day LIBOR of 0.47% plus 9.0% plus unused facility fee ranging (0.375% -1.00%) and for the brand name: (b) 90-day LIBOR of 0.47% plus 19.75%

35,576

Crystal Financial LLC

(1) 90-day LIBOR of 0.28% plus 9.5% plus unused facility fee ranging (0.375% -1.00%) and for the brand name: (2) 90-day LIBOR of 0.28% plus 19.0%

37,594

Term loan from private investment firm

Crystal Financial LLC

90-day LIBOR of 0.47% plus 9.0% plus unused facility fee ranging (0.375% -1.00%)

30,000

Term loan (a)

Crystal Financial LLC

90-day LIBOR of 0.28% plus 9.5% plus unused facility fee ranging (0.375% -1.00%)

30,000

Revolving credit facility (Canada)

Bank of Montreal

Bank's prime rate of 3% plus 4%

5,901

Bank of Montreal

Bank's prime rate of 3% plus 4%

477

Term loan from private investment firm, net of discount and including interest paid-in-kind

Lion Capital LLP

From 15.0% to 18.0%

103,614

Yes

Term loan, net of discount and including interest paid-in-kind (a)

Lion Capital LLP

From 15.0% to 18.0%

118,039

Other

459

N/A

364

N/A

Capital lease obligations

23 individual leases ranging between $1-$511

From 5.0% to 18.0%

2,100

N/A

15 individual leases ranging between $1-$5,217

From 0.4% to 18.0%

4,369

N/A

Cash overdraft

2,625

N/A

1,340

N/A

Total debt including cash overdraft

180,275

192,183

(a) Indebtedness repaid and related agreements terminated in connection with April 4, 2013 financing transactions.

Financial Covenants

Our credit agreements ~~impose~~and the indenture under which our Notes were issued contain 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.restrictive covenants. Significant covenants are summarized below.

Capital One Credit Facility - We are required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and we are also required to not exceed certain maximum leverage ratio thresholds, both determined at the end of each fiscal quarter. Additionally, our domestic subsidiaries are subject to an annual limitation of certain specified capital expenditure amounts as determined at the end of each fiscal year.

4436

Table of Contents

~~Lion~~Among other provisions, the Capital One Credit ~~Agreement~~ ~~- Significant covenants in~~Facility requires that we maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may at its discretion, adjust the ~~Lion~~advance restriction and criteria for eligible inventory and accounts receivable. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Bank of Montreal Credit Agreement, ~~include~~the indenture governing the Notes or other indebtedness, in each case of an ~~annual limitation~~amount greater than a specified threshold, would cause an event of ~~our capital expenditures to $30.0 million for fiscal 2012. Our total actual capital expenditures for~~default under the ~~nine months ended September 30, 2012~~ ~~were~~ ~~$14,257~~.

~~Additionally, the Lion~~Capital One Credit ~~Agreement requires a minimum Consolidated EBITDA amount (as specified in~~Facility. If an event of default occurs and is continuing under the credit ~~agreement) for any twelve consecutive months as determined at the end of each fiscal quarter (Quarterly Minimum Consolidated EBITDA).~~In addition, the Lion Eighth Amendment includes a second minimum Consolidated EBITDA covenant for the remainder of 2012 to be determined at the end of each month (Monthly Minimum Consolidated EBITDA) that conforms to the Crystal's minimum Consolidated EBITDA covenant.

~~We entered into a ninth amendment and waiver to the Lion Credit Agreement (the "Lion Ninth Amendment") effective as of~~ ~~September 30, 2012, which~~agreement, Capital One may, among other things, ~~waived our obligation to maintain~~terminate the ~~minimum Consolidated EBITDA covenants specified in the Lion Credit Agreement, as amended, for the twelve month period ended~~ ~~September 30, 2012. As a result, we were in compliance with the required financial covenants~~obligations of the ~~Lion Credit Agreement on~~ ~~September 30, 2012. See Note 7,~~ ~~Long-Term Debt~~lenders to ~~our condensed consolidated financial statements in Part I, Item 1.~~

~~Crystal Credit Agreement~~ ~~- Significant covenants in~~make loans, and the ~~Crystal Credit Agreement include a minimum excess availability covenant that requires~~obligation of the letter of credit issuer to make letter of credit extensions and require us to maintain minimum excess availability of the greater of (1) $8.0 million, or (2) 10% of the borrowing base. If the excess availability falls below this minimum, then we will be required to maintain a fixed charge coverage ratio of not less than 1.00:1.00 to be calculated monthly on a consolidated trailing twelve-month basis and continuing until the excess availability exceeds this minimum for sixty consecutive days. The second amendment adds (1) a new minimum excess availability covenant that requires us to maintain minimum excess availability to be no less than $5.0 million during the period from December 17, 2012 to February 1, 2012, and, (2) adds a minimum Consolidated EBITDA covenant for the remainder of 2012 to be determined at the end of each month. Furthermore, the Crystal Credit Agreement includes an annual limitation of our capital expenditures at our domestic subsidiaries to no more than $17.0 million for the year ending December 31, 2012 and $25.0 million for each year thereafter.

~~During the~~ ~~nine months ended September 30, 2012, our excess availability was below the minimum amount and, as a result, we were required to maintain the fixed charge coverage ratio. As of~~ ~~September 30, 2012, we were in compliance with the required financial covenants of the Crystal Credit Agreement.~~

~~On November 12, 2012, we and certain of our subsidiaries entered into amendments to both the Crystal Credit Agreement and the Lion Credit Agreement that, among other things, reduced by~~ ~~$600~~ ~~the target minimum EBITDA for the twelve months ended October 31, 2012 under the financial covenants of each credit agreement, respectively.~~

As of September 30, 2012, we were in compliance with the required financial covenants of the Crystal Credit Agreement and the Lion Credit Agreement, as amended. The Company has obtained a waiver of the minimum Consolidated EBITDA requirements for the twelve months ended October 31, 2012 under the financial covenants of the Crystal Credit Agreement and the Lion Credit Agreement.repay all outstanding amounts.

Bank of Montreal Credit Agreement - Significant covenants in the Bank of Montreal Credit Agreement include a restriction on our Canadian subsidiaries from entering into operating leases that would lead to payments under such leases totaling more than C$~~8.5 million~~8,500 (Canadian dollars) in any fiscal year. The credit agreement also requires our Canadian subsidiaries to maintain minimum excess availability of 5% of the revolving credit commitment under the facility.

As of ~~September 30, 2012~~March 31, 2013, we were in compliance with the required financial covenants of the Bank of Montreal Credit Agreement. ~~Each~~

Senior Secured Notes due 2020 - The indenture imposes certain limitations on our ability to, among other things and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of their capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. We must annually report to the ~~credit agreements~~trustee on compliance with ~~Lion Capital, Crystal and Bank of Montreal contain~~such limitations. The indenture also contains cross-default provisions whereby a payment default or acceleration of any indebtedness in an ~~event of default occurring under any of the other credit agreements~~aggregate amount greater than a specified threshold would cause an event of ~~default.~~default with respect to the Notes.

Future Capital Requirements

On ~~March 13, 2012,~~April 4, 2013, we ~~refinanced~~closed a private offering of $206,000 aggregate principal amount of our ~~senior credit facility, which extended the maturity~~13% Senior Secured Notes (the Notes) at 97% of ~~the loan from July 2012 to March 2015. In addition,~~par due 2020 and we entered into ~~an amendment~~a new $35,000 asset-backed revolving credit facility with Capital One maturing on April 4, 2018, subject to ~~extend~~a January 15, 2018 maturity under a specific circumstance. We used the ~~maturity~~net proceeds from the offering of the Notes, together with borrowings under the Capital One Credit Facility to repay and terminate our existing credit facilities with Lion ~~Credit Agreement from~~and Crystal, pay fees and expenses related to the transaction, and will use the balance for general corporate purposes.

Our C$11,000 (Canadian dollars) credit agreement with Bank of Montreal matures in December ~~2013 to December 2015. As a result of these financing transactions, we~~2013.

We believe that we have sufficient financing commitments to meet our funding requirements for the next twelve months.

~~Our~~ ~~C$11.0 million~~ credit agreement with Bank of Montreal matures in December 2012. While we intend to attempt to negotiate an extension of this credit agreement, we do not believe that this credit agreement represents a material component of our current or future capital requirements.

~~Table of Contents~~

Off-Balance Sheet Arrangements and Contractual Obligations

Our material off-balance sheet contractual commitments are operating lease obligations and letters of credit.

Operating lease commitments consist principally of leases for our retail stores, manufacturing facilities, main distribution centers and corporate office. These leases frequently include options, which permit us to extend the terms beyond the initial fixed lease term. As appropriate, we intend to negotiate lease renewals as the leases approach expiration.

Issued and outstanding letters of credit were $~~4.6 million~~1,880 at ~~September 30, 2012~~March 31, 2013 ~~and~~, related primarily to workers’ compensation insurance and rent deposits. We also have capital lease obligations, which consist principally of leases for our manufacturing equipment.

Seasonality

We experience seasonality in our operations. Historically, sales during the third and fourth fiscal quarters have generally been the highest, with sales during the first fiscal quarter the lowest. This reflects the combined impact of the seasonality of ~~the~~our wholesale and retail channels. Generally, our retail segment has not experienced the same pronounced sales seasonality as other retailers.

Table of Contents

Critical Accounting Estimates and Policies

As discussed in Part II, Item 8. Management Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012, we consider our most critical accounting estimates and policies to include:

revenue recognition;

inventory valuation, obsolescence;

fair value calculations, including derivative liabilities such as the Lion warrants;

valuation and recoverability of long-lived assets including the values assigned to acquired intangible assets, goodwill, and property and equipment;

income taxes;

accruals for the outcome of current litigation; and

self-insurance liabilities.

In general, estimates are based on historical experience, on information from third party professionals and on various other sources, and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted 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.

Inflation

Inflation affects the cost of raw materials, goods and services used in our operations. In 2010, the price of yarn and the cost of certain related fabrics began to increase as a result of the compounding effect of added demand, supply shortages primarily from the effect of severe weather conditions in certain cotton producing countries, and a ban on cotton exports imposed by the government of India. Prices continued to increase throughout 2010 and through the first quarter of 2011. ~~During~~Starting with the second quarter of 2012 and through the first ~~half~~quarter of ~~2012, we experienced lower quoted cost of yarn as opposed to sharply rising cost that took place during the first half of 2011.~~2013, prices have stabilized. We cannot predict if this decline in the cost of cotton is sustainable. In addition, high oil costs can affect the cost of all raw materials and components. The competitive environment can limit the ability of American Apparel to recover higher costs resulting from inflation by raising prices. Although we cannot precisely determine the effects of inflation on our business, we believe that the

~~Table of Contents~~

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. ~~Further, in response to increases in our raw material costs we have implemented price increases of certain products across all Business Segments.~~ We are unable to predict if we will be able to successfully pass on the added cost of any future raw material cost increases by further increasing the price of our products to our wholesale and retail customers.

4738

Table of Contents


~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk (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 the interest rate exposure on variable rate borrowings at~~ ~~September 30, 2012, a 1% increase in average interest rates on our borrowings would increase future interest expense by approximately~~ ~~$60~~ ~~per month. We determined these amounts based on approximately~~ ~~$71,477~~ ~~of variable rate borrowings at~~ ~~September 30, 2012~~. We are currently not using any interest rate collars or hedges to manage or reduce interest rate risk. As a result, any increase in interest rates on our 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 38.1% of our net sales for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2012~~ were denominated in other currencies such as Euros, British Pounds Sterling or Canadian Dollars, among others. 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.

~~Table of Contents~~

Item 4. Controls and Procedures


(a)	Disclosure Controls and Procedures

Under the supervision and participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon ~~this~~that evaluation, our Chief Executive Officer and our Chief Financial Officer ~~have~~ concluded that ~~as of September 30, 2012,~~ our disclosure controls and procedures were ~~ineffective due to a material weakness existing in our internal controls over financial reporting~~effective as of ~~December~~March 31, ~~2011 (described below), which~~2013.

There has ~~not been fully remediated as of September 30, 2012.~~

A material weakness is a deficiency, or a combination of deficiencies, in Internal Control over Financial Reporting (“ICFR”), such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness would permit information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. As of September 30, 2012, the following material weakness existed:

~~Material weakness related to financial closing and reporting process.~~

We concluded that we did not have a sufficient number of trained accounting personnel with expertise in GAAP to ensure that complex material and/or non-routine transactions are properly reflected in our consolidated financial statements. We also noted that we did not perform adequate independent reviews and maintain effective controls related to the preparation of consolidated financial statements, related notes thereto, account analyses, account summaries and account reconciliations prepared in the areas of inventory and related inventory reserves, cost of sales and certain other accounts.

~~(b)~~ ~~Remediation Activities~~

~~During 2012, the Company continued to take measures to remediate the remaining material weakness, described as follows:~~

~~Material weakness related to financial close and reporting process.~~

We identified and implemented additional internal controls to strengthen account analyses related to inventory costing. We transitioned the responsibility for maintaining standard costs from our production planning department to our accounting department and have enhanced production reporting in order to separately record and analyze production variances. In 2011 we fully updated our standard costing systems to reflect the recent trends in raw material costs, labor rates, and manufacturing overhead absorption rates. We enhanced our workforce management system which will enable us to more accurately track direct labor to specific production runs and analyze labor variances specific to our styles. That workforce management system was fully deployed to production process at the end of the first quarter of 2012. During the fourth quarter of 2012 we are completing another assessment of standard cost accuracy for sewing, cutting, overhead and dye/knitting/finishing service. We are continuing the process of reviewing all internal controls related to cost accounting and established procedures for cost data validation and enhanced historical cost reporting. During the third quarter of 2012 we established new procedures to review and validate all information that is pertinent to inventory accounting. These procedures include steps to validate data used in the inventory analysis, formal preparer and reviewer steps, roll-forward and reconciliation of general ledger balances. Such procedures will provide a more robust control environment for all inventory accounts and assure accountability for the analysis and balances being reported. We substantially improved the procedures related to analysis of inventory reserve accounts. We continue to enhance our international cost accounting procedures for intercompany inventory transfers and inventory costing. As we continue to solidify our staffing levels, we expect our internal controls over the financial closing and reporting process to strengthen and continue to work toward remediating this material weakness.

~~(c)~~ ~~Changes in ICFR~~

As noted in section (b) above, at the end of the quarter ended September 30, 2012, we fully deployed a new workforce management system to cover substantially all of the sewing direct labor data capture at our main manufacturing facility in Los Angeles. Other than that noted change, there have been no ~~other changes~~change in our internal control over financial reporting (as defined in ~~Rule~~Rules 13a-15(f) and 15d-15(f) under the Securities Exchange ~~Act)~~Act of 1934) during the ~~most recent fiscal~~first quarter ~~ended September 30, 2012~~of 2013 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

~~During 2012, the Company's management continued to implement the steps outlined above under “Remediation Activities” to improve the quality of its ICFR.~~

4939

Table of Contents

PART II-OTHER INFORMATION


Item 1.	Legal Proceedings

We are subject to various claims and contingencies in the ordinary course of business, including those related to litigation, business transactions, employee-related matters and taxes, and others. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we will record a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. There is no assurance that such matters will not materially and adversely affect our business, financial position, and results of operations or cash flows.

Individual Actions

On February 7, 2006, Sylvia Hsu, a former employee of American Apparel, filed a Charge of Discrimination with the Los Angeles District Office of the Equal Employment Opportunity Commission (“EEOC”) (Hsu v. American Apparel: Charge No. 480- 2006-00418), alleging that she was subjected to sexual harassment by a co-worker and constructively discharged as a result of the sexual harassment and a hostile working environment. On March 9, 2007, the EEOC expanded the scope of its investigation to other employees of American Apparel who may have been sexually harassed. On August 9, 2010, the EEOC issued a written determination finding that reasonable cause exists to believe we discriminated against Ms. Hsu and women, as a class, on the basis of their female gender, by subjecting them to sexual harassment. No finding was made on the issue of Ms. Hsu's alleged constructive discharge. In its August 19, 2010 written determination, the EEOC has invited the parties to engage in informal conciliation. If the parties are unable to reach a settlement which is acceptable to the EEOC, the EEOC will advise the parties of the court enforcement alternatives available to Ms. Hsu, aggrieved persons, and the EEOC. ~~The insurance carrier for us has asserted that it is not obligated to provide coverage for this proceeding.~~ We have not recorded a provision for this matter and ~~intend to work~~are working cooperatively with the EEOC to resolve the claim in a manner acceptable to all parties. ~~Should the matter be decided against us, we could experience an increase in similar suits and suffer reputational harm.~~ We do not believe at this time ~~believe~~ that any settlement will involve ~~the~~a payment of damages in an amount that would be material to and adversely affect our business, financial position, and results of operations ~~and~~or cash flows.

On November 5, 2009, Guillermo Ruiz, a former employee of American Apparel, filed suit against us on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging we failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of our employees. The complaint further alleges that we failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. We do not have insurance coverage for this matter. Should the matter be decided against us, we could not only incur substantial liability but also experience an increase in similar suits and suffer reputational harm. We have accrued an estimate for this loss contingency in our accompanying condensed consolidated balance sheet as of September 30, 2012. We may have an exposure to loss in excess of the amounts accrued, however, an estimate of such potential loss cannot be made at this time. Moreover, no assurance can be made that this matter either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, larger than our estimate, which could have a material adverse effect upon our financial condition and results of operations.

On June 21, 2010, Antonio Partida, a former employee of American Apparel, filed suit against us on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that we failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. There is no known insurance coverage for this matter. Should the matter be decided against us, we could not only incur substantial liability but also experience an increase in similar suits and suffer reputational harm. We have accrued an estimate for this loss contingency in our accompanying condensed consolidated balance sheet as of September 30, 2012. We may have an exposure to loss in excess of the amounts accrued, however, an estimate of such potential loss cannot be made at this time. Moreover, no assurance can be made that this matter either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, larger than our estimate, which could have a material adverse effect upon our financial condition and results of operations.

On or about December 2, 2010, Emilie Truong, a former employee of American Apparel, filed suit against us on behalf of

~~Table of Contents~~

putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging we failed to timely provide final paychecks upon separation. Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices. This matter is now proceeding in arbitration. There is no known insurance coverage for this matter. Should the matter be decided against us, we could not only incur substantial liability, but also experience an increase in similar suits and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon our financial condition and results of operations.

On or about February 9, 2011, Jessica Heupel, a former retail employee filed suit on behalf of putative classes of current and former non-exempt California employees (Jessica Heupel, individually and on behalf of all others similarly situated v. American Apparel Retail, Inc., Case No. 37-2011-00085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. There is no known insurance coverage for this matter. Should the matter be decided against us, we could not only incur substantial liability, but also experience an increase in similar suits and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon our financial condition and results of operations.

On or about September 9, 2011, Anthony Heupel, a former retail employee

Table of Contents

initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The plaintiff is seeking monetary damages in an amount in excess of $3,600, as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime. In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. ~~There is no known~~

We do not have insurance coverage for the above matters. We have accrued an estimate for the loss contingency for each of the above matters (excluding the Hsu case as noted above) in our accompanying condensed consolidated balance sheet as of March 31, 2013. We may have an exposure to loss in excess of the amounts accrued, however, an estimate of such potential loss cannot be made at this ~~matter.~~time. Moreover, no assurance can be made that these matters either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, larger than our estimate, which could have a material adverse effect upon our financial condition and results of operations.

Additionally, we are currently engaged in other employment-related claims and other matters incidental to our business. We believe that all such claims against us are without merit or not material, and we intend to vigorously dispute the validity of the plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information at this time, we believe, but we cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect our business, financial position, results of operations, or cash flows. Should ~~the matter~~any of these matters be decided against us, we could not only incur liability but also experience an increase in similar suits and suffer reputational harm.

Derivative Matters

Two shareholder derivative lawsuits (Case No. CV106576 GAF (JCx) and Case No. CV107518 RSWL (FFMx)) were filed in the United States District Court for the Central District of California which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal Derivative Action”). Plaintiffs in the Federal Derivative Action allege a cause of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) our alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. We do not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. Our status as a “Nominal Defendant” in the actions reflects the fact that the lawsuits are maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on our behalf. We filed a motion to dismiss the Federal Derivative Action which was granted with leave to amend on July 31, 2012. Plaintiffs did not amend the complaint and subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the Plaintiffs' motion to dismiss and entered judgment accordingly. On November 12, 2012, Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals where the case is currently pending.

Three of the matters comprising the State Derivative Action allege causes of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011, the Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).

Both the Federal Derivative Action and State Derivative Actions are covered under our Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.

Other Proceedings

Four putative class action lawsuits, (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in the United States District Court for the Central District of California in the Fall of 2010 against American Apparel and certain of our officers and executives on behalf of American Apparel shareholders who purchased our common stock between December 19, 2006 and August 17, 2010. On

Table of Contents

December 3, 2010, the four lawsuits were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal Securities Action”). The lead plaintiff alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in our press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of our internal and financial control policies and procedures; (ii) our employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on us. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper. We filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013. We filed a motion to dismiss the complaint on March 15, 2013. The hearing on the motion will be held June 3, 2013. The Federal Securities Action is covered under our Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.

Should any of the above matters (i.e., the Federal Derivative Action, the State Derivative Action, or the Federal Securities Action) be decided against us in an amount that exceeds our insurance coverage, or if liability is imposed on grounds which fall outside the scope of our insurance coverage, we could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. We are unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon our financial condition and results of operations.

Two shareholder derivative lawsuits, entitled Nikolai Grigoriev v. Dov Charney, et al., Case No. CV106576 GAF (JCx) (the “Grigoriev Action”) and Andrew Smukler v. Dov Charney, et al., Case No. CV107518 RSWL (FFMx) (the “Smukler Action”), wereThe Company has previously disclosed an arbitration filed by the Company on February 17, 2011, related to cases filed in the ~~United States District~~Supreme Court ~~for the Central District~~ of ~~California on September 2, 2010~~New York, County of Kings (Case No. 5018-1) and October 7, 2010, respectively, and four shareholder derivative lawsuits, entitled John L. Smith v. Dov Charney, et al., Case No. BC 443763 (the "Smith Action"), Lisa Kim v. Dov Charney, et al., Case No. BC 443902 (the "Kim Action"), Teresa Lankford v. Dov Charney, et al., Case No. BC 445094 (the "Lankford Action"), and Wesley Norris v. Dov Charney, et al., Case No. BC 447890 (the "Norris Action") were filed in the Superior Court of the State of California for the County of Los Angeles ~~on August 16, 2010, September 3, 2010, September 7, 2010,~~(Case Nos. BC457920 and October 21, 2010, respectively, by persons identifying themselves as American Apparel shareholders and purporting to act on behalf of American Apparel, naming American Apparel as a nominal defendant and certain current and former officers, directors, and executives of the Company as defendants.

Plaintiffs in the Smith Action, Kim Action, and Norris Action allege causes of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. The Lankford Action alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets

~~Table of Contents~~

also arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection. On November 4, 2010, the four lawsuits filed in the Superior Court of the State of California were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action"). On April 12, 2011, the Court issued an order staying the State Derivative Action on the grounds that the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).

On November 12, 2010, the Grigoriev Action and Smukler Action were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal Derivative Action”). Plaintiffs in the Federal Derivative Action filed a Consolidated Amended Shareholder Derivative Complaint on June 13, 2011. The amended complaint alleges a cause of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) our alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. Plaintiffs in each of the derivative cases seek damages on behalf of American Apparel in an unspecified amount, as well as equitable and injunctive relief. We do not maintain any exposure to loss in connection with these shareholder derivative lawsuits. The lawsuits do not assert any claims against us. Our status as a “Nominal Defendant” in the actions reflects the fact that the lawsuits are maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on our behalf. On August 29, 2011, we filed a motion to dismiss the Federal Derivative Action. A hearing on the motion was held on December 12, 2011. On July 31, 2012, the Court dismissed the Federal Derivative Action, with leave to amend. Plaintiffs in the Federal Derivative Action subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the Plaintiffs' motion to dismiss the consolidated derivative complaint and entered judgment accordingly. On November 12, 2012, Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals.

Four putative class action lawsuits, entitled Anthony Andrade v. American Apparel, et al., Case No. CV106352 MMM (RCx), Douglas Ormsby v. American Apparel, et al., Case No. CV106513 MMM (RCx), James Costa v. American Apparel, et al., Case No. CV106516 MMM (RCx), and Wesley Childs v. American Apparel, et al., Case No. CV106680 GW (JCGx), were filed in the United States District Court for the Central District of California on August 25, 2010, August 31, 2010, August 31, 2010, and September 8, 2010, respectively, against American Apparel and certain of our officers and executives on behalf of American Apparel shareholders who purchased the our common stock between December 19, 2006 and August 17, 2010. On December 3, 2010, the four lawsuits were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal Securities Action”). On March 14, 2011, the Court appointed the firm of Barroway Topaz, LLP (now Kessler Topaz Meltzer & Check, LLP) to serve as lead counsel and Mr. Charles Rendelman to serve as lead plaintiff. On April 29, 2011, Mr. Rendelman filed a Consolidated Class Action Complaint against American Apparel, certain of our officers, and Lion, alleging two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rules 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in our press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of our internal and financial control policies and procedures; (ii) our employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on us. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper. On May 31, 2011, we filed a motion to dismiss the Federal Securities Action. On January 13, 2012, the Court dismissed the Federal Securities Action, with leave to amend. Plaintiff filed an amended complaint on February 27, 2012. We moved to dismiss the amended complaint on March 30, 2012. A hearing on the motion was heard on May 21, 2012. The Court took this matter under submission. Discovery is stayed in the Federal Securities Action, as well as in the Federal Derivative Action, pending resolution of motions to dismiss the Federal Securities Action.

We are unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect upon our financial condition and results of operations.

On February 17, 2011, the Company filed complaints in arbitration against five former employees seeking: (1) declaratory relief that the arbitration, confidentiality, severance and bonus agreements signed by the former employees are valid and enforceable; (2) damages in the event the former employees or anyone of them breaches their confidentiality agreements, as threatened; (3) attorneys' fees and costs incurred to compel the suit into arbitration; (4) declaratory relief that the former

~~Table of Contents~~

employees' claims of sexual harassment and sexual assault are false and without merit; and (5) declaratory relief that the former employees have attempted to engage in abuse of process for the purpose of extorting from the Company and Dov Charney money solely to avoid public shame and economic loss. On March 4, 2011, one such former employee filed suitBC460331) against American Apparel, Dov Charney and certain members of the Board of Directors asserting claims of ~~American Apparel in the Supreme Court of New York, County of Kings, Case No. 5018-11. The suit alleges~~ sexual harassment, gender discrimination, retaliation, negligent hiring and supervision, intentional and negligent infliction of emotional distress, fraud and unpaid wages, and seeks, among other things, an award of compensatory damages, exemplary damages, attorneys' fees and costs, all in an amount of at least $250,000 (the "New York Suit"). In March 2012, the court ordered this case into arbitration. On March 23, 2011, three of the other former employees filed a consolidated suit against American Apparel and Dov Charney in the Superior Court of the State of California for the County of Los Angeles, Case No. BC457920 (the "Los Angeles Suit"). Such action alleges sexual harassment, failure to prevent harassment and discrimination, intentional infliction of emotional distress, assault and battery, ~~and a declaratory judgment that~~impersonation through the confidentiality and arbitration agreements signed by plaintiffs are unenforceable. Such action seeks monetary damages, various forms of injunctive relief, and attorneys' fees and costs. On July 28, 2011, the court ordered this case into arbitration. The Company's insurance carrier has acknowledged coverage of the New York Suit and Los Angeles Suit, subject to a deductible and a reservation of rights.

~~We are currently engaged in other employment-related claims~~internet, defamation and other ~~matters incidental~~related claims. The Company recently settled one of these cases with no monetary liability to ~~our business. We believe that all such~~the Company. The Company recently prevailed on the sexual harassment claims ~~against us are without merit or not material, and we intend to vigorously dispute the validity~~in another of ~~the plaintiffs' claims. Should~~ these ~~matters be decided against us, we could not only incur substantial liability but also experience an increase in similar suits and suffer reputational harm.~~cases. While the ultimate resolution of ~~such~~the remaining claims cannot be determined, in light of the favorable ruling in one of these cases, the amount of settlement in the other of these cases, and based on information available at this time regarding the remaining cases, we believe, but we cannot provide assurances that, the amount and ultimate liability, if any, with respect to these remaining actions will not materially affect our business, financial position, results of operations, or cash flows. ~~We cannot assure you, however, that such actions will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.~~

5342

Table of Contents


Item 1A.	Risk Factors

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks and uncertainties described in the "Special Note Regarding Forward-Looking Statements" under Part I of this report and our other filings with the SEC. The risks and uncertainties described in this report are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect us. If any of these risks actually materialize, our business, financial position, results of operations and cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose all or part of your investment.

During the three ~~and nine~~ months ended ~~September 30, 2012~~,March 31, 2013, there have been no material changes in ~~our~~the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~.2012, except that we are updating the first and second risk factors described therein to reflect the financing transactions that closed on April 4, 2013. Please refer to the Company's Annual Report on Form 10-K (filed with the SEC on March ~~14, 2012)~~5, 2013) for the year ended December 31, ~~2011~~2012 for a complete list of our risk factors.

We have substantial indebtedness, which could have adverse consequences to us, and we may not be able to generate sufficient cash flow in the future to service our indebtedness.

We currently have substantial indebtedness.Our level of indebtedness has important consequences to us and to you and your investment. For example, our level of indebtedness may:

require us to dedicate a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to use for operations, investments, future business opportunities and other general corporate purposes;

make it more difficult for us to satisfy our debt obligations, and any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default or an inability to borrow under the agreements governing such indebtedness;

in the case of a default or an event of default, as applicable, lead to, among other things, cross-defaults with our other indebtedness, an acceleration of our indebtedness or foreclosure on the assets securing our indebtedness, which could have a material adverse effect on our business or financial condition;

limit our ability to obtain additional financing, or to sell assets to raise funds, if needed, for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;

result in higher interest expense if interest rates increase on our floating rate borrowings;

place us at a competitive disadvantage relative to others in the industry as it is not common for companies involved in the retail apparel business to operate with such high leverage;

heighten our vulnerability to downturns in our business, the industry or in the general economy and limit our flexibility in planning for or reacting to changes in our business and the retail industry; or

reduce our ability to carry out our plans to expand our store base, product offerings and sales channels.

Our ability to service our indebtedness is dependent on our ability to generate cash from internal operations sufficient to make required payments on such indebtedness, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, some of which factors are further described in this “Risk Factors” section. We are permitted by the terms of our indebtedness, including our senior secured notes and the Capital One Credit Facility, to incur additional indebtedness, subject to the restrictions therein. We have experienced negative cash flows from operating activities in the past, and our business may not generate sufficient cash flow from operations to enable us to service our indebtedness or to fund our other liquidity needs. Such event could have a material adverse effect on us and we may need to take various actions which also could have material adverse consequences to us, including seeking to refinance all or a portion of our indebtedness, seeking additional debt or equity financing or reducing or delaying capital expenditures, strategic acquisitions or investments, and we may not be able to do so on commercially reasonable terms or at all.

The terms of our indebtedness contain various covenants that may limit our business activities, and our failure to comply with these covenants could have material adverse consequences to us.

The terms of our indebtedness contain, and our future indebtedness may contain, various restrictive covenants that limit our management's discretion in operating our business. In particular, these agreements include, or may include, covenants relating to limitations on:

dividends on, and redemptions and repurchases of, capital stock;

payments on subordinated debt;

liens and sale-leaseback transactions;

loans and investments;

Table of Contents

debt and hedging arrangements;

mergers, acquisitions and asset sales;

transactions with affiliates;

disposals of assets;

changes in business activities conducted by us and our subsidiaries; and

capital expenditures, including to fund future store openings.

In addition, our credit agreements contain, and any future credit agreements or loan agreements may contain, certain financial and maintenance covenants, including covenants relating to our capital expenditures, fixed charge coverage, borrowing availability and leverage, some of which may be tied to consolidated EBITDA, in each case as defined in the applicable debt agreements.

Such restrictive and other covenants could limit our ability to respond to market conditions, to provide for unanticipated capital requirements or to take advantage of business or acquisition opportunities.

In addition, our failure to comply with the various covenants under our indebtedness could have material adverse consequences to us. Such failure may result in our being unable to borrow under our revolving credit facility, which we utilize to access our working capital, and as a result may adversely affect our ability to finance our operations or pursue our expansion plans. Our debt agreements contain cross-default or cross-acceleration provisions by which non-compliance with covenants, or the acceleration of other indebtedness of at least a specified outstanding principal amount, could also constitute an event of default under such debt agreements. Accordingly, such a failure could result in the acceleration of all of our outstanding debt, and may adversely affect our ability to obtain financing that may be necessary to effectively operate our business and grow the business going forward. In addition, substantially all of our assets are used to secure our indebtedness, including loans under our credit agreements, the senior secured notes and certain equipment leasing agreements. In the event of a default on these agreements, substantially all of our assets could be subject to liquidation by the creditors, which liquidation could result in no assets being left for the stockholders after the creditors receive their required payment.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

None.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

~~Item 1.01 Entry into a Material Definitive Agreement.~~

~~Lion Ninth Amendment~~

The Company entered into the Lion Ninth Amendment, effective as of September 30, 2012, which among other things waived the Company's obligation to maintain the minimum Consolidated EBITDA covenants for the twelve month period ended September 30, 2012. As a result, the Company was in compliance with the required financial covenants of the Lion Credit Agreement on September 30, 2012.

The foregoing description of the amendment and waiver is not intended to be complete and is qualified in its entirety by reference to the Exhibit 10.3 filed herewith, which is incorporated herein by reference.

~~Crystal Third Amendment and Lion Tenth Amendment~~

On November 12, 2012, the Company and certain of its subsidiaries entered into amendments to both the Crystal Credit Agreement and the Lion Credit Agreement that, among other things, reduced by $600,000 the target minimum EBITDA for the twelve months ended October 31, 2012 under the financial covenants of each credit agreement, respectively.

~~La Mirada Lease~~

The Company determined during the third quarter of 2012 that a lease agreement entered into between the Company and PAC Finance 1 LLC, dated June 15, 2012, relating to a distribution center located in La Mirada, CA, was material to the Company. A copy thereof is filed herewith as Exhibit 10.4.

None.


Item 6.	Exhibits

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. Some agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

have been qualified by disclosures that were made to the other party in connection with the negotiation of the

~~Table of Contents~~

applicable agreement, which disclosures are not necessarily reflected in the agreement;

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Table of Contents

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and in the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.



Exhibit No.			Description

4.1			Indenture, dated as of April 4, 2013, by and among the Company, the Guarantors and U.S. Bank National Association (included as Exhibit 4.1 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein).

4.2			Form of Note (included as Exhibit 4.2 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein).

4.3			Registration Rights Agreement, dated as of April 4, 2013, by and among the Company, the Guarantors and Cowen and Company, LLC and Sea Port Group Securities, LLC, as representatives of the initial purchasers (included as Exhibit 4.3 of the Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and incorporated by reference herein).

10.1			Amendment No. 2,5, dated ~~August 30, 2012,~~February 6, 2013, among American Apparel, Inc., American Apparel (USA), LLC, the other Borrowers and Credit Parties party thereto, Crystal Financial LLC and other signatories thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed ~~September~~February 11, ~~2012~~2013 and incorporated by reference herein).

10.2			~~Eighth~~Eleventh Amendment to Credit Agreement, dated ~~August 30, 2012,~~February 6, 2013, among American Apparel, Inc. and the other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent and the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto (included as Exhibit ~~10.3~~10.2 of the Current Report on Form 8-K (File No. 001-32697) filed ~~September~~February 11, ~~2012~~2013 and incorporated by reference herein).

10.3*10.3			~~Ninth Amendment and Waiver to~~ Credit Agreement, dated ~~September 28, 2012,~~as of April 4, 2013, by and among ~~American Apparel, Inc.~~the Credit Parties, Capital One Leverage Finance Corp., as administrative agent, swing line lender, and lender, Capital One, N.A., as L/C issuer and the other ~~Credit Parties as the facility guarantors from time to time~~lenders party thereto ~~Wilmington Trust N.A.,~~(included as Exhibit 10.1 of the ~~administrative agent~~Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and ~~the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto.~~incorporated by reference herein).

10.4*10.4			~~Lease agreement, dated June 15, 2012, between American Apparel, Inc., as the tenant and PAC Finance 1 L.L.C. as the landlord.~~

10.5*			~~Tenth Amendment to Credit~~Intercreditor Agreement, dated ~~November 12, 2012,~~as of April 4, 2013, by and among ~~American Apparel, Inc.~~U.S. Bank National Association and Capital One Leverage Finance Corp. (included as Exhibit 10.2 of the ~~other Credit Parties as the facility guarantors from time to time party thereto, Wilmington Trust N.A., as the administrative agent~~Current Report on Form 8-K (File No. 001-32697) filed April 9, 2013 and ~~the collateral agent, Lion Capital (Americas) Inc., as a lender, Lion/Hollywood L.L.C., as a lender, and other lenders from time to time party thereto.~~incorporated by reference herein).

31.1*			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Label Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document


*	Filed herewith.

5545

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: ~~November 13, 2012~~May 8, 2013



AMERICAN APPAREL, INC.
Signature	Title	Date

/s/ DOV CHARNEY	Chief Executive Officer and Director (Principal Executive Officer)	~~November 13, 2012~~May 8, 2013
Dov Charney

/s/ JOHN LUTTRELL	Chief Financial Officer (Principal Financial and Accounting Officer)	~~November 13, 2012~~May 8, 2013
John Luttrell

5646



	Three Months Ended September 30, 2012
	U.S. Wholesale		U.S. Retail			Canada			International			Consolidated
Wholesale net sales	$	39,862	$	—		$	3,215		$	2,113		$	45,190
Retail net sales	—		52,714			13,086			39,256			105,056
Online consumer net sales	6,985		—			416			4,513			11,914
Total net sales to external customers	46,847		52,714			16,717			45,882			162,160
Gross profit	12,873		34,361			10,166			27,800			85,200
Income from segment operations	5,811		3,116			721			4,192			13,840
Depreciation and amortization	1,446		2,747			394			951			5,538
Capital expenditures	3,300		2,136			328			894			6,658
Deferred rent expense (benefit)	297		(349		)	(58		)	(122		)	(232		)

	Three Months Ended September 30, 2011
	U.S. Wholesale		U.S. Retail			Canada			International			Consolidated
Wholesale net sales	$	36,780	$	—		$	2,958		$	2,825		$	42,563
Retail net sales	—		43,104			11,944			33,244			88,292
Online consumer net sales	5,625		—			362			4,047			10,034
Total net sales to external customers	42,405		43,104			15,264			40,116			140,889
Gross profit	8,897		29,607			9,432			27,055			74,991
Income (loss) from segment operations	4,465		(622		)	(527		)	5,339			8,655
Depreciation and amortization	1,833		2,599			404			1,290			6,126
Capital expenditures	838		1,169			77			473			2,557
Retail store impairment	—		119			640			25			784
Deferred rent expense (benefit)	59		(294		)	(30		)	(219		)	(484		)