Overview
We are a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel. We design, manufacture and sell clothing, accessories and personal care products for women, men, children and babies through retail, wholesale and online distribution channels. As of March 31, 2012, we operated a total of 249 retail stores in the United States, Canada and 18 other countries. Our wholesale business is a leading supplier of T-shirts and other casual wear to screen printers and distributors. In addition, we operate an online retail e-commerce website at www.americanapparel.com where we sell our clothing and accessories directly to consumers.
We conduct our primary manufacturing operations out of an 800,000 square foot facility in the warehouse district of downtown Los Angeles, California. The facility houses our executive offices, as well as cutting, sewing, warehousing, and distribution operations. We conduct knitting operations at our facilities in Los Angeles and Garden Grove, California, which produce a majority of the fabric we use in our products. We also operate dye houses that provide dyeing and finishing services for nearly all of the raw fabric used in production. We operate a dyeing and finishing facility in Hawthorne, California, which provides fabric dyeing and finishing services. We operate a garment dyeing and finishing facility, located in South Gate, California, which is used in cutting, sewing, dyeing and finishing garments. We operate a fabric dyeing and finishing facility, located in Garden Grove, California, which has been expanded to include knitting, cutting and sewing operations. Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and to changing fashion trends and to closely monitor product quality. Our products are recognized for their quality and fit, and together with our distinctive branding these attributes have differentiated our products in the marketplace.
The results of the respective business segments exclude unallocated corporate expenses, which consist of our shared overhead costs. These costs are presented separately and generally include corporate costs such as human resources, legal, finance, information technology, accounting, and executive compensation. The following sets forth the change in retail store count during the three months ended March 31, 2012 and 2011.

                                   U.S. Retail    Canada     International    Total
Three Months Ended March 31, 2012
Open at January 1, 2012                 143         37             69          249
Opened                                    -          -              2            2
Closed                                   (2 )        -              -           (2 )
Open at March 31, 2012                  141         37             71          249

Three Months Ended March 31, 2011
Open at January 1, 2011                 157         40             76          273
Opened                                    -          -              -            -
Closed                                   (9 )       (2 )           (4 )        (15 )
Open at March 31, 2011                  148         38             72          258

Comparable Store Sales
The table below shows the increase (decrease) in comparable store sales for our retail stores, for the three months ended March 31, 2012, and 2011, and the number of retail stores included in the comparison at the end of each period. Comparable store sales are defined as the percentage change in sales for stores that have been open for more than twelve full months. Remodeled and expanded stores are excluded from the determination of comparable stores for the following twelve month period if the remodel or expansion results in a change of greater than 20% of selling square footage. Closed stores are excluded from the base of comparable stores following their last full month of operation. In calculating constant currency amounts, we convert the results of our foreign operations both in the current period and the prior year comparable period using the weighted-average foreign exchange rate for the prior comparable period to achieve a consistent basis for comparison.

                                      Three Months Ended March 31,
                                       2012                2011
Comparable store sales                    16 %              (5 )%
Number of stores in comparison (1)       243               248

(1) Comparable store sales results include the impact of online store sales. Executive Summary

Results of Operations
Net sales for the three months ended March 31, 2012 increased $16.6 million, or 14.3%, to $132.7 million from $116.1 million reported for the three months ended March 31, 2011 due primarily to higher sales across all of our segments. Net sales at our U.S. Wholesale segment increased by $6.7 million, or 19.3%, due to the launch of a new wholesale catalog and focused effort on expanding our wholesale customer base, specifically, to imprintable wholesale customers. We also added new products to our wholesale offering that attracted a more diversified customer base. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers. Online consumer net sales increased primarily as a result of functional improvements to our website and fulfillment process, and as well as a targeted online advertising and promotion effort.
Net sales at our U.S. Retail, Canada and International segments increased by $9.9 million, or 12.2%, due to strong performance across categories, particularly women's fashion and accessories, as well as better inventory composition and promotional strategy for key volume drivers.
Gross margin for the three months ended March 31, 2012 was 52.8% compared to 54.8% for the three months ended March 31, 2011. The decrease in gross margin was mainly due to the increase of cost of goods sold due to lower production volume and the resulting higher overhead costs for each unit sold. The increase was partially offset by lower yarn costs compared to sharply rising raw material prices during the first half of 2011.
Operating expenses, which include all selling, general and administrative costs, and retail store impairment charges, decreased as a percentage of sales, from 66.1% to 60.2%. Operating expenses were $79.9 million as compared to $76.7 million for the three months ended March 31, 2012 and 2011, respectively. The decrease was primarily due to a reduction in corporate overhead expenses and the fixed cost leverage as a result of increased sales.
Loss from operations was $9.8 million for the three months ended March 31, 2012 as compared with a loss from operations of $13.1 million for the three months ended March 31, 2011.
Net loss for the three months ended March 31, 2012 was $7.9 million as compared with a net loss of $20.7 million for the three months ended March 31, 2011. The improvement is due primarily to higher net sales across all our segments, partially offset by higher cost of sales as discussed above. In addition, for the three months ended March 31, 2012, we recognized a gain on extinguishment of debt of $11.6 million compared to a loss on extinguishment of debt of $3.1 million for the comparable period in 2011.

Liquidity Trends
As of March 31, 2012, we had approximately $7.3 million in cash and $6.8 million of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement. Additionally, we had $35.8 million outstanding

on a $50.0 million revolving credit facility under the Crystal Credit Agreement, $30.0 million of term loan outstanding under the Crystal Credit Agreement, $5.3 million outstanding on a C$11,000 revolving credit facility under the Bank of Montreal Credit Agreement, and $88.3 million of term loans outstanding under the Lion Credit Agreement. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1.
On March 13, 2012, we replaced our $75.0 million senior secured revolving credit facility with BofA with a $80.0 million senior credit facility with Crystal Financial LLC ("Crystal") and ("Crystal Credit Agreement"). The Crystal Credit Agreement calls for the $80.0 million to be allocated between an asset-based revolving credit facility of $50.0 million and term loan of $30.0 million. The Crystal Credit Agreement matures on March 13, 2015 and is collateralized by substantially all of our U.S. assets, and equity interests in certain of our foreign subsidiaries. Interest under the agreement is at the 90-day LIBOR plus 9.0% and also includes an unused facility fee ranging from 0.375% to 1.00% on the unused portion of the revolving credit facility, as well as an early termination fee if prepaid within the first two years.
In connection with the financing from Crystal, we also entered into an amendment to the Lion Credit Agreement to, among other things: (i) consent to the Crystal Credit Agreement, (ii) fix the maturity date at December 31, 2015, and (iii) modify certain financial covenants, including covenants related to minimum quarterly EBITDA and capital expenditures. In addition, the amendment to the Lion Credit Agreement modifies the Lion Credit Agreement to provide for a minimum of 5% of each interest payment on the outstanding principal in cash commencing on September 1, 2012.
Proceeds from the Crystal Credit Agreement were used to repay our existing BofA Credit Facility, fees and expenses related to the transaction and for general working capital purposes. See Note 6 to our condensed consolidated financial statements under Part I, Item 1.
Our C$11.0 million credit agreement with Bank of Montreal ("Bank of Montreal Credit Agreement") matures in December 2012. There can be no assurances that we will be able to negotiate a renewal or extension of this credit agreement with our existing lender or enter into a replacement credit agreement with new lenders on commercially reasonably terms or at all. If we are not able to enter into a renewal, extension or replacement of the Bank of Montreal Credit Agreement prior to its maturity, we would no longer have access to liquidity from such revolving credit facility after its maturity date.
We are in the process of executing a plan, which we commenced in 2010, to improve the operating performance and our financial position. This plan includes optimizing production levels at our manufacturing facilities including raw material purchases and labor; streamlining our logistics operations; web platform refinement; reducing corporate expenses; merchandise price rationalization in the wholesale and retail channels; store renovation; and improving merchandise allocation procedures. We continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.
Although our plan reflects improvements in these trends, there can be no assurance that our plan to improve the operating performance and our financial position will be successful.

Results of Operations

The results of operations of the interim periods are not necessarily indicative
of results for the entire year.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31,
2011
The following table sets forth our results of operations from our unaudited
condensed consolidated statements of operations by dollar and as a percentage of
net sales for the periods indicated (dollars in thousands):
                                                         Three Months Ended March 31,
                                            2012       % of net sales        2011       % of net sales
U.S. Wholesale                          $   41,335           31.2  %     $   34,650           29.9  %
U.S. Retail                                 42,609           32.1  %         37,020           31.9  %
Canada                                      13,338           10.1  %         12,629           10.9  %
International                               35,378           26.7  %         31,768           27.4  %
Total net sales                            132,660          100.0  %        116,067          100.0  %
Cost of sales                               62,604           47.2  %         52,429           45.2  %
Gross profit                                70,056           52.8  %         63,638           54.8  %

Selling expenses                            54,929           41.4  %         49,975           43.1  %
General and administrative expenses         24,922           18.8  %         26,104           22.5  %
Retail store impairment charges                  -              -  %            650            0.6  %
Loss from operations                        (9,795 )         (7.4 )%        (13,091 )        (11.3 )%

Interest expense                             9,553            7.2  %          7,131            6.1  %
Foreign currency transaction gain             (950 )         (0.7 )%           (811 )         (0.7 )%
Unrealized loss (gain) on change in
fair value of warrants                         651            0.5  %         (2,100 )         (1.8 )%
(Gain) loss on extinguishment of debt      (11,588 )         (8.7 )%          3,114            2.7  %
Other expense (income)                         128            0.1  %            (36 )            -  %
Loss before income tax                      (7,589 )         (5.7 )%        (20,389 )        (17.6 )%
Income tax provision                           302            0.2  %            356            0.3  %
Net loss                                $   (7,891 )         (5.9 )%     $  (20,745 )        (17.9 )%

U.S. Wholesale: Total net sales for the U.S. Wholesale segment increased $6.7 million, or 19.3%, to $41.3 million for the three months ended March 31, 2012 as compared to $34.7 million for the three months ended March 31, 2011. Wholesale net sales, excluding online consumer net sales, increased $4.8 million, or 16.5%, to $33.9 million for the three months ended March 31, 2012 as compared to $29.1 million for the three months ended March 31, 2011, primarily due to the launch of a new wholesale catalog and focused effort on expanding our wholesale customer base, specifically, to third party screen printers. We also added new products to our wholesale offering that attracted a more diversified customer base. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.
Online consumer net sales increased $1.9 million, or 34.5%, to $7.4 million for the three months ended March 31, 2012 as compared to $5.5 million for the three months ended March 31, 2011, primarily as a result of functional improvements to our website and fulfillment process, and as well as targeted online advertising, and promotion efforts.
U.S. Retail: Net sales for the U.S. Retail segment increased $5.6 million, or 15.1%, to $42.6 million for the three months ended March 31, 2012 as compared to $37.0 million for the three months ended March 31, 2011. Net sales increased due to strong performance across categories, particularly women's fashion and accessories, as well as better inventory composition, and promotional strategy for key volume drivers.
Comparable store sales for the three months ended March 31, 2012 increased by $5.8 million, or 17% while warehouse sales contributed an incremental $1.4 million increase from 2011 to 2012. The sales increase was partially offset by a $1.4 million sales decrease as a result of a reduction in the number of stores in operations from 148 at March 31, 2011 to 141 stores at March 31, 2012.

Canada: Total net sales for the Canada segment increased $0.7 million, or 5.6%, to $13.3 million for the three months ended March 31, 2012 as compared to $12.6 million for the three months ended March 31, 2011 as a result of improved performance across all sales channels. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the current period would have been approximately $13.6 million, or $1.0 million higher when compared to the same period last year.
Retail sales increased by $0.2 million or 2.1%, to $9.9 million for the three months ended March 31, 2012 as compared to $9.7 million for the three months ended March 31, 2011 due primarily to $0.3 million, or 3%, increase in comparable store sales. Since March 31, 2011, the number of retail stores in the Canada segment in operation decreased from 38 to 37. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail sales for 2012 would have been approximately $10.1 million, or 3.7% higher when compared to the same period last year.

Wholesale net sales increased $0.5 million, or 20.8% to $2.9 million for the three months ended March 31, 2012 as compared to $2.4 million for the three months ended March 31, 2011. The increase in net sales is due to streamlined staffing and operations. Additionally, the segment benefited from the improving economy. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total wholesale net sales for the Canada segment for 2012 would have been approximately $2.9 million, or 20.1% higher when compared to the same period last year.

Online consumer net sales for the three months ended March 31, 2012 were $0.6 million as compared to $0.5 million for the three months ended March 31, 2011. Foreign currency effects were minimal.
International: Total net sales for the International segment increased $3.6 million, or 11.4%, to $35.4 million for the three months ended March 31, 2012 as compared to $31.8 million for the three months ended March 31, 2011. The increase is due to higher sales across all sales channels. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, total revenue for the current period would have been approximately $36.0 million, or $4.2 million higher when compared to the same period last year. Retail net sales increased $2.7 million, or 10.6%, to $28.7 million for the three months ended March 31, 2012 as compared to $26.0 million for the three months ended March 31, 2011. The change is mainly attributed to the increased sales in the U.K., Japan, Australia and China. Comparable store sales for the three months ended March 31, 2012 increased by $3.6 million, or 15% as compared to the three months ended March 31, 2011. Since March 31, 2011, the number retail stores in the International segment decreased from 72 to 71. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, retail sales for 2012 would have been approximately $29.2 million, or 12.4% higher when compared to the same period last year. Wholesale net sales increased $0.3 million, or 19.0%, to $2.2 million for the three months ended March 31, 2012 as compared to $1.9 million for the three months ended March 31, 2011. The growth in wholesale is largely attributable to a new customer in the U.K. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2011, sales for the current period would have been approximately $2.3 million, or 22.8% higher when compared to the same period last year.
Online consumer net sales increased $0.6 million, or 13.0% to $4.5 million for the three months ended March 31, 2012 as compared to $3.9 million for the three months ended March 31, 2011. Foreign currency effects were minimal. Cost of sales: Cost of goods sold as a percentage of net sales was 47.2% and 45.2% for the three months ended March 31, 2012 and 2011, respectively. The increase of cost of goods sold as a percentage of sales was primarily due to lower production volume and the resulting higher overhead costs for each unit sold. This was partially offset by lower yarn costs compared to sharply rising raw material prices during the first half of 2011.
Selling expenses: Selling expenses increased $5.0 million, or 9.9%, to $54.9 million for the three months ended March 31, 2012 as compared to $50.0 million for the three months ended March 31, 2011. As a percentage of sales, selling expenses decreased to 41.4% in the three months ended March 31, 2012 from 43.1% in the three months ended March 31, 2011. The increase in selling expenses was due to $2.5 million in higher salaries, wages and benefits, and increased spending on advertising, and marketing of $1.8 million.
General and administrative expenses: General and administrative expenses decreased $1.2 million to $24.9 million for the three months ended March 31, 2012 as compared to $26.1 million for the three months ended March 31, 2011. As a percentage of sales, general and administrative expenses decreased to 18.8% during the three months ended March 31, 2012 from 22.5% during the three months ended March 31, 2011. The decrease in general and administrative expenses was primarily due to a $2.5 million reduction in professional fees (primarily accounting related fees), offset by $0.8 million in higher share-based compensation.

Retail store impairment charges: For the three months ended March 31, 2012, we evaluated our retail stores for impairment indicators and determined that no additional impairment charges were required for the three months ended March 31, 2012. For the three months ended March 31, 2011, we recorded impairment charges relating to retail store leasehold improvements of $0.7 million.
Interest expense: Interest expense increased $2.5 million to $9.6 million for the three months ended March 31, 2012 from $7.1 million for the three months ended March 31, 2011, primarily due to higher average balance of debt outstanding. Interest rates on our various debt facilities and capital leases ranged from 5.0% to 18.0% for the three months ended March 31, 2012 and 4.8% to 18.0% for the three months ended March 31, 2011. Interest expense for the three months ended March 31, 2012 primarily consisted of amortization of debt discount and deferred financing cost of approximately $2.9 million and interest on the Lion Credit Agreement of approximately $5.2 million. Interest paid in cash was $1.4 million.
Foreign currency transaction gain: For the three months ended March 31, 2012, foreign currency transaction gain totaled $1.0 million as compared to a gain of $0.8 million for the three months ended March 31, 2011. The change related to higher valuation of the U.S. Dollar relative to functional currencies used by our subsidiaries.
Unrealized loss (gain) on change in fair value of warrants: We recorded a $0.7 million loss and a $2.1 million gain in the fair value of warrants for the three months ended March 31, 2012 and the three months ended March 31, 2011, respectively.
(Gain) loss on extinguishment of debt: During the three months ended March 31, 2012, we recorded a gain on extinguishment of debt relating to the amendment to the Lion Credit Agreement terms of approximately $11.6 million. During the three months ended March 31, 2011, we recorded a loss on extinguishment of debt pertaining to the amendment to the Lion Credit Agreement terms of approximately $3.1 million. See Note 7, Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.
Income tax provision: Income tax provision was $0.3 million for the three months ended March 31, 2012 as compared to $0.4 million for the three months ended March 31, 2011. The Company incurred a loss from operations on a consolidated basis for the three months ended March 31, 2012. However, some of the Company's foreign domiciled subsidiaries incurred income from operations and will be taxable on a stand-alone reporting basis in their respective jurisdictions. As a result, the Company recorded a provision for income tax expense for the three months ended March 31, 2012 and there were no charges or benefits associated with previously established valuation allowances.

Liquidity and Capital Resources
As of March 31, 2012, we had approximately $7.3 million in cash and $6.8 million of availability for additional borrowings under the Crystal Credit Agreement and Bank of Montreal Credit Agreement. Additionally, we had (i) $35.8 million outstanding on a $50,000 revolving credit facility under the Crystal Credit Agreement, (ii) $30.0 million of term loan outstanding under the Crystal Credit Agreement, (iii) $5.3 million outstanding on a C$11,000 revolving credit facility under the Bank of Montreal Credit Agreement, and (iv) $88.3 million, net of discount of $33.9 million and including paid-in-kind interest of $1.0 million of term loan outstanding under the Lion Credit Agreement. See Notes 6 and 7 to our condensed consolidated financial statements under Part I, Item 1. On March 13, 2012, we replaced our $75.0 million senior secured revolving credit facility with BofA with the Crystal Credit Agreement, a $80.0 million senior secured credit facility with Crystal and other lenders. The Crystal Credit Agreement calls for the $80.0 million to be allocated between an asset-based revolving credit facility of $50.0 million and term loan of $30.0 million and matures on March13, 2015. In addition, the initial borrowing base under the revolving credit facility was increased by $12.5 million for the value associated with the American Apparel brand name. This initial increase will be ratably reduced to $0 during the period from April 13, 2012 through September 1, 2012.
Over the past years, our growth has been funded through a combination of borrowings from related and unrelated parties, bank debt and lease financing, proceeds from the exercise of warrants and issuance of common stock. Our principal liquidity requirements are for working capital and capital expenditures and in 2011 to fund operating losses. We fund our liquidity requirements primarily through cash on hand, cash flow from operations, if any, borrowings from revolving credit facilities and term loans under the Lion Credit Agreement.
We also in the past have funded liquidity needs with related party loans from our CEO, all of which were canceled in exchange for shares of common stock in March 2011, and cash investments by our CEO.
We generate cash primarily through the sale of our products manufactured by us at our retail stores and through our wholesale operations. Primary uses of cash are for the purchase of raw materials, payment to our manufacturing employees and retail employees, retail store opening costs and the payment of rent for retail stores.
We are in the process of executing a plan, which we commenced in 2010, to improve the operating performance and our financial position. This plan includes optimizing production levels at our manufacturing facilities including raw material purchases and labor; streamlining our logistics operations; reducing corporate expenses; merchandise price rationalization in our wholesale and retail channels; improving merchandise allocation procedures and rationalizing staffing levels. We continue to develop other initiatives intended to either increase sales, reduce costs or improve liquidity.
Although our plan reflects improvements in these trends, there can be no assurance that our plan to improve the operating performance and our financial position will be successful. We continue to evaluate other alternative sources of capital for ongoing cash needs, however, there can be no assurance we will be successful in those efforts.