American Apparel raises going concern doubts

BANGALORE Tue Aug 17, 2010 1:43pm EDT

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BANGALORE (Reuters) - American Apparel Inc's (APP.A) woes continued as it raised "substantial" doubt about its ability to continue as a going concern and warned it could breach a loan covenant, sending its shares down 22 percent to a lifetime low.

The company also said in a regulatory filing that it received a subpoena from the U.S. Attorney's Office for the Southern District of New York in July, as well as inquiries from the U.S. Securities and Exchange Commission regarding the resignation of its former auditors.

American Apparel's former auditor Deloitte had quit in March after warning of problems with the company's financial reporting, and the subsequent reliability of its financial statements for the year ended December 31, 2009.

American Apparel Chief Executive Dov Charney, who is also its largest shareholder, has been repeatedly sued for sexual harassment and the company has faced several problems in recent months from underperforming results to mass layoffs of illegal workers.

The Los Angeles-based company, which opened its first retail store in 2003, dodged a potential breach of debt covenants earlier this year at the cost of higher interest payments.

The company said on Tuesday it will not be in compliance with the minimum consolidated EBITDA covenant under its second lien credit agreement, as of September 30.

American Apparel, known for its shiny spandex leggings and cotton T-shirts, plans to work with the second lien lender to obtain the appropriate amendments prior to the anticipated covenant default, it said in a statement.

Popular with urban hipsters for "Made-in-USA" retro apparel, the company now sees losses from operations continuing through at least the third quarter, and said it may not have sufficient liquidity to continue to operate through next year.

It also expects substantial operating loss and negative cash flows for the six months ended June 30.

For the second quarter, the company forecast sales of about $132-$134 million, down from $136.1 million a year ago. Same-store sales, which fell in 11 out of 12 months in 2009, were down 16 percent in the quarter.

American Apparel shares were down 22 percent at $1.08 Tuesday afternoon on the American Stock Exchange.

At their peak, the shares touched $16.75 in December 2007, after blank check company Endeavor Acquisition Corp took the company public through a reverse merger.

(Reporting by Abhishek Takle in Bangalore; Editing by Gopakumar Warrier)

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