MOVIE STAR INC /NY/, 10-K, 1999-09-28

MOVIE STAR INC /NY/
10-K, 1999-09-28
WOMEN'S, MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------

FORM 10-K
(Mark One)

[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]

For the fiscal year ended June 30, 1999 or

[ ] Transition report pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934 [Fee Required]

For the transition period from ___________ to _________

Commission File Number 1-5893

MOVIE STAR, INC.
(Exact name of Registrant as specified in its Charter)

New York 13-5651322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

136 Madison Avenue, New York, NY 10016
(Address of Principal (Zip Code)
Executive Offices)

Registrant's telephone number including area code (212) 684-3400

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

Title of each class Name of each exchange on which registered

Common Stock, $.01 par value American Stock Exchange
$25,000,000 12.875% Debenture American Stock Exchange
due October 1, 2001

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

None
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information

<PAGE>

statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Yes X No

The aggregate market value of voting stock held by nonaffiliates of the
Registrant totalled $12,818,264 on August 31, 1999, based upon the closing
price of $1.375 at the close of trading on August 31, 1999.

As of August 31, 1999, there were 14,879,644 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

SEE Item 14 with respect to exhibits to this Form 10-K which are incorporated
herein by reference to documents previously filed or to be filed by the
Registrant with the Commission.

<PAGE>

MOVIE STAR, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PART I Page No.

Item 1 Business......................................I-1

Item 2 Properties....................................I-6

Item 3 Legal Proceedings.............................I-7

Item 4 Submission of Matters to a
Vote of Security Holders..................... I-7

PART II

Item 5 Market for Company's Common Stock and
Related Stockholder Matters..................II-1

Item 6 Selected Financial Data......................II-2

Item 7 Management's Discussion and Analysis
of Financial Condition and
. Results of Operations........................II-3

Item 8 Financial Statements and
Supplementary Data......................... F-1

Item 9 Disagreements on Accounting and
Financial Disclosure.........................II-14

PART III

Item 10 Executive Officers and Directors
of the Company..............................III-1

Item 11 Executive Compensation.............III-2

Item 12 Security Ownership of Certain Beneficial
Owners and Management.......................III-6

Item 13 Certain Relationships and
Related Transactions........................III-7

PART IV

Item 14 Exhibits, Financial Statement
Schedule and Reports on Form 8-K.............IV-1

<PAGE>

PART I

ITEM 1. BUSINESS

(a) The Company, a New York corporation organized in 1935, designs,
manufactures, markets and sells an extensive line of ladies' sleepwear, robes,
leisurewear, loungewear, panties and daywear; and also operates retail stores
under the names Movie Star Factory Stores, Bargain Box Factory Stores, Bobby's
Place, Bobby's Menswear and A Little Xtra from Movie Star ("Retail Stores").
During fiscal 1998, the Company exited the men's, women's and children's screen
printed tee shirt division.

The Company's products consist of ladies' pajamas, nightgowns, baby dolls,
nightshirts, dusters, shifts, caftans, sundresses, rompers, short sets,
beachwear, peignoir ensembles, robes, leisurewear, panties, and daywear
consisting of bodysuits, soft bras, slips, half-slips, teddies and camisoles.
These products are manufactured in various fabrics, designs, colors and styles
depending upon seasonal requirements, changes in fashion and customer demand.

The products sold in the Company's retail stores consist of lingerie,
loungewear, sportswear, outerwear and hosiery for regular and plus size women,
select menswear, jewelry and accessories. The specific products offered depend
on the buying opportunities that are available each season.

Between 1992 and 1997, as a result of consolidations in the retail industry, the
high cost of domestic manufacturing and difficulties the Company had encountered
in engaging reliable offshore contractors and obtaining sufficient quantities of
acceptable quality finished products from overseas, the Company experienced a
loss of sales to certain of its customers. In fiscal 1998, the Company began to
regain a portion of the sales it had lost by creating new designs at competitive
prices and by improving on-time delivery and the quality of its products. The
Company has shifted a large portion of its production to Mexico and other
offshore based contractors and has developed infrastructures in these locations
that has given the Company greater control over its operations, quality and
on-time delivery. The Company maintains an in-house design staff which affords
it the flexibility to work with merchandise buyers on fashion design and price
points and its remaining domestic manufacturing facilities allow shorter "lead
times" in producing certain of its products.

(b) Intentionally omitted.

(c) (i) The Company's products are sold to discount, specialty, national and
regional chain, mass merchandise and department stores and direct mail catalog
marketers throughout the United States. The prices to consumers for the
Company's products range from approximately $3.00 for certain of its panty
products to approximately $110.00 for certain other products, such as peignoir
sets. The Company's products are sold by in-house sales personnel and outside
manufacturer's representatives. Approximately 54% of the Company's sales are
made to national chains and mass merchandisers; the balance of the Company's
sales are unevenly distributed among discount, specialty, department and
regional chain stores, direct mail catalog marketers and to consumers through
the Company's Retail Stores. The Company's gross profit on its sales for each of
the fiscal years ended June 30, 1999, 1998 and 1997 was approximately 29%, 29%
and 27%, respectively.

The Retail Stores primarily sell apparel products manufactured by the Company
and other manufacturers at discounted retail prices. The prices to consumers for
the products sold in the Retail Stores range from approximately $.49 for hosiery
to $79.00 for outerwear. During the early to mid 90's, the Retail Stores began
to shift the mix of products sold from primarily non-branded first quality
closeouts and irregular merchandise at discounted prices to selling branded
merchandise, first quality non-branded merchandise and to a much lesser extent,
irregular merchandise at discounted prices. In fiscal 1999, 1998 and 1997 less
than 5%, 15% and 20%, respectively, of the products sold by these stores were
supplied by the Company. This decrease resulted primarily from the phase out of
the Company's popular-priced trade business and the Company's decision to
diversify and broaden the Retail Stores product line. The Retail Stores
accounted for approximately 13.1%, 16.6% and 16.7% of the Company's total sales
in fiscal 1999, 1998 and 1997, respectively. These stores operate at a gross
profit above 33%. The Retail Stores division advertises directly to consumers
through print, radio and television in the localities in which it operates.

I-1

<PAGE>

The Company limits the promotion of its manufactured products to cooperative
advertising in conjunction with its retail customers directed to the ultimate
retail consumer of its products.

From 1976 until 1998, the Company had, pursuant to various written agreements,
retained Harold Shatz and Jeffrey Hymowitz and their organization, Domino
Industries, Inc. ("Domino"), as a manufacturer's representative. In fiscal 1998,
Mr. Shatz effectively discontinued providing his services as a sales executive
to the Domino organization and did not wish to resume providing those services.
In view of this fact, the Company and Domino agreed to modify their agreement.
Under the modification, Domino accepted significantly lower commissions on the
net sales attributable to its sales efforts in consideration for the Company's
payment of a negotiated fixed fee payable in monthly installments until the
expiration of the agreement on December 31, 1998. Mr. Hymowitz became an
employee of the Company upon the expiration of the agreement. Working closely
with the Company, Mr. Hymowitz has continued to sell to certain accounts under
the supervision of Mel Knigin, the Company's President and most senior executive
in charge of sales and merchandising. In fiscal year 1999 and 1998,
approximately 36% and 30%, respectively, of the Company's net sales were
attributed to Mr. Hymowitz and the Domino organization. The Company believes
that the loss of its relationship with Mr. Hymowitz would not materially
adversely affect the Company because retailers' purchasing decisions are
primarily based upon the Company's products.

(ii) Not applicable.

(iii) The Company utilizes a large variety of fabrics made from natural and
man-made fibers including, among others, polyester, cotton, broadcloth, stretch
terry, brushed terry, flannel, brushed flannel, nylon, spun polyester, velour,
satins, tricot, jersey, fleece, jacquards, lace, stretch lace, charmeuse,
chambray, and various knit fabrics.

These materials are available from a variety of both domestic and foreign
sources. The sources are highly competitive in a world market. The Company
expects these competitive conditions to continue in the foreseeable future.
Generally, the Company has long-standing relationships with its domestic and
foreign suppliers and purchases its raw materials in anticipation of orders or
as a result of need based on orders received. Purchase of raw materials in high
volume provides the Company with the opportunity to buy at relatively low
prices. In turn, the Company is able to take advantage of these lower prices in
the pricing of its finished goods.

The amount of finished goods assembled for the Company in the Caribbean and
Central America has increased from 13% in fiscal 1997 and 1998 to 16% in fiscal
1999. The Company has also increased the amount of finished goods assembled in
Mexico from 9% in fiscal 1997 and 34% in fiscal 1998 to 48% in fiscal 1999.

The increases in Mexico were due to the Company's strategic decision to assemble
more of its finished goods in that country in order to take advantage of lower
labor costs and lower duty rates resulting from the North American Free Trade
Agreement ("NAFTA"). Certain of the raw materials used in the production of the
Company's products in Mexico are subject to export limitations under NAFTA,
called Tariff Protection Levels ("TPL"), that are similar to quotas. TPL is
assigned annually to various categories of textiles and is available on a
"first-come first-served" basis to U.S. companies exporting products from Mexico
containing the textiles subject to the TPL. In September 1998 and June 1999, the
maximum annual TPL for certain of the raw materials used in the Company's
products was exhausted. As a result, the rate of duty on the affected products
from Mexico shipped to the United States in the last four months of calendar
year 1998 and the last six months of calendar year 1999 increased from 2.8% in
1998 and no duty in 1999 to 16.6% of the value of the finished product. The
Company has investigated various alternatives to minimize the impact of this
increase, including the shift of a portion of its production to other locations,
such as the Philippines. Approximately 15% of the Company's finished goods were
imported from foreign sources in fiscal 1999 as compared to 10% in fiscal 1998
and 20% in fiscal 1997. In fiscal 1999, approximately 33% of the Company's raw
materials were imported as compared to approximately 37% in fiscal 1998 and 33%
in fiscal 1997.

The functions of purchasing finished products and raw materials from offshore
sources have been centralized to give the Company greater control over its
offshore purchases through closer oversight of these functions by senior
management and greater accountability from foreign based personnel employed by

I-2

<PAGE>

and reporting directly to the Company. Currently, the Company has two employees
in Bangladesh and two employees in the Philippines supervising the production of
finished products purchased by the Company from manufacturers in those
countries.

As a result of the Company's decision to shift a large portion of its production
to Mexico-based contractors, the Company has developed an infrastructure with
nine employees in Mexico to assure greater control over its operations and
assist in maintaining quality and on-time delivery. The Company also has two
employees in Honduras who assist in maintaining quality and on-time delivery.
Management personnel travel to Mexico, the Far East, the Caribbean and Central
America throughout the year to monitor the performance of the Company's offshore
manufacturers and contractors.

The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. The Company's import and offshore
operations are subject to constraints imposed by agreements between the United
States and a number of foreign countries in which the Company does business.
These agreements impose quotas on the amount and type of goods that can be
imported into the United States from these countries. Such agreements also allow
the United States to impose, at any time, restraints on the importation of
categories of merchandise that, under the terms of the agreements, are not
subject to specified limits. The Company's imported products are also subject to
United States customs duties and, in the ordinary course of business, the
Company is from time to time subject to claims by the United States Customs
Service for duties and other charges. The United States and other countries in
which the Company's products are manufactured may, from time to time, impose new
quotas, duties, tariffs or other restrictions, or adversely adjust presently
prevailing quotas, duty or tariff levels, which could adversely affect the
Company's operations and its ability to continue to import products at current
or increased levels. The Company cannot predict the likelihood or frequency of
any such events occurring.

The Company believes it maintains adequate inventories to cover the needs of its
customers.

(iv) The Company has several registered trademarks, of which "Movie Star",
"Movie Star Loungewear", "Cinema Etoile", "Cine Jour", "Private Property", and
"Night Magic" are material to the marketing by the Company of its products.
There is no litigation with respect to patents, licenses and trademarks.

The Company has entered into an exclusive licensing agreement to produce and
sell sleepwear and intimate apparel designed by Flora Nikrooz. The Company has
introduced a designer collection at affordable prices that have been designed by
Ms. Nikrooz under the Flora Nikrooz intimates name. These products are being
offered to department and better specialty stores. The Company plans to ship the
first orders in November 1999.

(v) The Company manufactures a wide variety of intimate apparel in many
different styles and sizes and for use in all seasons and climates in the United
States. Because of its product mix, it is subject to certain seasonal variations
in sales and in the utilization of its manufacturing facilities. More than 50%
of the Company's sales are made in the first six months of its fiscal year.

(vi) All sales are outright sales. Terms are generally net 10 days E.O.M. or net
30 days from the date the goods are shipped which, depending on date of
shipment, can be due from as short a period as twenty-one days or as long as
fifty days. It has become industry practice to extend payment terms up to an
additional thirty days for certain customers. Although sales are made without
the right of return, in certain instances the Company may accept returns or
agree to allowances. The Company maintains sufficient inventories of raw
materials and finished goods to meet its production requirements and the
delivery demands of its customers. As a result, the Company relies on its
short-term line of credit to supplement internally generated funds to fulfill
its working capital needs.

(vii) Wal-Mart accounted for 22% of sales for fiscal 1999 and 20% of sales for
fiscal 1998. Sears, Roebuck and Company accounted for 14% of sales for fiscal
1999 and 11% of sales for fiscal 1998. Target accounted for 11% of sales for
fiscal 1999 and 3% of sales for fiscal 1998.

Purchasing decisions by the Company's customers with respect to each group of
the Company's products and, in some instances, products within a group,
generally are made by different buyers and purchasing departments. The

I-3

<PAGE>

Company believes that the loss of orders from any one buyer or purchasing
department would not necessarily result in the loss of sales to other buyers or
purchasing departments of those customers.

(viii) The backlog of orders as of June 30, 1999 was approximately $32,300,000
and as of June 30, 1998 was approximately $33,000,000. Orders are booked upon
receipt. The Company believes that the current backlog is firm and will be
filled by the end of the current fiscal year.

(ix) There is no material portion of the business which may be subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the Government.

(x) The intimate apparel business is fragmented and highly competitive. The
industry is characterized by a large number of small companies manufacturing and
selling unbranded merchandise, and by several large companies which have
developed widespread consumer recognition of the brand names associated with
merchandise manufactured and sold by these companies. In addition, certain of
the larger retailers to whom the Company has historically sold its products have
sought to expand the development and marketing of their own brands and to obtain
intimate apparel products directly from similar sources as the Company.

Owning manufacturing facilities has required the investment of substantial
capital and subjected the Company to the costs of maintaining excess capacity.
Competitive conditions in the industry have required the Company to place
greater reliance on obtaining raw materials and finished products from sources
outside the United States. As a result, the Company has consolidated production
in its domestic plants by closing underutilized and inefficient facilities.
Between August 1990 and June 1998, the Company has closed seventeen
manufacturing plants in an effort to lower costs by reducing excess
manufacturing capacity and in response to the need to produce and purchase
products at a lower cost from sources outside the United States.

The intimate apparel industry is further characterized by competition on the
basis of price, quality, efficient service and prompt delivery. Because of this
competitive pressure, the Company no longer relies principally on domestic
manufacturing and has increased its reliance on offshore manufacturers and
contractors. Accordingly, changes in import quotas, currency valuations and
political conditions in the countries from which the Company imports products
could adversely affect the Company's business. Such shifts could also result in
the underutilization of the Company's remaining domestic plants and decrease
profitability.

(xi) No material research activities relating to the development of new products
or services or the improvement of existing products or services were undertaken
during the last fiscal year, except for the normal continuing development of new
styles and marketing methods.

(xii) There are no costs relating to complying with environmental regulations in
the fiscal year just completed or over future periods of which the Company is
aware.

(xiii) Of the approximately 588 employees of the Company, approximately 22 are
executive, design and sales personnel, 115 are administrative personnel, and the
balance are in manufacturing, warehousing and retail sales for the Retail Stores
division. In addition, the Company employs approximately 55 part-time sales and
stockroom assistants in its Retail Stores division.

The Company has never experienced an interruption of its operations because of a
work stoppage. Even though the Company is subject to certain seasonal variations
in sales, significant seasonal layoffs are rare.

Most employees have an interest in the Company's Common Stock through the
Company's ESOP. The Company deems its relationship with its employees to be
good. The Company is not a party to any collective bargaining agreement with any
union.

I-4

<PAGE>

Restriction on Dividends

Pursuant to a public offering of $25,000,000 of Debentures in 1986, and the
exchange in October 1996 of certain of those Debentures for New Senior Notes,
the Company may not declare or pay any dividend or make any distribution on any
class of its capital stock except dividends or distributions payable in capital
stock of the Company or to the holders of any class of its capital stock, or
purchase, redeem or otherwise acquire or retire for value any capital stock of
the Company if (i) at the time of such action an event of default, or an event
which with notice or lapse of time or both would constitute an event of default,
shall have occurred and be continuing, or (ii) if, upon after giving effect to
such dividend, distribution, purchase, redemption, other acquisition or
retirement, the aggregate amount expended for all such purposes subsequent to
June 30, 1986, shall exceed the sum of (a) 75% of the aggregate consolidated net
income of the Company earned subsequent to June 30, 1986, (b) the aggregate net
proceeds, including the fair market value of property other than cash received
by the Company from the issue or sale after September 30, 1986 of capital stock
of the Company, including capital stock issued upon the conversion of, or in
exchange for, indebtedness for borrowed money and (c) $4,000,000; provided,
however, that the provisions of this limitation shall not prevent the retirement
of any shares of the Company's capital stock by exchange for, or out of proceeds
of the substantially concurrent sale of, other shares of its capital stock, and
neither such retirement nor the proceeds of any such sale or exchange shall be
included in any computation made under this limitation.

I-5

<PAGE>

ITEM 2. PROPERTIES

The following table sets forth all of the facilities owned or leased by the
Company as of June 30, 1999.

<TABLE>
Owned or Bldg. Area Expiration Productive Extent of
Location Use Leased (sq. ft.) Annual Rent of Lease Capacity(4) Utilization(4)
- -------- ------ --------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
136 Madison Ave., Executive and Portions Sub- 23,000 $393,000 4/01 N/A N/A
New York, NY Administrative leased; (1)
(includes one offices; Portions
floor at 148 divisional sales Leased
Madison Ave., office and Directly from
NY, NY) showroom Landlord

180 Madison Ave., Sales Office Leased 3,000 $ 65,000 7/00 N/A N/A
New York, NY and Showroom

Petersburg, PA Warehousing Owned 140,000 _____ _____ N/A N/A
for finished
goods; dis-
tribution center

Lebanon, VA Manufacturing; Owned 170,000 _____ _____ 250 91%
warehousing for
piece goods and
finished goods;
distribution
center

Honaker, VA Vacant Owned 40,000 _____ _____ N/A N/A

South Mississippi 1 Mfg./Dist./ Owned/Leased 239,000 _____ _____ 200 28%(5)
Warehouse; 1 (2)
Distribution
Center

North Mississippi 1 Mfg./Vacant Owned 103,000 _____ _____ N/A N/A

Retail Stores 28 retail Leased(3) 103,000 $360,000(3) (3) N/A N/A
stores located
throughout
Mississippi and
Georgia
</TABLE>

- ----------
(1) Includes escalation for 1999.

(2) Leased from municipalities pursuant to local Development Authority
bond issues.

(3) Store leases generally are for one to three-year periods with
options to renew. Rents generally range from $2-$8 per square foot.

(4) "Productive Capacity" is based on the total number of employees
that can be employed at a facility providing direct labor for the manufacture of
the Company's products based on existing machinery and equipment and plant
design. "Extent of Utilization" is the percentage obtained by dividing the
average number of employees actually employed at a facility during the fiscal
year providing direct labor for the manufacture of the Company's products by
Productive Capacity.

I-6

<PAGE>

(5) Subsequent to June 30, 1998, the Company has minimized the amount
of production it does at this facility in order to maximize its overall
efficiency, lower manufacturing costs and to allow for more warehousing and
distribution space.

The following table sets forth the amount of space allocated to
different functions in shared facilities set forth in the preceding table.

AMOUNT
OF SPACE
LOCATION FUNCTION (Sq. ft.)
- -------- -------- ---------

136, 148 and 180 Corporate Offices; 7,000
Madison Avenue Divisional Sales Offices
New York, New York and Showrooms; 11,000
Production Staff and Design 8,000

Petersburg, Pennsylvania Warehousing and Distribution; 137,000
Offices 3,000

Lebanon, Virginia Manufacturing; 49,000
Warehousing and Distribution; 111,000
Offices 10,000

Mississippi Manufacturing; 29,000
Manufacturing and Distribution; 195,000
Offices 15,000

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings pending which are material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

I-7

<PAGE>

PART II

ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS

The Common Stock is traded on the American Stock Exchange. The following table
sets forth for the indicated periods the reported high and low prices per share.

High Low
---- ---

Year Ended June 30, 1999
First Quarter . . . . . . . . . . . . . . . . . . . . . 11/16 7/16
Second Quarter. . . . . . . . . . . . . . . . . . . . . 1 3/4 3/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . 2 1/4 1 1/8
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . 2 13/16 1 5/16

Year Ended June 30, 1998
First Quarter . . . . . . . . . . . . . . . . . . . . . 13/16 3/8
Second Quarter. . . . . . . . . . . . . . . . . . . . . 7/8 9/16
Third Quarter . . . . . . . . . . . . . . . . . . . . . 7/8 9/16
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . 7/8 11/16

As of August 31, 1999, there were approximately 891 holders of record of the
Common Stock. For restrictions on dividends, see Item 1 at page I-5.

MARKET FOR COMPANY'S 12.875% SUBORDINATED DEBENTURE
(per $1,000 par value)

High Low
------ ----
Year Ended June 30, 1999
First Quarter . . . . . . . . . . . . . . . . . . . . 940.00 860.00
Second Quarter. . . . . . . . . . . . . . . . . . . . 950.00 820.00
Third Quarter . . . . . . . . . . . . . . . . . . . . 950.00 861.25
Fourth Quarter. . . . . . . . . . . . . . . . . . . . 955.00 900.00

Year Ended June 30, 1998
First Quarter . . . . . . . . . . . . . . . . . . . . 837.50 750.00
Second Quarter. . . . . . . . . . . . . . . . . . . . 910.00 810.00
Third Quarter . . . . . . . . . . . . . . . . . . . . 980.00 900.00
Fourth Quarter. . . . . . . . . . . . . . . . . . . . 947.50 915.00

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<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

MOVIE STAR, INC. AND SUBSIDIARIES

ITEM 6. Selected Financial Data
(In Thousands, Except Per Share Amounts)
________________________________________________________________________________
<TABLE>

Statement of Operations Data: Fiscal Year Ended June 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET SALES $ 72,506 $ 64,537 $ 61,470 $ 84,115 $ 101,946
--------- --------- --------- --------- ---------

COST OF SALES 51,363 45,777 44,947 66,993 81,261

SELLING, GENERAL AND ADMINISTRATIVE
EXPENES 15,859 15,206 13,875 17,637 20,645

LOSS ON ABANDONMENT OF LEASED PREMISES -- -- -- 1,070 --

SPECIAL CHARGE -- -- -- -- 750
-------- --------- ------- --------- --------
67,222 60,983 58,822 85,700 102,656
-------- --------- ------- --------- --------
INCOME (LOSS) FROM OPERATIONS 5,284 3,554 2,648 (1,585) (710)

GAIN ON PURCHASES OF SUBORDINATED
DEBENTURES AND SENIOR NOTES -- (157) (560) -- --

INTEREST INCOME (118) (130) (157) (110) (104)

INTEREST EXPENSE 2,694 2,623 2,781 3,893 4,669
-------- --------- ------- --------- --------

INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES 2,708 1,218 584 (5,368) (5,275)

PROVISION FOR (BENEFIT FROM) INCOME
TAXES 35 16 65 (90) (246)
-------- --------- ------- --------- --------

NET INCOME (LOSS) $ 2,673 $ 1,202 $ 519 $(5,278) $ (5,029)
======== ======== ======= ========= ========

BASIC INCOME (LOSS) PER SHARE $ .19 $ .09 $ .04 $ (.38) $ (.36)
======== ======== ======= ========= ========
DILUTED INCOME (LOSS) PER SHARE $ .17 $ .08 $ .04 $ (.38) $ (.36)
======== ======== ======= ========= ========

BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,309 14,049 13,960 13,960 13,960
======== ======== ======= ========= ========

DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 15,869 15,161 15,868 13,960 13,960
======== ======== ======= ========= ========

Balance Sheet Data: At June 30,
1999 1998 1997 1996 1995

WORKING CAPITAL $ 22,616 $ 19,916 $ 18,636 $ 19,546 $ 22,648
======== ======== ======= ========= ========
TOTAL ASSETS $ 36,759 $ 36,743 $ 33,957 $ 34,610 $ 57,204
======== ======== ======= ========= ========
SHORT-TERM DEBT - Including
current maturities of long-term debt
and capital lease obligations $ 45 $ 40 $ 73 $ 45 $ 15,832
======== ======== ======= ========= ========
LONG-TERM DEBT $ 20,703 $ 20,980 $ 22,336 $ 23,533 $ 22,496
======== ======== ======= ========= ========
STOCKHOLDERS' EQUITY $ 8,166 $ 5,202 $ 3,941 $ 3,422 $ 8,700
======== ======== ======= ========= ========
</TABLE>

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<PAGE>

ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion contains certain forward-looking statements with
respect to anticipated results which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in the Company's industry;
general economic conditions; the addition or loss of significant customers; the
loss of key personnel; product development; competition; foreign government
regulations; fluctuations in foreign currency exchange rates; rising costs of
raw materials and the unavailability of sources of supply; the timing of orders
placed by the Company's customers; and the risk factors listed from time to time
in the Company's SEC reports.

Results of Operations

1999 vs. 1998

Net sales for the year ended June 30, 1999 increased by 12.3% to $72,506,000
from $64,537,000 in the comparable period in 1998. The increase in sales
resulted from higher sales in the intimate apparel division of approximately
$9,159,000, offset partially by a decrease in sales for the retail division of
approximately $1,182,000. Net sales in the intimate apparel division increased
to $63,006,000 as compared to $53,847,000 in the comparable period in 1998. This
increase was primarily due to the retailers' positive acceptance of the
Company's moderately priced fashion forward products. At June 30, 1999, the
Company's backlog of open orders was $32,300,000 as compared to $33,000,000 at
June 30, 1998. Net sales in the Company's retail division decreased to
$9,500,000 as compared to $10,682,000 in the comparable period in 1998. This
decrease was primarily due to poor weather patterns and hurricanes in the
geographic areas in which the stores are located, resulting in lower sales due
to fewer customers.

The gross profit percentage was 29.2% for the year ended June 30, 1999 as
compared to 29.1% for the year ended June 30, 1998. The gross margin in the
Company's intimate apparel division increased to 28.0% for the year ended June
30, 1999 from 27.5% for the year ended June 30, 1998. The higher margins in the
intimate apparel division resulted primarily from an improved product mix,
better control of product costs and the continued shift of production to
offshore contractors offset partially by additional duty (see discussion on
Tariff Protection Levels below). The gross margin for the retail division
decreased to 37.0% for the year ended June 30, 1999 as compared to 38.2% for the
year ended June 30, 1998. The lower margins in the retail division resulted
primarily from higher markdowns taken in the current year as compared to the
prior year, due to the closeout of excess seasonal merchandise that resulted
from an unseasonably warm fall and winter.

Certain of the raw materials used in the production of the Company's products in
Mexico are subject to export limitations under the North American Free Trade
Agreement, called Tariff Protection Levels ("TPL"), that are similar to quotas.
TPL is assigned annually to various categories of textiles and is available on a

II-3

<PAGE>

"first-come first-served" basis to U.S. companies exporting products from Mexico
containing the textiles subject to the TPL. In September 1998 and June 1999,
certain of the raw materials used in the Company's products reached the maximum
annual TPL. As a result, the rate of duty for this category of products shipped
from Mexico to the United States, after the annual TPL has been reached,
increased from 2.8% in 1998 and no duty in 1999 to 16.6% of the value of the
finished product. The Company has investigated various strategies to minimize
the impact of this increase. These strategies include purchasing more raw
materials that originate in Mexico that will not be subject to TPL limitations
and investigating other locations for manufacturing, such as the Philippines.

Selling, general and administrative expenses were $15,859,000, or 21.9% of net
sales, for the year ended June 30, 1999 as compared to $15,206,000, or 23.6% of
net sales, for the similar period in 1998. This increase of $653,000 resulted
primarily from increases in salary expense and salary related costs of $678,000
due to the hiring of additional personnel and salary increases for existing
personnel, a one-time charge of $625,000 in connection with the retirement of
the Company's Chief Executive Officer, Mark M. David, an increase in shipping
costs of $171,000 and a net increase in other general overhead expenses,
partially offset by a decrease in commissions of $891,000 and bad debts of
$291,000. The decrease in commissions was primarily due to the restructuring of
an agreement the Company had with its outside manufacturer's representative, who
became an employee of the Company on January 1, 1999 and the overall product mix
of the Company's sales.

The Company's intimate apparel division had selling, general and administrative
expenses of $13,065,00, or 20.7% of net sales, for the year ended June 30, 1999
as compared to $12,367,000, or 23.0% of net sales, for the similar period in
1998. This increase in dollars was primarily due to the same reasons described
above.

The Company's retail division had selling, general and administrative expenses
of $2,794,00, or 29.4% of net sales, for the year ended June 30, 1999 as
compared to $2,839,000, or 26.6% of net sales, for the similar period in 1998.
This increase in percentage was primarily due to the reduction in sales for the
division.

Income from operations increased to $5,284,000 for the year ended June 30, 1999,
from $3,554,000 for the similar period in 1998. This increase was due to higher
sales and gross margins partially offset by an increase in selling, general and
administrative expenses.

The Company's intimate apparel division had income from operations of $4,564,000
for the year ended June 30, 1999 as compared to $2,316,000 for the similar
period in 1998. This increase was due to higher sales and gross margins
partially offset by an increase in selling, general and administrative expenses.

The Company's retail division had income from operations of $720,000 for the
year ended June 30, 1999 as compared to income from operations of $1,238,000 for

II-4

<PAGE>

the similar period in the prior year. This decrease was due to lower sales and
gross margins offset partially by lower selling, general and administrative
expenses. The operational results for the retail division are based on direct
operating expenses and do not include any indirect corporate overhead.

In the second quarter of fiscal 1998, the Company purchased $500,000 in
principal amount of its 12.875% subordinated debentures. As a result of the
transaction, the Company recorded a pre-tax gain of $94,000, net of related
costs.

In the third quarter of fiscal 1998, the Company purchased $156,000 and $300,000
in principal amount of its 12.875% subordinated debentures. As a result of these
transactions, the Company recorded a pre-tax gain of $59,000, net of related
costs.

Interest income for the year ended June 30, 1999 was $118,000 as compared to
$130,000 for 1998.

Interest expense for the year ended June 30, 1999 was $2,694,000 as compared to
$2,623,000 for 1998.

The Company provided for an income tax provision of $35,000 for the year ended
June 30, 1999 as compared to $16,000 for 1998.

The Company recorded net income for the year ended June 30, 1999 of $2,673,000
as compared to net income of $1,202,000 for the same period in 1998. This
increase of $1,471,000 was due to higher sales and gross margins offset
partially by an increase in selling general and administrative expenses, a gain
on the purchase of subordinated debentures in the prior year, a net increase in
interest costs and a larger provision for income taxes in the current year.

1998 vs. 1997

Net sales for the year ended June 30, 1998 increased by 5.0% to $64,537,000 from
$61,470,000 in the comparable period in 1997. The increase in sales resulted
from higher sales in the intimate apparel division and the retail division of
approximately $3,311,000 and $453,000, respectively, offset by a decrease in
other business of $697,000. Net sales in the intimate apparel division increased
to $53,847,000 from $50,536,000 in the comparable period in 1997. This increase
was due to the creation of new designs and competitive products for its
customers. At June 30, 1998 the Company's backlog of open orders was $33,000,000
as compared to $21,300,000 at June 30, 1997. This increase is due to an expected
increase in business for fiscal 1999 and orders being booked earlier than they
were in the prior year. Net sales in the Company's retail division increased to
$10,682,000 from $10,229,000 in the comparable period in 1997. This increase was
primarily due to an expanded product line, which includes higher priced brand

II-5

<PAGE>

name products. The decrease in other business was the result of the Company's
decision to exit the men's, women's and children's screen printed tee shirt
division.

The gross profit percentage increased to 29.1% for the year ended June 30, 1998
from 26.9% in the similar period in 1997. The gross margin in the Company's
intimate apparel division increased to 27.5% for the year ended June 30, 1998
from 24.9% in the similar period in 1997. The higher margins in the intimate
apparel division resulted primarily from an improved product mix, better control
of product costs and the continued shift of a significant portion of production
to Mexico-based contractors and, to a lesser extent, the elimination of certain
problems it had in the prior year with the quality of specific items of the
Company's imported finished goods (discussed below). The shift in production to
Mexico-based contractors has enabled the Company to take advantage of lower duty
rates that result from the North American Free Trade Agreement ("NAFTA") and
shorter lead times associated with the raw materials that are available in
Mexico. The geographic proximity of the Mexico-based contractors also affords
the Company's senior management the opportunity to more easily monitor the
production of these products. The Company has seven employees in Mexico to
support this significant shift in production.

The gross margin for the retail division increased to 38.2% for the year ended
June 30, 1998 as compared to 35.7% in the similar period in 1997. The higher
margins in the retail division resulted primarily from lower markdowns taken in
the current year as compared to the prior year.

At the end of fiscal 1996 and extending into the second quarter of fiscal 1997,
the Company encountered problems with certain of its imported finished goods.
After taking delivery of these goods, the Company was required to correct
manufacturing defects before shipping the merchandise to one of the Company's
customers. Although there was no loss of sales attributable to this merchandise,
the Company incurred additional costs of approximately $400,000 associated with
correcting the quality problems, which had a negative impact on the financial
results for fiscal 1997. In fiscal 1997, the Company replaced the senior
personnel responsible for its import department and hired new employees located
in the Far East to supervise the production of its products. In addition, the
Company is now purchasing its products from different manufacturers than it had
in fiscal 1996 and the first half of fiscal 1997.

Selling, general and administrative expenses increased by $1,331,000 to
$15,206,000 for the year ended June 30, 1998 from $13,875,000 in the similar
period in 1997. This increase resulted primarily from increases in salary
expense and salary related costs, commission expense, a more favorable recovery
of bad debts in the prior year and an increase in expenses for the retail
division partially offset by a net decrease in other general overhead expenses.

The Company's intimate apparel division had selling, general and administrative
expenses of $12,367,000 for the year ended June 30, 1998 as compared to
$11,325,000 in the similar period in 1997. This increase was primarily the
result of salary expense and salary related expenses increasing approximately

II-6

<PAGE>

$481,000 due to the hiring of additional personnel, increases for executive and
sales personnel as well as increases for administrative personnel. Commission
expense increased by $400,000 primarily due to an increase in sales and a
restructured agreement with the Company's outside manufacturer's representative,
which included guaranteed commissions in exchange for a significantly reduced
commission rate on future sales through the expiration of the agreement,
December 31, 1998. The additional expense incurred in the current fiscal year
due to this restructuring was approximately $285,000. The Company also had a
more favorable recovery of bad debts in the prior year of approximately $447,000
primarily from one customer that resolved its bankruptcy on a more favorable
basis than the Company had anticipated.

The retail division had selling, general and administrative expenses of
$2,839,000 for the year ended June 30, 1998 as compared to $2,550,000 in the
similar period in 1997. This increase was primarily the result of increases in
salary expense and salary related costs, advertising expense and store related
expenses totaling approximately $310,000 due to its effort to expand its product
line with more brand name merchandise and increase sales.

Income from operations increased to $3,554,000 for the year ended June 30, 1998,
from $2,648,000 for the similar period in 1997. This increase was due to higher
sales and gross margins partially offset by an increase in selling, general and
administrative expenses. The Company's retail division had income from
operations of $1,238,000 and income from operations of $1,106,000 for the
similar period in the prior year. The operational results for the retail
division are based on direct operating expenses and do not include any indirect
corporate overhead.

In the first quarter of fiscal 1997, the Company purchased $1,320,000 in
principal amount of its 12.875% subordinated debentures to meet a sinking fund
payment due in October 1996. As a result of the transaction, the Company
recorded a pre-tax gain of $560,000, net of related costs.

II-7
<PAGE>

Interest income for the year ended June 30, 1998 was $130,000 as compared to
$157,000 for 1997.

Interest expense decreased by $158,000 for the year ended June 30, 1998, from
the comparable period in the prior year primarily due to the purchases of a
portion of the Company's 12.875% subordinated debentures and lower short-term
borrowing charges.

The Company provided for an income tax provision of $16,000 for the year ended
June 30, 1998 as compared to $65,000 for 1997.

The Company recorded net income for the year ended June 30, 1998 of $1,202,000
as compared to net income of $519,000 for the same period in 1997. This increase
of $683,000 was due to higher sales and gross margins and lower interest costs
offset partially by an increase in selling general and administrative expenses
and a larger gain on the purchase of subordinated debentures in the prior year.

Liquidity and Capital Resources

For the year ended June 30, 1999, the Company's working capital increased by
$2,700,000 to $22,616,000, principally from profitable operations and the sale
of non-operating assets offset partially by the payment and purchases of
long-term debt and the purchase of fixed assets.

During the fiscal year ended June 30, 1999, cash increased by $4,051,000. The
Company used cash of $528,000 for the purchase of fixed assets, $328,000 for the
repayment of short-term borrowings and $50,000 for the payment of capital lease
obligations. Cash generated from profitable operations, the sale of certain
non-operating assets aggregating $200,000 and the exercise of stock options of
$13,000 principally funded these activities.

Receivables at June 30, 1999 increased by $534,000 to $6,864,000 from $6,330,000
at June 30, 1998. This increase is due to orders for the Company's intimate
apparel division, being shipped later in fiscal 1999 as compared to the prior
year.

Inventory at June 30, 1999 decreased by $4,485,000 to $16,460,000 from
$20,945,000 at June 30, 1998. This decrease resulted in both the intimate
apparel division of approximately $3,941,000 and the retail division of
approximately $544,000. The decrease in the intimate apparel division was
primarily the result of an increase in the amount of finished goods being
purchased by the Company in fiscal 2000 which did not require the Company to
purchase and maintain an inventory of the raw materials associated with those
finished goods and a reduction in the level of excess and closeout finished
goods on hand. The decrease in the retail division resulted from the Company's
decision to reduce the level of inventory in this division.

II-8

<PAGE>

During the second quarter of fiscal 1999, the Company sold a non-operating
manufacturing facility located in Mississippi, a vacant parcel of land located
in Georgia and other non-operating assets for an aggregate of $200,000.

During the third quarter of fiscal 1998, the Company sold its interest in a
building located in Georgia for approximately $619,000.

During the second quarter of fiscal 1998, the Company sold two non-operating
manufacturing facilities located in Georgia for an aggregate of $500,000.

In the second quarter of fiscal 1998, the Company purchased $300,000 in
principal amount of its 8% Convertible Senior Notes due September 1, 2001. These
Notes entitled the previous holders to convert the principal amount into 800,000
shares of the Company's common stock, par value $.01. Also in the second quarter
of fiscal 1998, certain individuals affiliated with the Company purchased
$278,500 in principal amount of the 8% Convertible Senior Notes due September 1,
2001. The purchasing affiliates converted the Notes on March 31, 1999 into
742,662 shares of the Company's common stock, par value $.01. The affiliates
have agreed to certain restrictions on the circumstances under which they will
be permitted to sell the shares into which the Notes were converted. The
purchasers have also granted the Company the option to purchase the shares at a
price equal to 90% of the market price at the time any purchaser is permitted
under the agreement to sell the shares in the open market and wishes to do so.

Non-affiliated holders of $59,000 in principal amount of the Company's 8%
Convertible Senior Notes converted their Notes into approximately 157,000 shares
of the Company's common stock in the second quarter of fiscal 1998.

During the second quarter of fiscal 1998, the Company purchased $500,000 in
principal amount of its 12.875% subordinated debentures. As a result of the
transaction, the Company recorded a pre-tax gain of $94,000, net of related
costs.

During August and September 1999, the Company purchased $2,721,000 in principal
amount of its 12.875% subordinated debentures. As a result of the transaction,
the Company will record a pre-tax gain of approximately $105,000, net of related
costs, in the first quarter of fiscal 2000. The Company will reduce its
mandatory sinking fund requirement with these debentures.

The Company has, after the above purchases, $17,894,000 remaining in long-term
debt and a secured revolving line of credit of up to $13,500,000. The long-term
debt consists of $7,266,000 of 12.875% Subordinated Debentures, $10,550,000 of

II-9

<PAGE>

8% Senior Notes, and $78,000 of 8% Convertible Senior Notes. The remaining
sinking fund requirement for the 12.875% Subordinated Debentures is $1,016,000
due on October 1, 2000 and the balance of the principal in the amount of
$6,250,000 is due on October 1, 2001. The 8% Senior Notes and the 8% Convertible
Senior Notes do not require any amortization and mature on September 1, 2001.
The $78,000 of 8% Convertible Senior Notes are convertible into the Company's
common stock, at any time prior to maturity, at a price of $0.375 per share.

The Company has a secured revolving line of credit of up to $13,500,000, through
June 2001, to cover the Company's projected needs for operating capital and
letters of credit to fund the purchase of imported goods. Direct borrowings
under this line bear interest at the annual rate of 2.0% above the prime rate of
Chase Manhattan Bank in fiscal 1999 and the prime rate commencing July 1, 1999.
Availability under the line of credit is subject to the Company's compliance
with certain agreed upon financial formulas. Under the terms of this financing,
the Company has agreed to pledge substantially all of its assets, except the
Company's domestic inventory and real property.

Management believes its available borrowing under its secured revolving line of
credit, along with anticipated internally generated funds, will be sufficient to
cover its working capital requirements.

The Company has been authorized by the board of directors to make additional
purchases of its 12.875% Subordinated Debentures to satisfy its October 1, 2000
sinking fund requirement. The Company does not anticipate making any purchases
of its stock and anticipates that capital expenditures for fiscal 2000 will be
less than $700,000.

Recently Issued Accounting Standard

Recently Issued Accounting Standard - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative is dependent upon the
intended use of the derivative. SFAS No. 133 will be effective in the Company's
first quarter of the fiscal year ending June 30, 2001 and retroactive
application is not permitted. The Company has not yet determined whether the
application of SFAS No. 133 will have a material impact on its financial
position or results of operations.

II-10

<PAGE>

Imports

Year 2000

Overview
The Year 2000 issue is primarily the result of computer programs only accepting
a two-digit date code, as opposed to four digits, to indicate the year.
Beginning in the Year 2000, and in certain instances prior to the Year 2000,
these date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, the Company's date
critical functions may be adversely affected unless these computer systems and
software products are, or become, able to accept four-digit entries.

Internal Systems and Equipment
The Company has completed its comprehensive program consisting of identifying,
assessing and, when necessary, upgrading and/or replacing its systems and
equipment that were vulnerable to Year 2000 problems. The Company has also
successfully completed the testing of its entire system for Year 2000
compliance.

Third Party Relationships
The Company has been formally communicating with its significant suppliers and
customers to determine if those parties have appropriate plans to remedy Year
2000 issues when their systems interface with the Company's systems or may
otherwise impact the operations of the Company. The Company has substantially
completed its review and believes that its major customers and suppliers have

II-11

<PAGE>
addressed their Year 2000 issues. However, there can be no assurance, that the
systems of other companies on which the Company's processes rely will be timely
converted, or that a failure to successfully convert by another company, or a
conversion that is incompatible with the Company's systems, would not have an
impact on the Company's operations.

Contingency Plans
Based on the assessment efforts to date, the Company has focused on three
separate contingency plans (1) if the Company's systems are non-compliant (2) if
the Company's customers are non-compliant and (3) if the Company's suppliers are
non-compliant. The Company is continuously developing these plans to minimize
the impact of a potential failure. However, there can be no assurance that the
Company will be able to have a contingency plan in place for a significant
supplier and/or customer that does not become Year 2000 compliant.

Costs/Risks
Management currently estimates that the cost, in connection with bringing its
own systems and equipment into compliance, was less than $50,000 for fiscal 1998
and less than $150,000 for fiscal 1999. Although the Company is not aware of any
additional material operational issues or costs associated with preparing its
internal systems for the Year 2000, there can be no assurance that there will
not be a delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the Year 2000.

Potential sources of risk include but are not limited to (a) the inability of
principal suppliers or the countries in which those suppliers operate to be Year
2000 compliant, which could result in delays in product deliveries from such
suppliers, (b) the inability of our customers to become compliant, which could
result in them not accepting our product in a timely manner causing the Company
to be in an over inventoried position resulting in a disruption of its cash
flow, and (c) disruption of the distribution channel, including ports and
transportation vendors as a result of general failure of systems and necessary
infrastructure such as electrical supply.

II-12

<PAGE>

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE
SECURITIES LITIGATION REFORM ACT OF 1995

Except for historical information contained herein, this Report on Form 10-K
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve certain risks and uncertainties. The
Company's actual results or outcomes may differ materially from those
anticipated. Important factors that the Company believes might cause differences
are discussed in the cautionary statement under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.

II-13

<PAGE>

ITEM 8. INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Movie Star, Inc.:

We have audited the accompanying consolidated balance sheets of Movie Star, Inc.
and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1999. Our audits also included the financial
statement schedule listed in the index at Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Movie Star, Inc. and subsidiaries
as of June 30, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

Deloitte & Touche LLP
September 22, 1999
New York, New York

F-1

<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(In Thousands, Except Number of Shares)
_______________________________________________________________________________

ASSETS 1999 1998

CURRENT ASSETS:
Cash $ 4,597 $ 546
Receivables 6,864 6,330
Inventory 16,460 20,945
Deferred income taxes 1,983 2,200
Prepaid expenses and other current assets 602 456
-------- ------
Total current assets 30,506 30,477

PROPERTY, PLANT AND EQUIPMENT - Net 3,495 3,551

OTHER ASSETS 732 906

DEFFERED INCOME TAXES 2,026 1,809
-------- ------

TOTAL ASSETS $ 36,759 $ 36,743
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable $ -- $ 328
Current maturities of long-term debt
and capital lease obligations 45 40
Accounts payable 4,529 7,234
Accrued expenses and other current
liabilities 3,316 2,959
------- ------
Total current liabilities 7,890 10,561
------- ------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 20,703 20,980
------- ------
COMMITMENTS AND CONTINGENCIES -- --

STOCKHOLDERS' EQUITY
Common stock, $.01 par value - authorized,
30,000,000 shares; issued 16,897,000
shares in 1999 and 16,134,000 shares in 1998 169 161
Additional paid-in capital 4,072 3,789
Retained earnings 7,543 4,870
------- ------

11,784 8,820

Less treasury stock, at cost - 2,017,000 shares 3,618 3,618
------- ------
Total stockholders' equity 8,166 5,202

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,759 $36,743
======= =======

See notes to consolidated financial statements.

F-2
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(In Thousands, Except Per Share Amounts)
_____________________________________________________________________________

1999 1998 1997

NET SALES $72,506 $64,537 $61,470

COST OF SALES 51,363 45,777 44,947
------- ------- --------

GROSS PROFIT 21,143 18,760 16,523

OPERATING EXPENSES:
Selling, general and
administrative expenses 15,859 15,206 13,875
------- ------- --------

INCOME FROM OPERATIONS 5,284 3,554 2,648

GAIN ON PURCHASES OF SUBORDINATED
DEBENTURES AND SENIOR NOTES - (157) (560)

INTEREST INCOME (118) (130) (157)

INTEREST EXPENSE 2,694 2,623 2,781
------- ------- --------

INCOME BEFORE PROVISION FOR
INCOME TAXES 2,708 1,218 584

PROVISION FOR INCOME TAXES 35 16 65
------- ------- --------

NET INCOME $ 2,673 $ 1,202 $ 519
======= ======= =====

BASIC NET INCOME PER SHARE $.19 $.09 $.04
==== ==== ====

DILUTED NET INCOME PER SHARE $.17 $.08 $.04
==== ==== ====

BASIC WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 14,309 14,049 13,960
====== ====== ======

DILUTED WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 15,869 15,161 15,868
====== ====== ======

See notes to consolidated financial statements.

F-3
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(In Thousands)
_______________________________________________________________________________
<TABLE>
<CAPTION>

Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total

<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 15,977 $ 160 $3,731 $3,149 2,017 $(3,618) $3,422

Net income - - - 519 - - 519
------ ----- ------ ------ ----- ------- ------

BALANCE, JUNE 30, 1997 15,977 160 3,731 3,668 2,017 (3,618) 3,941

Net income - - - 1,202 - - 1,202
Conversion of long-term debt
for common stock 157 1 58 - - - 59
------ ----- ------ ------ ----- ------- ------

BALANCE, JUNE 30, 1998 16,134 161 3,789 4,870 2,017 (3,618) 5,202

Net income - - - 2,673 - - 2,673
Conversion of long-term debt
for common stock 743 8 278 - - - 286
Exercise of stock options 20 - 5 - - - 5
------ ----- ------ ------ ----- ------- ------

BALANCE, JUNE 30, 1999 16,897 $ 169 $4,072 $7,543 2,017 $(3,618) $8,166
====== ===== ====== ====== ===== ======= ======
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(In Thousands)
_______________________________________________________________________________

<TABLE>
1999 1998 1997

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,673 $ 1,202 $ 519
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 566 582 698
Provision for sales allowances and doubtful accounts (191) 98 (1,378)
Gain on purchases of subordinated debentures and senior notes - (157) (560)
Loss on disposal of property, plant and equipment 16 4 35
(Increase) decrease in operating assets:
Receivables (343) (2,281) 4,646
Inventory 4,485 (4,307) (2,391)
Prepaid expenses and other current assets (146) (251) (97)
Other assets 32 (66) 215
Increase (decrease) in operating liabilities:
Accounts payable (2,705) 2,247 (490)
Accrued expenses and other current liabilities 357 339 503
------ ----- -----

Net cash provided by (used in) operating activities 4,744 (2,590) 1,700
------ ----- -----

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (528) (191) (133)
Proceeds from sale of property and equipment 200 500 -
Proceeds from sale of other assets (interest in building) - 619 -
------ ----- -----

Net cash (used in) provided by investing activities (328) 928 (133)
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on and purchases of long-term debt and
capital lease obligations (50) (1,155) (815)
Net (repayment) proceeds of revolving line of credit (328) 328 -
Exercise of stock options 13 - -
------ ----- -----

Net cash used in financing activities (365) (827) (815)
------ ----- -----

NET INCREASE (DECREASE) IN CASH 4,051 (2,489) 752
CASH, BEGINNING OF YEAR 546 3,035 2,283
------ ----- -----

CASH, END OF YEAR $ 4,597 $ 546 $ 3,035
======= ====== =======
</TABLE>

(Continued)

F-5

<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(In Thousands)
_______________________________________________________________________________
<TABLE>

1999 1998 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during period for:
Interest $ 2,584 $2,544 $2,256
======= ====== ======
Income taxes (net of refunds received) $ 25 $ 13 $ 16
======= ====== ======

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Acquisition of equipment through assumption of
capital lease obligation $ 56 $ - $ 139
====== ====== =====

SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of long-term debt for common stock $(278) $ (59) $ -
Issuance of common stock 278 59 -
----- ------ -----
$ - $ - $ -
===== ====== =====

SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Increase in long-term debt for interest paid
in kind $ - $ - $ 217
Decrease in accrued liabilities for interest
paid in kind - - (217)
----- ------ -----
$ - $ - $ -
===== ====== =====
</TABLE>

(Concluded)

See notes to consolidated financial statements.

F-6
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
_______________________________________________________________________________

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - Movie Star, Inc. and its subsidiaries (the "Company") is a New
York corporation organized in 1935, which designs, manufactures, markets
and sells an extensive line of ladies' sleepwear, robes, leisurewear,
loungewear, panties and daywear; and also operates 28 retail stores.

Principles of Consolidation - The consolidated financial statements include
the accounts of the Company. All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the reported amounts of revenues and expenses during the
reporting period. The preparation of financial statements in conformity
with generally accepted accounting principles also requires management to
make estimates and assumptions that affect the disclosures of contingent
assets and liabilities at the date of the financial statements. Actual
results could differ from those estimates.

Inventory - Inventory is valued at lower of cost (first-in, first-out) or
market.

Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Depreciation and amortization are provided by the straight-line
method over the following estimated useful lives:

Buildings and improvements 15 - 30 years
Machinery & Equipment 5 years
Office furniture and equipment 5 years
Leasehold improvements Lesser of life of the asset or life
of lease

Revenue Recognition - Revenue is recognized upon shipment. Although sales
are made without the right of return, in certain instances, the Company may
accept returns or agree to allowances. Allowances for sales returns are
recorded as a component of net sales in the period in which the related
sales are recognized.

Income Taxes - The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."

Net Income Per Share - During the second quarter of fiscal 1998, the
Company adopted SFAS No. 128, "Earnings Per Share," as required. The
Company has restated all previously recorded net income per share amounts
for all periods presented.

Deferred Costs - Deferred financing costs are amortized over the life of
the debt using the straight-line method.

Comprehensive Income - Effective July 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting of comprehensive income and
its components in the financial statements. For the years ended June 1999,
1998 and 1997, comprehensive income approximated net income.

F-7
<PAGE>

Recently Issued Accounting Standard - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
It requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The accounting for changes in the fair value of
a derivative is dependent upon the intended use of the derivative. SFAS No.
133 will be effective in the Company's first quarter of the fiscal year
ending June 30, 2001 and retroactive application is not permitted. The
Company has not yet determined whether the application of SFAS No. 133 will
have a material impact on its financial position or results of operations.

Reclassification - Certain items in prior years in specific captions of the
accompanying consolidated financial statements and notes to consolidated
financial statements have been reclassified for comparative purposes.

2. INVENTORY

Inventory consists of the following:

June 30,
1999 1998
(In Thousands)

Raw materials $ 5,513 $ 8,762
Work-in process 2,121 2,431
Finished goods 8,826 9,752
------- -------
$16,460 $20,945
======= =======

3. RECEIVABLES

Receivables are comprised of the following:

June 30,
1999 1998
(In Thousands)

Trade $ 7,986 $ 7,666
Other 23 -
------- --------
8,009 7,666
Less allowance for doubtful accounts (1,145) (1,336)
------- -------

$ 6,864 $ 6,330
======= =======

F-8

<PAGE>

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

June 30,
1999 1998
(In Thousands)

Land, buildings and improvements $ 6,023 $ 6,233
Machinery and equipment 578 478
Office furniture and equipment 1,229 907
Leasehold improvements 203 187
------ ------
8,033 7,805
Less accumulated depreciation and
amortization (4,538) (4,254)
------ ------

$ 3,495 $ 3,551
======= =======

The Company held for sale or lease certain property, plant and equipment
with a net book value of approximately $324,000 and $518,000 at June 30,
1999 and 1998, respectively.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are comprised of the
following:

June 30,
1999 1998
(In Thousands)

Interest $ 534 $ 540
Insurance 1,030 910
Salary, commissions and employee
benefits 1,274 964
Other 478 545
------ -----
$3,316 $2,959
====== ======

6. NOTES PAYABLE

The Company has a line of credit agreement with a financial institution
expiring on July 1, 2001. Under the agreement, the Company may borrow for
either revolving loans or letters of credit up to the lesser of $13,500,000
or the sum of 80 percent of the net amount of eligible receivables, 50
percent of the eligible inventory and 50 percent of the eligible letters of
credit. Pursuant to the terms of the agreement, the Company has pledged
substantially all of its assets, except the Company's domestic inventory
and real property. Interest on outstanding borrowings is payable at 2
percent above the prime rate through June 30, 1999 and at the prime rate
commencing July 1, 1999. The Company paid a facility fee of approximately
$61,000 in fiscal 1999.

F-9

<PAGE>

Under the terms of the agreement, the Company is required to meet certain
financial covenants, of which the Company is in compliance at June 30,
1999. Furthermore, the Company is prohibited from paying dividends or
incurring additional indebtedness, as defined, outside the normal course of
business.

At June 30, 1999, the Company had no borrowings outstanding under this line
of credit and had approximately $4,930,000 of outstanding letters of
credit. Additionally, the Company had a cash balance of approximately
$4,179,000 deposited with the lender, which earned interest at 3 percent
less than the prime rate at June 30, 1999.

At June 30, 1998, the Company had borrowings of $328,000 outstanding under
this line of credit at an interest rate of 10.5 percent and also had
approximately $3,503,000 of outstanding letters of credit.

7. LONG-TERM DEBT

Long-term debt consists of the following:

June 30,
1999 1998
(In Thousands)

12.875% Subordinated Debentures $ 9,987 $ 9,987
8% Senior Notes 10,550 10,550
8% Senior Convertible Notes 78 356
Capital Lease Obligations 133 127
------- -------
20,748 21,020
Less current portion 45 40
-------- -------

Long-term debt $20,703 $20,980
======== =======

12.875% Subordinated Debentures - On October 10, 1986, the Company sold
$25,000,000 of 12.875% Subordinated Debentures due October 1, 2001 (the
"Debentures"). Interest payments on the outstanding Debentures are due
semi-annually on October 1 and April 1. The Debentures are redeemable, in
whole or in part, at the option of the Company, at any time, and are
subordinated to all senior debt (as defined). The Debentures contain
covenants with respect to limitations on dividends and stock purchases.

Annual sinking fund payments of $3,750,000 are required commencing October
1, 1996. However, required payments in any year may be reduced by
Debentures previously purchased by the Company. During fiscal 1996, the
Company purchased Debentures totaling $2,550,000. In fiscal 1997, the
Company purchased $1,320,000 of Debentures for approximately $824,000
including related costs and recorded a pre-tax gain of $560,000.
Furthermore in fiscal 1997, the Company acquired $10,187,000 of 12.875%
Debentures in an exchange (discussed below). In October 1997, February 1998
and March 1998, the Company purchased $500,000, $156,000 and $300,000 in
principal amount of its 12.875% subordinated debentures, respectively. As a
result of these transactions, the Company recorded a pre-tax gain of
$153,000, net of related costs, in fiscal 1998. The Company satisfied the
October 1, 1996 and 1997 sinking fund requirements and intends to satisfy
its sinking fund requirements through 1999 and reduce part of the 2000
requirement with these purchased Debentures.

F-10

<PAGE>

8% Senior Notes - In April 1996, the Company reached an agreement with
holders of $10,187,000 of the Company's outstanding 12.875% Debentures. The
holders of these Debentures agreed to exchange such Debentures for the
equivalent principal amount of a new series of notes ("Senior Notes")
bearing interest at a rate of 8 percent per annum, payable semi-annually
(April 1 and October 1) which will be senior to the remaining outstanding
Debentures. Additionally, these Debenture holders agreed to defer the
receipt of interest due April 1, 1996 (approximately $656,000) and October
1, 1996 (approximately $434,000) and to accept Senior Notes in exchange for
such deferred interest. The Senior Notes carried the right to convert up to
$715,500 of the Notes into 1,908,000 shares of the Company's common stock.
The Senior Notes will mature on September 1, 2001. As of June 30, 1999,
$78,000 of the 8% Convertible Senior Notes remain outstanding and are
convertible into 208,000 shares of the Company's common stock.

The debt exchange closed on October 15, 1996, but became effective
retroactively to April 1, 1996, the date of the deferral of interest on the
12.875% Debentures. In connection with the debt exchange, the Company
incurred certain costs, which have been capitalized and will be amortized
over the life of the Senior Notes using the straight-line method. The
Senior Notes contain covenants with respect to limitations on dividends and
stock purchases.

In November 1997, the Company purchased $300,000 in principal amount of its
8% Convertible Senior Notes due September 1, 2001. These Notes entitled the
previous holders to convert the principal amount into 800,000 shares of the
Company's common stock. In fiscal 1998, certain individuals affiliated with
the Company purchased $278,500 in principal amount of the 8% Convertible
Senior Notes due September 1, 2001. The purchasing affiliates converted the
Notes on March 31, 1999 into approximately 743,000 shares of the Company's
common stock, par value $.01. The affiliates have agreed to certain
restrictions on the circumstances under which they will be permitted to
sell the shares underlying the Notes. The affiliated purchasers have also
granted the Company the option to purchase the underlying shares at a price
equal to 90 percent of the market price at the time any purchaser is
permitted under the agreement to sell the underlying shares in the open
market and wishes to do so.

In December 1997, non-affiliated holders of $59,000 in principal amount of
the 8% Convertible Senior Notes converted their Notes into approximately
157,000 shares of the Company's common stock.

The maturities of long-term debt at June 30, 1999, including current
maturities, are as follows (in thousands):

Fiscal Year Amount

2000 $ 45
2001 3,787
2002 (9/1/01) 10,628
2002 (10/1/01) 6,288
-------

$20,748
=======

F-11

<PAGE>

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.

June 30,
-------------------------------------------
1999 1998
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)

Long-Term Debt and Capital
Lease Obligations $20,748 $18,917 $21,020 $17,389

Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Other
Current Liabilities - The carrying value of these items approximates fair
value, based on the short-term maturities of these instruments.

Long-Term Debt and Capital Lease Obligations- The fair value of these
securities are estimated based on quoted market prices. If no market quotes
are available, interest rates that are currently available to the Company
for issuance of the debt with similar terms and remaining maturities are
used to estimate fair value of debt issues.

The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1999 and 1998. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those respective
dates, and current estimates of fair value may differ significantly from
the amounts presented herein. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in
a current market exchange.

9. INCOME TAXES

Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating losses. The income tax effects of significant items,
comprising the Company's net deferred tax assets and liabilities, are as
follows:

F-12

<PAGE>

June 30,
1999 1998
(In Thousands)

Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment $ 345 $ 529
----- -----

Deferred tax assets:
Difference between book and tax basis of inventory 360 293
Reserves not currently deductible 1,521 1,812
Operating loss carryforwards 4,047 4,571
Difference between book and tax basis of senior notes 1,111 1,556
Other 93 81
----- ------
7,132 8,313
----- ------
Valuation allowance 2,778 3,775
----- ------
Net deferred tax asset $4,009 $4,009
====== ======

The provision for income taxes is comprised as follows:

Year Ended June 30,
1999 1998 1997
(In Thousands)

Current:
Federal $25 $(2) $65
State and local 10 18 -
Deferred - - -
--- --- ---
$35 $16 $65
=== === ===

Reconciliation of the U.S. statutory rate with the Company's effective tax
rate is summarized as follows:

Year Ended June 30,
1999 1998 1997
(In Thousands)

Federal statutory rate 34.0% 34.0% 34.0%

Increase (decrease) in tax resulting from:
Valuation allowance (42.2) (42.1) (41.5)
State income taxes (net of federal tax
benefits) 6.6 6.0 6.0
Other 2.9 1.4 1.5
Alternative minimum tax - 2.0 11.1
---- ---- ----
Effective rate 1.3% 1.3% 11.1%
==== ==== ====

F-13

<PAGE>

As of June 30, 1999, the Company has net operating loss carryforwards of
approximately $10,118,000 for income tax purposes that expire between the
years 2009 and 2012.

10. LEASES

The Company has operating leases expiring in various years through fiscal
2002, which include, in addition to fixed rentals, escalation clauses that
require the Company to pay a percentage of increases in occupancy expenses.

Future minimum payments under these leases at June 30, 1999 are as follows
(in thousands):

Fiscal Year Amount

2000 $ 634
2001 504
2002 6
------

$1,144
======

Rental expense for 1999, 1998 and 1997 was approximately $771,000, $764,000
and $787,000, respectively.

11. CONSULTING AGREEMENT

Commencing July 1, 1999, the Company entered into a five-year consulting
agreement with a majority shareholder, pursuant to which annual
compensation payments of approximately $200,000 are required.

12. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customers are not concentrated in any specific
geographic region but are concentrated in the retail industry. One customer
accounted for 22, 20, and 17 percent of the Company's net sales in fiscal
1999, 1998 and 1997, respectively. Another customer accounted for 14, 11,
and 12 percent of the Company's net sales in fiscal 1999, 1998 and 1997,
respectively. Additionally, another customer accounted for 11 and 3 percent
of the Company's net sales in fiscal 1999 and 1998, respectively, and less
than 1 percent in 1997 while another customer accounted for 5, 8, and 11
percent of the Company's net sales in fiscal 1999, 1998 and 1997,
respectively. The Company performs ongoing credit evaluations of its
customers' financial condition. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.

13. STOCK PLANS, OPTIONS AND WARRANT

Employee Stock Ownership Plan - The Company has an Employee Stock Ownership
and Capital Accumulation Plan and Trust covering substantially all of its
employees, pursuant to which it can elect to make contributions to the
Trust in such amounts as may be determined by the Board of Directors. No
contributions were made for the years ended June 30, 1999, 1998 and 1997.

F-14
<PAGE>

Stock Options - The Company has an Incentive Stock Option Plan ("1983
ISOP"), pursuant to which the Company has reserved 5,000 shares at June 30,
1999. This plan expired by its terms on June 30, 1993, but 5,000 previous
grants remained outstanding at June 30, 1999, of which 4,400 are presently
exercisable. The 1983 ISOP provided for the issuance of options to
employees to purchase common stock of the Company at a price not less than
fair market value on the date of grant.

On December 8, 1994, the Company's stockholders' approved a new Incentive
Stock Option Plan ("1994 ISOP") to replace the 1983 ISOP discussed above.
Options granted, pursuant to the plan, are not subject to a uniform vesting
schedule. The plan permits the issuance of options to employees to purchase
common stock of the Company at a price not less than fair market value on
the date of the option grant. The plan reserves 2,000,000 shares of common
stock for grant and provides that the term of each award be determined by
the Compensation Committee with all awards made within the ten-year period
following the effective date.

The Company also has a Key Employee Stock Option Plan covering the issuance
of up to 1,667,000 shares of the Company's common stock. Options to
purchase 200,000 shares at an exercise price of $.625 per share are
outstanding at June 30, 1999. None of the options granted are presently
exercisable.

Statement of Financial Accounting Standards No. 123, "Accounting
Stock-Based Compensation" was effective for the Company for fiscal 1997.
SFAS No. 123 encourages (but does not require) compensation expense to be
measured based on the fair value of the equity instrument awarded. In
accordance with APB No. 25, no compensation cost has been recognized in the
Consolidated Statements of Income for the Company's stock option plans. If
compensation cost for the Company's stock option plans had been determined
in accordance with the fair value method prescribed by SFAS No. 123, the
Company's net income would have been $2,333,000, $858,000 and $183,000 for
1999, 1998 and 1997, respectively. Basic net income per share would have
been $.16, $.06, and $.02 for 1999, 1998 and 1997, respectively and diluted
net income per share would have been $.15, $.06 and $.01 for 1999, 1998 and
1997, respectively. This pro forma information may not be representative of
the amounts to be expected in future years as the fair value method of
accounting prescribed by SFAS No. 123 has not been applied to options
granted prior to 1995.

Information with respect to stock options is as follows (shares in
thousands):
<TABLE>
<CAPTION>

1999 1998 1997
---------------------- ---------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
FIXED OPTIONS Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 2,253 $ .75 2,053 $ .76 1,701 $1.43
Granted 435 .63 200 .72 1,845 .63
Exercised (20) (.63) - - - -
Canceled (593) (1.05) - - (1,493) 1.36
---------- ----------- -------- --------- ------- -------
Outstanding - end of year 2,075 $ .64 2,253 $ .75 2,053 $ .76
========== ===== ======= ===== ====== =====

Exercisable - end of year 780 $ .67 996 $ .88 708 $ .94
========== ===== ======= ===== ====== =====
Weighted-average fair value of
options granted during the year $ .69 $ .64 $ .58
====== ===== =====
</TABLE>

The fair value of each option-pricing model with the following
weighted-average assumptions used for grants in 1999 and 1998,
respectively; risk-free interest rate 5.5 % and 5.7%; expected life 7 years
and 7 years; expected volatility of 95.3% and 115.9%. The fair values
generated by the Black-Scholes model may not be indicative of the future
benefit, if any, that may be received by the option holder.

F-15

<PAGE>

The following table summarizes information about stock options outstanding
at June 30, 1999 (options in thousands):

<TABLE>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------- ------------------------------------
Weighted-Average
Number Remaining Weighted- Weighted-
Range of Outstanding at Contractual Average Exercisable at Average
Exercise Prices June 30, 1999 Life (Yrs) Exercise Price June 30, 1999 Exercise Price
--------------- ------------------ ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$.625 - $1.375 2,075 7.9 $.64 780 $.67
</TABLE>

Warrant - In October 1998, in connection with an agreement with a financial
consulting firm, the Company granted a warrant to purchase 50,000 shares of
its common stock at $.4375 per share to the consultants. The warrant is
exercisable at anytime within ninety days following written notice from the
Company of the Company's intention to file a Registration Statement other
than on Form S-4 and S-8, under the Securities Act of 1933, as amended. No
expense related to such warrant was recorded since it was not material.

14. Net Income Per Share

The Company's calculation of Basic and Diluted Net Income Per Share are as
follows (in thousands, except per share amounts):

Year Ended June 30,
1999 1998 1997
Basic Net Income Per Share (In Thousands, Except Per Share)

Net Income to Common Stockholders $ 2,673 $ 1,202 $ 519
======= ======= ======
Basic Weighted Average Shares
Outstanding 14,309 14,049 13,960
======= ======= ======
Basic Net Income Per Share $.19 $.09 $.04
==== ==== ====

Diluted Net Income Per Share:

Net Income to Common Stockholders $ 2,673 $ 1,202 $ 519
Plus: Interest Expense on 8%
Convertible Senior Notes 6 40 57
------- ------- ------
Adjusted Net Income $ 2,679 $ 1,242 $ 576
======== ======= ======

Weighted Average Shares Outstanding 14,309 14,049 13,960
Plus: Shares Issuable Upon Conversion
of 8% Convertible Senior Notes 765 1,112 1,908
Shares Issuable Upon Conversion
of Stock Options 771 - -
Shares Issuable Upon Conversion
of Warrants 24 - -
------ ------- -------
Diluted Weighted Average Shares
Outstanding 15,869 15,161 15,868
======= ======= ======
Diluted Net Income Per Share $.17 $.08 $.04
==== ==== ====

F-16

<PAGE>

15. SEGMENT-RELATED INFORMATION

The Company has implemented SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." This Statement requires the Company to
use a management approach in identifying segments of its business. Prior
year's comparative financial information has been restated to conform with
the current year's presentation of segment-related information.

The Company has two reportable business segments: intimate apparel and
retail. The Company's reportable segments are individual business units
that offer different products and services. They are managed separately
because each segment requires different strategic initiatives, marketing,
and advertising based on its own individual positioning in the market.
Additionally, these segments reflect the reporting basis used internally by
senior management to evaluate performance and the allocation of resources.

The Company's intimate apparel segment designs, sources, manufactures,
markets and sells an extensive line of ladies' intimate apparel. This
segment primarily sells to discount, specialty, national and regional
chain, mass merchandise and department stores and direct mail catalog
marketers throughout the United States, as well as its Company-owned retail
stores.

The retail segment sells apparel products purchased primarily from external
suppliers, as well as from the Company's intimate apparel segment.

The accounting policies of the segments are consistent with those described
in Note 1, Significant Accounting Policies. Intersegment sales and
transfers are recorded at cost and treated as a transfer of inventory.
Senior management does not review these sales when evaluating segment
performance. The Company's senior management evaluates each segment's
performance based upon income or loss from operations before interest,
nonrecurring gains and losses and income taxes.

The Company's net sales, income from operations, depreciation and
amortization, total assets and capital expenditures for each segment for
the years ended June 30, 1999, 1998 and 1997 were as follows:

Year Ended June 30,
1999 1998 1997
(In Thousands)

Net Sales:
Intimate Apparel (a) $63,006 $53,855 $51,241
Retail 9,500 10,682 10,229
------- ------- -------
$72,506 $64,537 $61,470
======= ======= ======
Income From Operations:
Intimate Apparel (a) $ 4,564 $ 2,316 $1,542
Retail 720 1,238 1,106
------- ------- ------
$ 5,824 $ 3,554 $2,468
======= ======= ======
Depreciation and Amortization:
Intimate Apparel (a) $ 526 $ 549 $ 664
Retail 40 33 34
------- ------- ------
$ 566 $ 582 $ 698
======= ======= ======

F-17

<PAGE>

Year Ended June 30,
1999 1998 1997
(In Thousands)

Segment Assets:
Intimate Apparel (a) $33,547 $33,147 $30,858
Retail 3,212 3,596 3,099
------- ------- -------
$36,759 $36,743 $33,957
======= ======= =======
Capital Expenditures:
Intimate Apparel (a) $ 379 $ 186 $ 238
Retail 205 5 34
------- ------- ------
$ 584 $ 191 $ 272
======= ======= =======

(a) Includes discontinued apparel segment of men's, women's and children's
screen printed tee shirts in 1998 and 1997 of less than 10%.

16. SUBSEQUENT EVENT

During August and September 1999, the Company purchased $2,721,000 in
principal amount of its 12.875% subordinated debentures. As a result of the
transaction, the Company will record a pre-tax gain of approximately
$105,000, net of related costs, in the first quarter of fiscal 2000. The
Company will reduce its mandatory sinking fund requirement with these
debentures.

17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

Quarter
First Second Third Fourth
(In Thousands, Except Per Share)

Fiscal Year Ended June 30, 1999

Net sales $18,958 $25,789 $14,715 $13,044
Gross profit 5,657 7,386 4,381 3,719
Net income (loss) 1,183 2,330 202 (1,042)
Basic net income (loss) per
share .08 .17 .01 (.07)
Dilutive net income (loss) per
share .08 .15 .01 (.07)

F-18

<PAGE>

Quarter
First Second Third Fourth
(In Thousands, Except Per Share)

Fiscal Year Ended June 30, 1998

Net sales $15,202 $22,737 $12,918 $13,680
Gross profit 4,284 6,489 3,784 4,203
Net income (loss) 165 1,660 (123) (500)
Basic net income (loss) per
share .01 .12 (.01) (.03)
Dilutive net income (loss) per
share .01 .11 (.01) (.03)

Quarter
First Second Third Fourth
(In Thousands, Except Per Share)

Fiscal Year Ended June 30, 1997

Net sales $12,894 $22,133 $13,089 $13,354
Gross profit 3,285 5,745 3,535 3,958
Net income (loss) (63) 1,280 (329) (369)
Basic net income (loss) per
share - .09 (.02) (.03)
Dilutive net income (loss) per
share - .08 (.02) (.03)

* * * * * *

F-19

<PAGE>

Schedule II
MOVIE STAR, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

Column A Column B Column C Column D Column E

Additions Balance
Balance at Charged to at
Beginning Costs and End of
Description of Period Expenses Deductions Period

FISCAL YEAR ENDED JUNE 30, 1999:

Allowance for doubtful accounts $1,076 $ 40 $ (40)(a) $ 885
(191)(b)

Allowance for sales allowances 260 1,720 (1,720) 260
------ ------ ------ ----

$1,336 $1,760 $(1,951) $1,145
====== ====== ======= ======

FISCAL YEAR ENDED JUNE 30, 1998:

Allowance for doubtful accounts $ 778 $ 305 $ (7)(a) $1,076

Allowance for sales allowances 460 1,562 (1,762) 260
------ ------ ------ ----

$1,238 $1,867 $(1,769) $1,336
====== ====== ======= ======

FISCAL YEAR ENDED JUNE 30, 1997:

Allowance for doubtful accounts $1,956 $ 192 $(1,370)(a) $ 778

Allowance for sales allowances 660 1,315 (1,515) 460
------ ------ ------ ----

$2,616 $1,507 $(2,885) $1,238
====== ====== ======= ======

(a) Uncollectible accounts written off.
(b) Reduction in allowance.

S-1

<PAGE>

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

II-14

<PAGE>

PART III

ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

Director Since Name Age Position
- -------------- ---- --- --------
1981 Mark M. David 52 Chairman of the Board

1997 Melvyn Knigin 56 President, Chief Executive Officer
and Director

1983 Saul Pomerantz 50 Executive Vice President, Chief
Operating Officer, Secretary
and Director

1996 Gary W. Krat 51 Director
1996 Joel M. Simon 54 Director

Officer Since
- -------------
1999 Thomas Rende 38 Chief Financial Officer

Mark M. David was re-elected Chairman of the Board and Chief Executive Officer
on December 11, 1998. Effective as of July 1, 1999 Mr. David retired as a
full-time executive employee of the Company. Mr. David relinquished the position
of Chief Executive Officer in February 1999, but remained as Chairman of the
Board. He had been Chairman of the Board and Chief Executive Officer from
December 1985 to August 1995 and from April 1996 until February 1999, President
from April 1983 to December 1987 and Chief Operating Officer of the Company
since the merger with Stardust Inc. in 1981 until December 1987. Prior to the
merger, he was founder, Executive Vice President and Chief Operating Officer of
Sanmark Industries Inc.

Melvyn Knigin was elected to the Board of Directors on December 11, 1998. Mr.
Knigin was appointed Chief Executive Officer in February 1999. Mr. Knigin was
appointed to fill a vacancy on the Board of Directors and promoted to Senior
Vice President and Chief Operating Officer on February 5, 1997 and was promoted
to President on September 4, 1997. Since joining the Company in 1987, he was the
President of Cinema Etoile, the Company's upscale intimate apparel division.
Prior to joining the Company, he had spent most of his career in the intimate
apparel industry.

Saul Pomerantz, CPA, was re-elected to Board of Directors on December 11, 1998.
Mr. Pomerantz was appointed Chief Operating Officer in February 1999. Mr.
Pomerantz was elected Senior Vice President on December 3, 1987 and was promoted
to Executive Vice President on September 4, 1997. Previously, he was Vice
President-Finance since 1981. He was Chief Financial Officer from 1982 to
February 1999 and has been Secretary of the Company since 1983.

Thomas Rende was appointed Chief Financial officer in February 1999. Since
joining Movie Star in 1989, Mr. Rende has held various positions within the
finance department.

Gary W. Krat was re-elected to the Board of Directors on December 11, 1998. Mr.
Krat has been Senior Vice President of SunAmerica Inc. since 1990. He is also
Chairman and Chief Executive Officer of SunAmerica Financial Network, Inc. and
its six NASD broker dealer companies with nearly ten thousand registered
representatives. From 1977 until 1990, Mr. Krat was a senior executive with

III-1

<PAGE>

Integrated Resources, Inc. Prior to joining Integrated Resources, Mr. Krat was a
practicing attorney. He has a law degree from Fordham University and a Bachelor
of Arts degree from the University of Pittsburgh.

Joel M. Simon was re-elected to the Board of Directors on December 11, 1998. Mr.
Simon was the President and Chief Executive Officer of Starrett Corporation, a
real estate construction, development and management company from March to
December 1998. Since then and from 1996 to 1998, Mr. Simon has been
self-employed as a private investor. From 1990 until the end of 1996, Mr. Simon
was the Executive Vice President and Chief Operating Officer and, (until July
1993), was a director of a group of affiliated companies known as Olympia & York
Companies (USA)("O&Y-USA"), subsidiaries of a Canadian multinational real estate
concern. Prior to becoming Chief Operating Officer of O&Y-USA, from 1985 until
the end of 1989, Mr. Simon was the Executive Vice President-Administration and a
director of O&Y-USA. Mr. Simon is a Certified Public Accountant and was a senior
partner in an accounting firm prior to joining O&Y-USA. In 1992, O&Y- USA
experienced a liquidity crisis. The O&Y-USA crisis was caused and exacerbated by
its inability to obtain financial support from its Canadian parent, as it had in
the past, because of the parent company's own financial crises. Since then, most
of the O&Y-USA companies filed voluntary petitions for protection under Chapter
11 of the U.S. Bankruptcy Code. Substantially all of these companies have had
their plans of reorganization confirmed and consummated.

ITEM 11. EXECUTIVE COMPENSATION

Report of the Compensation Committee on Executive Compensation

Joel M. Simon, Gary W. Krat and Mark M. David were appointed by the Board of
Directors, and each of them agreed to serve as members of the Compensation
Committee (the "Committee").

Mark M. David relinquished the position of Chief Executive Officer in February
1999 and as a result, the Company's President, Melvyn Knigin, was appointed to
the additional position of Chief Executive Officer, the Company's Executive Vice
President, Saul Pomerantz, was assigned the additional duties of Chief Operating
Officer and Thomas Rende was promoted to the position of Chief Financial
Officer. Also, effective June 30, 1999, Mr. David retired as a full-time
executive employee of the Company. Pursuant to a retirement program negotiated
with Mr. David, he received a lump sum retirement payment and entered into a
written agreement with the Company to provide consulting services for a term of
five years for which he will receive a fixed annual fee. Pursuant to the terms
of the agreements with Mr. David, he will remain as the non-executive Chairman
of the Board of Directors and he is prohibited from participating in any
business which competes with the business of the Company. The salaries of
Messrs. Knigin, Pomerantz and Rende were increased for fiscal year 1999. In
light of Mr. David's retirement and the new duties assumed by the Company's
remaining senior executives, the Compensation Committee is in the process of
determining whether to make any adjustments to the salaries of Messrs. Knigin,
Pomerantz and Rende for fiscal year 2000.

Compensation Policies

In determining the appropriate levels of executive compensation for fiscal year
1999, the Committee based its decisions on (1) the Company's continued improved
financial condition, (2) the need to retain experienced individuals with proven
leadership and managerial skills, (3) the executives' motivation to enhance the
Company's performance for the benefit of its shareholders and customers and (4)
the executives' contributions to the accomplishment of the Company's annual and
long-term business objectives.

Salaries generally are determined based on the Committee's evaluation of the
value of each executive's contribution to the Company, results of the past
fiscal year in light of prevailing business conditions, the Company's goals for
the ensuing fiscal year and, to a lesser extent, prevailing levels at companies
considered to be comparable to and competitors of the Company.

In addition to base salary compensation, the Committee has also, from time to
time, recommended that stock options be granted to the executive officers of the
Company in order to reward the officers' commitment to maximizing shareholder
return and long-term results.

III-2

<PAGE>

Base Salary Compensation

Based on recommendations from the Company's Chairman of the Board and the other
Committee members' collective business experience, base salaries are determined
from year to year. The Committee does not utilize outside consultants to obtain
comparative salary information, but believes that the salaries paid by the
Company are competitive, by industry standards, with those paid by companies
with similar sales volume to the Company. The Committee places considerably more
weight on each executive's contribution to the Company's development and
maintenance of its sources of supply, manufacturing capabilities, marketing
strategies and customer relationships than on the compensation policies of the
Company's competitors; however, the Committee does not establish or rely on
target levels of performance in any of these areas to arrive at its
recommendations. Mr. David did not make recommendations with respect to his own
salary and does not participate in the Committee's determination of the salary
and other compensation to be paid to the Company's senior executives.

The current senior executives of the Company have been associated with the
Company in senior management positions for periods ranging from ten to twenty
years. They have been primarily responsible for the formulation and
implementation of the Company's recent financial and operational restructuring
and provide the Company with a broad range of management skills which are
considered by the Committee to be an essential source of stability and a base
for the Company's future growth.

Stock Option Grants

In 1983, the Company adopted an Incentive Stock Option Plan (the "ISOP") to
provide a vehicle to supplement the base salary compensation paid to key
employees. All of the Company's senior executives were eligible to receive
grants under the ISOP. Options under the ISOP are granted at fair market value
at the date of grant. In the past, the Committee has recommended and the Board
of Directors has granted options under the ISOP to each of the senior
executives, except Mr. David. The options granted under the ISOP were
exercisable at a rate of 11% per year for the first eight years of service after
grant and 12% for the ninth year after grant. No options have been granted to
the Company's senior executives under the ISOP since 1986 and no further options
may be granted under the ISOP. The 1983 ISOP has expired.

On July 15, 1994, the Committee adopted a new Incentive Stock Option Plan (the
"1994 ISOP") to replace the expired 1983 ISOP. All of the Company's management
and administrative employees are eligible to receive grants under the 1994 ISOP.
Subject to shareholder approval, options under the 1994 ISOP were granted to
each of the Company's senior executives (except Mark M. David) on July 15, 1994
at fair market value at that date. As a condition to the grant of options to the
Company's senior executives, the Committee required each of the recipients to
surrender for cancellation any interest in options granted prior to July 15,
1994. The 1994 ISOP was approved by the Company's shareholders at the Company's
annual meeting on December 8, 1994.

In addition to the ISOP, in 1988, the Committee recommended and the Board of
Directors adopted a non-qualified Management Option Plan (the "1988
Non-qualified Plan") to provide an additional continuing form of long-term
incentive to selected officers of the Company. The 1988 Non-qualified Plan was
approved by the Company's shareholders at the Company's annual meeting on
December 13, 1988. Generally, options under the 1988 Non-qualified Plan are
issued with a 10-year exercise period in order to encourage the executive
officers to take a long-term approach to the formulation and accomplishment of
the Company's goals.

In January 1997, Messrs. Simon and Krat, the independent Directors serving on
the Committee, recommended that the Company grant new options to Mark David
under the 1988 Non-qualified Plan at a price equal to the market price for the
Company's shares on the date of the grant. As a condition to the grant of new
options to Mr. David under the 1988 Non-qualified Plan, the Committee required
Mr. David to surrender for cancellation any interest in options granted to him
prior to January 29, 1997. On November 4, 1998, Mr. David voluntarily
surrendered his interest in the options granted under the 1988 Non-qualified
Plan.

Also in January 1997, the independent Directors serving on the Committee
recommended that the Company grant new options under the 1994 ISOP to Saul
Pomerantz and Melvyn Knigin at a price equal to the market price for the
Company's shares on the date of the grant. The grant of new options to Messrs.
Pomerantz and Knigin was also subject to the condition that they surrender

III-3

<PAGE>

for cancellation any interest in options granted to them prior to January 29,
1997.

In November 1998, the independent Directors serving on the Committee recommended
that the Company grant new options to Messrs. Knigin and Pomerantz under the
1994 ISOP and the 1988 Non-qualified Plan and to Mr. Rende under the 1994 ISOP.

Incentive Compensation

In September 1998, the Compensation Committee adopted an incentive compensation
plan for senior executives, other than Mr. David (the "1998 Incentive Plan").
Under the 1998 Incentive Plan, the Compensation Committee has the discretion to
award bonus compensation to senior executives in an amount not to exceed five
(5%) percent of any increases in income before taxes and any extraordinary
charges, as determined by the Compensation Committee, over the base amount of
$1,200,000. Based on the collective efforts of Messrs. Knigin and Pomerantz, the
Compensation Committee determined to award bonuses to them under the 1998
Incentive Plan for fiscal year 1999. Mr. Knigin was eligible to receive
incentive compensation equal to three (3%) percent and Mr. Pomerantz was
eligible to receive two (2%) of the available bonus compensation for fiscal
1999.

Compensation of the Chief Executive Officer

For fiscal year 1999, the annual base salary paid to Mark M. David, the
Company's Chairman of the Board and former Chief Executive Officer, remained at
the same $335,000 as he received in fiscal year 1998. Mr. Knigin became Chief
Executive Officer in February 1999. His annual base salary for 1999 was
$405,406.

Compensation Committee Interlocks and Insider Participation

Other than the Company's Chairman of the Board, there are no Compensation
Committee interlocks or insider participation. Mr. David did not participate in
the Committee's determinations of his compensation.

Mark M. David
Gary W. Krat
Joel M. Simon

III-4

<PAGE>

Summary Compensation Table

ANNUAL LONG TERM COMPENSATION
COMPENSATION RESTRICTED
NAMED PRINCIPAL FISCAL ------------ STOCK OPTIONS ALL OTHER
POSITION YEAR SALARY ($) AWARDS($) (# SHARES) COMPENSATION
- --------------- ---- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Mark M. David 1999 340,355 - -(1) 508,145 (2)
Chairman of the Board 1998 335,000 - 350,000(1) 8,145 (2)
1997 275,000 - 350,000(1) 8,145 (2)

Melvyn Knigin 1999 405,406 - 600,000(3) 67,495
President and Chief 1998 350,000 - 350,000(5) -
Executive Officer of 1997 296,660 - 350,000(5) -
the Company; Director

Saul Pomerantz 1999 228,342 - 500,000(4) 44,996
Executive Vice President 1998 200,000 - 350,000(5) -
and Chief Operating 1997 164,480 - 350,000(5) -
Officer of the
Company; Director

Thomas Rende 1999 126,300 - 105,000(6) -
Chief Financial Officer

</TABLE>

(1) Represents options to purchase 350,000 shares of Common Stock granted On
January 29, 1997 under the Company's Non-Qualified Stock Option Plan ("1988
Plan"). Mr. David surrendered these options on November 4, 1998.

(2) Represents annual premiums of $8,145 paid by the Company for a split dollar
form of life insurance policy on the life of Mark M. David and an accrual
for the retirement payment made to Mr. David in connection with his
retirement as a full-time employee of the Company.

(3) Represents options to purchase shares of Common Stock under the 1994
Incentive Stock Option Plan (the "1994 Plan") of which 350,000 shares were
granted on January 29, 1997 and 125,000 were granted on November 4, 1998
and 125,000 shares granted on November 4, 1998 under the Company's
Non-Qualified Stock Option Plan (the "1988 Plan").

(4) Represents options to purchase shares of Common Stock under the 1994
Incentive Stock Option Plan (the "1994 Plan") of which 350,000 shares were
granted on January 29, 1997 and 75,000 were granted on November 4, 1998 and
75,000 shares granted on November 4, 1998 under the Company's Non-Qualified
Stock Option Plan (the "1988 Plan").

(5) Represents options to purchase 350,000 shares of Commo Stock granted on
January 29, 1997 under the 1994 Incentive Stock Option Plan (the "1994
Plan").

(6) Represents options to purchase shares of Common Stock under the 1994
Incentive Stock Option Plan (the "1994 Plan") of which 20,000 shares were
granted on July 15, 1994, 50,000 were granted on January 29, 1997 and
35,000 were granted on November 4, 1998.

III-5

<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF
AUGUST 31, 1999

The following table sets forth certain information as of August 31,
1999 with respect to the stock ownership of (i) those persons or
groups (as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934) who beneficially own more than 5% of the
Company's Common Stock, (ii) each director of the Company and (iii)
all directors and officers of the Company as a group.

NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OFWNER PERRCENT OF
BENEFICIAL OWNERSHIP CLASS(1)
------------------------ ------------------------ -------------

Mark M. David 3,180,428(2)(6) 21.3744%
136 Madison Avenue
New York, NY 10016

Republic National 962,489; Direct 6.4685%
Bank as Trustee for
the Movie Star, Inc.
Employee Stock
Ownership Plan
452 Fifth Avenue
New York, NY 10018

Mrs. Abraham David 1,622,959(3)(7) 10.9072%
8710 Banyan Court
Tamarac, FL 33321

Melvyn Knigin 294,406(4) 1.9551%
136 Madison Avenue
New York, NY 10016

Saul Pomerantz 348,781(5) 2.3042%
136 Madison Avenue
New York, NY 10016

Thomas Rende 205,300(12) 1.3760%
136 Madison Avenue
New York, NY 10016

Joel M. Simon 74,166(10) 0.4984%
136 Madison Avenue
New York, NY 10016

Gary W. Krat 253,333(11) 1.7025%
733 Third Avenue
New York, NY 10017

Abraham David 25,000; Direct(9) 0.1680%
8710 Banyan Court
Tamarac, FL 33321

All directors and officers
as a group 5,979,373(2)(4)(5)(8)(10) 39.0127%
(6 persons) (11)(12)

III-6

<PAGE>

- -----------------

(1) Based upon 14,879,644 shares (excluding 2,016,802 treasury shares)
outstanding and options, where applicable, to purchase shares of Common
Stock, exercisable within 60 days.

(2) Includes 30,000 shares owned as trustee for his children 30,000 shares
owned as trustee for his sisters' children and 26,560 shares owned by his
spouse.

(3) Includes 606,695 shares owned by Annie David as a truste for the benefit of
her daughters, Marcia Sussman and Elaine Greenberg and her grandchildren,
Adam David, Evan David, Michael Sussman and David Greenberg.

(4) Includes options granted to Melvyn Knigin for 178,906 shares pursuant to
the 1994 Plan, exercisable within 60 days and 100,000 shares subject to the
Affiliates Agreement (see Item 13(a))

(5) Includes options granted to Saul Pomerantz for 226,871 shares and Shelley
Pomerantz for 30,000 shares (his wife who also is employed by the Company)
pursuant to the 1994 Plan, exercisable within 60 days, 66,666 shares
subject to the Affiliates Agreement (see Item 13(a)); and 244 shares owned
by his spouse and 8,000 shares held jointly with his spouse.

(6) Does not include Mrs. Abraham David's shares for which h holds the proxy.

(7) Mark M. David holds a proxy for these shares.

(8) Includes the shares held by Mrs. Abraham David.

(9) Abraham David is the husband of Annie David and the father of Mark M.
David.

(10) Includes 26,666 shares subject to the Affiliates Agreement (see Item
13(a)).

(11) Includes 233,333 shares subject to the Affiliates Agreement (see Item
13(a)).

(12) Represents options granted to Thomas Rende for 40,000 shares, pursuant to
the 1994 Plan, exercisable within 60 days, 46,000 shares held jointly with
his spouse, 3,300 shares owned by his spouse and 116,000 shares subject to
the Affiliates Agreement (see Item 13(a)).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a) In December 1997, certain of the officers and directors of the Company
(other than Mr. David), the Company's counsel and/or members of their
families (collectively, the "Affiliates"), purchased from unrelated third
parties 8% Convertible Senior Notes of the Company in the aggregate face
amount of $278,500 (the "Notes"). The Affiliates entered into a written
Agreement with the Company dated December 7, 1997 (the "Affiliates
Agreement") pursuant to which they agreed to (i) certain restrictions on
the circumstances under which the Notes and the shares of Common Stock
underlying the Notes could be sold or transferred, and (ii) granted the
Company the right to purchase the shares of Common Stock underlying the
Notes at a price equal to ninety (90%) of the market price at the time any
of the Affiliates is permitted under the Affiliates Agreement to sell the
shares of Common Stock in the open market and wishes to do so. As required
by the Affiliates Agreement, all of the Affiliates converted the Notes into
shares of Common Stock on March 31, 1999.

(b) Effective as of July 1, 1999, Mr. David retired as a full-time executive
employee of the Company. The Company and Mr. David have entered into a
series of written agreements which provide for the payment to Mr. David of
a lump sum retirement benefit of $500,000, the continuation of health
insurance benefits and a split dollar life insurance policy on Mr. David's
life and the retention of Mr. David's services as a consultant to the
Company for a term of five years. Pursuant to the consulting agreement, Mr.
David is prohibited from disclosing any confidential information of the
Company and from engaging in any business which is competitive with the
business of the Company.

III-7
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Page

(a) 1. Financial Statements and Supplementary Data

Included in Part II, Item 8 of this report:

Independent Auditors' Report F-1

Consolidated Balance Sheets at June 30, 1999
and 1998 F-2

Consolidated Statements of Income for the fiscal
years ended June 30, 1999, 1998 and 1997 F-3

Consolidated Statements of Stockholders' Equity for
the fiscal years ended June 30, 1999, 1998 and 1997 F-4

Consolidated Statements of Cash Flows for the fiscal
years ended June 30, 1999, 1998 and 1997 F-5 - F-6

Notes to Consolidated Financial Statements F-7 - F-19

2. Schedule

For the fiscal years ended June 30, 1999, 1998 and 1997:

II - Valuation and Qualifying Accounts S-1

Schedules other than those listed above are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.

IV-1

<PAGE>

(a) 3. EXHIBITS
<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
3.1 Certificate of Incorporation Incorporated by reference
to Form 10-K for fiscal
year ended June 30, 1988
and filed on October 13,
1988.

3.1.1 Amended Certificate of Incorporated by reference
Incorporation to Form 10-K for fiscal
year ended June 30, 1992
and filed on September 25,
1992.

3.1.2 Amended Certificate of Incorporated by reference
Incorporation to Form 8 Amendment to
Form 10-K for fiscal
year ended June 30,
1992 and filed on
January 19, 1993.

3.2 By-Laws Incorporated by reference
to Form 10-K for fiscal
year ended June 30, 1988
and filed on October 13,
1988.

4.1 Instruments defining the Incorporated by reference
rights of security holders to Exhibits to
including indentures Registration Statement on
Form S-2 (No. 33-7837)
filed October 10, 1986.

4.1.1 Indenture dated as of October Incorporated by reference
1, 1996 between the to Exhibits to Application
Company, as Issuer and for Qualification of
American Stock Transfer & Indenture under the Trust
Trust Company, as Trustee Indenture Act of 1939 on
Form T-3 (Commission File
No. 22-22243) filed on
September 13, 1996.

4.2 Plan of Merger dated November Incorporated by reference
18, 1980, between Stardust to Exhibits to
Inc. and Sanmark Industries Registration Statement on
Inc. whereby Sanmark Form S-14 (Registration
Industries Inc. was merged No. 2-70365) filed by
into Stardust Inc. Company's predecessor
corporation, Stardust Inc.
on February 12, 1981.

</TABLE>

IV-2

<PAGE>

<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
10.1 Agreement of Sale dated Incorporated by reference
December 12, 1983, as amended to Exhibits to
January 31, 1984, among Registration Statement
Industrial Development Form S-2 (No. 33-7837)
Authority of Russell County filed October 10, 1986.
(Virginia), the Company and the
Bankers Trust Company,
with attendant Deed and Bill
of Sale, Deed of Trust,
Assignment, and Promissory Note
in the sum of $3,000,000.

10.2 Employee Stock Ownership and Incorporated by reference
Capital Accumulation Plan to Exhibits to
dated April 17, 1984 as Registration Statement
amended on July 1, 1984 Form S-2 (No. 33-7837)
between Republic National filed October 10, 1986.
Bank of New York, as trustee,
and the Company.

10.3 Incentive Stock Option Plan Incorporated by reference
Agreement dated June 28, to Exhibits to
1983, as amended on January Registration Statement
13, 1986. Form S-2 (No. 33-7837)
filed October 10, 1986.

10.3.1 1994 Incentive Stock Option Incorporated by reference
Plan. to Form 10-K for fiscal
year ended June 30, 1994
and filed on October 12,
1994.

10.4 Form of Non-Qualified Stock Incorporated by reference
Option granted to several to Exhibits to
persons who are Registration Statement
manufacturer's Form S-2 (No. 33-7837)
representatives for the filed October 10, 1986.
Company.

10.5 Financing Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 30,
and the Company. 1996 and filed on May 15, 1996.

10.5.1 Side Letter re Covenants Incorporated by reference
dated as of April 24, 1996 to Form 10-Q for the
with Rosenthal & Rosenthal, quarter ended March 30,
Inc. 1996 and filed on
May 15, 1996.

</TABLE>

IV-3

<PAGE>

<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
10.5.2 Security Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 30,
and the Company. 1996 and filed on
May 15, 1996.

10.5.3 Security Agreement - Incorporated by reference
Inventory dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 30,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.

10.5.4 Security Agreement and Incorporated by reference
Mortgage - Trademarks dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 30,
Rosenthal & Rosenthal, inc. 1996 and filed on
and the Company. May 15, 1996.

10.5.5 Negative Pledge - Real Incorporated by reference
property dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 30,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.

10.5.6 Assignment of Leases, Rents Incorporated by reference
and Security Deposits dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 30,
Rosenthal & Rosenthal, Inc. 1996 and filed on
and the Company. May 15, 1996.

10.5.7 Letter Agreement dated as of Filed herewith.
June 28, 1999 between Rosenthal &
Rosenthal, Inc. and the Company
Modifying and extending the Financing
Agreement dated April 26, 1996

10.7 1988 Non-Qualified Stock Incorporated by reference
Option Plan. to Form 10-K for fiscal
year ended June 30, 1989
and filed on September 27,
1989.

10.8 License Agreement dated Incorporated by reference
July 26, 1990 between PGH to Form 8 Amendment to
Company, Licensor and Form 10-K for fiscal year
Sanmark-Stardust Inc. ended June 30, 1992 and
Licensee. filed on January 19, 1993.

10.9 License Agreement dated Incorporated by reference
November 14, 1991 between to Form 8 Amendment to
BonJour Group, Ltd., Licensor Form 10-K for fiscal year
and Sanmark-Stardust Inc., ended June 30, 1992 and
Licensee. Filed on January 19, 1993.

</TABLE>

IV-4

<PAGE>

<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
10.10 Prototype of Contract of Incorporated by reference
Purchase periodically entered to Form 10-K for fiscal
into between the Company year ended June 30, 1993
and Sears Roebuck and and filed on September 18,
Company. 1993.

10.11 Agreement dated as of July 1, 1999 Filed herewith
between Mark M. David and the Company
providing for retirement benefits
Mr. David.

10.12 Agreement dated as of July 1, 1999 Filed herewith
between Mark M. David and the Company
for Mr. David's consulting services.

21 Subsidiaries of the Company. Filed herewith.

23 Independent Auditors' Consent Filed herewith.

27 Financial Data Schedule Filed herewith.

28.1 Tender Offer Statement and Incorporated by reference
Rule 13E-3 Transaction to Schedule 14D-1 and Rule
Statement with respect to 13E-3 Transaction
Movie Star, Inc. Acquisition. Statement (No. 1-4585)
filed December 18, 1987.
</TABLE>

(a) 4. Report on Form 8-K

None.

IV-5

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this document to be signed on
its behalf by the undersigned, thereunto duly authorized.

September 28, 1999

MOVIE STAR, INC.

By: /s/ MARK M. DAVID
--------------------------------
MARK M. DAVID, Chairman
of the Board

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and as of the date indicated.

<TABLE>
<S> <C> <C>
/s/ MARK M. DAVID Chairman of the Board September 28, 1999
- -------------------------------
MARK M. DAVID

/s/ MELVYN KNIGIN President; Executive Officer; September 28, 1999
- ------------------------------- Director
MELVYN KNIGIN

/s/ SAUL POMERANTZ Executive Vice President; September 28, 1999
- ------------------------------- Chief Operating Officer;
SAUL POMERANTZ Secretary & Director

/s/ THOMAS RENDE Principal Financial & September 28, 1999
- ------------------------------- Accounting Officer
THOMAS RENDE

/s/ GARY W. KRAT Director September 28, 1999
- -------------------------------
GARY W. KRAT

/s/ JOEL M. SIMON Director September 28, 1999
- -------------------------------
JOEL M. SIMON

</TABLE>

IV-6

<PAGE>

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

21 SUBSIDIARIES OF THE COMPANY

23 INDEPENDENT AUDITORS' CONSENT

27 FINANCIAL DATA SCHEDULE

June 28, 1999
MOVIE STAR, INC.
136 Madison Avenue
New York, NY 10016

It is mutually agreed that the Financing Agreement entered into between
us dated April 24, 1996 as amended or supplemented (the "Financing Agreement")
is amended effective July 1, 1999 as follows:

1. Section 3.1 is deleted in its entirety and the following is substituted
in its place and stead:
3.1 Borrower agrees to pay to lender each month interest in arrears
(computed on the basis of the actual number of days elapsed over a year of 360
days) on the average daily balances in the Loan Account during the preceding
month at a rate to equal to the Prime Rate; provided however, that no decrease
shall reduce the Prime Rate below 6% per annum. Any change in the effective
interest rate due to a change in the Prime Rate shall take effecting the date of
such change in the Prime Rate.

2. Section 3.2 is deleted in its entirety and the following is substituted
in its place and stead:
3.2 Borrower shall pay to Lender a facility fee for each contract year
of this Agreement equal to one quarter of one percent (1/4 of 1%) of the Maximum
Amount payable on the first day of each contract year commencing on July 1,
1999. Upon any renewal of this Agreement, Borrower shall pay to Lender an annual
facility fee equal to one quarter of one percent (1/4 of 1%) of the Maximum
Amount provided, however, that commencing with the calendar quarter beginning
July 1, 1999, we shall rebate to you quarterly twenty-five percent (25%) of an
amount equal to one eighth of one percent (1/8 of 1%) of the Maximum Amount.

3. Section 3.3 is deleted in its entirety and the following is substituted
in its place and stead:
Should Lender arrange to open Letters of Credit or issue guarantees for
Borrower's account, Borrower agrees to pay Lender and amount equal to one
quarter of one percent (1/4 of 1%) percent of the face amount of such Letters of
Credit or guaranties, plus one eighth of one percent for each 60 days or portion
thereof that the letter of credit (or any resulting acceptance) or guaranty
remains open and unpaid, plus bank charges. In addition to the above we shall
rebate to you on a monthly basis one eighth of one percent (1/8 of 1%) of the
face amount of any letters of credit opened during such month. In no event,
however, shall the rebates in Paragraph 3.2 and 3.3 exceed $25,000 in any
contract year.

4. The Renewal Date specified in Section 9.1 is hereby amended to read
June 30, 2001.

5. Notwithstanding the provisions as set forth in Paragraph 9.1, the early
termination fee is herewith waived for the period from July 1, 2000 to
June 30, 2001.

6. The notification charge of $2,000.00 per month as set forth in your
letter to us dated April 24, 1996 is herewith terminated.

In all other respects the terms and conditions of the aforesaid
agreement, as the same may have heretofore been amended, shall remain unchanged.

ROSENTHAL & ROSENTHAL, INC.

BY: /S/ Jerry Sandak, Sr. V.P.
----------------------------

THE FOREGOING IS ACKNOWLEDGED
AND AGREED TO:
MOVIE STAR, INC.

BY: /S/ Thomas Rende
--------------------
THOMAS RENDE, CFO

AGREEMENT dated as of June 30, 1999 between MARK M. DAVID,
residing at 16870 Colchester Court, Delray Beach, Florida 33484 ("Executive"),
and MOVIE STAR, INC., a New York corporation having its principal office at 136
Madison Avenue, New York, New York, 10016 (the "Company").

RECITALS:

A. The Executive has relinquished his position as
Chief Executive Officer, and has retired as an employee, of the
Company; and

B. The Company desires to provide certain benefits to
Executive in recognition of Executive's long years of distinguished service to
the Company as its Chief Executive Officer; and

C. Executive desires to obtain such benefits in full
satisfaction of any and all claims Executive has or may have against the Company
in connection with the discontinuation of his employment with the Company.

IT IS AGREED:

1. Retirement Benefit Payment.
1.1 Simultaneously with the execution and
delivery of this Agreement, the Company shall pay to Executive and Executive
shall accept the sum of $500,000.00 representing the entire amount to be paid to
Executive in connection with Executive's retirement as an employee of the
Company effective as of June 30, 1999.

2. Medical Benefits.
2.1 From and after the date of this Agreement
through and including the date upon which Executive shall become eligible for
coverage under the provisions of Medicare or any similar governmental medical
benefits program, or in the event of the elimination or substantial curtailment
of benefits under Medicare or any such similar governmental medical benefits
program, the Company shall, at all times, at its sole cost and expense and for
the benefit of Executive and Executive's spouse, provide medical benefits to
Executive and his family which are (i) substantially similar to the medical
benefits provided to senior executives of the Company on the date hereof and,
(ii) in no event less favorable than the the medical benefits provided to senior
executives of the Company, from time to time.

3. Split Dollar Life Insurance.
3.1 That certain Split Dollar Life Insurance
Agreement, dated as of July 7, 1983, between the Company and Executive shall
remain in full force and effect until terminated in accordance with its terms.

4. Release of Claims.

<PAGE>

4.1 In consideration for the Company's agreement
to provide Executive with the sums and benefits set forth herein Executive, on
behalf of himself and his heirs, representatives and assigns, hereby release and
discharge the Company, its parent companies, and all of its and their
subsidiaries, divisions, and affiliated or related companies and all of the
respective current and former directors, officers, shareholders, successors,
agents, representatives and employees of each, of and from any and all claims
Executive ever had, now has, or may in the future assert regarding any matter
arising on or before the effective date of this Agreement, including, without
limitation, all claims regarding Executive's employment with or resignation as
an employee of the Company, any claim for equitable relief or recovery of monies
or damages, any contract (express or implied), any tort, any claim for wages,
any claim for breach of a fair employment practice law, including Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967,
as amended, the Older Workers Benefit Protection Act, the Civil Rights Act of
1991, the Employee Retirement Income Security Act of 1974, the Americans with
Disabilities Act, the Family and Medical Leave Act, the New York State Human
Rights Law, the New York City Humans Rights Law, and any violation of any other
local, state or federal law, ordinance or regulation.

4.2 Pursuant to and as a part of the complete and
total release and discharge of the Company, Executive agrees, to the fullest
extent permitted by law, not to sue, file a charge, claim, complaint, grievance
or demand for arbitration in any forum or, assist or otherwise participate
willingly or voluntarily in any claim, arbitration, suit, action, charge,
complaint, investigation or other proceeding of any kind which relates to any
matter that involves the Company, its parent companies, or any of its or their
subsidiaries, divisions or affiliated or related companies and all of the
respective current and former directors, officers, shareholders, successors,
agents, representatives and employees of each and that occurred on or before the
effective date of this Agreement. Executive represents that Executive has not
filed or initiated any such proceedings against the Company, its parent
companies, or any of its or their subsidiaries, divisions or affiliated or
related companies.

4.3 Executive recognizes and agrees that the
complete and total release and discharge of the Company as provided herein is an
indispensable part of the Company's agreement to pay the amounts and benefits
set forth in this Agreement, and it is understood and agreed that Executive's
failure to comply with the terms and conditions set forth in this Agreement
would, to the fullest extent permitted by law, constitute a breach of this
Agreement. In the event Executive breaches this Agreement or contests the
enforceability of this Agreement, the Company, in addition to any other rights,

<PAGE>

defenses or remedies which it may have, may require Executive to return any
amounts paid under this Agreement, and to pay the Company's reasonable costs and
attorneys' fees incurred as a result thereof.

4.4 Executive acknowledges that he has been given
an adequate period of time within which to consider this Agreement. During that
period, Executive has had the opportunity to review this Agreement with counsel
of his own choosing, has read this Agreement carefully and/or had it read by
your counsel, and is fully aware of and understands the contents and legal
effects of this Agreement. Executive acknowledges that he has been represented
by Leonard Tarr, Esq. in connection with this Agreement.

4.5 Executive further understands and agrees that
this Agreement is revocable by either party for seven (7) days following the
signing of this Agreement by both parties, and that this Agreement shall not
become effective or enforceable until that revocation period has expired. This
Agreement automatically becomes enforceable and effective on the eighth day
after the date this Agreement is signed by the last party ("effective date").
This Agreement may be revoked by a writing sent certified mail by either party
postmarked on or before the seventh day after the Agreement is signed by the
last party (unless that day is a Sunday or legal holiday (i.e., no mail
service), in which event the period is extended to the next day there is mail
service.

4.6 Executive agrees that no fact, evidence, event
or transaction currently unknown to Executive but which may hereafter become
known to Executive shall affect in any manner the final and unconditional nature
of the release stated above.

4.7 Executive warrants and represents that no
promise or inducement has been offered to Executive except as stated in this
Agreement; that this Agreement is executed without reliance upon any statement
or representation by the Company or any of its representatives concerning the
nature and extent of the claims herein released and any damages or legal
liability therefor; Executive is competent to execute this Agreement and accept
full responsibility therefor; and Executive acknowledges that this Agreement
evidences a full, final and complete settlement of any and all past, present and
future claims against the parties herein released.

5. Miscellaneous Provisions.
5.1 All notices provided for in this Agreement
shall be in writing, and shall be deemed to have been duly given when delivered
personally to the party to receive the same, when given by electronic means, or
when mailed first class postage prepaid, by registered or certified mail, return
receipt requested, addressed to the party to receive the same at her or its

<PAGE>

address set forth below, or such other address as the party to receive the
same shall have specified by written notice given in the manner provided for in
this Section 5.1. All notices shall be deemed to have been given as of the date
of personal delivery, transmittal or mailing thereof.

To Executive:
Mr. Mark M. David

Marked "Personal and Confidential"

with a copy given in the aforesaid manner to:

Leonard Tarr,Esq.

To Company:

Movie Star, Inc.
136 Madison Avenue
New York, NY 10016
Attn.: Mr. Melvyn Knigin

with a copy given in the aforesaid manner to:

Graubard Mollen & Miller
600 Third Avenue
New York, NY 10016
Attn.: Michael A. Salberg, Esq.

5.2 This Agreement sets forth the entire
agreement of the parties relating to the subject matter hereof and is intended
to supersede all prior negotiations, understandings and agreements with respect
thereto. No provisions of this Agreement may be waived or changed except by a
writing by the party against whom such waiver or change is sought to be
enforced. The failure of any party to require performance of any provision
hereof shall in no manner affect the right at a later time to enforce such
provision.

5.3 All questions with respect to the
construction of this Agreement, and the rights and obligations of the parties
hereunder, shall be determined in accordance with the law of the State of New
York applicable to agreements made and to be performed entirely in New York.

5.4 The article headings are inserted only as a
matter of convenience and for reference and in no way define, limit or describe
the scope of intent of any provision of this Agreement.

<PAGE>

5.5 This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of the Company. This Agreement
shall not be assignable by Executive and shall inure to the benefit of and be
binding upon Executive and his legal representatives.

IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.

/s/ MARK M. DAVID
------------------------------
MARK M. DAVID

MOVIE STAR, INC.

/s/ MELVYN KNIGIN
By: -------------------------
Title: President

CONSULTING AGREEMENT

This Agreement is made and entered into as of the 1st day of
July, 1999 between MARK M. DAVID ("David" or the "Consultant") and MOVIE STAR,
INC. (the "Company").

In consideration of the mutual promises made herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

1. The Company hereby engages the Consultant to render consulting
services and advice to the Company upon the terms and conditions set forth
herein. The term of this Agreement shall be for five (5) years commencing on
July 1, 1999.

2. During the term of this Agreement, Consultant shall provide the
Company with such consulting advice as is reasonably requested by the Company.
It is understood and acknowledged by the parties that the value of Consultant's
advice is not readily quantifiable, and that although Consultant shall be
obligated to render the services contemplated by this Agreement upon the
reasonable request of the Company, Consultant shall not be obligated to spend
any specific amount of time in so doing. Consultant's duties may include, but
will not necessarily be limited to:

(a) Rendering advice and assistance in connection with the
Company's operations, including without limitation, sourcing, manufacturing,
merchandising, marketing and sales;

(b) Disseminating information about the Company to the
investment community at large;

(d) Assisting in the Company's financial public relations;

(e) Arranging and attending, on behalf of the Company, at
appropriate times, meetings with investment bankers and financial advisors
retained by the Company;

(f) Rendering advice with regard to internal operations,
including:

(i) the formation of corporate goals and their
implementation;

(ii) the Company's financial structure and its divisions or
subsidiaries;

(iii) when and if necessary and possible, additional
financing through banks and/or insurance companies; and

(iv) corporate organization and personnel.

(g) Rendering advice with regard to any of the following
corporate finance matters:

(i) changes in the capitalization of the Company;

(ii) changes in the Company's corporate structure;

(iii) redistribution of shareholdings of the Company's
stock;

(iv) offerings of securities in public and private
transactions;

(v) alternative uses of corporate assets; and

(vi) structure and use of debt;

<PAGE>

In addition to the foregoing, Consultant agrees to furnish
advice to the Company in connection with (A) the acquisition of and/or merger
with other companies, the sale of the Company itself, or any of its assets,
subsidiaries or affiliates, or similar type of transaction, and (B) financings
from financial institutions, including but not limited to lines of credit,
performance bonds, letters of credit, loans or other financings .

Consultant shall also render such other consulting services as
may from time to time be agreed upon by Consultant and the Company.

3. The Company shall pay Consultant an annual fee of $200,000.00 in
monthly installments of $16,666.67, the first payment due upon the execution of
this Agreement; and

4. In addition to the annual fee payable hereunder, the Company shall
promptly reimburse Consultant for all reasonable travel and out-of-pocket
expenses ("Expenses") incurred in connection with the services performed by
Consultant pursuant to this Agreement, against itemized vouchers or receipts
submitted with respect to any such expenses and approved in accordance with the
Company's customary procedures; provided that the amount of such reimbursement
shall not exceed $12,000.00 per annum.

5. (a) Consultant acknowledges that:

(i) As a result of his current retention by, and prior
relationship (as an employee and director of), the Company, Consultant has
obtained and will obtain secret and confidential information concerning the
business of the Company and its subsidiaries and affiliates (referred to
collectively in this paragraph 5 as the "Company"), including, without
limitation, financial information, designs and other proprietary rights, trade
secrets and "know-how," customers and sources ("Confidential Information").

(ii) The Company will suffer substantial damage which
will be difficult to compute if, during the period of this Agreement or
thereafter, Consultant should enter a business competitive with the Company or
divulge Confidential Information.

(iii) The provisions of this Agreement are reasonable
and necessary for the protection of the business of the Company.

(iv) Consultant agrees that he will not at any time,
either during the term of this Agreement or thereafter, divulge to any person or
entity any Confidential Information obtained or learned by him as a result of
his rendering services under this Agreement, or his prior employment by, the
Company, except (A) in the course of performing his duties hereunder, (B) with
the Company's express written consent; (C) to the extent that any such
information is in the public domain other than as a result of Consultant's
breach of any of his obligations hereunder; or (D) where required to be
disclosed by court order, subpoena or other government process. If Consultant
shall be required to make disclosure pursuant to the provisions of clause (D) of
the preceding sentence, Consultant promptly, but in no event more than 72 hours
after learning of such subpoena, court order, or other government process, shall
notify, by personal delivery or by electronic means, confirmed by mail, the
Company and, at the Company's expense, Consultant shall: (1) take all reasonably
necessary and lawful steps required by the Company to defend against the
enforcement of such subpoena, court order or other government process, and (2)
permit the Company to intervene and participate with counsel of its choice in
any proceeding relating to the enforcement thereof.

(v) Upon termination of this Agreement, Consultant
will promptly deliver to the Company all memoranda, notes, records, reports,
manuals, drawings, and other documents (and all copies thereof) relating to the
business of the Company and all property associated therewith, which he may then

<PAGE>

possess or have under his control; provided, however, that Consultant shall be
entitled to retain copies of such documents reasonably necessary to document his
financial relationship (both past and future) with the Company.

(vi) During the period commencing on the date hereof
and ending on the date Consultant's services hereunder are terminated (and, if
Consultant is terminated with "Cause", as hereinafter defined, or Consultant
terminates this Agreement without "Good Reason," as hereinafter defined, until
June 30, 2005), Consultant, without the prior written permission of the Company,
shall not, anywhere in the world, (A) be employed by, or render any services to,
any person, firm or corporation engaged in any business which is directly or
indirectly in competition with the Company ("Competitive Business"); (B) engage
in any Competitive Business for his or its own account; (C) be associated with
or interested in any Competitive Business as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity; (D) employ or
retain, or have or cause any other person or entity to employ or retain, any
person who was employed or retained by the Company while Consultant was
rendering consulting services to the Company; or (E) solicit, interfere with, or
endeavor to entice away from the Company, for the benefit of a Competitive
Business, any of its customers or other persons with whom the Company has a
contractual relationship. Notwithstanding the foregoing, nothing in this
Agreement shall preclude Consultant from investing his personal assets in the
securities of any corporation or other business entity which is engaged in a
Competitive Business if such securities are traded on a national stock exchange
or in the over-the-counter market and if such investment does not result in his
beneficially owning, at any time, more than 4.9% of the publicly-traded equity
securities of such Competitive Business.

(b) If Consultant commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 5(a)(iv) or 5(a)(vi), the Company
shall have the right and remedy:

(i) to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed by Consultant that the services being rendered hereunder to the Company
are of a special, unique and extraordinary character and that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company; and

(ii) to require Consultant to account for and pay over to the
Company all monetary damages suffered by the Company as the result of any
transactions constituting a breach of any of the provisions of Sections 5(a)(iv)
or 5(a)(vi), and Consultant hereby agrees to account for and pay over such
damages to the Company.

Each of the rights and remedies enumerated in this Section
5(b) shall be independent of the other, and shall be severally enforceable, and
such rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company under law or equity.

(c) In connection with any legal action or proceeding arising
out of or relating to this Agreement, the prevailing party in such action or
proceeding shall be entitled to be reimbursed by the other party for the
reasonable attorneys' fees and costs incurred by the prevailing party.

(d) If Consultant shall violate any covenant contained in
Section 5(a), the duration of such covenant so violated shall be automatically
extended for a period of time equal to the period of such violation.

(e) If any provision of Sections 5(a)(iv) or 5(a)(vi) is held
to be unenforceable because of the scope, duration or area of its applicability,
the tribunal making such determination shall have the power to modify such

<PAGE>

scope, duration, or area, or all of them, and such provision or provisions shall
then be applicable in such modified form.

(f) The provisions of this paragraph 5 shall survive the
termination of this Agreement for any reason.

6. The Company acknowledges that Consultant or its affiliates are in
the business of providing consulting services and advice to others. Except as
expressly provided in Section of this Agreement, nothing herein contained shall
be construed to limit or restrict Consultant in conducting such business with
others, or in rendering such advice to others.

7. The Company recognizes and confirms that, in advising the Company
hereunder, Consultant will use and rely on data, material and other information
furnished to Consultant by the Company, without independently verifying the
accuracy, completeness or veracity of same.

8. (a) If Consultant dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay to the
person or persons designated by Consultant in writing, from time time, (i) an
amount equal to one half of the aggregate fees which would otherwise have been
payable from the date of Consultant's death through the date fixed for the
expiration of this Agreement, and (ii) all valid expense reimbursements through
the date of the termination of this Agreement. Consultant hereby designates
Norma David as the person to receive the payment referred to in this Section
8(a).

(b) If, during the term of this Agreement, there is a "Change
in Control" (as hereinafter defined) of the Company, the Company shall have the
right to terminate this Agreement upon not less than thirty (30) days prior
written notice to Consultant specifying in reasonable detail the events
resulting in a Change in Control.

(i) For the purposes of this Agreement, the term "Change in
Control" shall mean a change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Securities Exchange Act of 1934, as amended (the "Act"),
whether or not the Company is then subject to such reporting requirement;
provided, however, that, without limitation, such a Change in Control shall be
deemed to have occurred if, (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of securities of the Company
representing 40% or more of the combined voting power of the Company's then
outstanding securities without the prior approval of at least two thirds of the
members of the Company's Board of Directors (the "Board") in office immediately
prior to such person attaining such percentage interest; (B) the Company is a
party to a merger, consolidation, sale of assets or other transaction, or a
proxy contest, as a consequence of which members of the Board in office
immediately prior to such transaction or event constitute less than a majority
of the Board thereafter; or (C) during any period of two consecutive years,
individuals, other than Consultant, who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period) cease, for any reason, to constitute
a majority of the Board.

(ii) In the event of a termination of this Agreement in
accordance with the provisions of this Section 8(b), the Company shall pay to
Consultant (A) an amount equal to one half of the aggregate fees which would
otherwise have been payable from the date of such termination through the date
fixed for the expiration of this Agreement, and (B) all valid expense
reimbursements through the date of the termination of this Agreement.

<PAGE>

(c) The Company, by notice to Consultant, may terminate this
Agreement if Consultant shall fail because of illness or incapacity to render,
for six consecutive months, services of the character contemplated by this
Agreement. Notwithstanding such termination, the Company shall pay to Consultant
(i) an amount equal to one half of the aggregate fees which would otherwise have
been payable from the date of such termination through the date fixed for the
expiration of this Agreement, and (ii) all valid expense reimbursements through
the date of the termination of this Agreement.

9. The Company agrees to indemnify Consultant and hold Consultant
harmless against all costs, expenses (including, without limitation, reasonable
attorneys' fees) and liabilities (other than settlements to which the Company
does not consent, which consent shall not be unreasonably withheld)
(collectively, "Losses") reasonably incurred by Consultant in connection with
any claim, action, proceeding or investigation brought against or involving
Consultant with respect to, arising out of or in any way relating to
Consultant's services under this Agreement; provided, however, that the Company
shall not be required to indemnify Consultant for Losses incurred as a result of
Consultant's intentional misconduct or gross negligence (other than matters
where Consultant acted in good faith and in a manner he reasonably believed to
be in and not opposed to the Company's best interests). Consultant shall
promptly notify the Company of any claim, action, proceeding or investigation
under this paragraph and the Company shall be entitled to participate in the
defense of any such claim, action, proceeding or investigation and, if it so
chooses, to assume the defense with counsel selected by the Company; provided
that Consultant shall have the right to employ counsel to represent him (at the
Company's expense) if Company counsel would have a "conflict of interest" in
representing both the Company and Consultant. The Company shall not settle or
compromise any claim, action, proceeding or investigation without Consultant's
consent, which consent shall not be unreasonably withheld; provided, however,
that such consent shall not be required if the settlement entails only the
payment of money and the Company fully indemnifies Consultant in connection
therewith. The Company further agrees to advance any and all expenses
(including, without limitation, the fees and expenses of counsel) reasonably
incurred by the Consultant in connection with any such claim, action, proceeding
or investigation, provided Consultant first enters into an appropriate agreement
for repayment of such advances if indemnification is found not to have been
available.

10. (a) The Company, by notice to Consultant, may terminate this
Agreement for cause. As used herein, "Cause" shall mean: (i) the refusal or
failure by Consultant to carry out specific directions of the Board which are of
a material nature and consistent with his duties as a consultant hereunder, or
the refusal or failure by Consultant to perform a material part of Consultant's
duties hereunder; (ii) the commission by Consultant of a material breach of any
of the provisions of this Agreement; (iii) fraud or dishonest action by
Consultant in his relations with the Company or any of its subsidiaries or
affiliates, or with any customer or business contact of the Company or any of
its subsidiaries or affiliates ("dishonest" for these purposes shall mean
Consultant's knowingly or recklessly making of a material misstatement or
omission for his personal benefit); or (iv) the conviction of Consultant of any
crime involving an act of moral turpitude. Notwithstanding the foregoing, no
"Cause" for termination shall be deemed to exist with respect to Consultant's
acts described in clauses (i) or (ii) above, unless the Company shall have given
written notice to Consultant specifying the "Cause" with reasonable
particularity and, within thirty calendar days after such notice, Consultant
shall not have cured or eliminated the problem or thing giving rise to such
"Cause;" provided, however, that a repeated breach after notice and cure of any
provision of clauses (i) or (ii) above involving the same or substantially
similar actions or conduct, shall be grounds for termination for "Cause" without
any additional notice from the Company. In the event the Company terminates this
Agreement for "Cause" pursuant to the provisions of this Section 10(a), the
Company shall have no further obligation to Consultant under this Agreement.

<PAGE>

(b) The Consultant, by notice to the Company, may terminate
this Agreement if a "Good Reason" exists. For purposes of this Agreement, "Good
Reason" shall mean the occurrence of any of the following circumstances without
the Consultant's prior express written consent: (i) a substantial and material
adverse change in the nature of Consultant's duties or responsibilities that are
inconsistent with the duties or responsibilities set forth in this Agreement;
(ii) a substantial and material breach of this Agreement by the Company; and
(iii) a failure by the Company to make any payment to Consultant when due,
unless the payment is not material and is being contested by the Company, in
good faith. Notwithstanding the foregoing, no Good Reason shall be deemed to
exist with respect to the Company's acts described in clauses (i), (ii) or (iii)
above, unless the Consultant shall have given written notice to the Company
specifying the Good Reason with reasonable particularity and, within thirty
calendar days after such notice, the Company shall not have cured or eliminated
the problem or thing giving rise to such Good Reason; provided, however, that a
repeated breach after notice and cure of any provision of clauses (i), (ii) or
(iii) above involving the same or substantially similar actions or conduct,
shall be grounds for termination for Good Reason without any additional notice
from the Consultant.

In the event that Consultant terminates this Agreement for
Good Reason, pursuant to the provisions of this Section 10(b), or the Company
terminates this Agreement without "Cause," as defined in Section 10(a), the
Company shall continue to pay to Consultant (or in the case of his death, the
legal representative of Consultant's estate or such other person or persons as
Consultant shall have designated by written notice to the Company), all
payments, compensation and benefits required under this Agreement through the
term of this Agreement.

11. Consultant shall perform the services hereunder as an independent
contractor and not as an employee or agent of the Company or any affiliate
thereof. Consultant shall have no authority to act for, represent or bind the
Company or any affiliate thereof in any manner, except as may be expressly
agreed to by the Company in writing from time to time.

12. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof. No provision of this Agreement may be
amended, modified or waived, except in a writing signed by both parties. This
Agreement shall be binding upon and inure to the benefit of each of the parties
and their respective successors, legal representatives and assigns. This
Agreement may be executed in counterparts. In the event of any dispute under
this Agreement, then and in such event, each party agrees that the same shall be
submitted to the American Arbitration Association ("AAA") in the City of New
York, for its decision and determination in accordance with its rules and
regulations then in effect. Each of the parties agrees that the decision and/or
award made by the AAA may be entered as judgment of the Courts or the State of
New York, and shall be enforceable as such. This Agreement shall be construed
and enforced in accordance with the laws of the State of New York, without
giving effect to conflict of laws.

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the day and year first above written.

MOVIE STAR, INC.

/s/ Melvin Knigin
By:____________________
Name: Melvin Knigin
Title: President

/s/ Mark M. David
____________________
Mark M. David

Exhibit 21

MOVIE STAR, INC. AND SUBSIDIARIES

Company owns 100% of the voting securities of all of its subsidiaries, which are
included in the consolidated financial statements.

Name of Subsidiary Ownership State of Incorporation
- ------------------ --------- ----------------------
P.J. San Sebastian, Inc. 100% Delaware

- ----------

THE COMPANY WILL FURNISH A COPY OF THE EXHIBITS TO THIS ANNUAL REPORT UPON
THE WRITTEN REQUEST OF A PERSON REQUESTING COPIES THEREOF AND STATING THAT HE IS
A BENEFICIAL HOLDER OF THE COMPANY'S COMMON STOCK AT A CHARGE OF $.35 PER PAGE,
PAID IN ADVANCE. THE COMPANY WILL INDICATE THE NUMBER OF PAGES TO BE CHARGED FOR
UPON SUCH PERSON'S INQUIRY. REQUESTS FOR COPIES AND INQUIRIES SHOULD BE
ADDRESSED TO:

MOVIE STAR, INC.
136 MADISON AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: CORPORATE SECRETARY

Exhibit No. 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
333-4489 on Form S-8 of our report dated September 22, 1999, appearing in the
Annual Report on Form 10-K of Movie Star, Inc. and subsidiaries for the year
ended June 30, 1999.

DELOITTE & TOUCHE LLP
New York, New York
September 28, 1999

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