Form 10-Q AMERICAN APPAREL, INC For: Sep 30

November 10, 2014 4:40 PM

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

�

FORM 10-Q

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

For the quarter ended September�30, 2014


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)

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

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

At November�3, 2014, the Registrant had issued and outstanding 175,799,554 and 174,780,864 shares of its common stock, respectively.

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AMERICAN APPAREL, INC.

TABLE OF CONTENTS

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�	�	Page
Part I-Financial Information		6
Item�1.	Financial Statements�(unaudited)	6
�	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	6
�	Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013	7
�	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	8
�	Condensed Notes to Consolidated Financial Statements	10
Item�2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item�4.	Controls and Procedures	50
Part II-Other Information		50
Item�1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item�2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item�3.	Defaults Under Senior Securities	53
Item�4.	Mine Safety Disclosures	53
Item�5.	Other Information	53
Item 6.	Exhibits	53
�	�	�
Signatures	�	55

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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 100% 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," "expect," "believe," "plan," "estimate," "potential," "continue," or the negative thereof or other and similar expressions are forward-looking statements. In addition, in some cases, you can identify forward-looking statements by words or phrases such as "trend," "potential," "opportunity," "comfortable," "anticipate," "current," "intention," "position," "assume," "outlook," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions.

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


"	consequences of the suspension and possible termination of our chief executive officer, including the pending internal investigation related thereto, any litigation or regulatory investigations or any impact on our sales or brand, and any future determinations that may be made with respect thereto;


"	ability to hire and/or retain qualified employees, including at the chief executive officer and other executive levels;


"	future financial condition, results of operations, plans and prospects, expectations, goals and strategies for future growth, operating improvements and cost savings, and the timing of any of the foregoing;


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


"	ability to make debt service payments and remain in compliance with financial covenants under financing arrangements and obtain appropriate waivers or amendments with respect to any noncompliance;


"	liquidity and projected cash flows;


"	plans to make continued investments in advertising and marketing;�


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


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


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


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


"	economic and political conditions;�


"	overall industry and market performance;�


"	operations outside the U.S.;�


"	the impact of accounting pronouncements;�


"	ability to maintain compliance with the listing requirements of NYSE MKT LLC;


"	ability to improve efficiency and control costs at our production and supply chain facilities; and


"	other assumptions described in this 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 and those expressed in or implied by the forward-looking statements. Such assumptions, events, risks, uncertainties

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and other factors are found in Item IA. Risk Factors in Part II and elsewhere in this Quarterly Report on Form 10-Q, and the Annual Report on Form 10-K for the year ended December�31, 2013, and other reports and documents we file with the Securities and Exchange Commission (the "SEC") and include, without limitation, the following:


"	suspension and possible termination of our chief executive officer and consequences related thereto, including the pending internal investigation related thereto, any litigation or regulatory investigations or any impact on our sales or brand, and any future determinations that may be made with respect thereto;


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


"	voting control by our executive officers, directors, lenders and other affiliates;


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


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


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


"	general economic conditions, geopolitical events, other regulatory changes, and inflation or deflation;


"	disruptions in the global financial markets;


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


"	risks associated with consumer apparel spending in the U.S.;


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


"	seasonality and fluctuations in comparable store sales and wholesale net sales and associated margins;


"	ability to improve manufacturing efficiency at our production facilities;


"	ability to pass on the added cost of raw materials and labor to customers;


"	changes in the price of raw materials in the global market and labor costs including increases in minimum wages;


"	ability to effectively manage inventory levels;


"	ability to effectively operate our distribution facility located in La Mirada, California without unanticipated costs;


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


"	ability to renew leases on economic terms;


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


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


"	consequences of our significant indebtedness including our relationship with lenders; ability to comply with debt agreements; ability to generate sufficient cash flow to serve our debt; and the risk of acceleration of borrowings thereunder as a result of noncompliance;


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


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


"	loss of U.S. import protections; changes in duties, tariffs and quotas; other risks associated with our foreign operations and supply sources under market disruption; changes in import and export laws; currency restrictions and exchange rate fluctuations;


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


"	tax assessments by domestic or foreign governmental authorities, including import or export duties on our products and the applicable rates for any such taxes or duties;


"	ability to maintain compliance with the exchange rules of the NYSE MKT LLC;


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


"	adverse weather conditions or natural disaster, including those which may be related to climate change;


"	technological changes in manufacturing, wholesaling, or retailing;


"	the risk, including costs and timely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and could impact cash flow and liquidity, and ability to upgrade information technology infrastructure and other risks associated with the systems that operate our online retail operations; and


"	the risk of failure to protect the integrity and security of our information systems and our customers' information.

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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.

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PART I-FINANCIAL INFORMATION


Item�1.	Financial Statements (unaudited)

American Apparel, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share amounts)

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�	September�30, 2014			�	December 31, 2013
ASSETS	(unaudited)			�	�
Current assets:	�			�	�
��Cash	$	9,389		�	$	8,676
��Trade accounts receivable (net of allowances $2,583; $2,229)	26,776			�	20,701
��Prepaid expenses and other current assets	15,534			�	15,636
��Inventories, net	150,960			�	169,378
��Income taxes receivable and prepaid income taxes	679			�	306
��Deferred income taxes, net of valuation allowance	582			�	599
��Total current assets	203,920			�	215,296
Property and equipment, net	55,291			�	69,303
Deferred income taxes, net of valuation allowance	2,362			�	2,426
Other assets, net	45,616			�	46,727
TOTAL ASSETS	$	307,189		�	$	333,752
LIABILITIES AND STOCKHOLDERS' DEFICIT	�			�	�
Current liabilities:	�			�	�
��Cash overdraft	$	3,891		�	$	3,993
��Revolving credit facilities and current portion of long-term debt	27,060			�	44,042
��Accounts payable	33,868			�	38,290
Accrued expenses and other current liabilities	61,464			�	50,018
Fair value of warrant liability	14,704			�	20,954
Income taxes payable	2,365			�	1,742
Deferred income tax liability, current	1,227			�	1,241
Current portion of capital lease obligations	2,951			�	1,709
Total current liabilities	147,530			�	161,989
Long-term debt (net of unamortized discount $6,148; $5,779)	216,160			�	213,468
Capital lease obligations, net of current portion	2,708			�	5,453
Deferred tax liability	521			�	536
Deferred rent, net of current portion	14,165			�	18,225
Other long-term liabilities	13,696			�	11,485
TOTAL LIABILITIES	394,780			�	411,156
COMMITMENTS AND CONTINGENCIES				�
STOCKHOLDERS' DEFICIT	�			�	�
Preferred stock, $0.0001 par value per-share: authorized 1,000 shares; none issued	0			�	0
Common stock, $0.0001 par value per-share: authorized 230,000 shares; Issued 175,806; 113,469, Outstanding 174,712; 111,330	18			�	11
Additional paid-in capital	217,650			�	185,472
Accumulated other comprehensive loss	(5,823		)	�	(4,306		)
Accumulated deficit	(297,279		)	�	(256,424		)
Less: Treasury stock, 304 shares at cost	(2,157		)	�	(2,157		)
TOTAL STOCKHOLDERS' DEFICIT	(87,591		)	�	(77,404		)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	307,189		�	$	333,752

See accompanying condensed notes to consolidated financial statements.

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American Apparel, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(unaudited)



�	Three Months Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Net sales	$	155,869		�	$	164,543		�	$	455,362		�	$	464,839
Cost of sales	73,330			�	79,903			�	218,462			�	223,461
Gross profit	82,539			�	84,640			�	236,900			�	241,378
Selling and distribution expenses	52,640			�	63,982			�	159,145			�	177,235
General and administrative expenses (including related party charges of $155; $181, $537; $625)	38,785			�	24,918			�	90,829			�	80,716
Retail store impairment	1,193			�	233			�	1,921			�	311
Loss from operations	(10,079		)	�	(4,493		)	�	(14,995		)	�	(16,884		)
Interest expense	9,858			�	10,121			�	29,916			�	29,555
Foreign currency transaction loss (gain)	616			�	(449		)	�	748			�	422
Unrealized (gain) loss on change in fair value of warrants	(1,785		)	�	(12,922		)	�	(6,250		)	�	5,225
(Gain) loss on extinguishment of debt	(171		)	�	0			�	(171		)	�	32,101
Other (income) expense	(57		)	�	58			�	(5		)	�	42
Loss before income taxes	(18,540		)	�	(1,301		)	�	(39,233		)	�	(84,229		)
Income tax provision	644			�	212			�	1,622			�	1,299
Net loss	$	(19,184	)	�	$	(1,513	)	�	$	(40,855	)	�	$	(85,528	)
�	�			�	�			�	�			�	�
Basic and diluted net loss per-share ^(a)	$	(0.11	)	�	$	(0.01	)	�	$	(0.27	)	�	$	(0.78	)
Weighted-average basic and diluted shares outstanding ^(a)	173,769			�	110,354			�	153,354			�	110,172
�	�			�	�			�	�			�	�
Net loss (from above)	$	(19,184	)	�	$	(1,513	)	�	$	(40,855	)	�	$	(85,528	)
��Other comprehensive (loss) income items:	�			�	�			�	�			�	�
��Foreign currency translation	(1,919		)	�	1,445			�	(1,517		)	�	(785		)
��Other comprehensive (loss) income, net of tax	(1,919		)	�	1,445			�	(1,517		)	�	(785		)
Comprehensive loss	$	(21,103	)	�	$	(68	)	�	$	(42,372	)	�	$	(86,313	)

(a) The dilutive impact of incremental shares is excluded from loss position in accordance with U.S. generally accepted accounting principles ("GAAP")

See accompanying condensed notes to consolidated financial statements.

�

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American Apparel, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



�	Nine Months Ended September 30,
�	2014			�	2013
CASH FLOWS FROM OPERATING ACTIVITIES	�			�	�
Cash received from customers	$	450,079		�	$	465,468
Cash paid to suppliers, employees and others	(427,640		)	�	(466,499		)
Income taxes paid	(1,335		)	�	(2,082		)
Interest paid	(17,852		)	�	(5,726		)
Other	55			�	35
Net cash provided by (used in) operating activities	3,307			�	(8,804		)
�	�			�	�
CASH FLOWS FROM INVESTING ACTIVITIES	�			�	�
Capital expenditures	(8,675		)	�	(18,907		)
Proceeds from sale of fixed assets	52			�	30
Restricted cash	219			�	1,594
Net cash used in investing activities	(8,404		)	�	(17,283		)
�	�			�	�
CASH FLOWS FROM FINANCING ACTIVITIES	�			�	�
Cash overdraft	(102		)	�	2,812
Repayments of expired revolving credit facilities, net	0			�	(28,513		)
(Repayments) borrowings under current revolving credit facilities, net	(16,965		)	�	28,713
Repayments of term loans and notes payable	(57		)	�	(25,463		)
Repayment of Lion term loan	0			�	(144,149		)
Issuance of Senior Secured Notes	0			�	199,820
Payments of debt issuance costs	(2,099		)	�	(11,880		)
Net proceeds from issuance of common stock	28,446			�	0
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock	(414		)	�	(2,133		)
Repayments of capital lease obligations	(1,932		)	�	(773		)
Net cash provided by financing activities	6,877			�	18,434
�	�			�	�
Effect of foreign exchange rate on cash	(1,067		)	�	(287		)
Net increase (decrease) in cash	713			�	(7,940		)
Cash, beginning of period	8,676			�	12,853
Cash, end of period	$	9,389		�	$	4,913

See accompanying condensed notes to consolidated financial statements.

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American Apparel, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)



�	Nine Months Ended September 30,
�	2014			�	2013
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	�			�	�
Net loss	$	(40,855	)	�	$	(85,528	)
Depreciation and amortization of property and equipment, and other assets	19,822			�	19,155
Retail store impairment	1,921			�	311
Loss on disposal of property and equipment	48			�	77
Share-based compensation expense	3,764			�	8,044
Unrealized (gain) loss on change in fair value of warrants	(6,250		)	�	5,225
Amortization of debt discount and deferred financing costs	1,893			�	3,717
(Gain) loss on extinguishment of debt	(171		)	�	32,101
Accrued interest paid-in-kind	3,129			�	6,875
Foreign currency transaction loss	748			�	422
Allowance for inventory shrinkage and obsolescence	1,719			�	964
Bad debt expense	635			�	380
Deferred income taxes	(24		)	�	(26		)
Deferred rent	(3,661		)	�	(1,667		)
Changes in cash due to changes in operating assets and liabilities:	�			�	�
Trade accounts receivables	(5,918		)	�	249
Inventories	15,161			�	1,741
Prepaid expenses and other current assets	2			�	(4,026		)
Other assets	115			�	(4,274		)
Accounts payable	(3,181		)	�	(8,133		)
Accrued expenses and other liabilities	14,098			�	16,394
Income taxes receivable / payable	312			�	(805		)
Net cash provided by (used in) operating activities	$	3,307		�	$	(8,804	)
�	�			�	�
NON-CASH INVESTING AND FINANCING ACTIVITIES	�			�	�
Property and equipment acquired, and included in accounts payable	$	471		�	$	5,270

See accompanying condensed notes to consolidated financial statements.

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American Apparel, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(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. The Company manufactures and sells clothing and accessories for women, men, children and babies. The Company sells its products through the wholesale distribution channel supplying t-shirts and other casual wear to distributors and screen printers, as well as direct to customers through its retail stores located in the U.S. and internationally. In addition, the Company operates an online retail e-commerce website. At September�30, 2014, the Company operated a total of 245 retail stores in 20 countries including the U.S. and Canada.

The Company Highlights

Recent Developments - On September 29, 2014, the Board of Directors (the "Board") appointed Scott Brubaker as Interim Chief Executive Officer ("CEO") and Hassan Natha as Chief Financial Officer ("CFO"), and John Luttrell resigned as Interim Chief Executive Officer and Chief Financial Officer.

On July 7, 2014, the Company received a notice from Lion Capital LLP ("Lion") asserting an event of default and an acceleration of the maturity of the loans and other outstanding obligations under the loan agreement (the "Lion Loan Agreement") thereunder as a result of the suspension of Dov Charney as CEO of the Company by the Board. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General Group ("Standard General" and such agreement, subsequent to the assignment, the "Standard General Loan Agreement"). Standard General has waived any default under the Standard General Loan Agreement that may have resulted or that might result from Mr. Charney not being the CEO of the Company.

On September 8, 2014, the Company and Standard General entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. See Note 7.

In connection with the Nomination, Standstill and Support Agreement, dated July 9, 2014, (the "Support Agreement") among the Company, Standard General and Mr. Charney, five directors including Mr. Charney resigned the Company's Board, effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and the Company. In addition, a new director was appointed to the Board by Lion on September 15, 2014.

In 2012, German customs audited the import records of the Companys German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments of $5,409 on the Companys imports, including interest and penalties, at the September�30, 2014 foreign currency exchange rate (the assessment was issued in Euros). The German customs imposed a substantially higher tariff rate than the original rate that the Company had paid on the imports, more than doubling the amount of the tariff that the Company would have to pay. The assessments of additional retaliatory duty originated from a trade dispute between Europe and the U.S. which had nothing to do with the Company.

Despite the ongoing appeals of the assessment in the German courts and European Commission, the German authorities demanded, and the Company paid $4,390 in the third quarter of 2014 and the final balance of $85 in the fourth quarter of 2014. The Company recorded the duty portion of $83 in cost of sales and the retaliatory duties, interest and penalties of $5,326 in general and administrative expenses in its consolidated statements of operations.

The Company believes that it has valid arguments to challenge the merit of the German customs assessment and intends to vigorously defend its position in the German courts and before the European Commission. At this time, the outcome of the legal proceedings is subject to significant uncertainty and no assurance can be made that this matter will result in a full or partial recovery of this payment.

Liquidity - As of September�30, 2014, the Company had $9,389 in cash, $27,047 outstanding on a $50,000 asset-backed revolving credit facility with Capital One Business Credit Corp. ("Capital One" and such facility, the "Capital One Credit Facility") and $20,398 of availability for additional borrowings. On October 15, 2014, the Company paid $13,666 in interest on its senior secured notes.

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In March 2014, the Company entered into the Fifth Amendment to the Capital One Credit Facility (the "Fifth Amendment") and waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December�31, 2013 and March�31, 2014. Based on the Fifth Amendment, the interest rates on borrowings under the Capital One Credit Facility are equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% at the Company's option and are subject to specified borrowing requirements and covenants. In addition, the Fifth Amendment reset the minimum fixed charge coverage ratio, maximum leverage ratio, and maximum capital expenditures, and added a minimum adjusted EBITDA covenant. For the three months ended September�30, 2014, the Company was required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and achieve a minimum adjusted EBITDA of $23,406. The Company was in compliance with such covenant at September�30, 2014.

Management's Plan - The Company continues to develop initiatives intended to increase sales, reduce costs, or improve liquidity. Beginning with the fourth quarter of 2013, the Company instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. The Company also limited capital expenditures starting the first quarter of 2014. In addition, the Company continues to drive productivity improvements from its new distribution center, inventory reductions, other labor cost reductions, and consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing.

Although the Company has made significant improvements under these programs, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. The Company's cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. Accordingly, there can be no assurance that the Company's planned improvements will be successful.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements include the accounts of American Apparel, Inc. and its 100% owned subsidiaries. The condensed consolidated financial statements have been prepared in accordance with 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.

The financial data of the Company included herein is unaudited. The condensed consolidated financial statements do not contain certain information that was included in the annual financial statements included in the Company's Annual Report on Form 10-K for the year ended�December�31, 2013. Readers are urged to review the Company's Annual Report on Form 10-K for the year ended December�31, 2013 as well as other publicly filed documents�for more complete descriptions and discussions. In the opinion of management, the 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.

All intercompany balances and transactions have been eliminated upon consolidation. Certain prior year amounts have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include: inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill and property and equipment; fair value calculations, including derivative liabilities; contingencies, including accruals for the outcome of current litigation and assessments and self-insurance; income taxes, including uncertain income tax positions and recoverability of deferred income taxes and any limitations as to net operating losses ("NOL"); and cash flow projections in assessing future performance related to financial standards requiring a prospective analysis in valuing and classifying assets and liabilities. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts) and trade accounts receivable (including credit card receivables) relating substantially to the Company's U.S. Wholesale segment. Cash is managed within established guidelines, and the Company mitigates its risk by investing through major financial institutions. The Company had approximately $7,932 and $7,374 held in foreign banks at September�30, 2014 and December�31, 2013, respectively.

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Concentration of credit risk with respect to trade accounts receivable is limited by performing on-going credit evaluations of its customers and adjusting credit limits based upon payment history and the customer's current credit worthiness. The Company also maintains an insurance policy for certain customers based on a customer's credit rating and established limits. Collections and payments from customers are continuously monitored. One customer in the Company's U.S. Wholesale segment accounted for 17.6% and 14.2% of the Companys total trade accounts receivable as of September�30, 2014 and December�31, 2013, respectively. The Company maintains an allowance for doubtful accounts which is based upon historical experience and specific customer collection issues that have been identified. While bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.

Fair Value Measurements

The financial instruments recorded in the consolidated balance sheets include cash,�trade accounts receivable (including credit card receivables), accounts payable, revolving credit facilities, senior secured notes, term loans and warrants. Due to their short-term maturity, the carrying values of cash, trade accounts receivables, and accounts payable approximate their fair market values. In addition, the carrying amount of the revolving credit facility from Capital One approximates its fair value because of the variable market interest rate charged to the Company.

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data is not readily available, the Company's own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows:

Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level 2 Pricing inputs are other than unadjusted quoted prices in active markets, which are based on the following:

"Quoted prices for similar assets or liabilities in active markets;

"Quoted prices for identical or similar assets or liabilities in non-active markets; or

"Either directly or indirectly observable inputs as of the reporting date.

Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. The valuation policies and procedures underlying are determined by the Company's accounting and finance team and are approved by the CFO.

In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

As of September�30, 2014, there were no transfers between Levels 1, 2, and 3 of the fair value hierarchy.

Summary of Significant Valuation Techniques

Level 2 Measurements:

Senior secured notes: Estimated based on quoted prices for identical senior secured notes in non-active market.

Level 3 Measurements:

Term loans: Estimated using a projected discounted cash flow analysis based on unobservable inputs including principal and interest payments and discount rate. A yield rate was estimated using yields rates for publicly traded debt instruments of comparable companies with similar features. See Note 8.

Warrants: Estimated using the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility. See Notes 8 and 11.

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Indefinite-lived assets - goodwill: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions.

Retail stores: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit and discount rate. The key assumptions used in the estimates of projected cash flows were sales, gross margins, and payroll costs. These forecasts were based on historical trends and take into account recent developments as well as the Company's plans and intentions.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of its assets and liabilities, and are measured using enacted tax rates in effect for the year in which the differences are expected to reverse.�The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction.�A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such amounts will more likely than not go unrealized.�Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of cumulative losses and current operating performance and includes an assessment of the degree to which any losses are driven by items that are unusual in nature or incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions and any other factors arising during the period which may impact its future operating results. If it becomes more likely than not that a tax asset will be realized, any related valuation allowance of such assets would be reversed.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability.�In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions.�Management believes that adequate provisions have been made for all years, but the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with managements expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

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

For financial statement purposes, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its financial statements. Gross unrecognized tax benefits are included in current liabilities in the consolidated balance sheets, and interest and penalties on unrecognized tax benefits are recorded in the income tax provision in the consolidated statements of operations.

Accounting Standards Updates

In August 2014, the Financial Accounting Standards Board ("FASB") issued a new standard on disclosure of uncertainties about an entity's ability to continue as a going concern. The new standard provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entity's ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December�15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

In June 2014, the FASB issued a new standard on accounting for share-based payments. The new standard clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant date fair value of the award. The new standard also clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December�15, 2015. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

In May 2014, the FASB issued a new standard on recognizing revenue in contracts with customers. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes

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most current revenue recognition guidance. The new standard creates a five-step process to recognize revenue that requires entities to exercise judgment when considering contract terms and relevant facts and circumstances. The new standard also requires expanded disclosures surrounding revenue recognition. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December�15, 2016. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

Other recently issued accounting standards are not expected to have a material effect on the Company's consolidated financial statements.

Note 3. Inventories

The components of inventories are as follows: �



�	September�30, 2014			�	December�31, 2013
Raw materials	$	20,664		�	$	23,199
Work in process	3,094			�	2,596
Finished goods	131,676			�	146,361
�	155,434			�	172,156
Less reserve for inventory shrinkage and obsolescence	(4,474		)	�	(2,778		)
Total, net of reserves	$	150,960		�	$	169,378

Inventories consist of material, labor, and overhead, and are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. For the three and nine months ended September 30, 2014 and 2013, no 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 records lower of cost or market reserves for such identified excess and slow-moving inventories. The Company had a lower of cost or market reserves for excess and slow-moving inventories of $2,004 and $1,951 at September�30, 2014 and December�31, 2013, respectively.

The Company establishes reserves for inventory shrinkage for each of its retail locations and warehouse based on the historical results of physical inventory cycle counts. Inventory shrinkage reserves were $2,470 and $827 as of September�30, 2014 and December�31, 2013, 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 general and administrative expenses in the consolidated statements of operations. Depreciation and amortization expenses were $6,404 and $6,738 for the three months ended September 30, 2014 and 2013, respectively, and $19,822 and $19,155 for the nine months ended September 30, 2014 and 2013, respectively.

Based on the Company's retail store impairment analysis, it recorded impairment charges of $1,193 and $233 for the three months ended September 30, 2014 and 2013, respectively, and $1,921 and $311 for the nine months ended September 30, 2014 and 2013, respectively.

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Note 5. Accrued Expenses and Other Current Liabilities

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



�	September�30, 2014		�	December�31, 2013
Compensation, bonuses and related taxes	$	10,452	�	$	11,773
Accrued interest	13,106		�	6,064
Workers' compensation and other self-insurance reserves (Note 14)	6,472		�	6,383
Sales, value and property taxes	3,068		�	3,868
Gift cards and store credits	6,651		�	7,391
Loss contingencies	3,572		�	1,177
Deferred revenue	703		�	1,258
Deferred rent	3,492		�	3,363
Other	13,948		�	8,741
Total accrued expenses and other current liabilities	$	61,464	�	$	50,018

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

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



�	Lender	�	Expiration	�	September�30, 2014		�	December�31, 2013
Revolving credit facility	Capital One	�	April 14, 2018	�	$	27,047	�	$	43,526
Revolving credit facility	Bank of Montreal	�	March 31, 2014	�	0		�	443
Current portion of long-term debt	�	�	�	�	13		�	73
Total	�	�	�	�	$	27,060	�	$	44,042

The Company incurred interest charges of $9,858 and $10,121 for the three months ended September 30, 2014 and 2013, respectively, and $29,916 and $29,555 for the nine months ended September 30, 2014 and 2013, respectively, for all outstanding borrowings. The interest charges subject to capitalization were not significant for the three and nine months ended September 30, 2014 and 2013.

Revolving Credit Facility - Capital One

In March 2014, the Company entered into the Fifth Amendment to the Capital One Credit Facility which waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December�31, 2013 and March�31, 2014. Based on the Fifth Amendment, the interest rates on borrowings under the Capital One Credit Facility are equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% at the Company's option and are subject to specified borrowing requirements and covenants. In addition, the Fifth Amendment reset the minimum fixed charge coverage ratio, maximum leverage ratio, and maximum capital expenditures and added a minimum adjusted EBITDA covenant. For the three months ended September�30, 2014, the Company was required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and achieve a minimum adjusted EBITDA of $23,406. The Company was in compliance with such covenants at September�30, 2014.

The Capital One Credit Facility is secured by a lien on substantially all of the assets of the Company's domestic subsidiaries and equity interests in certain of the Company's foreign subsidiaries, subject to some restrictions. It requires that the Company maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may adjust the advance restriction and criteria for eligible inventory and accounts receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Senior Notes Indenture (the "Indenture") or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility. As of September�30, 2014, the Company had $1,280 of outstanding letters of credit secured against the Capital One Credit Facility.

The Company had $27,047 and $43,526 outstanding on a $50,000 asset-backed revolving credit facility with Capital One as of September�30, 2014 and December�31, 2013, respectively. The amount available for additional borrowings on September�30, 2014 was $20,398. The Capital One Credit Facility matures on April�14, 2018 and is subject to a January�15, 2018 maturity if excess availability is less than $15,000 at the time of notice to Capital One that an Applicable High Yield Discount Obligation redemption will be required pursuant to Section 3.01(e) of the Indenture governing the Notes (as defined in Note 7).

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Revolving Credit Facility - Bank of Montreal

The Company's 100% owned Canadian subsidiaries had a revolving credit facility with Bank of Montreal. Outstanding amounts under this credit facility were repaid, and the agreement expired on March�31, 2014.

Note 7. Long-Term Debt

Long-term debt consists of the following:



�	September�30, 2014			�	December�31, 2013
Senior Secured Notes due 2020 ^(a)	$	206,857		�	$	203,265
Standard General Loan Agreement ^(b)	9,034			�	0
Lion Loan Agreement ^(c)	0			�	9,865
Other	282			�	411
Total long-term debt	216,173			�	213,541
Current portion of debt	(13		)	�	(73		)
Long-term debt, net of current portion	$	216,160		�	$	213,468

(a) Includes accrued interest paid in-kind of $6,173 and $3,044 and net of unamortized discount of $5,316 and $5,779 at September�30, 2014 and December�31, 2013, respectively.

(b) Includes accrued interest paid in-kind of $365 and net of unamortized discount of $831 at September�30, 2014.

��

Senior Secured Notes due 2020

The Company has outstanding senior secured notes (the "Notes") issued at 97% of the $206,000 par value on April 4, 2013. The Notes mature on April�15, 2020 and bear interest at 15% per annum, of which 2% is payable in-kind until April�14, 2018 and in cash on subsequent interest dates. Interest on the Notes, of approximately $13,900 per payment period in 2015, is payable semi-annually, in arrears, on April 15 and October 15. On April�14, 2014 and October 15, 2014, the Company paid $13,390 and $13,666 in interest on the Notes, respectively.

On or after April�15, 2017, the Company may, at its option, redeem some or all of the Notes at a premium, decreasing ratably over time to zero as specified in the Indenture, plus accrued and unpaid interest to 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 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 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, 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' cash, trade accounts receivable, inventory and certain other assets (collectively, the "Credit Facility Priority Collateral"), subject to certain exceptions and permitted liens. The Notes and the guarantees, respectively, rank equal in right of payment with the Company's and its domestic subsidiaries' senior indebtedness, including indebtedness under the Capital One Credit Facility, before giving effect to collateral arrangements.

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

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

As of September�30, 2014, the Company was in compliance with the required covenants of the Indenture.

Standard General Loan Agreement

On July 7, 2014, Lion issued a notice of acceleration to the Company under the Lion Loan Agreement as a result of the Board's decision to suspend Mr. Charney as CEO of the Company. The notice accelerated and declared the amounts outstanding under the Lion Loan Agreement and any accrued interest immediately due and payable. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to Standard General. Standard General has waived any default under the Standard General Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of the Company.

On September 8, 2014, the Company entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. The principal amount of the term loan is $9,865. Interest under the loan agreement is payable in cash or, to the extent permitted by the Company's other debt agreements, in-kind.

As a result of the September 8, 2014 amendment, the Company evaluated the change in cash flows and determined that there was a greater than 10% change between the present values of the existing loan and the amended loan causing an extinguishment of debt. The Company recorded the amended loan at its fair value of $9,034 and recorded a gain of $171 on extinguishment of debt. Additionally, the $831 difference between the original principal amount of $9,865 and the fair value of the amended loan of $9,034 was recorded as a discount and will be recognized as interest expense using the effective interest method over the remaining term of the amended loan.

Note 8. Fair Value of Financial Instruments

The Company's financial instruments at fair value are measured on a recurring basis. Related unrealized gains or losses are recognized in unrealized (gain) loss on change in fair value of warrants in the consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note 2.

The following tables present carrying amounts and fair values of the Company's financial instruments as of September�30, 2014 and December�31, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Company did not have any assets or liabilities categorized as Level 1 as of September�30, 2014.



�	�	September�30, 2014
�	�	Carrying�Amount		�	Fair�Value
Senior Secured Notes due 2020	Level 2 Liability	$	206,857	�	$	224,540
Standard General Loan Agreement	Level 3 Liability	9,865		�	9,034
Lion Warrant	Level 3 Liability	(a)		�	14,704
�	�	$	216,722	�	$	248,278
�	�	�		�	�
�	�	December�31, 2013
�	�	Carrying�Amount		�	Fair�Value
Senior Secured Notes due 2020	Level 2 Liability	$	203,265	�	$	191,065
Lion Loan Agreement	Level 3 Liability	9,865		�	9,773
Lion Warrant	Level 3 Liability	(a)		�	20,954
�	�	$	213,130	�	$	221,792

(a) No cost is associated with these liabilities (see Note 11).

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The following table presents a summary of changes in fair value of the Lion Warrant (Level 3 financial liabilities) which are marked to market on a periodic basis:



�	Three Months Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Beginning balance	$	16,489		�	$	35,388		�	$	20,954		�	$	17,241
Adjustments included in earnings ^(a)	(1,785		)	�	(12,922		)	�	(6,250		)	�	5,225
Balance at September 30,	$	14,704		�	$	22,466		�	$	14,704		�	$	22,466

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

At September�30, 2014, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.

Note 9. Income Taxes

Income taxes for the three and nine months ended September 30, 2014 and 2013 were computed using an effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management.

The Company incurred losses from operations for the three and nine months ended September 30, 2014 and 2013. Based upon these results and the recent history of cumulative losses for the prior three years, as well as trends in the Company's performance projected through 2014, the Company's management believes that it is more likely than not deferred tax assets in certain jurisdictions are not fully realizable. Accordingly, the Company will not record any income tax benefits in the condensed consolidated financial statements until it is determined 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 partial valuation allowances in certain foreign jurisdictions, is required.

The Internal Revenue Code, Section 382, as amended, imposes annual limitation on the utilization of NOL carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change. The Company performed an analysis determining it was more likely than not that an ownership change had not occurred through December�31, 2013, and accordingly, NOL carryforwards through such date are not subject to an annual Section 382 limitation. On March�31, 2014, the Company completed a public offering of 61,645 shares of its common stock. On June 25, 2014 Standard General entered into an agreement with Mr. Charney to purchase shares of the Company's common stock and then loan Mr. Charney the funds necessary to acquire those shares from Standard General. On June 27, 2014, Standard General sold 27,351 shares of the Company's common stock to Mr. Charney. As of September�30, 2014, the Company has not completed an analysis whether an ownership change occurred under Section 382, which, if it did occur, could substantially limit its ability in the future to utilize its NOLs and other tax carryforwards.

The Internal Revenue Service completed its audit on the Company's tax year 2011, and there was no assessment. Tax years that remain subject to audits by the Internal Revenue Service are 2012 through 2013. The Company's state and foreign tax returns are open to audit under similar statute of limitations for the calendar years 2008 through 2013.

Note 10. Related Party Transactions

Personal Guarantees by Mr. Charney

As of September�30, 2014, Mr. Charney personally guaranteed the Company's obligations under three property leases aggregating $9,447 in obligations and with three vendors aggregating $1,970 in obligations.

Lease Agreement Between the Company and a Related Party

The Company has an operating lease expiring in November 2016 for its knitting facility with American Central Plaza LLC, which is partially owned by Mr. Charney and Marty Bailey, the Company's Chief Manufacturing Officer ("CMO"). Mr. Charney holds an 18.75% ownership interest in American Central Plaza LLC while the CMO holds a 6.25% interest. The remaining members of American Central Plaza LLC are not affiliated with the Company. Rent expenses (including property taxes and insurance payments) related to this lease were $155 for both the three months ended September 30, 2014 and 2013, and $466 and $465 for the nine months ended September 30, 2014 and 2013, respectively.

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Payments to Morris Charney

Morris Charney ("Mr. M. Charney") is Mr. Charney's father and served as a director of American Apparel Canada Wholesale Inc. and a director of American Apparel Canada Retail Inc. until June 28, 2014. Day to day operations of these two Canadian subsidiaries are handled by their management and employees, none of whom performs any policy making functions for the Company. The Company's management sets the policies for American Apparel, Inc. and its subsidiaries as a whole. Mr.�M. Charney did not perform any policy making functions for the Company or any of its subsidiaries. Instead, Mr.�M. Charney only provided architectural consulting services primarily for stores located in Canada. Mr.�M. Charney was paid architectural consulting and director fees amounting to $0 and $26 for the three months ended September 30, 2014 and 2013, respectively, and $71 and $160 for the nine months ended September 30, 2014 and 2013, respectively.

Agreements between Mr. Charney and Standard General

As of September 30, 2014, Mr. Charney owned approximately 42.7% of the Company's outstanding common stock. Mr. Charney and Standard General collectively controlled the right to vote such common stock.

On June 25, 2014, Mr. Charney entered into a letter agreement with Standard General in which, if Standard General was able to acquire at least 10% of the Company's outstanding shares, Standard General would loan Mr. Charney the funds needed for him to purchase those acquired shares from Standard General (the "SG-Charney Loan"). Between June 26, 2014 and June 27, 2014, Standard General acquired 27,351 of the Company's outstanding shares, and Mr. Charney purchased those shares at a price of $0.715 per share using the proceeds from the SG-Charney Loan. According to Mr. Charney's Schedule 13D/A, dated June 25, 2014, the loan bears interest at 10% per annum, payable in-kind and matures on July 15, 2019, with no prepayment penalty. The loan is collateralized by the newly acquired shares as well as by Mr. Charney's original shares of the Company's outstanding common stock.

On July 9, 2014, Mr. Charney and Standard General entered into a cooperation agreement, which provides, among other things, that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement dated March 13, 2009 between Mr. Charney and Lion. In addition, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right exercisable, on or prior to July 15, 2017, to purchase from Mr. Charney 32,072 shares (consisting of the 27,351 shares purchased by using the proceeds from the SG-Charney Loan and 10% of Mr. Charneys 47,209 original shares).

Loan and Warrants held by Lion

See Note 7 for a description of the loan made by Lion to the Company (and assigned to Standard General on July 16, 2014) and Note 11 for a description of warrants issued by the Company to Lion.

Note 11. Stockholders' Deficit

Public Offering

On March�31, 2014, the Company completed a public offering of approximately 61,645 shares of its common stock at $0.50 per share for net proceeds of $28,446.

Common Stock Warrants

As a result of the public offering in March 2014, Lion received the right to purchase an additional 2,905 shares of the Company's common stock, and the exercise price of all of Lion held warrants (the "Lion Warrants") was adjusted from $0.75 per share to $0.66 per share. Such adjustments were required by the terms of the existing Lion Warrants. As of September 30, 2014, Lion held warrants to purchase 24,511 shares of the Company's common stock, with an exercise price of $0.66 per share. These warrants will expire on February�18, 2022.

The Lion Warrants, as amended, contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of the Company's common stock issuable upon exercise of the Lion Warrants, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges.

As of September�30, 2014, the fair value of the 24,511 Lion Warrants, estimated using the Binomial Lattice option valuation model, was $14,704 and was recorded as a current liability in the consolidated balance sheets. The calculation assumed a stock price of $0.82, exercise price of $0.66, volatility of 71.69%, annual risk free interest rate of 2.27%, a contractual remaining term of 7.5 years and no dividends.

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The following table presents a summary of common stock warrants activity as of September 30, 2014:



�	Shares (in thousands)			�	Weighted-Average Exercise Price		�	Weighted-Average Contractual Life (in years)
Outstanding - January 1, 2014	21,606			�	$	0.75	�	8.2	�
Issued ^(a)	24,511			�	$	0.66	�	8.0	�
Forfeited ^(a)	(21,606		)	�	$	0.75	�	0.0	�
Expired	0			�	$	0.00	�	0.0	�
Outstanding - September 30, 2014	24,511			�	$	0.66	�	7.5	�
Fair value - September 30, 2014	$	14,704		�	�		�	�	�

(a) Issued and forfeited warrants represents repriced shares.

Earnings Per Share

The Company presents earnings per share ("EPS") utilizing a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and reflects net loss divided by the weighted-average shares of common stock outstanding for the period presented. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The Company had common stock under various options, warrants and other agreements at September�30, 2014 and December�31, 2013. The weighted-average effects of approximately 40,000 and 54,000 shares at September 30, 2014 and 2013, respectively, were excluded from the calculation of net loss per share for both three and nine months ended September�30, 2014 and 2013 because their effect 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 for the nine months ended September 30 are as follows:



�	2014	�	2013
SOF warrants	0	�	1,000
Lion warrants	24,511	�	21,606
Shares issuable to Mr. Charney based on market conditions ^(a)	13,611	�	20,416
Contingent shares issuable to Mr. Charney based on market conditions^�(b)	0	�	2,112
Contingent shares issuable to Mr. Charney based on performance conditions^�(c)	0	�	5,000
Employee options and restricted shares	1,505	�	3,449
�	39,627	�	53,583

(a) Charney Anti-Dilution Rights pursuant to the April�26, 2011 Investor Purchase Agreement, of which 6,805 expired unexercised on April�15, 2014.

(b) Pursuant to the March�24, 2011 conversion of debt to equity, which expired unexercised on March�24, 2014.

(c) Pursuant to Mr. Charney's employment agreement commenced April�1, 2012, of which 5,000 expired unexercised on December 31, 2013. (Note 12).

Note 12. Share-Based Compensation

The American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the "2011 Plan") authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 17,500 shares of the Company's common stock to be acquired by the holders of such awards and authorizes up to 3,000 shares that may be awarded to any one participant during any calendar year. The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of September�30, 2014, there were approximately 12,724 shares available for future grants under the 2011 Plan.

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Restricted Share Awards - The following table presents a summary of the restricted share awards activity as of September�30, 2014:



�	Shares (in thousands)		�	Weighted-Average Grant Date Fair Value Per Share		�	Weighted-Average Remaining Vesting Period (in years)
Non-vested - January 1, 2014	1,850		�	$	1.46	�	0.9
Granted	988		�	$	0.72	�	�
Vested	(1,737	)	�	$	1.00	�	�
Forfeited	(296	)	�	$	1.64	�	�
Non-vested - September 30, 2014	805		�	$	1.46	�	0.2

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

Stock Option Awards - The following table presents a summary of the stock option activity as of September�30, 2014:

�

(in thousands)

�

Weighted-Average Exercise Price

�

Weighted-Average Contractual Remaining Life

(in years)

�

Aggregate Intrinsic Value (in thousands)

Outstanding - January 1, 2014

700

�

0.82

�

7.8

�

Granted

�

Forfeited

�

Expired

�

Outstanding - September 30, 2014

700

�

0.82

�

7.0

�

3.5

Vested - September 30, 2014

700

�

0.82

�

7.0

�

3.5

Non-vested - September 30, 2014

�

0.00

�

Share-Based Compensation Expense - The Company recorded share-based compensation expenses of $1,106 and $1,228 for the three months ended September 30, 2014 and 2013, respectively, and $3,764 and $8,044 for the nine months ended September 30, 2014 and 2013, respectively, related to its share-based compensation awards that are expected to vest. No amounts have been capitalized. As of September�30, 2014, unrecorded compensation cost related to non-vested awards was $1,162, which is expected to be recognized through 2017.

Mr. Charney Anti-Dilution Rights - The Company recorded share-based compensation expense (included in the above) associated with Mr. Charney's certain anti-dilution rights of $268 and $1,628 for the three months ended September�30, 2014 and 2013, respectively, and $1,644 and $5,770 for the nine months ended September 30, 2014 and 2013, respectively. As of September�30, 2014, unrecorded compensation cost related to non-vested awards was $340, which is expected to be recognized through 2015. On April�15, 2014, the last day of the first measurement period, the Company determined that the vesting requirements for such period were not met, and as a result, 6,805 of the 20,416 anti-dilution rights expired unexercised.

Mr. Charney Performance-Based Award - Effective April�1, 2012, the Company provided Mr. Charney the rights to 7,500 shares of the Company's stock which were issuable in three equal installments, one per each measurement period, only upon the achievement of certain EBITDA targets for each of fiscal 2012, 2013 and 2014. The fair value of the award was based on the grant-date share price of $0.75 per share. For 2012, the Company achieved the target EBITDA and Mr. Charney received 2,500 shares, but did not achieve the target EBITDA for 2013. For 2014, the achievement of the performance condition was no longer considered probable, and previously recognized compensation costs were reversed during 2013. As of September�30, 2014, there was no unrecorded compensation cost related to this EBITDA award. The Company recorded share-based compensation expense of $0 and benefit of $1,015 for the three months ended September 30, 2014 and 2013, respectively, and $0 and $235 for the nine months ended September 30, 2014 and 2013, respectively.

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Non-Employee Directors - On January�2, April 1, and July�1, 2014, the Company issued a quarterly stock grant to each director for services performed of approximately 8, 20, and 11 shares based on grant date fair values of $1.21, $0.50, and $0.87 per share, respectively.

In connection with the Support Agreement, four non-employee directors resigned from the Company's Board, and six new directors were appointed to the Board. On September 15, 2014, each of the four resigned non-employee directors received a pro-rated quarterly stock grant of approximately 4 shares based on grant date fair value of $0.88 per share. On October 1, 2014, the Company issued quarterly stock grants ranging from approximately 4 to 16 shares based on the grant date fair value of $0.81 per share.

Note 13. Commitments and Contingencies

Operating Leases

The Company conducts retail operations under operating leases that expire at various dates through November 2024. The Company's primary manufacturing facilities and executive offices are currently under a long-term lease that expires on July�31, 2019. The rent expenses (including real estate taxes and common area maintenance costs) were $18,271 and $19,790 for the three months ended September 30, 2014 and 2013, respectively, and $55,611 and $59,154 for the nine months ended September 30, 2014 and 2013, 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 for retail stores, and general and administrative expenses in the consolidated statements of operations.

Customs and Duties

Mr. Charney Investigation

In connection with the June 18, 2014 suspension of the Company's CEO, Mr. Charney, a committee of the Board is charged with investigating potential misconduct by Mr. Charney. As the investigation is ongoing, no assurance can be made regarding the outcome of the investigation.

OSHA Settlement

In 2011, an industrial accident at the Company's facility in Orange County, California resulted in the fatality of a Company's employee. In accordance with law, a mandatory criminal investigation was initiated. In early August 2014, the Company and the Orange County district attorney's office began to negotiate a resolution of potential claims related to the accident, and the Company accrued $1,000 in costs representing its best estimate of the cost to settle this matter.�On August 19, 2014, a settlement of all claims related to the criminal investigation, pursuant to which the Company paid $1,000, was approved by the California Superior Court in Orange County.

Real Estate Matter

The landlord for the Company's headquarters and manufacturing facility in Los Angeles, California has identified certain alleged breaches under its lease. The Company is currently engaging with the landlord to resolve this dispute. Should the Company fail to resolve this matter on acceptable terms, they could result in material liability.

Advertising

The Company had approximately $980 in open advertising commitments at September�30, 2014, which were primarily allocated among print advertisements in newspapers or magazines and outdoor advertising. The majority of these commitments are expected to be paid during the remainder of 2014 and the first half of 2015.

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

The Company uses a combination of third-party insurance and self-insurance for a number of risks including workers' compensation, medical benefits provided to employees, and general liability claims. General liability primarily relates to litigation that arises from store operations. Self-insurance reserves include estimates of filed claims carried at their expected ultimate settlement value and claims incurred but not yet reported.

Estimating liability is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve required. Changes in future inflation rates, litigation trends, legal interpretations, benefit levels, and settlement patterns, among other factors, can impact ultimate claim costs. The Company estimates liability by utilizing loss development factors based on its specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. Although the Company does not expect ultimate claim costs significantly differ from its estimates, self-insurance reserves could be affected if actual developed claims considerably fluctuate from the historical trends and the assumptions applied.

The Company's estimated claims are discounted using a rate of 1.54% with a duration that approximates the duration of its self-insurance reserve portfolio. The undiscounted liabilities were $19,619 and $15,809 as of September�30, 2014 and December�31, 2013, respectively.

The workers' compensation liability is based on an estimate of losses for claims incurred but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. To guarantee performance under the workers' compensation program, the Company issued standby letters of credit of $500 and $450 with insurance companies being the beneficiaries as of September 30, 2014 and December 31, 2013, respectively, and cash deposits of $16,124 in favor of insurance company beneficiaries as of both September�30, 2014 and December�31, 2013. At September�30, 2014, the Company recorded a total reserve of $18,792, of which $5,086 is included in accrued expenses and $13,706 is included in other long-term liabilities on the consolidated balance sheets. At December�31, 2013, the Company recorded a total reserve of $15,356, of which $3,871 is included in accrued expenses and $11,485 is included in other long-term liabilities on the consolidated balance sheets.

The Company self-insures its health insurance benefit obligations while the claims are administered through a third party administrator. The medical benefit liability is based on estimated losses for claims incurred but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. The Company's total reserve of $1,386 and $2,512 was included in accrued expenses in the consolidated balance sheets at September�30, 2014 and December�31, 2013, respectively.

Note 15. Business Segment and Geographic Area Information

The Company reports the following four operating segments based on the management approach: U.S. Wholesale, U.S. Retail, Canada, and International. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments.

The U.S. Wholesale segment consists of the Company's wholesale operations of sales of undecorated apparel products to distributors and third party screen printers in the U.S. as well as its online consumer sales in the U.S. The U.S. Retail segment consists of the Company's retail operations in the U.S., which comprised 138 retail stores as of September�30, 2014. The Canada segment includes wholesale, retail and online consumer operations in Canada. As of September�30, 2014, the retail operations in the Canada segment comprised 31 retail stores. The International segment includes wholesale, retail, and online consumer operations outside of the U.S. and Canada. As of September�30, 2014, the retail operations in the International segment comprised 76 retail stores operating in 18 countries outside the U.S. and Canada. All of the Company's retail stores sell its apparel products directly to consumers.

The Company evaluates the performance of its operating segments primarily based on net sales and operating income or loss from operations. Operating income or loss for each segment does not include 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.

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



�	Three Months Ended September 30, 2014
�	U.S. Wholesale�			�	U.S.�Retail			�	Canada			�	International			�	Consolidated
Wholesale net sales	$	41,179		�	$	0		�	$	2,699		�	$	3,007		�	$	46,885
Retail net sales	0			�	50,277			�	9,957			�	35,588			�	95,822
Online consumer net sales	8,797			�	0			�	558			�	3,807			�	13,162
Total net sales to external customers	49,976			�	50,277			�	13,214			�	42,402			�	155,869
Gross profit	13,761			�	32,722			�	7,343			�	28,713			�	82,539
Income (loss) from segment operations	7,178			�	2,235			�	1,316			�	(937		)	�	9,792
Depreciation and amortization	2,132			�	2,807			�	414			�	1,051			�	6,404
Capital expenditures	(24		)	�	1,024			�	160			�	428			�	1,588
Retail store impairment	0			�	581			�	114			�	498			�	1,193
Deferred rent benefit	(15		)	�	(284		)	�	(56		)	�	(165		)	�	(520		)
�	�
�	�
�	Three Months Ended September 30, 2013
�	U.S. �Wholesale			�	U.S. Retail			�	Canada			�	International			�	Consolidated
Wholesale net sales	$	41,232		�	$	0		�	$	3,044		�	$	1,725		�	$	46,001
Retail net sales	0			�	54,303			�	11,321			�	39,278			�	104,902
Online consumer net sales	9,129			�	0			�	668			�	3,843			�	13,640
Total net sales to external customers	50,361			�	54,303			�	15,033			�	44,846			�	164,543
Gross profit	13,390			�	34,755			�	8,477			�	28,018			�	84,640
Income (loss) from segment operations	1,407			�	(317		)	�	1,091			�	2,987			�	5,168
Depreciation and amortization	1,934			�	3,172			�	507			�	1,125			�	6,738
Capital expenditures	1,360			�	2,387			�	540			�	983			�	5,270
Retail store impairment	0			�	0			�	145			�	88			�	233
Deferred rent expense (benefit)	5			�	(338		)	�	(66		)	�	(148		)	�	(547		)

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�	Nine Months Ended September 30, 2014
�	U.S. Wholesale�			�	U.S.�Retail			�	Canada			�	International			�	Consolidated
Wholesale net sales	$	128,361		�	$	0		�	$	7,434		�	$	7,007		�	$	142,802
Retail net sales	0			�	141,712			�	27,137			�	100,800			�	269,649
Online consumer net sales	28,606			�	0			�	2,120			�	12,185			�	42,911
Total net sales to external customers	156,967			�	141,712			�	36,691			�	119,992			�	455,362
Gross profit	47,122			�	91,521			�	20,003			�	78,254			�	236,900
Income (loss) from segment operations	26,045			�	(560		)	�	1,912			�	1,714			�	29,111
Depreciation and amortization	6,497			�	8,972			�	1,269			�	3,084			�	19,822
Capital expenditures	2,133			�	3,496			�	353			�	2,693			�	8,675
Retail store impairment	0			�	696			�	114			�	1,111			�	1,921
Deferred rent benefit	(415		)	�	(2,636		)	�	(155		)	�	(455		)	�	(3,661		)
�	�
�	Nine Months Ended September 30, 2013
�	U.S. Wholesale			�	U.S. Retail			�	Canada			�	International			�	Consolidated
Wholesale net sales	$	119,159		�	$	0		�	$	9,236		�	$	6,297		�	$	134,692
Retail net sales	0			�	149,811			�	31,664			�	105,629			�	287,104
Online consumer net sales	28,365			�	0			�	1,942			�	12,736			�	43,043
Total net sales to external customers	147,524			�	149,811			�	42,842			�	124,662			�	464,839
Gross profit	40,359			�	97,248			�	25,244			�	78,527			�	241,378
Income (loss) from segment operations	12,887			�	(2,239		)	�	1,592			�	6,291			�	18,531
Depreciation and amortization	5,327			�	9,231			�	1,388			�	3,209			�	19,155
Capital expenditures	5,847			�	9,377			�	970			�	2,713			�	18,907
Retail store impairment	0			�	78			�	145			�	88			�	311
Deferred rent expense (benefit)	43			�	(1,114		)	�	(279		)	�	(317		)	�	(1,667		)

Reconciliation of reportable segments combined income from operations for the three and nine months ended September 30, 2014 and 2013 to the consolidated loss before income taxes is as follows: �



�	Three Months Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Consolidated income from operations of reportable segments	$	9,792		�	$	5,168		�	$	29,111		�	$	18,531
Unallocated corporate expenses	(19,871		)	�	(9,661		)	�	(44,106		)	�	(35,415		)
Interest expense	(9,858		)	�	(10,121		)	�	(29,916		)	�	(29,555		)
Foreign currency transaction (loss) gain	(616		)	�	449			�	(748		)	�	(422		)
Unrealized gain (loss) on change in fair value of warrants	1,785			�	12,922			�	6,250			�	(5,225		)
Gain (loss) on extinguishment of debt	171			�	0			�	171			�	(32,101		)
Other income (expense)	57			�	(58		)	�	5			�	(42		)
Consolidated loss before income taxes	$	(18,540	)	�	$	(1,301	)	�	$	(39,233	)	�	$	(84,229	)

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Net sales by geographic location of customers for the three and nine months ended September 30, 2014 and 2013, are as follows:



�	Three Months Ended September 30,					�	Nine Months Ended September 30,
�	2014		�	2013		�	2014		�	2013
United States	$	100,253	�	$	104,664	�	$	298,679	�	$	297,335
Europe (excluding the United Kingdom)	17,440		�	19,065		�	50,105		�	51,996
Canada	13,214		�	15,033		�	36,691		�	42,842
United Kingdom	11,158		�	11,552		�	31,527		�	31,735
South Korea	4,287		�	2,987		�	9,867		�	8,093
Japan	3,203		�	4,977		�	10,266		�	14,421
Australia	2,306		�	2,367		�	6,891		�	7,575
China	2,262		�	1,950		�	6,002		�	5,526
Other foreign countries	1,746		�	1,948		�	5,334		�	5,316
Total consolidated net sales	$	155,869	�	$	164,543	�	$	455,362	�	$	464,839

Note 16. Litigation

The Company is subject to various claims and contingencies in the normal course of business that arise from litigation, business transactions, employee-related matters, or taxes. The Company establishes reserves when it believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of our pending actions is generally not yet determinable, the Company does not believe the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on its business, financial position, results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate.

Wage and Hour Actions

In April 2014, the five former employees' wage and hour cases including Guillermo Ruiz, Antonio Partida, Emily Truong, Jessica Heupel, and Anthony Heupel were settled on an aggregate and class-wide basis for $850, and a final approval was granted by the presiding arbitrator. On September 12, 2014, the court granted final approval of the settlement. The Company did not have insurance coverage for this matter.

Shareholder Derivative Actions

In 2010, two shareholder derivative lawsuits were filed in the United States District Court for the Central District of California (the "Court") 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 alleged a cause of action for breach of�fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over�1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment.�The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects the fact that the lawsuits are maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company filed a motion to dismiss the Federal Derivative Action which was granted with leave to amend on July 31, 2012. Plaintiffs did not amend the complaint and subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the Plaintiffs' motion to dismiss and entered judgment accordingly. On November 12, 2012, Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals where the case is currently pending.

Four shareholder derivative lawsuits were filed in fall of 2010 in the Superior Court of the State of California for the County of Los Angeles (the "Superior Court") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action").�Three of the matters comprising the State Derivative Action alleged causes of action for breach of fiduciary duty arising�out of�(i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and�(ii) the Company's alleged violation of state and federal immigration laws in connection�with the�previously disclosed termination of�over 1,500 employees following an

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Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising�out of�the same allegations.�On April�12, 2011, the Superior Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that, among other reasons, the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action (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.

In July 2014, two shareholder derivative lawsuits were filed in the Court and alleged similar causes of action for breach of�fiduciary duty by failing to (i) maintain adequate internal control and exercise proper oversight over Mr. Charney, whose alleged misconduct and mismanagement has purportedly harmed the Company's operations and financial condition, (ii) ensure Mr. Charney's suspension as CEO did not trigger material defaults under two of the Company's credit agreements, and (iii) prevent Mr. Charney from increasing his ownership percentage of the Company. The lawsuits primarily seek to recover damages and reform corporate governance and internal procedures. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects 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. These shareholder derivative lawsuits are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.

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

Federal Securities Action

Four putative class action lawsuits (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in fall of 2010 in the United States District Court for the Central District of California ("USDC") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the "Federal Securities Action"). The lead plaintiff appointed by the USDC alleges two causes of action for violations of Section�10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section�10(b), arising out of alleged misrepresentations contained in the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the USDC may deem proper.�On November 6, 2013, the USDC issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed motion of preliminary approval which was granted on April 16, 2014 without oral argument. On July 28, 2014, the USDC approved the settlement, and final judgment was entered on July 30, 2014. The settlement will result in a payment by the Company's insurance carrier of $4,800.

Employment Matters

The Company has previously disclosed arbitrations filed by the Company on or about February 17, 2011, related to cases filed in the Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the State of California for the County of Los Angeles (Case Nos. BC457920 and BC460331) against American Apparel, Mr. Charney and certain members of the Board of Directors asserting claims of sexual harassment, assault and battery, impersonation through the internet, defamation and other related claims.�The Company has settled or obtained a dismissal of all but one of these claims and believes that its aggregate liability for the settlements, net of insurance, will be less than $1,300. Discovery has commenced in the remaining arbitration.

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

Table of Contents

Note 17. Condensed Consolidating Financial Information

The Notes which constitute debt obligations of American Apparel Inc. (the "Parent") are fully and unconditionally guaranteed, jointly and severally, and on a senior secured basis, by the Company's existing and future 100% owned direct and indirect domestic subsidiaries, subject to customary automatic release provisions, including the satisfaction and discharge, or defeasance, or payment in full of the principal of, premium, if any, accrued and unpaid interest on the Notes, or, in certain circumstances, the sale or other disposition of substantially all of the assets of the subsidiary guarantor.

The following presents the Parent's consolidating balance sheets as of September�30, 2014 and December�31, 2013 and its consolidating statements of operations for the three and nine months ended September 30, 2014 and 2013, consolidating statements of cash flows for the nine months ended September 30, 2014 and 2013, the Company's material guarantor subsidiaries and the non-guarantor subsidiaries, and the elimination entries necessary to present the Company's financial statements on a consolidated basis. These condensed consolidating financial information should be read in conjunction with the Company's consolidated financial statement.

Table of Contents

Condensed Consolidating Balance Sheets

September�30, 2014

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries			�	Consolidated
ASSETS	�			�	�			�	�			�	�			�	�
CURRENT ASSETS	�			�	�			�	�			�	�			�	�
Cash	$	0		�	$	1,076		�	$	8,313		�	$	0		�	$	9,389
Trade accounts receivable, net	0			�	21,346			�	5,430			�	0			�	26,776
Intercompany accounts receivable, net	256,164			�	(240,669		)	�	(15,495		)	�	0			�	0
Inventories, net	0			�	117,144			�	33,746			�	70			�	150,960
Other current assets	376			�	12,429			�	3,990			�	0			�	16,795
Total current assets	256,540			�	(88,674		)	�	35,984			�	70			�	203,920
Property and equipment, net	0			�	42,732			�	12,559			�	0			�	55,291
Investments in subsidiaries	(105,031		)	�	17,396			�	0			�	87,635			�	0
Other assets, net	9,251			�	28,760			�	9,967			�	0			�	47,978
TOTAL ASSETS	$	160,760		�	$	214		�	$	58,510		�	$	87,705		�	$	307,189
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY				�	�			�	�			�	�			�	�
CURRENT LIABILITIES	�			�	�			�	�			�	�			�	�
Revolving credit facilities and current portion of long-term debt	$	0		�	$	27,047		�	$	13		�	$	0		�	$	27,060
Accounts payable	0			�	30,951			�	2,917			�	0			�	33,868
Accrued expenses and other current liabilities	17,756			�	30,455			�	13,253			�	0			�	61,464
Fair value of warrant liability	14,704			�	0			�	0			�	0			�	14,704
Other current liabilities	0			�	8,190			�	2,244			�	0			�	10,434
Total current liabilities	32,460			�	96,643			�	18,427			�	0			�	147,530
Long-term debt, net	215,891			�	0			�	269			�	0			�	216,160
Other long-term liabilities	0			�	26,037			�	5,053			�	0			�	31,090
TOTAL LIABILITIES	248,351			�	122,680			�	23,749			�	0			�	394,780
STOCKHOLDERS' (DEFICIT) EQUITY	�			�	�			�	�			�	�			�	�
Common stock	18			�	100			�	492			�	(592		)	�	18
Additional paid-in capital	217,650			�	6,726			�	7,869			�	(14,595		)	�	217,650
Accumulated other comprehensive (loss) income	(5,823		)	�	(1,682		)	�	(2,559		)	�	4,241			�	(5,823		)
(Accumulated deficit) retained earnings	(297,279		)	�	(127,610		)	�	28,959			�	98,651			�	(297,279		)
Less: Treasury stock	(2,157		)	�	0			�	0			�	0			�	(2,157		)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY	(87,591		)	�	(122,466		)	�	34,761			�	87,705			�	(87,591		)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY	$	160,760		�	$	214		�	$	58,510		�	$	87,705		�	$	307,189

Table of Contents

Condensed Consolidating Balance Sheets

December�31, 2013

(in thousands)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries			�	Consolidated
ASSETS	�			�	�			�	�			�	�			�	�
CURRENT ASSETS	�			�	�			�	�			�	�			�	�
Cash	$	0		�	$	512		�	$	8,164		�	$	0		�	$	8,676
Trade accounts receivable, net	0			�	15,109			�	5,592			�	0			�	20,701
Intercompany accounts receivable, net	247,414			�	(224,181		)	�	(23,233		)	�	0			�	0
Inventories, net	0			�	129,716			�	39,736			�	(74		)	�	169,378
Other current assets	97			�	10,442			�	6,002			�	0			�	16,541
Total current assets	247,511			�	(68,402		)	�	36,261			�	(74		)	�	215,296
Property and equipment, net	0			�	53,424			�	15,879			�	0			�	69,303
Investments in subsidiaries	(94,161		)	�	18,158			�	0			�	76,003			�	0
Other assets, net	9,282			�	27,934			�	11,937			�	0			�	49,153
TOTAL ASSETS	$	162,632		�	$	31,114		�	$	64,077		�	$	75,929		�	$	333,752
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY				�	�			�	�			�	�			�	�
CURRENT LIABILITIES	�			�	�			�	�			�	�			�	�
Revolving credit facilities and current portion of long-term debt	$	0		�	$	43,586		�	$	456		�	$	0		�	$	44,042
Accounts payable	0			�	34,738			�	3,552			�	0			�	38,290
Accrued expenses and other current liabilities	5,952			�	28,344			�	15,722			�	0			�	50,018
Fair value of warrant liability	20,954			�	0			�	0			�	0			�	20,954
Other current liabilities	0			�	6,830			�	1,855			�	0			�	8,685
Total current liabilities	26,906			�	113,498			�	21,585			�	0			�	161,989
Long-term debt, net	213,130			�	47			�	291			�	0			�	213,468
Other long-term liabilities	0			�	29,711			�	5,988			�	0			�	35,699
TOTAL LIABILITIES	240,036			�	143,256			�	27,864			�	0			�	411,156
STOCKHOLDERS' (DEFICIT) EQUITY	�			�	�			�	�			�	�			�	�
Common stock	11			�	100			�	492			�	(592		)	�	11
Additional paid-in capital	185,472			�	6,726			�	7,685			�	(14,411		)	�	185,472
Accumulated other comprehensive (loss) income	(4,306		)	�	(543		)	�	(671		)	�	1,214			�	(4,306		)
(Accumulated deficit) retained earnings	(256,424		)	�	(118,425		)	�	28,707			�	89,718			�	(256,424		)
Less: Treasury stock	(2,157		)	�	0			�	0			�	0			�	(2,157		)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY	(77,404		)	�	(112,142		)	�	36,213			�	75,929			�	(77,404		)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY	$	162,632		�	$	31,114		�	$	64,077		�	$	75,929		�	$	333,752

Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Three Months Ended September 30, 2014

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries			�	Consolidated
Net sales	$	0		�	$	110,401		�	$	55,621		�	$	(10,153	)	�	$	155,869
Cost of sales	0			�	67,669			�	15,550			�	(9,889		)	�	73,330
Gross profit	0			�	42,732			�	40,071			�	(264		)	�	82,539
Selling and distribution expenses	0			�	30,202			�	22,438			�	0			�	52,640
General and administrative expenses	10,101			�	12,274			�	16,401			�	9			�	38,785
Retail store impairment	0			�	580			�	613			�	0			�	1,193
(Loss) income from operations	(10,101		)	�	(324		)	�	619			�	(273		)	�	(10,079		)
Interest expense and other expense	7,236			�	1,220			�	5			�	0			�	8,461
Equity in loss (earnings) of subsidiaries	1,847			�	53			�	0			�	(1,900		)	�	0
(Loss) income before income taxes	(19,184		)	�	(1,597		)	�	614			�	1,627			�	(18,540		)
Income tax provision	0			�	109			�	535			�	0			�	644
Net (loss) income	$	(19,184	)	�	$	(1,706	)	�	$	79		�	$	1,627		�	$	(19,184	)
Other comprehensive (loss) income, net of tax	(1,919		)	�	(1,479		)	�	(2,269		)	�	3,748			�	(1,919		)
Comprehensive (loss) income	$	(21,103	)	�	$	(3,185	)	�	$	(2,190	)	�	$	5,375		�	$	(21,103	)

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Three Months Ended September 30, 2013

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries		�	Elimination Entries			�	Consolidated
Net sales	$	0		�	$	121,352		�	$	60,015	�	$	(16,824	)	�	$	164,543
Cost of sales	0			�	71,878			�	24,876		�	(16,851		)	�	79,903
Gross profit	0			�	49,474			�	35,139		�	27			�	84,640
Selling and distribution expenses	0			�	39,747			�	24,235		�	0			�	63,982
General and administrative expenses	(195		)	�	14,959			�	10,140		�	14			�	24,918
Retail store impairment	0			�	0			�	233		�	0			�	233
Income (loss) from operations	195			�	(5,232		)	�	531		�	13			�	(4,493		)
Interest expense and other expense	(3,521		)	�	169			�	160		�	0			�	(3,192		)
Equity in loss (earnings) of subsidiaries	5,229			�	(833		)	�	0		�	(4,396		)	�	0
(Loss) income before income taxes	(1,513		)	�	(4,568		)	�	371		�	4,409			�	(1,301		)
Income tax provisions	0			�	0			�	212		�	0			�	212
Net (loss) income	$	(1,513	)	�	$	(4,568	)	�	$	159	�	$	4,409		�	$	(1,513	)
Other comprehensive income (loss), net of tax	1,445			�	1,066			�	1,411		�	(2,477		)	�	1,445
Comprehensive (loss) income	$	(68	)	�	$	(3,502	)	�	$	1,570	�	$	1,932		�	$	(68	)

Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Nine Months Ended September 30, 2014

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries			�	Consolidated
Net sales	$	0		�	$	333,156		�	$	156,683		�	$	(34,477	)	�	$	455,362
Cost of sales	0			�	199,593			�	53,131			�	(34,262		)	�	218,462
Gross profit	0			�	133,563			�	103,552			�	(215		)	�	236,900
Selling and distribution expenses	0			�	91,851			�	67,294			�	0			�	159,145
General and administrative expenses	10,986			�	46,476			�	33,367			�	0			�	90,829
Retail store impairment	0			�	695			�	1,226			�	0			�	1,921
(Loss) income from operations	(10,986		)	�	(5,459		)	�	1,665			�	(215		)	�	(14,995		)
Interest expense and other expense	20,518			�	3,774			�	(54		)	�	0			�	24,238
Equity in loss (earnings) of subsidiaries	9,351			�	(200		)	�	0			�	(9,151		)	�	0
(Loss) income before income taxes	(40,855		)	�	(9,033		)	�	1,719			�	8,936			�	(39,233		)
Income tax provision	0			�	154			�	1,468			�	0			�	1,622
Net (loss) income	$	(40,855	)	�	$	(9,187	)	�	$	251		�	$	8,936		�	$	(40,855	)
Other comprehensive (loss) income, net of tax	(1,517		)	�	(1,139		)	�	(1,888		)	�	3,027			�	(1,517		)
Comprehensive (loss) income	$	(42,372	)	�	$	(10,326	)	�	$	(1,637	)	�	$	11,963		�	$	(42,372	)

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Nine Months Ended September 30, 2013

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries			�	Consolidated
Net sales	$	0		�	$	335,104		�	$	169,000		�	$	(39,265	)	�	$	464,839
Cost of sales	0			�	200,155			�	63,680			�	(40,374		)	�	223,461
Gross profit	0			�	134,949			�	105,320			�	1,109			�	241,378
Selling and distribution expenses	0			�	105,488			�	71,747			�	0			�	177,235
General and administrative expenses	311			�	50,638			�	29,757			�	10			�	80,716
Retail store impairment	0			�	78			�	233			�	0			�	311
(Loss) income from operations	(311		)	�	(21,255		)	�	3,583			�	1,099			�	(16,884		)
Interest expense and other expense	56,764			�	10,195			�	386			�	0			�	67,345
Equity in loss (earnings) of subsidiaries	28,453			�	(2,424		)	�	0			�	(26,029		)	�	0
(Loss) income before income taxes	(85,528		)	�	(29,026		)	�	3,197			�	27,128			�	(84,229		)
Income tax (benefit) provisions	0			�	(43		)	�	1,342			�	0			�	1,299
Net (loss) income	$	(85,528	)	�	$	(28,983	)	�	$	1,855		�	$	27,128		�	$	(85,528	)
Other comprehensive (loss) income, net of tax	(785		)	�	(282		)	�	(847		)	�	1,129			�	(785		)
Comprehensive (loss) income	$	(86,313	)	�	$	(29,265	)	�	$	1,008		�	$	28,257		�	$	(86,313	)

Table of Contents

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2014

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries		�	Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES	�			�	�			�	�			�	�		�	�
Net cash provided by (used in) operating activities	$	9,600		�	$	(18,005	)	�	$	11,712		�	$	0	�	$	3,307
CASH FLOWS FROM INVESTING ACTIVITIES	�			�	�			�	�			�	�		�	�
Capital expenditures	0			�	(5,629		)	�	(3,046		)	�	0		�	(8,675		)
Proceeds from sale of fixed assets	0			�	0			�	52			�	0		�	52
Restricted cash	0			�	0			�	219			�	0		�	219
Net cash used in investing activities	0			�	(5,629		)	�	(2,775		)	�	0		�	(8,404		)
CASH FLOWS FROM FINANCING ACTIVITIES	�			�	�			�	�			�	�		�	�
Cash overdraft	0			�	(102		)	�	0			�	0		�	(102		)
Repayments under revolving credit facilities, net	0			�	(16,532		)	�	(433		)	�	0		�	(16,965		)
Repayments of term loans and notes payable	0			�	(47		)	�	(10		)	�	0		�	(57		)
Payments of debt issuance costs	(1,745		)	�	(354		)	�	0			�	0		�	(2,099		)
Net proceeds from issuance of common stock	28,446			�	0			�	0			�	0		�	28,446
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock	(414		)	�	0			�	0			�	0		�	(414		)
Repayments of capital lease obligations	0			�	(1,885		)	�	(47		)	�	0		�	(1,932		)
Advances to/from affiliates	(35,887		)	�	43,118			�	(7,231		)	�	0		�	0
Net cash (used in) provided by financing activities	(9,600		)	�	24,198			�	(7,721		)	�	0		�	6,877
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH	0			�	0			�	(1,067		)	�	0		�	(1,067		)
NET INCREASE IN CASH	0			�	564			�	149			�	0		�	713
Cash, beginning of period	0			�	512			�	8,164			�	0		�	8,676
Cash, end of period	$	0		�	$	1,076		�	$	8,313		�	$	0	�	$	9,389
�	�			�	�			�	�			�	�		�	�
NON-CASH INVESTING AND FINANCING ACTIVITIES	�			�	�			�	�			�	�		�	�
Property and equipment acquired, and included in accounts payable	$	0		�	$	217		�	$	254		�	$	0	�	$	471

Table of Contents

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2013

(in thousands)

(unaudited)



�	Parent			�	Combined Guarantor Subsidiaries			�	Combined Non-Guarantor Subsidiaries			�	Elimination Entries		�	Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES	�			�	�			�	�			�	�		�	�
Net cash provided by (used in) operating activities	$	977		�	$	(25,732	)	�	$	15,951		�	$	0	�	$	(8,804	)
CASH FLOWS FROM INVESTING ACTIVITIES	�			�	�			�	�			�	�		�	�
Capital expenditures	0			�	(15,223		)	�	(3,684		)	�	0		�	(18,907		)
Proceeds from sale of fixed assets	0			�	(14		)	�	44			�	0		�	30
Restricted cash	0			�	3,265			�	(1,671		)	�	0		�	1,594
Net cash used in investing activities	0			�	(11,972		)	�	(5,311		)	�	0		�	(17,283		)
CASH FLOWS FROM FINANCING ACTIVITIES	�			�	�			�	�			�	�		�	�
Cash overdraft	0			�	2,812			�	0			�	0		�	2,812
Repayments of expired revolving credit facilities, net	0			�	(28,513		)	�	0			�	0		�	(28,513		)
Borrowings (repayments) under current revolving credit facilities, net	0			�	32,878			�	(4,165		)	�	0		�	28,713
Borrowings (repayments) of term loans and notes payable	4,500			�	(29,953		)	�	(10		)	�	0		�	(25,463		)
Repayment of Lion term loan	(144,149		)	�	0			�	0			�	0		�	(144,149		)
Issuance of Senior Secured Notes	199,820			�	0			�	0			�	0		�	199,820
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock	(2,133		)	�	0			�	0			�	0		�	(2,133		)
Payments of debt issuance costs	(11,237		)	�	(643		)	�	0			�	0		�	(11,880		)
Repayments of capital lease obligations	0			�	(739		)	�	(34		)	�	0		�	(773		)
Advances to/from affiliates	(47,778		)	�	58,601			�	(10,823		)	�	0		�	0
Net cash (used in) provided by financing activities	(977		)	�	34,443			�	(15,032		)	�	0		�	18,434
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH	0			�	0			�	(287		)	�	0		�	(287		)
NET DECREASE IN CASH	0			�	(3,261		)	�	(4,679		)	�	0		�	(7,940		)
Cash, beginning of period	0			�	3,796			�	9,057			�	0		�	12,853
Cash, end of period	$	0		�	$	535		�	$	4,378		�	$	0	�	$	4,913
�	�			�	�			�	�			�	�		�	�
NON-CASH INVESTING AND FINANCING ACTIVITIES	�			�	�			�	�			�	�		�	�
Property and equipment acquired, and included in accounts payable	$	0		�	$	4,682		�	$	588		�	$	0	�	$	5,270

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

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

OVERVIEW

General

We are a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel and accessories for women, men, children and babies. We are based in downtown Los Angeles, California. As of September�30, 2014, we had approximately 10,000 employees and operated 245 retail stores in 20 countries: the U.S., Canada, the U.K., Australia, Austria, Belgium, Brazil, China, France, Germany, Ireland, Israel, Italy, Japan, Mexico, Netherlands, South Korea, Spain, Sweden, and Switzerland. We also operate a global e-commerce site that serves over 60 countries worldwide at www.americanapparel.com. In addition, we operate a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and the imprintable industry.

We conduct our primary apparel manufacturing operations out of an 800,000 square-foot facility in the warehouse district of downtown Los Angeles, California. The following table presents non-retail facilities located in the U.S.



Location	�	Purpose
Los Angeles, California	�	Headquarters, wholesale and web sales operations, hosiery knitting, cutting and sewing of garments and warehousing
Los Angeles, California	�	Fabric knitting
Hawthorne, California	�	Fabric dyeing and finishing
South Gate, California	�	Cutting and sewing of garments, garment dyeing and finishing
Garden Grove, California	�	Fabric knitting, fabric dyeing and finishing, cutting and sewing of garments
La Mirada, California	�	Distribution Center

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

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

The following table presents, by segment, the change in retail store count during the three and nine months ended September 30, 2014 and 2013.



�	U.S. Retail	�	Canada	�	International		�	Total
Three Months Ended September 30, 2014	�	�	�	�	�		�	�
Open at June 30, 2014	137	�	31	�	79		�	247
Opened	1	�	0	�	0		�	1
Closed	0	�	0	�	(3	)	�	(3	)
Open at September 30, 2014	138	�	31	�	76		�	245
�	�	�	�	�	�		�	�
Three Months Ended September 30, 2013	�	�	�	�	�		�	�
Open at June 30, 2013	138	�	33	�	74		�	245
Opened	2	�	0	�	0		�	2
Closed	0	�	0	�	0		�	0
Open at September 30, 2013	140	�	33	�	74		�	247

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�	U.S. Retail		�	Canada		�	International		�	Total
Nine Months Ended September 30, 2014	�		�	�		�	�		�	�
Open at December 31, 2013	139		�	32		�	77		�	248
Opened	3		�	0		�	3		�	6
Closed	(4	)	�	(1	)	�	(4	)	�	(9	)
Open at September 30, 2014	138		�	31		�	76		�	245
�	�		�	�		�	�		�	�
Nine Months Ended September 30, 2013	�		�	�		�	�		�	�
Open at December 31, 2012	140		�	35		�	76		�	251
Opened	3		�	0		�	2		�	5
Closed	(3	)	�	(2	)	�	(4	)	�	(9	)
Open at September 30, 2013	140		�	33		�	74		�	247

B. Comparable Store Sales

The table below shows the changes in comparable store sales for our retail and online stores during the three and nine months ended September 30, 2014 and 2013, and the number of retail stores included in the comparison at the end of each period. Comparable store sales are defined as the percentage change in sales for stores that have been open for more than twelve full months. Remodeled and expanded stores are excluded from the determination of comparable stores during the following twelve months if the remodel or expansion results in a change of greater than 20% of selling square footage. Closed stores are excluded from the base of comparable stores following their last full month of operation.�

In calculating constant currency amounts, we convert the results of our foreign operations during the three and nine months ended September 30, 2014 and 2013 by using the weighted-average foreign exchange rate for the current comparable periods to achieve a consistent basis for comparison.



�	Three Months Ended September 30,					�	Nine Months Ended September 30,
�	2014		�	2013		�	2014		�	2013
Comparable store sales	(7	)%	�	2	%	�	(6	)%	�	5	%
Number of stores in comparison	230		�	237		�	233		�	237

C. Executive Summary

Recent Developments

On September 29, 2014, the Board appointed Scott Brubaker as CEO and Hassan Natha as CFO, and John Luttrell resigned as Interim CEO and CFO.

On July 7, 2014, we received a notice from Lion asserting an event of default and an acceleration of the maturity of the loans and other outstanding obligations under the Lion Loan Agreement as a result of the suspension of Mr. Charney, former CEO, by the Board. On July 14, 2014, Lion issued a notice rescinding the notice of acceleration. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to Standard General (the "Standard General Loan Agreement"). Standard General has waived any default under the Standard General Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of American Apparel.

On September 8, 2014, we entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO would constitute an event of default.

In connection with the Support Agreement with Standard General and Mr. Charney dated July 9, 2014, five directors including Mr. Charney resigned from the Board, effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and us. On September 15, 2014, a new director was appointed to the Board by Lion.

In 2012, German customs audited the import records of our German subsidiary for the years 2009 through 2011 and issued retroactive punitive duty assessments of $5,570 on our imports, including interest and penalties, at the September�30, 2014 foreign currency exchange rate (the assessment was issued in Euros). The German customs imposed a substantially higher tariff rate than the original rate that we had paid on the imports, more than doubling the amount of the tariff that we would have to pay. The

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assessments of additional retaliatory duty originated from a trade dispute between Europe and the US which had nothing to do with us.

Despite the ongoing appeals of the assessment in the German courts and European Commission, the German authorities demanded, and we paid $4,678 in the third quarter of 2014 and the final balance of $245 in the fourth quarter of 2014. We recorded the duty portion of $83 in cost of sales and the retaliatory duties, interest and penalties of $5,487 in general and administrative expenses in our consolidated statements of operations.

We believe that we have valid arguments to challenge the merit of the German customs assessment and intend to vigorously defend our position in the German courts and before the European Commission. At this time, the outcome of the legal proceedings is subject to significant uncertainty and no assurance can be made that this matter will result in a full or partial recovery of this payment.

Results of Operations

Net sales for the nine months ended September 30, 2014 decreased $9,477, or 2.0%, from the corresponding period in 2013 due to lower sales at our U.S. Retail, Canada and International segments, partly offset by an increase in the U.S. Wholesale segment.

U.S. Wholesale net sales for the nine months ended September 30, 2014, excluding online consumer net sales, increased by $9,202, or 7.7%, from the corresponding period in 2013 mainly due to initial stock orders from a significant new distributor that was added during the second quarter of 2014. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers. Online consumer net sales for the nine months ended September 30, 2014 was flat as compared to the corresponding period in 2013. We continue our focus on targeted online advertising and promotional efforts.

U.S. Retail net sales for the nine months ended September 30, 2014 decreased $8,099, or 5.4%, from the corresponding period in 2013 mainly due to a decrease in comparable store sales as a result of the unseasonably cool temperatures across the country during the first quarter of 2014 and lower foot traffic.

Canada net sales for the nine months ended September 30, 2014 decreased $6,151, or 14.4%, from the corresponding period in 2013 due to approximately $3,600 in lower sales, primarily in the retail and wholesale channels, and the unfavorable impact of foreign currency exchange rate changes of approximately $2,500.

International net sales for the nine months ended September 30, 2013 decreased $4,670, or 3.7%, from the corresponding period in 2013 due to approximately $8,000 lower sales in all three sales channels and the favorable impact of foreign currency exchange rate changes of approximately $3,300.

Gross profits as a percentage of sales were 52.0% and 51.9% for the nine months ended September 30, 2014 and 2013, respectively. Excluding the effects of the unusual and non-recurring events described below, gross profit as a percentage of net sales for the nine months ended September 30, 2014 decreased slightly to 52.2% from 52.4%. The decrease was due to higher sales discounts at our retail store operations, offset by a reduction in freight costs associated with the completion of our transition to La Mirada distribution center in late 2013.

Operating expenses include selling and distribution and general and administrative expenses. Operating expenses for the nine months ended September 30, 2014 decreased $7,977, or 3.1%, from the corresponding period in 2013, and were 54.9% and 55.5% of total net sales, respectively. Excluding the effects of the unusual and non-recurring events discussed below, operating expenses as a percentage of total net sales were 50.9% and 53.5% for the nine months ended September 30, 2014 and 2013, respectively. The decrease was primarily due to lower payroll from our cost reduction efforts and reduced expenditures on advertising and promotional activities.

Loss from operations was $14,995 for the nine months ended September 30, 2014 as compared to $16,884 for the nine months ended September 30, 2013. Excluding the effects of the unusual and non-recurring events discussed below, our operating results for the nine months ended September 30, 2014 would have been an income from operations of $3,986 as compared with a loss from operations of $5,298 for the nine months ended September 30, 2013. Lower sales volume and higher retail store impairments were offset by decreases in our operating expenses as discussed above.

Net loss for the nine months ended September 30, 2014 was $40,855 as compared to $85,528 for the nine months ended September 30, 2013, mainly as a result of the $1,889 reduction in loss from operations, the change of $11,475 in fair value of warrants between periods, and the $32,101 loss on the extinguishment of debt in 2013. See Results of Operations for the nine months ended September 30, 2014 for further details.

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Unusual and Non-Recurring Events

The table below summarizes the impact to our earnings of certain unusual costs which we consider to be non-recurring and presents gross profit, operating expenses, and income from operations on an as-adjusted basis, together with the reconciliation to the mostly directly comparable GAAP measure:

�

Nine months ended September 30,

�

2014

�

% of Net Sales

�

2013

�

% of Net Sales

Gross profit

236,900

�

52.0

�%

�

241,378

�

51.9

�%

Changes to supply chain operations

�

2,200

�

Customs settlements and contingencies

836

�

Gross profit - adjusted (Non-GAAP)

237,736

�

52.2

�%

�

243,578

�

52.4

�%

�

Operating expenses

249,974

�

54.9

�%

�

257,951

�

55.5

�%

Changes to supply chain operations

�

(8,700

)

�

Customs settlements and contingencies

(5,711

)

�

Internal investigation

(6,619

)

�

Employment settlements and severance

(5,815

)

�

(686

)

�

Operating expenses - adjusted (Non-GAAP)

231,829

�

50.9

�%

�

248,565

�

53.5

�%

�

Loss from operations

(14,995

)

�

(3.3

�

(16,884

)

�

(3.6

Changes to supply chain operations

�

10,900

�

Customs settlements and contingencies

6,547

�

Internal investigation

6,619

�

Employment settlements and severance

5,815

�

686

�

Income (loss) from operations - adjusted (Non-GAAP)

3,986

�

0.9

�%

�

(5,298

)

�

(1.1

Changes to Supply Chain Operations - In 2013, the transition to our new distribution center in La Mirada, California resulted in significant incremental costs (primarily labor). The issues surrounding the transition primarily related to improper design and integration and inadequate training and staffing. These issues caused processing inefficiencies that required us to employ additional staffing in order to meet customer demand. The transition was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced.

Customs settlements and contingencies - In 2012, German customs issued retroactive punitive duty assessments of $5,409 on certain containers of goods imported from 2009-2011, including interest and penalties. Although we have continued to dispute the special assessments with the German authorities and the European Commission, during the third quarter of 2014, the German authorities demanded, and we paid, $4,390 in the third quarter of 2014 and the final balance of $85 in the fourth quarter of 2014. See Note 13 to our condensed consolidated financial statements. We recorded the duty portion of $83 in cost of sales and the retaliatory duties, interest and penalties of $5,326 in general and administrative expenses in our consolidated statements of operations.

Internal Investigation - On June 18, 2014, the Board voted to replace Mr. Charney as Chairman of the Board, suspended him and notified him of its intent to terminate his employment as our President and CEO for cause. In connection with the Support Agreement, the Board formed a new special committee for the purpose of overseeing the continuing investigation into the alleged misconduct by Mr. Charney (the "Internal Investigation"). The suspension and subsequent internal investigation have resulted in substantial legal and consulting fees.

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Employment Settlements and Severance - As previously disclosed, in 2011, an industrial accident at our facility in Orange County, California resulted in the fatality of one of our employees, and in accordance with law, a mandatory criminal investigation was initiated. On August 19, 2014, a settlement of all claims related to the criminal investigation, pursuant to which the Company paid $1,000, was approved by the California Superior Court in Orange County. See Note 13 of Condensed Notes to the Consolidated Financial Statements under Part I. Item 1. Financial Statements. Additionally, as more fully discussed in Note 16 of Condensed Notes to the Consolidated Financial Statements under Part I. Item 1. Financial Statements, we settled certain previously disclosed employment-related claims during the third quarter of 2014 and as a result, recorded an accrual of approximately $1,700 related to these cases. Additionally, during 2014, we experienced unusually high employee severance costs.

Liquidity

As of September�30, 2014, we had $9,389 in cash, $27,047 outstanding on our $50,000 asset-backed revolving credit facility with Capital One, and $20,398 of availability for additional borrowings under the Capital One Credit Facility. As of November 3, 2014, we had $8,352 availability for additional borrowings under the Capital One Credit Facility.

In March 2014, we entered into the Fifth Amendment to the Capital One Credit Facility and waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December�31, 2013 and March�31, 2014. Interest rates on borrowings under the Capital One Credit Facility are equal LIBOR plus 5.0% or the bank's prime rate plus 4.0%, at our option, and are subject to specified borrowing requirements and covenants. In addition, the Fifth Amendment reset the minimum fixed charge coverage ratio, maximum leverage ratio, and maximum capital expenditures, and added a minimum adjusted EBITDA covenant. For the three months ended September�30, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and achieve a minimum adjusted EBITDA of $23,406. We were in compliance with such covenant at September�30, 2014.

Management s Plan

We continue to develop initiatives intended to either increase sales, reduce costs or improve liquidity. Beginning with the fourth quarter of 2013, we instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. We also limited capital expenditures starting the first quarter of 2014. In addition, we continue to drive productivity improvements from our new distribution center, inventory reductions, other labor cost reductions, and consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing.

D. Critical Accounting Policies and Estimates

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, 2013, we consider our most critical accounting policies and estimates to include:

"revenue recognition;

"inventory valuation, obsolescence;

"fair value calculations including derivative liabilities;

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

and property and equipment;

"income taxes;

"legal accruals; and

"self-insurance liabilities.

In general, estimates are based on historical experience, information from third party professionals and various other sources, and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions. Our management considers an accounting estimate to be critical if:

"it requires assumptions to be made that were uncertain at the time the estimate was made; and

"changes in the estimate, or the use of different estimating methods that could have been selected, could have a material

impact on our consolidated results of operations or financial condition.

RESULTS OF OPERATIONS

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

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Three Months Ended September 30, 2014 compared to Three Months Ended September 30, 2013

The following table presents our results of operations from the unaudited consolidated statements of operations by dollar and as a percentage of net sales for the periods indicated:

�

Three Months Ended September 30,

�

2014

�

% of net sales

�

2013

�

% of net sales

U.S. Wholesale

49,976

�

32.0

�%

�

50,361

�

30.6

�%

U.S. Retail

50,277

�

32.2

�%

�

54,303

�

33.1

�%

Canada

13,214

�

8.5

�%

�

15,033

�

9.1

�%

International

42,402

�

27.3

�%

�

44,846

�

27.2

�%

Total net sales

155,869

�

100.0

�%

�

164,543

�

100.0

�%

Cost of sales

73,330

�

47.0

�%

�

79,903

�

48.6

�%

Gross profit

82,539

�

53.0

�%

�

84,640

�

51.4

�%

�

Selling and distribution expenses

52,640

�

33.8

�%

�

63,982

�

38.9

�%

General and administrative expenses

38,785

�

24.9

�%

�

24,918

�

15.1

�%

Retail store impairment

1,193

�

0.8

�%

�

233

�

0.1

�%

�

Loss from operations

(10,079

)

�

(6.5

�

(4,493

)

�

(2.7

�

Interest expense

9,858

�

10,121

�

Foreign currency transaction loss (gain) ^(a)

616

�

(449

)

�

Unrealized gain on change in fair value of warrants ^(b)

(1,785

)

�

(12,922

)

�

Gain on extinguishment of debt

(171

)

�

Other (income) expense

(57

)

�

Loss before income tax

(18,540

)

�

(1,301

)

�

Income tax provision

644

�

212

�

Net loss

(19,184

)

�

(1,513

)

�

(a) Related to the exchange rate fluctuations of the U.S.�Dollar relative to functional currencies used by our subsidiaries.

(b) Mark-to-market adjustments associated with our warrants.

(1) U.S. Wholesale

U.S. Wholesale net sales, excluding online consumer net sales, was flat for the three months ended September 30, 2014 as compared to the corresponding period in 2013. Lower sales volume to existing customers were offset by sales to a significant new distributor customer.

Online consumer net sales for the three months ended September 30, 2014 decreased $332, or 3.6%, from the corresponding period in 2013 mainly due to lower sales order volume.

(2) U.S. Retail

U.S. Retail net sales for the three months ended September 30, 2014 decreased $4,026, or 7.4%, from the corresponding period in 2013 mainly due to a decrease of approximately $3,200 in comparable store sales as a result of lower store foot traffic. Net sales also decreased approximately $1,600 due to the closure of five stores, offset by increases of approximately $330 from one new store added after September 2013 and approximately $590 from OAK stores.

(3) Canada

Canada net sales for the three months ended September 30, 2014 decreased $1,819, or 12.1%, from the corresponding period in 2013 mainly due to lower sales of approximately $1,200 across sales channels and the unfavorable impact of foreign currency exchange rate changes of approximately $620.

Retail net sales for the three months ended September 30, 2014 decreased $1,364, or 12.0%, from the corresponding period in 2013. Store sales decreased approximately $900 primarily due to a decrease of approximately $330 in comparable store sales and

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approximately $590 as a result of the closure of two stores. Additionally, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $470.

Wholesale net sales for the three months ended September 30, 2014 decreased $345, or 11.3%, from the corresponding period in 2013 mainly due to lower sales of approximately $220 from large wholesale customers and the unfavorable impact of foreign currency exchange rate changes of approximately $130.

Online consumer net sales for the three months ended September 30, 2014 decreased $110, or 16.5%, from the corresponding period in 2013 mainly due to a reduction in online promotions towards a more targeted strategy and the unfavorable impact of foreign currency exchange rate changes of approximately $30.

(4) International

International net sales for the three months ended September 30, 2014 decreased $2,444, or 5.4%, from the corresponding period in 2013 mainly due to lower sales of approximately $3,500 in the retail and online channels offset by the favorable impact of foreign currency exchange rate changes of approximately $1,000.

Retail net sales for the three months ended September 30, 2014 decreased by $3,690, or 9.4%, from the corresponding period in 2013. Store sales decreased approximately $4,600 primarily due to approximately $3,600 decrease in comparable store sales and approximately $1,000 decrease in rummage sales, which were partially offset by approximately $860 from the favorable impact of foreign currency exchange rate changes.

Wholesale net sales for the three months ended September 30, 2014 increased $1,282, or 74.3%, from the corresponding period in 2013 mainly due to higher sales of approximately $1,200 in the U.K. and Continental Europe and the favorable impact of foreign currency exchange rate changes of approximately $60.

Online consumer net sales did not materially change for the three months ended September 30, 2014 compared to the corresponding period in 2013.

Unusual and Non-Recurring Events

The table below summarizes the impact to our earnings of certain unusual costs which we consider to be non-recurring and presents gross profit, operating expenses, and income from operation on an as-adjusted basis, together with the reconciliation to the most directly comparable GAAP measure. See Overview - Executive Summary for a description of each of the events noted:

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�

Three months ended September 30,

�

2014

�

% of Net Sales

�

2013

�

% of Net Sales

Gross profit

82,539

�

53.0

�%

�

84,640

�

51.4

�%

Changes to supply chain operations

�

1,200

�

Customs settlements and contingencies

836

�

Gross profit - adjusted (Non-GAAP)

83,375

�

53.5

�%

�

85,840

�

52.2

�%

�

Selling and distribution expenses

52,640

�

33.8

�%

�

63,982

�

38.9

�%

Changes to supply chain operations

�

(4,700

)

�

Selling and distribution expenses - adjusted (Non-GAAP)

52,640

�

33.8

�%

�

59,282

�

36.0

�%

�

General and administrative expenses

38,785

�

24.9

�%

�

24,918

�

15.1

�%

Customs settlements and contingencies

(5,711

)

�

Internal investigation

(5,263

)

�

Employment settlements and severance

(3,087

)

�

(159

)

�

General and administrative expenses - adjusted (Non-GAAP)

24,724

�

15.9

�%

�

24,759

�

15.0

�%

�

Loss from operation

(10,079

)

�

(6.5

�

(4,493

)

�

(2.7

Changes to supply chain operations

�

5,900

�

Customs settlements and contingencies

6,547

�

Internal investigation

5,263

�

Employment settlements and severance

3,087

�

159

�

Income from operation - adjusted (Non-GAAP)

4,818

�

3.1

�%

�

1,566

�

1.0

�%

(5) Gross Profit

Gross profit for the three months ended September 30, 2014 decreased 2.5% to $82,539 from $84,640 in the corresponding period in 2013 due primarily to lower sales volume across all segments. Gross profit, excluding unusual and non-recurring expenses, increased as a percentage of net sales to 53.5% from 52.2% due to a decrease in freight costs associated with the completion of our transition to our La Mirada facility in late 2013, partially offset by an increase in retail store sales discounts and higher custom duties expenses.

(6) Selling and distribution expenses

Selling and distribution expenses for the three months ended September 30, 2014 decreased $11,342, or 17.7%, from the corresponding period in 2013. Excluding the effects of the unusual and non-recurring events described above, selling and distribution expenses decreased $6,642, or 11.2%, from the corresponding period in 2013. The decrease was mainly due to lower retail store payroll of approximately $4,400 and advertising costs of approximately $1,600. The decreases were the result of reductions in both retail headcount and store hours as well as reduced advertising commitments. In addition, travel and entertainment expenses decreased approximately $600 from our cost reduction efforts.

(7) General and administrative expenses

General and administrative expenses for the three months ended September 30, 2014 increased $13,867, or 55.7%, from the corresponding period in 2013. Excluding the effects of the unusual and non-recurring events described above, general and administrative expenses decreased slightly to $24,724 for the three months ended September 30, 2014 from $24,759 for the corresponding period in 2013. As a result of our cost reduction efforts, the $1,700 in higher computer and leased equipment expenses was partly offset by a reduction in travel and entertainment expenses of $550 and a decrease in rent and utilities of $590. Additionally, salaries, wages and benefits decreased $1,100, partly offset by $600 in higher professional fees.

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(8) Loss from operations

Loss from operations was $10,079 for the three months ended September 30, 2014 as compared to $4,493 for the three months ended September 30, 2013. Excluding the effects of the unusual and non-recurring events described above, our income from operations were $4,818 and $1,566 for the three months ended September 30, 2014 and 2013, respectively. Lower sales volume and higher retail store impairments were offset by decreases in our operating expenses as discussed above.

(9) Interest expense

Interest expense for the three months ended September 30, 2014 slightly decreased $263, or 2.6% from the corresponding period in 2013.

(10) Income tax provision

Although we incurred a loss before income tax on a consolidated basis for the three months ended September 30, 2014, some of our foreign domiciled subsidiaries reported income before income tax 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, 2014. There were no charges or benefits recorded to income tax expense for valuation allowances.

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Nine Months Ended September 30, 2014 compared to the Nine Months Ended September 30, 2013

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

�

Nine Months Ended September 30,

�

2014

�

% of net sales

�

2013

�

% of net sales

U.S. Wholesale

156,967

�

34.4

�%

�

147,524

�

31.7

�%

U.S. Retail

141,712

�

31.1

�%

�

149,811

�

32.3

�%

Canada

36,691

�

8.1

�%

�

42,842

�

9.2

�%

International

119,992

�

26.4

�%

�

124,662

�

26.8

�%

Total net sales

455,362

�

100.0

�%

�

464,839

�

100.0

�%

Cost of sales

218,462

�

48.0

�%

�

223,461

�

48.1

�%

Gross profit

236,900

�

52.0

�%

�

241,378

�

51.9

�%

�

Selling and distribution expenses

159,145

�

34.9

�%

�

177,235

�

38.1

�%

General and administrative expenses

90,829

�

19.9

�%

�

80,716

�

17.4

�%

Retail store impairment

1,921

�

0.4

�%

�

311

�

0.1

�%

�

Loss from operations

(14,995

)

�

(3.3

�

(16,884

)

�

(3.6

�

Interest expense

29,916

�

29,555

�

Foreign currency transaction loss ^(a)

748

�

422

�

Unrealized (gain) loss on change in fair value of warrants^�(b)

(6,250

)

�

5,225

�

(Gain) loss on extinguishment of debt

(171

)

�

32,101

�

Other (income) expense

)

�

Loss before income tax

(39,233

)

�

(84,229

)

�

Income tax provision

1,622

�

1,299

�

Net loss

(40,855

)

�

(85,528

)

�

(a) Related to the exchange rate fluctuations of the U.S.�Dollar relative to functional currencies used by our subsidiaries.

(b) Mark-to-market adjustments associated with our warrants.

(1) U.S. Wholesale

Online consumer net sales for the nine months ended September 30, 2014 was flat as compared to the corresponding period in 2013. We continue our focus on targeted online advertising and promotional efforts.

(2) U.S. Retail

U.S. Retail net sales for the nine months ended September 30, 2014 decreased $8,099, or 5.4%, from the corresponding period in 2013 mainly due to a decrease of approximately $9,800 in comparable store sales as a result of the unseasonably cool temperatures across the country during the first quarter of 2014 and lower store foot traffic. Net sales also decreased approximately $3,500 due to the closure of eight stores, offset by an increase of approximately $800 from two new stores added since the beginning of January 2013. Additionally, sales from OAK stores contributed approximately $3,200 and sales from flea markets and consignments contributed approximately $700.

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(3) Canada

Canada net sales for the nine months ended September 30, 2014 decreased $6,151, or 14.4%, from the corresponding period in 2013 mainly due to approximately $3,600 in lower sales, primarily in the retail and wholesale channels, and the unfavorable impact of foreign currency exchange rate changes of approximately $2,500.

Retail net sales for the nine months ended September 30, 2014 decreased $4,527, or 14.3%, from the corresponding period in 2013. The decrease was due to $1,700 lower sales resulting the closure of four retail stores and approximately $950 from lower comparable store sales due to unseasonably cool temperatures. Additionally, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $1,900.

Wholesale net sales for the nine months ended September 30, 2014 decreased $1,802, or 19.5%, from the corresponding period in 2013. The decrease was due to lower sales orders resulting from a tightening focus on higher margin customers and lingering effects of order fulfillment delays associated with transition issues at the La Mirada distribution center during the fourth quarter of 2013. In addition, the impact of foreign currency exchange rate changes contributed to the sales decrease of approximately $500.

Online consumer net sales for the nine months ended September 30, 2014 increased $178, or 9.2%, from the corresponding period in 2013 mainly due to email advertising campaigns as well as improvements to the online store rolled out in the second half of 2013. The absolute increase in sales was partially offset by the impact of foreign currency exchange rate changes of approximately $150.

(4) International

International net sales for the nine months ended September 30, 2014 decreased $4,670, or 3.7%, from the corresponding period in 2013 due to approximately $8,000 lower sales in all three sales channels and the favorable impact of foreign currency exchange rate changes of approximately $3,300.

Retail net sales for the nine months ended September 30, 2014 decreased $4,829, or 4.6%, from the corresponding period in 2013. The decrease was due to lower comparable store sales of approximately $7,400 and lower sales of approximately $1,900 from the closure of seven retail stores. The decrease was offset by approximately $2,000 higher sales due to seven new stores added since the beginning of January 2013 and the favorable impact of foreign currency exchange rate changes of approximately $2,600.

Wholesale net sales for nine months ended September 30, 2014 increased $710, or 11.3%, from the corresponding period in 2013 mainly due to higher sales in the U.K. and the favorable impact of foreign currency exchange rate changes of approximately $300.

Online consumer net sales for the nine months ended September 30, 2014 decreased $551, or 4.3%, from the corresponding period in 2013 mainly due to lower sales order volume in Japan, the U.K. and Continental Europe, offset by higher sales order volume in Korea and the favorable impact of foreign currency exchange rate changes of approximately $400.

Unusual and Non-Recurring Events

The table below summarizes the impact to our earnings of certain unusual incremental costs which we consider to be non-recurring and presents gross profit, operating expenses, and income from operations on an as-adjusted basis, together with the reconciliation to the most directly comparable GAAP measure. See Overview - Executive Summary for a description of each of the events noted:

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�

Nine months ended September 30,

�

2014

�

% of Net Sales

�

2013

�

% of Net Sales

Gross profit

236,900

�

52.0

�%

�

241,378

�

51.9

�%

Changes to supply chain operations

�

2,200

�

Customs settlements and contingencies

836

�

Gross profit - adjusted (Non-GAAP)

237,736

�

52.2

�%

�

243,578

�

52.4

�%

�

Selling and distribution expenses

159,145

�

34.9

�%

�

177,235

�

38.1

�%

Changes to supply chain operations

�

(8,700

)

�

Selling and distribution expenses - adjusted (Non-GAAP)

159,145

�

34.9

�%

�

168,535

�

36.3

�%

�

General and administrative expenses

90,829

�

19.9

�%

�

80,716

�

17.4

�%

Customs settlements and contingencies

(5,711

)

�

Internal investigation

(6,619

)

�

Employment settlements and severance

(5,815

)

�

(686

)

�

General and administrative expenses - adjusted (Non-GAAP)

72,684

�

16.0

�%

�

80,030

�

17.2

�%

�

Loss from operation

(14,995

)

�

(3.3

�

(16,884

)

�

(3.6

Changes to supply chain operations

�

10,900

�

Customs settlements and contingencies

6,547

�

Internal investigation

6,619

�

Employment settlements and severance

5,815

�

686

�

Income (loss) from operation - adjusted (Non-GAAP)

3,986

�

0.9

�%

�

(5,298

)

�

(1.1

(5) Gross Profit

Gross profit for the nine months ended September 30, 2014 decreased 1.9% to $236,900 from $241,378 in the corresponding period in 2013 due to lower retail sales volume at our U.S. Retail, Canada and International segments, offset by higher sales at our U.S. Wholesale segment. Excluding the effects of the unusual and non-recurring events described above, gross profit as a percentage of net sales for the nine months ended September 30, 2014 decreased slightly to 52.2% from 52.4%. The decrease was due to higher sales discounts at our retail store operations, offset by a decrease in freight costs associated with the completion of our transition to our La Mirada facility in late 2013.

(6) Selling and distribution expenses

Selling and distribution expenses for the nine months ended September 30, 2014 decreased $18,090, or 10.2%, from the corresponding period in 2013. Excluding the effects of the unusual and non-recurring events described above, selling and distribution expenses decreased $9,390, or 5.6%, from the corresponding period in 2013 due primarily to lower selling related payroll costs of approximately $4,400, lower advertising costs of approximately $4,400 and lower travel and entertainment expenses of $900, all primarily as a result in our cost reduction efforts.

(7) General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2014 increased $10,113, or 12.5%, from the corresponding period in 2013. Excluding the effects of the unusual and non-recurring expenses described above, general and administrative expenses decreased $7,346, or 9.2% from the corresponding period in 2013. The decrease was primarily due to $3,900 in lower share-based compensation expense relating to the expiration and forfeiture of certain market-based and performance-based share awards and decreases in salaries and wages of approximately $3,600.

(8) Loss from operations

Loss from operations was $14,995 for the nine months ended September 30, 2014 as compared to $16,884 for the nine months ended September 30, 2013. Excluding the effects of the unusual and non-recurring events described above, our operating results for the nine months ended September 30, 2014 would have been an income from operations of $3,986 as compared with a loss from operations of $5,298 for the nine months ended September 30, 2013. Lower sales volume and higher retail store impairments were offset by decreases in our operating expenses as discussed above.

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(9) Interest expense

Interest expense for the nine months ended September 30, 2014 increased by $361, or 1.2% from the corresponding period in 2013.

(10) Income tax provision

Though we incurred a loss before income tax on a consolidated basis for the nine months ended September 30, 2014, some of our foreign domiciled subsidiaries reported income before income tax 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, 2014. There were no charges or benefits recorded to income tax expense for valuation allowances.

LIQUIDITY AND CAPITAL RESOURCES

Over the past years, our operations have been funded through a combination of borrowings from related and unrelated parties, banks and other debt, lease financing, and proceeds from the exercise of purchase rights and issuance of common stock. We continue to develop initiatives intended to either increase sales, reduce costs or improve working capital and liquidity. Beginning with the fourth quarter of 2013, we instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. We also limited capital expenditures starting the first quarter of 2014. In addition, we continue to drive productivity improvements from our new distribution center, inventory reductions, other labor cost reductions, and consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing.

Our principal liquidity requirements are for operations, working capital interest payments, and capital expenditures. We fund liquidity requirements primarily through cash on hand, cash flow from operations, and borrowings under our credit facilities. Our credit agreements contain covenants requiring us to meet specified targets for measures related to earnings, capital expenditures, and minimum fixed charge coverage ratio and maximum leverage ratio requirements. Our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under our credit facilities or result in an event of default.

As of September�30, 2014, we had $9,389 in cash, $27,047 outstanding on our $50,000 asset-backed revolving credit facility with Capital One and $20,398 of availability for additional borrowings under the Capital One Credit Facility. As of November 3, 2014, we had $8,352 availability for additional borrowings under the Capital One Credit Facility.

We are in the process of negotiating an unsecured credit agreement with Standard General (the "Standard General Credit Agreement") between one or more entities affiliated with Standard General and one or more of our foreign subsidiaries as borrowers. We expect that the Standard General Credit Agreement will (i) be guaranteed by us, (ii) provide for multiple borrowings by the borrowers thereunder in an aggregate amount not to exceed $15,000, which amounts will not be permitted to be reborrowed once repaid, (iii) bear interest at 14% per annum, and (iv) mature on October 15, 2020. We expect that amounts under the Standard General Credit Agreement would be available for additional liquidity with the approval of the Board.

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

A. Cash Flow



�	Nine Months Ended September 30,
�	2014			�	2013
Net cash provided by (used in):	�			�	�
Operating activities	$	3,307		�	$	(8,804	)
Investing activities	(8,404		)	�	(17,283		)
Financing activities	6,877			�	18,434
Effect of foreign exchange rate on cash	(1,067		)	�	(287		)
Net increase (decrease) in cash	$	713		�	$	(7,940	)

Cash provided by operating activities increased for the nine months ended September 30, 2014 from the corresponding period in 2013. The increase was mainly due to decreased inventory levels and improved operating income, partially offset by approximately $12,000 increase in interest payments and $10,200 payments related to certain unusual and non-recurring costs discussed in Results of Operations as well as the German customs duties (See Note 13 of Condensed Notes to the Consolidated Financial Statements under Part I. Item 1. Financial Statements).

Cash used in investing activities decreased for the nine months ended September 30, 2014 from the corresponding period in 2013, mainly due to the Company's ongoing efforts to reduce capital expenditures.

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Cash provided by financing activities decreased for the nine months ended September 30, 2014 from the corresponding period in 2013. In March 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,446. During the nine months ended September 30, 2014, we repaid a net amount of $16,965 borrowed under the Capital One Credit Facility. On April 4, 2013, we issued the Notes for aggregate net proceeds of $199,820 and entered into a new asset-backed revolving credit agreement with Capital One. The net proceeds of the Notes, together with borrowings under the new credit facility, were used to repay and terminate the outstanding amounts with Lion of $144,149 and with Crystal Financial LLP of $66,411.

B. Debt

The following is an overview of our total debt as of September�30, 2014:



Description�of�Debt	�	Lender	�	Interest�Rate	�	September�30, 2014		�	Covenant Violations
Revolving credit facility	�	Capital One	�	(1)	�	$	27,047	�	No
Senior Secured Notes	�	�	�	15.0%	�	206,857		�	No
Long-term debt with Standard General	�	Standard General	�	17.0%	�	9,034		�	No
Capital lease obligations	�	(2)	�	0.4% ~ 23.5%	�	5,659		�	N/A
Other	�	�	�	�	�	282		�	N/A
Cash overdraft	�	�	�	�	�	3,891		�	�
Total	�	�	�	�	�	$	252,770	�	�

(1) LIBOR plus 5.0% or the bank's prime rate plus 4.0% at our option according to the Fifth Amendment.

(2) 14 individual leases ranging between from $3 to $3,193.

For additional disclosure regarding debts, see Notes 6 and 7 of Condensed Notes to the Consolidated Financial Statements under Part I. Item 1. Financial Statements.

Financial Covenants

Capital One Credit Facility - Under the Fifth Amendment, we are subject to specified borrowing requirements and covenants. The Fifth Amendment requires a minimum fixed charge coverage ratio, a maximum leverage ratio, and a maximum capital expenditures allowed and adds a minimum adjusted EBITDA covenant. For the three months ended September�30, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and achieve a minimum adjusted EBITDA of $23,406. We were in compliance with these covenants at September�30, 2014.

The Capital One Credit Facility is secured by a lien on substantially all of the assets of our domestic subsidiaries and equity interests in certain of foreign subsidiaries, subject to some restrictions. It requires that we maintain a lockbox arrangement and contain certain subjective acceleration clauses. In addition, Capital One may adjust the advance restriction and criteria for eligible inventory and accounts receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the Indenture governing the Notes or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility. As of September�30, 2014, we had $1,280 of outstanding letters of credit secured against the Capital One Credit Facility.

Senior Secured Notes - The Indenture governing our Notes imposes certain limitations on our ability to, among other things and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan of liquidation. We must annually report to the trustee on compliance with such limitations. The Indenture also contains cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes. We were in compliance with the required covenants at September�30, 2014.

Standard General Loan Agreement - The Standard General Loan Agreement contains the same restrictive covenants as Lion Loan Agreement, which incorporated by reference several of the covenants contained in the Indenture governing our Notes, including covenants restricting our ability to incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan

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of liquidation. As of September 30, 2014, we were in compliance with the required covenants of the Standard General Loan Agreement.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

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

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

Issued and outstanding letters of credit were $1,280 at September�30, 2014, related primarily to workers' compensation insurance and store leases.

Item�3.��Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risk during the three and nine months ended September 30, 2014. For additional information, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in Part II of our Annual Report on Form 10-K for the year ended December�31, 2013.

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Item�4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and participation of our management, including our interim 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. Based upon that evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the quarter covered by this Quarterly Report on Form 10-Q. �

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. As we expand globally, we are increasingly dependent on information systems to operate our website, process transactions, respond to customer inquiries, manage inventory and production, purchase, well and ship goods on a timely basis and maintain cost-efficient operations. In connection with the process of upgrading our information technology infrastructure and resulting business process changes, we continue to create and enhance the design and documentation of our internal control processes to ensure effective controls over financial reporting.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) other than discussed above during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

PART II-OTHER INFORMATION


Item�1.	Legal Proceedings

For a discussion of legal matters, see Note 16 of Condensed Notes to the Consolidated Financial Statements in Part I. Item 1. Financial Statements of this Quarterly Report on Form 10-Q.


Item�1A.	Risk Factors

Before deciding to invest in us or to maintain or increase your investment, in addition to the risks described under this Item 1A, 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, as well as the other information in this report and such other filings. 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, or 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.

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, except for the following:

The suspension and possible termination of our chief executive officer could have a material adverse impact on our business.

On June 18, 2014, our Board of Directors voted to replace Mr. Charney as Chairman of our Board of Directors, suspended him and notified him of its intent to terminate his employment as our Chairman and CEO for cause. In connection with the Support Agreement, the Board formed a new special committee (the "Suitability Committee") for the purpose of overseeing the continuing investigation into the alleged misconduct by Mr. Charney (the "Internal Investigation"), and Mr. Charney agreed that pending his suspension, he would not serve as our CEO or an officer or employee of us or our subsidiaries until the Internal Investigation is completed. Based on the findings of the Internal Investigations, the Suitability Committee will determine whether it is appropriate for Mr. Charney to be reinstated as our CEO or serve as an officer or employee of us or any of our subsidiaries.

If the Suitability Committee determines it is not appropriate to reinstate Mr. Charney as CEO, we may have difficulty maintaining or developing our business as we seek to find a permanent CEO. In addition, as a result of the Internal Investigation and/or the Suitability Committee's determination, we could become subject to litigation and regulatory investigations, which could have a material adverse impact on our business.

We depend on key personnel, and our ability to grow and compete will be harmed if we do not retain the continued services of such personnel, or we fail to identify, hire and retain additional qualified personnel.

We depend on the efforts and skills of our management team and other key personnel, and the loss of services of one or more members of this team, many of whom have substantial experience in the apparel industry, could have an adverse effect on our

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business. Our senior officers closely supervise all aspects of our business, in particular the design and production of merchandise and the operation of our stores.

If we are unable to hire and retain qualified management or if any member of our management leaves, such departure could have an adverse effect on our operations and could adversely affect our ability to design new products and to maintain and grow the distribution channels for our products. In addition, the pendency and outcome of the Internal Investigation and the determination made by the Suitability Committee as to whether or not to reinstate Mr. Charney as our CEO or in another capacity could result in departure of additional members of our management or other key employees.

Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising and marketing areas, and other functions. In addition, if we experience material growth, we will need to attract and retain additional qualified personnel. The market for qualified and talented design and marketing personnel in the apparel industry is intensely competitive, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. If we are unable to attract or retain qualified personnel as needed, our growth will be hampered and our operating results could be materially adversely affected.

Litigation exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations.

We are subject to regulatory inquiries, investigations, claims and suits, including, among others, a consolidated putative shareholder class action, consolidated shareholder derivative actions, wage and hour suits, and numerous employment related claims and suits. In addition, on or about June 23, 2014, Mr. Charney submitted a demand in arbitration against us in connection with his suspension, which has been stayed pending the determination of the Suitability Committee in the Internal Investigation. If the Suitability Committee determines that it is not appropriate to reinstate Mr. Charney as our CEO or in another capacity acceptable to him, Mr. Charney could reinstate his demand for arbitration or file additional lawsuits against us.

In the event that any current or future inquiries, investigations, claims or suits are decided against us, we may incur substantial liability, experience an increase in similar suits or suffer reputational harm. We are unable to predict the financial outcome that could result from these matters at this time and any views we form as to the viability of these claims or the financial exposure in which they could result could change from time to time as the matters proceed through their course, as facts are established and various judicial determinations are made. No assurance can be made that these matters will not result in material financial exposure, which together with the potential for similar suits and reputational harm, could have a material adverse effect upon our financial condition and results of operations. See Note 16 of Condensed Notes to the Consolidated Financial Statements under Part I. Item 1. Financial Statements.

If we fail to maintain the value and image of our brand, our sales are likely to decline.

Our success depends on the value and image of our brand. Our name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brand depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation or those of our senior personnel were to be tarnished by negative publicity. Any of these events, including the publicity surrounding the suspension of Mr. Charney as our CEO, the pendency and results of the Internal Investigation and the determination made by the Suitability Committee, could result in decreases in sales.

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

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


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


"	payments on subordinated debt;


"	liens and sale-leaseback transactions;


"	loans and investments;


"	debt and hedging arrangements;


"	mergers, acquisitions and asset sales;


"	transactions with affiliates;


"	disposals of assets;


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


"	capital expenditures, including to fund future store openings.

We have amended the Capital One Credit Facility from time to time in order to waive certain obligations relating to, among other things, financial ratio covenants, including the third amendment dated November 14, 2013, and the fifth amendment dated

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March 25, 2014. As of September 30, 2014, we were in compliance with the financial covenants under the Capital One Credit Facility. There can be no assurance that we will maintain compliance with the Capital One Credit Facility, and we may need to make further amendments with the facility to avoid an event of default under the facility.

Under the indenture governing our senior secured notes, a special interest trigger event occurred as of December 31, 2013 because our consolidated total net leverage ratio, as calculated under the indenture, exceeded 4.50 to 1.00. As a result, interest on the senior secured notes now accrues at a rate of 15% annum, with the interest in excess of 13% per annum payable in-kind for any interest payment date prior to April 15, 2018 and in cash for any interest payment date thereafter. The additional 2% per annum of interest accrues retroactively from the issue date of the senior secured notes. Similarly, because of the special interest trigger event, the interest rate on the Lion Loan Agreement also increased from 18% to 20% per annum with the additional 2% payable retroactively from the date of the loan agreement. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General. On September 8, 2014, the Company entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments, including to remove a provision that specified that Mr. Charney not being the CEO of the Company would constitute an event of default. Interest under the Standard General Loan Amendment is payable in cash or, to the extent permitted by our other debt agreements, in-kind. We are currently paying the interest in cash as the terms of our other debt agreements do not currently permit payment in-kind.

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, our senior secured notes and certain equipment leasing agreements. In the event of a default on these agreements, substantially all of our assets could be subject to liquidation by the creditors, which liquidation could result in no assets being left for the stockholders after the creditors receive their required payment. In such an event, we would be required to seek alternative sources of liquidity, and there can be no assurance that any alternative source of liquidity would be available on terms acceptable to us, or at all.

If we are unable to maintain the listing of our common stock on the NYSE MKT or any other securities exchange, it may be more difficult for you to sell your securities.

Our common stock is currently traded on the NYSE MKT. We are currently in compliance with the continued listing standards of the NYSE MKT; however, in the past we have failed to meet such standards. We are subject to periodic review by NYSE MKT and no assurance can be given that we will continue to meet the listing requirements of NYSE MKT in the future. If for any reason the NYSE MKT should delist our common stock, and we are unable to obtain listing on another national securities exchange, we could face significant material adverse consequences, including:


"	a limited availability of market quotations for our securities;


"	a limited amount of news and analyst coverage;


"	a decreased ability to issue additional securities or obtain additional financing in the future; and


"	a determination that the common stock is a "penny stock," if the securities sell for a substantial period of time at a low price per share which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock.

Voting control by our executive officers, directors, lenders and other affiliates may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval.

In connection with the Support Agreement, five directors resigned from the Board, effective as of August 2, 2014, and five new directors were appointed to the Board, three of whom were designated by Standard General and two of whom were appointed by the mutual agreement of Standard General and us. On August 26, 2014, Lion exercised its right to designate one member to our Board, whose appointment was effective as of September 15, 2014.

As of August 1, 2014, Mr. Charney owned approximately 42.8% of our outstanding common stock and Mr. Charney and Standard General collectively controlled the right to vote such common stock. On July 9, 2014, Mr. Charney and Standard General, on

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behalf of one or more of its funds, entered into a cooperation agreement (the "Cooperation Agreement"), which provides among other things that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement (defined below). In addition, according to Mr. Charney's Schedule 13D/A, dated June 25, 2014, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right exercisable on or prior to July 15, 2017, to purchase from Mr. Charney shares representing approximately 18.4% of our currently outstanding common stock (consisting of the 27,351,407 shares purchased by Mr. Charney from Standard General using the proceeds of a loan from Standard General and 10% of Mr. Charneys 47,209,407 original shares which original shares also are pledged as security for such loan, which shares are further referenced in the Cooperation Agreement).

As of August 1, 2014, Lion beneficially owned approximately 14.1% of our outstanding common stock. Mr. Charney and Lion have the right to acquire additional beneficial ownership under certain circumstances. In addition, Mr. Charney and Lion are parties to an investment agreement pursuant to which Lion has the right to designate up to two directors on the Board and a board observer (or, if we increase our board size to 12, up to three directors and no board observers), subject to maintaining certain minimum ownership thresholds of common stock or shares of common stock issuable under Lion's warrants. In addition to the one member of the Board designated by Lion, Lion has the ability to designate one additional director and a board observer.

Mr. Charney and Lion also are parties to an investment voting agreement, dated March 13, 2009 (the "Investment Voting Agreement") which provides that, for so long as Lion has the right to designate any person or persons to the Board, Mr.�Charney will vote his shares of common stock in favor of Lion's designees, and Lion will vote its shares of common stock in favor of Mr.�Charney and each other designee of Mr.�Charney, in each case subject to Mr. Charney maintaining certain minimum ownership thresholds of common stock.

This concentration of share ownership, agreements allowing Standard General and Lion to appoint members to the Board, and voting agreements between Mr. Charney and Standard General and Mr. Charney and Lion, may adversely affect the trading price for the common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, some or all of our significant stockholders, if they were to act together, would be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquire from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders and may prevent our stockholders from realizing a premium over the current market price for their shares of common stock. Furthermore, our significant stockholders may also have interests that differ from yours and may vote their shares of common stock in a way with which you disagree and which may be adverse to your interests.


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

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

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

"may apply standards of materiality in a way that is different from what may be viewed as material to you

or other investors; and

"were made only as of the date of the applicable agreement or such other date or dates as may be specified

in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about 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.



�	�	�	�	Incorporated by Reference
Exhibit No.	�	Description	�	Form	�	Exhibits	�	Filing Date/Period End Date
�	�	�	�	�	�	�	�	�
3.1	�	Amended and Restated Bylaws of American Apparel, Inc., as amended, effective as of July 31, 2014	�	8-K	�	3.2	�	8/6/2014
�	�	�	�	�	�	�	�	�
4.1	�	Amendment No. 1 to Rights Agreement, dated as of July 9, 2014, by and between American Apparel, Inc. and Continental Stock Transfer & Trust Company as rights agent	�	8-K	�	4.1	�	7/9/2014
�	�	�	�	�	�	�	�	�
10.1	�	American Apparel, Inc. Severance Plan	�	8-K	�	10.1	�	7/25/2014
�	�	�	�	�	�	�	�	�
10.2	�	Employment Agreement, effective as of July 14, 2014, between American Apparel, Inc. and John J. Luttrell	�	8-K	�	10.1	�	7/18/2014
�	�	�	�	�	�	�	�	�
10.3*	�	Letter Agreement, dated as of September 28, 2014, by and between American Apparel, Inc. and Alvarez & Marsal North America, LLC	�	�	�	�	�	�
�	�	�	�	�	�	�	�	�
10.4*	�	Employment Agreement, dated as of September 29, 2014, by and between American Apparel, Inc. and Hassan Natha	�	�	�	�	�	�
�	�	�	�	�	�	�	�	�
10.5	�	Nomination Standstill and Support Agreement, dated as of July 9, 2014, by and among the Company, Standard General Master Fund L.P., P Standard General Ltd. and Dov Charney	�	8-K	�	10.1	�	7/9/2014
�	�	�	�	�	�	�	�	�
10.6*	�	Amendment to Credit Agreement, dated as of September 8, 2014, by and among American Apparel, Inc. and Standard General Master Fund L.P.	�	�	�	�	�	�
�	�	�	�	�	�	�	�	�
31.1*	�	Certification of Interim 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 Interim 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. �

Management contract or compensatory plan or arrangement.

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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�10, 2014



AMERICAN APPAREL, INC.
Signature	�	Title	�	Date
�	�	�	�	�
/s/ SCOTT BRUBAKER	�	Interim Chief Executive Officer	�	November�10, 2014
Scott Brubaker	�	Interim Chief Executive Officer	�	�
�	�	�	�	�
/s/�HASSAN NATHA	�	Chief Financial Officer	�	November�10, 2014
Hassan Natha	�	Chief Financial Officer	�	�

�

Exhibit 10.3

EXECUTED VERSION

��

September 28, 2014

David Glazek, Board Member

American Apparel, Inc.

747 Warehouse St.

Los Angeles, CA 90021

Dear Mr. Glazek:

Dated as of September 28, 2014 (the Effective Date), this letter agreement (this Agreement) hereby amends and restates that certain engagement letter agreement, dated September 2, 2014, among Alvarez & Marsal North America, LLC (A&M) and American Apparel, Inc., and its assigns and successors (the Company), including the scope of the services to be performed and the basis of compensation for those services. Upon execution of this letter by each of the parties below, this letter will constitute an agreement between the Company and A&M.


1.	Description of Services


(a)	Officers. In connection with this engagement, A&M shall make available to the Company:


(i)	Scott Brubaker to serve as the Interim Chief Executive Officer (the CEO)¹; and


(ii)	Upon the mutual agreement of A&M and the Company, A&M will provide additional employees of A&M and/or its affiliates and wholly-owned subsidiaries (Additional Personnel) as required (collectively, with the CEO, the Engagement Personnel), to assist the CEO in the execution of the duties set forth more fully herein.


(b)	Duties of CEO. The CEO shall act as the Interim Chief Executive Officer for the Company and oversee the Companys management team. Without limiting the generality of the foregoing, such duties shall include the following:


(i)	The CEO shall perform those duties that are customary for an individual working in the capacity of a chief executive officer;


(ii)	The CEO and certain Additional Personnel shall assist in the identification of cost reduction and operations improvement opportunities;


(iii)	The CEO and certain Additional Personnel shall assist in developing for the Boards' review possible strategic alternatives for maximizing the enterprise value of the Company's various business lines; and

¹A&M will provide advisory services until such time as the Board appoints the CEO.


(iv)	The CEO and certain Additional Personnel shall perform such other services as requested or directed by the Board or other Company personnel as authorized by


(v)	the Board, and agreed to by A&M that is not duplicative of work others are performing for the Company.


(c)	The Engagement Personnel shall report to the Board and, at the request of the Board, will make recommendations to and consult with the Board.

(d)

The Engagement Personnel will continue to be employed by A&M and, while rendering services to the Company, will continue to work with other personnel at A&M in connection with unrelated matters that will not unduly interfere with the services rendered by the Engagement Personnel pursuant to this Agreement. With respect to the Company, however, the Engagement Personnel shall operate under the direction of the Board and A&M shall have no liability to the Company for any acts or omissions of the Engagement Personnel related to the performance or non-performance of services at the direction of the Board and consistent with the requirements of the Engagement and this Agreement.


(e)	In connection with the services to be provided hereunder, from time to time A&M may utilize the services of employees of its affiliates, subsidiaries and independent contractors as Engagement Personnel. Such affiliates and subsidiaries are wholly owned by A&Ms parent company and employees.

Information Provided by Company and Forward Looking Statements. The Company shall use all reasonable efforts to: (i) provide the Engagement Personnel with access to management and other representatives of the Company; and (ii) to furnish all data, material, and other information concerning the business, assets, liabilities, operations, cash flows, properties, financial condition and prospects of the Company that Engagement Personnel reasonably request in connection with the services to be provided to the Company. The Engagement Personnel shall rely, without further independent verification, on the accuracy and completeness of all publicly available information and information that is furnished by or on behalf of the Company and otherwise reviewed by Engagement Personnel in connection with the services performed for the Company. The Company acknowledges and agrees that the Engagement Personnel are not responsible for the accuracy or completeness of such information and shall not be responsible for any inaccuracies or omissions therein. A&M and Engagement Personnel are under no obligation to update data submitted to them or to review any other areas unless specifically requested by the Board to do so.

You understand that the services to be rendered by the Engagement Personnel may include the preparation of projections and other forward-looking statements, and numerous factors can affect the actual results of the Companys operations, which may materially and adversely differ from those projections. In addition, Engagement Personnel will be relying on information provided by the Company in the preparation of those projections and other forward-looking statements.

Limitation of Duties. Neither A&M, nor the Engagement Personnel make any representations or guarantees that, inter alia, (i) an appropriate restructuring proposal or strategic alternative can be formulated for the Company, (ii) any restructuring proposal or strategic alternative presented to the Companys management or the Board will be more successful than all other possible restructuring proposals or strategic alternatives, (iii) restructuring is the best course of action for the Company, or (iv) if formulated, that any proposed restructuring plan or strategic alternative will be accepted by any of the Companys creditors, shareholders and other constituents. Further, neither A&M,

nor the Engagement Personnel, assume any responsibility for the Companys decision to pursue, or not pursue any business strategy, or to effect, or not to effect any transaction. The Engagement Personnel shall be responsible for implementation only of the restructuring proposal or alternative approved by the Board and only to the extent and in the manner authorized and directed by the Board.


4.	Compensation.


(a)	A&M will receive a fixed monthly fee for the services of Scott Brubaker as CEO and certain Additional Personnel to support the Duties of CEO described in paragraph 1.(b) herein.

Months 1-3 ��$250,000 per month

Months 3-6��$150,000 per month


(b)	Upon mutual agreement of A&M and the Company, A&M will receive fees for the services of any additional Engagement Personnel based on the following hourly rates:

Managing Directors�� $725-925

Directors�� $525-725

Analysts/Associates��$325-525

��

Such rates shall be subject to adjustment annually at such time as A&M adjusts its rates generally.

(c)

In addition, A&M will be reimbursed for its reasonable out-of-pocket expenses incurred in connection with this assignment, such as travel, lodging, duplicating, messenger and telephone charges. All fees will be billed and payable on a monthly basis in advance. All expenses will be billed and payable on a monthly basis or, at A&Ms discretion, more frequently. Invoices are due and payable upon receipt.


(d)	A&M is in receipt of a retainer in the amount of $25,000, which shall be credited against any amounts due at the termination of this engagement and returned upon the satisfaction of all obligations hereunder.

(e)

Further, the Company recognizes that A&M intends to seek an incentive compensation component for its services hereunder, in addition to the compensation set forth above, based on the contribution made by A&M during this assignment. To establish such incentive compensation, A&M and the Company agree they will work in good faith to reach agreement on the amount of such incentive compensation at the conclusion of the engagement, or such other time as the parties mutually agree. Such compensation shall be payable to A&M upon approval by the Board in its sole discretion.


5.	Termination.


(a)	This Agreement will apply from the commencement of the services referred to in Section 1 and may be terminated with immediate effect by either party without cause by written notice to the other party.


(b)	A&M normally does not withdraw from an engagement unless the Company misrepresents or fails to disclose material facts, fails to pay fees or expenses, or makes it unethical or unreasonably difficult for A&M to continue performance of the engagement, or other just cause exists.� ��


(c)	On termination of the Agreement, any fees and expenses due to A&M shall be remitted promptly (including fees and expenses that accrued prior to but are invoiced subsequent to such termination).� �


(d)	The provisions of this Agreement that give the parties rights or obligations beyond its termination shall survive and continue to bind the parties.


6.	No Audit. Company acknowledges and agrees that A&M and Engagement Personnel are not being requested to perform an audit, review or compilation, or any other type of financial statement reporting engagement that is subject to the rules of the AICPA, SEC or other state or national professional or regulatory body.

No Third Party Beneficiary. The Company acknowledges that all advice (written or oral) provided by A&M and the Engagement Personnel to the Company in connection with this engagement is intended solely for the benefit and use of the Company (limited to its Board and management) in considering the matters to which this engagement relates. The Company agrees that no such advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time in any manner or for any purpose other than accomplishing the tasks referred to herein without A&Ms prior approval (which shall not be unreasonably withheld), except as required by law.

Conflicts. A&M is not currently aware of any relationship that would create a conflict of interest with the Company or those parties-in-interest of which you have made us aware. Because A&M and its affiliates and subsidiaries comprise a consulting firm (the Firm) that serves clients on an international basis in numerous cases, both in and out of court, it is possible that the Firm may have rendered or will render services to, or have business associations with, other entities or people which had or have or may have relationships with the Company, including creditors of the Company. The Firm will not be prevented or restricted by virtue of providing the services under this Agreement from providing services to other entities or individuals, including entities or individuals whose interests may be in competition or conflict with the Companys, provided the Firm makes appropriate arrangements to ensure that the confidentiality of information is maintained.


9.	Confidentiality/Non-Solicitation.

A&M and Engagement Personnel shall keep as confidential all non-public information received from the Company in conjunction with this engagement, except: (i) as requested by the Company or its legal counsel; (ii) as required by legal proceedings; or (iii) as reasonably required in the performance of this engagement. All obligations as to non-disclosure shall cease as to any part of such information to the extent that such information is, or becomes, public other than as a result of a breach of this provision. The Company, on behalf of itself and its subsidiaries and affiliates and any person which may acquire all or substantially all of its assets agrees that, until two (2) years subsequent to the termination of this engagement, it will not solicit, recruit, hire or otherwise engage any employee of A&M or any of its affiliates who worked on this engagement while employed by A&M or its affiliates (Solicited Person). Should the Company or any of its

subsidiaries or affiliates or any person who acquires all or substantially all of its assets extend an offer of employment to or otherwise engage any Solicited Person and should such offer be accepted, A&M shall be entitled to a fee from the party extending such offer equal to the Solicited Persons hourly client billing rate at the time of the offer multiplied by 4,000 hours for a Managing Director, 3,000 hours for a Senior Director and 2,000 hours for any other A&M employee. The Company acknowledges and agrees that this fee fairly represents the loss that A&M will suffer if the Company breaches this provision. The fee shall be payable at the time of the Solicited Persons acceptance of employment or engagement.

10.

Indemnification/Limitations on Liability. The Company shall indemnify the Engagement Personnel acting as officers (the Indemnified Professionals) to the same extent as the most favorable indemnification it extends to its officers or directors, whether under the Companys bylaws, its certificate of incorporation, by contract or otherwise, and no reduction or termination in any of the benefits provided under any such indemnities shall affect the benefits provided to the Indemnified Professionals. The Indemnified Professionals shall be covered as officers under the Companys existing director and officer liability insurance policy. As a condition of A&M accepting this engagement, a Certificate of Insurance evidencing such coverage shall be furnished to A&M prior to the effective date of this Agreement. The Company shall give thirty (30) days prior written notice to A&M of cancellation, non-renewal, or material change in coverage, scope, or amount of such director and officer liability policy. The Company shall also maintain such insurance coverage for the Indemnified Professionals for a period of not less than six years following the date of the termination of the Indemnified Professionals services hereunder. The provisions of this section are in the nature of contractual obligations and no change in applicable law or the Companys charter, bylaws or other organizational documents or policies shall affect the Indemnified Professionals rights hereunder. The attached indemnity and limitation on liability provisions are incorporated herein and the termination of this agreement or the engagement shall not affect those provisions, which shall remain in full force and effect.

11.

Miscellaneous. This Agreement (together with the attached indemnity provisions), including, without limitation, the construction and interpretation of thereof and all claims, controversies and disputes arising under or relating thereto, shall be governed and construed in accordance with the laws of the State of New York, without regard to principles of conflict of law that would defer to the laws of another jurisdiction. The Company and A&M agree to waive trial by jury in any action, proceeding or counterclaim brought by or on behalf of the parties hereto with respect to any matter relating to or arising out of the engagement or the performance or non-performance of A&M hereunder. The Company and A&M agree, to the extent permitted by applicable law, that any Federal Court sitting within the Southern District of New York shall have exclusive jurisdiction over any litigation arising out of this Agreement; to submit to the personal jurisdiction of the Courts of the United States District Court for the Southern District of New York; and to waive any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of New York for any litigation arising in connection with this Agreement.

This Agreement shall be binding upon A&M and the Company, their respective heirs, successors, and assignees, and any heir, successor, or assignee of a substantial portion of A&Ms or the Companys respective businesses and/or assets, including any Chapter 11 Trustee. This Agreement incorporates the entire understanding of the parties with respect to the subject matter hereof and may not be amended or modified except in writing executed by the Company and A&M. Notwithstanding anything herein to the contrary, A&M may reference or list the Companys name

and/or logo and/or a general description of the services in A&Ms marketing materials, including, without limitation, on A&Ms website.

If the foregoing is acceptable to you, kindly sign the enclosed copy to acknowledge your agreement with its terms.

Very truly yours,

Alvarez & Marsal North America, LLC

By:��/s/ Scott Brubaker��

Scott Brubaker

Managing Director

Accepted and agreed:

American Apparel, Inc.

By: ��/s/ Allan Mayer��

Allan Mayer

Co-Chairman of the Board

INDEMNIFICATION AND LIMITATION ON LIABILITY AGREEMENT

This indemnification and limitation on liability agreement is made part of an agreement, dated September 28, 2014 (which together with any renewals, modifications or extensions thereof, is herein referred to as the "Agreement") by and between Alvarez & Marsal North America, LLC ("A&M) and American Apparel, Inc. (the Company), for services to be rendered to the Company by A&M.

A.��The Company agrees to indemnify and hold harmless each of A&M, its affiliates and their respective shareholders, members, managers, employees, agents, representatives and subcontractors (each, an "Indemnified Party" and collectively, the "Indemnified Parties") against any and all losses, claims, damages, liabilities, penalties, obligations and expenses, including the costs for counsel or others (including employees of A&M, based on their then current hourly billing rates) in investigating, preparing or defending any action or claim, whether or not in connection with litigation in which any Indemnified Party is a party, or enforcing the Agreement (including these indemnity provisions), as and when incurred, caused by, relating to, based upon or arising out of (directly or indirectly) the Indemnified Parties' acceptance of or the performance or nonperformance of their obligations under the Agreement; provided, however, such indemnity shall not apply to any such loss, claim, damage, liability or expense to the extent it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from such Indemnified Party's gross negligence or willful misconduct. The Company also agrees that (a) no Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with the engagement of A&M, except to the extent that any such liability for losses, claims, damages, liabilities or expenses are found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from such Indemnified Party's gross negligence or willful misconduct and (b) in no event will any Indemnified Party have any liability to the Company for special, consequential, incidental or exemplary damages or loss (nor any lost profits, savings or business opportunity). The Company further agrees that it will not, without the prior consent of an Indemnified Party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which such Indemnified Party seeks indemnification hereunder (whether or not such Indemnified Party is an actual party to such claim, action, suit or proceedings) unless such settlement, compromise or consent includes an unconditional release of such Indemnified Party from all liabilities arising out of such claim, action, suit or proceeding.

B.��These indemnification provisions shall be in addition to any liability which the Company may otherwise have to the Indemnified Parties. In the event that, at any time whether before or after termination of the engagement or the Agreement, as a result of or in connection with the Agreement or A&Ms and its personnels role under the Agreement, A&M or any Indemnified Party is required to produce any of its personnel (including former employees) for examination, deposition or other written, recorded or oral presentation, or A&M or any of its personnel (including former employees) or any other Indemnified Party is required to produce or otherwise review, compile, submit, duplicate, search for, organize or report on any material within such Indemnified Partys possession or control pursuant to a subpoena or other legal (including administrative) process, the Company will reimburse the Indemnified Party for its out of pocket expenses, including the reasonable fees and expenses of its counsel, and will compensate the Indemnified Party for the time expended by its personnel based on such personnels then current hourly rate.

C.��If any action, proceeding or investigation is commenced to which any Indemnified Party proposes to demand indemnification hereunder, such Indemnified Party will notify the Company with reasonable

promptness; provided, however, that any failure by such Indemnified Party to notify the Company will not relieve the Company from its obligations hereunder, except to the extent that such failure shall have actually prejudiced the defense of such action. The Company shall promptly pay expenses reasonably incurred by any Indemnified Party in defending, participating in, or settling any action, proceeding or investigation in which such Indemnified Party is a party or is threatened to be made a party or otherwise is participating in by reason of the engagement under the Agreement, upon submission of invoices therefor, whether in advance of the final disposition of such action, proceeding, or investigation or otherwise. Each Indemnified Party hereby undertakes, and the Company hereby accepts its undertaking, to repay any and all such amounts so advanced if it shall ultimately be determined that such Indemnified Party is not entitled to be indemnified therefor. If any such action, proceeding or investigation in which an Indemnified Party is a party is also against the Company, the Company may, in lieu of advancing the expenses of separate counsel for such Indemnified Party, provide such Indemnified Party with legal representation by the same counsel who represents the Company, provided such counsel is reasonably satisfactory to such Indemnified Party, at no cost to such Indemnified Party; provided, however, that if such counsel or counsel to the Indemnified Party shall determine that due to the existence of actual or potential conflicts of interest between such Indemnified Party and the Company such counsel is unable to represent both the Indemnified Party and the Company, then the Indemnified Party shall be entitled to use separate counsel of its own choice, and the Company shall promptly advance its reasonable expenses of such separate counsel upon submission of invoices therefor. Nothing herein shall prevent an Indemnified Party from using separate counsel of its own choice at its own expense. The Company will be liable for any settlement of any claim against an Indemnified Party made with the Company's written consent, which consent shall not be unreasonably withheld.

D.��In order to provide for just and equitable contribution if a claim for indemnification pursuant to these indemnification provisions is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification, then the relative fault of the Company, on the one hand, and the Indemnified Parties, on the other hand, in connection with the statements, acts or omissions which resulted in the losses, claims, damages, liabilities and costs giving rise to the indemnification claim and other relevant equitable considerations shall be considered; and further provided that in no event will the Indemnified Parties' aggregate contribution for all losses, claims, damages, liabilities and expenses with respect to which contribution is available hereunder exceed the amount of fees actually received by the Indemnified Parties pursuant to the Agreement. No person found liable for a fraudulent misrepresentation shall be entitled to contribution hereunder from any person who is not also found liable for such fraudulent misrepresentation.

E.��In the event the Company and A&M seek judicial approval for the assumption of the Agreement or authorization to enter into a new engagement agreement pursuant to either of which A&M would continue to be engaged by the Company, the Company shall promptly pay expenses reasonably incurred by the Indemnified Parties, including attorneys' fees and expenses, in connection with any motion, action or claim made either in support of or in opposition to any such retention or authorization, whether in advance of or following any judicial disposition of such motion, action or claim, promptly upon submission of invoices therefor and regardless of whether such retention or authorization is approved by any court. The Company will also promptly pay the Indemnified Parties for any expenses reasonably incurred by them, including attorneys' fees and expenses, in seeking payment of all amounts owed it under the Agreement (or any new engagement agreement) whether through submission of a fee application or in any other manner, without offset, recoupment or counterclaim, whether as a secured claim, an administrative expense claim, an unsecured claim, a prepetition claim or a postpetition claim.

F.��Neither termination of the Agreement nor termination of A&M's engagement nor the filing of a petition under Chapter 7 or 11 of the United States Bankruptcy Code (nor the conversion of an existing case to one under a different chapter) shall affect these indemnification provisions, which shall hereafter remain operative and in full force and effect.

G.��The rights provided herein shall not be deemed exclusive of any other rights to which the Indemnified Parties may be entitled under the certificate of incorporation or bylaws of the Company, any other agreements, any vote of stockholders or disinterested directors of the Company, any applicable law or otherwise.



AMERICAN APPAREL, INC. By: /s/ Allan Mayer ��	ALVAREZ & MARSAL NORTH AMERICA, LLC By: /s/ Scott Brubaker

Exhibit 10.4

EXECUTED VERSION

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (the Agreement), effective as of September 29, 2014 (the Effective Date), by and between American Apparel, Inc., a Delaware corporation (the Company), and Hassan Natha (herein referred to as the Executive).

WHEREAS, the Company and the Executive deem it to be in their respective best interests to enter into an agreement providing for the Companys employment of the Executive pursuant to the terms herein stated;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows:

1.��Employment; Position and Duties; Exclusive Services.

(a)��Employment.��The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the Term provided in Section�2 below and upon the other terms and conditions hereinafter provided.

(b)��Position and Duties.��During the Term, the Executive (i) agrees to serve as the Executive Vice President��and Chief Financial Officer of the Company and to perform such reasonably related duties as may be assigned to him from time to time by the Board of Directors of the Company (the Board), (ii) shall report only to the Board, the Chairman of the Board, the Chief Executive Officer, and the President��of the Company, (iii) shall be given such authority as is appropriate given the Executives position in a company the nature and size of the Company to carry out the duties described above, and (iv) agrees to serve, if elected, at no additional compensation in the position of officer or director of any subsidiary or affiliate of the Company.

(c)��Exclusive Services.��During the Term, and except for illness or incapacity and service on non-profit boards, approved by the Board in its discretion, that do not materially adversely affect or interfere with the performance of the Executives duties and obligations to the Company or any of its subsidiaries or affiliates, the Executive shall devote all of his business time, attention, skill and efforts exclusively to the business and affairs of the Company and its subsidiaries and affiliates, shall not be engaged in any other business activity, and shall perform and discharge the duties which may be assigned to him from time to time by the Board, the Chairman of the Board or the Chief Executive Officer consistent with his position.

(d)��Place of Employment.��The Executive shall perform his duties out of the Companys Los Angeles, California office (as same may be relocated in the same metropolitan area from time to time) or at such other location as shall be agreed to in writing by the Company and the Executive. The Executive will be commuting to the Companys Los Angeles California office. Notwithstanding anything herein to the contrary, the Company hereby agrees that this fact shall in no way be considered a breach of any term of this Agreement.

2.��Term of Agreement.

The term of employment under this Agreement shall initially be the twelve months commencing on September 29, 2014 (the Effective Date) and ending on September 28, 2015, and shall be automatically extended without further action by either party for successive one-year periods as of each September 29 (beginning September 29, 2015) (each, an Extension Date), unless written notice of either partys intention to terminate this Agreement has been given to the other party at least 90 calendar days prior to the expiration of the Term (including

any one-year extension thereof).��As used in this Agreement, the Term shall mean the initial one year term plus any extensions thereof as provided in this Section�2.

3.��Salary and Bonuses.

The Executives cash compensation for all services to be rendered by him in any capacity hereunder shall consist of base salary and other compensation as provided in this Section.

(a)��Salary.��The Executive shall be paid a base salary at the rate of $400,000.00 per annum.��The Salary shall be payable in accordance with the customary payroll practices for executives of the Company.��The amount of the Executives Salary will be reviewed not less often than annually by the Compensation Committee of the Board (the Compensation Committee) and may be increased on the basis of such review.��The Executives annual base salary, as in effect from time to time, is hereinafter referred to as the Salary.

(b)��Performance Bonuses�

(i)��The Executive will be eligible to receive an annual incentive compensation award in respect of each fiscal year of the Company during the Term, commencing with fiscal year 2014, with a target payment equal to 50% of Salary during each such fiscal year, subject to the terms and conditions of the Companys annual bonus plan, and further subject to written sales, EBITDA, net debt and inventory goals, criteria or targets, including, without limitation, the timely delivery of reviewed and audited, as applicable, financial statements and timely required SEC filings, all as determined by the Board or the Compensation Committee in its or their sole discretion in respect of each such fiscal year (each such bonus, an Annual Bonus).��Any Annual Bonus earned shall be payable in a lump sum in cash. The Annual Bonus earned in respect of each fiscal year of the Company during the Term, if any, shall be paid to the Executive in the fiscal year immediately following the fiscal year for which the bonus is earned, but in all events no later than the earlier of (A) ten days after the filing of the Companys Form 10-K with the Securities Exchange Commission, and (B) 90 days after the end of the applicable fiscal year for which the bonus is earned.

(ii) For the fiscal year ending December 31, 2014 the Executive shall be entitled to an Annual Bonus of not less than $50,000.

4.��Equity Awards.

The Compensation Committee of the Board is in the process of developing a long term incentive plan (the LTIP) for senior management. If an LTIP becomes effective, the Executive shall be entitled to participate in the LTIP at a level commensurate with Executives title and responsibilities. Any equity awards pursuant to the LTIP will be at the sole discretion of the Board. Immediately upon (a) a change of control of the Company, as defined in the LTIP, or (b) a termination of Executives employment (i) upon the Executives death or Disability (as defined below), (ii) by the Company without Cause (as defined below), or (iii) by the Executive with Good Reason (as defined below), all outstanding stock-based awards (including without limitation, restricted stock, phantom stock, and performance stock), stock options, and similar equity-based awards, and all restricted cash awards, in each case made to the Executive under the LTIP, shall be payable and/or vest as provided in the LTIP and the award to Executive, as applicable.

5.��Pension and Welfare Benefits.

During the Term, the Executive will be entitled to participate in all pension and welfare plans, programs and benefits that are applicable to executives of the Company.

6.��Other Benefits.

(a)��Travel and Business-related Expenses.��During the Term, the Executive shall be promptly reimbursed in accordance with the written policies of the Company for traveling and other expenses reasonably incurred in the performance of the business of the Company.

(b)��Relocation Expenses.��During the one-year period beginning on the Effective Date, the Company shall pay the Executive a cash stipend of $5,000 per month to cover transitional relocation expenses, such as housing (including apartment rental), travel and other similar expenses (the Relocation Stipend). The Relocation Stipend shall be paid in accordance with the same payment schedule as the Executives Salary.

(c)��Vacation; Leaves of Absence.��During the Term, the Executive shall be allowed time away with pay on the same basis as the Company generally provides to other executives of the Company, provided, that the Executive shall be provided with no less than 20 paid vacation days and paid federal holidays.

7.��Termination of Employment.��Upon termination of the Executives employment for any reason, the Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board (and any committees thereof) and the board of directors of any of the Companys affiliates and direct or indirect subsidiaries (and any committees thereof), if applicable, and agrees to resign as an officer of the Company and each of the Companys affiliates and direct or indirect subsidiaries.

(a)��Termination for Cause; Resignation Without Good Reason.

(i)��If the Executives employment is terminated by the Company for Cause (as defined below in this Section) or if the Executive resigns from his employment without Good Reason other than for death or Disability (as defined below in Section 7(d)), prior to the expiration of the Term, the Executive shall be entitled to receive:��(A) the Salary provided for in Section�3(a) and the Relocation Stipend, both as accrued through the date of such resignation or termination; and (B) any unreimbursed expenses, each within 30 days following termination.��The Executive shall not accrue or otherwise be eligible to receive Salary payments or to participate in any plans, programs or benefits described in Section�5�hereof with respect to periods after the date of such termination or resignation and shall not be eligible to receive any annual performance bonus or long term performance bonus in respect of the year of such termination or resignation or any calendar year following the year in which such termination or resignation occurs.��Any bonus earned in respect of a year prior to the year in which such termination or resignation occurs shall be payable at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan.

Subject to Section 18, the Executive shall have no right under this Agreement or otherwise to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of employment (except to the extent provided for under the terms of any such plan, arrangement or benefit).

(ii)��Termination for Cause shall mean termination by action of the Board because of: (A) the Executives willful and continued failure (other than by reason of the incapacity of the Executive due to physical or mental illness) substantially to perform his duties hereunder; (B) the Executives failure (other than by reason of the incapacity of the Executive due to physical or mental illness) to perform such reasonable duties as are assigned to him from time to time by the Board, the Chairman of the Board, the Chief Executive Officer, or the President of the Company; (C) the conviction of the Executive or the Executive entering a plea of guilty or nolo contendere to a crime that constitutes a felony or the perpetration by the Executive of a serious dishonest act against the Company or any of its affiliates or subsidiaries; (D) any willful misconduct by the Executive in connection with the performance of his duties, including, without limitation, conduct that is materially injurious to the financial condition or business reputation of the Company or any of its affiliates or subsidiaries, misappropriation of funds or property of the Company, securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company, misrepresentation to the Company, or any violation of law or regulations on Company premises or to which the Company is subject; (E) commission by Executive of an act involving moral turpitude, dishonesty, theft, unethical business conduct, or conduct that materially impairs or injures the reputation of, or harms, the Company; (F) aiding a competitor to the Company in a manner that adversely affects the Company; (G) failure by Executive to devote his full time and best efforts to the Companys business and affairs; (H) misappropriation of a Company opportunity for the Executives personal benefit; (I) a material breach of the Executives obligations under this Agreement or under any

Company written policy applicable to the Executive; or (J) chronic alcoholism or drug abuse which materially affects the Executives performance hereunder, provided, however, that no event or circumstance shall be considered to constitute Cause within the meaning of this clause (ii) unless the Executive has been given written notice of the events or circumstances constituting Cause within 30 calendar days of the Company becoming aware of the initial occurrence of such event or circumstance and, for those events or circumstances capable of cure (but only for those capable of a cure), Executive has failed to effect a cure thereof within 30 calendar days following the receipt of such notice.

(iii)��Resignation for Good Reason shall mean the resignation of the Executive because of (A) a material reduction in the Executives responsibilities, duties, authority, status or titles as described in Section�1 above or any reduction in the Executives Annual Salary or Annual Bonus opportunity, or a material reduction in the benefits provided to the Executive; (B) failure by the Company to pay or provide the Executive when due any compensation, benefits or perquisites to which the Executive is entitled pursuant to this Agreement or any other plan, contract or arrangement in which the Executive participates or is entitled to participate; (C) a material change in the Executives reporting structure; (D) failure of any successor (whether direct or indirect, by stock or asset purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume this Agreement (either by operation of law or in writing), (E) if Executive has moved his permanent residence to the Los Angeles metropolitan area, a relocation of the principal location at which the Executive is required to provide services to any office or location more than fifty (50) miles from the one described in Section�1(d) hereof; or (F) a material breach of the Companys obligations under this Agreement; provided,�however, that no event or circumstance shall be considered to constitute Good Reason within the meaning of this clause (iii) unless the Company has been given written notice of the events or circumstances constituting Good Reason by the Executive within 30 calendar days of the initial occurrence of such event or circumstance and, for those events or circumstances capable of cure (but only for those capable of a cure), the Company has failed to effect a cure thereof within 30 calendar days following the receipt of such notice.

(iv)�� The date of termination of employment by the Company pursuant to this Section�7(a) shall be the date specified in a written notice of termination from the Company to the Executive, which, in the case of a proposed termination to which the 30-day cure period provided for in subsection (ii) above applies shall be no less than 31 calendar days after the delivery of such notice to the Executive.��The date of a resignation by the Executive pursuant to this Section�7(a) shall be the date specified in the written notice of resignation from the Executive to the Company or, if no date is specified therein, ten (10) business days after receipt by the Company of the written notice of resignation from the Executive.

(b)��Termination Without Cause, Resignation for Good Reason.

(i)��If the Executives employment is terminated by the Company without Cause or if the Executive should resign for Good Reason, prior to the expiration of the Term, he shall be entitled to receive:��(A) the Salary provided for in Section�3(a) and the Relocation Stipend provided for in Section 6(b), both as accrued through the date of such resignation or termination and both payable within 30 days following termination and, subject to the Executives execution and delivery of a general release of all claims against the Affiliated Companies and the expiration of any release revocation period, which release shall be consistent with the terms of this Agreement and in form reasonably acceptable to the Company (the Release), within sixty (60) calendar days following termination of employment, continued payment of the Executives then-current Salary and the Relocation Bonus (if applicable) for a period of six (6) months (the Continuation Period), payable in accordance with the Companys usual payment practices;�provided�that the first payment shall be made on the sixtieth (60th) calendar day following termination of employment and shall include payment of any amounts that would otherwise be due prior thereto; (B) at the time of, on the terms of, and otherwise consistent with payments to similarly-situated executives, (x) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which such termination or resignation occurs and (y) an Annual Bonus for the calendar year in which the Executives termination of employment or resignation occurs equal to a pro rata portion of the Executives target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executives termination of employment or resignation, provided, however, that if the Executives employment is terminated during the first three months of a fiscal year, no such bonus shall be payable with respect to that fiscal year; and (C) any unreimbursed expenses.

Except to the extent required pursuant to Section 22 hereof, during the Continuation Period, Salary payments to the Executive shall be payable in accordance with the customary payroll practices of the Company.

Subject to the Executives execution and delivery of the Release and the expiration of any release revocation period within sixty (60) calendar days following termination of employment, the Executive (and those eligible dependents who were participants in the applicable plans as of the termination date) shall also be entitled to continued participation in the medical, dental and insurance plans and arrangements described in Section�5,�on the same terms and conditions as are in effect immediately prior to such termination or resignation, until the earlier to occur of (i) the last day of the Continuation Period and (ii) such time as the Executive is entitled to comparable benefits provided by a subsequent employer.��Anything herein to the contrary notwithstanding, the Company shall have no obligation to continue to maintain during the Continuation Period any plan or program solely as a result of the provisions of this Agreement.��If, during the Continuation Period, the Executive is precluded from participating in a plan or program by its terms or applicable law or if the Company for any reason ceases to maintain such plan or program, the Company shall provide the Executive with compensation or benefits the aggregate value of which, in the reasonable judgment of the Company, is no less than the aggregate value of the compensation or benefits that the Executive would have received under such plan or program had he been eligible to participate therein or had such plan or program continued to be maintained by the Company.

(ii)�� Except as may be provided under the terms of any applicable grants to the Executive under the LTIP, Section 18, any plan or arrangement in which the Executive participates, or as may be otherwise required by applicable law (including, without limitation, the provisions of Section 4980B(f) of the Internal Revenue Code of 1986, as amended (the Code)), the Executive shall have no right under this Agreement or any other agreement to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of employment.��In the event of a termination or resignation pursuant to this Section�7(b), the Executive shall have no duty of mitigation with respect to amounts payable to him pursuant to this Section�7(b) or other benefits to which he is entitled pursuant hereto, except as provided in the immediately preceding paragraph.��Notwithstanding anything to the contrary in this Agreement, the right of the Executive to receive payments provided for in this Section�7(b) shall be subject to Section�8 of this Agreement.��

(iii)��The date of termination of employment by the Company pursuant to this Section�7(b) shall be the date specified in the written notice of termination from the Company to the Executive or, if no date is specified therein, ten business days after receipt by the Executive of the written notice of termination from the Company.��The date of a resignation by the Executive pursuant to this Section 7(b) shall be the date specified in the written notice of resignation from the Executive to the Company which, in the case of a proposed resignation to which the 30-day cure period provided for in subsection 7(a)(iii) above applies shall be no less than 31 days after the delivery of such notice to the Company; and in the case of a proposed resignation to which the 30-day cure period does not apply and in which no date is specified therein, the date of resignation shall be ten business days after receipt by the Company of the written notice of resignation from the Executive.

(c)��Death.��If the Executives employment hereunder terminates by reason of death prior to expiration of the Term, the Executives beneficiary (or if no such beneficiary is designated, his estate) shall be entitled to receive:��(i) the Salary provided for in Section�3(a) and the Relocation Stipend provided for in Section 6(b), both as accrued through the date of the Executives death; (ii) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which the Executives death occurs; (iii) an Annual Bonus for the calendar year in which the Executives death occurs equal to a pro�rata portion of the Executives target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executives death; and (iv) any unreimbursed expenses.��Annual Bonus payments provided for in this Section�7(c) shall be made at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan.��As used in this Section, the term beneficiary includes both the singular and the plural of such term, as may be appropriate.

(d)��Disability.��If, the Executive is terminated from employment by the Company as a result of the Executives Disability (as defined below in this Section), the Executive, his conservator or guardian, as the case may be, shall be entitled to receive:��(i) the Salary provided for in Section 3(a) and the Relocation Stipend provided for in Section 6(b), both as accrued through the date of the Executives termination of employment; (ii) any Annual Bonus earned but not yet paid in respect of any calendar year preceding the year in which the Executives termination of employment occurs; (iii) an Annual Bonus for the calendar year in which the Executives termination of employment occurs equal to a pro rata portion of the Executives target Annual Bonus, if any, for such year, determined on the basis of the number of days in such year through the date of the Executives termination of employment; and (iv) any unreimbursed expenses.��Annual Bonus payments provided for in this Section�7(d) shall be made at the same time and in the same manner as bonuses are paid to participants in the applicable bonus plan.��For purposes of this Agreement, Disability shall mean that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve months.��Any dispute as to whether or not the Executive is disabled within the meaning of the preceding sentence shall be resolved by a physician reasonably satisfactory to the Executive and the Company, and the determination of such physician shall be final and binding upon both the Executive and the Company.

(e)��Non-Renewal of the Term.��In the event the Company elects not to extend the Term pursuant to Section 2, unless the Executives employment is earlier terminated pursuant to paragraphs (a), (b), (c) or (d) of this Section 7, the expiration of the Term and Executives termination of employment hereunder shall be deemed to occur on the close of business on the day immediately preceding the next scheduled Extension Date and the Executive shall be entitled to receive the benefits and payments set forth under Section 7(b)(i)(A)-(D) above.��Following such termination of Executives employment under this Section 7(e), except as set forth in this Section 7(e) and Section 18, Executive shall have no further rights to any compensation or any other benefits under this Agreement.�

8.��Tax Withholding.

Payments to the Executive of all compensation contemplated under this Agreement shall be subject to all applicable legal requirements with respect to the withholding of taxes.

9.��Confidentiality and Proprietary Rights.

(a)��Confidentiality.��The Executive acknowledges that as a result of his employment with the Company, the Executive will obtain secret and confidential information concerning the business of the Company, and its subsidiaries and affiliates (all of such entities referred to collectively in this Section as the Affiliated Companies).��Other than in the performance of his duties hereunder or if confidential information is required to be disclosed by law, court order or other legal process (provided that the Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment) or to the extent necessary to enable the Executive to enforce (or defend) his rights under this Agreement or any other agreement with the Company or any affiliate, the Executive agrees not to disclose, either during the Term of his employment with the Company or at any time thereafter, to any person, firm or corporation any confidential information concerning the Company which is not in the public domain or known within the relevant trade or industry (other than as a result of an unauthorized disclosure by the Executive) including trade secrets, budgets, strategies, operating plans, marketing plans, supplier lists, non-public company agreements, employee lists, or the customer lists or similar confidential information of the Company.

(b)��Proprietary Rights.��All records, files, memoranda, reports, price lists, customer lists, drawings, plans, sketches, documents and the like (together with all copies thereof) relating to the business of the Affiliated Companies, which the Executive shall use or prepare or come in contact with in the course of, or as a result of his employment, or as a result of work performed by the Executive for the Company, shall, as between the parties, remain the sole property of the Company. Upon termination of his employment with the Company, the Executive agrees to promptly return all such materials and shall not thereafter cause removal thereof from the premises of the Company. Further, the Executive agrees to disclose and assign, and does hereby assign, to the Company as its exclusive property, all ideas, writings, inventions, discoveries, improvements and technical or business innovations made or conceived by the Executive, whether or not patentable or copyrightable, either solely or jointly with others during the course of his employment with the Company, relating directly to the business, work or investigations of the Company or its subsidiaries (Company Inventions).

Notwithstanding the foregoing, the Executive understands that the provisions of this Agreement requiring assignment of Company Inventions to the Company do not apply to any invention that qualifies under the provisions of California Labor Code Section 2870 (as set forth in Exhibit A hereto). The Executive understands that Company will keep in confidence and will not disclose to third parties without the Executives consent any confidential information disclosed in writing to Company relating to inventions that qualify under the provisions of Section 2870 of the California Labor Code.

(c)��Except as may be required by applicable law, without the Executives prior written consent, the Executive shall not be subject to any restrictions on his activities following termination of employment with the Company other than as expressly set forth in this Agreement or the LTIP.

10.��Cooperation.

The Executive agrees that following the date of termination of employment, he shall reasonably cooperate with the Company, if so requested, with respect to the Companys business affairs, as well as any internal or external investigation, claims or litigation (whether or not currently pending) involving the Company, including providing information and assistance and making himself reasonably available for both pre-trial discovery and trial proceedings. The Company shall promptly reimburse Executive for any out-of-pocket expenses incurred by Executive in connection with his cooperation with the Company pursuant to this Section 10, including, without limitation, any reasonable attorneys fees and travel and lodging costs incurred by the Executive.

11.��Nonassignability; Binding Agreement.

Neither this Agreement nor any right, duty, obligation or interest thereunder shall be assignable or delegable by the Executive without the Companys prior written consent; provided, however, that nothing in this Section shall preclude the Executive from designating any of his beneficiaries to receive any benefits payable hereunder upon his death or disability, or his executors, administrators, or other legal representatives, from assigning any rights hereunder to the person or persons entitled thereto.��If the Executive should die while any payment, benefit or entitlement is due to him pursuant to this Agreement, such payment, benefit or entitlement shall be paid or provided to his designated beneficiary (or, if there is no designated beneficiary, his estate).��This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or assigns of the Company and the Executives heirs and the personal representatives of the Executives estate. In addition, the Company shall assign to and require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.

12.��Amendment; Waiver.��This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by the parties hereto.��No delay or failure by any party hereto in exercising, protecting or enforcing any of its rights, titles, interests or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance.

13.��Notices.

Any notice hereunder by either party to the other shall be given in writing by personal delivery, email or certified mail, return receipt requested, to the applicable address set forth below:



��	(a)	�To the Company:	�	American Apparel, Inc. 747 Warehouse Street Los Angeles, California 90021 Attention:��Tobias S. Keller and/or General Counsel Email: [email protected]
�	(b)	�To the Executive:	�	Hassan Natha 747 Warehouse Street Los Angeles, California 90021 Email:��[email protected]

(or such other address as may from time to time be designated by written notice by any party hereto for such purpose). Notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by email, on the business day following receipt of confirmation or, if by certified mail, on the date shown on the applicable return receipt.

14.��California Law.

This Agreement is to be governed by and interpreted in accordance with the laws of the State of California, without giving effect to the choice-of-law provisions thereof. If, under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof.

15.��Arbitration.

The Company and the Executive agree that any and all disputes based upon, relating to or arising out of this Agreement, the Executives employment relationship with the Company or any of its subsidiaries or

affiliates and/or the termination of that relationship, and/or any other dispute by and between the Executive and the Company or any of its subsidiaries or affiliates, including any and all claims that the Executive may at any time attempt to assert against the Company or any of its subsidiaries or affiliates, shall be submitted to binding arbitration in Los Angeles County, California, pursuant to the American Arbitration Associations (AAA) Employment Arbitration Rules and Mediation Procedures, including the Optional Rules for Emergency Measures of Protection (the Rules), provided that the arbitrator shall allow for discovery sufficient to adequately arbitrate any asserted claims, including access to essential documents and witnesses, and otherwise in accordance with California Code of Civil Procedure � 1283.05, and provided further that the Rules shall be modified by the arbitrator to the extent necessary to be consistent with applicable law. The arbitrator shall be a retired judge of the California Superior Court, California Court of Appeal, or United States District Court, to be mutually agreed upon by the parties. If, however, the parties are unable to agree upon an arbitrator, then an arbitrator, who is a retired judge of the California Superior Court, California Court of Appeal, or United States District Court, shall be selected by AAA in accordance with the Rules. The Company and the Executive further agree that each party shall pay its own costs and attorneys fees, if any; provided, however, that if either party prevails on a claim which affords the prevailing party an award of attorneys fees, then the arbitrator may award reasonable attorneys fees to the prevailing party, consistent with applicable law. In any event, the Company shall pay any expenses that the Executive would not otherwise have incurred if the dispute had been adjudicated in a court of law, rather than through arbitration, including the arbitrators fee, any administrative fee and any filing fee in excess of the maximum court filing fee in the jurisdiction in which the arbitration is commenced. The Company and the Executive further agree that any hearing must be transcribed by a certified shorthand reporter, and that the arbitrator shall issue a written decision and award supported by essential findings of fact and conclusions of law in order to facilitate judicial review.��Said award and decision shall be issued within thirty (30) calendar days of the completion of the arbitration. Judgment in a court of competent jurisdiction may be had on said decision and award of the arbitrator. For these purposes, the parties agree to submit to the jurisdiction of the state and federal courts located in Los Angeles County, California.

16.��Injunctive Relief.

The Executive acknowledges and agrees that the services being rendered by the Executive to the Company under this Agreement are of a special, unique and extraordinary character that gives them peculiar value to the Affiliated Companies, the loss of which (in violation of this Agreement) would cause irreparable harm to the Affiliated Companies and affiliates, for which the Affiliated Companies would have no adequate remedy at law.��The Executive further acknowledges and agrees that the trade secrets and confidential and related information referred to in this Agreement each are of substantial value to the Affiliated Companies and that a breach of any of the terms and conditions of this Agreement relating to those subjects would cause irreparable harm to the Affiliated Companies, for which the Affiliated Companies would have no adequate remedy at law. Therefore, in addition to any other remedies (in law or in equity) that may be available to the Company and/or any of its subsidiaries and affiliates under this Agreement or otherwise, the Affiliated Companies shall be entitled to obtain (pursuant to the Rules) temporary restraining orders, preliminary and permanent injunctions and/or other equitable relief (pursuant to the Rules) to specifically enforce the Executives duties and obligations under this Agreement, or to enjoin any breach of this Agreement, without the need to post a bond or other security and without the need to demonstrate special damages.

17.��Counterparts.

This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

18.��Indemnification. With respect to any acts or omissions that may have occurred prior to termination of the Executives employment, the Company will indemnify the Executive (and his legal representatives or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of a proceeding) by the laws of the State of California, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and By-Laws of the Company, as in effect at such time, or by the terms of any indemnification agreement between the Company and the Executive, whichever affords greatest protection to the Executive, and the Executive shall be entitled to the protection of any insurance policies the

Company maintained by the Company generally for the benefit of its directors and officers (the D&O Policies) (and the Executive shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives at the time such costs, charges and expenses are incurred or sustained (including any time following Executives termination of employment), in connection with any action, suit or proceeding to which he (or his legal representatives or other successors) may be made a party by reason of his being or having been a director, officer or employee of the Company or any subsidiary thereof, or his serving or having served any other enterprises as a director, officer or employee at the request of the Company. During the Term and for a customary tail period, the Company shall maintain in full force and effect one or more D&O Policies covering the Executive with coverage amounts customary for a business of the nature and size as the Company.

19.��Cumulative Remedies.

Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy.

20.��Headings; Construction.

The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement.��In construing this Agreement, no party hereto shall have any term or provision construed against such party solely by reason of such party having drafted or written such term or provision.

21.��Survival.

Any provision of this Agreement which imposes an obligation after termination or expiration of this Agreement (including but not limited to the obligations set forth in Section 9 hereof) shall, unless otherwise specified, survive the termination or expiration of this Agreement and be binding on the Executive and the Company.

22.��General 409A Compliance.

To the maximum extent applicable, it is intended that the Agreement comply with the provisions of Section 409A of the Code, as amended.��This Agreement will be administered and interpreted in a manner consistent with this intent, and any provision that would cause this Agreement to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply therewith (which amendment may be retroactive to the extent permitted by Section 409A of the Code).��Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, the Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payments shall be due to the Executive under this Agreement which are payable upon the Executive's termination of employment until the Executive would be considered to have incurred a separation from service from the Company within the meaning of Section 409A of the Code.��To the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following the Executive's termination of employment shall instead be paid in a lump sum on the first business day after the date that is six months following the Executive's termination of employment (or upon the Executive's death, if earlier).��In addition, for purposes of the Agreement, each amount to be paid or benefit to be provided to the Executive pursuant to this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code.��With respect to expenses eligible for reimbursement under the terms of the Agreement, (i) the amount of such expenses eligible for reimbursement in any taxable year shall not affect the expenses eligible for reimbursement in another taxable year and (ii) any reimbursements of such expenses shall be made no later than the end of the calendar year following the calendar year in which the related expenses were incurred, except, in

each case, to the extent that the right to reimbursement does not provide for a deferral of compensation within the meaning of Section 409A of the Code.

23. Section 280G.

(a)��Notwithstanding any other provision of this Agreement, in the event that the Executive becomes entitled to receive or receives any payments, options, awards or benefits (including, without limitation, the monetary value of any non-cash benefits and the accelerated vesting of equity-based awards) under this Agreement or under any other plan, agreement or arrangement with the Company, any person whose actions result in a change of control of the Company or any person affiliated with the Company or such person (collectively, the Payments), that may separately or in the aggregate constitute parachute payments within the meaning of Section�280G of the Internal Revenue Code of 1986, as amended (the Code), or any similar or successor provision (Section�280G) and it is determined that, but for this Section�23(a), any of the Payments will be subject to any excise tax pursuant to Section�4999 of the Code or any similar or successor provision, the Company shall pay to the Executive an amount equal to the Payments, reduced by the minimum amount necessary to prevent any portion of the Payments from being an excess parachute payment (within the meaning of Section�280G).

(b)��All computations and determinations called for by this Section�23 shall be made and reported in writing to the Company and the Executive by an independent accounting firm or independent tax counsel appointed by the Company (the Tax�Advisor), and all such computations and determinations shall be conclusive and binding on the Company and the Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections�280G and 4999 of the Code. The Company and the Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services.

(c)��In the event that Section�23(a) applies and a reduction is required to be applied to the Payments thereunder, the Payments shall be reduced by the Company in its reasonable discretion in the following order: (i)�reduction of any Payments that are exempt from Code Section�409A and (ii) reduction of any Payments that are subject to Code�Section�409A on a pro-rata basis or such other manner that complies with Code�Section�409A, as determined by the Company.

24.��Preemption.��In the event there is a conflict between any provision of this Agreement and any other agreement, plan, policy or program of the Company, the provisions of this Agreement shall control.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above, effective as of the Effective Date.



�	American Apparel, Inc.
�	�	�
�	By:	/S/ Tobias S. Keller
�	�	Tobias Keller, Interim General Counsel
�	�	�
�	�	�
�	�	/S/ Hassan Natha
�	�	Hassan Natha

Exhibit A

CALIFORNIA LABOR CODE SECTION 2870

EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS

(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employers equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employers business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under Subdivision (a), the provision is against the public policy of this state and is unenforceable.

Exhibit 10.6

EXECUTED VERSION

AMENDMENT NO.�2 TO CREDIT AGREEMENT

AMENDMENT NO.�2, dated as of September 8, 2014 (this Amendment), among American Apparel, Inc., a Delaware corporation (the Borrower), the Facility Guarantors party hereto, and Standard General Master Fund L.P., as Lender under, and as defined in, the Credit Agreement (as hereinafter defined), comprising 100% of the existing Lenders (the Consenting Lender);

WHEREAS, reference is hereby made to the Credit Agreement, dated as of May�22, 2013 (the Credit Agreement), among the Borrower, the Lenders party thereto, the Facility Guarantors party thereto and Lion/Hollywood L.L.C, as Initial Lender, as amended pursuant to Amendment No. 1 to Credit Agreement, dated November 29, 2013, as further amended by an Assignment and Acceptance with an effective date of July 16, 2014, pursuant to which Lion/Hollywood L.L.C. assigned all of its rights and obligations under the Credit Agreement to P Standard General Ltd., and as further amended by an Assignment and Acceptance with an effective date of July 22, 2014, pursuant to which P Standard General Ltd. assigned all of its rights and obligations under the Credit Agreement to Standard General Master Fund L.P.;

WHEREAS, as of the date hereof, the Borrower and the Consenting Lender desires to amend the Credit Agreement pursuant to amendments authorized by Section�8.02(ii) of the Credit Agreement to (i)�reduce the rate of interest payable on the Loans; and (ii)�make the other modifications set forth herein; and

WHEREAS, pursuant to Section�8.02 of the Credit Agreement, the consent of all Lenders adversely affected by the amendments contemplated hereby is required for the effectiveness of the amendments to the Credit Agreement set forth in this Amendment, and the Consenting Lender has agreed to consent to such amendments.

NOW, THEREFORE, in consideration of the premises and agreements, provisions and covenants herein contained, the parties hereto agree as follows:

SECTION ONE - Defined Terms; References.

(a)Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Amended Credit Agreement. The rules of construction and other interpretive provisions specified in Section�1.02 of the Amended Credit Agreement shall apply to this Amendment, including terms defined in the preamble and recitals hereto.

(b)As used in this Amendment, the following terms have the meanings specified below:

Amended Credit Agreement shall mean the Credit Agreement, as amended by Amendment No. 1 and this Amendment.

Amendment No.�2 Effective Date shall have the meaning provided in Section�5 hereof.

Notice of Acceleration shall mean the Notice of Acceleration, dated as of July 7, 2014, relating to an event of default and acceleration of Loans under the Credit Agreement.

SECTION TWO - Amendment.

(c)Each of the parties hereto agrees that, effective on the Amendment No.�2 Effective Date, the Credit Agreement shall be amended as follows:

The definition of Change of Control is hereby deleted in its entirety and replaced with the following text: Change of Control means the occurrence of one or more of the following events:

(1) any direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one transaction or a series of related transactions, of all or substantially all of the assets of the Borrower and its Subsidiaries, taken as a whole, to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a Group) (in each case, other than one or more Permitted Holders (as defined in the Senior Notes Indenture);

(2) the approval by the holders of Capital Stock of the Borrower of any plan or proposal for the liquidation, winding up or dissolution of the Borrower;

(3) any Person or Group (other than one or more Permitted Holders (which term, solely for the purposes of this clause (3), shall include Standard General and its Affiliates and any Group that Standard General or any of its Affiliates is a part of) and other than any entity formed for the purpose of owning Capital Stock of the Company) shall become the Beneficial Owner (as defined in the Senior Notes Indenture), directly or indirectly, in the aggregate of more than 50% of the total voting power of the Voting Stock of the Borrower; or

(4) individuals who on the Issue Date (as defined in the Senior Notes Indenture) constituted the Board of Directors of the Company (together with any new directors whose election or appointment by such Board of Directors (as defined in the Senior Notes Indenture) or whose nomination for election by the stockholders of the Borrower was approved pursuant to a vote of a majority of the directors then still in office who were either directors on the Issue Date or whose election, appointment or nomination for election was previously so approved) (together, the Incumbent Directors) cease for any reason to constitute a majority of such Board of Directors then in office.

Notwithstanding the foregoing: (A) any holding company whose only significant asset is Capital Stock of the Borrower or any of its direct or indirect parent companies shall not itself be considered a Person or Group for purposes of clause (3) above; (B) the transfer of assets between or among the Restricted Subsidiaries and the Company shall not itself constitute a Change of Control; (C) the term Change of Control shall not include a merger or consolidation of the Borrower with or the sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the Borrowers assets to, an Affiliate incorporated or organized solely for the purpose of reincorporating or reorganizing the Borrower in another jurisdiction and/or for the sole purpose of forming or collapsing a holding company structure; and (D) a Person or Group shall not be deemed to have beneficial ownership of securities subject to a stock purchase agreement, merger agreement or similar agreement (or voting or option agreement related thereto) until the consummation of the transactions contemplated by such agreement and (E) the term Change of Control shall not include any action taken by Standard General L.P. or any of its Affiliates (or any Group that Standard General L.P. or any of its Affiliates is a part of) to designate a majority of the Board of Directors without approval of the Incumbent Directors.

(i) The definition of Eligible Assignee is hereby amended by deleting the proviso contained therein.

(ii) The definition of Interest Rate is hereby deleted in its entirety and replaced with the following text: Interest Rate means a per annum rate equal to 17%.

(iii) The definition of Maturity Date is hereby amended by replacing the text October 4, 2018 with April 15, 2021.

(iv) The following definition is hereby added to Section 1.01 in the appropriate alphabetical order: Second Amendment Effective Date means September 8, 2014.

(v) The definition of Special Interest Trigger Event is hereby deleted in its entirety.

(vi) The following sentence contained in Section 2.04 is hereby deleted in its entirety: Any additional interest accrued on each Loan as a result of the occurrence of a Special Interest Trigger Event shall be payable by increasing the outstanding principal amount of the Loans by the amount of PIK Interest on such immediately succeeding Interest Payment Date applicable to such Loan for such period and in such amounts as required by the relevant Interest Election(s) made pursuant to Section 2.04(a).

(vii) Section 2.08 is hereby amended by adding the following section 2.08(c) thereto: (c)��At the end of each accrual period (as defined in Section 1272(a)(5) of the Internal Revenue Code after the fifth anniversary of the Second Amendment Effective Date, the Borrower will be required to make a cash payment on the Loans then outstanding of accrued but unpaid interest thereon or principal in an amount equal to the amount necessary so that the Loans will not constitute an applicable high yield discount obligation within the meaning of Section 163 of the Internal Revenue Code.

(viii) Section 6.01(k) is hereby deleted in its entirety and replaced with the text [Reserved].

��SECTION THREE - Effect of Amendment; Reaffirmation; Etc. Except as expressly set forth herein or in the Amended Credit Agreement, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Lenders under the Credit Agreement or under any other Loan Document and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other provision of the Credit Agreement or of any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Without limiting the foregoing, (i) each Loan Party acknowledges and agrees that each Loan Document to which it is a party is hereby confirmed and ratified and shall remain in full force and effect according to its respective terms (in the case of the Credit Agreement, as amended hereby), (ii)�each Facility Guarantor hereby confirms and ratifies its continuing unconditional obligations as Facility Guarantor under the Guarantee with respect to all of the Obligations. On and as of the Amendment No.�2 Effective Date, each reference in the Credit Agreement to this Agreement, hereof, hereunder, herein and hereby and each other similar reference, and each reference in any other Loan Document to the Credit Agreement, thereof, thereunder, therein or thereby or any other similar reference to the Credit Agreement shall refer to the Credit Agreement as amended pursuant to Amendment No. 1 and as amended hereby, (iii) each Loan Party hereby acknowledges that (x) P Standard General Ltd. is assignee of all of the rights and obligations under this Agreement of the Initial Lender pursuant to an

Assignment and Acceptance with an effective date of July 16, 2014 and (y) Standard General Master Fund L.P. is assignee of all of the rights and obligations under this Agreement of P Standard General Ltd. with an effective date of July 22, 2014 and (iv) each party hereto acknowledges that this Amendment constitutes a Loan Document.

��SECTION FOUR - Representations of Loan Parties. Each of the Loan Parties hereby represents and warrants that, immediately after giving effect to this Amendment:

(a)��the representations and warranties set forth in Article III of the Amended Credit Agreement and in each other Loan Document shall be true and correct in all material respects on and as of the Amendment No.�2 Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date; provided that any such representation and warranty that is qualified by materiality, material adverse effect or similar language shall be true and correct in all respects (after giving effect to such qualification therein) on and as of the Amendment No.�2 Effective Date with the same effect as though made on and as of such date or such earlier date, as applicable; and

(b)��no Default or Event of Default shall exist or would result from the transactions contemplated by this Amendment; and

(c)��on the Amendment No.�2 Effective Date, after giving effect to all of the transactions contemplated hereby, the Loan Parties and their Subsidiaries on a consolidated basis are Solvent.

SECTION FIVE - Effectiveness. This Amendment shall become effective on the date (the Amendment No.�2 Effective Date) when each of the following conditions shall have been satisfied:

(a)��the Lender shall have received counterparts of this Amendment executed and delivered by a duly authorized officer of each of (i)�the Loan Parties and (ii)�the Consenting Lender.

(b)��The Lender shall have received a Note, duly executed on behalf of the Borrower, dated as of the Amendment No. 2 Effective Date, payable to the order of the Lender in an aggregate principal amount equal to $9,500,000.

(c)��The Lender shall have received Charter Documents and such other documents and certificates as the Lender or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the transactions contemplated by the Loan Documents and any other legal matters relating to the Loan Parties, the Loan Documents or the transactions contemplated thereby, all in form and substance satisfactory to the Lender and its counsel.

(d)All necessary consents and approvals to the transactions contemplated hereby shall have been obtained and shall be reasonably satisfactory to the Lender.

(e)There shall have been delivered to the Lender such additional instruments and documents as the Lender or its counsel reasonably may require or request.

SECTION SIX - Limited Waiver. The Lenders party hereto hereby waive any Default or

Event of Default to the extent relating to any act or occurrence as described in the Notice of Acceleration.

SECTION SEVEN - No Other Amendments or Waivers; Confirmation.

Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Lenders, the Borrower or any other Loan Party under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrower to any future consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. After the Amendment No.�2 Effective Date, any reference in any Loan Document to the Credit Agreement shall mean the Credit Agreement as modified by Amendment No. 1 and as modified hereby. As of the Amendment No.�2 Effective Date, each reference in the Credit Agreement to this Agreement, hereunder, hereof, herein, or words of like import, and each reference in the other Loan Documents to the Credit Agreement (including, without limitation, by means of words like thereunder, thereof and words of like import), shall mean and be a reference to the Credit Agreement as amended by Amendment No. 1 and as amended hereby, and this Amendment, Amendment No. 1 and the Credit Agreement shall be read together and construed as a single instrument. Each of the table of contents and lists of Exhibits and Schedules of the Credit Agreement shall be amended to reflect the changes made in this Amendment as of the Amendment No.�2 Effective Date. This Amendment is a Loan Document.

SECTION EIGHT - Consent of Facility Guarantors. Each Facility Guarantor hereby consents to this Amendment and agrees that the terms hereof shall not affect in any way its obligations and liabilities under the Loan Documents (as amended and otherwise expressly modified hereby), all of which obligations and liabilities shall remain in full force and effect and each of which is hereby reaffirmed (as amended and otherwise expressly modified hereby).

SECTION NINE - Expenses. The Borrower agrees to reimburse each of the Lenders for their respective outstanding reasonable out of pocket expenses (whether or not yet invoiced to the Borrower) incurred in connection with the Credit Agreement, this Amendment and the other Loan Documents (including without limitation, the reasonable fees, disbursements and other charges of Debevoise & Plimpton LLP as counsel to the Lenders).

SECTION TEN - Governing Law. This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York.

SECTION ELEVEN - Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Amendment may be delivered by facsimile or other electronic transmission of the relevant signature pages hereof.

SECTION TWELVE - Headings. The Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment.

SECTION THIRTEEN - Notices. All communications and notices hereunder shall be given as provided in the Credit Agreement.

SECTION FOURTEEN - Severability. The fact that any term or provision of this Amendment is held invalid, illegal or unenforceable as to any person in any situation in any jurisdiction shall not affect the validity, enforceability or legality of the remaining terms or provisions hereof or the validity, enforceability or legality of such offending term or provision in any other situation, or jurisdiction or as applied to any person.

SECTION FIFTEEN - Successors. The terms of this Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

SECTION SIXTEEN - Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT.

SECTION SEVENTEEN - Submission to Jurisdiction. Each Loan Party agrees that any suit for the enforcement of this Amendment may be brought in the federal or state courts of the State of New York as the Lenders may elect in their sole discretion and consents to the non-exclusive jurisdiction of such courts. Each party to this Amendment hereby waives any objection which it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient forum and agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Amendment shall affect any right that any Credit Party may otherwise have to bring any action or proceeding relating to this Amendment against a Loan Party or its properties in the courts of any jurisdiction.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written.

AMERICAN APPAREL, INC.

as Borrower

By:��/s/ John Luttrell

Name:��John Luttrell

Title:��Executive Vice President and Chief Financial Officer

��

Each of the other Guarantors listed on Annex A hereto:

By:��/s/ John Luttrell

Name:��John Luttrell

Title:��Executive Vice President and Chief Financial Officer

STANDARD GENERAL MASTER FUND L.P., as Lender

By:��/s/ Joseph Mause

Name:��Joseph Mause

Title:��Chief Financial Officer

ANNEX A

American Apparel (USA), LLC

American Apparel Retail, Inc.

American Apparel Dyeing & Finishing, Inc.

KCL Knitting, LLC

Fresh Air Freight, Inc.

Exhibit 31.1

CERTIFICATION OF INTERIM CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Brubaker, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of American Apparel, Inc.


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

�



Date:	November�10, 2014	By:	/s/�SCOTT BRUBAKER
�	�	�	Scott Brubaker
�	�	�	Interim Chief Executive Officer (Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Hassan Natha, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of American Apparel, Inc.


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

�



Date:	November�10, 2014	By:	/s/�HASSAN NATHA
�	�	�	Hassan Natha
�	�	�	Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit 32.1

Certification of Interim Chief Executive Officer

Pursuant to 18 U.S.C. Section�1350,

as Adopted Pursuant to Section�906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of American Apparel, Inc. (the Company) on Form 10-Q for the quarter ended September�30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Scott Brubaker, Interim Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that:


(1)	The Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934.


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

�



Date:	November�10, 2014	By:	/s/�SCOTT BRUBAKER
�	�	�	Scott Brubaker
�	�	�	Interim Chief Executive Officer (Principal Executive Officer)

�

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. Section�1350,

as Adopted Pursuant to Section�906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of American Apparel, Inc. (the Company) on Form 10-Q for the quarter ended September�30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Hassan Natha, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that:


(1)	The Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934.


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

�



Date:	November�10, 2014	By:	/s/�HASSAN NATHA
�	�	�	Hassan Natha
�	�	�	Chief Financial Officer (Principal Financial and Accounting Officer)

�

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Form 10-Q AMERICAN APPAREL, INC For: Sep 30

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