[lucy92]

Pt 2.

Mr. Charney found himself at the center of four lawsuits from former employees, all alleging sexual harassment. One was dismissed and two others were settled out of court.
The fourth, filed in 2005 by former employee Mary Nelson in Los Angeles County Superior Court, persisted. She asserted that Mr. Charney had referred to women as "whores" and "sluts" and solicited sex acts from her. Mr. Charney says Ms. Nelson was simply a disgruntled employee, but his defense did little to contain the damaging reports circulating in the media.
"Undoubtedly Dov's approach didn't play well with the capital markets," says Rob Smith of C3 Capital Partners. "It's his personality that created the vision for his success, but it also was getting in the way." Mr. Smith, who financed American Apparel early on, says he still believes Mr. Charney is a genius. But his firm failed to convince other potential investors to back him after "they would take a look into Dov's background."
By the middle of 2006, Mr. Charney began looking for ways to boost his finance staff. He offered an $800-a-week internship to Adrian Kowalewski, a recent University of Chicago business-school graduate who had briefly spoken with Mr. Charney about an academic paper the month before. Mr. Kowalewski's task: to devise a plan to save the company's deteriorating finances.
Mr. Charney also resumed his search for a CFO. Rather than contact an executive recruiter, Mr. Charney bought a classified ad in his hometown newspaper, The Gazette of Montreal. Mr. Charney's father, an architect, did the first round of interviews.
Mr. Cieply, a former toy-industry executive, responded to the ad and got the job. The CFO says he soon discovered what he called "a lack of accounting knowledge" pervading the company. Mr. Cieply says he was forced to recant the company's earnings statement for the first half of that year. The move sent a chill through the company's creditors. U.S. Bank sent debt-collection letters demanding the company immediately pay overdue interest of $188,180, according to copies of these letters reviewed by The Wall Street Journal.
Mr. Charney continued opening stores at a clip of nearly three a month. But the company's sales growth in stores open more than a year, a key measure of a retailer's health, had fallen from 45% in 2005 to just 5% the next year, according to an American Apparel investor presentation.
In September 2006, New York-based LaSalle Financial Services canceled an $80 million refinance deal after the company's books were readjusted yet again, according to the company chronology. LaSalle, now owned by Bank of America, declines to comment. In November, the chronology shows U.S. Bank forced the company to hire a turnaround consultant.
"It was a big waste of time," says Mr. Charney. The books underwent another readjustment just after Thanksgiving 2006, reducing year-to-date earnings before interest, taxes, depreciation and amortization by $1.5 million to $24.5 million. The news came the day before another $35 million deal, this time with a private investment company, was to be signed. That deal, too, collapsed.
With vendors for yarn and dye delaying or canceling shipments, Mr. Charney says he cut back production and implemented rotating layoffs, in which employees left the company for set periods without pay.
That fall, Mr. Charney turned to Mr. Kowalewski -- now his corporate finance director -- for a solution. Having tried, and failed, to court other lenders, Mr. Kowalewski says he knew a traditional IPO was out of the question, given the rigorous accounting scrutiny involved and Mr. Charney's lack of a proven executive team. Private-equity firms would take American Apparel to the cleaners. But the company desperately needed money.
Mr. Kowalewski came up with a solution: an untraditional "blank check" initial public offering, in which a shell firm, known as a "special purpose acquisition company," acquires a private firm. He originally floated the plan as a means to raise the company's valuation and attract competitive bids. But Mr. Charney saw appeal in executing the deal: It would raise cash quickly, bypass the labors of the IPO and allow the tiny company to start trading publicly. While growing more commonplace, the use of SPACs remains controversial, precisely because they require far fewer disclosures by the company.
To do the deal, American Apparel needed willing partners -- and found them in Jonathan Ledecky and Eric Watson, two financiers who had helped bring SPACs into broader use. In this case, they had founded a shell company called Endeavor Acquisitions Corp. and raised public money for a takeover. Although Mr. Charney felt the men were pricing American Apparel far below its actual value, "I needed the money now, and they knew," Mr. Charney says. Under expected conditions, Endeavor would acquire American Apparel and Mr. Charney would receive a 55.1% controlling stake in the company; the company would receive an equity infusion of more than $125 million.
But there was a catch: The pair wanted Mr. Charney to give up the CEO post. "As if that was going to happen," Mr. Charney recalls thinking. He refused to cede the top post, and Mr. Ledecky acquiesced, announcing a deal with the company in December 2006. Still, Mr. Ledecky says he had won agreement that American Apparel would bring in a new CFO, chief information officer and chief operating officer.
But that, too, would change. Under the terms of Endeavor's agreement with investors, the holding company would dissolve if the merger weren't completed by December 2007. About a month before that deadline, Mr. Charney asked that "the new suits" not be brought in at all, Mr. Charney recalls. "We strongly disagreed with that," recalls Mr. Ledecky. "But at the same time you could have had a situation where the clock on Endeavor would have run out." Mr. Charney got his way.
On Dec. 12, the company began trading on the American Stock Exchange. Mr. Charney was now worth more than $580 million. On his first earnings call as the head of a public company, held on March 17, Mr. Charney introduced the company to Wall Street analysts with no new executives at his side.
Coming Back
With money in the bank, Mr. Charney says his financial problems are finally behind him. "I always keep coming back like a whale coming out of water," he says. He says the cash infusion will allow him to do what he likes best: Open more stores. Last month, the company said it will begin selling in China, and plans to open another 40 to 45 more shops in new markets like Brazil and Denmark. Nonetheless, American Apparel's March 17 filing contains 15 pages of risk factors, including the fact that the company has $116.8 million in aggregate debt that could "limit its ability to pursue its expansion plans."
In the meantime, Mr. Charney is still fighting Ms. Nelson's sexual-harassment suit, which is now in arbitration.
In a separate pending lawsuit filed in central California federal court, the company's earlier insurer, Navigators Insurance Co., has refused to pay any damages or legal fees related to the case in part because it says American Apparel failed to fully disclose prior problems it has had with sexual-harassment allegations. American Apparel says it disclosed all relevant material.
Meanwhile, director Woody Allen sued American Apparel on March 31 for using a photo of him dressed as a rabbi in billboard ads without his consent. In the suit, filed in Manhattan federal court, Mr. Allen is asking for more than $10 million in damages. American Apparel says the ads were put up "strictly as a social parody," adding: "We had no intention of selling garments through the use of Mr. Allen's image."