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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 OR
 o
    
    TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM            TO
 COMMISSION FILE NUMBER 000-51483
 TRUE RELIGION APPAREL, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 DELAWARE
(State or Other Jurisdiction of 
Incorporation Organization)
    
    98-0352633
(I.R.S. Employer
Identification No.)2263 E. Vernon Ave. Vernon, CA
(Address of Principal Executive Offices)
    
    90058
(Zip Code)
 Registrants telephone number, including area code: (323) 266-3072
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
 Title of Each Class
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share
    
    Nasdaq Global Market
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TRUE RELIGION APPAREL, INC.
 FORM 10-K ANNUAL REPORT
 FISCAL YEAR ENDED DECEMBER 31, 2006
 TABLE OF CONTENTS
 PART I1.
    
    Business
    
    
    11A.
    
    Risk Factors
    
    
    41B.
    
    Unresolved Staff Comments
    
    
    102.
    
    Properties
    
    
    103.
    
    Legal Proceedings
    
    
    114.
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART II5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    126.
    
    Selected Financial Data
    
    
    137.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    147A.
    
    Qualitative and Quantitative Disclosures About Market Risk
    
    
    218.
    
    Financial Statements and Supplementary Data
    
    
    219.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    219A.
    
    Controls and Procedures
    
    
    219B.
    
    Other Information
    
    
    22PART III10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    2311.
    
    Executive Compensation
    
    
    2312.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    2313.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    2314.
    
    Principal Accountant Fees and Services
    
    
    23PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    
    24SignaturesEXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.(i).1EXHIBIT 31.(i).2EXHIBIT 32.1EXHIBIT 32.2




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CAUTIONARY STATEMENT
   
 PART I
 
 Item 1. BUSINESS
 Overview
    Business Strengths
  Brand Equity.
 1




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Advertising and Marketing.
 Wholesale Distribution.
 Retail Distribution.
 Our Products
    Business Strategy
  2




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Supply Strategy
  Manufacturing
   Sources and Availability of Raw Materials
  Quality Control
  Competition
   Government Regulation and Supervision
   3




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Research and Development
  Employees
  Information Systems
  Trademarks
   Segment Information
  Other Information
  
 Item 1A. RISK FACTORS
 An investment in our stock involves a number of risks. Before making a decision to purchase our
securities, you should carefully consider all of the risks described in this quarterly report. If
any of the risks discussed in this quarterly report actually occur, our business, financial
condition and results of operations could be materially adversely affected. If this were to occur,
the trading price of our securities could decline significantly and you may lose all or part of
your investment.
 4




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Our continued operations depend on current fashion trends. If our products and design do not
continue to be fashionable, our business could be adversely affected.
  Our business and the success of our products could be harmed if we are unable to maintain our brand
image.
  We depend on third parties for significant elements of our sales and distribution efforts. If these
third parties do not continue to assist us in our sales and distribution, our revenue could
decrease, which would have an adverse impact on our business
  Our business may be negatively impacted as a result of changes in the economy.
  Our quarterly revenues and operating results fluctuate as a result of a variety of factors,
including seasonal fluctuations in demand for high-fashion denim , apparel and accessories delivery
date delays and potential fluctuations in our annualized tax rate, which may result in volatility
of our stock price.
  5




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We may be unable to sustain our past growth or manage our future growth, which may have a material
adverse effect on our future operating results.
   We face intense competition, including competition from companies with significantly greater
resources than ours, and if we are unable to compete effectively with these companies, our market
share may decline and our business could be harmed.
   Our business could be harmed if we fail to maintain proper inventory levels.
  Purchases of the merchandise we sell are generally discretionary and are therefore particularly
susceptible to economic slowdowns.
  6




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Our business could suffer if we need to add or replace manufacturers.
  Our stock price is highly volatile.
  
    
    quarterly variations in our operating results;
    
    changes in financial estimates by securities analysts;
    
    changes in market valuations or financial results of high-fashion denim companies;
    
    announcements by us or our competitors of new products, or significant acquisitions,
strategic partnerships or joint ventures;
    
    any deviation from projected growth rates in revenues;
    
    any loss of a major customer or a major customer order;
    
    additions or departures of key management or design personnel;
    
    any deviations in our net revenue or in losses from levels expected by securities analysts;
    
    activities of short sellers and risk arbitrageurs; and
    
    future sales of our common stock.
  Our business could suffer from the financial instability of our customers.
  7




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The loss of our Chief Executive Officer or other key management personnel would have an adverse
impact on our future development and could impair our ability to succeed.
   Government regulation and supervision could restrict our business.
  Increases in the price of raw materials or their reduced availability could increase our cost of
sales and decrease our profitability.
  If an independent manufacturer violates labor or other laws, or is accused of violating any such
laws, or if their labor practices diverge from those generally accepted as ethical, it could harm
our business and brand image.
  If our competitors misappropriate our proprietary know-how and trade secrets, it could have a
material adverse affect on our business.
   8




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One principal stockholder is able to control substantially all matters requiring a vote of our
stockholders and his interests may differ from the interests of our other stockholders.
  We are still exposed to potential risks from recent legislation requiring public companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
  We do not expect to declare or pay any dividends.
  Our success is dependent on our ability to protect our worldwide intellectual property rights, and
our inability to enforce these rights could harm our business.
   Our products may infringe upon the intellectual property rights of others, which may cause us to
incur unexpected costs or prevent us from selling our products.
  9




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We are subject to periodic litigation which could result in unexpected expense of time and
resources.
  Our international operations involve inherent risk which could result in harm to our business.
  
 Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
  ApproximateArea inLocation
    
    Use
    
    Square Feet2263 E. Vernon Ave.
Vernon, California
    
    Principal executive
and administrative
offices, design
facilities, distribution
and warehouse facilities,
production control, and
sourcing used by our
wholesale and retail
segments.
    
    
    119,0001525 Rio Vista Ave.
Los Angeles, California
    
    Our former
headquarters consisted of
approximately 20,000
square feet of combined
office and warehouse
space. We no longer use
this facility. On
February 15, 2007, this
facility was 50%
occupied, releasing the
Company from a portion of
its obligation.
    
    
    20,0001557 Rio Vista 
Los Angeles, California
    
    Former distribution
and warehousing facility
used by our Wholesale
segments. We no longer
use this facility. On
February 3, 2007, this
facility was occupied,
releasing the Company
from any further
obligation.
    
    
    8,900
  10




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Years Lease TermsExpire2007-2009
    
    
    02010-2012
    
    
    12013-2015
    
    
    22016-2018
    
    
    811
  Year ending December 31,2007
    
    $
    2,835,5232008
    
    
    2,907,3912009
    
    
    3,038,4412010
    
    
    3,115,2292011
    
    
    2,721,1902012 and thereafter
    
    
    11,696,835TOTAL
    
    $
    26,314,609
  
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  11




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PART II
 
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  2006
    
    
    2005
    
    
    2004High
    
    Low
    
    
    High
    
    Low
    
    
    High
    
    LowFirst Quarter
    
    $
    23.75
    
    
    $
    15.70
    
    
    
    $
    14.02
    
    
    $
    7.35
    
    
    
    $
    1.57
    
    
    $
    0.80Second Quarter
    
    $
    19.63
    
    
    $
    15.32
    
    
    
    $
    14.86
    
    
    $
    11.55
    
    
    
    $
    1.16
    
    
    $
    0.85Third Quarter
    
    $
    22.80
    
    
    $
    16.67
    
    
    
    $
    17.77
    
    
    $
    12.94
    
    
    
    $
    2.54
    
    
    $
    0.67Fourth Quarter
    
    $
    23.54
    
    
    $
    14.90
    
    
    
    $
    16.97
    
    
    $
    11.84
    
    
    
    $
    8.10
    
    
    $
    1.96
 Holders
  Dividends
  Performance Graph
   
 December 31,June 23, 2003
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006True Religion Apparel, Inc.
    
    
    $
    100
    
    
    
    $
    3,319
    
    
    
    $
    17,234
    
    
    
    $
    32,766
    
    
    
    $
    24,575S&P 1500 Apparel Retail Index
    
    
    $
    100
    
    
    
    $
    136
    
    
    
    $
    160
    
    
    
    $
    175
    
    
    
    $
    192S&P 500 Index
    
    
    $
    100
    
    
    
    $
    100
    
    
    
    $
    111
    
    
    
    $
    117
    
    
    
    $
    135
 12




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Item 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2006
    
    2005
    
    2004
    
    2003Statement of operations data:Net revenue
    
    $
    139,046,380
    
    
    $
    102,572,446
    
    
    $
    27,667,418
    
    
    $
    2,355,332Earnings (loss) from operations
    
    
    40,057,435
    
    
    
    34,021,502
    
    
    
    6,851,858
    
    
    
    (10,872
    )Income taxes
    
    
    14,320,000
    
    
    
    12,469,000
    
    
    
    2,498,681
    
    
    
    Net earnings (loss)
    
    
    24,435,315
    
    
    
    19,508,027
    
    
    
    4,228,177
    
    
    
    (10,872
    )Earnings (loss) per share:Basic
    
    $
    1.07
    
    
    $
    0.90
    
    
    $
    0.21
    
    
    $
    0.00Diluted
    
    $
    1.04
    
    
    $
    0.84
    
    
    $
    0.20
    
    
    $
    0.00Weighted number of shares outstandingbasic
    
    
    22,797,000
    
    
    
    21,674,000
    
    
    
    19,950,000
    
    
    
    16,698,219Weighted number of shares outstandingdiluted
    
    
    23,576,500
    
    
    
    23,179,500
    
    
    
    20,771,000
    
    
    
    16,698,219
 December 31,2006
    
    2005
    
    2004
    
    2003Balance sheet data:Working capital
    
    $
    62,262,421
    
    
    $
    34,056,266
    
    
    $
    7,043,768
    
    
    $
    813,841Total assets
    
    
    80,167,345
    
    
    
    43,991,691
    
    
    
    13,416,989
    
    
    
    1,472,394Stockholders equity
    
    $
    67,483,041
    
    
    $
    35,293,006
    
    
    $
    7,542,063
    
    
    $
    882,381
 13




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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Future Uncertainties
 The following discussion should be read in conjunction with the consolidated financial
statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K . It
contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various
factors, including those discussed below and elsewhere in this Annual Report on Form 10-K ,
particularly under the heading Risk Factors.
 Overview
      Executive Summary
  14




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Further grow our retail business.
 New product design and delivery
 Targeted approach to licensing .
 Financial Condition, Liquidity and Capital Resources
    Assets
  Liabilities and Working Capital
  15




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Cash Requirements and Additional Funding.
  Results of Operations
 The year ended December 31, 2006 vs. December 31, 2005
       16




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The year ended December 31, 2005 vs. December 31, 2004
     17




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Off Balance-Sheet Arrangements
   
    
    to submit all sales to Merchant Factors Corp. for approval prior to shipment to the customer.
    
    to assign to Merchant Factors Corp. all of its
receivables that are
acceptable to them, with
full recourse to Guru
Denim in the event of
non-payment by its
customer for any reason
except a financial
inability to pay (this
exception only applies to
customers whose credit has
been approved by the
factor in advance).
  Key Expense Categories
 Cost of revenues.
 Retail.
 Selling and shipping.
 18




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General and administrative.
 Seasonality
  Inflation
  Critical Accounting Policies
  Inventory
 Revenue Recognition.
 Stock-based Compensation.
 Impact of Recent Accounting Pronouncements
  19




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Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans  An Amendment of FASB Statements No. 87, 88, 106, and
132R. a b c
 
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Exchange Rate Risk
  
 Item 8. FINANCIAL STATEMENTS
  
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 9A. CONTROLS AND PROCEDURES
     Managements Consideration of the Calculation of the Income Tax Provision for the period ended
September 30, 2006
  21




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Managements Consideration of the Review of Unrecorded Liabilities for the period ended December
31, 2006
    Managements Consideration of the Control over Financial Reporting for the period ended December
31, 2006
   
 Item 9B. OTHER INFORMATION
  
 22




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PART III
 
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  www.truereligionbrandjeans.com
 
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED
 STOCKHOLDER MATTERS
  Equity Compensation Plan Information
  (c) Number ofsecuritiesremainingavailable for(a) Number of
    
    
    
    
    
    
    future issuancesecurities to be
    
    
    (b) Weighted-
    
    
    under equityissued upon
    
    
    average exercise
    
    
    compensationexercise of
    
    
    price of
    
    
    plans (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected inPlan Category
    
    and rights
    
    
    and rights
    
    
    column (a))Equity compensation plans approved by security holders
    
    
    1,108,332
    
    
    $
    1.56
    
    
    
    1,039,334Equity compensation plans not approved by security holders(1)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    1,108,332
    
    
    $
    1.56
    
    
    
    1,039,334
 
 (1)
    
    We have not authorized the issuance of equity securities under any plan not approved by
security holders. 
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  23




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PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Consolidated Financial StatementsThe Reports of Independent Registered Public Accounting Firm
and consolidated financial statements listed
on the accompanying Index to Consolidated Financial Statements are filed as part of this
report.(2)
    
    Consolidated Financial Statement ScheduleAll financial statement schedules have been omitted because they are either inapplicable or
the information required is provided in the Companys Consolidated Financial Statements and
Notes thereto, included in Part II, Item 8 of this report.(3)
    
    ExhibitsThe exhibits listed on the accompanying Exhibit Index are filed as part of this report.
 24




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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageManagements Report on Internal Controls over Financial Reporting
    
    
    F-1Reports of Stonefield Josephson, Inc., Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F-5Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
    
    
    F-7Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2006, 2005 and 2004
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 /s/ STONEFIELD JOSEPHSON, INC.CERTIFIED PUBLIC ACCOUNTANTSLos Angeles, CaliforniaMarch 23, 2007
 F-2




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Internal ControlIntegrated Framework
        F-3




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Internal ControlIntegrated
Framework Internal ControlIntegrated Framework
   
 F-4




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PART I  FINANCIAL INFORMATION
 ITEM 1. Consolidated Financial Statements
TRUE RELIGION APPAREL, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2006
    
    
    
    
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    44,877,637
    
    
    
    
    
    
    $
    9,436,632Marketable securities, available for sale
    
    
    0
    
    
    
    
    
    
    
    5,970,486Accounts receivable, net of allowances of
$495,672 and $478,719, respectively.
    
    
    6,331,736
    
    
    
    
    
    
    
    7,795,524Due from factor, net of charge backs and
other deductions (Note 3)
    
    
    9,531,884
    
    
    
    
    
    
    
    6,722,496Vendor receivable
    
    
    343,816
    
    
    
    
    
    
    
    310,000Other receivable
    
    
    439,221
    
    
    
    
    
    
    
    0Inventory (Note 4)
    
    
    9,399,305
    
    
    
    
    
    
    
    10,052,748Deferred tax asset
    
    
    2,923,000
    
    
    
    
    
    
    
    1,989,000Stock subscription receivable
    
    
    0
    
    
    
    
    
    
    
    68,080Prepaid expenses and short term deposits
    
    
    608,263
    
    
    
    
    
    
    
    409,985Total Current Assets
    
    
    74,454,862
    
    
    
    
    
    
    
    42,754,951Property and equipment, net of accumulated
depreciation (Note 5)
    
    
    4,993,432
    
    
    
    
    
    
    
    982,672Deposits and other assets
    
    
    719,051
    
    
    
    
    
    
    
    254,068TOTAL ASSETS
    
    $
    80,167,345
    
    
    
    
    
    
    $
    43,991,691LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    9,170,611
    
    
    
    
    
    
    $
    6,723,701Accrued payroll, vacation and bonus expense
    
    
    431,665
    
    
    
    
    
    
    
    157,220Accrued customer credits
    
    
    172,292
    
    
    
    
    
    
    
    91,000Accrued incentive compensation
    
    
    1,200,359
    
    
    
    
    
    
    
    355,321Deferred revenue
    
    
    257,416
    
    
    
    
    
    
    
    0Sales tax payable
    
    
    334,331
    
    
    
    
    
    
    
    0Income taxes payable
    
    
    625,767
    
    
    
    
    
    
    
    1,237,443Deferred tax liability
    
    
    0
    
    
    
    
    
    
    
    134,000Total current liabilities
    
    
    12,192,441
    
    
    
    
    
    
    
    8,698,685Long-term Liabilities:Commitments and contingencies (Note 10)Long-term deferred rent
    
    
    491,863
    
    
    
    
    
    
    
    0Total long-term liabilities
    
    
    491,863
    
    
    
    
    
    
    
    0TOTAL LIABILITIES
    
    
    12,684,304
    
    
    
    
    
    
    
    8,698,685Stockholders Equity:Preferred Stock, $.0001 par value,
20,000,000 shares authorized, 0 issued and
outstanding, respectively
    
    
    0
    
    
    
    
    
    
    
    0Common Stock, $.0001 par value, 80,000,000
shares authorized, 23,001,529 and
22,207,865 issued and outstanding,
respectively
    
    
    23,011
    
    
    
    
    
    
    
    22,217Additional paid in capital
    
    
    19,323,150
    
    
    
    
    
    
    
    11,569,224Retained earnings
    
    
    48,136,880
    
    
    
    
    
    
    
    23,701,565Total Stockholders Equity
    
    
    67,483,041
    
    
    
    
    
    
    
    35,293,006TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
    
    $
    80,167,345
    
    
    
    
    
    
    $
    43,991,691
 The accompanying notes are an integral part of these consolidated financial statements.
 F-5




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TRUE RELIGION APPAREL, INC AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 Years ended December 31, 2006, 2005 and 2004
 2006
    
    
    2005
    
    
    2004Sales - wholesale
    
    $
    134,067,735
    
    
    $
    102,572,446
    
    
    $
    27,667,418Sales - retail
    
    
    4,978,644
    
    
    
    0
    
    
    
    0Net sales
    
    
    139,046,380
    
    
    
    102,572,446
    
    
    
    27,667,418Cost of Sales
    
    
    65,427,277
    
    
    
    49,964,420
    
    
    
    14,513,337Gross Profit
    
    
    73,619,103
    
    
    
    52,608,025
    
    
    
    13,154,081Costs and Expenses:Retail
    
    
    1,688,376
    
    
    
    60,624
    
    
    
    0Selling and shipping
    
    
    15,015,643
    
    
    
    9,587,730
    
    
    
    3,433,353Investment banking expense
    
    
    892,620
    
    
    
    0
    
    
    
    0General and administrative
    
    
    15,965,029
    
    
    
    8,938,170
    
    
    
    2,868,87033,561,668
    
    
    
    18,586,524
    
    
    
    6,302,223Income from Operations
    
    
    40,057,435
    
    
    
    34,021,501
    
    
    
    6,851,858Other (Income)/Expense:Settlement expense (net of gain of $0,
$64,000 and $0, respectively)
    
    
    2,106,475
    
    
    
    2,140,000
    
    
    
    125,000Other Income
    
    
    (61,277
    )
    
    
    (55,426
    )
    
    
    0Realized (gain)/loss on marketable
securities (net of tax)
    
    
    (212,576
    )
    
    
    (9,903
    )
    
    
    0Interest
Income (net of $85,562, $35,053, $0, respectively, of
interest expense)
    
    
    (530,502
    )
    
    
    (30,197
    )
    
    
    0Total Other Expense
    
    
    1,302,120
    
    
    
    2,044,474
    
    
    
    125,000Net Income before Provision for Income
Taxes
    
    
    38,755,315
    
    
    
    31,977,027
    
    
    
    6,726,858Provision for Income Taxes
    
    
    14,320,000
    
    
    
    12,469,000
    
    
    
    2,498,681Net Income
    
    $
    24,435,315
    
    
    $
    19,508,027
    
    
    $
    4,228,177Net Income per share  Basic
    
    $
    1.07
    
    
    $
    0.90
    
    
    $
    0.21Net income per share  Diluted
    
    $
    1.04
    
    
    $
    0.84
    
    
    $
    0.20Weighted average shares outstanding- basic
    
    
    22,797,000
    
    
    
    21,674,000
    
    
    
    19,950,000Weighted average shares outstanding-
diluted
    
    
    23,576,500
    
    
    
    23,179,500
    
    
    
    20,771,000
 The accompanying notes are an integral part of these consolidated financial statements
 F-6




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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 Years ended December 31, 2006, 2005 and 2004
 2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    24,435,315
    
    
    $
    19,508,027
    
    
    $
    4,228,177Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    413,105
    
    
    
    182,618
    
    
    
    42,697Provision for bad debt
    
    
    329,391
    
    
    
    273,916
    
    
    
    130,120Shares issued for services
    
    
    2,104,000
    
    
    
    1,298,500
    
    
    
    42,320Non-cash stock option expense
    
    
    508,100
    
    
    
    0
    
    
    
    24,900Non-cash warrant expense
    
    
    0
    
    
    
    0
    
    
    
    46,100Amortization of non-cash compensation
expense
    
    
    3,314,296
    
    
    
    1,368,531
    
    
    
    119,094Deferred taxes
    
    
    (1,068,000
    )
    
    
    (1,707,541
    )
    
    
    (147,459
    )Employee option acceleration expense
    
    
    84,800
    
    
    
    0
    
    
    
    0Unrealized gain on securities
    
    
    0
    
    
    
    (13,426
    )
    
    
    0Changes in assets and liabilities:(Increase) Decrease in assetsAccounts Receivable
    
    
    1,134,396
    
    
    
    (5,684,443
    )
    
    
    (1,827,939
    )Due from Factor
    
    
    (2,809,388
    )
    
    
    (2,751,067
    )
    
    
    (3,971,429
    )Inventory
    
    
    653,442
    
    
    
    (6,727,082
    )
    
    
    (2,673,420
    )Vendor receivable
    
    
    247,051
    
    
    
    (310,000
    )
    
    
    0Stock subscription receivable
    
    
    68,080
    
    
    
    (68,080
    )
    
    
    0Other receivable
    
    
    (439,221
    )
    
    
    0
    
    
    
    0Prepaid Expenses and other current assets
    
    
    (479,144
    )
    
    
    (348,093
    )
    
    
    (61,892
    )Deposits and other assets
    
    
    (474,318
    )
    
    
    (168,862
    )
    
    
    (4,744
    )Increase (Decrease) in liabilitiesAccounts payable and accrued expenses
    
    
    2,446,910
    
    
    
    3,925,176
    
    
    
    2,208,531Accrued payroll, vacation and bonus expenses
    
    
    274,445
    
    
    
    157,220
    
    
    
    0Accrued customer credits
    
    
    81,292
    
    
    
    (179,000
    )
    
    
    270,000Accrued incentive compensation payable
    
    
    845,037
    
    
    
    107,050
    
    
    
    248,272Deferred revenue
    
    
    257,416
    
    
    
    0
    
    
    
    0Sales tax payable
    
    
    334,330
    
    
    
    0
    
    
    
    0Income taxes payable
    
    
    888,324
    
    
    
    3,466,510
    
    
    
    2,630,516Long term lease liability
    
    
    491,863
    
    
    
    0
    
    
    
    0Net cash provided by operating activities
    
    
    33,641,522
    
    
    
    12,329,954
    
    
    
    1,303,844CASH FLOWS PROVIDED BY (USED IN) INVESTMENT
ACTIVITIES:Purchase of equipment and trademarks
    
    
    (4,414,527
    )
    
    
    (752,198
    )
    
    
    (467,728
    )Sales of marketable securities
    
    
    63,135,189
    
    
    
    0
    
    
    
    0Purchase of marketable securities
    
    
    (57,164,703
    )
    
    
    (5,957,060
    )
    
    
    0Net cash
provided by (used in) investing activities
    
    
    1,555,959
    
    
    
    (6,709,258
    )
    
    
    (467,728
    )CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    243,524
    
    
    
    869,878
    
    
    
    45,510Proceeds from exercise of warrants
    
    
    0
    
    
    
    0
    
    
    
    1,000,000Proceeds from private placements
    
    
    0
    
    
    
    0
    
    
    
    1,000,000Net cash provided by financing activities
    
    
    243,524
    
    
    
    869,878
    
    
    
    2,045,510Net increase in cash
    
    
    35,441,005
    
    
    
    6,490,574
    
    
    
    2,881,626Cash and cash equivalents, beginning of year
    
    
    9,436,632
    
    
    
    2,946,058
    
    
    
    64,432Cash and cash equivalents, end of year
    
    $
    44,877,637
    
    
    $
    9,436,632
    
    
    $
    2,946,058Supplemental disclosure of cash flow information:Interest Paid
    
    $
    85,562
    
    
    $
    35,073
    
    
    $
    0Taxes Paid
    
    $
    15,080,000
    
    
    $
    8,197,165
    
    
    $
    8,626Fair market value of restricted stock issued for services
    
    $
    2,104,000
    
    
    $
    48,500
    
    
    $
    1,275,000Fair market value of restricted stock issued for payable
    
    $
    0
    
    
    $
    1,250,000
    
    
    $
    0
 The accompanying notes are an integral part of these financial statements
 F-7




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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY
 
 STATEMENTS OF STOCKHOLDERS EQUITY
  Net Income/Common Stock
    
    
    Additional Paid
    
    
    RetainedShares
    
    
    Amount
    
    
    In Capital
    
    
    Earnings
    
    
    TotalBalance at January 1, 2004
    
    
    18,825,133
    
    
    $
    18,835
    
    
    $
    898,185
    
    
    $
    (34,639
    )
    
    $
    882,381Issuance of common stock for
cash
    
    
    900,000
    
    
    
    900
    
    
    
    999,100
    
    
    
    
    
    
    
    1,000,000Issuance of common stock for
services
    
    
    26,437
    
    
    
    26
    
    
    
    42,294
    
    
    
    
    
    
    
    42,320Issuance of common stock for
cash upon exercise of warrants
    
    
    900,000
    
    
    
    900
    
    
    
    999,100
    
    
    
    
    
    
    
    1,000,000Exercise of stock options
    
    
    63,000
    
    
    
    63
    
    
    
    45,447
    
    
    
    
    
    
    
    45,510Expense related to
modification of warrants
    
    
    
    
    
    
    
    
    
    
    46,100
    
    
    
    
    
    
    
    46,100Issuance of options in
exchange for services
    
    
    
    
    
    
    
    
    
    
    24,900
    
    
    
    
    
    
    
    24,900Issuance of restricted stock
for future services
    
    
    250,000
    
    
    
    250
    
    
    
    (250
    )
    
    
    
    
    
    
    Tax benefit arising from
restricted stock issuance
    
    
    
    
    
    
    
    
    
    
    153,581
    
    
    
    
    
    
    
    153,581Amortization of long-term
share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    119,094
    
    
    
    
    
    
    
    119,094Net Income for the year ended
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,228,177
    
    
    
    4,228,177Balance at December 31, 2004
    
    
    20,964,570
    
    
    $
    20,974
    
    
    $
    3,327,551
    
    
    $
    4,193,538
    
    
    $
    7,542,063Amortization of long-term
share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    1,368,531
    
    
    
    
    
    
    
    1,368,531Issuance of common stock for
services
    
    
    14,285
    
    
    
    14
    
    
    
    9,986
    
    
    
    
    
    
    
    10,000Issuance of common stock for
services
    
    
    1,175
    
    
    
    1
    
    
    
    15,999
    
    
    
    
    
    
    
    16,000Issuance of common stock for
services
    
    
    2,500
    
    
    
    3
    
    
    
    22,497
    
    
    
    
    
    
    
    22,500Share-based compensation
issuance
    
    
    27,000
    
    
    
    27
    
    
    
    (27
    )
    
    
    
    
    
    
    Cash proceeds from exercise of
stock options
    
    
    1,098,335
    
    
    
    1,098
    
    
    
    868,787
    
    
    
    
    
    
    
    869,885Tax benefit arising from stock
options
    
    
    
    
    
    
    
    
    
    
    4,076,000
    
    
    
    
    
    
    
    4,076,000Tax benefit arising from
restricted stock issuance
    
    
    
    
    
    
    
    
    
    
    630,000
    
    
    
    
    
    
    
    630,000Issuance of common stock in
lieu of payable
    
    
    100,000
    
    
    
    100
    
    
    
    1,249,900
    
    
    
    
    
    
    
    1,250,000Net Income for the year ended
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,508,027
    
    
    
    19,508,027Balance at December 31, 2005
    
    
    22,207,865
    
    
    
    22,217
    
    
    
    11,569,224
    
    
    
    23,701,565
    
    
    
    35,293,006Recognition of long-term
share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    (8,077,390
    )
    
    
    
    
    
    
    (8,077,390
    )Amortization of long-term
share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    3,314,296
    
    
    
    
    
    
    
    3,314,296Issuance of common stock for
services
    
    
    560,000
    
    
    
    561
    
    
    
    10,180,829
    
    
    
    
    
    
    
    10,181,390SFAS 123R stock option expense
    
    
    
    
    
    
    
    
    
    
    508,100
    
    
    
    
    
    
    
    508,100Cash proceeds from exercise of
stock options
    
    
    233,664
    
    
    
    233
    
    
    
    243,291
    
    
    
    
    
    
    
    243,524Tax benefit arising from stock
options
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    
    
    
    
    1,500,000Modification of employee stock
option
    
    
    
    
    
    
    
    
    
    
    84,800
    
    
    
    
    
    
    
    84,800Net Income for the year ended
December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,435,315
    
    
    
    24,435,315Balance at December 31, 2006
    
    
    23,001,529
    
    
    $
    23,011
    
    
    $
    19,323,150
    
    
    $
    48,136,880
    
    
    $
    67,483,041
 The accompanying notes are an integral part of these financial statements
 F-8




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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY
 
 NOTES TO FINANCIAL STATEMENTS
  NOTE 1  BASIS OF PRESENTATION
 Description of company
    Business Segments
   NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
 Principles of Consolidation
  Comprehensive Income
  Classification of Certain Costs and Expenses
  F-9




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##### Table of Contents



Fair Value of Financial Instruments
  Use of Estimates
  Revenue Recognition
  Net Royalty Revenue
  Gift Certificates and Store Credits
  F-10




---



##### Table of Contents



Advertising
  Cash and Cash Equivalents
 Equivalents
  Balances
  Concentration of Credit Risk
  Earnings Per Share
  2006
    
    2005
    
    2004Weighted-average common shares
    
    
    22,797,000
    
    
    
    21,674,000
    
    
    
    19,950,000Dilutive common shares
    
    
    779,500
    
    
    
    1,505,500
    
    
    
    821,000Common stock equivalents
    
    
    23,576,500
    
    
    
    23,179,500
    
    
    
    20,771,000
  Income Taxes
  F-11




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##### Table of Contents



Inventory
  Property and Equipment
  Building improvements
    
    

    5 to 10

    
    yearsMachinery and equipment
    
    
    5
    
    yearsComputer equipment
    
    
    5
    
    yearsFurniture and fixtures
    
    
    5
    
    yearsTrade show booths
    
    
    5
    
    years
 Accounts Receivable
  Deferred Rent
  Long-Lived Assets
  F-12




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##### Table of Contents



Stock-Based Compensation
  Recent Accounting Pronouncements
     F-13




---



##### Table of Contents



Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans  An Amendment of FASB Statements No. 87, 88, 106, and 132R. a b c
 NOTE 3  DUE FROM FACTOR, NET OF CHARGEBACKS AND OTHER DEDUCTIONS
   F-14




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##### Table of Contents



2006
    
    
    2005Outstanding factored receivables
    
    $
    9,647,770
    
    
    $
    6,397,179Matured Funds
    
    
    
    
    
    
    20,666Assignments in transit
    
    
    619,114
    
    
    
    989,95310,266,884
    
    
    
    7,407,798Funds advanced
    
    
    
    
    
    
    (215,302
    )Reserves for chargebacks and other
deductions
    
    
    (735,000
    )
    
    
    (470,000
    )Due from factor, net of chargebacks, other
deductions and advances
    
    $
    9,531,884
    
    
    $
    6,722,496
 NOTE 4  INVENTORY
  2006
    
    
    2005Finished Goods
    
    $
    6,337,255
    
    
    $
    7,630,869Work-in-Progress
    
    
    3,062,050
    
    
    
    2,421,879$
    9,399,305
    
    
    $
    10,052,748
 NOTE 5
 MARKETABLE SECURITIES
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Gains in Accumulated
    
    Losses in AccumulatedOther Comprehensive
    
    Other ComprehensiveEstimated Fair Value
    
    Income
    
    IncomeUnited States
Government Securities
    
    $
    0
    
    
    $
    2,997,300
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Municipal Bonds and
Notes
    
    
    0
    
    
    
    2,973,186
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total debt securities
    
    $
    0
    
    
    $
    5,970,486
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 F-15




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##### Table of Contents



Estimated Fair ValueWithin one year
    
    $
    2,997,300After 1-5 years
    
    
    0After 5-10 years
    
    
    2,973,186$
    5,970,486
   NOTE 6  PROPERTY AND EQUIPMENT
  2006
    
    
    2005Computers and other equipment
    
    $
    490,525
    
    
    $
    278,463Furniture and Fixtures
    
    
    197,306
    
    
    
    64,293Leasehold Improvements
    
    
    1,834,137
    
    
    
    422,659Machinery & Equipment
    
    
    332,598
    
    
    
    185,566Trade Show booths
    
    
    549,886
    
    
    
    250,228Construction in progress
    
    
    2,220,621
    
    
    
    0Total Property and Equipment
    
    
    5,625,073
    
    
    
    1,201,209Less: Accumulated depreciation
    
    
    (631,641
    )
    
    
    (218,537
    )$
    4,993,432
    
    
    $
    982,672
 F-16




---



##### Table of Contents



NOTE 7  ACCOUNTS PAYABLE-MAJOR VENDORS
  NOTE 8  ACCRUED INCENTIVE COMPENSATION-OFFICERS
        F-17




---



##### Table of Contents



NOTE 9  SHARE-BASED COMPENSATION
 The Year Ended December 31, 2004
        F-18




---



##### Table of Contents



The
Year Ended December 31, 2005
         F-19




---



##### Table of Contents



Share-Based Payment
  December 31,
    
    
    December 31,2005
    
    
    2004Net income, as reported
    
    $
    19,508,027
    
    
    $
    4,228,177Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    0
    
    
    
    0Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (714,400
    )
    
    
    (337,400
    )Pro forma net income attributable to common
stockholders
    
    $
    18,793,627
    
    
    $
    3,890,777
 F-20




---



##### Table of Contents



December 31,
    
    
    December 31,2005
    
    
    2004Net income per share available to common
stockholders  basic and dilutedAs reported-basic
    
    $
    0.90
    
    
    
    0.21As reported-diluted
    
    $
    0.84
    
    
    
    0.2Pro forma-basic
    
    $
    0.87
    
    
    
    0.2Pro forma-diluted
    
    $
    0.81
    
    
    
    0.19
     Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average2006
    
    
    Price
    
    
    2005
    
    
    Price
    
    
    2004
    
    
    PriceOutstanding at beginning
of year
    
    
    1,358,664
    
    
    $
    1.46
    
    
    
    2,473,666
    
    
    $
    1.16
    
    
    
    465,000
    
    
    $
    0.48Granted
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    2,060,000
    
    
    $
    1.31Cancelled or expired
    
    
    (16,667
    )
    
    $
    0.77
    
    
    
    (16,667
    )
    
    $
    0.77
    
    
    
    (33,334
    )
    
    $
    0.77Exercised
    
    
    (233,665
    )
    
    $
    1.04
    
    
    
    (1,098,335
    )
    
    $
    0.79
    
    
    
    (18,000
    )
    
    $
    0.53Outstanding at end of year
    
    
    1,108,332
    
    
    $
    1.56
    
    
    
    1,358,664
    
    
    $
    1.46
    
    
    
    2,473,666
    
    
    $
    1.16Exercisable at the end of
the year
    
    
    1,108,332
    
    
    $
    1.56
    
    
    
    638,278
    
    
    $
    1.72
    
    
    
    848,000
    
    
    $
    1.16Price range of options ($)
    
    
    0.48-7.65
    
    
    
    
    
    
    
    0.48-7.65
    
    
    
    
    
    
    
    0.48-7.65
  F-21




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##### Table of Contents



Restricted Stock Awards
   .
  Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average2006
    
    
    Price
    
    
    2005
    
    
    Price
    
    
    2004
    
    
    PriceOutstanding at
beginning of year
    
    
    27,000
    
    
    $
    13.50
    
    
    
    250,000
    
    
    $
    5.10
    
    
    
    0
    
    
    $
    0.00Granted
    
    
    460,000
    
    
    $
    16.59
    
    
    
    29,500
    
    
    $
    14.07
    
    
    
    250,000
    
    
    $
    5.10Cancelled or
forfeited
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    $
    0.00Released from
restriction
    
    
    (82,750
    )
    
    $
    16.76
    
    
    
    (252,500
    )
    
    $
    5.14
    
    
    
    0
    
    
    $
    0.00Outstanding at end
of year
    
    
    404,250
    
    
    $
    16.59
    
    
    
    27,000
    
    
    $
    13.50
    
    
    
    250,000
    
    
    $
    5.10Price range of
shares
    
    $
    16.24-$21.31
    
    
    
    
    
    
    $
    9.00-$13.50
    
    
    
    
    
    
    $
    5.10
 NOTE 10  COMMITMENTS AND CONTINGENCIES
   F-22




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##### Table of Contents



Year ending December 31,2007
    
    $
    2,835,5232008
    
    
    2,907,3912009
    
    
    3,038,4412010
    
    
    3,115,2292011
    
    
    2,721,1902012 and thereafter
    
    
    11,696,835TOTAL
    
    $
    26,314,609
 NOTE 11  CONCENTRATIONS OF CERTAIN RISKS
   NOTE 12  LEGAL PROCEEDINGS
 Joseph C. Canouse
  F-23




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##### Table of Contents



The Indigo Group USA, Inc.
   NOTE 13  INCOME TAXES
  2006
    
    
    2005
    
    
    2004Current tax expense:Federal
    
    $
    12,434
    
    
    $
    11,128
    
    
    $
    2,010State and local
    
    
    3,257
    
    
    
    3,048
    
    
    
    636Total current expense
    
    
    15,691
    
    
    
    14,176
    
    
    
    2,646Deferred tax (benefit):Federal
    
    
    (1,245
    )
    
    
    (1,489
    )
    
    
    (142
    )State and local
    
    
    (126
    )
    
    
    (218
    )
    
    
    (5
    )Total deferred (benefit)
    
    
    (1,371
    )
    
    
    (1,707
    )
    
    
    (147
    )Total income tax expense
    
    $
    14,320
    
    
    $
    12,469
    
    
    $
    2,499
  Year ended December 31,2006
    
    2005
    
    2004Tax provision at
statutory federal rate
    
    
    35.00
    %
    
    
    35.00
    %
    
    
    35.00
    %State income taxes, net
of federal income tax
benefit
    
    
    5.80
    %
    
    
    5.80
    %
    
    
    8.70
    %Exclusion for export sales
    
    
    -1.00
    %
    
    
    -2.00
    %
    
    
    -6.60
    %Domestic production
deduction
    
    
    -0.87
    %
    
    
    -0.70
    %
    
    
    0.00
    %California tax credit
    
    
    -1.59
    %
    
    
    0.00
    %
    
    
    0.00
    %Other
    
    
    -0.39
    %
    
    
    0.90
    %
    
    
    0.00
    %Effective tax rate
    
    
    36.95
    %
    
    
    39.00
    %
    
    
    37.10
    %
 F-24




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##### Table of Contents



Year ended December 31,2006
    
    
    2005
    
    
    2004Operations
    
    $
    15,820
    
    
    $
    16,544
    
    
    $
    2,499Stockholders equity
    
    
    (1,500
    )
    
    
    (4,075
    )
    
    
    0Total income taxes
    
    $
    14,320
    
    
    $
    12,469
    
    
    $
    2,499
  Year ended December 31,2006
    
    
    2005
    
    
    2004Wholesale operations
    
    $
    37,990
    
    
    $
    31,964
    
    
    $
    6,727Retail operations
    
    
    765
    
    
    
    0
    
    
    
    0Total pretax income
    
    $
    38,755
    
    
    $
    31,964
    
    
    $
    6,727
  December 31,2006
    
    
    2005Deferred tax assets:Fixed assets basis difference
    
    $
    39
    
    
    
    ($19
    )Deferred compensation
    
    
    838
    
    
    
    0Bad debt reserve
    
    
    217
    
    
    
    255Deferred lease incentives
    
    
    216
    
    
    
    0Uniform capitalization
    
    
    294
    
    
    
    52CA State income tax
    
    
    1,096
    
    
    
    787SFAS 123R compensation exp
    
    
    223
    
    
    
    0Legal settlement
    
    
    0
    
    
    
    914Total deferred assets
    
    $
    2,923
    
    
    $
    1,989
  NOTE 14  SEGMENT INFORMATION
  F-25




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##### Table of Contents



2006
    
    Wholesale
    
    Retail**
    
    Eliminations*
    
    ConsolidatedNet Sales
    
    $
    134,799,348
    
    
    $
    4,978,644
    
    
    
    ($731,611
    )
    
    $
    139,046,380Gross Profit
    
    $
    71,165,053
    
    
    $
    2,315,074
    
    
    $
    138,976
    
    
    $
    73,619,103Net Income from
Operations
    
    $
    40,279,356
    
    
    $
    670,699
    
    
    $
    0
    
    
    $
    40,950,055Total Assets
    
    $
    78,395,775
    
    
    $
    1,771,570
    
    
    $
    0
    
    
    $
    80,167,345
 
 *
    
    Represents inter-company sales from wholesale to a retail store**
    
    During the year ended December 31, 2006, the sales of goods to retail was
changed from standard wholesale pricing to cost. NOTE 15  QUARTERLY INFORMATION (UNAUDITED)
  First
    
    Second
    
    Third
    
    FourthYear ended December 31, 2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterNet revenue
    
    $
    35,609
    
    
    $
    30,734
    
    
    $
    42,909
    
    
    $
    29,559Gross profit
    
    $
    18,776
    
    
    $
    16,352
    
    
    $
    22,383
    
    
    $
    16,153Net income
    
    $
    6,471
    
    
    $
    4,874
    
    
    $
    8,197
    
    
    $
    4,893Earnings per share:Basic
    
    $
    0.29
    
    
    $
    0.22
    
    
    $
    0.36
    
    
    $
    0.20Diluted
    
    $
    0.28
    
    
    $
    0.21
    
    
    $
    0.35
    
    
    $
    0.20
 First
    
    Second
    
    Third
    
    FourthYear ended December 31, 2005
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterNet revenue
    
    $
    20,108
    
    
    $
    22,003
    
    
    $
    34,990
    
    
    $
    25,471Gross profit
    
    $
    10,224
    
    
    $
    10,932
    
    
    $
    18,432
    
    
    $
    13,020Net earnings
    
    $
    3,832
    
    
    $
    4,263
    
    
    $
    7,726
    
    
    $
    3,687Earnings per share:Basic
    
    $
    0.18
    
    
    $
    0.20
    
    
    $
    0.35
    
    
    $
    0.17Diluted
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.33
    
    
    $
    0.16
 F-26




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##### Table of Contents



NOTE 16  SUBSEQUENT EVENTS
             F-27




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##### Table of Contents



F-28




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger, dated August 18, 2005, by and between the Registrant and
True Religion Apparel, Inc., a Nevada corporation and the Registrants predecessor in
interest (incorporated by reference from our Form 8-K Current Report, filed August 22,
2005).3.1
    
    Certificate of Incorporation (incorporated by reference from our Form 8-K Current Report,
filed August 22, 2005).3.2
    
    Bylaws (incorporated by reference from our Form 8-K Current Report, filed August 22, 2005).4.1
    
    Specimen Common Stock Certificate (incorporated by reference from our Form 8-K Current
Report, filed August 22, 2005).10.1
    
    Settlement Agreement and Mutual General Release with The Indigo Group USA and Jeremy Lew
(incorporated by reference from our Form 10-QSB Quarterly Report, filed on November 12,
2004).10.2
    
    Manufacturers Agreement with The Indigo Group, USA (incorporated by reference from our
Form 10-QSB Quarterly Report, filed on November 12, 2004).10.3
    
    Discount Factoring Agreement dated December 20, 2004, between Merchant Factors Corp. and
Guru Denim, Inc. (incorporated by reference from our Form 10-KSB/A filed on April 6,
2005).10.4
    
    True Religion Apparel, Inc. 2005 Stock Incentive Plan (incorporated by reference from our
Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act
of 1934, as filed on July 22, 2005).*10.5
    
    Letter dated July 1, 2005 amending the terms of the Discount Factoring Agreement between
Merchant Factors Corp. and Guru Denim, Inc. (incorporated by reference from our Form 10-Q
Quarterly Report, filed August 15, 2005).10.6
    
    Standard Single-Tenant Sublease dated July 1, 2005 between L.A. Fabric Imports, Inc. and
Guru Denim, Inc. for 1557 Rio Vista Ave. Los Angeles, California (incorporated by
reference from our Form 10-Q Quarterly Report, filed August 15, 2005).10.7
    
    Form of Indemnification Agreement between True Religion Apparel, Inc. and its officers and
directors (incorporated by reference from our Form 10-Q Quarterly Report, filed November
14, 2005).10.8
    
    Employment Agreement by and between the Company and Jeffrey Lubell dated January 4, 2006
(incorporated by reference from our Form 8-K Current Report, filed on January 10, 2006).*10.9
    
    Employment Agreement by and between the Company and Charles Lesser dated January 4, 2006
(incorporated by reference from our Form 8-K Current Report, filed on January 10, 2006).*10.10
    
    Employment Agreement by and between the Company and Kymberly Lubell dated January 4, 2006
(incorporated by reference from our Form 8-K Current Report, filed on January 10, 2006).*10.11
    
    Lease Agreement by and among True Religion Apparel, Inc., Guru Denim, Inc. and Rio Vista
Industrial Investments, LLC dated May 28, 2004 (incorporated by reference from our 10-KSB
Annual Report, filed on March 31, 2006).10.12
    
    Settlement Agreement and General Release by and between True Religion Apparel, Inc. and
Joseph Canouse dated March 21, 2006 (incorporated by reference from our 10-KSB Annual
Report, filed on March 31, 2006).




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##### Table of Contents



ExhibitNumber
    
    Description10.13
    
    Employment Agreement dated April 12, 2006, by and between the Company and Michael Buckley,
effective as of April 24, 2006 (incorporated by reference from our Form 8-K Current
Report, filed April 14, 2006).*10.14
    
    Standard Industrial/Commercial Single-Tenant Lease  Gross dated May 17, 2006, among ADJ
Enterprises, Ltd., Guru Denim, Inc. and the Company (incorporated by reference from our
Form 8-K Current Report, filed April 14, 2006).10.15
    
    Amendment to Employment Agreement dated May 31, 2006, by and between Jeffrey Lubell and
the Company (incorporated by reference from our Form 8-K Current Report, filed June 5,
2006).*10.16
    
    Amendment to Employment Agreement dated May 31, 2006, by and between Kymberly Lubell and
the Company (incorporated by reference from our Form 8-K Current Report, filed June 5,
2006).*10.17
    
    Amendment to Employment Agreement dated May 31, 2006, by and between Charles Lesser and
the Company (incorporated by reference from our Form 8-K Current Report, filed June 5,
2006).*10.18
    
    Waiver and Release Agreement dated May 30, 2006, by and among Mark Saltzman, the Company
and Guru Denim, Inc. (incorporated by reference from our Form 8-K Current Report, filed
June 5, 2006).*10.19
    
    Letter dated June 8, 2006, amending the terms of the Discount Factoring Agreement dated
December 20, 2004, between Merchant Factors Corp. and Guru Denim, Inc. (incorporated by
reference from our 10-Q/A filed on August 15, 2006).10.20
    
    Amendment No. 1 to Employment Agreement by and between the Company and Charles Lesser
dated January 3, 2007 (incorporated by reference from our Form 8-K Current Report filed on
January 3, 2007).*10.21
    
    Independent Contractor Agreement dated as of February 1, 2007, by and between Guru Denim,
Inc. and LAtelier (incorporated by reference from our Form 8-K Current Report filed on
January 25, 2007).10.22
    
    Employment Letter, dated March 7, 2007, by and between the Company and Peter Collins
(incorporated by reference from our Form 8-K Current Report filed on March 8, 2007).*10.23
    
    Release and Consulting Agreement, dated March 7, 2007, by and among Charles Lesser, the
Company and Guru Denim, Inc. (incorporated by reference from our Form 8-K Current Report
filed on March 8, 2007).*10.24
    
    Amendment to the True Religion Apparel, Inc. 2005 Stock Incentive Plan (incorporated by
reference from our Form 8-K Current Report filed on March 8, 2007).*21.1
    
    Subsidiaries of the Registrant23.1
    
    Consent of Stonefield Josephson, Inc.31(i).1
    
    Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934.31(i).2
    
    Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934.32.1
    
    Certification of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Represents a management contract or compensatory plan, contract or arrangement in which any
director or any of the named executives participates.




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##### Table of Contents



SIGNATURES
  TRUE RELIGION APPAREL, INC.By:
    
    /s/ Jeffrey LubellJeffrey Lubell, Chairman of the Board and Chief
Executive Officer(Principal Executive Officer)Date: March 25, 2007
  Signature
    
    Title
    
    Date/s/ Jeffrey Lubell

Jeffrey Lubell
    
    Chairman of the Board, and
Chief Executive Officer
(Principal Executive
Officer)
    
    March 25, 2007/s/ Charles A. Lesser

Charles A. Lesser
    
    Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
    
    March 25, 2007/s/ Joseph H. Coulombe

Joseph H. Coulombe
    
    Director
    
    March 25, 2007/s/ G. Louis Graziadio, III

G. Louis Graziadio, III
    
    Director
    
    March 25, 2007/s/ Robert L. Harris, II

Robert L. Harris, II
    
    Director
    
    March 25, 2007/s/ Mark S. Maron

Mark S. Maron
    
    Director
    
    March 25, 2007