VLCM Annual Report 2005

in 2005 compared to $0.4 million in 2004. On a pro forma basis, using an estimated annual effective tax rate for both periods of 40.8%, our provision for income taxes would have been $16.2 million in 2005 compared to $10.2 million in 2004.

Net Income As a result of the factors above, net income increased $4.7 million, or 19.3%, to $29.3 million in 2005 from $24.6 million in 2004.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenues Revenues in 2004 were $113.2 million, an increase of $36.9 million, or 48.4%, compared to $76.3 million in 2003. Revenues from our top five customers were $48.6 million in 2004, an increase of $19.2 million, or 65.5%, compared to $29.4 million in 2003, with Pacific Sunwear accounting for $13.8 million of the $19.2 million increase. We believe our continued revenue growth was driven primarily by increasing acceptance of our products at retail as a result of marketing and advertising programs that effectively promoted our brand, a compelling product offering, high quality standards and strong relationships with our retailers. In addition, several of our largest retailers opened additional stores over the year and those store openings likely contributed to an increase in our product revenues; however, period-over-period increases in our product revenues as judged solely by additional store openings by our largest retailers may not be a useful or accurate measure of revenue increases because our products may not be carried in every new store. The average selling price of our products remained relatively consistent with that of the prior year.

Product revenues increased $36.2 million, or 48.7%, in 2004 to $110.6 million from $74.4 million in 2003.

We believe the increase in product revenues in 2004 resulted primarily from increased demand across all of our product categories. Of the $36.2 million increase in product revenues, increases in mens products and girls products accounted for $32.5 million of that increase. Revenues from mens products increased $18.9 million, or 44.3%, to $61.5 million in 2004 from $42.6 million in 2003, and revenues from girls products increased $13.6 million, or 62.4%, to $35.4 million in 2004 from $21.8 million in 2003.

Licensing revenues increased 37.1% to $2.6 million in 2004 from $1.9 million in 2003. The increase in licensing revenues was a result of increased sales by our international licensees, particularly those in Europe and Australia.

Product revenues in the United States were $93.8 million, or 84.8% of our product revenues, and $63.3 million, or 85.1% of our product revenues in 2004 and 2003, respectively. Product revenues in the rest of the world consist primarily of product revenues from Canada and Japan and do not include sales by our international licensees. Product revenues in the rest of the world were $16.8 million, or 15.2% of our product revenues, and $11.1 million, or 14.9% of our product revenues in 2004 and 2003, respectively.

Gross Profit In 2004, gross profit increased $18.1 million, or 49.0%, to $55.0 million compared to $36.9 million in 2003. Gross profit as a percentage of revenues, or gross margin, in 2004 increased 0.2% to 48.6% compared to 48.4% in 2003. Gross margin related specifically to product revenues increased 0.3% to 47.4% in 2004 compared to 47.1% in 2003. This gross margin increase was largely driven by more accurate demand forecasting and better inventory management, which decreased the need to sell our products at discount or close-out prices.

Selling, General and Administrative Expenses In 2004, selling, general and administrative expenses increased $7.7 million, or 33.4%, to $30.6 million compared to $22.9 million in 2003. This increase in absolute dollars was due primarily to increased payroll and payroll-related expenses of $2.0 million due to expenditures on infrastructure and personnel, increased sales commission expenses of $1.5 million resulting from our increased product revenues and increased advertising 32