True Religion Apparel, Inc.

1525 Rio Vista Avenue
Los Angeles, California 90035
U.S.A.
Telephone: (323) 266-3072
Fax: (323) 266-8060
Web site: http://www.truereligionbrandjeans.com

Public Company
Incorporated: 2001 as Gusana Explorations Inc.
Employees: 95
Sales: $102.6 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: TRLG
NAIC: 315224 Men's and Boys' Cut and Sew Trouser, Slack, and Jean Manufacturing

True Religion Apparel, Inc. is a designer of premium denim wear, selling its apparel to fashion-conscious customers in North America, Asia, and Europe, where the company's signature emblem of a smiling Buddha strumming a guitar has attracted a loyal following. The product line, built around jeans that retail for as much as $465 per pair, comprises denim jeans, jackets, and shirts; corduroy jeans, jackets, and shirts; and velvet jeans and jackets for men. For women, True Religion designs denim jeans, jackets, shirts, skirts, and shorts; corduroy jeans and jackets; twill jeans; and velvet jeans and jackets. The company also sells denim jeans and corduroy jackets for children. The brand is sold primarily in specialty retail stores through 300 accounts that generate roughly 75 percent of the company's sales. The merchandise is also available in department stores such as Neiman Marcus, Bergdorf Goodman, and Saks Fifth Avenue. True Religion operates one retail store under the True Religion name, a 900-square-foot unit in Manhattan Beach, California. Sales abroad, led by markets in Japan, Germany, Canada, and the United Kingdom, account for 46 percent of the company's sales. True Religion apparel is made by third-party manufacturers based in the United States and Mexico.

ORIGINS

Jeffrey Lubell spent more than 20 years working in the textile industry before he launched his entrepreneurial career. The experience soon turned into a nightmare. With his wife Kymberly, Lubell launched two lines of jeans under the Bella Dahl and Jefri Jeans labels in the late 1990s, but the venture became ensnarled in financial and legal difficulties that likely left the Brooklyn native pining for a return to his days as a fabric salesman. Lubell's company, Bella Dahl Inc., fell behind in payments to its factor—a financial intermediary that purchases accounts receivable as security for short-term loans—and was forced into bankruptcy. Bitterness over the collapse of the company quickly turned into a legal battle: "We got no ownership and got hung out to dry with our liability with CIT Commercial Services, our factor," Lubell fumed in a September 25, 2001 interview with WWD. "We feel like two children were stolen from us, two prestigious denim labels," he said. "We're suing for our ownership interest and what was promised to us."

Anger flared and lawsuits were filed soon after CIT foreclosed on Bella Dahl Inc. in November 2000. Jolna Design Group Inc., led by brothers Kerry Jolna and Steve Jolna, purchased the trademarks and partial assets of Bella Dahl Inc. that month and began marketing the Bella Dahl and Jefri Jeans lines. In June 2001, the Jolna brothers were the first to strike, filing a lawsuit against the Lubells that alleged misappropriation of trade secrets and unfair competitive practices related to the Lubells' new line of jeans, Hippie Jeans. The Lubells fired back, filing a ten-count countersuit charging the Jolnas and CIT with fraud and conspiracy. "Kerry Jolna and Steve Jolna engineered a default of Bella Dahl Inc. under the factoring agreement," the lawsuit, as quoted in the January 28, 2002 issue of WWD, stated, "such that Kerry Jolna and Steve Jolna would be able to acquire crosscomplainants' [the Lubells'] IP [intellectual property] and other valuable property." In the end, the Lubells lost the battle, forcing them to start from scratch with their next venture, True Religion Apparel.

The lessons learned from the Bella Dahl debacle dictated the Lubells' approach with True Religion. "With my other two brands," Jeffrey Lubell said in a September 4, 2003 interview with WWD, "I made bad decisions. I said, 'I'd rather do things myself than to sell out and go through that again.' When you find a partner, you have to answer to someone else's rules and regulations because people who put money in think they deserve majority ownership." Lubell was careful not to make the same mistakes again when he and his wife launched the True Religion line in December 2002. He registered the company's trademarks to himself and he sought an arrangement that would provide an infusion of capital without forcing him to give up majority ownership of the company. Lubell's stipulations led to an odd corporate marriage, a deal that would see his company, Guru Denim Inc., a designer of high-fashion, high-priced denim wear, wed a beleaguered Canadian company prospecting for gold in British Columbia.

UNION OF A GOLD MINER AND A DENIM DESIGNER: 2003

The deal was a reverse merger, a transaction in which a private company is folded into a public company and managed by executives from the private company. Not uncommon, reverse mergers avoid the legal and underwriting expenses associated with taking a privately owned company public. For Lubell, a reverse merger answered his need for capital and met his desire to maintain control, a logical solution provided by an incongruous corporate union.

In April 2001, Gusana Explorations Inc. was incorporated as an exploration entity to mine for minerals and valuable metals in British Columbia. Incorporated in Nevada and occupying main offices in Vancouver, British Columbia, Gusana held titles to six mineral claims north of Vancouver, where it hoped to prospect for gold. The company never became a going enterprise. A registration statement filed with the Securities and Exchange Commission (SEC) on March 5, 2002, came across as particularly despondent, exceeding the usual cautionary tone adopted by companies in presenting their case to the U.S. regulatory body. "We have no known ore reserves," the statement read. "We have not identified any gold on the property and we cannot guaranty that we will ever find any gold. Even if we find that there is gold on our property, we cannot guaranty that we will be able to recover the gold. Even if we recover gold, we cannot guaranty that we will make a profit. If we cannot find gold or it is not economical to recover the gold, we will have to cease operations." Such was the outlook, when the company, unable to attract enough investors to finance its exploration efforts and having never generated any revenues, was forced to face its own collapse. The directors, presiding over a company with debts of $9,773 and assets of $2,819, looked for a way to save the corporate shell they controlled, deciding in May 2003 that something had to be done.

COMPANY PERSPECTIVES

Our strategy is to build brand recognition by marketing our products to fashion conscious, affluent consumers who shop in high-end boutiques and department stores and who want to wear and be seen in the latest, trendiest, jeans and related apparel. We plan to limit distribution to the more exclusive boutiques, specialty stores and department stores in an effort to maintain the unique nature of our brand and our True Religion Brand Jeans sell in the range of $170 to $300 per pair at retail. We utilize contract manufacturers located in the United States so that we can brand our products as having been "Made in the U.S.A.," and because it helps us control our costs and keep fixed overhead to a minimum. We plan to update our product offerings—style, fit, washes—every six months to be seen as a trend setter in the contemporary better jeans market.

While Gusana's directors mulled over their options in Vancouver, down south, in El Segundo, California, Lubell was exploring his own options. He solicited the help of a friend to secure a direct investment in Guru Denim, and his friend introduced him to the investment bankers backing a forlorn operation up north, Gusana. In June 2003, Lubell agreed to sell his denim company to Gusana, gaining the leverage he demanded after his experience with Bella Dahl. Gusana, unable to make its mark as a mining concern, became a clothing company, a super-premium denim designer headed by Lubell, who held the titles of president and chief executive officer. To further assuage any concerns on Lubell's behalf of a repeat of the Bella Dahl experience, he was given a 62 percent stake in the company, holding sway as the company's majority owner. The pot was sweetened by the $250,000 Lubell was given to support the apparel line's expansion, the price of selling Guru Denim to Gusana. The reverse merger was made complete in August 2003, when Gusana changed its name to True Religion Apparel Inc., an El Segundo-based company with Guru Denim as its mainstay subsidiary.

2003–05: A HOT TREND FUELING FINANCIAL GROWTH

By the time True Religion's corporate structure was in place, the company already had made a name for itself in the fashion world. Lubell and his three employees—his wife Kymberly, a production supervisor, and a product designer—created a buzz in the industry within months of launching the company's line, a line comprising "super-premium" denim wear. The company's jeans, bearing an emblem of a smiling Buddha strumming a guitar and, in some occasions, elaborately embroidered, were at the highest end of the price spectrum, wholesaling for between $100 and $200 and selling at retail for as much as $465. "Today's customer is about the product," Lubell said in a March 17, 2005 interview with WWD. "It's not about the price point. If you want to buy a price point, you go to Wal-Mart and Target." The line quickly attracted a following of celebrities, providing invaluable exposure. True Religion apparel was worn by Madonna, Gwyneth Paltrow, Bruce Willis, among a host of other luminaries, including the entire cast of the television program Desperate Housewives. The brand was featured in films such as Cake, The Fog, Domino, and Dukes of Hazzard, and appeared in a long list of fashion magazines, including Elle, Vogue, and Bazaar. "Anybody who's alive and kicking is a True Religion customer," Lubell exclaimed in the April 2006 issue of Kiplinger's Personal Finance Magazine, and many answered his call, eagerly paying for the prestige associated with the brand.

Lubell succeeded in generating hype about his apparel brand, and he also set up the means to get the most out of the public's desire for the True Religion label. During his first year in business, Lubell established distribution and licensing deals in Japan, Canada, Italy, Spain, Germany, Australia, and New Zealand, creating an international network that soon accounted for approximately half of the company's annual sales. Abroad and in the United States, the company's apparel was available at department stores, but Lubell relied heavily on specialty shops for showcasing the brand. From Italy's Gio' Moretti to France's Martine Chambon to New York City's Anik, prestigious boutiques represented the primary retail outlet for True Religion attire, accounting for two-thirds of all sales. Structured as such, the company's distribution and retail network generated explosive financial growth during the first few years of the True Religion brand. In 2003, the company collected $2.4 million in sales and recorded a net loss of $10,700. In 2004, the previous year's loss was turned into a $4.2 million gain, as sales swelled to $27.6 million. In 2005, revenues shot upward, jumping by nearly fourfold to $102.5 million. The company's net income for the year posted an even greater gain, leaping to $19.5 million. As the company's financial stature increased so too did its esteem among the investment community. True Religion's shares first began trading on the NASDAQ over-the-counter bulletin board, when the company essentially was a penny stock. In August 2005, the company's shares began trading on the main NASDAQ market, reaching a high of $17.77 per share during the year.

KEY DATES

2001:: Gusana Explorations Inc. is incorporated.
2002:: Jeffrey Lubell forms Guru Denim Inc.
2003:: In a reverse merger, Gusana and Guru Denim unite, creating True Religion Apparel, Inc.
2004:: True Religion records its first annual profit, posting $4.2 million in net income.
2005:: True Religion opens its first retail location, a 900-square-foot boutique in Manhattan Beach, California.

Looking ahead, there was every reason to expect further robust growth from True Religion, and there was the not-to-be-overlooked chance that the True Religion fad could sputter away as quickly as it began. Lubell catered to the most capricious of tastes, occupying a market niche that quickly enriched the successful and summarily discarded those who failed to captivate consumers. Some analysts wondered whether Lubell would take his company to the next level by developing True Religion into a so-called "lifestyle" brand and thereby endeavor to strengthen the financial potential and longevity of the True Religion name. The company was exploring one new avenue of growth as it entered the second half of the decade, opening its own retail location. In July 2005, the company opened a 900-square-foot True Religion store in Manhattan Beach, California, giving it a new, potentially massive business area to exploit. No plans were announced for additional store openings, however. In the years ahead, much remained to be seen in regard to True Religion's staying power in the business world, but there was certainty about the company's first years in business: True Religion created a stir in the fashion world, an achievement whose worth was not to be underestimated.

PRINCIPAL SUBSIDIARIES

Guru Denim, Inc.

PRINCIPAL COMPETITORS

Calvin Klein, Inc.; Innovo Group Inc.; Levi Strauss & Co.

True Religion Apparel, Inc.

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True Religion Apparel, Inc.

1525 Rio Vista Avenue
Los Angeles, California 90035
U.S.A.
Telephone: (323) 266-3072
Fax: (323) 266-8060
Web site: http://www.truereligionbrandjeans.com

ORIGINS

UNION OF A GOLD MINER AND A DENIM DESIGNER: 2003

COMPANY PERSPECTIVES

2003–05: A HOT TREND FUELING FINANCIAL GROWTH

KEY DATES

2001:: Gusana Explorations Inc. is incorporated.
2002:: Jeffrey Lubell forms Guru Denim Inc.
2003:: In a reverse merger, Gusana and Guru Denim unite, creating True Religion Apparel, Inc.
2004:: True Religion records its first annual profit, posting $4.2 million in net income.
2005:: True Religion opens its first retail location, a 900-square-foot boutique in Manhattan Beach, California.