Statement By Dov Charney Regarding American Apparel Bankruptcy Ruling

Jan 25, 2016, 20:00 ET from Dov Charney

LOS ANGELES, Jan. 25, 2016 /PRNewswire/ -- I am obviously disappointed by the judge's decision to confirm the debtors' reorganization plan and hand ownership of American Apparel to its bondholders.

[This outcome is one that] I have been working tirelessly for nearly two years to avoid this outcome in an effort to protect value for the company's various stakeholders. Now all stockholders will have their shares and value extinguished. 
Many of the company's loyal vendors will recover only cents on the dollar of what the company owes them. And the company's workers, given [faced with] current management's inability to generate profits, face a highly uncertain future.
It is without question that the debtors, Standard General and the bondholders carefully orchestrated a strategy to pass the Company over to the bondholders without exposing it to fair market test or bidding.
This outcome was the [only logical and] unfortunate conclusion of many months of pre-bankruptcy preparation on the part of the bondholders and the company's board.
[Here] The bondholders and current management effectively used Chapter 11 as a defensive measure to thwart my efforts. 
This goal was pursued despite the many alternative pathways and opportunities to preserve value.
As evidence of the lengths the Board went [to] in facilitating its scheme, they filed a "lock - up" agreement, prohibiting secured creditors and bondholders from considering alternative offers. 
Chief Judge Shannon was clearly concerned about the company's failure to undertake any marketing effort, and on November 19 he ordered them to market the company. Although the Debtors were uncooperative even after the Court's order, through intensive efforts with our financial partners, we submitted[—]a bid that was demonstrably superior to the Debtors' filed plan. Indeed, the Court said in its ruling that if American Apparel were for sale, the Court would not have hesitated to send the parties back to the auction table. 
The Debtors then increased their [economics] financial terms to match the offer, but refused to engage in further negotiations. They then embarked on a scorched earth campaign to block further bids, subjecting myself and my financial partners to days of depositions during the waning days of the already truncated marketing process. In short, they did everything possible to curtail all efforts to bring fair, reasonable value to creditors.
[Since] When I relocated American Apparel from South Carolina to Los Angeles in the late 1990[’]s I was bucking conventional wisdom by trying to preserve American manufacturing jobs and keep apparel manufacturing in the United States. Even though my competitors [everyone else] were moving jobs offshore, I was able to build and grow a profitable apparel business by manufacturing domestically. At every step along the way people challenged me and said I was crazy for trying. American Apparel was one of the only companies that shattered the sweatshop paradigm by paying fair wages, and did so at scale. By the time American Apparel went public in 2007, it was [running] the largest apparel manufacturing plant in the United States.
For these endeavors I remain justifiably proud.
There was logic to the company's unconventional business strategy as evidenced by the company's historic earnings. 
Until I was removed as CEO, the company had posted positive EBITDA (earnings before interest, taxes, depreciation and amortization) in nine of the last ten years. 
There were many other things that we did differently at American Apparel, besides manufacturing domestically, [in which] that [we] were ahead of the times. 
Whether it was deploying RFID technology in our retail stores, fulfilling e-commerce orders direct from retail stores, or opening stores in emerging neighborhoods before they were recognized as attractive retail markets (just a few examples among many), we were often ahead of the curve. 
It was because our organization respected and celebrated creativity and unorthodox thinking that we were so successful[,] and I was committed to protecting this spirit of contrarian thinking. 
The company was rebounding from a catastrophic distribution center shift [implemented] orchestrated by the former CFO, John Luttrell. Despite this monumental setback, the company was track to post a positive operating profit in the second quarter of 2014[,] and on track to hit its annual earnings guidance of $40 million EBITDA. 
With the company's bonds trading down because of the uncertainty around the success of the turnaround, I believe I was pushed out as CEO because of pressure that the bondholders exerted on the company's then CFO and Board of Directors. [(As I have alleged in my litigation,] I maintain the view that [the] then CFO, John Luttrell, conspired to sell the company behind my back. [and] To that end disenfranchised me as a shareholder during the June 2014 annual meeting by way of a misleading and fraudulent proxy[)] 
The resolute goal of the bondholders was to sell the company so they could profit, but I had to be pushed out of the way since I was the company's largest shareholder.
When the company's board removed me as CEO in June 2014, I was midway through what was shaping up to be a successful recalibration of American Apparel's business. The process of my disenfranchisement ultimately resulted in a wealth transfer from the company's shareholders, vendors, and employees to hedge funds, lawyers, and bankers.
Despite this conspiracy, I was not willing to give up[,] and I attempted to regain control of the company that was still in a very vulnerable position with its turnaround not yet complete.
I feared, with good reason, that the new management, not understanding what made American Apparel successful in the first place, would [try] attempt to [run] corporatize and conventionalize the company [in] at the expense of its creativity and values. [a more "conventional" manner.] 
[Because] The board and new management did not appreciate that a vertically integrated domestic manufacturer had to approach business in a fundamentally different fashion.[,] I felt that the company's future was in serious jeopardy if they proceeded to run [ran] it like a traditional retailer. [For this reason,] I quickly entered into a partnership with the hedge fund, Standard General, to regain control of the company. While I could have assembled a coalition of shareholders to force a change at the board level, [but] given the urgency of the situation[,] I decided to surrender part of my economic interest in the company. [to regain control quickly]. 
When Standard General did not deliver on their promises to reinstall me as CEO by late summer 2014, [even though they had appointed new directors constituting a majority of the board- is this necessary to add?], Standard General said I could buy them out of their investment. When I showed up with investors to do precisely this, they said that they could only support a go-private transaction for the entire company.
In December 2014, a private equity firm offered $1.30-$1.40 per share to take the company private. The board rebuffed this offer as well, as offering inadequate value to shareholders for a company they said was worth much more. Instead, the board pursued a path [where] on which only a year later the shareholders are receiving [zero] nothing. The offer that I made in conjunction with Hagan Capital to purchase the company was just one in a long list of offers[,]. [and] There was no reason to believe that this one would end any differently, given the powerful forces steering the company towards a reorganization where the bondholders would end up owning the company. While many parties close to me feared that this would be the outcome of my partnership with Standard General, even they could not fathom such a reversal.
While outside observers might not yet appreciate it, I believe the path being followed by the company's management is a road to ruin. The financial results of plummeting sales and EBITDA thus far support this. Management attempts to explain away their abysmal financial performance[,] as the result of inadequate liquidity, but the truth is that they [misunderstand] do not understand the unique business model that American Apparel must pursue as a vertically integrated domestic manufacturer.
Their losses are self-inflicted, the result of poor decisions[,] made by executives who are learning as they go. Part of me can scarcely believe that a court could confirm their plan as feasible given the operating performance of the business under their management and 18 months into their turnaround plan. 
[But] While the bondholders are likely to be put in a position to throw good money after bad for consciously pursuing this path, I worry for the manufacturing workers and the business community who are the collateral damage to this corporate drama.
I'm proud of the creativity and innovation that American Apparel fostered over the years. We made important strides in the areas of ethical manufacturing and art as they intersect with commerce. Although we were not successful, I should also extend a special thank you to my lawyers, Steve Kortanek and Dean Ferguson, who put in an enormous effort to try to assist me in recapturing the company. 
The sad reality is that American Apparel, the largest garment manufacturer in the United States, will not survive at this pace and I don't believe the current management has the talent to bring it back to health.
At the end of this saga, I, like the many former stockholders, will most likely be left with nothing. Despite that, what gives me great optimism are the things I possess that can't be stolen by a predatory hedge fund - my ideas, values, drive, authenticity, integrity and my passion. To that end I ask that my supporters stay tuned.

I have been working tirelessly for nearly two years to avoid this outcome in an effort to protect value for the company's various stakeholders. Now all stockholders will have their shares and value extinguished. 

Many of the company's loyal vendors will recover only cents on the dollar of what the company owes them. And the company's workers, given current management's inability to generate profits, face a highly uncertain future.

It is without question that the debtors, Standard General and the bondholders carefully orchestrated a strategy to pass the Company over to the bondholders without exposing it to fair market test or bidding.

This outcome was the unfortunate conclusion of many months of pre-bankruptcy preparation on the part of the bondholders and the company's board.

The bondholders and current management effectively used Chapter 11 as a defensive measure to thwart my efforts. 

This goal was pursued despite the many alternative pathways and opportunities to preserve value.

As evidence of the lengths the Board went in facilitating its scheme, they filed a "lock - up" agreement, prohibiting secured creditors and bondholders from considering alternative offers. 

Chief Judge Shannon was clearly concerned about the company's failure to undertake any marketing effort, and on November 19 he ordered them to market the company. Although the Debtors were uncooperative even after the Court's order, through intensive efforts with our financial partners, we submitted a bid that was demonstrably superior to the Debtors' filed plan. Indeed, the Court said in its ruling that if American Apparel were for sale, the Court would not have hesitated to send the parties back to the auction table. 

The Debtors then increased their financial terms to match the offer, but refused to engage in further negotiations. They then embarked on a scorched earth campaign to block further bids, subjecting myself and my financial partners to days of depositions during the waning days of the already truncated marketing process. In short, they did everything possible to curtail all efforts to bring fair, reasonable value to creditors.

When I relocated American Apparel from South Carolina to Los Angeles in the late 1990s I was bucking conventional wisdom by trying to preserve American manufacturing jobs and keep apparel manufacturing in the United States. Even though my competitors were moving jobs offshore, I was able to build and grow a profitable apparel business by manufacturing domestically. At every step along the way people challenged me and said I was crazy for trying. American Apparel was one of the only companies that shattered the sweatshop paradigm by paying fair wages, and did so at scale. By the time American Apparel went public in 2007, it was the largest apparel manufacturing plant in the United States.

For these endeavors I remain justifiably proud.

There was logic to the company's unconventional business strategy as evidenced by the company's historic earnings. 

Until I was removed as CEO, the company had posted positive EBITDA (earnings before interest, taxes, depreciation and amortization) in nine of the last ten years. 

There were many other things that we did differently at American Apparel, besides manufacturing domestically, that were ahead of the times. 

Whether it was deploying RFID technology in our retail stores, fulfilling e-commerce orders direct from retail stores, or opening stores in emerging neighborhoods before they were recognized as attractive retail markets (just a few examples among many), we were often ahead of the curve. 

It was because our organization respected and celebrated creativity and unorthodox thinking that we were so successful and I was committed to protecting this spirit of contrarian thinking. 

The company was rebounding from a catastrophic distribution center shift orchestrated by the former CFO, John Luttrell. Despite this monumental setback, the company was track to post a positive operating profit in the second quarter of 2014 and on track to hit its annual earnings guidance of $40 million EBITDA. 

With the company's bonds trading down because of the uncertainty around the success of the turnaround, I believe I was pushed out as CEO because of pressure that the bondholders exerted on the company's then CFO and Board of Directors. 

The resolute goal of the bondholders was to sell the company so they could profit, but I had to be pushed out of the way since I was the company's largest shareholder.

When the company's board removed me as CEO in June 2014, I was midway through what was shaping up to be a successful recalibration of American Apparel's business. The process of my disenfranchisement ultimately resulted in a wealth transfer from the company's shareholders, vendors, and employees to hedge funds, lawyers, and bankers.

Despite this, I was not willing to give up and I attempted to regain control of the company that was still in a very vulnerable position with its turnaround not yet complete.

I feared, with good reason, that the new management, not understanding what made American Apparel successful in the first place, would attempt to corporatize and conventionalize the company at the expense of its creativity and values. 

The board and new management did not appreciate that a vertically integrated domestic manufacturer had to approach business in a fundamentally different fashion. I felt that the company's future was in serious jeopardy if they proceeded to run it like a traditional retailer. I quickly entered into a partnership with the hedge fund, Standard General, to regain control of the company. While I could have assembled a coalition of shareholders to force a change at the board level, given the urgency of the situation I decided to surrender part of my economic interest in the company.

When Standard General did not deliver on their promises to reinstall me as CEO by late summer 2014, Standard General said I could buy them out of their investment. When I showed up with investors to do precisely this, they said that they could only support a go-private transaction for the entire company.

In December 2014, a private equity firm offered $1.30-$1.40 per share to take the company private. The board rebuffed this offer as well, as offering inadequate value to shareholders for a company they said was worth much more. Instead, the board pursued a path on which only a year later the shareholders are receiving nothing. The offer that I made in conjunction with Hagan Capital to purchase the company was just one in a long list of offers. There was no reason to believe that this one would end any differently, given the powerful forces steering the company towards a reorganization where the bondholders would end up owning the company. While many parties close to me feared that this would be the outcome of my partnership with Standard General, even they could not fathom such a reversal.

While outside observers might not yet appreciate it, I believe the path being followed by the company's management is a road to ruin. The financial results of plummeting sales and EBITDA thus far support this. Management attempts to explain away their abysmal financial performance as the result of inadequate liquidity, but the truth is that they do not understand the unique business model that American Apparel must pursue as a vertically integrated domestic manufacturer.

Their losses are self-inflicted, the result of poor decisions made by executives who are learning as they go. Part of me can scarcely believe that a court could confirm their plan as feasible given the operating performance of the business under their management and 18 months into their turnaround plan. 

While the bondholders are likely to be put in a position to throw good money after bad for consciously pursuing this path, I worry for the manufacturing workers and the business community who are the collateral damage to this corporate drama.

I'm proud of the creativity and innovation that American Apparel fostered over the years. We made important strides in the areas of ethical manufacturing and art as they intersect with commerce. Although we were not successful, I should also extend a special thank you to my lawyers, Steve Kortanek and Dean Ferguson, who put in an enormous effort to try to assist me in recapturing the company. 

The sad reality is that American Apparel, the largest garment manufacturer in the United States, will not survive at this pace and I don't believe the current management has the talent to bring it back to health.

At the end of this saga, I, like the many former stockholders, will most likely be left with nothing. Despite that, what gives me great optimism are the things I possess that can't be stolen by a predatory hedge fund - my ideas, values, drive, authenticity, integrity and my passion. To that end I ask that my supporters stay tuned.

Dov Charney
(213) 923-7943
dovcharneypersonal@gmail.com

 

SOURCE Dov Charney