American Apparel's abrupt ouster of controversial Chief Executive Dov Charney may pitch the company into bankruptcy by triggering defaults on two outstanding loans, the retailer warned Thursday.
In an SEC filing, American Apparel said the board's move to terminate Charney may trigger defaults under credit agreements with Lion/Hollywood and Capital One Business Credit Corp.
A default "could cause us to become bankrupt or insolvent," the retailer told the Securities and Exchange Commission. Any acceleration on debt payments "would have a material effect on our liquidity, financial condition and results of operations."
As of March 31, American Apparel owed Lion/Hollywood $9.9 million, a loan that matures in 2018, according to filings. The company also owed nearly $30 million to Capital One in a revolving credit facility.
The company is seeking a waiver from the lenders to prevent any default but warned that it has "no assurance" one will be granted on terms on the company can accept, if at all.
American Apparel said the loan agreement with Lion/Hollywood specifies that if Charney ceased to be CEO, the lenders can declare all outstanding obligations to be immediately due.
Reached by phone Thursday, Charney said he could not comment.
Even if the company avoids default, Charney's firing comes at a particularly precarious time for American Apparel, which has been fighting to lift sales after years of lackluster performance and debt.
Industry analysts said Charney should get credit for building an iconic and socially responsible brand, but became his own worst enemy.
"The bottom line is that Dov, for all of his misbehavior, was trying to do the right thing.
He wasn't paying workers in Bangladesh $2 a day, he was paying $10, $15 an hour in Los Angeles," said Ronnie Moas, founder of Standpoint Research. "He's very stubborn, utopian, idealistic."
He may also be the company's biggest problem.
"He had mannequins with pubic hair, a 60-year-old lingerie model, a playboy mansion full of 18-year-old girls," Moas said. "He had a problem with his behavior and it overshadowed all the good he was trying to do."
The stock used to be a darling of Wall Street, trading as high as $15 in 2007 when the retailer began expanding its retail presence around the country. But it soon began a rapid decline as the financial crisis crimped consumer spending, and never really recovered amid Charney's sexual harassment allegations.
This year, American Apparel has fought to retain its listing on the New York Stock Exchange while buried in negotiations over financing — efforts that the retailer said would force it to file its annual report late.
Wall Street greeted the news of Charney's ouster by boosting American Apparel shares up nearly 8% to 69 cents in trading Thursday morning.
The board decided on Wednesday, after the company's annual meeting, to replace Charney as chairman and terminate him as chief executive. The vote suspended Charney immediately. Under the terms of his employment, however, a 30-day period is required before termination.
In a statement, American Apparel said the action "grew out of an ongoing investigation into alleged misconduct." A source familiar with the matter said Charney's alleged problems appeared to not to be criminal in nature but involved his conduct with women and poor judgment.
Charney has long been dogged by both lawsuits and accusations of sexual misconduct and inappropriate behavior with employees.
He has also become a well-known advocate for the Made in the U.S.A. movement, a philosophy company officials planned to continue. Much of American Apparel's clothing is manufactured out of a factory in downtown Los Angeles and is "sweatshop-free."
Still, in recent years, the company has had to remove hundreds of employees after they were found to be without required documentation. And its ads, some shot by Charney, have raised eyebrows for racy themes in public locations.
American Apparel had always stood behind Charney — until now. To critics who question why the board didn't act sooner, Allan Mayer, the company's newly appointed co-chairman, said, "a board can't make decisions on the basis of rumors and stories in newspapers."
The board voted 5 to 0 to terminate Charney after its annual meeting, the source said.
"He was totally taken by surprise, which is part of the problem," said the source, who requested anonymity because of the sensitivity of the matter. "He's going to fight like hell to get this company back, but he won't succeed."
In 2013, American Apparel reported a net loss of $106.3 million, compared with a loss of $37.3 million in 2012. Facing a cash shortfall, the retailer in March announced plans to sell $30.5 million of stock to meet debt payments.
Charney, 45, was born in Montreal and attended Tufts University, where he ran American Apparel out of his dorm room. He moved the business to Los Angeles in 1997 and expanded into the retail market in 2003.
He has battled repeated accusations of sexual harassment in recent years. The source said several harassment cases were pending; others had been settled.
In 2011, American Apparel lashed out when four female former employees filed a sexual harassment lawsuit. At the time, the company told The Times that the women were friends who were colluding to "shake down" Charney and the company for money and that it had "voluminous evidence" to prove that the allegations were false.
In 2012, Charney was accused in a wrongful termination suit of choking and rubbing dirt in the face of a former store manager in Malibu. Charney also allegedly used ethnic and homophobic slurs against an employee and asked whether he was sleeping with a certain woman. The company denied the allegations.