By  on November 2, 2010

American Apparel Inc. on Monday filed itsdelayed update on second-quarter results with the Securities and Exchange Commission, reporting a loss and reiterating concerns about its ability to keep operating.

The Los Angeles-based retailer and producer of trendy basics said it incurred a substantial loss from operations and had negative cash flows from operating activities for the six months ended June 30. Based on results and projections for the rest of 2010, American Apparel said it “may not have sufficient liquidity necessary to sustain operations for the next 12 months. The company’s current operating plan indicates that losses from operations are expected to continue through at least the third quarter of 2010.”

American Apparel added in the regulatory filing that it is “probable that beginning Jan. 31, 2011, the company will not be in compliance with the minimum consolidated EBIT covenant under the Lion [Capital] credit agreement.” The company in the second quarter began classifying its obligations under the Lion credit agreement as current liabilities.

Shares of company rose 2 cents, or 2.1 percent, to 99 cents following the disclosure. As of the second quarter ended June 30, American Apparel said it had $8.1 million in cash and was in compliance with all required covenants of its Bank of America credit agreement and one from Lion Capital, which injected $80 million into the firm in March 2009. After June 30, however, the company was not in compliance with a covenant under its Bank of Montreal credit agreement, which required audited financial statements of American Apparel’s Canadian operations within 120 days after Dec. 31, 2009.

Noncompliance with covenants under the Lion credit agreement “constitutes an event of default” under the Bank of America agreement, which if not waived could impact American Apparel’s ability to borrow under the latter’s credit agreement. Moreover, once the Lion credit noncompliance is triggered, it could result in a declaration that all indebtedness under both the Bank of America and Lion credit agreements be “immediately due and payable,” according to the SEC filing.

American Apparel said it is working with lenders to obtain amendments before any covenant noncompliance, but that it couldn’t provide assurance that it will be able to secure them. It also raised questions about its own ability to seek alternative lending options should its indebtedness become due and payable.

“These factors, among others, raise substantial doubt that the company will be able to continue as a going concern,” American Apparel said.

Lion amended its loan agreement with the retailer last month to prevent a violation of the terms of the pact.

The second-quarter loss was $14.7 million, or 21 cents a diluted share, against income of $4.5 million, or 6 cents, in the year-ago period. Sales fell 2.4 percent to $132.7 million from $136.1 million. For the six months, the loss widened to $57.5 million, or 81 cents a share, from $6.1 million, or 9 cents, last year. Sales rose 1.7 percent to $254.5 million from $250.3 million.

Results include pretax store impairment charges of $1.4 million and $5.6 million for the quarter and six months, respectively.

The company said management is in the process of putting together a plan that would improve both its operating performance and financial position. It is also eyeing the possibility of store closures. As of June 30, it operated 279 stores in the U.S., Canada and 18 other countries.

Tom Casey, the former chief financial officer of Blockbuster Inc., joined the company as acting president last month.

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