EVERLAST WORLDWIDE INC
NOTE REGARDING FORWARD LOOKING INFORMATION           Certain   statements   contained  in  this  annual  report   constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and  Sections  21E of the  Exchange  Act.  Such  forward-looking  statements involve known and unknown risks,  uncertainties and other factors that may cause the actual  results,  levels of activity,  performance  or  achievements  of the Company,  or  industry  results,  to be  materially  different  from any  future results, levels of activity, performance or achievements expressed or implied by such  forward-looking  statements.  Such  factors  include,  among  others,  the following:  general economic and business conditions, the ability of the Company to  implement  its  business  strategy;  the  ability  of the  Company to obtain financing  for general  corporate  purposes;  competition;  availability  of key personnel;  and  changes  in,  or  the  failure  to  comply  with,  government's regulations. As a result of the foregoing and other factors, no assurance can be given as to the future results,  levels of activity and achievements and neither the  Company  nor  any  person  assumes  responsibility  for  the  accuracy  and completeness of these statements.  INTRODUCTION           Everlast  Worldwide Inc., a Delaware  corporation and its  subsidiaries (collectively,  the "Company" and herein  referred to as "we",  "us" and "our"), was  originally  organized  in the  State  of New  York on July 6,  1992 and was re-incorporated  on October 19, 1994.  Our sporting  goods business is currently engaged in the design, manufacture, marketing and sale of sporting goods related to the sport of boxing such as boxing  gloves,  heavy bags,  speed bags,  boxing trunks,  and  miscellaneous  gym equipment that are sold through  sporting goods stores, mass merchandisers,  catalog  operations,  gymnasiums,  and martial arts studios.  In  addition,   we  license  the  Everlast(R)  trademark  to  numerous companies, both domestic and international, that source and manufacture products such as men's,  women's  and  children's  apparel and  footwear,  cardiovascular equipment,  back to school stationery,  eyewear,  sports bags, hats, fragrances, fine jewelry, batteries,  nutritional products and other accessories. One of the Company's  business  strategies,  as a licensing  and marketing  company,  is to maximize  the value of its  intellectual  property  by entering  into  strategic licenses with entities which have been selected based upon the Company's  belief that they will be able to produce and sell quality products in the categories of their  specific  expertise.  This  licensing  strategy is designed to permit the Company to operate its  licensing  business  with minimal  working  capital,  no inventory, production or distribution costs or risks, and utilizing only a small group of core employees.  CORPORATE MISSION STATEMENT           Our corporate mission  statement,  which the management of Everlast has adopted,  is used in our day to day and long-term  strategic  planning processes and it states:  "Achieve constant  profitable growth through sales and licensing by setting and achieving  specific goals utilizing our strong  personnel and our existing worldwide brand strength.  Drive home the synergy of the Everlast brand and the feelings of individual  strength,  determination,  power,  and longevity exemplified  throughout  the history of boxing;  applicable  to everyday life in order to extend our brand  licensing in  categories  relevant to this  emotional quotient.  Increase our leadership position in boxing,  worldwide, with product, quality, availability and innovation. This effort will ensure the success of the most sacred segment of our business,  boxing, simply measured by our presence in the ring, yet responsible for our successful future."                                          1    HISTORICAL BACKGROUND AND OPERATIONS           Everlast was founded in 1910 as a manufacturer  of men's swimwear under the name  "Everlast."  Soon  thereafter,  Everlast began to  manufacture  boxing gloves,  protective headgear,  and related items. As the owner of the registered trademark Everlast(R), Everlast also licensed its brand name worldwide.        Everlast(R)  is a leading  brand  name in boxing  and a  widely-recognized brand name in boxing related  sporting  goods.  Everlast is the market leader in several  of  its  product  categories,  including  boxing  gloves,  heavy  bags, protective headgear and speed bags (collectively,  the "Sports Products"). These Sports  Products have been used or endorsed by boxers such as Jack Dempsey,  Joe Louis, "Sugar" Ray Robinson,  Jake LaMotta, Joe Louis, Rocky Marciano,  Muhammad Ali, Joe Frazier,  George Foreman,  Larry Holmes,  "Sugar" Ray Leonard,  Evander Holyfield,  Mike Tyson, Felix "Tito" Trinidad,  "Sugar" Shane Mosley,  Jeff Lacy and Jermain Taylor.           On October  24, 2000 the Company  completed a merger  whereby  Everlast Holding Corp., the parent company of Everlast World's Boxing  Headquarters Corp. ("Everlast"),  was merged with and into Active  Apparel  New Corp.  ("AANC"),  a wholly-owned  subsidiary  of the  Company  (the  "Merger").  As a result  of the Merger,  Everlast  became a wholly-owned  subsidiary of the Company.  The Merger involved  (i) payment of $10 million in cash;  (ii) the issuance of an aggregate of 505,000  shares of common stock,  $.002 par value of the Company (the "Common Stock") and an aggregate of 45,000 shares of redeemable  participating preferred stock,  stated value  $1,000 per share (the  "Preferred  Stock"),  to the former stockholders of Everlast Holding Corp.; and (iii) payment of approximately  $1.4 million in transaction  costs, for an aggregate purchase price of $61.9 million. Pursuant  to the  terms of that  certain  Agreement  and Plan of  Merger  by and between Everlast Holding Corp.,  Everlast,  the Company and AANC, as amended, if the fair market value of the Common Stock is not $13.00 by October 24, 2007,  as amended, the Company will be required to issue additional shares of Common Stock or, at its option, pay such amount in cash.  DISPOSAL OF APPAREL COMPONENT BUSINESSES           Over the past two years,  the Company has announced the disposal of its women's  (January  2005) and men's  (January 2006)  wholesale  apparel  business components  by licensing  them to Jacques  Moret,  Inc., a New York  corporation ("Jacques Moret").  The women's license was the largest license agreement in the Company's  history  whereby  it  licensed  its  United  States  women's  apparel category,  for a  guaranteed  minimum  royalty of $2.5  million per year through 2009.  The Company  further  expanded its  relationship  with  Jacques  Moret by licensing  its men's  business  to them  effective  January  2006.  The  Company believes  that it was in its best  interest  to license  its  women's  and men's apparel businesses to reduce risk,  increase  profitability and to grow Everlast apparel  presence as a result of the  licensee's  ability to source product more competitively,  due to Jacques Moret's buying power,  along with Jacques Moret's expanded  distribution  available  from  it  presence  in  certain  channels  of distribution.  The Company expects to achieve significant cost savings, improved profitability and cash flow savings from these strategic  decisions based on its historical  financial  results managing these  businesses,  in comparison to the licensing  revenue streams  achieved from the guaranteed  minimum  royalties the licenses provide the Company.  PRODUCTS           The Company sells a diverse collection of footwear and sports products. It licenses  the  Everlast(R)  trademark to numerous  companies  which source or manufacture products such as men's, women's and children's apparel and footwear, fitness exercise equipment, eyewear, sports bags, hats, fragrances,  nutritional products and other  products.  The  Company's  philosophy  within its  licensing product  categories  are  driven by the  synergy of the  Everlast  brand and the feelings  of  individual  strength,  determination,  power,  and  the  longevity exemplified  throughout  the history of boxing;  applicable  to everyday life in                                          2   order to extend the brand  licensing in  categories  relevant to this  emotional quotient.  All business activities and decisions as it relates to these licensed products are made by the Company's executive management.   SPORTS PRODUCTS           The Company manufactures,  imports and markets a line of boxing related sporting goods which consist primarily of the following:           (1)    Boxing Gloves:  These are Everlast's most  recognizable  product                 and are  made  for  professional,  amateur,  and  home  gym use.                 Everlast's  professional  gloves are  certified  throughout  the                 United  States and by the World  Boxing  Council*,  World Boxing                 Association*,  International  Boxing  Federation*,  World Boxing                 Organization*,  the  Association of Boxing  Commissions  and the                 Nevada State Athletic  Commission for all of their  professional                 fights;           (2)    Heavy Bags:  Everlast's  heavy bags are punching  bags  weighing                 between 25 and 150 lbs.;           (3)    Speed  Bags:  Speed  bags are small,  air-filled  bags which are                 mounted on swivels and platforms (at eye level);           (4)    Platforms:  Platforms are the wall  mountings used in suspending                 speed or heavy bags;           (5)    Freestanding   heavy   bag/speed   bag   home   gyms:   A  steel                 free-standing  unit that  carries a heavy bag as well as a speed                 bag for home use.           (6)    Boxing shoes.           (7)    Boxing trunks and robes; and           (8)    Miscellaneous Gym Equipment:  In addition to the  aforementioned                 core offerings, Everlast also manufactures,  imports and markets                 the  following   products  to   complement   its  product  line:                 protective headgear,  protection cups, mouthpieces,  hand wraps,                 boxing rings; martial arts equipment,  gym mats (assorted),  and                 medicine balls.  LICENSED PRODUCTS           The Company owns and utilizes the Everlast(R)  trademark  worldwide and is registered  with the United  States  Patent and Trademark  Office and in many foreign jurisdictions. The Company regards its Everlast(R) trademark as its most valuable asset based on the evaluation of an  independent  consulting  firm. The Company  believes  the  Everlast(R)  trademark  has  significant  value  in  the marketing  of  the  Company's  products.   The  Company  actively  protects  its trademarks against infringement.           The Company  licenses the Everlast(R)  trademark to numerous  companies which  source or  manufacture  products  such as men's,  women's and  children's active  and  sportswear  and  footwear,  cardiovascular  equipment,  fragrances, nutritional  products,  eyewear,  sports bags, hats and other  accessories ( the "Licenses  Products".)  Licensing  the  Everlast(R)  trademark  has  enabled the Company  to  expand   product   offerings   into  arenas  outside  of  its  core manufacturing   arenas,   to  strengthen  its  brand  image,   and  to  increase profitability,  while at the same time reducing working capital requirements and minimizing inventory risk.                                         3            The  Company  utilizes  a network  of  licensees  for  worldwide  brand distribution in the U.S. and over 100 countries.  In return for exclusive rights to market  Sports  Products,  certain  apparel  products  bearing  the  Everlast trademark(R)  (the  "Apparel  Licensed  Products")  and  accessories  in certain regions,  the licensees pay Everlast a fixed royalty rate upon the net revenues, among  other  criteria,  of the  licensees.  The  average  revenue for our gross licensing  revenue  stream  in  existence  for each of the  fiscal  years  ended December  31, 2005 and 2004 is  approximately  $140,000.  There were 87 existing licensing  arrangements  as of December 31, 2005  compared to 66 at December 31, 2004.  During the three years ended December 31, 2005,  2004 and 2003, we signed 30, 24 and 19 licenses  respectively,  and have  terminated or not renewed 9, 10 and 6  licenses,  respectively.  One  licensee,  Jacques  Moret,  accounted  for approximately  20% of our gross  licensing  revenues for the year ended December 31, 2005.           As of  January  1, 2006 and for the fiscal  year  ended  2006,  we have guaranteed  minimum  royalty  revenues of $10.2  million  (exclusive  of renewal option  provisions that may occur later this year along with any overages earned on our licensing arrangements above their minimum royalties) in which 52% of the licensing  revenues are from domestic  licenses,  26% from European licenses and 22% from all other countries.  Of this $10.2 million minimum royalty stream, 65% is derived from apparel category licenses,  10% from footwear licenses, 13% from sports  equipment and accessories  licenses and the remaining 12% from all other categories not mentioned (e.g. nutritional products.)           One of our objectives in 2006 is to expand our licensing  business into untapped geographic  locations,  including India and China. We also plan to grow our  existing   licensing   programs   throughout   Europe  with  licensees  who manufacture, market and distribute in our core competency categories of apparel, sporting goods,  boxing  equipment and footwear.  We will also work closely with our  current  licensees  to help  further  enhance the  merchandising  and sales execution of their existing Everlast businesses.   MARKETING, ADVERTISING, AND PROMOTIONS           Our marketing,  advertising and promotion campaign is to drive home the synergy  of  the  Everlast  brand  and  the  feelings  of  individual  strength, determination,  power,  and  longevity  exemplified  throughout  the  history of boxing;  applicable to everyday  life in order to extend our brand  licensing in categories  relevant to this emotional  quotient.  The Company maintains its own marketing and advertising  staff which conceives and oversees  implementation of most aspects of the Company's  advertising and sales  promotions  campaigns.  In addition,  the  Company  has a  graphic  arts  department  that  works  with the marketing and sales staff to develop  advertising  campaigns,  brand management, packaging solutions,  point-of-sale,  retail advertising and catalogs for all of the Company's product lines, as well as its licensees.           The Company  advertises and promotes its products to different consumer segments  through a variety of trade and consumer print  advertising  campaigns, generally in selected magazines and other  publications.  The Company also takes part in various cooperative advertising programs including national advertising, in-store  signage,   point-of-purchase  promotional  giveaways  and  cooperative advertising  arrangements  with  several of its retail  customers.  The  Company believes  these  programs  assist in raising  consumer  awareness and increasing retail floor space for its products. The Company has received continued exposure in print,  television  and movie  media from  famous  celebrities  and  athletes wearing the Apparel  Products as well as product  placement on the Academy Award winning  movie  "Million  Dollar  Baby"  to the  Mark  Burnett's  reality  drama television  show "The  Contender",  which initially aired on NBC network and its affiliates in March 2005,  which led to the #2 and #3 rankings  according to the Nielsen  Product  Placement  Ratings in 2005, and the EA Sports  Franchise Fight Night boxing videogame series.           To further  supplement  the growth of the sport and  provide a positive outlet for today's  youth,  Everlast is the proud  supplier and supporter of USA boxing,  Police  Athletic  League  Boxing,  The Daily  News  Golden  Gloves  and                                          4   countless other amateur  tournaments and grassroots programs across the country. Additionally,  we are a proud sponsor of PE4LIFE,  a non-profit  Sporting  Goods Manufacturing  Association  backed  organization,  to promote  boxing fitness in schools across the country.           The  Company   attends  and   participates   in  the   Sporting   Goods Manufacturers  Association Supershow*,  and MAGIC International* annual national trade shows, and other appropriate trade shows.           The Company's Sports Products have received  continued exposure through coverage in movies,  print media and television  because of its association with the history of boxing and its distribution of the Sports Products to amateur and professional  boxers for use in  nationally  televised  events.  The Company has focused on bringing the brand back into the boxing ring with multiple  sponsored events, such as HBO Latino Boxeo de Oro*, ESPN 2 Friday Night Fights*,  Broadway Boxing Series,  a monthly  tri-state boxing series televised on MSG* network and ESPN's Tournament of The Contender Series*, along with show by show sponsorships featured on Telemundo, Telefutura, HBO, Showtime and pay-per-view events.           The Company has promotional and consulting  contracts with noted boxing champions,  trainers,  and  spokespersons,  such as Oscar  De La  Hoya,  Jermain Taylor,  Sugar Shane Mosley,  Chris Byrd,  Jeff Lacy,  Peter Manfredo Jr., Marco Antonio Barrera,  Sugar Ray Leonard, Larry Holmes, Jack Dempsey, Rocky Marciano, Joe Louis, Sugar Ray Robinsons,  Floyd Patterson and Jim McNally ( NAVAL Academy boxing  coach).   The  Company  uses  the  boxing  industry  expertise  and  the relationships  of  these  individuals  to  assist  it  in  various   promotional activities  designed  to  generate  interest  of the  consumers  in  the  Sports Products.         The Company  employs  sales  personnel to promote the Sports  Products to professional and amateur boxers. Additionally, the Company continually evaluates and  redesigns  its  professional  line of  boxing  equipment  and  the  product packaging of its retail Sports  Products.  Finally,  the Company's  graphic arts department has produced two new catalogs,  one focusing on  wholesalers  for the consumer  retail  market and the other  directed  at  professional  and  amateur boxers.          To further complement our direct-to-consumer business and increase brand awareness,  Everlast  has  contracted  an  outside  firm to  develop  a  Magalog (half-magazine/half  catalog) to increase our brand  awareness and  connectivity with the Everlast  consumer as well as spike  incremental  sales. The Magalog is circulated to over 650,000  consumers,  three times a year to Everlast customers reaching gyms,  registered USA Boxing athletes,  trainers and general consumers. Everlastboxing.com  is the e-commerce link to the Magalog,  which features a mix of content and products for the end consumer.   MANUFACTURING AND SUPPLIERS   SPORTS PRODUCTS           Effective  December 2003, we have been  manufacturing  and distributing solely out of one  company-owned  facility.  This facility,  located in Moberly, Missouri has 304,000  square feet and is used to produce  products such as heavy bag and speed bag platforms, heavy bags, and boxing rings, as well as a "cut and sew" production  department where boxing gloves,  speed bags, boxing trunks, and other  related  items are  produced.  Certain of these  products  were  formerly produced in our Bronx, New York facility which was closed in December 2003.           Raw  materials  used  to  manufacture  Sports  Products  are  top-grain leather,  synthetic fabrics,  canvas, assorted wood and steel tubing, as well as various  other  materials  used in  stuffing  gloves and heavy  bags.  These raw materials are basic commodities, which the Company buys from several independent                                          5   suppliers.  No one  supplier  accounts  for more than ten  percent  (10%) of the Company's purchases of raw materials. The majority of raw materials are obtained domestically, with the exception of Nevatear(R), the material used in moderately priced  gloves,  bags,  and gym mats.  Nevatear(R) is a vinyl coated fabric with tire-cord  nylon  content  designed  to  withstand  years of usage.  The primary supplier for  Nevatear(R)  is Erez, an Israeli  company.  Alternate  sources for Nevatear(R) are widely available.           The  Company  also  imports   sub-assemblies  and  parts  used  in  the production  of its  finished  Sports  Products  such as shells  for heavy  bags, hardware,  components for speed bags and finished products.  The Company imports approximately  60% of its purchased raw material,  sub assemblies,  and finished goods with which one supplier of these  purchases  accounted for over 10% of all purchases made.   INVENTORY MANAGEMENT           As of  December  31,  2005,  the  Company's  inventory  for its  Sports Products was $6.7 million. Net sales were approximately $31 million for the year then ended.           The Company uses a fully  integrated  inventory  management  system for finished goods and the products  manufactured by its factory. The Company has an automated  perpetual  inventory  for finished  goods,  raw materials and work in progress  merchandise.  If  required  by major  retailers,  the Company has also incorporated its Sports Products into an EDI Quick Response Replenishment System to fill sales orders.    SALES AND DISTRIBUTION           For each of the fiscal  years  ended  2005,  2004 and 2003,  The Sports Authority Inc. ("Sports  Authority"),  including Gart's Sports, which was merged into Sports Authority in October 2003,  accounted for approximately 13% of sales of the Company.  Sports  Authority  has been a customer of the Company since its inception in 1992. There is no long-term contract between the Company and Sports Authority.  The Company  believes  that its  business  relationship  with Sports Authority is satisfactory.            The Company's  Sports Products are distributed  through  sporting goods stores, mass merchandisers,  catalog  operations,  gymnasiums,  and martial arts studios.  The  Company  distributes  its Sports  Products  to over 7,000  retail locations  throughout the United States and Canada. The Sports Products are sold by retailers such as Modell's*,  The Sports Authority*,  Big 5*, Academy*, Sam's Club and Wal-Mart* and The Home Depot*.            The Company has a sports  products  president  who  oversees  sales and marketing for Sports Products.  The Company also has nine sales  representatives who are assigned  different  territories in the United  States.  The Company has focused its marketing efforts for its Sports Products in the following areas:           o      TRADE  SHOWS:  The Company  participates  in more than ten trade                 shows annually,  which are attended by most major sporting goods                 retailers and manufacturers;           o      PRODUCT   CATALOGS:   The  Company  publishes  a  retail  and  a                 professional  catalog (the  "magalog")  which  features not only                 products  manufactured by the Company,  but in depth profiles on                 professional fighters, trainers and boxing fitness articles.           The Company  believes  that the sales of Sports  Products  are slightly seasonal towards the third and fourth quarters of its fiscal year.                                          6   QUALITY CONTROL  SPORTS PRODUCTS           The  Company  has  quality   control   procedures   in  effect  at  its manufacturing facility in Moberly,  Missouri.  Manufacturing supervisors inspect Sports Products for defects  throughout both the  manufacturing  process and the finishing stages, including imported products.  LICENSED PRODUCTS           The Company  requires its licensees to submit  samples of products that are to be  sold  under  exclusive  license  agreements.  These  sample  Licensed Products  are  inspected  by the  Company's  management  for  quality and proper placement of the Company's Everlast(R)  trademark.  Licensees that do not comply with the Company's quality or trademark  standards are notified that they are in breach of their license  agreement  and immediate  measures are taken to protect brand integrity.  COMPETITION  SPORTS PRODUCTS           The sporting goods industry is also highly  competitive.  However,  the Company  believes that it is the preeminent name in boxing equipment and as such is able to compete in this segment of the sporting goods industry. The Company's competitors  for its Sports  Products at the retail  level are Century  Sporting Goods* and private label brands.  At the  professional  and amateur boxing level the Company's competitors are Ringside*, Grant*, and Reyes*.  LICENSED PRODUCTS           Aggressive competition is also found in the licensing of sporting goods brands and  trademarks.  The Company  believes that the  Everlast(R)  trademark, however,  is the most recognized brand associated with the sport of boxing.  The Company  believes  that none of its  competitors  in the  boxing  segment of the sporting goods industry have significant licensing programs.    EMPLOYEES           As of February 28, 2006, the Company had 170 employees who are employed on  a  full-time  basis.  These  include  30  executive,  managerial,  clerical, administrative  and  sales  and  licensing   employees  at  its  New  York  City headquarters  and  140  employees  at its  manufacturing  facility  in  Moberly, Missouri. 105 employees of the Company at its manufacturing facility in Moberly, Missouri are covered  under a collective  bargaining  agreement  that expires on June 5, 2009. The Company  believes it has satisfactory  relationships  with its employees under the recently signed (June 2005) collective bargaining agreement.         The Company also employs additional  full-time and part-time employees in connection with the design,  marketing, and sale of its products on an as needed basis. The Company also hires temporary employees from time to time. The Company considers its relations with its employees to be satisfactory.                                           7    ENVIRONMENTAL CONSIDERATIONS           The  Company's  manufacturing  facility is subject to various  federal, state and local  environmental  laws and  regulations  limiting  the  discharge, storage,   handling  and  disposal  of  a  variety  of  substances  set  by  the Environmental  Protection  Agency,  particularly  the  federal  Water  Pollution Control  Act,  the Clean Air Act of 1970 (as  amended  in  1990),  the  Resource Conservation  and Recovery Act  (including  amendments  relating to  underground tanks) and the federal "Superfund" program.           The  Company  also is  subject  to  federal,  state and local  laws and regulations  relating to workplace  safety and worker  health,  including  those promulgated  under the Occupational  Safety and Health Act ("OSHA").  As part of its OSHA compliance efforts,  the Company requires all personnel working in high noise areas and those working in certain areas with high  concentrations of dust to wear protective equipment.           To the best of the Company's knowledge,  its manufacturing  facility is currently in compliance with all material  respects with existing OSHA standards and environmental laws and regulations.  The Company does not believe that there is a substantial  likelihood that further OSHA or environmental  compliance will require  substantial   expenditures  or  materially  affect  its  operations  or competitive position. The Company currently has no capital expenditures relating to satisfying environmental standards.   AVAILABLE INFORMATION  The    following    information    can   be    found   on   our    website    at HTTP://WWW.EVERLAST.COM:           o      Our annual report on Form 10-K,  quarterly reports on Form 10-Q,                 current reports on Form 8-K, and all amendments to those reports                 as  soon  as  reasonably  practicable  after  such  material  is                 electronically filed with the Securities and Exchange Commission                 ("SEC");           o      Our policies related to corporate governance, including our Code                 of  Business  Conduct  and  Ethics  applying  to our  directors,                 officers  and  employees   (including  our  principal  executive                 officer, and principal financial and accounting officer) that we                 have adopted to meet the requirements set forth in the rules and                 regulations of the SEC.
The Company operates in a changing  environment that involves  numerous known and unknown risks and uncertainties that could materially adversely affect its  operations.  The  following  highlights  some of these  factors  that  have affected, or may affect, the Company's operations.  IF OUR MARKETING  EFFORTS DO NOT EFFECTIVELY  MAINTAIN AND EXPAND OUR BRAND NAME RECOGNITION, WE MAY NOT BE ABLE TO ACHIEVE OUR GROWTH STRATEGY.           We believe that broader  recognition  and  favorable  perception of our brand-name  by  consumers  in our target  markets  are  essential  to our future success.  To increase  brand-name  recognition,  we believe we must  continue to devote significant  amounts of time and resources to advertising and promotions. These expenditures, however, may not result in favorable increase in recognition of our brand-name or a sufficient increase in revenues to cover such advertising and promotional expenses. In addition,  even if our brand recognition increases, our consumer  base and our revenues may not  increase,  and may in fact decline, either of which would harm our business.                                         8   WE DEPEND ON CERTAIN KEY EMPLOYEES AND THE LOSS OF THESE  EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS           We are dependent on the services of Seth Horowitz,  our Chairman of our Board,  President and Chief Executive  Officer,  as well as other key members of our  management  team.  We have entered into an  employment  agreement  with Mr. Horowitz  and he has agreed to continue his  employment  and not to compete with us. In addition,  we employ an executive who is solely responsible for worldwide licensing of the Everlast  brand name.  The failure of these  executives  or any other members of our management team to effectively  work together could prevent efficient decision-making, affecting product development and sales and marketing efforts  which would  negatively  impact our ability to manage our  business and operations.  In addition,  the loss of the services of Mr. Horowitz or other key managers  would  have a  material  adverse  effect  on our  business,  financial condition, results of operations and prospects.  DEPENDENCE ON GENERAL ECONOMIC CYCLE           Historically,  our industry has experienced  substantial changes in its business  cycle.  Recessions,  the  states  of the  global,  national  and local economies and uncertainties  regarding future economic prospects affect consumer spending  habits and  adversely  affect our  business,  financial  condition and results of  operations.  In addition,  we, as well as our  competitors,  sell to retailers who have experienced  financial  difficulties  during the past several years,  which have led to, among other  things,  consolidation  of retailers and stores.  If these financial  patterns  continue or worsen,  we cannot assure you that our business,  financial  condition  and results of operations  will not be materially adversely affected.            The  Company  believes  that the  sales  of both  sporting  goods  and licensing  are slightly  seasonal  towards the third and fourth  quarters of its fiscal year.  Our products,  taken as a whole,  are sold  year-round.  While our results of operations may vary quarterly, we do not believe that such variations are material to our business. Consequently, our results of operations in any one quarter are not  representative of the results of operations we expect for other quarters or for the full fiscal year.  CHANGES IN CONSUMER MARKET TRENDS; NEW PRODUCTS           The market  trends and  consumer  demands  for  Sporting  Products  and Licensed  Products  quickly  change  primarily  due to the  influence of fashion trends and  developments  of technology  of raw  materials.  Our sporting  goods business and our licensees' ability to anticipate,  gauge and respond adequately and timely to rapid  changes in  consumer  demand and market  trends  materially affect our business  and results of  operations.  If we or our  licensees do not effectively adapt to the quick changes in customer demands and market trends, we may not be able to achieve our profitability goals.  WE RELY ON A FEW CUSTOMERS FOR A LARGE PORTION OF NET SALES FROM SPORTING  GOODS AND WE GENERALLY DO NOT HAVE LONG TERM CONTACTS WITH ANY OF THESE CUSTOMERS           For  each of the  fiscal  years  ended  2005,  2004  and  2003,  Sports Authority has accounted for  approximately  13% of our sales of Sports Products. Sports  Authority  Inc. has been our customer  since 1992  although no long term contract  exists  between us and them.  Although  we believe  that our  business relationship  with Sports Authority is  satisfactory,  we cannot assure you, you that this business  relationship will continue to generate satisfactory sales in the future.  We are also trying to expand our network of retailers  carrying our products.  We plan to  focus  on  sporting  goods  stores,  mass  merchandisers, gymnasiums  and  martial  arts  studios  for our  Sports  Products.  There is no assurance that we will be able to successfully expand our market.                                          9    WE RELY ON OUR ROYALTY  STREAM FROM THE  LICENSING OF OUR EVERLAST  TRADEMARK TO NUMEROUS GLOBAL LICENSEES           Our net revenues from our licensing business has grown substantially in the last few years from  approximately  $5 million for the year ending  December 31, 2001 to $12 million for the year ended  December 31,  2005.  For fiscal year 2005,  one  licensee  accounted  for  approximately  20% of our gross  licensing revenues  and we believe  that an adverse  affect in its business and results of operations,  would  negatively  impact the  Company's  revenues  and  results of operations.  WE DEPEND ON OUR  INTELLECTUAL  PROPERTY RIGHTS AND WE CANNOT BE CERTAIN THAT WE WILL CONTINUE TO  SUCCESSFULLY  PROTECT THESE RIGHTS WHICH COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR LICENSING BUSINESS           Our  success  is  dependent  upon  the  continued   protection  of  our trademarks and other intellectual  property rights.  Counterfeit versions of our products may harm our reputation for producing high quality products and lead to losses in future periods.  Accordingly, we devote resources to the establishment and protection of our trademarks on a worldwide basis. We may be forced to incur substantial  costs to protect our intellectual  property and if we are unable to protect our intellectual property, the image of our brand may suffer.           Our  registered and common law trademarks  have  significant  value and some of our  trademarks  are  instrumental  to our ability to create and sustain demand for and market our  products.  We cannot  assure you that  third-parties, particularly  in other  countries,  will not assert claims to our trademarks and other  intellectual  property  or that we will be able to  successfully  resolve those  claims.  While  we  seek  international  protection  of our  intellectual property,  the laws of some  foreign  countries  may not allow us to protect our intellectual  property to the same extent as the laws of the United  States.  In addition, we could incur substantial costs to defend legal actions taken against us relating to our use of trademarks, which could have a material adverse effect on our business, results of operations and financial condition.  WE CANNOT BE CERTAIN THAT QUALITY  CONTROL  STANDARDS  WILL BE COMPLIED WITH AND NON COMPLIANCE MAY HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS           We require our  licensees to submit  samples of products that are to be sold under exclusive license  agreements and licensees who are not in compliance with our quality  control  standards are in breach of their license  agreements. These sample  Licensed  Products are inspected by our management for quality and proper placement of our Everlast(R) trademark. Licensees that do not comply with our quality or trademark standards are notified that they are in breach of their license  agreement.  No assurance may be made,  however,  that all non-compliant Licensed Products will be identified and that the  non-compliant  licensees will be notified of the breach of their license agreement.           We have  quality  control  procedures  in effect  at our  manufacturing facility in Moberly, Missouri. Manufacturing supervisors inspect Sports Products for defects throughout both the manufacturing  process and the finishing stages. No assurance may be made,  however,  that these quality control  procedures will prevent all defects of manufacturing and finishing.  IF THE UNITED STATES  CONTINUES TO IMPOSE TARIFFS AND IMPORT QUOTA  RESTRICTIONS ON PRODUCTS  MANUFACTURED IN CHINA,  OUR LICENSEES MAY NOT BE ABLE TO MEET THEIR MANUFACTURING NEEDS FROM COUNTRIES OTHER THAN CHINA OR FROM DOMESTIC SOURCES.            The United States and the countries in which our products are produced for our licensees or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations,  or may adversely adjust  prevailing  quota,  duty or tariff  levels.  Under the provisions of the World Trade Organization,  or WTO, Agreement on Textiles and Clothing, effective as of  January  1,  2005,  the  United  States  and other WTO  member  countries eliminated  quotas on  textiles  and  apparel-related  products  from WTO member countries. As a result of the eliminated quotas, our licensees experienced lower costs on their  imports of finished  goods  which  benefited  their  margins and operating  profitability  in the second  half of fiscal  year  2005.  The United                                          10   States  has now  imposed  quotas on  certain  categories  of  products  that our licensees import from China,  including,  but not limited to, certain shirts and certain  sportswear.  If our  licensees  are unable to meet their  product needs either from countries not affected by the United States' restrictions or tariffs or from  domestic  sources,  it could  materially  affect their gross margin and financial performance,  which may in turn materially affect our license revenues and financial performance.  OUR  BUSINESS  IS  SUBJECT  TO  INTENSE  COMPETITION  AND IT COULD BE  ADVERSELY AFFECTED BY THE FAILURE TO EFFECTIVELY COMPETE           Aggressive  competition  is found in the licensing and  manufacture  of sporting goods brands. We believe that the Everlast(R)  trademark,  however,  is the most recognized brand  associated with the sport of boxing.  We also believe that  none of our  competitors  in the  boxing  segment  of the  sporting  goods industry have significant  licensing programs. We cannot assure you that we will effectively  compete  against  our  competitors  and this  could have a material adverse affect on our financial performance.  WE RECENTLY INCURRED  SUBSTANTIAL  INDEBTEDNESS AND OUR DEBT SERVICE OBLIGATIONS MAY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS           As a result of a borrowing  consummated  on  February 8, 2006,  we have incurred  $25,000,000 of debt. While we believe that we currently  generate cash sufficient to pay the principal and interest on and other amounts due in respect of our indebtedness  when due, a payment of $15.5 million is due on December 31, 2009 for  which we may not have  sufficient  cash.  In  addition,  our  level of indebtedness  could have  other  effects  on our  future  operations,  including increasing our vulnerability to adverse changes in general economic and industry conditions and our ability to obtain additional financing.  POTENTIAL SPORTS PRODUCT  LIABILITY  EXPOSURE MAY HAVE A MATERIAL ADVERSE EFFECT ON THE CONSUMER DEMAND FOR OUR PRODUCTS           Our Sports  Products  are  exposed  to an  inherent  risk of  potential product  liability  claims as  boxing is a  high-risk  activity  which  involves physical contact.  A judgment against us due to an alleged failure or defects of our Sports Product could lead to substantial  damage awards.  Although we invest resources in research and  development  and every  attempt is made to ensure the safety of the Sport  Products,  claims  against us may arise and  regardless  of their merit or eventual  outcome these claims may have a material adverse effect on the consumer demand for our products.  WE  ARE  DEPENDENT  ON  OUR  MANUFACTURING  AND  DISTRIBUTION  FACILITY  AND  AN UNFORESEEN  NATURAL  OCCURRENCE,  ACT OF WAR OR ACT OF  TERRORISM  COULD  HAVE A MATERIAL  ADVERSE AFFECT ON OPERATIONS AT OUR  MANUFACTURING  FACILITY AND COULD NEGATIVELY IMPACT OUR SPORT PRODUCTS BUSINESS           We own a manufacturing and distribution  facility in Moberly,  Missouri of approximately 304,000 square feet. If a situation arises that would cause the Missouri  manufacturing  plant to  close  down or  reduce  our  production,  our business,  results of operations and financial condition could be materially and adversely affected. These situations may include fire, floods, power loss, power shortages, telecommunications failures, break-ins and similar events.           Furthermore,  certain  actions  domestically  or abroad  could  lead to business  disruptions  or to  cancellations  of  customer  orders  or a  general decrease in consumer  spending.  Our products are considered  non-essential  and their demand is highly elastic with the spending capability of our customers. An economic slow-down may have a material effect on our financial performance.                                           11
None
PRINCIPAL PLACE OF BUSINESS           The Company renewed its real property leases at its principal office at 1350  Broadway,  New York,  New York  effective  December 2003. The lease is for 12,087 square feet with an annual base rent of $407,728 through November 2008.    MANUFACTURING AND DISTRIBUTION FACILITY           The Company owns a manufacturing and distribution  facility in Moberly, Missouri of  approximately  304,000 square feet.  The Company  believes that its existing facility will be adequate to meet its needs for the foreseeable future. The  Company  further  believes  that  additional  manufacturing  space  will be available at its Moberly,  Missouri manufacturing plant in the event the Company requires additional capacity.
JOAN HANSEN & CO.           On December  20,  2000,  Joan Hansen & Co., a  non-exclusive  licensing agent of the Company (the "Agent"),  filed a lawsuit in the Supreme Court of the State of New York against the Company,  Everlast, George Horowitz, the President and Chief Executive  Officer of the Company,  and Ben Nadorf, a former principal stockholder of Everlast and a former Director of the Company,  individually. The Agent  alleged a breach of contract  on the basis that,  after the Merger of the parent  of  Everlast  with and into the  Company,  the  Company  stopped  paying royalties to Everlast,  and accordingly the Company  discontinued the payment of remuneration to the Agent.           The Agent further alleged that the Merger was a sham transaction;  that the  Company  intended  to default  on its  obligations  to the former  Everlast stockholders  and that the Everlast(R)  trademark and licenses would then revert to those  stockholders.  There  were  three  other  causes of  action  allegedly predicated on the theories of tortious  interference with contractual  relations and tortious  interference  with prospective  business  relations.  Damages were alleged in varying amounts, up to an aggregate of $55,500,000.           On  November  30,  2001,  the  Supreme  Court of the  State of New York dismissed the causes of action alleging  tortious  interference with contractual relations and tortious  interference with prospective  business relations,  made against George  Horowitz and Ben Nadorf.  The court also denied a  cross-motion, made by the Agent,  seeking  partial  summary  judgment  for breach of  contract against the Company.  The decisions  were  appealed by the Agent.  The Appellate Court affirmed the dismissal and the denial of the Agent's cross-motion.           Thereafter the Company filed a motion for summary  judgment against the Agent seeking  dismissal of the balance of the Agent's  claims.  That motion was decided in the Company's  favor on December 23, 2002. The Agent's appeal of that portion  of the  decision  dismissing  its claim for a breach  of  contract  was unanimously  affirmed  by the  Appellate  Division  on  December  16, 2003 and a subsequent a motion seeking permission to further appeal to the Court of Appeals was  denied.  The Agent  thereafter  asserted a breach of  contract  claims in a separate  demand for  arbitration.  Hearings  in the  arbitration  commenced  in November  2004.  On  January  6,  2006,  the   arbitrators   awarded  the  Agent approximately  $700,000 in back commissions and interest not paid as of December                                          12   31, 2005. The Company  recorded this charge in its fourth quarter of fiscal year 2005 and paid the  judgment  in  February  2006.  In  addition,  the  Company is required to make payments for commissions for certain future licensing  revenues during 2006 that will approximate $300,000.
No matters were submitted to a vote of security holders during the last quarter of fiscal year 2005.                                       PART II
MARKET INFORMATION           The Company's  shares of common  stock,  par value $.002 per share (the "Common  Stock")  are  quoted on the  Nasdaq  SmallCap  Market  under the symbol "EVST." The following table sets forth,  for the period  indicated,  the highest and lowest  bid  quotations  for the Common  Stock,  as  reported  by the NASDAQ system.  Quotations  reflect  prices  between  dealers,  do not  reflect  retail markups,  markdowns or  commissions,  and may not necessarily  represent  actual transactions.                                    2005                   High                      Low                   ----                      ---  1st Quarter       $12.91                    $5.75 2nd Quarter       $ 9.02                    $6.57 3rd Quarter       $ 7.40                    $4.60 4th Quarter       $11.36                    $3.47                                   2004                    High                      Low                   ----                      ---  1st Quarter       $3.58                     $2.54 2nd Quarter       $3.10                     $2.46 3rd Quarter       $4.63                     $2.75 4th Quarter       $8.44                     $2.80    HOLDERS           The  closing  bid price of each  share of Common  Stock as of March 17, 2006 was $18.83.  There were 370 record  holders of the shares of Common  Stock. Based upon information  received from some of these record holders,  the Company believes  there are  approximately  1,250  beneficial  holders  of the shares of Common Stock.  DIVIDENDS           The Company has never paid  dividends on its Common Stock.  The Company anticipates  that, for the foreseeable  future, no dividends will be paid on its                                          13   Common Stock in accordance  with its $25 million  Senior Term Facility which was closed on February 8, 2006.  DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2005)  - ----------------------------------------------------------------------------------------------------------- Plan Category        Number of securities to     Weighted-average         Number of securities remaining                          be issued upon         exercise price of         available for future issuance                      exercise of outstanding   outstanding options           under equity compensation                       options, warrants and     warrants and rights         plans (excluding securities                            rights (a)                                         reflected in column (a)) - ----------------------------------------------------------------------------------------------------------- Equity compensation        1,107,134                  $6.75                         1,222,200 plans approved by security holders - -----------------------------------------------------------------------------------------------------------                                           14
The following  selected  consolidated  financial  information  has been taken or derived from the Company's audited consolidated  financial  statements. The information  set forth below is not necessarily  indicative of the Company's results  of  future   operations  and  should  be  read  in   conjunction   with "Management's  Discussion  and  Analysis of Financial  Condition  and Results of Operations"  and the Company's  consolidated  financial  statements  and related notes included elsewhere in this Form 10-K. See "Item 8. Consolidated  Financial Statements and Supplementary Data."           As of January 1, 2005,  the  Company  has  licensed  its United  States women's  apparel  category to Jacques  Moret.  On December  14, 2005 the Company announced that effective  January 1, 2006; the Company expanded its relationship with Jacques Moret, whereby it signed a four-year license agreement,  granting a license for Everlast's men's activewear,  sportswear,  outerwear and swimwear in the United States. Accordingly,  Everlast has reported its results of operations on a GAAP basis,  which includes the application of SFAS No. 144 "Accounting for the Disposal of Long-Lived  Assets"  which  requires us to report our results of operations  from our  men's  and  women's  apparel  businesses  as  discontinued components for all current and prior periods presented.  - --------------------------------------------------------------------------------------------------------------------------------                                                                             For the year ended                                                 December 31     December 31     December 31      December 31      December 31                                                    2005             2004          2003 (a)          2002             2001                                               ================ =============== =============== ================ ================  Net Sales                                         $31,271,000    $24,438,000     $25,126,000       $27,922,000      $22,783,000 - -------------------------------------------------------------------------------------------------------------------------------- Net License Revenues                               11,982,000      9,059,000       6,669,000         5,501,000        5,141,000 - -------------------------------------------------------------------------------------------------------------------------------- Operating  Income (Loss) from Continuing Operations                               5,226,000      1,063,000      (2,158,000)          166,000          111,000 - -------------------------------------------------------------------------------------------------------------------------------- (Loss) Income from Discontinued                    (2,774,000)      (973,000)      1,018,000         1,937,000        2,228,000 Components, net of tax - -------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) (a)                                (948,000)    (1,027,000)       (955,000)        2,448,000        2,339,000 - -------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Dividend                                    -              -               -         1,451,000        1,675,000 - -------------------------------------------------------------------------------------------------------------------------------- Basic Per Share Data (b):    Net Income (loss) from Continuing                    $0.55         ($0.02)         ($0.63)            $0.05            $0.04 Operations                                             ($0.83)        ($0.31)          $0.32             $0.62            $0.72    Net (loss) from Discontinued Components - -------------------------------------------------------------------------------------------------------------------------------- Diluted Per Share Data (b):    Net Income (loss) from Continuing                    $0.47         ($0.02)         ($0.63)            $0.04            $0.02 Operations                                             ($0.71)        ($0.31)          $0.32             $0.47            $0.46    Net Income from Discontinued Components - -------------------------------------------------------------------------------------------------------------------------------- Total Assets                                       61,441,000     64,756,000      64,257,000        63,847,000       63,953,000 - -------------------------------------------------------------------------------------------------------------------------------- Long Term Debt, net of current maturities          26,531,000      6,643,000       4,866,000         3,227,000          141,000 - -------------------------------------------------------------------------------------------------------------------------------- Redeemable Preferred Stock                                  -     25,000,000      30,000,000        35,000,000       40,000,000   (a)      During  fiscal  year  2003,  the  Company  incurred  restructuring  and          non-recurring duplicative manufacturing costs aggregating $3.3 million,          pretax,  related to the relocation and  consolidation of its Bronx, New          York manufacturing  facility which closed in December 2003. These costs          are included in the net loss from continuing operations. (b)      Excludes  the  effect  of the  preferred  stock  dividends'  impact  of          earnings  per share for the years ended  December  31, 2002 and 2001 as          follows: Basic - $0.47 and $0.54; Diluted - $0.35 and $0.35.                                            15
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS           Our financial  statements  are prepared in accordance  with  accounting principles  generally  accepted in the United States of America.  The accounting principles we use require us to make estimates and  assumptions  that affect the reported  amounts  of  assets  and  liabilities  at the  date  of the  financial statements  and  amounts of income and  expenses  during the  reporting  periods presented.  We  believe  in the  quality  and  reasonableness  of  our  critical accounting  policies,  however it is likely that  materially  different  amounts would be reported under different conditions or using different assumptions that we have consistently applied. We believe our critical accounting policies are as follows, including our methodology for estimates made and assumptions used.        o     REVENUE  RECOGNITION  POLICY.  Revenues  from  royalty  and  finders             agreements  are  recognized  when  earned  by  applying  contractual             royalty rates to quarterly point of sale data, among other criteria,             received  from  the  Company's  licensees.   The  Company's  royalty             recognition  policy  provides  for  recognition  of royalties in the             quarter  earned,  although a large portion of such royalty  payments             are  actually  received  during  the  month  following  the end of a             quarter.  Revenues  are  not  recognized  unless  collectibility  is             reasonably assured.        o     TRADE RECEIVABLES. We perform ongoing credit evaluations on existing             and new  customers  daily.  We  apply  reserves  for  delinquent  or             uncollectible  trade  receivables  based on specific  identification             methodology  and also  apply a  general  reserve  based on our trade             receivable  aging  categories.  Credit  losses  have been within our             estimates over the last few years.        o     DEFERRED  TAXES.  Deferred  taxes  are  determined,   based  on  the             differences  between the financial statement and tax bases of assets             and liabilities,  as well as the future benefit of any net operating             loss carryforward, using enacted tax rates in effect for the year in             which the differences are expected to reverse.  Valuation allowances             are established  when necessary to reduce deferred tax assets to the             amounts  expected  to be  realized.  In  assessing  the  need  for a             valuation allowance management considers estimates of future taxable             income and ongoing prudent and feasible tax planning strategies.  In             accordance  with APB Opinion 23, the Company does not accrue  income             taxes  on the  undistributed  earnings  of a  subsidiary  which is a             "DISC"  since the  repatriation  of the  earnings of the DISC is not             expected in the foreseeable  future. If circumstances  change and it             becomes apparent that some or all of the  undistributed  earnings of             the DISC will be remitted in the foreseeable future, then taxes will             be accrued.        o     INVENTORY.  Our  inventory is valued at the lower of cost or market.             Cost has been  derived  principally  on standard  cost  methodology,             where  we  utilize  a  first-in-first-out  method.  We  provide  for             allowances on finished goods and  specifically  identify and reserve             for slow moving or obsolete raw materials and packaging.        o     VALUATION OF GOODWILL,  LONG-LIVED ASSETS AND INTANGIBLE ASSETS. The             Company  periodically  evaluates  goodwill,  long-lived  assets  and             intangible assets for potential  impairment  indicators.  Judgements             regarding  the  existence  of  impairment  indicators  are  based on             estimated future cash flows,  market conditions,  and legal factors.             Future  events could cause the Company to conclude  that  impairment             indicators exist and that the net book value of goodwill, long-lived             assets and intangible assets is impaired.  Any resulting  impairment             loss could have a material adverse impact on the Company's financial             condition and results of operations.                                          16          o     CONTINGENCIES  AND  LITIGATION.   Management   evaluates  contingent             liabilities including threatened or pending litigation in accordance             with SFAS No. 5, "Accounting for Contingencies" and records accruals             when the  outcome  of  these  matters  is  deemed  probable  and the             liability  could be  reasonably  estimated.  Management  makes these             assessments  based  on the  facts  and  circumstances  and  in  some             instances based in part on the advice of outside legal counsel.  RESULTS OF OPERATIONS  2005 AND 2004 DISPOSAL OF BUSINESS COMPONENTS            On December 17, 2004,  the Company  entered into its largest  licensing agreement in its history,  whereby it licensed its United States women's apparel business to Jacques Moret,  effective January 1, 2005. On December 14, 2005, the Company  announced  that  effective  January 1, 2006,  the Company  expanded its relationship  with Jacques Moret whereby the Company  licensed its United States men's apparel  business.  The Company  believes that its decision to license its men's and women's  apparel  businesses was in its best interests to reduce risk, increase  profitability and to grow Everlast apparel presence as a result of the licensee's ability to source product more  competitively,  due to the licensee's buying power, along with the licensee's expanded distribution available from the licensees  presence in certain channels of distribution.  The Company  estimates that  discontinuance of the men's apparel component and its replacement with the license  arrangement  would have improved the Company's net income  available to common  stockholder's by approximately  $1.3 million in 2005, had the transition been completed at the beginning of the year, after giving affect to income taxes and  dividends  associated  with the  Company's  Preferred  Stock.  The  Company estimates that the  discontinuance  of the men's and women's apparel  components and its  replacement  with the license  arrangements,  would have  improved  the Company's net income  available to common  stockholders  by  approximately  $1.4 million in 2004,  had the  transaction  been  completed at the  beginning of the year,  after giving affect to income taxes,  and dividends  associated  with its Preferred  Stock.  The  Company  believes  that its results of  operations  will benefit in 2006 as well. In addition, the Company's working capital requirements would have  decreased in both 2005 and 2004, and is expected to decrease in 2006 and thereafter as a result of carrying  lower levels of accounts  receivable and inventory.  Accordingly, the Company has reported its results of operations on a GAAP basis,  which includes the  application of SFAS No. 144 "Accounting for the Disposal  of  Long-Lived  Assets"  which  requires  us to report our  results of operations of the Company's men's and women's apparel businesses as discontinued components for all current and prior periods presented.  2005 AND 2003 RESTRUCTURING AND NON-RECURRING CHARGES           Commencing  July 2003, we decided to pursue and execute a plan to close the Bronx,  New York  facility.  Our decision to close this facility was largely the result of  significant  lease  escalation  costs  expected at the end of our existing lease term in April 2004 and our inability to reach practical  capacity at both the  Bronx,  New York and  Moberly,  Missouri  facilities.  Accordingly, during the fourth  quarter of fiscal  2003,  we  completed  the  relocation  and consolidation of the facilities.           During  the  fourth   quarter  of  fiscal  2003  we  recorded   charges aggregating  $2.1  million,   before  taxes,   related  to  the  relocation  and consolidation  of our Bronx, New York  manufacturing  facility into our Moberly, Missouri  facility.  Approximately  $1.2 million of these  charges were non-cash nature.           The restructuring charge includes $2.1 million of costs associated with the discontinuance of certain products, factory labor and related overhead costs resulting  from the idle capacity in the Bronx,  New York  facility,  severance, lease exit and other  disposal  costs.  Because of this $2.1 million of charges, our 2003 gross  profit was reduced by $1.1  million  charged to cost of sales as required by accounting rules. At December 31, 2003,  approximately  $0.5 million was accrued principally  related to lease exit costs. In addition,  we wrote off and  disposed  of  approximately  $0.1  million  of  fixed  assets.   Additional restructuring  charges  of $0.4  million  were  incurred  during  the year ended                                          17   December 31, 2003 related to severance  liabilities  and related  employee costs and other  disposal and lease exit costs.  In the fourth quarter of fiscal 2004, we were notified by the former union  representing  employees of the Bronx,  New York facility that a potential minimum  withdrawal  pension liability existed on these former employees that were covered under a defined benefit  multi-employer pension plan. In the second  quarter of fiscal year 2005 we and the union agreed on a settlement for $273,000 for this minimum withdrawal  liability resulting in a charge for the year ended  December 31, 2005.  Through  December 31, 2005,  we have paid $81,000  towards  this  settlement  and are required to pay  quarterly installments of $12,000 commencing July 1, 2005 through July 2009.  YEAR ENDED 2005 COMPARED TO YEAR ENDED 2004           Net revenues increased to $43.3 million for the year ended December 31, 2005 from $33.5  million for the year ended  December 31,  2004,  an increase of $9.8  million,  or 29%.  This  increase  was a result of  increases  in sales of sporting goods equipment of $6.8 million (28% increase),  and licensing revenues of $2.9  million  (32%  increase)  compared to the same  period  last year.  The increase in licensing revenues was a result of the aforementioned  Jacques Moret license,  which accounted for $2.5 million of this increase. The average revenue for our gross  licensing  revenue  stream in  existence  for the past two fiscal periods is approximately $140,000. There were 87 existing licensing arrangements as of December 31, 2005 compared to 66 at December 31, 2004.            Gross profit increased to $18.4 million for the year ended December 31, 2005 from $14.9  million for the year ended  December  31,  2004.  Gross  profit decreased as a percentage  of net revenues to 42.6% from 44.6%.  The increase in gross profit dollars was due to the aforementioned increase in net revenues. The decrease in gross profit percentage was due to: higher commodity costs primarily due to fuel  surcharges  which are expected to continue in the near term; and an unfavorable  change in sales  mix,  especially  during  the first half of fiscal 2005, which may or may not continue in the foreseeable future.           Selling and shipping expenses were  approximately  $5.2 million (12% of net  revenues)  for the year ended  December 31, 2005 compared with $6.3 million (18.7% of net  revenues) for the year ended  December 31, 2004.  The decrease in dollars and as a percentage  of net revenues was primarily a result of decreased marketing and selling  programs,  reduced  freight-out  and logistics  costs and other fixed selling costs,  including  personnel.  In addition,  during the year ended  December 31, 2005, we incurred a non-cash  charge in connection  with the issuance of warrants to purchase  149,000 shares of our common stock,  $0.02 par value (the  "Warrants") to Contender  Partners LLC,  aggregating  $182,000.  The warrants  were valued  using the Black  Scholes  option  pricing  model and were issued in exchange  for product  placement of men's  apparel and sporting  goods appearing on The Contender reality television show, which initially aired on NBC network and its affiliates in March 2005.           General and  administrative  expenses remained at $6.7 million for both the years ended  December 31, 2005 and December 31, 2004.  During the year ended December 31, 2005, we incurred a restructuring  charge of $287,000 for a minimum withdrawal  pension  liability  settlement  with the former  union  representing employees of the Bronx, New York facility which was closed in December 2003.           Amortization expense remained approximately $0.9 million for both years ended December 31, 2005 and 2004.           Operating  income increased to $5.2 million for the year ended December 31, 2005 from $1.1  million for the  December 31, 2004  comparable  period.  The increase  in  operating  income for the 2005  period was  primarily  a result of higher gross profit dollars and a decrease in operating  expenses,  as explained above.                                         18            Interest expense and finance costs,  net of interest income,  increased to $2.2  million in the year ending  December 31, 2005 from  approximately  $1.1 million  during the  December  31, 2004  period.  The increase was due to higher borrowing  costs  associated  with our  average  outstanding  factor  balance as compared to the prior period, and borrowings  associated with our outstanding $4 million notes payable and amortization of deferred finance costs associated with refinancing  our Preferred  Stock  completed in January  2004.  During the years ended  December  31,  2005 and  2004,  we did not  incur  any  interest  expense associated with our Preferred Stock due to our net losses for those years.           During  the  fourth  quarter  and year  ended  December  31,  2005,  we announced the passing of our President and Chief Executive Officer.  The Company was a  co-beneficiary  of a life insurance policy upon his life to the extent of $1.5  million.   Additionally,   the  Company   previously  created  a  deferred compensation  plan on his behalf,  and was  obligated to pay $1 million over his term as CEO, as defined.  Accordingly, the Company is required to accelerate its contribution  into  this  plan by reason of his  death,  of  approximately  $0.8 million,  at  December  31,  2005.  The  net  effect  of  these  events  was the recognition of approximately $0.7 million gain recorded in 2005.           As  previously  disclosed,  on December 20, 2000, a lawsuit was brought against the Company, its subsidiary (EWBH), and two officers of the Company. The complaint was initiated by EWBH's licensing  representative (the "plaintiff") in the Supreme Court of the State of New York (the "Court").  The plaintiff alleged breach of contract,  tortuous interference with contractual relations,  tortuous interference with prospective  business relations and unjust enrichment stemming from the merger of the Company  completed on October 24,  2000.  On December 23, 2002,  the balance of the lawsuit  against the Company was  dismissed by summary judgment.  Plaintiff  subsequently  filed a motion seeking permission to further appeal its claims to the Court of Appeals as well as  reasserting  its breach of contract claims in a separate demand for  arbitration.  The Agent appeal of that portion  of the  decision  dismissing  its claim for a breach  of  contract  was unanimously affirmed by the Appellate Division on December 16, 2003. Hearings in the arbitration  commenced in November 2004. On January 6, 2006, the arbitrators awarded the Agent  approximately  $700,000 in back  commissions and interest not paid as of December 31,  2005.  The Company  recorded  this charge in its fourth quarter of fiscal 2005 and paid the judgment in February 2006.           Income  before  income taxes from  continuing  operations  for the year ended December 31, 2005 was $3.0 million  compared to a $7,000 pre-tax loss from continuing  operations  for the year ended  December 31,  2004.  The increase in pre-tax  profits from  continuing  operations  was a result of higher  operating profits offset by higher interest costs, as explained above.           We recognized a tax provision  from our  continuing  operations of $1.1 million (39% of pretax  profit from  continuing  operations)  for the year ended December  31, 2005 as compared to a tax  provision of $46,000 for the year ended December  31,  2004.  We  expect  our  effective  income  tax rate in 2006 to be approximately 40%.           Net  income  from  continuing  operations  was $1.8  million in 2005 as compared  to a net  loss  of  $53,000  in  2004.  Loss,  net of  tax,  from  the discontinued components was $2.8 million during the year ended December 31, 2005 as compared to a loss from our discontinued component,  net of tax of $1 million in 2004. Accordingly, our net loss for the year ended December 31, 2005 was $0.9 million  as  compared  to net loss in the year  ended  December  31,  2004 of $1 million.  We do not  expect  to  incur  significant  costs  associated  with our discontinued  components  during  fiscal  2006,  and  expect our cash flows from operations to be favorably  impacted by the  elimination  of these  discontinued components in our business, by approximately $2 million for fiscal 2006.                                           19    YEAR END 2004 COMPARED TO YEAR END 2003           Net sales were $24.4  million for the year ended  December  31, 2004 as compared  to $25.1  million in 2003,  a  decrease  of $.7  million or 2.7%.  The decrease was primarily the result of a decrease in our women's  Canadian apparel business which was licensed in July in 2004.           Net  licensing  revenues  were $9.1  million for the year ended 2004 as compared to $6.7 million for the year ended  December 31, 2003.  The increase of $2.4 million,  or 35.8%,  in licensing  revenues in 2004 over 2003 was largely a result of new  licenses  entered  into ($1.5  million) as well as  increases  in revenues  generated  from  existing  licenses,  primarily  overages  earned ($.9 million).  In 2004 we ended with 66 licenses,  after terminating 10 licenses and entering  into 24 new  license  arrangements.  The  average  revenue for license agreements  in  existence  for the  past two  fiscal  periods  is  approximately $140,000.  There has been no change to the  aggregate  revenue  attributable  to pre-existing licenses.           Total net revenues in 2004 amounted to $33.5 million  compared to $31.8 million in 2003.  The $1.7  million  increase  was due to  increases  in license revenues as explained above.           Gross profit in 2004 increased to $14.9 million, 44.5% of net revenues, as compared to the gross profit in 2003 of $12.8  million,  40% of net revenues, an increase of $2.1 million. Gross profit in 2003 adjusted for the restructuring costs  included in cost of sales was $15.8 million or 43.7% of net revenue.  The increase in gross profit dollars and as a percentage of net revenues was largely a result of the increase in net license revenues.           Selling and shipping costs were approximately $6.3 million for the year ended 2004 (18.7% of net  revenues)  as compared to $6.8  million  (21.3% of net revenues)  for the year ended  December 31, 2003.  The  reduction in dollars and percentages  was due to lower revenues along with the  elimination of the higher dollar value of fixed  selling costs  (principally  salaries and  benefits),  in proportion to the related net revenue base,  causing  selling and shipping costs to decline as a percentage of net revenues.            General  and  administrative  expenses  were  $6.7  million  in 2004 as compared to $6.2 million in 2003,  an increase of $.5 million.  The increase was due to increases in salaries, taxes, insurance, rent and other overhead costs.           Restructuring  and  non-recurring  costs  were  $1.1  million  in  2003 compared to none in 2004.           Amortization  expense remained $0.9 million for each of the years ended December 31, 2004 and 2003.           Operating  income from  continuing  operations was $1.1 million for the year ended  December 31, 2004 compared to an operating  loss of $2.2 million for the year ended  December 31, 2003.  The $3.2  million  improvement  in operating income  for 2004 was  primarily  due to the $2.1  million in  restructuring  and non-recurring  costs  incurred  as  mentioned  above,  along with  increases  in licensing revenues.           Other expenses  (principally  interest  expense and finance costs) were $1.1  million in 2004 as  compared  to $.5  million in 2003,  an increase of $.6 million.  The  increase  was  due  to  our  refinance  in  January  2004  of our obligations  to redeem our  Preferred  Stock  which  contributed  $.8 million in interest and finance costs during 2004.           Loss  before  provision  (benefit)  for income  taxes  from  continuing operations was ($7,000) in 2004 as compared to a loss in 2003 of ($2.6) million. The  decrease  in the loss  before  provision  (benefit)  of income  taxes  from continuing  operations of $2.6 million was due to the reduced  operating loss in 2004 vs. 2003 offset by higher interest and financing costs.           We  recorded a tax  provision  of $46,000 in 2004 from our pretax  loss from continuing operations vs. a tax benefit of $640,000 in 2003.                                         20            Net loss from continuing  operations was $53,000 in 2004 as compared to a net loss of $2.0  million in 2003.  Loss,  net of tax,  from the  discontinued components  was $1.0 million in 2004 as compared to $1.0 million profit in 2003. Accordingly, our net loss for both 2004 and 2003 was approximately $1.0 million.           There were no dividends  payable to the holders of Preferred  Stock for fiscal years ended December 31, 2004 and 2003 due to our net losses.  LIQUIDITY AND CAPITAL RESOURCES           We finance our operations  and growth  primarily with our cash flows we generate from our operations and from borrowings with our Factor.           Net cash provided by operating  activities  for the year ended December 31,  2005 was $6.7  million  compared to net cash used from  operations  of $1.6 million for the year ended December 31, 2004. This increase was primarily due to the  discontinuance of our women's business  component which provided cash flows from our working capital items,  principally accounts receivable,  inventory and accounts payable.           Net cash used by investing  activities for the years ended December 31, 2005 and 2004 was both  approximately  $.5 million.  The Company  anticipates it will spend approximately $.6 million in investing activities in 2006.           Net cash used by  financing  activities  was $6.7  million for the year ended December 31, 2005 as compared to net cash provided by financing activities for the year  ended  December  31,  2004 of $.8  million.  During the year ended December  31,  2005,  our  primary  need for funds  was to  finance  the  annual mandatory  redemption of our Preferred  Stock and interest and financing  costs, along  with  repayments  from our  advances  under our line of  credit  with our Factor.  We have relied  primarily  upon our cash flow from  operations  and our asset based borrowings from our Factor to finance our operations,  expansion and payments under our Preferred Stock  redemptions and interest  payable.  Cash and cash equivalents were  approximately  $58,000 at December 31, 2005,  compared to $.6 million at December 31, 2004, a decrease of $.6 million. Working capital was $0.3 million at December 31, 2005 compared to $2.0 million at December 31, 2004. The  decrease  in  working  capital  was  due  to  losses  associated  with  our discontinued  men's apparel business  component along with increased  borrowings from our factor aggregating $1.8 million,  primarily to fund our preferred stock payments made of $3.0 million and interest financing costs of $0.8 million.           The balance of the amount due to Factor represents  accounts receivable assigned to the Factor, net of outstanding  advances made by the Factor us under the factoring agreement. At December 31, 2005 the amount due to factor was $13.0 million as compared to $11.3 million at December 31, 2004.   2006 LIQUIDITY OUTLOOK           In February 2006, we announced the redemption of all of our outstanding Preferred  Stock in the  aggregate  principal  amount of $20 million and related rights  and  privileges,   including  the  elimination  of  the   profit-sharing mechanism,  the retirement of two representatives on our board of director,  and the  prepayment  of our  outstanding  $6 million in notes  payable to one of the former Preferred Stockholders. We accomplished the redemptions and prepayment by entering into a $25 million  Senior  Secured  Four-Year Term Facility with Wells Fargo  Century,  Inc.  Under the terms of the credit  facility,  we redeemed our Preferred  Stock and  prepaid  notes  payable,  and all  rights  and  privileges thereof,  for an aggregate  amount of $22.7 million.  The remaining $2.3 million available  under  the  credit  facility  was  used  to  pay  for  financing  and professional  costs  associated  with the credit  facility.  The credit facility requires  quarterly  principal  installments of $635,000,  commencing  April 30, 2006, with a balloon of $15.5 million due December 31, 2009,  along with monthly interest  on the  related  outstanding  principal  at prime  plus 1%  (currently 8.50%).  The credit  facility  has  customary  covenants  in place,  including a                                          21   minimum  fixed-charge  financial covenant ratio, and excess cash-flow recapture. The credit  facility  is  secured  by all our  tangible  and  intangible  assets including that of our wholly-owned  subsidiaries.  In addition,  we also amended our $17 million  line of credit with our Factor,  who also  provided  the credit facility.           We  believe  our  2006   liquidity  and  working   capital  ratio  will significantly  be enhanced and improved by the  aforementioned  refinance of our debt and the  discontinued  men's  and  women's  business  components.  Our 2005 operating income from continuing operations was $5.2 million and earnings before interest,   taxes,   depreciation  and  amortization  (EBITDA)  from  continuing operations was $7.3 million.  We expect these  continuing  operations to provide operating and free cash flows in 2006 to finance our  operations,  and make debt service  payments in accordance  with the above term facility,  repayment to our factor from advances and  borrowings  used to fund working  capital  needs,  and other debt instruments and contractual  obligations shown in the table below. If positive  cash flow does not occur  there  will be a  decrease  in cash and cash equivalents and additional borrowings may be required by our Factor and/or other lenders.  CONTRACTUAL OBLIGATIONS            Obligations for all debt instruments,  capital and operating leases and other contractual obligations as of December 31, 2005, are as follows:                       Payments Due by Period (In 000's)                                                -----------------------------------------                                                                   Less than                                                      Total          1 Year     1-3 Years                                                ----------------------------------------- Senior Term Facility                               $ 25,000         1,905      $ 23,095 Long-term debt  obligations and capital lease obligations                                           3,672           236         3,436 Operating leases                                      1,180           408           772                                                ----------------------------------------- Total contractual cash obligations                 $ 29,852       $ 2,549      $ 27,303                                                =========================================  OFF-BALANCE SHEET ARRANGEMENTS           We have no off-balance  sheet  arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial  condition,  revenues or expenses,  results of operations,  liquidity, capital expenditures or capital resources that is material to our investors.                                          22
Market risk generally represents the risk that losses may occur in the values of financial  instruments  as a result of  movements  in interest  rates, foreign currency exchange rates and commodity prices. The Company does not enter into  derivatives  or other  financial  instruments  for trading or  speculative purposes.            Interest:  From time to time the  Company  invests  its excess cash in interest-bearing temporary investments of high-quality issuers. Due to the short time  the  investments  are  outstanding  and  their  general  liquidity,  these instruments  are classified as cash  equivalents  in the Company's  consolidated balance sheet and the Company believes that these investments do not represent a material  interest rate risk to it. The  Company's  long-term  debt  obligations consists of its $25 million  Senior  Term  Facility  that was closed in February 2006 and its mortgage  loan on its Moberly  facility and its  equipment  finance obligations. Based on the Company's average outstanding debt instruments subject to variable  interest  rates under its $17 million line of credit,  for the year ended  December 31, 2005 of $14.8  million,  a 50 basis point change in the base rate would result in an approximately $74,000 change in interest expense.            Foreign  Currency:  The  Company  conducts  business in Canada and the Licensed  Products  are sold in various  parts of the world.  Revenues  from the Company's  licensees  and  sales  from  its  Canadian  and  other  international customers are  denominated  in US Dollars and do not expose the Company to risks due to currency exchange rate fluctuations.
CONSOLIDATED FINANCIAL STATEMENTS            PLEASE SEE PAGE 2-F THROUGH 6-F.
None.
(a)  Evaluation of Disclosure Controls and Procedures.       Our Chief Executive  Officer and Chief Financial  Officer have reviewed our disclosure  controls and  procedures as of the end of the period covered by this Report.  Based upon this review, these officers concluded that, as of the end of the period covered by this Report,  our  disclosure  controls and procedures are effective in ensuring that  information  required to be disclosed by the Company in the  reports  it  files  or  submits  under  the  Exchange  Act is  recorded, processed,  summarized  and  reported,  within  the time  periods  specified  in applicable rules and forms.  (b)  Changes in Internal Controls.       There were no  significant  changes in our  internal  controls  or in other factors  that could  significantly  affect  these  controls  during the  quarter covered by this  report or from the end of the  reporting  period to the date of this Form 10-K.
None.                                         23                                         PART III  Item  10,  "Directors  and  Executive  Officers  of the  Registrant",  Item  11, "Executive  Compensation",  Item 12, "Security  Ownership of Certain  Beneficial Owners and  Management  and  Related  Stockholder  Matters",  Item 13,  "Certain Relationships and Related Transactions", and Item 14, "Principal Accountant Fees and  Services"  have been omitted from this report  inasmuch as the Company will file with the  Securities  and Exchange  Commission  pursuant to Regulation  14A within  120 days  after the end of the  fiscal  year  covered  by this  report a definitive Proxy Statement for the Annual Meeting of Stockholders of the Company currently  scheduled  to  be  held  on  June  2,  2006,  at  which  meeting  the stockholders  will vote upon,  among other things,  selection of the  directors. This information in such Proxy Statement is incorporated herein by reference.                                       PART IV
PART IV
(a)  (1)  LIST OF FINANCIAL STATEMENTS       Report of Independent Auditors       Consolidated Balance Sheets - December 31, 2005 and 2004       Consolidated Statements of Operations - Years ended December 31, 2005, 2004      and 2003       Consolidated  Statements of Stockholders' Equity - Years ended December 31,      2005, 2004 and 2003       Consolidated Statements of Cash Flows - Years ended December 31, 2005, 2004      and 2003       Notes to Consolidated Financial Statements       (2) List of Financial Statement Schedule           Valuation and Qualifying Accounts (Schedule II)                                                         Balance at                                                        Beginning         Charged to                       Balance at                                                           of             Costs and                          End of                                                         Period           Expenses       Deductions          Period                                                         ------           --------       ----------          ------  ALLOWANCE FOR DOUBTFUL ACCOUNTS:                 Year ended December 31, 2005                 $10,000          $38,595              -         $48,595                Year ended December 31, 2004                 412,000                -        402,000          10,000                Year ended December 31, 2003                 276,000          136,000              -         412,000                     RESERVE FOR CHARGEBACKS                 Year ended December 31, 2005                 275,000          833,046        219,046         889,000                Year ended December 31, 2004                 215,000        2,829,000      2,769,000         275,000                Year ended December 31, 2003                 150,000        1,862,000      1,797,000         215,000                       RESTRUCTURING ACCRUAL                 Year ended December 31, 2005                       -          287,000         81,305         205,696                Year ended December 31, 2004                 500,000                -        500,000               -                Year ended December 31, 2003                       -          500,000              -         500,000                                          24    (b)       REPORTS ON FORM 8-K       (1) Form 8-K dated December 14, 2005 and December 20, 2005.       The  Company  announced  in a press  release  dated  December  14, 2005 the signing of a license  agreement in granting  Jacques Moret,  Inc.,  licensee,  a license for the use of the Everlast mark to  manufacture,  market and distribute women's  apparel and activewear in the United  States.  On December 20, 2005 the Company filed copies of the Jacques Moret, Inc. license as a material contract.       (2) Form 8-K dated November 30, 2005       The  Company  announced  in a press  release  dated  November  29, 2005 the passing of its Chief Executive  Officer,  George Q. Horowitz and Chairman of the Board of Directors the naming of the Company's  President,  Seth Horowitz as its Chief Executive Officer and Chairman of the Board of Directors.       (3) Form 8-K dated November 7, 2005       The Company  announced  in a press  release its results of  operations  and financial condition for its fiscal 2005 third quarter ended September 30, 2005   (c)  Exhibits      Exhibit                                                           Filed     Index      Description of Document                              Herewith    Incorporated by Reference To:     -----      -----------------------                              --------    ------------------------------                Certificate of Incorporation of the Company, as 3.1(a)         amended ("Certificate of Incorporation").                        Exhibit 3.(i) of Registration Statement File No.33-87954                                                                                 (the "1995 Registration Statement")  3.1(b)         Certificate of Amendment of the Certificate of                   Exhibit 3.1(b) of the 2000 Form 10-KSB for the year ended                Incorporation.                                                   December 31, 2000  3.2            Bylaws of the Company.                                           Exhibit 3. (ii) of the 1995 Registration Statement.  10.1           Lease, dated as of December 1, 2003, between the                 Exhibit 10.2 of the 2003 Form 10-K for the year ended                Company and 1350 Broadway Associates.                            December 31, 2003.  10.2           Agreement and Plan of Merger dated August 21,                    Exhibit 99.1 of the Current Report on Form 8-K filed                2000 by and among Everlast Worldwide Inc. (f/k/a                 November 7, 2000.                Active Apparel Group, Inc.), Everlast Holding                Corp., a Delaware corporation, and the                stockholders of Everlast Holding.  10.3           2000 Stock Option Plan of the Company, as amended                Appendix A of Schedule 14A filed on May 2, 2005   10.4           2005 Non-employee Director Stock Option Plan                     Appendix B of Schedule 14A filed on May 2, 2005  10.5          Term Loan                                                         Exhibit 99.1 of the Current report on Form 8-K filed                                                                                 February 7, 2006  10.6          Second Amended and Restated Security Agreement                    Exhibit 99.2 of the Current report on Form 8-K filed                                                                                 February 7, 2006  10.7          Amended and Restated Factoring Agreement                          Exhibit 99.3 of the Current report on Form 8-K filed                                                                                 February 7, 2006  10.8          Security Purchase Agreement with Benjamin Nadorf                  Exhibit 99.4 of the Current report on Form 8-K filed                                                                                 February 7, 2006  10.9          Security Purchase Agreement with Arlene Shechet                   Exhibit 99.5 of the Current report on Form 8-K filed                                                                                 February 7, 2006  10.10         Security Purchase Agreement with Arthur Shechet                   Exhibit 99.6 of the Current report on Form 8-K filed                                                                                 February 7, 2006  21            List of Subsidiaries                                     X  23.1          Consent of Independent Auditors                          X  31.1a         Certification  of Chief Executive  Officer pursuant      X               to  Rule   13a-14(a)  and  Rule  15d-14(a)  of  the               Securities Exchange Act, as amended.  31.2a         Certification  of Chief Financial  Officer pursuant      X               to  Rule   13a-14(a)  and  Rule  15d-14(a)  of  the               Securities Exchange Act, as amended.                                                                    25   32.1a         Certification  by  CEO  pursuant  to  18  U.S.C.        X               Section 1350, as adopted pursuant to Section 906 of               the Sarbanes-Oxley Act of 2002.  32.2a         Certification  by  CFO  pursuant  to  18  U.S.C.        X               Section 1350, as adopted pursuant to Section 906 of               the Sarbanes-Oxley Act of 2002.                                            26                                         SIGNATURES       In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                             Everlast Worldwide Inc.                                            By: /s/ Seth Horowitz                                               ---------------------------------                                               Seth Horowitz                                               Chairman, Chief Executive Officer                                               and President                                            By: /s/ Gary J. Dailey                                               ---------------------------------                                               Gary J. Dailey                                               Chief Financial Officer  Dated: March 27, 2006          In accordance with the Exchange Act this report has been signed below by the following  persons on behalf of the  Registrant and in the capacities and on the dates indicated.   March 27, 2006                           /s/ Seth Horowitz                                           Seth Horowitz  (Chairman;  Chief                                           Executive Officer;  President                                           and Principal Executive Officer)   March 27, 2006                           /s/ Gary J. Dailey                                           -----------------------------------                                           Gary J. Dailey (Chief Financial                                           Officer; and Chief Accounting Officer)   March 27, 2006                           /s/ James Anderson                                           -----------------------------------                                           James Anderson (Director)   March 27, 2006                           /s/ Larry Kring                                           -----------------------------------                                           Larry Kring (Director)   March 27, 2006                           /s/ Edward Epstein                                           -----------------------------------                                           Edward Epstein (Director)   March 27, 2006                           /s/ Mark Ackereizen                                           -----------------------------------                                           Mark Ackereizen (Director)   March 27, 2006                           /s/ James Mcguire, Jr.                                           -----------------------------------                                           James McGuire, Jr. (Director)   March 27, 2006                           /s/ Jeffrey Schwartz                                           -----------------------------------                                           Jeffrey Schwartz (Director)                                             -----------------------------------                                           Teddy Atlas                                         27                                   EVERLAST WORLDWIDE INC.                                 AND SUBSIDIARIES                                    CONSOLIDATED                               FINANCIAL STATEMENTS                                  DECEMBER 31, 2005                           EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                   TABLE OF CONTENTS                                                                         PAGE  Report of Independent Registered Public Accounting Firm                1f   Consolidated Balance Sheets                                            2f   Consolidated Statements of Operations                                  3f   Consolidated Statements of Changes in Stockholders' Equity            4-5f   Consolidated Statements of Cash Flows                                  6f   Notes to Consolidated Financial Statements                           7f-31f                    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Board of Directors Everlast Worldwide Inc. and Subsidiaries New York, NY   We have  audited  the  accompanying  consolidated  balance  sheets  of  Everlast Worldwide  Inc.  and  subsidiaries  as of December  31,  2005 and 2004,  and the related consolidated statements of operations,  changes in stockholders' equity, and cash flows for each of the three  years in the  period  ended  December  31, 2005. These  consolidated  financial  statements are the  responsibility  of the Company's  management.  Our  responsibility  is to  express  an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,  evidence  supporting  the amounts and  disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audits  provide  a reasonable basis for our opinion.  In our opinion, the consolidated  financial statements referred to above present fairly, in all material  respects,  the financial position of Everlast Worldwide Inc. and  subsidiaries  as of December 31, 2005 and 2004, and the results of its operations  and its cash flows for each of the three  years in the period  ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.  Our  audits of the  consolidated  financial  statements  referred  to above also included  an audit of the  financial  statement  schedule  listed  in the  index appearing under Item 15(b)(1). In our opinion, this financial statement schedule presents  fairly,  in all material  respects,  the information set forth therein when read in conjunction with the related consolidated financial statements.    New York, NY                                     /s/ Berenson LLP February 17, 2006                                        1-f                         EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                             CONSOLIDATED BALANCE SHEETS                                                                                                       December 31,                                                                                      -----------------------------------------                                     ASSETS                                                   2005                   2004                                                                                      -------------------    ------------------ Current assets:    Cash and cash equivalents                                                            $    58,000            $   649,000    Accounts and licensing receivables, net                                               11,117,000              9,781,000    Inventory of discontinued components                                                   1,205,000              1,020,000    Inventories                                                                            6,732,000             11,762,000    Prepaid expenses and other current assets                                              2,761,000                921,000                                                                                      -------------------    ------------------               Total current assets                                                       21,873,000             24,133,000 Property and equipment, net                                                               6,213,000              6,182,000 Goodwill                                                                                  6,718,000              6,718,000 Trademarks, net                                                                          22,664,000             23,576,000 Restricted cash                                                                           1,059,000              1,028,000 Other assets                                                                              2,914,000              3,119,000                                                                                      -------------------    ------------------                                                                                         $61,441,000            $64,756,000                                                                                      ===================    ==================  LIABILITIES, REDEEMABLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS' EQUITY  Current liabilities:    Current maturities of Series A redeemable participating preferred stock              $         -            $ 3,000,000    Due to factor                                                                         13,028,000             11,316,000    Current maturities of long-term debt                                                   2,141,000                249,000    Accounts payable                                                                       3,159,000              6,530,000    Accrued expenses and other current liabilities                                         3,252,000              1,062,000                                                                                      -------------------    ------------------               Total current liabilities                                                  21,580,000             22,157,000 License deposits payable                                                                    465,000                440,000 Series A redeemable participating preferred stock                                                 -             22,000,000 Note payable                                                                                      -              4,000,000 Other liabilities                                                                                 -                190,000 Long-term debt, net of current maturities                                                26,531,000              2,643,000                                                                                      -------------------    ------------------                                                                                          48,576,000             51,430,000                                                                                      -------------------    ------------------ Commitments and contingencies Stockholders' equity:    Common stock, par value $.002; 19,000,000 shares authorized;      3,552,743 issued, 3,378,743 outstanding, 3,070,359-2004                                  8,000                  7,000    Class A common stock, par value $.01; 100,000 shares authorized, issued        and outstanding                                                                        1,000                  1,000    Paid-in capital                                                                       12,307,000             11,821,000    Retained earnings                                                                      1,276,000              2,224,000                                                                                      -------------------    ------------------                                                                                          13,592,000             14,053,000    Less: treasury stock, at cost (174,000 common shares)                                   (727,000)              (727,000)                                                                                      -------------------    ------------------                                                                                          12,865,000             13,326,000                                                                                      -------------------    ------------------                                                                                         $61,441,000            $64,756,000                                                                                      ===================    ==================                       The accompanying notes are an integral part of the consolidated financial statements.                                                                 2-f                                                     EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                                  CONSOLIDATED STATEMENTS OF OPERATIONS  - ------------------------------------------------------------------------------------------------------------------------------------                                                                                          Years ended December 31,                                                                            ---------------------------------------------------------                                                                                  2005                 2004                 2003                                                                            ----------------   ------------------    ---------------- Net sales                                                                   $31,271,000          $24,438,000          $25,126,000 Net license revenues                                                         11,982,000            9,059,000            6,669,000                                                                            ----------------   ------------------    ---------------- Net revenues                                                                 43,253,000           33,497,000           31,795,000                                                                            ----------------   ------------------    ----------------  Cost of goods sold                                                           24,807,000           18,553,000           18,999,000                                                                            ----------------   ------------------    ----------------  Gross profit                                                                 18,446,000           14,944,000           12,796,000  Operating expenses:    Selling and shipping                                                       5,178,000            6,262,000            6,776,000    General and administrative                                                 6,660,000            6,706,000            6,170,000    Restructuring and non-recurring costs                                        287,000                    -            1,095,000    Costs in connection with warrant issuance                                    182,000                    -                    -    Amortization expense                                                         913,000              913,000              913,000                                                                            ----------------   ------------------    ----------------                                                                              13,220,000           13,881,000           14,954,000                                                                            ----------------   ------------------    ----------------  Operating income (loss) from continuing operations                            5,226,000            1,063,000           (2,158,000)  Other expense (income):    Interest expense and financing costs                                       2,238,000            1,087,000              503,000    Proceeds from life insurance benefit, net                                   (653,000)                   -                    -    Loss on litigation settlement                                                692,000                    -                    -    Investment income                                                            (22,000)             (17,000)             (48,000)                                                                            ----------------   ------------------    ----------------                                                                               2,255,000            1,070,000              455,000                                                                            ----------------   ------------------    ----------------  Income (loss) before provision (benefit) for income taxes     from continuing operations                                                2,971,000               (7,000)          (2,613,000) Provision (benefit) for income taxes                                          1,145,000               47,000             (640,000)                                                                            ----------------   ------------------    ----------------  Net income (loss) from continuing operations                                  1,826,000              (54,000)          (1,973,000)  (Loss) income from discontinued components, net of tax                       (2,774,000)            (973,000)           1,018,000                                                                            ----------------   ------------------    ----------------  Net loss available to common stockholders                                     ($948,000)         ($1,027,000)            (955,000)                                                                            ================   ==================    ================ Basic earnings (loss) per share from continuing operations                        $0.55               ($0.02)              ($0.63)                                                                            ================   ==================    ================ Diluted earnings (loss) per share from continuing operations                      $0.47               ($0.02)              ($0.63)                                                                            ================   ==================    ================ Basic earnings (loss) per share from discontinued components                     ($0.83)              ($0.31)               $0.32                                                                            ================   ==================    ================ Diluted earnings (loss) per share from discontinued components                   ($0.71)              ($0.31)               $0.32                                                                            ================   ==================    ================ Net basic loss per share                                                         ($0.28)              ($0.33)              ($0.31)                                                                            ================   ==================    ================ Net diluted  loss per share                                                      ($0.24)              ($0.33)              ($0.31)                                                                            ================   ==================    ================                          The accompanying notes are an integral part of the consolidated financial statements.                                                                  3-f                                                     EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                       CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                                              YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003                                                                                                 Class A                                              Total               Common stock             common stock                                           comprehensive   ------------------------  -----------------------    Paid-in                                           Income (loss)      Shares        Amount      Shares       Amount     capital                                           ------------    ------------- ----------- ------------ ---------- --------------  Balance, December 31, 2002                                  3,008,236     $6,000       100,000     $1,000     $11,663,000                                                           ============= =========== ============ ========== ==============  Comprehensive loss:   Net loss                                 $ (955,000)   Unrealized holding loss                      (3,000)                                           ------------ Comprehensive loss                          $(958,000)                                           ============ Exercise of stock options                                      20,668          -             -          -          34,000                                                           ------------- ----------- ------------ ---------- --------------  Balance, December 31, 2003                                  3,028,904      6,000       100,000      1,000      11,697,000                                                            ============= =========== ============ ========== ==============  Comprehensive loss:  Net loss                                ($1,027,000)                                           ------------  Exercise of stock options                                      41,455      1,000                                  124,000                                                           ------------- ----------- ------------ ---------- --------------  Balance, December 31, 2004                                  3,070,359      7,000       100,000       1,000     11,821,000                                                           ============= =========== ============ ========== ==============  Comprehensive loss:   Net loss                                  ($948,000)                                           ============   Issuance of shares  associated with make-whole provision of Merger                                 70,108    Issuance of warrants  and  exercise of stock options                                              238,276      1,000                                  486,000   Balance, December 31, 2005                                  3,378,743     $8,000       100,000     $1,000     $12,307,000                                                           ============= =========== ============ ========== ==============                           The accompanying notes are an integral part of the consolidated financial statements.                                                                   4-f                                                                     Accumulated                                                                 Other           Treasury stock                                             Retained        comprehensive -------------------------                                             earnings        Income (loss)   Shares        Amount          Total                                           -------------- ---------------- ----------- ------------- ----------------  Balance, December 31, 2002                  $4,206,000           $3,000      174,000    $(727,000)     $15,152,000                                           ============== ================ =========== ============= ================  Comprehensive loss:                           (955,000)                                                   (955,000)   Net loss                                                       (3,000)                                    (3,000)   Unrealized holding loss  Comprehensive loss  Exercise of stock options                                                                                   34,000                                           -------------- ---------------- ----------- ------------- ----------------  Balance, December 31, 2003                   3,251,000      $         -      174,000     (727,000)      14,228,000                                          = ============== ================ =========== ============= ===============  Comprehensive loss:  Net loss                                   (1,027,000)                                                 (1,027,000)   Exercise of stock options                                                                                   125,000                                           -------------- ---------------- ----------- ------------- ----------------  Balance, December 31, 2004                   2,224,000                -      174,000     (727,000)      13,326,000                                           ============== ================ =========== ============= ================  Comprehensive loss:   Net loss    Issuance of shares  associated with make-whole provision of Merger                (948,000)                                                   (948,000)    Issuance of warrants  and  exercise of stock options                                                                                           487,000                                                                                                                   - Balance, December 31, 2005                  $1,276,000     $          -      174,000    $(727,000)     $12,865,000                                           ============== ================ =========== ============= ================                           The accompanying notes are an integral part of the consolidated financial statements.                                                                    5-f                                             EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                             CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                        Years ended December 31,                                                                              --------------------------------------------                                                                                   2005           2004            2003                                                                              ------------   --------------  ------------- Cash flows from operating activities:    Net loss                                                                   $(948,000)     $(1,027,000)    $ (955,000)    Adjustments to reconcile net loss to     net cash provided by (used in) operating activities:       Bad debts                                                                  39,000                -        136,000       Depreciation                                                              542,000          537,000        534,000       Amortization                                                            1,468,000        1,389,000      1,062,000       Non-cash cost in connection with warrant issuance                         182,000                -              -       Interest income on restricted cash                                        (31,000)         (13,000)       (11,000)       Non-cash  restructuring  and  non-recurring   charges,   including       related inventory charge                                                        -                -      1,157,000       Changes in assets (increase) decrease:        Accounts receivable                                                    4,125,000       (1,048,000)    (1,101,000)        Inventories                                                            4,844,000       (1,770,000)      (584,000)        Prepaid expenses and other current assets                             (1,839,000)         186,000       (338,000)        Other assets                                                            (350,000)        (111,000)       (74,000)       Changes in liabilities increase (decrease):        Accounts payable and  accrued expenses and other liabilities          (1,373,000)         423,000      1,238,000        License deposits payable                                                  25,000         (129,000)         5,000                                                                              ------------   --------------  -------------              Net cash provided by (used) operating activities                 6,684,000       (1,563,000)     1,069,000                                                                              ------------   --------------  -------------  Cash flows from investing activities:    Proceeds from sale of marketable securities                                        -                -        309,000    Acquisition of property and equipment                                       (572,000)        (531,000)      (268,000)                                                                              ------------   --------------  -------------              Net cash (used) provided by investing activities                  (572,000)        (531,000)        41,000                                                                              ------------   --------------  -------------  Cash flows from financing activities:    Repayment of long-term debt instruments                                     (219,000)        (310,000)      (389,000)    (Repayments)/ advances to/from factor                                     (3,789,000)       4,091,000      3,803,000    Redemption of participating preferred stock                               (3,000,000)      (3,000,000)    (3,000,000)    Issuance of common stock in connection with exercise       of options                                                                305,000          125,000         34,000    Financing costs in connection with preferred stock refinance                       -         (100,000)      (700,000)    Payment of preferred stock dividend                                                -                -     (1,451,000)                                                                              ------------   --------------  -------------              Net cash (used) provided by financing activities                (6,703,000)         806,000     (1,703,000)                                                                              ------------   --------------  -------------  Net decrease in cash and cash equivalents                                      (591,000)      (1,288,000)      (593,000) Cash and cash equivalents, beginning of year                                    649,000        1,937,000      2,530,000                                                                              ------------   --------------  -------------  Cash and cash equivalents, end of year                                        $  58,000       $  649,000     $1,937,000                                                                              ============   ==============  =============                     The accompanying notes are an integral part of the consolidated financial statements.                                         6-f                         EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003    1.       Nature of business:                    Everlast  Worldwide  Inc.,  a  Delaware  corporation  and  its          subsidiaries (collectively,  the Company and herein also referred to as          "we", "us" and "our") was organized on July 6, 1992.  Effective January          1,  2006,  we  are  engaged  in  two  business  segments:  the  design,          manufacturing,  importing, marketing and sale of sporting goods related          to the sport of boxing such as boxing gloves,  heavy bags,  speed bags,          boxing trunks,  and  miscellaneous  gym equipment that are sold through          sporting  goods  stores,   mass   merchandisers,   catalog  operations,          gymnasiums,  and martial  arts  studios;  and we license and market the          Everlast(R) trademark to numerous companies that source and manufacture          products  such as men's,  women's  and  children's  apparel,  footwear,          cardiovascular  equipment,  eyewear,  sports  bags,  hats,  fragrances,          nutritional  products and other  accessories.  Prior to January 1, 2006          and 2005,  we were engaged in the design,  manufacture,  marketing  and          sale of men's and women's,  respectively,  activewear,  sportswear  and          outerwear (the "Apparel Products") each featuring the widely-recognized          Everlast(R)  trademark.  On December 17, 2004,  Everlast  announced the          signing of the  largest  license  agreement  in the  Company's  history          whereby it  licensed  its United  States  women's  apparel  category to          Jacques Moret,  Inc.  effective  January 1, 2005. On December 14, 2005,          Everlast  announced  the signing of another  licensing  agreement  with          Jacques  Moret  whereby we licensed  its United  States  men's  apparel          category to them effective January 1, 2006.  2.       Significant accounting policies:           a.     Principles of consolidation:                  Our accompanying  consolidated  financial statements include the          accounts  of  the  Company  and  its  wholly-owned  subsidiaries.   All          significant intercompany accounts and transactions have been eliminated          in consolidation.           b.     Cash and cash equivalents:                  The  Company  considers  all  short-term   investments  with  an          original maturity of three months or less to be cash equivalents.  Cash          equivalents  include  commercial paper,  money market funds and certain          certificates of deposit.           c.     Cash concentration:                  The Company maintains its cash and cash equivalents  accounts at          various  commercial banks. The cash balances are insured by the Federal          Deposit Insurance Corporation (FDIC) up to $100,000 at each bank.           d.     Inventories:                  Our inventories are valued at the lower of cost or market.  Cost          has  been  derived  principally  using  standard  costs  utilizing  the          first-in,  first-out method. We provide  write-downs for finished goods          when the net  realizable  value has fallen below cost,  and provide for          slow moving or obsolete raw materials and packaging.           e.     Accounts and licensing receivables:                  The  accounts  and  licensing  receivables  arise in the  normal          course of our businesses.  It is the policy of management to review the          outstanding  accounts and licensing  receivable at year end, as well as                                         7-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            the bad debt  write-offs  experienced  in the past,  and  establish  an          allowance for doubtful accounts for uncollectible amounts. An allowance          for doubtful accounts of $49,000 and $10,000 has been established as of          December 31, 2005 and 2004, respectively.           f.     Property and equipment:                  Property  and  equipment  are  stated at cost.  Depreciation  is          computed by the straight-line method over the estimated useful lives of          the assets.  Leasehold improvements are amortized over the terms of the          respective  leases  or  estimated  life  of the  assets,  whichever  is          shorter.  Expenditures  for  maintenance  and  repairs  are  charged to          operations as incurred.           g.     Fair value of financial instruments:                  i.      Cash and cash equivalents:                          The carrying amounts reflected in the balance sheets for                 cash and cash  equivalents,  none of which are held for  trading                 purposes,  approximates  fair value due to the short maturity of                 these instruments.                  ii. Accounts receivable, due to factor and accounts payable:                          The  carrying  amounts of  accounts  receivable,  due to                 factor  and  accounts  payable  approximate  their  fair  values                 because of the short maturities of these instruments.           h.     Intangible assets:                  i.      Goodwill:                          Effective January 1, 2002, the Company adopted Statement                 of Financial  Accounting  Standards No. 142,  Goodwill and Other                 Intangibles.  SFAS 142 addresses the  financial  accounting  and                 reporting for acquired goodwill and other intangible  assets. As                 a result of adopting SFAS 142,  goodwill is no longer amortized.                 Rather,  goodwill  is subject to a periodic  impairment  test to                 asses its fair value.  During the years ended December 31, 2005,                 2004 and 2003 the Company completed its annual impairment review                 of goodwill, which indicated that there was no impairment.                  ii.     Trademarks:                          At  December  31,  2005,   the  Company  has  trademarks                 acquired from a merger in 2000.  These costs are amortized  over                 30 years.  From the date of the  merger,  through  December  31,                 2005,  management  has deemed these  trademarks to have a finite                 life, and has amortized these assets over thirty years.  For the                 years  ended  December  31,  2005,  2004  and  2003,   trademark                 amortization expense was $913,000 for each year, respectively.                                         8-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                   Trademarks are as follows:                                                       2005             2004                                                  ------------     -----------                 Gross carrying amount of                   trademarks, at cost             $27,380,000     $27,380,000                  Accumulated amortization            4,716,000       3,804,000                                                  ------------     -----------                  Trademarks - net                  $22,664,000     $23,576,000                                                  ============     ===========                  The  Company  anticipates   amortization   associated  with  its          intangible  assets to approximate  $913,000 annually over the next five          years, subject to a change in the estimated useful life.           i.     Concentration of credit risk:                  The Company  routinely  extends credit to companies for the sale          of its sporting goods  equipment  merchandise.  This credit risk may be          affected  by  changes  in  economic  or  other   conditions   and  may,          accordingly,  impact the  Company's  overall  credit  risk.  Management          believes  that  the  credit  risk is  mitigated  by the  strict  credit          evaluation of those customers to which it extends credit.  Reserves for          potential  credit  losses  are  maintained  and such  losses  have been          immaterial to the Company's  financial position and within management's          expectations.           j.     Significant contracts:                  Effective  January 1, 2005, a license agreement was entered into          by the Company  and Jacques  Moret,  Inc. of New York.  This  agreement          grants  Jacques  Moret,  a major  supplier  to the US  women's  apparel          market,  a license for Everlast  women's  apparel in the United States.          Under the terms of this  five-year  agreement,  Jacques  Moret will pay          $12.5 million in minimum  guarantees  to Everlast.  During this initial          five-year  term,  Moret has the option to renew for an additional  five          years for minimum  guarantees  of $13.5  million,  or has the option to          sign a  ninety-nine  year license for women's  apparel  rights,  in the          United  States and  Canada for  approximately  $26  million.  Effective          January 1, 2006,  the Company  expanded its  relationship  with Jacques          Moret,  whereby it signed a  four-year  license  agreement,  granting a          license for  Everlast  men's  active-wear,  sportswear,  outerwear  and          swimwear in the United States, for minimum guaranteed royalties of $2.3          million over the four-year  term.  The license  agreement also contains          renewal  options of  five-year  terms.  There is currently no perpetual          license  provision  in this  contract  as  with  the  women's  contract          mentioned above.           k.     Income taxes:                  The  Company  and  its  wholly-owned   subsidiaries,   with  the          exception  of Everlast  Sports  International,  Inc.  ("ESI"),  files a          consolidated  federal  income tax return.  ESI  qualifies as a Domestic          International Sales Corporation (DISC),  which results in a deferral of          tax on its income.  No deferred tax liability has been recorded,  since          the Company does not  anticipate  the  repatriation  of earnings in the          foreseeable  future.  The Company  also files  various  state and local          income tax returns pursuant to reporting requirements in those locales.                                          9-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            l.     Advertising expense:                  The Company expenses advertising costs as they are incurred.  As          of December 31, 2005,  2004 and 2003, the Company had incurred,  in its          continuing   operations,   advertising  and  promotional   expenses  of          approximately   $2.1   million,   $2.7   million   and  $2.4   million,          respectively.           m.     Estimates:                  The  financial   statements  are  prepared  in  accordance  with          accounting  principles  generally  accepted  in the  United  States  of          America. The accounting  principles we use require us to make estimates          and  assumptions  that  affect  the  reported  amounts  of  assets  and          liabilities  at the date of the  financial  statements  and  amounts of          income and expenses during the reporting periods presented.  We believe          in the quality and reasonableness of our critical accounting  policies;          however,  it is  likely  that  materially  different  amounts  would be          reported under different conditions or using assumptions different from          those that we have consistently applied.           n.     Shipping and handling costs:                  Shipping and handling costs from continuing  operations totaling          approximately  $.7  million,  $.8 million and $.4 million for the years          ended December 31, 2005, 2004 and 2003,  respectively,  are included in          selling and shipping expenses on the statement of operations.           o.     Accounting for stock based compensation:                  On December 16,  2004,  the FASB issued FASB  Statement  No. 123          (revised  2004),  Share-Based  Payment,  which  is a  revision  of FASB          Statement No. 123, Accounting for Stock-Based  Compensation.  Statement          123(R)  supersedes  APB Opinion No. 25,  Accounting for Stock Issued to          Employees,  and amends FASB Statement No. 95,  Statement of Cash Flows.          Generally,  the approach in Statement 123(R) is similar to the approach          described in Statement  123.  However,  Statement  123(R)  requires all          share-based  payments to employees,  including grants of employee stock          options,  to be recognized in the income  statement based on their fair          values.  Pro forma  disclosure  is no longer an  alternative.  In April          2005,  the SEC amended the compliance  dates for Statement  123(R) from          fiscal periods  beginning after June 15, 2005 to fiscal years beginning          after June 15, 2005. We expect to adopt  Statement 123 (R) in the first          quarter of our fiscal year commencing January 1, 2006.                  As  permitted  by  Statement  123,  we  currently   account  for          share-based  payments to  employees  using APB Opinion  25's  intrinsic          value method and, as such,  generally  recognizes no compensation  cost          for  employee  stock  options.  Accordingly,  the adoption of Statement          123(R)'s  fair  value  method  will  have an  impact  on our  result of          operations,  although it will have no impact on our  overall  financial          position.  The  impact  of  adoption  of  Statement  123(R)  cannot  be          predicted at this time because it will depend on levels of  share-based          payments  granted in the  future.  However,  had we  adopted  Statement          123(R)  in prior  periods,  the  impact  of that  standard  would  have          approximated the impact of Statement 123 as described in the disclosure          of pro forma net loss and loss per share below.                  Pro forma information  regarding earnings and earnings per share          is  required  by SFAS No. 123,  and has been  determined  as if we have          accounted  for our stock  options  under the fair value  method of that          Statement.  The fair value for these  options was estimated at the date          of grant using a Black-Scholes  option pricing model with the following          weighted-average  assumptions: risk free interest rates ranging from 1%          to 2%; no dividend  yield;  volatility  factors of the expected  market          price of our common  stock  ranging  from  approximately  78% to 6% for                                         10-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            fiscal years 2005 through 2002; and a weighted-average expected life of          the options of five years in each year.                  The  Black-Scholes  option valuation model was developed for use          in estimating the fair value of traded  options,  which have no vesting          restrictions and are fully transferable.  In addition, option valuation          models require the input of highly subjective assumptions including the          expected  stock  price  volatility.  Because  our  stock  options  have          characteristics  significantly  different from those of traded options,          and because changes in the subjective input  assumptions can materially          affect the fair value estimate,  in management's  opinion, the existing          models do not necessarily provide a reliable single measure of the fair          value of our employee stock options.                  For purposes of pro forma disclosures,  the estimated fair value          of the  options is  amortized  to  expense  over the  options'  vesting          periods. Our pro forma information is as follows:                                                         2005              2004           2003                                                      ---------------  ---------------  ------------  Net loss as reported                                    $(948,000)      $(1,027,000)     $(955,000)  Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects                                        78,000            57,000         35,000                                                      ---------------  ---------------  ------------  Pro forma net loss                                    $(1,026,000)      $(1,084,000)     $(990,000)                                                      ===============  ===============  ============  Earnings (loss) per share:   Basic - as reported                                   $(0.28)           $(0.33)         $(.31)                                                         =======           =======         ======   Basic - pro forma                                     $(0.30)           $(0.35)         $(.32)                                                         =======           =======         ======    Diluted - as reported                                 $(0.24)           $(0.33)         $(.31)                                                         =======           =======         ======   Diluted - pro forma                                   $(0.26)           $(0.35)         $(.32)                                                         =======           =======         ======                                         11-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            p.     Impairment of long-lived assets:                  Long-lived  assets such as  property,  plant and  equipment  and          trademarks,  are reviewed for impairment  whenever events or changes in          circumstances indicate that the carrying amount may not be recoverable.          If the total of the  expected  future  undiscounted  cash flows is less          than the carrying  amount of the asset,  a loss is  recognized  for the          difference between the fair value and carrying value of the asset.            q.     Revenue recognition:                  Product  revenues are  recognized  upon shipment of inventory to          the customers.  License revenues are recognized based upon the terms of          the  underlying  license  agreements,  when the  amounts  are  reliably          measurable and collectability reasonably assured.           r.     Deferred financing costs:                  Eligible  costs  associated  with  obtaining  debt financing are          capitalized  and amortized over the related term of the applicable debt          instruments, which approximates the effective interest method.            s.     Recent pronouncements:                  SFAS No.  146,  "Accounting  for Costs  Associated  with Exit or          Disposal Activities",  addresses financial accounting and reporting for          costs  associated  with exit or disposal  activities and nullifies EITF          Issue No. 94-3, "Liability Recognition for Certain Employee Termination          Benefits and other Costs to Exit an Activity  (including  Certain Costs          Incurred in a  Restructuring)."  The principal  difference between SFAS          No.  146 and Issue  94-3  relates to SFAS No.  146's  requirements  for          recognition  of a  liability  for a cost  associated  with  an  exit or          disposal  activity.  SFAS No. 146 requires  that a liability for a cost          associated  with an exit or disposal  activity be  recognized  when the          liability is incurred.  Under Issue 94-3, a liability  for an exit cost          as  generally  defined in Issue 94-3 was  recognized  at the date of an          entity's commitment to an exit plan. Therefore, SFAS No. 146 eliminates          the definition and  requirements for recognition of exit costs in Issue          94-3.  SFAS No. 146 also  establishes  that fair value is the objective          for initial  measurement of the  liability.  The provisions of SFAS No.          146 are  effective  for exit or disposal  activities  that we initiated          after  December  31,  2002.   Refer  to  Note  5,   Restructuring   and          Non-recurring  Charges for our  disposal and exit  activities  incurred          during the fiscal years ended through 2005, 2004 and 2003.  3.       Adoption of SFAS No. 150, "Accounting for Certain Financial Instruments          with Characteristics of both Liabilities and Equity"                  In May 2003,  FASB issued SFAS No. 150,  "Accounting for Certain          Financial  Instruments  with  Characteristics  of both  Liabilities and          Equity." SFAS No. 150 is effective for all  financial  instruments,  in          existence  prior  to May 31,  2003,  meeting  this  definition,  at the          beginning of the first interim  period  beginning  after June 15, 2003.          The Company has adopted the provisions of SFAS No. 150,  effective July          1, 2003 for the third quarter ending  September 30, 2003. The Statement          establishes  standards for  classifying  and  measuring as  liabilities          certain financial instruments that embody obligations of the issuer and          have  characteristics  of both  liabilities  and equity.  The Company's                                         12-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            Series A Redeemable  Participating  Preferred Stock ("Preferred Stock")          meets this definition, and thus has been reclassified as a liability on          our Consolidated Balance Sheets as of December 31, 2005 and 2004.                  Application  of  SFAS  No.  150  requires  our  Preferred  Stock          instruments to be reclassified  at its current  carrying amount with no          cumulative adjustment recognized. In addition,  dividends, if any to be          paid, as defined, associated with our Preferred Stock instrument are to          be  classified  as interest  expense  commencing  from the three months          ended  September 30, 2003 onward.  During the years ended  December 31,          2003  through  2005,  no  dividends  have been  classified  as interest          expense  due to our net losses.  Dividends  and other  amounts  paid or          accrued prior to  reclassification of the instrument to a liability are          not  reclassified  as interest cost upon  transition in accordance with          SFAS No. 150.  4.       Disposal of components:                  On December  17, 2004,  we announced  the signing of the largest license  agreement in our history  whereby we licensed our United States women's apparel category to Jacques Moret, Inc.,  effective January 1, 2005. On December 14,  2005 we further  expanded  our  relationship  with  Jacques  Moret  whereby effective January 1, 2006, we licensed our United States men's apparel category. We believe  that it was in our best  interest  to license  our women's and men's apparel businesses to reduce risk,  increase  profitability and to grow Everlast apparel  presence as a result of the  licensees'  ability to source product more competitively,  due to its buying  power,  along with its expanded  distribution available from it presence in certain channels of distribution.                  The   following   results  of  our  women's  and  men's  apparel components have been presented as (loss) income from discontinued  components in the accompanying consolidated statements of operations:                                                              2005               2004              2003                                                       ---------------   ----------------   --------------- Net sales                                              $ 10,406,000        $32,665,000       $32,990,000 Costs and expenses                                       14,638,000         33,464,000        31,216,000                                                       ---------------   ----------------   ---------------  (Loss) income before income taxes                        (4,232,000)         (799,000)         1,774,000 (Benefit) provision for income taxes                     (1,458,000)           174,000           756,000                                                       ---------------   ----------------   ---------------  (Loss) income from discontinued components            $  (2,774,000)       $  (973,000)     $  1,018,000                                                       ===============   ================   ===============                  Included in the loss (income) from  discontinued  components are losses on the disposal of assets of $487,000,  $155,000 and $0 in 2005, 2004 and 2003,  respectively.  At December 31, 2005 and 2004 inventory available for sale of approximately  $1 million each represents  inventory of our men's and women's apparel  components that were acquired by the licensee in January 2006 and 2005, respectively.  Payment for the inventory is scheduled to be received during 2006 for the men's portion of the inventory  available for sale. Payment for the 2004 inventory was received in 2005.    5.      Restructuring and non-recurring charges:                                          13-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                   During the fourth  quarter of fiscal  2003 we  recorded  charges          aggregating $2.1 million,  before taxes,  related to the relocation and          consolidation  of our Bronx, New York  manufacturing  facility into our          Moberly, Missouri facility. Approximately $1.2 million of these charges          were non-cash in nature.                  Commencing July 2003, we decided to pursue and execute a plan to          close the Bronx, New York facility. Our decision to close this facility          was largely the result of significant  lease  escalation costs expected          at the end of our existing  lease term in April 2004 and our  inability          to reach  practical  capacity at both the Bronx,  New York and Moberly,          Missouri facilities.  Accordingly,  during the fourth quarter of fiscal          2003, we completed the relocation and consolidation of the facilities.                  The   restructuring   charge  includes  $2.1  million  of  costs          associated with the  discontinuance of certain products,  factory labor          and related  overhead  costs  resulting  from the idle  capacity in the          Bronx,  New York  facility,  severance,  lease exit and other  disposal          costs.  Of this $2.1  million of  charges,  our 2003  gross  profit was          reduced  by $1.1  million  charged  to cost of  sales  as  required  by          accounting  rules. At December 31, 2003,  approximately $.5 million was          accrued principally related to lease exit costs which were paid in full          during 2004.  In addition,  we wrote off and disposed of  approximately          $.1 million of fixed assets.  Additional  restructuring  charges of $.4          million were incurred  during the year ended  December 31, 2003 related          to severance  liabilities and related employee costs and other disposal          and lease exit costs.                  In the fourth  quarter of fiscal 2004,  we were  notified by the          former union  representing  employees of the Bronx,  New York  facility          that a potential minimum  withdrawal pension liability existed on these          former   employees   that  were   covered   under  a  defined   benefit          multi-employer  pension plan. In the second  quarter of fiscal 2005 the          Company  and the union  agreed on a  settlement  of  $273,000  for this          minimum withdrawal  liability  resulting in a charge for the year ended          December 31,  2005.  Through  December  31, 2005,  the Company has paid          $81,000  towards  this  settlement  and is  required  to pay  quarterly          installments of $12,000 commencing July 1, 2005 through July 2009.   6.       Loss on litigation settlement:                  On December 20,  2000, a claim was brought  against the Company,          its subsidiary (EWBH),  and two officers of the Company.  The complaint          was initiated by a EWBH's licensing representative (the "plaintiff") in          the Supreme Court of the State of New York (the "Court"). The plaintiff          alleged  breach of contract,  tortuous  interference  with  contractual          relations,  tortuous  interference with prospective  business relations          and unjust enrichment stemming from the merger of the Company completed          on October 24,  2000.  On November  30,  2001,  the claims  against the          officers were  dismissed by the Supreme  Court.  On June 27, 2002,  the          Appellate  Divisions  unanimously  affirmed  the order  dismissing  the          plaintiff's claims.                  On  December  23,  2002,   the  case  against  the  Company  was          dismissed.  Plaintiff subsequently filed a motion seeking permission to          further  appeal  its  claims  to  the  Court  of  Appeals  as  well  as          reasserting  its breach of  contract  claims in a  separate  demand for          arbitration.  The  Plaintiff's  appeal of that  portion of the decision          dismissing its claim for a breach of contract was unanimously  affirmed          by the  Appellate  Division  on  December  16,  2003.  Hearings  in the          arbitration  commenced in November 2004. In April 2005, the Company was          notified that the arbitrator's  award held that Everlast's  termination          of Plaintiff's representation agreement was void and declared not to be          terminated.  The Company filed a motion in the Supreme Court,  New York          County  seeking an order to vacate the award.  On January 6, 2006,  the          Supreme Court,  New York County  rendered a written  decision and order          granting  the petition to confirm the award and  dismissing  Everlast's          counterclaim  to vacate that  portion of the award made in  Plaintiff's          favor and awarding Plaintiff  approximately $690,000 due as of December                                         14-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            31, 2005. In February  2006, the judgment was entered and Everlast paid          the  Plaintiff  $690,000  plus  amounts owed for  commission  earned in          January 2006 and interest thereof through February 24, 2006 aggregating          $710,000.  The Company will now be required to pay  commissions  to the          Plaintiff  during the year ended  December  31,  2006 of  approximately          $300,000.   7.      Proceeds from life insurance benefit:                  On November 29, 2005, we announced the passing of our then Chief          Executive Officer, George Horowitz. The Company was a co-beneficiary on          one of the life  insurance  policies in Mr.  Horowitz's  name, for $1.5          million.  At December 31, 2005,  the Company has recorded a receivable,          included in prepaid and other current assets, for these proceeds, which          we received in January  2006.  In addition,  as part of Mr.  Horowitz's          employment  contract,  the  Company  was  to  contribute  approximately          $30,000 annually towards his deferred compensation  retirement plan. In          the event of a  separation  of  employment  between  Mr.  Horowitz  and          Everlast ( including  death) the Company is obligated to pay $1 million          in deferred  compensation,  or the difference  between its prior annual          paid  contributions  into this  deferred  compensation  plan and the $1          million  commitment.  At  December  31,  2005,  the Company has accrued          approximately  $800,000  remaining  towards this deferred  contribution          commitment. The Company has paid this commitment in early March 2006 to          the estate of George  Horowitz.  For the year ended  December 31, 2005,          the  Company  has  recorded a net  benefit of $653,000 as it relates to          these events.                                         15-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003   8.       Due to factor:                  Certain  of  the  Company's  accounts  receivable  are  assigned          without recourse to a commercial  factor.  The amount due to the factor          represents  advances  received  in excess of net  sales  assigned.  The          amount due to the factor is net of a provision  for future  chargebacks          of  approximately  $476,000 and $275,000 at December 31, 2005 and 2004,          respectively.  Interest is charged at 1% above prime on advances.  This          factoring  arrangement is collateralized by the Company's  factored and          non-factored   accounts  receivable  and  certain  finished  goods,  as          defined.                                                                 As of                      As of                                                         December 31, 2005         December 31, 2004           Outstanding Borrowings from Factor           $14,811,000               $18,600,000                                                       -----------               -----------           Outstanding  Accounts Receivable Assigned     $2,259,000                $7,559,000          to Factor           Reserve for charge-backs                        (476,000)                 (275,000)                                                          ---------                 ---------           Net Outstanding Accounts Receivable            1,783,000                 7,284,000          Assigned to Factor                             ---------                 ---------           Net Due to Factor                            $13,028,000               $11,316,000                                                       -----------               -----------           Non-factored accounts and licensing          $11,579,000                $9,791,000          receivables                                  -----------                ----------           Less: Allowance for Doubtful Accounts           (462,000)                  (10,000)                                                         ---------                  --------           Net non-factored Accounts and Licensing      $11,117,000                $9,781,000          Receivables                                  -----------                ----------   9.       Inventories:                  Inventories from continuing operations consist of:                                                  2005               2004                                           ---------------   -----------------                 Raw materials                $1,429,000         $ 2,657,000                 Work-in-process                 188,000             688,000                 Finished goods                5,115,000           8,417,000                                           ---------------   -----------------                                              $6,732,000         $11,762,000                                           ===============   =================                                         16-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003   10.      Property and equipment:                                                                      2005              2004                                                               -------------    ---------------                 Land                                            $  309,000        $  309,000                 Buildings and building improvements              5,392,000         5,380,000                 Furniture and fixtures                             551,000           470,000                 Machinery and equipment                          4,640,000         4,041,000                 Vehicles                                            42,000            95,000                                                               -------------    ---------------                                                                 10,934,000        10,295,000                 Less: accumulated depreciation                   4,723,000         4,113,000                                                               -------------    ---------------                                                                 $6,213,000        $6,182,000                                                               =============    ===============  11.      Series A Redeemable  Participating  Preferred Stock,  Notes Payable and          Long-Term Debt:                  On October  24,  2000,  the Board of  Directors  designated  the          issuance of 45,000 shares (1,000,000 total preferred shares authorized)          $.01 par value of Series A Redeemable  Preferred  Stock (the "preferred          shares").  These  preferred  shares were issued  pursuant to the merger          agreement among the Company,  Everlast Holding Corp. and Active Apparel          New Corp., a wholly-owned  subsidiary of the Company,  and are recorded          at their fair value. The preferred shares have priority liquidation and          dividend rights over other securities issued.                  As part of the merger agreement,  the Company is to redeem 5,000          shares ($5,000,000  redemption value) on every December 31 until all of          the shares have been redeemed. The Company has the option to redeem all          of the  preferred  shares at the end of any  quarter  or an  additional          amount  greater than the  mandatory  redemption  at the end of any year          (December 31st).                  On January 13,  2004 we  announced  that we had entered  into an          Agreement   on  December   14,  2003  with  the   Principal   Preferred          Stockholder, modifying its annual minimum redemptions.                  Under the terms of the Agreement,  in lieu of a cash payment for          the  redemption  of a  portion  of  their  Series  A  Preferred  Stock,          $2,000,000  for each of the four years  commencing  December  14,  2003          through  December  14,  2006,  will be  converted  into four term loans          ("Notes").  The Notes are evidenced by four  promissory  notes from the          Company  which shall  provide for the payment of interest  and deferred          finance  costs.  Interest and deferred  finance costs are to be paid at          the combined  annual rate of 9.5% per annum on the aggregate $8 million          of notes  during each of the years 2004  through  2007,  and 10% during          2008 payable each  December  14th until  maturity on December 14, 2008.          The  Company  shall have the right to pre-pay the  promissory  notes in          full, with no prepayment fees, prior to December 14, 2008 together with          all unpaid  interest  and deferred  financing  costs due at the time of          pre-payment.  There are no changes to the existing  preferred  dividend          formula currently being used on the outstanding  redeemable  percentage          of  the  Series  A  Preferred  Stock,  mentioned  below.  As a  further          condition  of this  refinance,  the Company  incurred  financing  costs          aggregating  $800,000  of which  $700,000  was paid in  December  2003;          $100,000 in January 2004.                  If the  Company  fails to make a  mandatory  redemption  payment          within  thirty  days  after  it is due,  all  licenses  and  trademarks          obtained  pursuant to the merger  will be  assigned  back to the former          stockholders  of Everlast,  effective 60 days following the assignment,          if not remedied.                  Commencing  on the date of issue,  the  preferred  shares accrue          dividends  equal to  two-thirds  (2/3) of the "net  after tax  profits"          multiplied by the  "outstanding  redeemable  percentage." Net after tax                                         17-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003            profits is defined in the agreement as net income after taxes (pursuant          to generally accepted accounting principles) plus goodwill amortization          as it relates to the merger,  plus  compensation  from the granting and          the  exercise of the  Company's  employee  stock  options.  Outstanding          redeemable  percentage  is defined in the  agreement  as the  aggregate          redemption value of the preferred shares  outstanding as of January 1st          divided by $45 million.                    The  percentage of net income (as defined) to be paid to holders          of preferred stock is as follows:                Twelve months ending December 31,          2005            37.0%                                                          2006            29.6%                                                          2007            22.2%                                                          2008            14.8%                                                          2009             7.4%                  Dividends are due on March 31st of each succeeding  fiscal year.          As of  December  31, 2005 and 2004,  the  Company did not have  accrued          dividends on these preferred shares due to its net losses.                  On February 8, 2006, we announced  the entire  redemption of our          then  outstanding  $20  million  Series A  Preferred  Stock and related          rights and privileges,  including the elimination of the profit-sharing          mechanism,  the retirement of its two board of director seats,  and the          prepayment of our outstanding $6 million in notes payable to one of the          former Series A preferred stockholders.                  The redemptions and prepayment was  accomplished by the Company,          and all its wholly-owned  subsidiaries,  by entering into a $25 million          Senior Secured four-year Term Facility with Wells Fargo Century.  Under          the terms of the facility,  the Company redeemed its Series A Preferred          Stock and prepaid notes payable,  and all rights and privileges thereof          (including  the  elimination  of  the  make-whole   provision)  for  an          aggregate  amount of $22.7  million.  The  remaining  $2.3  million  of          financing  from the Term  Facility  was used to pay for  financing  and          professional costs associated with the Term Facility. The Term Facility          requires quarterly principal installments of $635,000, commencing April          30,  2006,  with a balloon  payment of $15.5  million due  December 31,          2009, along with monthly interest on the related outstanding  principal          at prime plus 1%  (currently  8.50%).  The Term  Facility has customary          covenants in place, including a minimum fixed-charge financial covenant          ratio, and excess cash-flow recapture.  The Term Facility is secured by          all tangible and intangible  assets of the Company and its wholly-owned          subsidiaries, as defined.                  In accordance with prevailing  accounting  principles  regarding          short-term debt expected to be refinanced at December 31, 2005, we have          reclassified our existing  current  ($3,000,000) and long-term Series A          Preferred Stock ($17,000,000) and notes payable  ($6,000,0000) based on          our current and long-term debt  requirements of our new  aforementioned          Senior Secured Term Facility.  Accordingly,  long-term debt consists of          the following:                                         18-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                                                                          2005            2004                                                                   --------------    -----------          $25 million Senior  Secured  Four-Year Term Facility         with  quarterly  installments  commencing  April 30,         2006 of $635,000 and a balloon of $15.5  million due         December  31, 2009.  Interest is charged  monthly on         the  outstanding  then  principal,  at prime plus 1%         (8.50% at December 31,  2005.) The Term  Facility is         secured by all tangible and intangible assets of the         Company, as defined.                                       $26,000,000                -          Term  loan  of  $3,350,000   due  in  sixty  monthly         payments  of  principal  and  interest,  based on an         amortization  of 180 months,  with a balloon payment         due on the  sixtieth  month.  The  interest  rate is         equal to the thirty day LIBOR yield plus 4% (8.5% at         December  31,  2005).  The term loan is  secured  by         property  and  equipment  having a net book value of         $3,265,000.  The term loan requires  maintenance  of         minimum cash flow coverage,  as defined. A letter of         credit of  $1,000,000  must be in place  during  the         entire  term  of  this  loan,  or  until  no  longer         required.  The  Company's  factor  has  issued  this         letter  of  credit  on  behalf  of the  Company.  As         collateral for the letter of credit, the Company has         cash restricted as to withdrawal of $1,059,000.              2,645,000        2,867,000          Equipment  loans  due  in  monthly  installments  of         principal and interest  through  2008.  The interest         rates on these loans range from 7.50% to 8.77%                  27,000           25,000                                                                   --------------    -----------                                                                     28,672,000        2,892,000         Less current maturities                                      2,141,000          249,000                                                                   --------------    -----------                                                                    $26,531,000       $2,643,000                                                                   ==============    ===========          Annual maturities of long-term debt are approximately as follows:              Twelve months ending December 31,     2006     $  2,141,000                                                   2007        4,974,000                                                   2008        2,542,000                                                   2009       19,015,000                                19-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003  12.      Cash surrender value, life insurance:                  The Company is the owner of cash surrender  value life insurance          policies on the life of the former Series A Preferred  stockholder  and          director.  The face value of these policies  approximates $1.8 million.          At December 31, 2005, the cash value, net of outstanding  loans of $1.5          million,  was $316,000 and is included in other assets. At December 31,          2004,  the cash  value,  net of  outstanding  loans of  $1,073,000,  is          $308,000  and is included in other  assets.  Subsequent  to the date of          these financial  statements,  the Company terminated these policies and          repaid all outstanding loans.    13.      Commitments and contingencies:           a. Lease commitments:                  The Company  has a lease for office and  showroom  space,  which          expires on November 30, 2008.                  At December 31, 2005,  future minimum rental  payments  required          under the noncancellable leases are approximately as follows:                  Twelve months ending December 31, 2006         $408,000                                                   2007          408,000                                                   2008          374,000                                                  Total       $1,189,000           Rent expense for the three years ended December 31, 2005, 2004 and 2003          was $451,000, $419,000 and $746,000, respectively.           b.     Employment agreements:                  i.    On  November   29,  2005  the  Company   entered  into  an                       employment   agreement   with  its   President  and  Chief                       Executive  Officer through the term of the agreement.  The                       initial  term of the  agreement  expires on  December  31,                       2010, but continues  thereafter for additional  three-year                       periods  unless either the  President and Chief  Executive                       Officer of the Company or the Board of Directors gives the                       other ninety days prior written notice of non-renewal. The                       agreement  also includes a noncompete  clause for a period                       of one year following its expiration or termination, along                       with  payments  and benefits  associated  with a change in                       control of the Company, as defined.                  ii.   The Company has an employment agreement with a senior vice                       president  with  an  initial  term of  five  years,  which                       expired   September   24,   2005.   The   agreement   will                       automatically  renew for successive  one-year terms unless                       terminated  by either  party  upon 60 days  prior  written                       notice.                                        20-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                   The  minimum   payments  for  base  salaries   pursuant  to  the          employment agreements are approximately as follows:           Twelve months ending December 31, 2006        $600,000                                            2007         325,000                                            2008         325,000                                            2009         325,000                                            2010         325,000           c.     Contingencies:                  i.    There are product  liability claims that arise against the                       Company  from time to time.  Such  actions are usually for                       amounts  greatly in excess of the payments,  if any, which                       may  be  required  to  be  made.  It  is  the  opinion  of                       management,   after  reviewing  such  actions  with  legal                       counsel to the Company, that the ultimate liability, which                       might result from such actions,  would not have a material                       adverse effect on the Company's financial position.  14.      Licensing revenues:                  i.    The   Company,   as  licensor,   has  numerous   licensing                       agreements with varying expiration dates.  Pursuant to the                       terms  of  the  licensing   agreements,   the  Company  is                       scheduled to receive approximate minimum royalty payments,                       exclusive  of  renewal  option  provisions,   which  would                       trigger additional minimum royalty payments, as follows:                        Twelve months ending December 31, 2006              $10,150,000                                                         2007               10,480,000                                                         2008                8,872,000                                                         2009                4,610,000                                                         2010                1,287,000                                          2011 and thereafter                6,320,000                        Net  licensing  revenue  generated  for  the  years  ended                       December 31, 2005,  2004 and 2003 amounted to $11,982,000,                       $9,059,000 and $6,669,000,  respectively.  These licensing                       revenues are reflected net of direct  related  expenses of                       $444,000, $679,000 and $845,000.                  ii.   In  connection  with  the  license   agreements,   certain                       licensees  are  required to make a specified  minimum cash                       deposit to the Company.  The deposit is  refundable to the                       licensee  upon  expiration  of the license  agreement.  At                       December 31, 2005 and 2004, the amounts on deposit totaled                       $465,000 and  $440,000,  respectively.  These  amounts are                       reflected  as  liabilities  to  licensees  on the  balance                       sheet.                                         21-f                        EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003  15.     Stock option plans:                  i.    1993 Stock Option Plan:                        A maximum of 443,900  options were available to be granted                       pursuant to this plan,  which terminated in November 2003.                       Accordingly,  no further stock options  grants can be made                       under this plan going forward.  Options previously granted                       prior to November 2003 vest in three years and have a term                       of ten years.  Options granted  pursuant to this plan were                       designated   by  the   Board  of   Directors   as   either                       non-qualified or incentive.                        The option price of shares designated as nonqualified were                       determined  by the  Board of  Directors  each year for the                       following year at 85% of fair market value and in the case                       of  incentive  stock  options  were no less  than the fair                       market value of the shares on the date of the grant.                  ii.   1995 Non-employee Director Stock Option Plan:                        A maximum of 100,000  options were available to be granted                       pursuant to the 1995  non-employee  director  stock option                       plan which expired  January 2005.  Accordingly  no further                       options can be  granted.  The 1995  non-employee  director                       stock option plan provided for automatic grants of options                       to purchase 3,000 shares and  thereafter  yearly grants to                       purchase  3,000  shares  of  common  stock to each  active                       director serving on the Board at the time of the grant who                       is not an officer or employee of the Company. The Director                       Plan provides additional grants of options to non-employee                       directors  of  100  shares  to  the  Chairman  of a  board                       committee  and 200 shares to the Chairman and Secretary of                       the  Board of  Directors.  Options  granted  vest in three                       years and have a term of seven years.                 iii.   2000 Stock Option Plan:                        The Board of  Directors  will  designate  options  granted                       pursuant to this plan as  incentive or  nonqualified.  The                       number of the Company's  common stock, par value $.002 per                       share,  subject  to this plan is  2,000,000.  The  maximum                       allowable  grant  to any  individual  in any  one  year is                       600,000  shares.  In the case of  incentive  options,  the                       exercise  price  shall  be at  minimum  equal  to the fair                       market value of the Company's  common stock on the day the                       option is granted.  In the case of non-qualified  options,                       the exercise price shall be 80% or more of the fair market                       value of the  Company's  common stock on the preceding day                       the option is granted.  Options  granted to a  stockholder                       holding more than 10% of the combined voting power,  shall                       have  exercise  prices  equal to or greater  than 100% and                       110% of the  fair  market  value of the  Company's  common                       stock on the date the option is granted for  incentive and                       non-qualified   options,   respectively.   The   Board  of                       Directors can make an appropriate and equitable adjustment                       in the number  and kind of shares  reserved  for  issuance                       under  this plan and in the  number  and  option  price of                       shares for  outstanding  options in the event of a capital                       change in the Company. The options granted under this plan                       vest over three years and have a ten-year term.                                        22-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                        Pursuant  to the merger of  Everlast  Worldwide,  Inc.  on                       October 24, 2000 the Board of Directors granted the former                       CEO of the Company,  125,000  non-qualified  stock options                       with an exercise price of $4.00 and an additional  380,000                       non-qualified  stock  options  with an  exercise  price of                       $13.00.  These options vested  immediately and expired ten                       years  from the grant  date.  These  options,  along  with                       others granted and held by the former CEO, expire February                       27, 2006, ninety days after his passing in accordance with                       the stock option plan.                 iv.      2005 Non-employee Director Stock Option Plan:                        The 2005 non-employee director stock option plan, approved                       by the  common  shareholders  in June 2005,  provides  for                       automatic  grants of options to purchase  5,000 shares and                       thereafter  yearly  grants  to  purchase  5,000  shares of                       common stock to each active director  serving on the Board                       at the time of the grant who is not an officer or employee                       of the Company.  The  Director  Plan  provides  additional                       grants of options to non-employee  directors of 100 shares                       to the Chairman of a board committee and 200 shares to the                       Chairman and Secretary of the Board of Directors.  Options                       granted  vest in  three  years  and  have a term of  seven                       years.  The number of the Company's common stock available                       for grant  under  this plan is  currently  200,000.  As of                       December 31, 2005,  no shares have been granted under this                       plan.                                                                                      SHARES                                                  ---------------------------------------------------------------------------                                                                                      1995                          Weighted                                                      2000           1993         Non-employee                       average                                                  Stock option   Stock option    director stock                     exercise       2005                                           plan           plan          option plan         Total          price       ----                                       -------------  -------------  -----------------  ------------  ------------        Outstanding at January 1                      687,500        202,856          63,244           953,600         $7.08        Granted                                       290,300              -               -           290,300         $3.89        Cancelled                                      (1,000)        (3,000)        (10,467)          (14,467)        $4.18        Exercised                                      (1,666)      (116,500)         (4,133)         (122,299)        $2.81                                                  -------------  -------------  -----------------  ------------       Outstanding at December 31                    975,134         83,356          48,644         1,107,134         $6.75                                                  =============  =============  =================  ============       Exercisable at December 31                    555,845         83,356          48,644           687,845         $8.48                                                  =============  =============  =================  ============                                          23-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                                                                                        SHARES                                                  -----------------------------------------------------------------------------                                                                                      1995                          Weighted                                                      2000           1993         Non-employee                       average                                                  Stock option   Stock option    director stock                     exercise       2004                                           plan           plan          option plan         Total          price       ----                                       -------------  -------------  -----------------  ------------  ------------        Outstanding at January 1                      505,000        320,211          55,400           880,611         $7.73        Granted                                       185,000              -          13,800           198,800         $2.77        Cancelled                                      (2,500)       (78,500)         (3,356)          (84,356)        $5.70        Exercised                                           -        (38,855)         (2,600)          (41,455)        $3.00                                                  -------------  -------------  -----------------  ------------       Outstanding at December 31                    687,500        202,856          63,244           953,600         $7.08                                                  =============  =============  =================  ============       Exercisable at December 31                    505,000        199,500          43,802           748,302         $8.26                                                  =============  =============  =================  ============                                                                                       SHARES                                                  -----------------------------------------------------------------------------                                                                                      1995                          Weighted                                                      2000           1993         Non-employee                       average                                                  Stock option   Stock option    director stock                     exercise       2003                                           plan           plan          option plan         Total          price       ----                                       -------------  -------------  -----------------  ------------  ------------        Outstanding at January 1                      505,000        328,679          58,100           891,779         $7.63        Granted                                             -              -           9,500             9,500         $3.83        Cancelled                                           -              -               -                 -          -        Exercised                                           -         (8,468)        (12,200)          (20,668)        $1.66                                                  -------------  -------------  -----------------  ------------       Outstanding at December 31                    505,000        320,211          55,400           880,611         $7.73                                                  =============  =============  =================  ============       Exercisable at December 31                    505,000        246,678          42,600           844,778         $7.92                                                  =============  =============  =================  ============                                                           Outstanding                                Exercisable                                          -----------------------------------------------    ---------------------------                                                           Weighted-        Weighted-                         Weighted-                                                            average          average                           average                  Exercise price                            exercise         exercise                          exercise                       range               Shares             price            price           Shares            price                 --------------------   ------------    ---------------   ---------------    -------------   -----------                  $.85  -   $2.35          56,000         2.53 years         $  2.21           56,000           $2.21                 $2.36  -   $2.99         180,834         8.56 years            2.75           60,278            2.75                 $3.00  -   $3.97         336,600         8.66 years            3.57           60,167            3.52                 $4.00  -   $6.25         147,200         5.00 years            3.57          125,000            4.00                 $9.38  -  $13.00         386,400         4.74 years           12.94          386,400           12.94                                        ------------                                         -------------                        Total           1,107,034         5.08 years            6.76          687,845            8.48                                        ============                                         ==============                                        24-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                   The  weighted-average  grant-date fair value for options granted          during the years  ended  December  31,  2005,  2004 and 2003 was $3.89,          $2.77 and $4.01, respectively.   16.      Income taxes:                  For the years  ended  December  31,  2005,  2004 and  2003,  the          Company's  provision  (benefit)  for  income  taxes  consisted  of  the          following:                                                                 2005            2004           2003                 Current tax provision (benefit):                  Federal                                      $    -       $(153,000)     $ (63,000)                  State and local                             100,000         (70,000)        20,000                  Foreign                                     136,000               -        120,000                                                         -------------    -----------    ------------                                                              236,000        (223,000)        77,000                                                         -------------    -----------    ------------                Deferred tax benefit:                  Federal                                    (437,000)        344,000        (42,000)                  State and local                            (112,000)         21,000              -                  Foreign                                           -               -              -                                                         -------------    -----------    ------------                                                             (549,000)        365,000        (42,000)                                                         -------------    -----------    ------------                         Total                              $(313,000)       $142,000      $  35,000                                                         =============    ===========    ============                   Income tax  (benefit)  provision  relating  to our  discontinued          components was $(1,458,000),  $96,000, and $675,000 for the years ended          December 31, 2005, 2004 and 2003, respectively.                  The  tax  effects  of   temporary   differences   give  rise  to          significant  deferred tax assets and  liabilities  at December 31, 2005          and 2004 as shown below:                                                                     2005           2004                Deferred tax assets:                  Benefit of loss carryforwards                   $715,000        $  -                  Inventory                                         63,000        110,000                  Other                                            124,000         16,000                                                                ----------     -----------                                                                   902,000        126,000                                                                ----------     -----------                Deferred tax liabilities:                  Fixed assets                                     126,000         72,000                  Prepaid assets                                   236,000        181,000                  Other                                                  -         58,000                                                                ----------     -----------                                                                   362,000        311,000                                                                ----------     -----------                Net deferred tax asset (liability)                $540,000      $(185,000)                                                                ==========     ===========                                         25-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                   The  following is a  reconciliation  of the  reported  amount of          income  tax  expense to the  amount of income  tax  expense  that would          result from applying  domestic federal statutory rates to income before          income taxes:                                                                          ----------------------------------------------                                                                                      Years ended December 31,                                                                             2005              2004             2003                                                                          ---------         ----------        ----------          Federal income tax rate                                            (34.0%)           (34.0%)          (34.0%)         State taxes, net of federal income tax benefit                      (8.0)             (5.5)             2.2         Nondeductible amortization of           intangible assets and other items                                117.8              45.0             27.6         Nontaxable life insurance proceeds                                (119.3)              -                -         Foreign income taxes                                                10.8               -               11.1         Work credit and other credits                                        -                 -               (4.9)         Other                                                                7.9              10.7              1.8                                                                          ---------         ----------        ----------                                                                            (24.8%)            16.2%             3.8%                                                                          =========         ==========        ==========  17.      Economic dependency:                  For the year ended  December 31, 2005,  two  customers  from our          sporting goods business  accounted for  approximately 23% of net sales.          For each of the years ended  December  31, 2004 and 2003,  one of these          customers accounted for approximately 13% of net sales, respectively.  18.      Earnings per share:                  We  report  basic  and  diluted  earnings  (loss)  per  share in          accordance  with SFAS No. 128,  "Earnings  Per Share" ("SFAS No. 128").          Basic earnings (loss) per share exclude the dilutive effects of options          and other contingent consideration that was given as part of the merger          in October 2000 of Everlast Worldwide,  Inc. Diluted earnings per share          include only the dilutive  effects of common stock  equivalents such as          stock options and contingent stock consideration.                  The  following  table  sets forth the  computation  of basic and          diluted earnings (loss) per share pursuant to SFAS No. 128:                                         26-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003                                                                           2005                 2004                 2003                                                                      ----------------------------------------------------- Net loss available to common stockholders:    Net loss                                                           $(948,000)         $(1,026,000)          $ (955,000)                                                                      -----------        -------------         ------------  Basic weighted average   common stock outstanding                                            3,326,000            3,132,000            3,108,000  Effect of dilutive securities(a):   Stock options and warrants                                            279,000                    -                    -   Contingent consideration                                              289,000                    -                    -                                                                      -----------        -------------         ------------  Diluted weighted average   common stock outstanding                                            3,894,000            3,132,000            3,108,000                                                                      ===========        =============         ============ Basic earnings (loss) per common share                                  $(0.28)              $(0.33)              $(0.31)                                                                      ===========        =============         ============ Diluted earnings (loss) per common share (a)                            $(0.24)              $(0.33)              $(0.31)                                                                      ===========        =============         ============   (a)     As a result of the net losses in 2004 and 2003,  the dilutive  effect of         options  and   contingent   consideration   (1,091,000   and  1,434,000,         respectively) are not shown as the results would be anti-dilutive.                  As part of the Company's  October 2000  acquisition  of Everlast         Holding Corp (EHC), contingent  consideration may be required to be paid         to the former  owners of EHC. This  consideration  may be in the form of         cash,  or at  the  Company's  option,  payable  in  common  shares.  The         consideration  will be paid  if the  Company's  stock  does  not  meet a         guaranteed  share price of $13.00.  This  guarantee  pertains to 380,000         outstanding  shares,  of which  38,000  shares are subject to an October         2005  payment or  issuance  date and the  remaining  342,000  shares are         subject to an October 2007 payment or issuance  date.  In October  2005,         the  Company  issued   approximately   70,000  shares  related  to  this         contingent consideration to certain of the former owners. As part of our         refinance in February 2006, there is no additional consideration that is         required to be paid to the remaining former owners of EHC.   19.     Stockholders' Equity:                  The  holder of the Class A common  stock  was  entitled  to five         votes per share on all matters upon which each holder of common stock is         entitled  to vote.  Upon the passing of our CEO in  November  2005,  the         Class A  holder,  the  class A voting  common  stock  has  retained  the         identical rights and privileges as the Company's regular common stock.                                          27-f                       EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         DECEMBER 31, 2005, 2004 AND 2003   20.    ash flow information:         a.       Supplemental disclosures of cash flow information:                                                       2005                2004               2003                                                  -------------     ----------------   ---------------            Cash paid during the year for:              Interest                             $1,237,000         $1,266,000          $1,000,000              Income taxes                              9,000              3,000             600,000   21.     Recently issued accounting standards:                  In November  2004,  the FASB  issued  SFAS No.  151,  "Inventory         Costs,  an  amendment of ARB No.43,  Chapter 4." SFAS amends  Accounting         Research  Bulletin  ("ARB") No.43,  Chapter 4, to clarify those abnormal         amounts of idle facility  expense,  freight,  handling  costs and wasted         materials (spoilage) should be recognized as current-period  charges. In         addition,  SFAS No.151  requires  that  allocation  of fixed  production         overhead to inventory be based on the normal  capacity of the production         facilities. SFAS No.151 is effective for inventory costs incurred during         the fiscal years  beginning  after  September  15, 2005.  The Company is         currently  assessing  the impact SFAS No.151 will have on the results of         operations, financial position or cash flows.                  In May 2005, the FASB issued SFAS No. 154,  "Accounting  Changes         and Error  Corrections"  ("SFAS 154") which  replaces APB Opinion No. 20         Accounting  Changes  and SFAS No. 3,  "Reporting  Accounting  Changes in         Interim Financial  Statement--An  Amendment of APB Opinion No. 28." SFAS         154  requires  retrospective  application  to prior  periods'  financial         statements of a voluntary  change in accounting  principal  unless it is         not  practicable.  SFAS 154 is  effective  for  accounting  changes  and         corrections of errors made in fiscal years  beginning after December 15,         2005, and are required to be adopted by the Company in the first quarter         of fiscal  2006.  Although  the Company  will  continually  evaluate its         accounting policies, management does not currently believe adoption will         have a material  impact on the  Company's  results of  operations,  cash         flows or financial position.   22.     Quarterly financial data (unaudited):                  As  previously  noted in our financial  statements,  in both the         fourth  quarters  of fiscal  2005 and 2004,  we  entered  into a license         agreements with a licensee whereby  effective  January 1, 2006 and 2005,         this licensee will source, market and distribute our United States men's         and women's  apparel  businesses  respectively.  In accordance with FASB         144,  we have  treated  the  men's and  women's  apparel  businesses  as         discontinued  components and as such, all prior periods herein have been         adjusted to exclude  the  operations  of our men's and  women's  apparel         businesses  and shown as  discontinued  components,  net of tax,  in our         statements of  operations  and unaudited  quarterly  financial  data for         fiscal 2005 and 2004 as summarized as follows:                                           28-f                                                 EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   DECEMBER 31, 2005, 2004 AND 2003                                                                                               2005                                                            -----------------------------------------------------------------------                                                               First               Second              Third              Fourth                                                              Quarter              Quarter            Quarter             Quarter                                                            -------------    -----------------    ----------------    -------------         Net revenues                                        $8,324,000          $10,251,000        $10,560,000         $14,118,000         Gross profit                                         4,005,000            4,351,000          4,435,000           5,655,000         Restructuring and non-recurring          charges                                                    -              273,000                  -              14,000          Discontinued component, net                           (320,000)            (328,000)        (1,063,000)         (1,063,000)         Net  income   (loss)   available   to  common        stockholder's                                          (94,000)            (596,000)           175,000            (433,000)         Earnings (loss) per share - basic (a)                   ($0.03)              ($0.18)             $0.05              ($0.13)         Earnings (loss) per share - diluted                     ($0.03)              ($0.18)             $0.04              ($0.13)                                                                                              2004                                                            -----------------------------------------------------------------------                                                               First               Second              Third              Fourth                                                              Quarter              Quarter            Quarter             Quarter                                                            -------------    -----------------    ----------------    -------------         Net revenues                                        $7,785,000           $7,255,000         $7,801,000         $10,656,000         Gross profit                                         4,567,000            4,087,000          3,321,000           2,969,000         Discontinued component, net                           (479,000)             120,000           (249,000)           (365,000)         Net income (loss) available to          common stockholder's                                 187,000               79,000           (250,000)         (1,044,000)          Earnings per share - basic                               $0.06                $0.03             ($0.08)             $(0.33)         Earnings per share - diluted                             $0.04                $0.02             ($0.08)             $(0.33)   (a)         As a result of the net loss in certain of the periods  presented  in             fiscal 2005 and 2004, the dilutive  effect of options and contingent             stock   consideration  are  not  shown,  as  the  results  would  be             anti-dilutive.                                        29-f                                                  EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   DECEMBER 31, 2005, 2004 AND 2003   23.     Operating Segments:                  Our  operating  segments are  evidenced by the  structure of our         internal  organization.  The segments of sporting  goods  equipment  and         licensing are defined for  operations  participating  in Everlast  brand         sales activity.  Our sporting goods business  predominately  operates in         one geographic  segment,  the United States and Canada, As of January 1,         2006 our licensing  segment receives  approximately  52% of its revenues         from domestic  licensees,  26% from European  licensees and 22% from all         other countries around the world not previously mentioned.                  Where   applicable,   "other"   represents  items  necessary  to         reconcile the consolidated financial statements, which generally include         corporate  activity  and costs,  to the  segment  financial  information         provided as follows:  FOR THE YEAR ENDED DECEMBER 31, 2005                                                   Sporting                                                     Goods          Licensing         Other        Total                                                 ------------------------------------------------------------  Net revenues                                      $31,271,000     $11,982,000     $ -           $43,253,000  Depreciation and amortization                                                       2,010,000     2,010,000                                                 ------------------------------------------------------------  Interest and financing costs, net                                                   2,238,000     2,238,000                                                 ------------------------------------------------------------   Income  (loss)  before  income taxes from continuing operations                                $487,000     $11,982,000     ($6,967,000)   $5,226,000   Identifiable Component Assets                     $22,668,000      $1,173,000     $37,600,000   $61,441,000                                                 ============================================================  FOR THE YEAR ENDED DECEMBER 31, 2004                                                   Sporting                                                     Goods          Licensing         Other        Total                                                 ------------------------------------------------------------  Net revenues                                      $24,438,000      $9,059,000    $ -            $33,497,000                                                 ------------------------------------------------------------ Depreciation and amortization                                                       1,926,000     1,926,000                                                 ------------------------------------------------------------ Interest and financing costs, net                                                   1,087,000     1,087,000                                                 ------------------------------------------------------------   Income (loss)  before  income taxes from continuing operations                                $437,000      $9,059,000     ($8,141,000)  ($1,063,000)                                                 ============================================================   Identifiable Component Assets                     $20,362,000      $1,176,000     $43,218,000   $64,756,000                                                 ============================================================                                          30-f                                                  EVERLAST WORLDWIDE INC. AND SUBSIDIARIES                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   DECEMBER 31, 2005, 2004 AND 2003     FOR THE YEAR ENDED DECEMBER 31, 2003                                                    Sporting                                                     Goods          Licensing         Other        Total                                                 ------------------------------------------------------------   Net revenues                                      $25,126,000      $6,669,000     $ -           $31,795,000  Depreciation and amortization                                                       1,596,000     1,596,000                                                 ------------------------------------------------------------  Interest and financing costs, net                                                     503,000       503,000                                                 ------------------------------------------------------------   Income (loss)  before  income taxes from continuing operations                               ($919,000)     $6,465,000     ($7,704,000)  ($2,158,000)                                                 ============================================================                                                  31-f           EX-21 2 ex21to10k03733_12312005.htm    sec document                                         EXHIBIT 21                                LIST OF SUBSIDIARIES  Active Apparel New Corp. Everlast World's Boxing Headquarters Corp. Everlast Sports Mfg. Corp. Everlast Sports International, Inc. Everlast Fitness Mfg. Corp. American Fitness Products, Inc.         EX-23.1 3 ex231to10k12312005.htm    sec document                                                                         Exhibit 23.1                            CONSENT OF INDEPENDENT AUDITOR   We  hereby  consent  to the  incorporation  by  reference  to  the  Registration Statement of Everlast Worldwide, Inc. (the "Company") on Form S-8 filed with the Securities and Exchange Commission on July 22, 2005 of our report dated February 17, 2006 on our audits of the financial statements of the Company as of December 31,  2005 and for the years  ended  December  31,  2004 and 2003,  which  report appears in the Annual Report of the Company on Form 10-K.   /s/Berenson LLP - -------------------------- Berenson  LLP  New York, NY March 28, 2006        EX-31.1A 4 ex311to10k03733_12312005.htm    sec document           CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER                EXHIBIT 31.1A              PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002   I, Seth Horowitz, certify that:       1.   I have reviewed this annual report on Form 10-K of Everlast  Worldwide           Inc.;       2.   Based on my  knowledge,  this  report  does  not  contain  any  untrue           statement  of a  material  fact  or  omit to  state  a  material  fact           necessary to make the statements  made, in light of the  circumstances           under which such  statements were made, not misleading with respect to           the period covered by this report;       3.   Based on my knowledge,  the financial statements,  and other financial           information  included in this report,  fairly  present in all material           respects the financial condition, results of operations and cash flows           of the  registrant  as of,  and for,  the  periods  presented  in this           report;       4.   The registrant's  other  certifying  officer and I are responsible for           establishing  and maintaining  disclosure  controls and procedures (as           defined  in  Exchange  Act  Rules  13a-15(e)  and  15d-15(e))  for the           registrant and we have:           a)   designed such disclosure controls and procedures,  or caused such                disclosure  controls  and  procedures  to be  designed  under our                supervision,  to ensure that material information relating to the                registrant,  including  its  consolidated  subsidiaries,  is made                known to us by others within those entities,  particularly during                the period in which this report is being prepared;           b)   Designed  such  internal  control over  financial  reporting,  or                caused such  internal  control  over  financial  reporting  to be                designed under our supervision,  to provide reasonable  assurance                regarding  the   reliability  of  financial   reporting  and  the                preparation  of financial  statements  for  external  purposes in                accordance with generally accepted accounting principles;           c)   evaluated  the  effectiveness  of  the  registrant's   disclosure                controls  and   procedures  and  presented  in  this  report  our                conclusions  about the  effectiveness of the disclosure  controls                and  procedures,  as of the  end of the  period  covered  by this                report based on such evaluation; and           d)   disclosed in this report any change in the  registrants  internal                control  over  financial   reporting  that  occurred  during  the                registrant's most recent fiscal quarter (the registrant's  fourth                fiscal  quarter  in  the  case  of an  annual  report)  that  has                materially  affected,  or  is  reasonably  likely  to  materially                affect,   the   registrant's   internal  control  over  financial                reporting; and       5.   The registrant's other certifying officer and I have disclosed,  based           on our most recent  evaluation,  to the registrant's  auditors and the           audit  committee  of  registrant's  board  of  directors  (or  persons           performing the equivalent function):           a)   all  significant  deficiencies  and  material  weaknesses  in the                design or operation of internal controls over financial reporting                which could adversely affect the registrant's  ability to record,                process, summarize and report financial data and information; and           b)   any fraud,  whether or not material,  that involves management or                other employees who have a significant  role in the  registrant's                internal controls over financial reporting.            Date: March 24, 2006                    /s/ Seth Horowitz                                                   --------------------------                                                   Seth Horowitz                                                   Chief Executive Officer         EX-31.2A 5 ex312to10k03733_12312006.htm    sec document           CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER                EXHIBIT 31.2A              PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002   I, Gary J. Dailey, certify that:       1.   I have reviewed this annual report on Form 10-K of Everlast  Worldwide           Inc.;       2.   Based on my  knowledge,  this  report  does  not  contain  any  untrue           statement  of a  material  fact  or  omit to  state  a  material  fact           necessary to make the statements  made, in light of the  circumstances           under which such  statements were made, not misleading with respect to           the period covered by this report;       3.   Based on my knowledge,  the financial statements,  and other financial           information  included in this report,  fairly  present in all material           respects the financial condition, results of operations and cash flows           of the  registrant  as of,  and for,  the  periods  presented  in this           report;       4.   The registrant's  other  certifying  officer and I are responsible for           establishing  and maintaining  disclosure  controls and procedures (as           defined  in  Exchange  Act  Rules  13a-15(e)  and  15d-15(e))  for the           registrant and we have:           a)   designed such disclosure controls and procedures,  or caused such                disclosure  controls  and  procedures  to be  designed  under our                supervision,  to ensure that material information relating to the                registrant,  including  its  consolidated  subsidiaries,  is made                known to us by others within those entities,  particularly during                the period in which this report is being prepared;           b)   Designed  such  internal  control over  financial  reporting,  or                caused such  internal  control  over  financial  reporting  to be                designed under our supervision,  to provide reasonable  assurance                regarding  the   reliability  of  financial   reporting  and  the                preparation  of financial  statements  for  external  purposes in                accordance with generally accepted accounting principles;           c)   evaluated  the  effectiveness  of  the  registrant's   disclosure                controls  and   procedures  and  presented  in  this  report  our                conclusions  about the  effectiveness of the disclosure  controls                and  procedures,  as of the  end of the  period  covered  by this                report based on such evaluation; and           d)   disclosed in this report any change in the  registrants  internal                control  over  financial   reporting  that  occurred  during  the                registrant's most recent fiscal quarter ( the registrant's fourth                fiscal  quarter  in  the  case  of an  annual  report)  that  has                materially  affected,  or  is  reasonably  likely  to  materially                affect,   the   registrant's   internal  control  over  financial                reporting; and       5.   The registrant's other certifying officer and I have disclosed,  based           on our most recent  evaluation,  to the registrant's  auditors and the           audit  committee  of  registrant's  board  of  directors  (or  persons           performing the equivalent function):           a)   all  significant  deficiencies  and  material  weaknesses  in the                design or operation of internal controls over financial reporting                which could adversely affect the registrant's  ability to record,                process, summarize and report financial data and information; and           b)   any fraud,  whether or not material,  that involves management or                other employees who have a significant  role in the  registrant's                internal controls over financial reporting.            Date: March 24, 2006                                                    /s/ Gary J. Dailey                                                    ---------------------------                                                    Gary J. Dailey                                                    Chief Financial Officer        EX-32.1 6 ex321to10k03733_12312005.htm    sec document                                                                         Exhibit 32.1                        CERTIFICATION OF CHIEF EXECUTIVE OFFICER    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)   In connection  with the Annual Report of Form 10-K for the period ended December 31, 2005 (the "Report") filed by Everlast Worldwide Inc., a Delaware corporation (the "Company") with the Securities and Exchange  Commission,  the  undersigned, Seth  Horowitz,  Chief  Executive  Officer  of,  does  hereby  certify,  to  his knowledge,  that pursuant to 18 U.S.C.  ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities  Exchange Act of 1934, as amended,  and the information  contained in the Report fairly presents,  in all material respects,  the financial  condition and results of operations of the Company.                                                    /s/ Seth Horowitz                                                  -------------------------------                                                  Seth Horowitz                                                  Chief Executive Officer                                                  March 24, 2006   A signed  original of this  written  statement  required by Section 906 has been provided to Everlast  Worldwide Inc. and will be retained by Everlast  Worldwide Inc and furnished to the  Securities  and Exchange  Commission or its staff upon request.         EX-32.2 7 ex322to10k03733_12312005.htm    sec document                                                                        Exhibit 32.2                        CERTIFICATION OF CHIEF FINANCIAL OFFICER     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)   In connection  with the Annual Report of Form 10-K for the period ended December 31, 2005 (the "Report") filed by Everlast Worldwide Inc., a Delaware corporation (the "Company") with the Securities and Exchange  Commission,  the  undersigned, Gary J.  Dailey,  Chief  Financial  Officer  of,  does  hereby  certify,  to his knowledge,  that pursuant to 18 U.S.C.  ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities  Exchange Act of 1934, as amended,  and the information  contained in the Report fairly presents,  in all material respects,  the financial  condition and results of operations of the Company.                                                   /s/ Gary J. Dailey                                                 --------------------------------                                                 Gary J. Dailey                                                 Chief Financial Officer                                                 March 24, 2006   A signed  original of this  written  statement  required by Section 906 has been provided to Everlast  Worldwide Inc. and will be retained by Everlast  Worldwide Inc and furnished to the  Securities  and Exchange  Commission or its staff upon request.         -----END PRIVACY-ENHANCED MESSAGE-----