MOVIE STAR INC /NY/, 10-K405, 10-K, 2000-09-27

MOVIE STAR INC /NY/
10-K405, 10-K, 2000-09-27
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, 2000 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
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Yes X No

<PAGE>

The aggregate market value of voting stock held by nonaffiliates of the
Registrant totalled $7,120,636 on August 31, 2000, based upon the closing
price of $.75 at the close of trading on August 31, 2000.

As of August 31, 2000, there were 14,896,977 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.

2000 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-4

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

Item 9 Disagreements on Accounting and
Financial Disclosure........................II-12

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-7

Item 13 Certain Relationships and
Related Transactions........................III-8

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, Bobby's Menswear and A Little Xtra
from Movie Star ("Retail Stores"). During Fiscal 2000, the Company closed eight
of its retail stores and as of June 30, 2000 operates 20 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, camisoles and
cami top sets. 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 primarily 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 facility allows 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 $8.00 for certain of its
seductivewear products to approximately $85.00 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 38% of the Company's
sales are made to mass merchandisers, 26% to national chains, and 22% to
department stores; the balance of the Company's sales are unevenly distributed
among discount, specialty, 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, 2000, 1999, and 1998
was approximately 29%.

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 $1.00 for
hosiery to $70.00 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 2000 and 1999, less than
5% of the products sold by these stores were supplied by the Company and in
fiscal 1998 less than 15% was 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 11.7%, 13.1% and 16.6% of the
Company's total sales in fiscal 2000, 1999 and 1998, respectively. These stores

I-1

<PAGE>

operate at a gross profit above 35%. The Retail Stores division advertises
directly to consumers through print, radio and television in the localities in
which it operates.

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 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 2000, Mr. Hymowitz and the Company
mutually agreed to terminate his employment with the Company. The Company
believes that the loss of its relationship with Mr. Hymowitz will 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 Company has historically produced its products at either one of its domestic
facilities or by purchasing them from a finished package manufacturer or by
contracting for their assembly from a cut, make and trim manufacturer ("CMT").
Due to the Company's strategic decision to purchase more of its finished goods
offshore to take advantage of lower labor costs, the Company has decreased its
domestic production and increased its finished package purchases. Domestic
production decreased from 43% of total production in fiscal 1998 and 25% in
fiscal 1999 to 10% in fiscal 2000. The purchase of finished packages increased
from 10% of total production in fiscal 1998 and 15% in fiscal 1999 to 40% in
fiscal 2000. CMT production was 47% of total production in fiscal 1998, 60% in
fiscal 1999 and 50% in fiscal 2000.

The Company purchased and contracted for the assembly of 48% of its products
from Mexico in fiscal 2000 and fiscal 1999 as compared to 34% in fiscal 1998.
The amount of finished goods purchased and assembled for the Company in Asia,
Africa, the Caribbean and Central America in fiscal 2000 was 42% of total
production as compared to 27% in fiscal 1999 and 23% in fiscal 1998. In fiscal
2000, approximately 61% of the Company's raw materials were imported as compared
to approximately 33% in fiscal 1999 and 37% in fiscal 1998.

Currently, the Company has nine employees in Mexico, three employees in
Bangladesh, five employees in the Philippines, two employees in Honduras and one
employee in Egypt supervising the production of finished products purchased by
the Company or assembled for the Company by manufacturers in those countries.

I-2

<PAGE>

These employees assist in maintaining quality and on-time delivery. Management
personnel travel to Mexico, Asia, Africa, 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",
"Heather Nicole" 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.

In fiscal 1999, the Company entered into an exclusive licensing agreement to
produce and sell sleepwear and intimate apparel designed by Flora Nikrooz. The
Company and Flora Nikrooz Inc. mutually agreed to terminate this Agreement in
December 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 19% of sales for fiscal 2000 and 22% of sales for
fiscal 1999. Sears, Roebuck and Company accounted for 10% of sales for fiscal
2000 and 14% of sales for fiscal 1999. Target accounted for 12% of sales for
fiscal 2000 and 11% of sales for fiscal 1999.

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, 2000 was approximately $33,600,000
and as of June 30, 1999 was approximately $32,300,000. 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 eliminated the
production in its domestic plants except for a minimal amount of domestic
production to accommodate small orders or orders with short lead times. Between
August 1990 and June 2000, the Company has closed eighteen 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. In January 2000, the Company had eliminated
the sewing at its facility in Lebanon, Virginia.

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 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.

(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 441 employees of the Company, approximately 24 are
executive, design and sales personnel, 112 are administrative personnel, and the
balance are in manufacturing, warehousing and retail sales for the Retail Stores
division. In addition, the Company employs approximately 61 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 or to the holders of any class of its capital stock
(except dividends or distributions payable in capital stock of the Company), 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 giving effect to such
dividend, distribution, purchase, redemption, other acquisition or retirement,
the aggregate amount expended for all such purposes subsequent to September 30,
1986, shall exceed the sum of (a) 75% of the aggregate consolidated net income
of the Company accrued on a cumulative basis 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, 2000.

<TABLE>
<CAPTION>
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 $500,000 4/01 N/A N/A
New York, NY Administrative leased; (1)
(includes one offices; Portions
floor Divisional Sales Leased
at 148 Madison Office and Directly from
Ave., NY, NY) Showroom Landlord

180 Madison Ave., Sales Office and Leased 3,000 $ 59,000 12/00 N/A N/A
New York, NY Showroom

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

Lebanon, VA Warehousing for Owned 170,000 _____ _____ N/A 75% (5)
finished goods;
Distribution
Center

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

South Mississippi 1 Mfg./Dist./ Owned/Leased 239,000 _____ _____ 75 44%
Warehouse; 1 (2)
Distribution
Center

North Mississippi 1 Mfg./Vacant Owned (6) 103,000 _____ _____ N/A N/A

Retail Stores 20 Retail Stores Leased(3) 103,000 $363,000(3) (3) N/A N/A
located
throughout
Mississippi
</TABLE>

----------
(1) Includes escalation for 2000.

(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. The annual
rent is based on the operation of 28 stores during the year, eight stores were
closed between April 1, 2000 and June 30, 2000.

(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) In January 2000, the Company eliminated the production it does at
this facility in order to maximize its overall efficiency and, lower
manufacturing costs. The 75% utilization represents the production period of
July 1, 1999 through January 31, 2000. During this period, productive capacity
was 250.

(6) Subsequent to June 30, 2000, this facility was sold.

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

<TABLE>
<CAPTION>
AMOUNT
OF SPACE
LOCATION FUNCTION (Sq. ft.)
-------- -------- ---------
<S> <C> <C>
136, 148 and 180 Madison Avenue Corporate Offices; 7,000
New York, New York Divisional Sales Offices and Showrooms; 11,000
Production Staff and Design 8,000

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

Lebanon, Virginia Warehousing and Distribution; 160,000
Offices 10,000

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

</TABLE>

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, 2000
First Quarter. . . . . . . . . . . . . 2 1 1/8
Second Quarter . . . . . . . . . . . . 1 7/16 13/16
Third Quarter . . . . . . . . . . . . 1 3/16 13/16
Fourth Quarter . . . . . . . . . . . . 1 7/16 7/16

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

As of August 31, 2000, there were approximately 933 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, 2000
First Quarter . . . . . . . . . . . 977.50 870.00
Second Quarter . . . . . . . . . . 997.50 948.75
Third Quarter . . . . . . . . . . . 992.50 955.00
Fourth Quarter . . . . . . . . . . 980.00 940.00

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

II-1

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
MOVIE STAR, INC. AND SUBSIDIARIES
ITEM 6. Selected Financial Data
(In Thousands, Except Per Share Amounts)
-----------------------------------------------------------------------------

Statement of Operations Data: Fiscal Year Ended June 30,
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET SALES $ 71,004 $ 72,506 $ 64,537 $61,470 $84,115
-------- -------- -------- ------- -------

COST OF SALES 50,199 51,363 45,777 44,947 66,993

SELLING, GENERAL AND ADMINISTRATIVE
EXPENES 16,496 15,859 15,206 13,875 17,637

LOSS ON ABANDONMENT OF LEASED PREMISES - - 1,070
-------- -------- -------- ------- -------
- -
66,695 67,222 60,983 58,822 85,700
-------- -------- -------- ------- -------

INCOME (LOSS) FROM OPERATIONS 4,309 5,284 3,554 2,648 (1,585)

GAIN ON PURCHASES OF SUBORDINATED DEBENTURES
AND SENIOR NOTES (164) - (157) (560) -

INTEREST INCOME (145) (118) (130) (157) (110)

INTEREST EXPENSE 1,856 2,694 2,623 2,781 3,893
-------- -------- -------- ------- -------

INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES AND
EXTRAORDINARY GAIN 2,762 2,708 1,218 584 (5,368)

PROVISION FOR (BENEFIT FROM) INCOME TAXES 35 35 16 65 (90)
-------- -------- -------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 2,727 2,673 1,202 519 (5,278)

EXTRAORDINARY GAIN ON PURCHASES OF
SUBORDINATED DEBENTURES AND SENIOR NOTES,
NET OF INCOME TAXES (393) - - - -
-------- -------- -------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ 3,120 $ 2,673 $ 1,202 $ 519 $ (5,278)
======= ======= ======= ======= =========

BASIC
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN PER
SHARE $.18 $.19 $.09 $.04 $(.38)
EXTRAORDINARY GAIN PER SHARE .03 - - - -
---- ---- ---- ---- -----
NET INCOME (LOSS) PER SHARE $.21 $.19 $.09 $.04 $(.38)
==== ==== ==== ==== ======

DILUTED

INCOME (LOSS) BEFORE EXTRAORDINARY GAIN PER
SHARE $.17 $.17 $.08 $.04 $(.38)
EXTRAORDINARY GAIN PER SHARE .03 - - - -
---- ---- ---- ----- ------
NET INCOME (LOSS) PER SHARE $.20 $.17 $.08 $.04 $(.38)
==== ==== ==== ==== ======

BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,889 14,309 14,049 13,960 13,960
====== ====== ====== ====== ======

DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 15,928 15,869 15,161 15,868 13,960
====== ====== ====== ====== ======
</TABLE>

(Continued)

II-2

<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES
ITEM 6. Selected Financial Data
(In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------
<TABLE>
<CAPTION>

Balance Sheet Data: At June 30,
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
WORKING CAPITAL $17,253 $22,616 $19,916 $18,636 $19,546
======= ======= ======= ======= =======
TOTAL ASSETS $31,627 $36,759 $36,743 $33,957 $34,610
======= ======= ======= ======= =======
SHORT-TERM DEBT - Including current maturities
of long-term debt and capital lease obligations $ 1,773 $ 45 $ 368 $ 73 $ 45
======= ======= ======= ======= =======
LONG-TERM DEBT $12,130 $20,703 $20,980 $22,336 $23,533
======= ======= ======= ======= =======
STOCKHOLDERS' EQUITY $11,292 $ 8,166 $ 5,202 $ 3,941 $ 3,422
======= ======= ======= ======= =======
</TABLE>

(Concluded)

II-3
<PAGE>

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

2000 vs. 1999

Net sales for the year ended June 30, 2000 decreased by 2.1% to $71,004,000 from
$72,506,000 in the comparable period in 1999. The decrease in sales resulted
from lower sales in the intimate apparel division and the retail division of
approximately $294,000 and $1,208,000, respectively. Net sales in the intimate
apparel division decreased to $62,712,000 as compared to $63,006,000 in the
comparable period in 1999. This decrease was primarily due to programs with
certain customers being discontinued or reduced which were partially offset by
new programs with the same and other customers. Net sales in the Company's
retail division decreased to $8,292,000 as compared to $9,500,000 in the
comparable period in 1999. This decrease was primarily due to a reduction in the
number of customers that visited our stores. During fiscal 2000, the Company
closed eight of its retail stores in an effort to reduce inventory levels and
expenses.

The gross profit percentage was 29.3% for the year ended June 30, 2000 as
compared to 29.2% for the year ended June 30, 1999. The gross margin in the
Company's intimate apparel division increased to 28.2% for the year ended June
30, 2000 from 28.0% for the year ended June 30, 1999. The higher margins in the
Company's intimate apparel division resulted from an improved product mix and
cost efficiencies due to the continued shift of production to offshore locations
and the elimination of the sewing operation at its manufacturing facility in
Virginia. The gross margin for the retail division increased to 37.4% for the
year ended June 30, 2000 as compared to 37.0% for the year ended June 30, 1999.
The higher margins in the retail division resulted primarily from lower
markdowns taken in the current year as compared to the prior year.

Selling, general and administrative expenses were $16,496,000, or 23.2% of net
sales, for the year ended June 30, 2000 as compared to $15,859,000, or 21.9% of
net sales, for the similar period in 1999. This increase resulted primarily from
increases in salary expense and salary related costs of $914,000 due to the
hiring of additional personnel and salary increases for existing personnel, an
increase in rent related expenses of $243,000, consulting fees of $208,000 and a
net increase in other general overhead expenses, partially offset by a decrease
in commissions of $264,000 and a one-time charge, in the prior year, of $625,000
in connection with the retirement of the Company's Chief Executive Officer, Mark
M. David.

II-4
<PAGE>

The Company's intimate apparel division had selling, general and administrative
expenses of $13,797,000, or 22.0% of net sales, for the year ended June 30, 2000
as compared to $13,065,000, or 20.7% of net sales, for the similar period in
1999. This increase was primarily due to the same factors, which resulted in the
Company wide increase in selling, general and administrative expenses.

The Company's retail division had selling, general and administrative expenses
of $2,699,000, or 32.5% of net sales, for the year ended June 30, 2000 as
compared to $2,794,000, or 29.4% of net sales, for the similar period in 1999.
While total selling, general and administrative expenses for the retail division
decreased, the increase in percentage was due to the lower sales volume for the
division.

Income from operations decreased to $4,309,000 for the year ended June 30, 2000,
from $5,284,000 for the similar period in 1999. This decrease was due to lower
sales and higher selling, general and administrative expenses partially offset
by an increase in gross margins.

The Company's intimate apparel division had income from operations of $3,903,000
for the year ended June 30, 2000 as compared to $4,564,000 for the similar
period in 1999. This decrease was due to lower sales and higher selling, general
and administrative expenses partially offset by an increase in gross margins.

The Company's retail division had income from operations of $406,000 for the
year ended June 30, 2000 as compared to income from operations of $720,000 for
the similar period in the prior year. This decrease was due to lower sales
offset partially by higher gross margins and 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.

During fiscal 2000, the Company purchased $5,640,000 in principal amount of its
12.875% subordinated debentures and $2,984,000 in principal amount of its 8%
senior notes.

With $3,737,000 of the 12.875% subordinated debentures purchased during fiscal
2000 and in conjunction with previously acquired debentures, the Company will
satisfy its sinking fund requirement due October 1, 2000. As a result of the
purchase of these debentures, the Company recorded a pre-tax gain of $164,000,
net of related costs. The remaining $1,903,000 of the 12.875% subordinated
debentures will be applied to the final payment due on these debentures on
October 1, 2001. As a result of the purchase of these debentures in fiscal 2000,
the Company recorded an extraordinary gain of $152,000, net of related costs and
income taxes.

The $2,984,000 in principal amount of the 8% senior notes will be applied in
reduction of the total amount due on these notes on September 1, 2001. As a
result of the purchase of these senior notes in fiscal 2000, the Company
recorded an extraordinary gain of $241,000, net of related costs and income
taxes.

Interest income for the year ended June 30, 2000 was $145,000 as compared to
$118,000 for 1999.

Interest expense for the year ended June 30, 2000 was $1,856,000 as compared to
$2,694,000 for 1999. This reduction was due to reduced overall borrowing needs,
a lower interest rate on the Company's revolving line of credit and the
purchases of its 12.875% subordinated debentures.

II-5
<PAGE>

The Company provided for an alternative minimum tax of $35,000 in each of the
years ended June 30, 2000 and June 30, 1999.

The Company recorded net income for the year ended June 30, 2000 of $3,120,000
as compared to net income of $2,673,000 for the same period in 1999. This
increase was due to higher gross margins, a net decrease in interest costs and a
gain on the purchase of the Company's subordinated debentures and senior notes
offset partially by a decrease in sales, an increase in selling general and
administrative expenses in the current year.

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
"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.

II-6

<PAGE>

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 $13,065,000, 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 $2,794,000, 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
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, respectively. As a
result of these transactions, the Company recorded a pre-tax gain of $59,000,
net of related costs.

II-7

<PAGE>

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.

Liquidity and Capital Resources

For the year ended June 30, 2000, the Company's working capital decreased by
$5,363,000 to $17,253,000, principally from the payment and purchases of
long-term debt offset partially by profitable operations.

During the fiscal year ended June 30, 2000, cash decreased by $3,885,000. The
Company used cash of $8,063,000 for the purchase and repayment of long-term debt
and capital lease obligations and $155,000 for the purchase of fixed assets.
Cash generated from operating activities of $2,613,000, the net proceeds from
short-term borrowings of $1,690,000 and the sale of certain non-operating assets
aggregating $30,000 funded these activities.

Receivables at June 30, 2000 increased by $1,096,000 to $7,960,000 from
$6,864,000 at June 30, 1999. This increase is due primarily to higher sales in
the Company's intimate apparel division for the fourth quarter of fiscal 2000 as
compared to the prior year.

Inventory at June 30, 2000 decreased by $1,817,000 to $14,643,000 from
$16,460,000 at June 30, 1999. This decrease occurred in both the intimate
apparel division and the retail division representing approximately $1,097,000
and $720,000, respectively. 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. The decrease in the retail division resulted from the Company's
decision to reduce the level of inventory in this division.

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 fiscal 2000, the Company purchased $5,640,000 in principal amount of its
12.875% subordinated debentures and $2,984,000 in principal amount of its 8%
senior notes.

The Company will satisfy its sinking fund requirement due October 1, 2000 with
$3,737,000 of the 12.875% subordinated debentures purchased in fiscal 2000 in
conjunction with previously acquired debentures. As a result of the purchase of

II-8
<PAGE>

these debentures, the Company recorded a pre-tax gain of $164,000, net of
related costs. The remaining $1,903,000 of the 12.875% subordinated debentures
will be applied to the final payment due on these debentures on October 1, 2001.
As a result of the purchase of these debentures, the Company recorded an
extraordinary gain of $152,000, net of related costs and income taxes.

The Company will apply $2,984,000 in principal amount of the 8% senior notes
acquired in fiscal 2000 in reduction of the total amount due on these notes on
September 1, 2001. As a result of the purchase of these senior notes, the
Company recorded an extraordinary gain of $241,000, net of related costs and
income taxes.

In January 2000, holders of $6,500 in principal amount of the Company's 8%
Convertible Senior Notes converted their Notes into 17,333 shares of the
Company's common stock, par value $.01.

In the second quarter of fiscal 1998, certain individuals affiliated with the
Company purchased from unrelated third parties $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. On and after January 2, 2001 these restrictions
will expire.

The Company has remaining $11,984,500 in principal amount of long-term debt and
a secured revolving line of credit of up to $18,000,000. The long-term debt
consists of $4,347,000 of 12.875% Subordinated Debentures, $7,566,000 of 8%
Senior Notes, and $71,500 of 8% Convertible Senior Notes. The balance of
$4,347,000 for the 12.875% Subordinated Debentures 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 $71,500 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 $18,000,000, 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 at the prime rate in fiscal 2000.
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 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 does not anticipate making any purchases of its stock and
anticipates that capital expenditures for fiscal 2001 will be less than
$650,000.

II-9
<PAGE>

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 determined that the application of
SFAS No. 133 will not have a material impact on its financial position or
results of operations.

In November 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting and Bulletin ("SAB") 101, "Revenue Recognition." This Bulletin sets
forth the SEC Staff's position regarding the point at which it is appropriate
for a Registrant to recognize revenue. The Staff believes that revenue is
realizable and earned when all of the follow criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or service has been
rendered; the seller's price to the buyer is fixed or determinable; and
collectibility is reasonably assured. The Company uses the above criteria to
determine whether revenue can be recognized, and therefore believes that the
issuance of this Bulletin does not have a material impact on these financial
statements.

Imports

II-10
<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-11

<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, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. 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
August 25, 2000
New York, New York

F-1
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
(In Thousands, Except Number of Shares)
----------------------------------------------------------------------------
ASSETS 2000 1999

CURRENT ASSETS:
Cash $ 712 $ 4,597
Receivables, net 7,960 6,864
Inventory 14,643 16,460
Deferred income taxes 1,706 1,983
Prepaid expenses and other current assets 437 602
------ -------

Total current assets 25,458 30,506

PROPERTY, PLANT AND EQUIPMENT - Net 3,247 3,495

OTHER ASSETS 619 732

DEFERRED INCOME TAXES 2,303 2,026
------ -------

TOTAL ASSETS $31,627 $36,759
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable $1,690 $ -
Current maturities of long-term debt and capital
lease obligations 83 45
Accounts payable 4,597 4,529
Accrued expenses and other current liabilities 1,835 3,316
------ -------

Total current liabilities 8,205 7,890
------ -------

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 12,130 20,703
------ -------

COMMITMENTS AND CONTINGENCIES - -

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - authorized,
30,000,000 shares; issued 16,914,000
shares in 2000 and 16,897,000 shares in 1999 169 169
Additional paid-in capital 4,078 4,072
Retained earnings 10,663 7,543
------ -------

14,910 11,784

Less treasury stock, at cost - 2,017,000 shares 3,618 3,618
------ -------

Total stockholders' equity 11,292 8,166
------ -------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,627 $36,759
======= =======

See notes to consolidated financial statements.

F-2
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(In Thousands, Except Per Share Amounts)

2000 1999 1998

Net sales $71,004 $72,506 $64,537

Cost of sales 50,199 51,363 45,777
------ ------- -------

Gross profit 20,805 21,143 18,760

Operating Expenses:
Selling, general and administrative
expenses 16,496 15,859 15,206
------ ------- -------

Income from operations 4,309 5,284 3,554

Gain on purchases of subordinated
debentures (164) - (157)

Interest income (145) (118) (130)

Interest expense 1,856 2,694 2,623
------ ------- -------

Income before income taxes and
extraordinary gain 2,762 2,708 1,218

Income taxes 35 35 16
------ ------- -------
Income before extraordinary gain 2,727 2,673 1,202

Extraordinary gain on purchases of
subordinated debentures and senior
notes, net of income taxes of $8,000 (393) - -
------ ------- -------
Net income $3,120 $ 2,673 $ 1,202
====== ======= =======

BASIC

Income before extraordinary gain per share $.18 $.19 $.09
Extraordinary gain per share .03 - -
---- ---- ----
Net income per share $.21 $.19 $.09
==== ==== ====

DILUTED

Income before extraordinary gain per share $.17 $.17 $.08
Extraordinary gain per share .03 - -
---- ---- ----
Net income per share $.20 $.17 $.08
==== ==== ====

Basic weighted average number of shares
outstanding 14,889 14,309 14,049
====== ====== ======

Diluted weighted average number of
shares outstanding 15,928 15,869 15,161
====== ====== ======

See notes to consolidated financial statements.

F-3
<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(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, 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

Net income - - - 3,120 - - 3,120
Conversion of long-term debt
for common stock 17 - 6 - - - 6
------- ------ ------ --------- ------ -------- -------

BALANCE, JUNE 30, 2000 16,914 $169 $4,078 $10,663 2,017 $(3,618) $11,292
======= ====== ====== ======== ====== ======== =======
</TABLE>

F-4

See notes to consolidated financial statements.

<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998

(In Thousands)
-------------------------------------------------------------------------------
<TABLE>
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,120 $ 2,673 $1,202
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Extraordinary gain on purchases of subordinated debentures
and senior notes, net of income taxes (393) - -
Depreciation and amortization 593 566 582
Provision for sales allowances and doubtful accounts 182 (191) 98
Gain on purchases of subordinated debentures and senior notes (164) - (157)
Loss on disposal of property, plant and equipment - 16 4
(Increase) decrease in operating assets:
Receivables (1,278) (343) (2,281)
Inventory 1,817 4,485 (4,307)
Prepaid expenses and other current assets 165 (146) (251)
Other assets (73) 32 (66)
Increase (decrease) in operating liabilities:
Accounts payable 68 (2,705) 2,247
Accrued expenses and other current liabilities (1,424) 357 339
--------- ------- ------

Net cash provided by (used in) operating activities 2,613 4,744 (2,590)
--------- ------- ------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (155) (528) (191)
Proceeds from sale of property, plant and equipment 30 200 500
Proceeds from sale of other assets (interest in building) - - 619
--------- ------- ------

Net cash (used in) provided by investing activities (125) (328) 928
--------- ------- ------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on and purchases of long-term debt and
capital lease obligations (8,063) (50) (1,155)
Net proceeds (repayment) of revolving line of credit 1,690 (328) 328
Exercise of stock options - 13 -
--------- ------- ------

Net cash used in financing activities (6,373) (365) (827)
--------- ------- ------

NET (DECREASE) INCREASE IN CASH (3,885) 4,051 (2,489)
CASH, BEGINNING OF YEAR 4,597 546 3,035
--------- ------- ------

CASH, END OF YEAR $ 712 $ 4,597 $ 546
========= ======= =====
</TABLE>

(Continued)

F-5

<PAGE>

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(In Thousands)
-------------------------------------------------------------------------------
<TABLE>
2000 1999 1998
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:

Cash paid during period for:
Interest $1,993 $2,584 $2,544
======= ======= ======
Income taxes (net of refunds received) $ 53 $ 25 $ 13
======= ======= ======

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Acquisition of equipment through assumption of
capital lease obligation $ 154 $ 56 $ -
======= ====== ======

SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of long-term debt for common stock $ (6) $ (278) $ (59)
Issuance of common stock 6 278 59
------- ------- -------
$ - $ - $ -
======= ======= ======
</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, 2000, 1999 AND 1998
-------------------------------------------------------------------------------

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 20
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 accounting principles generally accepted in the United
States of America 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 accounting principles generally accepted in the United
States of America 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 - Basic income per share is computed by dividing
net income by the weighted average number of common shares outstanding
for the period. Diluted income per share also includes the dilutive
effect of potential common shares outstanding during the period.

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

Comprehensive Income - In July 1998, the Company adopted the provisions
of SFAS No. 130, "Reporting Comprehensive Income." For the years ended
June 2000, 1999 and 1998, 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." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the
statement of financial position and to measure those instruments at
fair value. For fiscal 2001, the Company is required to adopt SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The Company has determined that the application of SFAS No. 133 will
not have a material impact on its financial position or results of
operations.

In November 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting and Bulletin ("SAB") 101, "Revenue
Recognition." This Bulletin sets forth the SEC Staff's position
regarding the point at which it is appropriate for a Registrant to
recognize revenue. The Staff believes that revenue is realizable and
earned when all of the following criteria are met: persuasive evidence
of an arrangement exists; delivery has occurred or service has been
rendered; the seller's price to the buyer is fixed or determinable;
and collectibility is reasonably assured. The Company uses the above
criteria to determine whether revenue can be recognized, and therefore
believes that the issuance of this Bulletin does not have a material
impact on these financial statements.

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,
2000 1999
(In Thousands)

Raw materials $ 5,787 $ 5,513
Work-in process 952 2,121
Finished goods 7,904 8,826
------- -------
$14,643 $16,460
======= =======
3. RECEIVABLES

Receivables are comprised of the
following:
June 30,
2000 1999
(In Thousands)

Trade $ 9,167 $ 7,986
Other 120 23
------- -------
9,287 8,009
Less allowance for doubtful
accounts (1,327) (1,145)
------ ------

$ 7,960 $ 6,864
======= =======

F-8
<PAGE>

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

June 30,
2000 1999
(In Thousands)

Land, buildings and improvements $5,921 $6,023
Machinery and equipment 582 578
Office furniture and equipment 1,537 1,229
Leasehold improvements 207 203
------ ------
8,247 8,033
Less accumulated depreciation
and amortization (5,000) (4,538)
------ ------

$ 3,247 $3,495
======= ======

Included in property, plant and equipment is property held for sale with a net
book value of approximately $235,000 and $324,000 at June 30, 2000 and 1999,
respectively.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are comprised of the
following:
June 30,
2000 1999
(In Thousands)

Interest $ 293 $ 534
Insurance 682 1,030
Salary, commissions and
employee benefits 538 1,274
Other 322 478
----- -----

$1,835 $3,316
====== ======
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,
in the aggregate, revolving loans and letters of credit, up to the
lesser of $18,000,000 or the sum of 80 percent of the net amount of
eligible receivables, 50 percent of the eligible inventory and 50

F-9

<PAGE>

percent of the eligible letters of credit; provided that the aggregate
amount of loans against the eligible inventory does not exceed
$6,500,000 and the aggregate face amount of the letters of credit
outstanding at any time does not exceed $10,000,000. Pursuant to the
terms of the agreement, the Company has pledged substantially all of its
assets, except the Company's real property. Interest on outstanding
borrowings is payable at the prime rate and, prior to July 1, 1999,
payable at 2 percent above the prime rate.

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, 2000. Furthermore, the Company is prohibited from paying
dividends or incurring additional indebtedness, as defined, outside the
normal course of business.

At June 30, 2000, the Company had borrowings of $1,690,000 outstanding
under this line of credit at an interest rate of 9.5 percent and also
had approximately $6,597,000 of outstanding letters of credit.

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.

7. LONG-TERM DEBT

Long-term debt consists of the following:
June 30,

2000 1999
(In Thousands)

12.875% Subordinated Debentures $4,347 $9,987
8% Senior Notes 7,566 10,550
8% Senior Convertible Notes 72 78
Capital Lease Obligations 228 133
------- ------
12,213 20,748
Less current portion 83 45
------- ------

Long-term debt $12,130 $20,703
======= =======

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.

F-10

<PAGE>

In the first quarter of fiscal 2000, the Company purchased an aggregate
of $2,834,000 in principal amount of its 12.875% subordinated debentures
and recorded a pre-tax gain of $114,000, net of related costs. The
Company will use these debentures to reduce its mandatory sinking fund
requirement due on October 1, 2000.

During the second and fourth quarter of fiscal 2000, the Company
purchased an aggregate of $2,786,000 and $20,000, respectively, in
principal amount of its 12.875% subordinated debentures. With $903,000
of these debentures and in conjunction with previously acquired
debentures, the Company will satisfy its sinking fund requirement due
October 1, 2000. As a result of the purchase of $903,000 of these
debentures, the Company recorded a pre-tax gain of $50,000, net of
related costs. The remaining $1,903,000 of repurchased debentures will
be applied to the final payment due on October 1, 2001. As a result of
the purchase of $1,903,000 of these debentures, the Company recorded an
extraordinary gain of $152,000, net of related costs and income taxes.

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, 2000, $71,500 of the 8% Convertible
Senior Notes remain outstanding and are convertible into approximately
191,000 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.

F-11

<PAGE>

In fiscal 2000, the Company purchased $2,984,000 in principal of its 8%
Senior Notes due September 1, 2001. As a result of this purchase, the
Company recorded an extraordinary gain of $241,000, net of related costs
and income taxes.

The maturities of long-term debt at June 30, 2000, including current
maturities, are as follows (in thousands):

Fiscal Year Amount

2001 $ 83
2002 (9/1/01) 7,638
2002 (10/1/01) 4,347
2002 75
2003 40
2004 30
------

$12,213
=======

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,
------------------------------------------
2000 1999
-------------------- ------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)

Long-Term Debt and Capital
Lease Obligations $12,213 $11,308 $20,748 $18,917

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

F-12
<PAGE>

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, 2000 and 1999.
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:

June 30,
2000 1999
(In Thousands)

Deferred tax liabilities:
Differences between book and tax
basis of property, plant and
equipment $ 354 $ 345
------ -----

Deferred tax assets:
Difference between book and
tax basis of inventory 360 360
Reserves not currently deductible 1,258 1,521
Operating loss carryforwards 3,228 4,047
Difference between book and
tax basis of senior notes 479 1,111
Other 83 93
------ ------
5,408 7,132
------ ------

Valuation allowance 1,045 2,778
------ ------
Net deferred tax asset $4,009 $4,009
====== ======

The provision for income taxes is comprised as follows:

Year Ended June 30,
2000 1999 1998
(In Thousands)

Current:
Federal $12 $25 $(2)
State and local 23 10 18
Deferred - - -
----- ---- -----
$35 $35 $16
===== ==== =====

F-13

<PAGE>

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

Year Ended June 30,
2000 1999 1998
(In Thousands)

Federal statutory rate 34.0% 34.0% 34.0%

Increase (decrease) in tax
resulting from:
Valuation allowance (41.0) (42.2) (42.1)
State income taxes (net of
federal tax benefits) 6.0 6.6 6.0
Other 2.3 2.9 1.4
Alternative minimum tax - - 2.0
---- ---- ----

Effective rate 1.3% 1.3% 1.3%
==== ==== ====

As of June 30, 2000, the Company has net operating loss carryforwards of
approximately $8,071,000 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 2003, 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, 2000 are as
follows (in thousands):

Fiscal Year Amount

2001 $542
2002 49
2003 8
----
$599
====

Rental expense for 2000, 1999 and 1998 was approximately $922,000,
$771,000 and $764,000, respectively.

11. CONSULTING AGREEMENT

Upon the retirement of Mark M. David as Chief Executive Officer, the
Company entered into a five-year consulting agreement with Mr. David on
July 1, 1999, pursuant to which annual compensation payments of
approximately $200,000 are required.

F-14

<PAGE>

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 19%, 22%, and 20% of the Company's net sales in fiscal 2000,
1999 and 1998, respectively. Another customer accounted for 12%, 11%, and
3% of the Company's net sales in fiscal 2000, 1999 and 1998, respectively,
while another customer accounted for 10%, 14%, and 11% of the Company's net
sales in fiscal 2000, 1999 and 1998, 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

Stock Options - The Company has an Incentive Stock Option Plan (the "1983
ISOP"), pursuant to which the Company has reserved 5,000 shares at June 30,
2000. This plan expired by its terms on June 30, 1993, but 5,000 previous
grants remained outstanding at June 30, 2000, which 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 (the "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.

On February 21, 2000, the Committee adopted a new Performance Equity Plan
(including a new Incentive Stock Option Plan) (the "2000 Plan"). The 2000
Plan authorizes the Company to grant qualified and non-qualified options to
participants for the purchase of up to an additional 750,000 shares of the
Company's common stock and to grant other stock-based awards to eligible
employees of the Company. The 2000 Plan is subject to stockholder approval
and will be presented to the stockholders at the Company's next Annual
Meeting.

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, 2000. Of the total options granted, 40,000 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 $2,623,000, $2,333,000 and $858,000
for 2000, 1999 and 1998, respectively. Basic net income per share would
have been $.18, $.16 and $.06, for 2000, 1999 and 1998, respectively and

F-15

<PAGE>

diluted net income per share would have been $.17, $.15 and $.06 for 2000,
1999 and 1998, 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):

2000 1999 1998
--------------------- --------------------- ---------------------
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 2,075 $ .64 2,253 $.75 2,053 $ .76
Granted 110 1.27 435 .63 200 .72
Exercised - - (20) (.63) - -
Canceled - - (593) (1.05) - -
------ ----- ------- ------- ------- -----
Outstanding - end of year 2,185 $ .68 2,075 $ .64 2,253 $ .75
===== ===== ======= ====== ======= =====

Exercisable - end of year 1,157 $ .66 780 $ .67 996 $ .88
===== ===== ======= ====== ====== =====
Weighted-average fair value of
options granted during the year $1.42 $ .69 $ .64
===== ====== ======
</TABLE>

The fair value of each option-pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998,
respectively; risk-free interest rate 6.2%, 5.5 % and 5.7%; expected
life 7 years, 7 years and 7 years; expected volatility of 106.0%, 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.

The following table summarizes information about stock options
outstanding at June 30, 2000 (options in thousands):

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------ -----------------------------------------
Weighted-
Average
Number Remaining Weighted- Weighted-
Range of Outstanding at Contractual Average Exercisable at Average
Exercise Prices June 30, 2000 Life (Yrs) Exercise Price June 30, 2000 Exercise Price
--------------- ------------------ ------ ------------ -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$.625 - $1.75 2,185 7.0 $.68 1,157 $.66
</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):

F-16

<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
(In Thousands, Except Per Share)
<S> <C> <C> <C>
Basic:
Income before extraordinary gain $ 2,727 $ 2,673 $1,202
Extraordinary gain 393 - -
------- ------- -------
Net income $ 3,120 $ 2,673 $ 1,202
======= ======= =======

Weighted average number of shares outstanding 14,889 14,309 14,049
======= ======= =======

Income before extraordinary gain per share $.18 $.19 $.09
Extraordinary gain per share .03 - -
------- ------- -------
Net income per share $.21 $.19 $.09
======= ======= =======

Diluted:
Income before extraordinary gain $ 2,727 $ 2,673 $ 1,202
Interest Expense on 8% Convertible Senior Notes 6 23 40
------- ------- -------
Adjusted net income before extraordinary gain 2,733 2,696 1,242
Extraordinary gain 393 - -
------- ------- -------
Adjusted net income $ 3,126 $ 2,696 $ 1,242
======= ======= =======

Weighted average number of shares outstanding 14,889 14,309 14,049
Shares Issuable Upon Conversion of
8% Convertible Senior Notes 201 765 1,112
Shares Issuable Upon Conversion of Stock Options 809 771 -
Shares Issuable Upon Conversion of Warrants 29 24 -
------- ------- -------
Total average number of equivalent shares outstanding 15,928 15,869 15,161
======= ======= =======

Income before extraordinary gain per share $.17 $.17 $.08
Extraordinary gain per share .03 - -
------- ------- -------
Net income per share $.20 $.17 $.08
======= ======= =======
</TABLE>

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.

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.

F-17

<PAGE>

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, 2000, 1999 and 1998 were as follows:

Year Ended June 30,
2000 1999 1998
(In Thousands)
Net Sales:
Intimate Apparel $62,712 $63,006 $53,855
Retail 8,292 9,500 10,682
------- ------- -------
$71,004 $72,506 $64,537
======= ======= =======

Income From Operations:
Intimate Apparel $ 3,903 $ 4,564 $ 2,316
Retail 406 720 1,238
------- ------- -------
$ 4,309 $ 5,284 $ 3,554
======= ======= =======

Depreciation and Amortization:
Intimate Apparel $ 535 $ 526 $ 549
Retail 58 40 33
------- ------- -------
$ 593 $ 566 $ 582
======= ======= =======

Segment Assets:
Intimate Apparel $29,704 $34,061 $33,654
Retail 1,923 2,698 3,089
------- ------- -------
$31,627 $36,759 $36,743
======= ======= =======

Capital Expenditures:
Intimate Apparel $ 303 $ 379 $ 186
Retail 6 205 5
------- ------- -------
$ 309 $ 584 $ 191
======= ======= =======

16. SUBSEQUENT EVENT

In August 2000, the Company sold a non-operating manufacturing facility
located in Mississippi for $97,000.

F-18
<PAGE>

17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
Quarter
First Second Third Fourth
(In Thousands, Except Per Share)
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended June 30, 2000

Net sales $19,219 $23,354 $14,487 $13,944
Gross profit 5,310 6,876 4,605 4,014
Net income 837 2,003 240 40
Basic net income per share .06 .13 .02 -
Diluted net income per share .05 .13 .02 -

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)
Diluted net income (loss) per share .08 .15 .01 (.07)

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)
Diluted net income (loss) per share .01 .11 (.01) (.03)

</TABLE>

* * * * * *

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 at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 2000:

Allowance for doubtful accounts $ 885 $ 65 $ (75) (a) $ 159
(716) (c)

Allowance for sales allowances 260 1,981 (1,789) 1,168
716 (c)
------ ------ ------- -----

$1,145 $2,762 $(2,580) $1,327
====== ====== ======= =====

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
====== ====== ======= ======
</TABLE>

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

S-1

<PAGE>

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

II-12
<PAGE>

PART III

ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

Director Since Name Age Position
-------------- ---- --------

1981 Mark M. David 53 Chairman of the Board

1997 Melvyn Knigin 57 President, Chief Executive
Officer and Director

1983 Saul Pomerantz 51 Executive Vice President,
Chief Operating Officer,
Secretary and Director

1996 Gary W. Krat 52 Director
1996 Joel M. Simon 55 Director

Officer Since

1999 Thomas Rende 39 Chief Financial Officer

Mark M. David was re-elected Chairman of the Board on November 18, 1999.
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 Chief Executive Officer and to the Board of Directors
on November 18, 1999. Mr. Knigin had been 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 the Board of Directors and elected Chief
Operating Officer on November 18, 1999. Mr. Pomerantz had been 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 elected Chief Financial Officer on November 18, 1999. Mr. Rende
had been appointed Chief Financial Officer in February 1999. Since joining Movie
Star in 1989, Mr. Rende has held various positions within the finance
department.

III-1

<PAGE>

Gary W. Krat was re-elected to the Board of Directors on November 18, 1999. Mr.
Krat is currently Chairman Emeritus of SunAmerica, Inc. From 1990 and until his
retirement in 1999, Mr. Krat was Senior Vice President of SunAmerica Inc.
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
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 November 18, 1999. Mr.
Simon is a principal of Crossroads, LLC, a financial consulting firm. 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. From 1996 to 1998, Mr. Simon was self-employed as a private investor.

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").

Following the realignment of senior management which resulted from the
retirement of Mark M. David at the end of fiscal year 1999, the Company entered
into comprehensive written employment agreements with Melvyn Knigin, who assumed
the additional position of Chief Executive Officer, and Saul Pomerantz, who
assumed the additional duties of Chief Operating Officer. In addition, Thomas
Rende was promoted to the position of Chief Financial Officer. In light of Mr.
David's retirement and the new duties assumed by the Company's remaining senior
executives, the Compensation Committee determined the salaries for Messrs.
Knigin, Pomerantz and Rende for fiscal year 2000.

Compensation Policies

In determining the appropriate levels of executive compensation for fiscal year
2000, the Committee based its decisions on (1) the realignment of senior
management following the retirement of Mark M. David, (2) the Company's
continued improved financial condition, (3) the need to retain experienced
individuals with proven leadership and managerial skills, (4) the executives'
motivation to enhance the Company's performance for the benefit of its
stockholders and customers, and (5) 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, the results of recent
past fiscal years 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 stockholder
return and long-term results.

Base Salary Compensation

Based on recommendations from the Company's Chairman of the Board, the
collective business experience of the other Committee members and negotiations
with Messrs. Knigin and Pomerantz, their base salaries were established for the
two- year terms of their respective employment agreements. 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;

III-2

<PAGE>

however, the Committee does not establish or rely on target levels of
performance in any of these areas to arrive at its recommendations.

The current senior executives of the Company have been associated with the
Company in senior management positions for periods ranging from eleven to more
than twenty-one 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 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. The 1994 ISOP authorized the
grant of options to purchase up to 2,000,000 shares of the Company's common
stock. Options for all of the shares of the Company's common stock under the
1994 ISOP have been granted. All of the Company's management and administrative
employees are eligible to receive grants under the 1994 ISOP. Subject to
stockholder 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 stockholders at the Company's
Annual Meeting on December 8, 1994.

On February 21, 2000, the Committee adopted a new Performance Equity Plan
(including a new Incentive Stock Option Plan) (the "2000 Plan" ). The 2000 Plan
authorizes the Company to grant qualified and non-qualified options to
participants for the purchase of up to an additional 750,000 shares of the
Company's common stock and to grant other stock-based awards to eligible
employees of the Company. The 2000 Plan is subject to stockholder approval and
will be presented to the stockholders at the Company's next Annual Meeting.

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 stockholders 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 1988, the Committee recommended and the Board of
Directors approved the grant of options under the non-qualified option plan to
all of the Company's then executive officers.

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

III-3

<PAGE>

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.

In February 2000, the Committee recommended that the Company grant additional
options to Messrs. Knigin and Pomerantz in conjunction with their respective
employment agreements and to Mr. Rende in connection with his promotion to Chief
Financial Officer.

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 had the discretion to
award bonus compensation to senior executives in an amount not to exceed five
(5%) percent of any increases in net income before taxes over the base amount of
$1,200,000 (the "Bonus Pool"). 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 net income before taxes in excess of $1,200,000.

In fiscal 2000, the Committee amended the 1998 Incentive Plan to increase the
Bonus Pool from 5% to 6.75%. Pursuant to their respective employment agreements,
Mr. Knigin was eligible to receive incentive compensation equal to three (3%)
percent and Mr. Pomerantz was eligible to receive two (2%) percent of net income
before taxes in excess of $1,200,000 for fiscal year 2000. In addition, the
Committee determined that Mr. Rende was eligible to participate in the Bonus
Pool and awarded him incentive compensation equal to 0.25% of net income before
taxes in excess of $1,200,000 for fiscal year 2000.

Compensation of the Chief Executive Officer

For fiscal year 2000, the annual base salary paid to the Company's Chief
Executive Officer, Melvyn Knigin, pursuant to his employment agreement was
$400,000. Mr. Knigin's employment agreement provides for the same annual base
salary in fiscal year 2001.

Compensation Committee Interlocks and Insider Participation

There are no Compensation Committee interlocks or insider participation.

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

III-4

<PAGE>

Summary Compensation Table
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL RESTRICTED
NAME AND PRINCIPAL FISCAL COMPENSATION STOCK OPTIONS ALL OTHER
POSITION YEAR SALARY ($) AWARDS($) (# SHARES) COMPENSATION
-------- ---- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Mark M. David 2000 - - - -
Chairman of the Board 1999 340,355 - - (1) 508,145 (2)
1998 335,000 - 350,000(1) 8,145 (2)

Melvyn Knigin 2000 405,127 - 800,000(3) 52,194
President and Chief Executive 1999 405,406 - 600,000(5) 67,495
Officer of 1998 350,000 - 350,000(5) -
the Company; Director

Saul Pomerantz 2000 252,254 - 630,000(4) 38,005
Executive Vice President and 1999 228,342 - 500,000(4) 44,996
Chief Operating 1998 200,000 - 350,000(5) -
Officer of the
Company; Director

Thomas Rende 2000 148,843 - 175,000(6) 3,772
Chief Financial Officer 1999 126,300 - 105,000(6) -
</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 (the
"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"). Fiscal Year 2000 also
includes 200,000 shares granted on February 22, 2000 pursuant to the 2000
Incentive Stock Option Plan (the "2000 Plan"), which are subject to
stockholder approval.

(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"). Fiscal Year 2000 also includes 130,000
shares granted on February 22, 2000 pursuant to the 2000 Incentive Stock
Option Plan (the "2000 Plan"), which are subject to stockholder approval.

III-5

<PAGE>

(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. Fiscal Year 2000 also includes
70,000 shares granted on February 22, 2000 pursuant to the 2000 Incentive
Stock Option Plan (the "2000 Plan"), which are subject to stockholder
approval.

III-6

<PAGE>

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AS OF AUGUST 31, 2000

The following table sets forth certain information as of August 31,
2000 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.

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

Mark M. David 3,095,428(2)(6) 20.7789%
136 Madison Avenue
New York, NY 10016

Republic National 845,814; Direct 5.6778%
Bank as Trustee
for the Movie
Star, Inc. Employee
Stock Ownership Plan
452 Fifth Avenue
New York, NY 10018

Mrs. Abraham David 1,582,159(3)(7) 10.6207%
8710 Banyan Court
Tamarac, FL 33321

Melvyn Knigin 421,437(4) 2.7721%
136 Madison Avenue
New York, NY 10016

Saul Pomerantz 442,824(5) 2.9042%
136 Madison Avenue
New York, NY 10016

Thomas Rende 229,300(12) 1.5327%
136 Madison Avenue
New York, NY 10016

Joel M. Simon 74,166(10) 0.4979%
136 Madison Avenue
New York, NY 10016

Gary W. Krat 253,333(11) 1.7006%
733 Third Avenue
New York, NY 10017

Abraham David 25,000;Direct(9) 0.1678%
8710 Banyan Court
Tamarac, FL 33321

All directors and officers as a group 6,098,647(2)(4)(5)(8) 39.0493%
(6 persons) (10)(11)(12)

III-7

<PAGE>

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

(1) Based upon 14,896,977 shares (excluding 2,016,802 treasury shares)
outstanding and options, where applicable, to purchase shares of Common
Stock, exercisable within 60 days.

(2) Includes 336,072 shares owned by his spouse.

(3) Includes 542,697 shares owned by Annie David as a truste for the benefit of
her daughters, Marcia Sussman and Elaine Greenberg and her grandchildren,
Michael Sussman and David Greenberg.

(4) Includes options granted to Melvyn Knigin for 260,937 shares pursuant to
the 1994 Plan, 25,000 pursuant to the 1988 Plan and 20,000 pursuant to the
200 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 282,914 shares and Shelley
Pomerantz for 40,000 shares (his wife who also is employed by the Company)
pursuant to the 1994 Plan, 15,000 pursuant to the 1988 Plan and 13,000
pursuant to the 2000 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 57,000 shares, pursuant to
the 1994 Plan, and 7,000 pursuant to the 2000 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. On and after January 2, 2001,
these restrictions will expire.

(b) Effective as of July 1, 1999, Mr. David retired as a full-time executive
employee of the Company.

III-8
<PAGE>

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-9

<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, 2000 and 1999 F-2

Consolidated Statements of Income for the fiscal
years ended June 30, 2000, 1999 and 1998 F-3

Consolidated Statements of Stockholders' Equity
for the fiscal years ended June 30, 2000, 1999
and 1998 F-4

Consolidated Statements of Cash Flows for the
fiscal years ended June 30, 2000, 1999 and 1998 F-5 - F-6

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

2. Schedule

For the fiscal years ended June 30, 2000, 1999 and 1998:

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>
<CAPTION>
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>
<CAPTION>
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 manufacturer's Registration Statement
representatives for the Form S-2 (No. 33-7837)
Company. filed October 10, 1986.

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 31,
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 31,
Inc. 1996 and filed on
May 15, 1996.
</TABLE>

IV-3

<PAGE>

<TABLE>
<CAPTION>
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 31,
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 31,
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 31,
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 31,
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 31,
Rosenthal & Rosenthal, Inc. 1996 and filed on
and the Company. May 15, 1996.

10.5.7 Letter Agreement dated as of Incorporated by reference to
June 28, 1999 between Rosenthal & Form 10K for the fiscal year ended
Rosenthal, Inc. and the Company June 30, 1999 and filed on September 28,
modifying and extending the
the Financing Agreement dated
April 24, 1996.

10.5.8 Letter Agreement dated as of September Filed Herewith.
13, 2000 between Rosenthal & Rosenthal
and the Company amending Financing
Agreement dated April 24, 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.
</TABLE>

IV-4

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Method of Filing
------ ----------------------------- -----------------------
<S> <C> <C>
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.

10.10 Prototype of Contract of Purchase Incorporated by reference
periodically entered into between to Form 10-K for fiscal
the Company and Sears, Roebuck year ended June 30, 1993
and Company. and filed on September 18, 1993.

10.11 Agreement dated as of July 1, 1999 Incorporated by reference to
between Mark M. David and the Company Form 10-K for fiscal year ended
providing for retirement benefits to Mr. June 30, 1999 and filed on September 28,
David. 1999.

10.12 Agreement dated as of July 1, 1999 Incorporated by reference to
between Mark M. David and the Company Form 10-K for fiscal year ended
for Mr. David's consulting services. June 30, 1999 and filed on September 28,
1999.

10.13 Employment Agreement dated as of Incorporated by reference to
February 22, 2000 between Saul Pomerantz Form 10-Q for the quarter ended March 31,
2000
and the Company. and filed on May 15, 2000.

10.14 Employment Agreement dated as of Incorporated by reference to
February 22, 2000 between Melvyn Knigin Form 10-Q for the quarter ended March 31,
2000
and the Company. and filed on May 15, 2000.

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 27, 2000

MOVIE STAR, INC.
/s/ Mark M. David
By: _________________________________
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 27, 2000
MARK M. DAVID

/s/ Melvyn Knigin
__________________ President; Chief Executive September 27, 2000
MELVYN KNIGIN Officer; Director

/s/ Saul Pomerantz
__________________ Executive Vice President; September 27, 2000
SAUL POMERANTZ Chief Operating Officer;
Secretary & Director

/s/ Thomas Rende
__________________ Principal Financial & Accounting September 27, 2000
THOMAS RENDE Officer

/s/ Gary W. Krat
__________________ Director September 27, 2000
GARY W. KRAT

/s/ Joel M. Simon
__________________ Director September 27, 2000
JOEL M. SIMON

</TABLE>

<PAGE>

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

10.5.8 Letter Agreement dated as of September
13, 2000 between Rosenthal & Rosenthal
and the Company amending Financing
Agreement dated April 24, 1996.

21 SUBSIDIARIES OF THE COMPANY

23 INDEPENDENT AUDITORS' CONSENT

27 FINANCIAL DATA SCHEDULE