American Apparel Drops After Getting Subpoena on Auditor Change

American Apparel Inc. dropped in U.S. trading after saying it received a subpoena from the U.S. attorney’s office over changing accounting firms and that operating losses may result in its breach of a debt covenant.

The retailer, based in Los Angeles, also received inquiries from the U.S. Securities and Exchange Commission after Deloitte & Touche LLP quit last month and was replaced by Marcum LLP, according to a regulatory filing today. Deloitte notified the company that its 2009 financial statements may not be reliable when it ended the relationship, American Apparel said.

The company has reduced store openings and is trying to offset the firing of 1,500 manufacturing workers last year for immigration infractions that lowered productivity. It may breach a debt covenant because of operating losses that could leave it without enough liquidity to keep operating for the next year, the company said in statement after the filing.

American Apparel, operator of more than 270 stores, declined 36 cents, or 26 percent, to $1.03 at 4:15 p.m. in NYSE Amex trading. The shares have dropped 67 percent this year.

The U.S. attorney’s office for the Southern District of New York requested documents used to prepare financial statements, said Peter Schey, a lawyer representing the company. Those documents will also be given to the SEC, he said.

The investigation doesn’t go beyond the auditor change, the Los Angeles-based attorney said. Deloitte asked for information on how the company forecasts future results, he said.

‘Weak Internal Controls’

“I don’t think there is any fire there,” Schey said. “Most of the smoke revolves around weak internal controls, being worked on as we speak. They may not be the most seasoned Wall Street players, but when it comes to ethics and integrity, they have it in spades.”

The retailer said in today’s filing it may be delisted from the NYSE Amex because it won’t be able to complete its financial statements for the second quarter ended June 30 in time following the change in auditors.

“Our failure to timely file the second-quarter Form 10-Q would be a material violation of our listing agreement with the NYSE Amex and, as a result, the NYSE Amex could initiate proceedings to delist our common stock from trading on the NYSE Amex,” the company said.

Cooperation With Requests

The company said it will cooperate with the requests about the change in accounting firms. Adrian Kowalewski, American Apparel’s chief financial officer, didn’t return phone calls and e-mail seeking comment. Chairman and Chief Executive Officer Dov Charney didn’t respond to an e-mail.

The second-quarter loss from operations was probably $5 million to $7 million, compared with income of $7.3 million a year earlier, the company said in a preliminary earnings report. Sales at stores open at least a year declined 16 percent. The company intends to post final earnings no later than Sept. 15 after its new auditor has time to review the results.

An amended debt covenant on a $75 million loan from London- based Lion Capital LLP requires American Apparel to report at least $20 million of Ebitda, or earnings before interest, taxes, depreciation and amortization, over four quarters beginning with the period ended June 30, according to an American Apparel spokesman. The threshold increases until it reaches $80 million on Sept. 30, 2013, he said.

The company said it expects to meet the debt obligation for the four quarters ended June 30. Based on the preliminary results, which project operating losses for the next two months, American Apparel said it probably won’t be in compliance for the four quarters ending Sept. 30.

The unaudited first-quarter net loss widened to $42.8 million, or 60 cents a share, from $10.6 million, or 15 cents, a year earlier, according to the filing. The company had a deadline of yesterday to file the results or risk being delisted from NYSE Amex.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

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