American Apparel Inc.’s investigation into its former chief executive officer Dov Charney piqued the interest of the Securities and Exchange Commission, which decided to take a closer look.
The company, which just received a much-needed infusion of cash, said Wednesday in its annual report that it learned on Feb. 5 the SEC had “issued a formal order of investigation with respect to matters arising from the Suitability Committee’s review relating to Mr. Charney.”
The filing noted: “The SEC’s investigation is a nonpublic, fact-finding inquiry to determine whether any violations of law have occurred. The company intends to cooperate fully with the SEC in its investigation.”
A source close to American Apparel said the inquiry was focused on Charney and his financial dealings at the company and, while not complete, they claimed it backed up the board’s decision to oust him.
Another source claimed the company disclosed the fact-finding in an effort to retaliate against Charney, who has been meeting with disgruntled employees of the firm. They also noted the SEC could be looking into the manner in which Charney was fired.
American Apparel’s board suspended Charney in June for alleged misconduct and violations of company policy after a marathon 10-hour closed-door annual meeting. Although the allegations were never specified, the firm was said to have claimed that Charney signed off on significant severance payments for former employees to shield himself from liability.
A December statement from Charney’s lawyers noted: “The Board’s investigation into Mr. Charney’s suitability to be reinstated as ceo or an employee of the company was a complete sham. The board delegated the running of the investigation to the same lawyers who made the initial recommendation to fire Mr. Charney in June. The sole purpose of the investigation was to justify the initial termination decision, which was completely groundless.”
On Wednesday, the company also said it was able to tweak the terms of its credit facility with Capital One, allowing it to borrow $15 million from Standard General in the form of an unsecured credit agreement that bears interest of 14 percent.
While coming at a dear price, the money will help keep American Apparel afloat. The company had delayed its annual report to regulators because of the financing issue and said, “We have sufficient financing commitments to make the April 15, 2015, interest payment as well as meet other funding requirements for the next 12 months.”
But American Apparel’s relatively new ceo Paula Schneider still has lots of work to do.
The firm’s fourth-quarter losses widened to $28 million from $20.8 million a year earlier. Due to an increase in the number of shares outstanding, losses on a per share basis improved to 16 cents from 19 cents.
Adjusted earnings before interest, taxes, depreciation and amortization totaled $10.3 million, while operating expense decreased 12 percent to $10.9 million.
“Our fourth quarter year-over-year growth in adjusted EBITDA and reduction in operating expenses position us for a solid turnaround of this business,” Schneider said. “We remain focused on putting the right processes and systems in place — such as a rigorous forecasting process and disciplined bottom-up budgeting — so that we can better leverage American Apparel’s strong brand.”
Sales for the three months ended Dec. 31 fell 9.2 percent to $153.5 million from $169.1 million.
American Apparel also named Jeff Chang to its board, replacing Robert Mintz. The seat is set aside for a representative of Lion/Hollywood.