UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number: 0-238001

LaCrosse Footwear, Inc.

Wisconsin
(State or other jurisdiction
of incorporation or organization)

Registrant’s telephone number, including area code: (503) 766-1010

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of Class
Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 22b-2 of the Act).

Yes o  No þ

Aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant at June 25, 2004: $32,751,078.

Number of shares of the registrant’s common stock outstanding at March 2, 2005: 5,934,280 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for 2005 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to be incorporated by reference into Part III).

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TABLE OF CONTENTS

PART I

Item 1.   Business

Unless the context requires otherwise, references in this Annual Report to “we,” “us” or “our” refer collectively to LaCrosse Footwear, Inc. and its subsidiaries.

Forward-Looking Statements

We caution you that this annual report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934. Forward-looking statements are only predictions or statements of our current plans, which we review on a continual basis. Forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as we “believe,” “expect,” or other words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. All forward-looking statements may differ from actual results due to, but not limited to:

	•	Commodity price increases, including rubber and petroleum. Price increases will affect transportation costs, footwear component costs, and ultimately product costs.
	•	Consumer confidence and related demand for footwear, including work and outdoor footwear.
	•	Weather and its impact on the demand for outdoor footwear.
	•	Dealer inventory levels.
	•	Company inventory levels, including inventory levels required for foreign-sourced product and the related need for accurate forecasting and the limited ability to resupply dealers for fill-in orders for foreign-sourced product.
	•	Potential problems associated with the manufacture, transportation and delivery of foreign-sourced product.
	•	United States and/or foreign trading rules, regulations and policies, including export/import regulations and regulations affecting manufacturers and/or importers.
	•	General domestic economic conditions, including interest rates and foreign currency exchange rates.

You should consider these important factors in evaluating any statement contained in this report and/or made by us or on our behalf. The Company has no obligation to update or revise forward-looking statements to reflect the occurrence of future events or circumstances.

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General

LaCrosse Footwear, Inc. (“LaCrosse” or the “Company”) is a leader in the design, development, marketing and manufacturing of premium quality protective footwear and clothing for the work and outdoor markets. The Company markets its products primarily under the LACROSSE^® and DANNER^® brands through selected distributors and retailers using independent representatives. LaCrosse’s products are characterized by innovative, functional design; durability; performance features; and quality materials.

Historically, LaCrosse has produced footwear primarily of rubber, some of which includes leather or fabric uppers. In March 1994, the Company acquired the business of Danner Shoe Manufacturing Co. (“Danner”), a producer of premium quality leather footwear for the work and outdoor markets, which is sold primarily under the DANNER^® brand. Danner’s legal name was changed to Danner, Inc. in 2002. To broaden the base of business in the protective clothing area, in May 1996, a 50%-owned subsidiary of the Company purchased the assets of Rainfair, Inc. (“Rainfair”) of Racine, Wisconsin. Rainfair designs and markets rainwear, footwear and other protective clothing generally for the work market, which are sold primarily under the LACROSSE^® brand. In January 1998, the Company acquired the remaining 50% of Rainfair that it did not own, thereby making it a wholly-owned subsidiary (and, subsequently, Rainfair was merged into the Company). In October 2002, the Company changed the name of its Rainfair division to LaCrosse Safety and Industrial. In 1997, the Company acquired the LAKE OF THE WOODS^® trade name. LAKE OF THE WOODS^® was a designer, manufacturer and marketer of branded leather footwear for both the work and outdoor markets. From 1997 to 1999, the Company transitioned the LAKE OF THE WOODS^® product offerings to the LACROSSE^® brand where leather boots have become a significant product offering for the LACROSSE^® brand.

The Company was incorporated in Wisconsin in 1983 but traces its history to 1897 when La Crosse Rubber Mills Company was founded. Current management purchased LaCrosse’s predecessor from the heirs of the founding family and other shareholders in 1982.

Strategy

The Company’s business strategy is to continue to:

	•	build, position and capitalize on the strength of established brands;
	•	develop innovative products and relevant technologies that will differentiate its products, footwear and rainwear;
	•	offer superior customer service; and
	•	expand and enhance its strong distribution network of sales representatives and retail and industrial customers.

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Brand Positioning

Within the retail channel of distribution, the Company markets footwear and rainwear under the well-established DANNER^® and LACROSSE^® brands. The Company also sells products through the safety and industrial distributor channel principally under the LACROSSE^® brand. Each brand is positioned uniquely in the marketplace to capitalize on differences in end user expectations for performance, price, and end-use. The DANNER^® brand represents the highest level of performance, with a select line of high quality, feature-driven leather footwear products at premium prices. The LACROSSE^® brand has a more extensive product line including rubber and leather footwear as well as an extensive line of rainwear and protective clothing.

Products

The Company’s brand product offering includes these major categories:

Rubber Footwear

The Company’s rubber footwear line is the most extensive of its product categories with product offerings covering the work and outdoor markets. The Company markets rubber footwear mainly under the LACROSSE^® brand. The product line ranges from low cost rubber products to high performance, handcrafted rubber products directed to specific work and outdoor market niches.

In addition, the Company markets products in rubber bottom, leather/fabric upper footwear for extreme cold and other high performance applications. A rubber bottom boot with a leather or fabric upper combines the waterproof qualities and flexibility of rubber footwear with the fit and support of a laced leather boot.

Leather Footwear

The Company markets leather footwear under two brand names, DANNER^® and LACROSSE^®. The DANNER^® products consist of premium quality work and outdoor boots available in numerous styles, many of which feature the stitch-down manufacturing process, which provides outstanding support and built-in comfort for the owner. Danner was the first footwear manufacturer to include a waterproof, breathable GORE-TEX^® liner (seam taped insert) in leather boots, and it continues to include that liner in over 90% of its Danner products. The LACROSSE^® brand markets a line of indoor and outdoor work boots and hikers appealing to consumers who desire durability and comfort.

Rainwear and Protective Clothing

Rainwear and footwear are complementary products in many work and outdoor environments. LaCrosse Safety and Industrial offers a broad line of quality rainwear and protective clothing appealing to those workers in utility, construction, chemical processing, food processing, and other groups traditionally purchasing through industrial distributors. While most of the garments are developed for general workwear, a number are constructed for specific applications such as acid and flame environments. These products are recognized in the industry for their durability, quality and heritage.

LaCrosse also sells footwear accessories such as liners, wader suspenders and socks. During 2004, the Company offered approximately 500 styles of footwear and rainwear.

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Overall, sales of work products accounted for approximately 58% of net sales, while sales of outdoor products accounted for approximately 42% of net sales in 2004.

Product Design and Development

The Company’s product design and development ideas originate within the Company and through communication with its customers and suppliers based upon perceived customer or consumer needs or new technological developments in footwear, rainwear and materials. Consumers, sales personnel and suppliers provide information to the Company’s marketing and product development personnel during the concept, development and testing of new product. New product needs generally can be related to functional or technical characteristics. The final aesthetics of the product are determined by marketing and product development personnel, at times in conjunction with outside design consultants. Once a product design is approved for production, responsibility is shared with outside sourcing facilities for pattern development and commercialization.

Customers, Sales and Distribution

The Company markets its brands and associated products through two separate channels of distribution: retail and industrial.

Within the retail market, the LACROSSE^® and DANNER^® brands are marketed through independent representative groups. For both brands, some of the independent agents are multi-line representative groups and some are dedicated to the Company’s products. A national account sales team complements the sales activities for the brands.

The Company’s industrial products are distributed through the LaCrosse Safety and Industrial Division using independent representatives and a national account team.

The Company’s products are sold directly to more than 4,000 accounts, including sporting goods/outdoor retailers, general merchandise and independent shoe stores, wholesalers, industrial distributors, catalog operations and the United States government. The Company’s customer base is also diversified as to size and location of customer and markets served. As a result, the Company is less dependent upon a few customers. However, the recent trend of consolidating retail and safety and industrial channels into regional, super regional, and national businesses is having an effect of consolidating the customer base. As consolidation continues, dependency on fewer, consolidated customers will increase.

The Company currently operates five Internet websites for use by consumers and customers. The primary purpose of the three consumer-oriented websites at this time is to provide product and Company information, and in the case of the DANNER^® and LACROSSE^® websites, to sell product to consumers who choose to purchase direct from the manufacturer. The Company also operates business-to-business websites, for the DANNER^®, LaCrosse Safety and Industrial and LACROSSE^® divisions that provide product ordering capability and critical information to dealers about the status of pending orders, inventory levels, shipping and other data.

The Company operates two retail outlet stores whose primary purpose is disposal of slow-moving merchandise and factory seconds. One of these stores is located at the manufacturing facility in Portland, Oregon.

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The Company also derives royalty income from Danner Japan Ltd., a Japanese company in which the Company has a 12% ownership interest. Danner Japan Ltd. distributes products in Japan under the DANNER^® brand that are manufactured by others overseas, and products manufactured in the Portland, Oregon factory. These sales amounts are included in revenues from foreign countries in our annual report.

Advertising and Promotion

A majority of the Company’s marketing expenditures are for promotional materials, cooperative advertising and point-of-sale advertising designed to assist dealers and distributors in the sale of the Company’s products. The Company customizes advertising and marketing materials and programs for each of its brands in each of its distribution channels, which allows it to emphasize those features of its products that have special appeal to the applicable targeted consumer.

The Company advertises and promotes its products through a variety of methods including national and regional print advertising, public relations, point-of-sale displays, catalogs and packaging, product licensing agreements and sponsorships, online promotion, and through co-promotion with dealers.

Manufacturing and Sourcing

Traditionally, the Company manufactured the majority of its rubber and leather products in its United States manufacturing facilities. During the last decade, the quality and timeliness of product provided by offshore sources have improved substantially. This has resulted in consumers shifting their allegiance from domestically produced product to product that offers the best value regardless of origin of manufacture. The Company outsourced over 65% of the product it sold in 2004 and 2003 and expects that number to increase over the next few years.

A significant portion of the outsourced products are purchased from a limited number of foreign manufacturers located in the Asian-Pacific region. The Company has established criteria for its third-party manufacturers in order to monitor product quality and labor practices. Sources of capacity related to these products are available worldwide and management has identified alternative sources for these products.

The raw materials used in production of the Company’s products are quality leather, crude rubber and oil-based vinyl compounds for protective clothing products. Since these products are all available on a global basis, the Company has no reason to believe these raw materials will not continue to be available at competitive prices.

The Company, or its contract manufacturers, purchase GORE-TEX^® waterproof fabric directly from W.L. Gore and Associates (“Gore”), for both the LaCrosse and Danner footwear. Gore has traditionally been Danner’s single largest supplier, in terms of dollars spent on raw materials. Over 90% of Danner styles are GORE-TEX^® lined. Agreements with Gore may be terminated by either party upon 90 days written notice. The Company considers its relationship with Gore to be good. GORE-TEX^® is a registered trademark of W.L. Gore & Associates, Inc.

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Backlog

At December 31, 2004, the Company had unfilled orders from its customers in the amount of approximately $7.5 million compared to $12.3 million at December 31, 2003. The backlog at December 31, 2003 included a $4.9 million General Services Administration, “GSA”, delivery order to supply boots to the U.S. military that the Company fulfilled in the first part of 2004. All orders at December 31, 2004 are expected to be filled during 2005. Because a major portion of the Company’s orders are placed in January through June for delivery in June through November, the Company’s backlog is lowest during the fourth quarter and peaks during the second quarter. Factors other than seasonality, such as pending large national account orders or United States government orders, could have a significant impact on the Company’s backlog. Therefore, backlog at any one point in time may not be indicative of future results. Generally, orders may be cancelled by customers prior to shipment without penalty.

Competition

The various categories of the protective footwear, rainwear and protective clothing markets in which the Company operates are highly competitive. The Company competes with numerous other manufacturers and distributors, many of whom have substantially greater financial, distribution and marketing resources than the Company. Because the Company has a broad product line, its competition varies by product category. The Company has two to three major competitors in most of its rubber product lines, at least four major competitors in connection with the Company’s outdoor footwear, and at least four major competitors in connection with its work footwear, rainwear and protective clothing.

LaCrosse believes it maintains a competitive position through the strength of its brands; its attention to quality and the delivery of value; its position as an innovator; its record of delivering products on a timely basis; its strong customer relationships; and, in some cases, the breadth of its product line. Some of the Company’s competitors compete mainly on the basis of price.

Leather boot manufacturers and suppliers, some of which have strong brand name recognition in the markets they serve, are the major competitors of the Company’s DANNER^® and LACROSSE^® leather product line. These competitors manufacture domestically and/or import products from offshore. Domestically manufactured DANNER^® brand products effectively compete with other domestically produced products, but are generally at a price disadvantage against lower-cost imported products, because offshore manufacturers generally pay significantly lower labor costs. Danner focuses on the premium quality, premium price segment of the market in which product function, design, comfort and quality, continued technological improvements, brand awareness, timeliness of product delivery and product pricing are all important. The Company believes, by attention to these factors, that the DANNER^® footwear line has maintained a strong competitive position in its current market niches. For leather boots, the LACROSSE^® brand, sources product from offshore. Therefore, it competes with other distributors with products sourced from offshore locations.

Several rubber boot manufacturers with strong brand recognition in their respective markets are the major competitors to LACROSSE^®, though the Company occupies a favorable niche in the higher price segments of the work and outdoor rubber boot markets. The Company’s history of supplying quality rubber boots has provided a foundation to compete effectively. Other suppliers offer similar products, some at lower prices and quality levels, against which the Company must effectively compete. The

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Company believes that its superior quality products, innovation and design leadership, coupled with solid delivery and customer support will enable it to effectively compete in this market.

Employees

As of December 31, 2004, the Company had approximately 300 employees, all located in the United States. Approximately 20 of the Company’s employees at the La Crosse, Wisconsin facility are represented by the United Steel Workers of America under a four-year collective bargaining agreement which expires in September 2006. Approximately 150 of the Company’s employees at the Portland, Oregon facility are represented by the United Food & Commercial Workers Union under a collective bargaining agreement which expires in January 2006. The Company considers its employee relations to be good.

Trademarks and Trade Names; Patents

The Company owns United States federal registrations for several of its marks, including LACROSSE^®, DANNER^®, RED BALL^®, RAINFAIR^®, LACROSSE and stylized Indianhead design that serve as the Company’s logo, RAINFAIR and stylized horse design that serve as Rainfair’s logo, FIRETECH^®, ICE KING^®, ICEMAN^®, AIRTHOTIC^®, GAMEMASTER^®, TERRA FORCE^TM, HYPER-DRI^®, CAMOHIDE^TM, ACADIA^®, and RED BALL JETS^®. The Company generally attempts to register a trademark relating to a product’s name only where the Company intends to heavily promote the product or where the Company expects to sell the product in large volumes. However, the Company relies on common law trademark rights for all unregistered brands. The Company defends its trademarks and trade names against infringement to the fullest extent practicable under the law. Other than registrations relating to the LACROSSE^® and DANNER^® names, the Company does not believe any trademark is material to its business.

The Company is not aware of any material conflicts concerning its marks or its use of marks owned by other companies.

The Company owns several patents that improve its competitive position in the marketplace, including the DANNER BOB^® outsole; TERRA FORCE^TM, a three-shank cement and stitch-down manufacturing process; and a patent for its AIRTHOTIC^® ventilated arch support that fits under the heel.

Seasonality/Working Capital

As has traditionally been the case, the Company’s sales in 2004 were higher in the last two quarters of the year than in the first two quarters and, to satisfy shipping requirements, the Company places orders for sourced product during the first quarter with delivery to the Company starting in the second quarter. As a result, inventories generally peak early in the third quarter. The Company expects these trends to continue. The Company has historically financed operations with cash generated from operations, long-term lending arrangements and short-term borrowings under a line of credit. The Company requires working capital to support fluctuating accounts receivable and inventory levels caused by our seasonal business cycle. The Company’s working capital needs are the lowest in the first quarter and highest from August through November in each year.

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Foreign Operations and Export Sales

Other than the Company’s 12% equity interest in Danner Japan, Ltd., the Company does not have foreign operations. International sales accounted for less than 4% of the Company’s net sales in 2004.

Environmental Matters

The Company and the industry in which it competes are subject to environmental laws and regulations concerning emissions to the air, discharges to waterways and the generation, handling, storage, transportation, treatment and disposal of waste materials. The Company’s policy is to comply with all applicable environmental, health and safety laws and regulations. These laws and regulations are constantly evolving and it is difficult to predict accurately the effect they will have on the Company in the future. Compliance with applicable environmental regulations and controls has not had, nor are they expected to have in 2005, any material impact on the capital expenditures, earnings or competitive position of the Company.

Where You Can Find More Information

We file annual reports, quarterly reports, current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 as amended (“Exchange Act”). You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at http://www.sec.gov/ where you can obtain most of our SEC filings. We also make available, free of charge on our website at www.lacrossefootwearinc.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You can also obtain copies of these reports by contacting our investor relations department at (800) 654-3517.

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Item 2. Properties

The following table sets forth certain information, as of December 31, 2004, relating to the Company’s principal facilities.

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Based on present plans, management believes that the Company’s current facilities will be adequate to meet the Company’s anticipated needs for at least the next two years.

Item 3. Legal Proceedings

From time to time, we become involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our financial statements. As of March 2, 2005, we were not a party to any material legal proceeding.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders during the quarter ended December 31, 2004.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

The Company’s Common Stock is publicly traded on the NASDAQ National Market under the ticker symbol BOOT. On March 2, 2005, the sale price of our Common Stock was $12.20 per share, as reported on the NASDAQ National Market. The table below shows the high and low sales prices per share of our Common Stock as reported by the NASDAQ National Market:

As of March 2, 2005, there were approximately 315 shareholders of record and approximately 1,406 beneficial owners of the Company’s Common Stock.

Dividends

The Company did not declare or pay a cash dividend in 2003 or 2004. Future dividend policy and payments, if any, will depend upon earnings and financial condition of the Company, the Company’s need for funds, any limitations on payments of dividends present in our current or future debt agreements and other factors.

Equity Compensation Plan Information

Certain information with respect to the Company’s equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.

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Item 6. Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth selected financial information derived from our consolidated financial statements. The discussion that follows the table should be read in conjunction with the consolidated financial statements:

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Overview

LaCrosse Footwear, Inc. (“LaCrosse” or the “Company”) is a leader in the design, development, marketing and manufacturing of premium quality protective footwear and clothing for the work and outdoor markets. The Company’s products are directed at both the retail consumer channel and the safety and industrial channel of distribution.

Economic indicators that are important to our business include consumer confidence and unemployment rate trends. Increasing consumer confidence trends improve retail channel product sales, and increasing employment trends improve safety and industrial channel sales.

Operationally, gross margins are an important determining factor in funding marketing, sales and product development costs, in addition to producing profits. In 2004, margin growth of 300 basis points, in part, contributed to the Company’s ability to achieve improved profitable growth. Overall, the Company has realized margin improvements of over 700 basis points, as compared to 2002.

From a working capital and return on equity standpoint, management of our accounts receivable and inventory is key. We are focused on improving asset turns as evidenced by our increased inventory turnover (as measured by cost of goods sold divided by average inventory). Our inventory turns for 2004 improved to 3.4 from 2.8 turns in 2003, or 22%. Without the GSA delivery orders, turns were 3.2 for 2004, an increase of 13%.

Due to continued improvements in systems, forecasting and management processes, in 2004 we reduced inventory by $7.1 million from the end of 2003. As a result of improved profitability and asset management, operating cash flow for the year was $15.5 million, which allowed us to eliminate our funded debt and achieve a cash balance of $7.1 million at the end of 2004.

Our sales are generally higher in the second half of the year, due to our cold and wet weather product offerings. We are continuing to augment our offerings with more year-round work products, as well as spring offerings of outdoor products. Weather, especially in the fall and winter, has been and will continue to be a contributing factor in our results.

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We principally examine success of products and markets by reviewing the growth of our channels of distribution and brands. The Company has successfully increased sales of both its work (formerly called “occupational”) and outdoor (formerly called “recreational”) footwear. Work sales were $60.7 million for the full year 2004, up from $51.9 million in 2003. The growth in work sales for the year spanned multiple product categories, including boots for public safety, general work and firefighting. Work sales were led by a $9.8 million increase due to the GSA delivery orders. Outdoor sales were $44.8 million for the full year 2004, up from $43.8 million in 2003. The growth in outdoor sales for the year included stronger penetration into the outdoor rugged/casual and hunting markets.

FISCAL 2004 COMPARED TO FISCAL 2003

Net Sales

Net sales in 2004 increased $9.8 million, or 10.2%, to $105.5 million from $95.7 million in 2003. The increase in net sales was primarily due to a 16.7% increase in the work channel of LaCrosse and Danner brand products, which spanned multiple product categories including $11.7 million related to boots for public safety including $9.8 million of GSA delivery orders. Net sales in the outdoor channel of LaCrosse and Danner brand products in 2004 increased 2.3% from 2003. We believe the overall increase is the result of a refocus on profitable sales growth and increasing brand equity. During 2004 we launched several successful new innovative products. In addition, during 2004, the Company fulfilled two GSA delivery orders to the United States government. GSA delivery orders are not a core business for the Company. Sales to the GSA accounted for approximately 11% and 2% of consolidated revenues in fiscal years 2004 and 2003, respectively. No other single customer provided revenue of 10% or more of consolidated revenues in any of the years presented.

Gross Profit

Gross profit in 2004 increased $6.2 million, or 20.9%, to $35.6 million from $29.5 million in 2003. As a percent of sales, gross profit improved to 33.8% in 2004, from 30.8% in 2003, an improvement of 300 basis points. The increase in gross profit as a percent of sales is a reflection of the increased sales of the Company’s new high-margin products and improved factory utilization due to increased production volume, related to the GSA delivery orders.

Selling and Administrative Expenses

Selling and administrative expenses increased $2.2 million, or 8.5%, to $28.0 million from $25.8 million in 2003. However, as a percent of sales, selling and administration remained consistent at 27%. The dollar increase is primarily due to charges for compensation, marketing, and selling expenses related to increased sales volumes and profitability.

Non-operating Expenses

Non-operating expenses in 2004 decreased $0.6 million, or 61.6%, to $0.4 million from $1.0 million in 2003. The decrease was primarily the result of lower interest expense from $1.1 million in 2003 to $0.5 million in 2004, due to lower average borrowings and lower interest rates. At the end of 2004, the Company had no outstanding borrowing, under its line of credit.

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Income Taxes

During 2003, all of the Company’s taxable income was offset by available net operating loss (NOL) carryforwards. At December 31, 2003, The Company had recorded a $3.6 million valuation allowance against its deferred tax assets due to the uncertainty of the realization and timing of the benefits from those deferred tax assets, as the Company had not achieved a sustained level of profitability. During 2004, management concluded that the Company had attained a sufficient level of sustained annual profitability to allow the valuation allowance to be reduced to reflect management’s estimate of the amount of deferred tax assets that will be realized in the near term. Additionally, the valuation allowance was further reduced by approximately $0.4 million associated with the estimated income tax benefit relative to the minimum pension liability recorded in equity, which had no effect on net income. Considering the projected levels of future income as well as the nature of the net deferred tax assets, management has now concluded that the deferred assets are fully realizable except for the deferred tax asset that relates to the majority of the Company’s state NOL carryforwards. The realization of these state NOL carryforwards is dependent upon yet to be developed tax strategies as well as having taxable income in years well into the future. In future periods of earnings, the Company will report income tax expense at statutory rates offset by any further reductions in the valuation allowance based on an ongoing assessment of the future realization of the state NOL deferred tax assets.

Direct Charge To Equity

In 2002, the Company recorded a $1.4 million charge directly to equity as a result of recognizing the minimum pension liability. In 2003, this charge was reduced by $0.2 million to $1.2 million. In 2004, the charge to equity decreased $0.2 million for an additional minimum pension liability charge of $0.2 million offset by an income tax benefit of $0.4 million. The charge is necessary when the accumulated benefit obligation is in excess of the sums of the respective plan assets and accrued pension liabilities. See Note 7 to the consolidated financial statements for more information.

Net Income

Net income for 2004 increased to $7.0 million or 6.6% of net sales in 2004 from $2.6 million or 2.7% of net sales in 2003. This increase in net income is based primarily on increased net sales, improved gross margins, and lower interest expense.

FISCAL 2003 COMPARED TO FISCAL 2002

Net Sales

Net sales in 2003 decreased $2.1 million, or 2.1%, to $95.7 million from $97.8 million in 2002. The decrease in net sales was due to a 23.9% decrease in the Safety and Industrial channel of LaCrosse and Rainfair brand products, partially offset by a 13.5% increase in Danner brand products over 2002. Net sales in the retail channel of LaCrosse brand products in 2003 were essentially equal to 2002. The overall decrease is the result of a strategic reduction in lower margin sales, and a reduction in the number of products being offered for sale, particularly in the private label and mass merchant markets in the Safety and Industrial channel of distribution.

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Gross Profit

Gross profit in 2003 increased $3.3 million, or 12.5%, to $29.5 million from $26.2 million in 2002. As a percent of sales, gross profit improved to 30.8% in 2003, from 26.8% in 2002, an improvement of 400 basis points. The increase in gross profit as a percent of sales is primarily due to improvements in our sourcing capabilities, lower manufacturing variances and a reduction in sales of lower-margin products. Both 2003 and 2002 were favorably impacted by a $0.1 million and $0.4 million reduction in the LIFO inventory reserve, as the manufactured pool of inventory was reduced.

Selling and Administrative Expenses

Selling and administrative expenses decreased $4.4 million, or 14.5%, to $25.8 million from $30.2 million in 2002. During 2002, we recorded $3.0 million of charges associated with the move of the corporate headquarters to Portland, Oregon from La Crosse, Wisconsin ($1.9 million) and the move of the Safety and Industrial division to Portland, Oregon from Racine, Wisconsin ($1.1 million). Factoring out one-time charges in 2002, the Company decreased selling and administrative expenses approximately $1.4 million, mainly as a result of the consolidation of company functions from several facilities to locations in Portland, Oregon and La Crosse, Wisconsin and leveraging internal systems and operating efficiencies.

Non-operating Expenses

Non-operating expenses in 2003 decreased $0.6 million, or 35.1%, to $1.0 million from $1.6 million in 2002. The decrease is primarily the result of lower interest expense, due to lower average borrowings and lower interest rates.

Income Taxes

No income tax provision was presented for 2003 due to the utilization of net operating loss carryforwards and a reduction in the deferred tax asset valuation allowance. The Company had a valuation allowance on its otherwise recognizable deferred tax assets. During 2002, the Company recognized an income tax benefit of $1.5 million due to tax provisions enacted as part of the Job Creation and Worker Assistance Act of 2002. The law extended the loss carryback period for certain losses from two to five years allowing the Company to carryback certain losses incurred during 2002 to reduce taxable income from 1997 and 1998. As a result, the Company received a tax refund of approximately $2.9 million during 2003.

Direct Charge To Equity

During 2002, the Company recorded a $1.4 million charge directly to equity as a result of recognizing our minimum pension liability. In 2003, the charge to equity was reduced by $0.2 million to $1.2 million. The charge is necessary when the accumulated benefit obligation is in excess of the sums of the respective plan assets and accrued pension liabilities. See Note 7 to the consolidated financial statements for more information.

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Net Income

Net income for 2003 increased to $2.6 million or 2.7% of net sales in 2003 from a net loss of $5.1 million in 2002. This increase in net income was based primarily on improved gross margins and decreased selling and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded working capital requirements and capital expenditures with cash generated from operations and borrowings under a revolving credit agreement or other long-term lending arrangements. We require working capital to support fluctuating accounts receivable and inventory levels caused by our seasonal business cycle. Borrowing requirements are generally the lowest in the first quarter and the highest during the third quarter.

On June 1, 2004, we entered into a three-year credit agreement with Wells Fargo Bank, N.A., to refinance our previous bank revolving line of credit. Amounts borrowed under the agreement are primarily secured by all of the assets of the Company. Borrowing limits against the line of credit are the lesser of $30.0 million or agreed upon percentages of qualified receivables and inventory. We had unused borrowing availability of $18.9 million at December 31, 2004. At our option, the credit agreement provides for interest rate options of prime rate or LIBOR plus 1.50%. Excess cash flows from operations are used to pay down the credit agreement. As of December 31, 2004, we had no outstanding balance under our current line of credit as compared with an outstanding balance of $5.3 million at December 31, 2003 under our former line of credit agreement. As of December 31, 2004, we were in compliance with all covenants related to our credit agreement. Existing cash balances, borrowings under the current credit agreement, and cash flows generated from operations are expected to be sufficient to meet our cash requirements for the next 12 months.

Net cash provided by operating activities was $15.5 million in 2004, compared to $6.4 million for 2003. The 2004 sum consisted of net income of $7.0 million, adjusted for non-cash items including depreciation and amortization totaling $1.5 million, and changes in working capital components, primarily an increase in accounts receivable of $2.2 million, a decrease in inventory of $7.1 million, and an increase in accounts payable and accrued expenses of $2.0 million. The decrease in inventory was primarily the result of close-out sales and improved management processes, systems, and forecasting. The increase in accounts payable and accrued expenses is due mainly to an increase in compensation expenses.

In 2003, the Company earned net income of $2.6 million, adjusted for non-cash items including depreciation and amortization totaling $1.7 million, and changes in working capital components, primarily a decrease in accounts receivable of $1.9 million, a decrease in refundable income taxes of $2.9 million, an increase in inventory of $0.6 million, and a decrease in accounts payable and accrued expenses of $2.3 million. Net cash used in investing activities was $0.7 million in 2004 compared to $1.1 million during 2003. The majority of the cash used in both years was for capital expenditures.

Net cash used in financing activities was $7.7 million in 2004 compared to $5.3 million in 2003. During 2004, we repaid $5.3 million of short-term borrowings and $2.2 million of long-term obligations

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compared to repayments of $3.1 million of short-term borrowings and $2.2 million of long-term obligations in 2003.

At December 31, 2004, the Company’s pension plan had accumulated benefit obligations in excess of the respective plan assets and accrued pension liabilities. This obligation in excess of plan assets and accrued liabilities has resulted in a cumulative direct charge to equity net of tax of $1.0 million as of December 31, 2004.

A summary of our contractual cash obligations at December 31, 2004 is as follows:

We also have a commercial commitment as described below:

As of December 31, 2004, the Company had a cash balance of $7.1 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies and estimates are summarized in the footnotes to our annual consolidated financial statements. Some of our accounting policies require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results may differ from these estimates under different assumptions and conditions. Certain of the most critical policies that require significant judgment are as follows:

Revenue Recognition. We recognize revenue upon shipment of products to our customers. Revenue is recorded net of estimated discounts and returns. Revenues are recognized when all of the following criteria are met: when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured.

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Allowance for Doubtful Accounts. We establish estimates of the uncollectibility of accounts receivable. Our management analyzes accounts receivable, historical write-offs as bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We maintain an allowance for doubtful accounts at an amount that we estimate to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on receivables. A considerable amount of judgment is required when assessing the realizability of receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts may be required. We have not experienced significant bad debts expense and our reserve for doubtful accounts of $0.3 million is considered adequate for any exposure to loss in our December 31, 2004 accounts receivable.

Product Warranties. We provide a limited warranty for the replacement of defective products. Our standard warranties require us to repair or replace defective products at no cost to the consumer. We estimate the costs that may be incurred under our basic limited warranty and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. We utilize historical trends and information received from customers to assist in determining the appropriate loss reserve levels. We believe our warranty liability of $0.8 million at December 31, 2004 is considered adequate to cover the estimated costs we will incur in the future for warranty claims on products sold before December 31, 2004.

Pension and Other Postretirement Benefit Plans. The determination of our obligation and expense for pension and other postretirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 7 to our annual consolidated financial statements and include, among others, the discount rate and expected long-term rate of return on plan assets. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe th