DEBT CONVERSION AGREEMENT

THIS DEBT CONVERSION AGREEMENT (the “Agreement”), dated as of January 28, 2008,
by and among FOH HOLDINGS, INC., a Delaware corporation (“FOH”), MOVIE STAR,
INC., a New York corporation (“MSI”), and those parties set forth on Exhibit A
(the “Holders”).

WHEREAS, on June 30, 2005, FOH issued Tranche A and Tranche B Term Notes due
January 7, 2010, pursuant to that certain Amended and Restated Tranche A/B and
Tranche C Term Loan Agreement dated as of June 30, 2005, as amended from time to
time (the “Term Loan Agreement”), to the Holders in an aggregate principal
amount of $7,599,999.99 (the “Tranche A/B Term Notes”);

WHEREAS, the Tranche A/B Term Notes have accrued interest at a rate equal to
eight percent (8%) (the “Tranche A/B Interest Rate”);

WHEREAS, the aggregate principal amount owed on the Tranche A/B Term Notes after
all adjustments up through January 28, 2008 is $7,500,000.00;

WHEREAS, pursuant to that certain Agreement and Plan of Merger and
Reorganization, dated as of December 18, 2006, as amended, by and among MSI,
Fred Merger Corp. and FOH (the “Merger Agreement”), the parties thereto agreed
that, upon approval by MSI’s shareholders, FOH and MSI would engage in a merger
transaction whereby FOH would become a wholly-owned subsidiary of MSI (the
“Merger”);

WHEREAS, as a condition to consummating the Merger, $7,500,000 of the principal
of the Tranche A/B Term Notes (the “Conversion Debt”) must be cancelled in
exchange for an aggregate of 3,629,325 shares (“Conversion Shares”) of the
Series A Convertible Preferred Stock of MSI, such number of Conversion Shares
being equal to the quotient obtained by dividing $7,500,000 by $2.0665, the
average trading closing price of MSI’s common stock (on its principal trading
market) for the twenty (20) trading days immediately preceding November 27,
2007, as described in the registration statement on Form S-1, as amended, of MSI
(No. 333-143619), which was declared effective on November 29, 2007, and related
Prospectus, dated as of November 29, 2007 (the “Rights Offering”);

WHEREAS, at a shareholders’ meeting held January 23, 2008, MSI’s shareholders
authorized the issuance of up to 10,000,000 shares of Preferred Stock, par value
$.01 per share, and to establish the terms, rights, preferences and privileges
of the Preferred Stock to be issued upon consummation of the Merger pursuant to
MSI’s Proxy Statement, dated as of November 30, 2007 (“Shareholders’ Approval”);
and

WHEREAS, upon the filing of MSI’s amended and restated certificate of
incorporation, a copy of which is attached hereto as Exhibit B and incorporated
herein by reference (the “Certificate”), with the appropriate governmental
authorities, the Preferred Stock shall have the rights and preferences set forth
in the Certificate;

 

 

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NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements of the parties hereinafter set forth, the parties hereto hereby agree
as follows:

1. DEBT CONVERSION.

1.1 The Holders hereby severally agree, subject to the conditions set forth
herein, to convert the Conversion Debt into 3,629,325 Conversion Shares at a
conversion price of $2.0665 per share, (“Debt Conversion”), subject to
appropriate adjustments for reclassifications, reverse stock splits, stock
splits, stock dividends, spin-offs or distributions, share combinations or other
similar changes affecting the Preferred Stock as a whole. Each Holder shall
convert the portion of the principal on the Tranche A/B Term Notes set forth
after such Holder’s name on Exhibit A and receive, in exchange therefore, the
amount of Conversion Shares set forth after such Holder’s name on Exhibit A.

1.2 Subject to the terms and conditions of this Agreement, the consummation of
the transactions contemplated by this Agreement shall take place at a closing
(“Closing”) to be held at such other time, date or place as the parties may
agree upon following the Shareholders’ Approval and filing of the Certificate
with the appropriate governmental authorities.

1.3 At the Closing, each Holder shall deliver any and all instruments
representing its Tranche A/B Term Note for cancellation to FOH and MSI shall
deliver to each Holder certificates representing the Conversion Shares to which
such Holder is entitled as a result of the Debt Conversion. Notwithstanding any
Holder’s failure to deliver any instruments representing the Tranche A/B Term
Notes, each Holder acknowledges that the instruments representing such Tranche
A/B Term Notes shall be void and unenforceable upon the Closing.

1.4 If a Holder has lost its Tranche A/B Term Note or is otherwise unable to
deliver its Tranche A/B Term Note at the Closing, it shall submit an affidavit
of loss and indemnity agreement so that the Tranche A/B Term Note may be
replaced and deemed cancelled in accordance with the terms hereof. In the event
that as a result of the Debt Conversion, fractions of shares would be required
to be issued, such fractional shares shall be rounded up or down to the nearest
whole share. MSI shall pay any documentary, stamp or similar issue or transfer
tax due on such Debt Conversion, except that the Holder shall pay any such tax
due because the Conversion Shares are issued in a name other than the Holder’s.

1.5 Nothing in this Agreement shall modify or reduce FOH’s liability to pay to
the Holders interest on the Conversion Debt that is accrued as of the date of
Closing, if any, at such time and in such amounts as provided for under the Term
Loan Agreement, as amended.

1.6 At the Closing, each Holder acknowledges that it shall acquire the
Conversion Shares for its own account and with no view to the distribution
thereof. Each Holder acknowledges that the Conversion Shares have not been
registered under the Securities Act, or the securities laws of any state and
cannot be offered or sold by such Holder unless subsequently so registered or
unless exemptions from the registration requirements of that Act and all
applicable state securities laws are available for the transaction.

 

 

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1.7 Each Holder authorizes MSI to place such restrictive legends on the
certificates evidencing ownership of the Conversion Shares as may be required by
the Securities Act or the securities laws of any state. Each Holder understands
that in the absence of an effective registration statement covering the
Conversion Shares or an available exemption from registration under the
Securities Act, the Conversion Shares must be held indefinitely and each Holder
is familiar with Rule 144 promulgated under the Securities Act, as presently in
effect, and understands the resale limitations imposed thereby and by the
Securities Act.

2. REPRESENTATIONS AND WARRANTIES OF MSI. MSI hereby represents and warrants to
the Holders as follows:

2.1 The Conversion Shares to be issued and delivered to the Holders upon
conversion of the Tranche A/B Term Notes have been duly authorized and, when
issued, will be validly issued, fully-paid and non-assessable. The issuance of
the Conversion Shares will be exempt from registration pursuant to Section
3(a)(9) promulgated under the Securities Act of 1933, as amended (“Securities
Act”) and such Conversion Shares will not be “restricted securities” as defined
under Rule 144 promulgated under the Securities Act.

2.2 MSI has full legal power to execute and deliver this Agreement and to
perform its obligations hereunder. All acts required to be taken by MSI to enter
into this Agreement and to carry out the transactions contemplated hereby have
been properly taken, and this Agreement constitutes a legal, valid and binding
obligation of MSI, enforceable in accordance with its terms and does not
conflict with, result in a breach or violation of or constitute (or with notice
of lapse of time or both constitute) a default under any instrument, contract or
other agreement to which MSI or its subsidiaries is a party.

2.3 The affirmative vote of (i) the holders of record of a majority of the
shares of MSI’s common stock and (ii) the holders of record of a majority of the
shares of MSI common stock held by MSI’s shareholders other than TTG Apparel,
LLC and its affiliates and associates with respect to the matters referred to in
Section 1 hereof are the only votes of the holders of any class or series of the
capital stock of MSI required to approve the transactions contemplated hereby.

2.4 None of MSI’s Certificate of Incorporation, as amended, or Bylaws, the laws
of New York, or any other applicable law, contains any applicable anti-takeover
provision or statute which would restrict MSI’s ability to enter into this
Agreement or consummate the transactions contemplated by this Agreement or which
would limit any of the Holders’ rights following consummation of the
transactions contemplated by this Agreement.

2.5 No broker, finder or investment banker is entitled to any brokerage,
finder’s or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
MSI.

2.6 MSI has delivered or made available to the Holders prior to the execution of
this Agreement true and complete copies of all periodic reports, registration
statements and proxy statements filed by it (collectively, the “SEC Filings”)
with the Securities Exchange Commission (the “Commission”) since December 18,
2006. Each of such filings with the

 

 

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Commission, as of its filing date, complied in all material respects with the
requirements of the rules and regulations promulgated by the Commission with
respect thereto and did not contain any untrue statement of a material fact or
omit a material fact necessary in order to make the statements contained therein
not misleading in light of the circumstances in which such statements were made.

2.7 MSI has taken all actions as may be necessary to effectuate the Debt
Conversion, including, but not limited to, providing notices to, and responding
to queries from, all applicable regulatory authorities and stock exchanges and
obtaining all necessary third party consents.

2.8 Since the date of the certified financial statements of MSI for its fiscal
year ended June 30, 2007, filed with the Commission in MSI’s Annual Report on
Form 10-K for such year (a copy of which has been made available to the
Holders), MSI and its subsidiaries, taken as a whole, has not suffered any
material adverse change in its assets, liabilities, financial condition, results
of operations or business, except for those occurring as a result of general
economic or financial conditions affecting the United States as a whole or the
region in which MSI conducts its business or developments that are not unique to
MSI but also affect other entities engaged or participating in the apparel
industry generally in a manner not materially less severely.

2.9 No information to be contained in the Proxy Statement and no representation
or warranty by MSI contained in this Agreement contains any untrue statement of
a material fact or omits a material fact necessary in order to make the
statements contained herein or therein not misleading in light of the
circumstances in which such statements were made.

2.10 Since December 18, 2006, and except as disclosed in the SEC Filings, MSI
has conducted its business in compliance in all material respects with all
applicable laws, rules, regulations, court or administrative orders and
processes and rules, directives and orders of regulatory and self-regulatory
agencies and bodies, except as would not reasonably be expected, singly or in
the aggregate, to be materially adverse to the business, assets or financial
condition of MSI.

2.11 MSI shall comply with the Registration Rights Agreement entered into by the
Holders, MSI and certain other parties dated as of the closing date to register
the shares of common stock of MSI issuable upon conversion of the Conversion
Shares received by the Holders upon the Debt Conversion for resale pursuant to
the Securities Act.

3. REPRESENTATIONS AND WARRANTIES OF FOH.  FOH hereby represents and warrants to
the Holders as follows:

3.1 FOH has full legal power to execute and deliver this Agreement and to
perform its obligations hereunder. All acts required to be taken by FOH to enter
into this Agreement and to carry out the transactions contemplated hereby have
been properly taken, and this Agreement constitutes a legal, valid and binding
obligation of FOH, enforceable in accordance with its terms and does not
conflict with, result in a breach or violation of or constitute (or with notice
of lapse of time or both constitute) a default under any instrument, contract or
other agreement to which FOH or its subsidiaries is a party.

 

 

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3.2 None of FOH’s Certificate of Incorporation, as amended, or Bylaws, the laws
of Delaware, or any other applicable law, contains any applicable anti-takeover
provision or statute which would restrict FOH’s ability to enter into this
Agreement or consummate the transactions contemplated by this Agreement or which
would limit any of the Holders’ rights following consummation of the
transactions contemplated by this Agreement.

3.3 No broker, finder or investment banker is entitled to any brokerage,
finder’s or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
FOH.

4. REPRESENTATIONS AND WARRANTIES OF THE HOLDERS. The Holders severally and not
jointly represent and warrant to MSI as follows:

4.1 Each Holder has full legal power to execute and deliver this Agreement and
to perform its obligations hereunder. All acts required to be taken by such
Holder to enter into this Agreement and to carry out the transactions
contemplated hereby have been properly taken; and this Agreement constitutes a
legal, valid and binding obligation of such Holder enforceable in accordance
with its terms.

4.2 Each Holder has reviewed the SEC Filings referenced above.

4.3 Each Holder has been given an opportunity to ask questions and receive
answers from the officers and directors of MSI and FOH and to obtain additional
information from MSI and FOH.

4.4 Each Holder has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of an investment in
MSI’s securities and has obtained, in its judgment, sufficient information about
MSI to evaluate the merits and risks of an investment in MSI.

4.5 Each Holder is relying solely on the representations and warranties
contained in Sections 2 and 3 hereof and in certificates delivered hereunder in
making their decision to enter into this Agreement and consummate the
transactions contemplated hereby and no oral representations or warranties of
any kind have been made by MSI or FOH or their respective officers, directors,
employees or agents to such Holders.

4.6 No broker, finder or investment banker is entitled to any brokerage,
finder’s or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of a
Holder.

5. CONDITIONS.

5.1 The obligations of MSI to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment of the following conditions:

(a) The representations and warranties of each of the Holders set forth in
Section 4 hereof shall be true and correct on and as of the Closing date and a
certificate certifying such shall be delivered.

 

 

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(b) All proceedings, corporate or otherwise, to be taken by the Holders in
connection with the consummation of the transactions contemplated by this
Agreement shall have been duly and validly taken and all necessary consents,
approvals or authorizations of any governmental or regulatory authority or other
third party required to be obtained by MSI or the Holders shall have been
obtained in form and substance reasonably satisfactory to MSI.

(c) Each Holder shall have delivered to FOH for cancellation its Tranche A/B
Term Notes or an affidavit of loss and indemnity.

5.2 The obligations of the Holders to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment of the following
conditions:

(a) The representations and warranties of MSI and FOH set forth in Sections 2
and 3 hereof shall be true and correct on and as of the Closing date.

(b) All proceedings, corporate or otherwise, to be taken by MSI in connection
with the consummation of the transactions contemplated by this Agreement shall
have been duly and validly taken and all necessary consents, approvals or
authorizations of any governmental or regulatory authority or other third party
required to be obtained by MSI or the Holders shall have been obtained in form
and substance reasonably satisfactory to the Holders.

6. TERMINATION. This Agreement may be terminated no later than the Closing:

6.1 At the option of any party in the event that the Debt Conversion has not
occurred by December 31, 2008 and such delay was not as a result of any breach
of this Agreement;

6.2 At the option of any party if any other party has materially breached a term
of this Agreement and has not cured such breach within 30 days of notice
thereof; or

6.3 At the option of any party if any competent regulatory authority shall have
issued an order making illegal or otherwise restricting, preventing, prohibiting
or refusing to approve the transactions contemplated hereby, and such order
shall have become final and non-appealable.

7. MISCELLANEOUS.

7.1 Section headings used in this Agreement are for convenience of reference
only and shall not affect the construction of this Agreement.

7.2 This Agreement may be executed in any number of counterparts and by the
different parties on separate counterparts and each such counterpart shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same agreement.

7.3 This Agreement shall be a contract made under and governed by the law of the
State of New York.

7.4 All obligations of MSI and rights of the Holders expressed herein shall be
in addition to and not in limitation of those provided by applicable law.

 

 

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7.5 This Agreement shall be binding upon MSI, the Holders and their respective
successors and assigns, and shall inure to the benefit of MSI, the Holders and
their respective successors and permitted assigns.

7.6 The terms and provisions of this Agreement are intended solely for the
benefit of each party hereto and their respective successors or permitted
assigns, and it is not the intention of the parties to confer third-party
beneficiary rights upon any other person or entity.

7.7 All amendments or modifications of this Agreement and all consents, waivers
and notices delivered hereunder or in connection herewith shall be in writing.

7.8 This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior agreements and
undertakings, both written and oral, among the parties with respect thereto.

7.9 WAIVER OF JURY TRIAL. EACH OF MSI, FOH AND THE HOLDERS HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.

7.10 SPECIFIC PERFORMANCE. THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT ANY
REMEDY AT LAW FOR ANY BREACH OF THE PROVISIONS OF THIS AGREEMENT WOULD BE
INADEQUATE, AND EACH PARTY HERETO HEREBY CONSENTS TO THE GRANTING BY ANY COURT
OF AN INJUNCTION OR OTHER EQUITABLE RELIEF, WITHOUT THE NECESSITY OF ACTUAL
MONETARY LOSS BEING PROVED, IN ORDER THAT THE BREACH OR THREATENED BREACH OF
SUCH PROVISIONS MAY BE EFFECTIVELY RESTRAINED.

[Signatures on Following Page]

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.

 

 

 

 

“MSI”

 

 

 

 

 

 

 

MOVIE STAR, INC.

 

 

 

BY: 

/s/ Melvyn Knigin

 

 

 

 

NAME: 

Melvyn Knigin

 

 

 

 

ITS:

Chief Executive Officer

 

 

 

 

“FOH”

 

 

 

 

 

 

 

FOH HOLDINGS, INC.

 

 

 

BY: 

/s/ Gary Marcotte

 

 

 

 

NAME: 

Gary Marcotte

 

 

 

 

ITS:

Chief Operating Officer

 

 

 

 

“HOLDERS”

 

 

 

 

 

 

 

FURSA CAPITAL PARTNERS LP

 

 

 

BY: 

/s/ Patrick Brennan

 

 

 

 

NAME: 

Patrick Brennan

 

 

 

 

ITS:

Chief Administrative Officer

 

 

 

 

FURSA MASTER REDISCOVERED OPPORTUNITIES FUND L.P.

 

 

 

BY: 

/s/ Patrick Brennan

 

 

 

 

NAME: 

Patrick Brennan

 

 

 

 

ITS:

Chief Administrative Officer

 

 

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BLACKFRIARS MASTER VEHICLE LLC – SERIES 2

 

 

 

BY: 

/s/ Patrick Brennan

 

 

 

 

NAME: 

Patrick Brennan

 

 

 

 

ITS:

Chief Administrative Officer

 

 

 

 

FURSA MASTER GLOBAL EVENT DRIVEN FUND L.P.

 

 

 

BY: 

/s/ Patrick Brennan

 

 

 

 

NAME: 

Patrick Brennan

 

 

 

 

ITS:

Chief Administrative Officer

 

 

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Exhibit “A”

HOLDERS

 

Name of Holder

 

Principal Balance of Tranche A/B Term Notes

 

Debt Conversion Shares

 

Fursa Capital Partners LP

 

$

388,804.99

 

188,147

 

Fursa Master Rediscovered Opportunities Fund L.P.

 

$

2,109,495.67

 

1,020,806

 

Blackfriars Master Vehicle LLC – Series 2

 

$

834,440.24

 

403,794

 

Fursa Master Global Event Driven Fund L.P.

 

$

4,167,259.10

 

2,016,578

 

Total

 

$

7,500,000.00

 

3,629,325

 

 

 

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Exhibit “B”

CERTIFICATE

 

 

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